Unit 4

Generic competitive strategies

There are four types of generic corporate strategies. They are:

1.

Stability strategies: make no change to the companys current activities

2.

Growth strategies: expand the companys activities

3.

Retrenchment strategies: reduce the companys level of activities

4.

Combination strategies: a combination of above strategies

Each one of the above strategies has a specific objective. For instance, a concentration strategy
seeks to increase the growth of a single product line while a diversification strategy seeks to alter
a firms strategic track by adding new product lines. A stability strategy is utilized by a firm to
achieve steady, but slow improvements in growth while a retrenchment strategy (which includes
harvesting, turnaround, divestiture, or liquidation strategies) is used to reverse poororganizational performance. Once a strategic direction has been identified, it then becomes
necessary for management to examine business and functional level strategies of the firm to
make sure that all units are moving towards the achievement of the company-wide corporate
strategy.

STABILITY STRATEGY

Stability strategy is a strategy in which the organization retains its present strategy at the
corporate level and continues focusing on its present products and markets. The firm stays with
its current business and product markets; maintains the existing level of effort; and is satisfied
with incremental growth. It does not seek to invest in new factories and capital assets, gain
market share, or invade new geographical territories. Organizations choose this strategy when
the industry in which it operates or the state of the economy is in turmoil or when the industry
faces slow or no growth prospects. They also choose this strategy when they go through a period
of rapid expansion and need to consolidate their operations before going for another bout of
expansion.

EXPANSION OR GROWTH STRATEGY

Firms choose expansion strategy when their perceptions of resource availability and past
financial performance are both high. The most common growth strategies are diversification at
the corporate level and concentration at the business level. Reliance Industry, a vertically
integrated company covering the complete textile value chain has been repositioning itself to be
a diversified conglomerate by entering into a range of business such as power generation and
distribution, insurance, telecommunication, and information and communication technology
services. Diversification is defined as the entry of a firm into new lines of activity, through internal
or external modes. The primary reason a firm pursues increased diversification are value
creation through economies of scale and scope, or market dominance. In some cases firms
choose diversification because of government policy, performance problems and uncertainty
about future cash flow. In one sense, diversification is a risk management tool, in that its
successful use reduces a firms vulnerability to the consequences of competing in a single
market or industry. Risk plays a very vital role in selecting a strategy and hence, continuous
evaluation of risk is linked with a firms ability to achieve strategic advantage (Simons, 1999).
Internal development can take the form of investments in new products, services, customer
segments, or geographic markets including international expansion. Diversification is
accomplished through external modes through acquisitions and joint ventures. Concentration can
be achieved through vertical or horizontal growth. Vertical growth occurs when a firm takes over
a function previously provided by a supplier or a distributor. Horizontal growth occurs when the
firm expands products into new geographic areas or increases the range of products and
services in current markets.

RETRENCHMENT STRATEGY
Retrenchment. Retrenchment means that the organization goes through a period of forced
decline by either shrinking current business units or selling off or liquidating entire businesses.
The organization may have experienced a precipitous drop in demand for its products or
services, prompting managers to order across-the-board cuts in personnel and expenditures
Many firms experience deteriorating financial performance resulting from market erosion and
wrong decisions by management. Managers respond by selecting corporate strategies that
redirect their attempt to turnaround the company by improving their firms competitive position or
divest or wind up the business if a turnaround is not possible. Turnaround strategy is a form of
retrenchment strategy, which focuses on operational improvement when the state of decline is
not severe. Other possible corporate level strategic responses to decline include growth and
stability.

Typesof retrenchment strategy

1- Turnaround:
Eliminating unprofitable outputs, pruning/cutting assets, reducing size of work force, rethinking
firms products lines and customer groups.

2- Divestment: sell one of business units

3- Liquidation: last resort strategy

COMBINATION STRATEGY

The three generic strategies can be used in combination; they can be sequenced, for instance
growth followed by stability, or pursued simultaneously in different parts of the business unit.
Combination Strategy is designed to mix growth, retrenchment, and stability strategies and apply
them across a corporations business units. A firm adopting the combination strategy may apply
the combination either simultaneously (across the different businesses) or sequentially. For
instance, Tata Iron & Steel Company (TISCO) had first consolidated its position in the core steel
business, then divested some of its non-core businesses. Reliance Industries, while
consolidating its position in the existing businesses such as textile and petrochemicals,
aggressively entered new areas such as Information Technology.

Strategy model related to portfolio analysis

Portfolio Strategy Portfolio strategy pertains to the mix of business units and product lines that fit
together in a logical way to provide synergy and competitive advantage for the corporation. For
example, an individual might wish to diversify in an investment portfolio with some high-risk
stocks, some low-risk stocks, some growth stocks, and perhaps a few income bonds.
In much the same way, cor- porations like to have a balanced mix of business divisions called
strategic business units (SBUs). An SBU has a unique business mission, product line,
competitors, and markets relative to other SBUs in the corporation.47 Executives in charge of the
entire corporation generally define the grand strat- egy and then bring together a portfolio of
strategic business units to carry it out. One useful way to think about portfolio strategy is the BCG
matrix.
The BCG Matrix The BCG (for Boston Consulting Group) matrix The BCG matrix organizes
businesses along two dimensionsbusiness growth rate and market share.48 Business growth
rate pertains to how rapidly the entire industry is increasing. Market share defines whether a
business unit has a larger or smaller share than competitors. The combinations of high and low
market share and high and low business growth provide four categories for a corporate portfolio.
The star has a large market share in a rapidly growing industry.
The star is important because it has additional growth potential, and profits should be plowed into
this business as investment for future growth and profits.
The star is visible and attractive and will generate profits and a positive cash flow even as the
industry matures and market growth slows.
The cash cow exists in a mature, slow-growth industry but is a dominant business in the
industry, with a large market share. Because heavy investments in advertising and plant

expansion are no longer required, the corporation earns a positive cash flow. It can milk the cash
cow to invest in other, riskier businesses.
The question mark exists in a new, rapidly growing industry but has only a small market share.
The question mark business is risky: it could become a star, or it could fail. The corporation can
invest the cash earned from cash cows in question marks with the goal of nurturing them into
future stars.
The dog is a poor performer. It has only a small share of a slow-growth mar- ket. The dog
provides little profit for the corporation and may be targeted for divestment or liquidation if
turnaround is not possible. The circles in Exhibit 8.5 represent the business portfolio for a
hypothet- ical corporation. Circle size represents the relative size of each business in the
companys portfolio. Most organizations, such as Gillette, have busi- nesses in more than one
quadrant, thereby representing different market shares and growth rates.

Porters Competitive Forces and Strategies

Michael E. Porter studied a number of business organizations and proposed that business-level
strategies are the result of five competitive forces in the companys environment.50 More
recently, Porter has examined the impact of the Internet on business-level strategy.51 New Webbased technology is influencing industries in both positive and negative ways, and understanding
this impact is essential for managers to accurately analyze their competitive environments and
design appropriate strategic actions.

Five Competitive Forces. Exhibit 8.6 illustrates the competitive forces that exist in a companys
environment and indicates some ways Internet technology is affecting each area. These forces
help determine a companys position vis--vis competitors in the industry environment.
1.Potential new entrants- Capital requirements and economies of scale are examples of two
potential barriers to entry that can keep out new competitors. It is far more costly to enter the
automobile industry, for example, than to start a specialized mail-order business. In general,
Internet tech- nology has made it much easier for new companies to enter an industry, for
example, by curtailing the need for such organizational elements as an established sales force,
physical assets such as buildings and machinery, or access to existing supplier and sales
channels.
2. Bargaining power of buyers. Informed customers become empowered customers. The
Internet provides easy access to a wide array of information about products, services, and
competitors, thereby greatly increasing the bargaining power of end consumers. For example, a
customer shopping for a car can gather extensive information about various options, such as
wholesale prices for new cars or average value for used vehicles, detailed specifications, repair
records, and even whether a used car has ever been involved in an accident
3. Bargaining power of suppliers. The concentration of suppliers and the avail- ability of
substitute suppliers are significant factors in determining supplier power. The sole supplier of
engines to a manufacturer of small airplanes will have great power, for example. The impact of
the Internet in this area can be both positive and negative. That is, procurement over the Web
tends to give a company greater power over suppliers, but the Web also gives suppliers access
to a greater number of customers, as well as the ability to reach end users. Overall, the Internet
tends to raise the bargaining power of suppliers.
4. Threat of substitute products. The power of alternatives and substitutes for a companys
product may be affected by cost changes or trends such as increased health consciousness that
will deflect buyer loyalty to companies. Companies in the sugar industry suffered from the growth
of sugar substitutes; manufacturers of aerosol spray cans lost business as environmentally
conscious consumers chose other products. The Internet has created a greater threat of new
substitutes by enabling new approaches to meeting customer needs. For example, traditional
travel agencies have been hurt by the offering of low-cost airline tickets over the Internet.
5. Rivalry among competitors. As illustrated in Exhibit 8.6, rivalry among competitors is
influenced by the preceding four forces, as well as by cost and product differentiation.
With the force of the Internet and information technology, it has become more difficult for
many companies to find ways to distinguish themselves from their competitors, so rivalry
has intensified.

Unit 5
Strategy Implementation
The final step in the strategic management process is implementationhow strategy is put into
action. Some people argue that strategy implementation is the most difficult and important part of
strategic management.65 No matter how creative the formulated strategy, the organization will
not benefit if it is incorrectly implemented. In todays competitive environment, there is an
increasing recognition of the need for more dynamic approaches to formulating as well as
implementing strategies. Strategy is not a static, analytical process; it requires vision, intuition,
and employee participation.
Many organizations are abandoning central planning departments, and strategy is becoming an
everyday part of the job for workers at all levels. Strategy implementation involves using several
toolsparts of the firm that can be adjusted to put strategy into action.
Once a new strategy is selected, it is implemented through changes in leadership, structure,
information and control systems, and human resources.67 For strategy to be implemented
successfully, all aspects of the organization need to be in congruence with the strategy.
Implementation involves regularly making difficult decisions about doing things in a way that
supports rather than undermines the organizations chosen strategy. Remaining chapters of this

book examine in detail topics such as leadership, organizational structure, information and
control systems, and human resource management.