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[BBAC601] CLASS NOTES [Business policy and strategy]

CORPORATE LEVEL STRATEGIES

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CHAPTER OVERVIEW
Market
Penetration

Market
Development

Production
Development

Intensification
Backward
Vertically
Integrated Forward

Diversification
Corporate Strategy Alternatives

Stability Diversification

Growth/ Merger &

Expansion Acquisition

Retrenchment Horizontally
Strategic
Alliance Integrated
Concentric
Combination Diversification

Conglomerate
Diversification
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4.1 INTRODUCTION

As discussed in chapter 1, strategies are formulated at different levels of an

organization – corporate, business and functional. Corporate level strategies occupy
the highest level of strategic decision making and cover actions dealing with the
objective of the firm, acquisition and allocation of resources and coordination of
strategies of various SBUs for optimal performance. Top management of the
organization makes strategic decisions. The nature of strategic decisions tends to
be value-oriented, conceptual and less concrete than decisions at the business or
functional level.

4.2 TYPOLOGIES OF STRATEGIES

Businesses follow different types of strategies to enter the market and to stay and
grow in the market. A large number of strategies with different nomenclatures have
been employed by different businesses and also suggested by different authors
on strategy. For instance, William F Glueck and Lawrence R Jauch discussed
four generic strategies including stability, growth, retrenchment and
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combination. These strategies have also been called Grand Strategies/Directional

Strategies by many other authors. Michael E. Porter suggested competitive
strategies including Cost Leadership, Differentiation, Focus Cost Leadership and
Focus Differentiation which could be used by the corporates for their different
business units. Besides these, we come across functional strategies in the
literature on Strategic Management and Business Policy. Functional Strategies are meant
for strategic management of distinct functions such as Marketing, Financial,
Human Resource, Logistics, Production etc.

We can classify the different types of strategies on the basis of levels of

organisation, stages of business life cycle and competition as given in the table – 1.

Table – 1

Basis of Types
Classification

Level Corporate Level Business

Level
Functional Level

Stages of Business Life Entry/Introduction Stage - Market Penetration

Cycle Strategy
Growth Stage - Growth/Expansion Strategy
Maturity Stage - Stability Strategy
Decline Stage - Retrenchment/ Turnaround Strategy

Competition Competitive Strategies - Cost Leadership,

Differentiation, Focus
Collaboration Strategies - Joint Venture, Merger &
Acquisition, Strategic Alliance
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It may be noted that there is no water tight compartmentation between different
typologies. For instance, a startup or a new enterprise might follow either a
competitive strategy i.e., entering the market where a number of rivals are already
operating, or a collaborative strategy, i.e., enter into a joint venture with an
established company. However, majority of startups are launched on a small scale
and their main strategy is to penetrate the market and to reach the breakeven
stage at the earliest and later pursue growth strategy.
Reality Bite: Patanjali Ayurved adopted market penetration strategy and to
be successful. It concentrated on product development and high quality at low
cost. It is now at the growth stage and is following competitive strategies.
It is competing with both domestic and multinational companies.
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A going concern can continue with the competitive strategy or resort to

collaborative strategy to ensure business growth.

Business conglomerates having multiple product folios formulate strategies at

different levels, viz., corporate, business unit and functional. Corporate level strategies
also known as grand strategies are meant to provide ‘direction’ to the company.
Business level strategies are formulated for each product division known as
strategic business unit. Further to implement the corporate and business level
strategies, functional strategies are formulated in business areas like
production/operations, marketing, finance, human resources etc. In fact, big corporates
follow an elaborate system of strategy formulation, implementation and control at
different levels in the company to survive and grow in the turbulent business
environment. In this chapter, we shall discuss the corporate level strategies. Business
level and Functional level strategies have been discussed in chapter 5 and chapter 6
respectively.

The corporate strategies a firm can adopt may be classified into four broad
categories:

1. Stability strategy
2. Expansion strategy
3. Retrenchment strategy
4. Combinations strategy
The basic features of the corporate strategies are as follows:

Strategy Basic
Feature

Stability The firm stays with its current businesses and product markets;
maintains the existing level of effort; and is satisfied with
incremental growth.

Expansion Here, the firm seeks significant growth-maybe within the current
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businesses; maybe by entering new business that are related to
existing businesses; or by entering new businesses that are
unrelated to existing businesses.

Retrenchme The firm retrenches some of the activities in some business (es),
nt or drops the business as such through sell-out or liquidation.

Combinatio The firm combines the above strategic alternatives in some

n permutation/combination so as to suit the specific requirements of
the firm.
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4.2.1. Stability Strategy

One of the important goals of a business enterprise is stability - to safeguard its
existing interests and strengths, to pursue well established and tested objectives, to
continue in the chosen business path, to maintain operational efficiency on a
sustained basis, to consolidate the commanding position already reached, and to
optimise returns on the resources committed in the business.

A stability strategy is pursued by a firm when:

 It continues to serve in the same or similar markets and deals in same or

similar products and services.
 The strategic decisions focus on incremental improvement of functional
performance
Stability strategy is not a ‘do nothing’ strategy. It involves keeping track of new
developments to ensure that the strategy continues to make sense. This strategy is
typical for those firms whose product have reached the maturity stage of product
life cycle. Small organizations may also follow stability strategy to consolidate
their market position and prepare for the launch of growth strategies.

I. Characteristics of Stability Strategy

 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.
 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.
 Stability strategy does not involve a redefinition of the business of the
corporation.
 It is basically a safety-oriented, status quo oriented strategy.
 It does not warrant much of fresh investments.
 It involves minor improvements in the product and its packaging.
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 The risk is also less.
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 With the stability strategy, the firm has the benefit of concentrating its
resources and attention on the existing businesses/products and
markets.
 The growth objective of firms employing this strategy is quite modest.
Conversely, only firms with modest growth objective choose for this
strategy.
II. Major Reasons for Stability Strategy
 A product has reached the maturity stage of the product life cycle.
 It is less risky as it involves less changes and the staff feels
comfortable with things as they are.
 The environment faced is relatively stable.
 Expansion may be perceived as being threatening.
 Consolidation is sought through stabilizing after a period of rapid
expansion.
4.2.2. Growth/Expansion Strategy
Growth/Expansion strategy is implemented by redefining the business by
enlarging the scope of business and substantially increasing investment in the
business. It is a popular strategy that tends to be equated with dynamism, vigour,
promise and success. An enterprise on the move is more agreeable stereotype than a
steady-state enterprise. It is often characterised by significant reformulation of
goals and directions, major initiatives and moves involving investments,
exploration and onslaught into new products, new technology and new markets,
innovative decisions and action programmes and so on. Expansion also includes
diversifying, acquiring and merging businesses. This strategy may take the enterprise
along relatively unknown and risky paths, full of promises and pitfalls.

I. Characteristics of Growth/Expansion Strategy

 Expansion strategy involves a redefinition of the business of the
corporation.
 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.
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 Expansion strategy leads to business growth. A firm with a mammoth

growth ambition can meet its objective only through the expansion
strategy.
 The process of renewal of the firm through fresh investments and new
businesses/products/markets is facilitated only by expansion strategy.
 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.
 Expansion strategy holds within its fold two major strategy routes:
Intensification Diversification. Both of them are growth strategies; the
difference lies in the way in which the firm actually pursues the
growth.
II. Major Reasons for Growth/Expansion Strategy
 It may become imperative when environment demands increase in
pace of activity.
 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.
 Expansion may lead to greater control over the market vis-a-vis
competitors.
 Advantages from the experience curve and scale of operations may
accrue.
III. Types of Growth/ Expansion Strategy
1. Expansion through Diversification
Diversification is defined as entry into new products or product lines, new services
or new markets, involving substantially different skills, technology and knowledge. When
an established firm introduces a new product, which has little or no affinity with its
present product line and which is meant for a new class of customers different
from the firm’s existing customer groups, the process is known as conglomerate
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diversification. Both the technology of the product and the market are different
from the firm’s present experience.
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Innovative and creative firms always look for opportunities and challenges to grow, to
venture into new areas of activity and to break new frontiers with the zeal of
entrepreneurship. They feel that diversification offers greater prospects of growth
and profitability than expansion.

For some firms, diversification is a means of utilizing their existing facilities and
capabilities in a more effective and efficient manner. They may have excess
capacity or capability in manufacturing facilities, investible funds, marketing
channels, competitive standing, market prestige, managerial and other
manpower, research and development, raw material sources and so forth. Another
reason for diversification lies in its synergistic advantage. It may be possible to
improve the sales and profits of existing products by adding suitably related or new
products, because of linkages in technology and/or in markets.

Expansion or growth strategy can either be through intensification or

diversification:Igor Ansoff gave a framework as shown in figure which
describes the intensification options available to a firm.

Market Penetration Product Development

Increase market share
Increase product usage Add product features,
Increase the frequency used product refinement
Increase the quantity used Develop a new-generation
Find new application for current users product Develop new
product for the same market

Market Development Diversification involving new

products and new markets

Expand geographically target

new segments Related / Unrelated
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Figure: Product-Market Expansion Grid

(a) Intensification
(i) Market Penetration:Highly common expansion strategy is market
penetration/concentration on the current business. The firm directs its
resources to the profitable growth of its existing product in the existing
market.
(ii) 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.
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(iii) 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.
(b) Diversification
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

(i) 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 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.

Forward and Backward Integration: Forward and backward

integration forms part of vertically integrated diversification. In vertically
integrated diversification, firms opt to engage in businesses that are vertically
related to the existing business of the firm. The firm remains vertically within
the same process. While diversifying, firms opt to engage in businesses that are
linked forward or backward in the chain and enter specific product/process steps
with the intention of making them into new businesses for the firm.

Backward integration is a step towards, creation of effective supply by

entering business of input providers. Strategy employed to expand profits and
gain greater control over production of a product whereby a company will
purchase or build a business that will increase its own supply capability or
lessen its cost of production. For example, A large supermarket
chain considers to purchase a number of farms that would
provide it a significant

amount of fresh produce.

On the other hand, forward integration is moving forward in the value chain
and entering business lines that use existing products. Forward integration will
also take place where organizations enter into businesses of distribution
channels. For example, A coffee bean manufacture may choose to
merge with a coffee cafe.

(ii) 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 UNRELATED
DIVERSIFICATION DIVERSIFICATION

Exchange or share assets or • Investment in new product

competencies by exploiting portfolios.
• Employment of new technologies.
• Brand name •Focus on multiple products.
• Marketing skills •Reduce risk by operating in
• Sales and distribution capacity multiple product markets.
• Manufacturing skills •Defend against takeover bids.
• R&D and new product • Provide executive interest.
capability
• Economies of scale
Figure: Related vs. Unrelated Diversification
(iii) Concentric Diversification: 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.
(iv) 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. For example, A
cement manufacturer diversifies into the manufacture of steel and
rubber
products.

2. Expansion through Mergers and Acquisitions

Acquisition or merger with an existing concern is an instant means of achieving the
expansion. It is an attractive and tempting proposition in the sense that it
circumvents the time, risks and skills involved in screening internal growth
opportunities, seizing them and building up the necessary resource base required to
materialise growth. Organizations consider merger and acquisition proposals in a
systematic manner, so that the marriage will be mutually beneficial, a happy and
lasting affair.

Apart from the urge to grow, acquisitions and mergers are resorted to for
purposes of achieving a measure of synergy between the parent and the acquired
enterprises. Synergy may result from such bases as physical facilities, technical and
managerial skills, distribution channels, general administration, research and
development and so on. Only positive synergistic effects are relevant in this
connection which denotes that the positive effects of the merged resources are
greater than the some of the effects of the individual resources before merger or
acquisition.
Merger and acquisition in simple words are defined as a process of combining
two or more organizations together. There is a thin line of difference between the
two terms but the impact of combination is completely different in both the
cases. Some organizations prefer to grow through mergers. Merger is considered to
be a process when two or more companies come together to expand their
business operations. In such a case the deal gets finalized on friendly terms and both
the organizations share profits in the newly created entity.In a merger two
organizations combine to increase their strength and financial gains along with
breaking the trade barriers.

When one organization takes over the other organization and controls all its
business operations, it is known as acquisitions. In this process of acquisition, one
financially strong organization overpowers the weaker one. Acquisitions often
happen during recession in economy or during declining profit margins. In this
process, one that is financially stronger and bigger establishes it power. The
combined operations then run under the name of the powerful entity. A deal in
case of an acquisition is often done in an unfriendly manner, it is more or less a
forced association where the powerful organization either consumes the
operation or a company in a weaker position is forced to sell its entity.

Types of Mergers

(a) Horizontal Merger

The types of mergers are similar to types of diversification.

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

merger with a direct competitor. The principal objective behind this type of
merger is to achieve economies of scale in the production process by shedding
duplication of installations and functions, widening the line of products, decrease in
working capital and fixed assets investment, getting rid of competition and so on.
For example, formation of Brook Bond Lipton India Ltd. through the merger
of Lipton India and Brook Bond.

(b) Vertical Merger:

It is a merger of two organizations that are operating in the same industry but at
different stages of production or distribution system. This often leads to increased
synergies with the merging firms. If an organization takes over its
supplier/producers of raw material, then it leads to backward integration. On the other
hand, forward integration happens when an organization decides to take over its
buyer organizations or distribution channels. Vertical merger results in many
operating and financial economies. Vertical mergers help to create an
advantageous position by restricting the supply of inputs to other players, or by
providing the inputs at a higher cost.

(c) Co-generic Merger:

In Co-generic merger two or more merging organizations are associated in some way
or the other related to the production processes, business markets, or basic required
technologies. Such merger include the extension of the product line or acquiring
components that are required in the daily operations. It offers great opportunities
to businesses to diversify around a common set of resources and strategic
requirements. For example, an organization in the white goods category
such as refrigerators can diversify by merging with another
organization having business in kitchen appliances.

(d) Conglomerate Merger:

Conglomerate mergers are the combination of organizations that are unrelated to
each other. There are no linkages with respect to customer groups, customer
functions and technologies being used. There are no important common factors
between the organizations in production, marketing, research and development and
technology. In practice, however, there is some degree of overlap in one or more
of these factors.

3. Expansion through Strategic Alliance

A strategic allianceis a relationship between two or more businesses that enables
each to achieve certain strategic objectives which neither would be able to
achieve on its own. The strategic partners maintain their status as independent and
separate entities, share the benefits and control over the partnership, and continue to
make contributions to the alliance until it is terminated. Strategic alliances are
often formed in the global marketplace between businesses that are based in
different regions of the world.

Advantages of Strategic Alliance

Strategic alliance usually are only formed if they provide an advantage to all the
parties in the alliance. These advantages can be broadly categorised as follows:
1. Organizational: Strategic alliance helps to learn necessary skills and obtain
certain capabilities from strategic partners. Strategic partners may also help to
enhance productive capacity, provide a distribution system, or extend supply
chain. Strategic partners may provide a good or service that complements
thereby creating a synergy. Having a strategic partner who is
 well-known and respected also helps add legitimacy and creditability to a new
venture.

2. Economic: There can be reduction in costs and risks by distributing them

across the members of the alliance. Greater economies of scale can be
obtained in an alliance, as production volume can increase, causing the cost per
unit to decline. Finally, partners can take advantage of co-specialization,
creating additional value, such as when a leading computer manufacturer
bundles its desktop with a leading monitor manufacturer’s monitor.
3. Strategic: Rivals can join together to cooperate instead of compete. Vertical
integration can be created where partners are part of supply chain. Strategic
alliances may also be useful to create a competitive advantage by the
pooling of resources and skills. This may also help with future business
opportunities and the development of new products and technologies.
Strategic alliances may also be used to get access to new technologies or to
pursue joint research and development.
4. Political: Sometimes strategic alliances are formed with a local foreign
business to gain entry into a foreign market either because of local
prejudices or legal barriers to entry. Forming strategic alliances with
politically-influential partners may also help improve your own influence and
position.
Disadvantages of Strategic Alliance

Strategic alliances do come with some disadvantages and risks. The major
disadvantage is sharing. Strategic alliances require sharing of resources and
profits, and also sharing knowledge and skills that otherwise organisations may not
like to share. Sharing knowledge and skills can be problematic if they involve trade
secrets. Agreements can be executed to protect trade secrets, but they are only as
good as the willingness of parties to abide by the agreements or the courts
willingness to enforce them.

Strategic alliances may also create a potential competitor. An ally may become a
competitor in future when it decides to separate out.
4.2.3. Retrenchment/Turnaround Strategy
(a) Retrenchment Strategy: It is followed when an organization substantially
reduces the scope of its activity. This is done through an attempt to find out the
problem areas and diagnose the causes of the problems. Next, steps are taken
to solve the problems. 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.

(b) Turnaround Strategy: 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 company has to survive. These danger signals are:

 Persistent negative cash flow from business(es)

 Uncompetitive products or services
 Declining market share
 Deterioration in physical facilities
 Over-staffing, high turnover of employees, and low morale
 Mismanagement
Action Plan for Turnaround

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 would involve the following stages:

 Stage One – Assessment of current problems: The first step is

to assess the current problems and get to the root causes and the extent
of damage the problem has caused. Once the problems are identified, the
resources should be focused toward those areas essential to efficiently
work on correcting and repairing any immediate issues.
 Stage Two –Analyze the situation and develop a strategic
plan: Before you make any major changes; determine the chances of
the business’s survival. Identify appropriate strategies and develop a
preliminary action plan. For this one should look for the viable core
businesses, adequate bridge financing and available organizational
resources. Analyze the strengths and weaknesses in the areas of
competitive position. Once major problems and opportunities are
 identified, develop a strategic plan with specific goals and detailed
functional actions.

 Stage Three –Implementing an emergency action plan: If the

organization is in a critical stage, an appropriate action plan must be
developed to stop the bleeding and enable the organization to
survive. The plan typically includes human resource, financial,
marketing and operations actions to restructure debts, improve
working capital, reduce costs, improve budgeting practices, prune
product lines and accelerate high potential products. A positive
operating cash flow must be established as quickly as possible and
enough funds to implement the turnaround strategies must be raised.
 Stage Four –Restructuring the business: The financial state of the
organization’s core business is particularly important. If the core
business is irreparably damaged, then the outlook for the entire
organization may be bleak. Prepare cash forecasts, analyze assets and
debts, review profits and analyze other key financial functions to
position the organization for rapid improvement.
During the turnaround, the “product mix” may be changed, requiring the
organization to do some repositioning. Core products neglected over
time may require immediate attention to remain competitive. Some
facilities might be closed; the organization may even withdraw from
certain markets to make organization leaner or target its products
toward a different niche.

The ‘people mix’ is another important ingredient in the organization’s

competitive effectiveness. Reward and compensation systems that
encourage dedication and creativity encourage employees to think
profits and return on investments.

 Stage Five –Returning to normal: In the final stage of

turnaround strategy process, the organization should begin to show
signs of profitability, return on investments and enhancing economic
value- added. Emphasis is placed on a number of strategic efforts
such as carefully adding new products and improving customer
 service, creating alliances with other organizations, increasing the
market share, etc.
The important elements of turnaround strategy are as follows:

 Changes in the top management

  Initial credibility-building actions
 Neutralising external pressures
 Identifying quick payoff activities
 Quick cost reductions
 Revenue generation
 Asset liquidation for generating cash
 Better internal coordination
(c) Divestment Strategy: 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.

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.

(d) Liquidation Strategy: 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.

I. Characteristics of Retrenchment/Turnaround Strategy

 This strategy involves retrenchment/divestment 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
(a) Obsolescence of product/process
(b) Business becoming unprofitable and unviable
(c) Inability to cope up with cut throat competition
(d) Industry overcapacity
(e) Failure of existing strategy

II. Major Reasons for Retrenchment/Turnaround Strategy

 The management no longer wishes to remain in business either partly or
wholly due to continuous losses and unviability.
 The management feels that business could be made viable by
divesting some of the activities or liquidation of unprofitable activities.
 A business that had been acquired proves to be a mismatch and
cannot be integrated within the company.
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[Paper Code] CLASS NOTES [Paper Name]

 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.
4.2.4. Combination Strategy
The above strategies are not mutually exclusive. It is possible to adopt a mix
of the above to suit particular situations. An enterprise may seek stability in
some areas of activity, expansion in some and retrenchment in the
others. Retrenchment of ailing products followed by stability and capped
by expansion in some situations may be thought of. For some
organizations, a strategy by diversification and/or acquisition may call for
a retrenchment in some obsolete product lines, production facilities and
plant locations.

I. Major Reasons for Combination Strategy

 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.

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Strategic Control

Everything you need to know about strategic control. Strategic controls are intended
to steer the company towards its long-term strategic direction.

After a strategy is selected, it is implemented over time so as to guide a firm within

a rapidly changing environment. Strategies are forward-looking, and based on
management assumptions about numerous events that have not yet occurred.

Strategic control is concerned with tracking the strategy as it is being implemented,

detecting problems or changes in the premises and making necessary adjustments.

In contrast to post- action control, strategic control is concerned with controlling and
guiding efforts on behalf of the strategy as action is taking place.

Strategic control is related to that aspect of strategic management through which an

organization ensures whether it is achieving its objectives contemplated in the strategic
action. If not, what corrective actions are required for strategic effectiveness.

Strategic Control: 3 Types of Strategic Control

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An organization needs to integrate its strategy

and control systems to ensure that strategy helps the organization in achieving its goals.

Strategic control specifically aims at ensuring that the organization is maintaining an

effective alignment with its environment and moving toward achieving its strategic goals.

Griffin has indicated that strategic control focuses on five aspects of Organizations –
structure, leadership, technology, human resources, and information and operational
control systems.

An organization cannot run without an effective evaluation and control system. Control
refers to any process adopted; by managers to align actions of people and systems of the
organization with its goals and interests.

Control is, in fact, regulation of the activities of an organization so that the managers and
other employees can have some kind of indication regarding performance about goals.

Sound control systems help an organization become effective and efficient. Control
systems can be defined as ‘evaluative and feedback processes to let people know their
managers are paying attention to what they do and can tell when undesired deviations
occur.’

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Control thus makes a comparison of the organization in terms of its performance – where
it is now and where it is expected to be. It also gives a signal to managers for any
corrective actions.

For example, A Courier Service has a performance goal of delivering 100; percent of its
parcels on time to its customers. The company finds that its on-time delivery has fallen to
98 percent, the control system would signal the problems to managers. The managers can
then undertake appropriate measures to correct the problem to raise its delivery-
performance over 98 percent.

Importance of Strategic Control

Strategic control systems provide managers the tools to regulate and govern their
activities.

In strategic control, managers first select strategy and organization structure and then

create control systems to evaluate and monitor the progress of activities directed towards
implementing strategies.

Finally, they adopt corrective actions through adjustments in the strategy if variations are
detected.

Strategic controls can be both proactive and reactive. When proactive, control systems
help in keeping an organization on track, anticipating future events arid responding to
opportunities and threats.

When reactive, strategic controls detect deviations after events have occurred and then
dollar corrective actions.

Strategic control systems further help managers achieve superior efficiency, quality,
innovation, and responsiveness to customers. Strategic managers can measure efficiency
by comparing the total inputs with the total outputs (how many units of inputs are used to

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produce a unit of output). Strategic managers create a control system to monitor the
quality of products.

When customers’ complaints are nonexistent or negligible arid hardly customers return
the product (such as machinery/equipment) for repair, managers indicate the quality of
products.

The strategic control system can also help in encouraging the employees to think about
innovation through the decentralization of authority/empowerment of employees,
monitoring the performance of each workgroup/team.

Lastly, the strategic control system makes employees more responsive to customers
through evaluating and monitoring employees’ behavior and contact with customers.

3 Types of Strategic Control

Strategic controls are mainly of 3 types:

1. Financial Controls.

2. Output Controls.

3. Behavior Controls.

1. Financial Controls

Financial control systems are concerned with the financial resources of an organization.
Financial resources are regularly flowing into the organization, and are also flowing out of
the organization.

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Some of the financial resources are held by the organization for internal use or some other
reasons. Managers use financial control systems to measure a company’s financial
performance.

For effective financial control, they establish financial goals (e.g., growth, profitability,
returns to shareholders) and then measure the actual achievement of those goals.

The most popular tools of financial controls are budgetary control, financial statements,
ratio analysis, and financial audits. Budgetary control is implemented by using a budget,
which is a plan expressed in numerical terms.

Although budget may be expressed in quantitative terms (units of output, time etp.), a
budget (annual or quarterly or monthly) is usually expressed in financial terms.

Managers may develop budgets for the entire organization, or even for the individual
departments and divisions. They use the budgets for measuring performance.

Budgets also help them in making comparisons from year to year and even across
departments and divisions. Financial statements mainly include a balance sheet, income
statement, cash flow statement, and funds flow statement.

Ratio analysis is concerned with the calculation of financial ratios to assess the financial
health of an organization. The important ratios that are usually used as parts of financial
control include liquidity ratios, debt ratios, coverage ratios, and operating ratios.

Financial audits include an internal audit by an organization’s staff and External audit by
qualified chartered accountant firms.

2. Output Controls/Operations Control

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In the case of the output control system, managers forecast performance goals for each
unit and employee. They forecast the actual performance of the units’ end employees.

Lastly, they compare the actual performance against the goals already set for them.

When the performance of employees or units is linked to the reward system, the output
control itself provides an incentive structure for employee motivation in the organization .

Learn more

Output control may take two forms; screening control and position control.

The first one concerns itself with meeting standards for product or service quality during
the actual production process/performance process. The latter deals with the quality of
products after completion of the transformation process.

3. Behavior Controls

A behavior control system refers to a comprehensive system of rules and procedures.

These are prescribed to direct the behavior/actions of employees at each level of the
organization. Rules and procedures standardize the way of reaching the goals.

Two forms of behavior control are;

i. operating budgets,

ii. standardization.

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The operating budget includes the allocations of resources that need to be used for
achieving goals by managers. Most commonly, managers at one level allocate to
managers at a lower level a specific amount of resources to use to produce goods and
services.

Managers’ efficiency .depends on to what extent they can stay within the allocated
resources, i.e., the budget.

Learn more

Standardization denotes the degree to which a business-unit specifies how decisions are to

be made so that employees’ behavior becomes predictable.’

Inputs (things that are used to produce goods or services such as raw materials, parts, and
labor), conversion activities (programming work activities so that they are done the same
way time and again), and outputs (performance characteristics of finished products or
services) can be standardized in a business unit.

All these are parts of behavioral control. Successful strategy implementation requires,
among others, a control system that matches the organization’s strategy.

Strategic managers should ensure that financial and output controls are supplemented with
behavior controls for efficient achievement of goals.

Monitoring

Strategy implementation requires a framework both for monitoring various actions

undertaken to implement the strategic plan and for offering recommendations to make

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adjustments to the actions to fulfill the vision of the organization better as outlined in the
plan.

The framework for monitoring provides a means for measuring the effect of each action,
identifies participants and their roles monitoring the actions, lays put time-frame for
monitoring, a specifies how the monitoring program could be documented information
obtained from the monitoring program will be used to offer recommendations to decision-
makers as to what changes the strategic plan may be needed to attain specif objectives in
the plan.

The management and staff of the organization will be involved in monitoring activities.

Evaluation Plan

This strategic plan requires an evaluation plan that would concentrate specifically on
whether the objectives already determined would have been achieved and whether it has
made an impact.

In addition to monitoring of the plan-activities, CMS will undertake both ‘ongoing

evaluation’ to assess the progress of activities and ‘impact evaluation’ to assess the impact
of the activities under this plan.

Evaluation needs to be carried out with the expectation that it would provide useful
information to several audiences, including the shareholders/owners.

Evaluation of the planned activities is expected to help in assessing whether the progress
and impact the activities/programs are likely to be sustainable in the long term and what
could affect sustainability.

The Timing of Evaluation and the Ways of Using Results

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An annual evaluation during the whole period of the strategic plan and impact evaluation
at the end of the plan would be worthwhile to gauge the level of progress of various plan-
activities and also the overall impact.

Methods of Information Collection and Analysis of Information

The organization can use such methods for data collection as a review of existing
documents (e.g., plan documents, surveys are special studies, CMS journals, and other
publications), use of information from the monitoring system, surveys with set
questionnaires, interviews (individual and group), observation, meetings, discussions and
workshops, tests (e.g., in training), etc.

The evaluators need to use quantitative and qualitative methods for the analysis of

information.

Output of Evaluation

The output of evaluations will have to be produced in terms of reports written in clearly
understood language.

Learn more

The evaluators to provide recommendations based on the contents of the evaluation

reports period the recommendation to at least be related to;

 What causes of action should be taken,

 how they should be implemented,

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 who will implement them and when,

 what constraints are likely to be involved,

 what will be needed to make sure the recommendations are acted upon,

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