STRATEGIC CHOICES

Porter’s competitive strategies

• Q. 1 Should our company or business unit compete on the
basis of lower cost (that is price) or should we differentiate
our offerings on some basis other than cost such as quality
or service? (Basis to compete)
• Q. 2 Should our company or business unit compete head
on with major competitors for the bigger but highly fought
market share or should our company or business unit
dodge bigger competitors by focusing on a niche (small
customer segment) in which our company can satisfy a
less sought after but profitable segment of the market?
(Competitive scope)
 Table 3.1 Capabilities Requirements for Generic Competitive Strategies
Generic Commonly Required Skills and Common Organizational
Strategy Resources Requirements
 Sustained capital investment  Tight cost control
and access to capital  Frequent, detailed control
 Process engineering skills reports
Overall Cost  Intense supervision of labor  Structured organization and
Leadership  Products designed for ease of responsibilities
manufacture  Incentives based on
 Low-cost distribution system meeting strict quantitative
targets
 Strong marketing abilities  Strong coordination among
 Product engineering functions in
 Creative flair  R&D, product development,
 Strong capability in basic and marketing
research  Subjective measurement
 Corporate reputation for and incentives instead of
quality or technological quantitative measures
Differentiation leadership  Amenities to attract highly
 Long tradition in the industry skilled labor, scientists, or
or unique combination of creative people
skills drawn from other
businesses
 Strong cooperation from
channels
Combination of the above Combination of the above
Focus policies directed at the particular policies directed at the
strategic target particular strategic target
SOURCE: COMPETITIVE ADVANTAGE: Techniques for Analyzing Industries and Competitors
by Michael E. Porter. 1980, by The Free Press.
 Cost Leadership Strategy
Lower-cost competitive strategy that targets at
the broad mass market and requires
“aggressive construction of efficient-scale
facilities, vigorous pursuit of cost reductions
from experience, tight cost and overhead
control, avoidance of marginal customer
accounts, and cost minimization in areas like
R&D, service, sales force, advertising, and so
on.”
Internationally, some companies successfully :

• Wal-Mart (discount retailing),

• McDonald’s (fast-food restaurants),
• Dell (computers),
• Alamo (rental cars),
• Aldi (grocery stores),
• Southwest Airlines, and Timex (watches).
In India companies ---
• Tata Motors (Trucks),
• Arvind Mills (Denims),
• Ranbaxy (Generic Drugs),
• Hero Cycles (Bicycles), and
• Reliance Industries (Petrochemical Refining)
 Differentiation
• Differentiation strategy is aimed at the wide
mass market and involves the creation of a
product or service that is perceived throughout
its industry as differentiated or unique.
• Differentiation is a feasible strategy for earning
above-average returns in a specific business
because the resulting brand loyalty lowers
customers’ sensitivity to price. Increased costs
can usually be passed on to the buyers.
International firms are
• Walt Disney Productions (entertainment),
• BMW (sporty cars),
• Nike (athletic shoes),
• Volvo (safe vehicles),
• Rolex Watches (Design) and Apple Computer (computers and cell
phones).
In India, companies –
Airtel (Telecommunications),
Honda (fuel efficient Scooters),
Maruti Suzuki (Fuel efficient Passenger Cars)
 Focus
• Focus strategy or sometimes it is referred as
niche / specialist can went in any of two
direction i.e. cost focus or differentiation
focus.
• Cost focus is a low-cost competitive strategy
that aims at a particular buyer group or
geographic market and attempts to serve only
this niche. In using cost focus, the company or
business unit develops a cost advantage in its
target segment.
 Indian example
• Peru born beverage company Aje Group (makers of Big
Cola). Rather than compete directly against Pepsi and Coca
Cola Aje Group focuses on modern organized retailers like
Future Group and many other grocery store chains. It
matches the quality of the well-known brands, but keeps
costs low by largely eliminating advertising and promotion
expenses.
• Companies using cost focus are Balaji Wafers (as discussed
in opening case), D Mart (grocery retail in western India).
Cost focus strategy is suitable for small firms in businesses
like courier, airlines.
 Differentiation focus
• a particular buyer group, product line segment, or
geographic market with differentiated or unique
offering.
• In using differentiation focus, a company or business
unit looks for differentiation in a targeted market
segment. This strategy is valued by those who
believe that a company or a unit that focuses its
efforts to serve the special needs of a narrow
strategic target more effectively than can its
competing firms.
• This is the strategy successfully followed by
Rolls Royce (a manufacturer of ultra luxury
cars), Nickelodeon (a cable channel for
children)
• In the trucking industry of the 1980s in India, heavy
duty vehicles (HDVs), manufactured almost
exclusively by Ashok Leyland, constituted a niche
product group and a niche market for the company.
With the enhancements in freight haulage patterns
and improvements in road infrastructure as well as
entry of several new players such as Volvo, MAN,
Hino and Navistar (besides the incumbent Tata
Motors) into the heavy haulage segment Today HDVs
no longer constitute a niche.
 Table 3.4 - Risks in competitive strategies

Risks in cost leadership Risks in differentiation Risks in Focus

Cost leadership is not Differentiation is not sustained: The focus strategy is imitated.
sustained: - Competitors imitate.
- Competitors copy. - Bases for differentiation
- Technology changes. become less important to
- Other bases for cost buyers.
leadership wear down.

Proximity in differentiation is Cost proximity is lost. The target segment becomes

lost. structurally unattractive:
_ Structure erodes.
_ Demand disappears.

Cost focusers achieve even Differentiation focusers achieve Broadly targeted competitors
lower even greater differentiation in overwhelm the segment:
cost in sub segments segments. _ The segment’s differences
from other segments narrow.
_ The advantages of a broad
line increase.

New focusers sub-segment the

industry.
Issues with competitive strategies
• With more than one single generic strategy the
firm will be "stuck in the middle" and will not
achieve a competitive advantage.
• For Example – A classic example of “stuck in
the middle” firm is US retailer K-Mart. This
company tried to imitate Wal-Mart’s low cost
strategy simultaneously followed Target’s
differentiation strategies. This dual strategy led
K-Mart to bankruptcy.
• Jagdish sheth & Rajendra Sisodia coined term
“ditch dwellers” – firms which are neither
having broad scope nor small enough to be
considered as focusers. This mean firms can
“stuck in the middle” on both variables i.e.
basis of competition (differentiation and cost)
and competitive scope (broad and small).
• The Toyota and Honda auto companies are often
presented as examples of successful firms able to
achieve both (cost leadership and differentiation)
of these generic competitive strategies.
• Due to advances in technology, a company may
be able to design quality into a product or service
in such a way that it can achieve both high quality
and high market share — thus lowering costs.
 Strategy Clock
• strategy clock -------- Cliff Bowman and Richard
D’Aveni
• The ‘strategy clock’ represents different
positions in a market where customers (or
potential customers) have different needs in
terms of value for money. These positions also
represent a set of generic strategies for
achieving competitive advantage.
• a) Price-based strategies (routes 1 and 2) - Route 1 is the
‘no frills’ strategy, which combines a low price with low
perceived product/service benefits and a focus on a price-
sensitive market segment.
• . Amazon.com used the Internet, and the associated
strategies e-commerce makes possible, to pursue a cost-
leadership model and consolidate the fragmented
bookselling industry. Amazon.com’s success in the book
market has accelerated the consolidation of the book
retail industry, and many small bookstores have closed
because they cannot compete by price or selection.
• b) The hybrid strategy (route 3)
• A hybrid strategy simultaneously attempts to
achieve differentiation and low price relative
to competitors. The success of this strategy
hinges on the ability to deliver enhanced
benefits to customers along with low prices; at
the same time achieving sufficient margins for
reinvestment to maintain and develop bases of
differentiation.
• For example, IKEA is differentiated on the
basis of its marketing, product range, logistics
and store operations. But low customer
expectations on service levels allow IKEA to
reduce cost as customers are prepared to
transport and build / assemble its products.
• c) (Broad) Differentiation strategies (route 4)
• The next option on strategy clock is a broad
differentiation strategy providing products or
services that offer benefits different from those
of competitors and that are widely valued by
customers. The objective is to achieve
competitive advantage by offering better,
unique products or services at the same price
or enhancing margins by pricing slightly higher.
• d) Focused differentiation (route 5)
• A focused differentiation strategy provides high
perceived product/service benefits, typically
justifying a sizeable price premium, usually to a
selected market segment (or niche). These could be
premium products and heavily branded. Focused
differentiators seek to convince customers who value
or see themselves as discerning of quality that their
product is sufficiently differentiated from
competitors’ products to justify its higher price tag.
• e) Failure strategies (routes 6, 7 and 8)
• A failure strategy is one which does not
provide perceived value for money in terms of
product features, price or combination of
both. So the strategies suggested by routes 6,
7 and 8 are ultimately leads to failure.
• Route 6 suggests increasing price without increasing
product/service benefits to the customer, the strategy
that monopoly organizations are blamed of following.
Unless the organization is protected by legislation, or high
economic barriers to entry, this strategy is not feasible.
• Route 7 is an even more terrible extension of route 6,
involving the reduction in product/service benefits whilst
increasing relative price.
• Route 8, reduction in benefits whilst maintaining price, is
also dangerous, though firms have tried to pursue it.
 Cooperative strategies
 

Collaboration opportunities / possibilities can be

possible around the five forces framework
suggested by Michel Porter.
• Collaboration to increase selling power.
• Collaboration to increase buying power.
• Collaboration to build barriers to entry or avoid
substitution.
• Collaboration to gain entry and competitive power.
• Collaboration to share work with customers.
 Table 3.5 Example of collaborative arrangements to increase
firm’s bargaining power
Objective behind
Example
collaboration
Collaboration to increase Banks and many financial institutes make
selling power cooperative arrangements with
insurance, mutual funds and other
companies so that they can cross sell the
products.
Collaboration to increase ITC with its collaborative initiatives with
buying power farmer like echoupal, Social & Farm
Forestry Programme (for note books) in
the back end supply chain has made win-
win situation for both farmer and itself.
Collaboration to build barriers Consortium formed by Nokia and other
to entry or avoid substitution companies to develop protocol
specification for Bluetooth.
Collaboration to gain entry For cloud computing products Microsoft
and HP work collaboratively.
 CORPORATE LEVEL STRATEGIES

• Corporate-level strategy is an action taken to

gain a competitive advantage through the
selection and management of combination of
businesses competing in several industries or
product markets. Corporate strategies are
normally expected to help the firm earn
above-average profits and create value for the
shareholders (Markides, 1997).
 Table 3.6 - Corporate strategy Vs Business strategy

Dimensions Corporate Business

Time horizon Very Long Medium

Type of decision Philosophical Mixed

Risk Involved High Medium

Impact Significant Major

Profit Potential Very High Medium

Levels of decision making Highest Middle Upper

 Key Issues……….
• The firm’s overall orientation towards growth,
stability or retrenchment (Directional Strategy)
• The industries or markets in which the firm
competes through its products and business
units. (Portfolio Strategy)
• The manner in which management coordinates
activities and transfers resources and nurtures
capabilities among product lines or business
units. (Parenting strategy)
• A. Directional Strategy -grand strategies
 Table 3.7 Directional Strategies At a Glance

Growth Stability Retrenchment

(Expansion) (Contraction)

Concentration (Intensification) Pause / proceed with action Turnaround

- Vertical Growth (Vertical No change Captive Company
Integration) Profit Sell out / Divestment
Bankruptcy / Liquidation
- Horizontal Growth
Outsourcing strategies
Diversification
- Concentric (Related)
- Conglomerate (unrelated)

-----Offensive----- ------------Defensive------------
 A. Growth Strategies
• Two basic growth strategies are concentration
or intensification on the current products and
business operations and diversification into
other product lines and industries.
 A.1) Concentration or Intensification

• Concentration or intensification strategy is the

one in which organization seeks growth by
focusing on single line of business.
• McDonald’s restricted itself to global fast-food
restaurant business
• Infosys remained focused on IT & ITES since
its inception and Wal-Mart, with its focus on
global discount retailing.
 Horizontal Growth

• When firm went on acquiring as well as

mergers with firms in the same industry then
it is known as horizontal growth.
• Horizontal growth results in horizontal
integration - the process of acquiring or
merging with industry competitors in an effort
to achieve the competitive advantages that
come with large scale and scope.
• Tata group companies went for horizontal
integration as Tata Motors acquired Jaguar &
Land rover; Tata steel took control of Corus
and Tata tea’s leveraged buyout of Tetley Tea.
Horizontal integration through mergers and acquisitions may
fail to produce the anticipated gains for a number of
reasons:
• Problems associated with merging very different company
cultures
• High managerial talent turnover in the acquired company
when the acquisition was a hostile one,
• Tendency of managers to overestimate the benefits to be
gained from a merger or acquisition and
• Underestimate the problems involved in merging their
operation.
Ansoff’s matrix
• Market Penetration / Consolidation – Intensifying
business activities in current markets with current
products and services by increasing sales offices,
expanding distribution channels, etc. Firm is aiming
higher market share.
• Market Development – Expanding into new markets
with current products and services offered by the
firm
• Product Development - Increasing the range of
product and services offered in current markets.
 International expansion
Table 3.8 International Market Entry modes / strategies
Entry Mode Meaning Example
Exporting Shipping goods produced in the company’s home country to other countries for marketing. becoming Usually any company intent to go international will start with this mode as it involves
increasingly popular for small businesses because of the Internet, fax machines, toll-free numbers, less resources and low risk.
and overnight express services,

Licensing Under a licensing agreement, the licensing firm grants rights to another firm in the host country to Anheuser-Busch used this strategy to produce and market Budweiser beer in the
produce and/or sell a product. The licensee pays compensation to the licensing firm in return for United Kingdom, Japan, Israel, Australia, Korea, and the Philippines.
technical expertise.

Franchising Under a franchising agreement, the franchiser grants rights to another company to open a retail Yum! Brands, McDonald’s, Subway
store using the franchiser’s name and operating system. In exchange, the franchisee pays the
franchiser a percentage of its sales as a royalty.

Joint Ventures An association between a company and a firm in the host country or a government agency in that Wal-Mart’s management formed an equal partnership joint venture in 2007 with
country. A quick method of obtaining local management, it also reduces the risks of expropriation and Bharti Enterprises to start wholesale operations. Under the name Bharti-Mart
harassment by host country officials.

Acquisitions Purchasing another company already operating in that area. Refer exhibit 3.2,

Green-Field Development Setting up own manufacturing plant and distribution system. It is one on the most flexible but Usually global automobile companies set up their green field projects in host nations.
riskiest entry mode.

Production Sharing Production sharing means the process of combining the higher labor skills and technology available Many companies have moved data processing,
in developed countries with the lower-cost labor available in developing countries. Often termed programming, and customer service activities “offshore” to Ireland, India, Barbados,
outsourcing. Jamaica, the Philippines, and Singapore, where wages are lower

Turnkey Operations Turnkey operations are typically contracts for the construction of operating facilities in exchange for Plant (refinery, chemical) design erection services, Fiat built an auto plant in Russia,
a fee. The facilities are transferred to the host country or firm when they are complete. for the Soviet Union in the late 1960s to produce an older model of Fiat under the
brand name of Lada

BOT Concept: The BOT (Build, It is a variation of the turnkey operation. Instead of turning the facility over Usually seen infrastructure projects like road, airport, etc.
Operate, Transfer) concept to the host country when completed, the company operates the facility for a fixed period of time
during which it earns back its investment plus a profit.

Management Contracts Management contracts offer a means through which a corporation can use some of its personnel to Any location where host country expropriates part or all of a foreign-owned company’s
assist a firm in a host country for a specified fee and period of time. holdings in its country.
Table 3.9 - The Advantages and Disadvantages of Different Entry Modes
• Bartlett and Ghoshal proposed four types of
international strategy based on firm’s
motivation to go seek international growth
• a)International Strategy – Firm create value by transferring
product and services as it is to foreign locations where these
products are not available.
• b)Multi-domestic Strategy – Firm try to achieve high level of local
responsiveness by tailoring product and services to the local
tastes and preferences of foreign markets
• c)Global strategy – In this company offers standard products
across the international markets to achieve lower cost by reaping
the benefits of economies of scale and experience curve.
• d) Transnational strategy – When a company adopts combined
approach of tailoring the products and services to become
responsive locally and simultaneously try to reduce cost.
 Vertical Growth

• Vertical growth is nothing but expanding the

operations into those areas or functions
previously provided by supplier or distributor.
The company itself grows by making supplies
or supplying its products. Vertical growth
results in vertical integration.
• According to Wheelen and Hunger vertical
integration is the degree to which a firm
operates vertically in multiple locations on
industry’s value chain right from extracting
raw materials to manufacturing to retailing.
• Nirma Limited integrate in a backward direction by
setting up plant to manufacture soda ash and linear
alkyl benzene, both important inputs for detergents
and washing soaps, to strengthen its low cost
advantage in the lower-end detergents market.
• Many textile firms in India such as Raymond’s, DCM,
Mafatlal and National Textile Corporation integrated
in forward direction by establishing their own retail
distribution systems to have better control over their
distribution activities.
 Figure 3.9 Levels of Vertical Integration
Taper Quasi Long term
Full Integration
Integration Integration contracts
Full Integrations Vs Taper Integration
 Risk in Vertical Growth
• Difficulty in effectively integrating the firms
involved,
• Overestimating the potential for synergy
through vertical integration,
• The huge financial burden that vertical
integration needs,
• Capacity balancing issues.
• Decreased flexibility due to higher investments.
 A.2) Diversification

• Diversification is the process of venturing into new

industries, distinct from a company’s core or original
industry, to make new categories of products that can be
sold profitably to customers in these new markets.
• Diversification means moving into new lines of business.

• Why Diversification??????????
1. Transfer competencies between business
units in different industries(ITC)
2. leverage competencies to create business
units in new industries, ( Canon)
3. share resources between business units to
realize economies of scope, (e.g. Procter &
Gamble (P&G)
4. Use product bundling, (e.g. Videocon group)
5. Use diversification to reduce rivalry in one or more industries:
In the late 1990s, Microsoft realized to the fact that Sony might
emerge as a rival. Although Sony was in a different industry,
Microsoft realized that the Sony Play-station was nothing more
than a specialized computer and, importantly, one that did not
use a Microsoft operating system.
Microsoft’s fear was that Sony might use the Playstation 2,
which came equipped with web-browsing potential, may
ultimately take customers away from PCs with Microsoft
operating systems. The desire to keep Sony’s aspirations in
check was one of the rationales for Microsoft’s diversification
into the videogame industry with the launch of the Xbox
Concentric and Conglomerate diversification

• Concentric or Related diversification is suitable

when a company has a strong competitive
position but industry attractiveness is low.
When Concentric or Related diversification
– When an organization competes in a no-growth or a slow-
growth industry.
– When adding new, but related, products would
significantly increase the sales of current products.
– When new, but related, products could be offered at highly
competitive prices.
– When new, but related, products have seasonal sales levels
that offset an organization’s existing peaks and valleys.
– When an organization’s products are currently in the
declining stage of the product’s life cycle.
– When an organization has a strong management team
 Examples
• Financing / Lease financing activity taken by Indian companies
in Automobile & capital goods sector is a good example of
concentric diversification. Ashok Leyland, Bajaj Group, L&T
Group, Mahindra Auto has started financing business so that
their customers can avail their products through financing
options.
• Jalgaon based, Jain Group is another example in which
concentric diversification is made with farmer (as a buyer or
supplier) as a linkage or commonality amongst their businesses.
Jain group has diversified entity with operations encompassing
irrigation products / equipments, food processing, tissue
culture, etc.
 Conglomerate (unrelated) diversification

• Conglomerate (unrelated) diversification is an

appropriate growth option when current
industry is unattractive and that the firm lacks
exceptional and outstanding capabilities, skills
and competencies in related products or
services.
– When revenues derived from an organization’s current products or services
would increase significantly by adding the new, unrelated products.
– When an organization competes in a highly competitive and/or a no-growth
industry, as indicated by low industry profit margins and returns.
– When an organization’s present channels of distribution can be used to
market the new products to current customers.
– When the new products have countercyclical sales patterns compared to an
organization’s present products.
– When an organization’s basic industry is experiencing declining annual sales
and profits.
– When an organization has the capital and managerial talent needed to
compete successfully in a new industry.
– When an organization has the opportunity to purchase an unrelated business
that is an attractive investment opportunity.
 Examples
• General Electric and Berkshire Hathaway are
examples of companies that have used
conglomerate diversification to grow
successfully. Managed by Warren Buffet,
Berkshire Hathaway has diverse interests in
furniture retailing, razor blades, airlines,
paper, broadcasting, soft drinks, and
publishing.
• Arvind group, hitherto limited to textiles, diversified
into unrelated activities such as manufacturing of
agro- products, floriculture and export of fresh
fruits. Likewise, Wipro is another conglomerate
with wide ranging business interests encompassing
vegetable oils, computer hardware & software,
medical equipment, hydraulic systems, fast moving
consumer products, lighting, export of leather shoe
nippers and has recently entered into venture
capital financing.
• Interestingly, diversification can sometimes be in
management’s self-interest, as large corporations
were diversifying simply to spread risk for managers,
to save managerial jobs in declining businesses or to
preserve the image of growth.
• For Example: - Enron’s initial diversification was for
creating and maintaining image of growth in front of
investors, analyst, etc. Enron’s unethical practices
and account manipulation led it to bankruptcy in
2001
Diversity – Performance relationship
 Strategic options to pursue directional
strategies
• organic development, mergers & acquisition
(or disposal) and alliances.
 Table 3.13
Strategic Options through “change in business definition”
Directional Business Definition Elements
Strategies Product Market Function
(What) (Who) (How)
Add new Find new Forward Vertical
Growth
products markets integration
Drop
Drop old distribution Become captive
Retrenchment
products channels / company
territories
Stability Not applicable Not applicable Not applicable
Drop old while Drop old Increase capacity
Combination add new products while and improve
products find new ones efficiency
 Table 3.14
Strategic Options through “change in pace”
Directional Business Definition Elements
Strategies Product Market Function
Penetrate Increase
Growth Find new uses
Markets Capacity
Decrease product Reduce market Outsource
Retrenchment
development shares R&D
Make packaging Improve
Protect market
Stability change, quality production
share
improvements efficiency
Increase
Drop old
Drop old while capacity and
Combination products while
add new products improve
find new ones
efficiency
various dimensions of corporate directional
strategies
Dimensions of corporate directional strategies
Directional Strategies
Strategy
Dimension Stability Growth Retrenchment

Emphasize cost
Focus on production
Focus on market reduction, sell
and marketing
penetration, add new unprofitable assets,
Internal efficiencies,
products, add new withdraw from some
organizational
markets markets, customer
restructuring
functions
Hold on to market Undertake mergers &
External Liquidation, Divestment
share acquisitions
Engage into new
Do away with related
Improve product / activities which will
Related products, markets and
service quality build synergy with
functions
current activities
Engage in new
Eliminated unrelated
activities which are
Unrelated - products, markets and
unrelated with current
functions
operations
Add complementary
Horizontal - -
products
Add new function on Reduce function on
Vertical -
the value chain value chain
Harvest to grow and
Active Emphasize innovation
- deploy in profitable
(offensive) & entrepreneurship
areas
Passive Defend position as a
Imitate New products -
(defensive) reaction to threat
organic development (Internal dimension)

• Highly technical products in terms of design or

method of manufacture allow themselves
through organic development
• Knowledge and capability development may
be developed by organic development.
• The final cost of developing new activities
internally may be greater than that of
acquiring other companies
• Apple Inc. is excellent example of Organic Growth.
Growth at Apple is driven by trend - setting product
innovation. Macintosh, iMac, iPod and iPhone are some
of the breakthrough products. Steve Jobs, Founder,
Apple Inc sums up it as - “Our belief was that if we kept
putting great products in front of customers, they would
continue to open their wallets.”
• Tech giant Microsoft, on the other hand is a clear case
of inorganic growth as it has successfully completed
more than 100 acquisitions since 1986.
Options for Inorganic development
Options for inorganic or external dimensions:
• A) Mergers & acquisition
• A merger is a transaction involving two or more corporations in
which shareholding is exchanged and at the end one corporation
exits.
• Merger is also defined as agreement between equals to pool their
operations and create a new entity. Merger generally refers to a
situation in which the assets and liabilities of two or more
companies (merging company) are vested in another company
(the merged company).
• The merging entity loses its identity and its shareholders become
shareholders of the merged company.
• An acquisition occurs when one firm deploys
its capital resources, such as stock, debt, or
cash, to buy another company. Under
acquisition an organisation takes ownership of
another organisation. Acquisition involves two
parties that is acquiring company and
acquired company.
• Takeover is used to reference a hostile
situation where the company being acquired
is negotiating / resisting. Also element of
bidding makes takeover complex & sometimes
competitive. In UK, takeover refers to the
acquisition of a public company whose shares
are listed on a stock exchange, in contrast to
the acquisition of a private company.
L&T’S SUCCESSFUL TAKEOVER DEFENCE AGAINST RELIANCE

• In the late 1980s, Larsen and Toubro Ltd (L&T) chairman N.M. Desai,
discovering that Manu Chhabria had acquired a stake in the firm,
presumably to launch a hostile bid, sought Reliance Industries Ltd’s
(RIL) Dhirubhai Ambani to buy a larger stake and come in as a white
knight.
• In the process Mukesh and Anil Ambani became directors of L&T. By
April 1989, Reliance, L&T's biggest private-sector customer, bought
12.4 percent and got two nominees on the L&T board.
• But Ambani had designs of his own and became chairman of L&T
with the support of the Congress government that asked financial
institutions with stakes in L&T to back him. Meanwhile a state-linked
financial company bought L&T shares from India's biggest mutual
fund and largest insurance company.
• It then sold the shares to a little-known investment company allegedly linked
with Reliance. RIL’s plan was spoiled when the Congress lost power and VP
Singh, became prime minister in 1989.
• The Indian Express vehemently discussed this in media that the takeover
had been affected by public sector financial institutions. Since these
institutions were not allowed to sell to private parties, the Indian Express
alleged that the whole operation was a fraud.
• The matter went to the courts. Sensing defeat, the Ambanis reversed the
transaction, taking a sizeable loss. An extraordinary general meeting was
called to decide whether the Ambanis would remain on the L&T board.
• At last, Dhirubhai resigned from L&T board. Eventually RIL sold its stake in
the early 2000s to the Grasim Industries a Aditya Birla group company,
paving another takeover battle that ended with L&T selling its cement
business to the Aditya Birla group.
 Table 3.16
Top 10 Mergers & Acquisitions globally
Announced
Current name of total value Announcement
Rank M&ADeal
acquirer (in $ date
biliion)
America Online
1 acquires Time Time Warner 186.2 01/10/2000
Warner
Vodafone Airtouch
2 acquires Vodafone Group 185.1 11/14/1999
Mannesmann
Fortis, Banco
Ageas, Banco
Santander, Royal
Santander, Royal
3 Bank of Scotland 100.0 04/25/2007
Bank of Scotland
group acquires ABN
group
Amro holding
Pfizer acquires
4 Pfizer 87.3 11/04/1999
Warner-Lambert
AT&T acquires
5 AT&T 83.1 03/05/2006
BellSouth
Exxon acquires
6 Exxon Mobil 80.3 12/01/1998
Mobil
Royal Dutch Shell
7 merges with Shell Royal Dutch Shell 80.1 10/28/2004
Transport & trading
Comcast acquires
8 Comcast 76.1 07/09/2001
AT&T Broadband
Sanofi-Synthelabo
9 Sanofi 73.5 01/26/2004
acquires Aventis
Glaxo Wellcome
10 merges with GlaxoSmithKline 72.4 01/17/2000
SmithKline Beechap
Source: - http://www.bloomberg.com last updated on August 2013
• Tata Steel’s mega takeover of European steel major Corus for $12.2
billion. The biggest ever for an Indian company.
• Hindalco of Aditya Birla group’s acquisition of Novellis for $6 billion.
• Ranbaxy’s sale to Japan’s Daiichi for $4.5 billion. It again bought by Sun
Pharmaceuticals for $4 billion.
• ONGC’s acquisition of Russia based Imperial Energy for $2.8 billion.
• HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion.
• Tata Motors acquisition of luxury car maker Jaguar Land Rover for $2.3
billion.
• Wind Energy company Suzlon Energy’s acquisition of  RePower for $1.7
billion.
• Reliance Industries taking over Reliance Petroleum Limited (RPL) for 8500
crores or $1.6 billion.
 Issues with M& A
• Adding value -
• Gaining the commitment of middle managers.
• Expected synergies may not be realised,.
• Problems of cultural fit.
 Strategic alliances
• an agreement between two or more
independent firms to do business together in
such manner so that economic gains are
accrued for all the firms. Again strategic
alliances can be formed by various means like
multiple service consortia, joint ventures,
leasing arrangements and value chain
partnerships.
• The need for critical mass or scale
• Co-specialisation (For example, joint venture
between Indian and foreign companies like Hero
Hona, Bajaj Kawasaki, TVS Suzuki are with this
motive. Indian companies would provide local know
how and focus on marketing & distribution while
foreign counterpart would focus on technology /
R&D, innovation aspects.)
• Learning from partners and developing
competences
Types of alliances and influencing factors
while choosing type of strategic alliances
 Table 3.17 strategic alliance success factors
 Have a clear strategic purpose.
 Integrate the alliance with each partner’s strategy.
 Ensure that Mutual value is created for all partners.
 Find a fitting partner with compatible goals and complementary
capabilities.
 Identify likely partnering risks and deal with them when the alliance is
formed.
 Allocate tasks and responsibilities so that each partner can specialize in
what it does best.
 Create incentives for cooperation to minimize differences in corporate
culture or organization fit.
 Minimize conflicts among the partners by clarifying objectives and avoiding
direct competition in the marketplace.
 In an international alliance, ensure that those managing it have
comprehensive cross-cultural knowledge.
 Exchange human resources to maintain communication and trust. Don’t
allow individual egos to dominate.
 Operate with long-term time horizons. The expectation of future gains can
minimize short-term conflicts.
 Develop multiple joint projects so that any failures are counterbalanced by
successes.
 Agree on a monitoring process. Share information to build trust and keep
projects on target.
 Monitor customer responses and service complaints.
 Be flexible in terms of willingness to renegotiate the relationship in terms
of environmental changes and new opportunities.
 Agree on an exit strategy for when the partners’ objectives are achieved
or the alliance is judged a failure.
Source: - Thomas, Wheelen & J. Hunger, J. (2008), Concepts in strategic
Management and Business Policy, Pearson, USA
 Stability Strategy

• It decides to serve the same markets with the

same products;
• It continues to pursue the same objectives
with a strategic push for incremental
improvement of functional performances; and
• It focuses on its resources in a narrow
product-market sphere for developing a
meaningful competitive advantage. 
• Steel Authority of India has adopted stability strategy
because of over capacity in steel sector. Instead it has
concentrated on increasing operational efficiency of its
various plants rather than going for expansion. 
• Apart from over capacity, regulatory restrictions in some
industries have forced companies to adopt stability
strategy. Cigarette, liquor industries fall in this category
because of strict control over capacity expansion as both
these industries require license under the provisions
of Industries (Development and regulations) Act, 1951.
•  
 1) Pause / Proceed with caution
• Under this strategy firms seeks time out – an
opportunity to rest before continuing growth
or retrenchment strategy. It is very deliberate
to do incremental changes until environment
situation changes.
• It is typically considered as a temporary strategy to
be used until the environment becomes more
hospitable or to enable a company to consolidate its
resources after prolonged rapid growth. This is often
considered as strategic pause.
• This strategy was seen in late-2008 during a U.S.
financial crisis (Lehman Crisis) when banks &
financial institutions were freezing their lending
activities and awaiting a rescue package from the US
federal government.
 2) No – Change strategy
A choice to maintain status quo by continuing current
policies and actions is no change strategy. This
strategy is appropriate in following conditions:-------
• External environment do not provide opportunities
and post threats at large
• Even firm do not have any significant strengths or
weaknesses.
• The firm has found a profitable business area in the
industry and no imminent new competitor is on the
horizon.
 EXAMPLES--------
• Many small-town retail businesses followed this
strategy before organized retailers moved into
their areas and forced them to rethink their
strategy.
• After recent coalgate scam coupled up with
“Government’s policy paralysis” Indian coal
mining companies took strategic pause and
followed stability strategy for a while.
•  
 3) Profit strategy
• This strategy is an attempt to artificially
support company’s profits when a company’s
sales are declining by reducing investments
and long term discretionary expenditure.
• This strategy is also suitable when a company go
through special situation like imminent Initial public
offering or management is expecting fresh Private
Equity investment negotiation rounds in near future.
• Company would like boost its value before going to
public for raising capital at good valuations. This
strategy is seductive but can be detrimental in the
long run as its competitive position may weaken so
badly which would lead to the worst situation.
 C) Retrenchment Strategy

• Retrenchment is a short-run renewal strategy

designed to overcome organizational
weaknesses that are contributing to declining
performance.
• C.1) Turnaround strategy
• Turnaround strategy is mainly appropriate when
firm’s problems are pervasive but not severely
critical. It is a strategy adopted by firms to stop
the decline and revive their growth. Turnaround
strategy is mainly appropriate when firm’s
problems are pervasive but not severely critical.
It is a strategy adopted by firms to stop the
decline and revive their growth.
Figure 3.13 Model of the Turnaround Process
 Table 3.10 Reasons for downturn in performance
Strategic Reasons Operating Reasons
Increased competition Strikes and labour problems
Raw material shortages Excess plant capacity
Decreased profit margins Depressed price levels
 Table 3.11 Turnaround strategy vocabulary
applied to personal situation
Firm facing turnaround situation Patient
Turnaround situation Poor health situation
Turnaround situation severity Ailment stage / Nature of disease
Asset Reduction Surgery
Cost reduction Weight reduction, decrease in
food intake, Medicines
Efficiency maintenance Maintaining leaner body
Entrepreneurial reconfiguration New lifestyle adopted by patient
Stability Post operation treatment to
negate effects of surgery & side
effects medicines
Recovery Post treatment restoration of
patient’s health
• TURNAROUND STORY OF INDIAN RAILWAYS
• Indian Railway (IR) was considered to be heading towards
bankruptcy, as per the report of Expert Group on Indian
Railways submitted in July 2001. Report had categorically
stated that “Today Indian Railway is on the verge of a
financial crisis... To put it bluntly, the ‘business as usual low
growth’ will rapidly drive IR to fatal bankruptcy. On a pure
operating level, IR is in a terminal debt trap.”
• The strategy for freight business made by (i) increased axle
load (ii) reduced wagon turnaround (iii) market oriented
tariffs and schemes.
• The strategy of higher volumes was also carried through in the
passenger business. The concept of revenue management, where
in differential pricing was charged for differential services like tatkal
and superfast. For passenger segment emphasize was made on
service quality. In the other business areas of parcel, catering and
advertising, the strategy of outsourcing through public private
partnership and wholesaling rather than retailing was embraced.
• Underlying all this was the strategy of increasing asset utilization
leading to operational efficiency. As a result of these initiatives IR
turned around and reported cash surplus before dividend of Rs
20000 crore in 2007-08 as against Rs. 359 crores in 2001 when it
was defaulted payment of dividends
 C.2) Captive Company strategy

• Captive strategy means relinquishing independence in

exchange for security. Company with very weak position
or company is operating in such industry which is not
sufficiently attractive or both may not initiate full blown
turnaround strategy.
• In this circumstances company’s management search an
angel by offering to be captive company to one of its
larger customers in order to guarantee company’s
existence through long term contract. By this way
company may reduce its cost and scope of some
functional activities.
• Before declaring itself as a sick company in 2013, Ambassador Car
maker Hindustan Motors (HM) was involved in contract
manufacturing. In the process HM became captive company as it
secured two long term contracts (through JVs) with Japanese auto
makers Mitsubishi and Isuzu. HM used to assemble Mitsubishi’s Cedia,
Outlander, Pajero and Montero. Its tie up with Isuzu Motors was for
sports utility vehicles (SUVs) and pickup trucks. During these times, a
very small production capacity was used for HM’s own products.
Besides Ambassador, HM also was involved in manufacturing ‘Winner’
light commercial vehicles. But all the HM’s efforts to revive (by HM’s
management & BIFR i.e Board for Industrial and financial
restructuring) its business failed leading to its liquidation.
•  
 DIVESTMENT
• Divestment strategy involves the sale of a company or major
component of it. This option is suitable for those corporations
operating with weak competitive position in the industry. If
turnaround and captive strategies are not viable then this
strategy is adopted. The sell out strategy makes sense if
management can obtain a good price for its shareholders and
the employees can keep their jobs.
• For Example – Ford sold its ailing Jaguar and Land Rover unit to
Tata Motors in 2008 for $2 billion. In year 2013-14 Jaiprakash
Associates sold some Cement manufacturing facilities.
•  
 LIQUIDATION
• Liquidation is the termination of the company.
This is the last resort to any company when all
other attempts of turnaround, captive
company, sell out fails.
• This is referred as bankruptcy. While the terms
bankruptcy and liquidation are often used
together, they technically mean two different
things.
 STRATEGIC CHOICE
• Strategic Choice is at the cardinal part of
strategy formulation.
 – Does this strategic option take us towards where
we want to go (strategic intent)?
– Whether it will be feasible in organizational
capabilities and resources? Simply will it work?
• Will this option be acceptable?
 Tools of strategic choice
• BCG Growth share matrix
• GE 9 cell matrix
• Gap Analysis
• SPACE Matrix
• Gap Analysis----Gap analysis throws two core
questions: "Where are we?" and "Where do
we want to be?"
Nature of Gap & Viable Strategic directions &
options
 SPACE matrix – a tool for strategic choice

• The Strategic Position and Action Evaluation

Matrix or SPACE analysis matrix is a tool for
evaluating strategic options and to choose
best amongst them.
 Key dimensions & variables considered in SPACE matrix
External Internal
Industry Environmental Competitive Financial
Attractiveness stability advantage strength
(IS) (ES) (CA) (FS)
Growth Political Market Share Return on
Potential Uncertainty Quality Sales
Life Cycle Interest Rates Customer Return on
Stage Technology Loyalty Assets
Entry Barriers Cyclical Cost Levels Cash Flow
Customer Environmental Product Range Gearing
Power Issues Working
Substitutes Capital
Intensity
Illustration of SPACE Analysis
SPACE Matrix
• The Aggressive position in the SPACE Analysis Matrix
occurs when all the dimensions are positive. The implicit
strategy is to aggressively grow the business raising the
stakes for all competitors.
• The Competitive posture arises when a firm has strong
advantages in an attractive industry but its financial
power is inadequate to compensate for environmental
instability. The immediate strategy is to improve its
financial strength by raising capital, improving
profitability, merging with a cash rich parent whilst
maintaining its competitive position.
• The Conservative posture happens when the firm is
financially strong but is unlikely to make significant returns
from the business as industry is not attractive enough. The
strategy is to look for diversification opportunities in more
attractive industries.
• The Defensive posture in the SPACE matrix occurs when all
the dimensions are scored poorly. Firms in this position
are very feeble and heading for failure unless the external
environment becomes more favourable. The firm will need
to retreat from all to focus on strongest segments so that
it can concentrate its limited resources on a turnaround.