Corporate Level Strategies

Corporate level strategies, also known as Grand or Generic strategies, are basically about the choice of direction that a firm adopts in order to achieve its objectives. It provides overall direction for the firm irrespective of its size whether it is small or big.

Corporate Strategies

For deciding the orientation towards growth, we have to answer three questions:

Should we continue with the same business with similar efforts – STABILITY STRATEGIES

Should we expand into new business areas by adding new functions, products and markets – GROWTH / EXPANSION STRATEGIES

Should we get out of this business or a part of the business – RETRENCHMENT STRATEGIES

Should we use a mixture of strategies – COMBINATION STRATEGY

CORPORATE STRATEGIESGrowth

Concentration Vertical Growth Horizontal GrowthDiversification Concentric Conglomerate

Stability

Cautiously proceedMaintain

Profit

Retrenchment

TurnaroundDivest/SaleLiquidation

Examples of Generic or grand strategies

Stability – better after sales service, bulk discount, Improve performance to sustainGrowth – Expansion in customer group, function or

technology

Retrenchment - Withdrawal - Customer group, function, technology (unprofitable)

Combination – When a mixture of strategies is used .

e.g. Wide variety of services to customers (stability)

- New products in product range (expansion)

Stability Strategies

It aims at maintaining the existing business course without any significant variations or additions.

Relevant for a firm working in reasonably certain and predictable environment, less risks

Usually followed by SMEs Same objectives are to be followedSuitable for short run if firm is satisfied with its

performance.

Features of Stability Strategies

Incremental improvements No redefinition of the businessFairly a modest strategyMaintains similar status

Reasons to follow Stability Strategies

Managerial satisfactionThe degree of resistance to changeFear of loss of controlLack of resourcesSome threats by external environmentRetention of core competenceCertainty and predictability of future

Types of Stability Strategies

No change strategy – A conscious decision to do nothing new .Co. enjoys relatively stable competitive

position and it has not much threats and opportunities.

Adopted by SMEsCo. makes few marginal adjustments for

inflation in its sales and profit aims.

Reasons for following No Change Strategies

At present, co. is having least risks and it doesn’t want to go in for higher risk levels.

Resistance to change is quite high and only inevitable changes are accepted.

The firm is happy with present level performance and preferring to continue the same.

This strategy is easier to follow.

Types of Stability Strategies

Game Strategy – Also known as Game Strategy. It assumes that the difficulties faced by the firm

are temporary.The firm takes measures such like reducing

investments and blaming the negative environment factors such as govt. policies.

It is a secretive strategy and cannot be continued for long time.

Aims at sustaining profitability.

Reasons for following Profit Strategies

The unit’s product is in saturation or declining stage.

The unit’s product is not prestigious to the org.

The unit’s contribution is not significant to the total sales of the org.

The unit’s sales will decline less rapidly than the reduction in corporate support.

Types of Stability Strategies

Pause Strategy – Is also known as ‘breathing spell’ strategy,

basically a short-term strategy.Adopted by the firms that wish to test the ground

before moving ahead with a full-fledged grand strategy.

It is an opportunity to rest before shift in strategy.The objective is to make present factors more

productive to assure rapid future growth.

Reasons for following Pause Strategies

o The firm has achieved high growth levels and it is the time to take rest to follow the new heat.

o To stare off political uncertainty and to wait and watch going further.

o There is a need for pause to regain stamina to run further.

o To achieve economies of scale after attaining sizeable market share.

Types of Stability Strategies

Proceed with Caution –It aims at pulling on the existing business

as a precaution measure particularly when the external env. factors are not clear.

The purpose is to allow the structural changes to take place and let the systems adapt to new strategies.

It is also a short-term strategy.

Reasons for following Proceed with Caution Strategies

The firm is facing any external env. threat. Internal constraints are there i.e.

weaknesses are outweighing its strengths. The firm is extremely cautious and a keen

observer of the environmental conditions. To maintain same status is preferable for

the firm and it does not want to go in for showmanship.

Expansion through Diversification

The strategy in which growth objective is achieved by adding new products or services to the existing ones.

It may involve internal or external, related or unrelated, horizontal or vertical and active or passive dimensions – either singly or collectively.

Reasons for Diversification

It spreads the risks e.g. business of air-coolers and water heaters.

Better utilization of resources.Developing competitive edge.It makes firm dominant in the market.It brings in the synergistic benefits.Due to environmental threats e.g. cigarette

manufacturers diversify in other lines.

Reasons for Diversification

Maximizing returns by investing in profitable business and selling out non-profitable ones.

Stabilizing returns by avoiding economic upswings and downswings through having stakes in different industries.

Exercising of personal choice by industrialists and managers to create industrial empires by owning businesses in diverse sectors.

Risks of Diversification

Demand a wide variety of dissimilar skills to manage them successfully.

Increases the administrative costs of managing, integrating and controlling a wide portfolio of businesses.

Decreasing commitment to single or few businesses that need more attention.

It is a complex strategy to formulate and implement.

Types of Diversification

Concentric or Related diversification – When an org. takes up an activity in such a manner that it is related to the existing business definition, either in terms of customer groups, functions or alternative technologies, it is called CONCENTRIC Diversification.

Concentric or Related diversification

This strategy involves either – Introduction of new products or services to

serve similar customers in similar markets. Introduction of new products or services

using technologies similar to the present product or service line.

Types of Concentric Diversification

Market related Concentric diversification – When a similar type of product is offered with unrelated technology. For example – A co. manufacturing white goods enters into the field of consumer goods.

Technology related Concentric diversification – New type of product or service is offered with the similar technology.

Types of Concentric Diversification

For example – A firm offering hire-purchase to institutional customers enters into providing home loans.

Market and technology related Concentric diversification – Similar type of product is provided with related technology. For example – A raincoat manufacturer makes waterproof shoes and rubber gloves to sell through same retail outlets.

Pros and Cons of Concentric Diversification

It enables a firm to attain synergy by exchange of resources and skills and to avail economies of scale and tax benefits.

It increases the risk and commitment, thus reducing the flexibility.

Types of Diversification

Conglomerate Diversification – It means addition of new products or services to the existing line of business.

It is the expansion of product line beyond the present industry into products and markets having no common features with the existing ones.

For example – Ponds’, ITC, Reliance etc.

Pros and Cons of Conglomerate Diversification

It offers the advantage of better mgt. and allocation of cash flows, higher ROI, and reduction of risk by spreading investment in different areas.

Diversion of resources and attention to other areas leading to lack of concentration and facing the risk of managing entirely new business.

Expansion by Cooperation

Variants of Cooperation Strategies

Mergers and AcquisitionsJoint VenturesStrategic Alliances

Mergers and Acquisitions

Concept of Mergers and AcquisitionsTypes of MergersMotives behind the MergersPros and Cons of Mergers and

Acquisitions

Joint Ventures

It is a form of business combination in which two unaffiliated firms contribute financial and /or physical assets, as well as personnel, to a new company formed to engage in some economic activity, such as production or marketing of a product.

Joint Ventures…….

A J/V by a domestic company with an MNC can allow the transfer of technology and reaching of global market.

Entering into J/V is a part of strategic business policy to diversify and enter into new markets, acquire finance, technology, patent and brand names etc.

Definition of Joint Ventures

According to Reserve Bank of India,

‘A foreign concern formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes a direct investment, whether such investment to a majority or minority shareholding.’

Conditions for Joint Ventures

When an activity is uneconomical for an organization to do it alone.

When risk of business has to be shared.When the distinctive competence of two

firms can be brought together.When setting up an organization requires

tough hurdles like tariffs, quotas, licenses etc.

Advantages of Joint Ventures

Optimum utilization of resources where their strengths lie.

Possible to undertake R&D in a bigger way, leading to more innovations.

Opportunity to acquire new technology or process.

Allow to go global

Advantages of Joint Ventures

Help to implement new systems, procedures and work culture to improve overall productivity and effectiveness.

Advantages of joint economies of co-production, common procurement etc.

Triggers of Joint Ventures

TechnologyGeographyChanges in regulationsSharing of risk and capitalIntellectual exchange

Strategic Alliances

It is an arrangement under which two or more firms cooperate in order to achieve certain common objectives.

The firms that unite remain independent subsequent to formation of an alliance.

Strategic Alliances

The agreement contains the terms like capital contribution, infrastructure, decision making, sharing of risk return etc.

Mutual understanding and trust are the basic tenets of strategic alliances.

Reasons for Strategic Alliances

Entering new marketsReducing manufacturing costsDeveloping and diffusing technology

Pitfalls in Strategic Alliances

Lack of trust and commitment, misunderstandings, conflicting goals and interests, inadequate preparation for entering into partnership, hasty implementation of plans. Besides, external environmental changes which make the alliance unviable are the major drawbacks of strategic alliances.

Types of Strategic Alliances

Pro competitive Alliances – (Low interaction, low conflict) – Inter industry, vertical value chain relationships between manufacturers and suppliers.

Non competitive alliances – (high interaction, low conflict) – intra industry, between non rival firms

Types of Strategic Alliances

Competitive Alliance – (High interaction, high conflict) – Between two very strong rival, may within the country or one domestic and the other foreign company.

Pre competitive Alliance- (Low interaction, high conflict) – Two firms, generally unrelated industries, work on well-defined activities such as new technology development, joint R&D, advertising comapign etc.

How to Manage Strategic Alliances

Clearly define a strategy and define responsibilities.

Phase in the relationships between the partners.

Blend the cultures of partners.Provide for an exit strategy

Examples of Strategic Alliances

Bank of India with Union Bank of India and Infrastructure Development Finance Company for IB, loan syndication training etc.

Bajaj Tempo with State Bank of Indore to promote agricultural mechanization. Scheme is known as Indore Bank-Bajaj Tempo-Krishi Vikas Scheme.

Expansion by Internationalization

These type of strategies require the organizations to market their products or services beyond the domestic or national market.

For doing so, an organization will have to assess the international environment, evaluate its own capabilities and devise strategies to enter foreign market.

Porter’s Model of Competitive Advantage of NationsThis model states that there are four

national characteristics that determine an environment conducive to create globally competitive firms in particular industry. These factors are:

Factor conditionsDemand conditions Related and supporting industriesFirm strategy, structure and rivalry

Porter’s ‘diamond’

Factors to be considered in International Strategies Cost Pressures – The pressure on a firm to

minimize its unit costs. It is high in industries like chemicals, petroleum or steel that serve universal needs.

Pressures for Local Responsiveness – Here the firm tailors its strategies to respond to national- level differences in terms of variables like preferences and tastes etc. e.g. cars, clothes, food, entertainment etc.

Types of International Strategies

Multi domestic StrategyGlobal StrategyInternational StrategyTransnational Strategy

Multi domestic strategy

Firms try to achieve a high level of local responsiveness by matching their offerings to the national conditions operating in the countries they operate in. Firm customizes its products and services according to their local conditions in the different countries. It leads to high costs as a lot depends on R&D etc.

Global Strategy

Firms rely on a low-cost approach based on enjoying the benefits of location economies and offer standardized products and services. Firms focus on low-cost structure and provide products and services in an undifferentiated manner in all the countries the global firms operate in, usually at competitive prices.

International Strategy

Firms create value by transferring products and services to foreign markets where these are not available.

Firm maintains a tight control over its overseas operations, offers standardized products in different countries with little or no differentiation.

Transnational Strategy

Firms adopt a combined approach of low-cost and high-responsiveness simultaneously.

Possibly, it is the only strategy viable in the modern competitive world.

International Entry Modes

Export Entry Mode

Direct Exports

Indirect ExportsContractual Entry Modes

Licensing

FranchisingInvestment Entry Modes

Joint ventures and strategic alliances

Wholly-owned subsidiaries

Advantages of Expansion through InternationalizationAchieving Economies of ScaleExpansion of MarketsHarnessing Location EconomiesAccess to resources Overseas

Disadvantages of Expansion through InternationalizationHigher RisksDifficulty in Managing Cultural DiversityHigher Bureaucratic CostsHigher Distribution CostsTrade Barriers

Strategic Decisions in Internationalization

Which international market to enter?Timing of entry into international markets.Scale of entry into international markets.

Growth/Expansion Strategies

A firm turns to expansion strategy when it seeks sizeable growth. According to William F. GlueckWilliam F. Glueck, ”A growth strategy is one that an enterprise pursues when it increases its level of objectives upward in significant increment, much higher than an exploration of its past achievement level.”

Growth/Expansion Strategies

Growth Strategy is an attractive strategy for two reasons:-

Growth based on market demand will cover up the company’s flaws and strategic errors.

A growing firm provides a lot of opportunities in terms of new jobs, career advancement and promotion.

Features of Growth Strategy

It is highly versatile strategy. It involves redefinition of the business. It is the mark of exponential growth. There are two routes to growth –

diversification and intensification.

Need for Growth Strategy

Survival rests on growth.Growth is imperative for efficient and

effective utilization of resources.Growth is managerial motivation.Moving from loss to profit wedge.Growth results in satisfaction to all the

stakeholders.

When to follow Growth Strategy?

When the organization gets green signal from external environment.

When the present business is non-viable to continue.

When the firm has rested after earlier spell of growth.

Factors to Considered for Expansion

Organization’s options for capacity expansion.

Future demand and costs inputs.Assessing technological changes.Predicting competitors capacity expansion.Assessing demand – supply balance.Expected cash flow.Testing the analysis for consistency.

Types of Growth/Expansion Strategies

a. Expansion through Concentration

b. Expansion through Integration

c. Expansion through Diversification

d. Expansion through Cooperation

e. Expansion through Internationalization

Variants of Growth Strategy

Market Development Strategy – Developing new markets by expanding geographical markets or by attracting other markets, to increase sales.

Product Development Strategy – Modifying the existing products or creating new products in related items already produced.

Innovative Strategy – Creating new products which change the PLC of present products and make them obsolete. R&D plays an important role.

Expansion through Concentration

A form of growth strategy resulting in concentration of resources on those product lines, which have growth potential.

Also known as ‘stick to the knitting’. “Doing what we know we are the best at

doing.” For Example, BAJAJ AUTOS

concentrating on two-wheelers market.

Expansion through Concentration

Involves converging resources in one or more of a firm’s business in terms of their respective customer needs, functions or alternative technologies, either singly or jointly, in such a manner that it results in expansion.

It is preferred because it would like to do more of what it is already doing.

Expansion through Concentration

It involves investment of resources in a product line for an identified market with the help of proven technology.

Internally, the firm should be strong enough to sustain expansion and it should have adequate funds to invest in additional resources required for expansion.

Merits of Expansion through Concentration

Involves minimal changes, so it is less threatening.

Enables the firm to master one or few businesses, thus gaining specialization.

Specialization ultimately, leads to competitive advantage to the firm.

Decision making process is easy as there is a high level of predictability.

Demerits of Expansion through Concentration

Putting all eggs in one basket has problems.Heavily dependent on single industry, so

adverse conditions can harm the firm.Can lead to org. inertia due to overdoing of

anything.Product obsolescence, emergence of newer

technologies, mkt. fluctuations can be the threats.

Cash flow problems at the time of maturity, when firm has over-invested in fewer areas.

Expansion through Integration

Since a value chain is a set of interlinked activities performed by an organization right from the procurement of basic raw materials down to the marketing of finished products to the ultimate consumers. So , the firm may move up or down in the chain, this is what is called INTEGRATION.

Expansion through Integration

A company attempts to widen the scope of its business definition in such a manner that it results in serving the same set of customers.

It is combining activities related to the present activity of the firm.

An integration takes place to grow financially strong, have the benefits of R&D and economies of production and marketing.

Expansion through Integration

Its adoption results in widening of the scope of the business definition of the firm and strengthening of core competencies and competitive advantage.

It is also an attempt to bring under one management the resources of two or more firms.

Expansion through Integration

Since a value chain is a set of interlinked activities performed by an organization right from the procurement of basic raw materials down to the marketing of finished products to the ultimate consumers. So , the firm may move up or down in the chain, this is what is called INTEGRATION.

Types of Integration

Horizontal Integration

Vertical Integration

- Forward or Downstream Integration

- Backward or Upstream Integration

Types of Integration

Horizontal Integration – It takes place between two rival firms producing same product or services.

It may be adopted with a view to expand geographically by buying a competitor’s business.

For Example – Brooke Bond and Lipton.

- Adidas and Reebok

Benefits of Horizontal Integration

Economies of Scale – lower cost structure by spreading over the fixed costs of operations over a larger base of products.

Economies of Scope – results in two or more organizations using the same resource base to produce a variety of products.

Increased Market Power Reduction in Industrial Rivalry

Types of Integration

Vertical Integration – When an org starts producing new products that serve its own needs, it takes place. Any new activity undertaken with the purpose of either supplying inputs or serving as a customer for outputs is vertical integration.

For Example – Vimal Textiles have their own retail showrooms.

Types of Vertical Integration

Forward/Downstream Integration – It is a case of the firm for advanced phases. It is moving higher up in the production, and /or distribution processes towards the end user or consumer.

If the costs of selling the finished products are lesser than the price paid to the sellers to do the same thing, it is profitable for the firm to move down the value chain.

Reasons for Forward Integration

Gaining better control over sales and prices.

Improving the scope of quality of service at downstream levels.

Harnessing the competitive advantage in the broader perspective.

Types of Vertical Integration

Backward/Upstream Integration – It involves the addition of activities to ensure the firms of its inputs. It means moving to earlier stages of production to get inputs at the lowest price with high quality and high quantity.

If the costs of making are less than the costs of procurement, firm moves up in the value chain.

For Example – Polyester cloth firm starts manufacturing polyester yarn.

Reasons for Backward Integration

Getting regular and adequate supply of inputs.

To have the benefits of enhanced quality control.

To save the indirect taxes payable on purchase of inputs.

To improve the negotiation power with suppliers.

Merits of Vertical Integration

ECONOMIES OF INTEGRATION Economies of combined operations. Economies of internal control and

coordination. Economies of Information. Economies of avoiding the market. Economies of stable relationships.

Merits of Vertical Integration

BEST TAPING OF TECHNOLOGY.ASSURED SUPPLY OF INPUTS AND

DEMAND FOR END PRODUCTSENHANCED ABILITY TO

DIFFERENTIATEOFF-SETTING BARGAINING POWER

AND INPUT COST-DISTORTIONS

Demerits of Vertical Integration

Huge Capital Investments Danger of Imbalance of Technology Uncertainty and Instability of Demand Dangers of Size Difference Post-Integration Managerial Problems