Grand Strategy

Prof. K. Chander 1

GRAND STRATEGYGRAND STRATEGY

• Strategic alternatives revolve around the question of whether to continue or change the business the enterprise is currently in or our improve the efficiency and effectiveness with which the firm achieves its corporate objectives.

• There are four grand strategic alternatives(1) Stability

(2) Expansion

(3) Retrenchment

(4) Combination of above three.

Prof. K. Chander 2

Possible business definition of an oral Possible business definition of an oral companycompany

CUSTOMERGROUPSFluoride

SegmentCosmeticSegment

ALTERNATIVETECHNOLOGIES

Paste/ Powder

Different base material

Different Additives/ flavouring

CUSTOMER FUNCTIONS

Dental/ Oral Health

Freshness

FoamAs per Abell, a business should be defined, in terms of customer groups that will be served, the customers needs/ customer functions that will be met and the technology that is used to satisfy these needs.

Prof. K. Chander 3

Stability StrategyStability Strategy

• Stability Strategy is adopted by an organization when it attempts at incremental improvement of functional performance in terms of its customer groups, customer function and alternative technology.

• A packaged tea company provides special service of institutional customers.

• A copier machine company provides better after sales service package.

• A Steel company modernizes its plant to improve efficiency and productivity.

Prof. K. Chander 4

Expansion StrategyExpansion Strategy

• When organization broadens the scope of its

customer groups, customer functions, etc or

technology – single or jointly to improve its

performance.

• A chocolate company includes middle age group

in addition to children.

• A stock broker includes personalized financial

service.

• A printing press changes from conventional

printing to Desk Top Publishing to improve

performance.

Prof. K. Chander 5

Expansion Strategy..Expansion Strategy..

• Expansion strategies are more risk prone.

Example –

– JPA

• Construction – Hotels – Cement – Gas Line

Remark –

(a) Started Selling Cement units;

(b) Started selling hotels; Sudden expansion can

bring collapse

Prof. K. Chander 6

Retrenchment StrategyRetrenchment Strategy

• Retrenchment Strategy Is followed where

company is making losses and subsequently

reduces the scope of either

– its customer group;

– customer function etc.

• In this manner retrenchment attempts to “Trim

the fat” and results in slimmer organizations.

• In real life situation one has to use combination

of three grand strategies.

Prof. K. Chander 7

Combination StrategyCombination Strategy

• When an organization adopts a mixture of

stability, expansion and retrenchment either at

the same time in its different businesses or at

different times in the same business with the aim

of improving its performance.

• Example of BEML

1. Stability – Dumper – 35,50,85,120

2. Expansion – Rope shovel/ Dragline

3. Retrenchment – Dropping of wheel loaders.

Prof. K. Chander 8

Major reasons for organization Major reasons for organization adopting different grand strategies.adopting different grand strategies.

A. Stability strategy is adopted because:

1. It is less risky, involves less changes and people

feel comfortable with things as they are.

2. The environment faced is relatively stable.

3. Expansion may be perceived as being threatening.

4. Consolidation is sought after period of rapid

expansion.

Prof. K. Chander 9

B. Expansion strategy is adopted because:

1. It may become imperative when environment demands increase in pace of activity.

2. Psychologically, strategists may feel more satisfied with the prospects of growth form expansion; chief executives may take pride in presiding over organizations perceived to be growth – oriented.

3. Increasing size may lead to more control over the market vis-à-vis competitors.

4. Advantages from the experience curve and scale of operations may accrue.

Prof. K. Chander 10

C. Retrenchment strategy is adopted because:

1. The management no longer wishes to remain in business either partly or wholly due to continuous losses and un-viability.

2. The environment faced is threatening.

3. Stability can be ensured by reallocation of resources from unprofitable to profitable businesses.

D. Combination strategy is adopted because:

1. The organization is large and faces complex environment.

2. The organization is composed of different industry businesses.

Prof. K. Chander 11

PROS AND CONS OF STRATEGY CHOICES AT IBMPROS AND CONS OF STRATEGY CHOICES AT IBM

All strategy alternatives have advantages and disadvantages. The option facing IBM are a case in point. Known as clones, company after company now products a personal computer which is compatible with the IBM product. Frequently, these competitor products claim to be cheaper, faster, and more reliable while they offer simple hardware options and use the same software.IBM has considered several strategy option, each which has pros and cons, to deal with the competitor threat from clones.

Strategy option Advantage Disadvantage

A. Introduce a low-price replacement for the basic PC using newer, less expensive technology

IBM would regain market share lost to clones and add a model ideal for the education market.

IBM might sacrifice gross margins, direct sales from more profitable models

B. With new hardware and software, alter the PC to make cloning more difficult and to prevent clones from participating fully in IBM computer networks.

IBM would keep major corporate customers, rebuilt market share as they shift to the new technology, reestablish control over prices and margins.

Consumers, especially small businesses, might stick with the current PC for which there are thousands of software packages.

C. Bring out a steady stream of new PCs that include more features, while cutting prices on older models.

By continuously updating and improving the PC, IBM could quickly make most clones obsolete and improve prices for its products

A rash of new models might make inventories of IBM PCs obsolete and could clog the dealer channel. With demand slackening new models might not sell better than current ones.

D. Withdraw from the low-end, “commodity” PC market, leaving the clones to battle each other in low-margin business.

IBM would be free to concentrate on selling more profitable versions of the PC to large corporations and, by linking those PCs into company data networks, would ultimately stimulate demand for mainframe computers to support them.

IBM would be walking away from as much as $3 billion in annual revenues. Such a move also would hinder it effort t win big shares of the education and home market.

Prof. K. Chander 12

STRATEGIC ALTERNATIVESSTRATEGIC ALTERNATIVES

• Environment appraisal and organizational

appraisal lead to strategic alternatives.

• The choice of strategy will depend on how our

organization perceives its strength and weakness

vis-à-vis the opportunists and threats the external

environment presents.

Prof. K. Chander 13

STRATEGIC ALTERNATIVES…STRATEGIC ALTERNATIVES…

• Major type of strategies adopted by organizations are:

1. Modernization

2. Diversification

3. Integration

4. Merger

5. Take over

6. Joint venture

7. Turn around

8. Divestment

9. Liquidation

10.Combination strategy

Prof. K. Chander 14

Modernization StrategyModernization Strategy

• Modernization basically means technological up gradation and it is used to increase production, lower costs, efficiency and productivity.• Internal stability strategy if the pace of modernization is

low to moderate.• Internal expansion strategy if the pace is high.• External expansion strategy is the organization merge

with or acquires another company for the purpose of modernization.

• Internal retrenchment strategy if resources are directed form one are to another with the aim of modernization.

• External retrenchment if part of organization is divested or liquidated with the aim of modernization. • Example SAIL.

Prof. K. Chander 15

Diversification and Integration Diversification and Integration StrategiesStrategies

• Diversification as the name suggests, additional of new business which may be internal, external, related or unrelated.

• Horizontal or vertical and active or passive dimensions of diversification.

VERTICAL INTEGRATION:-

When organization start new products which serve its own need. Example Manufacturing of engine, transmission etc.

Prof. K. Chander 16

Diversification and Integration Diversification and Integration Strategies…Strategies…

HORIZONTAL INTEGRATION

When the organization take up the same type of products at the same level of the production of marketing process. Example SAIL – take over Bhandravati Steel.

CONCENTRIC DIVERSIFICATION

When the organization take up an activity in such a manner that it is related to its existing business. Example – Rain coat manufacturers – Rubber bases items such as water proof shoes etc.

Prof. K. Chander 17

Diversification and Integration Diversification and Integration Strategies…Strategies…

CONGLOMERATE DIVERSIFICATION

When an organization takes up those activities

which are unrelated to its existing business.

Examples ITC – Cigarettes, Hotels,

Essar – Shipping, Steel

TTK group – Pressure cooker, Chemicals and

Pharmaceuticals.

Prof. K. Chander 18

Why are Diversification Strategies Why are Diversification Strategies AdoptedAdopted

• There are many reasons why organizations adopt

diversification strategies.

• The three basic and important reasons are:

1. Diversification strategies are adopted to minimize risk

by spreading it over several businesses.

2. Diversification may be used to capitalize on

organizational strength or minimize weakness.

3. Diversification may be only way out if growth in existing

business is blocked due to environmental and

regulatory factors.

Prof. K. Chander 19

Why are Diversification Strategies Why are Diversification Strategies AdoptedAdopted

• The different types of diversification strategies

described above are

– Vertical;

– Horizontal;

– Concentric; and

– conglomerate

• Each have their own advantages &

disadvantages.

Prof. K. Chander 20

Diversification strategies: Major advantages and Diversification strategies: Major advantages and disadvantagesdisadvantages

Diversification strategy Advantages Disadvantages

Vertical integration • Access and control of supply or demand

• Economizing operations

• Risk of unfamiliar business

Horizontal integration • Eliminating competitors• Access to new market

• Increase in risk and commitment.• Reduction in flexibility

Concentric diversification • Attain synergy by exchange and sharing of resources and skills

• Economies of scale and tax benefits

• Additional investment in marketing infrastructure or new technology.

• Untried markets and technologies.

Conglomerate diversification

• Better management and allocation of cash flows and obtaining high ROI

• Reducing risk by spreading investment in different businesses and industries

• Diversifying resources and attention to other areas, leading to lack of concentration

• Risks of managing entirely new businesses.

Prof. K. Chander 21

Patten of Diversification in Indian Patten of Diversification in Indian CompaniesCompanies

A research study of 72 large public and private sector companies in India, which highlighted the pattern of diversification in the Indian industry during the period 1960-75, concluded that:

1. The larger enterprises in the Indian industry in both the private and public sectors are very diversified

2. Both the private and public sector companies have diversified rapidly but in different ways. Private sector companies has typically diversified into unrelated areas while public enterprises have diversified into related ones.

3. Governmental regulations plays a greater role in diversification strategies than the interplay of market forces.

4. Private sector companies have followed diversification strategies in response to the need of regulatory mechanisms such as industrial policy resolutions, the IDR Act, MRTP Act, FERA, etc.

5. Public enterprises have adopted diversification in response to the public policy of national self-sufficiency and import substitution.

6. Diversification strategies have important implications from the view-point of public policy and corporate management.

Prof. K. Chander 22

MERGER, TAKE OVER AND MERGER, TAKE OVER AND JOINT VENTURE STRATEGIESJOINT VENTURE STRATEGIES

• Merger and Take Over (Acquisition) basically

involves external approach of expansion.

• Two or more companies are involved.

• All the three terms used are synonymous.

Merger

• When buyer and seller objectives are matched to a

large extent.

Prof. K. Chander 23

Acquisition and Take overAcquisition and Take over

• It is based on strong desire of the buyer to acquire

(often sprung as a surprise)

• Take over a common way of acquisition against

the wishes of present owner (Hostile take over or

friendly take over).

• Often these strategies are used for diversification.

Prof. K. Chander 24

Why the Buyer wishes to MergeWhy the Buyer wishes to Merge

• To increase the value of stocks.

• To increase the growth rate and make good

investment.

• To improve stability of earning and sales.

• To balance, complete or diversify product line.

• To reduce competition.

• To acquire to needed resource quickly

• To avail Tax concession and benefits.

Prof. K. Chander 25

Why Seller wishes to MergeWhy Seller wishes to Merge

• To increase owner stock value & investment.

• To increase growth rate.

• To acquire resources to stabilize operations.

• To benefits from tax legislation.

• To deal with top management succession

problems.

Prof. K. Chander 26

IMPORTANT ISSUES IN MERGERSIMPORTANT ISSUES IN MERGERS

STRATEGIC ISSUES

• Relates to commonality of interests between buyer

& seller firms.

• How much synergy is achieved by merger.

• A merger should ideally lead to the generation of

strength that would help the post merger

organization to achieve its objectives in the better

manner.

Prof. K. Chander 27

IMPORTANT ISSUES IN MERGERS…IMPORTANT ISSUES IN MERGERS…

FINANCIAL ISSUES

• Relate to the valuation of the seller firm and

the sources of financing for merger valuation

is drawn on the basis of assts, market

standing and opportunity, earnings potential,

or stock value.

• A common procedure is:

– Discounted Cash Flow Method.

– Capital Asset Pricing Method (CAPM)

Prof. K. Chander 28


FINANCIAL ISSUES…

• The other major financial consideration is the

source of financing.

• Acquisition o shares through exchange of debt and

equity is a method used abroad to avoid cash out

flow.

• Its difficult in India due to provision of Capital Gains

Taxation.

• Bank, Stock Market & Financial Institute are also

source of finance but not encouraged.

Prof. K. Chander 29


MANAGERIAL ISSUES

• It is important to note that the perception of how the

management will take place after merger.

• Usually merger is followed by changes in staff.

• Usually CEO and top manager are changed.

Prof. K. Chander 30


LEGAL ISSUES

• In India the provision relating merger and

amalgamations are made under Chapter – V of the

Company Act, 1956.

• The only section that deals with the transfer of

shares (or take over bids) is section 395.

• Apart from Company Act, and MRTP Act, Section

72-A (1) of the Income Tax Act is also relevant for

taxation purpose.

Prof. K. Chander 31


TAKE OVER STRATEGIES

• Take over or acquisition is the most popular

strategy being adopted by Indian companies.

• Normal route of expansion is licensing and setting

up new projects.

• Current decade has seen an increasing use of take

over strategies (or simple take over) as the means

of rapid growth.

Prof. K. Chander 32


TAKE OVER STRATEGIES…

• Major companies which have been taken over in the last few years include Shaw Wallace, Ashok Leyland, Dunlop, Harrison Malayalam, ICIM, ACC, L&T, Shalimar Paints, Scandia Steamship and many other others.

• Main Players are:– Manu Chhabria

– Hinduja Brothers

– R. P. Goenka

– Dhirubhai Amabani; and

– Vijaya Mallaya.

Prof. K. Chander 33

HOW TAKE OVERS TAKES PLACEHOW TAKE OVERS TAKES PLACE

Six – Step procedure recommended for acquisition:

a) Spell out the objective.

b) Indicate how the objective would be achieved.

c) Assess managerial quality.

d) Check the compatibility of business styles.

e) Anticipate and solve problems early.

f) Treat people with dignity and concern.

Prof. K. Chander 34

HOW TAKE OVERS TAKES PLACE…HOW TAKE OVERS TAKES PLACE…

Leverage Buy Out (LBO) or Boot Strap Acquisition:

• Which involve raising of funds by pledging the assets of the firm to be taken over.

• Negotiation are done through trusted intermediary, lower, development & merchant bankers, etc.

• Valuation of assets, Business Goodwill, Market Opportunities, growth potential, etc. are taken into consideration before fixing the price of shares. (Friendly Take Over.)

Prof. K. Chander 35

HOW TAKE OVERS TAKES PLACE…HOW TAKE OVERS TAKES PLACE…

Hostile Take Overs:

• Where a take over is opposed by the existing

management follow a different route.

• Here the shares are picked from market and

controlling interest are obtained, with the tacit help

of the other majority shareholders.

• It is believed political support matters a lot in

measure of success.

Prof. K. Chander 36

Pros & Cons of Take OversPros & Cons of Take Overs

• They ensure management accountability.

• Offers easy growth opportunities.

• Create mobility of resources.

• Avoid gestation period.

• Offers chance for sick units to survive.

• Open up alternative for select divestment.

The opponents of take over argue:

• Professionalism gets replaced by money power.

• Take over do not crate any real asset.

• Interest of minority shareholder is not protected.

Prof. K. Chander 37

Pros & Cons of Take Overs…Pros & Cons of Take Overs…

• Despite argument against take place over it becoming quite common & is expected to proliferate into near future.

• Take over in India – through most of them have been controversial & have faced adverse publicity – are expected to the viable strategic alternatives for external expansion strategy.

• Where take overs are rational, using it to consolidate capacities, taking assistance in diversification & creating synergy are good propositions

Prof. K. Chander 38

Joint Venture StrategiesJoint Venture Strategies

• Merger refer to a combination of two or more companies in to one company and may be possible in two ways absorption and consolidation.

– Absorption take place in merger & Acquisition.

– Consolidation take place when two or more companies combine to from a new company.

– Joint venture are special case of consolidation.

Prof. K. Chander 39

Conditions for Joint VentureConditions for Joint Venture

• When an activity is uneconomical for an organization to do alone.

• When the risk of Business has to be shared & therefore is reduced for participating firms.

• When the distinctive competence of Two or more companies is brought together.

• When setting up a organization requires surmounting hurdles such as import Quotas, tariffs, nationalistic, political interests, and cultural road blocks.

Prof. K. Chander 40

Type of Joint VentureType of Joint Venture

• Between two firms in one Industry.

• Between two firms across different Industries.

• Between Indian company & Foreign company in

Foreign Country.

• Between Indian company & Foreign company in

India.

• Between Indian Company & Foreign company

in Third countries.

Prof. K. Chander 41

Strategic Issues in Joint VentureStrategic Issues in Joint Venture

• Eliminating, controlling or reducing competition.

• Increase Market Share.

• Diversification in J. V. is planned across different

Industries.

• Technology Transfer through Joint Venture.

• Legal & regulator handle removed through Joint

Venture.

Prof. K. Chander 42

Strategic Issues in Joint Venture…Strategic Issues in Joint Venture…

• Many Indian company have formed Joint Venture

to have higher profitability & expansion outside

the ambit of MRTP restriction like, Tata’s have

set-up abroad hotels commercial vehicles and

leather manufacturing units. Birlas (Textile, sugar

& viscose staple fibre) etc.

• Under liberalization huge investment is expected

through Joint Venture route. Also technology up

gradation is on regular basis.

Prof. K. Chander 43

Benefits & Drawbacks in Joint Benefits & Drawbacks in Joint VentureVenture

• The major benefit that are likely to accrual from Joint Venture include the minimizing risks, reducing an individual company investment, having access to foreign Technology and Equity participation and synergistic advantages.

• The disadvantages that may arise in Joint Venture are problem in equity, foreign exchange regulations, lack of proper coordination among participating firm, cultural & behavioral differences, and the possibility of conflict among the partners.

Prof. K. Chander 44

Turnaround, Divestment’s & Liquidation Turnaround, Divestment’s & Liquidation strategiesstrategies

• If the organization chooses to focus on ways

and means to reverse the process of decline, it

adopts a turnaround strategy.

• If it cuts off loss making units, divisions, curtails

its product line, it performs divestment strategy.

• If none of these actions work then it choose to

abandon the activities totally resulting in

liquidation strategy.

Prof. K. Chander 45

Turn – Around StrategiesTurn – Around Strategies

• There are certain indicators which point out that the a turn – around is needed if the organization has to survive. These danger signs are:

1. Persistence negative cash flow.

2. Negative Profit.

3. Declining Market share.

4. Deterioration in Physical faculties.

5. Over manning & low morale.

6. Un-competitive product & services.

7. Mismanagement

Company which Faces one or more above problems is known as sick company.

Prof. K. Chander 46

Managing Turn – AroundManaging Turn – Around

• There are three ways.1. Existing Management team with advisory support

(External Consultant)

2. Existing Team withdraws temporally & a management consultant or turn – around specialist is employed by Banks and Financial Institutions.

3. The last method – The one Most popular – involves replacement of the Existing Team, specially the CEO or merge the sick unit with healthy

Approach: - a) Surgical b) Humane

Example: - KIMCO → Only ManagementVIL → Full (Partial)

Responsibility to turn – around

Prof. K. Chander 47

Managing Turn – Around…Managing Turn – Around…

• Action Plan: For the turn around to the successful. It is imperative to follow long term & short term Financial needs. A workable action plan for Turnaround should include:-

1. Analysis of product, market, production processes, competition and Market segment positioning.

2. Clear thinking about the market place & production line logic. Implementation by target setting, feed back & remedial action.

• Research Study reveals:-1. Primary need for proper management of Turnaround.

2. Than only Financial re-structuring as normally done by External agencies.

Prof. K. Chander 48

Managing Turn – Around…Managing Turn – Around…

• Role of External Agencies:-

1. Company have to declared sick (Company Act Net

worth < 50% losses accumulated 1995)

2. BIFR (Board of Industrial & Financial Restriction)

acts as corporate Doctor.

3. BIFR prepares re-habitation schemes for revival of

sick units

a) Change of management

b) Amalgamate with other company

c) Undertakes Sale of sick unit.

Prof. K. Chander 49

The elements in a turnaround The elements in a turnaround strategystrategy

• Ten comparable Indian companies, in five

groups of two each, were selected for study. In

each group, one company seemed to have been

more successful while the other less successful

in adopting the turnaround strategy. Based on

the set of ten elements that contribute to

turnaround, the case studies of these ten

companies were analyzed.

Prof. K. Chander 50

• First, it is important to note what these ten elements are:1. Changes in the top management;

2. Initial credibility-building actions;

3. Neutralizing external pressures;

4. Initial control;

5. Identifying quick payoff activities;

6. Quick cost reductions;

7. Revenue generation;

8. Asset liquidation for generating cash;

9. Mobilization of the organizations; and

10.Better internal coordination.

The elements in a turnaround The elements in a turnaround strategy…strategy…

Prof. K. Chander 51

• The comparative analysis of the actions taken by more successful companies and less successful companies revealed that no significant difference was there as far as the first three elements were considered.

• The crucial different lies in the way the companies attempted a turnaround on the basis of initial control of operation by the new management, quick cost reductions through various means, mobilizing the organization for improving motivation and morale, and better internal coordination.

The elements in a turnaround The elements in a turnaround strategy…strategy…

Prof. K. Chander 52

Rehabilitation package for Metal BoxRehabilitation package for Metal BoxMetal Box India Ltd, a reputed company in packaging industry, turned sick due to its wrong static move of diversifying into bearings manufacture in the early eighties. Eight of its nine units closed down as a result of which Board of Industrial and Financial Reconstruction (BIFR) and Industrial Credit and Investment Corporation of India (ICICI) formulated a rehabilitation package for turnaround of the company.The BIFR – ICICI package covers the following:– Closure of three unprofitable units at Calcutta, Bombay and Cochin.– Retrenchment of 3000 workers drawn from all the nine units through compensation.– A flat 20 percent cut in wages for the remaining workers.– Write – off or conversion of outstanding loans from financial institutions and banks.– Concessions and relief's of up to 50 percent in sales, octroi, and turnover taxes, among others from the state governments.– Induction of new promoter in place of the parent multinational Metal Box plc of UK which wants to diverts it 33.02 percent shareholding.

Prof. K. Chander 53

Divestment StrategiesDivestment Strategies• Divestment Strategy involve the scale of or liquidation of a

portion of business or major division, profit centre of SBU.

• Reasons for Divestment1. A business that had been acquired proves to be mismatch & cannot

be integrated with in the company.

2. Persistent negative cash flow.

3. Technological up-gradation required, which a company cannot afford.

4. Divestment by a firm may be part of merger plan.

• Approach to Divestment

A firm may choose to divest in two ways:1. A part of the company is divested by spinning it off as a financially

and managerially independent company with parent company retaining partial ownership.

2. The firm may be sold out right.

Prof. K. Chander 54

Liquidation StrategyLiquidation Strategy

• A retrenchment Strategy considered the most extreme

and unattractive is liquidation strategy, which involves

closing down a firm & selling its assets.

• Liquidation strategy may be unpleasant as a strategy

alternative but when a “Dead Business is worth more than

alive” for example Real state owned by firm may fetch it

more money than the actual returns of doing business.

• Liquidation done by court or under the supervision of

court.

Prof. K. Chander 55

Liquidation at Empress MillsLiquidation at Empress MillsOn may 14, 1986, the Bombay High Court appointed a provisional liquidator in the petition for the voluntary liquidation of Empress Mills at Nagpur Empress Mills is a 113-year-old mill owned by the Tatas. Behind the liquidation petition lie a host of reasons.

The major strategic cause for liquidation lies in the fact that for nearly the last 50 years, Empress Mills did not invest in modernization or keep pace with competition. In the wider context, government policies have not proved to be favorable for the cotton textile industry. The management of the mill carried the blame for neglect and delayed action.After Ratan Tata took over as Chairman of the company in 1977, some efforts were made for modernization but proved to be grossly insufficient. A proposal to merge the mill with other textile units of the Tatas could not materialize. Rationalization of the product mix across these units also proved to be non-starter owing to resistance offered by executives. Efforts to negotiate a voluntary retirement scheme to cut down 6000 workers-employees strength also failed. Ultimately, the banks and financial institutions delayed the formulation of a rehabilitation package that could turn the mill around. The state government apparently did not provide the much need political support that could have helped save the jobs of the workers.

The case of Empress Mills provides an important lesson that if timely strategic action is not taken and the situation is allowed to drift, oven the largest business group of India, such as the Tata, cannot save a company from inevitable deaths.

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Grand Strategy