CA Sunil Keswani 1

Chapter - 4
Strategic Choices
Strategic Choices
►Businesses follow different types of strategies to enter the market, to stay
relevant and grow in the market.
►William F Glueck and Lawrence R. Jauch discussed four generic strategies
including stability, growth, retrenchment and combination.
►These strategies have also been called Grand Strategies / Directional
Strategies by many other authors.

Stability Strategy
›»A stability strategy is pursued by a firm when:
ü It continues to serve in the same or similar markets and deals in same or
similar products and services.
ü This strategy is typical for those firms whose product have reached the
maturity stage of PLC or those who have a sufficient market share but need
to retain that.
›»It is not “Do Noting” Strategy but ‘Do Nothing New’ Strategy.
›»It involves minor improvement and not drastic changes.
Example – SAIL, NTPC, ONGC etc.

Characteristics of Stability Strategy

• Company stays with the same business, same product-market posture and
functions, maintaining same level of effort as at present.
• Firm focuses on incremental improvements in functional efficiencies.
• It does not involve a redefinition of the business of the corporation
• It is a safe strategy that maintains status quo.
• It does not warrant much of fresh investments.
• The risk involved in this strategy is less.
• The firms with modest growth objective choose this strategy.

Major Reasons for Stability Strategy

• A product has reached the maturity stage of the PLC.
• The staff feels comfortable with the status quo as it involves less changes
and less risks.
• Environment is relatively stable.
• Expansion may be perceived as threatening.
• After rapid expansion, a firm might want to stabilize and consolidate itself.
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Growth/Expansion Strategy
›»It is implemented by redefining the business by enlarging the scope of business
and substantially increasing investment in the business.
›»It is a strategy that can be equated with dynamism, vigour, promise and success.
›»This strategy may take the enterprise along relatively unknown and risky paths,
full of promises and pitfalls.
Example – Google, Tesla, Amazon etc.

Characteristics of Growth/Expansion Strategy

• It involves a redefinition of the business of the corporation.
• IT is the opposite of stability strategy. Rewards are very high along with
risks.
• It leads to business growth.
• It facilitate the process of renewal of the firm through fresh investments
and new businesses/products/markets.
• It is a highly versatile strategy; it offers several permutations and
combinations for growth.
• It holds within it two major strategy routes: Intensification and
Diversification.

Major Reasons for Growth/Expansion Strategy

• May become imperative when environment demands increase in pace of activity.
• Strategists may feel more satisfied with the prospects of growth from
expansion.
• Expansion may lead to greater control over the market vis-a-vis competitors.
• Advantages from the experience curve and scale of operations may accrue.
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Types of Growth/ Expansion Strategy

The growth strategies can be classified into two main types:
Expansion
Strategy

Internal Growth External Growth

Strategies Strategies

Intensification Diversification Mergers Alliance

- Market
Penetration - Verticle - Economic
- Concentric
- Market - Horizontal -Strategic
-Conglomoerate
Development -Cogeneric -Organization
-Innovation
- Product -Conglomerate -Political
Development

Internal Growth Strategies

I. Expansion or growth through Intensification
›It means that the organisation tries to grow internally by intensifying its
operations either by market penetration or market development or by product
development.
›The firm can intensify by adopting any of the following strategies:

Market •The firm directs its resources to the profitable growth of its
Penetration existing product in the existing market.

•It consists of marketing present products, to customers in related

Market
market areas by adding different channels of distribution or by
Development changing the content of advertising or the promotional media.

Product •It involves substantial modification of existing products or creation

of new but related items that can be marketed to current
Development customers through establish channels.
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›»Igor. H. Ansoff gave a framework as shown in figure below which describes the
intensification options available to a firm.

Existing Product New Product

Market Penetration Product Development

Existing Market

Existing Product + Existing Market Existing Product + New Market

• Increase market share. • Add product features, product

• Increase product usage. refinement.
• Increase the frequency used. • Develop a new-generation
• Increase the quantity used. product.
• Find new application for current • Develop new product for the
users. same market

Market Development Diversification

New Market

Existing Product + Existing Market New Product + New Market

• Expand geographically • Related/unrelated

• Target new segments

II. Expansion or Growth through Diversification

›Diversification is defined as an entry into new products or product lines, new
services or new markets, involving substantially different skills, technology and
knowledge.
›Based on the nature and extent of their relationship to existing businesses,
diversification can be classified into two broad categories:
Concentric ›»Concentric diversification takes place when the products are related.
Diversification
›»In this diversification, the new business that is it diversifies into is linked
to the existing businesses through process, technology or marketing.
›»The new product is a spin-off from the existing facilities and
products/processes.
›»The new product is only connected in a loop-like manner at one or more points
in the firm's existing process/technology/product chain.
›»Example, a company producing clothes ventures into the manufacturing of
shoes.
›»Concentric diversification is generally understood in two directions, vertical
and horizontal integration;
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Vertically
Integrated
›»Firms opt to engage in businesses that are related to the existing
Diversif- business of the firm, while remaining vertically within the same
ication product-process chain.
›»A firm can either opt for forward or backward integration.

Backward Integration Forward Integration

Concerned with creation of Moving forward in the value
effective supply by entering chain and entering business lines
business of input providers. that use existing products.
Strategy employed to expand
Forward integration will also
profits and gain greater
take place where organizations
control over production/
enter into businesses of
supply of a product whereby a
distribution channels.
company will purchase or build
a business that will increase
Example, A coffee bean
its own supply capability or
manufacture may choose to
lessen its cost of production.
merge with a coffee cafe.
Example, A large supermarket
chain considers to purchase a
number of farms that would
provide it a significant amount
of fresh produce.
Horizontal A firm gets horizontally diversified by integrating through
Integrated
Diversif-
acquisition of one or more similar businesses operating at the same
ication stage of the production-marketing chain. They can also integrate
with the firms producing complementary products or by-products
or by taking over competitors’ products.
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Conglomerate ›» No linkages related to product, market or technology exist; the new

Diversification
businesses/products are disjointed from the existing businesses/products
in every way; it is a totally unrelated diversification.
›»Conglomerate diversification has no common thread at all with the firm’s
present position.
›»Example, A cement manufacturer diversifies into the manufacture of
steel and rubber products.

Innovation Innovation drives upgradation of existing product lines or processes, leading to

increased market share, revenues, profitability and most important, customer
satisfaction. Innovation offers the following;
Help to solve ›»A business strives to find opportunities in existing problems of
complex
the society, and it does so through planned innovation in areas of
problems
expertise.
›»This guided innovation help to solve complex problems by
developing customer centric sustainable solutions.
›»Example, the pressing problem of environmental damage is
being tackled heads on by shifting to renewable sources of energy
like solar, wind, sea waves, etc.
›»It might be costly in introductory stages but in the long run it
will only have economic and environmental sustainability.
Increases ›»Productivity is defined as a measure of final output from a task
Productivity
or a process and companies are willing to spend millions on
increasing their productivity.
›»Innovation, by automating repetitive tasks, and simplifying the
long chain of processes, adds to productivity of teams and
thereby the organization as a whole.
›»Example, MS Excel, every finance professional uses this
software to simplify and automate their manual tasks.
Gives ›»An interesting concept about innovation is the faster a business
Competitive
innovates, the farther it goes from its competitor's reach.
Advantage
›»Innovative products need less marketing as they aim to provide
added satisfaction to consumers, thus, creating a competitive
advantage.
›»Innovation not only helps retain the existing customers but
helps acquire new ones with ease.
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External Growth Strategies

When the organization instead of growing internally thinks of diversifying by
making alliances with external organisations, it is called external growth
diversification.

I. Expansion through Mergers and Acquisitions

›Acquisition or merger with an existing concern is an instant means of achieving
the expansion.
› Merger is a process when two or more companies come together to expand their
business operations.
› In a merger the deal gets finalized on friendly terms and both organizations
share profits in the newly created entity.
› In a merger two organizations combine to increase their strength and financial
gains along with breaking of the trade barriers.
›When one organization takes over the other organization and controls all its
business operations, it is known as acquisition.
›In acquisition, one financially strong organization overpowers the weaker one.
› Acquisition often happen during recession in economy or during declining profit
margins.
› Deal is done in an unfriendly manner, it is more or less a forced association.

Types of Mergers

Horizontal Merger
►Horizontal merger is a combination of firms engaged in the same industry.

►It is a merger with a direct competitor.

►The objective is to achieve economies of scale, widening the line of products,

decrease in working capital and fixed assets investment, getting rid of
competition and so on.

►Example, formation of Brook Bond Lipton India Ltd. through the merger of
Lipton India and Brook Bond.

Vertical Merger
►It is a merger of two organizations that are operating in the same industry but
at different stages of production or distribution system.

►This often leads to increased synergies with the merging firms.

►If an organization takes over its supplier/producers of raw material, then it

leads to backward integration.
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►On the other hand, forward integration happens when an organization decides
to take over its buyer organizations or distribution channels.

► Example, Zee Ltd. and dish tv - forward

Co-generic Merger

►In this two or more merging organizations are associated in some way or the
other related to the production processes, business markets, or basic required
technologies.

►Such merger includes the extension of the product line or acquiring components
that are required in the daily operations.

► Example, an organization in the refrigerators can diversify by merging with

another organization having business in kitchen appliances.

Conglomerate Merger
►It is the combination of organizations that are unrelated to each other.

►There are no linkages with respect to customer groups, customer functions and
technologies being used.

►Example – L&T & Voltas

II. Expansion through Strategic Alliance

›A strategic alliance is a relationship between two or more businesses that
enables each to achieve certain strategic objectives which neither would be able
to achieve on its own.
›The strategic partners maintain their status as independent and separate
entities, share the benefits and control over the partnership, and continue to
make contributions to the alliance until it is terminated.
›These are formed in the global marketplace between businesses that are based
in different regions of the world.
Example – Kwality (Delhi based ice-cream) with Walls (HUL), Maruti with suzuki

Advantages of Strategic Alliance

Strategic alliance usually is only formed if they provide an advantage to all the
parties in the alliance.
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Organizational - It helps to learn necessary skills and obtain certain capabilities from
strategic partners.
- Strategic partners may also help to enhance productive capacity,
provide a distribution system, or extend supply chain and help
enhancing reputation in market.
Economic - There can be reduction in costs and risks by distributing them across
the members of the alliance.
- Greater economies of scale, advantage of co-specialization, creating
additional value can be obtained.
Strategic - Rivals can join together instead of competing with each other.
- It is useful to create a competitive advantage by the pooling of
resources and skills, to get access to new technologies or to pursue
joint research and development.
- This may also help with future business opportunities and the
development of new products and technologies.
Political - It helps to gain entry into a foreign market either because of local
prejudices or legal barriers to entry.
- Alliance with politically influential partners may also help improve
your own influence and position.

Disadvantages of Strategic Alliance

It require sharing of resources and profits, and also sharing knowledge and
skills that otherwise organisations may not like to share.
Agreements can be executed to protect trade secrets, but they are only as
good as the willingness of parties to abide by the agreements or the courts
willingness to enforce them.
Strategic alliances may also create potential competition when an ally becomes
an opponent in future when it decides to separate out.

Strategic Exits
›»It is followed when an organization substantially reduces the scope of its
activity.
›»This is done through an attempt to find out the problem areas and diagnose the
causes of the problems. Next steps are taken to solve the problems.
›»If the organisation choose to focus on ways and means to reverse the process
of decline, it adopts to turnaround strategy.
›»If the organisation cuts off the loss-making units, divisions, SBUs, curtails its
product line, or reduces functions performed, it adopts a divestment or
divestiture strategy.
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›»If both doesn’t work, then it may choose to abandon the activities totally,
resulting in a liquidation strategy.

I. Turnaround Strategy
›» For internal retrenchment to take place, emphasis is laid on improving internal
efficiency, known as turnaround strategy.
›» Certain conditions or indicators which point out need for a turnaround are:
ü Persistent negative cash flow from business(es)
ü Uncompetitive products or services
ü Declining market share
ü Deterioration in physical facilities
ü Over-staffing, high turnover of employees, and low morale
ü Mismanagement

Major Reasons for Retrenchment/Turnaround Strategy

• The management no longer wishes to remain in business either partly or
wholly due to continuous losses and unviability.
• The management feels that business could be made viable by divesting some
of the activities or liquidation of unprofitable activities.
• A business that had been acquired proves to be a mismatch and cannot be
integrated within the company.
• Persistent negative cash flows from a particular business creating the need
for divestment of that business.
• Severity of competition and the inability of a firm to cope with it may cause
it to divest.
• Technological upgradation is required if the business is to survive but where
it is not possible for the firm to invest in it, a preferable option would be to
divest.
• A better alternative may be available for investment, causing a firm to
divest a part of its unprofitable businesses.

Action Plan for Turnaround

A workable action plan for turnaround would involve the following stages:
Stage One - - The first step is to assess the current problems and get to the root
Assessment of
causes and the extent of damage the problem has caused.
current
- Once the problems are identified, the resources should be focused
problems
toward those areas essential to efficiently work on correcting and
repairing any immediate issues.
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Stage Two - - Determine chances of business survival.

Analyse the
- Identify appropriate strategies & develop a preliminary action plan.
situation and
- For this one should look for the viable core businesses, adequate
develop a
strategic plan bridge financing and available organizational resources.
- Analyse the strengths and weaknesses
- Develop a strategic plan with specific goals and detailed functional
actions.
Stage Three- - An appropriate action plan must be developed to stop the bleeding
Implementing
and enable the organization to survive.
an emergency
- The plan typically includes human resource, financial, marketing and
action plan
operations actions to restructure debts, improve working capital, and
so on.
- A positive operating cash flow must be established as quickly as
possible and enough funds to implement the turnaround strategies
must be raised.
Stage Four- - During the turnaround, the "product mix" may be changed, requiring
Restructuring
the organization to do some repositioning.
the business
- Core products neglected over time may require immediate attention
to remain competitive.
- Morale building of employees, reward and compensation should be
given that encourage dedication and creativity amongst employees to
think about profits and return on investments.
Stage Five - - The organization should begin to show signs of profitability, return
Returning to
on investments and enhancing economic value-added.
normal
- Emphasis is placed on a number of strategic efforts such as
carefully adding new products and improving customer service,
creating alliances with other organizations, increasing the market
share, etc.

›»The important elements of turnaround strategy are as follows:

• Changes in the top management
• Initial credibility-building actions
• Neutralising external pressures
• Identifying quick payoff activities
• Quick cost reductions
• Revenue generation
• Asset liquidation for generating cash
• Better internal coordination
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II. Divestment Strategy

›»It involves the sale or liquidation of a portion of business, or a major division,
profit centre or SBU.
›»Divestment is usually a part of rehabilitation or restructuring plan and is
adopted when a turnaround has been attempted but has proved to be
unsuccessful.
›»A divestment strategy may be adopted due to various reasons:
ü A business that had been acquired proves to be a mismatch and cannot be
integrated within the company.
ü Persistent negative cash flows from a particular business creating the need
for divestment of that business.
ü Severity of competition and the inability of a firm to cope with it may cause
it to divest.
ü It is not possible for the business to do Technological upgradation that is
required for the business to survive, a preferable option would be to divest.
ü A better alternative may be available for investment, causing a firm to divest
a part of its unprofitable business.

Strategic Options
›Strategic options need to be carved out from existing products and innovations
that are happening in the industry.
›Primarily used for competitive analysis and corporate strategic planning in multi-
product and multi business firms.
›The main advantage in adopting a portfolio approach in a multi-product, multi-
business firm is that resources could be channelised at the corporate level to
those business that possess the greatest potential.
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Ansoff’s Product Market Growth Matrix

›The Ansoff’s product market growth matrix (proposed by Igor Ansoff) is a
useful tool that helps businesses decide their product and market growth
strategy.
›With the use of this matrix a business can get a fair idea about how its growth
depends upon it markets in new or existing products in both new and existing
markets.
›Companies should always be looking to the future.
›One useful device for identifying growth opportunities for the future is the
product/market expansion grid.
›The product/market growth matrix is a portfolio-planning tool for identifying
growth opportunities for the company.

Existing Products New Products

Existing Market Product

Markets Penetration Development

Market
New Markets Diversification
Development

Market - It refers to a growth strategy was the business focuses on

Penetration selling existing products into existing markets.
- Penetration might require greater spending on advertising or
personal selling, increasing usage by existing customers.
Example, Gucci, a luxury clothing brand, selling its luxury clothing
in European markets with new designs, is market penetration.
Market - It refers to a growth strategy where the business seeks to sell
Development its existing products into new markets.
- It is achieved through new geographical markets, new product
dimensions or packaging, new distribution channels or different
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pricing policies to attract different customers or create new

market segments.
Example, Gucci, a luxury clothing brand, selling its luxury clothing
in Chinese markets, is market development.
Product - It refers to a growth strategy was business aims to introduce
Development new products into existing markets.
- It may require the development of new competencies and
requires the business to develop modified products which can
appeal to existing markets.
- Example, Gucci, a luxury clothing brand, selling casual clothing
in European markets, is product development.
Diversification - It refers to a growth strategy where a business market new
product in new markets.
- It is a strategy by starting up or acquiring businesses outside
the company's current products and markets.
- This strategy is risky because it does not rely on either the
company's successful product or its position in established
markets.
- Typically, the business is moving into markets in which it has
little or no experience.
Example, Gucci, a luxury clothing brand, selling casual clothing in
Chinese markets, is diversification.

ADL Matrix
►The ADL matrix (derived its name from Arthur D. Little) is a portfolio analysis
technique that is based on product life cycle.
►The approach forms a two- dimensional matrix based on stage of industry
maturity and the firm’s competitive position, environmental assessment and
business strength assessment.
►It helps in categorization of products or SBU's into one of five competitive
positions:
ü dominant,
ü strong.
ü favourable,
ü tenable and
ü weak
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It is four by five matrix as follows:

Stage of industry maturity - Arthur D. Little (ADL) Matrix
Competitive Embryonic Growth Mature Ageing
position
Dominant - Fast grow - Fast grow - Defend - Defend
- Build barriers - Attend cost position position
- Act offensively leadership - Attend cost - Renew
- Renew leadership - Focus
- Defend position - Renew -
– Act offensively - Fast grow Consider
- Act offensively withdraw
al
Strong - Differentiate - Differentiate - Lower cost - Find
- Fast grow - Lower cost - Focus niche
- Attack small firms Differentiate - Hold
- Grow with niche
industry - Harvest
Favourable - Differentiate - Focus - Focus - Harvest
- Focus - Differentiate Differentiate Turnarou
- Fast grow - Defend - Harvest nd
- Find niche
- Hold niche
- Turnaround
- Grow with
industry
- Hit smaller
firms
Tenable - Grow with - Hold niche - Turnaround - Divest
industry - Turnaround - Hold niche -
- Focus - Focus - Retrench Retrench
- Grow with industry
- Withdraw
Weak - Find niche - Turnaround - Withdraw -
- Catch-up - Retrench - Divest Withdraw
- Grow with - Niche or withdraw
industry
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The competitive position of a firm is based on an assessment of the following

criteria:
Dominant This is a comparatively rare position and in many cases is attributable either
to a monopoly or a strong and protected technological leadership.
Strong The firm has a considerable degree of freedom over its choice of strategies
and is often able to act without its market position being unduly threatened
by its competitions.
Favourable It generally comes about when the industry is fragmented and no one
competitor stand out clearly, results in the market leaders a reasonable
degree of freedom.
Tenable Firms are able to perform satisfactorily and can justify staying in the
industry, they are generally vulnerable in the face of increased competition
from stronger and more proactive companies in the market.

Weak The performance of firms in this category is generally unsatisfactory

although the opportunities for improvement do exist.

Boston Consulting Group (BCG) Growth-Share Matrix

►The BCG growth-share matrix is the simplest way to portray a corporation’s
portfolio of investments.
►Growth share matrix also known for its cow and dog metaphors is popularly used
for resource allocation in a diversified company.
►Using the BCG approach, a company classifies its different businesses on a two-
dimensional growth-share matrix.
In the matrix:
Ø The vertical axis represents market growth rate and provides a measure of
market attractiveness.
Ø The horizontal axis represents relative market share and serves as a measure
of company strength in the market.
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Using the matrix, organisations can identify four different types of products or
SBU as follows:
Stars - Are high growth, high market share businesses or products.
- Are products or SBUs that are growing rapidly.
- They also need heavy investment to maintain their position and finance
their rapid growth potential.
- They represent best opportunities for expansion.
Cash Cows - Are low-growth, high market share businesses or products.
- They generate cash and have low costs.
- They are established, successful, and need less investment to maintain
their market share.
- In long run when the growth rate slows down, stars become cash cows.
Question - Sometimes called problem children or wildcats, are low market share
Marks business in high-growth markets.
- They require a lot of cash to hold their share.
- They need heavy investments with low potential to generate cash.
- Question marks if left unattended are capable of becoming cash traps.
- Since growth rate is high, increasing it should be relatively easier.
- It is for business organisations to turn them stars and then to cash cows
when the growth rate reduces.
Dogs - Are low-growth, low-share businesses and products.
- They may generate enough cash to maintain themselves, but do not have
much future.
- Sometimes they may need cash to survive.
- Dogs should be minimised by means of divestment or liquidation.

BCG Matrix: Post Identification Strategies

►After a firm, has classified its products or SBUS, it must determine what role
each will play in the future. The four strategies that can be pursued are:
1. Build Here the objective is to increase market share, even by forgoing short-
term earnings in favour of building a strong future with large market
share.
[Link] Here the objective is to preserve market share.
3. Harvest Here the objective is to increase short-term cash flow regardless of long-
term effect.
4. Divest Here the objective is to sell or liquidate the business because resources
can be better used elsewhere.
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Problems and limitations of BCG Matrix

- It can be difficult, time-consuming, and costly to implement.
- Management may find it difficult to define SBUS and measure market share
and growth.
- It also focuses on classifying current businesses but provide little advice for
future planning.
- It lead to too much emphasis on market-share growth or growth through entry
into attractive new markets and can cause unwise expansion into hot, new, risky
ventures or divesting established units too quickly.

General Electric Matrix [“Stop-Light” Strategy Model]

►This model has been used by General Electric Company with the assistance of
the consulting firm McKinsey and Company.
►This model is also known as Business Planning Matrix, GE Nine-Cell Matrix and
GE Model.
►The strategic planning approach in this model has been inspired from traffic
control lights.
►The lights that are used at crossings to manage traffic are: green for go, amber
or yellow for caution, and red for stop.
►This model uses two factors while taking strategic decisions: Business Strength
and Market Attractiveness.

Understanding the GE Matrix

The vertical axis indicates market attractiveness, and the horizontal axis shows
the business strength in the industry. The market attractiveness is measured by
a number of factors like:
ü Size of the market.
ü Market growth rate.
ü Industry profitability.
ü Competitive intensity.
ü Availability of Technology.
ü Pricing trends.
ü Overall risk of returns in the industry.
ü Opportunity for differentiation of products and services.
ü Demand variability
ü Segmentation.
ü Distribution structure (e.g., direct marketing, retail, wholesale) etc.
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Business strength is measured by considering the typical drivers like:

ü Market share.
ü Market share growth rate.
ü Profit margin.
ü Distribution efficiency.
ü Brand image.
ü Ability to compete on price and quality.
ü Customer loyalty.
ü Production capacity.
ü Technological capability.
ü Relative cost position.
ü Management calibre, etc.

Business strength
Strong Average Weak

Invest/Expand Invest/Expand Select/Earn

High
Market attractiveness

Invest/Expand Select/Earn Harvest/Divest

Medium

Select/Earn Harvest/Divest Harvest/Divest

Low

►If a product falls in the green section, the business is at advantageous position.
►To reap the benefits, the strategic decision can be to expand, to invest and
grow.
►If a product is in the amber or yellow zone, it needs caution and managerial
discretion is called for making the strategic choices.
►If a product is in the red zone, it will eventually lead to losses that would make
things difficult for organisations.
►In such cases, the appropriate strategy should be retrenchment, divestment or
liquidation.
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Difference between BCG and GE Matrix

►Firstly, market attractiveness replaces market growth as the dimension of
industry attractiveness and includes a broader range of factors other than just
the market growth rate.
►Secondly, competitive strength replaces market share as the dimension by
which the competitive position of each SBU is assessed.
►Thirdly, GE is a nine cell matrix as compared to 4 cell of BCG Matrix.
►Fourthly, GE thinks both about present & future potential whereas BCG thinks
only of present & take decision.
►Fifth, GE is developed by GE together with Mckinsey and BCG developed by
Boston consulting Group.