301- Strategic Management Unit 3 Generic Competitive Strategies

301- Strategic Management

Unit III

3.1 Generic Competitive Strategies: Meaning of generic competitive strategies, Low cost,
Differentiation, Focus – when to use which strategy.

3.2Grand Strategies: Stability, Growth (Diversification Strategies, Vertical Integration

Strategies, Mergers, Acquisition & Takeover Strategies, Strategic Alliances & Collaborative
Partnerships), Retrenchment – Turnaround, Divestment, Liquidation, Outsourcing Strategies.

3.1 Generic Competitive Strategies

A) Introduction:

The concept of generic strategies for gaining competitive advantage has received considerable
attention recently in the business policy field. Competitive Strategy, a modern classic of
business thinking, provides a strong conceptual foundation for developing corporate strategy.

B) Meaning:

Generic competitive strategies are the marketing strategy any of three strategies for
marketing products or services: cost leadership, differentiation, and focus. The first implies
supplying products in a more cost-effective way than competitors do; the second refers to
adding value to products or services and the third focuses on a specific product market segment
with the goal of establishing a monopoly.

C) Porter’s Generic Competitive Strategies:

According to Porter (1980), a firm must decide whether to attempt to gain competitive
advantage by producing at a lower cost than its rivals produce or differentiate its products and
services and sell them at a premium price. Porter's framework is given in the following
diagram.

1) Cost Leadership / Low-cost Business Strategy:

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If a company wishes to pursue the strategy of cost leadership, it has to be the low cost
producer (Porter, 1980). A firm may gain cost advantage through economies of scale,
proprietary technology, cheap raw material, etc.

2) Differentiation Strategy:

The strategy of differentiation involves offering a different product, a different delivery

system, or using a different marketing approach (Porter, 1980).

3) Focus Strategies:

The firm focuses its marketing effort on serving a defined, focused market segments
with a narrow scope by tailoring its marketing mix to these specialized markets, it can better
meet the needs of that target market.

D) Cost Leadership / Low-cost Business Strategy:

A cost leadership strategy is an integrated set of actions designed to produce or deliver goods
or services at the lowest cost, relative to that of competitors, with features that are acceptable
to customers.

a) Achieving cost leadership

Use of
Demand Aiming at Cost
Economies Standardiz Differentiation
Forecastin Average Saving
of Scale ation Withholding
g Customer Technologi
es

a) Achieving Cost Leadership:

1) Demand Forecasting:

Accurate demand forecasting and high capacity utilization is to be done to realize cost
advantages.

2) Economies of Scale:

Economies of scale are to be attained. They lead to lower per unit cost of product or service.

3) Standardization:

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301- Strategic Management Unit 3 Generic Competitive Strategies
High level of standardization of products is needed. Uniform service packages can be offered.
Mass production techniques are to be used. All this yields lower per unit costs.

4) Aiming at Average Customer:

Aiming at the average customer makes it possible to offer a generalized set of utilities in a
product /service to cover a greater number of customers.

5) Use of Cost Saving Technologies:

Investments in cost-saving technologies can help a firm to squeeze every extra paisa out of the
cost, making the product /service competitive in the market.

6) Differentiation Withholding:

Withholding differentiation till it becomes absolutely necessary is another way to realize cost-
based competitiveness.

b) Benefits:

Cost Advantage

Capacity to
Absorb Increased
Price

Price Reduction

Minimizes Threat

Effective Entry
Barrier

1) Cost Advantage :

A firm is protected against the ill effects of competition if it has a lower-cost structure for its
products and services.

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2) Capacity to Absorb Increased Price :

Powerful suppliers possess a higher bargaining power to negotiate price increase for inputs.

3) Price Reduction :

Powerful buyers possess a higher bargaining power to effect price reduction.

4) Minimizes Threat :

The threat of cheaper substitutes can be offset to some extent by lowering prices.

5) Effective Entry Barrier :

Cost advantage acts as an effective entry barrier for potential entrants who cannot offer the
product / service at a lower price

c) Limitations:

Possibility of
Duplication of Cost
Reduction
Technique

Dilution of Customer
Focus

Reduction in Scope of
Product / Service

Great Threat of
Technological Shifts

1) Possibility of Duplication of Cost Reduction Technique:

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The duplication of cost reduction techniques makes the position of the cost leader vulnerable
from competitive threats.

2) Dilution of Customer Focus :

Cost leadership is obviously not a market - friendly approach. Severe cost reduction can dilute
customer focus and limit experimentation with product attributes.

3) Reduction in Scope of Product / Service :

Depending on the industry structure, sometimes less efficient producers may not choose to
remain in the market owing to the competitive dominance of the cost leader.

4) Great Threat of Technological Shifts :

Technological shifts are a great threat to a cost leader as these may change the ground rules on
which an industry operates.

E) Differentiation Strategy:

With the differentiation strategy, the unique attributes and characteristics of a firm’s product
provide value to customers.

a) Achieving Differentiation :

Such differentiation can be achieved by adopting following things.

1) A firm can use high-quality raw material inputs, superior process technology, speedy and
reliable distribution or better after-sales support.

2) It can incorporate features that offer utility for the customers and match their tastes and
preferences.

3) It can provide responsive customer service.

4) It can look for rapid product innovations and technological leadership.

5) It can incorporate features that enable the customers to claim distinctiveness from other
customers and enhance their status and prestige among the buyer community.

b) Benefits of Differentiation Strategy :

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Reduces
Competitive
Rivalry

Negligible
Bargaining
Threat of
Benefits Power of
Product
Suppliers
Substitutes

Entry
Barriers

1) Reduces Competitive Rivalry :

It reduces customer’s sensitivity to price increases. Customer brand loyalty too acts as a
safeguard against competitors.

2) Bargaining Power of Suppliers :

A firm implementing the differentiation strategy charges a premium price for its products. So
the suppliers must provide it with high quality parts.

3) Entry Barriers :

Customer loyalty and the need to overcome the uniqueness of a differentiated product are
substantial entry barriers faced by potential entrants.

4) Negligible Threat of Product Substitutes :

Firms selling the differentiated goods or services are positioned effectively against product
substitutes.

Limitations of differention strategy

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301- Strategic Management Unit 3 Generic Competitive Strategies

Difficulty in
Sustaining
Differentiation

Imitation of Over
Differentiation Differentiation

Limitations

Failure to Limit to
Communicat Price
e Benefits Premiums

Difficulty in Sustaining Differentiation :

In a growing market, products tend to become commodities. This is the case with the markets
with most industries in India. The basis for differentiation is long-term perceived uniqueness. It
is difficult to sustain. There is an imminent threat from competitors who can imitate the
differentiation strategy.

2) Over Differentiation:

Differentiation fails to work if its basis is something that is not valued by the customer. This
often happens in a case where unnecessary features are added for differentiation. Such things
also occur when over-differentiation is done, carrying little tangible benefit for the customer.

3) Limit to Price Premiums:

Price premiums too have a limit. Charging too high a price for differentiated features may cause
the customers to forego the additional advantage from a product/service on the basis of their
own cost-benefit analysis.

4) Failure to Communicate Benefits:

The firm may fail to communicate the benefits arising from differentiation adequately. It may
happen that the firm may rely too much on the fact that the intrinsic product attributes are
readily apparent to a customer. This may cause the differentiation strategy to fail.

5) Imitation of Differentiation:

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A firm’s means of differentiation no longer provide value for which customers are willing to
pay. The differentiation strategy becomes less valuable if imitation by rivals causes customers
to perceive that competitors offer the same goods or service, sometimes at a lower price.

F) Focus Strategies:

A focus strategy is an integrated set of actions that is designed to produce or deliver products or
services that serve the need of a particular competitive segment.

Types of Focus Strategies :

i) Focused Cost Leadership Strategy:

Some firms seek to provide customers with affordable solutions for better living through use of
the focused cost leadership strategy.

ii) Focused Differentiation Strategy:

Other firms implement the focused differentiation strategy. There are number of ways to
differentiate products or services to serve the unique needs of particular market segments.

b) Achieving Focus:

Focus is essentially concerned with identifying a narrow target in terms of markets and
customers. The firm implementing a focus strategy can adopt the following practices:

1) Identification Gaps:

A firm can choose specific niches by identifying gaps not covered by cost leaders and
differentiators.

2) Superior Skills:

A firm can create superior skills for catering to such niche markets.

3) Superior Efficiency:

A firm can create superior efficiency for serving such niche markets.

4) Achieving Lower Cost:

A firm can achieve lower cost or differentiation as compared to the competitors while serving
such niche markets.

5) Use of Innovative Ways:

A firm can develop innovative ways to manage the value chain which are different from the
ways prevailing in an industry.

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301- Strategic Management Unit 3 Generic Competitive Strategies
c) Benefits of Focus Strategies:

1) Protection from Competition:

A focused firm is protected from competition to the extent that the other firms, which have a
broader target, do not possess the competitive ability to cater to the niche markets.

2) Capacity to Absorb Price Increments:

Focused firms buy in small quantities, so powerful suppliers may not evince much interest. But
price increments up to a certain limit can be absorbed and passed on to the loyal customers.

3) Less Possibility of Shifting Loyalty:

Powerful buyers are less likely to shift loyalties as they might not find others willing to cater to
the niche markets as the focused firms do.

4) Substitute Barrier:

The specialization that focused firms is able to achieve in serving a niche market acts as a
powerful barrier to substitute products/services that might be available in the market.

5) Effective Entry Barrier:

Due to the focused specialization, the competence of the focused firms acts as an effective entry
barrier to potential entrants into the niche markets.

c) Limitations:

Rival’s Move
Transient
Nature of
Niches
Cost
Configuration
Difficult to
Move onto
Other
Segments
Difficulty
in
Achieving
Competen
ce

1) Difficulty in Achieving Competence:

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First of all, serving niche markets requires the development of distinctive competencies to
serve those markets. The development of such distinctive competencies may be a long-drawn
and difficult process.

2) Difficult to Move onto Other Segments:

Being focused means commitment to a narrow market segment. Once committed, it may be
difficult for the focused firm to move onto other segments of the market.

3) Cost Configuration:

A major risk for the focused firm lies in the cost configuration. Typically, the costs for the
focused firm are higher as the markets are limited and the volume of production and sales
small.

4) Transient Nature of Niches :

Niches are often transient. They may disappear owing to technology or market factors. For
instance, a new technology may make the process of making the niche products easier. In the
same way, there might be a shift in the consumer’s needs and preferences causing them to
move to other products. Sometimes the rising costs of niche products may cause the customers
to move to the lower-priced products of cost leaders.

5) Rival’s Move :

Rivals in the market may sometimes out-focus the focused firms by devising ways to serve the
niche markets in a better manner.

3.2 Using the Genetic Strategies

A) Consideration for Using Genetic Strategies:

Porter's strategies are not mutually exclusive. Low-cost producers should seek differentiation.
Following points must consider while using generic strategies:

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Identify the
Appropriate
Position of
Business

Configuring all
Notice the
Activities of
Industry Change
Business

Points for
Using
Strategies

A) Consideration for Using Genetic Strategies:

1) Notice the Industry Change:

It is important to bear in mind that condition in an industry change. New technology, new
entrants, competitor innovation, new customer needs or expectations mean that organizations
need to monitor their approach against the wider environment It is unrealistic to imagine that
any position will remain unchallenged for long.

2) Identify the Appropriate Position of Business:

Porter’s generic strategies are useful in providing an orientation for a business. They can help
the business to identity an appropriate position and then find ways to make sure that
supporting activities are compatible and consistent.

3) Configuring all Activities of Business:

Porter argues that competitive advantage can be pursued by 'deliberately choosing a different
set of activities to deliver a unique mix of value'. A successful strategy depends on the business
configuring all its activities to meet the customer needs it has positioned itself to target.

3.3 Grand Strategies

A) Introduction:

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

B) Meaning:

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301- Strategic Management Unit 3 Generic Competitive Strategies
Grand strategy is the set of strategic alternatives from which a firm chooses as it
manages its operations simultaneously across several industries and several markets. Grand
strategies are about decisions related to allocating resources among the different businesses of
a firm.

C) Dimensions of Grand Strategy

Internal/ext
ernal
Dimension

Active/pas Related/un
Dimension
sive related
s
Dimension Dimension

Horizontal/
vertical
Dimension

1) Internal/external Dimension:

a) The internal dimension operates when an organisation adopts a strategy independent of any
other entity.

b) The external dimension operates when an organisation adopts a strategy in association with
another entity.

2) Related/unrelated Dimension:

a) The related dimension operates when an organisation adopts a strategy that is related to its
existing business definition of one or more of its businesses in terms of their respective
customer groups, customer functions, or alternative technologies.

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301- Strategic Management Unit 3 Generic Competitive Strategies
b) The unrelated dimension operates when an organisation adopts a strategy that is unrelated
to its existing business definition of one or more of its businesses either in terms of their
respective customer groups. Customer functions or alternative technologies

3) Horizontal/vertical Dimension:

a) The horizontal dimension operates when an organisation adopts a strategy which results in
sewing additional customer groups and/or satisfying other customer functions in such a way
that they complement the existing business definition of one or more of its businesses.

b) The vertical dimension operates when an organisation adopts a strategy which results in the
expansion or contraction of the existing business definition of one or more of its businesses in
terms of the utilisation of alternative technologies.

4) Active/passive Dimension:

a) The active dimension operates when an organisation adopts an offensive strategy in

anticipation of environmental threats and opportunities.

b) The passive dimension operates when an organisation adopts a defensive strategy as a

reaction to environmental threats and opportunities.

3.4 Types of Grand Strategies

According to Glueck, there are four grand strategic alternatives: stability, expansion,
retrenchment and any combination of these three.

Stability Strategy

Growth Strategy

Types
Retrenchment
Strategy/ Defensive
Strategy

Combination
Strategy

A) Stability Strategy:

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a) Introduction:

Stability strategy is most likely to be pursued by small businesses or firms in a mature stage of
development. Stability strategies are implemented by 'steady as it goes' approaches to
decisions.

b) Meaning:

Stability strategy implies continuing the current activities of the firm without any significant
change in direction. If the environment is unstable and the firm is doing well, then it may
believe that it is better to make no changes. A firm is said to be a stability strategy if it is
satisfied with the same consumer groups and maintaining the same market share, satisfied with
incremental improvements of functional performance and the management does not want to
take any risks that might be associated with expansion or growth. Stability strategies are the
attempts made by an organisation at incremental improvement of functional performance.

c) Types of Stability Strategies:

1) No-change Strategy:

This strategy indicates that the company has nothing to do new but to continue with the
present business definition. It means that there is no change in the present strategy.

2) Profit Strategy:

If the problem is short lived a firm may wait for some time to let it pass away with time. Till
then, the firm tries to sustain its profitability by artificial measures by adopting a profit
strategy.

3) Pause / Proceed - with - Caution Strategy:

This is a strategy which is employed by the firm who wishes to test the ground before moving
ahead with a full-fledged grand strategy.

B) Expansion/Growth Strategies:

a) Types of Growth Strategies:

Expansion through Concentration :

Concentration is a simple, first - level type of expansion grand strategy. It involves converging
resources in one or more of a firm's business in terms of its respective customer needs,
customer functions or alternative technologies in such a manner that it results in expansion.
Concentration strategies involve investment of resources in a product line for an identified
market with the help of proven technology for expansion. Concentration is often the first -
preference strategy for a firm.

a) Benefits:

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i) Concentration involves minimal organisational changes so that it is less threatening: the
managers of a firm are more comfortable staying with present businesses.

ii) It also enables the firm to master one or a few businesses and enable it to specialise by
gaining an in-depth knowledge of these businesses. I

iii) Managers face fewer problems when dealing with known situations. Systems and processes
within the firm are developed in such a way that people become familiar with them.

iv) The decision-making process is under a lesser strain as there is a high level of predictability.

b) Limitations:

i) Firstly, concentration strategies are heavily dependent on the industry. So adverse conditions
in an industry can and do affect firms if they are intensely concentrated.

ii) If an industry goes into are cession, the firm concentrated in it finds it too difficult to
withdraw. If an industry becomes too crowded with competitors its attractiveness decreases
for the existing players.

iii) Secondly, factors such as product obsolescence, fickleness of markets. and emergence of
newer technologies are threats to concentrated firms. A firm too heavily invested in either of
these will face risks.

iv) Thirdly, concentration strategies may result in doing too much of a known thing.

v) Finally, concentration strategies may lead to cash flow problems that may pose a dilemma
before a firm.

II) Expansion through Diversification :

c) Types of Diversification Strategies :

1) Concentric Diversification :

When an organisation takes up an activity in such a manner that it is related to the existing
business definition of one or more of a firm’s businesses, either in terms of customer groups,
customer’s functions or alternative technologies, it is called concentric diversification.

2) Conglomerate Diversification:

When an organisation adopts a strategy, which requires taking up those activities, which are
unrelated to the existing business definition of one or more of its businesses, either in terms of
their respective customer groups, customer functions or alternative technologies, it is called
conglomerate diversification.

III) Expansion through Co-operation :

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Corporate strategies could take into account the possibility of mutual cooperation with
competitors while competing with them at the same time so that the market potential could
expand. The term co-operation expresses the idea of simultaneous competition and co-
operation among rival firms for mutual benefit. The central point is complementary among the
interests of rival firms. Mergers, takeovers or acquisitions, joint ventures and strategic alliances
are the types of co-operative strategies at the corporate level.

IV) Expansion through Internationalization:

International strategies are a type of expansion strategies that require firms to market their
products or services beyond the domestic or national market.

a) Types of International Strategies:

1) International Strategy:

Firms adopt an international strategy when they create value by transferring products and
services to foreign markets where these products and services are not available. This is a simple
strategy in the sense that an international firm, by maintaining a tight control over its overseas
operations.

2) Multi-domestics Strategy:

Firms adopt multi-domestic strategy when they try to achieve a high level of local
responsiveness by matching their products and services offerings to the national conditions
operating in the countries they operate in.

3) Global Strategy:

Firms adopt a global strategy when they rely on a low-cost approach based on reaping the
benefits of experience-curve effects and location economies and offering standardized products
and services across different countries.

4) Transnational Strategy:

Firms adopt a transnational strategy when they adopt a combined approach of low-cost and
high local responsiveness simultaneously for their products and services

VI) Expansion through Cooperation:

The External expansion strategy could be of following types:

a) Merger Strategies:

A merger is a combination of two or more organizations. In it, one acquires the assets
and liabilities of the other in exchange of shares or cash.

1) Reasons for Mergers:

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When there is merging of two organizations, one is buyer and the other is the seller. Both have
reasons for such merger. They can be given as follows:

For buyer:

a) To increase the value of the organizations stock.

b) To increase the growth rate and make a good investment.

c) To improve stability to earning and sales.

d) To balance, complete or diversify product line.

e) To reduce competition.

for the Sellers:

1) To increase the value of the owner's stock and investment.

2) To increase the growth rate.

3) To acquire resources to stabilize operations.

4) To benefit from tax legislation.

5) To deal with top management succession problem.

Important Strategic Issues in Mergers:

Strategic issues relate to the commonality of strategic interests between the buyer and seller
firms. It is important to know the extent of merger which leads to positive effects. The following
issues are to be taken into consideration:

a) Analysis of the strategic advantages and distinctive competencies of the merging firms.

b) A match between the objectives of the firms.

c) It should lead to the generation of strengths that would help the post-merger-organisation
to achieve its objectives in a better manner.

Types of Mergers:

1) Horizontal Mergers:

Horizontal mergers take place when there is a combination of two or more organizations in the
same business or of organizations engaged in certain aspects of the production or marketing
processes.

2) Vertical Mergers:

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Vertical mergers take place when there is a combination of two or more organizations, not
necessarily in the same business. They create complementarily either in terms of supply of
material or marketing of goods and services.

3) Concentric Mergers:

Concentric mergers take place when there is a combination of two or more organizations
related to each other in terms of either customer functions, customer group or the alternative
technologies used.

4) Conglomerate Mergers:

Conglomerate mergers take place when there is a combination of two or more organizations
unrelated to each other, either in terms of customer functions, customer groups or alternative
technologies used.

Acquisition/ Takeover Strategies:

There are three ways of entering new markets or offering new products. They are acquisition,
internal development or co-operative ventures.

1) Reasons for Acquisition:

Acquisition is pursued when;

a) The product is in the maturity of decline stages of the product life cycle.

b) The company has little knowledge of the products or markets it wishes to develop.

c) The earliest entry is desirable.

d) There are few internal development skills within the company.

e) There is production capacity in the industry.

f) The costs do not need to be spread over time.

2) Stages of Acquisition:

There are six steps in the procedure of acquisition. They can be explained as follows:

a) Spell out the objective.

b) Indicate how the objective would be achieved.

c) Assess managerial quality.

d) Check the compatibility of business styles.

e) Anticipate and solve problems early.

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f) Treat people with dignity and concern.

3) Advantages of Acquisition:

Acquisition offers the following advantages:

a) It ensures management accountability.

b) It offers easy growth opportunities.

c) It creates mobility of resources.

d) It avoids gestation periods and hurdles involved in new projects.

e) It offers a chance to sick units to survive.

f) It opens up alternatives for selective divestment.

4) Disadvantages of Acquisition:

a) Professionalism gets replaced by money power.

b) It does not create any real assets for society.

c) It is detrimental to the national economy.

d) It does not protect the interest of minority shareholders.

e) Avoidable stress and strains are created in the companies taken over or exposed to the
threat of takeovers.

c) Joint Venture/ Collaborative Partnership Strategies:

Joint venture occurs when at least two other firms create an independent firm.

1) Conditions for Joint Ventures :

Joint ventures may be useful to gain access to a new business mainly under four conditions:

a) When an activity is uneconomical for an organisation to do alone.

b) When the risk of business has to be shared.

c) When the distinctive competence of two or more organizations can be brought together.

d) When setting up an organisation requires surmounting hurdles, such as, important

quotas, tariffs, nationalistic - political interests and cultural roadblocks.

2) Types of Joint Ventures:

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Joint ventures are common within industries and in various countries. But they are especially
useful for entering international markets. The type of joint ventures can be given as follows:

a) Between two firms in one industry.

b) Between two firms across different industries.

c) Between an Indian firm and a foreign company in India.

d) Between an Indian firm and a foreign company in that foreign country.

e) Between an Indian firm and a foreign company in a third country.

3) Strategic Issues in Joint Ventures:

a) Joint ventures offer the advantages of achieving objective mutually by the participating
firms.

b) Eliminating, controlling or reducing competition may be of strategic importance and can

be brought about through joint ventures.

c) An increase in the market share can also be achieved.

d) Diversification strategies may be adopted by the participating firms if a joint venture is

planned across different industries.

e) If technology is crucial variable in strategy, then joint ventures with foreign companies
can be feasible.

4) Advantages :

a) It minimizes the risk.

b) It reduces an individual company's investment.

c) It creates opportunity to have access to foreign technology.

d) It facilitates broad-based equity participation.

e) It provides access to governmental and political support.

f) It facilitates entering new fields of business and synergistic advantages.

5) Disadvantages :

a) It creates problems in enquiry participation.

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b) There are problems of foreign exchange regulations.

c) There may be problem of lack of proper coordination among participating firms.

d) There is a possibility of conflict among the partners.

d) Strategic Alliances :

1) Reasons for Strategic Alliances :

a) The main purpose of accepting strategic alliances is to enhance the firm's organisational
capabilities and thereby gain competitive or strategic advantage.

b) A company that has a successful product or service may wish to look for new markets.

c) Strategic alliances are used to pool resources to gain economies of scale or make better
utilization of resources in order to reduce manufacturing costs.

d) Strategic alliances may be used to develop technological capability by leveraging the

technical expertise of two or more firms.

2) Principles of Managing Strategic Alliances :

a) A good start to a strategic alliance is to clearly define the strategy to be adopted. It

should be consistent with the corporate strategies of the partners.

b) Phasing Relationship Between the Partners. It means giving adequate time and
opportunity to the partners to know each other well.

c) When two firms come together in a partnership, it is absolutely important to blend their
cultures. A partnership is actually a joint effort of the people involved.

d) It is prudent to provide for an exit clause in case the alliance unfortunately does not
work or in case objectives are not achieved.

3) Advantages:

a) Helpful in enhancement of organisational capabilities

b) It facilitates access to new markets and new supply sources.

c) It facilitates use of latest technology and optimum utilisation of resources.

d) It creates a network of beneficial relationship.

e) It accelerates product introduction and overcome legal and trade barriers expeditiously.

f) It may help to attain speed and timing in implementing strategies.

g) It facilitates imitation of new products and services quickly.

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4) Disadvantages:

a) Lack of trust and commitment.

b) Perceived misunderstandings among partners.

c) Hasty implementation of plans.

d) Focusing on controlling the relationship rather than managing it for mutual benefit.

C) Outsourcing Strategies:

Outsourcing is the purchase of a value-creating activity from an external supplier. In multiple

global industries, the trend toward outsourcing continues at a rapid pace. Sometimes, virtually
all firms within an industry seek the strategic value that can be captured through effective
outsourcing. The automobile manufacturing industry is an example of this.

a) Reasons for Outsourcing :

1) Cost Savings :

It follows of the overall cost of the service to the business. This will involve reducing the scope,
defining quality levels, re-pricing, re-negotiation, cost re-structuring.

2) Cost Restructuring :

Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing
changes the balance of this ratio by offering move from fixed to variable cost and also by
making variable costs more predictable.

3) Improve Quality :

Achieve a step change in quality through contracting out the service with a new service level
agreement.

4) Knowledge :

It provides access to intellectual property and wider experience and knowledge.

5) Contract :

Services will be provided to a legally binding contract with financial penalties and legal redress.
This is not the case with internal services.

6) Operational Expertise :

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It facilitates access to operational best practice that would be too difficult or time consuming to
develop in-house.

7) Access to Talent :

It facilitates access to a larger talent pool and a sustainable source of skills, in particular in
science and engineering.

8) Capacity Management :

Supplier provides an improved method of capacity management of services and technology

where the risk in providing the excess capacity.

9) Catalyst for Change :

An organisation can use an outsourcing agreement as a catalyst for major step change that
cannot be achieved alone. The outsourcer becomes a Change agent in the process.

10) Enhance Capacity for Innovation :

Companies increasingly use external knowledge service providers to supplement limited in-
house capacity for product innovation.

12) Reduce Time to Market :

The acceleration of the development or production of a product is possible through the

additional capability brought by the supplier.

12) Commoditization :

The trend of standardizing business processes, IT services and application services enabling
businesses to intelligently buy at the right price. It allows a wide range of businesses access to
services previously only available to large corporations.

13) Risk Management :

An approach to risk management for some types of risks is to partner with an outsourcer who is
better able to provide the mitigation.

14) Venture Capital :

Some countries match government funds venture capital with private venture capital for
startups that start businesses in their country.

b) Benefits :

1) Creates Opportunities :

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301- Strategic Management Unit 3 Generic Competitive Strategies
Outsourcing creates opportunities for larger and smaller firms. Using focus business-level
strategies, companies concentrate on providing superior service to their customers in terms of
specific functions.

2) Seeks Value:

Outsourcing, a firm seeks the greatest value. It results in best work.

3) Advanced Technology:

Some companies cannot afford to develop internally all the technologies that might lead to
competitive advantage in the future. Outsourcing facilitates them to use the advanced
technologies.

4) Generates Resources :

Outsourcing is done in order to control costs. It generates resources that can be used to nurture
and support those firms’ design and marketing competencies

D) Retrenchment Strategies:

A strategic option which involves reduction of any existing product or services line along with
the level of objectives set below the past achievement is known as retrenchment strategy. It is
essentially a defensive strategy adopted as a reaction to operating problems stemming from
either internal mismanagement, unanticipated actions by competitors or changes in market
conditions.

D) Retrenchment Strategies:

a) Variants of Retrenchment Strategy :

1) Turn Around Strategy:

The turnaround strategy is often necessitated during recessionary conditions in an industry or

in the economy as a whole. More generally speaking, the turnaround strategy is called for when
there is a substantial or sustained down trend in the indicators of business performance which
may be caused by external factors and the absence of properly timed, fresh management input.

2) Divestment Strategy :

Sometimes it may not be possible for the organisation to carry on a particular line of
business because it does not offer any potential even after turn around action. In that case, the
organisation tries to get rid of that business by pursuing a divestment strategy.

3) Liquidation Strategy :

As extreme case strategy in which the organisation takes a decision to sell its entire
business and the radiation can be invested somewhere else in terminating an organisation’s

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301- Strategic Management Unit 3 Generic Competitive Strategies
existence either by selling of its assets or by shutting down the entire operation. Obviously
liquidating is the most unattractive strategy, and it is normally used only when all fails.

b) Reasons for Adopting Retrenchment Strategy :

1) Poor Performance :

When a firm suffers from poor performance in terms of lower earnings and profits and is
unable to recover its position by any other means, it may be required to shut down units of
activity or segments of business which continue to be a drag on total performance.

2) Threat of Survival:

When the survival of the firm is threatened by unanticipated problems in the product market,
the management may be under pressure from shareholders and employees to improve
performance by all means including cut back of operations.

3) Redeployment of Resources :

When alternative investment opportunities promise higher returns, some of the existing
business units or segments of activity may be shed and resources thus related utilised for
increased profitability and growth.

4) Insufficiency of Resources :

To sustain and develop the satisfactory earnings position in a production market, it may be
necessary to deploy large financial resources.

5) For Better Management and Efficiency :

Retrenchment strategy can be used to secure better management and improved efficiency.

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