Chapter 4

Strategic Management
Strategic management is the set of managerial decisions and actions that determines the long run performance of the corporate. It involves environmental scanning, strategy formulation, strategy implementation & evaluation and control.

Strategic Management Process

Evaluation & Control

Mission

Objective

Environmental Scanning
Internal External

Strategic Choice

Strategy Implementation

Corporate Level Management Business Level Management Functional Level Management

Levels of Strategic Management

Corporate Level Strategies
Head Office CEO, Board of Directors & Corporate Staff

Business Level Strategies

Division A

Division B

Divisional Managers & Staff

Function Level Strategies

Marketing Human Resource

Finance

Marketing Human Resource

Finance

Functional Managers
Operations

Operations

Companies adopt a long-term perspective while formulating a corporatelevel strategy.

Corporate Level Strategy is used for: 1. 2. Businesses or industries that the company should compete in Value creation activities that the company should perform in those businesses Methods to enter or leave businesses or industries in order to maximize its long-run profitability

3.

Corporate Level Strategies

Concentrated Growth Acquisitions Vertical Integration
Backward Integration
Forward Integration Full Integration Taper Integration

Horizontal Integration Strategic Alliance Diversification

Concentric Diversification Conglomerate Diversification

Turnaround

Divestiture
Liquidation Bankruptcy

Concentrated Growth
It is the strategy in which the firm directs its resources to the profitable growth of a single product, in a single market, with a single dominant technology and taking advantage of economies of scale.

IBM Case Study

Issue The companys semiconductor unit, which had bet on a strategy of manufacturing all kinds of chips for all 400 customers, had lost $ 1.2 billion over the previous 18 months. In spite of spending billions of upgrade its chip plant they were getting thrashed by Asian rivals that were manufacturing at much higher volumes and offering bargain-basement prices. Key outcome
The chip and computer unites would be combined Instead of manufacturing all kinds of chips for 400 customers, It would focus primarily on one family of chips (Power microprocessors). It would produce some chips for itself and the remaining for other key partner like Nintendo, Apple G5 computers, Cisco Systems networking gear. It would recruit co-investors to help fund advances in the chip manufacturing technology.

Strategy formulation On July 15, 2003, 70 experts headed by Chief Executive Samuel J. Palmisano gathered in a conference to formulate the strategy.

Results IBM gained share in high-end servers. IBM became processer supplier for next generation game consoles to companies like Sony, Microsoft & Nintendo & controls 100 % market share.

Conditions Favoring a Concentrated Growth Strategy

Firms industry is resistant to major technological advancements Firms targeted markets are not product saturated Firms markets are sufficiently distinctive to dissuade competitors in adjacent markets from entering firms segment Firms inputs are stable in price and quantity and available in amounts and at times needed Firms industry is stable Firms competitive advantages are based on efficient production or distribution channels Success of market generalists

Acquisitions
It is an agreement between two firms where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio business

Reasons for Acquisitions

Increased Market Share Overcome Barriers to Entry Lower Cost and Risk of New Product Development Diversification Reshaping its competitive Scope

Problems with Acquisitions

Integration Difficulties Inadequate evaluation of worth Cash Crunch Overly Diversified Too Large to manage

Vertical Integration
Vertical Integration is a strategy for increasing or decreasing operations backward into an industry that produces inputs for the company or forward into an industry that distributes the companys products.

Forward Integration

Types of Vertical Integration

Taper Integration

Out-side Distributers

In-house Distributers

Full Integration

Backward Vertical Integration Forward Vertical Integration Full Integration

Final Assembly Out-side Supplier

Backward Integration

In-house Component Parts Manufacturing

Taper Integration

Raw Material

Advantages
Lowered cost structure or better differentiation. Enhances & protects product quality Results in improved scheduling

Disadvantages
Increased Cost Structure Fast-changing Technology Unpredictable Demand Weak business model

Horizontal Integration
It is process of acquiring or merging with industry competitors in an effort to achieve the competitive advantages that come with large scale and scope.

In-house Distributers

Manufacturing Car (25 lakhs 10 lakhs)

Manufacturing Car (3 lakhs 10 lakhs)

Manufacturing Car (3 lakhs 1 lakhs)

In-house Component Parts Manufacturing

Raw material

Advantages
1. Lowers the cost structure
2. Creates increasing economies of scale Reduces the duplication of resources between two companies

Increases product differentiation Product bundling broader range at single combined price Total solution saving customers time and money Cross-selling leveraging established customer relationships

3.

Replicates the business model In new market segments within same industry

4.

Reduces industry rivalry

5.

Eliminate excess capacity in an industry Easier to implement tacit price coordination among rivals

Increases bargaining power Increased market power over suppliers and buyers Gain greater control

Disadvantages
Implementing a horizontal integration is not an easy task Problems associated with merging very different company cultures High management turnover in the acquired company when the acquisition is a hostile one Tendency of managers to overestimate the benefits to be had in the merger

Tendency of managers to underestimate the problems involved in merging their operations

The merger may be blocked if merger is perceived to: Create a dominant competitor Create too much industry consolidation Have the potential for future abuse of market power

Strategic Alliance
Strategic Outsourcing allows one or more of a companys value-chain activities or functions to be performed by independent specialized companies that focus all their skills and knowledge on just one kind of activity.
Distributer
FedEx Shared Facility

Distributer

Distributer
Distributer

Regional Center

Distributer

FedEx Center

Distributer

Factory
Distributer Distributer

FedEx Shared Facility

Factory

Distributer

Regional Center

Distributer

FedEx Shared Facility

Distributer

Distributer

Advantages
Reducing the cost structure
The specialist company cost is less than what it would cost to perform the activity internally.

Enhanced differentiation
The quality of the activity performed by the specialist is greater than if the activity were performed by the company.

Focus on the core business

Distractions are removed. The company can focus attention and resources on activities important for value creation and competitive advantage.

Disadvantages
Holdup company becomes too dependent on specialist provider

Loss of information company loses important customer contact or competitive information

Diversification
It is a strategy adopted by the firms to acquire new firms to expand its product base and to maximize its revenue. There are two types of diversifications Concentric Diversification & Conglomerate Diversification

Motivating factors for Diversification

Increase the firms stock value Increase the growth rate of the firm Better utilization of firms resources Improve the stability of the firm Balance or fill out the product line

Diversify the product line

Acquired the needed reasons

Concentric Diversification
As per this strategy firm are acquired or new ventures are made that are related to the acquiring firm in terms of technology, market or products. Hence the acquired business possess a high degree of compatibility with the firms current business.

Conglomerate Diversification
As per this strategy firm are acquired which are not related to the acquiring firm in terms of technology, market or products. The firms engage in this kind of activity as they take this as the most promising investment opportunity.

Turnaround
This strategy involves a concerted effort over a period of time to fortify a firms distinctive competencies and returning it to profitability.

Major Steps in Turnaround process

Change in Management Cost Reduction Asset Reduction

A Model of the Turnaround Process

Turnaround situation
Cause

Turnaround response
Recovery phase
(operating)

Severity Retrenchment phase

Internal factors

Declining sales or margins Low

Cost reduction

Efficiency maintenance

High Imminent bankruptcy Asset reduction Entrepreneurial reconfiguration

External factors

(strategic)

Recovery

Stability

Divestiture
This strategy involves the sale of a firm or a major component of a firm.

Reasons for Divestiture

Partial mismatched between acquired firm & parent firm

Hurdles in Divestiture
Finding a buyer who is willing to pay a premium above the value of a going concerns fixed assets

Corporate financial needs

Government antitrust actions

Liquidation
As per this strategy the firm sells its parts at tangible asset value and not as a going concern.

What's for the business?

It minimizes the losses of all the stakeholders. It gives the business a scope to gain greatest possible return and cash conversation so that it can relinquish its market share.

Bankruptcy
It is a strategy through which the business agrees to a complete distribution of their assets to creditors, most of whom receive a small part of what they are owed.

Outcome of bankruptcy
The business closes its doors Investors loose their money

Employees loose their jobs

Managers loose their credibility

Which Strategy to adopt?

Model of grand strategy clusters

Rapid Market Growth

Concentrated Growth Vertical Integration

Reformulation of concentric growth Horizontal Integration Divestiture Liquidation

Concentric Diversification

Strong Competitive position

Weak Competitive position

Turnaround or Retrenchment Concentric Diversification Conglomeratic Diversification Joint Venture Concentric Diversification Conglomeratic Diversification Divestiture

Liquidation

Slow Market Growth

Meaning

Grand strategies are the decisions or choices of long term plans from available alternatives. Grand strategies also called as master or corporate strategy. It is based on analysis of internal and external environment.

This direct the organization towards achievement of overall long term objectives (strategic intent).
They involve Expansion, Quality Improvement, Market Development, Innovation, Liquidation, etc. Usually they are selected by top level managers such as directors, executives etc.

Classification of Grand Strategy

It is classified into following: Stability Strategy Growth Strategy Retrenchment Strategy Combination Strategy

Grand Strategy

Stability

Growth

Retrenchment

Stability Strategy

A strategy is stability strategy when a firm attempts to maintain its status-quo with existing levels of efforts and it is satisfied with only incremental growth/improvement by marginally changing the business and concentrates its resources where it has or can develop rapidly a meaningful competitive advantages in the narrowest possible product market scope. Absence of significant change i.e. continuing to serve the same clients by offering the same product or service, maintaining market share, and sustaining the organization's return-on investment.

When do organization follow

It is common for most of the organizations to follow this strategy at some point of time in their life cycle.

When a firm serves defined market and its segments to fulfills its mission.
When a firm can relate itself with the environment and environmental factors do not show any appreciable change. This is possible for most of the firms in a short run, but for a few in long runs. When organization continues to pursue the same objectives by adjusting to the same level of achievement about the same percentage. Thus stability does not mean absence of growth but the growth is limited within specified limits and there is no substantial addition of facilities.

Cont.

When there is scope for incremental improvement in the same line of business to take the fullest advantage of situation. E.g. when a company has technological or other break through it continues to be in the same business until it has competitive advantage. Thus when a company is pioneer in a new business, it reaps the benefit of initiation. Then when competition increases and profitability reduces, it may go for other strategy. When a firm looks for functional improvement and there by efficiency and economy of operations so as to gain competitive advantage, it follows this strategy.

Why do organization follow

When management perception about performance in the present business is satisfactory, they tend to follow stability strategy because they are not always sure of a set of factors attributing to success. Thus they decide to continue the same business.

This strategy involves low risk unless there is a major change in the environment. So it provides safe business. Therefore it is preferred by risk avoiding managers.
Slow or resistant to change organizations follow this strategy. As they become larger and more successful, they develop such tendency & prefer stability. Organizations past history may be full of changes, so to reap the advantages of such past, stability is preferred for some time, usually after growth strategy.

Cont.

A firm having strategic advantage in the present business & market does not opt. for other strategy and prefers stability.

A company lacking in sufficient resources to effect major changes in business have to opt. for stability.
The environmental factors such as govt. norms, prohibition & restriction of certain products & process, licensing etc. prevent other strategies & a firm has to adopt stability strategy. A firm may have a product or group of products which is not prestigious to it, its market share as well as contribution to total sales is very small and its market is declining. So before retrenching such product, the firm wants to generate as much profit as possible, even by scarifying its market share, and follows stability strategy

Alternatives of stability strategy.

Incremental growth strategy

It is one in which a firm sets its objectives/achievement levels based on past accomplishment adjusted for inflation. It may be average achievement level of industry or even low. It is followed when environmental factors are more or less stable.

The organization is doing well or perceives as doing well in its present form. It being a less risky and the organization does not go for higher risk.

The organization is change resistant and prefers change only in extraordinary times.
It is easier to pursue as it does not disturb the organizational routines.

Cont.
Profit strategy / End game strategy / Harvesting strategy

It is one in which organization or its SBU aims at generating profit/cash, sometimes at the cost of market share also because

the product is not prestigious,

its market share & also contribution to total sales are very small.
The product is in stable or declining market Here, company wants to encase as much profit as possible before retrenchment.

Cont.
Sustainable growth strategy

It is one in which a firm tries to maintain its existence in unfavorable critical conditions like constraints on finance resources, raw material resources etc., govt. policy, cheaper imports, competitor by big and capable competitors etc.

Stability as a pause/breathing spell/proceed with caution strategy

It is one in which organization has followed growth strategy aggressively in recent past and want a pause on growth to consolidate its position by allowing structured changes to take place and the system to adopt to new strategies thereby it wants to take full advantage of future growth opportunities and strong present factors. Thus this strategy becomes intermediate choice between past & future, for some time.

Growth Strategy

Growth Strategies are means by which an organization plans to achieve the increased level of objective that is much higher than its past achievement level. Organizations may select a growth strategy

to increase their profits, sales or market share.

to reduce cost of production per unit.

increase in performance objectives.

Reasons for following

In the long run, growth is necessary for the very survival of the organizations. The organization that does not grow may be pushed out of the business because

Of the new entrants in the field

Higher wages, higher costs of other inputs, and lower level of efficiency because of certain obsolescence in plant and machinery.

Growth offers many economies because of large-scale operations.

Per unit cost of production can be very low

The economies of increasing scale enhance degrees of specialization. With more people available to do the different kinds of work

Greater penetration can be made

These eventually lead to certain competitive advantage to the organization concerned.

Cont.

Growth strategy is taken up because of managerial motivation to do so. Managers with high degree of achievement and recognition always prefer to grow. The needs on the part of managers push them to think as to how they can achieve their need satisfaction. The answer lies in the continuous growth of the organization or the group of organizations as a whole. There are certain intangible advantages of growth. These may be in the form of

Increased prestige of the organization Satisfaction to employees and

Social benefits
Preferred by investors

Growing companies have high level of prestige in the corporate world.

Alternatives of Growth Strategy

Concentric Expansion Strategy

It means investing the resources in one or more of a firms business so as to expand its present business. i.e. doing more what we are already doing and where we are best at doing; when potential for growth, attractiveness and maturity factors are favorable in the industry of the firm.

It can be aimed at-

Market penetration (capture the market share in the existing product and expand its business at rate higher than the industry growth)

Market development (increase sales by developing new markets, geography-wise or segment-wise)

Product development (achieve growth through product innovation to penetrate in new segment)

Vertical Integration Growth Strategy

It represents a decision by an organization to utilize internal transactions rather than market transactions to accomplish its objectives.

A firm starts undertaking & contributing activities, in addition to present activities, along the line of value addition stages from raw material stage to production and ultimately distribution of goods to customers, so as to gain ownership or increased control and thereby expand the business.
Vertical integration can be achieved in two ways

Forward Integration
Backward Integration

Cont.
Diversification Strategy

It is the process of entry into a business which is new to an organization. Diversified organizations can be classified into following

Concentric Diversification (Related diversification)

Market-wise Technology wise

Both

Conglomerate Diversification (Unrelated diversification)

Cont.
External Strategy Merger strategy

It means that two or more organizations merge together by formally losing their corporate identities and form another organization through combining assets & liabilities & issuing new stock, for mutual synergetic benefits. The new co. is called holding company and the merging companies are called subsidiary companies. According to the nature of business of merging companies, merger may be

Horizontal Vertical Concentric Conglomerate

Cont.
Acquisition or takeover

It means that one company attempts to acquire ownership or control over management of other co. either by mutual consent of or against the wishes of latters (other co.) management or stock holders. It may be

Friendly takeover Hostile takeover

Join venture It means that two or more companies combine to form a new company by equity participation and sharing of resources like finance, managerial talents, technology etc., so as to create new entity distinct from its parents JV b/w Government of India and another company JV b/w two or more Indian private sector companies JV b/w Indian company and a foreign company

Cont.
Strategic Alliance

It is one in which two (or more) firms unite by a win-win type agreement mutually acceptable to both (or all), In strategic alliance partners join hands together for certain specified objectives, when these objectives are achieved partners terminate their alliance.

Types of Strategic Alliance (Based on its focus)

Technology Development Alliance Operations and Logistics Alliance

Marketing, Sales and Service Alliance

Single Country or Multicountry Alliance X and Y Alliance

Retrenchment Strategy

It is a defensive strategy in which a firm having declining performance decides to improve its performance through contraction in this activities i.e. reducing the scope of its business by total or partial withdrawal from present business.

focusing on functional improvement with special emphasis on cost reduction or

reducing the number of functions it performs, by being a captive firm or

reducing the no. of products, markets, customer functions etc. or liquidation of business (as a last alternative) or combinations of above.

Reasons for adopting

When the organization is not doing well and perceives that it may not do better in future too in a particular line of business it is advisable to delete that line of business. After deletion, the organization can concentrate in other areas, where it has some advantages.
If the organization is not meeting its objectives even after following other alternative strategies it may go for retrenchment strategy. Also when the management is under pressure to improve the performance, this strategy can be pursued as a last resort.

Alternatives of Retrenchment Strategy

Turnaround Strategy

It is also known as cutback strategy hold the present business and cut the costs It is one in which a company tries to recover from its declining state by improving internal efficiency. Turnaround actions may include:

Change in the product mix Selling of assets which are not useful for long time or in future also to generate cash.

Closing down plants & divisions which are not rewarding.

Replacement of obsolete machinery Focus on specific products and customers and improved marketing, etc.

Cont.
Divestment Strategy

In divestment strategy the organization decides to get out of certain businesses and sells off units or divisions.
Divestment is done through:-

Outright sale of unit to another company for which the divested unit is a strategic fit. Or
Leveraged buyout- a companys shareholder are bought out by companys management and other private investors using borrowed funds Or

Spin off i.e. creating a new co. financially and managerially independent one from parent company and retaining or not retaining partial ownership by distribution of shares of new company to shareholders of parent company.

Cont.
Liquidation Strategy

It is one in which a firm closes down & sells its entire business at a fair price on the basis of tangible assets, management good will & also intangible assets and invests the realization somewhere else or distributes among debtors and members when

Business cant be revived and its retaining value is less than its selling.

Business is in peak form (value, but future is quite uncertain, having no direction,
Business has accumulated losses and some other organization offers higher price to get tax benefits, Liquidation value is more than discounted present value of future flow of income etc.

Combination Strategy

Combination strategy is not an independent classification but it is a combination of different strategies stability, growth, retrenchment in various forms. Thus the possible combinations of strategies may be:

Stability in some businesses and growth in other businesses Stability in some businesses and retrenchment in other businesses Growth in some businesses and retrenchment in other businesses Stability, growth and retrenchment in different businesses.

Reasons for following

Different products in different product life cycle

When different products of the organization are at different product life-cycle stages, they require different types of investment.

Business Cycle

Business cycle may affect the prospect of various businesses differently.

Number of businesses

When the number of businesses in an organization has gone beyond the optimum number, they are required to be reduced because some business may not be that attractive from longterm point of view.