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STRATEGIC MANAGEMENT

ASSIGNMENT – 2

BY:GAUTAM C.N

5TH SEM ‘C’

REG NO:08BMC08141
Grand Strategies
Strategy Formulation is a strategic planning or long range-planning. This process
is primarily analytical, not action oriented. This process involves scanning
external and internal environmental factors, analysis of the strategic factors and
generation, evaluation and selection of the best alternative strategy appropriate
to the analysis.

Identification of various alternative strategies is an important aspect of


strategic management as it provides the alternatives which can be considered and
selected for implementation in order to arrive at certain result. At this stage,
the managers are able to complete their environmental analysis and appraisal of
their strengths and they are in a position to identify what alternatives
strategies are available for them in the light of their organizational mission.

In this there are four main strategies:


1) Stability strategy
2) Growth/Expansion Strategy
3) Retrenchment strategy
4) Combination strategy

1. Stability strategy
The basic approach is ‘maintain present course: steady as it goes.’
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
firm’s resources and market requirement's.

Reasons for adopting Stability Strategies:


Managers of small business desire a satisfactory level of profits rather than increased
profits.
Maintenance of status quo involves less risk than a more growth strategy.
Change may upset the smooth operations and result in poor performance
especially, if the firm considers itself successful with the present level of
operations.
Changing operations to pursue a more aggressive growth strategy
usuallyrequires an increased investment and managerial support. Firms, which
cannotprovide resources, may continue with the stability strategy.
Some executives maintain with the stability strategy due to inertia for
change.
In some cases, firms are forced to adopt stability strategy, if they operate
in a low-growth or no-growth industry.
Firms that dominate its industry through their superior size and competitive
advantage may pursue stability to reduce their chances of being prosecuted for
engaging in monopolistic practices.
Smaller firms that concentrate on specialized products or services may
choose stability because of their concern that growth will result in reduced
quality and customer service.
Examples of Stability Strategies adopted by companies:
Steel Authority of India has adopted stability strategy because of over
capacity in steel sector. Instead it has concentrated on increasing operational
efficiency of its various plants rather than going for expansion. Others
industries are ‘heavy commercial vehicle’, ‘coal industry.
Apart from over capacity, regulatory restrictions in some industries have
forced companies to adopt stability strategy. Cigarette, liquor industries fall in
this category because of strict control over capacity expansion. Both these
industries require license under the provisions of Industries (Development and
regulations) Act, 1951.
Many companies in public sector have been forced to adopt stability
strategybecause of government’s policy of cutting the role of public sector and
budgetarysupport for expansion of these companies has been withdrawn.

2. Growth/Expansion Strategies
A growth strategy is one that an enterprise pursues when it increases its level of
objectives upward in significant increment, much higher than an exploration of its
past achievement level. The most frequent increase indicating a growth strategy is
to raise the market share and or sales objectives upward significantly.
If we look at the corporate performance in the recent years, we find how the
various organizations have grown both in terms of sales and profit as well as
assets. For example: Reliance Industries Limited, Nirma Limited.
Organizations may select a growth strategy to increase their profits, sales and/
or market share. They also pursue growth strategy to reduce cost of production per
unit. Growth Strategies involve a significant increase in performance objectives.
These strategies are adopted when firms remarkably broadens the scope of their
customer groups, customer functions and alternative technologies either singly or
in combination with each other.

Reasons for adopting Growth Strategies:


Growth Strategy is taken up because of managerial motivation to do so.
Managers with high degree of achievement and recognition always prefer to grow.
There are certain intangible advantages of growth. These may be in the form
of increased prestige of the organization, satisfaction to employees and social
benefits. Example: Growing companies have high level of prestige in the corporate
world, e.g., Reliance, Infosys, Hindustan Unilever, etc.
Types of Growth / Expansion Strategies:

(i)Concentric Expansion Strategy:The first route of growth is to expand


the
present line of business. It can be aimed at market penetration, market
development and / or product development.
Market Penetration: The organization tries to capture market share in the existing
product and aims at expanding its business at a rate higher than the industry
growth.
Example: Reliance has captured substantial market share in textile yarn and
intermediaries
Example: ITC has captured substantial market share in cigarettes.
Market Development: Attempt is made to increase sales by developing new markets
either geography-wise or segment-wise.
Example: Many companies which find that the urban market is saturated and there is
little scope for expansion, opt for developing new market in rural areas. Some of
the companies which have made keen attempt to develop rural market are HUL
(personal products), Colgate (oral care products), LG (TV), Videocon (Consumer
durables), etc.
Product Development: Efforts are attempted at to achieve growth through product
innovation so as to penetrate in new segment.
Example:SAMSUNG (TV) may offer slim line TV, Plasma TV, etc.

Benefits of Concentric Expansion Strategy:


A firm that is familiar with an industry would naturally like to invest more
in known business rather than unknown ones. Eg. Bajaj Auto
It involves minimal organizational changes.
It enables the firm to master one or a few businesses and enable it to
specialize by gaining an in depth knowledge of these businesses.
Managers face fewer problems when dealing with known situations.
Past experience is valuable as it is replicable.
Limitations of Concentric Expansion Strategy:
“Putting all one’s eggs in one basket has its own problems” these are as follows-
Concentration strategies are heavily dependent on the industry.
Factors like product obsolescence, fickleness of markets, and emergence of
newer technologies are threats to concentrated firms.
Concentration strategies may result in doing too much of a known thing.
Thismay create an organizational inertia; managers may not be able to sustain
interestand find the work less challenging and less stimulating.
(ii) Integration Strategy: When firms use their existing base to expand in
the
direction of their raw materials or the ultimate consumers, or, alternatively they
acquire complimentary or adjacent businesses, integration takes place. Integration
basically means combining activities related to the present activity of a firm.
Types of Integration Strategy:
Vertical Integration: When an organization starts making new products that serve
its own needs, vertical integration takes place. 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 firm’s product) is vertical
integration.

Backward Integration: retreating to the source of raw materials.


Example: Reliance started its business with textiles and went for backward
integration to produce PFY and PSF, critical raw materials for textiles, PTA and
MEG-raw materials for PSF and PFY, paraxylene -raw materials for PTA and MEG,
and
finally naphtha for producing paraxylene.
NaphthaàParaxyleneàPTA + MEGàPSf(fibres) and PFY yarnsà Textiles

Forward Integration: moves the organization nearer to the ultimate customer


Example: Expansion strategies at Modern Group, consisting of five companies
having
a combined turnover of Rs.115 crore in 1989, involved diversification in the form
of backward and forward integration.
Forward integration took place at Modern Suiting when it diversified into worsted
suiting. With an investment of Rs.7 crore, it acquired sulzer looms, sophisticated
fabric processing facilities and other sophisticated equipments to manufacture a
premium terry wool suiting with the brand name ‘Amadeus’.
Backward integration at Modern Woolens involved collaboration with Schild of
Switzerland for wool processing, combing, and woolen tops which are necessary for
the production of woolen textiles. In this manner, a number of backward and
forward linkages were being attempted within the Modern Group with the objective
of raising the turnover to Rs.250 crore by 1992.
Horizontal Integration: When an organization takes up the same type of products at
the same level of production or marketing process, it is said to follow a strategy
of horizontal integration
For Example: When a luggage company takes over its rival luggage company
Horizontal Integration strategy may be frequently adopted with a view to expand
geographically by buying a competitor’s business, to increase the market share .
RETRENCHMENT STRATERGY

A retrenchment grand strategy is followed when an organization aims


at a contraction of its activities through substantial reduction or the
elimination of the scope of one or more of its businesses in terms of
their respective customer groups, customer functions, or alternative
technologies either singly or jointly in order to improve its overall
performance. E.g: A corporate hospital decides to focus only on
special treatment and realize higher revenues by reducing its
commitment to general case which is less profitable.

The growth of industries and markets are threatened by various


external and internal developments (External developments –
government policies, demand saturation, emergence of substitute
products, or changing customer needs. Internal Developments – poor
management, wrong strategies, poor quality of functional management
and so on.) In these situations the industries and markets and
consequently the companies face the danger of decline and will go for
adopting retrenchment strategies. E.g: fountain pens, manual type
writers, tele printers, steam engines, jute and jute products, slide rules,
calculators and wooden toys are some products that have either
disappeared or face decline.

There are three types of retrenchment strategies – Turnaround


Strategies, Divestment Strategies and Liquidation strategies.

1. Turnaround Strategies
Turn around strategies derives their name from the action involved that
is reversing a negative trend. There are certain conditions or indicators
which point out that a turnaround is needed for an organization to
survive. They are:

• Persistent Negative cash flows


• Negative Profits
• Declining market share
• Deterioration in Physical facilities
• Over manning, high turnover of employees, and low morale
• Uncompetitive products or services
• Mis management
An organization which faces one or more of these issues is referred to
as a ‘sick’ company.

There are three ways in which turnarounds can be managed

• The existing chief executive and management team handles the


entire turnaround strategy with the advisory support of a external
consultant.
• In another case the existing team withdraws temporarily and an
executive consultant or turnaround specialist is employed to do the job.
• The last method involves the replacement of the existing team
specially the chief executive, or merging the sick organization with a
healthy one.

Before a turn around can be formulated for an Indian company, it has


to be first declared as a sick company. The declaration is done on the
basis of the Sick Industrial Companies Act (SICA), 1985, which
provides for a quasi judicial body called the Board of Industrial and
Financial Reconstruction (BIFR) which acts as the corporate doctor
whenever companies fall sick.

2. Divestment Strategies
A 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. Harvesting strategies a variant of the divestment
strategies, involve a process of gradually letting a company business
wither away in a carefully controlled manner
Reasons for Divestment
• The business that has been acquired proves to be a mismatch and
cannot be integrated within the company. Similarly a project that proves
to be in viable in the long term is divested
• Persistent negative cash flows from a particular business create
financial problems for the whole company, creating a need for the
divestment of that business.
• Severity of competition and the inability of a firm to cope with it may
cause it to divest.
• Technological up gradation 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
• Divestment may be done because by selling off a part of a business
the company may be in a position to survive
• A better alternative may be available for investment, causing a firm to
divest a part of its unprofitable business.
• Divestment by one firm may be a part of merger plan executed with
another firm, where mutual exchange of unprofitable divisions may take
place.
• Lastly a firm may divest in order to attract the provisions of the MRTP
Act or owing to oversize and the resultant inability to manage a large
business.

E.g: TATA group is a highly diversified entity with a range of


businesses under its fold. They identified their non – core businesses
for divestment. TOMCO was divested and sold to Hindustan Levers as
soaps and a detergent was not considered a core business for the
Tatas. Similarly, the pharmaceuticals companies of the Tatas- Merind
and Tata pharma – were divested to Wockhardt. The cosmetics
company Lakme was divested and sold to Hindustan Levers, as
besides being a non core business, it was found to be a non-
competitive and would have required substantial investment to be
sustained.