chapter 3grandstrategy 110308091800 phpapp02

7/31/2019 Chapter 3grandstrategy 110308091800 Phpapp02

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Grand strategies are the decisions or choices of long term plans

from available alternatives.

Grand strategies also called as master or corporate strategy.

It is based on analysis of internal and external environment.

This direct the organization towards achievement of overall long

term objectives (strategic intent).

They involve Expansion, Quality Improvement, MarketDevelopment, Innovation, Liquidation, etc.

Usually they are selected by top level managers such as directors,

executives etc.

Meaning


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It is classified into following:-

Stability Strategy

Growth Strategy

Retrenchment Strategy

Combination Strategy

Classification of Grand Strategy


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A strategy is stability strategy when a firm attempts to maintain

its status-quo with existing levels of efforts and it is satisfied withonly incremental growth/improvement by marginally changing

the business and concentrates its resources where it has or can

develop rapidly a meaningful competitive advantages in the

narrowest possible product market scope.

Absence of significant change

i.e. continuing to serve the same clients by offering the same

product or service, maintaining market share, and sustaining the

organization's return-on investment.

Stability Strategy


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It is common for most of the organizations to follow this strategy

at some point of time in their life cycle.

When a firm serves defined market and its segments to fulfills its

mission.

When a firm can relate itself with the environment andenvironmental factors do not show any appreciable change. This

is possible for most of the firms in a short run, but for a few in

long runs.

When organization continues to pursue the same objectives by

adjusting to the same level of achievement about the same

percentage. Thus stability does not mean absence of growth but

the growth is limited within specified limits and there is no

substantial addition of facilities.

When do organization follow


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When there is scope for incremental improvement in the sameline of business to take the fullest advantage of situation. E.g.

when a company has technological or other break through it

continues to be in the same business until it has competitive

advantage. Thus when a company is pioneer in a new business, it

reaps the benefit of initiation. Then when competition increases

and profitability reduces, it may go for other strategy.

When a firm looks for functional improvement and there by

efficiency and economy of operations so as to gain competitiveadvantage, it follows this strategy.

Cont.


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When management perception about performance in the present

business is satisfactory, they tend to follow stability strategybecause they are not always sure of a set of factors attributing to

success. Thus they decide to continue the same business.

This strategy involves low risk unless there is a major change in

the environment. So it provides safe business. Therefore it ispreferred by risk avoiding managers.

Slow or resistant to change organizations follow this strategy.

As they become larger and more successful, they develop such

tendency & prefer stability. Organizations past history may be full of changes, so to reap the

advantages of such past, stability is preferred for some time,

usually after growth strategy.

Why do organization follow


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A firm having strategic advantage in the present business &

market does not opt. for other strategy and prefers stability.

A company lacking in sufficient resources to effect major changes

in business have to opt. for stability.

The environmental factors such as govt. norms, prohibition &

restriction of certain products & process, licensing etc. prevent

other strategies & a firm has to adopt stability strategy.

A firm may have a product or group of products which is not

prestigious to it, its market share as well as contribution to total

sales is very small and its market is declining. So beforeretrenching such product, the firm wants to generate as much

profit as possible, even by scarifying its market share, and follows

stability strategy

Cont.


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Incremental growth strategy

It is one in which a firm sets its objectives/achievement levels

based on past accomplishment adjusted for inflation. It may be

average achievement level of industry or even low. It is followed

when environmental factors are more or less stable. The organization is doing well or perceives as doing well in

its present form.

It being a less risky and the organization does not go for

higher risk.

The organization is change resistant and prefers change only

in extraordinary times.

It is easier to pursue as it does not disturb the organizational

routines.

Alternatives of stability strategy.


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Profit strategy / End game strategy / Harvesting strategy

It is one in which organization or its SBU aims at generating

profit/cash, sometimes at the cost of market share also because

the product is not prestigious,

its market share & also contribution to total sales are verysmall.

The product is in stable or declining market

Here, company wants to encase as much profit as possible

before retrenchment.

Cont.


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Sustainable growth strategy

It is one in which a firm tries to maintain its existence in

unfavorable critical conditions like constraints on finance

resources, raw material resources etc., govt. policy, cheaper

imports, competitor by big and capable competitors etc.

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

It is one in which organization has followed growth strategy

aggressively in recent past and want a pause on growth to

consolidate its position by allowing structured changes to take

place and the system to adopt to new strategies thereby it wants

to take full advantage of future growth opportunities and strong

present factors. Thus this strategy becomes intermediate choice

between past & future, for some time.

Cont.


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means by which an organization plans

to achieve the increased level of objective that is much higher

than its past achievement level.

Organizations may select a growth strategy

to increase their profits, sales or market share.

to reduce cost of production per unit.

increase in performance objectives.

Growth Strategy


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In the long run, growth is necessary for the very survival of the

organizations. The organization that does not grow may be pushed

out of the business because

Of the new entrants in the field

Higher wages, higher costs of other inputs, and lower level of

efficiency because of certain obsolescence in plant and

machinery.

Growth offers many economies because of large-scale operations.

Per unit cost of production can be very low

The economies of increasing scale enhance degrees of

specialization. With more people available to do the different kinds of work

Greater penetration can be made

These eventually lead to certain competitive advantage to the

organization concerned.

Reasons for following


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Growth strategy is taken up because of managerial motivation to

do so. Managers with high degree of achievement and recognitionalways prefer to grow. The needs on the part of managers push

them to think as to how they can achieve their need satisfaction.

The answer lies in the continuous growth of the organization or

the group of organizations as a whole.

There are certain intangible advantages of growth. These may be

in the form of

Increased prestige of the organization

Satisfaction to employees and

Social benefits

Preferred by investors

Growing companies have high level of prestige in the corporate

world.

Cont.


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Concentric Expansion Strategy

It means investing the resources in one or more of a firmsbusiness so as to expand its present business.

i.e. doing more what we are already doing and where we are best

at doing; when potential for growth, attractiveness and maturity

factors are favorable in the industry of the firm. It can be aimed at-

Market penetration (capture the market share in the existing

product and expand its business at rate higher than the

industry growth)

Market development (increase sales by developing new

markets, geography-wise or segment-wise)

Product development (achieve growth through product

innovation to penetrate in new segment)

Alternatives of Growth Strategy


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Vertical Integration Growth Strategy

It represents a decision by an organization to utilize internaltransactions rather than market transactions to accomplish its

objectives.

A firm starts undertaking & contributing activities, in addition to

present activities, along the line of value addition stages from raw

material stage to production and ultimately distribution of goodsto customers, so as to gain ownership or increased control and

thereby expand the business.

Vertical integration can be achieved in two ways Forward Integration

Backward Integration

Cont.


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Diversification Strategy

It is the process of entry into a business which is new to anorganization.

Diversified organizations can be classified into following

Concentric Diversification (Related diversification) Market-wise

Technology wise

Both

Conglomerate Diversification (Unrelated diversification)

Cont.


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External Strategy

Merger strategy

It means that two or more organizations merge together by

formally losing their corporate identities and form another

organization through combining assets & liabilities & issuing new

stock, for mutual synergetic benefits. The new co. is calledholding company and the merging companies are called

subsidiary companies. According to the nature of business of

merging companies, merger may be

Horizontal

Vertical

Concentric

Conglomerate

Cont.


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Acquisition or takeover

It means that one company attempts to acquire ownership or

control over management of other co. either by mutual consent ofor against the wishes of latters (other co.) management or stock

holders. It may be

Friendly takeover

Hostile takeover

Join venture

It means that two or more companies combine to form a new

company by equity participation and sharing of resources like

finance, managerial talents, technology etc., so as to create newentity distinct from its parents

JV b/w Government of India and another company

JV b/w two or more Indian private sector companies

JV b/w Indian company and a foreign company

Cont.


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It is a defensive strategy in which a firm having declining

performance decides to improve its performance throughcontraction in this activities i.e. reducing the scope of its business

by total or partial withdrawal from present business.

focusing on functional improvement with special emphasis on

cost reduction or

reducing the number of functions it performs, by being a

captive firm or

reducing the no. of products, markets, customer functions etc.

or

liquidation of business (as a last alternative) or

combinations of above.

Retrenchment Strategy


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When the organization is not doing well and perceives that it

may not do better in future too in a particular line of business itis advisable to delete that line of business. After deletion, the

organization can concentrate in other areas, where it has some

advantages.

If the organization is not meeting its objectives even after

following other alternative strategies it may go for retrenchment

strategy. Also when the management is under pressure to

improve the performance, this strategy can be pursued as a last

resort.

Reasons for adopting


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Turnaround Strategy

It is also known as cutback strategy hold the present business

and cut the costs

It is one in which a company tries to recover from its declining

state by improving internal efficiency.

Turnaround actions may include:

Change in the product mix

Selling of assets which are not useful for long time or in future

also to generate cash.

Closing down plants & divisions which are not rewarding.

Replacement of obsolete machinery

Focus on specific products and customers and improved

marketing, etc.

Alternatives of Retrenchment Strategy


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Liquidation Strategy

It is one in which a firm closes down & sells its entire business at a

fair price on the basis of tangible assets, management good will &

also intangible assets and invests the realization somewhere else

or distributes among debtors and members when

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

Business is in peak form (value, but future is quite uncertain,

having no direction,

Business has accumulated losses and some other organization

offers higher price to get tax benefits,

Liquidation value is more than discounted present value of

future flow of income etc.

Cont.


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Combination strategy is not an independent classification but it is

a combination of different strategies stability, growth,

retrenchment in various forms.

Thus the possible combinations of strategies may be:

Stability in some businesses and growth in other businesses

Stability in some businesses and retrenchment in other

businesses

Growth in some businesses and retrenchment in other

businesses

Stability, growth and retrenchment in different businesses.

Combination Strategy


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Different products in different product life cycle

When different products of the organization are at different

product life-cycle stages, they require different types of

investment.

Business Cycle

Business cycle may affect the prospect of various businessesdifferently.

Number of businesses

When the number of businesses in an organization has gone

beyond the optimum number, they are required to be reducedbecause some business may not be that attractive from long-

term point of view.

Reasons for following


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Developed by Bruce Henderson (in 1970s)

It is a chart that had been created to help corporations with

analyzing their business units or product lines.

Helps to evaluate companys position in terms of its range of

products.

Helps to make decision regarding which product/service to be

kept, which it should let it go and in which it should invest in

further.

BCG Matrix

Boston Consulting Group Matrix


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High market growth rate

Low market share

Low cash generation than cash consumption.

Analyze carefully the market situation

Investment into high growth potential market.

Critical decision making for managers.

QUESTION MARKS:


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High market growth rate

High market share

Huge cash generation

Huge cash consumption

Huge investment in growing market

Becomes cash cows when market growth rate declines

Stars


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Low market growth rate

High market share

Huge cash generation than consumption

Low prospects for future growth-so no new investment in this

category.

Investment into STARS and QUESTION MARKS.

Cash Cows


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Low market growth rate

Low market share

Neither large cash generation nor consumption.

Also known as CASH TRAPS.

Dogs should be sold off or liquidated.

Dog


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A business level strategy is the integrated and co-ordinate course

of actions/plans adopted by a firm for each of its businesses

separately.

Types of Generic Business Strategy

Cost Leadership Strategy

Differentiation Strategy

Focus Strategy

Business Level Strategy


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Cost leadership strategy is one in which a firm attains competitive

advantage & hence increased market share by offering productsand services having the same utility/quality features as

competitors products and services/substitute products and

services; but the price/cost lower than them

Cost leadership strategy works well in the following conditions:- Competition is based purely on price factor.

No significant differentiation in product/service features.

There is almost no customer loyalty, with the result, they can

switch over from a firm to another firm.

Cost Leadership Strategy


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Sources of Becoming Cost Leader

A firm can lower its cost on the basis of economy of scale.

High capacity utilization

By going through vertical integration which is relevant for value

creation. A firm can save cost by standardizing its products and product-

producing activities.

Investment in cost-saving technologies may help a firm to

minimise its cost.

Cont.

B fit


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Developing competitive advantage and achieving large market share.

The firm is comparatively more protected from the impact of

downward trend in the industry.

The firm can bear the pressures put by suppliers in the form of

increasing prices of their supplies as well as customers in the form of

bargaining for lower product price.

Cost advantage acts as an entry barrier

It can be sustained only if barriers exist that prevent competitors

from achieving the same low cost. Severe cost reduction may dilute customer focus and customer

interests may be ignored,

Customers requiring extra features and ready to pay higher price are

lost.

Benefits

Drawbacks


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Diff i i S


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Differentiation strategy is the act of designing a set of meaningful

differences to distinguish the companys offerings from competitors

offerings.

Differentiation strategy is based on the difference of a firm from

their peers in the field.

Suitable in following market conditions

Market size is large enough to accommodate various firms using

differentiation strategy.

Customer needs and preferences are diversified so that the market

can be segmented into different groups.

If a firm makes attempts for creating value through differentiation,and charges higher prices, customers should be willing to pay for

this value creation.

The nature of products/services is such that the customers develop

brand loyalty.

Differentiation Strategy

B fi


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It can create a captive market for a company

High brand loyalty refrains new entrants in the market.

Customer group is not able to put pressure on the firm to lower

down prices

In case of bargains for higher prices for supplies, the firm can

offset this price increase by increase in product/service pricesbecause of brand loyalty

Benefits

D b k


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Drawbacks

Has to make huge promotional efforts. It may not be a strong base

to prevent the entry of new entrants. If many firms start differentiation in any industry price becomes

an ultimate decision factor.

The features not desired and not valued by customers do not

create response or brand loyalty. So differentiation becomes

meaningless,

Failure to communicate the benefits of differentiation or the

intrinsic differentiating features themselves to customers may

lead to failure of this strategy


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F St t


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In a focus strategy, firms focus on meeting the needs of a unique

market segment in the best possible way.

A focus strategy is a niche strategy.

Conditions:

The firm should have ingenuity to look for something out of

ordinary and a sharp eye for identifying niches,

Niche segment should be unique so that only specialized features

could satisfy it,

Special features should be so distinct that common customers do

not expect them to fulfill

Niche segment should be sufficiently profitable & having growthpotential

The firm should be able to create loyalty of customers on the basis

of acknowledged superiority to serve them. It should also be able to

create new niches.

Focus Strategy

B fit


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Firm is protected from competition to the extent that other firms

operating in broader markets do not pose competitive rivalry.

Customer Loyalty.

Prevent new entrants.

Cost structures of firms are higher.

Differentiators with comparatively lower cost can penetrate in the

niche markets.

Niche markets turn to be attractive in many cases for the cost

leaders and differentiators due to technological development.

Benefits

Drawbacks


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