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GRAND STRATEGIES
Stability Strat.
Growth Strat
Retrenchment strat
Combination Strat
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Growth Strategies
a. Intensive Growth (Concentration strategies) i. Market Penetration ii. Market Development iii. Product Development b. Integration i. Horizontal D. / merger/acquisition /takeover ii. Vertical D.
Backward D Forward D
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Retrenchment strategy
a. Turnaround b. Divestment c. Liquidation
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STABILITY STRATEGY
In an effective stability strategy, companies will concentrate their resources where the company presently has or can rapidly develop a meaningful competitive advantage in the narrowest possible product market scope consistent with the firms resources and market requirements.
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In order to understand how stability strategies work, here are the examples to illustrate how organization could aim at stability in each of the three dimensions of customer groups, customer functions and alternative technologies respectively.
A packaged tea company provides special service to its institutional buyers in order to encourage bulk buying and thus improve its marketing efficiency. A copier machine company provides better after-sales service to its existing customers to improve its company and product image and increase sales of accessories and consumables.
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Note that all these companies here do not go beyond what they are doing presently; they serve the same markets with the present products using the existing technology. The strategies aim at stability by causing the companies to marginally improve their performance or at least letting them remain where they are in case a volatile environment and a highly competitive market. The essence of stability strategic is, therefore not doing nothing but sustaining moderate growth in line with the existing trends. Where substantial growth is aimed at, the strategy to be adopted is that of expansion.
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expansion strategy.
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Given below in an example to show how companies can aim at expansion either in terms of customer groups, customer functions, or alternatives technologies.
A chocolate manufacture expands its customer groups to include middle-aged and old persons to its existing customers comprising children and adolescents.
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LIMITATIONS OF GROWTH
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Business firms cannot grow indefinitely. Growth has its own limitations, which are : Finance: Growth, especially external growth, requires additional capital investment, which is sometimes difficult for a small firm to arrange. Market: Growth can be achieved to the extent that the size of market permits. If a firm grows faster than increase in the size of the market, it is likely to face failure.
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Human Relations Problems: In a big firm, management loses personal touch with employees and customers. Motivation and morale tend to be low resulting in inefficiency. Management: Growth increases the functions and complexities of operations. As the number of functions and departments increase, coordination and control become very difficult. If the organization and management structure is not capable of accommodating them, growth may be harmful.
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Lack of knowledge: Under conglomerate growth, a firm enters new industries and new markets about which the managers know little. Managers find it difficult to find and develop managers who can quickly handle new units and improve their earning potential against heavy odds. Many growing firms could not succeed because their managers felt that they could manage anything anywhere.
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Forms of Growth
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PRODUCT
PRESENT MARKET
MARKET PENETRATION
NEW
PRESENT
PRODUCT DEVELOPMENT
NEW
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(A)Intensive Growth
Market Penetration [Present Product Present Market]: It involves selling more products
to the same market: a firm may attempt at focussing intensely on exisiting markets with its present products, using a market penetration type of concentration. Besides the primary objective of increasing usage by existing customers, market penetration strategies are also used to maintain or increase market share of present products.
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Product Development [New product Present Market]: In this, the firm tries to grow by developing new products for the present market.
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INTEGRATION STRATEGY
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(B). Diversification
Beyond a certain point, it is no longer possible for a firm to expand in the basic product market. So the firm seeks increased sales by developing new products for new markets. This strategy towards growth is called diversification. The diversification does not simply involve adding variety in a product but adding entirely different types of products. Diversification is a much-talked about and widely used strategy for growth. Many companies have opted for this. For example, LIC, an insurance concern initially, diversified into mutual funds. State Bank of India diversified into merchant banking and mutual funds. Similarly, Larsen and Toubro, an engineering company diversified into cement.
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Types of Diversification
a. Horizontal Integration (also known as
Merger)
b. Vertical Integration i. Backward Integration ii. Forward Integration c. Concentric Diversification d. Conglomerate Diversification
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Integration basically means combining activities related to the present activity of a firm. Such a combination may be done on the basis of the Value Chain. Value Chain is a set of interlinked activities performed by an organization right from the procurement of basic Raw Material down to the marketing of finished product to the ultimate consumers. So a firm may move up or down the value chain to concentrate more comprehensively on the customer group, and needs than it is already servicing.
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A firm that adopts integration as the expansion strategy commits itself to adjacent business. Thus, integration is an expansion strategy as its adoption results in a widening of the scope of the business definition of a firm. Integration is also a subset of diversification strategy as it involves doing something different from what the firm has been doing previously.
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integration.
H.I is also known as merger.
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ABOUT MERGER
Voluntary amalgamation of two firms on roughly equal terms into one new legal entity is known as merger. If the merged entities were competitors, the merger is called horizontal integration, If they were supplier or customer of one another, it is called vertical integration
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Vertical Integration
When an organization starts making new products that serve its own needs, vertical integration takes place. In other words, any new activity undertaken with the purpose of either supplying inputs (such as, raw materials) or serving as a customer for outputs (such as marketing of firms product) is a vertical integration. Vertical integration may be of two types backward and forward.
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Backward integration
It involves moving toward the input of the present product. It is aimed at moving lower on the production process so that the firm is able to supply its own raw materials or basic components. For example, a Car manufacturer may start producing tire tubes; Reliance Industries Ltd. has been able to grow largely through backward integration. It started business with textiles and went for backward integration to produce raw materials for textiles
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Forward integration
Forward integration means the firm entering into the business of distributing or selling its present products. It refers to moving upwards in the production/distribution process towards the ultimate consumer. The firm sets up its own retail outlets for the sale of its own products. For example, many companies like Bata, DCM, Bombay Dyeing, Raymonds and Reliance have set up their own retail outlets to sell their fabrics.
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combination.
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4. Sell-sufficiency: Horizontal combination does not lead to selfsufficiency of materials. But in vertical integration, the manufacturer of a product may integrate with the supplier of raw material. This will lead to self-sufficiency. 5. Inter-dependency: The combined units under horizontal combination are not interdependent as far as raw materials are concerned. All units operate as semi-autonomous units. The stoppage of work in one unit doesn't affect the working of others. But in case of vertical integration, there is a combination of successive stages of production. Stoppage of work at one stage will affect the functioning at all subsequent stages. For instance, bread can't be prepared if flour is not available.
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Concentric diversification may be of three types: 1. Marketing-related concentric diversification: A similar type of product is offered with the help of unrelated technology, e.g. a company in the sewing machine business diversifies into kitchenware and household appliances, which are sold through a chain of retail stores to family consumers. The market relatedness here is in terms of the common distribution channel for sewing machines, kitchenware and household appliances.
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Why Diversification?
It minimizes risk by spreading it over several businesses. It is used to capitalize on organizational strengths or minimize weaknesses. Sometimes, diversification may be the only way out if growth in existing businesses is blocked due to environmental and regulatory factors.
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(C)MODERNISATION
A firm may use the strategy of modernization to achieve growth. Modernization basically involves upgradation of technology to increase production, to improve quality and to reduce wastages and cost of production. The wornout and obsolete machines and equipment are replaced by the modern machines and equipment.
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(D).Merger
Merger is an external growth strategy. Merger can occur in two ways: (a) Acquisition OR takeover and (b) amalgamation.
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ABOUT MERGER
Voluntary amalgamation of two firms on roughly equal terms into one new legal entity is known as merger. If the merged entities were competitors, the merger is called horizontal integration, If they were supplier or customer of one another, it is called vertical integration
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Takeover or acquisition
Takeover or acquisition takes place when a company offers cash or securities in exchange for the majority shares of another company. It involves one company taking over control of another.
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Amalgamation
Amalgamation takes place when two or more companies of equal size or strength formally submerge their corporate identities into a single one in a friendly atmosphere.
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(E).Joint Venture
Joint Ventures are a special case of
b. two firms across different industries c. an Indian company and a foreign company in India d. an Indian company and foreign company in the foreign country OR e. an Indian company and a foreign company in a third country.
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A few examples of Joint Venture are: Birla Yamaha Ltd. is a joint venture of Birla and Yamaha Motor Co. of Japan. DCM and Daewoo Corporation of Korea established DCM Daewoo Motors Ltd. Hindustan Computers Ltd. and Hewlett Packard of USA formed HCL-HP Ltd, a joint venture company.
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Sony-Ericsson is a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones. The stated reason for this venture is to combine Sony's consumer electronics expertise with Ericsson's technological leadership in the communications sector. Both companies have stopped making their own mobile phones.
Virgin Mobile India Limited is a cellular telephone service provider company which is a joint venture between Tata Tele service and Richard Branson's Service Group. Currently, the company uses Tata's CDMA network to offer its services under the brand name Virgin Mobile, and it has also started GSM services in some states.
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Tata Motors and Fiat signed an agreement for Joint Venture to manufacture passenger vehicles, engines etc. Tata Motors signed another agreement with a Brazil based company Marcopolo to manufacture buses for India and international markets. JV between Bharati Enterprises and Wal-Mart having equal stake of both (50 50% partnership)
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Retrenchment strategies
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Retrenchment may be done either internally or externally. Turnaround is type of internal retrenchment strategy. A more serious form of external retrenchment is in the form of divestment or liquidation.
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Retrenchment grand strategy is followed when an organization substantially reduces the scope of either its customer groups, customer functions, or alternative technologies singly or jointly in order to improve its performance. Retrenchment involves total or partial withdrawal from either a customer group, customer function, or use of an alternative technology as can be seen from the situation given below.
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A pharmaceutical firm pulls out from retail selling to concentrate on institutional selling in order to reduce its sales force and increase marketing efficiency. A corporate hospital decides to focus only on specially treatment and realize higher revenues by reducing its commitment to general cases which are typically less profitable to deal with A training institution attempts to serve a large clientele through the distance learning system and discard its fact-to-face interaction methodology of training in order its expenses and use the existing facilities and personnel more efficiently. In this manner, retrenchment attempts to trim the fat and results in a slimmer organization bereft of unprofitable customer groups, customer functions, or alternative technologies.
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(A).Turnaround Strategy
This strategy aims at improving the efficiency of the firm by turning around its resources. This can be brought about by reducing assets, achieving cost reduction and increasing revenues. Focus in Turnaround strategy: Restore money-losing businesses to profitability rather than divest them. Objective of Turnaround strategy: Get whole firm back by curing problems of those businesses in portfolio responsible for pulling down overall performance. E.g. of Turnaround Strategy:
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2. Quality Management: It is also attempting to make long-term impact through manufacturing and management initiatives. For example, in order to improve quality, Telco has adopted the Six Sigma quality enhancement standards aiming at improving the reliability, durability and quality of the product. Further, it has embarked on implementing kaizen initiatives across the company, which also aims at cost-effectiveness. 3. Financial Restructuring: The initiatives for financial restructuring can be clubbed mainly under keeping borrowings under control, making strategic disinvestments and improvement in the risk profile, under which it proposes to reduce the cost of funds by retiring high cost debt, reducing the working capital days and putting efficient credit control systems.
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4. Organisational Renovation: Telco has started efforts towards right sizing by bringing down manpower by 11,500 over the last three years. The company will be concentrating both on asset and business restructuring besides cost cutting. While, marketing activity will be pepped up in the commercial vehicle line of business, non-vehicular businesses like reconditioning, providing transport solution and spares will be focused upon to reduce the cyclically of the business. 5. Product Realignment: The company plans to achieve increase the volume by targeting both new product development and aggressive marketing. Says Mr. Ravi Kant, " We will place more emphasis on new product development as it is expected to make a major difference to ward off competition."
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(B).Divestment Strategy
Divestment (also called divestiture or cutback) strategy involves the sale or liquidation of a portion of business, or a major division, 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.
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Third motive for firms to divest a part of the company is that a division is under-performing or even failing. Fourth motive for divestitures is to obtain funds. Divestitures generate funds for the firm because it is selling one of its businesses in exchange for cash.
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Examples:
Tata group is a highly diversified entity with a range of business under its fold. They identified their non-core businesses for divestment. TOMCO Tata Oil Mills Company detergent and soap) was divested and sold to Hindustan Unilevers as soaps and detergent was not considered a core business for the Tatas. Pharmaceutical companies of Tata Merind and Tata Pharma were divested to Wockhardt. The cosmetic company Lakme was divested and sold to HLL, as, besides being a non-core business, it was found to be non-competitive and would have required substantial investment to be sustained. Nihar coconut oil of HLL was divested to Marico industries ltd.
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(C).Liquidation strategies
A retrenchment strategy considered 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.
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The company management, government, banks and financial institution, trade unions, suppliers and creditors, and other agencies are extremely reluctant to take a decision, or ask, for liquidation. Each party has its own reasons for doing so. While the management may hesitate to liquidate due to the fear of failure, the government may not easily allow liquidation due to the political and other risks involved. Trade unions would naturally resist the loss of employment of workers. Ceasing operations does not mean that a firm is freed from its contractual obligations to the creditors and suppliers unless, of course, it is declare insolvent or bankrupt.
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Selling assets for implementing a liquidation strategy 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. Besides the practical difficulties in liquidation, there is also a psychological aspect, which cannot be overlooked. The prospects of liquidation create bad impact on the companys (or business groups) reputation. For many executives who are closely associated with firms, liquidation may be a traumatic experience. Despite the hesitancy on the part of all concerned with a company that intends to liquate and the difficulties in the process liquidation sometimes a firm may be forced to liquidate.
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Planned liquidation
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 by a firm may fetch it more than the actual returns of doing business. Planed liquidation would involve a systematic plan to reap the maximum benefits for the firm and its shareholders through the process of liquidation.
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After Ratan Tata took over as Chairman of the company in 1977, some efforts were made for modernization but proved to be grossly insufficient. A proposal to merge the mill with other textile units of the Tatas could not materialize. Rationalization of the product mix across these units also proved to be a non-starter owing to resistance offered by executive. Efforts to negotiate a voluntary retirement scheme to cut down on the 6000 workers-employees strength also failed.
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Ultimately, the banks and financial institution delayed the formulation of a rehabilitation package that could turn the mill around. The state government apparently did not provide the much-needed political support that could have helped save the jobs of the workers. The case of Empress Mills provides an important lesson that if timely strategic action is not taken and the situation is allowed to drift, even the largest business group in India, such as the Tatas, cannot save a company from inevitable death.
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When a firm diversifies into some business which is related with its present business in terms of marketing, technology, or both, it is called concentric diversification. When in concentric diversification new product or service is provided with the help of existing or similar technology it is called technologyrelated concentric diversification. For example, Mother dairy has added 'curd and Lassi to its range of milk products. In marketing-related concentric diversification, the new product or service is sold through the existing distribution system.
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Concentric Diversification (extra slide from chpt 5 ppt other one) (Related Diversification)