Module IV
Corporate Level Strategies (Part 1)
McGraw-Hill |
Topics
1. Corporate Level Strategy: Meaning
2. Overview of Types of Corporate Level Strategies
3. Expansion Strategies:
(i) Concentration Strategies
(ii) Integration Strategies
(iii) Diversification Strategies
McGraw-Hill | 2
Corporate Strategies
Corporate-level strategies (or simply, corporate strategies) are basically about decisions
related to:
• Allocating resources among the different businesses of a firm;
• Transferring resources from one set of businesses to others;
• Managing and nurturing a portfolio of businesses; and
• Creating value across businesses in the portfolio.
Corporate strategies help to exercise the choice of direction that an organisation adopts.
There could be a small business firm involved in a single business or a large, complex
and diversified conglomerate with several different businesses.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 3
Expansion Strategies
The corporate strategy of expansion is followed when an organisation aims at high
growth by substantially broadening the scope of one or more of its businesses in term of
their respective customer groups, customer functions, and alternative technologies -
singly or jointly - in order to improve its overall performance.
The major reasons for adopting expansion strategies are as below.
• It may become imperative when environment demands increase in pace of activity.
• Increasing size may lead to more control over the market vis-à-vis competitors.
• Advantages from the experience curve and scale of operations may accrue.
• Psychologically, strategists may feel more satisfied with the prospects of growth
from expansion: chief executives may take pride in presiding over organisations
perceived to be growth-oriented.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 4
Advantages
[Link] Market Share
[Link]
[Link] of Scale
[Link] to New Talent and Resources
[Link] Recognition and Reputation
[Link] Profit Potential
[Link] and Innovation
[Link] Advantage
[Link] Presence
[Link] Financial Performance
McGraw-Hill | 5
Disadvantages
[Link] Costs and Financial Risks
[Link] Saturation and Oversupply
[Link] Complexities
[Link] and Regulatory Challenges
[Link] Response and Rivalry
[Link] Dilution and Reputation Risks
[Link] Allocation Issues
[Link] Market Demand
[Link] Challenges in Mergers and Acquisitions
[Link] and Organizational Challenges
McGraw-Hill | 6
Concentration Strategies
Concentration is a simple, first-level type of expansion strategy. It involves converging
resources in one or more of a firm's businesses in terms of their respective customer
needs, customer functions, or alternative technologies - either singly or jointly - in such a
manner that expansion results.
In strategic management terminology concentration strategies are known variously as
intensification, focus, specialisation or organic growth strategies.
Among them, organic growth that means ‘growth from within’ as a strategy is often
contrasted with inorganic growth that takes the firm beyond toward diversification.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 7
Ansoff’ Product-Market Matrix Strategies
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 8
Types of Concentration Strategies
Market penetration involves selling more products to the same market: a firm may
attempt focussing intensely on existing markets with present products using a market
penetration type of concentration.
Market development involves selling same products to new markets: it may try attracting
new users for existing products resulting in a market development type of concentration.
Product development involves selling new products to same markets: it may introduce
newer products in existing markets by concentration on product development.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 9
Advantages
[Link] and Expertise
[Link] Efficiency
[Link] Market Penetration
[Link] Building
5Competitive Advantage
[Link] Marketing
[Link] Decision-Making
[Link] Allocation
[Link] Mitigation
[Link] and R&D
McGraw-Hill | 10
Disadvantages
[Link] to Market Fluctuations
[Link] Diversification
[Link] on a Single Market or Product
[Link] Adaptability to Changing Trends
[Link] Size Constraints
[Link] Risk in the Chosen Niche
[Link]-reliance on Specific Customers
[Link] and Legal Risks
[Link] for Saturation in the Target Market
[Link] Expanding into New Markets
McGraw-Hill | 11
Integration Strategies
Integration means expanding through combining businesses or activities related to the
present business or activity of a firm. This can be done in two ways.
One, the organisation can take over or partner with another firm at the same point of
production to expand its size of operations in the present business. This is integrating
horizontally.
Two, an organisation can take over or partner with another firm at a different point of
production in which case it is integrating vertically.
Integration strategies push the organisations outside their boundaries.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 12
Horizontal Integration and Vertical Integration
When an organisation takes up the same or similar type of products at the same level of
production or marketing process keeping it at the same stage of the value chain, it is said
to follow a strategy of horizontal integration.
When an organisation starts making new products that serve its own needs, vertical
integration takes place. In other words, any new activity undertaken with the purpose of
either supplying inputs or serving as a customer for outputs is vertical integration.
Vertical integration could be of two types: backward and forward integration. Backward
integration means retreating to the source of raw materials. Forward integration means
moving the organisation ahead to the ultimate customer or end user.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 13
Types Of Partial Vertical Integration Strategies
Taper integration strategies require firms to make a part of their own requirements and to
buy the rest from outside suppliers or when firms sell some of their products through
company outlets and others through independent retailers.
Through quasi integration strategies firms purchase most of their requirements from other
firms in which they have an ownership stake or when firms sell most of their products
through their own stores.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 14
Benefits and Limitations- Horizontal Integration
Benefits:
Horizontal integration leads to economies of scale, economies of scope, increased
market power, increased product differentiation, replicating a successful business
model and reduction in industry rivalry .
Limitations:
Horizontal integration increases size but it may attract the provisions of
monopolies, restrictive trade practices act or anti-trust laws. Economies of scope
may not arise in most cases.
McGraw-Hill |
Benefits - Vertical Integration
• Greater control over value chain resulting in economies of scale and scope and
improving supply chain coordination
• Greater control over market coverage leading to a bigger customer base
• More streamlined manufacturing processes with shorter production cycles
• More opportunities to differentiate products by means of better control of inputs
• Enhancing learning across processes and cross-functional experience
• Raising the entry barriers for potential competitors
• Savings in transportation costs due to proximity of value chain partners
McGraw-Hill |
Limitations - Vertical Integration
• Increased costs of coordinating integration over multiple stages of value chain
• Potential for either excess capacity or under-utilisation of resources because of
uneven productivity across different value chain activities
• Technological obsolescence due to relying on outside manufacturers
• Loss of strategic flexibility owing to dependence on outsiders
• Increased mobility and exit barriers
• Tight coupling to poor performing business units owing to dependence
• Lack of information and feedback from suppliers and distributors
McGraw-Hill |
Diversification Strategies
Diversification involves a substantial change in business definition - singly or jointly - in
terms of customer functions, customer groups, or alternative technologies of one or more
of a firm's businesses.
There could be many types of diversification strategies depending on whether the
organisation uses related or unrelated technology to make its new products for new
markets.
Two basic strategic alternatives of diversification are: related and unrelated diversification.
In Ansoff’s terminology, they are called concentric and conglomerate diversification
respectively.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 18
Concentric and Conglomerate Diversification
When an organisation takes up an activity related to the existing business definition of
one or more of a firm's businesses either in terms of customer groups, customers
functions or alternative technologies, it is concentric 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 conglomerate diversification.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 19
Types of Concentric Diversification
Marketing-related concentric diversification: A similar type of product is offered with the
help of unrelated technology.
Technology-related concentric diversification A new type of product or service is provided
with the help of related technology.
Marketing- and technology-related concentric diversification A similar type of product or
service is provided with the help of related technology.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 20
Why are Diversification Strategies Adopted?
• Diversification strategies are adopted to minimise risk by spreading it over several
businesses.
• Diversification may be used to capitalise on its capabilities and business model so as
to maximise organisational strength or minimise weaknesses.
• Diversification may be the only way out if growth in existing businesses is blocked due
to environmental and regulatory factors.
• Diversification takes an organisation away from the comfortable confines of
concentration and integration strategies to that of an environment fraught with many
risks.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 21
Risks of Diversification
• Diversification, especially unrelated, is a complex strategy to formulate and implement.
• Diversification strategies demand a wide variety of skills.
• Diversification results in decreasing commitment to a single or few businesses and
diverting it to several of them at the same time.
• Diversification often does not result in the promised rewards.
• Diversification increases the administrative costs of managing, integrating, and
controlling a wide portfolio of businesses.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 22
Module IV
Corporate Level Strategies (Part 2)
McGraw-Hill |
Topics
3. Expansion Strategies:
(iv) Internationalization Strategies
(v) Cooperative Strategies
(vi) Digitalization Strategies
McGraw-Hill | 2
International Strategies
International strategies are a type of expansion strategies that require organisations to
market their products or services beyond the domestic or national market. For doing so,
an organisation would have to assess the international environment, evaluate its own
capabilities, and devise strategies to enter foreign markets.
The major factors for the growth are the technological developments reducing the
transportation costs, improvement in communication technology enabling better contact
between trading and investing nations, and the policy-induced trade liberalisation leading
to lowering of barriers to international trade and investment
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 3
Modes of International Entry
Export entry modes: Under these modes, the firm produces in the home country and
markets in the overseas markets.
Contractual entry modes: These modes are non-equity associations between an
international company and a company or any other legal entity in the overseas markets.
Investment entry modes: These modes involve ownership of production units in the
overseas market based on some form of equity investment or direct foreign investment.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 4
Advantages of International Strategies
• Realising economies of scale
• Realising economies of scope
• Expansion and extension of markets
• Realising location economies
• Access to resources overseas
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 5
Disadvantages Of International Strategies
• Higher risks
• Difficulty in managing cultural diversity
• High bureaucratic costs
• Higher distribution costs
• Trade barriers
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 6
Factors influencing International Strategies
Cost pressures denote the demand on a firm to minimise its unit costs. By doing so,
the firm tries to derive full benefits from economies of scale and location economies.
Pressures for local responsiveness makes a firm tailor its strategies to respond to
national-level differences in terms of variables like customer preferences and tastes,
government policies, or business practices.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 7
Types of International Strategies
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.
Firms adopt a multi domestic strategy when they try to achieve a high level of local
responsiveness by customising their products and services according to the local
conditions present in the different countries they operate in.
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 standardised
products and services across different countries.
Firms adopt a transnational strategy when they adopt a combined approach of low-cost
and high local responsiveness simultaneously for their products and services.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 8
Types of International Strategies
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 9
Co-operative Strategies
In many cases, pursuit of corporate objectives may be achieved through cooperating
with other firms.
It focuses on the benefits that can be gained through cooperation and how the
management of cooperation can realize these benefits.
These are broadly known as cooperative strategies
Some of these strategies include mergers and acquisitions, Joint ventures and Strategic
alliances
McGraw-Hill | 10
Mergers And Acquisitions
Mergers take place when the objectives of the buyer firm and the seller firm are matched
to a large extent; acquisitions or takeovers usually are based on the strong motivation of
the buyer firm to acquire.
Takeover is a common way for acquisition and happens when one firm acquires
ownership and control over another firm. Mergers carried out in reverse are known as
demergers or spin-offs.
Demerger involves spinning off an unrelated business / division in a diversified company
into a stand-alone company along with a free distribution of its shares to the existing
shareholders of the original company.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 11
Types of Mergers and Acquisitions
Horizontal mergers take place when there is a combination of two or more organisations
in the same business, or of organisations, engaged in certain aspects of the production or
marketing processes.
Vertical mergers take place when there is a combination of two or more organisations,
not necessarily in the same business, which create complementarities either in terms of
supply of materials (inputs) or marketing of goods and services (outputs).
Concentric mergers take place when there is a combination of two or more
organisations related to each other either in terms of customers functions, customer
groups, or alternative technologies used.
Conglomerate mergers take place when there is a combination of two or more
organisation unrelated to each other, either in terms of customer functions, customer
groups, or alternative technologies.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 12
Reasons For Mergers And Acquisitions
Why the buyer wishes to merge:
• To increase the value of the organisation's stock.
• To increase the growth rate and make a good investment.
• To improve stability of earning and sales.
• To balance, complete, or diversify product line.
• To reduce competition.
Why the seller wishes to merge:
• To increase the value of the owner's stock and investment.
• To increase the growth rate.
• To acquire resources to stabilise operations.
• To benefit from tax legislation.
• To deal with top management succession problem.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 13
Issues in Mergers and Acquisitions
Issues:
• Strategic
• Legal
• Financial
• Managerial
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 14
Joint Ventures
A joint venture could be considered as the new entity resulting from a long-term contractual
agreement between two or more parties to undertake mutually beneficial economic activities,
exercise joint control, contribute equity, and share in the profits or losses of the entity.
Conditions calling for joint ventures:
• When an activity is uneconomical for an organisation to do alone.
• When the risk of business has to be shared and, therefore, is reduced for the participating
firms.
• When the distinctive competence of two or more organisation can be brought together.
• When setting up an organisation requires surmounting hurdles such as import quotas,
tariffs, nationalistic-political interests, and cultural roadblocks.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 15
Types Of Joint Ventures
Between two Indian organisations in one industry
Between two Indian organisations across different industries
Between an Indian organisation and a foreign organisation in India
Between an Indian organisation and a foreign organisation in that foreign country
Between an Indian organisation and a foreign organisation in a third country
Between government and private sector organisations in the form of public-private
partnerships
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 16
Joint Ventures : Benefits And Drawbacks
The major benefits that are likely to accrue from joint ventures include: minimising risk,
reducing an individual company's investment, and creating access to foreign technology,
broad-based equity participation, access to governmental and political support, and
entering new fields of business and synergistic advantages.
Reasons joint ventures can fail includes:
• Change of strategy
• Regulatory changes
• Success of joint venture
• Having partners hampers growth
• Lack of transparency
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 17
Strategic Alliances
Strategic alliances as an arrangement for “cooperation between two or more
independent firms involving shared control and continuing contributions by all partners
for mutual benefit.
In order to be strategic, an alliance must satisfy one of these criteria:
• Be critical to the success of a core business goal or objective
• Be critical to the development or maintenance of a core competency or other source
of competitive advantage
• Enables blocking a competitive threat
• Creates or maintains strategic choices for the firm
• Mitigates a significant risk to the business
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 18
Reasons For Strategic Alliances
Entering new markets: A company that has a successful product or service may wish to
look for new markets. They enter into a partnership with a local firm in that foreign market
which understands the markets better and is more culturally attuned to them.
Reducing manufacturing costs: Strategic alliances are used to leverage resources by
pooling resources to gain economies of scale or making better utilisation of resources in
order to reduce manufacturing costs.
Developing and diffusing technology: It helps develop technological capability by
leveraging the technical expertise of two or more firms.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 19
Types of Strategic Alliances
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 20
Types Of Strategic Alliances
Pro-competitive alliances (Low interaction / Low conflict): These are generally
inter-industry, vertical value-chain relationships between manufacturers and their
suppliers or distributors.
Non-competitive alliances (High interaction/ Low conflict): These are intra-industry
partnerships between non-competitive firms. Such alliances can be entered upon by firms
that operate in the same industry yet do not perceive each others as rivals.
Competitive alliance (High interaction/ High conflict): These are partnerships that bring
two rival firms in a cooperative arrangement where intense interaction is necessary.
Precompetitive alliance (Low interaction/ high conflict): These partnerships bring two firms
from different, often unrelated industries to work on well-defined activities .
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 21
Digitalisation
Digitalisation is defined as digital coding of information and the growing productivity gains
in processing and transmission it enables.
The versatility and economy of digitalisation makes it possible for information to be
available efficiently, sufficiently, inexpensively and extensively within and outside
organisations. This has significant implications for the strategies of organisations.
Digitalisation is a vast subject encompassing a number of areas such as business, social
sciences or technology.
The phenomenon of digitalisation has the potential to redefine the business of an
organisation radically.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 22
Methods of Digitalisation
Deconstruction: Through deconstruction, the total product or service is broken down into
components some of which can be delivered digitally thus enhancing the value to the
customers.
Disintermediation: When some processes in the value chain are eliminated it is called
disintermediation.
Re-intermediation: When processes in the value chain are supplemented by one or more
intermediaries it is called re-intermediation.
Industry morphing: Digitalisation has created a situation where traditional industries are
transforming into entirely new types of industries. In this way, the traditional boundaries
that defined a particular business are being transformed – a process called morphing.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 23
Methods of Digitalisation
Cannibalisation: In many businesses, a set of activities performed in the value chain are
being replaced by a new set of activities thus eating away that part of the value chain.
This eating away is called the cannibalisation of value chain.
Techno-intensification: Digitalisation of the value chain and value system results in a
situation where there is more intensive use of technology and decreasing use of human
resources. This phenomenon is termed as techno-intensification.
Re-channelling: Deconstruction of value chain results in breaking it down into
components and divesting or outsourcing these components to external suppliers and
alliance partners.
McGraw-Hill | © AZHAR KAZMI & ADELA KAZMI 24
Stability strategies result from
attempts by an organisation at
Stability strategies
incremental improvement of
functional performance.
25
TYPES OF STABILITY STRATEGY
▪No-change strategy- The conscious decision to do nothing new. This
is followed when the external environment is predictable and the internal environment is
stable. No significant opportunities and threats in the industry. No competition.
▪Profit strategy- This strategy is adopted when organizations is drifting with its
profitability. They undertake measures to reduce the cost, raise prices, increase productivity or
adopt such measures to tide over the temporary difficulties.
▪Pause / proceed-with-caution strategy- It is a tactic
strategy. It is adopted by organizations that wish to test the ground before moving ahead with a full
fledged corporate strategy. The idea is to let the strategic changes seep down the organizational
levels, let the structural changes to take place and let the system adapt to the new strategies.
26
Retrenchment strategies
Retrenchment strategy is followed when an organisation
substantially reduces the scope of its activities
▪ Turnaround strategies
▪ Divestment strategies
▪ Liquidation strategies
(c) Dr. Azhar Kazmi 2008 27
Turnaround strategies
Turnaround strategies derive their name from the action
involved, i.e. reversing a negative trend and turning
around the organisation to profitability.
▪ Conditions for turnaround
28
Conditions for Turnaround
Persistent Negative cash flows
Negative profits
Declining Market share
Deterioration in Physical facilities
High employee turnover and low morale of employees
Mismanagement
Uncompetitive Products
(c) Dr. Azhar Kazmi 2008 29
Divestment strategies
Divestment strategy involves the sale or liquidation of a
portion of business, or a major division, profit centre or
SBU.
▪ Reasons for divestment
▪ Approaches to divestment
▪ Decision to divest
30
Liquidation strategies
Liquidation involves closing down an organisation and
selling its assets.
▪ Why is liquidation difficult or undesirable?
▪ Planned liquidation
▪ Legal aspects of liquidation
▪ Liquidation strategies in Indian context
31
Combination strategies
Combination strategies are a mixture of stability,
expansion or retrenchment strategies applied either
simultaneously (at the same time in different
businesses) or sequentially (at different times in the
same business).
▪ Sequential combination
▪ Simultaneous combination
32