BPSM
Types of Strategies
Classification of Strategies
• Once a company completes its mission
formulation, environment scan & internal
appraisal, it has to think about the choice of
strategy alternatives to achieve its objectives.
• Strategy can be classified as Grand / Generic
/ Master / Root strategies which deal with
overall strategic action, or programmed
strategies that deal with implementation on
corporate strategy.
• Our focus will be on Grand strategies.
Classification of Strategies
• Grand / Master / Root strategies can be
of the following four types :
• Stability Strategy
• Growth Strategy
• Retrenchment Strategy
• Combination Strategy
• We examine each of them separately.
Stability Strategy
• Also referred to as the Defensive Approach.
• Basic principle is “Maintain the present
course”.
• It can be implemented when the co. is
comfortably satisfied with its current
performance and there is no significant
environment threat i.e it offers scope for safe
business.
• Some top level managements are reluctant to
change, take risks and hence adopt Stability
strategy.
Stability Strategy
• If a co. has passed through turbulent
environment. It tends to adopt Stability
Strategy.
• If the cost of changing strategy is very
high, a co. will adopt Stability Strategy.
• Though small amount of adjustments
can be made to the present strategies,
it is very insignificant and small.
Stability Strategy
• Types of Stability Strategy :
• Incremental Growth Strategy : Past objectives
adjusted for inflation. It is easy and does not disturb
routine of the organization.
• Profit Strategy : Gives extra support to a particular
product in the decline stage.
• Sustainable Growth Strategy : Gives extra resources
to a product to remain at a current position.
• Stability as a pause strategy : For cos. who’s previous
strategies are full of growth adopt Stability strategy
to take some time to breath and get ready for further
growth.
Growth Strategies
• A strategy in which an organization increases
its level of objectives upward in significant
increments, much higher than an exploration
of its past achievement level. It indicates on
objective to raise the market share or sales
objectives significantly.
• It should be differentiated from Normal
Growth which can be achieved by Learning
Curve.
• No strategy can however grow more that
1/3rd of the Market Share. Why?
Growth Strategies
• When & Why do cos. adopt Growth Strategies :
• If an org. has stabilized after various growth
strategies. Growth – Stability – Growth…
• If the envt. offers and permits growth. (FERA / FEMA
etc )
• Org. has excess funds ( Plough back profits )
• Present products are in the decline stage – High
costs and low revenues.
• Growth may offer economies of scale.
• Will & skill of management permits growth.
• Increase prestige, goodwill, reorganization etc.
Growth Strategies
• There are two
distinct Growth
routes :
Internal
Expansion
Vertical Integration
Diversification
Growth Strategies
External
Mergers
Acquisitions
&
Takeovers
Joint Ventures
Internal Growth Routes
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Expansion. The process of expansion :
Determine options for capacity expansion
Access future cost & demand of inputs.
Access probable technological change
Predict capacity addition by competitors
Access demand & supply in industry
Determine expected cash flow from
expansion.
7. Test the analysis for consistency.
Internal Growth Routes
• Vertical Integration :
• Backward Integration : Takes place when a
company looks for various options through
which it can own an important source of raw
material.
• Forward integration : Takes place when a
company looks for various options through
which it can own a distribution network for its
products.
Internal Growth Routes
• Diversification : Entry of an organization into a
business which is new to an organization either
market wise or technology wise or both.
• Types of diversification :
• Horizontal integration : Entering similar products
or product lines.
• Concentric Diversification : Some similar factors
can be used by diversification. E.g. : A tea
company starts producing other food products to
take advantage of its distribution network etc.
• Conglomerate diversification : Company enters
entirely different product – market segments.
External Growth Routes
• Mergers / Absorption / Amalgamation /
Reconstruction.
• Why :
• Quick entry into business
• Faster growth rate
• Diversification advantage
• Reduction in competition
• Tax advantage
• Synergetic effect.
Mergers
• Horizontal Merger : Both cos. have
similar products / product lines.
• Vertical Merger : One co. is a supplier
of the other.
• Concentric Merger : Two cos. are either
related technology wise or market wise.
• Conglomerate Merger : Two cos. have
entirely different products and markets
External Growth Routes
• Acquisition / Takeover Strategy :
• Takes place when one company takes control
over the other;
• Can be a Mutual takeover or a Hostile
takeover.
• Joint Ventures : Combined effort of two cos.
to form a new co.
• 3 types of objectives for JV cos. : Objectives
of the 1st co, objectives of the 2nd co &
objectives of the new company.
• Arbitration most important.
Retrenchment Strategies
• Comes from the HR when a co cuts its size of
employees due to recession / reorganization.
• Retrenchment strategy follows the saying
“Slow down and take a breath, we have to do
better”.
• In this strategy a co. decides to improve its
performance in reaching its objectives by
focusing on functional improvement,
reduction in costs, reduction in number of
functions it performs by becoming a captive
co, reduction in the number of products and
markets it serves and also liquidation of
business.
Types of Retrenchment Strategies
• Turnaround Strategy :
• Revenue generating : Only promote
those products having high demand.
• Cost cutting : Encourage VRS, lower
promotion costs etc.
• Asset Reduction : Sell off assets that
are underperforming.
• Combination : Of all of the above three.
Types of Retrenchment Strategies
• Divestment Strategies :
• Organization decides to get out of a
certain business & sells off units /
divisions.
• Probable reasons :
• Inadequate growth rate or market
potential
• Technology change
• Management unable to control business
Types of Retrenchment Strategies
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Liquidation Strategy :
Sell off business.
Probable reasons :
Very uncertain future.
Accumulated losses.
Some co. offers high price.
Less resources to continue.
Diversify into other businesses.