The following article throws light upon the types of corporate strategy. The types are:- 1. Expansion/growth strategies 2. Stability strategies 3. Retrenchment strategies and 4. Combination strategies. A Corporate strategy is one that specifies what businesses a firm is in or wants to be in and what it wants to do with those businesses. It is based on the mission and goals of the firm and the roles that each business unit of the firm will play.
Types of Corporate Strategy # 1. Expansion/Growth Strategies:
These are pursued basically to accelerate the pace of growth of an organisation. Most organisations chase expansion in order to exploit market opportunities. Expansion helps a firm dominate the market and gain control over competition. Organisational resources can be put to good use. Expansion strategies are also known as growth strategies.
Growth or expansion can happen in five different ways:
I. Expansion through Concentration:
Here growth happens by concentrating resources on few things that the organisation can do better than rivals. Expansion through concentration can be undertaken through three strategies, namely market penetration, market development and product development.
A. Market Penetration:
It is the strategy of a firm that directs its resources to the profitable growth of a single product, in a single market with a single dominant technology.
The firm tries to thoroughly exploit its expertise in a delimited competitive arena and increase the sale of its existing products in the existing markets by:
i. Increasing sales to current customers (buy toothpaste and take toothbrush free offers).
ii. Woo customers from competitors’ products (offer the Tata Nano car at an attractive, initial price to woo the potential buyers of Maruti car).
iii. Convert non-users into users (draw the rural folks to buy toothpaste, colour televisions, Tata-Sumo vehicle etc.)
Successful firms tend to rely on doing what they know they are best at doing. For example, to increase its tea sales, Tata Tea might cut prices, increase advertising, get its products into more stores, or obtain better store displays and point of purchase merchandising from its retailers.
Basically, Tata Tea management would like to increase usage of tea by current customers, and attract customers of other tea brands (HLL, Nestle, Duncan, etc.) to Tata Tea. Concentration helps a firm to specialize in a few areas and gain rich experience, expertise and specialised knowledge over a period of them.
Having lived with fairly predictable conditions, managers are able to have a better grip over market forces. Decisions flow smoothly; systems and procedures are in place; employees are familiar with market conditions; and organisational changes tend to be less threatening.
The firm is able to survive and grow through time – tested technologies, proven products and familiar markets. Concentration, of course, is not always on the credit side of the ledger. Putting all eggs in one basket may be a risky thing, especially when there is a downturn in the market place.
Concentration may be pursued by firms when:
(i) When the firm’s industry is resistant to major technological advancements,
(ii) When the firm’s target markets are not product saturated—that is, there are gaps that leave the firm with alternatives,
(iii) When the firm’s product markets are sufficiently distinctive to dissuade competitors in adjacent product markets from trying to invade the firm’s segment and
(iv) When the market is fairly stable without seasonal or cyclical swings (Pears and Robinson).
B. Market Development:
It consists of marketing existing products in new markets. The firm tries to achieve growth by finding new uses for the existing products and tap new customers on that basis (within the country or outside the country). The firm can add new channels of distribution to expand the customer reach of the product.
It can also enter new market segments by coming out with slightly different products for each price segment, undertaking cosmetic changes in colour, taste, packaging etc. (Hindustan lever’s offerings in toilet soap, detergent powder segments). Changes in media selection, promotional appeals, and distribution could also serve the same purpose.
C. Product Development:
This strategy tries to achieve growth through new products in existing markets. The new products in this case are not essentially new products, but improved versions of an existing product or substitutes serving the same need catering to the same market as at present.
Usually carried out through:
(a) Quality improvement – such as stronger, bigger, better, vastly improved product
(b) Feature improvement – such as expanding product’s versatility, safety, convenience, changing size of product, its weight, materials, accessories etc.
(c) Style improvement- increasing the product’s aesthetic appeal such as new scooter or motor cycle models, new packaging etc.
This strategy is often adopted to attract satisfied customers to prolong the life cycle of current products or to take advantage of a favourite reputation or brand name. A new car style, a second formula of shampoo for oily hair, new soap for fair complexion, a revised edition of a college text book are examples of the product development strategy.
II. Expansion through Integration:
Expansion through integration can happen either through vertical integration or horizontal integration.
Let’s examine these in greater detail:
a. Vertical Integration:
Vertical integration allows the firm to enlarge its scope of operations within the same overall industry. It takes place when one firm acquires another that is involved either in an earlier stage of the production process (backward or upstream) or a later stage of the production process (forward or downstream).
It gives a firm control over successive stages of the product’s processing, marketing and retailing. It strengthens a firm’s market position and internal capabilities, thereby helping it show superior performance.
i. Backward vertical integration occurs when the companies acquired supply the firm with products, components or raw materials. The main reason for backward integration is to gain a firm grip over supply and quality of raw materials.
Backward integration is quite common in industries where low cost and certainty of supply are important to maintaining the firm’s competitive advantage in its end markets. Drug companies, therefore, often exhibit high levels of backward integration to ensure supply of necessary chemical ingredients for their pharmaceuticals.
ii. Forward integration, on the other hand, helps a firm gain control over sales and prices of its existing products. However, increased risks are inherently present in both types of integration. It is not easy to share the additional burden and diverse responsibilities thrust upon managers in the changed scenario.
The longer chain increases the costs of coordination and bureaucracy At times, a technological innovation in the vertical channel may compel all of the vertically linked businesses to modify their operations. In a dynamic setting where changes in technology and demand are highly unpredictable, outsourcing (for suppliers and distributors) may be a better option.
Benefits and Costs of Vertical Integration:
1. It eliminates or reduces the costs of buying and selling incurred when separate firms carry out the various steps (transaction costs) of converting raw materials into finished goods. Most steel production is undertaken by integrated steel producers in plants that first produce pig iron from iron core and then convent iron to steel. Linking the two stages of production at a single location reduces transportation and energy costs. Same is the case with pulp and paper production.
2. Vertically integrated firms can coordinate their operations in a better way.
3. It reduces uncertainty of relying on external suppliers or buyers.
4. It raises entry barriers to competitors by forcing them to integrate, too, at high investments.
5. It preserves the company’s competitive edge by protecting its technologies.
Costs of Vertical Integration:
1. Vertical integration may lead a firm to over commit scare sources to a given technology, production process or other activity that could lock the firm into eventual obsolescence.
i. When things turn bad, high fixed costs may eat away profits.
ii. It is not easy to mesh different capabilities and skill sets smoothly.
2. The firm becomes more susceptible to organized labour strikes. Vertical integration compounds the risk; problems at any one stage of production threaten production and profitability at all other stages. The strike that broke out at a General Motors brake plant in 1997 halted production of GM’s auto assembly plants as well.
b. Horizontal Integration:
It refers to a situation where a firm merges or acquires another firm serving same customers, with the same or similar products and adopting the same marketing process. Horizontal integration is generally pursued to increase revenues and gain market share quickly in the same industry segment-for example a shoe manufacturer buying another shoe company with a view to gain market dominance and thereby reduce the level of competition.
Horizontal integration takes place generally in all such instances where the product is a commodity and pricing power is very important for competitive success.
III. Expansion through Diversification:
A firm can expand its operations by launching new products or new lines of business. It can enter new markets as well. A diversified firm is armed with a portfolio of products or businesses that help it to strengthen its position in more than one industry or market.
There are two types of diversification, which are as follows:
a. Concentric/related diversification- It occurs when an organisation diversifies into a related, but distinct business. With concentric diversification, the new businesses can be related to existing businesses through products, markets or technology. The new product is a spin-off from the existing facilities, products and processes.
For example, Philip’s the electronics major, decided to diversify into related businesses such as cellular phones, telecommunication equipment, electronic components etc. to exploit its core advantages in the form of related technology, strong distribution network etc. Concentric diversifications may occur due to factors such as common distribution channel, marketing skills, common brand name, and common customers.
Benefits of Related Diversification:
Some of the important benefits of related diversification may be listed thus:
1. Operational Relatedness Brings Returns- Firms often expect that sharing of activities across units would result in increased strategic competitiveness and improved financial returns.
At Proctor and Gamble, a paper towels business and a baby diapers business both use paper products as a primary input to the manufacturing process. Having a joint paper manufacturing plant that produces inputs for both units is an example of operational relatedness.
2. Distinctive Competence Extended to Other Areas- Related diversification extends a firm’s distinctive competence across closely fitting businesses to create new sources of value that form the basis for building synergy.
3. Honda has developed and transferred its expertise in small and now larger engines for a number of types of vehicles, from motor cycles and lawn mowers to its range of automotive products.
4. Motorola’s remarkable long-term success in semi-conductors and wireless telecommunication products has been built on the development of a set of core technological capabilities that are transferred and integrated across a number of different business areas.
5. Market Power Increases- Related diversification can also be used to gain market power. A large diversified company can use a powerful competitive weapon called—predatory pricing—to kill competition.
Predatory pricing is the ability to cut prices below the level of rivals’ costs and sustain losses over the period needed to cause the competitor to exit or sell out. Firms can also increase market power by using mergers and acquisitions to consolidate and their operations.
6. Infrastructure can be shared to Mutual Benefit- Production facilities, marketing programmes, purchasing procedures and delivery routes can be shared by diversified firms—leading to great economies on the cost front.
Giant fast moving consumer goods (FMCG) firms such as Proctor and Gamble, Hindustan Lever Ltd. mix their truckloads with multifarious items—depending on customer preferences in each location.
7. Reduces Economic Risk- Related diversification reduces an organisation’s dependence on any one of its business activities and thus reduces economic risk. Even if one or two of a firm’s businesses lose money, the organisation as a whole may still survive because the healthy businesses will generate enough cash to support the other.
Thus, related diversification strategies are basically designed to extend a firm’s distinctive competence and resources to other businesses. They enable a firm to lower its costs across a wider base of activities; increase the differentiation of its businesses; learn and transfer new technologies, skills and capabilities at a faster rate to diverse fields. The ideal concentric diversification occurs when the combined company profits increase strengths and opportunities, as well as decrease weaknesses and exposure to risk.
b. Unrelated/Conglomerate Diversification:
Conglomerate diversification takes place when an organisation diversifies into areas that are unrelated to its current business. The decision to diversify into unrelated areas is generally undertaken by firms in volatile industries that are subject to rapid technological change.
The obvious purpose is to reduce risk. It is also assumed that by restructuring the portfolio of businesses, the firm would be in a position to create value. Similarity in products, technology or marketing knowledge between the two firms is not an issue here, the acquiring firm simply wants to make an attractive investment.
Costs of Diversification:
Evidently, diversification into related or unrelated areas is not a sure bet. Problems could surface suddenly from multifarious—known as well as unknown-factors.
Let’s examine these more closely:
i. Cost of Ignorance:
Entering a new, unknown field is risky. The firm does not know the extent of competition. It may fail to read the mind of the consumer properly. Technological developments, environmental factors may compel the firm to shift gears continuously. Mistakes might be committed when the firm is navigating through uncharted waters.
ii. Cost of Neglect:
A company trying to expand through unrelated diversifications may have to divert its attention from its core businesses—at least temporarily. First, it must decide the areas where it wants to operate. Second, if acquisition is the route; it must identify suitable targets for purchase.
Third, top managers must integrate the new units with the existing businesses. All these steps would dilute the attention of the firm towards its own, original business. The costs of ignorance and neglect might prove to be crippling, especially in a highly competitive rapidly changing environment.
Conditions for Success in Diversification:
1. Thorough industry and competition analysis to identify the prospects of a new venture.
2. Undertaking a careful, exhaustive appraisal of internal strengths, weaknesses; needed resources for managing risk, synergies that could bring in additional benefits etc.
3. Managerial competence, technical know-how, relevant expertise in the proposed venture. Profitability of the project, entry barriers erected by competitors over the years – must also be looked into.
4. Most importantly, the firm should find satisfactory answers to nagging questions such as, does the diversification add to the corporate fit? Does it offer attractive returns? Is the firm going to be better off with the latest addition to its business portfolio?
When to Diversify?
Diversification will be fruitful only when the benefits generated by diversification outweigh the related costs. To contain costs, the firm should focus attention on familiar fields and by diversifying internally rather than by acquisition.
In any case, diversification is the most preferred route:
(i) When the firm intends extraordinary growth in assets, revenues and profits,
(ii) When the firm wants to counter vulnerability arising out of a single-product concentration – by creating a large portfolio of diverse businesses,
(iii) When the environment presents an unusually large number of exciting opportunities to be exploited by the firm’s resource base,
(iv) When there is great environmental uncertainty, firms embark on a constant search for new businesses,
(v) When the firm finds diversification to be more profitable than intensification,
(vi) When the firm has surplus resources that could be profitability deployed in new ventures,
(vii) When the firm finds synergy in its existing businesses and the new ones that it intends to set up.
When diversification is likely to produce fewer benefits than costs, the firm should turn its attention to restructuring its operations with a view to enhance shareholder value.
IV. Expansion through Cooperation:
Expansion strategies through cooperation include joint ventures, mergers and acquisitions strategic alliances and consortia. These are also known as combination strategies.
Let’s discuss these briefly:
A. Joint Ventures:
When two or more firms pool resources to accomplish a task that a firm could not accomplish, or that can be done more effectively by joining, the result is a joint venture. Like a merger or acquisition, a joint venture is not a strategy but a way of implementing a strategy. It helps a firm to undertake giant projects by spreading risks more efficiently.
Joint ventures could prove to be fruitful because they reduce competition. Small firms can join hands with large firms and exploit market opportunities from time to time. The joint venture partners can cut down their costs by reducing the ad spend and publicity costs.
To be successful, however, joint venture partners should be willing to share technology in the real sense, resolve cultural differences clearly and integrate operations at various locations in a more compact manner.
In any case, “joint ventures often limit the discretion, control and profit potential of partners, while demanding managerial attention and other resources that might be directed toward the firm’s mainstream activities”.
When to pursue Joint ventures? Joint ventures could be pursued successfully when the competition gets heated up, when both firms genuinely desire to reduce unhealthy competition, when firms have distinctive competencies that could help each other in growing their business, when firms intend to overcome licensing, customs, and tariff related restrictions.
When joint ventures prove to be fruitful? Joint ventures could prove to be useful when both partners genuinely want to share their expertise with each other, when both want to grow in their respective areas of strength without rubbing the other on the wrong side; when the partners intend to exploit local market opportunities and cross over legal hurdles imposed by government, when both partners begin to relish the company of each other. If there is mistrust and suspicion, the joint ventures collapse under their own weight.
B. Mergers and Acquisitions:
A merger occurs when two or more organisations (usually of roughly similar sizes) combine to become one through an exchange of stock or cash or both.
Mergers can take place in two different ways:
(i) Acquisition- It is the purchase of a firm by a firm that is considerably larger. The firm that acquires is called the acquiring firm and the other, the merging firm.
(ii) Consolidation- If both firms dissolve their identity to create a new firm, it is called consolidation. The combining firms may join hands through a cooperative or hostile approach.
A friendly merger takes place when both firms agree to combine their might in order to gain certain synergistic benefits; i.e. Marketing synergy (using common distribution channels, sales force, sales promotion etc.); Operating synergy (better use of facilities); Investment synergy (better use of resources as in the case of mergers of banks or financial institutions); Management synergy (using existing managerial talent in a judicious way).
It results in a carefully negotiated acquisition of one firm by another. A hostile merger – better known as takeover – refers to a surprise attempt by one company to acquire control (through the purchase of a controlling share of voting stock in a publicly traded company) of another company against the will of the current management.
Organisations are more likely to become takeover targets when their performance lags below potential, negatively affecting the price of their stock but making them attractive targets for acquisition.
Types of Mergers:
1. Vertical Mergers:
It is a combination of two or more firms, not necessarily in the same line of business, having complementarity in terms of supply of materials or marketing of goods and services. In vertical mergers the merging firm would either be a supplier or a buyer using its product as intermediary product for final production. For instance, a footwear company may merge with a leather tannery or a chain of retail shoe outlets.
2. Horizontal Mergers:
It is a combination of two or more firms in the same line of business; formed primarily to obtain economies of scale in production or broaden the product line, reduce working capital needs or eliminate competition, gain better control over market etc.
For instance if Jet Airways combines with Indian Airlines it would be integrating horizontally. The same would be true if General Motors purchases Daewoo Motors Ltd. for an agreed sum.
3. Concentric Mergers:
It is a combination of two or more firms somewhat related to each other in terms of customer functions, customer groups, production processes, or technologies used. Ansoff’s example of concentric merger is of the motor manufacturer who decides also to manufacture farm machinery; the new customers are only somewhat similar to the old, the new product and its technology is only somewhat similar to a car and yet a car and the farmer are not wholly dissimilar – there is some commonality and hence scope for positive synergy.
4. Conglomerate Mergers:
It is a combination of two or more firms unrelated to each other. Rather than concentrating on having a common thread running through their company, top managers who pursue this strategy are chiefly concerned with the rate of return.
Will proposed merger between a shipping company and an oil firm improve the company’s overall profitability? A cash rich company with few opportunities for growth in its industry may, for example, move into another industry where opportunities are great, but cash is hard to find.
Another example of conglomerate mergers might be the purchase by a corporation with a seasonal, and therefore, uneven cash flow of a firm in an unrelated industry with complementing seasonal sales that will level out the cash flow.
Mergers obviously, enable firms to combine their resources and efforts. Facilities can be put to best use, marketing efforts can be intensified and operating costs can be cut down significantly by bridging the growth gap.
A firm can expand its product line (both the number of product lines and the number of items in a product line) enhance its distribution network, increase its market share and even reduce competition by acquiring competing firms. It can put the R&D facilities of the other firm to good advantage and even avail tax concessions if the other firm has accumulated losses.
The acquiring firm can avoid putting all the eggs in one basket and improve its resource base (raising debt or equity whenever the need arises) Apart from the acquiring firm, the selling firm would like to go for mergers in order to:
(i) Increase the value of its own stock,
(ii) Increase the growth rate,
(iii) Acquire resources to stabilise operations,
(iv) Benefit from tax legislation,
(v) And bridge gaps in talent at the top level Mergers and acquisitions, however, do not always produce results; the reasons are fairly obvious.
Culture – clash is often cited as one of the reasons. The acquiring firm might have an aggressive culture and the acquired one might be living in a different world altogether. According to Thompson, “the real weaknesses of the acquired company are hidden until after the acquisition and consequently are underestimated.
Also underestimated are the cultural and managerial problems of merging two companies and then running them as one. As a result, insufficient managerial resources are devoted to the process of merging and hence the hoped – for synergy remains elusive”.
C. Strategic Alliances:
In a joint venture, the companies involved take an equity stake in one another. In strategic alliances, however, the partners contribute their skills and expertise to a cooperatively conceived and executed project for a specific period. Partners, during the said period, try to peep into each other’s know-how and learn from one another.
Alliances could take the shape of a licensing agreement too, where licensor would transfer his property right over patents, trademarks, technical know-how etc., to a licensee for a specified time in return for a royalty, Outsourcing is another useful approach to strategic alliances that helps firms to gain a competitive advantage (especially in technology intensive fields such as software, telecommunications, electronics, bio-technology etc.).
Many foreign direct investments are completed through equity strategic alliances, such as those by Japanese and US companies in India (Maruti, Hero Honda, Birla – Tata – A&T, etc.) Equity strategic alliances are more effective at transferring know-how between firms because they are close to hierarchical control than are non-equity alliances.
Non-equity Strategic alliances are formed through contractual agreements given to a company to supply, produce or distribute a firm’s goods or services without equity sharing. Such contractual arrangements may cover marketing and information sharing activities too.
As there is no need to bring in equity investments, such licensing agreements are less formal and demand fewer commitments from partners than joint ventures and equity strategic alliances. Under licensing agreements, the proprietary rights of a foreign partner are passed on to the other under a licensing agreement.
Firms such as Coca-Cola, Hilton, Hyatt, Holiday Inns, Kentucky Fried Chicken, McDonald’s and Pepsi have long engaged in licensing agreements with foreign distributors as a way to exploit new markets with standardised products that can profit from marketing economies (Pearce and Robinson).
Reasons for Strategic Alliances of Various Kinds:
Firms enter into strategic alliances for number of reasons, but they all involve some kind of risk reduction. Let’s see how this happens (Pitts and Lei).
i. New Market Entry:
Strategic alliances aim at helping players speed up market entry. Big drug firms generally cross-license their new drugs to one another. Such arrangements help the alliance partners reduce high fixed costs of R&D and global distribution.
The alliance between Nestle and Coca-Cola helped both partners to gain access to each other’s distribution network quickoy (coke distributes Nestle’s line of frint juices and coffers while Nestile offers coke and its other soft drink products through its channels) without such a cooperative arrangement, both companies would have to spend more time, energy and money to enter certain market segments.
ii. Define Future Industry Standards:
Strategic alliances can help define emerging industry standards or new products. In the desk-top printing industry, Canon has become the world’s longest supplier of engines that power laser printers. By joining hands with Hewlett-Packard, IBM and other manufacturers Canon ensures that over 60 per cent of the world’s laser printers use a Canon made engine to power the machine.
iii. Learn and Apply New Technologies:
Companies use alliances to learn or to gain access to new technologies. IBM, for instance, has teamed up with Motorola and Toshiba to enhance its semi-conductor manufacturing capabilities in making super dense chips.
From Motorola, IBM learns how to design new products for emerging wireless technologies. Toshiba offers its expertise in miniaturization skills. Both IBM and Motorola work together to develop new x-ray photolithography techniques that neither company can afford on its own.
iv. Fill Gaps in Product Line:
Companies use the alliances route to fill gaps in their product line. Ford formed an alliance with Nissan Motor to build new generation minivans. The alliance with Mazda helped Ford coproduce Ford Escort.
In turn Mazda has learnt from Ford as to how to build the Ford’s popular line of recreational vehicles. Ford’s alliance with Kia Motors of Korea helped it to import the low-end Festiva and resell the same under its own brand name.
Consortia are defined as large interlocking relationships, cross holdings and equity stakes between businesses of an industry.
There could be two forms of consortia:
i. Multipartner Consortia:
These are multipartner alliances intended to share an underlying technology. One of the most important European based consortiums to date is Air Bus Industries. Airbus brings together four European aerospace firms from Britain, France, Germany and Spain. A common consortium arrangement binds each firm to certain stipulations.
The goal of 20 Air bus Industries is to dethrone Boeing from its dominant position in the global commercial aircraft market. By pooling their member firm’s resources, Airbus Industries has become a threat for the US giant. Without a consortium arrangement, it is unlikely that any of the individual firms would have been able to challenge Boeing on a low-cost basis.
ii. Cross-Holding Consortia:
These include large Japanese Keiretsus (Sumitomo, Mitsubishi, Mitsui) and Korean Chaebols (Daewoo, Lucky-Gold Star, Hyundai, Samsung). Two important features of cross-holding consortia are building long-term focus and gaining technological critical mass among affiliated member companies.
The supplier-buyer relationships help members stabilize their production volume. Each member could obtain needed components from other consortium members easily (esp. for TV sets, VCRs etc.). All of them can pool resources and make huge fixed cost investments in key technologies. Further, there is a guaranteed internal market for components.
However, on the negative side “valuable capital is often locked up in investments that may be less productive or lacking the same degree of core competencies as compared with a much more focused competitor” (Pitts and Lei). Further, such cross holdings may slow down a member firm’s ability to react quickly to new developments.
iii. Tacit Collusion:
Apart from the above explicit strategic alliances, there could be implicit cooperative arrangements. Tacit collusion is an example of such an arrangement. Tacit collusion exists when several firms in an industry cooperate tacitly to reduce industry output below the potential competitive level, thereby increasing prices above the competitive level.
In the recent past, cement manufacturers in India, especially the Big Boys of the industry, have tried to regulate output and obtain better realizations per bag of cement through a tacit understanding in different parts of the country.
V. Expansion through Internationalization:
To market their products and services internationally, firms pursue this path. Keeping political, social, legal risks in mind, firms need to step into this arena carefully. International expansion is a different ball game altogether.
Four types of international expansion strategies might be listed thus:
a. International Strategy:
A firm creates value through international strategy by offering its products and services in foreign countries where those products and services are not available. The firm might profit through such strategies if it is able to offer high quality products and services-using its expertise, technological edge to good advantage- at affordable prices. Such a strategy helps a firm expand its market.
b. Multi-Domestic Strategy:
It creates value by customizing products and services according to local market conditions and offering those products and services in different countries. A multi-domestic firm should have a deep understanding of local market conditions. It must tune its policies in sync with tastes and preferences of customers in places where it wants to set up shop and expand in a big way.
c. Global Strategy:
It implies a low cost approach that can come through years of hard work, innovation, rich experience in different parts of the globe. A global firm is good at developing and marketing standardized products and services across different countries.
d. Transnational Strategy:
It combines low cost with high local responsiveness in order to deal with changing dynamics of market place in different parts of the globe. A transnational should be able to fine tune its products and services keeping the ever-changing tastes and preferences of customers in mind—wherever it goes.
Since it is a borderless corporation, it should be prepared to work without any kind of barriers or boundaries while dealing with products, markets, customers, technologies and workforce.
Types of Corporate Strategy # 2. Stability Strategy:
A stability strategy involves maintaining the status quo or growing in a methodical, but slow, manner. The firm follows a safety-oriented, status-quo-type strategy without effecting any major changes in its present operations.
The resources are put on existing operations to achieve moderate, incremental growth. As such, the primary focus is on current products, markets and functions, maintaining the same level of effort as at present. Organisations might follow a stability strategy for a variety of reasons.
Reasons for Choosing the Stability Strategy?
i. Why Rock the Boat?
If the company is doing reasonably well, managers may not like to take the risks or hassles associated with more aggressive growth.
ii. Why not Stop for a While?
Stability allows the firm to stop for a while, re-ex- amine what it has already done and proceed cautiously. An organisation that has stretched its resources during a period of accelerated growth may want to attain stability before it attempts further accelerated growth.
iii. Why to Swallow Risk?
If managers believe that growth prospects are low, they may follow a stability strategy with a view to hold on to their current market share. Stability strategy, is however, not a ‘do-nothing’ strategy. To maintain current position, the organisation definitely needs to carry out marginal improvements in performance in line with changing trends.
iv. Where are the Resources?
Introducing new products, entering new markets, undertaking major organisational changes – all require huge investments. Where there is an internal resource constraint, a stability strategy is preferred. If the organisation’s strategic advantages lie in the current business and market, it pursues the stability strategy to exploit its competitive advantages fully.
Types of Corporate Strategy # 3. Retrenchment Strategy:
Retrenchment strategy is a corporate level, defensive strategy followed by a firm when its performance is disappointing or when its survival is at stake for a variety of reasons. Economic recessions, production inefficiencies, and innovative breakthroughs by competitors are only three causes.
Managers choose retrenchment when they think that the firm is neither competitive enough to succeed through a counter attack (on market forces affecting its sales negatively) nor nimble enough (effecting fast changes) to be a fast follower.
In actual practice, retrenchment may take one of the following forms:
A. Divestment Strategy (Also Called Divestiture or Spin-Off):
It involves the sale of those units or parts of a business that no longer contribute to or fit the firm’s distinctive competence. The firm simply gets out of certain businesses and sells off units or divisions for various reasons.
Divestment may take one of three forms:
(a) Outright sale to another company,
(b) Leveraged Buy-Out (LBO), and
(c) Spin-off. A leveraged buyout occurs when a company’s shareholders are bought out (hence buy-out) by the company’s management and other private investors using borrowed funds (hence leveraged). In the last case, the parent company creates a new company, then distributes its shares to shareholders of the parent.
B. Turnaround Strategy:
A turnaround is designed to reverse a negative trend and bring the organisation back to normal health and profitability. The basic purpose of a turnaround is to transform the corporation into a leaner and more efficient firm.
It usually involves getting rid of unprofitable products, trimming the workforce, pruning distribution outlets, and finding other useful ways of making the organisation more efficient.
If the turnaround is successful, the organisation may then focus on growth strategy. Firms often lose their grip over markets due to various internal and external factors. If they have to survive and flourish in a competitive environment, they have to identify the danger signals quite early and undertake rectificational steps immediately. Such negative trends are not difficult to trace.
C. Liquidation Strategy.
This is a strategy to be followed as ‘last resort’. When neither a turnaround nor a divestment seems feasible, liquidation is used. Liquidation involves selling or disposing of all or part of an organisation’s assets, Liquidation is generally followed when-
(i) The future of a unit looks bleak in terms of sales, profitability etc.
(ii) The unit has unmanageable accumulated losses;
(iii) Some other firm is willing to buy the unit, to avail tax benefits;
(iv) It is not possible to revive the unit with the existing resources.
Types of Corporate Strategy # 4. Expansion through Combination Strategies:
Combination strategies are a mixture of expansion, stability or retrenchment strategies. They are a hybrid variety and can be applied in a firm either at the same time in different businesses or at different times within the same business. There is no reason to focus attention on any single strategy.
Depending on requirement, a firm can choose an appropriate path. The firm can pick up internal growth strategies such as market penetration, market development or product development or go after external growth strategies such as joint ventures, mergers etc. in order to achieve the chosen goals.
Every firm, of course, must undertake the journey keeping its own resource strengths in mind. The borderline between internal growth and external growth options is very thin. (When a firm grows horizontally it becomes an external growth option. Likewise, when it goes after unrelated diversifications by acquiring rivals businesses, it becomes an external growth option).
Whether it wants to grow vertically or horizontally through related or unrelated diversifications a firm should always keep its attention focused on competitive reactions, pressure from internal and external groups, own competencies in chosen fields etc.