UNIT 3: Formulation of competitive strategies

Porter's Generic Competitive Strategies (ways of competing)

A firm's relative position within its industry determines whether a firm's profitability is above
or below the industry average. The fundamental basis of above average profitability in the
long run is sustainable competitive advantage. There are two basic types of competitive
advantage a firm can possess: low cost or differentiation. The two basic types of
competitive advantage combined with the scope of activities for which a firm seeks to
achieve them, lead to three generic strategies for achieving above average performance in
an industry: cost leadership, differentiation, and focus. The focus strategy has two variants,
cost focus and differentiation focus.
1. Cost Leadership
In cost leadership, a firm sets out to become the low cost producer in its industry. The sources
of cost advantage are varied and depend on the structure of the industry. They may include
the pursuit of economies of scale, proprietary technology, preferential access to raw
materials and other factors. A low cost producer must find and exploit all sources of cost
advantage. if a firm can achieve and sustain overall cost leadership, then it will be an above
average performer in its industry, provided it can command prices at or near the industry
average.

2. Differentiation
In a differentiation strategy a firm seeks to be unique in its industry along some dimensions
that are widely valued by buyers. It selects one or more attributes that many buyers in an
industry perceive as important, and uniquely positions itself to meet those needs. It is
rewarded for its uniqueness with a premium price.

3. Focus
The generic strategy of focus rests on the choice of a narrow competitive scope within an
industry. The focuser selects a segment or group of segments in the industry and tailors its
strategy to serving them to the exclusion of others.
The focus strategy has two variants.
(a) In cost focus a firm seeks a cost advantage in its target segment, while in (b) differentiation
focus a firm seeks differentiation in its target segment. Both variants of the focus strategy
rest on differences between a focuser's target segment and other segments in the industry.
The target segments must either have buyers with unusual needs or else the production and
delivery system that best serves the target segment must differ from that of other industry
segments. Cost focus exploits differences in cost behaviour in some segments, while
differentiation focus exploits the special needs of buyers in certain segments.

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Types of growth strategies – concentrated growth, product development, integration,
diversification, Mergers & Acquisitions (Relevance, Problems, Advantages and
Disadvantages).

Types of Growth Strategies

Type # 1. Internal Growth Strategies:
The internal growth of an organization is possible by expanding operations through
diversification, increase of existing capacity, market growth strategies etc.
These strategies are broadly classified as:
1. Intensive Growth Strategies:
The firm pursues intensive growth strategies with an objective to achieve further growth of
existing products and/or existing markets.
The basic classification of intensive growth strategies:
(a) Market penetration strategy
(b) Market development strategy
(c) Product development strategy
These strategies are also called ‘organic growth strategies’.
(a) Market Penetration Strategy:
A firm pursuing market penetration strategy directs its resources to the profitable growth of a
existing products in current markets. It is the most common form of intensive growth
strategy.
The variants of these strategies are:
(a) Increase sales to current customers by habituating existing customers to use more.
(b) Pull customers from the competitors’ products to company’s products maintaining existing
customers intact.
(c) Convert non-users of a product into users of the product and making potential opportunity
for increasing sales.
The firm try to increase market share for present products in current markets through increase
of marketing efforts like increase of sales promotion and advertising expenditure,
appointment of skilled sales force, proper customer support and after sales service etc.
(b) Market Development Strategy:
This strategy involves introducing present products or services into new geographic areas. The
marketing efforts are made on existing products, to customers in related market areas, by
adding different channels of distribution or by changing the current content of the
advertising and promotional efforts.
The market development can be achieved in any of the following ways:
(a) By adding new distribution channels to expand the consumer reach of the product.
(b) By entering new market segments.
(c) By entering new geographical markets.
In market development strategy, a firm seeks to increase the sales by taking its product into
new markets.
(c) Product Development Strategy:
This strategy involves the growth of market through substantial modification of existing

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 products or creation of new but related products that can be marketed to current customers
through established channels.
The variants of this strategy are:
(a) Expand sales through developing new products.
(b) Create different quality versions of the product.
(c) Develop additional models and sizes of the product to suit the varied preference of the
customers.
A company can increase its current business by product improvement or introduction of
products with new features.
2. Integrative Growth Strategies:
The integrative growth strategies are designed to achieve increase in sales, assets and profits.
There are basically two variants in integrative growth strategy which involves:
(a) Integration at the same level or stage of business in the same industry i.e. horizontal
integration.
(b) Integration of different levels/stages of business in the same industry i.e. vertical integration
with backward and forward linkages.
(a) Horizontal Integration:
When two or more firms dealing in similar lines of activity combine together then horizontal
integration takes place. Many companies expand by creating other firms in their same line
of business. A firm is said to follow horizontal integration if it acquires or starts another
firm that produce the same type of products with similar production process/marketing
practices. When the combination of two or more business units (existing and created)
results in greater effectiveness and efficiency than the total yielded by those businesses,
when they were operated separately, the synergy has been attained.
The reasons for horizontal integration are as follows:
(a) Elimination or reduction in intensity of competition.
(b) Putting an end to practice of price cutting.
(c) Achieve economics of scale in production.
(d) Common pool of resources for research and development.
(e) Use of common distribution channels and uniform brand name.
(f) Fixation of common price.
(g) Effective management of capacity imbalances.
(h) Common advertising and sales promotion.
(i) Making common purchases at low prices.
(j) Reduction in overall cost of operations per unit.
(k) Greater leverage to deal with the customers and suppliers.
The horizontal integration will increase the monopolistic tendency in the market. Less number
of players in the industry will lead to collusion to reap abnormal profits by setting price of
finished products at higher level than the market determined price.
(b) Vertical Integration:
A vertical integration refers to the integration of firms in successive stages in the same industry.
The integration of different levels/stages of the industry is known as vertical integration.
Vertical integration may be either backward integration or forward integration.

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I. Backward Integration:
In case of backward integration, it extends to the suppliers of raw materials. A vertical
integration is one in which the company expands backwards by diversification into
supplying raw materials. This allows for smooth flow of production, reduced inventory,
reduction in operating costs, increase in economies of scale, elimination of bottlenecks,
lower buying cost of materials etc.
It is a diversification engaged at different stages of production cycle within the same industry.
Firms adopting this strategy can have a regular and uninterrupted supply of raw materials
components and other inputs and the quality is also assured.
II. Forward Integration:
It is a case of down-stream integration extends to those businesses that sell eventually to the
consumer. The purpose of such diversification is to attain lower distribution costs, assured
supplies to the market, increasing or creating barriers to entry for potential competitors.
The firm expands forward in the direction of the ultimate consumer. For example- a cement
manufacturing company undertakes the civil construction activity; it will be a case of
diversification with forward linkage. With forward integration, firms can acquire greater
control over sales, distribution channels, prices, and can improve its competitive position
through differentiation and customer support.
3. Diversification Growth Strategies:
Diversification means going into an operation which is either totally or partially unrelated to
the present operations.
Before opting for diversification, the following basic questions must be seriously
considered:
(a) Whether it brings a positive synergy, to the company?
(b) Whether the market wants the new product or service which we offer?
(c) Whether the product or service has a good growth potential?
Before selecting diversification strategy, one must have a clear understanding of the new
product/service, the technology and the markets. Diversification strategies are used to
expand firm’s operations by adding markets, products, services or stages of production to
existing operations. The purpose of diversification is to allow the company to enter lines
of business that are somewhat different from current operations.
Diversification makes addition to the portfolio of business the growth strategy is pursued when
the firm’s growth objectives are very high and it could not be achieved with in the existing
product/market scope. Spreading risks by operating in multiple areas decreases the threat
of any one area causing the firm to fail.
However, diversification spreads resources over several areas, similarly decreasing the
probability that the firm can be a strong force in any area. Diversification refers to the
directions of development which take the organization away from both its present products
and its present markets at the same time. Diversification strategies are becoming less
popular as organizations are finding it more difficult to manage diverse business activities.
Type # 2. External Growth Strategies:
Sometimes, a firm intends to grow externally when it take over the operations of another firm.
Such growth may be possible via mergers, takeovers, joint ventures, strategic alliances etc.

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 Such growth is called ‘inorganic growth’. Firms generally prefer the external growth
strategies for quick growth of market share, profits and cash flows.
1. Merger:
A merger refers to a combination of two or more companies into a single company. This
combination may be either through absorption or consolidation. Merger is said to occur
when two or more companies combine into one company. Merger is defined as ‘a
transaction involving two or more companies in the exchange of securities and only one
company survives.’
When the shareholders of more than one company, usually two, decides to pool the resources
of the companies under a common entity it is called ‘merger’. If as a result of a merger, a
new company comes into existence it is called as ‘amalgamation’. As a result of a merger,
one company survives and others lose their independent entity, it is called ‘absorption’.
Motives for Merger:
The merger activities are as a result of following factors and strategies, which are
classified under three heads:
(a) Strategic motives,
(b) Financial motives, and
(c) Organizational motives.
2. Takeover:
A takeover generally involves the acquisition of a certain block of equity capital of a company
which enables the acquirer to exercise control over the affairs of the company. The main
objective of takeover bid is to obtain legal control of the company. The company taken
over remains in existence as a separate entity unless a merger takes place.
Thus, a takeover is different from merger in that under a takeover, the company taken over
maintains its separate entity, while under a merger both the companies merge to form single
corporate entity, and at least one of the companies loses its identity.
The element of willingness on the part of the buyer and seller distinguishes an acquisition from
a takeover. If there exists willingness of the company being acquired, it is known as
‘acquisition’. If the willingness is absent, it is known as ‘takeover’.
Takeover may be defined as ‘a transaction or series of transactions whereby an individual or
group of individuals or company acquires control over the management of the company by
acquiring equity shares carrying majority voting power’. Takeover is an acquisition of
shares carrying voting rights in a company with a view to gaining control over the assets
and management of the company.
In theory, the acquirer must buy more than 50% of the paid-up equity of the acquired company
to enjoy complete control. But in practice, however effective control maybe exercised with
a smaller shareholding, because the remaining shareholders scattered and ill-organized are
not likely to challenge the control of acquirer.
Sometimes the acquirer may have tacit support of the financial institutions, banks, mutual
funds, having sizable holding in the company’s capital. The main objective of a takeover
bid is to obtain legal control of the company.
In takeover, the seller management is an unwilling partner and the purchaser will generally
resort to acquire controlling interest in shares with very little advance information to the

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 company which is being bought. Where the company is closely held by small group of
shareholders, the controlling interest is obtained by purchasing the shares of other
shareholders.
Where the company is widely held i.e. in case of listed company, the shares are generally traded
in the stock market, the purchaser will acquire shares in the open market. Takeover is a
general phenomenon all over the globe and companies whose stock prices are quoted less
and who are having latent potential for growth.
The takeovers are subject to the regulations contained in SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 1997. Takeover is a business strategy of acquiring
control over the management of Target Company – either directly or indirectly. The motive
of acquirer is to gain control over the board of directors of the target company for synergy
in decision-making. The eagle eyes of raiders are on the lookout for cash rich and high
growth rate companies with low equity stake of promoters.
Kinds of Takeover:
The ways in which controlling interest can be attained are discussed below:
i. Friendly Takeovers:
In a friendly takeover, the acquirer will purchase the controlling shares after thorough
negotiations and agreement with the seller. The consideration is decided by having friendly
negotiations. The takeover bid is finalized with the consent of majority shareholders of the
target company.
This form of purchase is also called as ‘consent takeover’. In a friendly takeover, the acquirer
first approaches the promoters/management of the target company for negotiating and
acquiring shares. Friendly takeover is for mutual advantage of acquirer and acquired
companies.
ii. Hostile Takeovers:
A person seeking control over a company, purchases the required number of shares from non-
controlling shareholders in the open market. This method normally involves purchasing of
small holding of small shareholders over a period of time at various places. As a strategy
the purchaser keeps his identity a secret. These takeovers are also referred to as violent
takeovers. The hostile takeover is against the wishes to the target company management.
Acquirer makes a direct offer to the shareholders of the target company without the prior
consent of the existing promoter/management.
iii. Bailout Takeovers:
These forms of takeover are resorted to bailout the sick companies, to allow the company for
rehabilitation as per the schemes approved by the financial institutions. The lead financial
institution will evaluate the bids received for acquisition, the financial position and track
record of the acquirer.
iv. Tender Offer:
In a tender offer, one firm offers to buy the outstanding stock of the other firm at a specific
price and communicates this offer in advertisements and mailings to stockholders. By
doing so, it bypasses the incumbent management and board of directors of the target firm.
Consequently, tender offers are used to carry out hostile takeovers.
The acquired firm will continue to exist as long as there are minority stockholders who refuse

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 the tender. From a practical standpoint, however, most tender offers eventually become
mergers, if the acquiring firm is successful in gaining control of the target firm.
v. Purchase of Assets:
In a purchase of assets, one firm acquires the assets of another, though a formal vote by the
shareholders of the firm being acquired is still needed.
vi. Management Buyout:
In this form, a firm is acquired by its own management or by a group of investors, usually with
a tender offer. After this transaction, the acquired firm can cease to exist as a publicly traded
firm and become a private business. These acquisitions are called ‘management buyouts’,
if managers are involved, and ‘leveraged buyout’, if the funds for the tender offer come
predominantly from debt.
3. Joint Venture:
All joint ventures are typically characterized by two or more ventures being bound by a
contractual arrangement which establishes joint control. Activities, which have no
contractual arrangements to establish joint control, are not joint ventures. The contractual
arrangements establish joint control over the joint venturers.
Such an arrangement ensures that no single venturer is in a position to unilaterally control the
activity. Joint venture may give protective or participating rights to the parties to the
venture. Protective rights merely allow a co-venturer to protect its interests in the venture
in situation where its interests are likely to be adversely affected.
Joint venture is a form of business combination in which two unaffiliated business firms
contribute financial and/or physical assets, as well as personnel, to a new company formed
to engage in some economic activity, such as the production or marketing of a product.
Joint venture can be formed between a domestic company and foreign enterprise in order
to flow the skills and knowledge both the ways.
A joint venture by a domestic company with multinational company can allow the transfer of
technology and reaching of global market. The partners in joint venture will provide risk
capital, technology, patent, trade mark, brand names and allow both the partners to reap
benefit to agreed share.
Joint ventures with multinational companies contribute to the expansion of production
capacity, transfer of technology and capital and above all penetrating into global market.
Entering into a Joint venture is a part of strategic business policy to diversity and enter into
new markets, acquire finance, technology, patent and brand names.
Forms of Joint Venture:
Joint ventures take many forms and structures.
But it can be broadly categorized into three:
i. Jointly Controlled Operations:
The operation of some joint ventures involves the use of the assets and other resources of the
venturers rather than the establishment of a corporation, partnership or other entity or a
financial structure that is separate from the venturers themselves.
ii. Jointly Cent Rolled Assets:
Some joint ventures involve the joint control, and often the joint ownership, by the venturers
of one or more assets contributed to, or acquired for the purpose of, the joint venture and

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 dedicated to the purposes of the joint venture.
iii. Jointly Controlled Entities:
A jointly controlled entity is a joint venture, which involves the establishment of a corporation,
partnership or other entity in which each venturer has an interest.
4. Strategic Alliances:
An ‘alliance’ is defined as associations to further the common interests of the members.
Strategic alliance is an arrangement or agreement under which two or more firms cooperate
in order to achieve certain commercial objectives. The motives behind strategic alliances
are to reduce cost, technology sharing, product development, market access, availability of
capital, risk sharing etc.
The concept of ‘alliance is gaining importance in infrastructure sectors, more particularly in
the areas of power, oil and gas. The basic objective is to facilitate transfer of technology
while implementing large objectives. The resultant benefits are shared in proportion to the
contribution made by each party in achieving the targets. In strategic alliance, two or more
firms that unite to pursue a set of agreed upon goals; remain independent subsequent to the
formation of an alliance.
The strategic alliances are generally in the forms like joint venture, franchising, supply
agreement, purchase agreement, distribution agreement, marketing agreement,
management contract, technical service agreement, licensing of technology/patent/trade
mark/design etc. The strategic alliance agreement contains the terms like capital
contribution, infrastructure, decision making, sharing of risk and return etc.
A strategic alliance integrates the synergetic talents of alliance partners. Mutual understanding
and trust are the basic tenets of strategic alliances. For smooth functioning of an alliance,
partners are required to have preset priorities and expectations from each other. This
strategy seeks to enhance the long-term competitive advantage of the firm by forming
alliances with its competitors existing or potential in critical areas instead of competing
with others.
Strategic alliances, which enable companies to increase resource productivity and profitability
by avoiding unnecessary fragmentation of resources and duplication of investment and
effort in R&D/technology. In a world of fast changing technologies, changing tastes and
habits of consumers, escalating fixed costs and growing protectionism – strategic alliance
is an essential tool for serving customers.
5. Franchising:
Franchising provides an immediate access to business operations and technology in profitable
fields of operations. It is an important means of doing business in several countries and
represents an effective combination of the advantages of large business with the motivation
and adaptation capabilities of small or medium scale enterprises.
It also enables linkages of large and small businesses within a framework of vertical division
of labour. The concept of franchising is quite comprehensive and covers an extensive range
of marketing and distribution arrangements for goods and services. Franchises are
becoming a key mechanism for technological, marketing and service linkages between
enterprises within a country as well as globally.
6. Licensing Agreement:

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A licensing agreement is a commercial contract whereby the licenser gives something of value
to the licensee in exchange of certain performance and payments.
(a) The licenser may provide any of the following:
i. Rights to produce a potential product or use a potential production process
ii. Manufacturing know-how (unpatented)
iii. Technical advice and assistance
iv. Right to use a trademark, brand etc.
(b) The licenser receives a royalty.
(c) The licensee may eventually become a competitor.
(d) Results in improved supply of essential materials, components, plants etc.
Licensing involves the transfer of some industrial property right from the originator. Most tend
to be patents, trademarks, or technical know-how that are granted to the licensee for a
specified time in return for a royalty. Another licensing strategy is to contract the
manufacturing of its product line to a foreign company to exploit local comparative
advantages in technology, materials or labour.

Types of Growth Strategies – Top 5 Types: Concentration Expansion Strategy,

Integration Expansion Strategy, Diversification Expansion Strategy and a Few
Others
Types of Growth/Expansion Strategies:
The expansion or growth strategies are further classified as:
1. Concentration Expansion Strategy
2. Integration Expansion Strategy
3. Internationalization Expansion Strategy
4. Diversification Expansion Strategy
5. Cooperation Expansion Strategy
Type # 1. Concentration Expansion Strategy:
Concentration involves expansion within the existing line of business. Concentration
expansion strategy involves safeguarding the present position and expanding in the current
product-market space to achieve growth targets. Such an approach is very useful for
enterprises that have not fully exploited the opportunities existing in their current products-
market domain.
A firm selecting an intensification strategy, concentrates on its primary line of business and
looks for ways to meet its growth objectives by increasing its size of operations in its
primary business.
Intensive expansion of a firm can be accomplished in three ways, namely, market penetration,
market development and product development is first suggested in Ansoff’s model.
Concentration strategy is followed when adequate growth opportunities exist in the firm’s
current products-market space.
Type # 2. Integration Expansion Strategy:
When firms use their existing base to expand in the direction of their raw materials or the
ultimate consumers, or, alternatively they acquire complimentary or adjacent businesses,
integration takes place. Integration basically means combining activities related to the

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 present activity of a firm.
In contrast to the intensive growth, integration strategy involves expanding externally by
combining with other firms. Combination involves association and integration among
different firms and is essentially driven by need for survival and also for growth by building
synergies.
Combination of firms may take the merger or consolidation route. Merger implies a
combination of two or more concerns into one final entity. The merged concerns go out of
existence and their assets and liabilities are taken over by the acquiring company. A
consolidation is a combination of two or more business units to form an entirely new
company.
All the original business entities cease to exist after the combination. Since mergers and
consolidations involve the combination of two or more companies into a single company,
the term merger is commonly used to refer to both forms of external growth. As is the case
in all the strategies, acquisition is a choice a firm has made regarding how it intends to
compete.
Type # 3. Internationalization Expansion Strategy:
International strategy is a type of expansion strategy that requires firms to market their products
or services beyond the domestic or national market. Firm would have to assess the
international environment, evaluate its own capabilities, and devise appropriate
international strategy. An organisation can “go international” by crossing domestic borders
international expansion involves establishing significant market interests and operations
outside a company’s home country.
Foreign markets provide additional sales opportunities for a firm that may be constrained by
the relatively small size of its domestic market and also reduces the firm’s dependence on
a single national market.
Firms expand globally to seek opportunity to earn a return on large investments such as plant
and capital equipment or research and development, or enhance market share and achieve
scale economies, and also to enjoy advantages of locations. Other motives for international
expansion include extending the product life cycle, securing key resources and using low-
cost labour.
However, to mould their firms into truly global companies, managers must develop global
mind-sets. Traditional means of operating with little cultural diversity and without global
competition are no longer effective firms.
International expansion is fraught with various risks such as, political risks (e.g., instability of
host nations) and economic risks (e.g., fluctuations in the value of the country’s currency).
International expansions increases coordination and distribution costs, and managing a
global enterprise entails problems of overcoming trade barriers, logistics costs, cultural
diversity, etc.
There are several methods for going international. Each method of entering an overseas market
has its own advantages and disadvantages that must be carefully assessed. Different
international entry modes involve a trade-offs between level of risk and the amount of
foreign control the organisation’s managers are willing to allow.
It is common for a firm to begin with exporting, progress to licensing, then to franchising

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 finally leading to direct investment. As the firm achieves success at each stage, it moves to
the next. If it experiences problems at any of these stages, it may not progress further.
If adverse conditions prevail or if operations do not yield the desired returns in a reasonable
time period, the firm may withdraw from the foreign market. The decision to enter a foreign
market can have a significant impact on a firm.
Expansion into foreign markets can be achieved through- exporting, licensing, joint venture
strategic alliance or direct investment.
Type # 4. Diversification Expansion Strategy:
Diversification is defined as the entry of a firm into new lines of activity, through internal or
external modes. Diversification is the process of entry into a business which is new to an
organisation either market-wise or technology-wise or both.
In diversification, firm acquires ownership or control over another firm against the wishes of
the latter’s management. But in practice it can be both, hostile or friendly. The primary
reasons a firm pursues increased diversification are value creation through economies of
scale and scope, or market dominance.
In some cases firms choose diversification because of government policy, performance
problems and uncertainty about future cash flow. In one sense, diversification is a risk
management tool, in that it’s successful use reduces a firm’s vulnerability to the
consequences of competing in a single market or industry.
Risk plays a very vital role in selecting a strategy and hence, continuous evaluation of risk is
linked with a firm’s ability to achieve strategic advantage. Internal development can take
the form of investments in new products, services, customer segments, or geographic
markets including international expansion. Diversification is accomplished through
external modes through acquisitions and joint ventures.
Firms choose expansion strategy when their perceptions of resource availability and past
financial performance are both high. The most common growth strategies are
diversification at the corporate level and concentration at the business level.
Reliance Industry, a vertically integrated company covering the complete textile value chain
has been repositioning itself to be a diversified conglomerate by entering into a range of
businesses such as power generation and distribution, insurance, telecommunication, and
information and communication technology services.
Tata Tea’s takeover of Consolidated Coffee (a grower of coffee beans) and Asian Coffee (a
processor) are the examples of related diversification.
Type # 5. Cooperation Expansion Strategy:
A cooperative strategy is a strategy in which firms work together to achieve a shared objective.
Cooperative strategies are used to gain competitive advantage by joining with one or two
competitors against other competitors of the industry. Cooperative strategy is the third
major alternative (internal growth and mergers and acquisitions are the other two) firms
use to grow, develop value-creating competitive advantages, and create differences
between them and competitors.
Thus, cooperating with other firms is another strategy that is used to create value for a customer
that exceeds the cost of creating that value and to create a favourable position in the
marketplace relative to the five forces of competition.

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Increasingly, cooperative strategies are formed by firms competing against one another, as
shown by the fact that more than half of the strategic alliances (a type of cooperative
strategy) established within a recent two-year period were between competitors such as
FedEx and the U.S. Postal Service.

Types of Growth Strategies – 3 Important Types: Intensive Growth Strategies,

Integrative Growth Strategies and Diversification Growth Strategies (With
Examples)
Type # 1. Intensive Growth Strategies:
Intensive growth strategies aim at achieving further growth for existing products and/ or in
existing markets.
There are three important intensive growth strategies, viz.:
i. Market penetration,
ii. Market development and
iii. Product development.
i. Market Penetration Strategy:
Market penetration strategy strives to increase the sale of the current products in the current
markets.
ii. Market Development Strategy:
The market development strategy involves broadening the market for a product.
iii. Product Development Strategy:
A company may be able to increase its current business by product improvement or introducing
products with new features. Example – Colgate-Palmolive has been trying to maintain its
share of the toothpaste market by introducing new brands. (Maintaining the market share
in a growing market means, obviously, increasing sales).
Many companies endeavour to maintain/increase sales through continuous feature
improvements/introduction of new products. This is very obvious in certain industries like
electronics, white goods, passenger vehicles (including two-wheelers), etc.
Often, market development and product development strategies facilitate better market
penetration.
Type # 2. Integrative Growth Strategies:
One of the common growth strategies is the integrative growth strategy. A major contributor
to the growth of Reliance Industries in the early stages was backward and forward
integration. It is today the most fully integrated company in the world (from petroleum
exploration to textiles retailing).
There are broadly two types of integrative growth:
i. Integration at the same level or stage of business in the same industry (horizontal integration),
or
ii. Integration of different levels/stages of business in the same industry (vertical integration).
i. Horizontal Integration:
Integration at the same level of business, popularly known as horizontal integration, involves
the acquisition of one or more competitors.
For example- a tyre company may grow by acquiring another tyre company. Examples of

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 horizontal integration includes acquisition of Universal Luggage’s (Aristocrat) by Bioplast
(V.I.P.) and Tata Oil Mills Company (TOMCO) by Hindustan Lever. The Indian cement
industry has witnessed considerable horizontal integration. The FMCG sector has recently
undergone several acquisitions resulting in horizontal integration.
Perhaps, the most important advantage of horizontal integration is that it eliminates or reduces
competition.
ii. Vertical Integration:
Integration of the different levels/stages of the same industry is known as vertical integration.
Type # 3. Diversification Growth Strategies:
Diversification means adding new lines of business. The new lines of business may be related
to the current business or may be quite unrelated. If the new lines added make use of the
firm’s existing technology, production facilities or distribution channels or it amounts to
backward or forward integration, it may be regarded as related diversification. (Example –
the diversification of Videocon).
Some companies expand the business into unrelated industries (Example – Wipro which is in
the business of several FMCG, electrical and lighting, furniture and IT). Other
examples- include the V-Guard, Reliance, LG, Samsung, Hyundai, General Electric, etc.
Expanding the market to geographical areas where the company has not had business is
also regarded as diversification.
Diversification is also described as portfolio change.
Large conglomerate (diversified) business houses dominate the industrial sector of many
countries. While most of the top industrial houses of the US are focused, of the West
European and Asian countries like Japan, South Korea and India are diversified.

Types of renewal strategies – retrenchment andturnaround. International expansion:

Importance and Reasons, Types – multi-domestic, franchising, licensing and joint ventures.

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.

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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 :

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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 :
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

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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.

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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.

4) Captive Company Strategy :

A captive company strategy occurs when a company becomes dependent on another company for its
survival. Sometimes a company with a weak competitive position may not opt for a tum around
strategy since the prospects of the industry are not that lucrative to warrant the effort required to
turnaround the company. The company still needs to overcome the problem of falling sales and
profitability. In this scenario the company seeks an "angel" who is typically in the form of one of the
larger customers of the company. The company thus becomes captive to this customer. It gets an
assured business and security. It can also reduce some of its functions like marketing and help reduce
costs. The benefit to the weaker company is that it gets assured sales. In return it has to lose its
independence.

For example, Simpson Motors agreed to become a captive company to General Motors whereby it
agreed to supply 80% of the company's production to General Motors through negotiated contracts.

A captive company strategy is suitable when :

 The company has a single large customer who purchases 75% of its production.
 The customer also performs many of the functions that the company is performing. Thus by
becoming the captive the company can save costs by cutting down on all common functions.

The captive company policy is chosen because :

 The company is not willing or is not able to support functions like marketing.

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  It is the best method of achieving financial strength in the company.
The moment a company becomes captive it relinquishes control of many important functions like
production, marketing and quality control. The captor company gets into negotiation with the captive
company and assures itself of the best deal. It may be able to avoid cost squeezes from competitors in
this fashion. The risk is the captive company gets associated with the risks of the captor company. The
benefit is that the captive company can now get the resources to operate in a bigger market and
compete against bigger competitors. It gets access to larger budgets of advertising and promotion.

The key thing in having a captive strategy is that the management of the company should have good
relationship with the acquiring management. There is a risk in the captive strategy but if managed
well the captive strategy can be a win-win for both the captive and the captor companies. The case of
Samsung also highlights how a company which started as a captive supplier to larger brands like
Electrolux ultimately became a bigger brand than the captor company itself. The captive company
thus can develop its own brands and prosper in the long-run. Though most managers do not like to get
into a captive relationship because it involves giving up control, many companies still end up getting
into captive strategy because they increasingly depend on one customer for sales.

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