SM Chapter 4

Akhilesh Daga

❏ Certified Research Analyst

❏ PLUS VERIFIED EDUCATOR

❏ Motivational Speaker
SM Chapter 4

Strategy is a deliberate search for a plan of

action that will develop a business
competitive advantage and compound it.
Bruce D. Henderson
SM Chapter 4
• Strategies are formulated at different levels of an organization –
corporate, business and functional.

• Corporate level strategies occupy the highest level of strategic

decision making and cover actions dealing with the objective of the
firm, acquisition and allocation of resources and coordination of
strategies of various Strategic Business Units for optimal
performance.

• Top management of the organization makes strategic decisions.

The nature of strategic decisions tends to be value-oriented,
conceptual and less concrete than decisions at the business or
functional level. This chapter deals with corporate level
strategies and their various types.
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Basis of Classification Types
Level of the Corporate Level
organisation Business Level Functional Level

Stages of Business Life Entry/Introduction Stage - Market

Cycle Penetration Strategy
Growth Stage - Growth/Expansion Strategy
MaturityStage -Stability Strategy
Decline Stage - Retrenchment/ Turnaround Strategy

Competition oriented Competitive Strategies -

Cost Leadership, Differentiation,
Focus
Collaboration Strategies - Joint Venture, Merger &
Acquisition, Strategic Alliance
SM Chapter 4
Reality Bite:

Patanjali Ayurved adopted market penetration strategy and to be

successful.

It concentrated on product development and high quality at low

cost.

It is now at the growth stage and is following competitive

strategies.

It is competing with both domestic and multinational companies.

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The corporate strategies a firm can adopt may be

classified into four broad categories:

1. Stability strategy
2. Expansion strategy
3. Retrenchment strategy
4. Combination strategy
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Strategy Basic Feature
Stability The firm stays with its current businesses and product
markets; maintains the existing level of effort; and is
satisfied with incremental growth.

Expansion Here, the firm seeks significant growth-maybe within

the current businesses; maybe by entering new
business that are related to existing businesses; or by
entering new businesses that are unrelated to existing
businesses.
Retrenchment The firm retrenches some of the activities in some
business (es) or drops the business as such through
sell-out or liquidation.
Combination The firm combines the above strategic alternatives in
some permutation/combination so as to suit the
specific requirements of the firm.
Stability Strategy
One of the important goals of a business enterprise is stability
strategy is to stabilise-

it may be opted to safeguard its existing interests and strengths,

to pursue well established and tested objectives,

to continue in the chosen business path,

to maintain operational efficiency on a sustained basis,

to consolidate the commanding position already reached, and

to optimise returns on the resources committed in the business.

Stability Strategy
 Stability Strategy
 It continues to serve in the same or similar markets and deals in
same or similar products and services.
 This strategy is typical for those firms whose product have
reached the maturity stage of product life cycle or those who
have a sufficient market share but need to retain that.
 They have to remain updated and have to pace with the
dynamic and volatile business world to preserve their market
share. Hence, stability strategy should not be confused with ‘do
nothing’ strategy.
 Small organizations may also follow stability strategy to
consolidate their market position and prepare for the launch of
growth strategies. For deeper understanding of these
strategies, let us delve into their characteristics:
Characteristics Stability Strategy
 A firm opting for stability strategy stays with the same
business, same product-market posture and functions,
maintaining same level of effort as at present.

 The endeavour is to enhance functional efficiencies in an

incremental way, through better deployment and utilization of
resources. The assessment of the firm is that the desired
income and profits would be forthcoming through such
incremental improvements in functional efficiencies.

 Stability strategy does not involve a redefinition of the

business of the corporation.
Characteristics
SM Chapter 4 Stability Strategy
 It is a safe strategy that maintains status quo.

 It does not warrant much of fresh investments.

 The risk involved in this strategy is less.

 While opting for this strategy, the organization can

concentrate on its resources and existing
businesses/products and markets, thus leading to building
of core competencies.

 The firms with modest growth objective choose this strategy.

Major reason for Stability Strategy
 A product has reached the maturity stage of the product life
cycle.

 The staff feels comfortable with the status quo as it involves

less changes and less risks.

 It is opted when the environment in which an organisation is

operating is relatively stable.

 Where it is not advisable to expand as it may be perceived as

threatening.

 After rapid expansion, a firm might want to stabilize and

consolidate itself.
Expansion Strategy
Growth/Expansion strategy is implemented by redefining the
business by enlarging the scope of business and substantially increasing
investment in the business.

It is a strategy that can be equated with dynamism, vigour, promise and

success. It is often characterised by significant reformulation of goals
and directions, major initiatives and moves involving investments,
exploration and onslaught into new products, new technology and new
markets, innovative decisions and action programmes and so on.

This strategy may take the enterprise along relatively unknown and risky
paths, full of promises and pitfalls.
Expansion Strategy
 Characteristics of Growth / Expansion

 Expansion strategy involves a redefinition of the business of the

corporation.

 Expansion strategy is the opposite of stability strategy. While in stability

strategy, rewards are limited, in expansion strategy they are very high. In
the matter of risks, too, the two are the opposites of each other.

 Expansion strategy leads to business growth. A firm with a mammoth

growth ambition can meet its objective only through the expansion
strategy.
Characteristics of Growth / Expansion
 The process of renewal of the firm through fresh investments and new
businesses/products/markets is facilitated only by expansion strategy.

 Expansion strategy is a highly versatile strategy; it offers several

permutations and combinations for growth. A firm opting for the
expansion strategy can generate many alternatives within the strategy
by altering its propositions regarding products, markets and functions
and pick the one that suits it most.

 Expansion strategy holds within its fold two major strategy routes:
Intensification Diversification. Both of them are growth strategies; the
difference lies in the way in which the firm actually pursues the
growth.
 Major reasons for Growth / Expansion
 It may become imperative when environment demands increase in pace of
activity.

 Strategists may feel more satisfied with the prospects of growth from
expansion; chief executives may take pride in presiding over organizations
perceived to be growth-oriented.

 Expansion may lead to greater control over the market vis-a-vis

competitors.

 Advantages from the experience curve and scale of operations may accrue.

 Expansion also includes intensifying, diversifying, acquiring and merging

businesses.
Expansion or growth through Intensification:
Expansion or growth through intensification means that the organisation
tries to grow internally by intensifying its operations either by market
penetration or market development or by product development.

It tries to cash on its internal capabilities and internal resources.

Expansion through Diversification

When a firm tries to grow and expand by diversifying into various

products or fields, it is called growth by diversification.

This is also an internal growth strategy. Innovative and creative firms

always look for opportunities and challenges to grow, to venture into new
areas of activity and to break new frontiers with the zeal of
entrepreneurship using their internal resources.

They feel that diversification offers greater prospects of growth and

profitability than intensification.
Expansion through Diversification
Diversification is defined as an entry into new products or product lines,
new services or new markets, involving substantially different skills,
technology and knowledge.

When an established firm introduces a new product, which has little or no

affinity with its present product line and which is meant for a new class of
customers different from the firm’s existing customer groups, the process is
known as conglomerate diversification.

Both the technology of the product and the market are different from the
firm’s present experience.
Market Penetration:

Highly common expansion strategy is market penetration/concentration on

the current business.

The firm directs its resources to the profitable growth of its existing
product in the existing market.
Market Development:

It consists of marketing present products, to customers in related market

areas by adding different channels of distribution or by changing the
content of advertising or the promotional media.
Product Development:

Product development involves substantial modification of existing

products or creation of new but related items that can be marketed to
current customers through establish channels.
Expansion Strategy
Vertically Integrated Diversification: In vertically integrated diversification,
firms opt to engage in businesses that are related to the existing business
of the firm.

The firm remains vertically within the same process sequence moves
forward or backward in the chain and enters specific product/process steps
with the intention of making them into new businesses for the firm.

The characteristic feature of vertically integrated diversification is that the

firm remains in the vertically linked product- process chain.

A firm can either opt for forward or backward integration or horizontal

integration.
Forward and Backward Integration:
Forward and backward integration forms part of vertically integrated
diversification.

In vertically integrated diversification, firms opt to engage in businesses

that are vertically related to the existing business of the firm.

The firm remains vertically within the same process. While diversifying,
firms opt to engage in businesses that are linked forward or backward in
the chain.
Backward integration is concerned with creation of effective supply by
entering business of input providers.

Strategy employed to expand profits and gain greater control over

production/supply of a product whereby a company will purchase or
build a business that will increase its own supply capability or lessen
its cost of production.

For example, A large supermarket chain considers to purchase a number

of farms that would provide it a significant amount of fresh produce.
On the other hand, forward integration is moving forward in the value
chain and entering business lines that use existing products.

Forward integration will also take place where organizations enter into
businesses of distribution channels.

For example, A coffee bean manufacture may choose to merge with a

coffee cafe.
Horizontal Integrated Diversification:

A firm gets horizontally diversified by integrating through acquisition

of one or more similar businesses operating at the same stage of the
production-marketing chain.

They can also integrate with the firms producing complementary

products or by- products or by taking over competitors’ products.

The following figure explains the horizontal diversification, wherein,

textile mill 1 acquires textile mill 2 and 3 as well.
Concentric Diversification:
Concentric diversification takes place when the products are related. In this
diversification, the new business that is it diversifies into is linked to the
existing businesses through process, technology or marketing.

The new product is a spin-off from the existing facilities and

products/processes.

This means that in concentric diversification too, there are

benefits of synergy with the current operations. However, concentric
diversification differs from vertically integrated diversification in the nature of
the linkage the new product has with the existing ones.
Concentric Diversification:

While in vertically integrated diversification, the new product falls within the
firm’s current process-product chain, but in concentric diversification, there is
a departure from this vertical linkage.

The new product is only connected in a loop-like manner at one or more

points in the firm’s existing process/technology/product chain.

For example, a company producing cakes also expands and make pastry
Conglomerate Diversification:

In conglomerate diversification, no linkages related to product, market or

technology exist; the new businesses/products are disjointed from the
existing businesses/products in every way; it is a totally unrelated
diversification.

In process/technology/function, there is no connection between the

new products and the existing ones.

Conglomerate diversification has no common thread at all with the firm’s

present position.

For example, A cement manufacturer diversifies into the manufacture of

steel and rubber products.
External Growth Strategies

When the organization instead of growing internally thinks of diversifying

by making alliances with external organisations, it is called external
growth diversification.

It can be classified in two ways.

• Expansion through Mergers and Acquisitions

• Expansion through Strategic Alliance

Acquisition or merger with an existing concern is an instant means of
achieving the expansion.

It is an attractive and tempting proposition in the sense that it

circumvents the time, risks and skills involved in screening internal
growth opportunities, seizing them and building up the necessary
resource base required to materialise growth.

Organizations consider merger and acquisition proposals in a systematic

manner, so that the marriage will be mutually beneficial, a happy and
lasting affair.
Apart from the urge to grow, acquisitions and mergers are resorted to for
purposes of achieving a measure of synergy between the parent and the
acquired enterprises.

Synergy may result from such bases as physical facilities, technical and
managerial skills, distribution channels, general administration, research and
development and so on.

Only positive synergistic effects are relevant in this connection which

denotes that the positive effects of the merged resources are greater than
the effects of the individual resources before merger or acquisition.
Merger and acquisition in simple words are defined as a process of
combining two or more organizations together.

There is a thin line of difference between the two terms but the impact
of combination is completely different in both the cases.

Some organizations prefer to grow through mergers.

Merger is a process when two or more companies come together to

expand their business operations.

In such a case the deal gets finalized on friendly terms and both the
organizations share profits in the newly created entity.

In a merger two organizations combine to increase their strength and

financial gains along with breaking of the trade barriers.
When one organization takes over the other organization and controls all
its business operations, it is known as acquisition.

In acquisition, one financially strong organization overpowers the weaker

one. Acquisitions often happen during recession in economy or during
declining profit margins.

In this process, the stronger one overpowers the weaker one. The combined
operations then run under the name of the powerful entity.

A deal in case of an acquisition is often done in an unfriendly manner, it

is more or less a forced association where the powerful organization
acquires the operations of the company that is in a weaker position and is
forced to sell its entity.
Horizontal Merger

Horizontal merger is a combination of firms engaged in the same industry. It

is a merger with a direct competitor.

The principal objective behind this type of merger is to achieve economies of

scale in the production process by shedding duplication of installations and
functions, widening the line of products, decrease in working capital and
fixed assets investment, getting rid of competition and so on.

For example, formation of Brook Bond Lipton India Ltd. through the merger
of Lipton India and Brook Bond.
Vertical Merger
It is a merger of two organizations that are operating in the same
industry but at different stages of production or distribution system.
This often leads to increased synergies with the merging firms. If an
organization takes over its supplier/producers of raw material, then it
leads to backward integration.
On the other hand, forward integration happens when an organization
decides to take over its buyer organizations or distribution channels.
Vertical merger results in many operating and financial economies.
Vertical mergers help to create an advantageous position by restricting
the supply of inputs to other players, or by providing the inputs at a
higher cost.
For example, backward integration and forward integration.
Co-generic Merger

In Co-generic merger two or more merging organizations are associated

in some way or the other related to the production processes, business
markets, or basic required technologies.

Such merger includes the extension of the product line or acquiring

components that are required in the daily operations. It offers great
opportunities to businesses to diversify around a common set of
resources and strategic requirements.

For example, an organization in the white goods category such as

refrigerators can diversify by merging with another organization having
business in kitchen appliances.
Conglomerate Merger

Conglomerate mergers are the combination of organizations that are

unrelated to each other.

There are no linkages with respect to customer groups, customer functions

and technologies being used.

There are no important common factors between the organizations in

production, marketing, research and development and technology. In
practice, however, there is some degree of overlap in one or more of these
factors.
Expansion through Strategic Alliance
A strategic alliance is a relationship between two or more businesses that
enables each to achieve certain strategic objectives which neither would be
able to achieve on its own.

The strategic partners maintain their status as independent and separate

entities, share the benefits and control over the partnership, and continue
to make contributions to the alliance until it is terminated.

Strategic alliances are often formed in the global marketplace between

businesses that are based in different regions of the world.
Advantages of Strategic Alliance

Organizational:

Strategic alliance helps to learn necessary skills and obtain certain

capabilities from strategic partners.

Strategic partners may also help to enhance productive capacity, provide a

distribution system, or extend supply chain.

Strategic partners may provide a good or service that complements

thereby creating a synergy.

Having a strategic partner who is well-known and respected also helps

add legitimacy and creditability to a new venture.
Advantages of Strategic Alliance

Economic:

There can be reduction in costs and risks by distributing them across the
members of the alliance.

Greater economies of scale can be obtained in an alliance, as production

volume can increase, causing the cost per unit to decline.

Finally, partners can take advantage of co-specialization, creating additional

value, such as when a leading computer manufacturer bundles its desktop
with a leading monitor manufacturer’s monitor.
Advantages of Strategic Alliance

Strategic:

Rivals can join together to cooperate instead of competing with each other.

Vertical integration can be created where partners are part of supply chain.
Strategic alliances may also be useful to create a competitive advantage by
the pooling of resources and skills.

This may also help with future business opportunities and the development
of new products and technologies.

Strategic alliances may also be used to get access to new technologies or to

pursue joint research and development.
Advantages of Strategic Alliance

Political:

Sometimes strategic alliances are formed with a local foreign business

to gain entry into a foreign market either because of local prejudices
or legal barriers to entry.

Forming strategic alliances with politically influential partners may

also help improve your own influence and position.
Disadvantages of Strategic Alliance
Strategic alliances do come with some disadvantages and risks.

The major disadvantage is sharing.

Strategic alliances require sharing of resources and profits, and also sharing
knowledge and skills that otherwise organisations may not like to share.

Sharing knowledge and skills can be problematic if they involve trade secrets.

Agreements can be executed to protect trade secrets, but they are only as
good as the willingness of parties to abide by the agreements or the courts
willingness to enforce them.

Strategic alliances may also create potential competition when an ally

becomes an opponent in future when it decides to separate out.
Retrenchment Strategy
Retrenchment Strategy: It is followed when an organization substantially
reduces the scope of its activity.

This is done through an attempt to find out the problem areas and diagnose
the causes of the problems.

Next, steps are taken to solve the problems.

These steps result in different kinds of retrenchment strategies.

If the organization chooses to focus on ways and means to reverse the

process of decline, it adopts at turnaround strategy.
If it cuts off the loss-making units, divisions, or SBUs, curtails its
product line, or reduces the functions performed, it adopts a divestment
(or divestiture) strategy.

If none of these actions work, then it may choose to abandon the

activities totally, resulting in a liquidation strategy.

We deal with each of these strategies below.

Turnaround Strategy
Retrenchment may be done either internally or externally.
For internal retrenchment to take place, emphasis is laid on
improving internal efficiency, known as turnaround strategy.
There are certain conditions or indicators which point out that a
turnaround is needed if the company has to survive.

These danger signals are:

Persistent negative cash flow from business(es)
Uncompetitive products or services
Declining market share
Deterioration in physical facilities
Over-staffing, high turnover of employees, and low morale
Mismanagement
Action Plan for Turnaround
For turnaround strategies to be successful, it is imperative to focus on
the short and long-term financing needs as well as on strategic issues.

A workable action plan for turnaround would involve the following

stages:

Stage One – Assessment of current problems:

The first step is to assess the current problems and get to the root
causes and the extent of damage the problem has caused.

Once the problems are identified, the resources should be focused

toward those areas essential to efficiently work on correcting and
repairing any immediate issues.
Stage Two –Analyze the situation and develop a strategic plan:

Before you make any major changes; determine the chances of the
business’s survival.

Identify appropriate strategies and develop a preliminary action plan.

For this one should look for the viable core businesses, adequate bridge
financing and available organizational resources.

Analyze the strengths and weaknesses in the areas of competitive

position. Once major problems and opportunities are identified, develop a
strategic plan with specific goals and detailed functional actions.
Stage Three –Implementing an emergency action plan:

If the organization is in a critical stage, an appropriate action plan must

be developed to stop the bleeding and enable the organization to survive.

The plan typically includes human resource, financial, marketing and

operations actions to restructure debts, improve working capital, reduce
costs, improve budgeting practices, prune product lines and accelerate high
potential products.

A positive operating cash flow must be established as quickly as possible

and enough funds to implement the turnaround strategies must be raised.
Stage Four –Restructuring the business:

The financial state of the organization’s core business is particularly

important.

If the core business is irreparably damaged, then the outlook for the
entire organization may be bleak.

Prepare cash forecasts, analyze assets and debts, review profits and
analyze other key financial functions to position the organization for
rapid improvement.
During the turnaround, the “product mix” may be changed, requiring the
organization to do some repositioning.

Core products neglected over time may require immediate attention to remain
competitive.

Some facilities might be closed; the organization may even withdraw from
certain markets to make organization leaner or target its products toward a
different niche.

Morale building is another important ingredient in the organization’s

competitive effectiveness.

Reward and compensation systems that encourage dedication and creativity

amongst employees to think about profits and return on investments.
Stage Five –Returning to normal:

In the final stage of turnaround strategy process, the organization should

begin to show signs of profitability, return on investments and enhancing
economic value-added.

Emphasis is placed on a number of strategic efforts such as carefully

adding new products and improving customer service, creating alliances
with other organizations, increasing the market share, etc.
The important elements of turnaround
strategy are as follows:

 Changes in the top management

 Initial credibility-building actions
 Neutralizing external pressures
 Identifying quick payoff activities
 Quick cost reductions
 Revenue generation
 Asset liquidation for generating cash
 Better internal coordination
Divestment Strategy

Divestment strategy involves the sale or liquidation of a portion of

business, or a major division, profit centre or SBU.

Divestment is usually a part of rehabilitation or restructuring plan and is

adopted when a turnaround has been attempted but has proved to be
unsuccessful.

The option of a turnaround may even be ignored if it is obvious that

divestment is the only answer.
 A divestment strategy may be adopted due to various reasons:
A business that had been acquired proves to be a mismatch and cannot be
integrated within the company.

 Persistent negative cash flows from a particular business create

financial problems for the whole company, creating the need for
divestment of that business.
 Severity of competition and the inability of a firm to cope with it may
cause it to divest.
 It is not possible for the business to do Technological upgradation that
is required for the business to survive, a preferable option would be to
divest.
 A better alternative may be available for investment, causing a firm to
divest a part of its unprofitable business.
Characteristics of Divestment Strategy

 This strategy involves divestment of some of the activities in a given

business of the firm or sell-out of some of the businesses as such.

 Divestment is to be viewed as an integral part of corporate strategy

without any stigma attached.

 Like expansion strategy, divestment strategy, too, involves a

redefinition of the business of the corporation.
Compulsions for divestment can be many and varied, such as

(a) Obsolescence of product/process

(b) Business becoming unprofitable and unviable
(c) Inability to cope up with cut throat competition
(d) Industry overcapacity
(e) Failure of existing strategy
Liquidation Strategy

A retrenchment strategy considered as the most extreme and

unattractive is liquidation strategy, which involves closing down a firm
and selling its assets.

It is considered as the last resort because it leads to serious

consequences such as loss of employment for workers and other
employees, termination of opportunities where a firm could pursue any
future activities, and the stigma of failure.
Liquidation Strategy
Many small-scale units, proprietorship firms, and partnership ventures
liquidate frequently but medium-and large-sized companies rarely liquidate
in India.

The company management, government, banks and financial institutions,

trade unions, suppliers and creditors, and other agencies are extremely
reluctant to take a decision, or ask, for liquidation.

Selling assets for implementing a liquidation strategy may also be difficult

as buyers are difficult to find.

Moreover, the firm cannot expect adequate compensation as most assets,

being unusable, are considered as scrap.
 Liquidation Strategy
Liquidation strategy may be unpleasant as a strategic alternative but when
a “dead business is worth more than alive”, it is a good proposition.

For instance, the real estate owned by a firm may fetch it more money
than the actual returns of doing business.

When liquidation is evident (though it is difficult to say exactly when), an

abandonment plan is desirable.

Planned liquidation would involve a systematic plan to reap the maximum

benefits for the firm and its shareholders through the process of liquidation.
Major Reasons for Retrenchment/Turnaround Strategy

 The management no longer wishes to remain in business either

partly or wholly due to continuous losses and unviability.

 The management feels that business could be made viable by

divesting some of the activities or liquidation of unprofitable
activities.

 A business that had been acquired proves to be a mismatch and

cannot be integrated within the company.

 Persistent negative cash flows from a particular business create

financial problems for the whole company, creating the need for
divestment of that business.
SM Chapter 4

 Severity of competition and the inability of a firm to cope

with it may cause it to divest.

 Technological upgradation is required if the business is to

survive but where it is not possible for the firm to invest in
it, a preferable option would be to divest.

 A better alternative may be available for investment, causing

a firm to divest a part of its unprofitable businesses.
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