Types of Strategies

Within the overall parameter of competitive

generic strategies, an organisation has to

evolve specific strategy to resolve the specific
problems and manage situations confronting
it. Based on different sets of situations, an
enterprise may have various strategic routes
which can be classified into three major
groups that is
Stability Strategy
Growth Strategy
Retrenchment Strategy

Stability Strategy
A stability strategy refers to a strategy by a company

where the company stops the expenditure on

expansion, in other words it refers to situation where
company do not venture into new markets or
introduce new products.
This strategy is essentially a continuation of existing
strategies. Such strategies are typically found in
industries having relatively stable environments. The
firm is often making a comfortable income operating
a business that they know, and see no need to make
the psychological and financial investment that
would be required to undertake a growth strategy

Stability strategy implies continuing the current

activities of the firm without any significant change

in direction. If the environment is unstable and the
firm is doing well, then it may believe that it is better
to make no changes.
A firm is said to be following a stability strategy if it
is satisfied with the same consumer groups and
maintaining the same market share, satisfied with
incremental improvements of functional
performance and the management does not want to
take any risks that might be associated with
expansion or growth.

Stability strategy is most likely to be pursued by small

businesses or firms in a mature stage of development.

Stability strategies are implemented by steady as it
goes approaches to decisions. No major functional
changes are made in the product line, markets or
functions.
However, stability strategy is not a do nothing
approach nor does it mean that goals such as profit
growth are abandoned. The stability strategy can be
designed to increase profits through such approaches
as improving efficiency in current operations.

Why do companies pursue a stability strategy?

1) the firm is doing well or perceives itself as successful

2) it is less risky
3) it is easier and more comfortable
4) the environment is relatively unstable
5) too much expansion can lead to inefficiencies
Situations where a stability strategy is more advisable than
the growth strategy:
a) if the external environment is highly dynamic and unpredictable
b) strategic managers may feel that the cost of growth may be
higher than the potential benefits
c) excessive expansion may result in violation of anti trust laws

Types of Stability
Strategies;
1) Pause/Process with caution strategy some

organizations pursue stability strategy for a

temporary period of time until the particular
environmental situation changes, especially if they
have been growing too fast in the previous period.
Stability strategies enable a company to consolidate
its resources after prolonged rapid growth.
Sometimes, firms that wish to test the ground before
moving ahead with a full-fledged grand strategy
employ stability strategy first.

2) No change strategy a no change

strategy is a decision to do nothing new i.e

continue current operations and policies for
the foreseeable future. If there are no
significant opportunities or threats operating
in the environment, or if there are no major
new strengths and weaknesses within the
organization or if there are no new
competitors or threat of substitutes, the firm
may decide not to do anything new.

3) Profit strategy the profit strategy is an

attempt to artificially maintain profits by reducing

investments and short-term expenditures. Rather
than announcing the companys poor position to
shareholders and other investors at large, top
management may be tempted to follow this
strategy. Obviously, the profit strategy is useful to
get over a temporary difficulty, but if continued for
long, it will lead to a serious deterioration in the
companys position. The profit strategy is thus
usually the top managements short term and often
self serving response to the situation.

Growth and Expansion strategy

Growth Strategy refers to a strategic plan

formulated and implemented for expanding

firms business. For smaller businesses,
growth plans are especially important because
these businesses get easily affected even by
smallest changes in the marketplace.

Objectives for growth

(I) Survival:
(ii) Economies of Scale:
(iii) Owners mandate:
(iv) Expansion of the market :
(v) Latest Technology
(vi) Prestige and Power
(vii) Government Policy

Intensive growth strategy

Intensive growth strategy or expansion

involves raising the market share, sales

revenue and profit of the present product or
services. The firm slowly increases its
production and so it is called internal growth
strategy. It is a good strategy for firms with a
smaller share of the market. Three alternative
strategies are available in this regard. These
are:

TYPES OF INTENSIVE
STRATEGIES

Intensive Strategies

13

Market penetration
Market development
Product development

Prof. Dr. Majed El-Farra 2009

(a) Market Penetration This strategy aims at

increasing the sale of present product in the

presented market through aggressive
promotion. The firm penetrates deeper into
the market to capture a larger share of the
market. For example, promoting the idea of
cold coffee during the summer season, also
the idea of instant coffee, instant tea and tea
bags.

(b) Market Development It implies increasing sales by selling present

products in the new markets. For example selling electronic goods in rural
areas or sale of chocolates to middle aged and old persons.
Market development leads to increase in sale of existing products in
unexplained markets. Unilever introduced Sunsilk shampoo in US. Was sold
in Europe, Latin America and Asia.

(c) Product Development: In this, the firm tries to grow by developing

improved products for the present market. For example, A.C. with
remote control, Refrigerator with automatic defreezing and flexible
shelves. Coca-Cola launched Diet Coke Sweetened with Splenda

Advantages of Intensive Growth

Strategy
(1) Growth is slow and natural. Therefore, it can be
handled easily.
(2) Capital required for expansion can be taken from
the firm's own funds.
(3) Existing resources can be better utilized
(4) The growing firm is in a better position to face
competition in the market.
(5) Only a few changes are required in the organisation
and management systems of business.
(6) Expansion provides economics of large-scale
operations.

Limitations of Intensive Growth

Strategy
(1) Growth is very slow and it takes a long

time for growth to actually happen.

(2) A business firm loses the possibility of
exploiting many business opportunities by
restricting its operations to the present
products and markets.
(3) It is not always possible to grow in the
present product market.

Diversification Strategy
Beyond a certain point, it is no longer possible for a firm to

expand in the basic product market. So the firm seeks

increased sales by developing new products for new markets.
This strategy towards growth is called diversification.
The diversification does not simply involve adding variety in
a product but adding entirely different types of products.
Products added may be complementary. Diversification is a
much talked about and widely used strategy for growth.
Many companies have opted for this.
For example, LIC,an insurance concern initially, diversified
into mutual funds. State Bank of India diversified into
merchant banking and mutual funds. Similarly, Larsen and
Toubro, an engineering company diversified into cement.

Advantages of
Diversification
(i) Better use of its resources. By adding up
related products to its existing product portfolio,
a company can more effectively utilize its
managerial personnel, marketing network,
research and development facilities, etc.
(ii) Reduce the decline in sales. By developing
new products the sales revenue and earnings can
be maintained or even increased. For example,
Bajaj Scooters India Ltd. entered in the field of
mopeds.

(iii) More competitive With greater resources, more

products and higher

profits, the diversified firm is more competitive than a
single product firm.
(iv) Minimize risk. When one line of business faces

recession, another line

may be in high growth stage. For example, a welldiversified engineering firm
like Larsen and Toubro did well even when the
engineering industry was
facing recession.

(v) Use of cash surplus of one business to

finance another business having good

potential for growth.
(vi) Economies of scale Diversification adds to

size of business which improves the

competitiveness of a firm. It offers a lot of
economy in operations because common
facilities can be used for several products.

Limitations of
Diversification.
(I) Huge funds are required for diversification. The internal savings of the

business may not be sufficient to finance growth.

(ii) The functions and responsibilities of top executives increase because

of need to handle new product, technology and markets. They may find
problems in coordination which may lead to inefficient operations.
(iii) Diversification may involve new technology and new markets and the

present staff may face problems in adjusting to this growth pattern.

(iv) Diversification may lead to unknown products and markets leading to

more risk.

TYPES OF
DIVERSIFICATION
Diversification Strategies

23

Concentric diversification
Conglomerate diversification
Horizontal diversification
Vertical diversification

Prof. Dr. Majed El-Farra 2009

Concentric Diversification
When a firm diversifies into some business which is

related with its present business in terms of marketing,

technology, or both, it is called concentric diversification.
When in concentric diversification new product or service
is provided with the help of existing or similar technology
it is called technology-related concentric diversification.
For example, Mother dairy has added 'curd and Lassi to
its range of milk products. In marketing-related concentric
diversification, the new product or service is sold through
the existing distribution system. For instance, a bank may
start providing mutual fund services to its customers.

Concentric diversification is
suitable
(a) When cyclical fluctuations in the present

products or services are to be counteracted;

(b) When the cash flows generated by the existing
product or service are in surplus;
(c) When demand for present product or service
has reached saturation point;
(d) To gain managerial expertise in new field of
business; and
(e) When reputation of present product or service is
high and can be used for new products or service.

For instance, the addition of tomato ketchup

and sauce to the existing "Maggi" brand

processed items of Food Specialities Ltd. is an
example of technological-related concentric
diversification

Conglomerate
Diversification
When a firm diversifies into business which is

not related to its existing business both in

terms of marketing and technology it is called
conglomerate diversification.
Several Indian companies have adopted this
strategy.Reliance, Sahara, DCM, Essar group,
ITC, Godrej, HMT are examples of
conglomerate diversification.

Conglomerate diversification strategy is

suitable
(I) To grow faster than the growth realized

through expansion;
(ii) To avail of potential opportunities for
profitable investment;
(iii) To achieve competitive edge and greater
stability;
(iv) To make better use of cash surplus of
present products or service;
(v) To allocate the risks.

Horizontal Integration:
It involves addition of parallel new products to the existing

product line.
This may happen internally or externally, internally, a
company may decide to enter a parallel product market in
addition to the existing product line.
Externally, a company combines with a competing firm.
For example, Sparta Ceramics India Ltd. took over Neyveli
Ceramics and Refractories Ltd. (Neycer). Both the
companies are in sanitary ware and tiles business. Two or
more competing firms are brought together under single
ownership and control. Seven small cement firms
combined and formed Associated Cement Companies
(ACC).

Advantages. Horizontal integration has the following

advantages:

(i) Wasteful competition among the combining

firms is removed.
(ii) It provides economies of large-scale
production and distribution.
(iii) It provides better control over the market
and increases the competitiveness of the
company.
(iv) The firm gets better control over supply

and prices of the product.

Disadvantages. Horizontal integration has the

following limitations:
(I) The firm is not confident of supply of raw

materials.
(ii) If many firms combine to form horizontal
integration, there is a risk of over- capitalisation.
(iii) The management of the firm may become
bureaucratic and inflexible.
(iv) The firm may acquire exploit consumers and
labour by becoming a monopoly.
For example, a company that was making
notebooks earlier may also enter the pen market
with its new product.

Vertical Integration
In vertical integration new products or services

are added which are complementary to the

present product line or service. New products
fulfill the firms own requirements by either
supplying inputs or by serving as a customer for
its output.
In vertical integration the firm moves backward
or forward from the present product or service.
Vertical integration may be of two types
backward and forward.

Backward integration.
It involves moving toward the input of the

present product. It is aimed at moving lower

on the production process so that the firm is
able to supply its own raw materials or basic
components. For example, a Car manufacturer
may start producing tire tubes;

Advantages.
(I) Regular supply It ensures regular supply of raw materials or

components.
(ii) High return on investment It facilitates higher return on
investment for the company as a whole through better use of
overhead facilities
(iii) Competitiveness It improves the competitive power of the
company. As it controls more elements of the production process, it
has advantages over the uninterested firms in the form of lower
costs, lower prices and lower risks.
(iv) Quality control It improves quality control over imports for the
final product.
(v) Bargaining power It improves the company's power of negotiation
with suppliers on the basis of known costs.
(vi) Tax saving It saves indirect taxes payable on the purchase of
inputs.

Disadvantages.
(a) If an existing input producing unit is taken over, it may involve large

Investment
(b) By investing heavily in backward integration the developments of the final

products nay get hampered. This in turn may lead to undue pressure on pricing
and sales effort.
(c) In the absence of backward integration the firm may purchase at a lower

cost from technically more efficient suppliers. With backward integration, this
opportunity gets lost.
(d) Any adverse Changes in the economy affecting the present product market

will also affect adversely the production of inputs.

(e) When the divisions using the inputs do not have the freedom of comparing

market conditions of supply, the problem of transfer pricing may become

acute.

Forward integration.
Forward integration means the firm entering

into the business of distributing or selling its

present products. It refers to moving upwards
in the production/distribution process towards
the ultimate consumer. The firm sets up its
own retail outlets for the sale of its own
products. For example, many companies like
Bata, DCM, Bombay Dyeing, Raymonds and
Reliance have set up their own retail outlets to
sell their fabrics.

Advantages.
(I) The firm can exercise greater control over sales

and prices of its products. This is very useful in an

oligopolistic market.
(ii) The firm's own retail stores serve as better source
of customer feedback. Thus the firm gets better
control over quality
(iii) The firm can improve its profits by reducing the
costs of distribution and the costs of middlemen.
(iv) The firm can secure the economies of integration.
Handling and transportation costs can be reduced.

Disadvantages.
(a) The proportion of fixed costs in the firms costs increases. As

a result the firm is exposed to greater cyclical changes in

earnings.
(b) Moreover, the fortunes of business are tied to the in-house
distribution system. From this point of view, forward Integration
increases business risk.
(c) Since its processes are interdependent, a slight interruption
in one process may dislocate the entire production system.
(d) In the absence of proper balance between up-stream and
down-stream units, the firm has to buy from or sell in the open
market. The firm may be competing with its own customers.
(e) It is very difficult to efficiently manage an integrated firm
because every business has its own structure, technology and
problems.

Meaning of Turnaround
Strategy
Theconceptor meaning of turnaround strategy covers

following points:
Turnaround strategy means to convert, change or transform
a loss-making company into a profit-making company.
It means to make the company profitable again.
The main purpose of implementing a turnaround strategy is
to turn the company from a negative point to a positive
one.
If a turnaround strategy is not applied to a sick company, it
will close down.
It is a remedy for curingindustrialsickness.

Turnaround is a restructuring strategy. Here, a

loss-bearing company is transformed into a

profit-earning company, by making systematic
efforts.
It tries to remove all weaknesses to help a sick
company once again become strong, stable and
a profit-making institution.
It tries to reverse the position from loss to profit,
from declining sales to increasing sales, from
weakness to strength, and from an instability to
stability.

It aids to reduce the brought forward losses of

the loss-making company.

It helps the sick company to stand once again
in themarket.
It is a complete U-turn of a planned strategic
economic transition.

Examples of turnaround strategy

Manufacturing company say XYZ is suffering from

losses due to excess idle time taken by labour to

complete their jobs. The manufacturing company
XYZ will follow turnaround strategy to reduce labour
inactivity by installing modern machines
(automation) to carry on the same work or job.
Educational institution, for example, C is suffering
from losses due to non-registration of students in
their courses. This institution C will follow
turnaround strategy to reduce losses by providing
facilities like e-Registration, conducting online
classes, etc. to attract students.

Steps in turnaround
strategy
1. setting up a turnaround committee
2. identifing the causes of losses
3. detail investigation of causes
4. alternate solutions
5. analysis of altrenate solutions
6. selection of best alternate solutions
7. communication of turnaround strategy
8. organisation and allocation of resources
9. implementation
10. review

MODERNISATION
A firm may use the strategy of modernization to

achieve growth.
Modernization basically involves upgradation of
technology to increase production, to improve
quality and to reduce wastages and cost of
production.
The worn-out and obsolete machines and

equipment are replaced by the modern machines

and equipment.

Advantages of Modernization. The modernization has following

advantages:
(I) Modernization improves the productivity and efficiency of the
firm.
(ii) The profitability of the firm goes up because of increased
efficiency and reduced wastages.
(iii) It makes available better quality products to the customers.
(iv) The firm becomes more competitive in the long-run because
of modernization.
(v) The growth is systematic and does not affect the normal
functioning of the firm.
(vi) The workers acquire modern skills because of which their
wages go up.

Limitations of
Modernization.
However, the strategy of modernization can be used only if the firm

has adequate capital through accumulated savings or is able to raise

capital from different sources for the acquisition of modern plant and
machinery.
Modernization will actually serve its purpose only if the workers are
adequately trained in the new method of production.
(i) The accumulated savings of the business may not be sufficient to

Finance modernization of plant and machinery.

(ii) The responsibilities of top executives would increase because of

need to handle new product, technology and markets.

(iii) The existing staff may face problems in adapting to the new

technology.

Merger
Merger is an external growth strategy. When different

companies combine together into new corporate

organizations, such a process is known as mergers.
Merger can occur in two ways:
(a) Acquisition or
takeover and (b) Amalgamation.
Takeover or acquisition takes place when a company
offers cash or securities in exchange for the majority
shares of another company. It involves one company
taking over control of another.
Amalgamation takes place when two or more companies
of equal size or strength formally submerge their
corporate identities into a single one in a friendly
atmosphere.

Advantages
(i) A merger provides economies of large-scale operations.
(ii) Better utilization of funds can be made to increase profits.
(iii) There is possibility of diversification.
(iv) More efficient use of resources can be made.
(v) Sick firms can be rehabilitated by merging them with

strong and efficient concerns.

(vi) It is often cheaper to acquire an existing unit than to set
up a new one.
(vii) It is possible to gain quick entry into new lines of
business.
(viii) It can provide access to scarce raw materials and
distribution network and managerial expertise.

Disadvantages
(a) The combined enterprise may be unwieldy.

Effective co-ordination and control becomes

difficult. As a result efficiency and profitability
may decline.
(b) Mergers give rise to monopoly and
concentration of economic power which often
operate against the interest of the society and
the country.

Example of Merger

Consider the example of merger

Company 'A' and Company 'B' are operating
(existing) in the market. Company 'A' is an
acquiring company, and Company 'B' is
getting acquired by Company 'A'. In other
words, Company 'B' gets merged with
Company 'A'.

In this example of merger, Company 'A' will purchase the

majority of equity shares (ownership shares) of Company 'B'.

Company 'A' will take over the assets and liabilities of the
Company 'B'. The shareholders of the Company 'B' will be given
the shares of Company 'A'. The acquiring Company 'A' will
continue to operate (function) by its erstwhile (former) name.
Some recent examples of well-known mergers are as follows:
British Salt operating in UK merged with TATA Chemicals based
in India.
Zain Telecommunications operating in Africa merged with Bharti
Airtel Limited based in India.
Bank of Rajasthan operating in India merged with ICICI Bank
(India).

Other types of
strategies
Defensive Strategies

52

Joint venture
Retrenchment
Divestiture
Liquidation

Prof. Dr. Majed El-Farra 2009

Joint Venture
When two or more firms mutually decide to establish

a new enterprise by participating in equity capital and

in business operations, it is known as joint venture. A
joint venture is a business partnership between two or
more companies for a specific business operation.
Joint venture can be with a firm in the same country
or a foreign country. For example, Birla Yamaha Ltd. is
a joint venture of Birla and Yamaha Motor Co. of
Japan, Hindustan Computers Ltd. and Hewlett Packard of USA formed
HCL-HP Ltd, a joint venture company.

Advantages of forming a Joint

Venture
1.Provide companies with the opportunity to gain new capacity and

expertise
2. Allow companies to enter related businesses or new geographic
markets or gain new technological knowledge and access to greater
resources, including specialised staff and technology
3. sharing of risks with a venture partner
4. Joint ventures can be flexible. For example, a joint venture can have a
limited life span and only cover part of what you do, thus limiting both
your commitment and the business' exposure.
5. In the era of divestiture and consolidation, JVs offer a creative way for
companies to exit from non-core businesses.
6. Companies can gradually separate a business from the rest of the
organisation, and eventually, sell it to the other parent company. Roughly
80% of all joint ventures end in a sale by one partner to the other

The Disadvantages of Joint Ventures

1. It takes time and effort to build the right relationship and

partnering with another business can be challenging. Problems

are likely to arise if:
2. The objectives of the venture are not 100 per cent clear and
communicated to everyone involved.
3. There is an imbalance in levels of expertise, investment or
assets brought into the venture by the different partners.
4. Different cultures and management styles result in poor
integration and co-operation.
5. The partners don't provide enough leadership and support in
the early stages.
6. Success in a joint venture depends on thorough research and
analysis of the objectives.

Sony-Ericsson is a joint venture by the Japanese consumer electronics

company Sony Corporation and the Swedish telecommunications

company Ericsson to make mobile phones. The stated reason for this
venture is to combine Sony's consumer electronics expertise with
Ericsson's technological leadership in the communications sector. Both
companies have stopped making their own mobile phones.
EDIT [03/03/2012]: This joint venture agreement is no more available.
Virgin Mobile India Limited is a cellular telephone service provider
company which is a joint venture between Tata Tele service and Richard
Branson's Service Group. Currently, the company uses Tata's CDMA
network to offer its services under the brand name Virgin Mobile, and
it has also started GSM services in some states.

DIVESTMENT STRATEGY
Refersto thesale of an asset

forfinancial,legalorpersonal reasons.
Forcorporations, divestment can refer to a
companysellingoff a portion of itsassets, such
as asubsidiary to raisecapitalor to focus
thebusinesson a smaller core ofgoods
andservices .

2. Divestment
Strategies
A divestment strategy involves the sale or liquidation

of a portion of business, or a major division. Profit

centreor SBU. Divestment is usually a part of
rehabilitation or restructuring plan and is adopted
when a turnaroundhas been attempted but has
proved to be unsuccessful. Harvesting strategies a
variant of the divestmentstrategies, involve a
process of gradually letting a company business
wither away in a carefully controlledmannerReasons
for Divestment

Forinvestors, divestment can be used as a

social tool toprotest particular corporate

policies, such as a companytradingwith a
country known for childlaborabuses.
Ebay sells skype

E.g:
TATA group is a highly diversified entity with a range of

businesses under its fold. They identified their non core

businesses for divestment. TOMCO was divested and
sold to Hindustan Levers as soaps and a detergentwas
not considered a core business for the Tatas. Similarly,
the pharmaceuticals companies of the Tatas-Merind and
Tata pharma were divested to Wockhardt. The
cosmetics company Lakme was divested and soldto
Hindustan Levers, as besides being a non core business,
it was found to be a non- competitive and wouldhave
required substantial investment to besustained.

Reasons for adopting divestment

strategy
Problem of mismatch
Negative cash flow
Technology up gradation
Concentration on core business
Returns to share holder
Attractive offers from other firms
Problem of competitions
Withdrawal of obsolete product

Liquidation Strategy
. Liquidation Strategies
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
seriousconsequencessuchaslossofemploymen
tforworkersandotheremployees,terminationo
fopportunities where a firm could pursue any
future activities and the stigmaof failure.

The psychological implications

The prospects of liquidation create abad

impact on thecompanys reputation.

For many executives who are closely

associated firms, liquidationmay be
atraumatic experience