Formulation of Strategy

Unit-III
Group Members:
Dipti
Chanchal
Eliza
Chandan
Divya Sachdev
Deepak
Divya Kant
Debagni

Submitted To:
Pawan Gupta Sir
 Integration
Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream
buyers. Contrary to horizontal integration, which is a consolidation of many firms that handle the
same part of the production process, vertical integration is typified by one firm engaged in
different parts of production (e.g. growing raw materials, manufacturing, transporting,
marketing, and/or retailing).

There are three varieties: backward (upstream) vertical integration, forward (downstream)
vertical integration, and balanced (both upstream and downstream) vertical integration.

• A company exhibits backward vertical integration when it controls subsidiaries that

produce some of the inputs used in the production of its products. For example, an
automobile company may own a tire company, a glass company, and a metal company.
Control of these three subsidiaries is intended to create a stable supply of inputs and
ensure a consistent quality in their final product. It was the main business approach of
Ford and other car companies in the 1920s, who sought to minimize costs by centralizing
the production of cars and car parts.
• A company tends toward forward vertical integration when it controls distribution
centers and retailers where its products are sold.
• Balanced vertical integration means a firm controls all of these components, from raw
materials to final delivery.

Horizontal integration
It is a Corporate strategy used to sell a type of product in numerous markets. Horizontal
integration in marketing is much more common than vertical integration is in production.
Horizontal integration occurs when a firm is being taken over by, or merged with, another firm
which is in the same industry and in the same stage of production as the merged firm, e.g. a car
manufacturer merging with another car manufacturer.

Benefits of horizontal integration

Horizontal integration allows:

 Economies of scale
  Economies of scope

 Economies of stocks

 Strong presence in the reference market

Merger Strategy
A merger is a combination of two or more organizations in which one acquires the assets and
liabilities of the other in exchange for shares or cash, or both the organizations are dissolved, and
the assets and liabilities are combined and new stock is issued eg: Polyolefin Industries with
NOCIL, TVS Whirlpool Ltd. with Whirlpool of India Ltd, Sandoz (India Ltd.) with Hindustan
Ciba Geigy Ltd, Nirma Detergents Ltd, Nirma Soaps and Detergents Ltd. and Shiva Soaps and
Detergent Ltd. with Nirma Ltd.

Types of Mergers
Horizontal Mergers: It is a merger of two or more companies that compete in the same
industry. It is a merger with a direct competitor and hence expands as the firm’s operations in the
same industry. Horizontal mergers are designed to produce substantial economies of scale and
result in decrease in the number of competitors in the industry. The merger of Tata Oil Mills Ltd.
with the Hindustan lever Ltd. was a horizontal merger.

Vertical Mergers: Combination of different firms engaged in activities complimentary to

each other like supply of raw materials, production of goods and marketing.
Eg.: Footwear Company combines with a leather tannery or with a chain of shoe retail stores

Concentric merger: Combination of firms related to each other in terms of customer

groups or customer functions or alternative technologies.
Eg.: Footwear Company combines with a hosiery firm making socks or with a leather goods
company making purses, handbags, and so on.

Conglomerate Merger: Combination of firms unrelated to each other in terms of

customer groups or customer functions or alternative technologies.
Eg.: Footwear Company combines with a pharmaceutical firm.
 Important Issues in Mergers
Strategic issues: It relates to the commonality of strategic interest between the buyer and
seller firms. The strategic advantages and distinctive competencies of the merging firms have to
be analyzed.

Financial issues: It relates to the valuation of the seller firm and the sources of financing
for mergers to take place.
Value may be assessed keeping in view the assets, market standing and opportunity, earnings
potential, or stock value.

Financial issues: The basic point is to arrive at a valuation model where the impact on the
EPS of the merging firm is either positive or neutral
Eg. Where this took place successfully is the ‘Ranbaxy-Crosslands’ merger where there was a
considerable appreciation of the EPS of the merged identity
E.g. Where it did not took place is the case of ‘Punjab National Bank – New Bank of India’
merger where the EPS of the merged entity became negative

Managerial Issues: It relate to the problems of managing firms after the merger has taken
place
Usually, mergers are followed by the changes in staff, specially chief executives and top
managers

Legal issues in Merger: It relate to the provisions made in law for the purpose of
mergers.
 JOINT VENTURE STRATEGIES
A 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 and contribute equity and share in the profits or losses of the entity.
Mergers refer to a combination of two or more companies into one company and may be possible
in two ways: absorption and consolidation. Absorption takes place in mergers and acquisitions
where the company acquires another company. Consolidation takes place when two or more
companies combine to form a new company. Joint ventures are a special case of consolidation.

The technical definition of joint venture by the Reserve Bank of India is: ‘a foreign concern
formed, registered or incorporated in accordance with the laws and regulations of the host
country in which the Indian party makes a direct investment, whether such investment amounts
to a majority or minority shareholding’.

Conditions for Joint Ventures

Joint ventures may be useful to gain access to new business, mainly under
four conditions:

1. When an activity is uneconomical for an organization to do alone.

2. When the risk of business has to be shared and, therefore, is reduced for the participating
forms.

3. When the distinctive competence of two or more organizations can be brought together.

4. When setting up an organization requires surmounting hurdles such as import quotas,

tariffs, nationalistic-political interests and cultural roadblocks.

Types of joint ventures

Joint ventures are possible within industries, across industries and across countries. But they are
especially useful for entering international markets. Frequently, Indian firms will enter a foreign
market in a joint venture with a foreign market in a joint venture with a foreign company. A
foreign company entering India would also enter into a joint venture with an Indian company.
From the point of view of Indian organizations, the following types of joint ventures are
possible:

Ltd and the Indian Railways for setting up a Rs. 5,352- crore thermal power plant at Nabinagar
in Bihar, to meet the requirements of the rail network across the country. The joint venture
company, Bharatiya Rail Bijlee Company, will execute the 1000 MW plant , with NTPC holding
74 per cent equity while the Railways will provide the balance).

1. Between two Indian organizations across difeerent industries (e.g. Action Aid India and
Tata Institute of Social Sciences in a joint venture, offering degree courses for rural
communities in India).

2. Between an Indian organizations and a foreign organization in India (e.g. DLF Ltd.
Forging a 50:50 joint venture with Nakheel, a large property developer of the UAE, for
two integrated townships in India at an investment of US$ 10 billion).

3. Between an Indian organisation and a foreign organization in that foreign country (e.g.
Kirloskar Brothers Ltd. having a joint venture with SPP Pumps Ltd, UK, for catering to
EU market).

4. Between an Indian organization and a foreign org. in a third country (e.g. Apollo Tyres of
India and Continental AG of Germany setting up a tyre manufacturing joint venture in
Malaysia ).

Strategic Issues in Joint Ventures

Joint ventures offer the advantages of achieving objectives mutually by the participating firms.
Eliminating, controlling or reducing competition may be of strategic importance and can be
brought about through joint ventures. Increasing the market share can also be achieved.
Diversification strategies may be adopted by the participating firms if a joint venture is planned
across different industries. If technology is a critical variable in strategy, then joint ventures with
foreign companies can be feasible. If legal and regulatory hurdles come in the way of external
expansion , they could be subverted through a joint venture strategy of combining with a foreign
firm in that foreign country or in a third country. Environmental threats within the country or
opportunities abroad may cause firms to undertake joint ventures.

A special mention need be made of joint ventures abroad by Indian companies, as they have
become significant in recent years. Sometimes, these take the form of joint enterprises with firms
from other countries, which along with Indian firms set up projects in third countries.
Administratively, the Ministry of Commerce deals with joint ventures. Despite the problems
faced, joint ventures offer a viable strategic advantage which are important for joint ventures to
be set up and sustained.

Benefits and Drawbacks in joint ventures

The Major benefits that are likely to accrue from joint ventures include :

Minimizing risk, reducing an individual company’s investment, creating access to foreign

technology, broad-based equity participation, access to governmental and political support and
entering new fields of business and synergistic advantages.

The disadvantages that may arise in joint ventures are:

Problems in equity participation, foreign exchange regulations, lack of proper coordination

among participating firms, cultural and behavioral differences and the possibility of conflict
among the partners.

Divestment Strategy - Meaning

• A divestment (also called divestiture or cutback) strategy involves the sale or liquidation
of a portion of a business, or a major division, profit centre, or SBU.
• Divestment is usually a part of rehabilitation or restructuring plan and is adopted when a
turnaround has been attempted but has proven to be unsuccessful.
• It is the opposite of Investment.

Reasons for Divestment

 • If an acquired business proves to be a mismatch and cannot be integrated with the
company.
• Persistent negative cash flows.
• Severity of competition and the inability of the firm to cope with it
• No funds for technological up gradation.
• Divestment may be done because by selling off a part of the unprofitable business, the
company may be in a position to survive.

Approaches to Divestment
• Either a part of the company is divested by spinning it off as a financially and
managerially independent company, with the parent company retaining partial ownership
or not.
• Or the organization may sell a unit completely. In this, a buyer is found who can consider
the divested unit to be a ‘strategic fit’. So it can be sold profitably.

Decision to Divest
• The decision to divest is a painful one for the management as it amount to admitting
failure. The CEO who is associated with the project finds it psychologically difficult to
withdraw from a commitment.
• But with the emergence of professional management, divestment strategies are becoming
quite popular as businesses are now turning into focused organizations and creating their
competitive advantage.
• But when divestment does not work, Liquidation may be the only strategic alternative
left.

Example :

India’s largest paint manufacturer, Asian Paints undertook an international divestment when it
decided to divest its stake in it’s Australian operations. The company’s operations in Queensland
were small and not expected to make any significant impact in the company’s performance. The
company has entered into a share purchase agreement to offload it’s stake in Asian paints
(Queensland) Ltd. , held by it’s wholly owned subsidiary , Asian Paints ( International) ,
Mauritius . Compared with Asian Paint’s revenue of Rs. 3,700 crore in the 2006, the Australian
unit fetched only Rs. 15 crore.

Liquidation Strategies
 • It is the most extreme and unattractive strategy which involves closing down an
organization and selling it’s assets.
• It is considered the last resort because it leads to serious consequences like loss of
employment for workers, termination of opportunities for future and stigma of failure.

Why is Liquidation difficult or undesirable ?

• The management may hesitate to liquidate due to fear of failure.
• The trade unions would naturally resist the loss of employment of workers.
• Moreover inadequate compensation for most unusable assets as they will be considered
as scrap.
• Also it creates a bad impact on the company or the Business group.

Planned Liquidation
• Sometimes a ‘dead business is worth more than alive’. For instance, the real estate owned
by an organization may fetch it more money than the actual returns of doing business.
• Planned liquidation would involve a systematic plan to reap the maximum benefits for
the organization and it’s shareholders through the process of liquidation.

Legal Aspects of Liquidation

• Under the Companies Act, 1956, liquidation is termed as winding-up. The Act defines
winding-up of a company as the process whereby it’s life is ended and it’s property
administered for the benefit of it’s creditors and members.
• At the end of winding up, the company will have no assets or liabilities.

• The Act provides for a liquidator who takes control of the company, collects it’s assets,
pays it’s debts and finally, distributes any surplus among the members according to their
rights .

• When the affairs of a company are completely winded up, the dissolution of the company
takes place.

CORPORATE PORTFOLIO
ANALYSIS
The business portfolio is the collection of businesses and products that make up the company.
The best business portfolio is one that fits the company's strengths and helps exploit the most
attractive opportunities.

The company must:

1. Analyse its current business portfolio and decide which businesses should receive more
or less investment, and

2. Develop growth strategies for adding new products and businesses to the portfolio, whilst
at the same time deciding when products and businesses should no longer be retained.

The two best-known portfolio planning methods are the Boston Consulting Group Portfolio
Matrix and the McKinsey / General Electric Matrix (discussed in this revision note). In both
methods, the first step is to identify the various Strategic Business Units ("SBU's") in a company
portfolio. An SBU is a unit of the company that has a separate mission and objectives and that
can be planned independently from the other businesses. An SBU can be a company division, a
product line or even individual brands - it all depends on how the company is organised.

The McKinsey / General Electric Matrix

The McKinsey/GE Matrix overcomes a number of the disadvantages of the BCG Box. Firstly,
market attractiveness replaces market growth as the dimension of industry attractiveness, and
includes a broader range of factors other than just the market growth rate. Secondly, competitive
strength replaces market share as the dimension by which the competitive position of each SBU
is assessed.
The diagram below illustrates some of the possible elements that determine market attractiveness
and competitive strength by applying the McKinsey/GE Matrix to the UK retailing market:

Factors that Affect Market Attractiveness

Whilst any assessment of market attractiveness is necessarily subjective, there are several factors
which can help determine attractiveness. These are listed below:

- Market Size

- Market growth

- Market profitability

- Pricing trends
- Competitive intensity / rivalry

- Overall risk of returns in the industry

- Opportunity to differentiate products and services

- Segmentation

- Distribution structure (e.g. retail, direct, wholesale

Factors that Affect Competitive Strength

- Strength of assets and competencies

- Relative brand strength

- Market share

- Customer loyalty

- Relative cost position (cost structure compared with competitors)

- Distribution strength

- Record of technological or other innovation

- Access to financial and other investment resources

Experience curse
The experience curve says that the more you do something, the less it costs to do it. And that has
important implications if you have chosen to build your market share by having lower costs than
your competitors -- a cost advantage strategy. It was developed by Bruce Henderson and his
colleagues at the Boston Consulting Group (BCG) in 1966.

Experience curve theory is not the same as economies of scale, though scale can contribute to it.
Its true ancestor is the learning curve. T.P. Wright, who studied the US aircraft industry, first
devised the theory of the learning curve in the 1930s. He observed that every time cumulative
aircraft production doubled -- that's the total number made over time -- the man-hours required to
make each one fell by a constant percentage (10-15% according to his study.

Let's say it's 10%. If, after making 1,000 units of a particular product, each unit takes one hour to
produce, when cumulative volumes reach 2,000, it should take only 54 minutes. At 4,000 that
will have fallen to 48.6 minutes, at 8,000 to 43.7 minutes, and so on. The theory explains that if
you consider a labor-intensive production line. As volumes build over time, workers become
more confident and quick with their hands. They spend less time scratching their heads or
making errors, and they learn quicker ways of doing things. The same applies, in its own way, to
their managers.

Labor costs money, so the learning curve reduces costs over time. The experience curve is based
on the same principle -- it says that there is a relationship between experience and efficiency --
but takes a broader view. . During an assignment of semiconductor manufacturing consultants at
BCG observed that a cumulative doubling of production reduced production costs by 20-30%.
This phenomenon became particularly visible in the electronics industry as rapid volume growth
in those same semiconductors, and hence electronic calculators, personal computers and other
electronic appliances, resulted in dramatically falling costs and price.

Standardization and automation contribute to increased efficiencies and, as production increases,

equipment becomes better utilized. That too has the effect of lowering unit costs. Other
efficiencies may come from tweaking the product design and the mix of inputs. Suppliers will
also benefit from the experience curve, which should lower the cost of components.

Experience curve can be used in the following two ways:-

1. As a sensor to identify cost reduction opportunities. If a company had not cut production
costs in line with the experience curve, it was time they started to look for ways to do so.

2. The other important application of the experience curve lay in its implications for
competitive strategy.

To have lower costs than your rivals is a powerful competitive advantage. The effects of the
experience curve make it even more important for a company to grow its market share since, all
else being equal, the biggest share will translate into the lowest costs. That cost advantage can
then be enjoyed as greater profitability, or used to put downwards pressure on prices and
maintain market dominance.
Technology and innovation have a habit of interrupting the curve, however. The introduction of
new products or processes puts an end to the old curve and starts a new one. Of course, if every
player in the industry is aware of the experience curve, the knowledge becomes less useful. If all
firms pursue a strategy based upon it, they will all end up with low prices, too much capacity and
no increase in share.

THE PRODUCT LIFE CYCLE

A new product progresses through a sequence of stages from introduction to growth, maturity,
and decline. This sequence is known as the product life cycle and is associated with changes in
the marketing situation, thus impacting the marketing strategy and the marketing mix.

The product revenue and profits can be plotted as a function of the life cycle stages as shown in
the graph below:

INTRODUCTION STAGE
In the introduction stage, the firm seeks to build product awareness and develop a market for the
product. The impact on the marketing mix is as follows:

• Product branding and quality level is established and intellectual property protection
such as patent and trademarks are obtained.

• Pricing may be low penetration pricing to build market share rapidly,

or high skim pricing to recover development costs.

• Distribution is selective until consumers show acceptance of the product.

• Promotion is aimed at innovators and early adopters. Marketing

communications seeks to build product awareness and to educate
potential consumers about the product.

GROWTH STAGE

In the growth stage, the firm seeks to build brand preference and increase market
share:

• Product quality is maintained and additional features and support services may be
added.

• Pricing is maintained as the firms enjoy increasing demand with little competition.

• Distribution channels are added as demand increases and customers accept the
product.

• Promotion is aimed at a broader audience.

MATURITY STAGE
At maturity, the strong growth in sales diminishes. Competition may appear with similar
products. The primary objective at this point is to defend market share while maximizing profit.

• Product features may be enhanced to differentiate the product from that of

competitors.

• Pricing may be lower because of the new competition.

• Distribution becomes more intensive and incentives may be offered to encourage

preference over competing products.

• Promotion emphasizes product differentiation.

DECLINE STAGE
As sales decline, the firm has several options:

• Maintain the product, possibly rejuvenating it by adding new features

and finding new uses.

• Harvest the product – reduce costs and continue to offer it, possibly to
a loyal niche segment.

• Discontinue the product, liquidating remaining inventory or selling it to

another firm that is willing to continue the product.

The marketing mix decision in the decline phase will depend on the selected strategy. For
example, the product may be changed if it is being rejuvenated, or left unchanged if it is being
harvested or liquidated. The price may be maintained if the product is harvested, or reduced
drastically if liquidated.

LIMITATIONS OF THE PRODUCT LIFE CYCLE CONCEPT

The term “life cycle” implies a well-defined life cycle as observed in living organisms, but
products do not have such a predictable life and the specific life cycle curves followed by
different products vary substantially. Consequently, the life cycle concept is not well suited for
the forecasting of product sales. Furthermore, critics have argued that the product life cycle may
become self –fulfilling. For example, if sales peak and then decline, mangers may conclude that
the product is in the decline phase and therefore cut the advertising budget, thus precipitating a
further decline.

Nonetheless, the product life cycle concept helps marketing managers to plan alternate marketing
strategies to address the challenges that their products are likely to face. It also is useful for
monitoring sales results over time and comparing them to those o products having similar life
cycle.

BCG Matrix
The origin of the Boston Matrix lies with the Boston Consulting Group in the early 1970s. It was
devised as a clear and simple method for helping corporations decide which parts of their
business they should allocate their available cash to. Following the credit crunch, this is newly
important in some sectors because of the limited availability of credit. The Boston Consulting
Group (BCG) Matrix is a simple tool to assess a company’s position in terms of its product
range. It helps a company think about its products and services and make decisions about which
it should keep, which it should let go and which it should invest in further.
Market Share and Market Growth

To understand the Boston Matrix you need to understand how market share and market growth
interrelate.
Market share is the percentage of the total market that is being serviced by your company,
measured either in revenue terms or unit volume terms. The higher your market share, the higher
the proportion of the market you control.

The Boston Matrix assumes that if you enjoy a high market share you will be making money.
(This assumption is based on the idea that you will have been in the market long enough to have
learned how to be profitable, and will be enjoying scale economies that give you an advantage).

The question it asks is, "Should you be investing additional resources into a particular product
line just because it is making you money?" The answer is, "not necessarily."

This is where market growth comes into play. Market growth is used as a measure of a market's
attractiveness. Markets experiencing high growth are ones where the total market is expanding,
meaning that it’s relatively easy for businesses to grow their profits, even if their market share
remains stable.

By contrast, competition in low growth markets is often bitter, and while you might have high
market share now, it may be hard to retain that market share without aggressive discounting.
This makes low growth markets less attractive.
Question Marks

Question marks are products that grow rapidly and as a result consume large amounts of cash,
but because they have low market shares they don’t generate much cash. The result is large net
cash consumption. A question mark has the potential to gain market share and become a star, and
eventually a cash cow when the market growth slows. If it doesn’t become a market leader it will
become a dog when market growth declines. Question marks need to be analyzed carefully to
determine if they are worth the investment required to grow market share.

Dogs

Dogs have a low market share and a low growth rate and neither generates nor consumes a large
amount of cash.
However, dogs are cash traps because of the money tied up in a business that has little potential.
Such businesses are candidates for divestiture.

Stars
Stars generate large sums of cash because of their strong relative market share, but also consume
large amounts of cash because of their high growth rate. So the cash being spent and brought in
approximately nets out. If a star can maintain its large market share it will become a cash cow
when the market growth rate declines.

Cash Cows

As leaders in a mature market, cash cows exhibit a return on assets that is greater than the market
growth rate – so they generate more cash than they consume. These units should be ‘milked’
extracting the profits and investing as little as possible. They provide the cash required to turn
question marks into market leaders.

How to Use the Tool:

To use the Boston Matrix to look at your opportunities

Step One: Plot your products on the worksheet according to their market share and mark
growth.
Step Two: Classify them into one of the four categories. If a product seems to fall right on one
of the lines, take a hard look at the situation and rely on past performance to help you decide
which side you will place it.
Step Three: Determine what you will do with each product/product line. There are typically
four different strategies to apply:

• Build Market Share: Make further investments (for example, to maintain Star status,
or to turn a Question Mark into a Star.)
• Hold: Maintain the status quo (do nothing)
• Harvest: Reduce the investment (enjoy positive cash flow and maximize profits from a
Star or a Cash Cow)
• Divest: For example, get rid of the Dogs, and use the capital you receive to invest in
Stars and Question Marks.

TIPS
Tip 1:
There’s nothing “magical” about the position of the lines

between the quadrants. There may be very little real difference, for example, between a
Problem Child with a market share of 49%, and a Star with a market share of 51%. It’s
also not necessarily true that the line should run through the 50% position. As ever, use
your common sense.
 Tip 2:
A similar (and equally powerful) tool is the Action Priority Matrix, which helps you pick
projects which legitimately give you the quickest and highest value returns. By using the
BCG Matrix and Action Priority Matrix together, you get the best of both worlds!
Tip 3:
From a personal perspective, you can evaluate the opportunities open to you by
substituting the dimension of "Market Share" with one of "Professional Skills". Plot the
options open to you on the personal version of the BCG Matrix, and take action
appropriately.
Tip 4:
A similar (and equally powerful) tool is the Action Priority Matrix, which helps you pick
projects which legitimately give you the quickest and highest value returns. By using the
BCG Matrix and Action Priority Matrix together, you get the best of both worlds!

Key Points

The Boston Matrix is an effective tool for quickly assessing the options open to you, both on a
corporate and personal basis.

With its easily understood classification into "Dogs", "Cash Cows", "Question Marks" and
"Stars", it helps you quickly and simply screen the opportunities open to you, and helps you
think about how you can make the most of them.

Limitations

• High market share is not the only success factor

• Market growth is not only indicator for attractiveness of a market
• Sometimes Dogs can earn more cash as cash cows