SM unit 3
SM unit 3
SM unit 3
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.
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.
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.
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.
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
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.
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
(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
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.
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.
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.
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.
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.
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.
Friendly takeover
Hostile takeover
Reverse takeover
Backflip takeover
3.JOINT VENTURES
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.