Strategic Alternatives

Objectives

• Understanding the basic framework for grand strategy that

includes
– stability,
– expansion,
– retrenchment and
– the combination strategies
– and then the dimensions along with these strategies

• The generic strategies suit at business levels

Grand Strategies
Strategic alternatives have to be viewed from the corporate level

Corporate level strategies are basically about

– decisions related to the allocation of resources for various business

– Managing and nurturing portfolio of various businesses in a
corporate umbrella
– The choices are wide and much how organization perceives its
strengths and weaknesses viz-a-viz the opportunities and threats
 1. Grand Strategies

• Starting point to think strategic alternative is by Abell’s way of

defining business ( customer group, customer functions, and
alternative technologies) for laying down the future directions of
portfolio management
• According to Glueck, the grand strategies are
– stability,
– expansion,
– retrenchment and
– the combination strategies
( others refers this has generic or basic strategy)
 1.1 Stability strategies

• Adopted for incremental improvements in terms of customer

group, customer functions, and alternative technologies
(e.g.) copier machine company provides better after sales
service
steel manufacturer improves the plant efficiency

• Business stay as it is
• Shows marginal improvement
• Remains same @ volatile environment
• Proves moderate growth with existing trend
 1.2 Expansion strategies

• Expansion strategies are followed when the organization

broadens the scope of operations in terms of customer group,
customer functions, and alternative technologies
(e.g.) car manufacture moves from economic cars to luxury cars
bank moves from personal services to ATM

• Alters the basic business definition

• Have profound impact on internal configurations
• Quite risky
 1.3 Retrenchment strategies

• Retrenchment strategies are followed when the organization

substantially reduces the scope of operations in terms of
customer group, customer functions, and alternative
technologies
(e.g.) a corporate hospital may concentrate on specialist
treatment
university can reduce its courses offered

• Trim the fat and slimmer the organization

• Aims to focus and concentarte
 1.4 Combination strategies

Combination strategies are followed when the organization

adopts a mixture of stability, expansion, retrenchment in
terms of customer group, customer functions, and
alternative technologies @ same or different types of
business

(e.g.) paint company improves the quality of decorative painting

for its customer and expands its product to automotive paints
and close down the division of large scale painting contracts
 The other approaches of grand strategies
• Derek F Abell's

- Focused Strategy
- Differentiated strategy
- Undifferentiated strategy
 1.5 Dimensions of grand strategies

• The basic 4 grand strategies has a possible of mixed varieties of strategies with
its various dimensions ( Glueck)
– Internal and External Dimensions
(with in the entity and outside of business entity)
– Related and Unrelated Dimensions
(existing with one or more dimensions of business or not)
– Horizontal and Vertical Dimensions
(business serves additional customer or satisfy other function is
called horizontal e.g. Hotel Saravanabavan produces readymade
chapattis and sells to retail)
(organization services in existing business but expands or
contraction takes place with alternative technology e.g. coco cola
thinks of bottling plant and laxmimills things of own show rooms)
– Active and Passive Dimensions
( offensive or defensive approach)
 1.6 Comprehensive view of strategy

4 grand strategies
4 dimensions
2 types of each dimensions
3 ways of defining business

Paves 4 x 4 x 2 x 3 = 96 alternative avenues for

corporate to move
 1.1 Stability strategies
Stability strategy could be of 3 types
1. No Change strategy
- status quo is absent of strategy
- firm does not change anything because it finds no worthy in
changing
- its not the status of inactive but act like niche in the
segment
2. Profit Strategy
- improving the management style to increase profits by cost
cut, raise price, increases productivity
- usually for temporary arrangements
3. Pause/proceed-with-caution Strategy
- strategy for transition period
- establishing the war ground to ready
 1.2 Expansion strategies
Expansion strategy could be of 5 ways
1.2.1 Expansion thru Concentration
1.2.2. Expansion thru Integration
1.2.3. Expansion thru Diversification
1.2.4. Expansion thru Cooperation
1.2.5. Expansion thru Internationalization
 1.2.1 Expansion thru Concentration

• Converges resources with existing business

• Just as “stick to knitting” – excellent firms tend to rely on doing
what they know they are best at doing
(e.g.. Bajaj Auto consistently concentrates 2 wheeler segment for more
than 2 decades with proven technology, forbidden competitor for the
rivals, sustained market share of familiar market)
• The advantages are
– Minimal organizational change
– Master in one
– Intensity focus may lead to distinctive competencies
• The limitations are
– Putting all eggs in one basket
– Creation of organizational inertia
– Result in cash flow problems
 1.2.2. Expansion thru Integration
• The horizontal and vertical dimensions of grand strategy is used
to define integration strategy
• Integration means combining activities related to the present
activity of the firm, such can be done on the basis the value chain

• Integration is the expansion strategy and subset of diversification

too
 1.2.2. Expansion thru Integration
• Integration strategy are motivated for transaction cost of
economics
• Ansoff came out with the matrix which explains different kinds
of integration (as well diversification ) strategies
• Among the integration: 2 strategies are
– Vertical integration : towards the source (backward) or towards the
customer ( forward), some times companies can’t fulfill the integration so
called as ‘partial integration’ which also can be stated in 2 forms “Taper
integration” (procure from outside) and Quasi Integration (as outsourcing)
– Horizontal Integration : when organization takes up the same type of
product at the same levels of production (Neycer Ceramic + Spartek
Ceramic)
 1.2.2. Expansion thru Integration
Ansoff’s Matrix for diversification strategies

New Products

New Functions Related Technology Unrelated technology

Firms its own customer Vertical Integration

Same type of product Horizontal Diversification

Similar types of products Market and technology Market and technology

related diversification related diversification

New Types of product Technology-related Conglomerate

concentric diversification Diversification
 1.2.3. Expansion thru Diversification

– Diversification can happen at all dimensions (Active and

Passive, Horizontal and Vertical, Related and Unrelated,
Internal and External)
• Different types of diversification strategies
a. Concentric diversification (related to existing business definition)
1. Market related Concentric diversification (similar type of product
with unrelated technology – Usha in Fans , Sewing machine but on home
appliances)
2. Technology related Concentric diversification (Honda produces
different robotics)
3. Market - Technology related Concentric diversification ( rain coat
manufacture can produce waterproof shoes, gloves in same market)
b. Conglomerate diversification
Complete well diversified as ITC, Essar, TTK, ….
 1.2.4. Expansion thru Cooperation
• During win-lose situations the “cooperation” and “co-opetion” strategies will work out
• Cooperation strategies can be following types
– Mergers
– Takeovers (acquisitions)
– Joint ventures
– Strategic alliances
• Merger (amalgamations . Ref sec 2(1a)IT act,1961)
– Is a combination of one or more organization in one which acquires the other assets
and liabilities thru various forms
– for organization which acquires another is “acquisition”
– For organization which acquired is “merger”
– For both it is “consolidation”
– Amalgamation is a form of merger – can happen by absorption and consolidation

Types of merger
• Horizontal, Vertical, Concentric, Conglomerate mergers
 1.2.4. Expansion thru Cooperation
• Takeovers (acquisitions)
how takeover takes place?
- motivation behind takeover
- arrangement of finance (direct negotiation to LBO)
Types of takeover
- hostile and friendly takeover
• Joint Ventures
– JV are special case of consolidation (also called consortium)
– JV can happen within and between industry and countries as well
• Strategic Alliances
– Join for specific purpose and remain independent
– The relation is win-win and reciprocal
– The reason behind can be for entering to new market, reducing cost, developing
new tech….
 1.2.5. Expansion thru Internationalization
• Entry Mode
– Export entry mode (direct and indirect)
– Contractual entry mode (licensing agreements, franchising)
– Investment entry mode ( JV, SA, Independent or Wholly owned)
• Types
– Classified based on pressure of local responsiveness and cost pressure
High
Global Transnational Strategy
Cost pressure Strategy

Low
Multidomestic
International Strategy Strategy

Low High

Pressure of local responsiveness

 1.3 Retrenchment strategies

• Types of retrenchment strategies

– Turnaround strategies
• reversing the negative trend
• Rehabilitation finance helps for turnaround ( IRBI, SIC, BIFR..)
– Divestment strategies
• Sale of potion or whole business
– Liquidation strategies
• When organization reaches bankrupt
• Can be of planned liquidation or liquidation thru legal aspects
 1.4 Combination strategies

• Types of combinations
– Simultaneous Combination
– Sequential Combination
– Both
Generic Strategies
@
Business Levels
 2. Generic Business Strategies

• M Porter credited with extensive pioneer work in business level

strategies ( he refers as competitive strategies)
• The dynamics factors that determine the choice of a competitive
strategy are 2,
– The industry structure
( refers to 5 forces of competition)
– The position of the firm in the industry
( refers to approach of competing - competitive advantage and competitive
scope)
2.1The industry structure
 2.2 The position of the firm in the industry
strategic scope and strategic strength.

Strategic scope is a demand-side dimension (Porter was

originally an engineer, then an economist before he specialized
in strategy) and looks at the size and composition of the market
you intend to target.

Strategic strength is a supply-side dimension and looks at the

strength or core competency of the firm. In particular he
identified two competencies that he felt were most important:
product differentiation and product cost (efficiency).
2.2 The position of the firm in the industry
 2.2.1 Cost leadership
1. Achieving cost leadership (How?)
– accurate demand forecasting and high capacity utilization
– higher level of standardization and uniform service packages
– investing in cost saving technologies
– Withholding differentiation
2. Conditions under cost leadership is used (when?)
– Price based competition is vigorous
– Market demands standardized products
– Switching cost is low
– Only few ways to differentiate and its is in-significant
3. Benefits
– Cost advantage makes competitive advantage
– Threat of substitute is off-set
4. Risks
– Cost advantage is short-lived
– Technology shifts often
 Evaluating business’s cost leadership opportunities

Process innovation Product redesign to reduce Technology

Lowering production number of components development
Safety
costs training for all employees reduces HRM
absenteeism,
downtime,
Reduced andof
level accidents
management Computerized, integrated info. systems General
administration Pr
cuts corporate overhead Reduces errors and costs of
it
Favorable long-term contracts; captive suppliers or Procurement
key customer for supplier
M
Global, online Economy of scale Computerized Cooperative Subcontracted Service ar
advtg. creates service techs.
gi
suppliers provide in plant reduces routing lowers Repair products
n
automatic equipment costs transportation local cost
correctly first
restocking of and depreciation expense advantage in time or bear
orders based on buying media costs
sales space/time

Inbound logistics Operations Outbound logistics Mkt &

sales

31
 Discussion Question?
When economies of scale exist, firms with large volumes of production
will have lower costs than will firm with smaller volumes of production.
The realization of these economies of scale, however, is far from
automatic. What action can firm take to ensure that they realize
whatever economies of scale are created by their volume of
production?

One way of thinking about organizing to implement cost-leadership

strategies is that firms that pursue this strategy should be highly
centralized, have high levels of direct supervision, and keep employee
wage to an absolute minimum. Another approach of decentralization
decision making authority – to ensure that individuals who know the
most about reducing cost make decisions about how to reduce costs.
This, in turn, would imply less direct supervision and somewhat higher
levels of employee wages. Which of these two approach seems more
reasonable? Under what conditions would these different approches
make more or less sense?
 2.2.2 Differentiation
1. Achieving differentiation (How?)
– Sustainable differentiation comes from creativity
– Creating customization for specific customers
– Different way of channels
– Differentiate thru services and supports
2. Conditions under differentiation is used (when?)
– Preference of customer is too diversified
– Willingness to pay premium price for the differentiation
– Stability and profitability of the segment
3. Benefits
– Leaning the scope of competition
– Safeguarded by the loyal customers
– Good negotiation over the value chain ( both supplier and buyers)
– Threats to new entrants and substitutes
4. Risks
– In growing market brands usually turns to commodity (no advantage for first movers)
– Premium price may have limitations
 Evaluating business’s Differentiation opportunities

Cutting-edge production technology and product features Technology

to maintain a distinct image and actual product development
Programs to ensure technical competence of sales HRM
staff and a marketing orientation of service personnel
Comprehensive, personalized database to build knowledge of customers General
administration Pr
to be used in customizing how products are sold, serviced, replaced of
it
Quality control presence at key supplier facilities; work with Procurement
suppliers’ new product development activities
M
Purchase superior Careful inspection JIT coordination Expensive, Service Service ar
quality well- informative personnel have gi
of products at each with buyers; use considerable
n
known step to improve of own/captive advertising
discretion to
components, product transportation and credit
raising performance and service to ensure promotion to customers
quality/image of lower defect rate timeliness build image for repairs
final products
Inbound logistics Operations Outbound logistics Mkt &
sales

34
 Discussion Question
Ivory soaps, Hyundai, and Timex are all cited as example of
firms pursuing cost leadership strategies, but these firms make
substantial investments in advertising, which seems more likely
to be associated with a product differentiation strategy. Are
these firms really pursuing a cost-leadership strategies or are
they pursuing a product differentiation strategy by emphasizing
their lower costs?

Although cost leadership is, perhaps, less relevant for firms

pursuing differentiation, cost are not totally irrelevant. What
advice about costs would you give a firm pursuing a product
differentiation strategy?
 2.2.3 Focus business strategy
1. Achieving focus (How?)
– Selecting niche market (not captured by cost bases or differentiated bases)
– Develop a new platform for value creation thru value chain
– Develop distinctive capability
2. Conditions under focus is used (when?)
– Special requirements for product / service
– Promising profit and growth potential
– Niche cum loyalty
3. Benefits
– Duplicating the distinctive capability is difficult leads to long term sustainable
– Price discrimination is possible, so leverage on different buyers can happen
– Powerful barrier for new entrants and substitutes and remote rivalry
4. Risks
– Focused means commitment to the segment
– Niche are often transient (over technology, rise costs)
– Giants (companies) may jump in
 Discussion Question

Porter originally argued that there are three generic competitive

strategies: cost leadership, differentiation, and focus. Others
have suggested that focus is just a special case of cost
leadership or product differentiation and thus there are only two
competitive strategies. It could also be argued that firms can
choose from among numerous strategic alternatives, but
whatever alternative they choose, the critical task is to
implement that strategy efficiently. This suggests that there is
one completive strategy – efficiency. So, how many competitive
strategies are there: three, two, or one. Does your answer
affect the strategic decision firms should make?
 2.2.4Integrating cost leadership and differentiation
The hybrid strategy
End
Choosing the specific market, developing the distinctive core
competencies, high level of product specification (by own),
value addition and creation (managed by the value chains)

Means
 Using new technologies like process technology, FMS… mass
customizations are possible with low costs
 Hold the technological capabilitiess
 Outsource the routine matters – reduce cost on others
 Summary

• Strategies @ corporate level

• Strategies @ business level
• Combines together says strategic alternatives