Grand Strategies/Corporate level strategies

Vasudeva Prasad

Expansion/Growth Strategies
There are four types of expansion (Growth) strategies: 1. Expansion through concentration 2. Expansion through integration 3. Expansion through diversification 4. Expansion through cooperation

1) Expansion through concentration

A firm that is familiar with an industry would naturally like to invest more in known business rather than unknown business. Concentration can be done through
a) Market Penetration: It involves selling more products to the same market by focusing intensely on existing markets with its present products Market Development: It involves selling the same products to new markets by attracting new users to its existing products.

b)

c)

Product Development: It involves selling new products to the same markets by introducing newer products in existing markets.

2) Expansion through integration

It is combing activities related to the present activity of a firm. It involves moving up & moving down in the value chain. Integration strategies are of two type

Vertical and Horizontal integration

4) Expansion through cooperation

The term cooperation expresses the idea of simultaneous competition and cooperation among rival firms for mutual benefits. Cooperative strategies could be of the following types: 1. Mergers

2. Takeovers
3. Joint ventures 4. Strategic alliances

Diversification
It is the process of adding new businesses to the company that are distinct from its established operations. A diversified company is one which is involved in two or more distinct businesses.

Vasudeva Prasad

The choices of Diversification

1.

Internal new venturing

It is starting a new business from scratch.

2. 3.

Acquisitions
Involves buying existing business.

Joint ventures

Establishing new business assistance of a partner.

with

Expanding Beyond a Single Industry

Advantages of staying in a single industry

Focus resources and capabilities on competing successfully in one area Focus on what the company knows and does best

Disadvantages of being in a single industry

Danger of the industry declining Missing the opportunity to leverage resources and capabilities to other activities Resting on success and not continually learning

Examples

Being in Single Industry

McDonalds focuses on the global fast food Wal-Mart focuses on global discount retailing

Diversifying mistakes
Coca-cola decided to expand into the movie business by acquiring Columbia Pictures. Ultimately it sold off Columbia Pictures at loss because it lacked the competency required for its new business.

A Company as a Portfolio of Distinctive Competencies

Gary Hamel and C K Prahalad have developed a model to help managers Reconceptualize the company as a portfolio of distinctive competencies rather than a portfolio of products Consider how those competencies might be leveraged to create opportunities in new industries Existing industries in which a company competes vs. new industries

Establishing a Competency Agenda

Increasing Profitability Through Diversification

1.

Transferring competencies:

Taking a distinctive competence developed in one industry and applying it to an existing business in another industry The competencies transferred must involve activities that are important for establishing competitive advantage
For Example - GM acquired Hughes Aircraft simply because it falls in the same industry. The acquisition was a failure because the GMs Competitive position did not improve. Ultimately Hughes was sold off.

Increasing Profitability Through Diversification (contd)

1.

Leveraging competencies:

Taking a distinctive competency developed by a business in one industry and using it to create a new business in a different industry

2.

Sharing resources: economies of scope:

Cost reductions associated with sharing resources across businesses

Leveraging Competencies at Philip Morris

Sharing Resources at Proctor & Gamble

Increasing Profitability Through Diversification (contd)

1.

Managing rivalry: multipoint competition:

Diversifying into an industry in order to hold a competitor in check that has either entered its industry or has the potential to do so Multipoint competition: companies competing against each other in different industries

Increasing Profitability Through Diversification (contd)

1.

Exploiting general organizational competencies:

Entrepreneurial capabilities Effective organization structure and controls Superior strategic capabilities

Types of Diversification
1.

Related diversification

Entry into a new business activity in a different industry that is related to a companys existing business activity, or activities, by commonalities between one or more components of each activitys value chain

2.

Unrelated diversification

Entry into industries that have no obvious connection to any of a companys value chain activities in its present industry or industries

The Limits of Diversification

Related diversification is only marginally more profitable than unrelated diversification Extensive diversification tends to depress rather than improve profitability

Mergers and Acquisitions

Merger is a strategy through which two firms agree to integrate their operations on a relatively co-equal basis Acquisition is a strategy through which one firm buys a controlling, or 100% interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio

Reasons for Acquisition

Cost of new product development/increas ed speed to market

Increased diversification Acquisitions

Increased market power

Avoiding excessive competition

Overcoming entry barriers

Lower risk compared to developing new products

Learning and developing new capabilities

Problems in Achieving Acquisition Success

Too large

Acquisitions

Managers overly focused on acquisitions

Integration difficulties

Too much diversification

Inadequate evaluation of target

Large or extraordinary debt

Inability to achieve synergy

Problems in Achieving Acquisition Success: Integration Difficulties

Integration challenges include:

Melding
Linking

two disparate corporate cultures

different financial and control systems

Building

effective working relationships (particularly when management styles differ) problems regarding the status of the newly acquired firms executives of key personnel weakens the acquired firms capabilities and reduces its value

Resolving

Loss

Problems in Achieving Acquisition Success: Inadequate Evaluation of the Target

Due Diligence
The

process of evaluating a target firm for acquisition

Ineffective due diligence may result in paying an excessive premium for the target company

Evaluation requires examining:

Financing

of the intended transaction Differences in culture between the firms Tax consequences of the transaction Actions necessary to meld the two workforces

Problems in Achieving Acquisition Success: Large or Extraordinary Debt

High debt can:

Increase the likelihood of bankruptcy Lead to a downgrade of the firms credit rating Prevent investment in activities that contribute to the firms long-term success such as: Research and development Human resource training Marketing

Problems in Achieving Acquisition Success: Inability to Achieve Synergy

Synergy exists when assets are worth more when used in conjunction with each other than when they are used separately
Firms

tend to underestimate indirect costs when evaluating a potential acquisition

Problems in Achieving Acquisition Success: Too Much Diversification

Scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units performances Acquisitions may become substitutes for innovation

MERGERS
Mergers can be categorized as follows: Horizontal: Two firms are merged across similar products or services. Horizontal mergers are often used as a way for a company to increase its market share by merging with a competing company. Vertical: Two firms are merged along the value-chain, such as a manufacturer merging with a supplier. Vertical mergers are often used as a way to gain a competitive advantage within the marketplace. Conglomerate: Two firms in completely different industries merge, such as a gas pipeline company merging with a high technology company. Typically, companies in mature industries with poor prospects for growth will seek to diversify their businesses through mergers and acquisitions.

Reasons for Mergers

1.

Creating Synergy Value

The underlying principle behind mergers and acquisitions ( M & A ) is simple: 2 + 2 = 5. The value of Company A is $ 2 billion and the value of Company B is $ 2 billion, but when we merge the two companies together, we have a total value of $ 5 billion. The joining or merging of the two companies creates additional value which is known "synergy" value. Synergy value can take three forms:
Revenues Expenses Cost of Capital

Reasons for Mergers

1.

Positioning
Taking advantage of future opportunities that can be exploited when the two companies are combined One company may have a major weakness (such as poor distribution) whereas the other company has some significant strength. By combining the two companies, each company fills-in strategic gaps.

2.

Gap Filling

3.

Diversification

The Merger & Acquisition Process

Phase 1 - Pre Acquisition Review: The first step is to assess your own situation and determine if a merger and acquisition strategy should be implemented. Phase 2 - Search & Screen Targets: The second phase within the M & A Process is to search for possible takeover candidates. Phase 3 - Investigate & Value the Target: The third phase of M & A is to perform a more detail analysis of the target company. Phase 4 - Acquire through Negotiation: How much do we offer in the first round of bidding? What are the benefits of the M & A for the Target Company? Phase 5 - Post Merger Integration: Full Integration Moderate Integration Minimal Integration

RETRENCHMENT

Retrenchment is a corporate-level strategy that seeks to reduce the size or diversity of an organization's operations. Retrenchment is also a reduction of expenditures in order to become financially stable. Retrenchment is a pullback or a withdrawal from offering some current products or serving some markets. Retrenchment or retreat becomes necessary or expedient for coping with particularly hostile and adverse situations in the environment and when any other strategy is likely to be suicidal.

Retrenchment Strategy

With a retrenchment strategy the effort of management is to raise the level of enterprise achievements focusing on improvements in the functional performance and cutting down operations with negative cash flows. 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.

When is Retrenchment Strategy suitable ?

When firm has failed to meet its objectives and goals consistently over time but has distinctive competencies When firm is one of the weaker competitors When the there is

Inefficiency, low profitability, poor employee morale

When an organizations strategic managers have failed

Types of Retrenchment strategies

1.

Turnaround: Turnaround is adopted in following cases

Negative Profits Declining market share High turnover of employees, and low morale Uncompetitive products or services

An organization which faces one or more of these issues is referred to as a sick company.

35

Types of Retrenchment strategies

1.

Divestment:

A divestment strategy involves the sale or liquidation of a portion of business, or a major division. Profit centre For Example: TOMCO (Tata Oil Mills Company) was divested and sold to Hindustan Levers as soaps and a detergent was not considered a core business for the Tatas.

Types of Retrenchment strategies

1.

Liquidation:

It is considered as the last resort because it leads to serious consequences such as loss of employment for workers Is normally adopted to avoid legal hindrances

2.

Bankruptcy

Stability Strategies

Stability strategy implies continuing the current activities of the firm without any significant change in direction.

A firm is said to be following a stability strategy if it is satisfied with the same consumer groups and maintaining the same market share, satisfied with incremental improvements of functional performance and the management does not want to take any risks that might be associated with expansion or growth. In the maturity stage. However, stability strategy is not a do nothing approach nor does it mean that goals such as profit growth are abandoned.

Why do companies pursue a stability strategy?

1) the firm is doing well or perceives itself as successful 2) it is less risky 3) it is easier and more comfortable 4) the environment is relatively unstable 5) too much expansion can lead to inefficiencies

Situations where a stability strategy is more advisable than the growth strategy:
a) If the external environment is highly dynamic and unpredictable b) Strategic managers may feel that the cost of growth may be higher than the potential benefits c) Excessive expansion may result in violation of anti trust laws

Types of stability strategies

1. No-Change Strategy

It is a conscious decision to do nothing new. The firm will continue with its present business definition. When a firm has a stable internal and external environment the firm will continue with its present strategy. The firm has no new strengths and weaknesses within the organization and There are no opportunities or threats in the external environment. Taking into account this situation the firm decides to maintain its strategy.

Types of stability strategies

2. Profit Strategy Keep milking the cow, but dont feed it

No firm can continue with the No Change Strategy. The problem arises due to unfavorable situation like economic recession, government attitude, and industry down turn, competitive pressures and like. The profit strategy is an attempt to artificially maintain profits by reducing investments and short-term expenditures. The profit strategy is thus usually the top managements short term and self serving response to the situation.

Types of stability strategies

3. Pause/ Proceed with Caution Strategy
It

is employed by the firms that have an intense pace of expansion and wish to rest for a while before moving ahead. The purpose is to allow all the people in the organization to adapt to the changes. It is a deliberate and conscious attempt to postpone strategic changes to a more opportune time.

Ansoff's Growth Matrix

Was Developed by H.Igor Ansoff The Ansoff matrix presents the product and market choices available to an organisation The Ansoff matrix is also referred to as the market/product matrix in some texts The four strategies entailed in the matrix are

1) Market Penetration 2) Product Development 3) Market Development 4) Diversification

1) Market Penetration

Market penetration is the name given to a growth strategy where the business focuses on selling existing products into existing markets. This strategy is important for businesses because retaining existing customers is cheaper than attracting new ones

Companies maintain or increase the market share of current products

Increase usage by existing introducing loyalty schemes customers by

E.g. in 2000, Mitsubishi announced a 10% reduction in prices in the UK in order to encourage purchases

2) Product Development

Product development is the name given to a growth strategy where a business aims to introduce new products into existing markets.
The reasons that justify the use of this strategy include one or more of the following:
to utilise of excess production capacity, counter competitive entry, maintain the companys reputation as a product innovator, exploit new technology, and to protect overall market share

Eg. Colgate Palmolive recently introduced 'Colgate Plax'

3) Market Development

Market development is the name given to a growth strategy where the business seeks to sell its existing products into new markets. Companies move beyond its immediate customer base This strategy often involves the sale of existing products in new international markets. Eg. TATA Motors strated selling its cars in US markets as part of its Market Development strategy
Vasudeva Prasad

4) Diversification
Diversification is the name given to the growth strategy where a business markets new products in new markets. This is more risky strategy because the business is moving into markets in which it has little or no experience. Eg: WIPRO's diversification from FMCG to IT

Vasudeva Prasad

Porter's Generic Competitive Strategies

Michael Porter has argued that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation.

He has described a category scheme consisting of three general types of strategies that are commonly used by businesses to achieve and maintain competitive advantage. They are: 1)
2) 3)

Cost Leadership Strategy

Differentiation Strategy Focus Strategy a) Focus on Low cost b) Focus on Differenciation

Porters Generic Competitive Strategies

51

1) Cost Leadership Strategy

This strategy involves the firm winning market share by appealing to cost-conscious or price-sensitive customers.

This is achieved by having the lowest prices in the target market segment
The firm must be able to operate at a lower cost than its rivals The firm hopes to take advantage of economies of scale and experience curve effects The firm may be able to sustain a competitive advantage based on cost leadership if only the competitors are unable to lower the cost by same level.

Best example is Wal-Mart

2) Differentiation Strategy
Differentiation involves the creation of a product or services that is perceived throughout its industry as unique This specialty can be associated with design, brand image, technology, features, dealers network, or customers service

The value added by the uniqueness of the product may allow the firm to charge a premium price for it.
The risks associated with a differentiation strategy include imitation by competitors and changes in customer tastes

3) Focus Strategy
The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation In either case, the basis of competition will still be either cost leadership or differentiation. The peinciple is that the needs of the group can be better serviced by focusing entirely on it. A firm using a focus strategy often enjoys a high degree of customer loyalty

Struck in the middle?

If a firm attempts to achieve an advantage on all fronts, in this attempt it may achieve no advantage at all. For example, if a firm differentiates itself by supplying very high quality products, it risks undermining that quality if it seeks to become a cost leader.

For this reason, Michael Porter argued that to be successful over the long-term, a firm must select only one of these three generic strategies. Otherwise, with more than one single generic strategy the firm will be "stuck in the middle" and will not achieve a competitive advantage.