Choice of Strategy

Chapter- 4

Grand Strategies

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 LEARNING OBJECTIVES
• LONG TERM OBJECTIVES
• SINGLE BUSINESS GROWTH STRATEGIES
• MULTI BUSINESS GROWTH STRATEGIES
• COOPERATIVE GROWTH STRATEGIES
• DOWNSCOPING STRATEGIES

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 IDENTIFYING STRATEGIC ALTERNATIVES
• Strategy outlines the steps an organization will take in
order to achieve a set of objectives.
• Strategy is developed by evaluating available
alternatives and choosing one or more of the
alternatives.
• Strategies exist at different levels of the organization
and are classified according to the scope of their
coverage.
• Corporate strategies, Business unit strategies and
Functional strategies as discussed in the first chapter.

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 Long Term Objectives & Grand Strategies
Companies have to make many fundamental decisions
about their path to future success:
• Single Business vs. Multiple business
• Growth vs. Down scoping of business
• Profit vs. Revenue increase
• Economic viability, Public Responsibility
• Technological leader vs. Follower
Decisions depend on:
• Industry attractiveness
• CEO’s disposition
• Company’s availability of funds and ability to borrow
• Competitors’ actions
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 Types of long term objectives
Business Oriented :
– Profitability, return on equity
– Competitive position, market share
– Technological leadership, innovation rate
Employee Oriented :
– Employee Development, inventory of workers’
skill
– Employee Relations, job satisfaction & loyality
levels
– Productivity, rate of decrease in customer
complaints and defective items
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 LIST OF GRAND STRATEGIES
GROWTH
Single business growth strategies
• Concentration Cooperative growth
• Market Diversification / Development strategies
• Product Differentiation / Development Joint ventures

• Radical Innovation (Product Strategic

Diversification) alliances
Consortia
• Horizontal integration
• Vertical integration DOWNSCOPING
Multi business growth strategies Turnaround
• Concentric Diversification Divestiture
• Conglomerate Diversification Liquidation
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 Growth strategies

A firm pursuing a growth strategy:

• regularly develops new products
• enters new markets
• finds new uses for its existing products
and;
• develops new production processes.

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 Concentration Strategy-Intensive Growth
• Focus on a single product in a single market
Policy Options:
• Stretching the product line (new sizes, styles, tastes, colours)
• Expanding distribution into new geographic areas
• Encouraging non-users to use the product
• Encouraging more usage
• Penetrating competitor’s positions through pricing
strategies, product differentiation and advertising.
Successful when:
• Products are distinctive
• Markets are stable
• Company has a high market share
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 Market Development/ Diversification
Exploiting product knowledge in multiple
markets
Attracting other segments within the same
market by using :
– other channels of distribution
– other media for advertisement

Opening additional geographic markets (geographic

expansion)

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 Product Development
Developing new products for present markets
Developing related products by adapting present products to
the changing needs of the customers
• by changing the shape, appearance, size, ingredients,
intensity, etc. of the products
Developing quality variations
Developing additional models and sizes (product
proliferation)

– Such a strategy is adopted to prolong the life-cycle

of current products.
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 Radical Innovation
– Spend resources on R&D for technological
patents

– Stay technologically ahead of competition

– Take advantage of specialized knowledge by

charging a premium on the products

– Reinvest profits in R&D

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 Integration Strategy
Growth by acquisitions and mergers
Horizontal Integration:

Acquisition of firms that operate in similar industries to develop

market share.

The strategy is aimed at eliminating competition and providing

the acquiring firm access to new markets and resources.
Vertical Integration:
Acquisition of firms that supply raw materials - Backward
integration
Acquisition of firms that provide distribution and marketing
facilities - Forward integration

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 Multi Business Growth Strategies
• Diversification: This is when an organization moves into areas
that are clearly different from its current business to spread risk
so that the organization is not subject to the whims of just one
product or industry.
Concentric Diversification
– Businesses are related on the basis of similar product technology, market
knowledge or production technology
**Focus on synergy
– Examples :- Honda, Eastman, Kodak, Philip Morris
Conglomerate Diversification
– Companies use internal capital to expand to businesses that are
attractive and offer great opportunities to grow
**Focus on profits
– Examples- ITT, General Electric, Westinghouse
*Growth strategies are achieved through acquisitions, mergers,
or joint ventures
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 Ctd……
• An acquisition occurs when one company purchases
the assets of another and absorbs them into its own
operations.
• A merger occurs when two or more companies
combine into one. Neither party acquires the other but both
companies merge together combining operations to form a
new entity.
• A joint venture occurs when two or more
organizations pool their resources for a given project.
The two or more firms lack a necessary component for success
in a particular competitive environment and by pooling
resources together, they may be capable of doing something
they could not do separately and are able to share risks and
profits involved.
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 Cooperation strategies
Why should companies cooperate with others?
• Reduce risk and uncertainty

• Share different and scarce resources

• Learn know-how and market knowledge

• Share the benefits of ccomplementary assets

Types of strategies for cooperation
Joint ventures

Strategic alliances

Consortia
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 Joint venture (joint ownership)
A child company created and operated for the benefits
of the co-owners (parent companies)
Advantages: easy access to capital, raw materials and
foreign markets
Disadvantages: limited discretion, control, & profits
Parents: Samsung Electronics (Korean) & France
Telecom (French); Child: Orange Mobile Phone
Company (British)
Parents: Chrysler Corp. (US) & Mitsubishi (Japanese);
Child: Diamond Star Company (US)

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 Strategic Alliances
Long term mutually beneficial cooperation beyond supplier-
customer relationship, but without any kind of equity sharing
These are partnerships that exist for a definite period during
which partners contribute their skills and expertise to a co-
operative project. One partner may contribute
manufacturing expertise while the other provides marketing
skills.

Licensing: transfer of some industrial property rights

(patents, trademark, know-how, etc.) in return for a favor
(royalty payment, or avoiding tariffs or quotas)
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 Ctd…
Subcontracting: manufacturing done by
contractor having comparative advantages in
factors (inputs) of production
Franchising: marketing done by franchisee having
comparative advantages in local markets
Outsourcing: supporting activities done by
different outer providers having comparative
advantages in any one of them

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 Consortia (Network)
A large scale cooperation among numerous local
companies operating especially within the same
industry (with or without equity sharing)
Keiretsu in Japanese (a conglomeration of
businesses):
Up to 50 firms holding each others’ stocks,
coordinated by a large company; ex: Mitsubishi
Or by a bank; ex: SANK bank in Maldives, EGS
Bank in Turkey

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 Harvesting strategies

• Most products eventually reach a decline stage.

• This may be because of new competition, changes
in consumer preferences or new technology.
• When this happens a firm ‘harvests’ as much as it
can from the product, i.e. milking the cow dry.
• The approach is to limit additional investment and
expenses and to maximize short-term profits and
cash flow.

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Ctd-
• Such a strategy should be considered under
the following conditions:
• The product is in the decline stage
• The current market share of the product is
small
• The firm has other better uses for its
resources
• The product is not a major contributor of the
sales or profitability of the firm.

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 Down scoping Strategies
Turnaround (Defensive strategy)
A kind of crisis management when profits decline
because of:
• Economic recessions in the general
environment
• Innovative breakthroughs in the task
environment
• Product inneficiencies in the internal
environment

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 Ctd…
If strategists believe that stability and recovery
are possible, they may follow either way:
• Cost reduction by getting rid off some
employees, promotional activities, and low-
margin customers.
• Asset reduction by getting rid off unproductive
assets, i.e. some land, buildings, cars,
equipment.
• Such strategy is also called Retrenchment/
restructuring/ downsizing
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 Ctd..
Divestiture:
Selling of a business or major component of a
business to another business in order to:
–reduce debts of a declining investment in our
portfolio
–raise capital by sacrificing a successful
investment for the sake of the total
corporation
–improve the image of the corporation in the
eyes of the governmental bodies regulating
antitrust actions
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 Ctd…
Why we buy an unsuccessful investment of another
firm?
– “we have necessary skills and resources to recover”
– or “we can create a synergy between this newly
bought company and our present investments”
Liquidation: Firm sold in parts to raise funds
• It is where a firm is sold in parts for its tangible asset
value. As a strategy, it minimizes the losses of all the
firm’s shareholders.
• The proceeds of the sale are then distributed to
creditors, the remainder of which can then be
distributed to shareholders.
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Ctd….

Bankruptcy
• A company can go to the courts to ask for a
reorganization bankruptcy.
• It persuades its creditors to temporarily freeze
their claim while it undertakes to reorganize and
build the company’s operations back to
profitability.
• The company may close down unprofitable
business divisions, reduce its workforce or
negotiate employee contracts to affordable salary
levels.
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 Grand Strategy Selection Matrix
Overcome Weakness
Turnaround Vertical Integration
Divesture Coglomorate Diversification
Liquidation

Internal Focus External Focus

Concentration Horizontal Integration
Market/Product Development Concentric Diversification,
Innovation Joint Ventures

Maximize Strengths
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 THE END!!!

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