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FORMULATING STRATEGIES MODULE-6

Formulating long term and Grand strategies A number of business writers have emphasized that strategy is the outcome of a formal planning process and that top management plays the most important role in this process. The task of analyzing the organization’s external and internal environment and then selecting an appropriate strategy is normally referred to as strategy; formulation. In contrast, strategy implementation typically involves designing appropriate organizational structures and control systems to put the organization’s chosen strategy into action. The planning process has 5 main steps 1. Select the corporate mission and major corporate goals. 2. Analyze the organization’s external competitive environment to identify opportunities and threats. 3. Analyze the organization’s internal operating environment to identify the organization’s strengths and weaknesses. 4. Select strategies that build on the organization’s strengths and correct its weaknesses in order to take advantage of external opportunities and counter external threats. 5. Implement the strategies Grand Strategies; Identification of various alternative strategies is an important aspect of strategic management as it provides the alternatives which can be considered and selected for implementation in order to arrive at certain results The basic objective of identification of strategic alternatives is two fold: First, the managers should be aware about the various courses of action available to them and second, even if large number of possible alternative actions are available to them, even if large number of possible alternative actions are available, they should be in a position to limit themselves to various relevant alternatives so that unnecessary exercises are not taken up. The Grand strategy covers up 1. Stability - In an effective stability strategy, Cos will concentrate their resources where the Company presently has or can rapidly develop a meaningful competitive advantage in the narrowest possible product-market scope consistent with the firm’s resources and market requirement. 2. Growth - Is one that an enterprise pursues when it increases its level of objectives upward in significant increment, much higher than an exploration of its past achievement level. The most frequent increase indicating a growth strategy; is to raise the market share and or sales objectives upward significantly

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3. Retrenchment - Is one that an entries pursues when it decides to improve its performance in reaching its objectives by (i) focusing on functional improvement, specially reduction in cost (ii) reducing the number of functions it performs by becoming a captive company or (iii) reducing the number of the products and markets it serves up to and including liquidation of the business. ( Turnaround, divestment, liquidation) 4. Turnaround: Also known as cutback strategy has the basic philosophy “hold the present business and cut the costs”. This situation needed as no organization is immune from internal hard time-stagnation or declining performance no matter what the state of economy is. It can be for a part of the Co when economical advantage is under stress. It is a scanning process to cut costs to see that it becomes viable. 5. Divestment Strategy: The organization after observing for sometime finds there is no future to the dept or product decides to dispose off. This is done by transferring transferring the shares to the buyer at a specific negotiated rate. There may be reasons like a company wants to go for a new project wants to dispose off the existing company can also go by disinvestment route. 6. Liquidation Strategy: When a specific line of activity i.e. production or service is not profitable and no future and also that there are no buyers through disinvestment process, can dismantle and liquidate the assets and collect money to be used in the profitable areas. Generally, the Cos having accumulated losses or forthcoming period is not promising, liquidation is one option. 7. Combination: It is a combination of stability, growth, retrenchment strategies in various forms. The basic reason for adopting this strategy by a multi-business organization is that a single strategy does not fit all businesses at a particular point of time, because each business faces different kinds of problems. Like life cycle, recession, severe completion from better technology products etc 8. Business Restructuring: Choosing the profitable lines and ignoring the loss making or less profitable units so that more concentration can be given to the prospering lines. Cutting down overheads by reducing less utility manpower starting from top

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Competing in Foreign Markets: Globalization: in its true sense is a way of corporate life necessitated, facilitated and nourished by transationalisation of the World economy and developed by corporate strategies.. Globalization is an attitude of mind – it is mindset which views the entire world as a single market so that the corporate strategy is based on the dynamics of the global business environments. Effects of Globalization on the firm. (1) Opportunities to compete abroad via exports (2) Opportunities to invest abroad (2) Opportunities to raise finance from overseas source of Capital. Entry Strategies 1. Moving into new markets overseas by linking up with local dealers and distributors. 2. Takes over their activities on its own by opening a branch. 3. Carryout the manufacturing and marketing in overseas on its own. 4. Have the headquarter in overseas and manage different units spread in abroad countries. 5. Changeover to the local culture as if it is that country’s Company.(Global Co) Registered in that country. Essential Conditions for Globalization 1. 2. ;. Business Freedom: The host country should not have too much restriction on the product or service and allow the Co to do the business without must hindrances. 2. Facilities: Govt should provide all infrastructural facilities like power, winter, import of material, free land or cheap land, license etc. 3. Govt Support: Incentive policies, tax holidays, R & D support , financial support like cheaper finance. 4. Resources : Liberal availability of resources like materials, power, water, liberal visas for technical staff etc 5. Competitiveness: The product and services possessing competitive advantage in terms of price, availability, quantities, technological superiority, after sales services. Quest for competitive advantage in foreign markets Why does a nation achieve international success in a particular industry? There are four broad attributes of a nation that shape the environment in which local firms compete that promote or impede the creation of competitive advantage. These factors are,

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(1) Factor conditions; Competitive advantage from factors depend on how efficiently Advance factors such as modern digital data communication infrastructure, highly educated personnel and research institute in sophisticated disciplines. Specialized factors such as narrowly skilled personnel, infrastructure with specific properties, knowledge base in particular fields, and other factors with relevance to a limited range or even to a single industry are more critical in determining the competitive advantage. Basic factors - such as natural resources, climate, location, unskilled and semi skilled labor and debt capital. Generalized factors such as the highway system, a supply of debt capital or pool of well motivated educated employees. (2) Demand conditions; Nations gain competitive advantage in industries where the home demand gives their companies a clearer or earlier picture of emerging buyer needs and where demanding buyers pressure, companies to innovate faster and achieve more sophisticated competitive advantage than their foreign rivals. A nation may also gain advantage when its domestic demand internationalizes and pulls it products and services abroad. (3) Related and Supporting Industries : The presence in the nation of relied and supporting industries that are internationally competitive creates advantages in downstream industries in several ways such as the supply of the most cost-effective inputs in an efficient and sometimes preferential way. (4) Firm Strategy, Structure and Rivalry: National circumstances and context create strong tendencies in how companies are created, organized and managed as well as what the nature o domestic rivalry will be. Always a foreign goods meets the inhome producer’s resistance. Strategic Alliances- Globalization Strategies 1. Exporting: Finding overseas market, getting in touch with the agency or business house in the host country, exporting is the easiest alliance possible. Known as “Marketing Niche” Like we import from other countries, we can export commodities required by foreign country. This is monitored by Export-Import policy of the Government. 2.

Foreign Investment: Indian Companies are starting business in abroad through investment route with a local partner or alone. The resources available in that country is more economical to procure. Other infrastructural support is available provided by the Government, foreign investment becomes easy.

3. Mergers and Acquisitions: Either takeover a Company by purchase of shares and make investment or merge the company and invest if it is feasible. One will get ready market, infrastructure etc to start with.

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4. Joint Venture: With a foreign or home country business partner a joint venture an alliance can be worked out. The Co will get local govt support, customer support , technology support etc. It is an equity participation to form a new entity with a MOU sharing responsibilities and contributions in terms of technology, finance, marketing etc. 5. Foreign Branching: The office and manufacturing activity can be taken in an overseas Co and run the same as a branch. 6. Licensing & Contract Manufacturing: With the local business partner, we can supply our drawings and specification for the production. The manufacturing is done by the licensee with or without investor. 7. Franchising: The product or formula or specification of the product moves to the foreign country where the Franchisee is marketing the product or service. Joint Ventures & its relevance Internal new venturing is an important means by which large, established companies can maintain their momentum and grow from within. One alternative is to form strategic alliances, and even establish a formal joint venture with a company that has a valuable distinctive competency. Often in joint venture, two or more companies agree to pool specific resources and capabilities that they believe will create more value for both companies and appoint managers from both companies to control the new operations. Setting and Qualifying long term objectives for Grand Strategies Often called Master or Business Strategies, provide basic direction for strategic actions They are the basis of coordinated and sustained efforts directed toward achieving longterm business objectives. The Strategy indicates the time period over which long-range objectives are to be achieved. Thus a grand strategy can be defined as a comprehensive general approach that guides a firm’s major actions. The 15 principal grand strategies are, concentrated growth, market development, product development, innovation, horizontal integration, vertical integration, concentric diversification, conglomerate diversification, turn around, divestiture, liquidation, bankruptcy, joint venture, strategic alliances and consortia. Any one of these strategies could serve as the basis for achieving the major long-term objectives of a single firm. But a firm involved with multiple industries, businesses, product lines, or customer groups – as many firms are - usually combines several grand strategies. For clarity, however, each of the principal grand strategies is described independently in this section, with examples to indicate some of its relative strength and weaknesses. . Long-term objectives were defined as the results a firm seeks to achieve over a specified period, typically five years. Seven common long-term objectives were discussed – profitability, productivity, competitive position, employee development, employee

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relations, technological leadership and public responsibility. These, or any other long term objective should be acceptable, flexible, measurable overtime, motivating, suitable, understandable and achievable. The grand strategies are (1) Stability (2) Growth (3) Retrenchment (4) Combination Areas of application of Long Term Objectives 1. Profitability - Profit is the main objective expressed in earnings per share or return on equity. Hence profitability is a continuous object of any firm. 2. Productivity; Should always engaged in increasing in the productivity of their systems. Which results in cost reduction and improves the speed. 3. Competitive Position - Success rests on CP which gives highest strength to the firm in a competitive environment. 4. Employee Development - Value addition through training and education leads to improved earnings and security. It is time consuming and an effort in the long term achievement 5. Employee Relation - A key factor which gives good stability and a tool for achievements Productivity linked benefits, welfare improves the relations. 6. Technological Leadership - To sustain in a developing market, the Co should expose the Technical Leadership as a part of marketing strategy. Modern Technology gives an edge over development of goods and services. 7. Public Responsibility – Stake holder’s interest is a predominant factor of success of any Co. Public image can be achieved by many ways through charitable and educational contributions and community welfare schemes. Innovation: It has become increasingly risky not to innovate. Both consumer and industrial markets have come to expect periodic changes and improvements in the products offered. As a result, some firms find it profitable to make innovation their grand strategy. They seek to reap the initially high profits associated with customer acceptance of a new or greatly improved product. The underlying rationale of the grand strategy of innovation is to create a new product life cycle and thereby make similar existing products obsolete. Innovation is not product development. Growth orientation is possible through innovation. History of human civilization is full of innovation of different types, like technological inventions have changed the patten of human lives. In the present globalised and competitive environment in which customers aspirations are increasing day by day, every forward looking Co is trying to satisfy its customers needs in innovative ways. Innovation is the process of creating and doing new things. Incremental innovations force organization in continuously improve their products and service and keep abreast or ahead of the competition. In managing innovations there are two types of strategic issues involved. Innovation generation - incremental in radical, functionality, technicality and

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(2) Innovation diffusion – spreading a new idea from its source of invention or creation to its ultimate users or adopters. Integration This comes under Growth Strategy wherein the expansion can go with Vertical and Horizontal integration. The condition is that the expansion is related to the same product line. Ex. Nylon Textiles Co adding petro-chemical unit is backward ward integration. Textiles expanding with products like Garments are a Forward. Integration. Adding another Textile unit is a horizontal integration. In all the above, there is increase in capacities, contributing to the larger & diversified markets like Garment, Textile and Petroleum. Integration can be by way of merger, takeover, divestment route. Ex: Plantation – Coffee Curing - Coffee packing, ore - ingots - rods - fabrication., Mining - Cement - mixed cement - hollow blocks Diversification Another growth strategy is diversification which is the process of entry into a business which is new to an organization either market-wise, or technology-wise or both. Diversification looks at higher yield and benefit than existing lines of business. Industries have finance Companies, Cell phone trading, real-estate, IT etc ITC having Hotel & Resorts, paper factory. Great Eastern Shipping goes to Real Estate. Diversification can also be Horizontal, Veridical, Concentric and Conglomerate integrations. The main reasons for diversification can be for 1. Motivation for obtaining better use of resources- Cement Co going for Hollow blocks. Or Mixed Cement. 2. To increase capability for adapting to a rapidly changing and increasing competitive environment - increase the production level or capture market share. 3. To overcome restraints of legal frame work. –Too much Govt control makes the Co to go for diversification and slowly reduce the parent line of business. Conglomerate (unrelated) Diversification Means collected or clustered together. Conglomerate is a combination of two or more products not closely related by technology or market factors like a Textile Co going for Cement. Or Cement Co going for IT etc. A conglomerate looks like a well diversified firm though a difference between the two can be made. Conglomerate is generally formed by mergers, diversified major is created though internal sources. The Benefits are, (1) Reduction of Risk - all eggs in one basket (2) economies of large scale operation – with common facilities (3) increase in profits - idle capital turns to utility (4) attain managerial competence

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Retrenchment Growth strategies and stability strategies are generally adopted by firms that are in satisfactory competitive positions. But, when the firm’s position is disappointing or, at the extreme, when its survival is at stake, then retrenchment strategies may be appropriate. Retrenchment strategies include Turnaround strategies, captive company strategy, divestment strategy, transformation strategy and liquidation strategies. Reasons for adopting Retrenchment Strategies 1. Prevalence of poor economic conditions. 2. Competitive pressures may also cause firms to curtail their operations 3. Operating and production inefficiencies may also cause firms to pursue retrenchment strategies 4. Inability of the firm to implement latest technology caused by technological revolution. 5. The Co is not doing well or perceives itself as doing poorly. 6. The Co has not met its objectives and there is pressure from shareholders, customers or others to improve performance. 7. External environment poses threat and internal strengths are insufficient to face the threat. 8. Better opportunities in the environment are perceived in other area of business or other markets where a firm’s strengths can be utilized. Restructuring Is a combination strategy in the form of divesting non-core businesses and concentrating on core businesses achieving growth in these areas through Greenfield projects or through takeovers. When there is economic recession and unrelated diversification, the low performance lines are to be restructured (dismantled) and more yield business lines are given more attention. At the Group Level - Based on future economic forecasters, managerial competence, where it does not add to the Competitive Advantage, restructuring is the answer. After trying all alternatives available like switching over to new lines of business, transferring people to other positive lines, then the restructuring is adopted. Restructuring is done by divesting, auctioning, and by de-merger, At Organization Level Same as above by discontinuing and disposing off the inefficient and loss making lines. Tata Oil Mills (soap factory) was sold to Unilever.

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Turnaround Strategy Improving internal efficiency can be done by turnaround strategy or cutback strategy . i.e. “hold the present business and cut the costs” This situation is needed as no organization is immune from internal hard time-situation or declining performance. . The aim of turnaround strategy is to transform the organization into a more effective business. Turnaround means reverse the negative trend. The different areas of the organization and business are analyzed, down size manpower, reduce the fixed assets, discard or introduce new resources. The turnaround strategy involves that strategic actions which an organization takes to compete in the same business in turnaround situations. Turnaround situations may be improvement in organizational lower performance caused by downward trend which is not controllable by present actions of management. The situations are, 1. 2. 3. 4. 5. 6. 7. 8.

Incurring losses continuously. Declining demand for product and or services. Increasing cash outflows and or declining cash inflows. Declining sales and declining market share. Increasing debt and debt service. Continuous problems of working capital. High rate of employee turnover and employee job dissatisfaction. Significant decrease in the market prices of the share. Turnaround strategy should aim at setting a reverse trend to this declining or negative situation.

GE Multifactor Portfolio Matrix/ 9 cell planning grid In a group Co, the GE chart is used to find the position of each SBU to decide whether any strategic decisions are to be taken. Similarly the GE Matrix can be used for different production/business line to see the worthiness of the portfolio and take correcting actions. The chart divides 3 categories like strong, average and weak on Business Strength And 3 on strategic market growth rate. There are 9 cells. Each industry weight age and rating product is taken and plotted on the matrix. One can visualize the place of the SBU in order to take appropriate strategy like restructuring, turnaround, divestment etc based on data collected. The factors of attractiveness are generally, Market share, Market share growth, Brand image, After sales service, Distribution capacity, Capacity utilization, Product quality, Technology.

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Contingency Approach to Strategic Choice A Co should also be well prepared to deal with contingencies .e. unforeseen or other critical developments that affect the Co, like major changes in competitive environment, govt policy or budget allocation, strikes, boycotts, war, internal disturbances, natural calamities etc. A contingency plan thus, is a plan to cope up with critical developments which mark major deviations from the strategies planning limits. Since environmental variables are dynamic, their accurate forecast is difficult. The strategy is formulated for each probable scenario at normal conditions. It is understood that Contingency Strategy is an Alternate Strategy to meet the eventuality. Ex - When a new product is launched, there are resistances from Competitors. It can be either aggressive or not there. The planning must be for both so that the actions can be quick and planned. The fundamental purpose of a contingency strategy is to place the managers in a better position to deal with unexpected developments than if they have not made preparations for such developments. By failing to anticipate certain events, managers may not act as quickly as they should in a critical situation and may create more damage financially, cause delay and confusion. Issues to the Contingency Strategy – 1.

2. 3. 4.

The subject of contingency strategy should be one for which the probability of occurrence is considered lower than that for events included in strategic planning process one, the actual occurrence of which will cause serious damages specially if not dealt with quickly and the one the organization can plan ahead to deal with swiftly if the event and condition is very wide for most of the organization. Trigger Points or warning signals of the imminence of the event for which the strategy was prepared. Provide the provision for trigger points in the plan. Details: The details must be complete even for contingency plans. However, the manager may find a different approach depending upon the situation arising at that point of time. Volume: There is no need to provide for every alternative. Only the major events are given the alternative approaches. The weight age of damages will decide the compulsion on bringing alternative course under the Contingency Strategy.

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