Grand Strategies: Strategic Alternatives

Grand Strategy
What?
The general plan of major action by which a firm intends to achieve its long-term goals Provides basic direction for the strategic actions of a firm

4 General Categories:
Growth Stability Retrenchment Combination

Strategic Alternatives
Strategy Alternatives

Growth/
Expansion

Stability

Retrenchment

Combination

Growth Strategy.What?
Growth in sales, market share etc Firm tries to:
Redefine the business Enter new businesses (related or unrelated) Look at its product portfolio more intensely

Alternatives by changing its mix of:

Products Markets Functions

Intensification exploits internal opportunities Diversification exploits external opportunities

When to Adopt a Growth Strategy?

Growth must be manageable
Enable stability over time Ensure profitability

Growth must take into account environmental demands

PESTEL factors - eg. FDI limits Requires advance thinking and careful planning

Growth should be the natural choice

Environment presents several opportunities Special concessions and incentives are readily available Eg. Special benefits offered by Government

Growth Strategy..Why?
To Ensure Survival
Environment is turbulent, highly competitive Firm may be pushed out by new entrants Eg. Ambassador car, Diners Credit Card

To Obtain Scale Economies

Fixed costs spread over large volume of units Cheaper product Great market penetration

Growth Strategy..Why?
To Stimulate Talent
Attract the best managers and entrepreneurs Eg. Hero Honda, Infosys, Wipro

To Reach Commanding Heights

Growth ensures market control Influence market behavior Prestige & power Secures investor confidence Satisfied employees, investors Increased employment Low-price High-quality products

Problems created by Growth

Business may become exceedingly vulnerable Impossible to manage properly May not offer sound investment opportunities May run into tremendous losses Recovery and reestablishment takes time

How to Manage Growth?

Objectives of a rational growth policy:
Minimum Growth
Set and meet growth targets (Short-term, Long-term) Meet targets without losing standing in marketplace Growth in economic performance and economic results Economic objectives rather than volume objectives

Optimum Growth
Balance between risk and return on resources Effectively combine activities, products and business At least minimum growth but not exceeding optimum point Requires objectives, priorities & strategy to exploit strengths of the business More importantly, growth goals should be rational and grounded in the objective reality of a business, of its markets, of its technologies, rather than in financial fantasy

How to Manage Growth?

Objectives of a rational growth policy:
Internal Preparation
Based on the strengths of a company Requires financial planning Requires a human organization capable of achieving different and bigger things continuously For a company to be able to grow, top management must be willing and able to change itself, its role, its relationship, and its behaviour.

Strategic Growth Options

Growth Strategies
Growth/Expansion

Intensification

Diversification

Market Penetration

Market Development
Product Development Innovation

Horizontal Concentric Conglomerate

Vertical Forward

Backward

Intensification - Leveraging Internal Opportunities

Market Penetration
Directing the firms resources to the profitable growth of a single product, in a single market with a single dominant technology by:
Increasing sales to current customers Woo competitors customers Convert non-users into users

Conditions:
Firms industry is resistant to major technological advancements Firms target markets are not product saturated Firms product markets are sufficiently distinctive Market in fairly stable without seasonal or cyclical swings

Market Penetration
Pros
Reduces amount of resources needed to increase market share Helps firm to specialize in a few areas Managers have a better grip over market forces Decisions flow smoothly Systems & procedures are in place Employees are familiar with market conditions

Cons Firm may become a victim in case of a slowdown in the economy

Market Development
Marketing existing products in new markets by finding new uses for the existing products and tapping new customers Add new channels of distribution Enter new market segments by coming out with slightly different products (packaging, pricing, etc) Change in media selection, promotional appeals Changes in the Marketing Mix (except Product) Eg. Du Ponts Nylon

Product Development
Growth through new products in existing markets Improved versions of an existing product or substitutes serving the same need, same market Extend existing products life cycle Usually carried out through:
Quality improvement Feature improvement Style improvement

Various forms in actual practice:

Supply new products that are closely associated with existing product Categorize customer purchases and supply Focus on tech base

Innovation
Develop new products replacing existing products Radical & incremental innovations Technical and product innovations Process innovations Could be costly (R&D, premarketing costs etc) Obvious benefits Eg. McDonalds Veggie Burger

Growth Strategies
Growth/Expansion

Intensification

Diversification

Market Penetration

Market Development
Product Development Innovation

Horizontal Concentric Conglomerate

Vertical Forward

Backward

Diversification Leveraging External Opportunities

What?
Describes the number of different businesses that an org is engaged in and the extent to which these businesses are related to one another Involves entry into fields where both products and markets are significantly different than those of a firms initial base Related and Unrelated

Requires careful planning and meticulous preparation Requires deep pockets and strong staying power Requires relevant core competency and capable managers to handle the associated risks competently Cost of entry should be reasonable Potential field should be attractive Proposals should be screened and pretested carefully Proceed cautiously

Diversification Leveraging External Opportunities

Pros
Minimizes risks associated with confining the business Helps in preempting potential competitors Helps in gaining superiority over competitors Introduction of new products satisfying a variety of needs Helps in consolidation of the firms position in the industry Effective and efficient use of firms resources May be the only way to grow as a result of saturation of existing businesses

Cons May lead to neglect of old business Managers may fail to understand intricacies of new business Competitors may retaliate with full force

Types of Diversification Strategies

DIVERSIFICATION

Vertical

Horizontal

Forward

Concentric

Backward

Conglomerate

Vertical Integration
Allows firm to enlarge its scope of operations within the same overall industry One firm acquires another that is involved:
Either in an earlier stage of the production process (backward or upstream) Or a later stage of the production process (forward or downstream)

Vertical Integration
Backward Integration Firm acquires companies that supply it with products, components, or raw materials To gain a firm grip over supply and quality of raw materials Common in industries where low cost and certainty of supply are important Forward Integration Firm gains control over sales and prices of its existing products

Vertical Integration
Benefits
Eliminates or reduces the costs of buying and selling Firms can coordinate their operations in a better way Reduces uncertainty of relying on external suppliers or buyers Raises entry barriers to competitors by forcing them to integrate too Preserves the companys competitive edge by protecting its technologies

Costs
May lead a firm to overcommit scarce sources to a given tech, production process or other activity, eventual obsolescence When things turn bad, high fixed costs may eat away profits Difficult to mesh different capabilities /skill sets smoothly Firm becomes more susceptible to organized labor strikes

When to Integrate Vertically?

Are our existing suppliers or customers meeting the final consumers needs?
If possible outsource to specialized firms

How volatile is the competitive situation?

Lose of flexibility

Is it possible to own a business without actually buying it?

Close cooperation without losing identity

Will vertical integration enhance the businesss structural position?

Great market power = Great temptation

Horizontal Integration
Firms expand by acquiring other companies in the same line of business
Eliminates competitors Provides access to new markets Through M&As

2 Types:
Concentric/Related Conglomerate/Unrelated

Concentric Diversification
Diversification into a related but distinct business Related through products, markets or tech May occur due to factors like:
Common distribution channel Marketing skills Common brand name Common customers

Benefits of Related Diversification

Operational Relatedness brings Returns
Increase strategic competitiveness Improved financial returns

Distinctive Competence Extended to Other Areas

Creates new sources of value

Market Power Increases

Predatory pricing, kills competition Access to markets or distribution channels

Infrastructure can be Shared to Mutual Benefit

Economies on the cost front Resource sharing among businesses (centralization)

Reduces Economic Risk

Reduces dependence on one business activity

Conglomerate Diversification
Diversification into areas that are unrelated to current business Purpose
Reduce Risk Firm may be able to create value

Methods:
Buying high Buying cash Buying a company whose seasonal and cyclical sales patterns would provide stability to the firms total cash flow and profitability Buying a largely debt-free company to improve the firms borrowing power

Conglomerate Diversification
Largely a mater of managerial judgment Source of value = Senior managements ability to time the market Reasons for failure:
Inadequate focus Failure to understand the business fully Competitive disadvantage compared to organizations that use related diversification

Costs of Diversification
Cost of Ignorance
Firm does not know the extent of competition Firm may fail to read consumers mind properly Firm may be compelled to shift gears continuously

Cost of Neglect
Firm may have to divert attention from its core businesses

Examples
Sanghi Group NEPC Group Modern Group

When to Diversify?
Benefits outweigh related costs Firm intends extraordinary growth Firm wants to counter vulnerability Environment presents large number of opportunities to be exploited by the firms resource base Presence of great environmental uncertainty Diversification more profitable than Intensification Firm has surplus resources that could be profitably deployed in new ventures Firm finds synergy in its existing businesses and the new ones

When to Diversify?
When costs outweigh benefits:
Restructure operations to enhance shareholder value by:
Selective Focus Spin-off

Strategic Alternatives
Strategy Alternatives

Growth/
Expansion

Stability

Retrenchment

Combination

Stability Strategy
Maintain status quo or methodical, but slow, growth Safety-oriented, status-quo-type strategy without effecting any major changes in present operations Reasons for Stability Strategy:
Why rock the boat? Why not stop for a while? Why swallow risk? Where are the resources?

Stability Strategy
Limitations
Highly competitive and turbulent environment Corporate Death = Failure to improve profits over the long term Change is inevitable Resting on past laurels = Suicide In volatile industries, short-run success, long-run death

Stability Strategy
Types:
Incremental Growth
Concentrate on one product line at a time Steady growth Low-risk, low market share, change resistant

Profit/Harvesting Strategy
Goal = Generate Cash

Sustainable Growth Strategy

Environment is unfavorable

Pause Strategy
After turbulent period of rapid growth Integrate SBUs, consolidate position, improve operational efficiency, R&D, marketing Pause and prepare for another big leap

Strategic Alternatives
Strategy Alternatives

Growth/
Expansion

Stability

Retrenchment

Combination

Retrenchment Strategy
Defensive strategy Firm is neither competitive enough nor nimble enough Not necessarily the DEATH KNELL Radical surgery to cut the extra fat Adopted out of necessity Examples:
Arvind Mills Xerox

Retrenchment Strategy
Retrenchment

Divestment

Turnaround

Liquidation

Bankruptcy

Divestment Strategy
Sale of units or parts of a business that no longer contribute to or fit the firms distinctive competence 3 Forms:
Outright Sale Leveraged Buy-Out (LBO)
Shareholders bought out by management and other private investors using borrowed funds

Spin-off
Create new company Distribute shares to parent company shareholders

Divestment Strategy
Reasons:
Strong Focus Unlock Critical Funds Invest in Emerging Tech A Maker of Policy From Red to Black Unviable projects

Examples:
ACC Raymond K M Birla Group

Turnaround Strategy
Designed to reverse a negative trend, bring the org back to normal health and profitability Transform corporation into a leaner and more efficient firm Danger signals:
Continuous cash flow problems Declining profits; lower profit margins Dwindling market share High employee turnover Low employee morale Underutilization of capacity Raw material supply problems Rising input prices Strikes & Lockouts Increased competition, uncompetitive products or services Recession Mismanagement etc.

Turnaround Strategy
Turnaround To-Do List
Change the leader Change the prices Focus attention on specific customers and specific products Extend the products life, product improvement Replace existing products with new ones Focus on power brands, rationalize product line Liquidate assets for generating cash Better internal coordination Emphasis on selling, advertising, etc.

Liquidation Strategy
Last resort strategy Selling/disposing of all or part of an orgs assets Usually done when:
Future of the unit looks bleak Unit has unmanageable accumulated losses Some other firm is willing to buy the unit Revival of the unit is not possible with existing resources

Resistance from labor unions, suppliers, creditors, financial institutions 3 way of Liquidation, Companies Act, 1956
Compulsory winding up Voluntary winding up Voluntary winding up under courts supervision

Bankruptcy
Reorganization Bankruptcy
Org unable to pay its debts, seek court protection from creditors and from certain contract obligations, tries to regain financial health and stability

Liquidation Bankruptcy
Firm agrees to distribute all assets to creditors

Thank You and Have a Nice Day!!!