CHAPTER -7

CORPORATE LEVEL STRATEGY – EXPANSION OR GROWTH STRATEGY

GROWTH or EXPANSION STRATEGIES

Every enterprise seeks growth as its long-term goal to avoid annihilation in a relentless and
ruthless competitive environment. Growth offers ample opportunities to everyone in the
organization and is crucial for the survival of the enterprise. However this is possible only
when fundamental conditions of expansion have been met. Expansion strategies are designed
to allow enterprises to maintain their competitive position in rapidly growing national and
international markets. Hence to successfully compete, survive and flourish, an enterprise has
to pursue an expansion strategy. Expansion strategy is an important strategic option, which
enterprises follow to fulfil their long-term growth objectives. They pursue it to gain significant
growth as opposed to incremental growth envisaged in stability strategy. Expansion strategy is
adopted to accelerate the rate of growth of sales, profits and market share faster by entering
new markets, acquiring new resources, developing new technologies and creating new
managerial capabilities.

A growth strategy is one that an enterprise pursues when it increases its level of objectives
upward in significant increment, much higher than an exploration of its past achievement level.
The most frequent increase indicating a growth strategy is to raise the market share and or sales
objectives upward significantly. If we look at the corporate performance in the recent years, we
find how the various organizations have grown both in terms of sales and profit as well as
assets. For example: Reliance Industries Limited, Nirma Limited. Organizations may select a
growth strategy to increase their profits, sales and/ or market share. They also pursue growth
strategy to reduce cost of production per unit. Growth Strategies involve a significant increase
in performance objectives. These strategies are adopted when firms remarkably broadens the
scope of their customer groups, customer functions and alternative technologies either singly or
in combination with each other.

Expansion strategy provides a blueprint for business enterprises to achieve their long term
growth objectives. It allows them to maintain their competitive advantage even in the
advanced stages of product and market evolution. Growth offers economies of scale and scope
to an organization, which reduce operating costs and improve earnings. Apart from these
advantages the organization gains a greater control over the immediate environment because of
its size. This influence is crucial for survival in mature markets where competitors
aggressively defend their market shares.

Conditions/ Reasons for adopting for Expansion /Growth Strategies:

In the long run, growth is necessary for the very survival of the organizations themselves,
particularly when the environment is quite volatile. Growth offers many economies because of
large scale operations. Growth Strategy is taken up because of managerial motivation to do so.
Managers with high degree of achievement and recognition always prefer to grow. 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. Example: Growing companies have
high level of prestige in the corporate world, e.g., Reliance, Infosys, Hindustan Unilever
etc.Firms opt for expansion strategy under the following circumstances:
 When the firm has lofty growth objectives and desires fast and continuous growth in
assets, income and profits. Expansion through diversification would be especially
useful to firms that are eager to achieve large and rapid growth since it involves
exploiting new opportunities outside the domain of current operations.
 When enormous new opportunities are emerging in the environment and the firm is
ready and willing to expand its business scope.
 Firms find expansion irresistible since sheer size translates into superior clout.
 When a firm is a leader in its industry and wants to protect its dominant position.
 Expansion strategy is opted in volatile situations. Substantive growth would act as a
cushion in such conditions.
 When the firm has surplus resources, it may find it sensible to grow by levering on its
strengths and resources.
 When the environment, especially the regulatory scenario, blocks the growth of the
firm in its existing businesses, it may resort to diversification to meets its growth
objectives.
 When the firm enjoys synergy that ensues by tapping certain opportunities in the
environment, it opts for expansion strategies.
 Economies of scale and scope and competitive advantage may accrue through such
synergistic operations. Over the last decade, in response to economic liberalisation,
some companies in India expanded the scale of existing businesses as well as
diversified into many new businesses.
Growth of a business enterprise entails realignment of its strategies in product market
environment. This is achieved through the basic growth approaches of intensive expansion,
integration (horizontal and vertical integration), diversification and international operations.
Firms following intensification strategy concentrate on their primary line of business and look
for ways to meet their growth objectives by increasing their size of operations in this primary
business. A company may expand externally by integrating with other companies. An
organization expands its operations by moving into a different industry by pursuing
diversification strategies. An organization can grow by “going international”, i.e., by crossing
domestic borders by employing any of the expansion strategies discussed so far.

TYPES OF GROWTH / EXPANSION STRATEGIES:

The expansion or growth strategies are further classified as :
i) Concentration Expansion Strategy:
ii) Integration Expansion Strategy
iii) Diversification Expansion Strategy
iv) Cooperation Expansion Strategy
v) Internationalization Expansion Strategy

EXPANSION THROUGH CONCENRATION

Concentration involves expansion within the existing line of business. Concentration expansion
strategy involves safeguarding the present position and expanding in the current product-
market space to achieve growth targets. Such an approach is very useful for enterprises that
have not fully exploited the opportunities existing in their current products-market domain. A
firm selecting an intensification strategy, concentrates on its primary line of business and looks
for ways to meet its growth objectives by increasing its size of operations in its primary
business. Intensive expansion of a firm can be accomplished in three ways, namely, market
penetration, market development and product development first suggested in Ansoff’s model.
Concentration strategy is followed when adequate growth opportunities exist in the firm’s
current products-market space. However, while going in for internal expansion, the
management should consider the following factors.

 While there are a number of expansion options, the one with the highest net present
value should be the first choice.
  Competitive behaviour should be predicted in order to determine how and when the
competitors would respond to the firm’s actions. The firm must also assess its strengths
and weaknesses against its competitors to ascertain its competitive advantages.
 The conditions prevailing in the environment should be carefully examined to
determine the demand for the product and the price customers are willing to pay.
 The firm must have adequate financial, technological and managerial capabilities to
expand the way it chooses.
 Technological, social and demographic trends should be carefully monitored before
implementing product or market development strategies. This is very crucial,
especially, in a volatile business environment.

Exibit 7.1 Ansoff’s Product-Market Expansion Grid

PRODUCT
PRESENT NEW
MARKET

MARKET PRODUCT
PRESENT PENETRATION DEVELOPMENT

MARKET
NEW DEVELOPMENT DIVERSIFICATION

(Source: H I Ansoff “Strategies for diversification” Harvard Business Review 1957.5 pp 113-124)

The product/market grid first presented by Igor Ansoff (1968), shown in exhibit 7. 1, has
proven to be very useful in discovering growth opportunities. This grid best illustrates the
various intensification options available to a firm. The product/market grid has two
dimensions, namely, products and markets. Combinations of these two dimensions result in
four growth strategies. According to Ansoff’s Grid, three distinct strategies are possible for
achieving growth through the concentration route. These are:

Market Penetration: The firm seeks to achieve growth with existing products in their current
market segments, aiming to increase its markets share. When a firm believes that there exist
ample opportunities by aggressively exploiting its current products and current markets, it
pursues market penetration approach. Market penetration involves achieving growth through
existing products in existing markets and a firm can achieve this by:
  Motivating the existing customers to buy its product more frequently and in larger
quantities. Market penetration strategy generally focuses on changing the infrequent
users of the firm’s products or services to frequent users and frequent users to heavy
users. Typical schemes used for this purpose are volume discounts, bonus cards, price
promotion, heavy advertising, regular publicity, wider distribution and obviously
through retention of customers by means of an effective customer relationship
management.
 Increasing its efforts to attract its competitors’ customers. For this purpose, the firm
must develop significant competitive advantages. Attractive product design, high
product quality, attractive prices, stronger advertising, and wider distribution can assist
an enterprise in gaining lead over its competitors. All these require heavy investment,
which only firms with substantial resources, can afford. Firms less endowed may
search for niche segments. Many small manufacturers, for instance, survive by seeking
out and cultivating profitable niches in the market. They may also grow by developing
highly specialized and unique skills to cater to a small segment of exclusive customers
with special requirements.
 Targeting new customers in its current markets. Price concessions, better customer
service, increasing publicity and other techniques can be useful in this effort.

In a growing market, simply maintaining market share will result in growth, and there may
exist opportunities to increase market share if competitors reach capacity limits. While
following market penetration strategy, the firm continues to operate in the same markets
offering the same products. Growth is achieved by increasing its market share with existing
products. However, market penetration has limits, and once the market approaches saturation
another strategy must be pursued if the firm is to continue to grow. Unless there is an intrinsic
growth in its current market, this strategy necessarily entails snatching business away from
competitors. The market penetration strategy is the least risky since it leverages many of the
firm’s existing resources and capabilities. Another advantage of this strategy is that it does not
require additional investment for developing new products.

Reliance has captured substantial market share in textile yarn and intermediaries where as
ITC has captured substantial market share in cigarettes by following market penetration
strategy.
Market Development: Market Development strategy tries to achieve growth by introducing
existing products in new markets. Market development options include the pursuit of additional
market segments or geographical regions. The development of new markets for the product
may be a good strategy if the firm’s core competencies are related more to the specific product
than to its experience with a specific market segment or when new markets offer better growth
prospects compared to the existing ones. Because the firm is expanding into a new market, a
market development strategy typically has more risk than a market penetration strategy. This is
because managers do not normally sound knowledge of new markets, which may result in
inaccurate market assessment and wrong marketing decisions. In market development
approach, a firm seeks to increase its sales by taking its product into new markets. The two
possible methods of implementing market development strategy are:

 The firm can move its present product into new geographical areas. This is done by
increasing its sales force, appointing new channel partners, sales agents or
manufacturing representatives and by franchising its operation; or
 the firm can expand sales by attracting new market segments. Making minor
modifications in the existing products that appeal to new segments can do the trick.

Many companies which find that the urban market is saturated and there is little scope for
expansion, opt for developing new market in rural areas. Some of the companies which have
made keen attempt to develop rural market are HUL (personal products), Colgate (oral care
products), LG (TV), Videocon (Consumer durables), etc.

Product Development: Expansion through product development involves development of new

or improved products for its current markets. The firm remains in its present markets but
develops new products for these markets. Growth will accrue if the new products yield
additional sales and market share. This strategy is likely to succeed for products that have low
brand loyalty and/or short product life cycles. A Product development strategy may also be
appropriate if the firm’s strengths are related to its specific customers rather than to the specific
product itself. In this situation, it can leverage its strengths by developing a new product
targeted to its existing customers. Although the firm operates in familiar markets, product
development strategy carries more risk than simply attempting to increase market share since
there are inherent risks normally associated with new product development. Samsung
Electronics for example (TV) may offer slim line TV, Plasma TV, etc as its product
development strategy.The three possible ways of implementing the product development
strategy are:

 The company can expand sales through developing new products.

 The company can create different or improved versions of the current products.
 The company can make necessary changes in its existing products to suit the different
likes and dislikes of the customers.

Combination Strategy : Combination strategy combines the concentration strategy variants

i.e., market penetration, market development and product development to grow. In the market
development and market penetration strategy, the firm continues with its current product
portfolio, while the product development strategy involves developing new or improved
products, which will satisfy the current markets.

Diversification: The firm grows by diversifying into new businesses by developing new
products for new markets.

Benefits of Concentric Expansion Strategy:

A firm that is familiar with an industry would naturally like to invest more in known business
rather than unknown ones, the managers of the firms are more comfortable in dealing with the
present business. It involves minimal organizational changes. It enables the firm to master one
or a few businesses and enable it to specialize by gaining an in depth knowledge of these
businesses. Managers face fewer problems when dealing with known situations. Intensive
focusing of resources on a few businesses may also create conditions for the firm to develop a
competitive advantage. System and processes within firm are developed in such a way that
people are familiar with them . The decision making process is under less strains as there is
high level of predictability. Past experience is valuable as it is replicable.
Limitations of Concentric Expansion Strategy:
“Putting all one’s eggs in one basket has its own problems”. Concentration strategies are
heavily dependent on the industry. Adverse condition in an industry affect the firm if they are
intensely concentrated . If the industry goes into recession , the concentrated firm will fond it
too difficult to withdraw from it. Factors like product obsolescence, fickleness of markets, and
emergence of newer technologies are threats to concentrated firms. Concentration strategies
may result in doing too much of a known thing. This may create an organizational inertia;
managers may not be able to sustain interest and find the work less challenging and less
stimulating. Concentration strategies may lead to cash flow problems that may pose a dilemma
before a firm. Large cash inflows are required for building up assets while the businesses are
growing. But when these businesses mature, firms often face a cash surplus with little scope for
investing in the present businesses.
Bajaj Auto has consistently concentrated on two and three wheelers automobiles since its
inception as it finds it to be a high growth and attractive industry to invest in it .It has tried
various means to sustain its market share in a competitive market. At different times , it has
adopted variations of concentrated strategies of market penetration, e g selling more in urban
areas, and product development e g state of art motorcycle and un geared scooters . For its
rivals it has remain a formidable competitors with proven products manufactured through
tried and tested technology and sold in familiar markets. Of late Bajaj Auto has started
diversifying in four wheeler and developing a small car in collaboration with Nissan .
Xerox India (Formerly Modi Xerox ) is the Indian Subsidiary of Xerox Corporation , the well
known American printer, photocopier and office supplier company. In a bid to expand its share
in small and medium size businesses segment in India , it adopted a concentration strategy
through market penetration , market development and product development . For market
penetration , it offered print jobs service through lesser printers and multifunctional devices ,
increasing its product range to over 20 products and services .Market development activities
included educating the small business entrepreneurs to create new markets for its products.

EXPANSION THROUGH INTEGRATION

When firms use their existing base to expand in the direction of their raw materials or the
ultimate consumers, or, alternatively they acquire complimentary or adjacent businesses,
integration takes place. Integration basically means combining activities related to the present
activity of a firm. In contrast to the intensive growth, integration strategy involves expanding
externally by combining with other firms. Combination involves association and integration
among different firms and is essentially driven by need for survival and also for growth by
building synergies. Combination of firms may take the merger or consolidation route. Merger
implies a combination of two or more concerns into one final entity. The merged concerns go
out of existence and their assets and liabilities are taken over by the acquiring company. A
consolidation is a combination of two or more business units to form an entirely new company.
All the original business entities cease to exist after the combination. Since mergers and
consolidations involve the combination of two or more companies into a single company, the
term merger is commonly used to refer to both forms of external growth. As is the case in all
the strategies, acquisition is a choice a firm has made regarding how it intends to compete .
Firms use integration to
 increase market share,
 avoid the costs of developing new products internally and bringing them to the market,
 reduce the risk of entering new business,
 speed up the process of entering the market,
 become more diversified and
 quite possibly to reduce the intensity of competition by taking over the competitor’s
business.

The costs of integration include reduced flexibility as the organization is locked into specific
products and technology, financial costs of acquiring another company and difficulties in
integrating various operations. There are many forms of integration, but the two major integrat

Types of Integration Strategy

(i) Vertical Integration When an organization starts making new products that serve
its own needs, vertical integration takes place. Any new activity undertaken with
the purpose of either supplying inputs (such as raw materials) or serving as a
customer for outputs (such as, marketing of firm’s product) is vertical integration.
(ii) Horizontal Integration : When an organization 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. Horizontal Integration strategy may be frequently adopted
with a view to expand geographically by buying a competitor’s business, to increase
the market share or to benefit from economies of scale .

Vertical Integration: Vertical integration refers to the integration of firms involved in

different stages of the supply chain. Thus, a vertically integrated firm has units operating in
different stages of supply chain starting from raw material to delivery of final product to the
end customer. The vertical integration may take place in two types :

Backward Integration: In backward integration the firm move towards the source of
raw materials.
Forward Integration: In the forward integration, the firm moves the closer to the
ultimate customers
 An organization tries to gain control of its inputs (backwards integration) or its outputs
(forward integration) or both. Vertical integration may take the form of backward or forward
integration or both. The concept of vertical integration can be visualized using the value chain.
Consider a firm whose products are made via an assembly process. Such a firm may consider
backward integrating into intermediate manufacturing or forward integrating into distribution.
Backward integration sometimes is referred to as upstream integration and forward integration
as downstream integration. For instance, Nirma undertook backward integration by setting up
plant to manufacture soda ash and linear alkyl benzene, both important inputs for detergents
and washing soaps, to strengthen its hold in the lower-end detergents market. Reliance started
its business with textiles and went for backward integration to produce PFY and PSF, critical
raw materials for textiles, PTA and MEG-raw materials for PSF and PFY, paraxylene -raw
materials for PTA and MEG, and finally naphtha for producing paraxylene

Forward integration refers to moving closer to the ultimate customer by increasing control
over distribution activities. For example, a personal computer assembler could own a chain of
retail stores from which it sells its machines (forward integration). Many firms in India such as
DCM, Mafatlal and National Textile Corporation have set up their own retail distribution
systems to have better control over their distribution activities. Some companies expand
vertically backwards and forward. Reliance Petrochemicals grew by leveraging backward and
forward integration: it began with manufacturing of textiles and fibres, moved to polymers and
other intermediates then went into the manufacture of fibres, then to petrochemicals and oil
refining. In power, Reliance Energy wants to do the same thing and the catchphrase that for
this vertical integration is ‘ from well-head to wall-socket’. Reliance Energy’s strategy is to
straddle the entire value chain in the power business. It plans to generate power by using the
group’s production of gas, transmit and distribute it to the domestic and industrial consumers,
reaping the returns of not just generating power using its own gas but selling what it generates
not as a bulk supplier but to the end user. In essence, a firm seeks to grow through vertical
integration by taking control of the business operations at various stages of the supply chain to
gain advantage over its rivals. The record of vertical integration is mixed and hence, decisions
should be taken after a comprehensive and careful consideration of all aspects of this form of
integration. In most cases the initial investments may be very high and exiting an arrangement
that does not prove beneficial may be hard. Vertical integration also requires an organization to
develop additional product market and technology capabilities, which it may not currently
possess.
Modern Group, involved in the vertical integration. Forward integration took place at Modern
Suiting when it diversified into worsted suiting. With an investment of Rs.7 crore, it acquired
sulzer looms, sophisticated fabric processing facilities and other sophisticated equipments to
manufacture a premium terry wool suiting with the brand name ‘Amadeus’. Backward
integration at Modern Woollens involved collaboration with Schild of Switzerland for wool
processing, combing, and woollen tops which are necessary for the production of woollen
textiles. In this manner, a number of backward and forward linkages were being attempted
within the Modern Group

Factors conducive for vertical integration include

 Taxes and regulations on market transactions,

 Obstacles to the formulation and monitoring of contracts,
 Similarity between the vertically-related activities,
 Sufficient large production quantities so that the firm can benefit from economies of
scale and
 Reluctance of other firms to make investments specific to the transaction.

Vertical integration may not yield the desired benefit if,

 The quantity required from a supplier is much less than the minimum efficient scale for
producing the product.
 The product is widely available commodity and its production cost decreases
significantly as cumulative quantity increases,
 The core competencies between the activities are very different,
 The vertically adjacent activities are in very different types of industries (For example,
manufacturing is very different from retailing.) and
 The addition of the new activity places the firm in competition with another player with
which it needs to cooperate. The firm then may be viewed as a competitor rather than
a partner.

Why Firms integrate vertically? : There are number of factors and benefits associated with
the vertical integration. These are listed below :

 It reduce transportation costs if common ownership results in closer geographic

proximity,
  It improve supply chain coordination,
 It helps in capturing upstream or downstream profit margins,
 It increase entry barriers to potential competitors, for example, if the firm can gain sole
access to scarce resource,
 It allow the firm to gain access to downstream distribution channels that otherwise
would be inaccessible,
 This facilitate investment in highly specialized assets in which upstream or downstream
players may be reluctant to invest and
 It facilitates investment in highly specialized assets in which upstream or downstream
players may be reluctant to invest.

The downside risks of an integration strategy to a company include

 Difficulty of effectively integrating the firms involved,

 Incorrect evaluation of target firm’s value,
 Overestimating the potential for synergy between the companies involved,
 Creating a combination too large to control,
 The huge financial burden that acquisition entails,
 Capacity balancing issues. (For instance, the firm may need to build excess upstream
capacity to ensure that its downstream operations have sufficient supply under all
demand conditions),
 Potentially higher costs due to low efficiencies resulting from lack of supplier
competition,
 Decreased flexibility due to previous upstream or downstream investments, (however,
that flexibility to coordinate vertically –related activities may increase.),
 Decreased ability of increase product variety if significant in-house development is
required, and
 Developing new core competencies may compromise existing competencies.

There are alternatives to vertical integration that may provide some of the same benefits with
fewer drawbacks. The following are a few of these alternatives for relationships between
vertically related organizations.

 Long-term explicit contracts and Implicit contracts (relying on firm’s reputation)

 Franchise agreements
  Joint ventures
 Co-location of facilities

Exhibit 7.2 : Digital Giants to Accelerate Vertical Integration

Samsung Electronics and LG Electronics plan to streamline production lines in cooperation

with their affiliates to reduce factors of uncertainty in the procurement of components. The two
South Korean giants seek to manufacture top-of-the-line products like cell phones and digital
TVs in a self-sufficient fashion. LG Group will invest 30 trillion won by 2010 to develop
certain electronic components that include system integrated chips, plasma displays and
camera modules. Samsung Electronics already retains a strong portfolio, comprising Samsung
Corning (display-specific glass), Samsung SDI (displays) and Samsung Electro-Mechanics
(camera modules), and aims to further hone its push for vertical integration. So-called vertical
integration refers to the degree to which a company owns or controls its upstream suppliers,
subcontractors or affiliates and its downstream buyers. The advantage of the strategy is the
expansion of core competencies by reducing risks in the supply of components as well as the
slashing of transportation costs. Some experts have said vertical integration is vital to the
improvement of these two giant digital firms’ competitiveness despite criticism that such
expansion would increase the entry barriers for industry newcomers.

Horizontal Integration: The acquisition of additional business in the same line of business or
at the same level of the value chain (combining with competitors) is referred to as horizontal
integration. Horizontal growth can be achieved by internal expansion or by external expansion
through mergers and acquisitions of firms offering similar products and services. A firm may
diversify by growing horizontally into unrelated business. Integration of oil companies, Exxon
and Mobil, Indian Oil Corporation and Burma Petroleum is an example of horizontal
integration. Aditya Birla Group’s acquisition of L&T Cements from Reliance to increase its
market dominance is an example of horizontal integration. This sort of integration is sought to
reduce intensity of competition and also to build synergies.

Solidaire India Ltd. is a prominent manufacturer of TVs and has a sizeable presence in the
market in southern India. It started with the name of Hi Beam Electronics Ltd. in 1974.
Subsequently, this unit was merged with two other units to form a consortium called TriStar
Electronics. In 1978, the brand name Solidaire was adopted. In this manner the growth strategy
of the company started with Horizontal Integration.
Another esample of horizontal integration is takeover of Neyveli Ceramics and Refractories
Ltd. (Neycer) by Spartek Ceramics India Ltd. in the early 1990s. Both the companies were in
sanitary ware and tile production. By acquiring Neycer, Spartek became the largest ceramic tile
manufacturer in the country.

Benefits of Horizontal Integration :The following are some benefits of horizontal

integration:

 Economies of scale- It leads to lower cost structure by spreading the fixed cost of
operation over a large base of products , thereby reucing the cost of production per
unit . It can also be to achieved by selling more of the same product, for example, by
geographic expansion.
 Economies of scope – It allows sharing of common resources base to a variety of
products. It is commonly referred to as ‘synergies’.
 Increased market power – Bigger size of operations allows the organisation exerting
market power of bargaining over suppliers and downstream channel members.
 Reduction in industry rivalry- After horizontal integration, there are few competitors
left in the market ,thereby reducing the intensity of the rivalry in the industry .
 Increased product differentiation - Horizontal integration allows the organisation to
offer a wide range of products which can be bundled together. Through product
bundling , the customer gets a complete range of products at a single combined price,
providing the advantage of product differentiation .
 Synergy achieved by using the same brand name to promote multiple products as well
as lower cost of global operations made possible by operating plants in foreign markets.

Risk of Horizontal Integration

Horizontal integration by acquisition of a competitor will increase a firm’s market share.

However, if the industry concentration increases significantly then anti-trust issues may arise.
Aside from legal issues, another concern is whether the anticipated economic gains will
materialize. Before expanding the scope of the firm through horizontal integration,
management should be sure that the imagined benefits are real. Many blunders have been made
by firms that broadened their horizontal scope to achieve synergies that did not exist, for
example, computer hardware manufacturers who entered the software business on the premise
that there were synergies between hardware and software. However, a connection between two
products does not necessarily imply realizable economies of scope. Finally, even when the
potential benefits of horizontal integration exist, they do not materialize spontaneously. There
must be an explicit horizontal strategy in place. Such strategies generally do not arise from
the bottom –up, but rather, must be formulated by corporate management.

Exhibit 7.3 : Backward Vertical Integration adopted by Amazon.com and Starbucks

Amazon.com : Amazon.com backward vertically integrated when it became not only a

bookseller but a book publisher. As a bookseller, Amazon.com buys books from various
suppliers, such as publishing companies. By becoming a publisher itself, it has integrated into
its business the role of supplier and can sell books that its own publishing company publishes.
Booksellers set the price at which Amazon.com can buy a book from them. This in turn limits
the amount that Amazon.com can charge a customer for a book and still make a profit. If
Amazon.com publishes the book itself, it can acquire its books cheaper, as its publishing arm
does not need to produce a profit as an independent publisher would. Additionally, while a
publisher normally would sell its books to a variety of booksellers, Amazon can choose
whether to sell the books it publishes to other bookstores or sell its books only through
Amazon.com. In this way, it can control competition for its books and the price it can charge
for them.

Starbucks : Starbucks is best known as a chain of coffee shops. As such, it has various
suppliers and inputs -- it buys coffee beans to make coffee as well as customized mugs and
products to sell in its stores. It backward vertically integrated when it bought a coffee farm in
China, because normally it would have to buy coffee beans from a coffee bean supplier.
Starbucks chose to buy a coffee farm in China, an area that showed tremendous growth in the
number of coffee drinkers. At the same time, there was increased competition among
companies selling coffee, such as McDonald's and other chains such as Costa Coffee. Adding
so many new coffee drinkers to the market creates competition for high-quality beans, with
every coffee shop needing to buy them. Competition for high-quality beans means that some
competitors will not receive them at all and that those who do will pay a high price driven up
by competition. By backward vertically integrating by buying a coffee farm, Starbucks ensures
that it will have a bean supply and that it will receive it at a reasonable price.

(http://smallbusiness.chron.com/examples-backward-vertical-integration-strategies-14703.html)
EXPANSION THROUGH INTERNATIONAL STRATEGY

International Strategy is a type of expansion strategy that requires firms to market their
products or services beyond the domestic or national market. Firm would have to assess the
international environment, evaluate its own capabilities, and devise appropriate international
Strategy . An organization can “go international” by crossing domestic borders International
expansion involves establishing significant market interests and operations outside a
company’s home country.

Foreign markets provide additional sales opportunities for a firm that may be constrained by
the relatively small size of its domestic market and also reduces the firm’s dependence on a
single national market. Firms expand globally to seek opportunity to earn a return on large
investments such as plant and capital equipment or research and development, or enhance
market share and achieve scale economies, and also to enjoy advantages of locations. Other
motives for international expansion include extending the product life cycle, securing key
resources and using low-cost labour. However, to mould their firms into truly global
companies, managers must develop global mind-sets. Traditional means of operating with
little cultural diversity and without global competition are no longer effective firms.

International expansion is fraught with various risks such as, political risks (e.g. instability of
host nations) and economic risks (e.g. fluctuations in the value of the country’s currency).
International expansions increases coordination and distribution costs, and managing a global
enterprise entails problems of overcoming trade barriers, logistics costs, cultural diversity, etc.
There are several methods for going international. Each method of entering an overseas market
has its own advantages and disadvantages that must be carefully assessed. Different
international entry modes involve a tradeoffs between level of risk and the amount of foreign
control the organization’s managers are willing to allow. It is common for a firm to begin with
exporting, progress to licensing, then to franchising finally leading to direct investment. As the
firm achieves success at each stage, it moves to the next. If it experiences problems at any of
these stages, it may not progress further. If adverse conditions prevail or if operations do not
yield the desired returns in a reasonable time period, the firm may withdraw from the foreign
market. The decision to enter a foreign market can have a significant impact on a firm.

Expansion into foreign markets can be achieved through: exporting , licensing , joint venture
strategic alliance or direct investment. These terms are briefly explained here .
Exporting: Exporting is marketing of domestically produced goods in a foreign country and is
a traditional and well-established method of entering foreign markets. It does not entail new
investment since exporting does not require separate production facilities in the target country.
Most of the costs incurred for exporting products are marketing expenses.

Licensing: Licensing permits a company in the target country to use the property of the
licensor. Such property usually is intangible, such as trademarks, patents, and production
techniques. The licensee pays a fee in exchange for the rights to use the intangible property
and possible for technical assistance. Licensing has the potential to provide a very large ROI
since this mode of foreign entry also does require additional investments. However, since the
licensee produces and markets the product, potential returns from manufacturing and
marketing activities may be lost.

Direct Investment: Direct investment is the ownership of facilities in the target country. It
involves the transfer of resources including capital, technology, and personnel. Direct
investment may be made through the acquisition of an existing entity or the establishment of a
new enterprise. Direct ownership provides a high degree of control in the operations and the
ability to better know the consumers and competitive environment. However, it requires a high
degree of commitment and substantial resources.

Joint Venture Strategy: Joint Ventures are partnerships in which two or more firms carry out
a specific project or corporate in a selected area of business. Actually, corporate partnerships
are formed for specific and time bound objectives which, once achieved, leave little reason for
the alliance to be continued. Joint Ventures that last longer do so because their objectives have
been redesigned” Examples of joint ventures are :
• IBM ,World Trade Corporation and Tata Industries Ltd. created joint venture to form
Tata Information Systems Ltd. The stated purpose was to make it India’s top
information technology company
•Cummins Engine Company and TELCO formed a joint venture to manufacture Telco
Engines
• Reliance Industries and Nynex Corporation
• Tata Industries and Bell Canada
• Ashok Leyland and Singapore Telecom
There are five common objectives in a joint venture: market entry, risk/reward sharing,
technology sharing and joint product development, and conforming to government regulations.
Other benefits include political connections and distribution channel access that may depend
on relationships. Joint ventures are favoured when:

 The partners’ strategic goals converge while their competitive goals diverge;
 The partners’ size, market power, and resources are small compared to the industry
leaders; and
 Partners’ are able to learn from one another while limiting access to their own
proprietary skills.

The critical issues to consider in a joint venture are ownership, control, length of agreement,
pricing, technology transfer, local firm capabilities and resources, and government intentions.
Potential problems include, conflict over asymmetric investments, mistrust over proprietary
knowledge, performance ambiguity – how to share the profits and losses, lack of parent firm
support, cultural conflicts, and finally, when and how when to terminate the relationship. Joint
ventures have conflicting pressures to cooperate and compete:

 Strategic imperative; the partners want to maximize the advantage gained for the joint
venture, but they also want to maximize their own competitive position.
 The joint venture attempts to develop shared resources, but each firm wants to develop
and protect its own proprietary resources.
 The joint venture is controlled through negotiations and coordination processes, while
each firm would like to have hierarchical control.

Strategic Alliances: Strategic Alliance is a combination of the efforts of two or more

organizations to develop competitive advantage In Strategic Alliance, two or more partners
join hands together for certain specified objectives, generally, for certain specific period. when
these objectives are achieved, partners terminate their alliance.
Examples: Oberoi group of Hotels’ has entered into Strategic Alliance with ‘Lufthansa
Airlines’, ‘Hong Kong Bank’, and ‘Mercury Travels’. All these four organizations undertake
promotional activities jointly. Any person who stays in Oberoi hotels gets bonus point. His
bonus point increases if he travels by Lufthansa, uses Hong Kong Bank facilities, and engages
Mercury Travel’s services. On the basis of his accumulated bonus points, he gets various prizes
including free air ticket to New York.

Exibit 7.4 Four types of International Strategies

 Pressure Global strategy Transnational Strategy
for
International Strategy Multidomestic Strategy
cost
Reduction
Pressure for local responsiveness
(Source :Bartlett CA,& Ghoshal , Managing Across Borders , Boston,M A , Harvard
Business School Press , 1989.)

Types of International Strategies:

International Strategy: Firms adopt International Strategy when they create value by
transferring products and services to foreign markets where these products and services are not
available. International firm, by maintaining a tight control over its overseas operations, offers
standardized products and services in different countries with little or no differentiation. Like
IBM, Kellogg, Proctor & Gamble, Microsoft, etc adopt this strategy for the different countries
they operate in.

Multidomestic Strategy: The organization decentralizes operational decisions and activities to

each country in which it is operating and customizes its products and services to each market.
Firm adopts a Multidomestic Strategy when they try to achieve a high level of local
responsiveness by matching their products and services offerings to the national conditions
operating in the countries they operate in. Multidomestic firm attempts to extensively
customize their products and services according to the local conditions operating in the
different countries. U.S. auto manufacturers maintained decentralized overseas units that
produced cars adapted to different countries and regions. General Motors produced Opel in
Germany and Vauxhall in Great Britain while Chrysler produced the Simca in France and Ford
offered a Canadian Ford. Other examples are Coca Cola, McDonald, Pizza Hut, etc.

Global strategy: The global firms try to focus intensively on a low cost structure by leveraging
their expertise in providing certain products and services, and concentrating the production of
these standardized products and services at a few favourable locations around the world. These
products and services are offered in an undifferentiated manner in all countries the global firm
operates in, usually at competitive prices. For example, Ford is treating its Contour as a car for
all world markets—one that can be produced and sold in any industrialized nation.
Transnational Strategy: Firms adopt a transnational strategy when they adopt a combined
approach of low-cost and high local responsiveness simultaneously for their products and
services. The organization seeks the best of both the multidomestic and global strategies by
globally integrating operations while tailoring products and services to the local market. In
other words a company ‘thinks globally but acts locally’. Many authors refer to this concept as
‘Glocalization’. Global electronic communications and connectivity can help integrate
operations while flexible manufacturing enables firms to produce multiple versions of products
from the same assembly line, tailoring them to different markets. This gives more choice in
locating facilities to take advantage of cheaper labour or to get the best of other factors of
production

Exhibit 7.5 Managing Global Supply Chains to Enhance Competitiveness

Logistics capabilities (the movement of supplies and goods) make or mar global operations.
Global operations involve highly coordinated international flow of goods, information, cash,
and work processes. Setting up a global supply chain to support producing and selling products
in many countries at the right cost and service levels is a very difficult task. However the
benefits of managing this difficult task has many benefits, which include rationalization of
global operations by setting up right number of factories and distribution centers and
integration of far-flung operations under a unified command to better manage inventory and
order filling activities. Optimizing global supply chain operations can cut the delivery times
and costs drastically and improve global competitiveness. Smart supply chain planning may
result in locating facilities where they make the most logistical sense, while saving on taxes.
This is better than simply locating where labour is cheapest, but where taxes and other cost
may not be most favourable.

EXPANSION THROUGH DIVERSIFICATION

Diversification is defined as the entry of a firm into new lines of activity, through internal or
external modes. Diversification is the process of entry into a business which is new to an
organization either marketwise or technology wise or both. In diversification , firm

to acquire ownership or control over another firm against the wishes of the latter’s
management. But in practice it can be hostile or friendly. The primary reason a firm pursues
increased diversification are value creation through economies of scale and scope, or market
dominance. In some cases firms choose diversification because of government policy,
performance problems and uncertainty about future cash flow. In one sense, diversification is a
risk management tool, in that its successful use reduces a firm’s vulnerability to the
consequences of competing in a single market or industry. Risk plays a very vital role in
selecting a strategy and hence, continuous evaluation of risk is linked with a firm’s ability to
achieve strategic advantage . Internal development can take the form of investments in new
products, services, customer segments, or geographic markets including international
expansion. Diversification is accomplished through external modes through acquisitions and
joint ventures.

Firms choose expansion strategy when their perceptions of resource availability and past
financial performance are both high. The most common growth strategies are diversification at
the corporate level and concentration at the business level. Reliance Industry, a vertically
integrated company covering the complete textile value chain has been repositioning itself to
be a diversified conglomerate by entering into a range of business such as power generation
and distribution, insurance, telecommunication, and information and communication
technology services. Tata Tea’s takeover of Consolidated Coffee (a grower of coffee beans)
and Asian Coffee (a Processor) are the examples of related diversification .

Why firm Adopts Diversification strategy ?

Diversification is a strategy that takes a company into new markets with new products or
services. Companies may choose a diversification strategy for different reasons.

(i) Economies of scope: Firstly, companies might wish to create and exploit
economies of scope, in which the company tries to utilize its exciting resources and
capabilities in other markets. This can oftentimes be the case if companies have
under-utilized resources or capabilities that cannot be easily disposed or closed.
Using a diversification strategy, companies may therefore be able to utilize all its
capabilities or resources, and able to attract new business from market segments not
catered to earlier.
(ii) Utilisation of managerial skills: Secondly, managerial skills found within the
company may be successfully used in other markets, where the dominant logic and
managerial procedures of management can be successfully transferred to other
markets.
(iii) Cross-subsidizing business: Thirdly, companies pursuing a diversification strategy
may be able to cross-subsidize one product with the surplus of another. This way,
companies with a very diverse portfolio of products catering to different markets
may potentially grow in power, and be able to withstand a prolonged period of price
 competition etc. When having subsidized one product for a substantial period of
time, the company might possibly be able to win a monopoly, making it the only
supplier in the respective market.
(iv) Spread financial risks: fourthly, companies may also want to use a diversification
strategy to spread financial risk over different markets and products, so that the
entire success of the company is not reliant on one market or product only.
(v) To Grow. Growth is an implicit objective in nearly all organisations. Stock markets
tend to reward growing companies. Managers find growth extremely attractive
because it hold out the prospects of increased earnings for the firm leading to
increased compensations for themselves. They also see the acquisition of new
knowledge as instrumental in improving their self actualisation prospects.
(vi) Fuller utilisation of Resources and Capabilities. Firms find that they have
unutilised or underutilised capacities sometimes in manufacturing some times in
other fields . Alternatively a firm could find that it can perform a business activity
at a lower cost and with better timeliness than if it utilised its internal capabilities.
For example in Timex Watches it was decided that share dept functions could be
performed at much lower cost than if they were done by an outside agency. It also
provided a better level of service to share holders.
(vii) To escape from an unattractive or undesirable industry. The best example of
this type of diversification is the Tobacco industry where the giants including
Phillip Morris, R.J. Reynolds and British American Tobacco have all diversified
because of the severe regulatory pressures applied to their industry. It is interesting
to note that whereas BAT’s diversification into financial services has been highly
successful, similar attempts to diversify by their Indian subsidiary ITC were
unsuccessful and it had to exit this business after a few years.
(viii) To make use of surplus Cash flows. There are many examples of this type found
in Indian Industry. Bajaj Auto and Bombay Dyeing have consistently over the last
few years invested surplus cash from their core businesses in Two Wheelers and
Textiles respectively into treasury operations mostly short term lending to other
cash strapped corporates. At times a firm might use surpluses from one of its cash
rich businesses to cross fund other businesses.

There may however be other reasons for companies to use a diversification strategy than the
those listed above, and companies may very well benefit from a diversification strategy for
other reasons. However, it is important for companies to realize the possible danger of
diversifying its scope of operations to much. Companies might risk neglecting its core
capabilities and become too diversified, where too many different products supplied to
different markets might have negative effects on products and services, where e.g. product
quality or uniqueness might suffer due to the shift in focus on different products and markets.

Types of the diversification strategy can be split into two different types:

 Related Diversification or Concentric Diversification

 Unrelated Diversification or Conglomerate Diversification
Related diversification or Concentric Diversification

Related or Concentric diversification occurs when a firm adds related products or markets.
The goal of such diversification is to achieve strategic fit. Strategic fit allows an organization
to achieve synergy. In essence, synergy is the ability of two or more parts of an organization to
achieve greater total effectiveness together than would be experienced if the efforts of the
independent parts were summed. Synergy may be achieved by combining firms with
complementary marketing, financial, operating, or management efforts. Financial synergy may
be obtained by combining a firm with strong financial resources but limited growth
opportunities with a company having great market potential but weak financial resources. For
example, debt-ridden companies may seek to acquire firms that are relatively debt-free to
increase the lever-aged firm's borrowing capacity. Similarly, firms sometimes attempt to
stabilize earnings by diversifying into businesses with different seasonal or cyclical sales
patterns.

Strategic fit in operations could result in synergy by the combination of operating units to
improve overall efficiency. Combining two units so that duplicate equipment or research and
development are eliminated would improve overall efficiency. Quantity discounts through
combined ordering would be another possible way to achieve operating synergy. Yet another
way to improve efficiency is to diversify into an area that can use by-products from existing
operations. For example, breweries have been able to convert grain, a by-product of the
fermentation process, into feed for livestock. Also breweries have been able to achieve
marketing synergy through national advertising and distribution. By combining a number of
regional breweries into a national network, beer producers have been able to produce and sell
more beer than had independent regional breweries.

Management synergy can be achieved when management experience and expertise is applied
to different situations. Perhaps a manager's experience in working with unions in one company
could be applied to labour management problems in another company. Caution must be
exercised, however, in assuming that management experience is universally transferable.
Situations that appear similar may require significantly different management strategies.
Personality clashes and other situational differences may make management synergy difficult
to achieve. Although managerial skills and experience can be transferred, individual managers
may not be able to make the transfer effectively.

When expanding into different products or markets using existing capabilities, companies can
create related diversification by using its capabilities and resources in other settings. A car
manufacturer might for instance expand its operations into manufacturing of motorcycles or
trucks, and use its capabilities and resources to become successful in these markets. Likewise,
a company might create related diversification by integrating into the existing value network.
For instance, companies producing steel might go into the mining business, where it might
control the supplies etc. for its main operations. Likewise, clothes manufacturers might create
their own brand shops, in which they sell their clothes.
Maruti used to initially only assemble cars. It progressively introduced engine and transmission
manufacture into its operations. On the other hand a firm might decide to move up the value
chain. Reliance, in its textile operation only manufactured the cloth. Later on it opened
exclusive retail outlets which addressed not only the sales and distribution aspects of its
business, but also contributed to brand building. Sometimes a firm may reverse the direction of
its vertical integration. Telco which in its early years had embarked on a massive programme
of backward integration which resulted in its producing most of the parts for its trucks and
buses, in recent years has consciously moved out of component manufacture and sought to
concentrate on final assembly of its products.

Hindustan Lever, the FMCG major, used to be largely in the soaps and detergents business. In
the last ten years, it has diversified into the foods and beverages business largely through the
acquisition of first Lipton the tea company and later the acquisition of Brooke Bond. IBM has
entered the Infotech consultancy business another example of related diversification.

Larsen and Toubro (L&T) has diversified over the past three decades around its core
competence in construction engineering. Originally the firm only made parts and machinery for
construction. Later the firm diversified into excavating and Earth moving equipment and still
later into the cement industry thus taking a stake in one of the vital inputs to it’s industry. Each
of these diversifications addressed the “scope” opportunity for a firm which had a clear
definition and understanding of its Competitive Space. Escorts another prominent engineering
company has a widely diversified product portfolio which includes Tractors, automobiles of
the two wheeler type and several critical automobile components for auto engines. The
company’s diversification was developed around its core competence in automobile
engineering . It is another matter that this firm has recently diversified into unrelated areas
including electronics and telecommunications without much success.

Unrelated Diversification or Conglomerate Diversification

Conglomerate diversification occurs when a firm diversifies into areas that are unrelated to its
current line of business. In this case companies expand their operation into markets or products
beyond current resources and capabilities. Synergy may result through the application of
management expertise or financial resources, but the primary purpose of conglomerate
diversification is improved profitability of the acquiring firm. Little, if any, concern is given to
achieving marketing or production synergy with conglomerate diversification.

The unrelated diversification seems to be applicable and meaningful in at least two cases:

 Firstly, if the parent company is able to provide different businesses with managerial
knowledge and expertise that strengthens the individual business, it will be very
feasible to diverse into different markets that will potentially increase parent company
profits.
 Secondly, unrelated diversification might give a company the opportunity of increasing
the strength of the economy of different markets, and to develop competencies that can
be shared between different markets and products. 
One of the most common reasons for pursuing a conglomerate growth strategy is that
opportunities in a firm's current line of business are limited. Finding an attractive investment
opportunity requires the firm to consider alternatives in other types of business. Philip Morris's
acquisition of Miller Brewing was a conglomerate move. Products, markets, and production
technologies of the brewery were quite different from those required to produce cigarettes.
Firms may also pursue a conglomerate diversification strategy as a means of increasing the
firm's growth rate. As discussed earlier, growth in sales may make the company more attractive
to investors. Growth may also increase the power and prestige of the firm's executives.
Conglomerate growth may be effective if the new area has growth opportunities greater than
those available in the existing line of business.

The American tobacco firms Phillip Morris and R.J. Reynolds entered the FMCG arena
specifically in food and beverages, BAT’s major and extremely successful diversification was
into financial services. General Electric is the ultimate example of a firm which has pursued
unrelated diversification with dizzying success for several years. However how much that has
to do with the dynamism of its legendary leader Jack Welch will only be clear after the firm
has been under new leadership for a few years. The 1970s it must be mentioned witnessed a
surge of Conglomeratism. Many of the firms that pursued the strategy of unrelated
diversification went bankrupt leading to revulsion for this form of diversification. However the
other successful instance of Conglomeratism-Asea Brown Boveri- shows that if pursued
properly, unrelated or to put it more accurately seemingly unrelated diversification can be
extremely advantageous.

Probably the biggest disadvantage of a conglomerate diversification strategy is the increase in

administrative problems associated with operating unrelated businesses. Managers from
different divisions may have different backgrounds and may be unable to work together
effectively. Competition between strategic business units for resources may entail shifting
resources away from one division to another. Such a move may create rivalry and
administrative problems between the units.Caution must also be exercised in entering
businesses with seemingly promising opportunities, especially if the management team lacks
experience or skill in the new line of business.

Without some knowledge of the new industry, a firm may be unable to accurately evaluate the
industry's potential. Even if the new business is initially successful, problems will eventually
occur. Executives from the conglomerate will have to become involved in the operations of the
new enterprise at some point. Without adequate experience or skills (Management Synergy)
the new business may become a poor performer.Without some form of strategic fit, the
combined performance of the individual units will probably not exceed the performance of the
units operating independently. In fact, combined performance may deteriorate because of
controls placed on the individual units by the parent conglomerate. Decision-making may
become slower due to longer review periods and complicated reporting systems.

COOPERATION EXPANSION STRATEGY

A cooperative strategy is a strategy in which firms work together to achieve a shared objective.
Cooperative strategies are used to gain competitive advantage by joining with one or two
competitors against other competitors of the industry. Cooperative strategy is the third major
alternative (internal growth and mergers and acquisitions are the other two) firms use to grow,
develop value-creating competitive advantages, and create differences between them and
competitors. Thus, cooperating with other firms is another strategy that is used to create value
for a customer that exceeds the cost of creating that value and to create a favorable position in
the marketplace relative to the five forces of competition. Increasingly, cooperative strategies
are formed by firms competing against one another, as shown by the fact that more than half of
the strategic alliances (a type of cooperative strategy) established within a recent two-year
period were between competitors such as FedEx and the U.S. Postal Service. The two general
types of cooperative strategies are collusion and strategic alliance.
Collusion:
Collusion is the strategy by which the firms join together to reduce the output and hence results
in the increase of prices by the normal economic law of supply and demand. It could be either
explicit in which the companies cooperate through direct communication or negotiation or tacit
in which the firms cooperate through informal signals. Both the types of the collusive strategies
are illegal in most of the countries.
According to Barney, tacit collusion in the industries is most likely to be successful if
(i) there are a small numbers of identifiable competitors
(ii) costs are similar among firms and
(iii) there is one firm tends to act as the “Price leader”
(iv) common industry culture that accepts the cooperation
(v) sales are characterized by high frequency of small orders
(vi) large inventories and backlog are the normal pattern to be followed at the time of
demand
(vii) there are high entry barriers to keep out the new competitors.

Strategic Alliances:
A strategic alliance is the cooperation between one or two companies to achieve the mutually
beneficial strategic objectives. A strategic alliance is a partnership between firms whereby
firms’ resources, and capabilities are combined to pursue mutual interests to develop,
manufacture, or distribute goods or services. The reasons for the formation of strategic
alliance are:
(i) To obtain technology or manufacturing capabilities – A company having competitive
advantage in one field could forge alliance with another company of different
competitive advantage to gain over the other competitors.
(ii) To obtain access to specific markets – Instead of buying or building its own companies
the firm could give rights to companies in other countries to market its product.
(iii) To reduce the financial risk – By means of strategic alliance the company could
reduce the loss that may happen if the new project fails.
(iv)To reduce political risk – the company could get rid of the political disturbance by
forming the partnership with the company that is having good relation with the political
parties of the particular country
(v) To achieve or ensure competitive advantage – by forming the strategic alliance the
company would be able to achieve new or increase its existing competitive advantage.

Various types of strategic alliances:

The various types of strategic alliance are:
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 are too expensive to develop
alone such as access to advance technology. It is fairly weak and distant alliance due to very
little interaction between the players.
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 entity and
allocated ownership, operational responsibilities, financial risks and rewards to each member
while preserving their separate identity”. Disadvantages of joint ventures include loss of
control, decrease in the profitability, transfer of technology to the partners and probability of
conflict between the partners. However research shows that the joint ventures tend to be more
successful if both the partners are having equal stake in the partnership and are dependent on
each other for the success.
Franchising is a cooperative strategy used to spread risk and use resources and capabilities.
In other words, a franchise refers to a contract between two legally independent companies that
allows the franchisee to sell the franchisor’s product or do business under its trademarks over a
given time and location. Franchising is a particularly attractive strategy to use in fragmented
industries where no firm or small set of firms has a dominant share in the industry, making it
possible for a company to gain a large market share by consolidating independent companies
through contractual relationships.

Equity strategic alliance is an alliance where partner firms own unequal shares of equity in a
venture formed by combining some of their resources and capabilities to create a competitive
advantage. Ford Motor Company and Mazda Motor Corporation formed a long-standing equity
strategic alliance.

Non-equity strategic alliance is an alliance where a contract is given to supply, produce, or

distribute a firm’s products without any equity sharing. It require less formal and demand
fewer partner commitments. It is unsuitable for complex projects that require effective transfers
of tacit knowledge between partners

Licensing Arrangement: A licensing arrangement is the strategic alliance by which the firm
in one country grants license to a firm in other country to produce and/or sell its product.
The licensee pays the compensation to the licensing firm in exchange of the technology. This is
more useful where a company could not enter due the investment restriction in the particular
country.

Other types of strategic alliances include distribution agreements, supply contracts, and
marketing agreements (such as code-sharing agreements among airlines). Typically taking the
form of a non-equity strategic alliance, outsourcing is the purchase of a value-creating primary
or support activity from another firm.