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the policies being currently implemented. Lindblom stressed the rationale of this approach on the grounds that
the comprehensive analytical conclusion of expected goals to be attained in the uncertain future is not helpful
because of the inability of an individual to cope with complex problems, the lack of information, the cost
analysis, the problem of timing, as well as the difficulty of stating realistic goals.
3. Entrepreneurial Approach The underlying thrust of the entrepreneurial approach is related with the role
of the manager as an entrepreneur. Drucker depicted the role of the manager as an entrepreneur, i.e., a manager
who acts like a systematic risk maker and risk taker, looking for and finding opportunity. Entrepreneurship is
essentially the acceptance of change as an opportunity and the acceptance of the leadership in change is the
unique task of the entrepreneur. Therefore, in this approach, the role of an entrepreneur is focused on
opportunities and not on problems.
4. Inside Out Planning According to Ewing, a basic approach to developing strategies could be inside out
planning. Ewing was of the opinion that strategies should first be conceived in a thought process derived from
the unique talents and resources possessed by a business organisation. In this approach, it is only later that
the market forecasts should be taken into consideration, as a kind of check or constraint on the strategies which
are conceived in this manner.
5. Key Factor Approach The key factor approach consists of determination of the really important,
significant factors that are crucial in the success of a specific business and then concentrating major decisions
on them. For example, a new imaginative Barbie fairy doll which has wings and can fly around a room may be a
critically strategic factor in the success of the toy company manufacturing Barbie dolls. The cornerstone of
strategy formation in the key factor approach may also be finding a propitious niche in the market where a
company can give the consumers an irresistible value at a relatively low cost, which was not being satisfied till
then.
6. Integrated Approach An integrated approach to the strategy formulation process provides a framework
which consists of the following components:
(i) Analysis of the present internal and external business conditions.
(ii) Identification and evaluation of the present business strategy, i.e., of the main goals and objectives,
policies and plans which currently guide the enterprise.
(iii) Discovery of the strengths and the weaknesses as viewed in the present business strategy and busi-
ness environment.
(iv) Consideration of the changes in the present strategy.
(v) Identification of general alternatives which are capable of resolving the problems and exploiting the
opportunities.
(vi) Development of the alternatives or formulation of unified strategies by combining the different alterna-
tives in each of the problem areas and opportunity areas.
(vii) Evaluation of each unified strategy in terms of the objectives of the business organisation and selection
of the strategy which is the most appropriate since it best satisfies these objectives.
For an ongoing organisation, re-appraisal of the present business strategy actually becomes the first stage
in the total process of strategy formulation. This requires identification of the present, existing business
strategy which is being followed. Generally, it has been noted that often it is difficult to identify the present
business strategy. This is because of the fact that the business strategy being followed may not have been
specified in clear-cut terms or not have been articulated. Furthermore, it could be due to the fact that there may
be an articulated strategy, but it is not adhered to in practice by the organisation. Moreover, it could also be on
account of the fact that the business enterprise may not have developed any real strategy and it may simply be
muddling through.
!$ Business Organisation and Management
GROWTH OR EXPANSION STRATEGY
A growth strategy signifies something different from stable growth strategy or stability strategy. In a situation
where an organisation raises the level of its objectives from what it had achieved in its immediate past in terms
of its market share, sales revenue, and so on, for example, or when its strategic business decisions are centred
around increased functional performance in major respects, these are typical instances of growth strategy.
Another type of growth strategy is typically found when new products are added to the existing product line,
or when dissimilar products are taken up for production and sale, or business activities are expanded through
acquisition, merger, or amalgamation of business enterprises. Growth strategy is different from stability
strategy in the sense that the former implies exponential growth while the latter implies an extrapolation of
growth which is based on past performance.
The modes of growth strategy could be said to evolve beginning with the early stages of the potential
development of a business organisation and culminate in more advanced and complex forms, in the later stages.
On that basis, William Guth has distinguished between various types of growth strategies in the American
context which have been enumerated upon as follows:
1. A growth strategy which is concerned with the involvement of maintaining the relative position of a
business enterprise in a high growth product market area.
2. A growth strategy which deals with the increase in the market share in a high growth market.
3. A growth strategy which deals with the increase in the market share in a slow growth, i.e., a mature market.
4. A growth strategy which is concerned with the maintenance of a strong relative position in a slow
growth market; using excess cash flow, funds capacity and other resources to support penetration of
multinational markets with the existing product line.
5. A growth strategy which is concerned with the maintenance of a strong relative position in a maturing
market, using excess cash flow, external funds capability and other resource to support the penetration
of new product market areas domestically.
6. A growth strategy which is concerned with the maintenance of a strong relative position in multinational
markets with the present product line, using excess cash flow, funds capability and other resources to
diversify its products.
7. A growth strategy which is concerned with the maintenance of a strong position in a diversified product
line domestically, using excess cash flow, fund capability, and other resources to diversify the market.
availed of and threats should be overcome. In volatile industries, a business enterprise which is not able
to keep pace with the times and its changing conditions is bound to be left high and dry, sooner or later.
3. Growth strategy is associated with strong managerial motivation as one of its advantages. Expansion of
a business enterprise is a rewarding phenomenon in numerous ways. Larger size of a business enter-
prise generally denotes higher executive compensation. It satisfies power and recognition needs. For a
business enterprise to seize market share from its competitors or to enter challenging new fields is not
only an exciting and satisfying feeling but it also gives a sense of achievement. Moreover, growth is
often perceived as an index of effectiveness which has greater news value than stability.
combining units are dissolved and a new business enterprise is formed to take over the assets and liabilities of
all those units against the issue of shares or debentures, it is called an amalgamation or consolidation.
Mergers by way of acquisition and mergers by way of consolidation, i.e., amalgamation are widely acknowl-
edged as desirable strategies of external growth.
Types of Mergers Mergers may be differentiated on the basis of the activities which are added in the process
of the merger, to the existing product or service lines. Mergers may result in horizontal or vertical
diversification, in the same manner that it may be used as a means of intensive growth. A combination of two
or more enterprises in the same line of business or of enterprises engaged in particular aspects of a production
process is called a horizontal merger. A concentric merger involving a combination of two or more business
entities related by technology, the production process or markets is akin to the horizontal merger. A
" Business Organisation and Management
conglomerate merger refers to a combination of two or more business units which are not closely related to each
other in respect of technology, production processes or markets and it is akin to the vertical merger of firms.
There are several examples of mergers. In India, the growth of numerous industrial enterprises has taken
place through mergers, acquisitions and amalgamation. The Buckingham and Carnatic Mills Company was
formed by consolidation of three cotton textile companies, including the Ahmedabad Manufacturing Company
and Calico Printing Company. Examples of mergers through acquisition are the purchase of the Jamshedpur
Bearing Unit of Metal Box Ltd, by TISCO, the acquisition of Mafatlals dyestuff unit at Pune by Deepak Nitrites
Ltd.
In 1970, a group of firms under the Kothari management, i.e., Blue Mountain, Waterfall Estate and Balmadies
Plantation, along with Kothari Texitles and the Adoni Spinning and Weaving Co. Ltd. were merged to form
Kothari (Madras) Ltd. with the objective of accelerated growth and better utilisation of resources. In the US, the
American Motors Corporation came into existence in 1954, due to the merger of Nash Kelvinator Corporation
and the Hudson Motor Company. In 1959, Olivetti Company, the Italian manufacturer of typewriters, acquired
the Underwood Corporation, a large typewriter producer in the US. The merger of the British Motor
Corporation and Leyland Motors into British Leyland Motors is a typical example of mergers in U.K. In recent
times one of the biggest acquisitions has been the $35.3 billion acquisition of US telecom major MCI by
WorldCom.
The adoption of the new takeover bill by SEBI in February 1997 enabled takeover bids to be made more
openly. Corporate acquisition and takeovers had turned into a kind of war between the acquirers, their
competitors and the target companies. India Cements has taken over Visaka Cement Industry, in which Gujarat
Ambuja Cement also displayed an interest. The JK Industries, acquisition of the ailing Vikrant Tyres was
initiated by the former acquiring 36.99% equity in the latter. Later, they made a conditional open offer for
another 15.01% of the equity. SEBI insisted that the offer should be for 20%, because according to the takeover
code a level below that was permissible only if the acquirers stake was over 51%. JK Industries appealed to the
Finance Ministry, stating that the offer of 15.01% was intended to take its holding above the 51% mark and the
ministry ruled in its favour.
Techniques of Mergers, Acquisitions or Takeovers A merger can take place with a cooperative, friendly
approach on the part of the combining firms, or it they could be accomplished by one firm through a bid to
takeover another with a hostile approach. A friendly merger takes place when two or more companies agree
upon the advantages of the merger and work harmoniously together towards its achievement. This results in a
negotiated acquisition of one firm by another. A hostile merger is often called a takeover.
Due to the legal and technical issue involved certain takeover bids in India hit the headlines. In 1983, an
attempt was made by the London-based industrialist, Lord Swaraj Paul, to buy up shares in Escorts and DCM,
making a bid for takeover of the management of the two companies. The purchase of shares apparently was
encouraged by the Non-Resident Investment Scheme of the Union Ministry of Finance, the implications of
which were yet to be analysed. An implication was the possible de-stablisation of the existing management of
corporate enterprises. Another implication was the possibility of foreign MNCs making inroads in the Indian
market.
Box 8.2 Sikkim Banks Merger with the Union Bank of India
Sikkim Banks Merger with the Union Bank of India
Sikkim Bank Ltd, a private sector bank registered under the Sikkim Company Act, was all set to go into liquidation
in 1998. The Reserve Bank of India (RBI) stepped in and put forward a scheme for the banks merger with the Union
Bank of India, one of the top nationalised banks in India. The majority stake in Sikkim Bank was held by North
Eastern Financial Corporations R.S. Choudhary, who along with Vinod Baid, a Calcutta stock-broker, was a part of
the management between 1994 and 1997. The bank had 65 employees almost all of whom were officers. It had
branches across the country.
Growth Strategy "
According to its balance sheet, Sikkim Banks deposits as on 31st March, 1998 stood at Rs.70.24 crore (Rs.42.35
crore was the provisional fiscal) while advances were Rs.59.51 crore (Rs.26.37 crore was the provisional fiscal) and
investments stood at a substantial Rs.14.51 crore (Rs.10.37 crore was the provisional fiscal). The bank posted a
Rs.49.94 lakh loss for 1997-98 as against Rs. 81.33 lakh profit in the previous year. Six cooperative banks featured
as important depositors in the bank, together accounting for Rs.12.94 crore of deposits.
The magnitude of the problem of the bank did not come to light until January 1999. The banks MD, A.K.
Mustafi, was asked to step down by the RBI, and S.N Kunda, AGM in the Bank of Boroda, working in its Surat
branch, was sent to take charge as the M.D. of Sikkim Bank.
The RBIs inspection report regarding the affairs of Sikkim Bank revealed that the banks net worth were negative
to the extent of Rs.40.11 crores and its capital adequacy was also negative at 62.05%. The banks gross non
performing assets stood at Rs.57 crores, constituting 95.5% of its advances. The RBI also discovered that the credit
proposals had not been forwarded in a responsible way and the bank had not evolved any policy pertaining to asset-
liability management. Even more serious was the revelation that funds had been siphoned out. This had primarily
been done through 10 companies. The amount siphoned out was around Rs. 60 crores. Rs.40 crores out of the total
amount was taken out of the bank irregularly and the remainder was taken out by way of cheques and discounting of
bills.
The new M.D. of the bank, in his report to the RBI in February 1999, stated that the banks top management,
including Choudhary and Baid fully endorsed the scam perpetrated by the senior officials of the bank. An interesting
point is that an earlier inspection report in 1995-96 had pointed out that cash credit worth Rs.36 crores had been
granted against hypothecation of stock which did not exist physically. Therefore, three years were wasted by the RBI
which had failed to take steps against these irregularities.
In early 1999, the RBI had put a three months moratorium on the activities of the bank which was extended by
another three months from 5th June. The moratorium included a ceiling, i.e., a cap of Rs. 2,000/- on withdrawals at a
time, and a ban on further lending.
The terms of the merger scheme stipulated that the entire amount of paid-up capital and reserve of Sikkim Bank
would be treated as a provision for bad and doubtful debts on the day the scheme was in force. The RBI also laid down
guidelines for provision of depreciation on the other assets of Sikkim Bank and the rights of its members. All the
employees of Sikkim Bank were to continue in service as employees of the Union Bank of India as is the norm.
Q UESTIONS
1. What do you understand by approaches to business strategy formulation?
2. What is business growth?
3. Explain the various growth strategies.
4. Elaborate upon the growth strategies which can be adopted by a business enterprise.
5. Discuss the advantages of diversification as a growth strategy.
6. Why is it important for business enterprises to seek growth?
7. What are the advantages of a diversification strategy vs. growth through mergers?
8. Differentiate between horizontal integration and vertical integration.
9. What are the benefits of acquisitions as growth strategies?
10. Write short notes on the following:
(a) Growth strategy. (b) Approaches to growth strategy.
(c) Diversification strategy. (d) Mergers vs. amalgamation.
(e) Takeovers.
11. How could the perpetration of the scam in Sikkim Bank have been prevented? Suggest suitable steps for
mergers to be successful.
12. Discuss Laxmi Mittals takeover bid for Arcelor.