l3.2 grand strategy

8/11/2019 L3.2 Grand Strategy

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Grand Strategy

Corporate Strategy


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Grand Strategy

They are COPRPORATE Strategies/Master

Strategies of the firm

Usually they pose a question

Are we in the RIGHT INDUSTRY MIX?

It leads to major decisions such as

ExpansionOrganic & InorganicMajor Production/Quality Initiative

Entry into New Market Territory

Innovation

Liquidation etc


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Classification of Grand Strategies

1.Stability

2.Growth3.Retrenchment

4.Combination


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Stability StrategyWhat it is?

Firm intends and maintains a status quo

Applies very small marginal changes ifneeded

Does not mean ZERO GROWTH, but it isgradual and incremental on very small scale

e.g. to serve the same clients, offering the same

product or service, maintaining market share,and sustaining the organization's return-oninvestment


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Stability StrategyWhy and When?

Happy with current performance Being in safe business, preferred by risk avoiding

managers

As the organization acquires critical mass; they worry

about maintaining the status quo

Just to reap the rewards of past growth strategy, stability

is preferred for some time

Lacking in sufficient resources to effect major changes inbusiness

The environmental factors such as govt. norms,

prohibition & restriction of certain products & process,

licensing etc. prevent other strategies to follow


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Stability StrategyWhy and When?

Firms Near saturation and expects growth in a

limited range When working for a defined market and its

requirements

Environmental factors are steady and constant

(not showing any appreciable change) Sees scope for only incremental improvement

until it gains certain competitive advantage

Product or group of products which is not

prestigious to it, its market share as well ascontribution to total sales is very small and itsmarket is declining, so before retrenchment firmopts for whatever possible stability


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For Example

SAIL:

Over capacity in steel sector.

Hence concentrated on increasing operationalefficiency of its various plants rather than going

for expansion

Bata: has not demonstrated a desire to diversity intoother apparels as have of its competitors


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Stability StrategyVarious Options

1.1 Holding Strategy:

When(a) to rest, digest, and consolidate after growth or some turbulent

events - before continuing a growth strategy, or

(b) In an uncertain or hostile environment, it is prudent to stay in a

holdingpattern until there is change in or more clarity aboutthe future in the environment.

c) Resource Constrains

d) Environment prohibits continuation in growth

How:Continues at its present rate of development.

Retain current market share.

Current level of resource input and managerial effort will not be increased

Which means that the functional strategies will continue at previous levels.


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Hindalco Industrieshttp://www.livemint.com/Companies/118rvkcWOUjMouWh6Eb4RI/Hindalco-looks-to-consolidate-existing-and-new-operations.htmlWed, Aug 14 2013

HindalcoIndustries Ltd, Indias second largest aluminium producer,

wants to consolidate its existing and new operations rather than rushto buy mines overseas, a strategy that stands in contrast to plans of

other metal companies that believe that falling commodity prices

present a good opportunity for them to secure assets.

We have everything here...we have bauxite, we have coal. And that is

why we are going (with our projects) here with our greenfield

exercise,Debu Bhattacharya, managing director of Hindalco and vice-

chairman of NovelisInc., HindalcosUS unit, said on the sidelines of a

conference on Tuesday to announce quarterly earnings.

Hindalco wants to first make sure the cash flows from new projectsstart flowing in as expected, that investments are justified and risks put

behind which would take a couple of year, according to a person

familiar with the strategy, who declined to be identified.

Till then, Hindalco is unlikely to have a major appetite for any big

acquisition, the source said.
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Stability Strategy- Various Options1.2 Stable Growth:

Avoiding change - representing indecision(this/that) orrisk in making a choice for change.

Alternatively, it may be a comfortable, even long-termstrategy in a mature, rather stable environment,

e.g., a small business in a small town with fewcompetitors. It simply means that the firms strategydoes not include any bold initiatives. It will just seek todo what it already does, but a little better.

In this approach, the firm concentrates on one product orservice line. It grows slowly but surely, increasingly itsmarket penetration by steadily adding new products orservices and carefully expanding its market.


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Stability Strategy - Various Options1.3 Harvesting Strategy:

When:Firm has the dominant market share,

May seek to take advantage of this position and generate cash forfuture business expansion.

Usually associated, with cost cutting and price increases to generate

extra profits.Even market share may be sacrificed to earn profits and generatefunds.

Through:Selective price increases and

Reducing costs without reducing price.Thus selected products are milked rather than nourished and defended.

Example: Hindustan Levers Lifebuoy soap is an example in point. Ityielded large profits under careful management.


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Stability Strategy - Various Options

1.4 Profit or Endgame Strategy:Firm capitalizes on a situation in which old product or technology is yet

to be replaced by a new one.

Number of products based on older technologies in the market wouldlater create an aftermarket for spare parts that would last for years.

Firms adopting this strategy decide to follow the same technology, atleast partially, while transiting into new technological domains.

For example

Sylvania and GE decided to stay in the vacuum tube market

Bajaj in two stroke bikes

until the end of the game.

Firm eventually shelves the old assets at some point of time and moveto the new product or technology.

But critical question is, Can we make more money by using theseassets or by selling them? The answer to that question is timedependent.

Does not require new investment, so it is not a growth strategy.


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Growth Strategy

Growth Strategies are means by which anorganization plans to achieve the increased level of

objective that is much higher than its past marginal

achievement level.

Organizations may select a growth strategy

to increase their profits, sales or market share.

to reduce cost of production per unit.

increase in performance objectives.


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Growth StrategyWhy & When

Inherent Desire to grow Highly Preferred by investors

Increased prestige of the organization

Satisfaction to employees

For successful long term sustenance in the business So as to defend from new entrants, higher costs,

inefficiencies, technology obsolescence

Avail advantage of economies of scale

So as to reduce per unit cost, enhance degree ofspecialization, greater penetration

Build certain/added competitive advantage


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Growth StrategyVarious Options

Concentrates on its primary line of business

It means expand its present business - i.e. doing more what the firm isalready doing and is best at doing

Involvesfocusing resourceson the profitable growth of a single product, ina single market, with a single dominant technology

Rationale- Firm develops and exploits its expertise in a delimited

competitive arena It can be aimed at-

Market penetration (capture the market share in the existingproduct and expand its business at rate higher than the industrygrowth)

Market development (increase sales by developing new markets,geography-wise or segment-wise)

Product development (achieve growth through product innovationto penetrate in new segment)

When a single-business organization pursuesgrowth, it is using the concentration strategy

2.1 Concentric Expansion Strategy


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Concentration Strategy

Four concentration strategy options

Products

Customers

Current

New

Current New

Product-Market

Exploration

Product

Development

Market

Development

Product/Market

Diversification


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2.2 Integration Strategy

Represents growth via acquisition Horizontal integration

Acquisition of one or more similar firms operating

at the same stage of the production-marketingchain; with an aim to..

eliminating competitors

enhance production capacity

Vertical integration Backward: To get supply of input from acquired firm

Forward: To supply input to acquired firm

(value chain)


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Horizontal Integration Strategies

Expanding the firm's operations through combiningwith competitors operating in the same industry &

doing the same things

It is an appropriate corporate growth strategy as

long as

It enables the company to meet its growth objectives

It can be strategically managed to attain a sustainable

competitive advantage

It satisfies legal and regulatory guidelines


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Vertical Integration Strategies

An organizations attempt to gain control of Its inputs (backward integration) -- supplier

Its output (forward integration) -- distributor

Or both inputs and output

Purpose is to (1) reduce resource acquisition costs, &(2) deal with inefficient operations

Vertical Integration Considered a growth strategy because the firms

operations are expanded beyond primary business Mixed empirical results as to whether strategy helps or

hurt performance

What is the role of outsourcing in achieving sameobjective as vertical integration?


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Vertical Integration Strategies

Benefits Reduced purchasing &

selling costs

Improved coordination

of functions &capabilities

Protected proprietarytechnology

Costs Reduced flexibility as

firm is locked intoproducts & technology

Create an exit barrierdue to existence ofassets that are hard tosell

Difficulties in

integrating variousoperations

Financial costs ofacquiring or starting up


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Acquisitions or mergers of suppliers or customerbusinesses arevert ical integrat ions

Acquisitions or mergers of competingbusinesses areho r izon tal integrat ion s

Textile producer

Shirt manufacturer

Clothing store

Textile producer

Shirt manufacturer

Clothing store

Vertical and Horizontal Integrations


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2.3 Diversification Strategy

Why: To Grow

To more fully utilize existing resources and capabilities Skills in sales & marketing, general management skills &

knowledge, distribution channels, etc.

Risk reduction and/or spreading Escape from unattractive or undesirable industries (e.g., tobacco & oil

companies)

Stability of profit flows (CAPM: systematic vs. unsystematic risks;shareholders & diversified portfolios)

To make use of surplus cash flows Large cash balances attract corporate raiders Use cash balances to avoid hostile takeovers

To build shareholder value Create synergyamong the businesses of a firm

Make 2 + 2 = 5: The whole should be greater than the sum of the parts


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Enter in to unchartered territory/getting out of ones comfortzone

Entry into a business which is new to an organization

2.3.1 Related (Concentric) Diversification

Involves acquisition of businesses related to acquiring firm in terms oftechnology, markets, or products

Concentric diversification emphasizes commonality

Diversifying into a different industry but one thats related insome ways to the organizations current operations

Search for strategic synergy, which is the performance of thesum of the parts is better than the whole

The idea that 2 + 2 = 5

Synergy happens because of the interactions and theinterrelatedness of the combined operations and the sharing

of resources, capabilities, & distinctive competencies


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2.3.2 Conglomerate Diversification (Unrelateddiversification)

Involves acquisition of a unrelated business because itrepresents a promising investment opportunity

Conglomerate diversification emphasizesprofits for each

individual unit Diversifying into completely different industry

from the firms current operations Firm move into industries where there is

No strategic fit to be exploited No meaningful value chain relationships No unifying strategic theme

Approach is venture into any business with goodprofitability prospects


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Unrelated Diversification

Targets for unrelated diversification Firms with undervalued assets

Firms in financial distress

Firms with bright growth prospects but limited capital

Advantages Business risk spread over different industries

Efficient allocation of capital resources

Stability of profits

Enhanced shareholder value


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Unrelated Diversification

Disadvantages

Difficulties of competently managing many

diverse businesses

No strategic fits which can be leveraged intocompetitive advantage

Unrelated diversification is afinance-driven

approach to creating shareholder value

A i l l t ti i hi h t


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A mergeris a legal transaction in which two or

more organizations combine through an exchange

of stock, but only one firm actually remain

An acquisitionis an outright purchase of anorganization by another, through amicable process

A takeoveris basically a acquisition it may not be

amicable; it is hostile

Joint Venture- Two or more separate organization

form an independent organization for strategic

purposes; especially when parties to want to keep

themselves separate legal entities Strategic Alliance - Two or more firms share

resources, capabilities or competencies to pursue

some business purpose; Similar to JVs but no

formation of a separate entity


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2.4 External Strategy2.4.1 Merger strategy It means that two or more organizations merge together by

formally losing their corporate identities and form anotherorganization through combining assets & liabilities & issuing new

stock, for mutual synergetic benefits. The new co. is called holdingcompany and the merging companies are remain subsidiarycompanies. According to the nature of business of mergingcompanies, merger may be

Horizontal

Vertical

Concentric

Conglomerate

Example: Merger of Sterlite and Malco into Sesa Goa - 2013

Satyam merged with TechMahindra - July 2013


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Growth StrategyVarious Options2.4 External Strategy contd

2.4.2 Acquisition or Takeover

It means that one company attempts to acquire ownership orcontrol over management of other co. either by mutualconsent of or against the wishes of latters (other co.)management or stock holders. It may be

Friendly Acquisition

Hostile Takeover

Example:

Bharti Airtel acquired Zain Africa, February 2010

Hindalco Industires acquired Novelis , February 2007Hostile: Sanofi-Aventis acquired Genzyme Corp. 2011 $24

billion


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Growth StrategyVarious Options2.4 External Strategy contd

2.4.3 Join venture

It means that two or more companies combine to form a new

company by equity participation and sharing of resources like

finance, managerial talents, technology etc., so as to create new

entity distinct from its parents

Percipients could be:

a Government firm (PSU)

an Indian Company,

a foreign company

Example: Virgin Group and Tata Tele Services

Volvo and Indias Eicher ;

McDonalds will open its fast food restaurants :"McDosalu


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2.4 External Strategy contd

2.4.4 Strategic Alliance Involves creating apartnershipbetween two or more companies that

contribute skills and expertise to a cooperative project

Exists for a defined period, till achievement of objective

Does not involve the exchange of equity

Type: a win-win type

Types of Strategic Alliance (Based on its focus)

Technology Development Alliance

Operations and Logistics Alliance

Marketing, Sales and Service Alliance Single Country or Multi-country Alliance

Example:


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Strategic Alliances

A strategic alliance is the cooperation betweenone or two companies to achieve the mutuallybeneficial strategic objectives such as

To obtain technology or manufacturingcapabilities

To obtain access to specific markets

To reduce the financial risk

To reduce political risk

To achieve or ensure competitive advantage


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Strategic Alliances - Types

Mutual service consortiapartnershipto gain a

benefit that are too expensive to develop alone

Joint venture - creates an independent business

entity and allocated ownership operationalresponsibilities, financial risks and rewards to

each member while preserving their separate

identity Licensing Arrangement - licensee pays the

compensation to the licensing firm


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2.4. External Strategy contd

2.4.5 Outsource:

Firm outsources its non-core activities to outside

parties and there by it can better focus on core

activitiesAdvantages:

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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Retrenchment Strategy Defensive strategy in a declining performance environment

Aims at to improve performance through contraction in

activities i.e. reducing the scope of its business by total or

partial withdrawal from present business.

focusing on functional improvement with special emphasis

on cost reduction or

reducing the number of functions it performs, by being a

captive firm or

reducing the no. of products, markets, customer functions

etc. or

liquidation of business (as a last alternative) or

combinations of above.


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Retrenchment StrategyWhy & When

Organization is not doing well and perceives that it maynot do better in future too

May be after deletion there could be better options,such as concentrate in other areas, where it has some

advantages.

If the organization is not meeting its objectives evenafter following other alternative strategies it may go forretrenchment strategy.

Also when the management is under compulsivepressure to improve the performance but it can do so,this strategy can be pursued as a last resort.


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Alternative of Retrenchment Strategy3.1. Turnaround Strategy

It is also known as cutback strategy hold the present business and

cut the costs

It is one in which a company tries to recover from its declining state

by improving internal efficiency.

Turnaround actions may include:

Change in the product mix

Selling of assets which are not useful for long time or in future

also to generate cash.

Closing down plants & divisions which are not rewarding.

Replacement of obsolete machinery

Focus on specific products and customers and improved

marketing, etc.


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Declining

sales or

margins

Imminent

bankruptcy

Low

High

Cost

reduction

Asset

reduction

Efficiency

maintenance

Entrepreneurial

reconfiguration

Stability

Recovery

Internal

factors

External

factors

Turnaround situation Turnaround response

Cause Severity Retrenchment phase Recovery phase

(operating)

(strategic)

A Model of the Turnaround Process


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Retrenchment Strategy

3.2. Divestment Strategy In divestment strategy the organization decides to get out of certain

businesses and sells off units or divisions.

Divestment is done through:-

Outright sale of unit to another company Or Leveraged buyout(by buying firm)- The acquisition of another

company using a significant amount of borrowed money (bonds

or loans) to meet the cost of acquisition Or

Spin off i.e. creating a new co. financially and managerially

independent one from parent company; with or without

retaining earlier ownership


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Retrenchment Strategy3.3. Liquidation Strategy

Liquidation - Involves sale of tangible and intangible assets

distribution of proceeds to creditors

Reorganization - Involves creditors temporarily freezing their

claims while a firm reorganizes and rebuilds its operations more

profitably

When?

Business cant be revived and its retaining value is less than its selling.

Business is in peak form, but future is quite uncertain, having no

direction (and there in better option than this one) Business has accumulated losses and some other organization offers

higher price to get tax benefits,

Liquidation value is more than discounted present value of future flow

of income etc.


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CombinationStrategy

It is a combination of different strategiesstability, growth,

retrenchment

The possible combinations could be:

Stability in some businesses and growth in otherbusinesses

Stability in some businesses and retrenchment in other

businesses

Growth in some businesses and retrenchment in otherbusinesses

Stability, growth and retrenchment in different businesses.


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l3.2 grand strategy

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