generic and grand strategies

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Prof.Sushil\IITD\Session-VI 1

MANAGEMENT POLICY AND STRATEGYSESSION - VI

Generic and Grand StrategiesProf. Sushil

Department of Management Studies

Indian Institute of Technology, Delhi

INDIA

Email: [email protected]




Generic Strategies

Differentiation

Low-cost

leadership

Focus




PORTER’S GENERIC STRATEGIES

1. Cost

Leadership2. Differentiation

3 A. Cost Focus 3 B. Differentiation

FocusNarrow

Target

Broad

Target

DifferentiationLower Cost

CompetitiveAdvantage

Competitive Score




REQUIREMENTS FOR GENERIC COMPETITIVESTRATEGIES

Generic Commodity Required Common OrganizationalStrategy Skills and Resources Requirements

Overall cost Sustained capital investment Tight cost control

leadership access to capital Frequent, detailed control

reports

Process engineering skills Structured organization

and responsibilities

Intense supervision of labour Incentives based on

Products designed for ease meeting strict quantitative

Low-cost distribution system targets in manufacture

Differentiation Strong marketing abilities Strong coordination

Product engineering among functions in R&D,

Creative flare product development, and

marketing




REQUIREMENTS FOR GENERIC COMPETITIVESTRATEGIES

CONTD…

Strong capability in basic Subjective measurement and

research incentives instead of

quantitative measures

Corporate reputation for Amenities to attract highly

quality or technological skilled labour, scientists, or

leadership creative people Long tradition in the industry

or unique combination of skills

drawn from other businesses

Strong cooperation from

channels

Focus Combination of the above Combination of the above policies

policies directed at the directed at the regular strategic

particular strategic target target




RISKS OF THE GENERIC STRATEGIES

Risks of Cost Leadership Risks of Differentiation Risk of Focus

Cost of leadership is not Differentiation is not The focus strategy is

sustained initiated

sustained: Competitors imitate The target segment

Competitors imitate: Bases for differentiation becomes structurally

unattractive Technology changes becomes less imported to Structure erodes

Other bases for cost buyers Demand disappears

leadership erode

Proximity in differentiation Cost proximity is lost Broadly targeted

is lost competitors overwhelm

the segment:

The segment’s differencesfrom other segments narrow

The advantages of a broad

line increase

Cost focusers achieve Differentiation focusers New Focusers sub-segments

even lower cost in segments achieve even greater the industry

differentiation in segments




STAGE OF `INDUSTRY’ DEVELOPMENT

Keeping

ahead of the

field

Cost leadership

Raise barriers

Deter

competitors

Redefine scopeDivest

peripherals

Encourage

departures

Imitation at

lower cost Jointventures

Differentiati

on Focus

Differentiation

Newopportunities

Leade

r

Follower

Growth Maturity Decline

Strategicposition oforganizatio

n




Types of Grand Strategies

Consortia

Concentrated Growth

Market Development

Product Development

Innovation

Horizontal Integration

Vertical Integration

Concentric Diversification

Conglomerate Diversification

Turnaround

Divestiture

Liquidation

Bankruptcy

Joint Ventures

Strategic Alliances




Characteristics of a Concentrated GrowthStrategy

Involves focusing resources on the profitable growth of a

single product, in a single market, with a single dominant

technology

Rationale - Firm develops and exploits its expertise in a

delimited competitive arena

Determinants of competitive market success

– Ability to assess market needs

– Knowledge of buyer behavior

– Customer price sensitivity

– Effectiveness of promotion




Conditions Favoring a Concentrated GrowthStrategy

Firm’s industry is resistant to major technologicaladvancements

Firm’s targeted markets are not product saturated

Firm’s markets are sufficiently distinctive to dissuadecompetitors in adjacent markets from entering firm’s segment

Firm’s inputs are stable in price and quantity and available inamounts and at times needed

Firm’s industry is stable

Firm’s competitive advantages are based on efficientproduction or distribution channels

Success of market generalists




Strategies of Market and ProductDevelopment

Market development – Consists of marketing present products, often with only

cosmetic modifications, to customers in related market areas

by

Adding channels of distribution or

Changing content of advertising or promotion Product development

– Involves substantial modification of existing products or

creation of new but related products

–

Based on penetrating existing markets by Incorporating product modifications into existing items or

Developing new products connected to existing products




Specific Options for Selected GrandStrategies

Concentration: Increasing use of present products in present

markets1. Increasing present customers’ rate of use:

a. Increasing size of purchaseb. Increasing rate of product obsolescencec. Advertising other uses

d. Giving price incentives for increased use2. Attracting competitors’ customers

a. Establishing sharper brand differentiationb. Increasing promotional effortc. Initiating price cuts

3. Attracting nonusers to buy the producta. Inducing trial use through sampling, price incentives, and

so onb. Pricing up or downc. Advertising new uses




Specific Options for Selected GrandStrategies (continued)

Market Development: Selling present products in new markets

1. Opening additional geographic markets

a. Regional expansion

b. National expansion

c. International expansion

2. Attracting other market segments

a. Developing product versions to appeal to other

segments

b. Entering other channels of distribution

c. Advertising in other media




Innovation Strategy

Involves creating a new product life cycle,

thereby making similar existing products

obsolete




Strategies of Horizontal and VerticalIntegration

Horizontal integration

– Based on growth via acquisition of one or more similar

firms operating at the same stage of the production-

marketing chain – Involves eliminating competitors, providing acquiring firm

with access to new markets

Vertical integration

– Involves acquiring firms To supply acquiring firm with inputs - backward integration or

Are customers for firm’s outputs - forward integration




Acquisitions or mergers of suppliers or customerbusinesses are vertical integrations

Acquisitions or mergers of competingbusinesses are horizontal integrations

Textile producer

Shirt manufacturer

Clothing store

Textile producer

Shirt manufacturer

Clothing store

Vertical and Horizontal Integrations




Motivations Related to DiversificationStrategies

Increase growth rate of firm

Investment is better use of funds than using them forinternal growth

Improve stability of earnings and sales

Balance or fill out product line

Diversify product line

Acquire a needed resource quickly

Achieve tax savings

Increase firm’s stock value

Increase efficiency and profitability




Diversification Strategies

Concentric diversification – Involves acquisition of businesses related to acquiring

firm in terms of technology, markets, or products

Conglomerate diversification

– Involves acquisition of a business because it representsa promising investment opportunity

– Primary motivation is profit pattern of venture

Difference between the approaches

– Concentric diversification emphasizes commonality whereas conglomerate diversification emphasizes

profits for each individual unit




Turnaround Strategy

Involves a concerted effort over a period of

time to fortify a firm’s distinctive

competencies, returning it to profitability




Declining sales

ormargins

Imminentbankruptcy

Low

High

Costreductio

n

Assetreduction

Efficiencymaintenanc

e

Entrepreneurialreconfiguration

S t a b i l i t y

R e c o v e r y

Internalfactors

Externalfactors

Turnaround situation Turnaround response

Cause Severity Retrenchment phase Recovery phase

(operating)

(strategic)

A Model of the Turnaround Process




Divestiture and Liquidation Strategies

Divestiture strategy – Involves selling a firm or a major component of a firm

– Reasons for divestiture

Partial mismatches between acquired firm and parent firm

Corporate financial needs

Government antitrust action

Liquidation strategy

– Involves selling parts of a firm, usually for its tangible assetvalue and not as a going concern




The Strategy of Bankruptcy

Two approaches – Liquidation - Involves complete distribution of a firm’s

assets to creditors, most of whom receive a small

fraction of amount owed

– Reorganization - Involves creditors temporarilyfreezing their claims while a firm reorganizes and

rebuilds its operations more profitably

Advantage of a reorganization bankruptcy

– Proactive option offering maximum repayment of afirm’s debt in the future if a recovery strategy is

successful




Corporate Combination Strategies

Joint venture

– Involves establishing a third company (child), operated for the benefit of the co-owners (parents)

Strategic alliance

– Involves creating a partnership between two or morecompanies that contribute skills and expertise to acooperative project

Exists for a defined period

Does not involve the exchange of equity

Consortia, Keiretsus, and Chaebols – Defined as large interlocking relationships between

businesses of an industry




The Top Five Strategic Reasons forOutsourcing

1. Improve Business Focus

2. Access to World-Class Capabilities

3. Accelerated Reengineering Benefits

4. Shared Risks

5. Free Resources for Other Purposes




INDIAN BUSINESS HOUSESTATA GROUP

Group Overview

India’s largest business house

More than 85 companies

39 listed

8% of India’s market capitalization

2.6 Million shareholders

2,70,000 employees

Turnover Rs 343 billion (1996-1997)




INDIAN BUSINESS HOUSESTATA GROUP Contd...

1996-97 Rs (Billion)

322

343

30

23

40

% change Over 1995-

96

18.8

18

-7.1

- 16

19

Financial Highlights

Assets

Turnover

PBT

PAT

Exports





Metals

Automobiles

Energy

Engineering

Chemicals

Pharmaceuticals

Consumer Products

Services

Agro Industries

IT and Communication

Exports

Finance





Tata Heritage

Jamsetji Tata

– Started textile mill in 1877

– Inspired steel and power industry – Technical education and philanthropy

JRD Tata

– Pioneered civil aviation

– Funded Hom Bhabha’s nuclear programme

– Guided the Tata group for over half a century

Ratan Tata

– Present Chairman since 1991





Holding Companies

Tata Sons

– Founded by Jamsetji Tata

– Promoted many of the present Tata companies – 63% held by Tata philanthropic trusts

Tata Industries

– 100% subsidiary of Tata Sons founded in 1945

– Managing agency till 1970

– Promoted new Tata companies in technology based

businesses

Cross holdings among other Tata companies





Restructuring

Prompted by post 1991 changing environment

Need to identify and focus on core businesses

Resistance from satraps – Russi Mody, Darbari Seth, Ajit Kerkar

Shrink number of companies

– From over 85 to about 30

Shrink number of core businesses – From about 25 to around 10 or 12

Mergers and divestments

McKinsey hired as a consultants





Restructuring Strategy

Keep and grow

– Power, watches, metals, chemicals, telecom, hospitality,

financial services, infotech, emerging services,

infrastructure, automobiles

Forge strategic tie ups

– Tea and beverages, retailing

Remain only as strategic investors

– Luxury cars, infotech, printing, cosmetics

Sell

– Refrigeration, paints, textiles, trading, electronics, oil drilling,

petrochemicals, pharma, specialty chemicals





Recent Developments

Voltas focus on air conditioning and engineering

business

– Hive off pesticides business to Ralchem Pesticides (whollyowned subsidiary of Rallis - largest integrated agrochemical

company in India)

Electrolux Voltas - JV between Voltas and AB

Electrolux

– Refrigerators

– Washing machines

– Compressors for refrigerators



Prof Sushil\IITD\Session-VI 34


Recent Developments

Tata Tea focusing on global agro business

– Manages 32 tea gardens in Sri Lanka

– Adding tea gardens inTurkey – Acquired a 9.5% stake in Asian Coffee

Overseas Operations

– Automobile assembly in Bangladesh

– Instant tea operations in the US

– Chain of hotels across the world

– Precision tooling operations in Singapore

generic and grand strategies

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