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CORPORATE LEVEL STRATEGIES

 The strategies considered by business firms are CORPORATE, BUSINESS, and

FUNCTIONAL strategies.
 In the hierarchy the top most one is corporate strategy.
 Corporate strategy provides the overall direction of the organization in terms of its
general attitude towards growth and management of business.
 CORPORATE LEVEL STRATEGIES, GRAND STRATEGIES, GENERIC
STRATEGIES and BASIC STRATEGIES are synonyms.
 Corporate strategies are basically about decisions related to
1. Allocating resources among different businesses of a firm
2. Transferring resources from one set of businesses to others
3. Managing and nurturing a portfolio of businesses in such a way that the overall
corporate objectives are achieved.
 Defining a business along with the three dimensions of customer groups,
customer functions and alternative technologies, and analyzing based on the business
definition provides a set of strategic alternatives that an organization can consider.
 Strategic alternatives revolve around
1. The question of whether to continue or
2. Change the business the enterprise is currently in or
3. Improve the efficiency and effectiveness with which the firm
achieves its corporate objectives in its chosen business sector.
The different grand strategy alternatives are

STABILITY, EXPANSION (GROWTH), RETRENCHMENT, COMBINATION

I. STABILITY STRATEGIES

This strategy is adopted by an organization when it attempts at an incremental

improvement of its functional performance by marginally changing one or more of its
businesses in terms of their respective customer groups, customer functions and
alternative technologies.

Let us see the illustrations

 A packaged tea company provides a special service to its institutional buyers,

apart from its consumer sales through market intermediaries, in order to encourage
bulk buying and thus improve its marketing efficiency

 A copier machine company provides better after sales service to its existing
customers to improve its company and product image and increase the sale of
accessories and consumables.
 A steel company modernises its plant to improve efficiency and productivity.

The essence of stability strategies is sustaining a moderate growth or remaining where

they are in line with the existing trends.

Stability strategy is adopted because

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It is less risky, involves fewer changes and people feel comfortable with things as they are

1. The environment faced is relatively stable.

2. Expansion may be perceived as being threatening
3. Consolidation is sought through stabilising after a period of rapid expansion.

Stability strategies are of three types

1. NO CHANGE STRATEGIES
2. PAUSE/PROCEED WITH CAUTION STRATEGIES
3. PROFIT STRATEGIES

1.NO-CHANGE STRATEGY

This stability strategy is

 A conscious decision to do nothing new, that is to continue with the present

business definition
 That when faced with a predictable and certain external environment and stable
organisational environment, a firm decides to continue with the present strategy
 The no-change stability strategy is adopted when
1. The firm does not find it worthwhile to alter the present situation by
changing its strategy.
2. There are no significant opportunities or threats operating in the
environment.
3. There are no major strengths and weaknesses within the organisation.
4. There are no new competitors and no obvious threat of substitute products.

 One must make a distinction between an inactive firm, which does not change its
strategy, and a firm consciously decides to continue with its present strategy.

2.PROFIT STRATEGY

 No-change strategy cannot be continued indefinitely.

 When the level of profit comes down the firm has to do something.
 The firm may assess the situation and assume that the problems are short lived and
will go away with time.
 Till then, the firm tries to sustain its profitability by artificial measures by
adopting a profit strategy.
 Some strategies firms adopt when profitability comes down are

1. Measures to reduce investment

2. Cut costs
3. Raise prices
4. Increase productivity
5. Selling prime land in commercial locality
6. Hive off some divisions in non-core businesses
7. Resort to provide services to other organisations, which need outsourcing
facilities.

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 The problems for the temporary difficulties may be

a. Economic recession
b. Government attitude
c. Industry downturn
d. Competitive pressure etc.

 These strategies work only if the difficulties are temporary, if the problems persist
these strategies will deteriorate the firms position.

3.PAUSE/PROCEED-WITH-CAUTION STRATEGIES

 It is employed by firms that wish to test the ground before moving ahead with a
full-fledged grand strategy.
 Or it may be after expansion and wish to rest a while before moving ahead.
 An intervening phase of consolidation is necessary before a firm could embark on
further expansion strategies.
 The purpose is

1. To let the strategic changes seep down the organisation levels

2. To allow structural changes to take place
3. To let the systems adapt to the new strategies

 This is also a temporary strategy like profit strategy, but differs in the way the
objectives are defined.
 While the profit strategies are the enforced choices aimed at sustaining
profitability to overcome temporary difficulties/ problems, the pause strategy is a
deliberate and conscious attempt to adjourn major strategic changes to a more
opportune time or when the firm is ready to move on rapid strides again.

EXPANSION (GROWTH) STRATEGIES

 When an organisation aims at high growth by substantially broadening the scope

of one or more of its businesses in terms of its customer groups, customer
functions and alternative technologies – singly or jointly – in order to improve its
overall performance, the expansion grand strategy is followed.
 Expansion strategy is adopted because

1. It may become imperative when environment demands increase in pace of

activity.
2. Psychologically, strategists may feel more satisfied with the prospects of growth
from expansion; chief executives may take pride in presiding over organisations
perceived to be growth oriented
3. Increasing size may lead to more control over the market vis-à-vis competitors
4. Advantages from the experience curve and scale of operations may accrue

Let us see the illustrations

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a. A chocolate manufacturer expands its customer groups to

include middle-aged and old persons among its existing
customers.
b. A stockbroker’s firm offers personalised financial services
to small investors apart from its normal functions of dealing
in shares and debentures in order to increase the scope of its
business and spread its risks.

c. A printing firm changes from the traditional letterpress

printing to desktop publishing in order to increase its
production and efficiency.

 The company moves in one or the other direction so as to substantially alter its
present business definition.
 Expansion strategies have a profound impact on a company’s internal
configuration causing extensive change in almost all aspects of internal
functioning.
 As compared to stability, expansion strategies are more risky.
 Growth is a way of life, hence all organisations plan to expand, and that is why the
expansion strategies are most popular.
 The factor providing opportunities for companies to seek expansion are
1. A growing economy
2. Burgeoning (rapidly growing) markets
3. Customers seeking new ways of need satisfaction
4. Emerging technologies

 The different types of expansion strategies are

1. Expansion through concentration
2. Expansion through integration
3. Expansion through diversification
4. Expansion through cooperation
5. Expansion through internationalisation

1.EXPANSION THROUGH CONCENTRATION

 Concentration is simple, first level type of expansion grand strategy.

 Converging resources in one or more of a firm’s business in terms of their
respective customer groups, customer functions, or alternative technologies, either
singly or jointly, results in expansion.
 Concentration strategies are known variously as intensification, focus or
specialisation strategies.
 Concentration strategies are called as ‘stick to the knitting’ strategies (In search of
excellence- by Peters and Waterman in 1982) derived from the fact that excellent
firms tend to rely on doing, what they know they are best at doing.
 Concentration strategies involve investment of resources in a product line for an
identified market with the help of proven technology.
 A firm may attempt

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1. Focussing intensely on the existing markets with its present

products by using a market penetration type of concentration.
2. To try attracting new users for existing products resulting in a
market development type of concentration.

3. To introduce newer products in existing markets by concentration

on product development.

 The concentration strategies would apply to situations where the firms find
expansion worthwhile.
 The industries that a firm belongs to should possess a high potential for growth
and be sufficiently attractive for concentration to take place.
 The firm should be financially sound to sustain expansion.
 Concentration is the first preferred expansion strategy because the firm would like
to do more of what it is already doing.
 A firm familiar with an industry would like to invest more in known businesses
rather than unknown ones.
 The firms prefer to concentrate on industries, whose established way of doing
things are familiar to them.
 Advantages of concentration strategies are

1. Minimum organisational changes hence less threatening.

2. Managers are more comfortable staying with present businesses.
3. Intense focussing of resources may lead to develop a competitive
advantage.
4. Managers face fewer problems when dealing with known
situations.
5. The decision making process is under lesser strain as there is a high
degree of predictability.
6. Past experience is valuable as it is replicable.

 Limitations are

1. Heavily dependent on the industry.

2. Adverse conditions in the industry can and do affect firms.
3. If the industry goes in to a recession, it is difficult to withdraw for
the firm.
4. The potential for industry growth, industrial attractiveness and
industrial maturity are variable factors.
5. The industrial attractiveness decreases for the existing players if it
is crowed with competitors.
6. Factors such as obsolescence, fickleness (ever changing nature) of
markets, and emergence of newer technologies are threats to
concentrated firms.
7. Concentration strategies may result in doing the known thing,
which in turn make the job of managers less interesting, less
challenging and less stimulating.
8. For concentration the initial investment required is very high and
on maturity of business the cash inflow will be very high, the firm

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will have surplus money with very little scope for investing in the
present business.

EXPANSION THROUGH INTEGRATION

 A company attempts to widen the scope of its business definition in such a manner
that it results in serving the same set of customers.
 The alternative technology dimension of the business definition undergoes a
change.
 Integration basically means combining activities related to the present activity of a
firm, on the basis of the value chain.
 The value chain is a set of interlinked activities performed by an organisation right
from the procurement of raw materials down to the marketing of finished products
to the ultimate consumers.
 Integration is an expansion strategy as its adoption results in a widening scope of
the business definition of a firm.
 Integration is also a subset of diversification strategies as it involves doing
something different from what the firm has been doing previously.
 The firms are motivated to adopt integration strategies at certain conditions, which
can be explained by transaction cost economics.

1. Transaction cost economics is a branch of study in the economics of transactions

and their costs.
2. According to transaction cost economics, a ‘make or buy’ decision is taken when
firms wish to negotiate with suppliers or buyers.
3. The cost of making the items used in the manufacture of one’s own products are to
be evaluated against the cost of procuring them from suppliers.
4. If the costs of making are less than the cost of procurement then the firms moves
up in the value chain to make the items by itself.
5. Likewise if the cost of selling the finished products is lesser than the price paid to
the sellers to do the same thing then it is profitable for the firm to move down on
the value chain.
6. In both these cases the firm adopts an integration strategy.

 The integration strategies are of two types; the vertical integration and horizontal
integration.
 Vertical Integration: When an organisation starts making new products that
serves its own needs, vertical integration takes place.
 In other words, any new activity undertaken with the purpose of either supplying
inputs or serving as a customer for outputs is vertical integration.
 Vertical integration could be of two types: backward and forward integration.
 Backward integration means retreating to the source of raw materials while
forward integration moves the organisation nearer to the customer.
 Generally when firms vertically integrate they do so in a complete manner, that is
they move backward or forward decisively in a full integration.
 When firms does not commit fully for vertical integration, it results in partial
vertical integration strategies.
 Two of such partial vertical integration strategies are taper integration and quasi
integration.
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 Taper integration strategies require firms to make a part of their own requirement
and to buy the rest from outsiders.
 By quasi integration strategies, firms purchase most of their requirements from
other firms in which they have an ownership stake.
 Ancillary industrial units and outsourcing through subcontracting are adapted
forms of quasi integration.
 For outsourcing to take place firms create captive supply sources by providing a
part of the manufacturing requirements such as design and drawings, and raw
materials to the subcontractors, who then make the parts and supply to the firm.
 Horizontal Integration: when an organisation takes up the same type of products
at the same level of production or marketing process, it is said to follow a strategy
of horizontal integration (or a merger).
 Horizontal integration strategy may be frequently adopted with a view to expand
geographically by buying the competitors business, to increase the market share or
to benefit from economies of scale.
 For example
1. Solidaire India limited started with the name Hi-Beam electronics ltd in
1974 and merged with two other units to form the consortium Tri-star
electronics and adapted the brand name Solidaire in 1978. Thus it adopted
growth strategy in the form of horizontal integration.
2. The takeover of the Neyveli Ceramics and Refractories Ltd by Spartek
Ceramics India Ltd in 1990 (both were in sanitaryware and tile production)
made Spartek the largest ceramic tile manufacturer in the country.

 The demerits of integration strategies are

1. Like concentration strategies, integration strategies too carry a risk, as the
firm commits itself to adjacent businesses all geared to serve the same set
of customer groups and customer needs.
2. If the firm is integrated and the principal product fails or becomes
obsolete then it faces a grave risk.
3. though the integration strategies provide a better control over its value
chain by creating access to and control of supply and demand, the flip side
is that it commits the firm to a set of customer needs and customer
groups more intensely.

EXPANSION THROUGH DIVERSIFICATION

 Diversification involves a substantial change in the business definition- singly or

jointly – in terms of customer functions, customer groups or alternative
technologies of one or more of a firm’s businesses.
 Diversification strategies are of two basic types- concentric diversification,
conglomerate diversification

CONCENTRIC DIVERSIFICATION

 When a firm takes up an activity in such a manner that it is related to the existing
business definition of one or more of a firm’s businesses, either in terms of

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customer groups, customer functions or alternative technologies, it is called

concentric diversification.
 Concentric diversification may be of three types:

1. Marketing related concentric diversification: When a similar type of product is

offered with the help of unrelated technology, for example, a company in the
sewing machine business diversifies into kitchenware and household appliances,
which are sold to housewives through a chain of retail stores.
2. Technology related concentric diversification: When a new type of product or
service is provided with the help of related technology, for example, a leasing firm
offering hire-purchase services to institutional customers also starts consumer
financing for the purchase of durables to individual customers.
3. Marketing and technology related concentric diversification: When a similar
type of product ( or service) is provided with the help of related technology, for
example, a raincoat manufacturer makes other rubber based items, such as,
waterproof shoes and rubber gloves, sold through the same retail outlets.

CONGLOMERATE DIVERSIFICATION

 When a firm adopts a strategy which requires taking up those activities which are
unrelated to the existing business definition of one or more of its businesses, either
in terms of their respective customer groups, customer functions or alternative
technologies, it is called conglomerate diversification.
 Some examples are
1. ITC- cigarettes, hotel industry
2. Essar group- shipping, marine construction, oil support services, and iron
and steel
3. Shriram fibres ltd- nylon, synthetic industrial fibres, nylon tyre cords,
fluorochemicals, flurocarbon refrigerant gases, ball and needle bearings,
auto electrical, hire-purchase and leasing, and financial services)
4. TTK group – pressure cookers, chemicals, pharmaceuticals, hosiery,
contraceptives, publishing etc)
5. Polar group- (fans, marbles, granite)

 Diversification strategies are adopted

1. To minimise risk by spreading it over several businesses.
2. To capitalise on organisational strengths or minimise weaknesses
3. As the only way out if growth in existing businesses is blocked due to
environmental and regulatory factors.
 The advantages of diversification strategies are

1. Concentric diversification enables a firm to attain synergy by exchange of

resources and skills, and to avail economies of scale and tax benefits.
2. Conglomerate diversification offers the advantage of better management and
allocation of cash flows, realising a higher return on investments, and the
reduction of risk by spreading investment in different businesses and
industries.

 The disadvantages of diversification strategies are

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1. The disadvantage of concentric diversification lies in the increase in risk and

commitment and a reduction in flexibility.
2. Conglomerate diversification has the disadvantage of diversion of resources and
attention to other areas leading to a lack of concentration and facing the risks of
managing entirely new businesses.

EXPANSION THROUGH COOPERATION

 Corporate strategies take in to account the possibility of mutual cooperation with

competitors while competing with them at the same time. This helps such that the
market potential could expand.
 The term ‘co-opetition’ expresses the idea of simultaneous competition and
cooperation among rival firms for mutual benefit.
 Cooperative strategies can be of the following types:

1. Mergers
2. Takeovers (acquisitions)
3. Joint ventures
4. Strategic alliances

 Merger: Denotes the fusion of two or more firms into one company.
 Takeovers (acquisitions): It is the transaction through which one firm buys up a
part or whole of the assets of another company by paying compensation resulting
in the transfer of effective control.
 Joint Ventures: In a joint venture two or more firms join together, share the stake
and float the business.
 Strategic Alliance: Two or more firms arrive at an agreement on certain issues of
mutual interest: no new firm is created; only working agreements are agreed upon.

MERGER STRATEGIES

 A merger is a combination of two or more organisations in which one acquires the

assets and liabilities of the other in exchange for shares or cash or both the
organisations are dissolved and the assets and liabilities are combined and new
stock is issued.
 The synonyms used are amalgamation, consolidation, integration
 For the organisation which acquires another, it is an acquisition,
 For the organisation, which is acquired, it is merger.
 If both organisations dissolve their identity to create a new organisation, it is
consolidation.

Examples:

1. Polyolefin Industries with NOCIL

2. TVS Whirlpool Ltd with Whirlpool India Ltd
3. Sandoz (India) Ltd with Hindustan ciba Geigy Ltd
4. Nirma Detergents ltd, Nirma Soaps and Detergents Ltd, and Shiva soaps and
detergents ltd with Nirma Ltd.

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Purpose of merger:

1. Procurement of supplies:

 To safeguard the source of raw materials or intermediary product.

 To obtain economies of purchases in the form of discount, saving in transportation
costs, overhead cost in purchase department etc.
 To share the benefits of supplier economies by standardising materials.

2. Revamping production facilities:

 To achieve economies of scale by amalgamating production facilities through

more intensive utilisation of plant and resources.
 To standardise product specifications, improvement of quality of product,
expanding market and aiming at consumer satisfaction through strengthening after
sales service.
 To obtain improved production technology and know-how from the merging
company to reduce cost, improve quality and produce competitive products to
retain and improve market share.

3. Market expansion and strategy:

 To eliminate competition and product existing in market.

 To obtain new market outlets in possession of the merging company.
 To obtain new products for diversification or substitution of existing products and
to enhance the product range.
 Strengthening retail outlets and sale depots to rationalise distribution.
 To reduce advertising cost and improve public image of the merging company.
 Strategic control of patents and copyrights.

4. Financial strength:

 To improve liquidity and have direct access to cash resources.

 To dispose off surplus and outdated assets for cash out of combined enterprise
 To enhance gearing capacity, borrow on better strength and greater assets backing
 To avail of tax benefits
 To improve EPS

4. General:

 To improve its own image and attract superior managerial talents to manage its
affairs.
 To offer better satisfaction to consumers or users of the product.
 To fulfil its own developmental plan of having merger strategy for growth.

Types of Mergers

The following are the four types of mergers

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1. Horizontal mergers
2. Vertical mergers
3. Concentric mergers
4. Conglomerate mergers
Horizontal merger:
 This takes place when there is a combination of two or more organisations in the
same businesses.
 Even organisations engaged in certain aspects of the production or marketing
processes.
Example: Kwality ice creams merged with Dollops of Cadburys and Milk food ice creams
of Milk food products.
Vertical merger:
 It is a combination of two or more organisations not necessarily in the same
business.
 They create complementarity either in terms supply of materials (inputs) or
marketing of goods and services (output)
Example: A footwear company combines with a leather tannery or a chain of shoe
retail stores.
Concentric merger:
This takes place when there is a combination of two or more organisations, which are
related to each other in terms of customer functions, customer groups or alternative
technologies used.
Example: Spartek combining with Akhil ceramics, for production of tiles, sanitary ware
etc.
Conglomerate merger:
This takes place when there is a combination of two or more organisations, which are
unrelated to each other in terms of customer functions, customer groups or alternative
technologies used.
Example: The RPG group in automobile industry making two wheelers shifted its
prospects in to a totally unrelated field of music by merging with HMV with MIL.
Demergers:
 Mergers carried out in the reverse are called demergers or spin-offs.
 Demerger involves spinning-off (separating) an unrelated business/division in a
diversified company in to a stand-alone company.
 It also involves free distribution of its shares to the existing shareholders of the
original company.
Example:
1. Hoechst Schering Agrevo Ltd from Hoechst India Ltd.
2. Ciba Speciality from Hindustan Ciba Geigy Ltd
3. Sandoz India Ltd from Clarient India
4. Aptech from Apple Industries Ltd

Motives behind mergers

There are basically two motives behind mergers. They are
1. Defensive (Passive)
2. Offensive (Active)
Defensive merger motive
The defensive or passive merger motives are further subdivided into

 Survival requirement motive

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 Protection motive
The reasons behind survival requirement motive are
 There may be a deterioration of capital structure from losses.
 Technological obsolescence.
 There may be a loss of raw material
 There can also be a market loss to superior products.
The reasons behind protection motive are for requirement of protection against
 Market infringement
 Lower cost position of a competitor
 Product innovation by others
 An unwanted takeover
Offensive merger
The offensive or active merger motives are further subdivided into
1. Diversification motive
2. Gains motive
The details of diversification motive are due to
 Counter, cyclical motives
 Counter, seasonal motives
 International operations
 Multiple strategic plans
The details of gains motives can be
 Market position
 Technological edge
 Financial strength
 Managerial talent
Considerations before merger
There are three important aspects that need to be considered before a merger. They are
 Financial
 Legal
 Human resource considerations
The answers for the following questions have to be considered for understanding.
Financial considerations:
1. How much is the company worth?
2. How does the acquirer pay for it?
Legal consideration:
1. Will the relevant government body approve the merger?
2. What are the tax laws?
3. What legal considerations may prompt take over attempts?
Human resource considerations
1. Are the executives of the acquiring company threatening to the target
company?
2. Do the executives of the target company fear that they will have to leave
the firm?
Dos and Don’ts in acquiring a firm or
Factors to be considered in acquiring a firm or
How to proceed in acquiring a firm
Do’s:
1. Pinpoint and spell-out the merger objectives, especially economic objectives.
2. Specify the substantial gains for the stockholders of both companies.
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3. Be able to convince yourself that the acquired company’s management is or can

be made competent.
4. Certify the existence of important resources, but do not expect perfection.
5. Spark the merger program with everybody’s involvement.
6. Clearly define the business you are in.
7. Take an in-depth SWOT and KSF of both the target company and your own.
8. Create a climate of mutual trust by anticipating problems and discussing them
early with the other company.
9. Do not threaten the management and the employees of the target firm.
10. Human considerations should get highest priority in structuring your merger plan.
Don’ts:
1. Paying too much
2. Assuming that a boom market will not crash.
3. Leaping before looking
4. Straying too far from the field
5. Swallowing something too big
6. Marrying disparate corporate cultures
7. Counting on key employees to stay and never leave the organisation.
Post merger success formula or
Strategies for success after merger or
Post-merger strategies
The following strategies create better chances of success in the post merger phase.
 Focussing on limiting financial risk. This can be done by
1. Maintaining price disciplines
2. Pricing ahead of inflation
3. Reducing response time to price changes
4. Pricing to value etc.
 Emphasise on cost discipline to maintain margins.
 Emphasise financial control over balance sheet items.
 Emphasise on product disciplines by
1. Exploiting winners and getting rid of losers.
2. Redesigning products.
3. Raising the hurdle required for margins on new product entry.
 Stay close to respective market niches by
1. Building on the strength of their core product lines.
2. Avoiding excessive diversification.
3. Finding specialised niches for opportunity.

TAKE OVER STRATEGIES

 Takeover and acquisition are two terms that are used interchangeably.
 It is a popular strategic alternative adopted by several Indian companies in the
post liberalisation scenario.
Reasons for Takeover or
Why Takeover strategies are adopted
 To avoid long gestation period. If an already running firm is taken over then the
gestation period is already crossed.
 To attain higher/increased growth rates.
 To achieve sudden increase in resources
 To improve market price of shares.

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 To acquire a unit for investing surplus funds

 Trained Manpower
 To fill in gaps in existing product lines
 To have quick access to another company’s market
 To achieve improved synergy
 For distribution of risks
 To secure tax advantages
 Chance for a sick unit to survive
 Benefits of economies of scale
 Presence over large geographical area
Procedure for takeover
1. Spell out the objectives clearly.
2. Indicate how the objective would be achieved.
3. Assess managerial quality.
4. Check the compatibility of business styles
5. Anticipate and solve problems early.
6. Treat people with dignity and concern
Types of takeover

There are basically two types of takeovers viz.

1. Friendly takeovers
2. Hostile takeovers
Friendly takeovers
 Negotiations through intermediaries of both the companies i.e., the acquirer and
the target company are made. During this negotiations many factors are discussed
such as
1. Valuation of the assets
2. Business goodwill
3. Market opportunities
4. Growth potential and so on.
 Then a final arrangement is made by fixing the price to be paid for share transfer
or a swap ratio for shares.
 Thus a friendly takeover is made.

Hostile takeovers
Hostile takeovers are those, which are resisted, or expected to be opposed, by the existing
management or professionals.
The procedure is as follows:
 Shares are picked up from the open market and controlling interests obtained.
 With the help of other majority shareholders and usually one or more of the
financial institutions, a bid is made to enter the company’s board and to acquire
control.
 The existing management offers resistance by refusing to register the transfer of
shares.
 Forestalling of moves by deals through court orders and injunctions.
 It is believed that political support matters a lot in the measure of success achieved
in a bid to takeover a firm ( in both the cases of the acquirer and target company)
Advantages of takeovers
 They ensure management accountability.
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 Offer easy growth opportunities

 Create mobility of resources
 Avoid gestation periods and hurdles involved in new projects.
 Offer chances of revival for sick units.
 Open up alternatives for selective divestment.
Disadvantages of takeover
 Professionalism is replaced by money power.
 They do not create any real assets to the society.
 They are detrimental to the nations economy.
 Interests of minority shareholders are not protected.
 Avoidable stress and strain are created in companies that are taken over or facing
the threat of takeover
JOINT VENTURE STRATEGIES
 Joint Ventures are a special type of consolidation where “two or more companies
form a temporary partnership (also called as consortium) for a specified purpose”.
Conditions for joint venture
Joint venture strategies may be useful to gain access to a new business mainly under
four conditions.
 When an activity is uneconomical for an organisation to do alone.
 When the risk of business has to be shared and, therefore, is reduced for the
participating firms.
 When the distinctive competence of two or more organisations can be brought
together.
 When setting up an organisation requires surmounting hurdles, such as, import
quotas, tariffs, nationalistic political interests and cultural roadblocks.
Types of joint ventures
The following types of joint ventures are possible from the Indian point of view.
 Between two firms in one industry.
 Between two firms across different industries
 Between an Indian firm and a foreign company in India.
 Between an Indian firm and a foreign company in that foreign country.
 Between an Indian firm and a foreign company in a third country.
Examples:
1. IBM World Trade Corporation and Tata Industries Ltd created a joint venture to
form Tata Information Systems Ltd. The stated purpose was to make it India’s top
information technology company.
2. Cummins engine company and TELCO formed a joint venture to manufacture
Telco engines.
3. The telecom sector has witnessed a number of joint ventures like
 Reliance Industries and Nynex Corporation
 A V Birla Group and AT&T
 Tata Industries and Bell Canada
 Essar Group and Bell Atlantic
 Ashok Leyland and Singapore Telecom
4. The Indian companies having joint ventures abroad are
 The Tata Group (hotels, commercial vehicles, leather)
 The Birlas (textiles, sugar, and viscose staple fibre)
 The Kirloskars (Engineering) etc.

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Strategic issues in Joint Ventures

The following are the strategic issues in joint ventures
 They offer the advantages of achieving objectives mutually by participating firms.
 Eliminating, controlling or reducing competition.
 An increase in the market share can be achieved.
 The participating teams may adopt diversification strategies.
 If technology is a critical factor, then the joint Ventures with foreign can be
feasible.
 Legal and regulatory hurdles which arise in external expansion can be overcome
through joint ventures and setting up a unit in a third suitable country.
 Besides the environmental threats in one country can be overcome by utilising
opportunities in another country.
Advantages of Joint Ventures
The major advantages of joint ventures are
 Minimising risk
 Reduction in investment by an individual company
 Access to foreign technology
 Broad based equity participation
 Access to government and political support
 Entering new fields of business
 Synergistic advantages
Disadvantages of Joint Ventures
 Problems in equity participation
 Foreign exchange regulations
 Lack of proper coordination among participating firms
 Cultural and behavioural differences
 Possibility of conflict among the partners.
STRATEGIC ALLIANCES
Strategic alliances can be defined in terms of three necessary and sufficient
characteristics. They are
1. Two or more firms unite to pursue a set of agreed upon goals but remain
independent subsequent to the formation of the alliance.
2. The partner firms share the benefits of the alliance and control over the
performance of assigned tasks – perhaps the most distinctive characteristic of
alliances and the one that makes them so difficult to manage.
3. The partner firms contribute on a continuing basis in one or more key strategic
areas, such as, technology, product and so on.
Thus strategic alliance can be defined as
“ Cooperation between two or more independent firms involving shared control and
continuing contributions by all partners for mutual benefit.”
Example:
1. TVS- Suzuki
2. Mahindra – Ford
3. BPL – Sanyo
4. Ranbaxy – Eli Lilly
5. Taj hotels – British airways
6. SPIC Group – Telstra
Types of strategic alliances
There are four types of strategic alliances
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1. Procompetitive alliances:( Low interaction / Low conflict)

 Generally inter industry.
 They are vertical value chain relationships between suppliers and
manufacturers.
 So supplier and buyer firms enter into long-term contracts for working out
these alliances.
2. Non competitive alliances:( high interaction / low conflict)
 Intra industry partnerships between non competitive firms
 Alliance occurs in the firms in the same industry and are not perceiving
themselves as rivals.
 Their areas of activity do not coincide
 They are sufficiently dissimilar to prevent feelings of competitiveness
 They usually are from distinct areas in the industry – geographically & so
on.
3. Competitive alliance ( High interaction / High conflict)
 Partnership between two rival firms
 Intense interaction is required
 They may be inter or intra industry
 Usually MNCs do this with local firms
4. Precompetitive alliance (low interaction / high conflict)
 Two firms from different often-unrelated industries are brought together to
work on well-defined activities.
 They may be new technology / product development, creating awareness
about new products or ideas, joint R & D activities etc.
Reasons for entering strategic alliances
The basic reasons are three
1. Entering new markets, which may be difficult by itself on its
own.
2. Reducing manufacturing costs, by pooling resources to achieve
economies of scale.
3. Developing and diffusing technology, by getting the best of
technical expertise of the firms in the alliance.
Managing strategic alliance
The following four principles are to be followed to manage alliances successfully.
1. Clearly define a strategy and assign responsibilities.
2. Phase in the relationship between the partners.
3. Blend the cultures of the partners
4. Provide for an exit strategy.

EXPANSION THROUGH INTERNATIONALISATION

 Porter has given; four national characteristics create an environment that is
conducive to creating globally competitive firms in particular industries. They
are
1. Factor conditions: The special factors or inputs of production such as natural
resources, raw materials, labour, and so on that a nation is endowed with.
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2. Demand conditions: The nature and size of the buyers needs in the domestic
market.
3. Related and supporting industries: The existence of related and supporting
industries to the ones in which the nation excels.
4. Firm strategy, structure, and rivalry: The conditions in the nation
determining how firms are created, organised, and managed and the nature the
domestic competition.
On the basis of an analysis of these four sets of factors, a country can determine
the industry or industry niche in which a cluster of companies that are globally
competitive can be developed.
The phenomenon of internationalisation
 When there is limited market available to a firm, then it has to look beyond the
borders for expansion opportunities.
 Expansion through internationalisation is not an easy option.
 There are exacting benchmarks of price, quality and timely delivery to be
achieved.
 For a firm in the US, internationalisation may mean extending the reach of
their products, or services to foreign markets where these are not available or
if available, are expensive and not of the required quality.
 For an Indian firm the motives may be quite different. Here the firm may be
constrained by the legal and administrative system and, additionally, may have
exhausted the domestic potential so it is forced to expand internationally.
Understanding international strategies
 International strategies are a type of expansion strategies that require firms to
market their products or services beyond the domestic or national market.
 For doing so, the firms have to assess the international environment, evaluate
its own capabilities, and devise strategies to enter foreign markets.
 There is several entry options, ranging from exporting to setting up wholly
owned subsidiaries that a firm can choose from.
 Then the firm has to implement the strategies and monitor and control its
foreign operations.
 International strategies require a different strategic perspective than strategies
that are formulated for, and implemented in, the national context.
Types of international strategies
The decisions on international strategies hang on two sets of factors.viz,
1. Extent of cost pressures: denote the demand on a firm to minimise its
unit costs.
2. Extent of pressures for local responsiveness: denote making the firm
tailor its strategies to respond to national-level differences in terms of
variables like customer preferences and tastes, government policies or
business practices.

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The juxtaposition of these two factors leads to four international strategies as given
below.

Cost pressures
High Transnational
Global strategy
strategy
International Multidomestic
strategy strategy
Low

Low high

Pressure for local responsiveness

1. International strategy:
 Firms create value by transferring products and services to foreign markets
where these products and services are not available.
 Firms offer standardised products and services in different countries with
little or no differentiation.
 Most international companies like Coca Cola, McDonald, IBM, Kellog,
Proctor and Gamble, Microsoft etc. adopt this strategy.
2. Multidomestic strategy:
 The firms try to achieve a high level of local responsiveness by matching
their products and services, to the national conditions operating, in the
countries they operate in.
 The products and services are customised extensively, according to the local
conditions operating in the different countries.
 This leads to a high cost structure as functions, such as, research and
development, production, and marketing have to be duplicated.
3. Global strategy:
 Reaping the benefits of experience curve effects and location economies and
offering standardised products and services across the different countries, with
a low cost approach.
 The products and services are given in an undifferentiated manner in all
countries the global firm operates in , usually at competitive prices.
4. Transnational strategy:
 A combined approach of low cost and high responsiveness simultaneously for
their products and services.
 Being the contradictory objectives, it calls for a creative approach to manage
production and marketing of products and services.
 This is possibly the viable strategy in the competitive world.
 The flow of expertise should not be in one way, but it should be global
learning, that is the mutual transfer of expertise from all concerned.
Entry modes:
 Mode of entry means the manner in which the firm would commence its
international operations.
 A firm would have to decide which mode suits its circumstances best before
it could be adopted.
 The different entry modes are
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1. Export entry modes: the firm produces in the home country and
markets in the overseas market.
 Direct exports do not involve home country intermediaries.
 Indirect exports involving intermediaries in the home country
and who are responsible for exporting the firm’s products.
2. Contractual entry modes: Non-equity associations between an
international company and a company or legal entity in the overseas
market.
 Licensing is an arrangement where the international company
transfers knowledge, technology, patent, and so on for a limited
period of time to an overseas entity, in return for some
payment, usually a royalty payment.
 Franchising involves the right to use a business format, usually
a brand name, in the overseas market, in return for some
payment.
 Other forms of contractual modes are, technical agreements
(for technology transfer), service contracts (for technical
support or expertise provision), contract manufacturing,
production sharing, turnkey operations, build-operate-transfer
(BOT) arrangements etc.
3. Investment entry modes: these modes involve ownership of
production units in the overseas market based on some form of equity
investment or direct foreign investment.
 Joint venture and strategic alliances involve a cooperative
partnership between two or more firms with financial interests
as the basis of cooperation.
 Independent ventures or wholly owned subsidiaries are
modes in which the parent international company holds 100 per
cent equity and is in full control. Such facilities may be created
either through a new venture known as a Greenfield venture or
acquired through takeover strategies.
Advantages of international strategies

 International strategies offer an attractive strategic alternative for firms and carries
with it rewards in the form of lower costs, increased sales and higher profits.
 There are ample opportunities for economies of scale and learning.
 The pointers for international strategies becoming a favoured alternative for
expansion are
1. Global integration and strengthening of the International economic order
2. Primacy of economic considerations over the political in international
relations
3. Emergence of regional trade blocs
4. Emergence of the internet as a communication platform
5. Higher levels of cultural diffusion
6. The establishment of bilateral and multilateral institutions such as the
WTO to regulate and manage trade relations
Disadvantages of international strategies
 The cost of failures can be high.

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 The risk related to uncertainty in economic and political environments in host

countries
 Difficulty in managing the cultural diversity
 Cost of coordination, communication and distribution and trade barriers.
RETRENCHMENT STRATEGIES
 The retrenchment grand strategy is followed when an organisation substantially
reduces the scope of activity.
 This strategy is followed when an organisation aims at a contraction of its
activities through substantial reduction or elimination of the scope of one or more
of its businesses, in terms of their respective customer groups, customer functions,
or alternative technology- either singly or jointly- in order to improve its overall
performance.
 The following situations explain about retrenchment
1. A pharmaceutical firm pulls out from retail selling to concentrate on
institutional selling in order to reduce the size of its sales force and
increase marketing efficiency.
2. A corporate hospital decides to focus only on speciality treatment and
realise higher revenues by reducing the commitment to general cases,
which are typically less profitable to deal with.
3. A training institution attempts to serve a large clientele through the
distance learning system and to discard its face-to-face interaction
methodology or training in order to reduce its expenses and use the
existing facilities and personnel more efficiently.
 Retrenchment strategy is adopted because
1. The management no longer wishes to remain in business either partly or
wholly due to continuous losses and viability.
2. The environment faced is threatening.
3. Stability can be ensured by reallocation of resources from unprofitable to
profitable businesses.
 The external developments which cause threats to the prospects of industries and
markets are
1. Adverse government policies
2. Demand saturation
3. Emergence of substitute products
4. Changing customer needs and preferences
 The threatening factors due to internal or company specific developments are
1. Poor management
2. Wrong strategies
3. Poor quality of functional management
 The above factors make the company to fail and decline.
 The symptoms of decline are
1. Diminishing profitability
2. Declining cash flow
3. Falling sales
4. Shrinking market share
5. Increasing debts
 This is the situation in which recovery is seen as a strategic option.
 There are four types of recovery situations
1. Realistically non recoverable situation where there is little chance of survival

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 As the company is not competitive

 The potential for improvement is low
 There is a cost disadvantage
 Demand for basic products or services are in a terminal decline.
2. Temporary recovery situation is possible when
 The repositioning of the product is possible
 New forms of competitive advantages can be found
 Cost reduction or revenue generation are possible.
3. Sustained survival situation where the industry is in the process of slow decline. A
company facing such situation could either divest or turnaround, if it foresees a
comfortable niche in the industry where it perceives chances of being the industry
leader.
4. Sustained recovery situation where a genuine turnaround is possible owing to new
product development and/or market repositioning and if the industry is still
attractive enough.
 The three different turnaround strategies are
1. Turnaround strategy: If the organisation chooses to focus on the ways and
means to reverse the process of decline, it is turnaround strategy.
2. Divestment or divestiture strategy: If the company cuts off the loss-making
units, divisions or SBU’s, curtails product line, or reduces the functions
performed, it is a divestment strategy.
3. Liquidation strategy: If none of the above actions work, then the company
may choose to abandon the activities totally, resulting in liquidation
strategy.
TURNAROUND STRATEGIES:
 Retrenchment may be done internally, by emphasising the improvement of
internal efficiency, which is operating turnaround strategy.
 The external retrenchment is more serious and leads to divestment or liquidation.
 The action involved is reversing a negative trend, hence the name turnaround.
 Conditions for turnaround strategies or indicators of necessity of turnaround
are the following danger signs,
1. Persistent negative cash flow
2. Negative profits
3. Declining market share
4. Deterioration in physical facilities
5. Over manning, high turnover of employees, and low morale
6. Uncompetitive products or services
7. Mismanagement
 An organisation, which faces one or more of these problems, is referred to as a
‘sick’ company.
 Managing turnaround: There are three ways in which turnarounds can be
handled.
1. The existing chief executive and management team handles the entire turnaround
strategy with the advisory support of a specialist external consultant.
2. The existing team withdraws temporarily and an executive consultant or
turnaround specialist is employed to do the job. The banks and financial
institutions usually depute this position.

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3. The most difficult to attempt and the most often used is replacing the existing
team, specially the chief executive, or merging the sick organisation with a
healthy one.
 Approaches to turnaround: There are two different approaches normally
followed by most of the new CEO’s of the sick firms.
1. Surgical approach: The new CEO quickly asserts his authority by
a. Issuing orders and directives for changes
b. Centralises functions
c. Fires employees
d. Closes down plants and divisions
e. Changing the product mix
f. Replacing the obsolete machinery
g. Strengthening the R&D, marketing and financial controls
h. Fixing accountability until the business shows signs of turnaround

2. Non-surgical or human approach: This approach involves

a. Understanding problems
b. Eliciting opinions
c. Adopting a conciliatory attitude
d. Coming to negotiated settlements among different factions
e. Emphasising on behavioural change
f. Aiming at improved work culture and morale.
Both the approaches may succeed, depending on the circumstances, but the latter has a
greater potential to succeed in the long run.
 Action plans for turnaround: A workable action plan includes
a. Analysis of product, market, production processes, competition,
and market segment positioning
b. Clear thinking about the market place and production logic
c. Implementation of plans by target setting, feedback, and
remedial actions.
The elements in a turnaround strategy
The ten elements that contribute to a turnaround are
 Changes in the top management
 Initial credibility- building actions
 Neutralising external pressures
 Initial control
 Identifying quick payoff activities
 Quick cost reductions
 Revenue generation
 Asset liquidation for generating cash
 Mobilisation of the organisations
 Better internal coordination

DIVESTMENT STRATEGIES

 Divestment (or Divestiture) strategy involves the sale or liquidation of a portion of

business, or a major division, profit centre or SBU.
 Divestment is usually a part of a rehabilitation or restructuring plan and is adopted
when a turnaround has been attempted but has proved to be unsuccessful.
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 Harvesting strategies, a variant of the divestment strategies, involve a process of

gradually letting a company or business whither away in a carefully controlled and
calibrated manner.
 Reasons for divestment: A divestment strategy may be adopted due to various
reasons.
a. A business acquired, proves to be a mismatch and cannot be integrated within the
company.
b. A project that proves to be inviable in the long-term is divested.
c. Persistent negative cash flow from a particular business leads to divestment.
d. Severity of competition and inability of a firm to cope with it may cause it to
divest.
e. Difficulty to invest for the technological upgradation for survival, a preferable
option would be to divest.
f. Divestment may be done to keep the company in a position to survive, by selling
off a part of a business.
g. For investment the company can sell off its unprofitable business.
h. Divestment by one firm may be part of a merger plan executed with another firm.
Such an exchange is in mutual strategic interest.
i. A firm may divest to reduce in size and not to attract the provisions of the MRTP
Act and the inability to manage a large business.

 Approaches to divestment:
1. Spinning it off as a financially and
managerially independent company, with
the parent company retaining or not
retaining partial ownership, divests a part
of the company.
2. The firm may sell a unit outright to a
buyer at a higher profit, who considers
the divested unit to be a ‘strategic fit’.

Decision to divest:
 As it amounts to admitting failure, divestment decision is painful.
 The CEO who is associated with the project finds psychologically
difficult to renege (go back) on a commitment.
 It is easier for a new CEO to divest a unit to which he is not
emotionally connected.
 Another reason for divestment decision is to avoid diffusion of core
competencies and to streamline their business portfolio and
emerge as a focussed organisation.
Examples:
1. TATA group divested TOMCO and sold to Hindustan levers as soaps and
detergents were not considered a core business of Tatas. Similarly the
pharmaceutical companies, Merind and Tata pharma were divested to
Wockhardt.
2. The cosmetic company LAKME was divested and sold to Hindustan
Levers, as, besides being a non-core business, it was found to be non-
competitive.

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3. General Electric Company (GEC) of India divested Genelec, a trading

company since GEC did not have enough funds to invest in Genelec and
the sale of Genelec could create funds for GEC’s expansion plans.

LIQUIDATION STRATEGIES

 The most unattractive and extreme retrenchment strategy is the liquidation

strategy, which involves closing down a firm and selling its assets.
 It is considered as the last resort because it leads to serious consequences such as
loss of employment for workers and other employees, termination of opportunities
and the stigma of failure.
 Liquidation strategies are undesirable to the company management, the
government, banks and financial institutions, trade unions, suppliers and creditors,
and other agencies etc. since each has its own reasons.
 Management hesitate to liquidate due to fear of failure.
 The government may not easily allow liquidation due to political and other risks
involved.
 Trade unions would naturally resist the loss of employment of workers.
 The firm is not freed from contractual obligations to the creditors and suppliers
unless it is declared insolvent or bankrupt.
 Selling assets to implement liquidation strategies are difficult since it is difficult to
find the buyer.
 A firm cannot expect adequate compensation as most assets, being unusable, are
considered as scrap.
 In addition to the difficulties in the process of liquidation, it is a traumatic
experience for the executives who are closely associated with the firm.
 Even though it is not desirable, more difficult, firms are forced to liquidate if no
alternative strategy is available.
 Planned liquidation would involve a systematic plan to reap the maximum
benefits for the firm and its shareholders through the process of liquidation.
 The legal aspects of liquidation are covered under the Companies Act, 1956.Under
the act liquidation may be done in any of the following three ways.
1. Compulsory winding-up under an order of the court
2. Voluntary winding-up
3. Voluntary winding-up under the supervision of court.

COMBINATION STRATEGIES
 When the organisation adopts a mixture of stability, expansion, and retrenchment
strategies the combination strategy is followed.
 Combination strategy is adopted because
1. The organisation is large and faces a complex environment
2. The organisation is composed of different businesses, each of which lies in
a different industry requiring a different response.

 Combination strategies are of three types

1. Simultaneous- using different grand strategies at the same time in
different businesses
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Example: TTK Ltd diversified from pressure cookers to non-stick cooking utensils, TTK
Chemicals merged with TTK Pharma, TT Industries & Textiles Ltd expanded through
joint venture, London rubber co ltd adopted an expansion plan, Larcom & protectives ltd
diversified into unrelated fields of disposable syringes and needles, TTK Maps &
Publications expanded in to the general publishing business after a turnaround.
2. Sequential- using different grand strategies at different times in the same
business
Example: Thermax pvt ltd- in 1970s expansion to make packaged tube boiler,
diversification in to water treatment plants, takeover of Tulsi Fine Chemicals, expansion
for making large field erected boiler, diversification into surface coating and pollution
control equipment. In 1980s diversification into energy conservation equipment,
unrelated diversifications into software, financial engineering, electronics, etc.In 1990s
international strategy of setting up a resin plant in US, strategic alliances with fuel
suppliers, Joint venture with US based EPS for energy service business etc.
3. Simultaneous and sequential- using different grand strategies at the same
time in different businesses and at different times in the same business.

Dr.G.Dileep