Lesson 07

Chapter 7 – Strategic Choice

7-1 Excel BooksExcel Books

Strategic Choice

What is strategy about?

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Strategies surface at different tiers in the organization hierarchy depending on the architecture of the organization. Corporate strategy is the highest, in the sense that it is the broadest, applying to all parts of the organization. Corporate strategies are concerned with the broad and long-term questions of what business(es) the organization is in or wants to be in, and what it wants to do with those businesses. Corporate strategy gives direction to corporate values, corporate culture, corporate goals, and corporate missions. Down one step is business-level strategy. They are basically competitive strategies. These strategies are about:

how to compete successfully in particular markets, and how can the business units acquire competitive advantage and position itself

among its competitors. At the next level are functional strategies which include:

marketing strategies, new product development strategies, human resource strategies, etc.

Functional strategies generally emphasize on short and medium term plans and limit their domain to the department’s functional responsibility.

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Research &Development

InformationSystems

Marketing

Manufacturing

Human ResourcesFinance

Business Unit Strategy• Mission• Business goals

• Competencies

Corporate or Grand Strategy• Vision• Corporate goals• Philosophy and culture

Functional Strategies

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The evolution of strategic choice is driven by many different forces. Ideas and practices emerge from collaborative contacts between organizations.

Firms cannot avoid learning and borrowing when they trade and work together. The evolution of strategy is also pushed along by competition and confrontation.

New ideas and practices arise when managers try to outwit or beat back powerful rivals.

New strategies are often a recasting of the old, they infiltrate new practices covertly.

Finally, strategy is pushed along by the sheer creativity, of managers, because they explore new ways of doing things.

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The Strategic Choice Process:

To some extent strategic choice shapes and even limits the goals a company can reasonably pursue. The logically viable strategy emerges where the three logical elements overlap. Where all three circles overlap, the differing requirements of intent and assessment are most fully met.

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Interaction of the external and internal environments:

Where any two circles overlap are areas where feasible options may exist. They may not be aligned to strategic intent, or if they are aligned are not found feasible. Choices of what not to do may sometimes be as important as choosing what to do.

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Though, organizations find themselves in an almost infinite variety of strategic situations, the questions below, identify the strategic issues that have to be addressed: What is the most tightly defined profitable core of our business, and is it gaining or losing

strength? What defines the boundaries of the business that we are competing for, and where are

those boundaries going to shift in the future? Are there new competitors currently at the fringe of our business that pose potential

longer-term threats to the core? Are we certain that we are achieving the full strategic and operating potential of our core

business, the "hidden value" of the core? What is the full set of potential adjacencies to our core business and possible adjacency

moves? Are we looking at these in a planned, logical sequence or piecemeal? What is our point of view on the future of the industry? As a team, do we have

consensus? How is this point of view shaping our adjacency strategy and point of arrival? Should major new growth initiatives be pursued inside, next to, or outside the core? How

should we decide? Is industry turbulence changing the fundamental source of future competitive advantage?

How? Through new models? New segments? New competitors? And what are we monitoring on a regular basis?

Are organizational enablers and inhibitors to growth in the right balance for the needed change?

What are the guiding strategic principles that should apply consistently to all of our major strategic and operating decisions?

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Organizations that exist only to produce profit don't last long. And organizations that don't pay attention to profits can not exist to fulfill their long-term purpose. Corporate level strategies, or Grand strategies, form the framework that enable organizations to cope with the external and internal environments. Corporate level strategies resolve the basic objectives and focus the organization’s activities with its objectives to optimize the use of the organization’s resources.The strategic intent gives a broad direction to strategic choice. Within this broad direction, there are a number of specific options concerning the direction of developing the organization’s strategies. The organization can adopt any of the approaches described below or it can combine the approaches in the options it exercises:

Growth Strategies: Long Term Strategies Corporate Parenting: Resource Allocation and Centralized Management of

Business Units. Portfolio Analysis: Products and Business Units. Corporate Revival: Short Term Strategies

Grand Strategies

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Most successful organizations follow a growth path. Managements opt for growth strategies because they:

Equate growth with success, Potential of greater rewards, and View a strategy of stability as long run failure.

Growth strategies become a means towards: more sales revenues, more employees, more market share, and help improve odds against greater uncertainty.

Profitable growth generates cash, which allows it to fund further growth without excessive debt or diluting equity too much. The organization can retain its strategic freedom as well as enhance its investment potential. However, unprofitable growth:

allows debts to grow, increases interest costs, and the overall cost of capital.

Gradually, the company loses its ability to pursue growth opportunities because of depressed stock prices and dwindling cash flows.

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AConcentration

BProduct Development

DMarket Development

CDiversification

Existing

New

Existing New

MARKETS

PRODUCTS

Consolidation Market Penetration Withdrawal

Existing Competencies New Competencies

New Segments New Territories New Uses

Existing Competencies New Competencies

Ansoff’s ‘Direction Matrix’: Provides a framework for different Growth Strategies.

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These are also called Protect / Build strategies. It consists of growth within current product lines. The organization concentrates on its primary line of business and looks for ways to meet its growth objectives through increasing its level of operations in this primary business. The the set of choices that are possible are:

‘Consolidate’— can be an attempt to hold market share in existing markets or expand existing capacity. The former is a defensive option which usually involves cutting costs and perhaps prices and is more common in markets that are mature or beginning to decline. The later is an aggressive strategy to preempt competition.

‘Market Penetration’—increase market share of the same market. This is a more aggressive option and usually involves investing in product improvement, advertising, or channel development. Acquiring the businesses of competitors who are withdrawing from the market may be a necessary related resource option.

‘Withdraw’—leave the market by closing down or selling out. This appears to be a negative option but may be necessary to focus available resources into areas of greater strength. It is common in declining markets to see some of the competitors selling out to others who can operate the combined operation more cheaply.

Concentration Strategies: Quadrant ‘A’

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Consolidation StrategyAn attempt to hold market share in existing markets is often a defensive option. Sometimes in markets that are mature or beginning to decline organizations find the need to consolidate and hold on to their market share. In order to do this, it is necessary to have:

a knowledge of customers, an understanding of their requirements, and their economics.

One has to look at a product or service from the viewpoint of the customer and understand its total cost of ownership and the way it creates value.

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Indian Oxygen is an example. It dominated the industrial gases market for nearly five decades. The late seventies saw a period of extensive competition with the entry of major international players like Air Liquide, Messers Greishem, Praxair. The company started losing market share as well profitability. By 1980, on a turnover of Rs. 167 crores, it made a profit of Rs. 25 lacs. Indian Oxygen had to undertake a major restructuring and cost reduction.

It rationalized its portfolio, hived off its workforce, implemented programs on increasing productivity, reduced costs, and changed focus and offered to set-up units in customer premises in lieu of long

term contracts. By 1996, it had regained its market share and profitability. On a turnover of Rs. 219 crores, it had a profit of 16 crores. Business India hailed Indian Oxygen as a major comeback story.

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Market Penetration Strategies: Market penetration is the front end of the strategy, the back end of this strategy is an increase in the effective capacity of the organization. Growth in the market penetration is achieved through horizontal and vertical integration. In effect, the organization effectively enhances its capacity. The strategies are:

Capacity Expansion Horizontal and Vertical Integration Combination Strategies

Capacity expansion Capacity expansion adds capacity, within the industry, to improve the competitive position of the organization. It focuses on growth by enabling it to increase the flow of its products in the industry. Capacity expansion is a very significant strategic decision. The strategic issue in capacity expansion is how to add capacity avoiding industry overcapacity.Overbuilding of capacity has plagued many industries e.g. paper, aluminum and many chemical businesses, just to name a few.

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Assess probable future demand and costs of inputs

Assess probable technological changes

Test Analysis for Consistency

Determine firm’s options for size & type of capacity addition

Determine Industry Supply & Demand Balance

Determine expected Cash flows from capacity additions

Predict capacity addition by Competition

Elements of the Capacity Expansion decision

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The model of the Capacity Expansion decision exposes the degree of uncertainty about the future as the central determinant of the way the process proceeds. With known future demand, organizations will compete to get the capacity on stream to supply that demand and perhaps preempt such action from others. Where there is great uncertainty about future demand, the risk taking capacity and the financial capabilities of the organization will determine the course of action.Two types of expectations are crucial:

future demand, and competitor’s behavior.

The decision must be clear on the lead times in adding capacity. The necessity to add capacity in large units increases the risk of bunching of capacity and can lead to serious overcapacity. There is a tendency of increased minimum efficient scale of operations. Changes in production technology often have the effect of attracting investment in the new technology.

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Some of the structural considerations of capacity expansion become more marked when there are significant exit barriers.

Suppliers often sell more capacity than you need by providing subsidies or incentives.

Governments encourage capacity building by offering tax incentives in their desire to promote indigenous industry and increase or maintain employment, as a social goal.

Buyers often encourage organizations to put up capacity but do not place orders once the capacity has been put up.

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Integration

HorizontalIt is the growth of a company at the same stage of the value chain.

VerticalA firm’s decision to replace market transactions with internal transactions.

Horizontal & Vertical Integration

A potential benefit of integration is access to technology. The firm may have to develop its own technological capability. This enables the firm to avoid sharing proprietary data with its suppliers. Foreclosure of technology can be an important advantage. Technological changes, changes in product design involving components, strategic failures, or managerial problems can create unfavorable situations, and raise the cost of changeover to another supplier or customer. The firm has to protect against independent suppliers or customers doing research, or have large-scale research efforts, or have know-how that is difficult to replicate.

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However, integration increases the proportion of the organization’s fixed costs, i.e. it increases the operating leverage of the firm, but also increases its business risks.Integration will also raise the overall exit barriers, which can often hurt the interests of the firm. Integration can also reduce the flexibility of its investment funds. To maintain the performance of the vertical chain, it may be forced to invest in marginal requirements of the different processes. One can gain economies of integration to varying levels through long term contracts or use of different modes of vertical integration.

Independent companies often are interested in long term contracts to gain the benefits of integration with any investment. Such contracts may not achieve all the economies of integration because they expose one or both the parties to risk of being locked in for long periods of time – and that have to be paid for.

Taper integration and quasi-integration are partial integration. They can result in many of the benefits of integration while reducing some of the costs. The organization exercises control over its suppliers or customers.

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Horizontal integration uses the strategy of concentric diversification. It consists of procuring related companies or products and processes. The company could start related business within the firm, which would be an example of internal concentric diversification. Horizontal growth strategies can also focus on expanding the distribution of products or services to new geographic locations. For example, KLM purchased controlling stock in Northwest Airlines to gain access to American and Asian markets.

Vertical Integration

It is expressed by the acquisition of a company or addition of new capacity either further down the

supply chain, or further up the supply chain, or both.

Forward IntegrationOr

Upstream Integration

Backward IntegrationOr

Downstream Integration

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Though vertical integration does not protect from the uncertainties of supply and demand, it reduces the uncertainty about their effects on the firm. In cases where the organization has been dealing with suppliers or customers who wield significant bargaining power, it is beneficial for the firm to integrate even if there are no other savings from this strategy.Vertical integration offers greater value added under the control of the organization through superior services or product differentiation. In the case of backward integration, it is critical that the volumes of purchases of the organization are large enough to support an in-house supplying unit. If it accepts a cost disadvantage of producing uneconomic quantities, it must sell some of the production externally. Selling extra output in the open market may be difficult because the organization might have to sell to its competitors. If the volume of throughputs is sufficient to set-up capacity with economies of scale, the organization will reap benefits of in joint production, sales purchasing and other areas.

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Major Costs and Benefits of Vertical Integration

Benefits CostsReduced purchasing and selling costs Improved coordination among functions and

capabilities

Protect proprietary technology Reduced flexibility as organization is locked into product(s) and technology

Difficulties in integrating various operations Financial costs of acquiring or starting up

Combination Strategy:Strategies are often used in combination. The combination strategy is the simultaneous pursuit of two or more growth strategies.

Many large, diversified companies, use combinations of strategies to meet their objectives, since the strategy must embrace each of the organization's business units.

This also demonstrates that an organization is generally not limited by any single strategy but may simultaneously follow a mix of strategies.

Combination strategies may also include a growth focus in some of the organization's units and retrenchment or spin-off in some other units.

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The Withdrawal Strategy There are many reasons why an organization may follow a withdrawal strategy. It may be triggered by poor performance, a bad economy, excessive debt or ill-chosen acquisitions. This strategy is used for portfolio restructuring. If the organization believes that it has too many slow-growth businesses, the strategy is used both for divestment and acquisitions. Sometimes, organizations like to sell investments, as a divestment. A divestment is a sale of healthy firms that don't "fit" the organization’s strategic plan.Divestment may be the result of failure, but it may also be a strategy to disinvest in unprofitable lines and divert resources to other areas so that the overall effect could make a company or business group more focused on its core competencies and to create competitive advantage. Spin offs are another expression of withdrawal strategy. In a spin-off, an organization sets up a business unit as a separate business. This is one way to allow a new management team to try to do better with a business unit that is a poor or mediocre performer. Some companies use spin-offs as a strategy to improve profitability.

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At some point in time there is a limitation in increasing the level of operations. The reasons may be:

limitations in the growth or size of the market of the primary business, organizational limitations, or better opportunities in other areas.

As long as the organization generates cash, the organization has to find further growth and product development is one of the options.A number of different strategies used for product development that are described in the tables that follow.

Product Development Strategies – Quadrant ‘B’

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Technology Option

Advantages and Benefits Disadvantages and Risks Cost Factors

Internal Development

Develop knowledge in company, stronger companyExclusivity, competitive advantageTax and other Government incentives

Long time to marketGenerally more Expensive than external acquisitionRisk of failure, loss of investment and timeMay not have R&D expertise, equipment etc.

R&D StaffEquipmentOffice, Laboratory and Shop space

Collaborative or R&D with Networking

Develop knowledge in company, stronger companyExclusivity, competitive advantageTax and other Government incentivesStaff exposed to other sources of ideas

Long time to market (shortened somewhat)Networking costs added, overall costs downRisk of failure reduced (better knowledge base)Inventiveness can be curtailed

R&D Staff, equipment, and spaceAttending trade shows, conferencesReading relevant journals, magazines

R&D Contract/ Consulting Engineers

No investment in facilitiesLow investment on staffOwn technology, unique product

Do not have hands-on knowledge in-houseHarder to keep confidentialSame time, cost and risk issues as in Internal R&D

Staff to understand technology, manage contractsContractor fees may be lower than R&D

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Technology Option Advantages and Benefits

Disadvantages and Risks Cost Factors

Licensing Reduced risks due to known technologyReduced time to marketDevelops internal capability

Risk in applying technology to new applicationVery little support available

Searching, networkingSome internal technical staffAdaptation/ adoption costs

Joint Venture Immediately implementable Proven technology, low riskProbably, exclusivity in the regionLearn from provider

Market risksDo not have control, have to agree with partnerDoes not develop technical strength

Up-front investment in new businessOngoing operational costsTraining costs

Manufacturing Sub-contract/ Producer-customer

Quickest, ready to useLowest risk, proven technologyImplementation supportNon-exclusive

Competitive advantage issuesPossible implementation problemsBuilds little technical strength

Up-front paymentTraining costsShould be lass than developing because development costs shared by many

Acquisition of a Company with Technology

Short time to market, perhaps already in marketLow riskCould buy good image

May have to adapt technology to needsMay acquire negative baggageMay have merger problems

Depends on purchase price of companyShould be proportional to technological assets

Reverse Engineering

Less costly, less risky, less time compared to internal R&DOpportunity to improve product to gain competitive advantage

Me-too-productRisk of not fully understanding original designSome legal risks

Strong Engineering capabilitySome office, laboratory, shop spacePossible legal costs

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Strategic Choice Diversification Strategies- Quadrant ‘C’: Diversification entails entry into new markets with new products. Market forces try to divide organizations into smaller entities so as to achieve the economist’s ideal of a perfect market with a large number of small operators defenseless against the forces of competition. In contrast, corporate managements try to grow and diversify fighting market forces so as to achieve high profits and be able to control their own destinies. This conflict is the basis for the theory of diversification. In the 1970’s, diversification was the essence of strategy. Organizations tried to diversify in order to minimize risks in their product portfolios and enhance their capability for unlimited growth.Problems in many organizations that followed this dogma, created a new concept of strategy – core competence. Organizations that focused on diversification missed opportunities that opened up around the globe as markets and technologies converged to create huge new businesses. Since the late nineties, there has been a renewed interest in diversification.

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When does one diversify and to what extent? The answers lie both in the market and the organization. When the organization has a high level of organizational capability, it can bring the market into submission and thereby diversify and earn sustained high profits.

As markets become stronger and more efficient, when competition is high, capital markets are efficient, and labor markets are more flexible,

Then organizations require higher levels of management capability to protect their diversity. Diversification is an exciting option for those who have the management capability.Diversification may be related or unrelated to the existing operations of the organization:

Related diversification is called concentric diversification, and Unrelated diversification is called conglomerate diversification.

More generally, diversified businesses grow faster and growth tends to be greatest if the diversification is unrelated. However, related diversifications tend to be more profitable.

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Concentric Diversification:

The acquisition or internal development of a business outside of, but in some way related to a company’s existing scope of operations. Related diversification again divides into backward, forward, and horizontal integration.

Acquisitions and mergers have been dominant means of implementing diversification strategies. The other option is through internal development.

Concentric Concentric DiversificationDiversification

Horizontal Integration

Forward Integration

A move towards suppliers and raw materials in the same overall business.

Move towards the market place or customers in the same overall business.

Lateral move into a closelyrelated business such as selling by-products.

Backward Integration

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Strategy

AcquisitionsAn acquisition is transacted by the purchase of one organization by another for a set amount of money or stocks, or both.

MergersOccurs when two companies combine their resources and operations through an exchange of stock, resulting in one legal entity.

Internal Development

When the organization decides to use its own resources to develop new products for diversification.

Acquisitions/Mergers: Takeovers and mergers can have real advantages, particularly if there is a good fit between the organizations. Synergy can occur, although less often than expected. The disadvantages of mergers are that they can result in operational and psychological issues which can distract the people who have to make them work. Competitors can take advantage of this. Acquisitions can be of two types:

A company at the same stage of the value chain. A company either further down the supply chain to wholesalers and retailers

(forward integration), or further up the supply chain to suppliers (backward integration).

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In any acquisition, the critical point is the price of the acquisition. The more efficient the market, the less are the chances that the acquisition will provide above average profits. It is quite difficult to win at the acquisition game, unless:

The floor price for the acquisition is low, The market is imperfect, and The buyer has a unique ability to operate the business.

Floor price will be low when the seller has estate problems, needs capital quickly, if the seller has lost key management and sees no successors, or he is not optimistic about the prospects of the business.

Often in imperfect markets, the buyer has superior information or the number of bidders is low. These are conditions for low floor prices. Often companies buy when there is an economic down turn, when the prices are generally low and this provides an opportunity for above average returns in the long run.The buyer may sometimes have the unique ability to improve the operations of the seller or the industry meets the criteria for internal development. In either case, possibilities of above average returns exist. Very often the motivation for acquisition is that the acquisition will uniquely help the buyer’s position in the existing business

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During recent years there have been many hostile acquisitions or takeovers. The target organization's management often try to defend against the takeover. The common defensive measures are as follows:

• Buy up (repurchases) its stock • Look for a "friendly" merger partner, often referred to as a white knight • Take on significant amounts of long-term debt that becomes due and payable if the

organization is acquired, often referred to as a cyanide pill • call in government regulators to initiate an antitrust suit • Stagger the terms (time frames) its board members serve • Give current shareholders the right to purchase additional stock at a substantial discount,

often called a poison pill

Acquiring companies may have little technical or market risk; however, they pose challenges in system integration: The company may be producing products other than the products desired by

the acquiring firm and this may cause problems. The non- balance sheet assets of the company, in terms of capabilities and skills,

may be in the hands of a few individuals who may or may not want to remain in the company given the new circumstances.

When negotiating a purchase, the acquiring company must have a full understanding of the value of the things it wants and the hidden liabilities.

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The common factors that you must consider when deciding whether to pursue growth via mergers/acquisitions or internal development are:

Use Merger/Acquisition When Use Internal Development

Organization is in maturity stage Organization is new or in a growth stage

Industry the organization wants to enter imposes high entry barriers

Industry the organization wants to enter has low entry barriers

Industry the organization wants to enter is not closely related to the existing one

Industry the organization wants to enter is closely related to the existing one

Unwilling to accept time frame and development costs of starting the new business

Willing to accept time frame and development costs of starting the new business

Unwilling to accept risks of starting the new business

Willing to accept risks of starting the new business

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Conglomerate Diversification is the acquisition or internal development of a business outside of, and in no way related to a company’s existing scope of operations. Conglomerate diversification requires strong analysis of fit between the unrelated industries. It is often an excellent option for:

organizations whose assets are undervalued; who are financially distressed; organizations with bright growth prospects but which are short on investment capital; or when there is some sort of barrier to expansion in/or related areas of the

existing business e.g. regulatory change etc. Conglomerate diversification has a number of advantages.

Business risk is scattered over many industries and capital can be invested in whatever seems to offer the best profit prospects. Profitability is more stable because hard times in one industry may be partially offset by good times in another. Ability to share facilities—a sales force, for instance Reduction in the risk profile of the organization by creating a balance in the timing of cash flow, etc.

If corporate managers are good at spotting bargain-priced firms with big upside profit potential, shareholder wealth can be enhanced.

Conglomerate Diversification:

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On the negative side, diversification does nothing to enhance the competitive strength of individual business units. Corporate synergy can be achieved only if the organization has the ability to build and manage the units through an integrated network, that exhibits three key features:

(a) strong entrepreneurial units; (b) rich, horizontal flow of knowledge, best practices across units; and (c) corporate ambition, set of values and identity.

Creating strong, diversified organizations with integrated networks raises questions about the quality of management. Some of the issues raised are:

1. Top management competence Can top management tell a good acquisition from a bad one? Can they select good managers to run each business? Do they know what to do if a business unit stumbles?

2. Are the firm's profits more stable? How much diversity can the firm manage successfully? How broad should the organization’s portfolio be? Do the "up & down" cycles cancel out?

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Market development strategies are used not only in terms of expanding markets for the organization’s products, but also as a learning opportunity to improve overall competitiveness and move the organization up the value curve. There are three main routes to market development.

through contractual agreements through strategic alliances, and through internationalization.

Contractual arrangements: Long term contracts are agreements between two firms without actual exchange of ownership. Contractual arrangements come in many different forms.

Consortia: These are groups of companies that form a joint entity for a specific purpose—such as building the channel tunnel. When the project is finished, the consortium breaks up.Franchising: It is most common in retailing. The franchisee pays the franchiser a fee for services and royalties, for use of the company name, business approaches, and advertising. The franchisee risk is determined by the success of the brand name and by the support and advice provided by the franchiser.

Market Development Strategies – Quadrant ‘D’

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There are other types of contractual arrangements used for technology acquisition. Personnel Secondment: Firms to fill gaps in their perceived technological requirements are increasingly using Personnel Secondment, e.g. Operation and Maintenance contracts for running complex operations. This method is increasingly being used where the promoters have high level of financial and organizational skills but lack technical skills. Another form is “body shopping”. The costs are low, because the transfer of technology is facilitated either through an individual or group of individuals or through an off-shore entity with the core competency to create value through price differentials. The contracting organization is able to develop its technological objectives during the period of secondment. Strategic Alliance is an intention to cooperate at a strategic level, to share information, and to work together in a way that goes beyond a clear contractual arrangement. It defines a cooperative arrangement between two or more companies where:

• A common strategy is developed in unison and a win-win attitude is adopted by all parties,

• The relationship is reciprocal, with each partner prepared to share specific strengths with each other, thus lending power to the enterprise,

• A pooling of resource, investments, and risks occurs for mutual (rather than individual) gain.

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Strategic alliances are an effective way in which the necessary speed of response and global spread can be achieved by sharing resources, capabilities, or distinctive competencies to pursue some business purpose. The incentive for strategic alliances is to gain competitive or strategic advantage. This would include: Access to new markets and new supply sources; Access to the latest technology; or Improve the utilization of resources.

In the developing counties and the underdeveloped countries, organizations rely on strategic alliances for technology and know-how acquisition, on a large scale. Strategic alliances are also used to accelerate product introduction and overcome legal and trade barriers. Sometimes, speed and timing are of essence in implementing strategies, alliances may help the organization attain these.

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1These are partnerships within the industry yet do not perceive each others as rivals . The companies share the risk and cost.

Non-competitive

2Many foreign companies, operating independently in India, have sought to enter into a cooperative arrangement with local rival companies for specific purposes.

Competitive

3Two organizations from different, often unrelated industries, work on well-defined activities.

Pre-competitive

4Generally alliances within the industry exemplified by vertical value-chain relationships e.g. between manufacturers and their suppliers and distributors.

Pro-competitive

Typologies of Strategic Alliances:

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The model below explains the strategic issues:

high

low

Non-competitive

Competitive

Pro-competitive

Pre-competitive

low high

Interaction

Conflict

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There are four basic principles to manage alliances successfully.

Clearly define the strategy and assign responsibilities

Phase in the relationship between the partners

Blend the cultures of the partners

Provide for an exit strategy

Phasing means giving time and opportunity to the partners to know each other well. One success and people find it easier to work in other projects.

It is important to blend cultures. There must be an understanding and appreciation of differences.

Strategic alliance is a demanding in terms of the leadership and human relations skills of the managers involved.

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Ways to Go International

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ModeMode

Export

DirectInvestment

License

Franchise

The firm produces in the home country and markets it in overseas markets.

An arrangement where the company transfers knowledge, know-how, technology, rights to patents, etc. overseas for a fixed time in return for some form of payment, usually a royalty payment.

Involves the right to use the business format, usually a brand name, in an overseas market in return for the franchiser receiving some form of payment.

This involves ownership of production units in the overseas market based on some form of equity investment or direct foreign investment.

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Text

Text

Text

Text

Text

Text

Global Strategy

Transnational Strategy

International Strategy

Multidomestic Strategy

high

low

low high

Cost Pressures

Local Responsiveness

International Strategies

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Global: The organization offers standardized products and uses integrated operations.

For example: Coca Cola and Pepsi their drinks internationally. They can be produced and sold in any nation. The basic formula is either manufactured by them locally or imported and sold to bottler who has to maintain the standards laid out internally for their products.

The white goods industry, FMCG industry and Fast foods and Beverage industries have established global brands in a large number countries and this seems to be a new global trend.

Multi-domestic: Multi-domestic strategy is adopted when an organization can achieve a high level of local responsiveness by matching products and services to the national conditions operating in the countries they operate in. It attempts to extensively customize products and services according to the local conditions. This may lead to a high-cost structure as research and development, production, and marketing have to be duplicated. However, the advantages that accrue; especially when cultural, social, climatic and economic differences exist; can be substantial.

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Transnational: The organization seeks the best of both the multi-domestic and global strategies by globally integrating operations while tailoring products and services to the local market. Flexible manufacturing enables organizations to produce multiple versions of products from the same assembly line, tailoring them to different markets. This gives more choice in locating facilities to take advantage of cheaper labor or to get the best of other factors of production.

International: Firms that have products or technologies which are proprietary or protected against replication can create value by transferring products and services to foreign markets where these products and services are not available. This is called an international strategy. The international organization maintains a tight control over its overseas operations, offers standardized products and services in different countries with little or no differentiation.

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Entering International Markets

Four national characteristics are conducive to creating globally competitive firms in particular industries. Factor conditions: the special factors or inputs of production such as natural

resources, raw materials, labor, and so on that a nation is specially endowed with.

Demand conditions: The nature and size of the buyer’s needs in the domestic market.

Related and supporting industries: The existence of related and supporting industries to the ones in which a nation excels.

Firm strategy, structure and rivalry: The conditions in the nation determining how firms are created, organized, and managed and the nature of domestic competition.

International strategies offer a promise of above-average returns. Globalization, trade liberalization, higher levels of cultural diffusion, and new communication technologies, indicate the likelihood of international strategies becoming a favored mode of growth.The disadvantages lie in factors, such as, risks related to uncertainty in economic and political environments, difficulty managing cultural diversity, cost of coordination, communication and distribution, and barriers to expansion and growth.

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Grand Strategy Clusters ModelGrand Strategy Clusters Model is an excellent framework to examine the strategies, we have covered so far. The classification is based upon the organization’s competencies and markets. In this approach you first consider the industry.

• What is the product sector growth rate? • Is it growing or declining?

Competitive Strength are assessed on two levels: • The size and trend of the market share, whether it is moving up, static or going

down, and • The financial strength; specifically either cash flow from operations, or access to

capital.

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CompetitiveCompetitivePositionPosition

Strong market share and weak finances = average

Low market share and strong finances = average

Neither strong market share nor strong finances = weak

Strong market share and strong finances = strong

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WEAK COMPETITIVE POSITION

Quadrant IV• Concentric diversification

Horizontal diversification Conglomerate diversification Joint ventures

Quadrant III• Retrenchment Concentric

diversification Horizontal diversification Conglomerate diversification

Quadrant I• Market development Market

penetration Product development Forward integration Backward integration Horizontal integration Concentric diversification

Quadrant II• Market development Market

penetration Product development Horizontal integration Divestiture

RAPID MARKET GROWTH

SLOW MARKET GROWTH

STRONGCOMPETITIVE

POSITION

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Strong sector, strong competitive position: The strategic choices include: Increase demand and sales in existing and new markets Increase market penetration and services and capture greater share. Enhance or extend existing products and services; add-ons, backends, strategic

joint ventures. Gain control over distribution - bring external sales inside. Take sales from

distributors. Gain control over suppliers; Acquisition, merger, or joint-ventures with

competitors Develop strategic partnerships to increase distribution, or gain new products. Develop related products and services for existing customer base - backend

strategies.

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Strong sector, weak competitive position: This is a difficult decision, because the sector is strong, but the organization has relatively small market share, and limited or no cash. The choices include:

Move into small, defined and profitable niche markets. Focus on increasing market penetration for existing products and services and capture greater share using marketing as a strategy. Seek strategic partnerships for products/services for existing customers Develop products and services for existing customer base - backend strategies. Get out of the business

Weak sector, strong competitive position: This is an ideal case for Growth. As the organization has cash, it is in a position to exploit its standing. The organization should:

Add related products and services for existing customer base - backend strategies.

Add un-related products and services for existing customer base - backend strategies. Add new products and services for new customer base Create joint ventures in unrelated markets

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Weak sector, weak competitive position: This requires the organization to retreat. The different options are:

Reduce costs if you can. Sell product line Sell company If you don't want to liquidate, look at the option of expanding your market using

low-cost / no-cost marketing strategies or create strategic partnerships and joint ventures. It may be difficult to attract partners to a market with poor fundamentals.

This framework is specific to a business unit with one major industry and/or product focus. If the business is more complex, the process will need to be repeated for each focus sector. Finally, look at the strategic intent of the organization and confirm that the strategy chosen adequately addresses the issues facing the organization in these three areas.

Does the strategy facilitate the organization to reach its full potential in the core business;

effectively expand into logical adjacent businesses surrounding that core; or permit the organization to preemptively redefine the core business so as to

maintain its position in the marketplace. An affirmative answer confirms the success of the strategy.

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Strategic ChoiceCorporate ParentingCorporate Parenting is a corporate strategy employed by highly centralized and diversified firms with large resource pools. It reflects the role and responsibility of a multi-business parent to its business units. The relationship takes different forms in different organizations and varies considerably. Parenting roles can be:

Aiding the business units in the development of their strategies and enhancing their competitive advantage, or

Primary involvement in areas where answerable to external stakeholders. Business organizations, as parents, can basically be subdivided into two categories:

Short term Parenting: The parent adds value to its stakeholders by rearranging the assets. It takes on the role of a Portfolio Manager. Portfolio Managers identify and acquire undervalued assets and resell them at a profit. They do not contribute to the resources of the business units that they acquire.

Long Term Parenting: is based on a clear distinction on differences between business level and corporate strategy. The objective of the parent, who has long tern interests in the business unit, is to facilitate the business unit to achieve competitive advantage.

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Long Term Parenting

to facilitate the business unit to achieve competitive advantage, the parent has to do it either through skill transfer or through activity sharing.

It means that:

The parent must add more value than the business unit would be able to do by itself.

It must also strive to add more value than the parent of another such business unit.

The parent that can add value in these ways is said to have parenting advantage and clearly is entitled to enjoy the rights of a good parent.

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Parenting Value

Stand-alone Value

Rival Parent Value

HighHigh

Low Low

Weak

WeakStrong Strong StrongWeak

We need to define the various portfolios so that we have quantitative measurements of the value of the organization and the business unit. For the parent to gain optimal value, the business units must perform more highly in aggregate under the parent that they would under standalone circumstances.

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The goal is to keep the business units in the parenting advantage area in the upper right quadrant of the first matrix. This would raise make the business stronger. The business unit would then move towards the right quadrant in the second matrix and the parent would be in a stronger position than the rival parent.

The figure shows the parent as a poor performer and therefore the business would be better off on a standalone basis. The best solution would be to sell the business to the rival parent, who has the most value for the business and will probably pay a high price to acquire it.Decision making: Decision making is a complex process. As the number of business units in the corporate structure increase, parenting becomes more intricate. At the heart of decision-making are the following questions:

Which businesses should the parent invest its resources in; How should these investment be structured; How should the parent act, influence and relate to its business units; Does the parent’s relationship with the business units create the optimal value for the group.

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The corporate parent has two distinct responsibilities in regard to achieving the goals: The parent has to identify the value creators/ destroyers and take appropriate action of enhancing the value creation potential and minimizing the value destruction potential. To ensure that they have a sufficient understanding and feel for these business to be able to identify value improvement opportunities, and understand the key value drivers.

These are basic to the success of the relationship. The parent should not inadvertently impose value destruction influences. The objective should be that the business units fully express their abilities by their performance. Define the various portfolios in such a way that they are amenable to quantitative measurements. The business units must perform more highly in aggregate under the parent that they would under standalone circumstances. For a parent to be deemed to create value in a portfolio, it needs to have a clear idea of the criteria for determining the value. To successfully achieve this, it has to:

identify the critical success factors for each business unit, analyze requirements to convert weaknesses into strengths, and to determine parental fit.

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The Parenting Matrix: There are a number of factors that play a role on the scope of the fit between the parent and the business units. These are termed Parent Characteristics. These can be represented by a matrix, called the ‘parenting matrix’.

The parenting matrix looks at Business Units in two contexts; Strategic characteristics; and Parenting needs.

These criteria are used to categorize different business units.

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Ballast BUs Heartland BUs

Alien BUs Value Trap BUs

High

Low

Fit between BU Strategy & Corporate Purpose

Low Fit between BU Parenting Needs &HighCorporate Capabilities

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‘Heartland businesses’ are the core businesses, and there is the greatest fit on both dimensions;

‘Ballast businesses’ have a good strategic fit but cannot exploit the capabilities of the parent;

‘Value trap’ businesses are those where there is a fit between the parenting needs of the business unit but there is no strategic fit;

‘Alien businesses’ are units that have little strategic fit and can derive little benefit from the parent.

Value trap businesses create decision problems for the parents, while alien businesses are candidates for disposal.

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Strategy Selection:

The parent has to finally decide upon the definition, profiles, structure and number of businesses in the portfolio of the organization. These decisions, ultimately determine the portfolio composition.

Depending upon the ‘fit’ of the business unit, the parent can take a view using different means that include

combining businesses,

separating out units,

spinning off units,

mergers and acquisitions,

corporate renewal initiatives, new business creation, strategic alliances and other forms of venturing, and the reallocation and transformation of under utilized resources.

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The portfolio is developed over a period of time. The parent needs to have answers to the following questions:

What are the portfolio priorities?

How is the portfolio changing and how should it change?

What are the profit drivers for the business

How should we be analyzing the situation and the next moves?The job of the parent is to influence and assist the business units to achieve their business objectives as well as the corporate objectives. The degree to which they can be persuaded will depend on a number of factors but will be primarily driven by:

the organizational culture, strategic importance, strategic and financial risk, skills, personalities, management styles, etc.

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A parent may try to seek benefits to businesses by helping the interrelationships between them. In addition, it may try to transfer skills and competencies from one business unit to another. Corporate parents have a number of ways to influence their business units:

Stand-alone Influence Synergy Influence Services Influence Create optimal conditions for creating advantage, and Corporate development and portfolio alignment.

Selection Metrics : The selection would be based on measurements and corporate objectives of the organization and it’s identified options:

Targeted acquisitions or mergers Changes to existing business structure A required number of new ventures into a new geographical region A successful venture into a new business type, product or service Achieving a price for a spin-off or purchase Finding new channels for product sales by growing alliances

Parenting Influences

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Performance Metrics: The objectives of the business and their implementation are situational. Therefore there could be any number of measurements designed to track their performance and success. Examples of some of the measures are: Increase downstream asset ratio Increase the revenue from exports by x% Specific outcomes of a corporate initiative Turnaround or improvement goals of an under-utilized asset or poor performing

business Efficiency improvements by getting BU’s to corporate better, e.g. less wastage,

certain shared overhead and R& D etc.A value oriented view of corporate activities recognizes underlying principles of the business is investments that earn a return in excess of the opportunity cost of capital. The value-managed corporation is characterized by an ability to adopt an outsider’s view of the business and by a willingness to act on opportunities to create incremental value. This philosophy is necessary to be developed and institutionalized throughout the corporation, and adopted by the parent as a way of life.Short-term parenting will be covered in under short-term strategies.

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A number of techniques have been developed for displaying a diversified organization’s operations as a portfolio of businesses. The techniques provide simple frameworks for reviewing the performance of multiple Strategic Business Units (SBUs’) collectively. Techniques of portfolio analysis have their greatest applicability in developing strategy at the corporate level. They chart and characterize the different businesses in the organization’s portfolio and help in determining the implications for resource allocation.The basis for many of these matrix analyses grew out of work carried out in the 1960s by the Boston Consulting Group (BCG). BCG came up with a hypothesis to explain how an organization with the highest market share in the industry generally will have the greatest accumulated volume of production and therefore the lowest cost relative to other producers in the market. Systematic cost differences arise between competitors because some develop more knowledge about production than others.

Portfolio Analysis

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This concept has important implications:

if a company can accelerate its production experience by increasing its market share, it could gain a cost advantage in its industry that would be difficult to match.

Substantial investment in pursuing market share today could pay off even more substantially tomorrow.

This linear relationship between costs and cumulative production became known as the Experience Curve. According to the experience curve concept:

costs of value added decline approximately 20 to 30 percent in real terms each time accumulated experience is doubled.

If the growth rate is constant, the cost decline continues indefinitely as long as the growth rate continues.

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• If the growth stops, costs continue to decline, but the rate of decline is cut in half each time the accumulated experience doubles

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The cost declines do not occur automatically. It is assumed that there is added investment in an amount commensurate with the marginal cost of capital. The experience curve deals with the entire realm of possibilities of job element management with volume changes. Its business effects are: Market Share: Costs are inversely proportional to market share. A high

market share will produce low cost. Growth: Relative costs should improve if growth rate is faster than that of

competitors. Debt Capacity: Relative debt capacity will increase with no loss of safety if

market share increases. Shared Experience: Cost should decline proportionately faster or slower when

cost elements are shared between more than one product. Product Design: Choice of design element alternatives can be determined by

whether initial experience is high or low compared to future volume expected. Make or Buy: The relative experience between your experience and supplier

experience differential if you make the part should determine the choice of make or buy.

Procurement Negotiation: The value to the supplier of large scale procurement can be calculated. Also the rate of normal cost change for the supplier can be calculated.

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Market Potential: By comparing market elasticity with cost decline, the market potential can be approximated.

Product Line Breadth: The total economic effect of product line extension can be evaluated by interaction of the experience and volume of combined cost elements.

The basic mechanism that produces the experience curve effect is still to be adequately explained, but the effect itself is beyond question. The absence of its effect is almost a warning of mismanagement.

The experience curve and the learning curve are related. The learning curve is a somewhat limited application, of the experience curve. It is only applied to direct labor.

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BCG MatrixThe Boston Consulting Group Matrix (BCG Matrix) is the best-known portfolio planning framework used to strategize for SBUs.

A SBU is a business that can be planned separately from others, has its own set of Competitors, and is managed as a Profit Centre.

A SBU can either be an entire mid-size company or a division of a large corporation. It normally formulates its own business level strategy and often has separate objectives from the parent company. A business portfolio is the collection of SBU that makes up a corporation. The optimal business portfolio is one that fits perfectly to the company's strengths and helps to exploit the most attractive industries or markets. The BCG growth share matrix is directly derived from the experience curve and based on the pattern of cash flow. The aim of the analysis is:

Analyze its current business portfolio and decide which SBUs’ should receive more or less investment,

Develop growth strategies for adding new products and businesses to the portfolio, and Decide which businesses or products should no longer be retained.

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Stars

Cash Cows Dogs

Question Marks

BCG Matrix

The matrix reflects the contribution of the products offered by the firm to its cash flow. Based on this analysis, products are classified as:

• ‘stars’, • ‘cash

cows’,• ‘question

marks’ & ‘dogs’.

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Stars (high growth, high market share): Stars are in the upper left quadrant of the matrix.

They grow rapidly

They use large amounts of cash

Are leaders in the business so they should also generate large amounts of cash.

There is generally a balance on net cash flow.

Over time all growth slows. Therefore, stars eventually become cash cows if they hold their market share. If they fail to hold market share, they become dogs. Cash Cows (low growth, high market share): Cash cows are in the lower left quadrant of the matrix.

Such products are profitable and cash generation is high, Because of the low growth, investments needed should be low. Keep profits high They form the foundation of an organization.

Cash cows pay the dividends, pay the interest on debt and cover the corporate overhead.

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Dogs (low growth, low market share): Dogs are in the lower right quadrant.

These products need to be avoided. You should try to minimize the number of dogs in a company. Beware of expensive ‘turn around plans’. As soon as they stop delivering cash, they should be phased out or otherwise liquidated

They are essentially worthless and are generally cash traps.

Question Marks (high growth, low market share): They are in the upper right quadrant. These products have the worst cash characteristics of all, because high

demands and low returns due to low market share If nothing is done to change the market share, question marks will simply

absorb great amounts of cash and later, as the growth stops, turn into dogs. Either invest heavily or sell off; or invest nothing and generate whatever

cash it can. Either you should increase market share or deliver cash.

Question marks are the real gambles. Their cash needs are great because of their growth. Yet, their cash generation is very low because their market share is low.

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The GE / Mckinsey Matrix is also known as General Electric's Stoplight Grid. It is a more complex version of the BCG Matrix, however, it is derived from the same principles.Strategic Business Units (SBUs) are portrayed as a circle plotted in the Matrix:

the size of the circles represent the Market Size; the size of the pies represent the Market Share of the SBUs’, and arrows represent the direction and the movement of the SBUs’ in the

future.

GE / McKinsey Matrix:

Corporate strategy is a game plan to achieve the highest levels of operational effectiveness.

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In this model, market growth is replaced by market (Industry) attractiveness as the dimension of industry attractiveness. Market Attractiveness includes market growth rate as just one of the parameters. Depending on the product characteristics, different parameters are selected to measure ‘market attractiveness’. Market share in the BCG Matrix is replaced by competitive strength. This is the dimension assesses the competitive position of each SBU. Likewise, it includes a broader range of factors other than just the market share. Typical factors that affect ‘Market Attractiveness’ are called ‘drivers’ and can be:

Market size Market growth rate Market profitability Pricing trends Competitive intensity / rivalry Overall risk of returns in the industry Opportunity to differentiate products and services Demand variability Segmentation Distribution structure

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Typical drivers of Competitive Strength of a Strategic Business Unit: Strength of assets and competencies Relative brand strength Market share Market share growth Customer loyalty Relative cost position (cost structure compared with competitors) Relative profit margins (compared to competitors) Distribution strength and production capacity Record of technological or other innovation Access to financial and other investment resources

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The GE Matrix involves a six-step approach, which include the following:

The drivers for each dimension are to be specified. The organization must carefully determine those factors that are important to its overall strategy You must assign relative importance by giving weights to the drivers Score the SBUs’ on each driver and multiply weights times scores for each SBU to determine the value of each dimension Repeat the exercise for each dimension View resulting graph and interpret it Perform a review/sensitivity analysis using adjusted weights and scores.

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Directional Policy MatrixThe Directional Policy Matrix is similar to the GE & BCG Matrix. The vertical axis is market attractiveness and the horizontal axis is Industry Attractiveness. The recommendations are similar to that of the BCG Matrix, i.e. invest, grow, harvest or divest.

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There are eight steps involved in the analysis. The following steps are an example that is based on work carried out at in a multinational firm. Step 1. Determine the products or services for markets that you intend to include in

the matrix. Step 2. Define the market attractiveness factors. Factors can be summarized into

three headings Growth rate Accessible market size – an attractive market is not only large but is also

accessible Profit potential – this varies considerable from industry to industry

Step 3. Determine the scoring method and weightage criteria. (weighting out of 100 and score out of 10 for example)

Step 4. Define business strengths. These can be grouped into the following factors as an example and each factor can be made up of numerous sub-factors:

Product requirements Price requirements Service requirements Promotion requirements

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Step 5. Weight and score the business strengths. Multiply the score by the weighting. Divide this by 100. Add other factor scores to obtain an overall score. Divide each score into the score of the biggest competitor (taken as 1) to obtain a relative score.

Step 6 Plot the ‘x’-co-ordinates along with their corresponding market attractiveness co-ordinates on the matrix. The market size is used to determine the size of the circle and the organizations share of this market is depicted as a wedge in the circle.

Step 7 (optional step). The factors are rescored for the products /services in three years time. The circles are plotted on the same matrix as the original demonstrates the movement that will have to take place to achieve forecast.

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Step 8. Strategies are set to achieve the desired positions on the matrix.

Invest Grow Harvest Divest

High MAHigh BS

High MALow BS

Low MAHigh BS

Low MALow BS

This is the ideal quadrant. The strengths are directed at a highly attractive market. Invest resources in those parts of the business which are in this quadrant.

An uncomfortable quadrant. The market potential is attractive but the business strengths or being really successful are inadequate. Efforts need to be selective, as this segment will cost you.

The market has little attractiveness in terms of future potential but the business strengths are high. It is good for near term profits, so maintain the position as long as possible.

The market is not particularly attractive and business strengths are below average here. Keep in this segment only if it supports a more profitable part of your business.

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Advantages & Disadvantages of Matrix Models

The degree of applicability of the portfolio model depends on the relative importance and the manner in which the models are used. One has to be careful in the use of matrix analyses. The advantages and disadvantages of using matrixes for decision making are given below:

Advantages Key areas. These models highlight certain aspects of business that are

considered essential to success or failure Cash flows. They focus on cash flow requirements of the SBU's and help

identify the different cash flow implications and requirements of different business activities. This helps management to carry out its resource allocation function.

Balance portfolio. They help identify strengths and weaknesses in the portfolio, the gaps that need to be filled; when a new SBU needs to be added or when one needs to be removed; and the duplicative businesses in the portfolio.

Diverse perspective. The diverse activities of a multi-business company are analyzed in a systematic manner and enterprise diversity highlighted.

Flexible comparisons. Some matrices, like the McKinsey Matrix, are highly flexible in being able to select different factors for different industries. This kind of analysis can provide coverage of a wide number of strategically relevant variables.

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Disadvantages Too simple. Matrix models are simplistic. The important factors are reduced to only

two dimensions other factors are necessarily excluded or lose their distinctiveness in the collapsed dimensions.

Market share and cash flow mismatch. High market share in a low-growth industry does not necessarily result in large positive cash flow characteristics of a "cash cow" business. Low growth industries can be very competitive and staying ahead in such environments can require major cash investments.

Market share and cost savings mismatch. The connection between relative market share and economies of scale may also not be a direct relationship.

Subjective numbers. The numerical format of some matrices may lead the user to place greater confidence in them than is warranted.

Static pictures. The analyses not projective, they do not account adequately for changes due industry evolution, technological change, and other environmental forces, etc.

Multiple SBU's. There is a limit to the number of SBU's that can be examined. Such problems can occur when the volume exceeds 40-50 SBU's.

Conflict of interests. When a SBU contains several different but related businesses conflicts of interest can occur between the cash flow priorities of a SBU and the company as a whole.

Inappropriate divesting. Improper application of portfolio techniques may result in inappropriate divesting of useful synergistic holdings. Synergistic effects of linked SBU’s are seldom reflected in matrices.

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Strategic ChoiceShort Term Corporate StrategiesThere are situations when urgent action is required and specific objectives are required for the organization to survive, mainly in times of crisis or major transition. These could be:

When the industry or the economy is in upheaval or in an uncertain state, it might convince strategists to be conservative until conditions became more certain.

In cases, where the company is on the brink of failure, the limited options of management is reflected in a focus on short term strategies to ride over the situation.

The focus of these strategies is on: Efficiency (reducing use of resources), Ease of routine ( reducing costs), Reducing risk, Overcoming economic or governmental constraints, and Effecting stability after growing

The different short-term strategies are: A Stability Strategy, A Renewal or Turnaround Strategy, or Liquidation.

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Some of the stability strategies are: Stable Growth, and Profit Strategy.

Stable Growth In its generic form, this strategy means that the organization's will take no bold initiatives. The stabilizing strategy is used to strengthen the company’s gains or to review its status. ‘Do nothing’—that is, continue present strategies is important as it is usual to compare any proposed change with the ‘do nothing’ option as a baseline. Though most large corporations do not look favorably at stability strategies. Sometimes an organization requires time out to take care of their infrastructure and regroup.For a large corporation, such strategies are most appropriate when these conditions exist:

a stable and unchanging environment, satisfactory organizational performance, an absence of valuable strengths and critical weaknesses, and only insignificant opportunities and threats.

Stability Strategies

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This option is rarely viable for the long term as competitors will gradually take over the market by improving:

their products,

processes, or

relationships.

However, a good strategist can make good use of this strategy in the appropriate circumstances.

This strategy is appropriate for firms with solid markets and few threats and weaknesses.

For small businesses, it does not make sense as there is danger of large corporations breaking into the industry.

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Profit Strategy:

A profit strategy capitalizes on a situation in which a long-time trend or type of product is being replaced by a new one. Such a strategy is usually driven by the stockholders based on two considerations:

How long will the market for the old product or technology last?

Will this market provide adequate profits?

The critical question for managements is, "Can we make more money by using these assets or by selling them?“There are two forms of profit strategy, and they are the opposite, or mirror image of each other.

Harvest: This means that the organization decides to sell (harvest) its older technology and go with the new one. Endgame: Organizations adopting the end game strategy decide to stay in the business. They decide to stay in the market until the "end of the game."

All competitors eventually must harvest the old assets at some point of time and move to the new product or technology.

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Retrenchment & Turnaround Management: The symptoms of organizational problems are reflected when sales and profits are down and market share is slipping. A strategy must be found in time to stop the decline if the organization is to continue to succeed.Strategies that will stop the organization's decline and put it back on a successful path are called renewal strategies. There are two main types of renewal strategies:

Retrenchment, and Turnaround.

Corporate renewal calls for two primary actions: Cost cutting in the form of more emphasis on profitable products and a search for

cheaper raw materials, and Reduction of personnel accompanied by creating the conditions for an increase

in efficiency. One or both of these tools are employed. In retrenchment Managers try a minimal restructuring —hoping that nothing more painful will be needed to turn the organization around. The assumption is that the organization will return to health with a cutback. In turnaround, the actions are more severe.

Renewal Strategies

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Retrenchment:

Retrenchment is a short-run renewal strategy. Retrenchment is used when:

Technological advancements, global competition, other environmental changes, mergers, and acquisitions may make growth and stability strategies no longer viable.

This strategy is characteristic of an organization that is reducing its size or selling off less profitable product lines.

The strategy is meant to replenish and revitalize the organizational resources and capabilities so that the organization can compete again.There are three stages of retrenchment strategy which are given below: Stage One - Cost Cutting: A cost cutting program should be preceded by careful

thought and analysis. If you consider cost-cutting as part of your strategy implementation, be sure to specify exactly how it would be implemented across the organization. Support why the cost-cutting should take the form you propose.

Stage Two - Re-engineering: Reengineering involves casting aside old assumptions about how an organization's business processes should be done and starting from scratch to design more efficient processes. This may cut costs. It is better to abandon processes that are not efficient.

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Stage three – Downsizing & Downscoping:Downsizing means laying-off people. It is a good way to cut costs quickly. But unless downsizing is tied to a rational strategy, problems can result. Cutting staff without changing the amount and type of work may result in cost cuts, but product quality and customer service may suffer. If they do, the organization's performance measures will suffer. The aspect of laying-off labor and employees is a sensitive issue. However, some companies offer voluntary retirement schemes. Some firms also provide for a social safety net to redeploy and retrain workers.Down scoping means eliminating businesses that are unrelated to the company's core business. The company tries to establish a focus on it's core businesses so that top-level managers manage the these more effectively.Down scoping is successful if it results in refocusing the company on its core (and related) businesses and, in turn, on its core competencies. Both the parent and spin-off company usually show increases in shareholder value and accounting performance following the spin-off. Down scoping often includes downsizing, so that the company does not lose

key employees from core businesses. Organizations that have faced a significant deterioration of profits or cash flow are good candidates for a third-party consultant to intervene and manage it back to profitability.

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Organizations that have faced a significant crisis that has negatively affected operations are also good candidates. These strategies are designed to address organizational weaknesses that lead to performance declines. The main issues in many of these strategies are: making the critical decisions on timing, removing common obstacles, and maintaining profitability.

Turnaround Management:Turnaround management is the “management of corporate healing.” It is a highly targeted effort to return an organization to profitability, and/or increase cash flow to a sufficient level. There are two approaches: Symptomatic: The symptoms of corporate sickness are identified and addressed

through vigorous management action. In many cases, such decisive action may require unpleasant decisions to be taken: Cost-cutting, Layoffs, and Closures.

Systemic: These turnarounds typically go beyond the immediate and look for the underlying causes. They try to transform the mindset of stakeholders and the corporation’s systems and processes by including the stakeholders in both the diagnosis and remedial steps.

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There are five critical stages of a successful turnaround:

Stage One - Assessment of Current Problems: The first step is to assess the current problems and get to the root causes and the extent of damage the problem has caused. Once the problems are identified, the resources should be focused toward those areas essential to efficiently work on correcting and repairing any immediate issues that would otherwise stand in the way of a complete recovery. If necessary, steps should be taken to replace top managers or weak board members who might impede the turnaround process, and to put into place a top management team who will most successfully lead the turnaround effort.

Stage Two - Analyzing the Situation: Before you make any major changes; determine the chances of the business's survival. Identify appropriate strategies and develop a preliminary action plan.The source of an organization’s problems often lies in the fact that the organization has become unfocused. Whatever the original cause, it is necessary to strategically re-focus the organization to position it for rapid recovery.For this one should look for:

the viable core businesses; adequate bridge financing, and adequate organizational resources.

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A more detailed assessment of strengths and weaknesses in the areas of competitive position should also be carried out. Once major problems and opportunities are identified, a strategic plan with specific goals and detailed functional actions is developed.

This plan must then be sold to all key parties in the organization, including the board of directors, management team and employees. Also, the plan needs approval from key parties outside the organization--bankers,

major creditors and vendors. The status quo is challenged and those who change as a result of the plans are

rewarded and those who don't are sanctioned.In a typical turnaround, the new organization emerges from the operating table, a

smaller organization but no longer losing cash. Stage Three - Implementing an Emergency Action Plan: If the organization is in

a critical stage, an appropriate action plan must be developed to stop the bleeding and enable the organization to survive.

Many areas within an organization need to be running effectively for a successful recovery, these include human resources, marketing, sales, IT, and management. You have to make sure these areas are working on an integrated plan that supports recovery.

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The plan typically includes financial, marketing and operations actions to restructure debts, improve working capital, reduce costs, improve budgeting practices, correct pricing, prune product lines and accelerate high potential products.

Cash is the lifeblood of the business. A positive operating cash flow must be established as quickly as possible and enough cash to implement the turnaround strategies must be raised.

Often, unprofitable divisions or business units are unloaded. Frequently, you can apply some quick, corrective surgery before placing them on the market. If the unit fails to attract a buyer in a given time frame, liquidation occurs.

At this time emotions run high; employees are laid off or entire departments eliminated. After sizing up the situation objectively, you as a skilled leader must implement these decisions quickly and fairly. Stage Four - Restructuring the Business: Once the major issues have been covered, the losing divisions are sold off and administrative costs cut.

Turnaround efforts are directed toward making the remaining operations as effective and efficient as possible. This may require further restructuring to increase profits and return on assets and equity.

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The financial state of the organization's core business is particularly important. If the core business is irreparably damaged, then the outlook for the entire organization may be bleak. To put the organization's financial house in order:

• Prepare cash forecasts, • Analyze assets and debt, • Establish lines of credit, • Identify sources of new capital if necessary, • Review profits, R&D, and • Analyze other key financial functions to position the organization for rapid

improvement.If the remaining corporation is capable of long-term survival, it must now concentrate on sustained profitability and the smooth operation of existing facilities. During the turnaround, the product mix may have changed, requiring the organization to do some repositioning. Core products neglected over time require immediate attention to remain competitive. In the new, leaner organization, some facilities might be closed; the organization may even withdraw from certain markets or target its products toward a different niche.

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The "people mix" is another important ingredient in the organization's competitive effectiveness. Reward and compensation systems that encourage dedication

and creativity encourage employees to think "profits" and "return on investment." Stage Five - Returning To Normal: In the final stage of the turnaround process,

the organization should begin to show signs of profitability. While earlier steps concentrated on correcting problems, stage five focuses on profitability, return-

on- equity and enhancing economic value-added. Financially, the emphasis shifts from cash flow concerns to maintaining a strong balance sheet, long-term financing, and strategic accounting and control

systems. From a marketing point-of-view, emphasis is placed on a number of strategic efforts including: • initiating new marketing programs to broaden its business base and increase

market penetration; • carefully adding new products and improving customer service; • creating alliances with other world-class organizations.

All of these changes can cause problems for employees and management. The job is to ensure that change is managed as effectively as possible to minimize

the potential for disruption. Rebuilding momentum and morale is almost as important as rebuilding the ROI.

It means a rebirth of the corporate culture and transforming the negative attitudes to positive, confident ones as the organization maps out its future. 7-97

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Judging a Turnaround: Not all turnarounds succeed. An organization may put a quick end to its disastrous losses but never quite attain an acceptable return position.

When this occurs, management may decide to sell the business to an organization better able to produce an acceptable return on the funds invested.

On the other hand, the turnaround may be so successful that the organization becomes a target of a takeover bid. In either scenario, the turnaround manager plays a key role in identifying prospective purchasers or analyzing the takeover prospect, and then negotiating a successful sale.Transformational turnarounds often yield better corporate performance and gear an organization to withstand the stress of competition. It also enables an organization to grasp a big opportunity and innovate successfully. Turnarounds can differ drastically between organizations. A successful turnaround model will require a certain type of corporate leadership and reduce the human costs of turnaround while building capacity for sustainable growth.

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Consider, for example, the case of Scott Paper of the US. An old and established organization with annual sales of $5 billion, the organization saw losses during 1991-93 and declining sales. John Dunlap was brought in as CEO in April 1994. During his first five days in office, he dissolved the management committee, fired nine out of 11 top executives, destroyed all previous strategic plans and brought in three of his own people.

Over the next few months 40 per cent of the employees were asked to go home, and this included 70 per cent of the staff at corporate headquarters. He disposed of about $4.6 billion worth of assets, paid off debts and invested some of that money in the market to keep the Scott stock at respectable levels. Scott turned profitable in under a year. Kimberly-Clark bought it out for over $7 billion and the CEO made good money from stock options. Contrast this with the creative turnaround at Siemens-Nixdorf, Germany. S-N, an InfoTech organization, fell sick in the early ’90s and had 40,000 employees.Gerhard Schulmeyer of ABB was brought in as CEO in October 1994 to turn the organization around. He met some 9,000 employees and stakeholders even before taking over, and his diagnosis was that the organization needed a mindset change to thrive in the dynamic IT industry in which it operates.

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In order to create an entrepreneurial, customer-focused and teamwork-oriented culture, 2,000 change agents were identified and trained for exposure to entrepreneurial culture.

2,000 profit centers and 250 SBUs, were created with the trained change agents heading those. Each action was assigned to a project leader, who recruited his/her own team for it. Twice monthly, transformation program developments were discussed organization-wide. The result was the organization broke even in 1995, and in 1996 it had made a 550 million DM profit on sales of 15,400 million DM. As it becomes more difficult to maintain profitability, it is important to understand what it takes to complete a successful corporate turnaround. Other Options: A turn around strategy is used to overcome weaknesses. However, when there is a crisis, the options are different. If the crisis is moderate, the best option is to disinvest. An organization divests when it sells a business unit to another organization that will continue to operate it. The end option that is to be exercised depends on the specific position taken by the organization’s management and the legal system under which it operates. The options indicate the non-viability of the firm as a business.

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Restructuring:Restructuring options can be classified into the following categories: ‘Portfolio manager’, ‘ Skill transferer’, or ‘Activity sharer’.

Restructurers use Leveraged Buyouts (LBO). This refers to a restructuring action, whereby the management of the company and/or an external party buys all of the assets of the business, largely financed with debt, and thus makes the company private. Generally, the investment of Restucturer’s is highly leveraged.

Portfolio Managers Skill Transferers Activity Sharers

Strategic Requirements

Identifying & acquiring undervalued assets

Divesting low-performing BUs quickly and good performers at a premium

Transferring skills to BUs to give competitive advantage

On-going transfer of skills Identification of appropriate skills

to transfer

Sharing activities to provide competitive advantage to BUs

Identification of benefits/costs Overcoming BU resistance to

sharing

Organizational requirements

Autonomous BUs Small, low cost

corporate staff Incentives based on BU

results

Autonomous but collaborative BUs Corporate staff as integrators Cross BU task forces Incentives based partly on results

BUs encourage to share Strategic Planning at different

levels Corporate staff as integrators Incentives based on corporate

results

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Though the relationship with the business unit, in this case is short-term, as in short term parenting, the Restructurer, adds value to the business unit it restructures. It adds value to its stakeholders by cashing in on the transformation of the business unit.

There are many examples of restructuring in Indian business houses. Some of the best business houses in the country have gone in for restructuring.

The objective was to disinvest in non-core businesses so that the core businesses become more lean and hungry. In general, the new owners restructure the private company by selling a significant number of assets or businesses, both to down scope the company and to reduce the level of debt used to finance the acquisition.The primary intent of the new owners is to capture the value created through restructuring and improve their profit by selling undervalued assets. The challenge they face is to intervene and transform the performance of the business unit. Restructuring is successful when it enables top management to regain strategic control of a company's operations.

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Liquidation and Bankruptcy

Sometimes a business unit or a whole organization becomes so weak that the owners cannot find an interested buyer. It may be best to sell the organizational asset piecemeal. A simple shutdown will prevent owners from throwing good money after bad once it is clear that there is no future for the business. In such situations liquidation may be the answer. The main problem is: What to do with the remaining physical assets and the employees? Each situation is unique, and you still must identify steps to implement your strategy. Under the Indian Companies Act, 1956, liquidation is termed as winding-up. The Companies Act, 1956 under Part VII, Sections 425 to 560, deals comprehensively with the different legal aspects of liquidation. The Act defines winding-up of a company as the process whereby its life is ended and its property administered for the benefit of its creditors and members. The Act provides for a liquidator who takes control of he company collects its assets, pays its debts, and finally distributes and surplus among the members according to their rights.

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Liquidation or winding-up according to the companies Act, 1956 may be done in three ways:

Compulsory winding-up under an order of the Court

Voluntary winding-up

Voluntary winding-up under the supervision of the Court

Bankruptcy is a last resort step when the business fails financially. The business is dissolved and the court will liquidate its assets. The proceeds will be used to pay off the organization's outstanding debts.

A better option is to reform instead of liquidating. Under this option, the organization reorganizes its operations while being protected from its creditors. If the organization can emerge from bankruptcy, it pays off its creditors as best it can. The Companies Act provides for this. The dissolution of a company, which ceases to exist as a corporate entity for all practical purposes, is kept under suspended animation for two years. Thus, within a period of two years, the Court may order for the revival of the company.

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