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CHAPTER 4 :- STRATEGIC PLANNING

Generally, the strategic planning process culminates in the formulation of corporate strategy. The strength of the
entire process of strategic planning is tested by the efficacy of the strategy finally adopted by the firm. The
ultimate question is whether the strategy ironed out is the appropriate one-whether it would take the firm to its
objectives.

CORPORATE STRATEGY
Corporate strategy is basically the growth design of the firm; as:-
 It spells out the growth objective of the firm - the direction, extent, pace and timing of the firm's growth.
 It also spells out the strategy for achieving the growth.
Thus, we can also describe corporate strategy as the objective-str ategy design of the firm. And, t o
arrive at such an objective-strategy design is the basic burden of corporate strategy formulation.

NATURE, SCOPE AND CONCERNS OF CORPORATE STRATEGY

Corporate strategy is basically concerned with the c hoice of business es, pr oducts and market s. The following
points will clarify the corporate strategy.
♦ It can also be viewed as the objective-str ategy design of the firm.
♦ It is the design for f illin g the fir m's strategic pla nnin g gap.(i.e gap between strategy plan & its execution)
♦ It is concerned with the choice of the fir m's pr oducts and m arkets; it actually denotes the changes/
additions / deletions in the firm's existing product-market postures. It spells out the businesses in which the
firm will play, the markets in which it will operate and the customer needs it will serve.
♦ It ensures that the right fit is achieved between the f irm and its envir onm ent.
♦ It helps build the relevant com petitive advantages for the firm.
♦ Corporate objectives and corporate strategy together descr ibe the firm's concept of business .

OBJECTIVES OF CORPORATE STRA TEGY

 Corporate strategy in the first place ensures the growth of the firm
 It ensures the correct alignment of the firm with its environment.
 The purpose of corporate strategy is to harness the opportunities available in the environment,
countering the threats embedded therein.
 It helps in matching the unique capabilities of the firm with the promises and threats of the environment
that it achieves this task.

It is obvious that r espondin g to envir onm ent is part and parcel of a firm's existence. The question is how good
or how methodical is the response. This is where strategy steps in. Str ategy is the opp osite of adhoc responses
to the changes in the environment-in competition, consumer tastes, technology and other variables. It amounts to
long-term, well thought-out and prepared responses to the various forces in the business environment.

Proactive and Reactive Strategy

A company's strategy is typically a blend of Partly proactive and partly reactive strategy
Practive Strategy:-
 It is also called as intentional strategy.
 The biggest portion of a company's current strategy flows from previously initiated actions and business
approaches that are working well enough to strengthen the company's overall position and performance.
 This part of management's game plan is deliberate and proactive, standing as the product of
management's analysis and strategic thinking about the company's situation and its conclusions about
how to position the company in the marketplace and tackle the task of competing for buyer patronage.

Reactive Strategy:-
 In Business, every strategic move is not the result of proactive plotting and deliberate management
design.
 Things happen that cannot be fully anticipated or planned for. When market and competitive conditions
take an unexpected turn or some aspect of a company's strategy hits a stone wall, some kind of strategic
reaction or adjustment is required.
 Hence, a portion of a company's strategy is always developed on the fly, coming as a reasoned
response to unforeseen developments - fresh strategic move on the part of rival firms, shifting customer
requirements and expectations, new technologies and market opportunities, a changing political or economic
climate, or other unpredictable or unanticipated happenings in the surrounding environment.

THE STAGES OF CORPORATE STRATEGY FORMULATION- IMPLEMENTATION PROCESS

Crafting and executing a company's strategy is a five-stage managerial process as given below:

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1. Developing a strategic vision of where the company needs to head and what its future product-customer-
market-technology focus should be.
2. Setting objectives and using them as yardsticks for measuring the company’s performance and
progress.
3. Crafting a strategy to achieve the desired outcomes and move the company along the strategic course that
management has charted.
4. Implementing and executing the chosen strategy efficiently and effectively.
5. Monitoring developments and initiating corrective adjustments in the company's long- term direction,
objectives, strategy, or execution in light of the company's actual performance, changing conditions,
new ideas, and new opportunities.

Stage 1 : Developin g a strategic vision ( Already discussed in detail in Chapter 2)

Stage 2 : Setting objectives

 Corporate objectives flow from the mission and growth ambition of the corporation. Basically, they
represent the quantum of growth the firm seeks who achieve in the given time frame.
 The objective provides the basis for it major decisions of the firm and also said the organizational
performance to be realised at each level.
 The managerial purpose of setting objectives is to convert the strategic vision into specific performance
targets – results and outcomes the management wants the achieve - and then use these objectives as
yardsticks for tracking the company's progress and performance.
 Ideally, managers ought to use the objective-setting exercise as a tool for truly stretching an organization
to reach its full potential.

The balanced scorecard approach: (strategic + financial objectives) – The balanced scorecard approach for
measuring company performance requires settin g both fina ncia l and stra tegic objectives and tr ackin g their
achievem ent. Unless a company is in deep financial difficulty, such that its very survival is threatened,
company managers are well advised to put more emphasis on achieving strategic objectives than on achieving
financial objectives whenever a trade-off has to be made. The surest path to sustained future profitability
year after year is to relentlessly pursue strategic outcomes that strengthen a company’s business position and,
ideally, give it a growing competitive advantage over rivals. What ultimately enables a company to deliver
better financial results from operations is the achievement of strategic objectives that improve its competitiveness
and market strength.

A need for both short-term and long-term objectives: As a rule, a company's set of financial and
strategic objectives ought to include both short-term and long-term performance targets. Having quarterly or
annual objectives focuses attention on delivering immediate performance improvements. Targets to be achieved
within three to five years prompt considerations of what to do now to put the company in position to perform
better down the road.
Long-t erm objectives: To achieve long-term prosperity, strategic planners commonly establish long-term
objectives in seven areas.
♦ Profitability.
♦ Productivity.
♦ Competitive Position.
♦ Employee Development.
♦ Employee Relations.
♦ Technological Leadership.
♦ Public Relations
Long-term objectives represent the results expected from pursuing certain strategies, Strategies
represent the actions to be taken to accomplish long-term objectives. The time frame for objectives and
strategies should be consistent, usually from two to five years,
Qualities of Long-Term Objectives
♦ Acceptable.
♦ Flexible.
♦ Measurable.
♦ Motivating.
♦ Suitable.
♦ Understandable.
♦ Achievable.

Objectives should be quantitative, measurable, realistic, understandable, challenging, hierarchical, obtainable,

and congruent among organizational units. Each objective should also be associated with a time line.

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Clearly established objectives offer many benefits. They provide direction, allow synergy, aid in
evaluation, establish priorities, reduce uncertainty, minimize conflicts,etc.

Short-r ange objectives can be identical to long-range objectives if an organization is already performing at the
targeted long-term level. For instance, if a company has an ongoing objective of 15 percent profit growth
every year and is currently achieving this objective, then the company's long-range and short-range objectives
for increasing profits coincide. The most important situation in which short-range objectives differ from long-
range objectives occurs when managers are trying to elevate organizational performance and cannot reach the
long- range target in just one year. Short-range objectives then serve as stair-steps or milestones.

The need for objectives at all organizational levels: objective setting should not stop with top management's
establishing of companywide performance targets. Company objectives need to be broken down into
performance targets for each separate business, product line, functional department, and individual work
unit. Company performance can't reach full potential unless each area of the organization does its part
and contributes directly to the desired companywide outcomes and results. This means setting performance
targets for each organization unit that support-rather than conflict with or negate-the achievement of
companywide strategic and financial objectives.
The ideal situation is a team effort in which each organizational unit strives to produce results in its area of
responsibility that contribute to the achievement of the company's performance targets and strategic vision. Such
consistency signals that organizational units know their strategic role and are on board in helping the company
move down the chosen strategic path and produce the desired results.

Stage 3: Crafting a strategy to achieve the objectives and vision

A company's strategy is at full power only when its many pieces are united. Ideally, the pieces and layers
of a company's strategy should fit together like a jigsaw puzzle. To achieve this unity, the strategizing
process generally has proceeded from the corporate level to the business level and then from the business
level to the functional and operating levels. Midlevel and frontline managers cannot do good strategy making
without understanding the company’s long-term direction and higher-level strategies. All the strategy makers
in a company are on the same team and the many different pieces of the overall strategy crafted at various
organizational levels need to be in sync and united. Anything less than a unified collection of strategies weakens
company performance.
A company's strategic plan lays out its future direction, performance targets, and strategy. Developing a strategic
vision, setting objectives, and crafting a strategy are basic direction-setting tasks. They map out the company's
direction, its short-range and long-range performance targets, and the competitive moves and internal action
approaches to be used in achieving the targeted business results. Together, they constitute a strategic plan for
coping with industry and competitive conditions, the expected actions of the industry's key players, and the
challenges and issues that stand as obstacles to the company's success.
In making strategic decisions, inputs from a variety of assessments are relevant. However, the core of any
strategic decision should be based on three types of assessmen ts.
1. The first concerns organizational strengths and weaknesses.
2. The second evaluates competitor strengths, weaknesses, and strategies, because an organization's
strength is of less value if it is neutralized by a competitor's strength or strategy.
3. The third assesses the competitive context, the customers and their needs, the market, and the market
environment.
These assessments focus on determining how attractive the selected market will be, given the strategy selected.
The goal is to develop a strategy that exploits business strengths and competitor weaknesses and neutralizes
business weaknesses and. competitor strength. The ideal is to compete in a healthy, growing industry with a
strategy based on strengths that are unlikely to be acquired or neutralized by competitor.

Stage 4 : Implementing & executing the strategy

To convert strategic plans into actions and results, a manager must be able to direct organizational change,
motivate people, build and strengthen company competencies and competitive capabilities, create a strategy-
supportive work climate, and meet or beat performance targets.
In most situations, managin g the str ategy-execution process in cludes the f ollowin g pr incipal aspects:
 Staffing the organization with the needed skills and expertise, consciously building and strengthening
strategy-supportive competencies and competitive capabilities, and organizing the work effort.
 Developing budgets that steer ample resources into those activities critical to strategic success.
 Using the best-known practices to perform core business activities and pushing for continuous
improvement.
 Installing information and operating systems that enable company personnel to better carry out their
strategic roles day in and day out.
 Motivating people to pursue the target objectives energetically

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 Tying rewards and incentives directly to the achievement of performance objectives and good strategy
execution.
 Creating a company culture and work climate conducive to successful strategy implementation and
execution.
 Exerting the internal leadership needed to drive implementation forward and keep improving strategy
execution. When the organization encounters stumbling blocks or weaknesses, management has to see that
they are addressed and rectified quickly.

Good strategy execution involves creating strong "fits" between strategy and organizational capabilities, between
strategy and the reward structure, between strategy and internal operating systems, and between strategy
and the organization's work climate and culture.

Monitoring d evelopments, evaluating performan ce and making corrective adjustments

So long as the company's direction and strategy seem well matched to industry and competitive conditions
and performance targets are being met, company executives may decide to stay the course. Simply fine-tuning the
strategic plan and continuing with ongoing efforts to improve strategy execution are sufficient.
But whenever a company encounters disruptive changes in its external environment, questions need to be
raised about the appropriateness of its direction and strategy. If a company experiences a downturn in its
market position or shortfalls in performance, then company managers are obligated to ferret out whether the
causes relate to poor strategy, poor execution, or both and then to take timely corrective action. A company's
direction, objectives, and strategy have to be revisited anytime external or internal conditions warrant. It is to be
expected that a company will modify its strategic vision, direction, objectives, and strategy over time.
Proficient strategy execution is always the product of much organizational learning. It is achieved unevenly
– coming quickly in some areas and proving nettlesome and problematic in others. Periodically assessing what
aspects of strategy execution are working well and what needs improving is normal and desirable. Successful
strategy execution entails vigilantly searching for ways or continuously improve and then making corrective
adjustments whenever and wherever it is useful to do so.

STRATEGIC ALTERNATIVES
MICHAEL PORTER’S GENERI C S TRATEGIES
According to Porter, strategies allow organizations to gain competitive advantage from three different bases: cost
leadership, differentiation, and focus. Porter calls these base generic strategies.

Cost Leadership Strategies

This generic strategy calls for being the low cost producer in an industry for a given level of quality. The firm sells its
products either at average industry prices to earn a profit higher than that of rivals, or below the average industry
prices to gain market share. In the event of a price war, the firm can maintain some profitability while the competition
suffers losses. Even without a price war, as the industry matures and prices decline, the firms that can produce more
cheaply will remain profitable for a longer period of time. The cost leadership strategy usually targets a broad market.

Some of the ways that firms acquire cost advantages are by improving process efficiencies, gaining unique access to a
large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some
costs altogether. If competing firms are unable to lower their costs by a similar amount, the firm may be able to sustain
a competitive advantage based on cost leadership.

Firms that succeed in cost leadership often have the following internal strengths:
 Access to the capital required to make a significant investment in production assets; this investment
represents a barrier to entry that many firms may not overcome.
 Skill in designing products for efficient manufacturing, for example, having a small component count to
shorten the assembly process.
 High level of expertise in manufacturing process engineering.
 Efficient distribution channels.

Striving to be the low-cost producer in an industry can be especially effective when the market is composed of
many price-sensitive buyers, when there are few ways to achieve product differentiation, when buyers do not
care much about differences from brand to brand, or when there are a large number of buyers with significant
bargaining power.

Some risks of pursuing cost leadership are that competitors may imitate the strategy, thus driving overall
industry profits down; that technological breakthroughs in the industry may make the strategy ineffective; or that
buyer interest may swing to other differentiating features besides price.

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Differentiation Strategies
A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued
by customers and that customers perceive to be better than or different from the products of the competition.
A differentiation strategy should be pursued only after a careful study of buyers’ needs and preferences
to determine the feasibility of incorporating one or more differentiating features into a unique product that
features the desired attributes. A successful differentiation strategy allows a firm to charge a higher price for its
product and to gain customer loyalty because consumers may become strongly attached to the differentiation
features.

Firms that succeed in a differentiation strategy often have the following internal strengths:
 Access to leading scientific research.
 Highly skilled and creative product development team.
 Strong sales team with the ability to successfully communicate the perceived strengths of the product.
 Corporate reputation for quality and innovation.

The risks associated with a differentiation strategy include imitation by competitors and changes in customer tastes.
Additionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their
market segments.

A risk of pursuing a differentiation strategy is that the unique product may not be valued highly enough by
customers to justify the higher price. When this happens, a cost leadership strategy easily will defeat a
differentiation strategy. Another risk of pursuing a differentiation strategy is that competitors may develop
ways to copy the differentiating features quickly. Firms thus must find durable sources of uniqueness that
cannot be imitated quickly or cheaply by rival firms.

Focus Strategies
A successful focus strategy depends on an industry segment that is of sufficient size, has good growth
potential, and is not crucial to the success of other major competitors. Midsize and large firms can effectively
pursue focus-based strategies only in conjunction with differentiation or cost leadership-based strategies. All
firms in essence follow a differentiated strategy. Because only one firm can differentiate itself with the lowest
cost, the remaining firms in the industry must find other ways to differentiate their products.
Focus strategies are most effective when consumers have distinctive preferences or requirements and
when rival firms are not attempting to specialize in the same target segment.
Risks of pursuing a focus strategy include the possibility that numerous competitors will recognize
the successful focus strategy and copy it, or that consumer preferences will drift toward the product attributes
desired by the market as a whole. An organization using a focus strategy may concentrate on a particular
group of customers, geographic markets, or on particular product-line segments in order to serve a well-
defined but narrow market better than competitors who serve a broader market.

Generic Strategies and Industry Forces

In the above diagram, strategies have been shown depending upon the market size to be targeted or the strategic
advantage to be obtained:-

Low Cost Provider Strategy:-

 The target segment is broad cross- section of the market
 Here the firm try to concentrate on reducing the cost of production & capturing the entire market.
 Offer economical prices/good value
 A continuous search for cost reduction without sacrificing acceptable quality and essential features

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Broad Differentiation Strategy

 The target segment is broad cross- section of the market
 An ability to offer buyers something different from competitors
 Build in whatever features buyers are willing to pay for
 Charge a premium price to cover the extra costs of differentiating features

Focused Low Cost Strategy

 The firm here concentrates in the narrow buyer segments on the basis of lower cost
 Here the firm would concentrate on particular section so that the narrow buyer segment consumes more
quantity of the product at lower cost.

Focused Differentiation Strategy

 The firm here concentrates in the narrow buyer segments on the basis of product differentiation
 The niche (focused low cost) or special attributes that appeal to the tastes or requirements of niche
members

Best-Cost Provider Strategy

 The new model of best cost provider strategy is a further development of above generic strategies.
 The target segment is Value- conscious buyer
 People are almost always attracted to a bargain, and there are companies that want to use this to their
advantage.  The answer is to operate their business based on a best-cost provider strategy. 
 Companies that employ this type of strategy strive to include attractive and often upscale features in their
products or services while also offering a price lower than the customer would expect for a product with such
features. 
 This kind of strategy requires the company to balance between cost control and special features that drive
prices upward. 
 A best-cost provider strategy is effective in a market that has a wide range of products with varying features.

4.3 Grand strategies/directional strategies Various strategy alternatives are available to a firm for achieving its
growth objective. Here we shall see what these alternatives are, how they have been classified into a few broad
categories, We shall also analyse the scope of each of these alternatives, since it is in view of their scope that firms
choose the particular alternative. The corporate strategies a firm can adopt have been classified into four broad
categories: stability, expansion, retrenchment and combination known as grand strategies. Grand strategies,
which are often called master or business strategies, are intended to provide basic direction for strategic actions.
They are seen as the basic of coordinated and sustained efforts directed toward achieving long-term business
objectives.

CHARACTERISTICS AND SCOPE OF VARIOU S GRAND STRATEGIES

STABILITY STRATEGY:
1. A firm opting for stability strategy stays with the same business, same product- market posture and
functions, maintaining same level of effort as at present.
2. The endeavour is to enhance functional efficiencies in an incremental way, through better deployment
and utilization of resources. The assessment of the firm is that the desired income and profits would be
forthcoming through such incremental improvements in functional efficiencies.
3. Naturally, the growth objective of firms employing this strategy will be quite modest.
4. Stability strategy does not involve a redefinition of the business of the corporation.
5. It is basically a safety-oriented strategy.
6. It does not warrant much of fresh investments.
7. The risk is also less.
8. It is a fairly frequently employed strategy.
9. With the stability strategy, the firm has the benefit of concentrating its resources and attention on the existing
businesses/products and markets.
10. But the strategy does not permit the renewal process of bringing in fresh investments and new
products and markets for the firm.

EXPANSION STRATEGY:
1. Expansion strategy is the opposite of stability strategy. While in stability strategy, rewards are limited,
in expansion strategy they are very high. In the matter of risks, too, the two are the opposites of each other.
2. Expansion strategy is the most frequently employed generic strategy.
3. Expansion strategy is the true growth strategy. A firm with a mammoth growth ambition can meet its
objective only through the expansion strategy.

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4. Expansion strategy involves a redefinition of the business of the corporation.

5. The process of renewal of the firm through fresh investments and new businesses/products/markets is
facilitated only by expansion strategy.
6. Expansion strategy is a highly versatile strategy; it offers several permutations and combinations for
growth. A firm opting for the expansion strategy can generate many alternatives within the strategy
by altering its propositions regarding products, markets and functions and pick the one that suits it most.

Ex pansion strategy holds withi n its f old two major str ategy r outes: Inte nsif ication and Diversification
With intensification strategy, the firm pursues growth by working with its current businesses
Intensification, in turn, encompasses three alternative routes:
Market penetration strategy:- In this strategy, it would mean that the firm aims to sell more of its existing
products in the markets that they are already in. This would translate into allocating more resources and
efforts to build up sales and marketing activities to attain revenue growth. Indirectly, the firm is also trying to
increase its market share. Generally, this may seem less risky to a certain extent because the firm is already
dealing in the same markets and products, however there may be limitations as to how much growth one can
derive in this strategy

Market development strategy:- This happens when a firm decides to sell its existing products into new
geographical markets or new market segments (another defined target market). The firm would also need to
spend on sales and marketing to persuade consumers in new markets to purchase the product/services

Product development strategy:- This strategy on the other hand, necessitates developing new products to be
sold in existing markets. This can be seen as a quite common process because for a company to sustain its
presence and growth, it cannot rely on a single product range. For instance, in the retail industry of product
consumables like shampoo, cosmetics and even apparels, companies are competitively refreshing their
product lines to keep in touch with consumers as well as to keep up with certain trends, market needs/tastes
and etc. One would need some good grasp of market knowledge and skills to come with new product
introductions that suits consumer's needs

Diversification strategy involves expansion into new businesses that are outside the current businesses and
markets.
♦ There are three broad types of diversification
♦ Vertically integrated diversification
♦ Concentric diversification
♦ Conglomerate diversification
♦ Vertically integrated diversification involves going into new businesses that are related to the current ones.
♦ It has two components – forward integration and backward integration.

♦ The firm remains vertically within the given product-process sequence; the intermediaries in the chain become
new businesses.

♦ In concentric diversification, too, the new products are connected to the firm's existing process/technology.
But the new products are not vertically linked to the existing ones. They are not intermediates. They serve new
functions in new markets. A new business is spinned off from the firm's existing facilities.

♦ In conglomerate diversification too, a new business is added to the firm's portfolio. But, it is disjointed
from the existing businesses; in process/ technology/function, there is no connection between the new business
and the existing ones. It is unrelated diversification.

C. Divestment strategy:

♦ Divestment strategy involves retrenchment of some of the activities in a given business of the firm or sell-
out of some of the businesses as such.

♦ Divestment is to be viewed as an integral part of corporate strategy without any stigma attached.

♦ Like expansion strategy, divestment strategy, too, involves a redefinition of the business of the
corporation.

♦ Compulsions for divestment can be many and varied, such as

♦ Obsolescence of product/process

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♦ Business becoming unprofitable

♦ High competition

♦ Industry overcapacity

♦ Failure of strategy

Major reasons for organizations adopting different grand strategies: A. Stability strategy is adopted because:
♦ It is less risky, involves less changes and people feel comfortable with things as they are.

♦ The environment faced is relatively stable.

♦ Expansion may be perceived as being threatening.

♦ Consolidation is sought through stabilising after a period of rapid expansion.

B. Expansion strategy is adopted because:

♦ It may become imperative when environment demands increase in pace of activity.

♦ Psychologically, strategists may feel more satisfied with the prospects of growth from expansion; chief
executives may take pride in presiding over organizations perceived to be growth-oriented.

♦ Increasing size may lead to more control over the market vis-a-vis competitors.

♦ Advantages from the experience curve and scale of operations may accrue.

C. Retrenchment strategy is adopted because:

♦ The management no longer wishes to remain in business either partly or wholly due to continuous losses
and unviability.

♦ The environment faced is threatening.

♦ Stability can be ensured by reallocation of resources from unprofitable to profitable businesses.

D. Combination strategy is adopted because:

♦ The organization is large and faces complex environment.

♦ The organization is composed of different businesses, each of which lies in a different industry requiring
a different response.

Expansion Strategy

Expansion or growth strategy can either be through intensification or diversification. Igor Ansoff gave a
framework as shown which describe the intensification options available to a firm.

The most common expansion strategy is market penetration/concentration on the current business. The firm
directs its resources to the profitable growth of a single product, in a single market, and with a single technology.
Market Development

It consists of marketing present products, to customers in related market areas by adding different channels of
distribution or by changing the content of advertising or the promotional media.

Product Development

Product Development involves substantial modification of existing products or creation of new but related items
that can be marketed to current customers through establish channels.

Diversification Strategy

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Diversification endeavours can be related or unrelated to existing businesses of the firm. Based on the
nature and extent of their relationship to existing businesses, diversification endeavours have been classified into
four broad categories:

(i) Vertically integrated diversification

(ii) Horizontally integrated diversification

(iii) Concentric diversification

(iv) Conglomerate diversification

Vertically integrated diversification

In vertically integrated diversification, firms opt to engage in businesses that are related to the existing business
of the firm. The firm remains vertically within the same process. Sequence It moves forward or backward in the
chain and enters specific product/process steps with the intention of making them into new businesses for
the firm. The characteristic feature of vertically integrated diversification is that here, the firm does not jump
outside the vertically linked product-process chain. The example of Reliance Industries provided at the close of
this chapter illustrates this dimension of vertically integrated diversification.

Horizontal integrated diversification

Through the acquisition of one or more similar business operating at the same stage of the production-marketing
chain that is going into complementary products, by-products or taking over competitors’ products.

RELATED DIVERSIFICATION
• Exchange or share assets or competencies, thereby exploiting
• Brand name
• Marketing skills
• Sales and distribution capacity
• Manufacturing skills
• R&D and new product capability
• Economies of scale

UNRELATED DIVERSIFICATION
• Manage and allocate cash flow.
• Obtain high ROI.
• Obtain a bargain price.
• Refocus a firm.
• Reduce risk by operating in multiple product markets.
• Tax benefits.
• Obtain liquid assets.
• Vertical integration.
• Defend against a takeover.

Concentric diversification too amounts to related diversification. In concentric diversification, the new
business is linked to the existing businesses through process, technology or marketing. The new product is
a spin-off from the existing facilities and products/processes. This means that in concentric diversification too,
there are benefits of synergy with the current operations. However, concentric diversification differs from
vertically integrated diversification in the nature of the linkage the new product has with the existing ones. While
in vertically integrated diversification, the new product falls within the firm's current process-product chain, in
concentric diversification, there is a departure from this vertical linkage. The new product is only connected in a
loop-like manner at one or more points in the firm's existing process/technology/product chain.

Conglomerate diversification
In conglomerate diversification, no such linkages exist; the new businesses/ products are disjointed from the
existing businesses/products in every way; it is a totally unrelated diversification. In
process/technology/function, there is no connection between the new products and the existing ones.
Conglomerate diversification has no common thread at all with the firm's present position.

Retrenchment, Divestment and Liquidation Strategies

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Retrenchment grand strategy is followed when an organization substantially reduces the scope of its
activity. This is done through an attempt to find out the problem areas and diagnose the causes of the
problems. Next, steps are taken to solve the problems. These steps result in different kinds of retrenchment
strategies. If the organization chooses to focus on ways and means to reverse the process of decline, it adopts
at turnaround strategy. If it cuts off the loss-making units, divisions, or SBUs, curtails its product line, or reduces
the functions performed, it adopts a divestment (or divestiture) strategy. If none of these actions work, then it
may choose to abandon the activities totally, resulting in a liquidation strategy. We deal with each of these
strategies below.

Turnaround Strategies
Retrenchment may be done either internally or externally. For internal retrenchment to take place, emphasis is
laid on improving internal efficiency, known as turnaround strategy.
There are certain conditions or indicators which point out that a turnaround is needed if the organization has to
survive. These danger signs are:
♦ Persistent negative cash flow

♦ Negative profits

♦ Declining market share

♦ Deterioration in physical facilities

♦ Overmanning, high turnover of employees, and low morale

♦ Uncompetitive products or services

♦ Mismanagement

For turnaround strategies to be successful, it is imperative to focus on the short and long-term financing needs as
well as on strategic issues. A workable action plan for turnaround should include:
Analysis of product, market, production processes, competition, and market segment positioning.
Clear thinking about the market place and production logic. Implementation of plans by target-setting, feedback,
and remedial action. A set of ten elements that contribute to turnaround are:
♦ Changes in the top management

♦ Initial credibility-building actions

♦ Neutralising external pressures

♦ Initial control

♦ Identifying quick payoff activities

♦ Quick cost reductions

♦ Revenue generation

♦ Asset liquidation for generating cash

♦ Mobilization of the organizations

♦ Better internal coordination.

Divestment Strategies

Divestment strategy involves the sale or liquidation of a portion of business, or a major division, profit
centre or SBU. Divestment is usually a part of rehabilitation or restructuring plan and is adopted when a
turnaround has been attempted but has proved to be unsuccessful. The option of a turnaround may even be
ignored if it is obvious that divestment is the only answer.
A divestment strategy may be adopted due to various reasons:

♦ A business that had been acquired proves to be a mismatch and cannot be integrated within the company.

With Best Wishes, CA Pankaj Lohiya, M.No. 9772058169

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♦ Persistent negative cash flows from a particular business create financial problems for the whole company,
creating the need for divestment of that business.

♦ Severity of competition and the inability of a firm to cope with it may cause it to divest.

♦ Technological upgradation is required if the business is to survive but where it is not possible for the
firm to invest in it, a preferable option would be to divest.

♦ A better alternative may be available for investment, causing a firm to divest a part of its unprofitable
businesses.

Liquidation Strategies

A retrenchment strategy considered the most extreme and unattractive is liquidation strategy, which involves
closing down a firm and selling its assets. It is considered as the last resort because it leads to serious
consequences such as loss of employment for workers and other employees, termination of opportunities where
a firm could pursue any future activities, and the stigma of failure. Many small-scale units, proprietorship
firms, and partnership ventures liquidate frequently but medium-and large-sized companies rarely liquidate in
India. The company management, government, banks and financial institutions, trade unions, suppliers and
creditors, and other agencies are extremely reluctant to take a decision, or ask, for liquidation.

Selling assets for implementing a liquidation strategy may also be difficult as buyers are difficult to find.
Moreover, the firm cannot expect adequate compensation as most assets, being unusable, are considered as
scrap.

Liquidation strategy may be unpleasant as a strategic alternative but when a "dead business is worth more than
alive", it is a good proposition. For instance, the real estate owned by a firm may fetch it more money than the
actual returns of doing business. When liquidation is evident (though it is difficult to say exactly when), an
abandonment plan is desirable. Planned liquidation would involve a systematic plan to reap the maximum
benefits for the firm and its shareholders through the process of liquidation. Under the Companies Act, 1956,
liquidation (termed as winding up) may be either by the court, voluntary, or subject to the supervision of the
court.

With Best Wishes, CA Pankaj Lohiya, M.No. 9772058169