What is Combination Strategy ?

A combination strategy is said to be employed by a company when it tries to

achieve several business objectives with the aid of a single strategy.
Business strategies usually involve objectives like growth, consolidation or
stability. Combination strategies are aimed at improving the competitive
position of a company in the industry. In the combination strategy, the
organisation attempts to achieve two or more business objectives at the same
time.
Example : Reliance Industries started off as a textile manufacturer. However
because of distribution inefficiencies in the market the company was forced to
open retail outlets of its own under the brand name "Vimal". By getting into
direct retailing of its products Reliance was able to sidestep the wholesaler and
retailers in the market who were not pushing his products. Reliance therefore
used a combination of horizontal and vertical integration. Reliance was using
many petrochemicals in its existing business Reliance then decided to get into
the manufacture of petrochemicals so that it could price its products
competitively. In this, it got into the manufacture of Polyester Staple Fibre
(PSF). It further got into the refining of crude oil and set up a world class oil
refinery at Hazira. Large diversified companies are using combination strategies
to meet their objectives. This also satisfies the diversified needs of all the
strategic business units of a company. A company is not a slave to a single
strategy but can be practising several strategies at the same time. Some units of
a company could be pursuing a growth strategy whereas some of the other units
of the organisation could be in the decline or maturity of the product life cycle
and hence could be in a process of retrenchment or stability.

Combination strategy is by itself a combination of several strategies - stability,

growth, retrenchment. This is because individual business units in a company
have different products at different stages of the product life cycle and each are
facing different problems. The combination strategies can be of the following
types :
1. Stability in some part of the business and growth in another.
2. Stability in some business and retrenchment in some other part.
3. Growth in some businesses and retrenchment in another.
 4. Stability, growth and retrenchment in various businesses.

Reasons to Adopt Combination Strategy

The reason a company adopts a combination strategy is that different business

units in a company have different problems and there cannot be a single
solution for all of them. The specific reasons to follow a combination strategy
are:

1) Different Products in Different Product Life Cycle :

The different products of a company are in different stages of the product life
cycle.
For example, products which are in the growth stage require a lot of investment
in advertisement and sales promotion because at this stage the company wants
more and more customers to try the product. Similarly products which are in the
maturity stage of the product life cycle call for a stability strategy and in this the
company is trying to milk these products for profits and not make any new
investment in them. Products which are in the declining stage require to be
retrenched.

2) Business Cycle :
Different divisions and products of the company are also affected differently by
the business cycle. This may provide growth opportunities for some businesses
and for others it may spell disaster. Hence, in some businesses the company will
go for expansion while in others there will be retrenchment.

3) Number of Businesses :
Companies sometimes grow so fast that the number of products and businesses
become unmanageable. Hence it makes sense for the management to reduce the
number of businesses. This is also necessary as the resources available are
limited and can only be allocated to companies where the returns are maximum.
Types of Combination Strategy

The following are just a few of the possible combination strategies, all
companies which have multi-businesses and products use a combination
strategy. This is also true if they cater to different markets. Combination
strategies can be simultaneous or sequential depending on the particular type of
business situation. Two types of combination strategies are as follows:

1) Simultaneous Combination:
 Divesting a Strategic Business Units (SBU) or product line while at the
same time adding a SBU or product line somewhere else.
 For some products or businesses the company may adopt a turnaround
strategy whereas for others it may adopt a growth strategy.
 The company may be harvesting some products whereas for others it may
follow a growth strategy.

2) Sequential Combination :
This can be used by the company in the following ways :
 At first employing a growth strategy and then switching over to a stability
strategy.
 First employing a turnaround strategy and then using the growth
strategy once the ground level situation gets better.
What is External Growth?

External growth (also known as inorganic growth) refers to growth of a

company that results from using external resources and capabilities rather than
from internal business activities. External growth is an alternative to internal
(organic) growth. However, internal and external growth should not be
considered opposites.

The main advantage of external growth over internal growth is that the former
provides a faster way to expand the business. However, organic growth is
widely regarded as a better measure of a company’s performance than external
growth.

External Growth Strategies

Companies may pursue external growth using two primary vehicles: mergers
and acquisitions (M&A) and strategic alliances. The main difference between
the two is in regard to change of ownership. M&A deals involve an exchange of
ownership between the companies in the transaction. Conversely, a strategic
alliance enables businesses to pursue their collective objectives while remaining
independent entities.
1. Mergers and acquisitions (M&A)

Mergers and acquisitions refer to transactions between business entities that

involve a complete exchange of ownership. A merger is a financial transaction
in which two companies unite into one new company with the approval of
the boards of directors of both companies. In a merger, the involved companies
may create a completely new entity (under a new brand name) or the acquired
company may become a part of the acquiring company.

Conversely, an acquisition is a financial transaction in which the acquiring

company (bidder) purchases a controlling stake in a target company. It can be
done with the consent of the management and shareholders of a target company
(friendly takeover) or without it (hostile takeover).

Generally, M&A transactions can provide substantial benefits and growth

opportunities to the participating entities. Nevertheless, mergers and
acquisitions are commonly challenging in terms of the integration of the
companies.

2. Strategic alliances

Unlike M&A transactions, strategic alliances do not involve a complete

exchange of ownership between the participating companies. Instead,
companies combine their assets and resources for a certain period of time to
achieve predetermined goals while remaining independent.

A strategic alliance can take one of two forms: equity and non-equity
alliances. Equity alliances are created when independent companies become
partners and establish a new entity jointly owned by the participating partners.
The most common form of an equity alliance is a joint venture.

On the other hand, non-equity alliances are created through contracts.

Examples of non-equity alliances are franchising and licensing agreements, in
which one company provides products, services, or intellectual property to
another company in exchange for a fee.

Unlike M&A transactions, strategic alliances are much easier to execute and do
not require an extreme commitment from the involved parties. However, the
benefits and growth opportunities of strategic alliances may be limited, as
compared to the opportunities that an acquisition may offer.
Uses of External Growth Strategies

A company can use external growth strategies to achieve a number of different

objectives, such as the following:

 Obtain access to new markets

 Increase market power
 Access new technology/brand
 Diversify a product or service
 Increase the efficiency of business operations

The implementation of external growth strategies can be challenging for a

number of reasons. For example, a company that wants to acquire another entity
may face resistance from the target’s management or shareholders.

In addition, the selection of a potential target company (in case of a merger or

acquisition) is a challenging process in and of itself, and one that involves many
risks. For example, merged companies may face a clash of corporate culture, or
the synergies created through the transaction may not be sufficient to produce
the gains that were anticipated to result from the merger.

What is Retrenchment Strategy ?

Retrenchment is a corporate strategy that aims to decrease the scale of

operations of the company. It can also involve cutting down the expenditure of
the company so that it becomes financially viable. It can involve reducing the
number of product lines or businesses, withdrawing from certain geographical
markets so that the company becomes financially sustainable.

For example, HUL has reduced the number of brands in its portfolio in the past
so that the resulting "power brands" contribute more meaningfully to the
company's profitability. A retrenchment strategy often helps the company from
making a turnaround, as all the unprofitable businesses are pruned and removed.

Retrenchment, as applied in the field of personnel management, denotes

employees leaving the company either because of slowdown of economy, re-
alignment of work, or there is less work available. The exact word is used in the
field of strategic management with a slightly different emphasis because
retrenchment strategy does not always indulge in getting off the business. In the
area of personnel management, retrenchment refers to the removal or benching
of workers from the working place because of reduced demand due to recession.
In strategic management the word retrenchment has a very different
connotation. In this, the company does not always remove a business but instead
focuses on the following :
1. Focusing on cost reducing activities.
2. It can become a captive company by decreasing the number of tasks that
it performs.
3. A number of markets being catered to by reduction in the number of
products being offered.
A retrenchment strategy therefore offers many strategic alternatives to the
company. These can be in the form of :
 Cutback and Turnaround Strategy
 Divestment Strategy
 Liquidation Strategy

Reasons to Adopt Retrenchment Strategy

The reasons for adopting retrenchment strategy are as follows :

1) Poor Performance :
When the performance of the company is not satisfactory and it is incurring
losses then it makes sense to close down the business lines or centers which are
not adding value and are acting as performance laggards in the company.

2) Threat to Survival :
When the performance of the company is hampered by sudden activities in its
product markets then the company may often shut down some of its operation.
Mar times such a strategy is also forced by the company's shareholders.

3) Redeployment of Resources :
Sometimes excellent investment opportunities exist elsewhere and the company
may be forced to cut down its operations in the existing business and redeploy
the resources released to more productive areas.
4) Inadequate Resources :
The company may also be in the need of financial resources to sustain its
existing market positions. The company may not have the requisite funds for
this and may be forced to hive off unproductive areas of its business so that it
may redeploy the resources.

5) For Securing better Management and Improved Efficiency :

A company sometimes expands into too many areas. This affects its operational
efficiency as it becomes unmanageable. A strategy of retrenchment allows the
company to become a manageable size by simplifying its product portfolio.

Types of Retrenchment Strategy

Retrenchment is a strategy that aims at reducing cost to make the company

financially viable. It allows the company to regroup and arrest the decline of its
sales and profits by reducing costs and re-allocating its assets to more
productive uses. There are four Retrenchment Strategy Types/forms are as
follows :
1) Turnaround Strategy
2) Divestment Strategy
3) Liquidation Strategy
4) Captive Company Strategy

1) Turnaround Strategy :
Turnaround as the name suggests means reversing an adverse trend. The basic
goal of turnaround is to change a company from a loss making and under
performing enterprise into one with acceptable levels of profitability, liquidity
and cash flow. A turnaround strategy implies the management of an under
performing company in terms of its management, funding etc., and turns it into
a profitable one.

In order to manage the turnaround strategy, a company needs to overcome the

reasons of under performance, to rectify the financial troubles achieve financial
progress, regain the confidence of the various stakeholders and also overcome
adverse situations prevalent in its internal and external environments. The
turnaround strategy requires an improvement in the efficiency of the company.
It is most effective when it is done at a stage when the problems of the company
are visible to all but not on an alarming stage. The two main aspects of a
successful turnaround strategy are contraction and consolidation.

Contraction has the characteristics of a quick fix. It is an attempt to quickly "fix

the problem" in the company. This can be in the form of a wide scale cut in the
costs and size of the company. Consolidation on the other hand is a strategy to
stabilize the operations of the already lean company which has suffered
contraction. A consolidation program includes efforts to remove all
unnecessary overhead costs. There is also an attempt to justify all the functions
in terms of their cost. This is a very delicate situation for the company. A
consolidation exercise not carried out properly can cause a lot of damage to the
company. It can lead to many people leaving the company. An atmosphere of
downsizing and rampant cost cutting especially where it is backed and enforced
ruthlessly by top management, can lead to a lot of harm to the employees of the
company and hence impact the productivity of the company.

2) Divestment Strategy :
A company which has a very week industry position and cannot turnaround its
performance or become captive to another company has no option but to shut
operations and close down. It can sell its operation to another entity. In that
manner the shareholders of the company will get a good price for their
investment in the company. The advantage of selling out another company is
that the other company may have the resource and the competency to
turnaround the company and make it profitable.

(Retrenchment strategy example companies in India) For

example, Mahindra and Mahindra sold off its M-Seal brand of adhesives to
Pidilite (makers of Fevicol). Pidilite had the competency to make maximum use
of the M-Seal brand and was better placed than Mahindra in the Indian
adhesives market. A company which has a very bad competitive position and
cannot turnaround its troubled business or become a captive company to another
one has no other option than to sell off the entire company or divest a part of the
company. Divestment is also called divestiture or cut back. This involves the
liquidation of a part of the business or an SBU or a profit centre. Many a times
divestiture is a fall through of a failed turnaround attempt. Sometimes a
turnaround attempt may be ignored by the company because a divestiture seems
more attractive.
The divestiture strategy comprises the sale of a part of the company or a major
component of the company. For example, Sara Lee Corp. was a diversified
company which was selling everything from Wonderbras and Kiwi shoe polish
to Coffee. The new president of Sara Lee, Steven McMillan, was faced with
stagnant revenue and declining profits. As a result he decided to hive off 15
businesses which added up to 20% of the company's revenue. He also laid off
13200 employees. From the resources that got generated from this divestiture,
Sara Lee added more brands to its core brands and made them more powerful
by bridging incomplete product lines. As a result Sara Lee was able to increase
its bakery segment four-fold.

3) Liquidation Strategy :
An unsuccessful company which has none of three strategic options available
has no other option but to go in for liquidation or bankruptcy. Liquidation is
better than a bankruptcy because in the former case the management has some
control whereas in the latter case the entire control is vested with the courts.
Bankruptcy is the situation in which the management of the company is handed
over to the courts who then handle the settlement of the company's debts and
obligations. This is done with a belief that the company will emerge stronger
than before once the debts have been settled.

For example, Global Trust Bank was a private sector bank which had a good
track record and had 11.8 crore in net profits as of Dec 31, 2003. However
because of adverse market conditions the bank collapsed and had to ultimately
go for bankruptcy. This company was merged with the Oriental Bank of
Commerce. A more recent example, is the case of the Vijay Mallya owned
company Kingfisher airlines which declared itself bankrupt. An amicable
solution is still to be found by the court in this case.

Liquidation differs from bankruptcy because in this case the management seeks
to terminate the existence of the company whereas in the case of bankruptcy the
management wants to continue with operations. In this case the company is
difficult to be sold-off entirely but the management sells as many company
assets as possible and the cash realized is given to: creditors and the
shareholders of the company. The advantage of liquidation is that the top
management including the Board of Directors still retain all the management
control of the company and do not hand over the power to the court. This
ensures that the shareholders get a better deal. By going for liquidation, the
management concedes that it has failed and also that it requires that all the
stakeholders need to go if for lot of pain. The employees of the company also
have to bear a lot of hardships. That is why liquidation is considered the least
attractive of all the corporate strategies. The positive aspect is that it benefits all
the stakeholders of the company. In the case of bankruptcy, the company plans
a long and ordered exit so that the greatest return is got for the assets of the
company.