STRATEGIC MANAGEMENT-MMH 4TH.

SEMESTER/C9T//UNIT-III

Formulation of competitive strategies: Michael E Porter’s Generic competitive

Strategies, Implementing Competitive Strategies- Offensive and Defensive Moves.
Formulating Corporate Strategies: Introduction to Strategies of growth, Stability and
Renewal, Types of Growth Strategies- Concentrated Growth, Product development,
Integration, Diversification, Internal expansion(Multi-Domestic Approach, Franchising,
Licensing and Joint ventures). Types of Renewal Strategies- Retrenchment and Turn
Around.Strategic fundamentals of Merger and Acquisitions.

Competitive Strategy is defined as the long term plan of a particular company in order to gain
competitive advantage over its competitors in the industry. It is aimed at creating defensive
position in an industry and generating a superior ROI (Return on Investment). Competitive
strategy consists of the business approaches and initiatives undertaken by a company to attract
customers and to deliver superior value to them through fulfilling their expectations as well as
tostrengthen its market position. This means that competitive strategy is concerned withactions
that managers undertake to improve market position of the company through satisfying the
customers. Improving market position implies undertaking actions against competitors in the
industry. Thus, the concept of competitive strategy (as opposed to cooperative strategy) has a
competitor-orientation. Competitive strategy includes those approaches that prescribe various
ways to build sustainable competitive advantage. Management’s action plan is the focus of
competitive strategy,management adopts action-plan to compete successfully with the
competitors in the market. It also aims at providing superior value to customers.
The objective of competitive strategy is to win the customers’heart through satisfying their
needs and finally to attain competitive advantage as well as out compete the competitors (or
rival companies.).Such type of strategies play a very important role when industry is very
competitive and consumers are provided with almost similar products. One can take example
of mobile phone market.
Before devising a competitive strategy, one needs to evaluate all strengths, weaknesses,
opportunities, threats in the industry and then go ahead which would give one a competitive
advantage. Understanding competition, studying customer needs, evaluating their strengths &
weakness etc. are all an important aspect of marketing strategy. Companies can study &
evaluate on the basis of their market share, SWOT analysis etc, which would eventually help
them drive business &sales revenue.

Types of competitive strategies by Porter :

The Generic Strategies can be used to determine the direction (strategy) of the organisation.
Michael Porter used 4 strategies that an organisation can choose from. He believed that a
company must choose a clear course in order to be able to beat the competition.
The four strategies to choose from are:

1. Cost Leadership
2. Differentiation
3. Cost Focus
4. Differentiation Focus
Michael Porter described the theory in his 1985 book ‘Competitive Advantage: Creating and
Sustaining Superior Performance’. The basis was formed by three strategies, namely Cost
leadership, Differentiation and Focus. He divided the latter into Cost
Focus and Differentiation Focus.

According to Michael Porter, competitive strategy is devised into 4 types:

1. Cost Leadership

For adopting this strategy, a company has to target a broad market (large demand) and offer
the lowest possible price. There are 2 options within this course. A company can opt to keep
costs as low as possible; or ensure that it has a larger market share with average prices. In both
cases, the point is to keep the company costs as low as possible. The consumer price is a
different story.

Organisations that apply this strategy successfully usually have substantial investment capital
at their disposal, efficient logistics and low costs when it comes to materials and labour. The
organisation is generally focused on internal processes.Here, the objective of the firm is to
become the lowest cost producer in the industry and is achieved by producing in large scale
which enables the firm to attain economies of scale. High capacity utilisation, good bargaining
power, high technology implementation are some of the factors necessary to achieve cost
leadership. e.gMicromax phones.

2. Differentiation leadership

Here the company targets a broad market (high demand), by offering products or services
having unique features. With this strategy, the company makes its product as exclusive as
possible, making it more attractive than comparable products offered by the competitors.
Succeeding using this strategy requires good research & development, innovation and the
ability to deliver high quality. Effective marketing is important, so that the market understands
the benefits of your unique product. It’s important to be flexible and to be able to adapt quickly
in a changing market, or you risk the competition beating you at it. Such an organisation is
focused on the outside world and has a creative approach. Under this strategy, firm maintains
unique features of its products in the market thus creating a differentiating factor. With this
differentiation leadership, firms target to achieve market leadership. And firms charge a
premium price for the products (due to high value added features). Superior brand and quality,
major distribution channels, consistent promotional support etc. are the attributes of such
products, e.g. BMW, Apple.

3. Cost focus

The company usually targets a niche market (little competition, ‘focused market’) and offers
the lowest possible price. In this strategy, the company chooses to target a clear niche market
and through understanding the dynamics of the market and the wishes of the consumers,
attempts to ensure that the costs remain low. Under this strategy, firm concentrates on specific
market segments and keeps its products low priced in those segments. Such strategy helps the
company to satisfy sufficient consumers and gain popularity. E.g. Sonata watches.

4. Differentiation focus

The Company targets a niche market (little competition, ‘focused market’) and its product or
service has unique features. This strategy often involves strong brand loyalty among
consumers. It is very important to ensure that the product remains unique, in order to stay ahead
of possible competition. Under this strategy, firm aims to differentiate itself from one or two
competitors, again in specific segments only. This type of differentiation is made to meet
demands of border customers who refrain from purchasing competitors’ products only due to
missing of small features. It is a clear niche marketing strategy. E.g. Titan watches

Without following anyone of above mentioned competitive strategies, it becomes very difficult
for firms to sustain in competitive industry. In order to choose the right strategy for the
organisation, it is important to be aware of the competencies and strengths of its own.

Choose the right strategy

However, the following steps may be followed to choose the appropriate strategy best suitable
to the company.

Step 1: Doing a SWOT analysis for the business. This will clarify the strengths and weaknesses
as well as the highlight opportunities and threats.

Step 2: Trying to truly grasp the market of the industry. This can be done, for example, through
the Five Forces Analysis – a model also developed by Porter – designed to determine profit
potential. The 5 forces that influence this are:

• the (power of) suppliers;

• the (power of) the customers;
• the availability of comparable products;
• the threat of new entrants;
• and internal competition.

Step 3: Comparing the SWOT analysis with the outcomes of step 2. For each of Porter’s
strategies, ask yourself how you might use that strategy to influence the previously
mentioned five forces. On that basis, determine which strategy offers you the best starting point
(and profit potential).

Examples of competitive strategy

There can be several examples based on the four parameters given by Michael Porter. Some
examples are given below:

1. Cost leadership: Micromax smart phones and mobile phones are giving good quality
products at an affordable price which contain all the features which a premium phone like
Apple or Samsung offers

2. Differentiation leadership: BMW offers cars which are different from other car brands.
BMW cars are more technologically advanced, have better features and have got personalized
services

3. Cost focus: Sonata watches are focused towards giving wrist watches at a low cost as
compared to competitors like Rolex, Titan, Omegaetc.

4. Differentiation focus: Titan watches concentrates on premium segment which includes

jewels in its watches.

Organizations need to adopt competitive strategies for their existence and for maintaining their
position in market. When it comes to adopting a competitive strategy, organizations need to
consider what factors separate them from their competitors. Research firm Dun & Bradstreet
suggests evaluating the competitive advantages in business process, expertise, uniqueness or
relationships an organization enjoys with its suppliers, customers and marketing channels
before adopting any of the strategies.

Competitive strategies can be divided into offensive and the defensive strategies. Companies
pursuing offensive strategies directly target competitors from which they want to capture
market share. In contrast, defensive strategies are used to discourage or turn back an offensive
strategy on the part of the competitor.

Offensive strategy:

An offensive competitive strategy is a type of corporate strategy that consists of actively trying
to pursue changes within the industry. Companies that go on the offensive generally invest
heavily in research and development (R&D) and technology in an effort to stay ahead of the
competition. Offensive strategies directly target competitors from which they want to capture
market share. Some of the offensive strategies are as follows:

Frontal Attack: A frontal attack is attacking a competitor ahead on by producing similar

products with similar quality and price; it is highly risky unless the attacker has a clear
advantage. The most prominent example is war between Pepsi & Coca Cola. Both are cash
rich. Since ages they use frontal attack strategy against each other. Both are market leaders in
beverage market. When Pepsi introduced diet Pepsi, Coke introduced diet Coke.
Flank Attack: The Flank attack is the marketing strategy adopted by the challenger firm and
is intended to attack the weak points or blind spots of the competitor, especially when
competitor enjoys leadership position in market. LG outflanked the other colored TV producers
in India, by launching a rural-specific colour TV “Sampoorna”, thereby becoming the first one
to tap the rural areas. LG demonstrated that Rural Customers are not just price conscious, but
are actually value conscious and are ready to pay reasonable premium if organization deliver
solution to their long-standing problem with their Sampoorna CTV.

Encirclement Attack: This form of market challenger strategy is used when the competitor
attacks another on the basis of strengths as well as weaknesses and does not leave any stone
unturned to overthrow the competition. The current e-commerce scenario is the best example
of the encirclement attack where the E-commerce companies are ready to go negative in their
margins to beat a competitor on turnover basis. They want to come on top and gain maximum
customers by hook or crook.

Bypass Attack: This type of strategy is found in a firm which has the brains to innovate. And
when it innovates, it bypasses the complete competition and creates a segment of its own. Off
course, other competitors soon follow. But the attack is very useful in the long term to create
brand reputation and gain customers. Sony Corp. co-founder Masaru Ibuka who liked to listen
to music during his frequent business trips was tired of carrying his bulky TC-D5 cassette deck
around. He asked his designers to create something smaller. They came back with the
headphone-equipped TPS-L2. It looked sleek and striking, which they showed to chairman
Akio Morita. “Try this,” Ibuka said. “Don’t you think a stereo cassette player that you can
listen to while walking around is a good idea?” On July 1, 1979, the sleek little device hit the
market, priced at $150. Sony called it the ‘Soundabout’, and then changed the name to the
Walkman. Walkman became such a craze, consumers wound up buying 400 million of them.
Today, with half of Smartphone owners using their devices to listen to music, it’s easy to forget
how radically the Walkman changed things. Another example of Bypass attack is I phone and
I Pod

Guerrilla marketing: Making small but useful changes, which repeatedly puts a brand in the
forefront, and slowly but surely makes it a huge name in the market, is the crux of Guerrilla
marketing. A small brand, which wants to take on huge competitors, which first becomes
famous in a local market, then will introduce price discounts and trade discounts. Guerrilla
marketing campaigns are highly targeted in terms of location where they are launched.

Guerilla marketing is born a way of marketing which allows brand differentiation concerning
the competition. In fact, right guerrilla marketing actions are usually, activities remembered by
the people who have witnessed it. One of the usual places to create guerrilla marketing actions
is the zebra crossings. The lines painted on the ground give you a lot to play with if you have
the necessary creativity. For example, McDonald’s simulates that the lines are French fries
coming out of the typical package of the hamburger brand. What is interesting about this action
is that, besides of being part of a real zebra crossing, which still has the same function, it has
achieved that the image is one of the company’s products. And besides, with the image type of
the M in the sight of all pedestrians.

Defensive strategies:

Defensive strategy is defined as a marketing tool that helps companies to retain valuable
customers that can be taken away by competitors. When rivalry exists, each company must
protect its brand, growth expectations, and profitability to maintain a competitive advantage
and adequate reputation among other brands. To reduce the risk of financial loss, firms strive
to take their competition away from the industry. Following are some regularly used defensive
strategies by firms:

Retrenchment: It consists of the reduction of the expenses by employees’ layoffs to increase

profitability. This forces employees to manufacture the company’s products with limited
resources or with cheaper raw material. For example, HSBC lay off 200 employees in Pune
recently. In 2009, Starbucks had closed down 600 units in the United States and 61 in Australia;
they lay off employees in thousands. Another example is Tech Mahindra and IBM in India
went on retrenchment drive in past two years.

Divest: When the company sells some of its assets to accomplish a certain objective, such as
higher returns or reduces debts. Usually, companies that implement this strategy want to invest
that capital to create higher future revenue. This strategy has helped some organisations to get
more focused on their core business and improve their performance in the market. It is common
that enterprises sell their poor assets or divisions.

For example, in 2009 Ailing Lehman Brothers Holdings divested its venture-capital division
as the firm sold In December 2009, L&T sold its 17% stake in Bangalore International Airport
Ltd (BIAL) to GVK Power and Infrastructure Ltd. (GVKPIL) for ₹ 686 crore; part of the
assets were sold to generate enough cash to pay their debts. L&T wants to sell its holding in
the Dhamra Port in Odisha to Adani Ports.

Liquidation: Liquidation is the hardest strategy to perform by a company because it means

that it went into bankruptcy. This can be caused because the operation and administration of
the firm was not appropriate or the managers were not trained enough to control the activities
of the firm. In this case, the unique solution is to sell all the company’s assets in small parts to
shareholders, stakeholders or other companies that are economically solvent. Although this is
a tough decision, it is better to stop the operational chaos instead of continuing losing more
money. The National Company Law Tribunal (NCLT) has ordered liquidation of two Rotomac
group companies’ Global and Exports companies whose promoter Vikram Kothari is accused
of being involved in a banking fraud. The order was pronounced at the NCLT’s Allahabad
chapter in 2016. But, as of October 1st 2019, there are no buyers for junk priced Rotomac.

The three main types of corporate strategies are growth, stability, and renewal.

A. Growth - A growth strategy is when an organization expands the number of markets served
or products offered, either through its current business(es) or through new business(es).
Because of its growth strategy, an organization may increase revenues, number of employees,
or market share. Organizations grow by using concentration, vertical integration, horizontal
integration, or diversification. An organization that grows using concentration focuses on its
primary line of business and increases the number of products offered or markets served in this
primary business. An expansion strategy is synonymous with a growth strategy. A firm seeks
to achieve faster growth, compete, achieve higher profits, grow a brand, capitalize on
economies of scale, have greater impact, or occupy a larger market share. This may entail
acquiring more market share through traditional competitive strategies, entering new markets,
targeting new market segments, offering new produce or services, expanding or improving
current operations. Below are common expansion strategies:
An expansion strategy is synonymous with a growth strategy. A firm seeks to achieve faster
growth, compete, achieve higher profits, grow a brand, capitalize on economies of scale, have
greater impact, or occupy a larger market share. This may entail acquiring more market share
through traditional competitive strategies, entering new markets, targeting new market
segments, offering new produce or services, expanding or improving current operations. Below
are common expansion strategies: Expansion through Concentration – This involves focusing
resource allocation and operational efficiency on one or a select group of business units or core
business functions. Concentration might include: penetrating an existing market with an
existing value proposition; developing a new market by attracting new customers to an existing
value proposition; developing a new value proposition to introduce in the existing market. The
benefits of expansion through concentration is that it allows the firm to focus on areas where it
already has operations and a level of competency. It is comfortable to avoid major changes in
operations while employing existing knowledge. This type of strategy can be risky from the
stand point of putting too many eggs in one basket. Changes in the market (price fluctuations,
customer sentiment, new value propositions, etc.) may cause the strategy to be unsuccessful.

Expansion through Diversification – This strategy involves diversifying the value offering
of the company in one of two methods: 1) Concentric Diversification entails developing a new
value proposition that are related to existing value propositions; or 2) Conglomerate
Diversification entail entering into new markets (either with an existing value proposition or
by combining with another industry competitor). This strategy generally reduces specific
industry risks, such as an economic downturn. The profits of one value offering might offset
losses in another business unit during difficult times.

Expansion through Integration – Integration involves the consolidation of operational units

anywhere along the value chain to create greater efficiency and produce economies of scale.
Unlike other strategies, it does not involve making changes to existing markets or targeting
new customer groups. There are two primary types of integration: 1) Vertical integration
involves consolidation up or down the value chain. Forward vertical integration involves
consolidating closer to the point at which value is delivered to the consumer. Backward vertical
integration involves consolidating closer to the genesis of value (such as the point of
manufacturing). Horizontal integration involves consolidating operations at the same point in
the value chain. This consolidation may be between business units or by acquiring or
combining with a competitor. See our separate discussion of Horizontal and Vertical
integration for greater detail.

Expansion through Co-operation – This strategy entails working closely with a competitor
(while potentially still competing against them in the market). Working with the competitor
provides both companies an advantage that trumps any advantage (or disadvantage caused to
the competitor) from not working together. Working together will generally provide
operational efficiency to one or both competitors or expand the market potential for one or both
competitors. Working together may take the form of consolidation of business units (mergers
or acquisitions), strategic alliance (affinity group or association), or joint venture (loose
partnership-like alliance generally used to undertake a project or enter into foreign markets).

Expansion through Internationalization – This method involves creating new markets for a
value offering by looking outside of the immediate nation. Generally, this option is preferable
when there is little room for expansion in domestic markets. Internationalization can be carried
out through the following strategic approaches: 1) International Strategy – focusing on offering
a value proposition in a foreign country without modification of differentiation; 2) Multi-
domestic Strategy – involves modifying or differentiating a product to make it attractive or
suitable to foreign markets; 3) Global Strategy – focuses on delivering the standardized value
proposition in countries where there is a low cost structure for delivery; 4) Transnational
Strategy – employs both a global and multi-domestic strategy by modifying or differentiating
a product in foreign markets where there is a low cost structure that results in profits from
delivering the value proposition.

B. Stability - A stability strategy is a corporate strategy in which an organization continues to

do what it is currently doing. The organizationdoesn’tgrow but doesn't fallbehind as well.
Examples of this strategy include continuing to serve the same clients by offering the same
product or service, maintaining market share, and sustaining the organization's current business
operations. The organization does not grow, but does not fall behind, either. Jauch and Glueck
observe, ‘a stability strategy is a strategy that a firm pursues when-

1. It continues to serve the customers in the same product or service, market, and function
sectors as defined in its business definition, or in very similar sectors.
2. Its main strategic decisions focus on incremental improvement of functional performance.’

As the name implies, a stability business strategy seeks to maintain operations and market size
and position. This strategy is characteristic of small risk-averse firms or firms operating in a
very precarious market that is comfortable with its current position. The stability strategy is not
a “do nothing” strategy. It may involve incremental improvements.
These strategies are generally broken into:

No Change Strategies – A firm makes no considerable changes to its objectives or operations.

The firm examines the internal and external factors affecting the firm in its current operating
and market environment. The firm makes a conscious decision to maintain its current strategic
objectives. This is most common in low competition environments, with no major or market-
shifting occurrences, and the firms competitive position is stable. For example, firms operating
in niche markets commonly choose a niche (cost or differentiation) strategy and maintain that
strategy until internal or external factors necessitate a change.

Profit Strategies – A profit strategy endorses any action necessary to maintain or improve
profitability. This may include cutting costs (operational efficiency, outsourcing), selling
assets, raising prices, increasing output (sales), or offsetting losses with profits from another
business unit. This strategy is common with firms that are profitable but are facing temporary
pressures that are threatening their profitability, such as competition, market conditions,
recession, inflation, cost escalations, etc. If these pressures become long-term, a profit strategy
risks harming the firm by reducing competitiveness (particularly if the firm competes on cost
or price). If a firm’s value offering or resources are becoming obsolete, the profit strategy may
provide temporary profits before the business unit is dissolved or otherwise disposed of. In any
event, the strategy generally does not involve the investment of new resources. Profitability is
maintained with present levels or less resources.

Caution Strategies – This strategy requires a firm to wait and continue to assess the market
before employing any particular strategy. It is basically reconnaissance before strategic action
is taken. This is a temporary strategy employed for a limited time while deciding on a formal
strategy to pursue. It avoids making any significant investment of resources and discontinues
any strategy formula pursued until the firm has a full understanding of the market and the effect
 of former strategies. This strategy is common among manufacturing companies evaluating the
launch of new products.

C. Renewal - strategies that address declining performance. The two types of renewal strategies
are retrenchment and turn around strategies. When an organization is in trouble, something
needs to be done. Managers need to develop strategies, called renewal strategies, that address
declining performance. The two main types of renewal strategies are retrenchment and
turnaround strategies. A retrenchment strategy is a short run revival strategy used for minor
performance problems. A redemption strategy seeks to restructure, sell or otherwise divest a
business unit. The purpose is to reduce costs, streamline operations, or stabilize cash flow. This
strategy helps an organization stabilize operations, revitalize organizational resources and
capabilities and prepare to compete once again.  When an organization’s problems are more
serious, more drastic actions – the turnaround strategy is needed.  Managers do two things for
both renewal strategies:  cut costs  restructure organizational operations.

The three primary types of retrenchment strategy are discussed below :

Retrenchment Strategy
Definition: The Retrenchment Strategy is adopted when an organization aims at reducing its
one or more business operations with the view to cut expenses and reach to a more stable
financial position.

In other words, the strategy followed, when a firm decides to eliminate its activities through a
considerable reduction in its business operations, in the perspective of customer groups,
customer functions and technology alternatives, either individually or collectively is called as
Retrenchment Strategy.

The firm can either restructure its business operations or discontinue it, so as to revitalize its
financial position. There are three types of Retrenchment Strategies:

1.Turnaround.
2.Divestment
3. Liquidation

To further comprehend the meaning of Retrenchment Strategy, go through the following

examples in terms of customer groups, customer functions and technology alternatives.

1. The book publication house may pull out of the customer sales through market intermediaries
and may focus on the direct institutional sales. This may be done to slash the sales force and
increase the marketing efficiency.
2. The hotel may focus on the room facilities which is more profitable and may shut down the
less profitable services given in the banquet halls during occasions.
3. The institute may offer a distance learning programme for a particular subject, despite teaching
the students in the classrooms. This may be done to cut the expenses or to use the facility more
efficiently, for some other purpose.
 In all the above examples, the firms have made the significant changes either in their customer
groups, functions and technology/process, with the intention to cut the expenses and maintain
their financial stability.

Turnaround Strategy

Definition: The Turnaround Strategy is a retrenchment strategy followed by an organization

when it feels that the decision made earlier is wrong and needs to be undone before it damages
the profitability of the company.

Simply, turnaround strategy is backing out or retreating from the decision wrongly made earlier
and transforming from a loss making company to a profit making company.

Now the question arises, when the firm should adopt the turnaround strategy? Following are
certain indicators which make it mandatory for a firm to adopt this strategy for its survival.
These are:

▪ Continuous losses
▪ Poor management
▪ Wrong corporate strategies
▪ Persistent negative cash flows
▪ High employee attrition rate
▪ Poor quality of functional management
▪ Declining market share
▪ Uncompetitive products and services
Also, the need for a turnaround strategy arises because of the changes in the external
environment Viz, change in the government policies, saturated demand for the product, a threat
from the substitute products, changes in the tastes and preferences of the customers, etc.

Example: Dell is the best example of a turnaround strategy. In 2006. Dell announced the cost-
cutting measures and to do so; it started selling its products directly, but unfortunately, it
suffered huge losses. Then in 2007, Dell withdrew its direct selling strategy and started selling
its computers through the retail outlets and today it is the second largest computer retailer in
the world.

Divestment Strategy
Definition: The Divestment Strategy is another form of retrenchment that includes the
downsizing of the scope of the business. The firm is said to have followed the divestment
strategy, when it sells or liquidates a portion of a business or one or more of its strategic
business units or a major division, with the objective to revive its financial position.
 The divestment is the opposite of investment; wherein the firm sells the portion of the business
to realize cash and pay off its debt. Also, the firms follow the divestment strategy to shut down
its less profitable division and allocate its resources to a more profitable one.

An organization adopts the divestment strategy only when the turnaround strategy proved to
be unsatisfactory or was ignored by the firm. Following are the indicators that mandate the firm
to adopt this strategy:

▪ Continuous negative cash flows from a particular division

▪ Unable to meet the competition
▪ Huge divisional losses
▪ Difficulty in integrating the business within the company
▪ Better alternatives of investment
▪ Lack of integration between the divisions
▪ Lack of technological upgradations due to non-affordability
▪ Market share is too small
▪ Legal pressures
Example: Tata Communications is the best example of divestment strategy. It has started the
process of selling its data center business to reduce its debt burden.

Liquidation Strategy
Definition: The Liquidation Strategy is the most unpleasant strategy adopted by the
organization that includes selling off its assets and the final closure or winding up of the
business operations.

It is the most crucial and the last resort to retrenchment since it involves serious consequences
such as a sense of failure, loss of future opportunities, spoiled market image, loss of
employment for employees, etc.

The firm adopting the liquidation strategy may find it difficult to sell its assets because of the
non-availability of buyers and also may not get adequate compensation for most of its assets.
The following are the indicators that necessitate a firm to follow this strategy:

▪ Failure of corporate strategy

▪ Continuous losses
▪ Obsolete technology
▪ Outdated products/processes
▪ Business becoming unprofitable
▪ Poor management
▪ Lack of integration between the divisions
Generally, small sized firms, proprietorship firms and the partnership firms follow the
liquidation strategy more often than a company. The liquidation strategy is unpleasant, but
closing a venture that is in losses is an optimum decision rather than continuing with its
operations and suffering heaps of losses.

TYPES OF GROWTH STRATEGIES

A growth strategy is one that an enterprise pursues when it increases its level of objectives
upward, much higher than an exploration of its past achievement level.The most frequent
increase indicating a growth strategy is to raise the market share and or sales objectives upward
significantly.
Growth Strategy is pursued to reduce the cost of production per unit. Growth strategies involve
a significant increase in performance objectives.These strategies are adopted when firms
remarkably broaden the scope of their customer groups, customer functions and alternative
technologies either singly or in combination with each other.Growth strategy can be adopted
in the form of expansion, vertical integration, diversification, merger, acquisition and joint
venture.The basic objective in all these cases is growth but the basic problem in each case is
significantly different which needs more elaborate discussion.
Some of the types of growth strategies are as follows:-

1. Internal Growth Strategy

2. External Growth Strategy
3. Concentration Expansion Strategy
4. Integration Expansion Strategy
5. Internationalization Expansion Strategy.
6. Diversification Expansion Strategy
7. Cooperation Expansion Strategy
8. Intensive Growth Strategy
9. Integrative Growth Strategy
10. Diversification Growth Strategy.

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 tries 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
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.
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.
. 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.
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
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
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.
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
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:
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.
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.
Product Development Strategy:
This strategy involves the growth of market through substantial modification of existing
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.

InternationalExpansion 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
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.

MERGER AND ACQUISITION

Merger and Acquisition are part of strategic management of any business. It involves
consolidation of two businesses with an aim to increase market share, profits and influence in
the industry. Merger and acquisition are the corporate strategies that deal with buying, selling
or combining different companies with a goal to achieve rapid growth. However, the decisions
on mergers and acquisitions are taken after considering a few facts like the current business
status of the companies, the present market scenario, and the threats and opportunities etc. In
fact, the success of mergers and acquisitions largely depend upon the merger and acquisition
strategies adopted by the organizations.

Mergers and Acquisitions are complex processes which require preparing, analysis and
deliberation. There are a lot of parties who might be affected by a merger or an acquisition,
like government agencies, workers and managers. Before a deal is finalized all party needs to
be taken into consideration, and their concerns should be addressed, so that any possible
hurdles can be avoided.

Merger and acquisition strategies are the roadmap for the corporate development efforts of an
organization. The strategies on merger and acquisition are devised to transform the strategic
business plan of the organization to a list of target acquisition prospects. The merger and
 acquisition strategies offer a framework, which evaluates acquisition candidates and helps the
organisation to identify the suitable ones.

Many big companies continuously look out for potential companies, preferably smaller ones,
for mergers and acquisitions. Some companies may have their core cells, which concentrate
on mergers and acquisitions. Merger and acquisition strategies are devised in accordance with
the policy of the organization. Some may prefer to diversify or to expand in a specific field of
business, while some others may wish to strengthen their research facilities etc.

Mergers and Acquisitions (M&A) is a type of corporate strategy, which stands forall operations
related to transfer of property rights in companies, including formation and restructuring of
companies.
Many people refer to mergers and acquisitions as though they were one thing (M&A) and use
the words interchangeably, when in fact; they are two distinct features of corporate takeover.

• Merger
By definition, a merger takes place when two equal companies join forces and create a new
entity. Stock for both of the companies is surrendered, and new stock is issued for the newly
created company. Typically the company is renamed; often a combination of the two previous
companies, but in some way there is a distinction that the two companies have united.
A true merger rarely happens. In most cases, one company will buy out another company, but
will allow the purchased company to refer to it as a merger to avoid the negative connotations
often associated with a buy out. If the buyout is friendly, the CEOs of both companies will
refer to the purchase as a merger – indicating the willingness of both companies to work
together.

• Acquisition
Similar to a merger, an acquisition always results in a new company being formed out of
two separate entities. The process of that unification process is slightly different for an
acquisition. Unlike a merger, an acquisition is always done by the purchase of one company
by another. The buyout may be friendly and smoothly done, but there is no release of new
stock, and the buying company retains its name. The buyout is sometimes considered hostile,
such as when a smaller company does not wish to be purchased but is taken over through the
purchase of stock shares.
The joining of two companies does not always result in a successful transition into one united
company. Unless careful planning and strategizing is put into place, the resulting corporation
may be in more of a chaos than before. Key company leaders must set the stage for ensuring
that the goals of the new company are clearly communicated to employees and are being
evaluated for success.
The potential benefits to both companies can include greater profits, a greater share of the
market and an increased visibility with customers. It is up to the leadership to ensure that the
benefits are realized after a merger or acquisition takes place.
Merger and Acquisition Strategy Process
The merger and acquisition strategies may differ from company to company and also depend
a lot on the policy of the respective organization. However, merger and acquisition strategies
have got some distinct process, based on which, the strategies are devised.

Determine Business Plan Drivers

Merger and acquisition strategies are deduced from the strategic business plan of the
organization. So, in merger and acquisition strategies, you firstly need to find out the way to
accelerate your strategic business plan through the M&A. You need to transform the strategic
business plan of your organization into a set of drivers, which your merger and acquisition
strategies would address.

While chalking out strategies, you need to consider the points like the markets of your intended
business, the market share that you are eyeing for in each market, the products and technologies
that you would require, the geographic locations where you would operate your business in,
the skills and resources that you would require, the financial targets, and the risk amount etc.

Determine Acquisition Financing Constraints

Now, you need to find out if there are any financial constraints for supporting the acquisition.
Funds for acquisitions may come through various ways like cash, debt, public and private
equities, PIPEs, minority investments, earn outs etc. You need to consider a few facts like the
availability of untapped credit facilities, surplus cash, or untapped equity, the amount of new
equity and new debt that your organization can raise etc. You also need to calculate the amount
of returns that you must achieve.

Develop Acquisition Candidate List

Now you have to identify the specific companies (private and public) that you are eyeing for
acquisition. You can identify those by market research, public stock research, referrals from
board members, investment bankers, investors and attorneys, and even recommendations from
your employees. You also need to develop summary profile for every company.

Build Preliminary Valuation Models

This stage is to calculate the initial estimated acquisition cost, the estimated returns etc. Many
organizations have their own formats for presenting preliminary valuation.