UNIT III

After studying the environment, the next step for any organization is to identify an appropriate
strategy.

There are different levels in every organization, and leaders / managers at various levels are
responsible for strategizing at their particular level.

Strategy formulation in an organization is done at three levels:

1. Corporate
2. Business (SBU – Strategic Business Unit)
3. Functional

What is an SBU?
Multi-business organizations that have presence in different industries and cater to various
different needs of their customers are called conglomerate companies. Two examples of Indian
conglomerates are: Tata (Tata Motors, Tata Steel, Tata Consultancy Services, Tata Power and
many more), Reliance Industries Limited (Reliance Petroleum, Reliance Infrastructure,
Reliance Retail, Reliance Entertainment and many more).
Now each of these businesses within the Tata or Reliance group of industries works and
behaves as a separate business entity. Business decisions for one company, say Tata motors,
will not be relevant for another, say Tata Communications. Therefore, each business has its
own leaders and policy makers. Thus, each business works on its own “Strategies”, and hence,
is referred to as a Strategic Business Unit (SBU). This is a common term you will come across
when you go to the corporate world and work for MNCs.
The three levels of strategies are indicative of who the decision makers are, as well as who the
strategy is intended for.

Example: At RIL, Mukesh Ambani with his team of top management will make strategies that
will impact the entire conglomerate firm, as a whole. These decisions can be things like adding
a new SBU to the business line, removing a particular loss incurring SBU from the business
line, renaming certain business etc. These are called Corporate Strategies.
The next level of strategies will be those made by the heads of Reliance Jio, Reliance Retail,
Reliance Petroleum etc, i.e. the MD of each SBU. Such strategies will impact only that
particular SBU. The decisions can be things like adding a new product line, entering a new
market, changing the advertising and promotional methods etc. Such strategies are called
Business level strategies.
Finally, the third level of strategy, which is called Functional strategy comes into picture. Each
SBU in the organization will have its own departments like Marketing, Finance, HR, Public
Relations, Operations etc. Each department will have its own strategies that will be made by
the department heads. They are referred to as Functional strategies.
(Your syllabus covers only corporate level strategies)
FORMULATION OF CORPORATE STRATEGIES

Approach to strategy formulation

As per Business Definition of any business within an organization, it can be identified
i. which customer groups the business serves
ii. which customer functionality is fulfilled
iii. what alternative technologies are used to attain the same

All corporate strategies are defined based on these three factors, keeping in mind the demands
of internal and external environment of the organization.
The strategies defined at corporate level may pertain to existing SBUs or to a new SBU
altogether, and have a huge impact on the internal functioning of the SBU as well as its
Business Definition.

Types of Corporate Strategies

I. Growth aka Expansion aka Intensification – This strategy is aimed at high growth,
substantially broadening the scope of existing business or entering into new business to
improve overall performance.
There are 6 types of growth strategies, namely:
a. Concentration
b. Integration
c. Diversification
d. Internationalization
e. Cooperation
f. Digitalization
 II. Stability – It is aimed at incremental or marginal improvement in existing businesses only
to sustain in a volatile environment or highly competitive market.

a. No change
b. Pause / proceed with caution
c. Profit

III. Retrenchment – Aimed at contraction of business through substantial reduction in business

offering or complete elimination of a business to improve overall sustainability of
organization.

a. Divestment
b. Turn around
c. Liquidation

IV. Combination – Aimed at using a mix of growth, stability and retrenchment simultaneously
on multiple businesses or sequentially on a business to improve overall sustainability of the
organization.

a. Simultaneous combination
b. Sequential combination
c. Simultaneous and sequential
GROWTH
Ia. Concentration Strategy
This is the most fundamental expansion strategy, where organizations tend to focus on business that
they already excel at. Therefore, concentration strategy will NOT include adding a new business line
to the organization.

The focus remains on at least one of the two components of business definition: Who we serve and
What we serve.

Concentration Strategy includes three out of the four quadrants of Ansoff’s Product Market Matrix.

Current Product New Product

Current Market

Market Penetration Product Development

New Market

Market Development Diversification

In Market Penetration, Product development and Market development, the organization maintains
its current line of business. However, they expand the business line by converging their resources to
enhance their operations. Thus, all three result in growth of business in an area that the organization
was already operating in.

In Product development, a new product is launched in their existing market base, taking into account
the fulfilment of a customer need that was previously not taken care of. E.g. Coca Cola and PepsiCo
coming up with zero calorie drinks based on the new age health conscious customer. Gillette coming
up with two, then three, then 6 blade razors. E.g Cadbury has launched new flavours of chocolates

In Market development, a new market is capitalized for the existing products of the organization. This
market could be geographically or demographically new to the organization, which was not being
catered to previously. E.g. Starbucks entering new geographical locations, CCD offering institutional
sales.
In Market Penetration, same products are offered to the existing market using new technology or
different pricing or various promotional techniques so that product consumption is increased or
market share is increased or both. E.g. Nike with their aggressive marketing and promotion,
McDonalds with their customized products and localized promotional efforts

Advantages of Concentration Strategies

i. Specializing in existing businesses enables high competitive advantage in the market

ii. Degree of change required for expansion is low, therefore operations performance is not
hampered
iii. Internal and External environment are predictable, therefore risk of failure is low
iv. Decision-making process is faster due to familiar environment
v. Minimal training and resource costs due to existing infrastructure availability

Limitations of Concentration Strategies

i. Dependence on single industry decreases risk distribution

ii. Maturity of industry causes limited scope of expansion
iii. Supplementary industries and alternative technologies pose a threat
iv. Constrained product or industry operations may result in constrained innovation
Ib. Integration Strategy
When business is expanded corresponding to the current line of business by combining certain
activities, it refers to Integration. Integration will include expansion within the same arena or
related/adjacent businesses.

The focus remains on who we serve and what we serve, expanding beyond our current scope but
related to it by broadening the business definition scope. This can be carried out in two different ways:
Horizontal integration and Vertical integration.

Horizontal integration: It includes taking up of new business within the same industry but beyond the
original boundaries of the organization. This can be done by either expanding the scope of current
product or the scope of current market. Mergers or acquisitions of competitors is a type of horizontal
integration which keeps the product base same, but the market scope is increased substantially. E.g.
acquisition of Idea by Vodafone resulted in instant increase in the market size as well as market share
for Vodafone. This is an example of horizontal integration.

Benefits of Horizontal integration:

i. Economies of scale: Fixed Cost remains same with bigger product and market base, reducing
per unit cost
ii. Better utilization of assets, complementary use of available resources and skill set
iii. Product bundling allows for product differentiation providing a larger market segment
iv. Known products and business model allow for greater expansion at low risk
v. Acquisition of competitor allows direct reduction in industry rivalry

Vertical integration: When an organization becomes its own supplier or buyer, fulfilling a need that
was previously being taken care of by another firm, it is called vertical integration.
This is done by adding a business line to the existing business that lies adjacent to current business in
the value chain.

A strategy for vertical integration of an organization is based around Make or Buy decisions. The
organization checks if buying raw materials is more cost effective or producing raw materials in-house.
Similarly, is selling products through self-owned subsidiaries more cost effective than having buyers
outside the firm? Based on such decisions, the organization can decide to move up the value chain
(towards suppliers) or down the value chain (towards buyers).

Value chain - the process or activities by which a company adds value to an article, including
production, marketing, and the provision of after-sales service. It comprises of
i. Inbound logistics (raw material)
ii. Operations (Production)
iii. Outbound logistics (Delivery)
iv. Marketing and Sales
v. After Sales Service
Each organization operates at the Operations level and has a value chain of its own, through which it
acquires raw material, produces finished products and delivers them to the end customer.

For an organization at the Operations level to expand its business along the value chain, expansion by
moving towards the source of raw materials is called backward integration. This is a type of vertical
integration. When a company acquires its suppliers or enters in the business area of that of its
suppliers, it is called backward integration. E.g Reliance started producing polymers in order to be able
to produce artificial yarn.

Expansion by moving towards the customer base is called forward integration. When the company
enters the business arena that was previously looked after by its customers, it is called forward
integration. (e.g. Maruti, which was originally only manufacturing cars but not distributing them
moved towards Delivery and sales with the opening of Nexa). This is a type of vertical integration.

Both forward and backward integration are types of vertical integration, since the organization is
moving along the value chain.

In vertical integration, sometimes all the activities starting from the first step of value chain by
acquiring raw material and going to the last step in value chain by providing final goods or services to
the end customer are integrated by some companies. It is called fully integrated organization.

In partial vertical integration, an organization may choose to produce some of its raw material and
obtain the remaining from suppliers (or sell some units itself while remaining units are sold through
resellers). This is called taper integration. (e.g. Maruti sells some of its cars through Nexa while
remaining through other dealerships).

When organization A invests in a supplier (or a buyer) such that a part of the supplier (or buyer)
organization is owned by the organization A, (organization A holds a share in their supplier or buyer),
it is called quasi integration.

Benefits of Vertical Integration

i. Cost advantage in fully integrated production
ii. Improved visibility to management on bottlenecks and weaknesses
iii. Improved operational efficiency and effectiveness
Ic. Diversification Strategy

Diversification is a corporate strategy to enter into a new market or industry in which the business
doesn't currently operate, by creating a new product for that new market.

When there is a substantial change in the business definition of an existing business, or a new business
definition is formed altogether, it is considered as Diversification.
It is implemented by making significant changes to the current products (What) being offered to
current customer base (Who) through current technology (How). Either one or more of these undergo
a major change, resulting in expansion of business.

Diversification may be done related to current line of business, called Concentric Diversification, or
unrelated to current line of business, called Conglomerate Diversification.

Concentric Diversification (aka Related Diversification) – As the name suggests, expanding the
circle of offerings concentric to its current focus centre is called concentric diversification. E.g. A car
manufacturing company venturing into two wheelers is still operating in the automotive industry or
an animal feed producing firm starts producing animal supplements or accessories, or a floor coverings
manufacturer venturing into home furnishings like curtains.

Concentric Diversification can be done in three ways:

1. Marketing-related Concentric Diversification – where a different product is created
(using a new technology) that can be targeted for the same market and distribution
channels. e.g. Patanjali making various healthcare, home care and personal care
products all being targeted for the same market through the same stores/outlets.
2. Technology related Concentric Diversification – where a different product is created
leveraging the same technology that was used for previous product mix. e.g. A
company making greases and lubricants for 2-wheelers also starts producing them for
4-wheelers.
3. Marketing and Technology related Concentric Diversification – where a different
product is created leveraging existing technology and marketed through same
channels for the same target audience, but fulfilling a different need. e.g. Banking
institutions have started selling insurance

Main reason for concentric diversification is to capitalize synergies of:

1. Operations (Production efficiency) e.g. Reliance Petroleum by-products caused them to
venture into Hydrocarbons, other polymers, Gas
2. Finance (Low per unit or transactional cost) (Make or buy decision)
3. Market (utilize same distribution channel)
4. Personnel (available skill set and expertise)

Difference between Product Development and Concentric Diversification

Product Development Concentric Diversification
New product for existing market New product for new market
Product is a variant of existing products Product is related to existing products but fulfils
a different need
 e.g. Coca Cola producing Diet Coke and Coke e.g. Coca Cola acquiring Costa Coffee
Zero

Difference between Vertical Integration and Concentric Diversification

Vertical Integration Concentric Diversification
The firm makes a new product which they will The firm makes a new product for a new market
use themselves
All vertical integrations are also concentric All concentric diversifications are NOT vertical
diversifications integrations
e.g. when Netflix started making original content e.g. Nestle adding ketchup to brand Maggi after
for distribution, it is vertical integration as well the success of noodles is concentric
as concentric diversification diversification, but not vertical integration

Conglomerate Diversification (aka Unrelated Diversification) – This refers to expanding the

business in a field that is completely unrelated to existing business definition. E.g. A sugar
manufacturing company venturing into steel industry, or a cloth mill company starting up an electronic
gadgets unit.
It is often referred to as Portfolio management, since a variety of unrelated businesses are managed
simultaneously.
It provides for Finance and Personnel synergy only, Operations and Market synergy are not achievable.

Diversification may be internal (organic growth) or external (inorganic growth).

When a firm starts a new business unit from scratch, manufacturing and selling new products to a new
market by themselves, it is called organic growth or internal diversification.
When it enters a new business by acquiring or merging with an existing firm, it is called inorganic
growth or external diversification.

Difference between Concentric and Conglomerate Diversification

Concentric Diversification Conglomerate Diversification
Diversifying into business related to existing Diversifying into business completely unrelated
business to existing business
Can synergize based on Operations, Finance, Can synergize based on Finance and Managerial
Personnel, Marketing and Managerial skills skills only
Less risky due to similarity with existing business More risky due to being a completely unknown
domain
e.g. Nestle making maggi ketchup after maggi e.g. Balmer Lawrie into steel, lubricants and
noodles logistics

Advantages of Diversification (concentric and conglomerate)

Example – Reliance Industries Limited
i. It enables to capitalize on synergies of operations, marketing, finance, technology, expertise
etc.
 ii. It allows the organization to invest in areas of growing market scope, when its current
products’ market has reached maturity or economic slowdown or regulatory shutdown –
improved resource allocation
iii. Expansion of customer base that can be capitalized for current business also
iv. Risk mitigation by distributing risk over various businesses thereby stabilizing returns
v. Investing extra cash at hand in new business is easier than expanding current business due to
limitations of shareholders’ value expectations
vi. Capitalize on seasonal trends or competitive differentiating advantages

Disadvantages of Diversification (concentric and conglomerate)

Example – United Breweries entering Aviation business (Kingfisher)
i. It may lead to scattered attention and decreased commitment thereby causing loss of
competitive advantage
ii. Venturing into new business is risk prone
iii. Lack of expertise / skill / experience
iv. Increase in administrative problems
v. Infrastructure, training, value chain setup and promotional cost increase
vi. Trap of easy loan that looks like easy growth

While there may be many strategic reasons for an organization to move into concentric or
conglomerate diversification, one of the main reasons still remains as passion to grow beyond
boundaries.

All companies use different types of strategies at different points in time.

e.g. Colgate Palmolive started off as a soap company in US. It has grown to become a global company
by acquiring existing small oral care, personal care and home care product companies in different
countries all over the world.

When Colgate (already making toothpastes) made a new type of toothpaste, it was Product
Development.
When Colgate started manufacturing the tubes for their toothpastes, it was Vertical Integration.
When, after toothpaste, it started making toothbrushes also, it was Concentric Diversification.
When Colgate started making pet food, it was Conglomerate Diversification.
Id. Internationalization Strategy
A firm that has operations in more than one country is known as a multinational corporation (MNC).

When an organization intends to internationalize, it needs to assess all the factors that may impact its
decision, like:
i. Assessment of international environment
ii. Assessment of internal capabilities
iii. Assessment of cross-border integration in terms of economies, trade tariffs, markets etc.

Factors that affect internationalization strategy:

1. Cost (does the organization have a high pressure of cost reduction?) – Higher the pressure to
reduce costs, lower the costs.
2. Local responsiveness to product (does the new market require customization of the product?)

Based on these factors, there can be four types of international strategies:

International Strategies
When there is no pressure of local responsiveness, then a standardized product is offered with no
customization, no differentiation. There is also low pressure of cost reduction, so costs may go high
to some extent, hence the focus is on countries where these products or services are not available.
High level of control is maintained over foreign operations by the base organization. E.g. Software

Multi-domestic Strategies
In this type of strategy, each country is considered a separate domestic market where localized /
customized products and services are offered. Due to this, costs on R&D, trainings, market
development, product development and setup become high. Thus, cost reduction is not high here, but
local responsiveness (customization of product as per local taste) is high. E.g. McDonalds, Pizza Hut
Global Strategies
When the pressure of local responsiveness is not high, standardized products are offered. Here, focus
on cost reduction is high. Therefore, expansion is done in countries that provide benefits of skill /
location / economy etc. (e.g. availability of cheap labour and raw material). No customization is done,
standard products are produced at few (selective) specializing locations in the world. E.g. Automobile
manufacturing

Transnational Strategies
It aims at providing customized products based on local needs, while keeping the costs low. This is
difficult to attain, possible only with a creative approach, knowledge sharing and local support from
the country.

Methods / Ways to enter the international market

Export: Does not involve high amount of capital investment in the host country. All production
activities are carried out in the home country, sales are done internationally.
Direct export (through organization’s reseller in other country) and Indirect export (through
intermediaries)

Contractual: Does not involve high amount of capital investment in the host country. The organization
signs a contract with a third party in the other country and receives a royalty (monetary benefit) from
them, in lieu of permission to sell their products.
This may be done through Licensing (sharing know-how, patent and product knowledge for a limited
period of time) or through Franchising (sharing know-how and product knowledge along with brand
name, quality standards, and other sale directions).

Investment: When the organization invests a fair amount of capital in the host country in order to set
up a business platform there.
This can be done in two ways:
1. In partnership with an existing company of that country (through a Joint
Venture or Strategic Alliance) sharing the control with the host company
2. Independently setting up a fully owned subsidiary with complete control in
own hands. In order to obtain a fully owned subsidiary in another country,
the organization may choose to do greenfield venture where they setup
business in that country from the scratch, or they may choose acquisition
of an existing firm in that country.

Things to consider while strategizing to enter international market:

a. Where – Which country/location to go to, based on the benefits of the market, costs to be
incurred and risks involved
b. When – Whether to take first move advantage or wait for others to check market response
(high risk vs. low risk decisions). First move advantage gives benefit of higher market share
and creating entry barriers for competitors, but is also more risky.
c. Extent – Small scale office or full scale investment
Advantages of Internationalization
1. Economies of scale – through increased sales volume
2. Economies of scope – through knowledge sharing and skill enhancement
3. Tremendous scope of extension of market
4. Location economies – Availability of cost effective raw material, land and labour
5. Access to resources not available in home country

Disadvantages of Internationalization
1. Higher risk due to unpredictability of market response (compared to home country)
2. Organization management and employees need to deal with cultural diversity
3. Face trade barriers / entry barriers
4. High cost of setup / distribution system / training
Ie. Co-operative Strategy
When two or more organizations co-operate for mutual benefit, it is called Co-operative strategy.

This can be done in three ways:

i. Mergers and Acquisitions
ii. Joint Venture
iii. Strategic Alliance

Mergers and Acquisitions (M&A)

When one organization is taken over by another organization, so that the entity of acquired
organization is dissolved, it is called M&A. Other names for M&A are amalgamation, consolidation or
integration.

The acquiring firm purchases the assets as well as the liabilities of the firm being acquired.

If firm A purchases firm B, it is generally referred to as a merger for B, who has gone and merged into
another firm. For firm A, it will be called an acquisition as they have purchased the assets and liabilities
of B in exchange for shares or cash.

Acquisitions may be friendly or hostile, based on whether the firm being acquired wanted the M&A
or not. Hostile acquisitions are generally followed by law suits and long battles over ownership, and
may not turn out to be fruitful or successful.

Leveraged Buyout (LBO) – This is a term used for an acquisition where the assets of the firm being
acquired are used as a collateral to accumulate funds for buying (acquiring) the firm.

Types of Mergers and Acquisitions

Horizontal Merger – When firm A acquires firm B where both firms are operating in the same market,
catering to similar needs by producing similar products. Mostly, they are either competitors or
substitutes of each other. E.g. Vodafone’s acquisition of Idea.

Vertical Merger – When firm A acquires firm B such that both are a part of the same value chain, and
firm B is either a supplier or buyer of firm A, it is referred to as a vertical merger. Vertical mergers are
often used for forward or backward integration.

Concentric Merger – When firm A acquires firm B when both firms are operating in related industries,
but they are neither direct competitors nor a supplier/buyer to each other, it is called concentric
merger. It generally refers to M&A between firms producing substitute products.

Conglomerate Merger – When firm A ventures into a totally unrelated business by acquiring firm B
where the product and market are different, it is referred to as conglomerate merger.

Reverse mergers are also called demergers or spin-offs and they refer to the division of a firm into two
or more separate legal entities. E.g. Reliance Industries limited demerged 4 of its SBUs which then
formed the Anil Dhirubhai Ambani group of companies.
Advantages of M&As
1. Increase in stock value of both
2. When strategically done, both firms can complement each other’s strengths and share
resources to bring about a synergistic effect
3. Reduce direct competition, at times
4. Enables stabilizing the operations by merging with a stronger or resourceful firm
5. May enable increase in market share (by acquiring market share of competitor)
6. May enhance product or brand portfolio (through concentric or conglomerate M&A)

Two common examples of recent M&A are acquisition of Idea by Vodafone, and that of Flipkart by
Walmart.
Others include Facebook acquiring Instagram and Whatsapp, UberEats acquired by Zomato.

Joint Ventures
Joint ventures are long term contracts between two or more parties who decide to work together by
forming a new (third) legal entity. Both participating firms have a stake in the new firm, therefore both
have a proportionate share in the profits (or losses). They exercise a joint control over the new firm.
Some common examples are JV between ICICI and Prudential Inc for life insurance, and JV between
ICICI and Fairfax Canada (JV is called ICICI Lombard) for general insurance.

Types of Joint Ventures

Joint ventures can be formed between any two or more parties, within the same industry or in
different industries, within the same country or multinational. Sometimes, the headquarters may be
based in one of the participative companies, but they may also choose to set up a plant in a third
country. E.g. Apollo and Continental tyres have setup a Joint Venture manufacturing plant in Malaysia.

Why do companies form JVs?

1. To share or obtain technology – e.g. Maruti formed a JV with Suzuki to adapt their automobile
manufacturing technology
2. To expand geographically – Starbucks formed a JV with Tata to enter new markets that Tata
has a good hold in
3. To expand under regulatory restrictions – Insurance companies have a capping on FDI in India,
hence they have formed JVs with Indian banks to set up their market base here e.g. Bajaj
Allianz, ICICI Prudential etc
4. For intellectual know-how / knowledge – Tata entered the DTH market in India by forming a
JV with UK based DTH firm Sky, which had a strong foothold and working knowledge of the
entertainment industry.
5. To share risk, capital investment and resources

Advantages of Joint Ventures

1. Shared risk
2. Distinctive competencies of one firm can complement the other to create synergy
3. Shared development costs or other investments

Disadvantages of Joint Ventures

1. Management issues may arise in case of lack of transparency or insecurity or difference in
opinion
 2. Policy changes may be required to adapt to the new environment that gels with the partner
firm
3. Cultural diversity needs to be managed so that employees as well as customers feel at ease,
which may not always be easy to attain.

Strategic Alliances
When two organizations come together under a contract such that they adopt a common business
strategy that creates a Win-Win situation for both, it is called a strategic alliance. It does not include
venturing into the partner’s business line, nor does it include forming a new legal entity. The contract
only allows both firms to work together for mutual benefit. This is done by sharing strengths and risks,
by creating a common pool of resources that can be used by both firms, and providing synergy to
business through shared goals and objectives.

Main features of a Strategic Alliance are:

1. Contractual terms
2. No new / separate legal entity formed
3. No dissolution of any of the firms
4. No new / separate branding

e.g. Barnes and Nobles book stores have got into a strategic alliance with Starbucks such that all
bookstores have in-house cafes. Spotify music distributors have formed a strategic alliance with Uber
such that Spotify users can play their music list in Uber cabs while riding.

Other examples include strategic alliance between KFC and PepsiCo which means when you buy a
burger at KFC, you won’t get Coca Cola, it will always be Pepsi. Similarly, when you buy a burger at
McD, you will only find Coca Cola there, not Pepsi. So KFC and McD continue to make burgers only,
not soft drinks. Pepsi and Coca Cola continue to make soft drinks only, not burgers. But they know the
combination of burger and soft drink is popular, so the companies form an alliance to enhance their
sales.

Steps involved in forming a strategic alliance

1. Clear strategy definition
2. Responsibility and ownership definitions
3. Phase-in relationship and cultures of each other
4. Clear exit strategy in contract for both parties
1f. Digitalization Strategy

The process of converting any material (data or information) into digital format is called digitalization.

(It is different from the term Digitization which means conversion of analog to digital.)

Value System – Each organization has a value chain along which it operates. Many similar such value
chains are inter-connected to each other, because the finished products for one organization may
often act as the raw material to another. Thus, a huge network of value chains is often formed that
collectively impacts the operations of any organization.

Digitalization at any one step in the value chain impacts other steps also, which creates a rippling
effect of further digitalization. Digitalization of a value chain (or value system or parts of it) enables in
streamlining of the operations and greater reliability.

How digitalization impacts the value system:

1. Deconstruction – When a part or sub-part of product delivery is done digitally, while

the core product is still delivered physically. E.g. while purchasing a laptop which is
delivered physically, certain software licenses and warranty are delivered digitally
through CD or over email. Similarly, many rewards (like gift vouchers) that come with
product purchase are also delivered digitally through SMS or email.

2. Dis-intermediation – Intermediation is the term used for having intermediaries in the

value chain. Dis-intermediation, thus, refers to the elimination of certain
(intermediate) processes from the value chain as a result of digitalization. E.g. Buying
plane / train / bus tickets has moved to a digital platform where tickets are booked
online and payment is also made digitally. This has resulted in the removal of ticket
resellers / brokers / travel agents from the value chain, who used to work as
intermediaries.

3. Re-intermediation – This is the opposite of disintermediation. It refers to the addition

of certain intermediaries in the value chain. While this may sound as making the value
chain longer, any digitalization that causes addition of intermediaries in the value
system enables the process to become faster and more reliable. It also usually enables
to replace multiple intermediaries by one – the digital platform. E.g. Online book
stores, online shopping marts etc. have seen the addition of digital platform as an
intermediary that has been added to the value chain between producer and
consumer, but it has replaced multiple stages of reselling, thus improving the value
system on the whole.

4. Industry morphing – When digitalization brings such major changes in any value chain
that the entire industry associated to it has to evolve, it is referred to as industry
morphing. E.g. Retail sector and banking.

5. Cannibalization – When disintermediation eliminates an entire part of the value chain

completely so that it is not required anymore, it is called cannibalization.
 6. Techno-intensification – When digitalization brings about more technology in the
value chain, thereby increasing automation and reducing human-intervention, it is
called techno-intensification. E.g. most call centres now have an automated 24X7 IVR
(interactive voice response) system that reduces the first step of human intervention
while simultaneously increasing productivity. Similarly, many activities related to
banking are now self-service on website or mobile app, without the need of a bank
employee.

7. Re-channelling – With the increase in focus towards core competencies, outsourcing

has become a major approach towards operations, causing certain parts of the value
chain to be outsourced to specialists. This is called re-channelling.

What is e-business?
Business where all activities can be done electronically / online.

e-CRM – Supporting the customers through online support staff (chat windows)
e-Ordering – Placing all orders for raw material online; that may include e-tendering or reverse
auctions
e-Payments – All payments to suppliers are made electronically, and also all payments from customers
are received electronically
e-Tracking – The status of any order can be checked online at any point of time

Major functions which are digitalized

1. Internal and external communication – All communication with employees, shareholders,
suppliers and customers is done electronically. Email, intranet, intra-company social
networking sites enable quick and secure communication
2. Advertising and promotion – Billboards, newspapers and magazines are traditional methods.
Advertising is now done through technology such as Search Engine Optimization (SEO) and
Social Media Optimization (SMO)
3. Purchasing – Comparison of available products, getting product information, online order
placement and payment
4. Information management – Storage, retrieval, distribution, accumulation, data mining are all
done electronically. Cloud storage is used for information structuring that allows more reliable
data management. An organization’s entire internal functions are managed through ERP
software and supporting tools like SAP, Oracle PeopleSoft etc
5. Team structure – Teams are virtual now, employees may be based in different parts of the
world but work as a team with digitalization. Remote login, video conferencing etc allow a
diverse set of people, geographically separated, to work together towards a common
objective. (Results in increased efficiency and effectiveness, increased loyalty and decreased
operational costs)
6. Automated quality assurance and quality control through robotic machinery
Types of digitalization strategies based on implementation

1. E-channel – The entire value chain, or a part of it is digitalized between the organization and
its buyers and/or suppliers
2. Click and Brick – Refers to the model where some traditional methods of doing business are
retained (brick) while some functions are digitalized (click) e.g. Banking sector has digitalized
many operations while retaining some operations in window banking format
3. E-portal – When a web portal is used for communication with the stakeholders and sales. This
portal is usually personalized for the organization as per business needs e.g. company selling
products through their own wbsite
4. E-Market – This is a common market (portal) for communication and sale of products with
many suppliers and many buyers. E.g Amazon
5. Pure e-digital products – Certain industries have evolved from being digitalized to being
digitally transformed. The entire operations from production of goods to sales, delivery,
payment, and after-sales-service is done electronically. The consumption of product by
consumer is also done digitally. E.g. Digital media, online content, blogs, music etc.
STABILITY
IIa. No change strategy
This is the first type of Stability strategy. When a conscious decision is taken to maintain status quo, it
is referred to as No Change Strategy. It is different from being complacent. Complacency is dangerous,
it is the lack of initiatives from leadership in understanding the organization’s status, or identifying the
opportunities, threats, strengths and weaknesses. However, a no-change strategy is a deliberate
decision to not make any changes to existing operations, profitability and processes. This is always a
Temporary Approach as no organization can survive on a no-change strategy for a long period of time.
It is followed when the operations are running smoothly, profits are stable and there are no major
opportunities or threats in the external environment, nor any instability in the internal environment.
(There is a constant tracking and analysis of external and internal environment so that the leaders
know when to move out of no change strategy and to take action.)

IIb. Profit Strategy

When profits are not stable since there are certain threats in the external environment which are
temporary or short-lived, organizations need to identify strategies to stay afloat until the threat has
passed. This generally includes steps to increase cash flow or profit, by reducing costs, increasing
productivity, reducing or postponing investments or even changing their product range. Anything that
keeps the organization’s bottom line stable until the temporary threat has passed is considered as a
Profit strategy. Such threats are normally external to the organization, since internal problems are
normally long term and perpetual unless consciously taken care of. Profit strategy is also a Temporary
Approach since it is followed as a measure to stay stable.

Most companies are following the profit strategy in the current scenario of lockdown due to pandemic
Covid 19. A lot of automobile manufacturing firms have started manufacturing ventilators, clothing
companies are manufacturing PPEs and masks and hotels are being turned into quarantine centers.

IIc. Pause / Proceed with caution

Organizations may choose to follow a Pause/Proceed with caution strategy under two circumstances.
The firm may PAUSE to take a break after a rigorous project or a growth implementation. This pause
period is used in such cases to take account of all changes, to stabilize operations, consolidate and re-
vitalize resources and to internalize the changes implemented.

On the other hand, PROCEED WITH CAUTION strategy may be followed by an organization before it
steps up for a major project or growth strategy. This time period is used to test waters and
comprehend the possible response to upcoming changes. It acts like a preview before the actual
implementation.
Pause/Proceed with caution strategy is a Temporary Approach as it gives a cooling-off period to the
firm before or after a major change.
RETRENCHMENT
Retrenchment Strategy is adopted when an organization aims at reducing its one or more business
operations with the view to cut expenses and reach a more stable financial position.
- Reducing the scope of current activities
- Done when declining industry and / or market

The decline of an organization or industry may be attributed to

External factors such as
i. Upgraded technology
ii. New business models
iii. Government policies
iv. Changing customer needs / taste
v. Demand saturation for products
vi. Substitute products availability

Or Internal factors such as

i. Ineffective top management
ii. Functional (departmental) quality issues like marketing issues or production problems or poor
after sales service
iii. Stakeholders resistance to change when the situation demands evolving
iv. Cost inefficiency or disadvantage due to location or skill or knowledge
v. Ineffective organizational design (from top management)

Some common SYMPTOMS that reflect that an organization (or business unit) is in a declining stage
are:
i. Decrease in profits
ii. Decrease in sales
iii. Decrease in market share
iv. Decrease in credibility or goodwill with financial institutions or suppliers or creditors
v. Increase in debts

TYPES OF RETRENCHMENT STRATEGIES

1. Turnaround
2. Divestment
3. Liquidation
III a. Turnaround

When an organization’s leadership identifies any of the above symptoms that reflect a decline in
meeting the objectives of the organization, the first step is an effort to recover from losses and regain
the original position in the market. This strategy is called a turnaround.

Reversing a negative trend / turning around the organization from loss making to profit making is
called a turnaround strategy. Only when a turnaround strategy does not work, does the company
move to divestment or liquidation.

There are three ways to bring a turnaround in the organization:

i. Existing CEO (or top management) works with the advisory support (an external consultant
specializing in turnaround of failing companies) work together to improve the efficiency and
effectiveness of the organization. This is possible only when the credibility of the top
management in the market (financial institutions, suppliers and other stake holders) is still
intact.
ii. Existing CEO (or top management) withdraws from their position temporarily. The external
consultant works towards improving the profitability of the firm by increasing efficiency and
effectiveness. Once the turnaround is successful, the CEO (or top management) return to their
original positions.
iii. The top management of the firm is replaced by new leaders, or the firm is merged into another
firm (through M&A) to bring about a change in operations

When the top management is replaced by a new CEO (or leader), the new leader has a choice to either
bring about a turnaround in an employee friendly manner, called the non-surgical or humane way, or
in an operations and result centric manner where people may lose jobs, called the surgical way. The
humane way is generally found to be more successful in the long run.

Action Plan for Turnaround Strategy

i. Thorough analysis of product, market, internal and external environments, production

processes, competitors etc. to identify problem areas
ii. Clarity on desired product, production systems and market segment
iii. Small achievable targets are made with continuous monitoring, evaluation, feedback and
remedial actions

Role of external agencies in turnaround in India

NCLT (National Company Law Tribunal) was formed on 1 Dec 2016 by Govt. of India.
It takes care of liquidation or turnaround of sick companies, replacing BIFR (previous govt. initiative
for sick companies’ aid).
NCLAT (National Company Law Appellate Tribunal) is the court that resolves all appeals against the
decisions made by NCLT.
In order to obtain assistance from NCLT in dealing with the losses or making a turnaround, any
organization first needs to declare itself as a sick company. It is then that NCLT analyses the
organization’s health and provides guidance on revival techniques such as:
Technological advancements or modernization
Sale or leasing out of the undertaking to another firm
Concessions like tax rebate or exemptions
Amalgamation with another company (which receives tax benefit for reviving a sick unit)

RBI co-ordinates with the firm and NCLT to make financial arrangements for revival like providing loans
or rescheduling repayments.

III b. Divestment / Divestiture

Divestment is the second retrenchment approach that is carried out only when there is no possibility
of revival or turnaround of the firm using existing funds / skill or leadership, or when turnaround
efforts have failed already.

It is the selling off of a business unit or division or portion of the business which is making losses.

Disinvestment – The sale of govt. equity in any public sector organization to another public sector firm
(or even to a private firm, which is then called privatization of the firm.)

Common reasons for Divestment

i. An acquired BU does not gel with the current company, e.g. cultural gap
ii. The SBU has been making losses consistently
iii. The firm needs technological advancement or upgrade which demands unaffordable
investment
iv. Unable to match competition or identify competitive scope
v. To keep the other SBUs afloat and overall health of the organization stable
vi. To fulfil capital requirement for another lucrative SBU or project or a better investment

Approaches to divestment

 Spin-off as an independent company (in which the parent company may or may not have a
stake after spin-off)
 Find a buyer for the SBU who sees the SBU as a strategic fit with their firm and sell off the SBU

The main purpose behind divestment is to streamline a diversified business and bring back the focus
on core competencies. The original parent company may receive stocks from the new parent company
or capital in lieu of the business which is sold off.

Some common examples of divestments are

i. Hindustan Unilever (HUL) divested from sea-food processing business
ii. Tata sold off its soaps and detergents business to HUL
iii. Samsung sold off its automobile manufacturing unit to Renault in 2000
iv. Balmer Lawrie closed down its tea business
III c. Liquidation

Liquidation is usually the final resort for an organization that is unable to recover from persistent
losses.
While divestment involves selling off a business unit or a part of the firm to another party, liquidation
is for the entire firm. For a multiple BU firm, when losses are so severe that all SBUs must either be
closed down or sold off, it is referred to as liquidation.

It is only carried out when all attempts at turnaround have failed, and divesting only some part of the
business is also not able to revive other sick Business Units. The firm then closes down its operations
and sells off the assets to pay for the pending debts and dues. This is generally seen in small scale
enterprises or single owner proprietorships. However, there have been cases where multiple BU firms
operating at multinational levels have also gone through liquidation. E.g. Nortel Networks was a
telecom giant based in Canada, which went bankrupt and dissolved.

Dissolution – When the legal existence of the firm ends, and its name is removed from all markets and
books of accounts of all stakeholders.

Process of Liquidation
i. Winding up, property administered for creditors and members.
ii. Liquidator is appointed who sells off assets and distributes the funds received from selling
assets to repay debts and creditors and financial institutions etc. (Filing for bankruptcy or
going through liquidation does not free the company from the liabilities of all due payments).
iii. When all assets have been sold and as much liability resolved as possible, the organization is
formally dissolved.

Liquidation may be carried out

 Compulsorily, on Court’s order
 Voluntarily, to wind up business when it is no more profitable
 Voluntarily, but under the supervision of Court

III d. COMBINATION

It is also known as mixed or hybrid strategies. In real business world scenario, no organization survives
through its lifetime on one type of strategy only. Thus, a mix of growth, stability and retrenchment are
used over different business units, at different periods of time. However, it is categorically considered
as a combination strategy when
 two strategies are applied on two business units simultaneously, or
 two strategies are applied on a business unit consecutively
BUSINESS LEVEL STRATEGIES

Business level strategies are those defined at the SBU level, which impact the other SBUs only
indirectly.

The basic intent behind all business level strategies is to identify how to give the best of products to
the organization’s customers by gaining competitive advantage.

1. Competitive advantage for any firm depends on two main factors:

2. Industry structure – This is best described by Porter’s 5 forces model
3. Firm’s positioning in the market – This is dependent upon
i. whether the firm controls its costs to remain low
ii. how differentiated is the product from competitors
iii. and the scope of product and customer base (narrow or broad market base)

Based on the above factors, there are three types of business level strategies that are most commonly
adopted by firms, namely:
1. Cost Leadership
2. Differentiation
3. Focus

Cost Leadership
The competitive advantage which firms look for in this type of strategy is Low Cost. The focus is on
keeping total cost low. However, since the product pricing is kept at par with competitors for similar
quality products, the profit margin becomes higher. This makes the firm a cost leader, and also gives
them the freedom to reduce prices to face competition if need arises.

The important factor here for organizations to bear in mind is to ensure that the total cost spread over
the entire value chain should be low. Thus, the focus should not just remain on a few major suppliers,
but the entire value chain of the product. At each step of the value chain, the cost drivers of that
function must be understood and analysed to identify the scope of cost reduction.

The disadvantage of following a cost leadership strategy is that there is no customer loyalty or brand
related market control. If any competitor decreases the price by a small margin, the cost leadership
benefit may be lost, since methods to reduce costs over the value chain may be easily imitable.

Differentiation
In this strategy, the focus of organization is to use a USP of the product as their competitive advantage.
Certain special features are embedded in the product that make it stand out from the competitors.
This differentiation enables the organization to achieve customer loyalty, which helps them to retain
the customers even if the prices surge due to competition.
The profits in this type of strategy are made from the difference in premium pricing of a superior
quality product and the extra costs that are incurred to differentiate the product.

The important factor here for the organizations is to identify the precise needs of the customer and
creating unmatched value for them by fulfilling such needs.
Focus
In this strategy, the focus of organization is to cater to a specific section of the market, and keeping
the scope of service narrowed down to that segment. This narrow segment may be based on
demography, geography or lifestyle preferences of the customers. Thus, any gaps in the market that
are left by firms who serve the masses using cost leadership or differentiation, are filled in by firms
that follow the focus strategy. Some common examples are tyre manufacturing for aircrafts,
manufacturing cars for physically challenged, or simply targeting the niche section of the society with
luxury products.

Formulation and implementation of Business level strategies

The important factors to bear in mind while identifying and implementing the most suitable strategy
for an organization is WHEN and WHERE.

The WHEN question allows the management to identify the most suitable timing when the strategy
must be put into action. Decision is taken on whether it is more profitable to be a first mover and face
the risk, or wait for competitors to make the first move and follow them with less risk.

The WHERE question enables the management of the SBU to identify the most favourable market
locations where the strategy must be implemented first.

Lastly, the management must ensure that the business strategy being identified and implemented
must be in sync with the lifecycle stage of the industry – embryonic, growth, maturity and decline.