Unit - 4 Strategic MGMT

5.
1 CORPORATE-LEVEL STRATEGIES
decisions related|to:
Corporate-level strategies (or simply, corporate strategies) are basically about
allocating resources among the different businesses of a firm
transferTing resources from one set of businesses toothers and
managing and nurturing aportfolio of businesses.
These decisions are taken so that the overall corporate objectives are achieved.
strategies help to exercise the choice of direction that an organisation adopts. There could be a
Corporate complex and diversified conglomerate with
involved in a single business or a large,
Small business firm these cases would be about the basic direction of
businesses. The corporate strategy in both
Several different business, it could mean the adopion of
whole. In the case of the small firm having a single
the firm as a case of the large, multi-bus1ness Iirm, the
that yield better profitabilityfor the firm. In the
Courses of action
businesses for maximising their contribution to
Corporate strategy would also be about managing the various
resources from one set of businesses to others.
the overallcorporate objectives and transferring Abell has suggested defining
Recallthat in Section 2.4, we referred to the concept of business definition.
functions and alternativetechnologies.
a business along the three dimensions of customer groups, customer would be quite complex.
The business definition for a small firm would be simple while that for a large firm, it terms of these three
could be defined in
A large firm would consist of several businesses, each of which
dimensions.
along the three
The complexity of large firms arises from the fact that each of its businesses, defined
dimensions, result in a variety of customer groups, customer functions and alternative technologies that a
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 ol
several different technologies.
Ananalysis basedon business definition provides a set of strategic alternatives that an organisation can
consider. 'Strategic alternatives revolve around the question of whether to continue or change the busines
the enterprise is currently in or improve the efficiency and effectiveness with which the firm achieves is
3
corporate objectives in its chosen business sector. According to Glucck, there are four strategic alternatives
expansion, stability, retrenchment and anycombination of these threc.
Lorporate-Level Strategies: Concentration, Integration and Diversification 147
Let us get a bird's eye-view of the four
subsequently,in the rest of this strategic alternatives before we go into the details of each of these
chapter.
Expansion Strategies
The corporate strategy of
oning the scope of oneexpansion
is followed when an
or more of its
businesses organisation aims at high growth by substantially
in terms of their
alternative or jointly-in order respective
functions and customer groups, customer
technologies-singly
Expansion strategies are also often known as
growth or
to improve its overall performance.
intensification strategies.
Eyhibit 5.1 Major reasons Tor adopting different
corporate strategies
Expansion strategy is adopted because:
4 lt may become imperative when
the
9 Psychologically, strategists may feelenvironment demands increase in pace of activity.
more satisfied with the prospects of growth from
executives may take pride in presiding over organisations expansion: chief
o Inoreasing size may lead to perceived to be growth-oriented.
more control over the market vis-à-vis competitors.
A Advantages from the experience curve and scale of operations may accrue.
Stability strategy is adopted because:
1. It is less risky, involves less changes and
people feel comfortable with things as they are.
2. The environment faced is relatively stable.
3. Exparnsion may be perceived as being threatening.
4. Consolidation is sought through stabilising after a period of rapid
expansion.
Retrenchment strategy is adopted because:
1. The management no longer wishes to remain in business either partly or wholly, due to continuous
losses
and the organisation becoming unviable.
2. The environment faced is threatening.
3. Stability can be ensured by realocation of resources from unprofitable to profitable businesses.
Combination Strategy is adopted because:
1. The organisation is large and faces complex environment.
2. The organisation is composed of different businesses,each of which lies in a different industry, requiring a
different response.
Exhibit 5.l presents the major reasons why each of the different corporate strategies is adopted. Because of
the many reasons for which they are adopted, expansion strategies are quite popular. Given below are three
examples to show how companies can aim at expansion either in terms of customer groups, customer
functions or alternative technologies.
" Achocolate manufacturer expands its customer group to include middle-aged and old persons to its
existing customers comprising children and adolescents.
apart from its normal func
AStockbroker's firm offers personalised financial services to small investors
its
uons of dealing in shares and debentures, iin order to increase the scope of its business and spread
risks.
desk-top publishing in order to
pming firm changes from the traditional letter press printing to
Increase its production and efficiency.
or the other direction so as to substantially alter its
arsO the above cases, the company movesin one internal
ent business definition. Expansion strategies have a profound impact on the company's
internal functioning.
configuration. causing extensive changes in almost all aspects of
148 Strategic Management and Business Policy
Stability Strategies
corporate strategy of stability is adopted by an organisation when it attempts at incremental
Ihe
of its pertormanceby marginally
changing onc or more of its businesses in
groups, customer tunctions, and alternative
technologies - either singly or collectively.
strategies work, here are three examples to illustrate how
In orderto understand how stability dimensions of customers groups, customer
inprovceursntMee
terms of their respective
could aim at stability in each of the three

technologies respectively.
company provides
functions and
special service to its institutional buyers, apart from its
orgaanl etsraNkaly
packaged tea th
A order to encourage bulk buying andthus
sales through narket intermediaries, in improve its consSut,
" efficiency.
A copier machine company provides better after-sales service to its existing customers to improve it
sales of accessories and consumables.
Tmarkeim
company and product image and increase and productivity.
steelallcompany modernises its plant to improve efficiency
NoteAthat three companies here, do not go beyond what they are doing presently; they serve the Same
markets with the present products using the existing technology. The strategies aim at stability causing te
companies to marginally improve their performance or, at least, letting them remain where they are in cae
they face a volatile environment and a highly competitive market. The essence of stability strategies is,
line with the existing trends
therefore, not doing anything but sustaining moderate growth in advance, It is i
Sometimes, strategists, like army commanders, think it better to retreat than to
situations that retrenchment is a feasible strategicalternative.
Retrenchment Strategies
organisation aims at contraction of its activite
The corporate strategy of retrenchment is followed when an businesses in terms of thi.
througha substantial reduction or elimination of the scope of one or more of its
jointly-it
respective customer groups, customer functions Or alternative technologieseither singly or
order to improve its overall performance.
Retrenchment involves total or partial withdrawal from a customer group, customer function, or use ofan
given below:
alternative technology in one or more of a firmn's businesses, as can be seen from the situations
selling in order to
" Apharmaceutical firm pulls out from retail selling to concentrate on institutional
reduce the size of its sales force and increase marketing efficiency.
by redut
" A corporate hospital decides to focus only on specialty treatment and realise higher revenues
ing its commitment to general cases which are typically less profitable to deal with.
discad
" A training institution attempts to serve a larger clientele through the distance learning system and
its face-to-face interaction methodology of training in order to reduce its expenses and use the exisg
facilities and personnel more efficiently.
In this manner, retrenchment attempts to ´trim the fat' and results in a 'slimmer' organisation, descnibe'
be
situations
unprofitable customer groups, customer functions or alternative technologies. All thefaces. In ordertodedl
above are, in fact, an over-simplification of the complex reality that an organisation
with the real-life situations, organisations have to evolve a combination of the three strategies.
(
Combination Strategies and

exxpansionofts
The combination strategy is followed when an organisation adopts a mixture of stability, One
times in
retrenchment strategies, either at the same time in its different businesses or at different th
account
businesses, with the aim of improving itsperformance. take into.
formulaticn t
Any combination strategy isthe result of a serious attempt on the part of strategists tostrategy
variety of environmental and organisational factors that affect the process of
Corporate-Level Strategies: Concentration, Integration and Diversification 149
snlicated situations generally require complex solutions.
ethat strategists have to offer when faced with the Combination strategies are the complex solu
Observe how the two companies below deal with the challenges of real-life business.
. ADaints company
augments its offering of decorativecomplex
paints
situations they face.
to
(stability) and expands itsproduct range to include industrial andprovide a wider variety to its customers
taneously. it decides to close down the division which automotive paints (expansion). Simul
(retrenchment). undertakes large-scale painting coniract jobs
Over the years, strategic changes at a large
manufacturing base and divesting its trading business group indicate that it has been
activities. strengthening its
sions. by retrenching the unprofitable products and Stability has been aimed at in some of its divi
the case of its industrial services, while major expansion has taken place in
products and construction business. A variety of strategies have thus been
followed, both sequentially and simultaneously, creating a
nature of the conglomerate that the company actually is. complex web of strategies, in line with the
We proceed now to a description of the
major types of strategies that organisations usually
following strategies will be discussed in detail. adopt. The
1. Expansion strategies
(a) Expansion through concentration
(b) Expansion through integration
(c) Expansion through diversification
(d) Expansion through cooperation
(e) Expansion through internationalisation
() Expansion through digitalisation
2. Stability strategies
(a) No change strategies
(b) Pause/proceed with caution strategies
(c) Profit strategies
3. Retrenchment strategies
(a) Turmaround 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 strategies are the
OSt Popular corporate strategies. Companiesaim for substantial growth. A growing economy, burgeoning
akets, customers seeking new ways of need satisfaction and emerging technologies offer ample
OPportunities for companies to seek expansion.
This chapter will focus on expansion through concentration, integration and diversification. The next
chapter will deal with the three other types of expansion strategies of cooperation, internationalisation and
digitalisation.
D.2 CONCENTRATION STRATEGIES
Concentration is aSimple, first-level type of expansion strategy. It involves converging resources in one or
more of a firm's
businesses in terms of their respective customer needs, customer functions, or alternative
technologies- -either singly or jointlyin such a manner that expansion results. In strategic management
Policy
Stralegc Management and Business
150 intensification
strategies are known variously as
or focus
terminology. concentration
strategies. In Search for Excellence,
advocated a
parameter
specialis;
other words,{or suce s
(1982), in their
Peters and Waterman knitting'."Concentration strategies are,in
'stick to the
the knitting'
firms strategies.
whichthey calledExcellent
as firms tendto rely on doing what they knowthey are best at doing
In practical terms. concentration strategies involve an investment of resources in a product he' sid
proven technology. Most of you who have studied a basic marke
identified market, with the help of product-market matrix shown in
course would be familiar with the classic Ansoff's
Harvard Business Review and is
still used by Exhibit 5.2.
proposed in a 1957 article in the strategic
directions for their organisations. We will see
marketers interested in finding out the growth here
of growth strategies proposed by Ansoff and take up diversification in a later
section.
threey
Exhibit 5.2 Ansoff Product-Market Matrix
PRODUCT
PRESENT NEW
MARKET
MARKET PRODUCT
PRESENT PENETRATION DEVELOPMENT
MARKET DIVERSIFICATION
NEW DEVELOPMENT
Source: Adapted from H. I. Ansoff, "Strategies for

124. Diversification", Harvard Business Review, 1957, 5, pp. 113
The product-market matrix
1. Market penetration involvesprovides us three types of concentration
selling strategies:
intensely on existing markets with itsmore products to the same market:
present
a firm may attempt at looU
Besides the primary objective of products, using a market penetration type of concent
are also used to increasing usage by
maintain or increase market share of existing customers, market penetration market strategies
driving out competitors, and secure present products, restructure a mature by
aggressive marketing with low pricing, dominance growth markets. Budget airlines in
in
resulting in a very high adopting a market India strategy.
o
2. Market growth rate for the aviation
industry penetration type of concentration
development
for existing involves for
selling the same products to new several years. newuserS
products, resulting in a market markets: it may try attractingi maynot
necessarily be inthe
geographical development type of
uct with a
different pricing to a
sense; they can be
Droduct could be sold remains the different set of customers. demographic, concentration.
for instance,
New markets
the samesane
offering the
tural commodity basic thrust in a market Yet, finding new regions where agricul
produced southern,
in development strategy. Coir is a major faced
north-eastern western India. The coir industry
and has
sevcrc crisis due to thc synthetic foam and fibres products. Market development type of concentration
strategiesinthe coir industry have attempted to prescnt coir products as an cnvironment-fricndly product
for discerning customers, especially in the exports markets.
3. Produc development involves selling ncw products to the same markets: it may introduce newer prod-
ucts in the existing markets by concentration on product development. The tourism industryin India has
been able to attract new customers in significant numbers. New products such as selling India as a
golfing or ayunveda--based medical treatment destination are some of the product development efforts in
the tourismindustry to attract more tourists
lt is immediately apparent that concentration strategies would apply to situations where the firm finds
expansion worthwhile. Forinstance, the industries that afirm belongs to should possess ahigh potential for
growthand be sufficiently attractive for concentration to take place. Internally, the firm should be strong
cnoughtoosustain expansion; it should, say, have adequate funds toinvest in additional resources required for
expansiontotake place, or it should be able to develop new competencies requiredto develop new products
and markets.
Eor expansion,concentration is often the first-preference strategy for a firm for the simple reason that it
iid ike doing more of what it is already doing. Afirm that is familiar with an industry would naturally like
to invest more in known businesseS rather than in unknown ones. Each industry is unigue in the sense that
there are established ways of doing things. Firms operating in an industry for long, are familiar with these
industries.
ways. So they prefer concentration on these
finds
Bajai Auto has consistently concentrated on two- and three-wheelers since the last several years as it
means to sustain its market share
it to be a high growth and attractive industry to invest in. It has tried various
concentration strategy of market
in a competitive market. At different times, it has adopted variations of the
penetration (e.g. selling more in urban centres), market development (e.g. selling to upwardly mobile
scooters).
customers in ruralareas), and productdevelopment (e.g. state-of-the-art motorcycles and ungeared
manufactured through tried and tested
For its rivals, it is a formidable competitor with proven products
technology and sold in familiar markets.
Corporation, the well-known
Xerox India (formerly Modi Xerox) is the Indian subsidiary of Xerox
bid to expand its share in the small and
American printer, photocopier and office-supplies company. In a strategy through market penetration,
medium businesses segment in India, Xerox adopted a concentration
penetration, it offered print job service through
market development and product development. For market launched several new office products including
multifunctional devices toconsolidate its market standing. It
product range to over 20 products and services.
laser printers and multi-functional devices, increasing its
business entrepreneurs to create new markets for
Market development activities included educating the small
its products.?
advantages.
It is obvious that concentration strategies have several
changes, so it is less threatening: the managers ofa firm
" Concentration involvesminimal organisational
are more comfortable with the present businesses. in
master one or a few businesses and enable it to specialise by gaining an
aiso enables the firm to
depth knowledge of these businesses. businesses may also create conditions for the firm to develop a
few
ateilse TOcussing of resources on a
competitive advantage.
Managers face less problems dealing with known situations. such away that people are familiar
with them.
firm are developed in
Sand processes within the as there is high level of predictability.
Past experience
ston-making process is under less strain
1s valuable as it is replicable.
5.3 INTEGRATION STRATEGIES combination be
of a firm. Such a interlinked may
Integration means combining activities related to the present activity chain is a set of activities
done on the basis of the value chain. In Section 4.4, we saw that a valuematerials down to the the marketing of
performed by an organisation, right from procurement raw chain to concentrate
down the value
finished products to the ultimate consumers. So, afirm may move upOr it is already serving. A madopting
customers grouns and needs that
more comprehensively on the to
ntegration
adiacent businesses. The pivot around wnncn wOrds, a
megration as an expansion strategy commits itself
functions and customer groups. n Otner
customer
Surategies are designed is the present set of definition in such a manner that it results in
serVing the
widen the scope of its business
cOmpany attempts to undergoes a change.
set of customers. The alternative technology dimension of the business definition business
same
expansion strategy as its adoption results in awidening of the scope of the
Integration is an diversification strategies, as we Will shortly see, for it
definition of a firm. Integration is also a subset of
had been previously doing. Several process-based
involves doing something different from what the firm textiles have integrated firms. These firmns deal with
or
industries such as hydrocarbons, petrochemicals. steel
raw materials to the ultimate consumer. Firms
products having avalue chain extending from the basic
through the process, integrating activities
operating at one endof the value chain attempt to move up or down
adjacent to their present activities. integration strategies. Transaction
There are certain conditions under which firms are motivated to adopt
costs, helps to explain the situation
cost economics, a branch of study ineconomics of transactions and their
a 'make or buy' decisior
where integration strategies could work. According to transaction cost economics,
is taken when firms wish to negotiate with suppliers or buyers. The costs of making the items used in the
manufacture of one's own products are to be evaluated against the cost of procuring them from suppliers. If
the costsof making are lessthan the cost of procurement, then the firm moves up the value chain to make the
items itself. Likewise, if the costs of selling the finished products are lesser than the price paid to the sellers
todothe same thing,then it is profitable for thefirm to move down the value chain. In both these cases, the
firm adopts an integration strategy.
Inor Ansoff has presented another matrix,
explainsthe different types of
besides theproduct-market matrix shownin Exhibit 5.2,
integration
(as well as diversification) strategies. This matrix is which
Exhibit 5.3. presented in
Exhibit 5.3 Ansoff's matrix for diversification strategies
New products
Related technology
New functions Unrelated technology
Firm its own customer
Vertical integration
Same type ofproduct Horizontal diversification
Similar type of product Marketing and Marketing related
technology-related concentric
diversification diversification
Newtype of product
Technology-related
concentric diversification
Conglomerate
diversification
Source: Adapted from H.!. Ansoff, Corporate Strategy, New York, McGraw-Hill, 1965, p.132.
According to Ansoff, firms operate on the twodimensions of new products and new functions. New products
could be made through related technology or unrelated technology.The new functions could range from the
firm being its own customer to an entirely new type of product. Based on these dimensions, it is possible to
have four types of integration and diversification strategies. Among the integration strategies we have two
types:horizontal and vertical integration. We discuss horizontal and vertical integration now. The other two
types of diversification strategies will be taken up in the next section.
Horizontal Iniegration
In the previous section, we saw that concentration strategies 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, it is said to follow a strategy of horizontal integration. For example, a luggage company taking over
acquisition or merger). A horizontal
IS Tival luggage company is horizontal integration (also known as competitive position in the
ntegration strategy results ina bigger size with concomitant benefits of astronger competitor's
ndustry. It may be frequently adopted with aview to expand geographically by buying a
from economies of scale. Yet, it does not take the
usness, to increase the market share or to benefit
in the same industry, serving the same
Oganisation beyond itsexisting business definition. It stillremains Horizontal
customers through its existing products, by the means of the same technologies.
ALS and integrating
acquisitions since these are one of the means for
Lsuonis quite similar to mergers and inasubsequent chapter.
horizontaly. We would be dealing with mergers and acquisitionsstrategy keeps the organisation at the same
integration
tems of value chain terminology. ahorizontal shoes and it adopts the horizontal
integration
level. This means that if the company was manufacturing
manufacturer. A company making cat food adding dog food to its product
Decomes a bigger shoe items being
Iane industry. A hypermarket that adds to its repertoire of
Tange, still within the animal feed
sold, throughremains
industry.
move it out of the retailing
horizontal integration, does not
and Business Policy
154 Strategic Management operations functiong
WIshesto sellinvarious geographical
cxists bothinmnarket of the marketing
termssegments, itcan have When a
anda number ofsubsidiariee.selling the Same
Horizontal integration company
of marketing. When a has
products widely, making it
horizontally integrated
productsandselligthem
in terms
through an integrated marketing network, it is several
producing the same
takeovers ofsmaller banksin orderto

consolidate
hattainorizonNal,
ries The bankingindustryinIndia offers arelevant contextfor ahorizontal|integration strategy being usediy
integrated in terms of production.
andSangli BBakby
ab
size. The takeover of Ganesh Bank byofFederal Bank, Nedungadi Bank by Global Trust Bank,
spate
consolidation. There has been a
ICICI Bank. and United Western Bank by IDBI Bank are some of the examples of horizontal integraion. A
the synergy foreseenin term of the larger banks
commonfactor in these
Taking
their reach the
and
consolidation
specific
enhancingcasetheir
exercises
regional
of the
is
horizontal India.
presence in
integration expaninz
by the amalgamation of United Western Bark imt
that IDBI was able to
substantially
Bank of branches networkto its ownsmaller 181 branches network.increase its
India (|DBI), we find
presence by addingthe 230-bank
Industrial Development Getting arOund
easier
amalgamation. In terms
Reserve Bank India's restriction on opening new bank branches is through Such
of of marketing, IDBI gets to enhance its credit profile: IDBI is dominant in industril
the
Western is strong agricultural credit financing through its semi-urban and rura
inafinancial
branches.
financing while
Owing United
to its past history of being institution, IDBI mostly is in long-term borrowings
integration thus can
United Western, it gets access to lower cost deposit base. Horizontal proveto bea
With
win-win game for both the banks. sectors whess 3
nature of horizontal integration strategy offers a unique benefit to industries and
The and effectivenr
realising objectives of efficiency
small size of organisations is achallenge to overcome in and non-governmental organisations (NGO
These could be small-scale industries, cooperative societies nh
These are typically small in size with linmited
impact. For them, a horizontal integration strategy
than merely augmenting the physical
becomes an innovative means of increasing the size of the impact rather together tomake halt
lines may get
size. A group of small-scale industrial units in similar product-market
with supplier, lower costs and increasei
purchases in order to reap the benefits of a higher bargaining power
or rain water harvestine
accessibility. Several NGOsWorking in complementary fields such as micro-credit
knowledge repositories.
may get together to share resources,expertise, networking,and becoming network PLANa large NGO
Aproject funded by Childreach, a US-based branch of the Indian NGO
working internationally for child sponsorship--brought together five NGOS within India, illustrating bow
worked in differeat
scaling up of impactcould take place without increasing the physical size. The five NGOs
ecological areas, adopted varied strategies of scaling up of impact and existed in different stages of evolution.
Through the means of horizontal integration, it became possible to expand the number and diversity of the
socialactivities undertaken.
There are many obvious benefits of adopting ahorizontal integration strategy. Some of these are:
Economies of scale Horizontal integration invariably leads to alower cost structure by spreading ov
the fixed cost of operations over alarger base of products, thereby reducing the per-unit cost resulung
economies of scale.
" Economies ofscope When horizontal integration results in two or more organisations using te of
Cconomies
resource base to produce a variety of products in the product Tange offered, it results in
scope. This is due to a better utilisation of assets. Customersa
" Increased product differentiation Horizontal integration allows offer
organisations to getsto
wider range of productsthat can be bundled together. Through product bundling, the customer,produt
buy a complete range of products at asingle combined price, thus, providing the addvantage of
differentiation.
Corporate-Level Strategies: Concentration, Integration and
" Increased market power Bigger size of operations enables the Diversification 155
gration exercise
increased
Replicating a successful power over suppliers and organisation adopting horizontal inte-
marketmodel
business
getsto replicate it with another An organisation customers.
Reduction in industry rivalry organisation through horizontal successful at employing a business model
try,ithereby reducing the
After horizontal
integration thereintegration.
The several intensity of
advantages of horiZontal industry rivalry.
are fewer
competitors left in the indus-
volvedin horizontal integration like integration should not blind us to the risks.
those mentioned below:
" There is little practical evidence to
There are some risks in-
inerease the value of an organisation.show that horizontal integration in the form of
Horizontal mergers actually does
integration
ndrestrictive trade increases size. But increasing size may attract the provisions of the
practices
.hustlike computer hardware and act or whichever
anti-trust laws are in monopolies
software are two entirely different force in a country.
necessarily arise out of horizontal integration. products, economies of scope do not
Vertical Integration
When an organisation starts making new
other words, any new activity products that serve its own needs, vertical
undertaken with the purpose of either supplying inputsintegration takes place. In
orserving as a customer for
outputs (such as marketing of firm's product) is vertical (such as raw materials)
Vertical integration could be of two types:
means retreating to the source of raw backward and forward integration. integration.
Backward integration
nearer to the ultimate customer.
materials. Forward integration moves the organisation ahead, taking it
Exhibit 5.4 presents a simplified value chain system
operating in the textile industry and how
strategies might be applied. WTO mandated abolition of textile quotas, removal of restrictions of integration
agreement and the resultant reduced profit margin have changed the multi-fibre
companies. Several of the Indian textile companies have been adopting businesS environment for textile
Spinning companies getting into weaving and garments manufacturing adopt forwardvertical integration strategies.
and garment producersentering into spinning adopt backward integration, while fabric
integration to ensure supply of good quality yarn.
Exhibit 5.4 Integration strategies based on value chain system in textile
industry
Backward PRESENT
POSITION Forward
Integration OF FIRM Integration
Filament
Hydrocarbons Petrochemicals extrusion
Domestic/
Spinning Processing Garments Export
markets
Agriculture / Cotton, wool, Ginning

sericulture and silk
5.4 DIVERSIFICATION STRATEGIES
Diversification involves a substantialchange in business definition-singly orjointly - in terms of customer
functions, customer groups or alternative technologies of one or more of a firm's businesses. We can refer to
Ansoff'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 Ansoff, of diversifica
tion strategies. We goback to that exhibit to see what types of diversification strategies are possible. When a
products (e.g. a book

fim moves beyond vertical integration, it can offer similar types of publisher
carpet
publishing magazines) or new types of products (c.g. a book publisher goinginto going int,
the case where the book publisher goes into publishing magazines, she is
of busincss, making it arelated diversification. When the book publisher
IS nOw in an entirely new business, which is in no way related to
takes up carpet mamannufuaftahcchettuursriainnmgg,e)ty.pe
still, in Some ways, in
her original business of book

she
Thìs provides us two basic strategic alternatives in diversification:
related and unrelated
that horizontal integration discussed earlier is also actually horizontal

diversification
Ansofr sterminology, they are called concentric and conglomerate diversification
dinvolves p u b l i
iversificaNottioenher. e,
respectively.
as it
s h i n g,
In
diversification.magazimonevsingis
laterally into new types of products. Our example of the book publisher going into publishing
also an example of horizontal integration. Sometimes, it is also called horizontal
we will focus here on just two types of diversifications, that of concentric and conglomerate
horizontal integration has already been discussed under the topic of horizontal integration.
díversificHoatwioevner, as
Concentric or Related Diversification

When an organisation takes up an activity in such a manner that it is related to the ex1sting business defni.
of one or more of a firm's businesses, either in terms of customer groups, customers functions or altermot
technologies, it is concentric diversification. The relatedness is to be seen in terms of the three dimensions
the business definition. If the new business is in any way related to the original business in terms fi
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 market
relatedness here is in terms of the common distribution channel for sewing machines, kitchenware and
household appliances.
2. Technology-related concentric diversifcation A new type of product or service is provided with the
help of related technology, e.g. a leasing firm offering hire-purchase services to institutional customers
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 service is
provided with the help of a related technology, e.g. a synthetic water tank manufacturer makes othe
synthetic items such as pre-fabricated doors and windows for residential and commercial establishments,
sold through its hardware suppliers network. The market relatedness here is in terms of the common
distribution channels for water tanks and pre-fabricated doors and windows, while the technology relat
edness is in the common technology of plastic processing and engineering required for manufactuilg
these products.
Related diversification is an attractive corporate strategy as it offers the best of both worlds: it enables drver
sification of the organisation from itsoriginal business as well as keeps it closé to it in terms of relatedne
Larsen
an
&Toubro, the largest private sector company in the engineering and construction industry indiversif-
Ind
exanmple of an organisation that has grown consistently owing to its judicious strategy of
related
construction
cation. A major part of its revenue, nearly 85 per cent in 2007, comes from the engineering and
technologY
business. It has minor businesses in other sectors such as electrical and electronics, information
applicationsforits
and machinery and industrial products, yet even these sectors in different ways, focus on industrial
major business of construction and infrastructure development. For instance, machinery and
Lorporate-Level Strategies: Concentration, Integration and Diversification 159
products make cement and mining machinery that have use in the construction industry. Thus, L&T has
aimedat developing focused, integrated businesses through its related diversification strategies.
Another example of focused related diversification is from the cooperative sector. Indian Farmers and
Fertilisers Cooperative Limited (IFFCO)) operates in different businesses on the basis oftheir relatedness to
itssole beneficiary-theeIndian farmer. The primary business of IFFCOis the production and distribution of
fertilisers. However. its related diversification strategies has taken it into other businesses such as general
insurance, to offer insurance risk cover tofarmers and agricultural commodity trading to enable farmers to
gainaccessto quality testing and warehousing facilities.
Conglomerate or Unrelated Diversification
When an organisation adopts astrategy which requires taking up those activities which are unrelated to the
existing business definition of any of its businesses, either in terms of their respective customer groups,
customer functions or alternative technologies,it is conglomerate diversification.
Offering a new product manutactured through an unfamiliar technology for a new set of customerS
inyolves considerable risk. There has to be asound rationale for taking the risk of unrelated diversification.
In order to understand the rationale for unrelated diversification, we need to understand the condition under
which such diversification can be undertaken. Often, strategists would embark upon diversification when
their organisation has excess capital. Excess capital means surplus cash over and above what is needed to run
the existing businesses profitably and to meet debt commitments. Proper managerial action demands that any
surplus cash generated by the organisation must be returned in the form of dividend to shareholders. It can
only be reinvested in the present businesses if there are bright chances of increasing the worth of the
organisation and enhancing the sharcholders' value. Thus, unrelated diversification can only be justified
when the surplus cash reinvested intonew 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 couldtake an individual decision to diversify their own portfolio of investment rather
than keep investing in a company that does diversification on their behalf.
In 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 ahigher price. The managerial competence required is of financialacumen to
identify acquisition candidates, managing the proces of acquisition, skill at turming 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
Tamily-owned or professional. are diversified entities. The Aditya Birla Group is in a variety of unrelated
DUSihesses such as aluminium, business process outsourcing, carbon black, cement, chemicals, copper,
erlisers, gas, insulators, mining, retail, software, sponge iron, telecom and textiles. The Godrej Group
poultry,
Pales in agriculture products, animal feed, branded tea, chemicals, pest management services,
FMCG, hotels,
seaTood, property development and rural retailing. The ITCGroup is in agribusiness,
retail, specialties,
tPaperboards and packaging. RPG Enterprises is in entertainment, power, such as baby care
tduCts, transmission, and tyres. The TTK Group has presence in such diverse areas
echnology,condoms, food products. kitchenware, maps, medical devices, personal carediversified,
products and
if tend
usually can focus on one or few ines of business and
pharmaceuticals. Small But
to be in related lines. companies
sometimes, even small business groups could venture into unrelated lines of
business. For example, the New Delhi-based Shiva Group operates in cotton socks, latex gloves and printing,
Wood-free, and writing papers.
Public sector organisations, even ofa very large size, normally would not go beyondtheir
When they diversify. thcy do so through vertical intcgration as it happens in the case of oil core
But cven here, sometimes onc may come across a company like Indian Oil that has and gas
ventured into
which is unrelated to its mainline business of oil. State-level public sector companies
busines e
beyond thcir core arcas, with some exceptions like Sikkim Time Corporation that likewise, dorelail ng
businesses of watch manufacturing, semiconductors and TV speakers manufacturing. operates in
and dve ,
NGOs and voluntaryorganisations, owing to the nature of their activities, are usuallysmal1
alimited area of activity. Large NGOs like Child Rights and You (CRY) too
area. Within the area they operate in,the voluntary
organisations
concentrate action
foc
into resticted
can however diversify use
on ad on
CAPART, for instance, is a well-known voluntary organisation working in the area of rural unrelated area
a
While doing so, its activities encompass a wide range including disability action, disaster
marketing development, public cooperation, international funding, rural technology
development. and dmaevnewatlaogpeemmrseehnnea.,
Why are Diversification Strategies Adopted?
There are many reasons why organisations adopt diversification strategies. In
important reasons are:
general, the three hacis ..
1. Diversification strategies are adopted to minimise risk by
spreading it over several
ample, a company offering seasonal products (e.g. air coolers) may diversify into businesses Fors
sonal products (e.g. water heaters) to complement its product range in a another range of se
way so as to offset the
disadvantages of one set of products with that of the other.
2. Diversification may be used to capitalise on its
capabilities and business model sO as to maximise
organisational strengths or minimise weaknesses. For example, a company
the area of after-sales service may establish a specialised agency for havinga core competence in
other manufacturers. offering after-sales services for
3. 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
ing to the impact of anti-smoking legislation, growing opposition to threats to its business ow
smoking and increasing health
awareness, may diversify into paper manufacturing.
The two types of diversification strategies we are discussing here have
their own specific reasons tor
adoption.
Reasons for Concentric or Related Diversification The reasons for concentric
deduced from the concept ofsynergy we discussed in Section 4.1. Synergy is an idea thatdiversification
the
can te
or lesser than the sum of its parts. The organisation enters into a whole is greate
related business so that it can reap ul
benefits of synergy. The major reasons why organisations adopt concentric
" Realising financial synergies in terms of diversification strategies ae.
transaction cost savings and tax savings
Realising marketing synergies by increased market power (e.g. offering a complete range of
plv Oui-
and multipoint market contact with the distribution channel partners (e.g. using the same retailing
lets)and customers (e.g. users of a range of
complementary
Realising operational synergies through economies of scale,products)
i.e., increasing the size of operationsa
economies of scope, i.e., using a common base of resources and capabilities for varied,but
related businesses operating
" Realising personnel synergies through utilising human resources with
cies for another business common skill sets anu
enetworks informational synergies by

Realising using common sOurces of information, databases and information
Realising managerial synergies by managing a set of related businesses requiring a Common set of ad-
ministrative skills
and experience
Reasonsfor Conglomerate or Unrelated Diversification While related diversification uses the ra-
tionale of synergy creation as the basic reason, in the case of unrelated diversification, it is spread1ng riSk
Over different, unrelated businesses. The stark difference between related and unrelated diversification is
herefore in terms of the emphasis placed. The emphasis in related diversification is on operational matters,
onning the benefits of synergies. The emphasis in unrelated diversification is on financial matters by
spreading risks over several different businesses. The major reasons why organisations adopt unrelated di-
versification strategies are:
. Soreading business risks by investing in different industries
Maximising returns by investing in profitable businesses and selling out unprofitable ones
Leveraging competencies in corporate restructuring by turning around loss making companies
Stabilising returns by avoiding economic upswings and downswings through having stakes in different
industries
Taking advantage of emerging opportunities afforded by an expanding economy and encouraging gov
ernment policies
e Migrating from businesses under threat from the business environment
e Exercising of personal choice by industrialists and managers to create industrial empires by owning
businesses in diverse sectors
Risks of Diversification
t is amoot point that any diversification -relatedor unrelated is risky. These risks arise because of the
conditions mentioned below: o nt
" Diversification,especially unrelated, is acomplex strategy to formulate and implement. It demands a
very high levelof managerial, operational and financialcompetence 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.as
"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
atention 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 it
1S 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 being
enhanced, has been lost due to diversification.
" Diversification increases the administrative costs of managing, integrating and controlling awide port
loioof businesses. This can often offset the savings expected through synergies in the case of related
diversification or decreasing risks anticipated in unrelated diversification. concentration and integration
Diversiges,ficattoiothat
n takes organisation away from the comfortable confines of
of ananenvironment fraught with many risks. Unfamiliarity is frightening. Getting through
more
o r Situations safely demands astute survival skills. Emerging succe_sful from risky situations is
ging. Yet, the lure of the rewards of success often outweigh the dread of difficulties experienced in the
Exhlblt 0.2 Four types of
Internatlonal strateglen
Global
alralegy Tranensllonal
slalouy
Internatilonal Multldonestic
slralegy slrategy
Pressures for loGalrasponsivengss

Sourco: Basod on G.A. Bartlett & 8.Ghoshal, Managing
Pross, 1989. Aoross Bordera, Boston, M.A., Harvard Busing6s Bchool
According to Bartlctt and Ghoshal, therc arc four types of
international strategics: international trategy,
multidomestic strategy. global strategy and tranNnational strategy."
" Firms adopt an international strategy when they
foreign markets wherethesc productN und serviccscreate value by translerring products and
arc notavailable. This 0N a simplestrategy inservices to
that an internationalfirm, by maintaining atight thesense
control over its oversea% operations, offers standardised
products and services in different ountries, with little or no
" Firms udopt a multidomestic strategy when they differentiation.
try to achicve a high level of local
matching their products and service offerings to the national conditions responsiveness by
operate in. In this case, the multidomestic firm attempts to operating the countries they
in
cxtensively
services according to the local condiions opcrating in the different custormisc their products and
high-cost structure as functions such as rescarch and developnent, countries, Obviously, thin leads to a
duplicated. production and marketing have to be
" Firms adopt aglobal strategy when they rely on a low-cost
approach based on reuping the hencfits of
Cxpericnce-curveeffects and Jocation cconomies and offering standardiCd products
ditferentcountries. The global firm tries to intensively focus on a low-cost structure and
by
serviccs acrOSs
Cxpertise in providing certain products and services and concentrating the production of theirleveraging
aandardIsCd products and services at a few favourable locations around the world. These productsthese and
NerVicesare offered in an undifferentiated manner in all countrics the global firm operates in,
Usually al
compctitive prices.
" Firms adopt atransnational strategy when they adopt acombined approach of
low-cost high
responsiveness simultaneously, for their products and services. Dealing with these tWo and
tory objectivesis adifficult proposition and calls for acreative approach to managing the often Ioca
marketing of products and services. Bartlett and Ghoshal make a strong case for contradic.
transnational strategy as they opine that this is possibly the only viable strategy in a production
They fecl that the flow of expertise should not be aone-way process from the
transnational a
competdo
itp
i
in a developed country tothe developing countries it operates in. Rather, as Bartlett and firm wotd.
vtin
eg he
gest, atransnational firm shouldtransfer the expertise from its foreign subsidiaries to its Ghoshaslituaed
andfrom one foreign subsidiary to another foreign subsidiary through aprocess they
learning.
As you will note, Indian firms would find it challenging to adopt any of the four types of
headquagobalren
term as
strategies. For doing so, they would either need to adopt a low-cost approach and/or offer
products and services across different countries. Both these approaches are difficult to adopt in idinfteerrneantitoiantaeld
the
of the capabilities required. It is for this reason that the only world-class industry that India
has is
development. Here, a low-cost approach is possible owing to a variety of fortuitous reasons such asof lows ab:sence
widely available expertise in IT and less government interference. Further, local software
sary in the case of software development due to the technical nature ofIT responsiveness is not
products and Iservices.
similar line of thought,one could say that the other industries where
industries, in general and knowledge-based industries such as
India could find a niche are the se
pharmaceuticals and entertainment.
Followinga
International Entry Modes
When a firm adopts one or more of the
that the firm should adopt. Mode of entryinternational strategies, the question arises about the mode of entry
means the manner in which the firm would
tional operations. There are several entry modes, each with their commence its intema.
fim would have to decide which mode suits its own set of advantages and disadvantages A
circumstances
Root presents a three-part classification of entry modes, best before it could be adopted.
modes mentioned by various authors. under which we could place the different entry
1. Export Entry Modes Under these
modes, the firm produces in the home country and
overseas markets. markets in the
(a) Direct exports do not involve
home-country intermediaries and marketing is done either through adirect
agent/distributor or through a direct
(b) Indirect exports involve branch/subsidiary in the overseas markets.
products. intermediaries the home country, who are responsible for exporting the fim s
in
2. Contractual Entry Modes

These
pany and acompany or any other legal modes are non-equity associations between an international cOr
(a) Licensing is an entity in the overseas markets.
arrangement where the
etc. for a limited period of international company transfers knowledge, technology. pal
time, to an overseas entity, in return for some form of usually a
royalty payment. payment,
(b) Franchising involves the rightto usea business format,
return for the franchiser receiving some usually a brand name, in the in
overseas market,
(c) Other forms of form of payment.
vice contractual arrangements such as technical ser
contracts (for technical support or expertise agreements (for technology transfers),shar
ing, turnkey operations, provision), contract manufacturing, production.
build-operate-transfer arrangements, etc.
(BOT)
Corporate-Level Strategies: Internationalisation, Cooperation and Digitalisation 177
Iavestment EntryModes These modes involve
S.come
hased
on formof
ownership of production units in the overseas market,
equity investment or direct foreign investment.
(a) Joint venture and strategic alliances involve aa cooperative partnership between two or more firms, with
financial interests as the basis of cooperation.(These entry s have been discussed earlier under the
heading of cooperative strategies.) options
(b) Independent ventures or wholly-owned subsidiaries are modes in
which the parent international com-
nny holds 100 per cent equity and is in fullcontrol. Such facilities may be created either through a new
venture known as greenfield venture or acquired through
takeover strategies.
firm contemplating entry into international markets has to weigh several factors before choosing one or
tynes of the entry modes. Normally, exporting and licensing are the easier initial options as these
involve a lower level of commitment and hence, lower risk. Strategic alliances have proved to be a popular
entry m
mode due to its several advantages such as facilitated entry into foreign markets, sharing the risks and
cnsts of entry or using complementary skills and assets with strategic partners. But for a stronger presence,
joint ventures or wholly-owned subsidiaries are required.
interests of ivalfms. IS Of the complementarities
Thissoction of the chapter deals with the strategic alternatives based on cooperation among firms. As we
such cooperation could take place in various ways.
seshortly,strategies
anll could be of the
Caperative
acquisitions (or
following types:
takeovers)
Mergers and
2LJointventures
3Strategicalliances
Merger and acquisitions (oritakeover) strategies essentially involve the external approach to expansion.
Basicallytwo, or 0ccasionally more than two entities are involved. There is not much difference in the three
Ierms usedfor such types of strategies andthey are frequently used synonymously. But asubtie distinction
he made., While mergers take place when the objectives of the buyer firm and the seller firm are matched
0alarge
extent, acquisitions or takeovers usually are based on the strong motivation of the buyer firm to
33
cquire. Youwill frequently find mergers being mentioned with acquisitions in academic as well as popular
management literature and M&A being used as the combined acronym. Take over is a common way for
acquisition and may be defined as 'the attempt (often sprung as a surprise) of one firm to acquire ownership
ontrolover another firm against the wishes of the latter's management (and perhaps some of its stock
lders) 3 But this definition need not be taken very seriously as many takeovers, in practice, may not have
anv element of surprise and may not necessarily be against the wishes of the acquired firm. In fact, takeovers
are frequently classified as hostile takeovers(which are against the wishesof the acquired firm) and friendly
takeovers (by mutual consent, in which case they could also be described as a merger). Without being to0
fastidious, one can use these terms synonymously.
of
Joint ventures occur when an independent firm is created by at least two other firms. In an era
globalisation, joint ventures have proved to be an invaluable strategy for companies looking for expansion
opportunities globally.
Strategic alliances are partnerships between firms whereby their resources, capabilities and core compe
distribute goods or services.
encies are combined to pursue mutual interests to develop, manufacture or
fums
Similar to joint ventures, strategic alliances have become quite popular as a strategic alternative for
ioking for cOoperation among national as well as international partners.
these strategies are very often used as a
vuier important point to note, before we move further, is that Discussion on each of these cooperative
means of integration, diversification and restructuring of companies.
Sralegies follows.
Merger and Acquisition StrategieS integration)of two or more
Organiestavombination (other terms used: amalgamation, consolidation or
exchange for shares or cash, or
in which one acquires the assets and liabilities of the other in newstock is issued. For the
OrganisatiOrganisations
ons
boh the liabilities are combined and
are dissolved and assets and
organisation which is acquired, it is a merger.
rganisation which acquires
Ií both organisations dissolveanother, acquisition. Forthe
it is an to create a new organisation, it is consolidation.
their identity
Indian companies. For more than
hreeTakeoveror acquisition is a popular strategic alternative adopted by
was through licensing and setting up new
rojects.decades
of growth
The pafter Independence, the seen an increasing use of takeover strategies (or simply takeo
normal route
es) as the post-liberalisation period has
means of rapid
growul
188 Stalegic Management and Business Policy
measures of 1991.
The realimpetus for M&A strategies arOse after the liberalisation The
Restrictive Trade Practices(MRTP) Act was amended and no prior government permission
carry out MQAN. The Securities Exchange Board of India
(SEB) introduced the Substantial Monopol
was ies:
requted t
Shares and Takeovers Regulations, 1994 (popularly known as the Takeover Code) that provided for
takeovers, revision and withdrawal of open offer and competitive bidding, introducing a measure of AcquisitiIs
ency in takcover dealings. The takeover code is a sct of regulations which deternines whether
acquisition of shares in a company amnounts to an attempt to takeover. It was designed {0 ensure
transpat
takcover process is transparent and donc in a fair manner. Another committee set up in 1996, that the
Bhagwati Committec, went into the issue of rationalising the takeover code." Finally, theknown
Securiwerties
as the
Exchange Board of India (Substantial Acquisitions of Shares and Takeovers) Regulations, 1997
ficd bythe SEBI resulting in acomprehensive document for regulatingtakeovers in India. Another
cant regulatory change is the amendment to the Securities Contracts Regulation Act for signifth-e
provision permiting companies to refuse to registershares lodged by the acquiring firm,
for hostile takeovers totake place. makiwithndrg awing
it possbke
According to a doctoral study on the corporate takeovers in India, the major reasons for
activity were: legal reforms, cconomic reforms, cconomicslowdown and depressed stock markets increased
and ch M&A
in shareholders attitude, specially that of the financial institutional investors. Increasing MNC activitv
India too has added another dimension to the already hot M&A scenario in the country. 37
Statistics related to M&A in India are quite impressive. For instance, the market research firm, DeaBoi
found that Indiancompanies spent over US $23 billion in 2006, a jumnp of over 400 per cent over that in 200%
in acquiring foreign companies, more than half of which were in Europe.*
taking over Indian companies) and outbound (Indian companies taking over Inbound (forcign companies
acquisitions have increased dramatically. According to investment bankers, foreign
M&A
companies) mergers and
cross US$100 billion in 2007, being double of those in 2006 and four times of deals in India are likely to
those in 2005. You can getan
idea of the popularity of M&As in India by noting that in the first two
months 2007 itself, the value of deals
of
consummated were worth close to $ 40 billion. Among these were:9
" Mahindra &Mahindra's takeover of a 90
percent stake in
pany with over 140 years of experience in forging business.Schoneweiss, family-owned German com
a
" The headlines-hitting deal in carly-2007 was
Tata's takeover of Corus, for slightly over US $10 billion.
" Hutchison Whampoa of Hong Kong sold their
whopping US $11.I billion,. controlling stake in Hutchison-Essar to Vodafone for a
Bangalore-based MTR's packaged food division founda buyer in Orkala, a Norwegian
$100 million. company, for U
" Service companies were not left
behind in the M&A game when the taxation
RSM Ambit was acquired by practice of Mumbai-Dac
PricewaterhouseCoopers.
Types of Mergers and Acqulsitlons Mergers and
classified as under. acquisitions may be of different types and va
1, Horizontal mergers take
place when
business, or of organisations engagedthere
in
is a combination of two or
certain
more organisations n fo
instance, acompany making footwear aspects of the production or marketing processes.
combines
ceuticals combines withanother retailer in the with another footwear company, or aretailer offpharmu
2. Vertical mergers take same business.
place when there is a necessarilyo
combinationeither
the same business, which creates complementarities of two
in terms
or moreof organisations,
supply of materials
noti (innpputs)o
marketing of goods and services (outputs). For instance, afootwear Company combines withaleather
tannery or with a chain of shoe retail stores.
Corporate-Level Strategies: Internationalisation,Cooperation and
Digitalisation 189
3. Concentric mergers take place when there is a combination of two or more organisations related to each
terms of customer functions, customer groups, or alternative
othereither in
footwear company combines with a hosiery firm making socks or another technologies used. Thus, a
orwith.aleather goods company making purses, handbags etc. specialty footwear company,
ofnerate mergers take place when there is a combination of twoor more
cach other, either terms of customer functions, customer groups or
in organisationsunrelated to
afootwear companycombining with a pharmaceutical firm. alternative technologies used, e.g.
carried out in reverse are known as
Mergers
business/divisionn in
in a
demnergers or spin-offs. 'Demerger involves spinning off an
unrelatedl diversified company into a stand-alone company, along with a free distribu
to the existing shareholders of the original
tionofitsshares company. There have
have been several cases of
in India such as when Hindustan Ciba Geigy
demergers embarked on a demerger that created Novartis,
Syngentaand Ciba Specialty. Reliance Industries Ltd., following the death of Dhirubhai Ambani and the
Synt between his two sons, was demerged into four companies: Reliance
SoDaliance Energy Ventures Ltd., Reliance Capital Ventures Ltd. and Reliance Communication Ventures
Natural Resources Ltd.
Dlefilms demerged into three entities: Zee Entertainment Enterprises, Wire & Wireless India and Zee
News.
Reasons for Mergers and Acquisitions For amerger to take place, two organisations have to act. One
isthe buyer organisation and the other is the seller. Both these types of organisations have aset of reasons on
the basis of which they merge. Glueck has identified the reasons as follows.
Whythe buyer wishes to merge:
1. Toincrease the value of the organisation's stock.
2. To increase the growth rate and make a good investment.
3. To improve the stability of its earnings and sales.
4. Tobalance, complete or diversify its product line.
5. To reduce competition.
6. To acquire a needed resource quickly.
7. To avail tax concessions and benefits.
8. To take advantages of synergy.
Why the seller wishes to merge:
1. To increase the value of the owner's stock and investment.
2. To increase the growth rate.
3. Toacquire resources to stabilise operations.
4. To benefit from tax legislation.
J. To deal with top management succession problem.
Imp ortance that have to be
Joint Venture Strategles long-term contractual
as an entityresulting from a agreement
tWO or venture
Ajoint more partics, considered
couldtobeundertake mutually
betwe n
beneficialeconomicactivities, exercise joint control and contrib.
losses of the entity.
ute cquity and share inthe profits or more companies into one company and may be possible
two or
Mergers refer to a combination of place in mergers and acquisitions where
Absorption takes the
acquires and consolidation.
another company.
Ways: absorption Consolidation takes place when two or more companies combine to form aneM
consolidation.
case of by
company
Company. Joint vcntures
The technical arcaofspecjal
definition joint venture the Reserve Bank of India is: 'a foreign concern formed
registered or incorporated in accordance with the laws and regulations of the host country in which: he Indvan
party makes adirect investment, whether suchinvestment amounts to a majority or minority shareholding: $
to new
Conditions for Joint Ventures Joit
under four conditions: 46
Joint ventures may be useful to gain access business, mainly
1. When an activityis 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.
together.
J. When the distinctive competence of two or more organisations can be brought
4. When setting up an organisation requires surmounting hurdles such as import quotas, tariffs, nationak.
tic-political interests and cultural roadblocks.
From the above conditions, it can be seen that joint ventures are an effective strategy when development cos
have to be shared, risk spread out and expertise combined to make effective use of resources.
47
Business Today identified five triggers for ajoint venture:
" Technology The foreign partner in the joint venture can bring in high-class technology while the India
partner has agood understanding of the local market. Telecom and automobiles are examples where this
is seen to be taking place.
Geography This could be a case where a foreign player has a presence in many key global markets and
India is necessary to complete the story. Insurance here is a relevant example where large players like
Prudential and Standard Life are large global players. For the Indian partner, it is a big opportunity to
participate in the joint venture.
Regulation This is normally the case when a highly regulated sector opens up. Insurance, which fora
long time wasclosed to foreign investment, today allows up to 26 per cent equity participation. This as
seen a flow of foreign players, with players like Bajaj and ICICI being the Indian partners.
Sharing of risk and capital This includes capital-intensive sectors like heavy-engineering that a9
require technological expertise. Here, both the partners look for a scenario where risks can be equáaly
shared.
"Intellectual exchange Here, asector like the legal business could serve as an example. Though thehardto
no clear-cut law on the entry of foreign law firms, the intellectual advantage at both ends
ignore.
Corporate-Level Strategies: Internationalisation, Cooperation and
ofoinr Ventures Joint ventures are Digitalisation 193
npes pOssible within industries, across
tries.But they are especially useful for entering industries and acroSs cOun-
foreign
markett in a joint venture with a international markets.
foreign company. Aforeign company Frequently, Indian firms will enter a
intoa jointventure with an Indian company. From entering India would also enter
possible:
the point of view of Indian
ypesof fjoint
Between
ventures are
two Indian organisations in one
organisations, the following
1.
Dn Railways for setting up a Rs. industry (e.g. Ajoint venture between NTPC Ltd
J,352-crore thermal power plant at Nabinagar in Bihar. to meet and the
requirements of the rail network across the the
country. The joint venture company,
1000 MW plant, with NTPC
holding 74 per cent equityBharatiya
Company, will execute the Rail Bijlee
will provide the balance). while the Railways
Datteentwo Indian organisations across different industries (e.g.
SacialSciences in a joint venture, offering degree courses for ruralAction Aid India and Tata Institute of
, Datween an Indian organisation and a foreign communities in India).
organisation in India (e.g. DLF Ltd. forging a 50:50 joint
Nenture with Nakheel, a large property developer of the UAE, for two
investment of US$ 10 billion). integrated townships in India at an
ARetween an Indian organisation and aforeign
organisation in that foreign country (e.g. Kirloskar Broth
ers Ltd. having a joint venture with SPP Pumps Ltd, UK, for
s Between an Indian organisation and a foreign catering to the EUmarket).
and Continental AG of Germany setting up a tyre
organisation in a third country (e.g. Apollo Tyres of India
manufacturing joint venture in Malaysia).
Strategic Issues in Joint Ventures Joint ventures offer the advantages of
by the participating firms. Eliminating, controlling or reducing competition may achieving objectives mutually
andcan be brought about through joint ventures. Increasing the market share can be of strategic importance
also be achieved. Diversi
fication strategies may be adopted by the participating firms if a joint venture is planned across
industries. If technology is a critical variable in strategy, then joint ventures with foreign different
feasible. If legal and regulatory hurdles come in the way of external expansion, they could companies can be
be
through ajoint venture strategy of combining with a foreign firm in that foreign country or in a thirdsubverted
Environmental threats within the country or opportunities abroad may cause firms to undertake joint country.
tures.
ven
A special mention need be made of joint ventures abroad by Indian companies, as they
have become
SIgnificant in recent years. Sometimes, these take the form of joint enterprises with firms from other coun
tes, which along with Indian firms set up projects in third countries. Administratively, the Ministry of
Lommerce deals with joint ventures. Despite the problems faced, joint ventures offer a viable strategic alter
auve for organisations interested in external expansion strategies. Strategic advantages are important for
J ventures to be set up and sustained. Consider the following examples of Indian and foreign organisa
Uons coming together in joint
" ventures:
Japanese auto major Nissan entered into atripartite joint venture with Renault of France and Mahindra
AAindra of India for setting up a car manufacturing plant in Chennai to introduce its premium
sedan Teana in Indian markets. the setting up of ajoint venture with Star Group Ltd. to create aleading
Balaji Telefilms Ltd. announced
television network of regional language general entertainment channels, initially targeted at the fast
growing South Indian market. The joint venture, 51-per cent owned by Star and 49-per cent by Balaji
lelefilms,
"Biocon Ltd,will be based in Chennai.
India's largest biotechnology company, Will set up a joint venture with Abu Dhabi-basedis
BiBiNeophar
con'tsmheamaiden ventureinthe region and since the GCCregion is emerging as an important nmarket
to manufacture and market a range of bio-pharmaceuticals in the Gulf countries. Thisfor
oocon,
Proposed joint venture could help in strengthening its global forays.
Policy
Strategic Management and Business
194" Tata Tea has entered into a joint venture company withthe Chinese state owned tea company,
is the largest greentea exporter of China.

Tea Import &Export
Company (ZTIE), which Tata
hold a majority stake in the tea company.
Ventures The major benefits
that are likely to accrue
\eawi
JoBnt
Benefis and Drawbacks in reducing anindividual company'sinvestment, creatino
risk,
venturesinclude: minimising participation, accessto governmental and access t0
politicalIsupport and
(echnology, broad-based equity advantages. The disadvantages that may arise in joint
fields of business and
synergistic
exchange regulations, lack of proper coordination among enteringeN
ventures
lemsinequity participation,
firms, cultural and behavioural
Indian organisations need
foreign
to
differences
be on
the
the
and
guard
reasons by
the
as
possibility of conflict among the
the
partne
there is a high probability of joint ventures
Business Today, as to why joint ventures could
paric pati ,
analysis of
totheir advantage. An 48
the"following
Change concusions:
of strategy India could cease to be of interest to aforeign partner. This happened in tthe caseo
decided that Asia as a market was not strategic. Following
this
Bell Canada when
sold its stake
itRegulatory changes
the company
Indian promoters. deisioa
Often, thistoisthebeyond the control of the partners. This could work against the jom
in Tata Cellular
venture when either the limit on FDI has not been hiked in time or if it has been reduced. Insurance ba
been asector where the 26 per cent FDI limit for sometime now, has not gone down too well withtk
foreign partners.
doing too well, one of the partners
Success of joint venture Ironically, if the joint venture is becotes
partner. Suddenly as
very keen on increasing its holding, which is not acceptable to the other
partnership becomes hard to manage.
Having partners hampers growth Sometimes, having a partner can hamper grOWth prospects. In b
case of Tata Telecom, the Tatas decided to sell their holding tothe other partner, Avaya lInc. It warted
wellfor both the partners who felt that they would be better off on their own.
" Lack of transparency tis very important that the ground rules are laid down well in advance. If nta
mation is withheld, it can cause considerable levels of mistrust among partners. This can have ver
serious consequences. The break-up of the Hutchison-Essar joint venture is one where the lack of tan
parency has been one of the key reasons.
Joint venture is arisky, yet arewarding strategy, provided the partners share strategic interests right fromt:
beginning and work diligently to make the partnership work.
Strategic Alliances
Yoshino and Rangan define strategicalliances in terms of three necessary and sufficient characteristc
" Two or more firms unite to pursue a set of agreed upon goals, but remain independent subsequent
formation of the alliance:
The partner firms share the benefits of the alliance and control over the performancee of assigne ttasts-
perhaps the most distinctive characteristic of alliances andthe one that makes them So difficult to mat
age; and
The partner firms contribute on a continuing basis, in one or more key strategic areas, for exalmple
technology, product and so forth.
Lando Zeppei, managing partner of Bo0z, Allen & Hamilton, defines strategic alliance as a cooperatik
arrangement between two or more companies where:U
A
common strategy is developed in unison and a win-win
attitude is adopted by all pårue
Corporate-level Strategies: Internationalisation, Cooperation and Digitalisation 193
relationshipis reciprocal, with each partner
The prepared to share specific strengths with cach other,
. lendingpower to the enterprise.
thus
poolingofresources, investment and risks occurs for mutual (rather than individual) gain.
A Mehtaand Samanta, strategic alliances are 'cooperation betweentwo of more independent firms
say
briet.
involving sharedcontrol and continuing contributions by all partners for mutual benefit"
n
Stratcgicalliances, by definition, cannot be tactical. In order to be strategic, an alliance must satisfy one of
thesecriteria:
critical to the success of a core business goal or objective
be
[ must criticalto the
must be
development or maintenance of a core competency or other source of competi-
e It
tiveadvantage
enable blocking a competitive threat
e It must create or maintain strategic choices forthe firm
lt must
a significantrisktto the business
It must mitigate
Reasonsfor Strategic Alliances The primary reason why firms enter into strategic alliances is to en-
hancetheir
organisational capabilities and thereby gain competitive or strategic advantage. Forthis to hap-
pen,they
continually strive to gain access to new markets and new supply sources. They also wishto become
When the firms
more profitableby using the latest technology and making optimum utilisation of resources.
findthat it is not
feasible to either create resources internally or to acquire them, they rely on strategic
relationships.
alliances to create a network of beneficial alliances are used:3
Walters. Peters and Dess list several reasons why strategic
product or service may wish to look for new
1Entering new markets A Company that has a successful
This is especially true in case a com
markets. Doing soon one'soWn capabilities may seem tobe difficult.
enter into a partnership with a local firm which
nany wishes to explore foreign markets. Here, it is better to
them. This isone of the reasons why multi
Inderstands the markets better and is more culturally attuned to
with Indian firms.
national corporations have entered into strategic alliances
used to pool resources to gain economies of scale
2. Reducing manufacturing costs Strategic alliances are manufacturing costs. This is especially true of
or make better utilisation of resources in order to reduce
procompetitive alliances where a long-term relationship is developed with suppliers and buyers.
and diffusing technology Strategic alliances may be used to develop technological capabil
3. Developing firmsan act which may be difficult to perform if
more
y by leveraging the technical expertise of two or
these firms act independently. over
these reasons, strategic alliances are also used toaccelerate product introduction and
Apart from implementing strategies.
timing are of essence in
Onme legal and trade barriers expeditiously. Speed and and services are imitated quickly by competitors.
products
es may help firms to attain these. New pre-empt such imitation. For
When firms enter Into strategic alliances with other firms, it is possible to
introduce new products in foreign markets quickly with the help of local firms.
T8lobal firm may permitting foreign companies to enter their mar
participation before
kets Eountnes insist upon local contingent upon local participa-
kets. Entry into life and generalinsurance marketsin India has been made foreign andIndian firms.
tion,in which case it is imperative for strategic alliances to take place between
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5.

could aim at stability in each of the three

Combination Strategies and

Source: Adapted from H. I. Ansoff, "Strategies for

takeovers ofsmaller banksin orderto

Agriculture / Cotton, wool, Ginning

products (e.g. a book

her original business of book

that horizontal integration discussed earlier is also actually horizontal

Concentric or Related Diversification

enetworks informational synergies by

Pressures for loGalrasponsivengss

2. Contractual Entry Modes

is the largest greentea exporter of China.

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