5.1 CORPORATE-LEVEL STRATEGIES Corporate-level strategies (or # allocating resoure imply, corporate strategies) are Ss among the different businesses of a firm + wansferring resources from one set of businesses to others * managing and nurturing a portfolio of businesses, These decisions are taken so that the overall corporate objectives Corporate strategies help to exercise the choice of direction that an organisation adopts. There could be a small business firm involved in a single business or a large, complex and diversified conglomerate with several different businesses. The corporate strategy in both these cases would be about the basic direction of the firm as a whole. In the case of the small firm having a single business, it could mean the adoption of courses of action that yield better profitability for the firm. In the case of the large, multi-business firm, the corporate strategy would also be about managing the various businesses for maximi the overall corporate objectives and transferring resources from one set of businesse: ally about decisions related to and are achieved. ing their contribution to sto others. Recall that in Section 7.4, we referred to the concept of business definition. Abell has suggested defining a business along the three dimensions of customer groups, customer functions and alternative technologies.” The business definition for a small firm would be simple while that for a large firm, it would be quite complex. A large firm would consist of several businesses, each of which could be defined in terms of these three dimensions. The complexity of large firms arises from the fact that each of its businesses, defined along the three dimensions, result in a variety of customer groups, customer functions and alternative technologies that firm is involved with. It is therefore common to find multi-business firms with interests in serving a diverse base of customer groups, performing for them a variety of customer functions, and making use of a range of several different technologies : An analysis based on business definition provides a set of strategic alternatives that an organisation cat consider. “Strategic alternatives revolve around the question of whether to continue or change the business the enterprise is currently in or improve the efficiency and effectiveness with which the firm achieves is corporate objectives in its chosen business sector’ 3 According to Glueck, there are four strategic alternatives expansion, stability, retrenchment and any combination of these three.Corporate-Level Porate-Level Strategies: Concentration, Integration and Diversification 147 Let us get a bird's eye-view of the four i Our strategie alterna subsequently, in the est of this chapter. a” Mematives before we go into the details of each ofthese _ Expansion Strategies —~ Exhibit 8.1 Major reasons for adopting different corporate strategies Expansion strategy is adopted because: ¥ A oie imperative when the environment demands inerease in pace of activity. yen cacally, strategists may feel more satisfied with the prospects of growth trom expansion: chief executives may take pride in presiding over organisations perceived to be growth-oriented. 3: Increasing size may lead to more control over the market vis-a-vis competitors. »Corporate-Level Statesies: Concentration Integrati and Diversification 149 Complicated situations generally require comple tions that strategists have to offer when faced a Observe how the two companies below deat A paints company augments its of \ stability) and expands its product range to include inden al and Rice eoere aa tancously. it decides 10 close down the division which undertakes lage sce parton cena (retrenchment) idertakes large-scale painting contract jobs } Solutions. Combination strategies are the complex solu- the challenges of real-life business With the complex situations they face ‘ering of decorative paints to provide Over the years, strategic changes at a large business gro ca : manufacturing base and divesting ss qt group indicate that it has been strengthening its trading activities. Stability has been aimed at in a ° lity has been aimed at in some of its divi sions, by retrenching the unprofitable Products and services, while major expansion has taken place in the ee industrial products and construction business A variety of strategies have thus been followed, both sequentially and simultaneously, creating a complex web of Strategies, in line with the nature of the conglomerate thatthe company actually is Ne proceed now to a description of the major types of strategies that organisations usually adopt. The following strategies will be discussed in detail : 1. Expansion strategies (a) Expansion through concentration (b) Expansion through integration (c) Expansion through diversification (d) Expansion through cooperation (e) Expansion through internationalisation (f) Expansion through digitalisation . Stability strategies (a) No change strategies (b) Pause/proceed with caution strategies (c) Profit strategies 3. Retrenchment strategies (a) Turnaround strategies (b) Divestment strategies (c) Liquidation strategies 4. Combination strategies (a) Simultaneous combination (b) Sequential combination (c) Combination of simultaneous and sequential strategies Growth is a way of life. Almost all organisations plan to expand. This is why expansion strate: Most popular corporate strategies. Companies aim for substantial growth, A growit markets, customers seeking new ways of need satisfaction and emer: Opportunities for companies to seek expansion. This chapter will focus on expansion through concentration, integration chapter will deal with the three other types of expansion strategies of cooperation, intemationalisation and digitalisation economy. bury ng technologies offer ample ul diversification. The next 5.2 CONCENTRATION STRATEGIES ——~ Concentration is a simple, first-level type of expansion strategy. It involves converging resources in ne More ofa firm’s businesses in tenis of theit respective customer need, customer functions, oF altermative echnologies—either singly or jointly—in such a manner that expansion results, In strategic manag.150 Strategic Management and Business Policy terminology, concentration strategies strategies. Peters and Waterman (1982), in their In Search for Excellence, advocated a parameter for SUCCessfy firms which they called as ‘stick to the knitting’.’ Concentration strategies are, in other words, the “stick ty the knitting” strategies. Excellent firms tend to rely on doing what they know they are best at doing, In practical terms, concentration strategies involve an investment of resources in a product line fur identified market, with the help of proven technology. Most of you who have studied a basic marker course would be familiar with the classic Ansoff'sproduct-market matrix shown in Exhibit 5.2. Th 42 Proposed in a 1957 article in the Harvard Business Review and is still used by strategic planner, yy | \arketers interested in finding out the growth directions for their organisations. We will see here three jp of growth strategies proposed by Ansoff and take up diversification in a later section. re known variously as intensification, focus oF specatisay / Exhibit 5.2 Ansoff’ Product-Market Matrix PRODUCT present | new | MARKET ] | MARKET propuct PRESENT PENETRATION | DEVELOPMENT MARKET | DIVERSIFICATION DEVELOPMENT Se i Source: Adapted from H. |. Ansoft, “Strategies for Diversification’, Harvard Business Review, 1957, 5 pp. 113 124, a. ily Ury attracting new Use? Pment type of concentration, New markets may be demographic, for instance, offering the same pt t set of cusiomers. Yet, finding new regions where the sal hrust in a market development strategy. Coir is a major agricul north-eastern and western India. ‘The coir industry has [0 for existing products, resulting in a ma necessarily be in the eographical senye; they ea uuct with a different pricing to a differ product could be sold remains the basic th tural commodity produced in southern,Corporate-Level Strategies: Concentration, Integration and Diversification 157 is di 5 P severe cr o i synthetic foam and fibres products. Market development type of concentration strategi industry have attempted to present coir products as an environment-friendly product for discerning customers, especially in the exports markets. 4, Product development involves selling new products to the same markets: it may introduce newer prod- dts in the existing markets by concentration on product development, The tourism industry in India has not en able fo attract new customers in significant numbers, New prncts such ay selling India as a golfing or ayurveda-based medical treatment destination are some of the product development efforts in {he tourism industry to attract more tourists. Jy apparent that concentration strategies would apply to situations where the firm finds x pasion worthwhile, For instance the industries that a firm betongs to should possess 8 high potential for stb and be sufficiently attractive for concentration to take place. Internal! the firm should be strong rough to sustain expansion: it should, say, have adequate funds to invest in additional resources required for SReansion to take place, oF it should be able to develop new competencies required £0 develop new products and markets For expansion, concentration is often the first-preference strategy for a firm for the simple reason that it sould like doing more of what itis already doing. A firmthat is familiar with an industry would naturally like eAfvest more in known businesses rather than in unknown ones. Each industry is unidue 18 the sense that there are established Ways of doing things. Firms operating in an industry for long, are familiar with these teays. So they prefer concentration on these industries, Baia} Auto has consistently concentrated on two- and three-wheelers since the last several years as it finds strobe ahigh growth and attractive industry to invest in. Ithas tried various means 10 sustain market share ine competitive market, At different times, it has adopted variations ofthe concentration sinses of market penetration (e.g. selling more in urban centres), market development (5 selling to upwardly mobile aeesmer in rural areas), and product development c.g. state-of-the-art motoreycles and ungeared scooters) For ite rivals, itis a formidable competitor with proven produets manufactured through tried and tested technology and sold in familiar markets. Xerox India (formerly Modi Xerox) is the Indian subsidiary of Xerox Corporaliow, the well-known American printer, photocopier and office-supplies company. In a bid to expand its share in the small and medium businesses segment in India, Xerox adopted a concentration strateBy through market penetration, ‘market development and product development. For market penetration, it offered print job service through sna anational devices to consolidate its market standing. It ]aunched several new office products including taser printers and multi-functional devices, increasing its product range © ©*°t 20 products and services Market development activities included educating the small business entrePrenears tocreate new markets for its products.* Iris obvious that concentration strategies have several advantages. 0 coaeentntion involves minimal organisational changes, so itis less threatening the managers of a tiem are more comfortable with the present businesses. © Italso enables the firm to master one or a few businesses and enable it to specialise by ganmng an in depth knowledge of these businesses. © Intense focussing of resources on a few businesses may also create conditions for the (rm 10 develop a competitive advantage © Managers face less problems dealing with known situati © Systems and processes within the firm are developed in such a way that peopl fe familiar with them. © The decision-making process is under less strain as there is high level of predictability, Past experience is valuable as it is replicable.Serer eure trae Horii ontal Integration —~ In the previous section, we saw that concentration s rategies enable firms to focus more intensely on their existing businesses. They do so by market penetration, market development or product development. In concentration, Whatever the organisation. does, it does not move it beyond its own boundaries. But when an. organisation moves beyond its boundaries into the domain of the industry it is operating in, it no longer is adopting a concentration strategy. It goes over to the adoption of horizontal integration. When an organisation takes up the same type of products at the same level of. production or marketing process. itis said to follow a stratesy of horizontal integration, For ‘example, a luggage company taking over its rival luggage company is horizontal integration (also known as acquisition or merger),)A horizontal imegration strategy results in a bigger size with concomitant benefits of a stronger competitive position in the industry. It 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) Yet, it does not take the organisation beyond its existing business definition. It still remains in the same industry, serving the same markets and customers through its existing products, by the means of the same technologies, Horizontal integration js quite similar to mergers and acquisitions since these are one of the means for integrating horizontally )We would be dealing with mergers and acquisitions in a subsequent chapter. In terms of value chain terminology, a horizontal integration strategy keeps the organisation at the same level. This means that if the company was manufacturing shoes and it adopts the horizontal integration strategy, it becomes a bigger shoe manufacturer. A company making cat food adding dog food to its product range, still remains within the animal feed industry. A hypermarket that adds to its repertoire of items being sold, through horizontal integration, does not move it out of the retailing industry.154. Strategic Management and Business Policy exists both in terms of the marketing and operations functions. When a com " arket segments, it can have a number of subsidiaries selling the a Jin terms of marketing. When a company has several fc, ied marketing network, itis horizon, y Horizontal integration wishes to sell in various geographical m: products widely. making it horizontally integrated ries producing the same products and selling them through an integrated in terms of production. The banking industry in India offers a relevant consolidation. There has been a spate of takeovers of te context for a horizontal integration strategy being useq j, smaller banks in order to consolidate and attain abipg size. The takeover of Ganesh Bank by Federal Bank, Nedungadi Bank by Global Trust Bank, Sanghi Bani by ICICI Bank. and United Western Bank by IDBI Bank are some of the examples of horizontal integration, 5 common factor in these consolidation exercises is the synergy foreseen in term of the larger banks expanf, their reach and enhancing their regional presence in India, “Taking the specific case of the horizontal integration by the amalgamation of United Wester Bank in, Industrial Development Bank of India (IDB1), we find that [DBI was able to substantially increase its rea presence by adding the 230-bank branches network to its own smaller 181 branches network. Getting aroun; the Reserve Bank of India’s restriction on opening new bank branches is easier through such z: amalgamation, In terms of marketing, IDBI gets to enhance its credit profile: [DBI is dominant in indus financing while United Western is strong in agricultural credit financing through its semi-urban and rura branches. Owing to its past history of being a financial institution, IDBI mostly is in long-term borrowings With United Western, it gets access to lower cost deposit base. Horizontal integration thus can prove to bea win-win game for both the banks.” The nature of horizontal integration strategy offers a unique benefit to industries and sectors where the small size of organisations is a challenge to overcome in realising objectives of efficiency and effectiveness These could be small scale industries, cooperative societies and non-governmental organisations (NGOs These are typically small in size with limited impact. For them, a horizontal integration strategy often becomes an innovative means of increasing the size of the impact rather than merely augmenting the physical size. A group of small-scale industrial units in similar product-market lines may get together to make bulk purchases in order to reap the benefits of a higher bargaining power with supplier, lower costs and increased accessibility. Several NGOs working in complementary fields such as micro-credit or rain water harvesting ‘may get together to share resources, expertise, networking, and becoming knowledge repositories. AA project funded by Childreach, a US-based branch of the Indian NGO network PLAN—a large NGO working internationally for child sponsorship—brought together five NGOs within India, illustrating bo sealing up of impact could take place without increasing the physical size. The five NGOs worked in ditfees ecological areas, adopted varied strategies of scaling up of impact and existed in different stages of evolu ‘Through the means of horizontal integration, it became possible to expand the number and diversity 0 pocial activities undertaken.* ‘There are many obvious benefits of adopting a horizontal integration strategy. Some of these are » Economies of scale Horizontal integration invariably leads to a lower cost structure by spreads the fixed cost of operations over a larger base of prodi o the ned nt fo Products, thereby reducing the per-unit cost result © Economies of scope When horizontal ime; resource base to produce a variety of prod scope. This is due to a better utilisation of assets. # Increased product differentiation Woricontal imtegrati wider range of products that can be bundled together. ‘Th buy a complete range of products at a differentiation. my ‘gration results in two or more organisations using the lucts in the product range offered, it results in economies allows organisations to offer custome * j yugh product bundling, the customer gels ° rele combined price, thus, providing the advantage of produOrporate-Leve : Porate-Level Strategies: Concentration, integration and Diversification 155 Increased market power : . a Cae ape se Of operations enables the organisation adopting horizontal inte- 0 ower over suppliers and customers. cating a succesy 7 Repl ting a succes ful business ‘model An organisation successful at employing a business model gets o replicate meet Organisation through horizontal integration 0 Reduction in industry rivalry After horizontal integration there are fewer competitors left in the indus- try thereby reducing the intensity of industry rivalry, The several advantages of horizontal integration should not blind us to the risks There yolved in horizontal integration like those mentioned below: ; ¢ There is Title practical evidence to show that horizontal integration in the form of mergers actually does increase the value of an organisation, ¢ Horizontal integration increases size. But increasing size may attract the provisions of the monopolies and restrictive trade practices act or whichever anti-trust laws are in foree'in a country « Just like computer hardware and software a e re two entirely different products, economies of scope do not necessarily arise out of horizontal integration, are some risks in- vertical Integration — Y When an organisation starts making new products that serve its own needs, vertical integration takes place. In © other words, 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, Vertical integration could be of two types: backward and forward integration. Backward integration means retreating to the source of raw materials. Forward integration moves the organisation ahead, taking it nearer to the ultimate customer. Exhibit 5.4 presents a simplified value chain system operating in the textile industry and how integration strategies might be applied. WTO mandated abolition of textile quotas, removal of restrictions of multi-fibre agreement and the resultant reduced profit margin have changed the business environment for textile companies. Several of the Indian textile companies have been adopting vertical integration strategies Spinning companies getting into weaving and garments manufacturing adopt forward integration, while fabric and garment producers entering into spinning adopt backward integration to ensure supply of good quality yam Exhibit 5.4 Integration strategies based on value chain system in textile industry 7 = Backward |__| PRERENY | —_ Foose ————} position |-—— Integration Integration OF FIRM | ae Filament Hydrocarbons |>| Petrochemicals >| Filament ] | Domestic be| Export F] markets Ginning Agriculture/ | ,| Cotton, wool, | , sericuture [™| and silkpee a — Despite the hype about outsou ofthe major pitfalls in using vertical integra 'g Increaséd Costs of coordinat <} Potential for either excess ~~ geross different value chi Technological obsolescence due to relying on outside manufacturers Loss of strategic flexibility owing to dependence on outsiders Increased mobility and exit barriers ‘Tight coupling to poor performing business units owing to dependence Lack of information and feedback from suppliers and distributors Vertical integration has to be used judiciously to avoid the lo managerial cost of integration, ‘All integration strategies require trade-offs to take place. There are relative merits and demerits of integration. Similar to concentration strategies, integration strategies carry a risk as the firm commits itself to adjacent businesses, all geared to serve the same set of customers groups and customer needs. If the firm is integrated and the principal product fails or becomes obsolete then it faces a grave risk. Further, while integration strategies provide a firm better control over its value chain by creating access to and control of supply and demand, the flip side is that it commits the firm to a set of customer needs and customer groups more intensely. Because of these reasons, several firms diversify to reduce their risk. Diversification strategies are discussed next. integration, they are strategies having limitations. Some strategies extensively are:” ntegration over multiple stages of value chain ‘ity or under-utilisation of resources because of uneven productivity activities 54 DIVERSIFICATION STRATEGIES Diversification involves a substantial change in business definition - singly or jointly - in terms of customer functions, customer groups or alternative technologies of one or more of a firm’s businesses. We can refer to Ansofi’s product-market matrix in Exhibit 5.2 and the diversification matrix in Exhibit 5.3 to understand the concept of diversification. When new products are made for new markets then diversification takes place. The notion of diversifying is therefore related to the newness of products or markets or both. By adopting diversification, an organisation does something novel in terms of making new products or serving new markets or doing both simultaneously. Exhibit 5.3, referred to in the previous section, provides a popular classification by Ansoft, of diversifica- tion strategies, We go back to that exhibit to sée what types of divérsification strategies are possible. When a\ y 158 Strategic Management and Business Policy firm moves beyond vertical integration, itcan offer similar types of products (8. a book Publisher going ing publishing magazines) or new types of products (e.g. 1 book publisher going into carpet manufacturing) i, the case where the book publisher goes into publishing magazines, she is stil in some ways. he Same type of business, making ita related diversification, When the book publisher takes up carpet manufacturing, hy ve now in av enttely new business, which is in no way related to her original business of book publishin This provides us two basic strategic alternatives in diversification: related and unrelated diversification fp [Anoft's terminology. they are called concentric and conglomerate diversification respectively. Note he, that horizontal integration discussed earlier is also actually horizontal diversification as it involves movi laterally into new types of products. Our example ofthe book publisher going into publishing magazine, also an example of horizontal integration. Sometimes, iti also called horizontal diversification. Hower sve will focus hereon just two types of diversifications, that of concentric and conglomerate diversification horizontal integration has already been discussed under the topic of horizontal integration. Concentric or Related Diversification ‘When an organisation takes up an activity in such a manner that its related tothe existing business definition one or more ofa firm's businesses, either in terms of customer groups, customers functions or alternative technologies. its concentric diversification \The relatedness is to be seen in terms of the three dimensions of the business definition. If the new business is in any way related to the original business in terms of te customer groups served, customer functions performed or alternative technologies employed, then it i related or concentric diversification. Concentric diversification may be of three types: 1. Marketing-related concentric diversification A similar type of product is offered with the help of unrelated technology, e.g. a company in the sewing machine business diversifies into kitchenware and household appliances, which are sold through a chain of retail stores to family consumers. The markt relatedness here is in terms of the common distribution channel for sewing machines, kitchenware and household appliances. 2. Technology-related concentric diversification A new type of product or service is provided with the help of related technology, e.g. leasing firm offering hire-purchase services to institutional customs also starts consumer financing for purchase of durables to individual customers. The technology related- ness is in terms of the procedure of the financing service to institutional and individual customers 3, Marketing. and technology-related concentric diversification A similar type of product or services provided with the help of a related technology, e.g. a synthetic water tank manufacturer makes ob: synthetic items such as pre-fabricated doors and windows for residential and commercial establishmens. sold through its hardware suppliers network. The market relatedness here is in terms of the commer distribution channels for water tanks and pre-fabricated doors and windows, while the technology rl edness is in the common technology of plastic processing and engineering required for manufactur these products. Related diversification is an attractive corporate strategy as it offers the best of both worlds: it enables de sification of the organisation from its original business as well as Keeps it close to it in terms of relatedness Larsen & Toubro, the largest private sector company in the engineering and construction industry in ti 8 an example of an organisation that has grown consistently owing to its judicious strategy of related divers cation. A major part of its revenue, nearly 85 per cent in 2007, comes from the engineering and constructs? business. It has minor businesses in other sectors such as electrical and electronics, information technole®} and machinery and industrial products, yet even these sectors in different ways, focus on applications" a major business of construction and infrastructure development, For instance, machinery and industc - Srporate-Level Strategies: Concentration, Integration and Diversification 159 .s make cement ini reduc = foots machinery that have use in the construction industry. Thus, L&T has aimed a developing focused, Me ed businesses through its related diversification strategies. Aeher example off nite petted diversification is from the cooperative secu Indian Farmers and See ee sa Pela ©) operates in different businesses on the basis of their relatedness to its sole in farmer. ‘ary business of IFFCO is the production and distribution of i d strategies has taken it into other businesses such as general sgsanes, to Otte: heateane ik ever to farmers nd axricural cor modi trading to enable farmers to sain access to quality testing and warehousing fucilitie, / vConglomerate or Unrelated Diversification (When an organisation adopts a strategy which requires taking up those activities which are unrelated to the existing business definition of any of its businesses ei customer functions or altemative technologies, it is conglomerate diversification Offering a new product manufactured through a es In order to understand the rationale for unrelated diversification, we need to understand the condition anciey which such diversification can be undertaken, h div Often, strategists would embark upon diversification when their organisation has excess capital. Excess capital means s ther in terms of their respective customer groups, surplus cash over and above what is needed to run caly be reinvested in the present businesses if there are bright chances of increasing the worth of the organisation and enhancing the shareholders’ value. Thus, unrelated diversification can only be justified when the surplus cash reinvested into new ventures can generate more value for the shareholders, otherwise it is prudent to return it to them." Carrying the argument further, if shareholders are looking for diversification, they could take an individual decision to diversify their own portfolio of investment rather than keep investing in a company that does diversification on their behalf. !n formulating unrelated diversification strategies, strategists act as portfolio managers, constantly on the look out for undervalued companies that might be acquired at low price, quickly turned around for Profitability, and sold out at a higher price. The managerial competence required is of financial acumen to identify acquisition candidates, managing the process of acquisition, skill at turing around loss making businesses, and then selling them in the corporate market for a higher price. There are several examples of Indian companies in different sectors which have adopted a path of growth and expansion through conglomerate diversification. Almost all private sector business groups, whether family-owned or professional, are diversified entities. The Aditya Birla Group is in a variety of unrelated businesses such as aluminium, business process outsourcing, carbon black, cement, chemicals, copper, ferilisers, gus, insulators, mining, retail, software, sponge iron, telecom and textiles. The Godre) Group perates in agriculture products, animal feed, branded tea, chemicals, pest management serv ices, poultry Processed food, property development and rural retailing. The ITC Group is in agribusiness, FMCG. hotels, IT and paperboards and packaging. RPG Enterprises is in entertainment, power, retail, specialties, technology, transmission, and tyres. The TTK Group has presence in such diverse areas such as baby eare Products, condoms, food products, kitchenware, maps, medical devices. personal care products and Pharmaceuticals. Small companies usually can focus on one or few lines of business and if diversified, tend ‘0 be in related lines. But sometimes, even small business groups could venture inte unrelated lines of business. Forexample, the New Delhi-based Shiva Group operates in cotton socks, lates gloves and printing, Wood-free, and writing papers.y 160 tegic Management andl Business Policy e. normally would not go beyond their core by Public sector organisations, even of a very large size, nornatlly mt hoe i re i Neng When they diversity, they do so through vertical integration as it happens 19 the ci and gas indy But even here, sometimes one may come across a company like Indian Oil that has ventured inte rey Which is unrelated to ity mainline business of oil, State-level public sector compa ‘exceptions like Sikkim Time Corporation that operates in q, Wty ling s likewise, don, beyond their cone areas, with so te Dusinesses of watch manufacturing, semiconductors and TV speakers manufacturing CONGOs and voluntary organisations, owing to the nature of their activities, are usually small and fo yoy Aimited area of activity. Large NGOs like Child Rights and You (CRY) too concentrate action on a tex, area) Within the area they operate in, the voluntary organisations can however diversify into unrelated are, CAPART, for instan well-known voluntary organisation working in the area of rural developmen While doing so, its activities encompass a wide range including disability action, disaster manageme, marketing development, public cooperation, international funding, rural technology and w, 1h development. why are Diversification Strategies Adopted? ns adopt diversi cation strategies. In general, the three basic an) There are many important reasons a 1. Diversification strategies are adopted to minimise risk by spreading it over several businesses. Forex ample, a company offering seasonal products (e.g, air coolers) may diversify into another range of sy sonal products (e.g. water heaters) to complement its product range in a way So as t0 offset ihe disadvantages of one set of products with that of the other 2. Diversification may be used to capitalise on its capabilities and bus organisational strengths or minimise weaknesses, For example, a company having a core competence the area of after-sales service may establish a specialised ageney for offering after-sales services for other manufacturers. Diversification may be the only way out if growth in existing businesses is blocked due to environmental and regulatory factors. For example, a cigarette making company perceiving threats to its business o& ing to the impact of anti-smoking legislation, growing opposition to smoking and increasing healt awareness, may diversify into paper manufacturing. The two types of diversification strategies we are di adoption Why organs: ness model so as {0 maxims: e cussing here have their own specific reasons i Reasons for Concentric or Related Diversification ‘The reasons for concent diversiticatio £0 deduced from the concept of synergy we discussed in Section 4.1. Synergy is an ides that the whole is or lesser than the sum of its parts. The organisation enters into a related business so that it cat reap benefits of synergy. The major reasons why organisations adopt concentric diversification strtexics 8° # Realising financial synergies in terms of wansaction cost savings and tax sav 7 ‘© Realising marketing synergies by increased market power (e.g. offe sand multipoint market contact with the distribution channel partne lets) and custon fe range of PENA ex anne reals crs (e.g. users of a range of complementary products) _A# Realising operational synergies through economies of seale, i.e, incre economies of scope. Le. Usiny a common base of resources and « related businesses <9 Realising personnel y cies for another business the size of operations ‘apabilities tor operating yaniel ies through utilising hi Fesources with Common skill sets and cop¢ Realising informational synergies by using eo : 2 ig B common sources of information, databases and information reasons for Conglomerate or U Vionale of synergy creation as the basic ver different, unrelated businesses, versification strategies are: ‘Spreading business risks by investin « Maximising returns by investing in ig in different industries + Zaking advantage of emerging opportunities afforded by an expanding economy and encouraging gov ~~ ernment policies 7 Migrating from businesses under threat from the business environment * Exercising of personal choice by industrialists and managers to create industrial empires by owning businesses in diverse sectors Risks of Diversification itis a moot point that any diversification—related or unrelated—is risky. These risks arise because of the conditions mentioned below: * Diversification, especially unrelated, is a complex strategy to formulate and implement, It demands a very high level of managerial, operational and financial competence to be successful Diversification strategies demand a wide variety of skills. Different businesses operating in diverse in- dustries would require dissimilar sets of skills to manage them successfully. Diversification results in decreasing commitment to a single or few businesses and diverting it to several of them at the same time. This phenomenon often results in a situation where businesses that need more ‘attention get less and the ones needing little get more. Imbalance of commitment does not help to realise the many benefits of diversification such as maximising returns. Diversification often does not result in the promised rewards. Experience around the world shows that st is easy to be lured by the glamour of diversification and not be able to reap the benefits of synergies and Strategic advantage ultimately. In fact, cases are legion where the shareholders value instead of Dewy enhanced, has been lost due to diversification Diversification increases the administrative costs of managing, integrating and controlling a wwe port folio of businesses. This can often offset the savings expected through synergies un the case of related diversifica asing risks anticipated in unrelated diversification Diversification takes an onpanteaton away fom the confortable confi of sw\ctuabe an! megraon Stategies, to that of an environment fraught with many risks, Untamilianity 1» thghicming Geting through Unfamiliar situations safely demands astute survival skills, Emerging successful tro. risky ivatioas o more challenging. Yet, the lure of the rewards of success often outweigh the dread of difficulues expenenced inMerger and Acquisition Strategies _ ~ merger is a combination (other t : . : : A oe eee ( : erms used: amalgamation, consolidation or integration) of two or more organisations in wi one acquires the assets and liabilities of the other in exchange for shares or cash, or both the organisations are dissolved and assets and liabilities are combined and new stock is issued. For the organisation which acquires another, it is an acquisition. For the organisation which is acquired. it is a merger. If both organisations dissolve their identity to create a new organisation, it is consolidation Takeover or acquisition is a popular strategic alternative adopted by Indian companies. For more than three decades after Independence, the normal route of growth was through licensing and setting up new projects. The post-liberalisation period has seen an increasing use of takeover strategies (or simply takeo- vers) as the means of rapid growth.Types of Mergers and Acquisitions Mergers and acquisitions may be of different types and can be classified as under. 1. Horizontal mergers take place when there is a combination of two or more organisations in the same business, or of organisations engaged in certain aspects of the production or marketing processes. For instance, a company making footwear combines with another footwear company, or a retailer of pharma- ceuticals combines with another retailer in the same business. Vertical mergers take place when there is a combination of two or more organisations, not necessarily in the same business, which creates complementarities either in terms of supply of materials (inputs) or marketing of goods and services (outputs). For instance, a footwear company combines with a leather tannery or with a chain of shoe retail stores.vel Strat Hon, Cooperation and Digtalisation 189 “Demerger involves spinning off an 1e company, along with «free distribu- the original company." There have been several cases of seitlement between his two sons, was demerged into four companies: Rel Lid. Reliance Energy Ventures Ltd., Reliance Capital Ventures Ltd. and Zee Telefilms demerged into three entities: Zee Entertainment Enterprises, News, ‘Reasons for Mergers and Acquisitions. For ame 'sthe buyer organisation and the other s the seller. Bo the basis of which they merge. Glueck has identified ‘Why the buyer wishes to merge: To increase the value ofthe organisation's stock. To increase the growth rate and make a good investment. resource quickly. To avail tax concessions and benefit. 8. Totake advantages of synergy. Why the seller wishes to merge: 1. To increase the value of the owner's stock and investment. top management succession problem. “Tnportant issues in Mergers and Acquisitions There ace many issues of importance that have be dealt with in mergers. ‘These issues involve expertise in special areas such as190 Strategic Management business The val TThe second financit ancin, i range from the acquiring Companies’, external comme ‘under the relevant pro wach asthe carrying forward >. wager managing firms afte the merger has aken plz Mraawediment wil tke place after them is importan matters and affects the process of the mergé {pecially chief executives and top mar rofessional managem mergers are followed by chang ‘urance that the merger will lead merger attempts are foiled because of managers rerger period poses uncertainty tw the manager: of the m job, status within the company and their earnings and prom- ‘hanges, the existing managers oppose change | {ng in an exodus of managers. sions made in law for the purpose of mergers. In India. jion and other schemes, are contained in Chapter ¥ Sections 391 10 395 of the Companies Act, 1956 and ‘ers making the process of mer {seues. This happens because the insecure abi n citanenshed groups ma 1 a thorough understanding of the related pro_Abint Venture Strategies A joint venture could be consi two or more parties, to undert tractwal agreement between control and contrib- ‘more companies smpany and may be possible in two ‘Absorption takes place in mergers and aequisitions where the company fe when two or more companies combine 1 new company. Joint ventures are a spec ‘The technical definition of joint venture by the Reserve Bank registered or incorporated in accordance with the laws and reg party makes a direct investment, whether such investment amou! dia is: ‘a foreign concern formed, rneof the host country in which the Indian Toa majority or minority shareholding Conditions for Joint Ventures Joint ventures may be useful to gain access to new business, mainly under four conditions:** 1. When an activity is uneconomical for an organisation to do alone. 2. When the risk of business has to be shared and, therefore, is reduced for the participating firms. 3. When the distinctive competence of two or more organisations can be brought together. 4. When setting up an organisation requires surmounting hurdles such as import quotas, tariffs, nationalis: tic-political interests and cultural roadblocks. From the above conditions, it can be seen that joint ventures are an effective strategy when development oss have to be shared, risk spread out and expertise combined to make effective use of resources. Business Today identified five triggers for a joint venture: «Technology ‘The foreign partner in the joint venture can bring in high-class technology while the Inde partner has a good understanding of the local market. Telecom and automobiles are examples where is is seen to be taking place. © Geography This could be a case where a foreign player has a presence in many key global markets: India is necessary to complete the story. Insurance here is a relevant example where large players bit Prudential and Standard Life are large global players. For the Indian partner, it is a big opportuni ® participate in the joint venture. Regulation This is normally the case when a highly regulated sector opens up. Insurance. whi! Jong time was seen a flow of foreign players, ij and ICICI being the Indian © Sharing of risk and capital sive sectors like heavy- require techn cal expertise. Here, both the partners look for a scenario where risks cam be shared, Intellectual exchange Here, ase no clear-cut law on the entry ignore. the hard serve as an example. Though advantage at both ends isCorporate-tevel Intemationalsation, Cooperation and Digialsation 193 Hons in one industry je.g. A joint venture between NTPC Lid and the sg upaRs. 7 Nabinagar in tion and a foreign org int venture with SPP Pumps ion in that foreign country (e.g. Kirloskar Broth UK, for catering tothe EU mark sation in a third country (eg. Apollo Tyres of India AG of Germany setting up a tyre manufacturing joint venture in Malaysia) ome in the way of external expansion, they could be subverted ‘trough joint venture strategy of combining with a foreign firm in that foreign country orin a third country. Environmental threats within the country or opportunities abroad may cause firms to undertake joint ven. mention need be made of joint ventures abroad by Indian companies, as they have become in recent years. Sometimes, these take the form of joint enterprises with Firms from other coun- Indian firms set up projects in third count ly. the Ministry of ble strategic ater: Strategic advantages are important for ng examples of Indian and foreign organisa- Sedan Teana in Indian markets, * Balai Telefilms Ltd. announced the setting up ofa joint venture with Star Group Lid. television network of regional language general entertainment channels, {Abu Dhabi-based ‘countries. 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