Business Policy & Strategy

UNIT 4
 Strategy hierarchy
1. Corporate strategy: 1) growth strategy, 2)
stability strategy, 3) retrenchment strategy.
2. Business unit strategy: 1) cost leadership, 2)
differentiation, 3) focus, 4) mixed.
3. Functional strategy.

Prof. Dr. Majed El-Farra 2009 2

STRATEGY
Strategic alternatives revolve around the question of whether to continue or change
the business enterprise is currently in or improve the efficiency and effectiveness with
which the firm achieves its corporate objectives in its chosen business sector.

Corporate Level Strategies

Corporate strategies involve decisions concerning allocation of resources among
different businesses, transfer of resources from one business to another, and managing
the portfolio of business.

Characteristics of Strategy
• Long term in nature: The plan can be made in a short time, but the effect or impact
it has on the organization is in the long term or in the foreseeable future.
• Strategy contains elements of uncertainty
• It is directed towards the goals of the organization
• Dynamic in nature
• Strategy are normally complex
• Strategy affects the whole organization
Types of growth/expansion strategies

• Concentration Strategies
• Integration Strategies
• Diversification Strategies
• Cooperation Strategies
 Concentration strategies
• Concentration is a simple, first-level type of
expansion strategy. It involves converging
resources in one or more of a firm's
businesses in terms of their respective
customer needs, customer functions, or
alternative technologies - either singly or
jointly - in such a manner that expansion
results.

(c) Dr. Azhar Kazmi 2008 8

Ansoff’s product-market matrix
PRODUCT
PRESENT NEW

MARKET

MARKET PRODUCT
PRESENT PENETRATION DEVELOPMENT

MARKET DIVERSIFICATION
NEW DEVELOPMENT

(c) Dr. Azhar Kazmi 2008 9

1. Market penetration involves trying to gain additional share of a firm’s existing markets
using existing products. Often firms will rely on advertising to attract new customers with
existing markets. Ex Nike, for example, features famous athletes in print and television ads
designed to take market share within the athletic shoes business from Adidas and other
rivals

2. Market development involves taking existing products and trying to sell them within new
markets. One way to reach a new market is to enter a new retail channel. Starbucks, for
example, has stepped beyond selling coffee beans only in its stores and now sells beans in
grocery stores. This enables Starbucks to reach consumers that do not visit its coffeehouses.

3. Product development involves creating new products to serve existing markets. In the
1940s, for example, Disney expanded its offerings within the film business by going beyond
cartoons and creating movies featuring real actors. More recently, McDonald’s has gradually
moved more and more of its menu toward healthy items to appeal to customers who are
concerned about nutrition.
Integration Strategies

Integration strategy involves widening the scope of a firm’s business definition. The firm may
move up or down its value chain to serve the same group of customers.

Types of Integration Strategies

1. Horizontal integration: When an organisation takes up the same type of products at the
same level of production or marketing process.

2. Vertical integration: When an organisation starts making new products that serve its own
needs

3. Taper integration strategies require firms to make a part of their own requirements and to
buy the rest from outsiders. Ex In the case of Smithfield Foods, its purchase of Carroll’s
allowed it to produce 27% of the hogs it needed to process into pork.

4. Quasi integration strategies firms purchase most of their requirements from other firms in
which they have an ownership stake. Ex the pharmaceutical company Bristol-Myers Squibb
purchased 17% of the common stock of ImClone in order to gain access to new drug products
being developed through biotechnology.
 Diversification strategies
• Diversification involves a substantial change in
business definition - singly or jointly - in terms
of customer functions, customer groups, or
alternative technologies of one or more of a
firm's businesses.

• Diversification strategy involves expansion into

new businesses that are outside the current
businesses and markets.

(c) Dr. Azhar Kazmi 2008 20

ADVANTAGES OF DIVERSIFICATION

The following are the advantages of diversification:

1. As the economy changes, the spending patterns of the people
change. Diversification into a number of industries or product line can
help create a balance for the entity during these ups and downs.

2. There will always be unpleasant surprises within a single investment.

Being diversified can help in balancing such surprises.

3. Diversification helps to maximize the use of potentially underutilized

resources.

4. Certain industries may fall down for a specific time frame owing to
economic factors. Diversification provides movement away from
activities which may be declining.
DISADVANTAGES OF DIVERSIFICATION

The following are the disadvantages of diversification:

1. Entities entirely involved in profit-making segments will enjoy profit maximization.
However, a diversified entity will lose out due to having limited investment in the
specific segment. Therefore, diversification limits the growth opportunities for an
entity.

2. Diversifying into a new market segment will demand new skill sets. Lack of
expertise in the new field can prove to be a setback for the entity.

3. A mismanaged diversification or excessive ambition can lead to a company over

expanding into too many new directions at the same time. In such a case, all old
and new sectors of the entity will suffer due to insufficient resources and lack of
attention.

4. A widely diversified company will not be able to respond quickly to market

changes. The focus on the operations will be limited, thereby limiting the
innovation within the entity.

5. On understanding the advantages and disadvantages of diversification, we’ll see

the types of diversification strategies.
HORIZONTAL DIVERSIFICATION
This strategy of diversification refers to an entity offering new services
or developing new products that appeal to the firm’s current customer
base. For example, a dairy company producing cheese adds a new
variety of cheese to its product line.

VERTICAL DIVERSIFICATION
This form of diversification takes place when a company goes back to a
previous or next stage of its production cycle. For example, a company
involved in the reconstruction of houses starts selling construction
materials and paints. It may be forward integration or backward
integration.
 Concentric or related diversification

• Marketing-related concentric diversification

• Technology-related concentric diversification
• Marketing- and technology-related concentric
diversification

(c) Dr. Azhar Kazmi 2008 30

 Conglomerate or unrelated diversification

• When an organisation adopts a strategy which

requires taking up those activities which are
unrelated to the existing business definition of
one or more of its businesses either in terms
of their respective customer groups, customer
functions or alternative technologies

(c) Dr. Azhar Kazmi 2008 31

4. COOPERATION STRATEGIES

Competing or rival firms can benefit through mutual

cooperation when they have complimentary capabilities

1. Strategic Alliance

2. Joint Ventures

3. Mergers and Acquisitions

1. Strategic Alliance

When two or more independent firms combine their resources and capabilities for mutually
agreed common objectives.

When two or more firms unite to pursue a set of agreed upon goals

Reasons for Strategic Alliances

1. To enter new markets

2. To reduce manufacturing costs
3. To develop new products
4. To develop and diffuse technology
5. To preempt competition

Example: ICICI Bank and Vodafone India: A strategic alliance example in India is of ICICI Bank,
India’s largest private sector bank and Vodafone India, one of India’s largest telecom service
providers, entered into a strategic alliance to launch a unique mobile money transfer and
payment service called ‘m-pesa
Limitations

1. It can be successful only when there is mutual trust

2. Partner expect too much from alliance. It can broke alliance if expectations not meet
3. Business secrets of partners may become known
4. Misunderstanding among partners

Types of Strategic Alliance

1. Technology Development Alliance

2. Operations and Logistics Alliance
3. Marketing, Sales and Service Alliance
4. Single Country or Multi Country Alliance
2. Joint Venture

A joint venture is a new company formed jointly by two or more independent companies.
Each partner contributes a distinctive competence such as finance, technology, managerial
expertise etc.

Advantage of Joint Ventures

1. Technology
2. Geography
3. Regulation
4. Sharing Risk and Capital
5. Intellectual Exchange

Drawbacks of Joint Ventures

1. Change of Strategy
2. Regulatory Changes
3. Success of Joint Venture
4. Partners Hampering Growth
5. Lack of Transparency
Examples of Joint Venture
• Vodafone & Telefónica agreed to share their mobile network.
• BMW and Toyota co-operate on research into hydrogen fuel cells, vehicle electrification
and ultra- lightweight materials.
• West Coast – joint venture between Virgin Rail & Stagecoach.
• Google and NASA developing Google Earth.
Merger Strategy
It refers to the aspect of corporate strategy, corporate finance and management dealing
with the buying, selling, dividing and combining of different companies and similar
entities Through it can help an enterprise grow rapidly in its sector or location of origin,
or a new field or new location, without creating a subsidiary, other child entity or using
a joint venture.

Types of Mergers
1. Horizontal Merger: Two or more organizations engaged in the same business
combine together. Ex- ex-bank of Mathura with ICICI & Lipton India & Brokebond

2. Vertical Merger: Two or more organizations at different at different level, business in

the same industry. Ex: Time Warner Incorporated, a major cable operation, and the
Turner Corporation, which produces CNN

3. Concentric Merger: When the combining firms are related to each other in terms of
customer groups, customer functions or alternative technologies. Ex: a footwear
company may combine with hosiery firm making socks or a form manufacturing
leather bags

4. Conglomerate Merger: Combining firms are totally unrelated. Ex: a footwear firm
may combine with an automobile firm and Walt Disney with abc.
Reason for Mergers

1. Provides quick entry to market

2. Helps in faster growth

3. Facilitates diversification of operations

4. Reduce competition and dependence

5. When one firm has tax liability and other firm has accumulated
losses, their merger helps to save taxes

6. Synergy in marketing , operations and management

7. Merger helps seasonal business to stabilize sales revenue

Strategic issues in Merger

1. Synergistic Effects: To achieve synergistic effect, they must be complementary and

there should be a match between the objective/strategic interests of the partners

2. Financial Issues: The valuation of business/shares of the merging firm, taxation

implications of the merger are the main financial issues. Firm’s industry profile,
growth prospects, market price etc. are the factors to be kept in mind.

3. Managerial Issues: Merger is usually followed by changes in top management.

Professional management approach should be followed by companies

4. Legal Issues: In India, merger are regulated under the Companies Act and
Competition Act. Under the Income Tax Act, accumulated losses can be carried
forward.
Acquisition or Takeover Strategy

• When one company acquires majority or full ownership and control of another
company.

• Friendly Takeover

• Hostile Takeover
Stability Strategies
• Stability does not mean remaining stable over longtime
period or keeping the status quo

• It refers to maintaining the present course, slow and

steady
Example
Pending
Example pending
 Retrenchment

• A strategy used by corporations to reduce the

diversity or the overall size of the operations of the
company

• It is often used in order to cut expenses • Goal of

implementing this is to become a more financial
stable business
Three major action plans involved in
turnaround are as follows:

1.Changes in top management

2.Strategic Turnaround

3.Operating Turnaround
Divestment strategy involves the sale or liquidation of a
portion of business, or a major division, Profit Centre or SBU

• It is adopted when a turnaround has been attempted but

was unsuccessful

• Certain reasons are drawn for this strategy to be adopted

Ex: Nokia - Microsoft

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
Guidelines for situations when particular strategies are most effective

1. Forward Integration
2. Backward Integration
3. Horizontal Integration
4. Market Penetration
5. Market Development
6. Product Development
7. Concentric Diversification
8. Conglomerate Diversification
9. Horizontal Diversification
10. Joint Venture
11. Retrenchment
12. Divestiture
13. Liquidation