SM unit 3

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GRAND STRATEGIES/ STRATEGIC ALTERNATIVES/CORPORATE STRATEGIES

Grand strategies, often called master or business strategies provide basic direction for
strategies actions. Indicate the time period over which long range objectives are to be
achieved. Firms involved with multiple industries, businesses, product line, are customer
groups usually combine several grand strategies.

The Grand Strategies are the corporate level strategies designed to identify the firm’s
choice with respect to the direction it follows to accomplish its set objectives. Simply, it
involves the decision of choosing the long term plans from the set of available alternatives.
The Grand Strategies are also called as Master Strategies or Corporate Strategies.

There are four grand strategic alternatives that can be followed by the organization to
realize its long-term objectives:

1. Stability Strategy
2. Expansion Strategy
3. Retrenchment Strategy
4. Combination Strategy

The grand strategies are concerned with the decisions about the allocation and transfer of
resources from one business to the other and managing the business portfolio efficiently,
such that the overall objective of the organization is achieved. In doing so, a set of
alternatives are available to the firm and to decide which one to choose, the grand
strategies help to find an answer to it.
Business can be defined along three dimensions: customer groups, customer functions and
technology alternatives. Customer group comprises of a particular category of people to
whom goods and services are offered, and the customer functions mean the particular
service that is being offered. And the technology alternative covers any technological
changes made in the operations of the business to improve its efficiency.

(i) STABILITY STRATEGY

The Stability Strategy is adopted when the organization attempts to maintain its
current position and focuses only on the incremental improvement by merely changing one
or more of its business operations in the perspective of customer groups, customer
functions and technology alternatives, either individually or collectively.

Generally, the stability strategy is adopted by the firms that are risk averse, usually
the small scale businesses or if the market conditions are not favourable, and the firm is
satisfied with its performance, then it will not make any significant changes in its business
operations.

Types of stability strategy

1. No-Change Strategy
2. Profit Strategy
3. Pause/Proceed with Caution Strategy

1. No change strategy:

The No-Change Strategy, as the name itself suggests, is the stability strategy followed
when an organization aims at maintaining the present business definition. Generally, the
small or mid-sized firms catering to the needs of a niche market, which is limited in scope,
rely on the no-change strategy
2. Profit strategy:

The Profit Strategy is followed when an organization aims to maintain the profit by
whatever means possible. Due to lower profitability, the firm may cut costs, reduce
investments, raise prices, increase productivity or adopt any methods to overcome the
temporary difficulties.

3. Pause or proceed with caution strategy:

The Pause/Proceed with Caution Strategy is well understood by the name itself, is a
stability strategy followed when an organization wait and look at the market conditions
before launching the full-fledged grand strategy.

(ii) EXPANSION STRATEGY

It is adopted by an organization when it attempts to achieve a high growth as


compared to its past achievements. In other words, when a firm aims to grow considerably
by broadening the scope of one of its business operations in the perspective of customer
groups, customer functions and technology alternatives, either individually or jointly, then
it follows the Expansion Strategy.

The reasons for the expansion could be survival, higher profits, increased prestige,
economies of scale, larger market share, social benefits, etc.

For example, the baby diaper company expands its customer groups by offering the diaper
to old aged persons along with the babies.

The banks upgraded their data management system by recording the information on
computers and reduced huge paperwork. This was done to improve the efficiency of the
banks.

The firm can follow either of the five expansion strategies to accomplish its objectives:
1. Expansion through Concentration
2. Expansion through Diversification
3. Expansion through Integration
4. Expansion through Cooperation
5. Expansion through Internationalization

Types of expansion strategy

1. Expansion through Concentration

A strategic approach in which a business focuses on a single market or product. This allows
the company to invest more resources in production and marketing in that one area, but
carries the risk of significant losses in the event of a drop in demand or increase in the level
of competition.

•Concentrated growth strategies are strategies that center on improving current products
and/or markets without changing any other factors. The firm directs its resources to
the profitable growth of a single product, in a single market, and with a single technology.

•A strategy of concentration allows for a considerable range of action:

The business can attempt to capture a large market share by increasing present
customer's rate of usage, by attracting competitors' customers, or by interesting nonusers
in the products or services. There are basically three approaches to pursuing a
concentration strategy: market development, product development, and horizontal
integration.
•For many firms, concentration strategies are very sensible. These strategies involve trying
to compete successfully only within a single industry. McDonald’s, Starbucks, and Subway
are three firms that have relied heavily on concentration strategies to become dominant
players.

The Product – Market Matrix (ANSOFF matrix) provides three types of Concentration
strategies: Prepare from the book

(1) Market penetration,

(2) Market development,

(3) Product development and

(4) Diversification

 Market penetration

It involves trying to gain additional share of a firm’s existing markets using existing
products. Often firms will rely on advertising to attract new customers with existing
markets using loyalty program, coupons, and sales promotions.

Nike, for example, features famous athletes in print and television ads designed to take
market share within the athletic shoes business from Adidas and other rivals. McDonald’s
has pursued market penetration in recent years by using Latino themes within some of its
advertising.

 Market Development
Market development involves taking existing products and trying to sell them within new
markets. One way to reach a new market is to enter a new retail channel.

Starbucks, for example, has stepped beyond selling coffee beans only in its stores and now
sells beans in grocery stores. This enables Starbucks to reach consumers that do not visit
its coffeehouses.

 Product Development

Product development involves creating new products to serve existing markets.

In the 1940s, for example, Disney expanded its offerings within the film business by going
beyond cartoons and creating movies featuring real actors. More recently, McDonald’s has
gradually moved more and more of its menu toward healthy items to appeal to customers
who are concerned about nutrition.

 Diversification

Diversification strategies are most often used by organizations that have become mature
and have reached the limits of growth achievable through vertical and horizontal
strategies. It involves selling new product in new market.

 Marketing related concentric diversification

Concentric diversification involves adding similar products or services to the existing


business. For example, when a computer company that primarily produces desktop
computers starts manufacturing laptops, it is pursuing a concentric diversification strategy.

 Technology related concentric diversification/ Horizontal diversification

Horizontal diversification involves providing new and unrelated products or services to


existing consumers. For example, a notebook manufacturer that enters the pen market is
pursuing a horizontal diversification strategy.
2. Expansion through Diversification

A diversification strategy is the strategy that an organization adopts for the development
of its business. ... The strategy is to enter into a new market or industry which the
organization is not currently in, whilst also creating a new product for the new market.

Types of Diversification strategy: Prepare from the book


 Concentric or Related diversification
 Conglomerate or unrelated diversification

3. Expansion through Integration

It is the process of acquiring or merging with competitors, leading to industry


consolidation. Horizontal integration is a strategy where a company acquires, mergers
or takes over another company in the same industry value chain.
Integration strategies allow a firm to gain control over distributors, suppliers, and /or
competitors. It is done where the 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 of the business undergoes a change ,it is combing activities
related to the present activity of a firm. Such combination may be done through value
chain.

Types of Integration strategies

Vertical Integration
Vertical integration refers to the degree with which a business unit is integrated with its
suppliers and buyers. Suppliers are typically referred to as existing “upstream” from the
organization, while buyers are considered “downstream.” Vertical integration strategies
in strategic management are typically used when organizational leaders have identified
a need or desire to expand into new industries. For example, the vertical integration
strategies of a fast food chain might include the purchase of a cup factory or a bun
factory in order to cut the costs of those supplies. Benefits of vertical integration
strategies include enhanced product quality and increased profitability.

Types of vertical integration strategies


Vertical integration integrates a company with the units supplying raw materials to it
(backward integration), or with the distribution channels that carry its products to the
end-consumers (forward integration).
For example, a supermarket may acquire control of farms to ensure supply of fresh
vegetables (backward integration) or may buy vehicles to smoothen the distribution of
its products (forward integration).
A car manufacturer may acquire tyre and electrical-component factories (backward
integration) or open its own showrooms to sell its vehicle models or provide after-sales
service (forward integration).
There is a third type of vertical integration, called balanced integration, which is a
judicious mix of backward and forward integration strategies.

Advantages of vertical integration


 smoothen its supply chain (by ensuring ready supply of tyres andelectrical
components in the exact specifications that it requires)
 make its distribution and after-sales service more efficient (by opening its own
showrooms
 absorb for itself upstream and downstream profits (profits that would have gone
to the tyre and electrical companies and showrooms owned by others)
 increase entry barriers for new entrants (by being able to reduce costs through
its own suppliers and distributors)
 helps to develop its core competencies

Disadvantages of vertical integration


The quality of goods supplied earlier by external sources may fall because of a lack
of competition.
Flexibility to increase or decrease production of raw materials or components may
be lost as the company may need to sustain a level of production in pursuit of
economies of scale.
It may be difficult for the company to sustain core competencies as it focuses on the
integration of the new units.

Horizontal Integration
Horizontal integration in strategic management is typically a single-industry strategy.
Horizontal integration often includes the practice of acquiring and/or merging with
other businesses within the same industry to achieve organizational objectives. For
example, a shoe company may decide to acquire a competitor in order to obtain a
greater share of the market. Some of the benefits of horizontal integration strategies
include a lower cost structure, reduced industry rivalry and increased product
differentiation.
Horizontal integration, as we have seen, is a company’s acquisition of a similar or a
competitive business—it may acquire, but it may also merge with or takeover, another
company to strengthen itself—to grow in size or capacity, to achieve economies of scale
or product uniqueness, to reduce competition and risks, to increase markets, or to enter
new markets.

Advantages of horizontal integration

 The advantages of horizontal integration are economies of scale, increased


differentiation (more features that distinguish it from its competitors), increased
market power, and the ability to capture new markets.
 Economies of scale: The bigger, horizontally integrated company can achieve a
higher production than the companies merged, at a lower cost.
 Increased differentiation: The company will be able to offer more product
features to customers.
 Increased market power: The new company, because of the merger of
companies, will become a bigger customer for its old suppliers. It will command
a bigger end-product market and will have greater power over distributors.
 Ability to enter new markets: If the merger is with an organisation abroad, the
new company will have an additional foreign market.

Disadvantages of horizontal integration strategy


a company should be able to handle the bigger organisation efficiently if the
advantages of horizontal integration are to be realised.
The legal ramifications will have to be studied as there are strict anti-monopoly laws
in many countries: if the merged entity threatens to oustcompetitors from the
market, these laws will be used against it.
As a company grows bigger with horizontal integration, it might becometoo
rigid, and its procedures and practices may become unfriendly tochange. This
could prove dangerous to it.
The decision whether to employ vertical or horizontal integration has along-term
influence on the business strategy of a company.

Each company will have to choose the option more suitable to it, based on its
unique place in the market and its customer value propositions. A deep analysis of its
strengths and resources will help it make the right choice.

4. Expansion through Cooperation:


 Cooperative strategy refers to a planning strategy in which two or more firms work
together in order to achieve a common objective. Several companies apply cooperative
strategies to increase their profits through cooperation with other companies that stop
being competitors.

 Cooperative strategies are of the following types:
 ➢ Mergers & Acquisitions
 ➢ Takeovers
 ➢ Joint ventures
 ➢ Strategic alliances

1. MERGERS & ACQUISITIONS

Merger
A merger is a combination of two or more organizations in which one acquires the
assets and liabilities of the other in exchange for shares or cash or both the
organizations are dissolved and the assets and liabilities are combined and new stock is
issued For the organization which acquires another, it is an acquisition and for the
organization which is acquired, it is a merger. If both the organizations dissolve their
identity to create a new organization, it is consolidation

Acquisition
Acquisition refers to overtaking the company and its operational aspects of the
company. For example, Flipkart and Myntra, a big acquisition in Indian history. Flipkart
acquired Myntra at a whooping amount of Rs. 2000 crore deal according to the insider
details. Another example of acquisition is Tata Tea taking over Tetley Tea making it
world’s second largest tea marketer and which was double of what Tata tea was for a
271 lakh pound through leverage buyout.

If two companies combine their value would more as a single unit rather them different
unit. Mergers and acquisitions are done by company to increase their market share and
to survive in competitive markets. Mergers and acquisition are two different thing.
Merger is when two different company joins hands to create a new venture. For
example – Lipton tea and Brooke bond. Where as acquisition refers to overtaking of one
entity by other. For example – TATA group acquired Corus 2006 the deal size was
$12.98 billion. Legally speaking in merger two companies come in an agreement for the
formation of a third company and in acquisition one company takeover all the
operational aspects of other company.
Basically, a merger can take place in the following two ways:
1. Acquisition of an organization by another organization
2 Creation of a new organization by amalgamation of two or more organizations

Following reasons:
• To increase the value of organization's stock.
• To increase the growth rate and make a good investment.
• To improve stability of earnings and sales.
• To reduce competition
• To balance, compete or diversify product line.
• To acquire needed resources quickly.
To avail of tax concessions and benefits.

Types of Merger

 Horizontal merger – two companies with delivering same product and are in direct
competition. Example Coke and Pepsi.
 Vertical merger – two companies which are producing products of one finished
product. Example – automobile company joining hands with part supplier.
 Market extension merger – two companies selling same products in different
markets. Example -Eagle Bancshares
 Product extension merger – two companies selling different but related products in
the same market. Example – Mobilink telecom by broadband.
 Conglomerate merger – in this there are two companies that does not any common
product line. Example – Walt Disney and American Broadcasting

2. TAKEOVERS
 Takeovers generally refer to purchase of one company by other. Whereas in UK
takeovers
 are termed as acquisition of a public company whose shares are listed in the stock
exchange.
 A few reasons are as follows:
 ➢ To attain quick growth.
 ➢ To diversify the business of the company
 ➢ Need for establishing oneself as an industrialist.
 ➢ To increase the market share of its company
 ➢ To create goodwill in the market.
 ➢ To build an industrial empire.

 Takeovers are of different kinds these can be –

 Friendly takeover
 Hostile takeover
 Reverse takeover
 Backflip takeover

 Friendly takeover A friendly takeover is a takeover in which the acquisition is


approved by the management. In this before a bid is made by the bidder the deal is
usually first informed to management and if the management thinks that through this
deal the shareholder are getting benefited or through its rejections they suffer loses. In
private company the shareholders and the board are usually the same people or
connected with one another, so private takeover are friendly. For example – Johnson
and Johnson friendly takeover of Dutch Vaccine maker Crucell. The deal accounted to
1.75billion euros.
 Hostile takeover In a hostile takeover the bidder can takeover the company whether
their management are willing or not willing to sell the company. Hostile takeover
happens when the board rejects the offer made by the bidder.
 Reverse takeovers A reverse takeover is the one in which the public company is
acquired by the private company so that private company can bypass the complex
process of going public. In this generally the private players buys the share of the public
company and then merge it with their company. For example MTN a African based
telecommunication company is planning for reverse takeover of Reliance
communication through this deal the company value would reach up to 70 billion with
120 lakh users.
 Backflip takeover It is a type of takeover in which the acquiring company turns
himself into the subsidiary of the purchased company. This happens when a larger but
less known company acquire a struggling company. For example the takeover of Bank
of America by the National Bank, but it adopted the name of Bank of America.

 3.JOINT VENTURES

A joint venture is a strategy developed by two or more organizations that mutually


participate in a business venture, contribute to the total equity capital and establish a
new organization. A joint venture strategy is a strategy in which two or more company
pool up their resources for accomplishing a specific task.

The main purposes of joint ventures are controlling, influencing and reducing
competition among the organizations.
The following are reasons for firms to enter into a joint venture:
➢ To conveniently introduce new technologies,
➢ To reduce the amount of risk involved in a new venture.
➢ To compete with larger organizations.

5. Expansion through Internationalization

The Expansion through Internationalization is the strategy followed by an organization


when it aims to expand beyond the national market

Types of International Strategy. Prepare from the book

Porters Model of Competitive Advantage of Nation - Prepare from the


book

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