Growth Strategies-I

UNIT 9 GROWTH STRATEGIES-I

Objectives
The objectives of this unit are to:
l acquaint you with the concept of corporate strategy;
l familiarize you with the various generic corporate strategies;
l explain the nature, scope and approaches to implementation of stability and
growth strategies; and
l finally discuss the rationale for adopting these strategies.

Structure
9.1 Introduction
9.2 Nature and Scope of Corporate Strategies
9.3 Nature of Stability Strategy
9.4 Expansion Strategies
9.5 Expansion through Intensification
9.6 Expansion through Integration
9.7 International Expansion
9.8 Summary
9.9 Key Words
9.10 Self-Assessment Questions
9.11 References and Further Readings

9.1 INTRODUCTION
Strategic management deals with the issues, concepts, theories approaches and action
choices related to an organization’s interaction with the external environment.
Strategy, in general, refers to how a given objective will be achieved. Strategy,
therefore, is mainly concerned with the relationships between ends and means, that is,
between the results we seek and the resources at our disposal. For the most part,
strategy is concerned with deploying the resources at your disposal whereas tactics is
concerned with employing them. Together, strategy and tactics bridge the gap
between ends and means.
Some organizations are groups of different business and functional units, each of them
must be having its own set of goals, which may not necessarily be same as the goals
of the corporate headquarters looking after the interests of the entire organization.
Since the goals are different and the means to achieve them are different, strategies are
likely to be different. This understanding has led to the hierarchical division of
strategy at two levels: a business-level (competitive) strategy and a company-wide
strategy (corporate strategy) (Porter, 1987). In addition to these strategies, many
authors also mention functional strategies, practiced by the functional units of a
business unit, as another level of strategy.
Corporate Strategies: These are concerned with the broad, long-term questions of
“what businesses are we in, and what do we want to do with these businesses?” The
corporate strategy sets the overall direction the organization will follow. It matters 5
Corporate Level whether a firm is engaged in one or several businesses. This will influence the overall
Strategy strategic direction, what corporate strategy is followed, and how that strategy is
implemented and managed. Corporate strategies vary from drastic retrenchment
through aggressive growth. Top management need to carefully assess the environment
before choosing the fundamental strategies the organization will use to achieve the
corporate objectives.
Competitive Strategies: Those decisions that determine how the firm will compete in
a specific business or industry. This involves deciding how the company will compete
within each line of business or strategic business unit (SBU). Competitive strategies
include being a low-cost leader, differentiator, or focuser. Formulating a specific
competitive strategy requires understanding the competitive forces that determine how
intense the competitive forces are and how best to compete.
Functional Strategies: Also called operational strategies, are the short-term (less than
one year), goal-directed decisions and actions of the organization’s various functional
departments. These are more localized and shorter-horizon strategies and deal with
how each functional area and unit will carry out its functional activities to be effective
and maximize resource productivity. Functional strategies identify the basic courses of
action that each functional department in a strategic business unit will pursue to
contribute to the attainment of its goals.
In a nutshell, corporate-level strategy identifies the portfolio of businesses that in total
will comprise the corporation and the ways in which these businesses will relate. The
competitive strategy identifies how to build and strengthen the business’s long-term
competitive position in the marketplace while the functional strategies identify the
basic courses of action that each department will pursue to contribute to the
attainment of its goals.

Activity 1
Explain the various corporate, competitive and functional strategies followed by a
firm of your choice. What is the impact of these strategies on the firm’s performance?
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Corporate Strategy
Corporate strategy is essentially a blueprint for the growth of the firm. The corporate
strategy sets the overall direction for the organization to follow. It also spells out the
extent, pace and timing of the firm’s growth. Corporate strategy is mainly concerned
with the choice of businesses, products and markets. The competitive and functional
strategies of the firm are formulated to synchronize with the corporate strategy to
enable it to reach its desired objectives. Defined formally, a corporate-level strategy is
an action taken to gain a competitive advantage through the selection and management
of a mix of businesses competing in several industries or product markets. Corporate
strategies are normally expected to help the firm earn above-average returns and
create value for the shareholders (Markides, 1997). Corporate strategy addresses the
issues of a multi-business enterprise as a whole. Corporate strategy addresses issues
relating to the intent, scope and nature of the enterprise and in particular has to
provide answers to the following questions:
l What should be the nature and values of the enterprise in the broadest sense?
6
What are the aims in terms of creating value for stakeholders?
l What kind of businesses should we be in? What should be the scope of activity in Growth Strategies-I
the future so what should we divest and what should we seek to add?
l What structure, systems and processes will be necessary to link the various
businesses to each other and to the corporate centre?
l How can the corporate centre add value to make the whole worth more than the
sum of the parts?
A primary approach to corporate level strategy is diversification, which requires the
top-level executives to craft a multibusiness strategy. In fact, one reason for the use of
a diversification strategy is that managers of diversified firms possess unique
management skills that can be used to develop multibusiness strategies and enhance a
firm’s competitiveness (Collins and Montgomery, 1998). Most corporate level
strategies have three major components:
a) Growth or directional strategy, outlines the growth objectives ranging from
drastic retrenchment through stability to varying degrees of growth and methods
and approaches to accomplish these objectives.
b) Corporations are responsible for creating value through their businesses. They do
so by using a portfolio strategy to manage their portfolio of businesses, ensure
that the businesses are successful over the long-term, develop business units, and
ensure that each business is compatible with others in the portfolio. Portfolio
strategy plans the necessary moves to establish positions in different businesses
and achieve an appropriate amount and kind of diversification. Portfolio strategy
is an important component of corporate strategy in a multibusiness corporation.
The top management views its product lines and business unit as a portfolio of
investments from which it expects a profitable return. A key part of corporate
strategy is making decisions on how many, what types, and which specific lines
of business the company should be in. This may involve decisions to increase or
decrease the breadth of diversification by closing out some lines of business,
adding others, and changing emphasis among the portfolio of businesses. A
portfolio strategy is concerned not only about choice of business portfolio, but
also about portfolio of geographical markets for acquisition of inputs, locating
various value chain activities and selling of outputs. In short, a portfolio strategy
facilitates efficient allocation of corporate resources, links the businesses and
geographically dispersed activities and builds synergy leading to corporate or
parenting advantage.
c) Corporate parenting strategy, which tries to capture valuable cross-business
strategic fits in a portfolio of business and turn them into competitive
advantages, especially transferring and sharing related technology, procurement
leverage, operating facilities, distribution channels, and/or customers. In other
words, it decides how we allocate resources and manage capabilities and
activities across the portfolio — where do we put special emphasis, and how
much do we integrate our various lines of business. Corporate parenting views
the corporation in terms of resources and capabilities that can be used to build
business units value as well as generate synergies across business units.
Corporate parenting generates corporate strategy by focusing on the core
competencies of the parent corporation and on the value create from the
relationship between the parent and its businesses. To achieve corporate
parenting advantage a corporation needs to do at least the following.
l Better choice of business to compete.
l Superior acquisition and development of corporate resources.
l Effective deployment, monitoring and controlling of corporate resources.
l Sharing and transferring of resources from one business to other leading to
synergy. 7
Corporate Level
Strategy 9.2 NATURE AND SCOPE OF CORPORATE
STRATEGIES
Growth is essential for an organization. Organizations go through an inevitable
progression from growth through maturity, revival, and eventually decline. The broad
corporate strategy alternatives, sometimes referred to as grand strategies, are:
stability/consolidation, expansion/growth, divestment/retrenchment and combination
strategies. During the organizational life cycle, managements choose between growth,
stability, or retrenchment strategies to overcome deteriorating trends in performance.
Just as every product or business unit must follow a business strategy to improve its
competitive position, every corporation must decide its orientation towards growth by
asking the following three questions:
l Should we expand, cut back, or continue our operations unchanged?
l Should we concentrate our activities within our current industry or should we
diversify into other industries?
l If we want to grow and expand nationally and/or globally, should we do so
through internal development or through external acquisitions, mergers, or
strategic alliances?
At the core of corporate strategy must be a clear logic of how the corporate objectives,
will be achieved. Most of the strategic choices of successful corporations have a
central economic logic that serves as the fulcrum for profit creation. Some of the
major economic reasons for choosing a particular type corporate strategy are:
a) Exploiting operational economies and financial economies of scope.
b) Uncertainty avoidance and efficiency.
c) Possession of management skills that help create corporate advantage.
d) Overcoming the inefficiency in factor markets and
e) Long term profit potential of a business.
The non-economic reasons for the choice of corporate strategy elements include
a) dominant view of the top management, b) employee incentives to diversify
(maximizing management compensation), c) desire for more power and management
control, d) ethical considerations and e) corporate social responsibility.
There are four types of generic corporate strategies. They are:
l Stability strategies: make no change to the company’s current activities
l Growth strategies: expand the company’s activities
l Retrenchment strategies: reduce the company’s level of activities
l 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 firm’s 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 poor-organizational
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.

8
Stability Strategy Growth Strategies-I

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.

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 firm’s 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 firm’s 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
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 firm’s 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.

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 corporation’s business units. A firm 9
Corporate Level adopting the combination strategy may apply the combination either simultaneously
Strategy (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.

Activity 2
Search the website for information on Reliance Group, Tata group and Aditya Birla
group of companies. Compare the business models and briefly explain the type of
corporate strategies that these corporates are following.
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9.3 NATURE OF STABILITY STRATEGY

A firm following stability strategy maintains its current business and product
portfolios; maintains the existing level of effort; and is satisfied with incremental
growth. It focuses on fine-tuning its business operations and improving functional
efficiencies through better deployment of resources. In other words, a firm is said to
follow stability/ consolidation strategy if:
l It decides to serve the same markets with the same products;
l It continues to pursue the same objectives with a strategic thrust on incremental
improvement of functional performances; and
l It concentrates its resources in a narrow product-market sphere for developing a
meaningful competitive advantage.
Adopting a stability strategy does not mean that a firm lacks concern for business
growth. It only means that their growth targets are modest and that they wish to
maintain a status quo. Since products, markets and functions remain unchanged,
stability strategy is basically a defensive strategy. A stability strategy is ideal in stable
business environments where an organization can devote its efforts to improving its
efficiency while not being threatened with external change. In some cases,
organizations are constrained by regulations or the expectations of key stakeholders
and hence they have no option except to follow stability strategy.
Generally large firms with a sizeable portfolio of businesses do not usually depend on
the stability strategy as a main route, though they may use it under certain special
circumstances. They normally use it in combination with the other generic strategies,
adopting stability for some businesses while pursuing expansion for the others.
However, small firms find this a very useful approach since they can reduce their risk
and defend their positions by adopting this strategy. Niche players also prefer this
strategy for the same reasons.

Conditions Favouring Stability Strategy

Stability strategy does entail changing the way the business is run, however, the range
of products offered and the markets served remain unchanged or narrowly focused.
Hence, the stability strategy is perceived as a non-growth strategy. As a matter of fact,
stability strategy does provide room for growth, though to a limited extent, in the
1 0 existing product-market area to achieve current business objectives. Implementing
stability strategy does not imply stagnation since the basic thrust is on maintaining the Growth Strategies-I
current level of performance with incremental growth in ensuing periods. An
organization’s strategists might choose stability when:
l The industry or the economy is in turmoil or the environment is volatile.
Uncertain conditions might convince strategists to be conservative until they
became more certain.
l Environmental turbulence is minimal and the firm does not foresee any major
threat to itself and the industry concerned as a whole.
l The organization just finished a period of rapid growth and needs to consolidate
its gains before pursuing more growth.
l The firm’s growth ambitions are very modest and it is content with incremental growth
l The industry is in a mature stage with few or no growth prospects and the firm is
currently in a comfortable position in the industry

Rationale for Using Stability Strategy

There are a number of circumstances in which the most appropriate growth stance for
a company is stability rather than growth. Stability strategy is normally followed for
a brief period to consolidate the gains of its expansion and needs a breathing spell
before embarking on the next round of expansion. Organizations need to ‘cool off’ for
a while after an aggressive phase of expansion and must stabilize for a while or they
will become inefficient and unmanageable. India Cements went through a rapid
expansion by acquiring other cement companies before stabilizing and consolidating
its operations. Videocon and BPL had first diversified into new businesses and then
started consolidating once faced with stiff competition.
Managers pursue stability strategy when they feel that the enterprise has been
performing well and wish to maintain the same trend in subsequent years. They would
prefer to adopt the existing product-market posture and avoid departing from it.
Sometimes, the management is content with the status quo because the company
enjoys a distinct competitive advantage and hence does not perceive an immediate
threat.
Stability strategy is also adopted in a number of organizations because the
management is not interested in taking risks by venturing into unknown terrain. In fact
they do not consider any other option as long as the pursuit of existing business
activity produces the desired results. Conservative managers believe product
development, market development or new ways of doing business entail great risk and
therefore, avoid taking decisions, which can endanger the company. A number of
managers also pursue consolidation strategy involuntarily. In fact, they do not react to
environmental changes and avoid drastic changes in the current strategy unless
warranted by extraordinary circumstances.
Sometimes environmental forces compel an organization to follow the strategy of
status quo. This is particularly true for bigger organizations, which have acquired
dominant market share. Such organizations are usually not permitted by the
government to expand because it may lead to monopolistic and restrictive trade
practices detrimental to public interest.

Approaches to Stability Strategy

There are various approaches to developing stability/consolidation strategy. The
Management has to select the one that best suits the corporate objective. Some of
these approaches are discussed below. In all these approaches, the fundamental course
of action remains the same, but the circumstances in which the firms choose various
options differ. 1 1
Corporate Level Holding Strategy: This alternative may be appropriate in two situations: (a) the need
Strategy for an opportunity to rest, digest, and consolidate after growth or some turbulent
events - before continuing a growth strategy, or (b) an uncertain or hostile
environment in which it is prudent to stay in a “holding pattern” until there is change
in or more clarity about the future in the environment. With a holding strategy the
company continues at its present rate of development. The aim is to retain current
market share. Although growth is not pursued as such, this will occur if the size of
the market grows. The current level of resource input and managerial effort will not
be increased, which means that the functional strategies will continue at previous
levels. This approach suits a firm, which does not have requisite resources to pursue
increased growth for a longer period of time. At times, environmental changes
prohibit a continuation in growth.
Stable Growth: This alternative essentially involves avoiding change, representing
indecision or timidity in making a choice for change. Alternatively, it may be a
comfortable, even long-term strategy in a mature, rather stable environment, e.g., a
small business in a small town with few competitors. It simply means that the firm’s
strategy does not include any bold initiatives. It will just seek to do what it already
does, but a little better. In this approach, the firm concentrates on one product or
service line. It grows slowly but surely, increasingly its market penetration by steadily
adding new products or services and carefully expanding its market.
Harvesting Strategy: Where a firm has the dominant market share, it may seek to
take advantage of this position and generate cash for future business expansion.
This is termed has harvesting strategy and is usually associated, with cost cutting and
price increases to generate extra profits. This approach is most suitable to a firm
whose main objective is to generate cash. Even market share may be sacrificed to
earn profits and generate funds. A number of ways can be used to accomplish the
objective of making profits and generating funds. Some of these are selective
price increases and reducing costs without reducing price. In this approach,
selected products are milked rather than nourished and defended. Hindustan
Lever’s Lifebuoy soap is an example in point. It yielded large profits under careful
management
Profit or Endgame Strategy: A profit strategy is one that capitalizes on a situation in
which old and obsolete product or technology is being replaced by a new one. This
type of strategy does not require new investment, so it is not a growth strategy. Firms
adopting this strategy decide to follow the same technology, at least partially, while
transiting into new technological domains. Strategists in these firms reason that the
huge number of product based on older technologies on the market would create an
aftermarket for spare parts that would last for years. Sylvania, RCA, and GE are
among the firms that followed this strategy. They decided to stay in the vacuum tube
market until the “end of the game.” As with most business decisions, timing is critical.
All competitors eventually must shelve the old assets at some point of time and move
to the new product or technology. The critical question is, “Can we make more money
by using these assets or by selling them?” The answer to that question changes as time
passes.
Activity 3
Identify Indian companies following stability strategy. Also identify the type of
stability strategy followed by these firms.
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 Growth Strategies-I
9.4 EXPANSION STRATEGIES
Every enterprise seeks growth as its long-term goal to avoid annihilation in a
relentless and ruthless competitive environment. Growth offers ample opportunities to
everyone in the organization and is crucial for the survival of the enterprise. However,
this is possible only when fundamental conditions of expansion have been met.
Expansion strategies are designed to allow enterprises to maintain their competitive
position in rapidly growing national and international markets. Hence to successfully
compete, survive and flourish, an enterprise has to pursue an expansion strategy.
Expansion strategy is an important strategic option, which enterprises follow to fulfill
their long-term growth objectives. They pursue it to gain significant growth as
opposed to incremental growth envisaged in stability strategy. Expansion strategy is
adopted to accelerate the rate of growth of sales, profits and market share faster by
entering new markets, acquiring new resources, developing new technologies and
creating new managerial capabilities.
Expansion strategy provides a blueprint for business enterprises to achieve their long-
term growth objectives. It allows them to maintain their competitive advantage even
in the advanced stages of product and market evolution. Growth offers economies of
scale and scope to an organization, which reduce operating costs and improve
earnings. Apart from these advantages the organization gains a greater control over
the immediate environment because of its size. This influence is crucial for survival in
mature markets where competitors aggressively defend their market shares.

Conditions for Opting for Expansion Strategy

Firms opt for expansion strategy under the following circumstances:
l When the firm has lofty growth objectives and desires fast and continuous
growth in assets, income and profits. Expansion through diversification would be
especially useful to firms that are eager to achieve large and rapid growth since it
involves exploiting new opportunities outside the domain of current operations.
l When enormous new opportunities are emerging in the environment and the firm
is ready and willing to expand its business scope
l Firms find expansion irresistible since sheer size translates into superior clout.
l When a firm is a leader in its industry and wants to protect its dominant position.
l Expansion strategy is opted in volatile situations. Substantive growth would act
as a cushion in such conditions.
l When the firm has surplus resources, it may find it sensible to grow by levering
on its strengths and resources.
l When the environment, especially the regulatory scenario, blocks the growth of
the firm in its existing businesses, it may resort to diversification to meets its
growth objectives.
l When the firm enjoys synergy that ensues by tapping certain opportunities in the
environment, it opts for expansion strategies. Economies of scale and scope and
competitive advantage may accrue through such synergistic operations. Over the
last decade, in response to economic liberalisation, some companies in India
expanded the scale of existing businesses as well as diversified into many new
businesses.
Growth of a business enterprise entails realignment of its strategies in product –
market environment. This is achieved through the basic growth approaches of
intensive expansion, integration (horizontal and vertical integration), diversification
and international operations. Firms following intensification strategy concentrate on
1 3
Corporate Level their primary line of business and look for ways to meet their growth objectives by
Strategy increasing their size of operations in this primary business. A company may expand
externally by integrating with other companies. An organization expands its
operations by moving into a different industry by pursuing diversification strategies.
An organization can grow by “going international”, i.e., by crossing domestic borders
by employing any of the expansion strategies discussed so far.

9.5 EXPANSION THROUGH INTENSIFICATION

Intensification involves expansion within the existing line of business. Intensive
expansion strategy involves safeguarding the present position and expanding in the
current product-market space to achieve growth targets. Such an approach is very
useful for enterprises that have not fully exploited the opportunities existing in their
current products-market domain. A firm selecting an intensification strategy,
concentrates on its primary line of business and looks for ways to meet its growth
objectives by increasing its size of operations in its primary business. Intensive
expansion of a firm can be accomplished in three ways, namely, market penetration,
market development and product development first suggested in Ansoff’s model.
Intensification strategy is followed when adequate growth opportunities exist in the
firm’s current products-market space. However, while going in for internal expansion,
the management should consider the following factors.
l While there are a number of expansion options, the one with the highest net
present value should be the first choice.
l Competitive behaviour should be predicted in order to determine how and when
the competitors would respond to the firm’s actions. The firm must also assess
its strengths and weaknesses against its competitors to ascertain its competitive
advantages.
l The conditions prevailing in the environment should be carefully examined to
determine the demand for the product and the price customers are willing to pay.
l The firm must have adequate financial, technological and managerial capabilities
to expand the way it chooses.
l Technological, social and demographic trends should be carefully monitored
before implementing product or market development strategies. This is very
crucial, especially, in a volatile business environment.

Ansoff’s Product-Market Expansion Grid

The product/market grid first presented by Igor Ansoff (1968), shown in exhibit 1, has
proven to be very useful in discovering growth opportunities. This grid best illustrates
the various intensification options available to a firm. The product/market grid has
two dimensions, namely, products and markets. Combinations of these two dimensions
result in four growth strategies. According to Ansoff’s Grid, three distinct strategies
are possible for achieving growth through the intensification route. These are:
l Market Penetration: The firm seeks to achieve growth with existing products in
their current market segments, aiming to increase its markets share.
l Market Development: The firm seeks growth by targeting its existing products
to new market segments.
l Product Development: The firm develops new products targeted to its existing
market segments.
l Diversification: The firm grows by diversifying into new businesses by
developing new products for new markets.
1 4
 Exhibit 1: Ansoff’s Grid Growth Strategies-I

Markets/Products Current Markets New Markets

Current Products Market Penetration Market Development
New Products Product Development Diversification

Market Penetration
When a firm believes that there exist ample opportunities by aggressively exploiting
its current products and current markets, it pursues market penetration approach.
Market penetration involves achieving growth through existing products in existing
markets and a firm can achieve this by:
l Motivating the existing customers to buy its product more frequently and in
larger quantities. Market penetration strategy generally focuses on changing the
infrequent users of the firm’s products or services to frequent users and frequent
users to heavy users. Typical schemes used for this purpose are volume
discounts, bonus cards, price promotion, heavy advertising, regular publicity,
wider distribution and obviously through retention of customers by means of an
effective customer relationship management.
l Increasing its efforts to attract its competitors’ customers. For this purpose, the
firm must develop significant competitive advantages. Attractive product design,
high product quality, attractive prices, stronger advertising, and wider
distribution can assist an enterprise in gaining lead over its competitors. All
these require heavy investment, which only firms with substantial resources, can
afford. Firms less endowed may search for niche segments. Many small
manufacturers, for instance, survive by seeking out and cultivating profitable
niches in the market. They may also grow by developing highly specialized and
unique skills to cater to a small segment of exclusive customers with special
requirements.
l Targeting new customers in its current markets. Price concessions, better
customer service, increasing publicity and other techniques can be useful in this
effort.
In a growing market, simply maintaining market share will result in growth, and there
may exist opportunities to increase market share if competitors reach capacity limits.
While following market penetration strategy, the firm continues to operate in the same
markets offering the same products. Growth is achieved by increasing its market
share with existing products. However, market penetration has limits, and once the
market approaches saturation another strategy must be pursued if the firm is to
continue to grow. Unless there is an intrinsic growth in its current market, this
strategy necessarily entails snatching business away from competitors. The market
penetration strategy is the least risky since it leverages many of the firm’s existing
resources and capabilities. Another advantage of this strategy is that it does not
require additional investment for developing new products.

Market Development Strategy

Market Development strategy tries to achieve growth by introducing existing products
in new markets. Market development options include the pursuit of additional market
segments or geographical regions. The development of new markets for the product
may be a good strategy if the firm’s core competencies are related more to the specific
product than to its experience with a specific market segment or when new markets
offer better growth prospects compared to the existing ones. Because the firm is
expanding into a new market, a market development strategy typically has more risk
than a market penetration strategy. This is because managers do not normally possess 1 5
Corporate Level sound knowledge of new markets, which may result in inaccurate market assessment
Strategy and wrong marketing decisions.
In market development approach, a firm seeks to increase its sales by taking its
product into new markets. The two possible methods of implementing market
development strategy are, (a) the firm can move its present product into new
geographical areas. This is done by increasing its sales force, appointing new channel
partners, sales agents or manufacturing representatives and by franchising its
operation; or (b) the firm can expand sales by attracting new market segments.
Making minor modifications in the existing products that appeal to new
segments can do the trick.

Product Development Strategy

Expansion through product development involves development of new or
improved products for its current markets. The firm remains in its present
markets but develops new products for these markets. Growth will accrue if the new
products yield additional sales and market share. This strategy is likely to
succeed for products that have low brand loyalty and/or short product life cycles.
A Product development strategy may also be appropriate if the firm’s strengths are
related to its specific customers rather than to the specific product itself. In this
situation, it can leverage its strengths by developing a new product targeted to its
existing customers. Although the firm operates in familiar markets, product
development strategy carries more risk than simply attempting to increase
market share since there are inherent risks normally associated with new
product development.

The three possible ways of implementing the product development strategy are:
l The company can expand sales through developing new products.
l The company can create different or improved versions of the current products.
l The company can make necessary changes in its existing products to suit the
different likes and dislikes of the customers.

Combination Strategy
Combination strategy combines the intensification strategy variants i.e., market
penetration, market development and product development to grow. In the market
development and market penetration strategy, the firm continues with its current
product portfolio, while the product development strategy involves developing new or
improved products, which will satisfy the current markets.

Activity 4
Search for information about Hindustan Lever Limited and explain which of the above
intensification strategies is it currently following. Why is the company following these
strategies? Discuss.
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 Growth Strategies-I
9.6 EXPANSION THROUGH INTEGRATION
In contrast to the intensive growth, integration strategy involves expanding externally
by combining with other firms. Combination involves association and integration
among different firms and is essentially driven by need for survival and also for
growth by building synergies. Combination of firms may take the merger or
consolidation route. Merger implies a combination of two or more concerns into one
final entity. The merged concerns go out of existence and their assets and liabilities are
taken over by the acquiring company. A consolidation is a combination of two or
more business units to form an entirely new company. All the original business
entities cease to exist after the combination. Since mergers and consolidations
involve the combination of two or more companies into a single company, the term
merger is commonly used to refer to both forms of external growth. As is the case in
all the strategies, acquisition is a choice a firm has made regarding how it intends to
compete (Markides, 1999). Firms use integration to (1) increase market share,
(2) avoid the costs of developing new products internally and bringing them to the
market, (4) reduce the risk of entering new business, (5) speed up the process of
entering the market, (6) become more diversified and (7) quite possibly to reduce the
intensity of competition by taking over the competitor’s business. The costs of
integration include reduced flexibility as the organization is locked into specific
products and technology, financial costs of acquiring another company and difficulties
in integrating various operations. There are many forms of integration, but the two
major ones are vertical and horizontal integration.
i) Vertical Integration: Vertical integration refers to the integration of firms
involved in different stages of the supply chain. Thus, a vertically integrated firm has
units operating in different stages of supply chain starting from raw material to
delivery of final product to the end customer. An organization tries to gain control of
its inputs (called backwards integration) or its outputs (called forward integration) or
both. Vertical integration may take the form of backward or forward integration or
both. The concept of vertical integration can be visualized using the value chain.
Consider a firm whose products are made via an assembly process. Such a firm may
consider backward integrating into intermediate manufacturing or forward integrating
into distribution. Backward integration sometimes is referred to as upstream
integration and forward integration as downstream integration. For instance, Nirma
undertook backward integration by setting up plant to manufacture soda ash and
linear alkyl benzene, both important inputs for detergents and washing soaps, to
strengthen its hold in the lower-end detergents market. Forward integration refers to
moving closer to the ultimate customer by increasing control over distribution
activities. For example, a personal computer assembler could own a chain of retail
stores from which it sells its machines (forward integration). Many firms in India such
as DCM, Mafatlal and National Textile Corporation have set up their own retail
distribution systems to have better control over their distribution activities.
Some companies expand vertically backwards and forward. Reliance
Petrochemicals grew by leveraging backward and forward integration: it
began with manufacturing of textiles and fibres, moved to polymers and other
intermediates then went into the manufacture of fibres, then to petrochemicals and oil
refining. In power, Reliance Energy wants to do the same thing and the catchphrase
that for this vertical integration is ‘ from well-head to wall-socket’. Reliance
Energy’s strategy is to straddle the entire value chain in the power business.
It plans to generate power by using the group’s production of gas, transmit and
distribute it to the domestic and industrial consumers, reaping the returns of not just
generating power using its own gas but selling what it generates not as a bulk
supplier but to the end user.
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Corporate Level In essence, a firm seeks to grow through vertical integration by taking control of the
Strategy business operations at various stages of the supply chain to gain advantage over its
rivals. The record of vertical integration is mixed and hence, decisions should be taken
after a comprehensive and careful consideration of all aspects of this form of
integration. In most cases the initial investments may be very high and exiting an
arrangement that does not prove beneficial may be hard. Vertical integration also
requires an organization to develop additional product market and technology
capabilities, which it may not currently possess.
Factors conducive for vertical integration include (1) taxes and regulations on market
transactions, (2) obstacles to the formulation and monitoring of contracts,
(3) similarity between the vertically-related activities, (4) sufficient large production
quantities so that the firm can benefit from economies of scale and (5) reluctance of
other firms to make investments specific to the transaction. Vertical integration may
not yield the desired benefit if, (1) the quantity required from a supplier is much less
than the minimum efficient scale for producing the product. (2) the product is widely
available commodity and its production cost decreases significantly as cumulative
quantity increases, (3) the core competencies between the activities are very different,
(4) the vertically adjacent activities are in very different types of industries (For
example, manufacturing is very different from retailing.) and (5) the addition of the
new activity places the firm in competition with another player with which it needs to
cooperate. The firm then may be viewed as a competitor rather than a partner.
Firms integrate vertically to (1) reduce transportation costs if common ownership
results in closer geographic proximity, (2) improve supply chain coordination,
(3) capture upstream or downstream profit margins, (4) increase entry barriers to
potential competitors, for example, if the firm can gain sole access to scarce resource,
(5) gain access to downstream distribution channels that otherwise would be
inaccessible, (6) facilitate investment in highly specialized assets in which upstream or
downstream players may be reluctant to invest and (7) facilitate investment in highly
specialized assets in which upstream or downstream players may be reluctant to
invest.
The downside risks of an integration strategy to a company include (1) difficulty of
effectively integrating the firms involved, (2) incorrect evaluation of target firm’s
value, (3) overestimating the potential for synergy between the companies involved,
(4) creating a combination too large to control, (5) the huge financial burden that
acquisition entails, (6) capacity balancing issues. (For instance, the firm may need to
build excess upstream capacity to ensure that its downstream operations have
sufficient supply under all demand conditions), (7) potentially higher costs due to low
efficiencies resulting from lack of supplier competition, (8) decreased flexibility due to
previous upstream or downstream investments, (however, that flexibility to coordinate
vertically –related activities may increase.), (9) decreased ability of increase product
variety if significant in-house development is required, and (10) developing new core
competencies may compromise existing competencies.
There are alternatives to vertical integration that may provide some of the same
benefits with fewer drawbacks. The following are a few of these alternatives for
relationships between vertically related organizations.
l Long-term explicit contracts
l Franchise agreements
l Joint ventures
l Co-location of facilities
l Implicit contracts (relying on firm’s reputation)
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Figure 9.1 shows the backward and forward integration followed by an illustration: Growth Strategies-I

No Integration Backward Integration Forward Integration

Raw Materials Raw Materials Raw Materials

s s s

Intermediate Intermediate Intermediate

Manufacturing Manufacturing Manufacturing

s s s

Assembly Assembly Assembly

s s

Distribution Distribution Distribution

s s s

End Customer End Customer End Customer

Figure 9.1: Backward and Forward Integration

Illustration: Digital Giants to Accelerate Vertical Integration

Samsung Electronics and LG Electronics plan to streamline production lines in
cooperation with their affiliates to reduce factors of uncertainty in the procurement
of components. The two South Korean giants seek to manufacture top-of-the-line
products like cell phones and digital TVs in a self-sufficient fashion. LG Group will
invest 30 trillion won by 2010 to develop certain electronic components that include
system integrated chips, plasma displays and camera modules. Samsung Electronics
already retains a strong portfolio, comprising Samsung Corning (display-specific
glass), Samsung SDI (displays) and Samsung Electro-Mechanics (camera
modules), and aims to further hone its push for vertical integration.
So-called vertical integration refers to the degree to which a company owns or
controls its upstream suppliers, subcontractors or affiliates and its downstream
buyers. The advantage of the strategy is the expansion of core competencies by
reducing risks in the supply of components as well as the slashing of transportation
costs. Some experts have said vertical integration is vital to the improvement of
these two giant digital firms’ competitiveness despite criticism that such expansion
would increase the entry barriers for industry newcomers.
Source: Korean Times

ii) Horizontal Combination / Integration: The acquisition of additional business in

the same line of business or at the same level of the value chain (combining with
competitors) is referred to as horizontal integration. Horizontal growth can be
achieved by internal expansion or by external expansion through mergers and
acquisitions of firms offering similar products and services. A firm may diversify by
growing horizontally into unrelated business. Integration of oil companies, Exxon and
Mobil, is an example of horizontal integration. Aditya Birla Group’s acquisition of
1 9
L&T Cements from Reliance to increase its market dominance is an example of
Corporate Level horizontal integration. This sort of integration is sought to reduce intensity of
Strategy competition and also to build synergies.

Benefits of Horizontal Integration

The following are some benefits of horizontal integration:
l Economies of scale-achieved by selling more of the same product, for example,
by geographic expansion.
l Economies of scope – achieved by sharing resources common to different
products. Commonly referred to as ‘synergies’.
l Increased bargaining power over suppliers and downstream channel members.
l Reduction in the cost of global operations made possible by operating plants in
foreign markets.
l Synergy achieved by using the same brand name to promote multiple products.

Hazards of Horizontal Integration

Horizontal integration by acquisition of a competitor will increase a firm’s market
share. However, if the industry concentration increases significantly then anti-trust
issues may arise. Aside from legal issues, another concern is whether the anticipated
economic gains will materialize. Before expanding the scope of the firm through
horizontal integration, management should be sure that the imagined benefits are real.
Many blunders have been made by firms that broadened their horizontal scope to
achieve synergies that did not exist, for example, computer hardware manufacturers
who entered the software business on the premise that there were synergies between
hardware and software. However, a connection between two products does not
necessarily imply realizable economies of scope. Finally, even when the potential
benefits of horizontal integration exist, they do not materialize spontaneously. There
must be an explicit horizontal strategy in place. Such strategies generally do not arise
from the bottom –up, but rather, must be formulated by corporate management.

9.7 INTERNATIONAL EXPANSION

An organization can “go international” by crossing domestic borders as it employs
any of the strategies discussed above. International expansion involves establishing
significant market interests and operations outside a company’s home country.
Foreign markets provide additional sales opportunities for a firm that may be
constrained by the relatively small size of its domestic market and also reduces the
firm’s dependence on a single national market. Firms expand globally to seek
opportunity to earn a return on large investments such as plant and capital equipment
or research and development, or enhance market share and achieve scale economies,
and also to enjoy advantages of locations. Other motives for international expansion
include extending the product life cycle, securing key resources and using low-cost
labour. However, to mold their firms into truly global companies, managers must
develop global mind-sets. Traditional means of operating with little cultural
diversity and without global competition are no longer effective firms
(Kedia and Mukherji, 1999).
International expansion is fraught with various risks such as, political risks (e.g.
instability of host nations) and economic risks (e.g. fluctuations in the value of the
country’s currency). International expansions increases coordination and distribution
costs, and managing a global enterprise entails problems of overcoming trade barriers,
logistics costs, cultural diversity, etc.
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There are several methods for going international. Each method of entering an Growth Strategies-I
overseas market has its own advantages and disadvantages that must be carefully
assessed. Different international entry modes involve a tradeoff between level of risk
and the amount of foreign control the organization’s managers are willing to allow. It
is common for a firm to begin with exporting, progress to licensing, then to
franchising finally leading to direct investment. As the firm achieves success at each
stage, it moves to the next. If it experiences problems at any of these stages, it may not
progress further. If adverse conditions prevail or if operations do not yield the desired
returns in a reasonable time period, the firm may withdraw from the foreign market.
The decision to enter a foreign market can have a significant impact on a firm.
Expansion into foreign markets can be achieved through:
l Exporting
l Licensing
l Joint Venture
l Direct Investment

Exporting: Exporting is marketing of domestically produced goods in a foreign

country and is a traditional and well-established method of entering foreign markets.
It does not entail new investment since exporting does not require separate production
facilities in the target country. Most of the costs incurred for exporting products are
marketing expenses.

Licensing: Licensing permits a company in the target country to use the property of
the licensor. Such property usually is intangible, such as trademarks, patents, and
production techniques. The licensee pays a fee in exchange for the rights to use the
intangible property and possible for technical assistance. Licensing has the potential
to provide a very large ROI since this mode of foreign entry also does require
additional investments. However, since the licensee produces and markets the product,
potential returns from manufacturing and marketing activities may be lost.

Joint Venture: There are five common objectives in a joint venture: market entry,
risk/reward sharing, technology sharing and joint product development, and
conforming to government regulations. Other benefits include political connections
and distribution channel access that may depend on relationships.
Joint ventures are favoured when:
l The partners’ strategic goals converge while their competitive goals diverge;
l The partners’ size, market power, and resources are small compared to the
industry leaders; and
l Partners’ are able to learn from one another while limiting access to their own
proprietary skills.
The critical issues to consider in a joint venture are ownership, control, length of
agreement, pricing, technology transfer, local firm capabilities and resources, and
government intentions. Potential problems include, conflict over asymmetric
investments, mistrust over proprietary knowledge, performance ambiguity – how to
share the profits and losses, lack of parent firm support, cultural conflicts, and finally,
when and how when to terminate the relationship.
Joint ventures have conflicting pressures to cooperate and compete:
l Strategic imperative; the partners want to maximize the advantage gained for the
joint venture, but they also want to maximize their own competitive position.
l The joint venture attempts to develop shared resources, but each firm wants to
develop and protect its own proprietary resources.
l The joint venture is controlled through negotiations and coordination processes, 2 1
while each firm would like to have hierarchical control.
Corporate Level Direct Investment: Direct investment is the ownership of facilities in the
Strategy
target country. It involves the transfer of resources including capital, technol-
ogy, and personnel. Direct investment may be made through the acquisition of
an existing entity or the establishment of a new enterprise. Direct ownership
provides a high degree of control in the operations and the ability to better
know the consumers and competitive environment. However, it requires a
high degree of commitment and substantial resources. Exhibit 2 compares
different International Market Entry Modes.
Exhibit 2: Comparison of International Market Entry Modes

Mode Conditions Favoring this Mode Advantages Disadvantages

l Limited sales potential in l Minimizes risk l Trade barriers &

target country; little product and investment tariffs add to costs
Exporting adaptation required l Speed of entry l Transport costs
l High target country; l Maximizes scale; l Limits access to
production costs uses existing local market
l Liberal import policies facilities information
l High political risk l Company viewed
as an outsider

l Import and investment l Minimizes risk l Lack of control

barriers and investment over use of
l Legal protection possible in l Speed of entry assets
target environment l Able to l Licensee may
Licensing
l Low sales potential in target circumvent trade become
country barriers competitor
l Large cultural distance l High ROI l Knowledge
l Licensee lacks ability to leakages
become a competitor l License period
is limited

l Import barriers l Overcomes l Difficult to

l Large cultural distance ownership manage
Joint restrictions and
l Assets cannot be fairly priced l Dilution of
Ventures cultural distance control
l High sales potential
l Combines l Greater risk
l Some political risk resources of 2 than exporting
l Government restrictions on companies & licensing
foreign ownership l Potential for l Knowledge
l Local company can provide learning spillovers
skills, resources, distribution l Viewed as insider l Partner may
network, brand name etc.
l Less investment become a
required competitor

l Import barriers l Greater l Higher risk

l Small cultural distance knowledge of than other
local market modes
Direct l Assets cannot be fairly priced
Investment l Can better apply l Requires more
l High sales potential
specialised skills resources and
l Low political risk commitment
l Minimise
knowledge l May be difficult
spillover to manage the
l Can be viewed local resources.
2 2 as an insider
There are three major strategy options for going international: Growth Strategies-I

Multidomestic: The organization decentralizes operational decisions and activities to

each country in which it is operating and customizes its products and services to each
market. For years, U.S. auto manufacturers maintained decentralized overseas units
that produced cars adapted to different countries and regions. General Motors
produced Opel in Germany and Vauxhall in Great Britain while Chrysler produced the
Simca in France and Ford offered a Canadian Ford.
Global: The organization offers standardized products and uses integrated operations.
Example: Ford is treating its Contour as a car for all world markets—one that can be
produced and sold in any industrialized nation.
Transnational: The organization seeks the best of both the multidomestic and global
strategies by globally integrating operations while tailoring products and services to
the local market. In other words a company ‘thinks globally but acts locally’. Many
authors refer to this concept as ‘Glocalization’. Global electronic communications and
connectivity can help integrate operations while flexible manufacturing enables firms
to produce multiple versions of products from the same assembly line, tailoring them
to different markets. This gives more choice in locating facilities to take advantage of
cheaper labor or to get the best of other factors of production

Managing Global Supply Chains to Enhance Competitiveness

Logistics capabilities (the movement of supplies and goods) make or mar global
operations. Global operations involve highly coordinated international flow of goods,
information, cash, and work processes. Setting up a global supply chain to support
producing and selling products in many countries at the right cost and service levels is
a very difficult task. However the benefits of managing this difficult task has many
benefits, which include rationalization of global operations by setting up right number
of factories and distribution centers and integration of far-flung operations under a
unified command to better manage inventory and order filling activities. Optimizing
global supply chain operations can cut the delivery times and costs drastically and
improve global competitiveness. Smart supply chain planning may result in locating
facilities where they make the most logistical sense, while saving on taxes. This is
better than simply locating where labor is cheapest, but where taxes and other cost
may not be most favourable (Refer case study in Appendix 1).

9.8 SUMMARY
Strategy refers to how a given objective will be achieved. Therefore, strategy is
concerned with the relationships between ends and means, that is, between the results
we seek and the resources at our disposal. There are three levels of strategy, namely,
corporate strategies, competitive strategies and functional strategies. Corporate
strategies are concerned with the broad, long-term questions of “what businesses are
we in, and what do we want to do with these businesses?” It sets the overall direction
the organization will follow. On the other hand, competitive strategies determine how
the firm will compete in a specific business or industry. This involves deciding how
the company will compete within each line of business. Functional strategies, also
referred to as operational strategies, are the short-term (less than one year), goal-
directed decisions and actions of the organization’s various functional departments.
There are various approaches to developing stability strategy. They are holding
strategy, stable growth, harvesting strategy, profit or endgame strategy. Growth of
business enterprises implies realignment of its business operations to different product
–market environments. This is achieved through the basic growth approaches of
intensive expansion, integration (horizontal and vertical integration), diversification
and international operations. All these aspects have been covered in this unit. 2 3
Corporate Level
Strategy 9.9 KEY WORDS
Corporate Strategies: Corporate strategy is essentially a blueprint for the growth of
the firm.
Competitive Strategies: Strategies that determine how the firm will compete in a
specific business or industry.
Combination Strategy: Combination strategy may include combination of two
alternatives i.e., market penetration and market development or combination of all the
three alternatives.
Diversification: the firm grows by diversifying into new businesses by developing
new products for new markets.
Expansion Strategies: Growth or expansion strategy is the most important strategic
option, which firms pursue to gain significant growth as opposed to incremental
growth envisaged in stable strategy.
Functional Strategies: Also called operational strategies, these are the short-term,
goal-directed decisions and actions of the organization’s various functional
departments.
Generic Corporate Strategies: The four variants of corporate strategy, namely,
stability strategy, growth/expansion strategy, retrenchment/divestment strategy and
combination strategy are called generic corporate strategies or grand strategies.
Harvesting Strategy: The firm has a dominant market share, which it wants to
leverage to generate cash for future business expansion.
Integration Strategy: The combination or association with other companies to
expand externally is termed as integration strategy.
Intensification Strategy: Intensive expansion strategy involves safeguarding its
present position and expanding in the firm’s current product-market space to achieve
growth targets.
International Expansion: Global expansion involves establishing significant market
interests and operations outside a company’s home country.
Product Development: The firm develops new products targeted to its existing
market segments.
Stability Strategy: Strategy, which aims to retain present strategy of the firm at the
corporate level by focusing on its present products and markets.
Strategy: Strategy refers to how a firm plans to achieve a given objective.

9.10 SELF-ASSESSMENT QUESTIONS

1) What is corporate level strategy? Why is it important for a diversified firm?
2) What are the various reasons that firms choose to move from either a single- or a
dominant-business position to a more diversified position?
3) What do you mean by stability strategy? Does this strategy mean that a firm
stands still? Explain.
4) Under what circumstances do firms pursue stability strategy? What are the
different approaches to stability strategy?
5) What resources and incentives encourage a firm to pursue expansion strategies?
What are the main problems that affect a firm’s efforts to use an expansion
strategy?
2 4
6) Given the advantages of international expansion, why do some firms choose not Growth Strategies-I
to expand internationally?
7) What is the example of a political risk in expanding operations into Africa or
Middle East?

9.11 REFERENCES AND FURTHER READINGS

Collins D.J. & Montgomery, C.A. (1998). ‘Creating Corporate Advantage’, Harvard
Business Review, 76(3) 70-83.
Hitt, Michael A., Duane, Ireland R. and Hoskisson, Robert E. (2001) Strategic
Management: Competitiveness and Globalization, 4e, Thomson Learning.
Kedia, B.L. & Mukherji, A. (1999). ‘Global Managers; Developing a Mindset for
Global Competitiveness’, Journal of World Business, 34 (3); 230-251.
Markides, C.C. (1999). To Diversify or not Diversify, Harvard Business Review,
75(6); 93-99.
Markides, C.C. (1999). A Dynamic View of Strategy, Sloan Management Review, 40
(3); 55-63.
Porter, M.E. (1987). From Competitive Advantage to Corporate Strategy, Harvard
Business Review, 65 (3); 43-59.
Ramaswamy, V.S. and Namakumari, S. (1999). Strategic Planning: Formulation of
Corporate Strategy (Texts and Cases)-The Indian Context, 1e, Macmillan India
Limited.
Simons R. (1999). How Risky is Your Company? Harvard Business Review; 77 (3);
85-94.
Srivastava, R.M. (1999). Management Policy and Strategic Management (Concepts,
Skills and Practice), 1e, Himalaya Publishing House.

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Corporate Level Appendix-1
Strategy

Case Study

Ranbaxy – A Company with a Global Vision

The late Dr. Parvinder Singh was one of the first Indian entrepreneurs to develop a
global vision. He expanded Ranbaxy’s operations to more than 40 countries. The
company is today a net forex earner, with exports to over 40 countries. It has JVs/
subsidiaries in 14 countries, marketing offices in six other countries and a licensing
arrangement in Indonesia.
Ranbaxy’s exports, mainly antibiotics, have grown at a compounded average growth
rate of around 28 per cent over the last five years. Although the bulk of exports are in
comparatively low-value bulk drugs, the proportion of formulations is expected to rise
significantly in the next few years. Cifran, for instance, has already proved to be a
leading product in China and Russia. Ranbaxy has acquired pharma companies in
New Jersey and Ireland to increase its penetration in the USA and UK markets. Up
until 1990-91 Ranbaxy was not known for its research. During that year the company
made headlines with the success of the complicated synthesis of an antibiotic drug,
Cefaclor. US drug major Eli Lily, impressed by Ranbaxy’s ability to resynthesise the
molecule, decided to enter into two joint ventures (JVs) with Ranbaxy. These JVs
opened the door for its overseas expansion.
The company classified the global markets into three categories-advanced, emerging,
and developing based on growth prospects for generic drugs. This led to focusing
attention on the emerging markets such as China, Ukraine and CIS with growth rates
much larger than those in advanced and developing markets. Ranbaxy’s international
operations have helped the company to cut cost of production by half in some of the
key bulk drugs—6APA, 7ADCA, fluoroquinolones and cephalexin. Because of
international operations in 40 odd countries, capacities are higher, which reduces unit
cost of production. The lower cost of production also helps domestic operations. With
19 per cent growth in domestic sales in 1997-98, the company has not neglected the
Indian operations. With international operations on the verge of giving decent returns
the company is keen to shore up its market share in the domestic market.
Obviously, shareholders have been handsomely rewarded. The growth rate in the price
of the scrip has been very impressive in the past few years. The company today
enjoys a unique position of having a balanced mix of finance, marketing and R&D
strengths to start earning higher returns on all its assets.

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