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7/30/2019 Generic and Grand Strategies
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Prof.Sushil\IITD\Session-VI 1
MANAGEMENT POLICY AND STRATEGYSESSION - VI
Generic and Grand StrategiesProf. Sushil
Department of Management Studies
Indian Institute of Technology, Delhi
INDIA
Email: [email protected]
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Prof.Sushil\IITD\Session-VI 2
Generic Strategies
Differentiation
Low-cost
leadership
Focus
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Prof.Sushil\IITD\Session-VI 3
PORTER’S GENERIC STRATEGIES
1. Cost
Leadership2. Differentiation
3 A. Cost Focus 3 B. Differentiation
FocusNarrow
Target
Broad
Target
DifferentiationLower Cost
CompetitiveAdvantage
Competitive Score
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Prof.Sushil\IITD\Session-VI 4
REQUIREMENTS FOR GENERIC COMPETITIVESTRATEGIES
Generic Commodity Required Common OrganizationalStrategy Skills and Resources Requirements
Overall cost Sustained capital investment Tight cost control
leadership access to capital Frequent, detailed control
reports
Process engineering skills Structured organization
and responsibilities
Intense supervision of labour Incentives based on
Products designed for ease meeting strict quantitative
Low-cost distribution system targets in manufacture
Differentiation Strong marketing abilities Strong coordination
Product engineering among functions in R&D,
Creative flare product development, and
marketing
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Prof.Sushil\IITD\Session-VI 5
REQUIREMENTS FOR GENERIC COMPETITIVESTRATEGIES
CONTD…
Strong capability in basic Subjective measurement and
research incentives instead of
quantitative measures
Corporate reputation for Amenities to attract highly
quality or technological skilled labour, scientists, or
leadership creative people Long tradition in the industry
or unique combination of skills
drawn from other businesses
Strong cooperation from
channels
Focus Combination of the above Combination of the above policies
policies directed at the directed at the regular strategic
particular strategic target target
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Prof.Sushil\IITD\Session-VI 6
RISKS OF THE GENERIC STRATEGIES
Risks of Cost Leadership Risks of Differentiation Risk of Focus
Cost of leadership is not Differentiation is not The focus strategy is
sustained initiated
sustained: Competitors imitate The target segment
Competitors imitate: Bases for differentiation becomes structurally
unattractive Technology changes becomes less imported to Structure erodes
Other bases for cost buyers Demand disappears
leadership erode
Proximity in differentiation Cost proximity is lost Broadly targeted
is lost competitors overwhelm
the segment:
The segment’s differencesfrom other segments narrow
The advantages of a broad
line increase
Cost focusers achieve Differentiation focusers New Focusers sub-segments
even lower cost in segments achieve even greater the industry
differentiation in segments
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Prof.Sushil\IITD\Session-VI 7
STAGE OF `INDUSTRY’ DEVELOPMENT
Keeping
ahead of the
field
Cost leadership
Raise barriers
Deter
competitors
Redefine scopeDivest
peripherals
Encourage
departures
Imitation at
lower cost Jointventures
Differentiati
on Focus
Differentiation
Newopportunities
Leade
r
Follower
Growth Maturity Decline
Strategicposition oforganizatio
n
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Prof.Sushil\IITD\Session-VI 8
Types of Grand Strategies
Consortia
Concentrated Growth
Market Development
Product Development
Innovation
Horizontal Integration
Vertical Integration
Concentric Diversification
Conglomerate Diversification
Turnaround
Divestiture
Liquidation
Bankruptcy
Joint Ventures
Strategic Alliances
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Prof.Sushil\IITD\Session-VI 9
Characteristics of a Concentrated GrowthStrategy
Involves focusing resources on the profitable growth of a
single product, in a single market, with a single dominant
technology
Rationale - Firm develops and exploits its expertise in a
delimited competitive arena
Determinants of competitive market success
– Ability to assess market needs
– Knowledge of buyer behavior
– Customer price sensitivity
– Effectiveness of promotion
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Prof.Sushil\IITD\Session-VI 10
Conditions Favoring a Concentrated GrowthStrategy
Firm’s industry is resistant to major technologicaladvancements
Firm’s targeted markets are not product saturated
Firm’s markets are sufficiently distinctive to dissuadecompetitors in adjacent markets from entering firm’s segment
Firm’s inputs are stable in price and quantity and available inamounts and at times needed
Firm’s industry is stable
Firm’s competitive advantages are based on efficientproduction or distribution channels
Success of market generalists
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Prof.Sushil\IITD\Session-VI 11
Strategies of Market and ProductDevelopment
Market development – Consists of marketing present products, often with only
cosmetic modifications, to customers in related market areas
by
Adding channels of distribution or
Changing content of advertising or promotion Product development
– Involves substantial modification of existing products or
creation of new but related products
–
Based on penetrating existing markets by Incorporating product modifications into existing items or
Developing new products connected to existing products
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Prof.Sushil\IITD\Session-VI 12
Specific Options for Selected GrandStrategies
Concentration: Increasing use of present products in present
markets1. Increasing present customers’ rate of use:
a. Increasing size of purchaseb. Increasing rate of product obsolescencec. Advertising other uses
d. Giving price incentives for increased use2. Attracting competitors’ customers
a. Establishing sharper brand differentiationb. Increasing promotional effortc. Initiating price cuts
3. Attracting nonusers to buy the producta. Inducing trial use through sampling, price incentives, and
so onb. Pricing up or downc. Advertising new uses
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Prof.Sushil\IITD\Session-VI 13
Specific Options for Selected GrandStrategies (continued)
Market Development: Selling present products in new markets
1. Opening additional geographic markets
a. Regional expansion
b. National expansion
c. International expansion
2. Attracting other market segments
a. Developing product versions to appeal to other
segments
b. Entering other channels of distribution
c. Advertising in other media
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Prof.Sushil\IITD\Session-VI 15
Innovation Strategy
Involves creating a new product life cycle,
thereby making similar existing products
obsolete
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Prof.Sushil\IITD\Session-VI 16
Strategies of Horizontal and VerticalIntegration
Horizontal integration
– Based on growth via acquisition of one or more similar
firms operating at the same stage of the production-
marketing chain – Involves eliminating competitors, providing acquiring firm
with access to new markets
Vertical integration
– Involves acquiring firms To supply acquiring firm with inputs - backward integration or
Are customers for firm’s outputs - forward integration
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Prof.Sushil\IITD\Session-VI 17
Acquisitions or mergers of suppliers or customerbusinesses are vertical integrations
Acquisitions or mergers of competingbusinesses are horizontal integrations
Textile producer
Shirt manufacturer
Clothing store
Textile producer
Shirt manufacturer
Clothing store
Vertical and Horizontal Integrations
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Prof.Sushil\IITD\Session-VI 18
Motivations Related to DiversificationStrategies
Increase growth rate of firm
Investment is better use of funds than using them forinternal growth
Improve stability of earnings and sales
Balance or fill out product line
Diversify product line
Acquire a needed resource quickly
Achieve tax savings
Increase firm’s stock value
Increase efficiency and profitability
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Prof.Sushil\IITD\Session-VI 19
Diversification Strategies
Concentric diversification – Involves acquisition of businesses related to acquiring
firm in terms of technology, markets, or products
Conglomerate diversification
– Involves acquisition of a business because it representsa promising investment opportunity
– Primary motivation is profit pattern of venture
Difference between the approaches
– Concentric diversification emphasizes commonality whereas conglomerate diversification emphasizes
profits for each individual unit
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Prof.Sushil\IITD\Session-VI 20
Turnaround Strategy
Involves a concerted effort over a period of
time to fortify a firm’s distinctive
competencies, returning it to profitability
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Prof.Sushil\IITD\Session-VI 21
Declining sales
ormargins
Imminentbankruptcy
Low
High
Costreductio
n
Assetreduction
Efficiencymaintenanc
e
Entrepreneurialreconfiguration
S t a b i l i t y
R e c o v e r y
Internalfactors
Externalfactors
Turnaround situation Turnaround response
Cause Severity Retrenchment phase Recovery phase
(operating)
(strategic)
A Model of the Turnaround Process
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Prof.Sushil\IITD\Session-VI 22
Divestiture and Liquidation Strategies
Divestiture strategy – Involves selling a firm or a major component of a firm
– Reasons for divestiture
Partial mismatches between acquired firm and parent firm
Corporate financial needs
Government antitrust action
Liquidation strategy
– Involves selling parts of a firm, usually for its tangible assetvalue and not as a going concern
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Prof.Sushil\IITD\Session-VI 23
The Strategy of Bankruptcy
Two approaches – Liquidation - Involves complete distribution of a firm’s
assets to creditors, most of whom receive a small
fraction of amount owed
– Reorganization - Involves creditors temporarilyfreezing their claims while a firm reorganizes and
rebuilds its operations more profitably
Advantage of a reorganization bankruptcy
– Proactive option offering maximum repayment of afirm’s debt in the future if a recovery strategy is
successful
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Prof.Sushil\IITD\Session-VI 24
Corporate Combination Strategies
Joint venture
– Involves establishing a third company (child), operated for the benefit of the co-owners (parents)
Strategic alliance
– Involves creating a partnership between two or morecompanies that contribute skills and expertise to acooperative project
Exists for a defined period
Does not involve the exchange of equity
Consortia, Keiretsus, and Chaebols – Defined as large interlocking relationships between
businesses of an industry
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Prof.Sushil\IITD\Session-VI 25
The Top Five Strategic Reasons forOutsourcing
1. Improve Business Focus
2. Access to World-Class Capabilities
3. Accelerated Reengineering Benefits
4. Shared Risks
5. Free Resources for Other Purposes
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Prof.Sushil\IITD\Session-VI 26
INDIAN BUSINESS HOUSESTATA GROUP
Group Overview
India’s largest business house
More than 85 companies
39 listed
8% of India’s market capitalization
2.6 Million shareholders
2,70,000 employees
Turnover Rs 343 billion (1996-1997)
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Prof.Sushil\IITD\Session-VI 27
INDIAN BUSINESS HOUSESTATA GROUP Contd...
1996-97 Rs (Billion)
322
343
30
23
40
% change Over 1995-
96
18.8
18
-7.1
- 16
19
Financial Highlights
Assets
Turnover
PBT
PAT
Exports
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Prof.Sushil\IITD\Session-VI 28
INDIAN BUSINESS HOUSESTATA GROUP Contd...
Metals
Automobiles
Energy
Engineering
Chemicals
Pharmaceuticals
Consumer Products
Services
Agro Industries
IT and Communication
Exports
Finance
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Prof.Sushil\IITD\Session-VI 29
INDIAN BUSINESS HOUSESTATA GROUP Contd...
Tata Heritage
Jamsetji Tata
– Started textile mill in 1877
– Inspired steel and power industry – Technical education and philanthropy
JRD Tata
– Pioneered civil aviation
– Funded Hom Bhabha’s nuclear programme
– Guided the Tata group for over half a century
Ratan Tata
– Present Chairman since 1991
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Prof.Sushil\IITD\Session-VI 30
INDIAN BUSINESS HOUSESTATA GROUP Contd...
Holding Companies
Tata Sons
– Founded by Jamsetji Tata
– Promoted many of the present Tata companies – 63% held by Tata philanthropic trusts
Tata Industries
– 100% subsidiary of Tata Sons founded in 1945
– Managing agency till 1970
– Promoted new Tata companies in technology based
businesses
Cross holdings among other Tata companies
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Prof.Sushil\IITD\Session-VI 31
INDIAN BUSINESS HOUSESTATA GROUP Contd...
Restructuring
Prompted by post 1991 changing environment
Need to identify and focus on core businesses
Resistance from satraps – Russi Mody, Darbari Seth, Ajit Kerkar
Shrink number of companies
– From over 85 to about 30
Shrink number of core businesses – From about 25 to around 10 or 12
Mergers and divestments
McKinsey hired as a consultants
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Prof.Sushil\IITD\Session-VI 32
INDIAN BUSINESS HOUSESTATA GROUP Contd...
Restructuring Strategy
Keep and grow
– Power, watches, metals, chemicals, telecom, hospitality,
financial services, infotech, emerging services,
infrastructure, automobiles
Forge strategic tie ups
– Tea and beverages, retailing
Remain only as strategic investors
– Luxury cars, infotech, printing, cosmetics
Sell
– Refrigeration, paints, textiles, trading, electronics, oil drilling,
petrochemicals, pharma, specialty chemicals
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Prof.Sushil\IITD\Session-VI 33
INDIAN BUSINESS HOUSESTATA GROUP Contd...
Recent Developments
Voltas focus on air conditioning and engineering
business
– Hive off pesticides business to Ralchem Pesticides (whollyowned subsidiary of Rallis - largest integrated agrochemical
company in India)
Electrolux Voltas - JV between Voltas and AB
Electrolux
– Refrigerators
– Washing machines
– Compressors for refrigerators
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Prof Sushil\IITD\Session-VI 34
INDIAN BUSINESS HOUSESTATA GROUP Contd...
Recent Developments
Tata Tea focusing on global agro business
– Manages 32 tea gardens in Sri Lanka
– Adding tea gardens inTurkey – Acquired a 9.5% stake in Asian Coffee
Overseas Operations
– Automobile assembly in Bangladesh
– Instant tea operations in the US
– Chain of hotels across the world
– Precision tooling operations in Singapore