Chapter 7

Grand Strategies

GRAND STRATEGIES - MeaningGrand strategies are the decisions or choices of long term plans from available alternatives.

Grand strategies also called as master or corporate strategy. It is based on analysis of internal and external environment.This direct the organization towards achievement of overall long term objectives (strategic intent).They involve Expansion, Quality Improvement, Market Development, Innovation, Liquidation, etc.• Usually they are selected by top level managers such as directors, executives etc.

Classification of Grand Strategy

It is classified into following:-Stability StrategyGrowth StrategyRetrenchment StrategyCombination Strategy

Stability strategyThis strategy is followed by small and medium sized

enterprise.These strategies can be used for short term and when

such organisations are satisfied with their current performance.

No change strategyTo continue with present business business definition

Here taking no decision sometimes, is a decision too….Useful in predictable and certain external environment

There is no significant opportunity or threat in the market

Useful for a niche market

Stability strategyIt is less risky, involves less changes and people

feel comfortable with things as they are.The environment faced is relatively stableExpansion may be perceived as being

threatening.Consolidation is sought through stabilising after

a period of rapid expansion.Here the company serves the same markets with

the present product.The essence of stability strategies is not doing

anything but sustaining moderate growth in line

No change strategy- No change strategy is a decision to do nothing new i.e continue current operations and policies for the future.

Pause/proceed with caution strategy- Some organizations pursue stability strategy for a temporary period of time until the particular environmental situation changes, especially if they have been growing too fast in the previous period.

Profit strategies- The profit strategy is an attempt to artificially maintain profits by reducing investments and short-term expenditures.

Profit strategyFocus on only profit

Useful for a short period of timeFirm can go in for reducing investment, cut costs, raise price oin order to face temporary difficulties

Sustain profitability by whatever means.Pause/Proceed with caution strategy

Useful for firm that wish to test the ground before moving ahead with a full fledged corporate strategy.

Can apply before going in for consolidationIt is a temporary strategy just like profit strategyFollowing this strategy is a conscious attempt to

adjourn major strategic changes or when the organisation is ready to move on with rapid force

again

Stability Strategy

A strategy is stability strategy when a firm attempts to maintain its status-quo with existing levels of efforts and it is satisfied with only incremental growth/improvement by marginally changing the business and concentrates its resources where it has or can develop rapidly a meaningful competitive advantages in the narrowest possible product market scope.Absence of significant change i.e. continuing to serve the same clients by offering the same product or service, maintaining market share, and sustaining the organization's return-on investment.

When do organization follow Stability Strategy

It is common for most of the organizations to follow this strategy at some point of time in their life cycle. When a firm serves defined market and its segments to fulfills its mission. When a firm can relate itself with the environment and environmental factors do not show any appreciable change. This is possible for most of the firms in a short run, but for a few in long runs. When organization continues to pursue the same objectives by adjusting to the same level of achievement about the same percentage. Thus stability does not mean absence of growth but the growth is limited within specified limits and there is no substantial addition of facilities.

Cont….

When there is scope for incremental improvement in the same line of business to take the fullest advantage of situation. E.g. when a company has technological or other break through it continues to be in the same business until it has competitive advantage. Thus when a company is pioneer in a new business, it reaps the benefit of initiation. Then when competition increases and profitability reduces, it may go for other strategy.When a firm looks for functional improvement and there by efficiency and economy of operations so as to gain competitive advantage, it follows this strategy.

Why do organization follow

When management perception about performance in the present business is satisfactory, they tend to follow stability strategy because they are not always sure of a set of factors attributing to success. Thus they decide to continue the same business.This strategy involves low risk unless there is a major change in the environment. So it provides safe business. Therefore it is preferred by risk avoiding managers.“Slow or resistant to change” organizations follow this strategy. As they become larger and more successful, they develop such tendency & prefer stability.Organization’s past history may be full of changes, so to reap the advantages of such past, stability is preferred for some time, usually after growth strategy.

Cont….

A firm having strategic advantage in the present business & market does not opt. for other strategy and prefers stability.A company lacking in sufficient resources to effect major changes in business have to opt. for stability.The environmental factors such as govt. norms, prohibition & restriction of certain products & process, licensing etc. prevent other strategies & a firm has to adopt stability strategy.

Growth Strategy

Growth Strategies are means by which an organization plans to achieve the increased level of objective that is much higher than its past 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.

Reasons for following

In the long run, growth is necessary for the very survival of the organizations. The organization that does not grow may be pushed out of the business becauseOf the new entrants in the fieldHigher wages, higher costs of other inputs, and lower level of efficiency because of certain obsolescence in plant and machinery.

Reasons for following

Growth offers many economies because of large-scale operations. Per unit cost of production can be very low The economies of increasing scale enhance degrees of specialization. With more people available to do the different kinds of work

Greater penetration can be made These eventually lead to certain competitive advantage to the organization concerned.

Cont….

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 Preferred by investorsGrowing companies have high level of prestige in the corporate world.

Expansion strategy

This strategy is adopted when organisation aims high growth and wants to improve overall performance.

Reasons for adopting expansion strategies:--1.It may become essential when the environment demands increase in

pace of activity2.Chief executives may take pride in presiding over organisational

perceived to be growth-oriented3. Increasing size may lead to more control over the market along with

the competitors

Expansion strategy in the form of customer group, function and alternative technology (Customer groups relate to ‘who’ is being

satisfied, customer needs describe ‘what’ is being satisfied, and alternative

technologies means ‘how’ the need is being satisfied.)

Expansion strategiesExpansion through concentrationExpansion through integrationExpansion through diversificationExpansion through cooperationExpansion through

internationalizationExpansion through digitalisation

Concentric Expansion Strategy It means investing the resources in one or more of a firm’s business so as to expand its present business. i.e. doing more what we are already doing and where we are best at doing; when potential for growth, attractiveness and maturity factors are favorable in the industry of the firm. It can be aimed at-

Market penetration (capture the market share in the existing product and expand its business at rate higher than the industry growth)Market development (increase sales by developing new markets, geography-wise or segment-wise)Product development (achieve growth through product innovation to penetrate in new segment)

Vertical Integration Growth Strategy It represents a decision by an organization to utilize internal transactions rather than market transactions to accomplish its objectives.A firm starts undertaking & contributing activities, in addition to present activities, along the line of value addition stages from raw material stage to production and ultimately distribution of goods to customers, so as to gain ownership or increased control and thereby expand the business.Vertical integration can be achieved in two ways

Forward IntegrationBackward Integration

Cooperative strategies

Mergers and acquisitions

Joint venturesStrategic alliances

Merger and acquisition strategies

Mergers- It takes place when the objectives of the buyer firm and the seller firms are matched.

A merger is a combination of two or more organisations in which one acquires the assets and liabilities of the other in exchange for shares or cash or both the organisations are dissolved and assets and liabilities are combined and new stock is issued.

Acquisition or takeover- These are based on the strong motivation of the buyer firm to acquire.

Takeover can be in the form of hostile takeovers and friendly takeovers.

Types of mergers and acquisitionsHorizontal mergers- Mergers between two or

more organisations in the same businessConcentric mergers- It take place when

there is a combination of two or more organisations related to each other either in terms of customer functions, customer groups or alternative technologies.

Vertical mergers- Not necessary the same business

Conglomerate mergers- For e.g. footwear company combine with pharmaceutical firm.

Important issues in mergers and acquisitionsStrategic issues- Synergistic effects,

strategic advantages and distinctive competencies….

Financial issues- Sources of finance for acquisition, share price of target firm, growths prospects of target firm, quality and integrity of top management….

Managerial issuesLegal issues

Tata Chemicals buys British saltReliance Power and Reliance Natural Resources

mergerAirtel’s acquisition of Zain in AfricaICICI Bank buys Bank of RajasthanThe Reliance – BP dealMahindra & Mahindra acquires Ssangyong

Acquisition or takeover It means that one company attempts to acquire ownership or control over management of other co. either by mutual consent of or against the wishes of latter’s (other co.) management or stock holders. It may be

Friendly takeoverHostile takeover

Strategic Alliance It is one in which two (or more) firms unite by “a win-win type” agreement mutually acceptable to both (or all), In strategic alliance partners join hands together for certain specified objectives, when these objectives are achieved partners terminate their alliance.Types of Strategic Alliance (Based on its focus)

Technology Development AllianceOperations and Logistics AllianceMarketing, Sales and Service AllianceSingle Country or Multicountry AllianceX and Y Alliance

FACTORS PROMOTING THE RISE OF STRATEGIC ALLIANCES

To gain access to foreign markets – in the pharmaceutical industry, Pharmacia and Pfizer have formed an alliance for smooth market entry to accelerate the acceptance of a new drug.

To reduce financial risks – IBM, Toshiba and Siemens have entered into an alliance to share the fixed costs of developing new microprocessors.

To bring complementary skills – Intel formed and alliance with Hewlett- Packard (HP) to use HP’s capability to develop Pentium microprocessors.

To reduce political risks – Maytag, a U.S company entered into alliance with Chinese appliance maker RSD to gain access to China.

To achieve competitive advantage – GM and Toyota established joint venture by name Nummi Corporation.

To set technological standards – Philips entered into an alliance with Matsushita to manufacture and market the digital compact cassette.

To shape industry evolution – Lucent Technologies and Motorola entered into an alliance to develop a new generation of Digital signal processing chips that is designed to power next- generation cellular phones and other consumer electronics.

TYPES OF STRATEGIC ALLIANCES

a) Mutual Service Consortia: A Mutual Service Consortium is a partnership of similar companies in similar industries who pool their resources to gain a benefit that is too expensive to develop alone.

Eg: IBM offered Toshiba its expertise in chemical mechanical polishing to develop a new manufacturing process.

b) Joint Venture: A joint venture is a cooperative business activity, formed by two or more separate organizations for strategic purposes, that creates an independent business identity and allocates ownership, operational responsibilities and financial risks and rewards to each member, while preserving their separate identity or autonomy.

Eg: IOC and oil tanking GmbH formed a joint venture to build and operate terminating services for petroleum products.

 

c) Licensing Arrangement: A licensing agreement is an agreement in which the licensing firm grants rights to another firm in another country or market to produce and/ or sell a product.

Eg: P&G licensed the ‘Old Spice’ trademark and business to a Goa- based company, Menezes cosmetics (P) Ltd for a period of 10 years to manufacture, sell, distribute and market in India, Sri Lanka and Bangladesh.

d) Value-Chain Partnership: The value- chain partnership is a strong and close alliance in which one company or unit forms a long- term arrangement with a key supplier or distributor for mutual advantage.

Eg: Value- Chain partnership between Cisco Systems and its suppliers.

All forms of strategic alliances are filled with uncertainty. One thorny issue in any strategic alliance is how to cooperate without giving away the company or business unit’s core competence. There are many other issues that need to be dealt with when the alliance is initially formed and others that emerge later.

Joint Venture strategiesA Joint venture could be

considered as an entity resulting from a long term contractual agreement between two or more parties, to undertake mutually beneficial economic activities, exercise joint control.

Conditions for joint ventureWhen an activity is uneconomical for an

organisation to do alone.When the risk of the business has to be

shared.When the distinctive competencies of two

or more organisations can be brought together.

Types of joint venturesBetween two organisations in one industry.Between two organisations across different

industries.Between an Indian organisation and a

foreign organisation in India.Between an Indian organisation and a

foreign organisation in that foreign country.Between an Indian organisation and a

foreign organisation in third foreign country.

Concentration strategies

It involves converging resources in one or more of a firm’s business in terms of their respective customer group, customer function and alternative technologies.

A strategic approach in which a business focuses on a single market or product. This allows the company to invest more resources in production and marketing in that one area, but carries the risk of significant losses in the event of a drop in demand or increase in the level of competition.

Ansoff’ Product- Market Matrix

ProductMarket

Present New

Present Market Penetration

Product development

New Market development

Diversification

Integration strategiesIt means combining activities related to the present

activity of a firm.One can take the help of value chain analysisHere integration strategies are designed on the basis of

present set of customer functions and customer group.Integration strategy is also a subset of diversification

strategy.Reasons for adopting this strategy-Transaction cost

economicsHere the company may go in for MAKE OR BUY

decision.Horizontal integration and Vertical integration…..

Horizontal integration1.Here the organisation moves beyond its

boundaries into the domain of the industry it is operating in.

2.When an organisation 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 (acquisition or merger).

3.It may involves buying a competitor’s business in order to increase the market share and remain in the same industry.

Benefits1.Product differentiation2.Increased market power3.Reduction in industrial rivalry

Vertical integration1. Here the orgsniation starts making new

products that serve its own needs.2. Any activity undertaken with the purpose of

either supplying inputs (raw material) or serving new customer for output (marketing of firm’s product) is vertical integration.

3. It can be backward or forward integration.4. Backward integration means moving back to

the source of raw materials while forward integration moves the organization nearer to the ultimate customer.

5. Taper integration strategies requires firms to make part of their own requirements and to buy the rest from outsiders.

Expansion Strategy- Diversification strategy

When new products are made for the new market the diversification takes place.

By adopting diversification, an organisation does something in terms of newness of products or markets.

It can be of Concentric (Related) and Conglomerate (Unrelated) diversification.

Related or concentric diversification- Here, an organisation takes up an activity in such a manner that it is related to the existing business definition or if the new business is related with the existing business definition.Marketing related concentric diversification- Common

distribution channelsTechnology related concentric diversification Marketing and technology related concentric

diversification

Conglomerate or unrelated diversification- 1.When an organisation adopts a strategy which requires taking up those activities which are unrelated to the existing business definition of any of its businesses either in terms of their respective customer groups, customer function or alternative technologies, it is conglomerate diversification.2.Can go for this strategy if the company has excess capital

Expansion through Internationalization

Here the firm goes beyond the national market.A firm should assess the international environment.Porter’s Model of competitive advantage of Nations-

Four national characteristics create an environment that is conducive to create globally competitive firm in a particular industry.

1.Factor conditions- Special factors of production such a s natural resources, raw materials, labour etc.

2.Demand conditions- The nature and size of the buyer’s need in the domestic market.

3.Related and supporting industries- The existence of related and supporting industries to the ones in which a nation excels.

4.Firm strategy, structure and rivalry- The conditions in the nation determining how firms are created, organised, managed and the nature of domestic competition.

Types of International strategies

Focus on the cost pressures and pressures for local responsiveness

International strategy- Transferring the products and services to the foreign market. Here the firm offers standardised products and services in different countries with little or no differentiation.

Multidomestic strategy- Focus is on high level of local responsiveness and on customization

Global strategy- Here the company focuses on standard products and services and the focus is on to reduce the cost. It selects few favorable locations around the world.

Transnational strategy- Focus is on low cost and high local responsiveness. It is difficult to adopt this strategy and it calls for creative approach to manage the production and marketing of products and services.

Strategic decisions in Internationalisation

Which International markets to enter???Timing of entry into international market.Scale of entry into international markets….

ADVANTAGES Economies of scaleExpansionAccess to resources overseas

DISADVANTAGESHigh riskDifficulty in managing cultural diversityHigher distribution costTrade barriers

Retrenchment Strategy

It is a defensive strategy in which a firm having declining performance decides to improve its performance through contraction in this 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 orreducing the number of functions it performs, by being a captive firm orreducing the no. of products, markets, customer functions etc. or liquidation of business (as a last alternative) orcombinations of above.

Reasons for adopting

When the organization is not doing well and perceives that it may not do better in future too in a particular line of business it is advisable to delete that line of business. After deletion, the organization can concentrate in other areas, where it has some advantages. If the organization is not meeting its objectives even after following other alternative strategies it may go for retrenchment strategy. Also when the management is under pressure to improve the performance, this strategy can be pursued as a last resort.

Retrenchment strategyHere the organisation contracts its activitiesThe management no longer wishes to remain in

business due to continuous losses.The environment faced is threatening.Stability can be ensured by reallocation of

resources from unprofitable to profitable businesses.

Retrenchment strategiesHere the organisation reduces the scope of its

activitiesMajor external factors leading to decline:-

1.New organisation form2.New technologies

3.New business models4.Demand saturation

5.Changing customer needs and preferences6.Emergence of substitute products

Major internal factors leading to decline:-1.Ineffective top management

2.Inappropriate strategies3.High cost

4.Ineffective sales and marketing5.Wrong organisation design

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 mixSelling 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 machineryFocus on specific products and customers and improved marketing, etc.

Turnaround strategies- If your company is steadily losing profit or market share, a turnaround strategy may be needed. There are two forms of turnarounds: First, one may choose contractions (cutting labor costs and Marketing). Second, they may decide to consolidate

Divestment strategies- This is a form of retrenchment strategy used by businesses when they downsize the scope of their business activities. Divestment usually involves eliminating a portion of a business. Firms may elect to sell, close a strategic business unit, major operating division, or product line. This move often is the final decision to eliminate unrelated, unprofitable, or unmanageable operations.

Liquidation strategies- sell the business

Turnaround strategieso This can be Internal(focus on improving internal

efficiency) or externalManaging turnaroundo CEO and management handles the entire turnaround

strategy with the support of external consultant. CEO must have a good credibility with the banks and financial institutions.

o Can go in for a person deputed by the banks and financial institutions

o Replace the existing team and CEO or merge the sick organisation with a healthy one.

Approaches to TurnaroundIssue order for changeChange product mix

Focus on R&DRemove obsolete machinery

Focus on improving work culture and improve morale

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 for which the divested unit is a strategic fit. Or Leveraged buyout- a company’s shareholder are bought out by company’s management and other private investors using borrowed funds Or Spin off i.e. creating a new co. financially and managerially independent one from parent company and retaining or not retaining partial ownership by distribution of shares of new company to shareholders of parent company.

Divestment strategyo Sale or liquidation of a portion of businesso It can be SBU or a major divisiono This strategy is followed if the organisation failed

in implementing turnaround strategy.Reasons for Divestmento Business which was earlier acquired proves to be

a mismatch and cannot be integrated within the company.

o Persistent negative cash flow from a particular business

o Intense competitiono Not able to adopt new technologyo Better alternative may be available for the firm

Liquidation Strategy It is one in which a firm closes down & sells its entire business at a fair price on the basis of tangible assets, management good will & also intangible assets and invests the realization somewhere else or distributes among debtors and members when

Business can’t be revived and its retaining value is less than its selling.Business is in peak form (value, but future is quite uncertain, having no direction,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.

Liquidation strategyo Close down the organisation and sell its assetso Should be considered as a last solutiono It may lead to serious consequences such as loss of

employment, termination of opportunities where an organisation could pursue

o Small scale units can be easily liquidated but its is very difficult to liquidate medium or large size organisation in Indian for several following reasons:----

1. Govt. may not allow for liquidation2. Pressure of trade union

3. Company management, banks, financial institutions, creditors

Combination strategyo Mixture of stability, expansion and retrenchment

strategyo Very difficult for the organisation to follow single

strategy as the business environment is very complex.

Corporate restructuringSynonyms of restructuring are revamping,

regrouping…..It can take place at the macro level( reduction

of subsidies, dismantling of price control) and micro level ( Business level restructuring, financial restructuring, organisational restructuring).

Business level restructuring- Changes in the organisation’s set of businesses in order to create more profitable enterprise.

Financial restructuringOrganisational restructuring

Reasons for corporate restructuringAt business level

An organisation may go in for restructuring in its business portfolio.

Business portfolio changes could lead to the organisational acquiring new

businesses and divesting some others.

It may go in for combination strategy

Combination Strategy

Combination strategy is not an independent classification but it is a combination of different strategies – stability, growth, retrenchment – in various forms.Thus the possible combinations of strategies may be:

Stability in some businesses and growth in other businessesStability in some businesses and retrenchment in other businessesGrowth in some businesses and retrenchment in other businessesStability, growth and retrenchment in different businesses.

Reasons for following

Different products in different product life cycleWhen different products of the organization are at different product life-cycle stages, they require different types of investment.

Business CycleBusiness cycle may affect the prospect of various businesses differently.

Number of businessesWhen the number of businesses in an organization has gone beyond the optimum number, they are required to be reduced because some business may not be that attractive from long-term point of view.

OutsourcingOutsourcing, in literal terms, means

sourcing from outside. The term is increasingly used to refer to sub-contracting of a set of functions or processes by one firm to another, or to a group of individuals. The latter organization is often in another physical location, or another country altogether.

Sourcing Decision Cycle Framework

Sourcing involves many decisions (Figure 1).The first step is the make or buy decision.If buy is selected then the company must decide

where.If the company decides to go offshore it must

decide if the offshore company is near or far.Periodic evaluation must take place.Continual evaluation is needed to determine if

the arrangement is satisfactory or not (either for outsourcing or insourcing).

Onshore insourcingIf the work is performed by the client company’s subsidiary located inside the client company’s home country it is called onshore insourcing

Onshore outsourcingIf the work performed by a third party vendor and both the client company and the third party vendor located in the same country it is called onshore outsourcing.

Nearshore insourcingIf the work is performed by the client company’s subsidiary geographically located closer to the client’s company it is called nearshore insourcing.

Outsourcing

Nearshore outsourcingIf the work is performed by a third party vendor geographically located closer to the client company it is called nearshore outsourcing

Offshore insourcingIf the work is performed by the client company’s subsidiary located for way from the client company’s home country it is called Offshore insourcing

Offshore outsourcingIf the work is performed by a third party vendor geographically located for way from the client company it is called offshore outsourcing

Outsourcing

Insourcing Outsourcing

Onshore Amazon.com ousourced all its storage and other services to its subsidiaryAmazon Web Services, LLC.Several US companies send work to their subsidiaries in Mexico and Canada.

Several companies outsource their Payroll services to ADP

Nearshore For example work send by US basedGoogle, Inc. to its subsidiary Google Canada Corporation in Canada

Several US companies send work to third partyvendors located in Canada and Mexico

Offshore Accenture sending work to Accenture India Private Limited

Any work sent to Indian consulting companies like TCS, Infosys, Wipro

Outsourcing

The Advantages of Outsourcing

Swiftness and Expertise: Most of the times tasks are outsourced to vendors who specialize in their field. The outsourced vendors also have specific equipment and technical expertise, most of the times better than the ones at the outsourcing organization. Effectively the tasks can be completed faster and with better quality output

Concentrating on core process rather than the supporting ones: Outsourcing the supporting processes gives the organization more time to strengthen their core business process.

Risk-sharing: one of the most crucial factors determining the outcome of a campaign is risk-analysis. Outsourcing certain components of your business process helps the organization to shift certain responsibilities to the outsourced vendor. Since the outsourced vendor is a specialist, they plan your risk-mitigating factors better.

Reduced Operational and Recruitment costs: Outsourcing eludes the need to hire individuals in-house; hence recruitment and operational costs can be minimized to a great extent. This is one of the prime advantages of offshore outsourcing.

The Disadvantages of Outsourcing

Risk of exposing confidential data: When an organization outsources HR, Payroll and Recruitment services, it involves a risk if exposing confidential company information to a third-party.

Synchronizing the deliverables: In case you do not choose a right partner for outsourcing, some of the common problem areas include stretched delivery timeframes, sub-standard quality output and inappropriate categorization of responsibilities. At times it is easier to regulate these factors inside an organization rather than with an outsourced partner.

Hidden costs: Although outsourcing most of the times is cost-effective at times the hidden costs involved in signing a contract while signing a contract across international boundaries may pose a serious threat.

Lack of customer focus: An outsourced vendor may be catering to the expertise-needs of multiple organizations at a time. In such situations vendors may lack complete focus on your organization’s tasks.

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