MANAGEMENT POLICY AND STRATEGY SESSION - VI Generic and Grand Strategies

Prof. Sushil Department of Management Studies Indian Institute of Technology, Delhi INDIA Email: sushil@dms.iitd.ernet.in
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Generic Strategies

Low-cost leadership

Differentiation

Focus

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PORTERS GENERIC STRATEGIES

Competitive Advantage
Lower Cost Broad Target Competitive Score Narrow Target 3 A. Cost Focus 1. Cost Leadership Differentiation 2. Differentiation

3 B. Differentiation Focus

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REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIES

Generic Strategy
Overall cost leadership

Commodity Required Skills and Resources

Sustained capital investment access to capital Process engineering skills

Common Organizational Requirements

Tight cost control Frequent, detailed control reports Structured organization and responsibilities

Intense supervision of labour Incentives based on Products designed for ease Low-cost distribution system Differentiation Strong marketing abilities Product engineering Creative flare meeting strict quantitative targets in manufacture Strong coordination among functions in R&D, product development, and marketing

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REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIES

CONTD
Strong capability in basic research Subjective measurement and incentives instead of quantitative measures Amenities to attract highly skilled labour, scientists, or creative people

Focus

Corporate reputation for quality or technological leadership Long tradition in the industry or unique combination of skills drawn from other businesses Strong cooperation from channels Combination of the above Combination of the above policies policies directed at the directed at the regular strategic particular strategic target target

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RISKS OF THE GENERIC STRATEGIES

Risks of Cost Leadership Risks of Differentiation Risk of Focus

Cost of leadership is not Differentiation is not The focus strategy is sustained initiated sustained: Competitors imitate The target segment Competitors imitate: Bases for differentiation becomes structurally unattractive Technology changes becomes less imported to Structure erodes Other bases for cost buyers Demand disappears leadership erode Proximity in differentiation Cost proximity is lost Broadly targeted is lost competitors overwhelm the segment: The segments differences from other segments narrow The advantages of a broad line increase Cost focusers achieve Differentiation focusers New Focusers sub-segments even lower cost in segments achieve even greater the industry differentiation in segments
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STAGE OF `INDUSTRY DEVELOPMENT

Growth

Maturity

Decline

Strategic position of organizatio n Follower

Leade r

Keeping ahead of the field Imitation at lower cost Joint ventures

Cost leadership Raise barriers Deter competitors Differentiati on Focus

Redefine scope Divest peripherals Encourage departures Differentiation New opportunities

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Types of Grand Strategies

Concentrated Growth Market Development Conglomerate Diversification Turnaround

Product Development
Innovation Horizontal Integration Vertical Integration Concentric Diversification

Divestiture
Liquidation Bankruptcy Joint Ventures Strategic Alliances

Consortia
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Characteristics of a Concentrated Growth Strategy

Involves focusing resources on the profitable growth of a single product, in a single market, with a single dominant technology Rationale - Firm develops and exploits its expertise in a delimited competitive arena Determinants of competitive market success Ability to assess market needs Knowledge of buyer behavior Customer price sensitivity Effectiveness of promotion

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Conditions Favoring a Concentrated Growth Strategy

Firms industry is resistant to major technological advancements Firms targeted markets are not product saturated Firms markets are sufficiently distinctive to dissuade competitors in adjacent markets from entering firms segment Firms inputs are stable in price and quantity and available in amounts and at times needed Firms industry is stable Firms competitive advantages are based on efficient production or distribution channels Success of market generalists
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Strategies of Market and Product Development

Market development Consists of marketing present products, often with only cosmetic modifications, to customers in related market areas by Adding channels of distribution or Changing content of advertising or promotion Product development Involves substantial modification of existing products or creation of new but related products Based on penetrating existing markets by Incorporating product modifications into existing items or Developing new products connected to existing products

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Concentration: Increasing use of present products in present markets 1. Increasing present customers rate of use: a. Increasing size of purchase b. Increasing rate of product obsolescence c. Advertising other uses d. Giving price incentives for increased use 2. Attracting competitors customers a. Establishing sharper brand differentiation b. Increasing promotional effort c. Initiating price cuts 3. Attracting nonusers to buy the product a. Inducing trial use through sampling, price incentives, and so on b. Pricing up or down c. Advertising new uses
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Specific Options for Selected Grand Strategies

Specific Options for Selected Grand Strategies (continued)

Market Development: Selling present products in new markets

1. Opening additional geographic markets a. Regional expansion

b. National expansion
c. International expansion 2. Attracting other market segments a. Developing product versions to appeal to other segments b. Entering other channels of distribution c. Advertising in other media
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Specific Options for Selected Grand Strategies (concluded)

Product Development: Developing new products for present markets

1. Developing new product features a. Adapt (to other ideas, developments) b. Modify (change color, motion, sound, odor, form, shape) c. Magnify (stronger, loner, thicker, extra value) d. Minify (smaller, shorter, higher e. Substitute (other ingredients, process, power) f. Rearrange (other patterns, layout, sequence, components) g. Reverse (inside out) h. Combine (blend, alloy, assortment, ensemble; combine units, purposes, appeals, ideas) 2. Developing quality variations 3. Developing additional models and sizes (product proliferation) Prof.Sushil\IITD\Session-VI 14

Innovation Strategy

Involves creating a new product life cycle, thereby making similar existing products obsolete

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Strategies of Horizontal and Vertical Integration

Horizontal integration

Based on growth via acquisition of one or more similar firms operating at the same stage of the productionmarketing chain Involves eliminating competitors, providing acquiring firm with access to new markets

Vertical integration

Involves acquiring firms

To supply acquiring firm with inputs - backward integration or Are customers for firms outputs - forward integration

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Vertical and Horizontal Integrations

Textile producer Textile producer

Shirt manufacturer

Shirt manufacturer

Clothing store

Clothing store

Acquisitions or mergers of suppliers or customer businesses are vertical integrations

Acquisitions or mergers of competing businesses are horizontal integrations Prof.Sushil\IITD\Session-VI

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Motivations Related to Diversification Strategies

Increase firms stock value

Increase growth rate of firm

Investment is better use of funds than using them for internal growth Improve stability of earnings and sales Balance or fill out product line Diversify product line Acquire a needed resource quickly

Achieve tax savings Increase efficiency and profitability

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Diversification Strategies

Concentric diversification Involves acquisition of businesses related to acquiring firm in terms of technology, markets, or products Conglomerate diversification Involves acquisition of a business because it represents a promising investment opportunity Primary motivation is profit pattern of venture Difference between the approaches Concentric diversification emphasizes commonality whereas conglomerate diversification emphasizes profits for each individual unit
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Turnaround Strategy

Involves a concerted effort over a period of time to fortify a firms distinctive competencies, returning it to profitability

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A Model of the Turnaround Process

Turnaround situation
Cause

Turnaround response
Recovery phase
(operating)

Severity Retrenchment phase

Internal factors

Declinin g sales or margins Low

Cost reductio n

Efficiency maintenanc e Recovery Entrepreneuria l reconfiguratio n

High Imminent bankruptc y Asset reductio n

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External factors

Stability

(strategic)
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Divestiture and Liquidation Strategies

Divestiture strategy

Involves selling a firm or a major component of a firm

Reasons for divestiture

Partial mismatches between acquired firm and parent firm

Corporate financial needs

Government antitrust action

Liquidation strategy

Involves selling parts of a firm, usually for its tangible asset value and not as a going concern

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The Strategy of Bankruptcy

Two approaches

Liquidation - Involves complete distribution of a firms assets to creditors, most of whom receive a small fraction of amount owed Reorganization - Involves creditors temporarily freezing their claims while a firm reorganizes and rebuilds its operations more profitably Proactive option offering maximum repayment of a firms debt in the future if a recovery strategy is successful
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Advantage of a reorganization bankruptcy

Corporate Combination Strategies

Joint venture Involves establishing a third company (child), operated for the benefit of the co-owners (parents) Strategic alliance Involves creating a partnership between two or more companies that contribute skills and expertise to a cooperative project Exists for a defined period Does not involve the exchange of equity Consortia, Keiretsus, and Chaebols Defined as large interlocking relationships between businesses of an industry

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The Top Five Strategic Reasons for Outsourcing

1. Improve Business Focus 2. Access to World-Class Capabilities

3. Accelerated Reengineering Benefits 4. Shared Risks 5. Free Resources for Other Purposes
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INDIAN BUSINESS HOUSES TATA GROUP

Group Overview

Indias largest business house More than 85 companies 39 listed 8% of Indias market capitalization 2.6 Million shareholders 2,70,000 employees Turnover Rs 343 billion (1996-1997)

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INDIAN BUSINESS HOUSES TATA GROUP Contd...

Financial Highlights

Assets Turnover PBT PAT Exports

1996-97 Rs (Billion) 322 343 30 23 40

% change Over 199596 18.8 18 -7.1 - 16 19

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INDIAN BUSINESS HOUSES TATA GROUP Contd...

Metals Automobiles Energy Engineering Chemicals Pharmaceuticals

Consumer Products Services Agro Industries IT and Communication Exports Finance

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INDIAN BUSINESS HOUSES TATA GROUP Contd...

Tata Heritage Jamsetji Tata

Started textile mill in 1877 Inspired steel and power industry Technical education and philanthropy Pioneered civil aviation Funded Hom Bhabhas nuclear programme Guided the Tata group for over half a century Present Chairman since 1991
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JRD Tata

Ratan Tata

INDIAN BUSINESS HOUSES TATA GROUP Contd...

Holding Companies Tata Sons

Founded by Jamsetji Tata Promoted many of the present Tata companies 63% held by Tata philanthropic trusts 100% subsidiary of Tata Sons founded in 1945 Managing agency till 1970 Promoted new Tata companies in technology based businesses

Tata Industries

Cross holdings among other Tata companies

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INDIAN BUSINESS HOUSES TATA GROUP Contd...

Restructuring Prompted by post 1991 changing environment Need to identify and focus on core businesses Resistance from satraps

Russi Mody, Darbari Seth, Ajit Kerkar

From over 85 to about 30 From about 25 to around 10 or 12

Shrink number of companies

Shrink number of core businesses

Mergers and divestments McKinsey hired as a consultants

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INDIAN BUSINESS HOUSES TATA GROUP Contd...

Restructuring Strategy Keep and grow

Power, watches, metals, chemicals, telecom, hospitality, financial services, infotech, emerging services, infrastructure, automobiles Tea and beverages, retailing

Forge strategic tie ups

Remain only as strategic investors

Luxury cars, infotech, printing, cosmetics

Refrigeration, paints, textiles, trading, electronics, oil drilling, petrochemicals, pharma, specialty chemicals
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Sell

INDIAN BUSINESS HOUSES TATA GROUP Contd...

Recent Developments Voltas focus on air conditioning and engineering business

Hive off pesticides business to Ralchem Pesticides (wholly owned subsidiary of Rallis - largest integrated agrochemical company in India)

Electrolux Voltas - JV between Voltas and AB Electrolux

Refrigerators Washing machines Compressors for refrigerators

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INDIAN BUSINESS HOUSES TATA GROUP Contd...

Recent Developments Tata Tea focusing on global agro business

Manages 32 tea gardens in Sri Lanka Adding tea gardens inTurkey Acquired a 9.5% stake in Asian Coffee Automobile assembly in Bangladesh Instant tea operations in the US Chain of hotels across the world Precision tooling operations in Singapore

Overseas Operations

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