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STRATEGY
The word strategy is derived from the Greek word strategos that is stratus
(meaning army) and ago (meaning leading/moving).
Strategy is an action that managers take to attain one or more of the organizations
goals. Strategy can also be defined as a general direction set for the company and its
various components to achieve a desired results state in the future. Strategy results
from the detailed strategic planning process.
A strategy is all about integrating organizational activities and utilizing and allocating
the scarce resources within the organizational environment so as to meet the present
objectives. While planning a strategy it is essential ti consider that decision are not
taken in a vacuum and that any act taken by a firm is likely to be met by a reaction
from those affected, competitors, customers, employees or suppliers .
DEFINITION OF STRATEGY
According to oxford dictionary
Strategy is a plan of action or policy designed to achieve a major or overall
aim.
According to Johnson and schools
Strategy is the direction and scope of an organization over long term: which
achieves advantage for the organization through its configuration of resources
within a challenging environment, to meet the needs of markets and to fulfill
stakeholders expectations.
In simple words it can be defined as
Strategy is a broad long term plan designed to achieve the overall objectives of the
firm
In other words, strategy is about
Where is the business trying to get to in the long term?( direction)
Which markets should a business compete in and what kinds of activities are involve
in such markets?(markets: scope)
How can the business perform better than the competition in those markets?
(advantage)
What resources (skills, asses, finance, relationships, technical competence and
facilities) are required in order to be able to compete? (resources)
PROCESS OF STRATEGY
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The process of strategy is cyclical in nature. The elements within it interact among
themselves. Figure-1 present the process for single SBU firm. The process has to be
adjusted for multiple SBU firms because there it is conducted at corporate level as
well as SBU levels as these firms insert SBU strategy between corporate strategy and
functional strategy.
For our understanding, the process has been divided into the following steps:
1. Strategic Intent
2. Environmental and Organizational Analysis
3. Identification of Strategic Alternatives
4. Choice of Strategy
5. Implementation of Strategy
6. Evaluation and Control
LEVEL OF STRATEGIES
corporate level
Finance - 4% of revenues.
While the corporation must manage its portfolio of businesses to grow and survive,
the success of a diversified firm depends upon its ability to manage each of its product
lines. While there is no single competitor to Textron, we can talk about the
competitors and strategy of each of its business units. In the finance business segment,
for example, the chief rivals are major banks providing commercial financing. Many
managers consider the business level to be the proper focus for strategic planning.
Reach - defining the issues that are corporate responsibilities; these might include
identifying the overall goals of the corporation, the types of businesses in which the
corporation should be involved, and the way in which businesses will be integrated
and managed.
CORPORATE STRATEGIES
Just as every product or business unit must follow a business strategy to improve its
competitive position, every corporation must decide its orientation towards growth by
asking the following three questions:
1. Should we expand, cut back, or continue our operations unchanged?
The non-economic reasons for the choice of corporate strategy elements include :
a) Dominant view of the top management,
b) Employee incentives to diversify (maximizing management compensation),
c) Desire for more power and management control,
d) Ethical considerations and
e) corporate social responsibility.
Stability strategies:
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Growth strategies:
Expand the companys activities
3.
Retrenchment strategies:
Reduce the companys level of activities
4.
Combination strategies:
A combination of above strategies
STABILITY STRATEGY
Stability strategy is a strategy in which the organization retains its present strategy at
the corporate level and continues focusing on its present products and markets. The
firm stays with its current business and product markets; maintains the existing level
of effort; and is satisfied with incremental growth. It does not seek to invest in new
factories and capital assets, gain market share, or invade new geographical territories.
Organizations choose this strategy when the industry in which it operates or the state
of the economy is in turmoil or when the industry faces slow or no growth prospects.
They also choose this strategy when they go through a period of rapid expansion and
need to consolidate their operations before going for another bout of expansion.
EXPANSION OR GROWTH STRATEGY
Firms choose expansion strategy when their perceptions of resource availability and
past financial performance are both high. The most common growth strategies are
diversification at the corporate level and concentration at the business level. Reliance
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Industry, a vertically integrated company covering the complete textile value chain
has been repositioning itself to be a diversified conglomerate by entering into a range
of business such as power generation and distribution, insurance, telecommunication,
and information and communication technology services. Diversification is defined as
the entry of a firm into new lines of activity, through internal or external modes. The
primary reason a firm pursues increased diversification are value creation through
economies of scale and scope, or market dominance. In some cases firms choose
diversification because of government policy, performance problems and uncertainty
about future cash flow. In one sense, diversification is a risk management tool, in that
its successful use reduces a firms vulnerability to the consequences of competing in a
single market or industry. Risk plays a very vital role in selecting a strategy and
hence, continuous evaluation of risk is linked with a firms ability to achieve strategic
advantage (Simons, 1999). Internal development can take the form of investments in
new products, services, customer segments, or geographic markets including
international expansion. Diversification is accomplished through external modes
through acquisitions and joint ventures. Concentration can be achieved through
vertical or horizontal growth. Vertical growth occurs when a firm takes over a
function previously provided by a supplier or a distributor. Horizontal growth occurs
when the firm expands products into new geographic areas or increases the range of
products and services in current markets.
RETRENCHMENT STRATEGY
Many firms experience deteriorating financial performance resulting from market
erosion and wrong decisions by management. Managers respond by selecting
corporate strategies that redirect their attempt to turnaround the company by
improving their firms competitive position or divest or wind up the business if a
turnaround is not possible. Turnaround strategy is a form of retrenchment strategy,
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which focuses on operational improvement when the state of decline is not severe.
Other possible corporate level strategic responses to decline include growth and
stability.
COMBINATION STRATEGY
The three generic strategies can be used in combination; they can be sequenced, for
instance growth followed by stability, or pursued simultaneously in different parts of
the business unit. Combination Strategy is designed to mix growth, retrenchment, and
stability strategies and apply them across a corporations business units. A firm
adopting the combination strategy may apply the combination either simultaneously
(across the different businesses) or sequentially. For instance, Tata Iron & Steel
Company (TISCO) had first consolidated its position in the core steel business, then
divested some of its non-core businesses. Reliance Industries, while consolidating its
position in the existing businesses such as textile and petrochemicals, aggressively
entered new areas such as Information Technology.
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RETRENCHMENT STRATEGIES
A retrenchment grand strategy is followed when an organization aims at a contraction
of its activities through substantial reduction or the elimination of the scope of one or
more of its businesses in terms of their respective customer groups,
customer
functions,or alternative technologies either singly or jointly in order to improve its o
verall performance.
E.g.:
A corporate
hospital
decides
to
focus
only
on
special
treatment
and
so on.)In these situations the industries and markets and consequently the companies
face the danger of decline and will go for adopting retrenchment strategies.
E.g.:
Fountain pens, manual type writers, tele printers, steam engines, jut
e a n d j u t e products, slide rules, calculators and wooden toys are some products that
have either disappeared or face decline. There are three types of retrenchment
strategies - Turnaround Strategies, Divestment Strategies and Liquidation strategies.
RETRENCHMENT STRATEGIES
Retrenchment is a short-run renewal strategy designed to overcome organizational
weaknesses that are contributing to deteriorating performance. It is meant to replenish
and revitalize the organizational resources and capabilities so that the organization can
regain its competitiveness. Retrenchment may be thought as a minor surgery to
correct a problem. Managers often try a minimal treatment first-cost cutting or a small
layoff-hoping that nothing more painful will be needed to turn the firm around. When
performance measures reveal a more serious situation, more drastic action must be
taken to restore performance.
Retrenchment strategies call for two primary actions:
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TURNAROUND STRATEGIES
Turnaround strategies derives their name from the action involved that is
reversing a negative trend. There are certain conditions or indicators which
point out that a turnaround is needed for an organization to survive. They are
TURNAROUND STRATEGY
Turnaround is a strategy adopted by firms to arrest the decline and revive their
growth. A turnaround situation exists when a firm encounters multiple years of
declining Financial performance subsequent to a period of prosperity (Bibeault, 1982;
Hambrick & Schecter, 1983; Schendel et al., 1976; Zammuto & Cameron, 1985).
Turnaround situations are caused by combinations of external and internal factors
(Finkin, 1985; Heany, 1985; Schendel et al., 1976) and may be the result of years of
gradual slowdown or months of precipitous financial decline. The strategic causes of
performance downturns include increased competition, raw material shortages, and
decreased profit margins, while operating problems include strikes and labour
problems, excess plant capacity and depressed price levels. The immediacy of the
resulting threat to company survival posed by the turnaround situation is known as
situation severity (Altman, 1983; Bibeault, 1982; Hofer, 1980). Low levels of severity
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are indicated by declines in sales or income margins, while extremely high severity
would be signaled by imminent bankruptcy. The recognition of a relationship between
cause and response is imperative for a turnaround process and hence, the importance
of properly assessing the cause of the turnaround situation so that it could be the focus
of the recovery response is very important.
Turnaround Process
The Turnaround Process begins with a depiction of external and internal factors as
causes of a firms performance downturn. If these factors continue to detrimentally
impact the firm, its financial health is threatened. Unchecked financial decline places
the firm in a turnaround situation. A turnaround situation represents absolute and
relative-to-industry declining performance of a sufficient magnitude to warrant
explicit turnaround actions. A turnaround is typically accomplished through a two
stage process.
The initial stage is focused on the primary objectives of survival and achievement of
a positive cash flow. The means to achieve this objective involves an emergency plan
to halt the firms financial haemorrhage and a stabilization plan to streamline and
improve core operations. In other words, it involves the classic retrenchment
activities: liquidation, divestment, product elimination, and downsizing the workforce.
Retrenchment strategies are also characterized by the revenue generating,
product/market refocusing or cost cutting and asset reduction activities. While cost
cutting, asset reduction and product/market refocusing are easy to visualize, the idea
of revenue-generating is best captured by a strategy that is characterized by increased
capacity utilization, and increased employee productivity.
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external problems, turnaround has most often been achieved through strategies based
on an revenue driven reconfiguration of business assets. For firms that declined
primarily as a result of internal problems, turnaround has been most frequently
achieved through recovery responses that were heavily weighted toward efficiency
maintenance strategies. Recovery is said to have been achieved when economic
measures indicate that the firm has regained its pre-downturn levels of performance.
Between these two stages, a clear strategy is needed for a firm. As the financial
decline stops, the firm must decide whether it will pursue recovery in its retrenchment
reduced form through a scaled-back version of its pre-existing strategy, or whether it
will shift to a return-to-growth stage. It is at this point that the ultimate direction of
the turnaround strategy becomes clear. Essentially, the firm must choose either to
continue to pursue retrenchment as its dominant strategy or to couple the
retrenchment stage with a new recovery strategy that emphasizes growth. The degree
and duration of the retrenchment phase should be based on the firms financial health.
When severity is low, a firm has some financial cushion. Stability may be achieved
through cost retrenchment alone. When the turnaround situation severity is high, a
firm must immediately stabilize the decline or bankruptcy is imminent. Cost
reductions must be supplemented with more drastic asset reduction measures. Assets
targeted for divestiture are those determined to be underproductive. In contrast, more
productive resources are protected from cuts or reconfigured as critical elements of
the future core business plan of the company, i.e., the intended recovery response.
In addition, Robbins and Pearce found that the severity of the turnaround situation
was the best indicator of the type and extent of retrenchment that was needed,
although an immediate cost cutting response to financial decline (absolute and relative
to the industry) was consistently found to be of value. The researchers also presented
a model of turnaround based on evidence that business firm turnaround
characteristically involved a multi-stage process in which retrenchment could serve as
either a grand or operating strategy. Hofer (1980) conceptualized a link between
severity of the downturn and the degree of cost and asset reductions that a firm should
include in its recovery response. He referred to cost and asset reduction activities as
operating turnaround strategies. Operating strategies designed for cost reduction were
recommended for firms in less severe turnaround situations. Drastic cost reductions
coupled with asset reductions were recommended for firms in more severe turnaround
situations i.e., more severe problems require more drastic solutions. Usually, asset
reduction is more drastic than cost reduction.
His model predicted a negative relationship between growth strategies and turnaround
success where there were strong competitive pressures. Where firms were in weak
market positions, success was found for cutback and restructuring strategies. For
firms competing in mature or declining industries, efficiency or operating recovery
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strategies offer the best prospects for successful turnaround. Retrenchment (cost
cutting and asset reducing) are sufficient under certain circumstances to reestablish
the long term viability of the firm.
Refer to turnaround case study of Kirloskar Pneumatic Company limited below:
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The first thing KPC management team did was to understand the business of KG
Khosla - their product lines, style of business, etc. Then it started leveraging the
synergies between the two companies. Since the sales of the KPC were already
bottoming out and the Khosla product line with its manufacturing facilities was added
to its plant in Pune, the company was left with no other option except to cut costs
across the board. By the end of 2000, the management of KPC had through an
understanding with the staff at Faridabad plant of KG Khosla reduced the employee
strength considerably. The VRS at Faridabad was introduced with a total
understanding with the parting staff. KPC then shifted 90 people from Pune to
Faridabad for about three months during which time the company saw to it that the
production continued at Faridabad with these workers. After this activity at Faridabad,
the company also restructured its Pune plant by reducing the strength by 650 people.
The final strength of employees at both the plants after this whole downsizing
exercise finally stood at 800.
The company then turned its attention on restructuring its debt to bring the interest
costs down. The third element of improvement was adding new product lines to its
existing range while concentrating on improving the efficiency of its existing
products. As a result, KPC turned around after successful implementation of all these
well planned initiatives during the period 1999 2002.
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SURVIVAL STRATEGY
When the company is on the verge of extinction, it can follow several routes for
renewing the fortunes of the company. These are discussed in the following sections.
Divestment Strategies
A 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 r
ehabilitation or restructuring plan and is adopted when a turnaround
has been attempted but has proved to be unsuccessful. Harvesting
strategies a variant of the divestment strategies, involve a process
of gradually letting a company business wither away in a carefully
controlled manner Reasons for Divestment
The business that has been acquired proves to be a mismatch and
cannot be integrated within the company. Similarly a project that
proves to be in viable in the long term is divested
Persistent negative cash flows from a particular business create financial problems for
the whole company, creating a need for the divestment of that business.
Severity of competition and the inability of a firm to cope with it may cause it to
divest.
Technological up gradation 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
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Divestment may be done because by selling off a part of a business the company may
be in a position to survive
A better alternative may be available for investment, causing a firm to
divest a part of its unprofitable business.
Divestment by one firm may be a part of merger plan executed with another firm,
where mutual exchange of unprofitable divisions may take place.
Lastly a firm may divest in order to attract the provisions of the MRTP Act
or owing to oversize and the resultant inability to manage a large business.
E.g.:
TATA group is a highly diversified entity with a range of businesses
under its fold. They identifi ed their non core businesses for
divestment. TOMCO was divested and sold to Hindustan Levers
as soaps and a detergent was not considered a core business
for the Tatas. Similarly, the pharmaceuticals companies of the Tatas
Merind and Tata pharma
were
divested
to
Wockhardt.
The
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Tomco and Tata Steels cement plant was a conscious decision. It was Tata Steels
decision to concentrate on steel and get out of the cement business. As for Tomco, the
company had reached a point where it required immediate attention, not only in
financial terms but in terms of management as well. The group felt that it did not have
the requisite managerial skills in the specific area where Tomco operated and hence
decided to hive it off.
KB Toys filed for bankruptcy and announced plans to close half of its 1,217
stores in the USA. Toys R Us is the #1 specialty toy retailer. KB is
#2.Background:
KB Toys (previously known as Kay Bee Toys) was a chain of mall-based retail toy
stores in the United States. It was founded in 1922 by the Kaufman brothers. KB
operated 605stores in 44 U.S. states, Puerto Rico as well as Guam. KB Toys operated
three distinct store formats: KB Toys, KB Toy Works, and KB Toys Outlet (aka Toy
Liquidators). It was privately held in Pittsfield, Massachusetts. KB Toys was owned
by Big Lots and Melville Corporation at one time.
Fact:
KB Toys filed for bankruptcy in five years, the chain was liquidated beginning in
December 2008. The sales were concluded by the end of January 2009. The Gordon
Brothers Group handled the liquidation of these stores. On February 9th 2009, KB
closed the remaining stores following the second bankruptcy filing in four years.
Strategy picked upon this case:
Divestiture
selling division or part of the organization to raise capital for further strategic
acquisition or investment
Reasons:
In this case, the description has just stated that KB Toys planned to close half of its
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stores in the USA (while the fact, KB Toys had already done liquidation). While at
that time, KB Toys wished might gain capital to survive through divestiture
Spin-Off
In a spin-off, a firm sets up a business unit as a separate business through a
distribution of stock or a cash deal. This is one way to allow a new management team
to try to do better with a business unit that is a poor or mediocre performer. For
instance, Indian Rayon and Industries Ltd (IRIL), an Aditya Birla group enterprise,
has decided to spin-off its insulators business under Jaya Shree Insulator Division, in
favour of a new company - Vikram Insulators Private Ltd (VIPL). The net assets of Rs
92.98 crore of the insulators division were transferred in favour of VIPL and a 50:50
joint venture with the Japanese insulators giant - NGK Insulators Ltd - was forged.
The joint venture with NGK Insulators Ltd was proposed in order to upgrade the
quality of the existing insulators and to develop new and more technically advanced
insulators.
In consideration of transfer of the insulators business, VIPL would allot to IRIL 1.25
crore equity shares of Rs 10 each at par and debentures of (rupee equivalent) $ 25
million. On completion of the demerger, NGK would subscribe to 1.25 crore equity
shares of Rs 10 each of VIPL for cash at a premium. This would result in equal
shareholding for both IRIL and NGK and equal board representation in VIPL.
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With increased and complex demands of the power transmission system, the quality
and technical requirements of insulators have become more stringent and rigid. The
existing manufacturers of insulators in the country, including IRIL, did not have the
technical capability of manufacturing insulators of such high quality and specification
and hence the need for this new arrangement.
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Financial Results
All these restructuring initiatives resulted in:
1. The company reporting the highest ever profit of Rs.170 million by Gillette in
India. Net profit during the nine month ended September 2003 stood at
Rs.437 million.
2. Operating margins jumped from a low 10% in second quarter of 2002 to 26% in
second quarter of 2003. Besides the divestment of the low margin battery business,
the strengthening of the Indian rupee also aided profitability, as 40% of Gillette
products sold in Indian market are imported products.
3. Core grooming business registered a healthy topline growth of 11% and gross
margins also improved.
4. Inventory came down by 14% and receivables have also been bought down.
5. Ad-spend in first nine months of the year of 2003 was Rs.211 million (7.7% of net
sales). The company planned to increase ad-spend in the fourth quarter of
2003 and 2004. Surplus cash freed through sale of assets and working capital
improvement was proposed to be reinvested in brand building.
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LIQUIDATION STRATEGY
A retrenchment strategy which is considered the most extreme and
unattractive is the 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 The psychological implications
The prospects of liquidation create a bad impact on the companys reputation.
For many executives who are closely associated firms, liquidation
may be a traumatic experience. Legal aspects of liquidation Under
the Companies Act 1956, liquidation is termed as winding up. The
Act defines winding up of a company as the process whereby its life
is ended and its property administered for the benefit of its creditors
and members. The Act provides for a liquidator who takes control of
the company, collect its assets, pay it debts, and finally distributes any
surplus among the members according to their rights
E.g.:
A p a i n t c o m p a n y a u g m e n t s i t s o f fe r i n g o f d e c o r a t i v e p a i n t s t o
p r o v i d e a w i d e r variety to its customers (stability) and expands its product range
to include industrial and automotive paints (expansion). Simultaneously, it
decides to close down the division which undertakes large scale painting contract
jobs (retrenchment).It would be difficult to find an organization that has
survived and grown by adopting a single pure strategy. The complexity of doing
business demands that different strategies be adopted to suit the situational
demands made upon the organization. An organization which has followed a
stability strategy for quite some time has to think of expansion. Any organization
which has been on an expansion path for long has to pause to consolidate
its businesses.
Liquidation is the final resort for a declining company. This is the ultimate stage in the
process of renewing company. Sometimes a business unit or a whole company
becomes so weak that the owners cannot find an interested buyer. A simple shutdown
will prevent owners from throwing good money after bad once it is clear that there is
no future for the business. In such a situation, liquidation is the best option. A case in
point is the liquidation of loss-making Bharat Starch, a B M Thapar group company,
following the sale of its starch and citric acid divisions to English India Clays and Bilt
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KEY FINDINGS
To date, there has been no comprehensive study of great power retrenchment and no
study that defends retrenchment as a probable or practical policy. Using historical data
on gross domestic product, we identify eighteen cases of "acute relative decline" since
1870. Acute relative decline happens when a great power loses an ordinal ranking in
global share of economic production, and this shift endures for five or more years. A
comparison of these periods yields the following findings:
The rate of decline is the most important factor for explaining and predicting the
magnitude of retrenchment. The faster a state falls, the more drastic the retrenchment
policy it is likely to employ.
The rate of decline is also the most important factor for explaining and predicting
the forms that retrenchment takes. The faster a state falls, the more likely it is to
renounce risky commitments, increase reliance on other states, cut military spending,
and avoid starting or escalating international disputes.
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Wars are infrequent during ordinal transitions. War broke out close to the transition
point in between one and four of the eighteen cases (622 percent).
Retrenching states rebound with some regularity. Six of the fifteen retrenching
states (40 percent) managed to recapture their former rank. No state that failed to
retrench can boast similar results.
CONCLUSION
Retrenchment is probable and pragmatic. Great powers may not be prudent, but they
tend to become so when their power ebbs. Regardless of regime type, declining states
routinely renounce risky commitments, redistribute alliance burdens, pare back
military outlays, and avoid ensnarement in and escalation of costly conflicts.
Husbanding resources is simply sensible. In the competitive game of power politics,
states must unsentimentally realign means with ends or be punished for their
profligacy. Attempts to maintain policies advanced when U.S. relative power was
greater are outdated, unfounded, and imprudent. Retrenchment policiesgreater
burden sharing with allies, less military spending, and less involvement in militarized
disputeshold the most promise for arresting and reversing decline.
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