Chapter(4) : strategic choices

1) Ansoff product market growth matrix :

MARKET PENETRATION : *refers to a growth strategy where we focus on existing products in

existing markets

*we can do this by greater spending on advertisements , aggressive

promotions , pricing strategy so that no new entrants can't come

MARKET DEVELOPMENT : *refers to a growth startegty where we expand the existing products in new
markets

*we can do this by expanding into new markets and new distribution

channels with existing product to create new market segments

PRODUCT DEVELOPMENT : *refers to a growth strategy where we aim to expand new products in our
existing markets

*we can do this by developing modified products

DIVERSIFICATION : *refers to a growth strategy where we market new products in new markets
*we can do this by starting or acquiring the business outside the company

*risky because we have no position of that product in the market

2) BCG growth share matrix : Based on two factors - *growth rate *relative

market
share

}> It is used for resource allocation in a diversified company

}> It is the simplest way to portray a corporation's portfolio of investments

}> It focuses on present scenario and doesn't focus on future

}> It can be time consuming and costly to implement

classification of products in BCG matrix :- *STARS *CASH COWS

*QUESTION MARKS *DOGS

} STARS : *products that are growing rapidly and need heavy investment to maintain it's position

*they show best opportunity for expansion

} CASH COWS : *products that have low growth and high market share

*they generate cash and need less investment to maintain it's market share

*stars become cash cows when the growth rate falls

} QUESTION MARKS : *products that have high growth and low market share

*they have low potential to generate cash

*we should try to turn them into stars

*also known as problem children

} DOGS : *products that have low growth and market share

*they don't have much future

*divestment or liquidation is the only option

strategies based on classification :- *BUILD *HOLD *HARVEST *DIVEST

}> BUILD : *objective is to increase market share by forgoing shortterm earnings LIKE QUESTION MARKS

}> HOLD : *objective is to preserve the market share LIKE STARS

}> HARVEST : *objective is to increase short term cash flow LIKE CASH COWS

}> DIVEST : *objective is to liquidate/sell the business & allocate those resources else where LIKE DOGS

3) GE 9 cell matrix :- Based on two factors - *business strength *market attractiveness

*it is an approach which is inspired by the traffic lights say Green for Go, Amber or Yellow for Caution, Red for Stop

*it focuses on both present and future scenario

*developed by general electric company along with Mckinsey

-In Green zone, business must expand, invest and grow

-In Amber or Yellow zone, business needs caution and manager discretion is called for strategic decision

-In Red zone, business needs to liquidate,divest,retrenchment

4) ADL Matrix :- *it is a portfolio analysis technique based on product life cycle

*it's role is to assess the competetive position of a firm based on 5 competetive

positions such as *DOMINANT *STRONG *FAVOURABLE *TENABLE *WEAK

 # DOMINANT :- *this is a comparitively rare position

*attributable either to a monopoly or a strong & protected tecnological leadership

# STRONG :- *this is a position where the firm has a considerable degree of freedom over its choice of strategies

*its market position is unduly threatened by its competetors

# FAVORABLE :- *this position comes when the industry is fragmented

# TENABLE :- *this is a position where the firms are generally vulnerable due to increased competetion from

stronger & more proactive companies in the market

# WEAK :- *this is a position where the firms are unsatisfactory although opportunities exists

5) corporate strategies :-
*stability *expansion *retrenchment *combination

Stability Strategy
*objective is to safeguard its existing interests and strengths, to continue in the chosen business path, to consolidate the
commanding position aldready reached

pursued when : *the business serve in the same/similar markets and deals in same/similar products and services

*suitable for those firms whose product has reached the maturity stage of product life cycle

*hence, stability strategy should not be confused with 'do nothing' strategy

characteristics : *focuses on incremental improvement

*doesn't involve redefinition of business

*safety oriented ,status-quo strategy

*less risk strategy

*involves only minor improvement

*firms with modest growth objective will choose this strategy

reasons for stability strtategy : *product has reached its maturity stage of product life cycle

*business environment is relatively stable

*expansion is perceived as threatening

*after rapid expansion, firms might want to stabilise itself

Growth/Expansion strategy
*expansion strategy is a strategy which involves redefining the business by enlarging scope of business
*it may be by way of adding a new product line to the present one, increasing fuctional performance ,acquisitions and mergers

*It's a risky and highly versatile strategy

reasons for growth/expansion strategy : *growth is a cherished cultural value

*in the face of changing environment, growth is necessary

*advantages from experience curve

*greater control over competetors

types of growth/expansion strategy : A) Internal growth strategies B) External growth strategies

Internal growth strategies includes Intensification & Diversification

A] Internal growth strategies

1] Intensification strategy is a strategy which consists increasing the sales revenue profit and market
share of existing product line

- further divided into 3 types say Market penetration, Market development and

Product development

1A] Market penetration is a strategy in which firms focus on selling existing products in existing
markets. *achieved by making more sales to existing customers through more advertisement

1B] Market development is a strategy in which firms focus on selling existing products in existing
markets by adding new distribution channels

1C] Product development is a strategy in which firms focus on introducing new products in existing
markets

2] Diversification strategy is a strategy which consists of adding new products or services to the
existing product line

- further divided into 2 types say Horizontal & vertical diversification

2A] Horizontal diversification is a diversification in which firms acquire one or more similar businesses
operating at the same stage of production

- further divided into 2 types say Concentric & Conglomerate diversification

2A1] Concentric diversification is a diversification in which

-> firms add related product/markets and

-> here new business is linked to the existing business

 through the process, technology or market

2A2] Conglomerate diversification is a diversification in which

-> firms diversifies into areas that are unrelated to its

current line of business and

-> here no linkages between new business and existing

business

2A3] Innovation :- -> innovation drives upgradation of existing product lines

or processes

-> leads to increased market share, revenue, profits, customer

satisfaction

benefits of innovation :

a] Helps to solve complex problems by offering customer centric sustainable solutions

b] Gives competetive advantage as more innovation we do, more far we go from competetor's reach and it needs less
marketing

c] Increase productivity by automating repetetive tasks which adds productivity of team and thereby benefitting the
organaisation as a whole

2B] Vertical diversification is a diversification in which

-> firms opt to engage in businesses that are related to

the existing business of the firm by remaining

vertically within the same process

- further divided into 2 types say Forward & Backward integration

2B1] Forward integration is a strategy in which

-> firms move forward in the value chain and enter into

the business that uses the existing product;

For example :- distribution channels

2B2] Backward integration is a strategy in which

 -> firms step backwards by entering into the effective

supply of existing business to increase profits and gain

greater control over procurement & production

-> this reduces overall dependency on suppliers

B] External growth strategies

1] Merger occurs when two or more firms combine operations to form one corporation to achieve management synergy by
creating a stronger management team

1A] Horizontal merger : *it is a merger of two or more organisations in same industry

*it's a merger with a direct competitor

objectives : *to avoid competetion

*is to achieve economies of scale in the production process

*to reduce duplication of work

*to reduce fixed cost

1B] Vertical merger : *it is a merger of two or more organisations in same industry but at different stages of
production or distribution system

*objective is to create an advantageous position by restricting the supply of inputs to other player

1C] Co-generic merger : *it is a merger of two or more organisations that are associated in someway either
through production process or business market or technology

1D] Conglomerate merger : *it is a merger of two or more organisations that are unrelated to each other

2] Strategic alliance is a relationship between two or more businesses that enables each other to achieve
certain strategic objectives which neither be able to achieve on its own

*the strategic partners maintain their status independent and seperate entities

*strategic alliances are ofen formed in a global market place

ADVANTAGES OF STRATEGIC ALLIANCE : ESOP

1. Economic -> *reduction in costs and risks by distributing them across the members of

the alliance

2.Strategic -> *rivals can join together to co-operate instead of competing with each
 other

*create competetive advantage by pooling resources and skills

3.Organisational -> *helps to learn necessary skills and obtain ertain capabilities from strategic

partners

*helps to enhance productive capacity , distribution system and extend

supply chain

4. Political -> *forming strategic alliances with politically influenced partners helps to

improve own influence and position

DISADVANTAGES OF STRATEGIC ALLIANCE : *strategic alliance require sharing of resources , profits ,

knowledge and skills which some organisations may not like to

share

*sharing knowledge and skills can be problematic if they invole

trade secrets

6. Strategic exits :-
*Strategic Exits are followed when an organization substantially reduces the scope of its activity
*here retrenchment strategies are followed say

-> If the organization chooses to focus on ways and means to reverse the process of decline, it adopts a turnaround strategy

-> If the organisation chooses to cuts off the loss-making units, divisions, or SBUs, curtails its product line, or reduces the
functions performed, it adopts a divestment strategy

-> If none of these actions work, then it may choose to abandon the activities totally, resulting in a liquidation strategy

A] TURNAROUND STRATEGY

*it is a strategy in which organisation chooses to transform itself into a leaner structure in order to reverse the process of
decline
*it involves changes in the top level management

Certain conditions or indicators or reasons or danger signals which point out that a turnaround is
needed if the company has to survive :

♦ Persistent negative cash flows

♦ Declining market share
♦ Uncompetitive products or services
♦ Mismanagement
♦ Over-staffing, high employee turnover

Action plan/steps to follow for turnaround :

♦ Stage One – Assessment of current problems: *assess the current problems and find out the root cause and the
extent of damage the problem has caused. *further efficiently work
on correcting and repairing any immediate issues

♦ Stage Two –Analyze the situation and develop a strategic plan:

*Identify appropriate strategies and develop a preliminary action plan

*Analyze the strengths and weaknesses in the areas of competitive position
*Once major threats and opportunities are identified, develop a strategic plan with specific goals and objectives

♦ Stage Three –Implementing an emergency action plan: *If the organization is in a critical stage, an appropriate
action plan must be developed to stop the bleeding and enable the organization to survive

♦ Stage Four –Restructuring the business: *efforts to be made to position the organisation in a better position for
rapid improvement *during this
stage, the “product mix” may be changed, Some facilities might be closed, the organization may even withdraw from certain
markets to make organization leaner thereby targeting its products toward a different niche

♦ Stage Five –Returning to normal: *the organization should begin to show signs of profitability, return on investments
and enhancing economic value-added

Important elements of turnaround strategy :

⮚ Changes in the top management

⮚ Quick cost reductions
⮚ Asset liquidation for generating cash
⮚ Revenue generation
⮚ Better internal coordination
⮚ Initial credibility-building actions
⮚ Neutralising external pressures
⮚ Identifying quick payoff activities

B] DIVESTMENT STRATEGY

*Divestment strategy involves the sale or liquidation of a portion of business or a major division, profit centre or SBU
* adopted when a turnaround has been attempted but has proved to be unsuccessful
*The option of a turnaround may even be ignored if it is obvious that divestment is the only answer

Reasons for divestment :

-> Persistent negative cash flows from a particular business

-> Severity of competition and the inability of a firm to cope with it

-> A better alternative may be available for investment, causing a firm to divest a part of its unprofitable business.
-> A business that had been acquired proves to be a mismatch and cannot be integrated within the company

C] LIQUIDATION STRATEGY

*involves closing down of the firm and selling off its assets
*adopted when both turnaround and divestment strategy has been attempted but has proved to be unsuccessful
*it is considered as most extreme and unattractive strategy
*in liquidation strategy there will be a loss of employement with the stigma of failure