Module 2&3 Sm Imba

7/30/2019 Module 2&3 Sm Imba

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Strategic alternatives

(Traditional approach )• There can be four grand strategiestraditionally:

1. Stability strategy

2. Expansion strategy/growth strategy

3. Divestment strategy

4. Combination strategy



1. Stability strategy

• Organization always try to stabilize inareas of strengths.

• Stability doesn’t mean nil growth ,but thetargets are modest.

• It maintains present course in steadymanner in the situations like noappreciable change in environment.

• Stability strategy is also valid when

organizational objectives are same over aperiod of time and growth is limited in awell specified manner.



2. Growth / Expansion strategy

• When firms seek sizable growth, it usesthis strategy.

• It tries to exploit the opportunities in theenvironment.

• Opposite to stability strategy here therewards and the risks are very high.

• Expansion strategy holds two major

routes1. Intensification

2. Diversification



Strategy Alternatives

Stability Expansion Divestment Combination

Intensification Diversification

Market

Penetration

Market

Development

Product

Development

Vertically

Integrated

Concentric

Diversification

Conglomerate

DiversificationBackwardForward



1. Intensification strategy• In it the firm pursues growth by within the

existing businesses of the firm.

• This encompasses three routes

1. Market penetration strategy2. Market development strategy

3. Product development strategy



existing market New market

Marketpenetration

Marketdevelopment

Productdevelopment

Diversification

Ansoff’s product-market

expansion grid



Example of MUL

• Maruti started with maruti 800to penetratemetro, mini metro and class 1 townsthrough fuel efficiency and affordability.

• It entered class 2 and class 3 towns(market development) revolutionizing theautomobile scene.

• It continuously added new products likeGypsy, Omni, 1000, Zen ,Alto, Wagon R,Bolero etc as product development.



Vertical integration• In it the firm opts to engage in businesses that

are related to existing business of the firm.• So the firm doesn’t jump outside the vertically

linked product- process chain.

• In forward integration, the firm develops outlets

for sale of its product.• In backward integration , additional processing is

undertaken in reverse direction.

• Forward Integration is when you are enteringinto subsequent stage – eg. HarissonsMalayalam Plantations getting into packagedtea, Mafatlal getting into ready-mades



• Starting with textiles in the late ’70s, Reliancepursued a strategy of backward vertical

integration—in polyester, fibre intermediates,plastics, petrochemicals, petroleum refining andoil and gas exploration and production.

• Backward Integration is entering preceding

stage of business eg. Brooke Bond getting intoplantation business, Reliance into petroleummining.

• many companies like Bata, DCM, BombayDyeing, Raymonds and Reliance have set uptheir own retail outlets to sell their fabrics.



Diversification

• When there is need to grow continually but

there is a limit in the present line of business you go for diversification

• It means entry into new line of activity

other than your traditional business• There are two types of diversification

– Concentric and

– Conglomerate



Concentric diversification.• Concentric diversification includes adding new,

but related, products or services.• When new product or service is provided with

the help of existing or similar technology it iscalled technology-related concentric

diversification. For example, Mother dairy hasadded 'curd and Lassi’ to its range of milkproducts.

• In marketing-related concentric diversification,the new product or service is sold through the

existing distribution system. For instance, a bankmay start providing mutual fund services to itscustomers.



• Concentric diversification is suitable for thefollowing purposes:

• (a) When cyclical fluctuations in the presentproducts or services are to be counteracted;

• (b) When the cash flows generated by theexisting product or service are in surplus;

• (c) When demand for present product or servicehas reached saturation point;

• (e) When reputation of present product or

service is high and can be used for newproducts or service



Conglomerate Diversification

• When a firm diversifies into businesswhich is not related to its existing businessboth in terms of marketing and technology

it is called conglomerate diversification.

• Several Indian companies have adoptedthis strategy. Sahara, Essar group, ITC,

Godrej, are examples of conglomeratediversification.



• Conglomerate diversification strategy issuitable for the following purposes:

(I) To grow faster than the growth realizedthrough expansion;

(ii) To avail of potential opportunities for profitable investment;

(iii) To achieve competitive edge and greater stability;

(iv) To make better use of cash surplus of present products or service.



Growth patterns• Most corporate growth can be achieved by

organic or inorganic growth.

• Organic growth relates to the steady internalexpansion of existing activities, yielding in an

increase in output and sales. e.g., JIT, TQM etc.• Contrary to this, inorganic growth also called

core growth, describes the enlargement of corporations via mergers, acquisitions, jointventures and strategic alliances etc.



JOINT VENTURES• When two or more firms mutually decide to

establish a new enterprise by participatingin equity capital and in businessoperations, it is known as joint venture.

• A joint venture is a business partnership

between two or more companies for aspecific business operation.

• Birla Yamaha Ltd. is a joint venture of Birla

and Yamaha Motor Co. of Japan,• DCM and Daewoo Corporation of Korea

established DCM Daewoo Motors Ltd.



Strategic issues in JV1. Objectives of JV: There can be three set of

objectives- two sets for partners and one for the joint venture itself.

2. Choice of partner: It can be based on financial

capability, technical, managerial capability etc.3. Pattern of shareholding: norms as prescribedby Indian government.

4. Management pattern: management should be

autonomous with internal structure based onchoice of partner and pattern of shareholding.



JVs are especially effective strategy topursue when . . .

• a privately owned organization forms a JV with apublicly owned organization. E.g., ONGCValues Ltd (OVAL),

• a domestic organization forms a JV with aforeign company. e.g., Maruti Suzuki

• the distinctive competencies of two or more firmscomplement each other especially well.

• some project is potentially very profitable butrequires overwhelming resources and risks.

• two or more smaller firms have troublecompeting with a large firm.

• there exists a need to introduce a newtechnology quickly.



– In a JV the respective strengths are shared toovercome a weakness or exploit a new opportunity

– In international business JV is one of the mostpopular forms of organisations because it has theleast financial, political and legal constraints as amode of entry.

• Sony Ericsson JV for mobile phones to take onthe might of market leader Nokia.

• The Tata group is investing $10 million in Advinus Therapeutics, its pharma joint venture

with Rashmi Barbhaiya’s company for drugdiscovery and development of pharmaceutical.



Advantages of joint venture

• J Vs are highly flexible and can be formed in anymanner that the companies want

• Minimum legal formality and statutory constraints

• Partners can operate more efficiently and

synergistically for a specific objective• Benefits both companies if it works out.

• Joint ventures and cooperative arrangementsallow companies to:

– improve communications and networking – globalize operations

– minimize risk.



What are some common reasonsfor JV failures?

• The venture may benefit the partneringcompanies but may not benefit customers whothen complain about poorer service or criticizethe companies in other ways.

• The venture may not be supported equally byboth partners.

• Lower profits in initial stages, so conflict with

partner may result in failure• Loss of control over operations as both mayhave different corporate strategies



Strategic alliances• A Strategic Alliance is a formal

relationship formed between two or moreparties to pursue a set of agreed upongoals, for a specified period whileremaining independent organizations.

• HLL and CARE India to empower poor rural women-―Project Shakti‖.

• American Express,, and Kingfisher

Airlines, announced a strategic partnershipaimed at identifying and leveraging marketopportunities.



Characteristics of SA• Two or more firms unite to pursue a set of

agreed upon goals but remain independent.• The partner firms share the benefits of alliance

and control over the performance of assignedtask.

• The partner firms contribute on a continuingbasis in one or more key strategic areas, for example, technology, product etc.

• NIIT IFBI The Institute of Finance, Banking andInsurance and HDFC Bank announce strategic

Alliance for offering better job opportunities.



Cost/Risks involved in SA1. Relational risk: that the partners will not follow

the norms agreed earlier.2. Performance risk is the probability like

objectives of SA will not be accomplished.

3. Cross cultural risk is the risk due to culturaldifferences among strategic partners.

4. Implementation risk is whether the feasibilitycheck of the SA proved to be worthwhile or

not.5. Cannibalization risk exists if collaborating

with competitors.



• The firm gets committed not only to a goal of its own but that of its alliance partner. Thisinvolves cost in terms of goal displacement.

• The firm may not be able to use its own timetested technology, if the alliance partner does

not subscribe to it. Cost of using less knowntechnology is involved here.

• SA failure would mean loss of time, money,material, information, reputation, status,

technological superiority, competitive position,and financial position.



Divestment strategy

• It involves dropping some of the activities in a

given business of firm or total dropping of someof the businesses of the firm.

• It involves a redefinition of the business of the

corporation.• Compulsions for divestment can be following:

• obsolescence of product,

• Unprofitable business,

• high competition,

• industry overcapacity and

• failure of expansion strategy.



Examples of divestment• Parle divested its soft drink business by selling

thumps up to coca cola because of heavycompetition.

• TATAs divested Tomco’s brands Hamam, Jai,

and Moti along with 501detergent bar to HLL.

• Glaxo divested its food division to Heinz to be

more focused to pharma business.



Porter’s Generic Strategies

• Michael Porter has argued that a firm's strengthsultimately fall into one of two headings: costadvantage and differentiation.

• By applying these strengths in either a broad or narrow scope, three generic strategies result:cost leadership, differentiation, and focus.

• These strategies are applied at the business unitlevel. They are called generic strategiesbecause they are not firm or industry dependent.



Porter’s Generic Strategies

UniquenessLow Cost

Position

Differentiation Overall CostLeadership

FocusFocus

Differentiation Focus Low Cost



Differentiation strategy Differentiation is a strategy aimed at

producing products and servicesconsidered unique industry wide anddirected at consumers who are relatively

price insensitive.e.g. Canon uses superior quality to differentiateitself in the photocopying industry

• A successful differentiation strategy can

allow a firm to charge a higher price for itsproduct & gain customer loyalty . E.g.,Pizza Hut



Cost Leadership

Cost Leadership emphasizes producing

standardized products at a very low per-unit costfor consumers who are price sensitive e.g.Nirma in the detergent field

• economies of scale, learning and experiencecurve effects, capacity utilization, linkages withsuppliers and distributors can lead to it.

• A cost leadership strategy can be especiallyeffective when the market is composed of manyprice-sensitive buyers & buyers do not caremuch about differences from brand to brand.E.g., GoAir, Indigo airlines



Focus

Focus means producing products and servicesthat fulfill the needs of small groups of consumers. e.g. Rolls Royce.

A successful differentiation strategy can allow a

firm to charge a higher price for its product &gaincustomer loyalty because consumers maybecome strongly attached to the differentiationfeatures. E.g., Satyapaul Sarees.

The risk of pursuing a differentiation strategy isthat the unique product may not be valued highby customers to justify the higher price.



Portfolio analysis• The business portfolio is the collection of

businesses and products that make up thecompany. The best business portfolio is one thatfits the company's strengths and helps exploitthe most attractive opportunities.

• The company must:

• (1) Analyse its current business portfolio anddecide which businesses should receive more or less investment, and

• (2) Develop growth strategies for adding new

products and businesses to the portfolio, whilstat the same time deciding when products andbusinesses should no longer be retained.



SWOT Matrix

Leave B lank

Strengths – S

List Strengths

Weaknesses –

W

List Weaknesses

Opportunities –

O

List Opportunities

SO Strategies

Use strength s to take

advantage of

opportuni t ies

WO Strategies

Overcoming

weaknesses by taking

advantage o f

opportuni t ies

Threats – T

List Threats

ST Strategies

Use strengths to avoid

threats

WT Strategies

Minim ize weakness es

and avoid threats



BCG Matrix



Question Marks

• High growth, low share• Build into Stars/ phase out• Requires cash to hold

market share

Stars

• High growth & share• Profit potential • May need heavy

investment to grow

Cash Cows

• Low growth, high share

• Established, successfulSBU’s •Produces cash

Dogs

• Low growth & share

• Low profit potential

Relative Market ShareHigh Low

M a r k e t G r o w t h R a t e

L o w

H i g h



Strategic choices in BCG• there are four possible strategies for each SBU:

• (1) Build Share: here the company can invest toincrease market share (for example turning a "questionmark" into a star)

• (2) Ho ld : here the company invests just enough to keepthe SBU in its present position

• (3) Harvest: here the company reduces the amount of investment in order to maximize the short-term cashflows and profits from the SBU. This may have the effectof turning Stars into Cash Cows.

• (4) Divest : the company can divest the SBU by phasingit out or selling it - in order to use the resourceselsewhere (e.g. investing in the more promising"question marks").



The BCG Matrix for ITC Ltd.

Stars

•Hotels

•Paperboards/

Packaging.

?

•FMCG- Others

Cows

•FMCG-Cigarettes• Agri business.

Dogs

•ITC Infotech.



GE Stoplight Matrix

• The GE Matrix overcomes a number of thedisadvantages of the BCG Box.

• Firstly, market attractiveness replaces market

growth as the dimension of industryattractiveness, and includes a broader range of factors other than just the market growth rate.

• Secondly, competitive strength replacesmarket share as the dimension by which thecompetitive position of each SBU is assessed.



• Market Attractiveness Subjective assessmentbased on broadest possible range of externalopportunities and threats beyond control of management – Overall market Size – Annual growth rate – Competitive intensity

– Technological Requirements… • Business Strength Subject assessment of how

strong a competitive advantage is created bya broad range of a firm’s internal strengthsand weaknesses – Market Share – Product Quality – Brand Reputation – Distribution networks…..



I n d

u s t r y A t t r a c t i v e n e s s

Business Strength/competitive position

High

Medium

Low

Strong Average Weak

Invest/ Expand

Harvest / Divest

Select /

Earn



Advantages of the Industry Attractiveness-

Business Strength Matrix over the BCG Matrix

• Terminology is less offensive and moreunderstandable

• Multiple measures associated with eachdimension tap many factors relevant to businessstrength and market attractiveness

• Allows for broader assessment during both

strategy formulation and implementation for amulti business company

Module 2&3 Sm Imba

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