UNIT 3

Generic Competitive Strategies

UNIT 3 SYLLABUS
 Generic Competitive Strategies: Meaning of generic
competitive strategies, Low cost, Differentiation,
Focus –when to use which strategy.
 Grand Strategies: Stability, Growth (Diversification
Strategies, Vertical Integration Strategies, Mergers,
Acquisition & Takeover Strategies, Strategic
Alliances & Collaborative Partnerships),
 Retrenchment – Turnaround, Divestment,
Liquidation, Outsourcing Strategies.
GENERIC COMPETITIVE STRATEGIES
 The Generic Competitive Strategy (GCS) is a
methodology designed to provide companies with a
strategic plan to compete and gain an advantage
within the marketplace.
 According to Porter, a company can leverage its
strengths to position itself within the competition.
When classifying the strengths of a company, they can
either be placed under the heading of cost advantage
or differentiation. Within those two strength
categories, the scope of the company is either broad or
narrow.
GENERIC COMPETITIVE STRATEGIES
 Example
 Consider planning a trip that will require several nights’ stay in
a hotel. There are three to choose from in the town:
 Hotel A has no amenities beyond the basics. A bed, a bathroom
and a tiny pool in the back are all that is offered at the low cost
accommodations.
 Hotel B is a pricey resort, loaded with options; has a free
breakfast buffet, an on-site spa, several pools and a well-
apportioned room with a view of a nature preserve.
 Hotel C is a smaller hotel that caters to business travelers in the
state. They offer business services, studio rooms with full kitchen
facilities, catered business dinners and late check-out options to
allow for longer meetings.
 Travelers choose one of these three hotels based on their personal
needs and preferences.
 Each hotel, however, is an example of a particular type
of Generic Competitive Strategy that businesses use to set
themselves apart from the competition.
GENERIC COMPETITIVE STRATEGIES
 Hotel A is betting on the premise that cost is one of the primary
decision making factors when choosing a hotel. They don’t offer
fancy extras, but the rooms are clean and cheap.
 Hotel B draws clients who want to be pampered and who will
wear the hotel’s monogrammed bathrobe proudly on their way
down to breakfast. The rooms are expensive, but are larger than
some of the homes people live in.
 Hotel C has narrowed their attention to the weary business
traveler and has mastered the art, while maintaining prices that
are middle of the road.
WHEN IS THE GENERIC COMPETITIVE STRATEGY
USEFUL
 The GCS is useful when a company is looking to gain an advantage
over a competitor. If a company wants to ‘win’ the advantage over
other businesses, it does so by winning sales and taking customers
away from competitors. An advantage in business, though, does not
come easily. It must be developed and established firmly within the
framework of a company. Using a business strategy is not a one-off or
a weekend exercise; it must become the driving force of the company.
 In order to do this successfully, a company must implement a Generic
Competitive Strategy. Not confined to a specific industry or company,
the methodology can be used in for-profit companies of any kind, as
well as not for profit organizations. No matter what type of business,
the principles behind the GCS are universal and can be applied to any
company.
 The primary benefit using a GCS is to establish a methodology of
doing business that will drive the company in a certain direction.
Rather than simply maintaining the status quo, a GCS gives a
company a blueprint to follow that will create the structure of the
company.
COMPONENTS OF THE GENERIC COMPETITIVE
STRATEGY
 GCS is based on three generic strategies: cost
leadership, differentiation, and focus. Each strategy has a
different mechanism for reaching success. Companies within the
same industry may not choose the same strategy – it is a choice
that must be made with the company’s management, based on the
desired outcome for success and the company’s strengths. Each
strategy has unique components that shape the company.
 Cost Leadership
 A business that wants to achieve an edge through cost leadership will
become an expert in lowering costs while maintaining prices. The goal
should always be to reduce the costs associated with doing business,
while continuing to charge the same price as its competitors. This
gives the company a greater profit, without having any extra
expenses. Another method of maximizing the Cost Leadership position
is by lowering the selling point. Because the costs associated with
the products are already low, the company is still making a healthy
profit. This allows the company to under bid the competitors while still
preserving profits.
 Differentiation
 The differentiation strategy seeks to set a company apart by creating
products that are different than a competitor’s. The specific ways that
a company differentiates itself from the competition will depend on the
industry of the company, but may include features, support and
functionality. The uniqueness of the company – the differentiation –
must only be a feature that a customer is willing to pay a premium
price for. A company that focuses on differentiation may be
disappointed to realize that their market share is continually
changing and comes with a set of risks.
 Focus
 The company that uses the Focus strategy is selecting
a niche market, and then determining the scope of the
focus. Within the Focus strategy is the option to use
either cost leadership or differentiation. It may be
confusing to keep in mind that the Focus strategy is
dealing with a specific, niche market. Focus does not
mean a smaller market simply because the company
is small – it means that the company has chosen to
add value to their products and offer them to a select
number of customers. Because the company who
chooses a Focus strategy deals exclusively with their
client base, they develop a loyal relationship which
can generate sales and profits for the future.
CREATING THE GENERIC COMPETITIVE STRATEGY
 Before creating a Generic Competitive Strategy, a company must
decide which strategy to employ. Taking into account the strengths of
the company may give an indication of the best strategy to choose, but
should not be rushed simply to move to the next item.
 To determine the best strategy for the company, follow a few simple
steps:
 Create a Strengths, Weakness, Opportunities, Threats
(SWOT) chart for each of the three strategies. Once that is completed,
it may be clear that a strategy would not be appropriate. If that is the
case, eliminate that strategy, and continue to the next step.
 Conduct an analysis of the industry the business is in. Finding
out specifics about the business industry can lead to an increased
understanding of the market and how to best position the company.
 Compare the SWOT analysis to the business industry results.
Select the most viable options from the SWOT analysis and compare
to the business industry analysis. From the comparisons, a company
can begin to answer questions such as:
 How does this strategy help manage supplier power?
 How does this strategy help reduce the threat of substitution?
 How does this strategy help reduce customer power?
 As the company begins to answer the comparison questions, a clear
choice should emerge. To decide on the correct strategy, choose the
strategy that provides the company with the best set of options for
the future.
 There is an implied danger in not selecting a strategy. Porter
referred to the company that had not chosen a definitive strategy
as being ‘stuck in the middle’. A firm that doesn’t make a clear
choice of strategy may become a company that has little to no
profitability, has no competitive advantage and may become a
target for companies that chose to differentiate. However, recent
studies have indicated that there may be benefit of using a hybrid
method that combines more than one strategy. Regardless of what
strategy is used, one thing is clear: a company must have a
directional strategy to move forward.

USING THE GENERIC COMPETITIVE STRATEGY
 Prioritizing the company’s activities based on the
chosen strategy will help maximize the success of the
plan. The Generic Competitive Strategy will affect the
daily decisions of a company, and the industry forces
that a company has to deal with may change the way
the company operates. The five industry forces (entry
barriers, buyer power, supplier power, threat of
substitutes, rivalry) would all be affected differently
based on the GCS chosen.
 Using the Cost Leadership strategy requires an
aggressive stance towards cost in every aspect of the
company’s operations. With low-cost as the defining
quality, the company’s management must be ruthless
in the pursuit of lower costs.
USING THE GENERIC COMPETITIVE STRATEGY

 The Differentiation strategy, on the other hand, leads

to profits but does not lead to a large market share. By
focusing on specific traits of a product or service, a
portion of the marketplace is automatically
disregarded. This leads to a smaller number of
potential customers, but may generate more profits
due to their loyalty and willingness to spend more.
 Establishing a Focus strategy means the company is
choosing to prioritize their activities for a specific
market segment. That segment may respond in kind
by conducting their business exclusively with the
company, thus providing higher profit levels. The
company will not be successful, however, if they fail to
provide their niche market with differences from what
the rest of the consumers receive.
EXAMPLES OF GENERIC COMPETITIVE STRATEGY
 Wal-Mart is perhaps one of the most well-known
companies that use Cost Leadership as their
business strategy. With efficient distribution methods,
huge volume discounts from suppliers, and their
control of manufacturing and inventory, they are able
to offer low prices. They have minimized costs and are
able to pass the savings on to customers, resulting in
higher number of customers who spend an average
amount of money in their stores. By specializing in low
costs, they appeal to a wide number of customers who
flock to the store in search of a bargain.
Once a fledgling computer company, Apple has set itself apart
through their Differentiation strategy. They developed an
operating platform (iOS) and then designed products that use
that system. The hardware for their products is designed by
Apple engineers and designers and their products are
compatible and top-notch. Apple not only set itself apart from
the competition, it has created a subculture of loyal customers
who flock to be the first to receive new devices and products.
By designing every component that is used in their products,
they have set themselves completely apart from the rest of the
industry – leaving competitors far behind.
For drivers, there are a few choices: car, truck, motorcycle. The market for
motorcycles is relatively small and the market for luxury motorcycles is
even smaller. Harley Davidson has established itself as an industry
leader in the niche market of motorcycle riders. They use Differentiation
Focus as a competitive strategy, and they do it well. Harley riders expect
a certain standard from their bikes, along with responsive customer
service. This niche market has evolved almost to the point of being a ‘club’
where members find their common ground in the machines they drive.
Harley has set itself apart, and established itself as the standard for the
true bike rider.
Porter began a movement that is still active in today’s business world
when he introduced the Generic Competitive Strategy idea. Establishing a
company without considering the advantage it wishes to pursue is
effectively setting the company up to fail. Careful consideration of the
different advantages will give even the most novice entrepreneur an idea of
which direction the company should be moving. A correctly implemented
strategy will help keep the company on target, while ensuring that they
maintain a competitive edge within the industry.
 THE GRAND STRATEGIES
Stability Expansion Retrenchment Combination
Strategies Strategies Strategies Strategies

No Change Turnaround Simultaneous

Concentration
Strategies Strategies Combination

Profit Divestment Sequential

Integration
Strategies Strategies Combination

Pause /
Proceed with Liquidation Combination
Diversification
caution Strategies of both
strategies

Co-operation

Internationaliz
ation

Digitalization
 STABILITY STRATEGY
INTRODUCTION
A part of Corporate Strategy.
Corporate Strategies are framed and controlled by
the top level management.
This strategies deal with how a firm would like to
behave in the future.
STABILITY

Stability strategy implies continuing the current

activities of the firm without any significant change
in direction.
This strategy is most likely to be pursued by small
businesses or firms in a mature stage of
development.
Stability strategy is not a ‘do nothing’ approach nor
goals such as profit growth are abandoned.
TYPES OF STABILITY STRATEGIES

No-Change
Types

Profit

Pause/Proceed
With Caution
NO-CHANGE STRATEGY

A no change strategy is a decision to do nothing

new
A firm adopts this strategy when their internal &
external environment is stable.
There are no major new strengths and weaknesses
within the organization
There are no new competitors and no threat of
substitute products
Small and Medium firms adopt this sort of
strategy
PROFIT STRATEGY
The profit strategy is an attempt to artificially maintain
profits by reducing investments and short- term
expenditures
For example in a situation where the profitability is drifting
lower organizations undertake measures to reduce
investments, cut costs, raise prices, increase productivity.
The profit strategy is useful to get over a temporary
difficulty
But if continued for long, it will lead to a serious
deterioration in the company’s position
For e.g. - The companies sell of assets such as prime land in a
commercial locality and move out to the suburbs. Some have
hived off some divisions in non-core businesses to raise
money while a few have resorted to provide services to other
organization need outsourcing facilities.
PAUSE/PROCEED WITH CAUTION

Employed by firms to test the grounds before the

full- fledged strategy
Helps all the employees to get used to it
This strategy enables a company to consolidate its
resources after prolonged rapid growth
ADVANTAGES OF STABILITY STRATEGIES
The firm successfully runs and objectives are achieved and
there is satisfactory performance
A stability strategy is less risky unless the conditions are
really bad.
When pursuing this strategy there is no disruption of
routine work.
Most suitable in short run.
DISADVANTAGES OF STABILITY STRATEGIES
Only useful for small and medium scale industries.
No use of this strategy in long run, if it applies in long run
the overall growth would be less.
Less opportunity of innovation and growth due to stable
strategy.
No more expansion and boredom process not to do changes in
the firm.
GROWTH STRATEGIES
 Diversification Strategies
 When new products are made for new markets then
diversification takes place
 By adopting diversification, an organization does
something novel in terms of making new products or
serving new markets or doing both.
 Market Penetration involves selling more products to
the same market.
 Market Development involves selling the same products
to new markets.
 Product development involves selling new products to
the same markets
 Diversification involves selling new products to new
consumers
 MARKET PENETRATION

Increase sales through effective marketing strategies

within the current target market

1.To maintain or grow the market share of the

current product range
2.Become the dominant player in the growth
markets
3.Drive out competitors
4.Increase the usage of a company's
products by its current customers
 MARKET DEVELOPMENT

 Expand sales in new markets through expanding

geographic representation
 An organization's current product can be changed
improved and marketed to the existing market.
 The product can also be targeted to anther customer
segment. Either way, both strategies can lead to
additional earnings for the business.
 PRODUCT DEVELOPMENT

Increase sales through new products/services An

organization that already has a market for its
products might try and follow a strategy of
developing additional products, aimed at it's
current market.
Even if the new products are need not be new to
the
market, they remain new to the business.
 DIVERSIFICATION

 Diversification Strategy is the development of new

products in the new market. Diversification strategy is
adopted by the company if the current market is
saturated due to which revenues and profits are lower.
 It is of two types:-

 1. Concentric or Related Diversification

 2. Conglomerate or Unrelated Diversification

• Why Firms Diversify

– To grow
– To more fully utilize existing resources and capabilities.
– To escape from undesirable or unattractive industry
environments.
– To make use of surplus cash flows.
CONCENTRIC OR RELATED DIVERSIFICATION
 Strategy of adding related or similar product/service lines to existing
core business, either through acquisition of competitors or through
internal development of new products/services.
 Three types of concentric diversification
 1. Marketing related concentric diversification: A similar type of
product is offered with the help of unrelated technology. E.g. Sewing
machine company diversifies into kitchenware
 Technology related concentric diversification: A new type of product
or service is provided with the help of related technology. E.g.
financing service to institutional and individual customers.
 Marketing and technology related diversification: A similar type of
product or service is provided with the help of a related technology.
E.g. A synthetic water tank manufacturer makes other synthetic
items such as fabricated doors and windows.
CONGLOMERATE OR UNRELATED DIVERSIFICATION
 When an organization adopts a strategy which requires taking
up those activities which are unrelated to the existing business
definition of any of its businesses, either in terms of their
respective customer groups , customer functions or alternative
technologies it is conglomerate diversification.
 When the organization has excess capital they go for unrelated
diversification.
COOPERATIVE STRATEGIES
 Cooperative strategies are
 1. Mergers and Acquisitions (or take over): -
Essentially involve external approach to expansion
 2. Joint Ventures: When an independent firm is
created by at least two firms. Expansion opportunities
globally.
 3. Strategic Alliances: are partnerships between firms
whereby their resources, capabilities and core
competencies are combined to pursue mutual interest
to develop, manufacture or distribute goods and
services
 WHAT DOES MERGER MEAN?
The combining of two or more companies. In merger two
companies agree to move ahead and exist as a single new
company. A merger is a combination (other terms used:
amalgamation, consolidation or integration) of two or more
organizations in which one acquires the assets and liabilities of
the other in exchange for shares or cash, or both the
organizations are dissolved and assets and liabilities are
combined and new stock is issued. For the organization which
acquires another , it is an acquisition. For the organization
which is acquired, it is a merger. It both organization dissolve
their entity to create a new organization, it is consolidation.

Example: Glaxo Wellcome + SmithKline Beecham= GlaxoSmithKline

TYPES OF MERGER
1. Horizontal Merger: Two or more organization in the same business
or of organizations engaged in certain aspects of the production or
marketing process. eg. Company making footwear with another
footwear company
2. Vertical Merger: when there is a combination of two or more
organization, not necessarily in the same business, which creates
complementariness either in terms of suply of materials or
marketing of goods and services. Eg. Footwear combines with a
leather tannery
3. Concentric Merger: when there is a combination of two or more
organizations related to each other either in terms of customer
functions, customer groups or alternative technologies used. E.g.
footwear company joins with hosiery firm making socks.
4. Conglomerate Merger: when there is a combination of two or more
organization, unrelated to each other, either in terms of customer
functions, customer groups or alternative technologies used. E.g.
footwear company combines with a pharmaceutical company
EXAMPLES
 On 31 August
2018, Vodafone India merged with Idea Cellular, to form a
new entity named Vodafone
Idea Limited. Vodafone currently holds a 45.1% stake in the
combined entity and Aditya Birla Group holds a 26% stake.
Kumar Mangalam Birla heads the merged company as the
Chairman.
 Horizontal Merger : Example =Merger of Exxon and Mobil.
 Vertical Merger : Example: Time Warner Incorporated, a major
cable operation, and the Turner Corporation, which produces
CNN, TBS, and other programming.
 Concentric Merger: Merge of Concentric Dialup Internet With
NextLink
 Conglomerate Merger: Walt Disney Company and theAmerican
Broadcasting Company.
 JOINT VENTURE STRATEGIES
 A joint venture could be considered as an entity
resulting from a long-term contractual agreement
between two or more parties to undertake mutually
beneficial economic activities, exercise joint control and
contribute equity and share in the profits or losses of
the entity.
 Technical definition of joint ventures: A foreign concern
formed registered or incorporated in accordance with
the laws and regulations of the host country in which
the Indian party makes a direct investment, whether
such investment amount to a majority or minority
shareholding
 CONDITIONS FOR JOINT VENTURE
 It is useful to gain access to new business, mainly under
four conditions.
 1. When an activity is uneconomical for an organization
to do alone.
 2. When the risk of business has to be shared and
therefore is reduced for the participating firms.
 3. When the distinctive competence of two or more
organizations can be bought together.
 4. When setting up an organization requires
surmounting hurdles such as import quotas, tariffs,
nationalistic-political interests and cultural roadblocks.
 TYPES OF JOINT VENTURE
 Joint ventures are possible within industries, across
industries and across countries. But they are specially
useful for entering international markets.
 From the point view of Indian organizations the
following types of joint ventures are possible
 1. Between two Indian organizations in one industry.
Eg. A Joint venture between NTPC (National Thermal
Power Corporation Limited) and the Indian railways for
setting up a Rs.5,352 crore thermal power plant at
Nabinagar in Bihar to meet the requirements of the rail
network across the country. The joint venture company
is Bharatiya Rail Bijlee Company
 TYPES OF JOINT VENTURE
 2. Between two Indian organizations across different
industries. Eg. Action Aid India and Tata Institute of
Social Sciences in a Joint venture, offering degree courses
for rural communities in India.
 3. Between an Indian organization and a foreign
organization in India. Eg. DLF Ltd. Having 50-50 joint
venture with Nakheel, a large property developer of UAE.
 4. Between an Indian organization and a foreign
organization in a foreign country. Eg. Kirloskar Brothers
Ltd. Having a joint venture with SPP Pumps Ltd. UK, for
catering to the EU market.
 5.Between an Indian Organization and a foreign
organization in a third country. E.g. Apollo Tyres of India
and Continental AG of Germany setting up a tyre
manufacturing joint venture in Malaysia.
BENEFITS AND DRAWBACKS IN JOINT VENTURES
 Benefits
 1. Minimizing Risk
 2. Reducing an individual companies investment
 3. Creating access to foreign technology
 4. Access to governmental and political support
 Disadvantages
 1. Problems in equity participation
 2. Foreign exchange regulations
 3. cultural and behavioural differences
 4. Proper coordination among participating firms.
 STRATEGIC ALLIANCES
 According to Yoshino and Rangan, strategic alliances in
terms of three necessary and sufficient characteristics.
 Two or more firms unite to pursue a set of agreed upon
goals, but remain independent subsequent to the
formation of the alliance
 The partner firms share the benefits of the alliance and
control over the performance of assigned tasks perhaps
the most distinctive characteristic of alliances and the one
that makes them so difficult to manage: and
 The partner firms contribute on a continuing basis, in one
or more key strategic areas, for e.g. technology, product
 STRATEGIC ALLIANCES
 In order to be strategic, an alliance must satisfy one of these
criteria:
 It must be critical to the success of a core business goal or
objective
 It must be critical to the development or maintenance of a
core competency or other source of competitive advantage.
 It must enable blocking a competitive threat
 It must create or maintain strategic choices for the firm
 It must mitigate a significant risk to the business
 Reasons for Strategic Alliances
 1. Entering new markets
 2. Reducing manufacturing costs
 3. Developing and diffusing technology
 REASONS FOR STRATEGIC ALLIANCES
 1. Entering new markets: A company that has a successful
product or service may wish to look for new markets. This is
especially true in case a company wishes to explore foreign
markets. It is better to enter into a partnership with a local
firm which understands the market better and is more
culturally attuned to them.
 2. Reducing manufacturing costs: Strategic alliances' are
used to pool resources to gain economies of scale or make
better utilization of resources in order to reduce
manufacturing costs. This is especially true of
procompetitive alliances where a long term relationship is
developed with suppliers and buyers.
 3. Developing and diffusing technology: Strategic alliances'
may be used to develop technological capability by
leveraging the technical expertise of two or more firms – an
act which may be difficult to perform if these firms act
independently.
 TYPES OF STRATEGIC ALLIANCES
 1. Procompetitive alliances (Low interaction/Low conflict):
These are generally interindustry, vertical vale-chain
relationships between manufactures and their suppliers or
distributors. Such alliances offer the benefits of vertical
integration, without firms actually investing in resources for
manufacturing inputs or distributing semi-finished or
finished goods. Supplier and buyer firms entering upon long-
term contracts constitute procompetitive alliances
 2. Non Competitive alliances (High interaction/ Low
conflict): These are intraindustry partnerships between
noncompetitive firms. Such alliances can be entered upon by
firms that operate in the same industry, yet do not perceive
each other as rivals. Their areas of activity do not coincide
and they are sufficiently dissimilar to prevent feelings of
competitiveness arising. Firms that have carved out distinct
areas in the industry – geographically or otherwise – adopt
the onompetitive alliances route
 TYPES OF STRATEGIC ALLIANCES
 1. Procompetitive alliances (Low interaction/Low conflict):
These are generally interindustry, vertical vale-chain
relationships between manufactures and their suppliers or
distributors. Such alliances offer the benefits of vertical
integration, without firms actually investing in resources for
manufacturing inputs or distributing semi-finished or
finished goods. Supplier and buyer firms entering upon long-
term contracts constitute procompetitive alliances
 2. Non Competitive alliances (High interaction/ Low
conflict): These are intraindustry partnerships between
noncompetitive firms. Such alliances can be entered upon by
firms that operate in the same industry, yet do not perceive
each other as rivals. Their areas of activity do not coincide
and they are sufficiently dissimilar to prevent feelings of
competitiveness arising. Firms that have carved out distinct
areas in the industry – geographically or otherwise – adopt
the onompetitive alliances route
 TYPES OF STRATEGIC ALLIANCES
 3. Competitive alliances (High interaction/High conflict):
These are partnerships that bring two rival firms in a
cooperative arrangement where intense interaction is
necessary. These alliances may be intra or inter industry.
Several cases of foreign companies operating independently
in India and also entering into cooperative arrangement
with local rival companies for specific purposes, have taken
the competitive alliance route.
 4. Pecompetitive alliance (Low interaction/ High conflict):
These partnerships bring two firms from different, often
unrelated industries, to work on well-defined activities such
as new technology development new product development or
creating awareness about new products or ideas for
acceptance among the potential customers. Joint research
and development activities and mass awareness campaigns
are examples of precompetitive alliance activities.
 MANAGING STRATEGIC ALLIANCES
 Clearly define a strategy and assign responsibilities
 Phase in the relationship between the partners
 Blend the cultures of the partners
 Provide for an exit strategy
 The East India Hotels entered into a strategic alliance with
Hilton International for the group’s Trident Hotels. East
India Hotels will manage, operate and undertake domestic
marketing of all its hotels, while Hilton will be responsible
for International marketing, promotion and reservations
through the Hilton International network.
 INTEGRATION STRATEGIES
 Integration means combining activities related to the
present activity of a firm.
 There are certain conditions under which firms are
motivated to adopt Integration strategies
 e. g. transaction cost economics.
 The costs of making the items used in the manufacture of
one’s own products are to be evaluated against the cost of
procuring them from suppliers. If the costs of making are
less than the cost of procurement, then the firm moves up
the value chain to make the items itself if the costs are more
then it will move down the value chain.
 In both the cases the firm adopts an integration strategy.
 INTEGRATION STRATEGIES
 According to Ansoff, firms operate on the two dimensions of
new products and new functions.
 Based on these two dimensions it is possible to have two
types of integration strategies
 Horizontal Integration
 Vertical Integration
INTEGRATION STRATEGY ALSO CALLED
MANAGEMENT CONTROL STRATEGY .
INTEGRATION STRATEGIES ALLOW A FIRM TO
GAIN CONTROL OVER DISTRIBUTORS,
SUPPLIERS, AND/OR COMPETITORS.

Forward
Vertical
Integratio Integratio
n Backward
n Horizontal
Strategy Integration
 HORIZONTAL INTEGRATION STRATEGIES
 When an organization takes up the same type of products at the same
level of production or marketing process, it is said to follow a strategy of
horizontal integration.
 E.g. A luggage company is taking over its rival luggage company is
horizontal Integration
 Definition
“It is the process of acquiring or merging with competitors, leading to
industry consolidation.”
“Horizontal integration is a strategy where a company acquires,
mergers or takes over another company in the same industry value
chain.”
For example, Disney merging with Pixar (movie production),
It results in bigger size of the company
Stronger competitive position
To expand geographically
To Increase the market share
Take benefit of economies of scale
 VERTICAL INTEGRATION STRATEGIES
 When an organization starts making new products that serve its own
needs, it is called vertical Integration
 Vertical Integration is of two types
 Backward and forward integration
 RETRENCHMENT STRATEGIES
 Retrenchment strategy is followed when an organization substantially
reduces the scope of its activities.
 This is done through an attempt to find out the problem areas and
diagnose the causes of the problems.
 Basically retrenchment strategies area response to decline in industries
and markets.
 An organization therefore needs to understand clearly, the causes of the
decline and its consequences, in order to provide an appropriate response
to decline.
 A strategy used by corporations to reduce the diversity or the overall size of
the operations of the company. This strategy is often used in order to cut
expenses with the goal of becoming a more financial stable business.
Typically the strategy involves withdrawing from certain markets or the
discontinuation of selling certain products or service in order to make a
beneficial turnaround.
 In other words, the strategy followed, when a firm decides to eliminate its
activities through a considerable reduction in its business operations, in
the perspective of customer groups, customer functions and technology
alternatives, either individually or collectively is called as Retrenchment
Strategy.
 RETRENCHMENT STRATEGIES
The first set of factors leading to a decline is external to the organization.
Some of them are
 New organizational forms
 New dominant technologies
 New business models
 Adverse Govt. Policies
 Demand Saturation
 Changing customer needs and preferences
 Emergence of Substitute products
The second set of factors leading to decline is internal to the organization
 Ineffective top management
 Inappropriate strategies
 Poor quality of functional management
 Wrong organization design
 Excess assets
 High costs
 Ineffective sales and marketing
 Unproductive new product development
TYPES OF RETRENCHMENT
STRATEGIES
 TURNAROUND STRATEGIES
❖ Turnaround strategy means backing out, withdrawing or retreating
from a decision wrongly taken earlier in order to reverse the process
of decline.
❖ There are certain conditions or indicators which point out that a
turnaround is needed if the organization has to survive. These danger
signs are as follows:
❖ a) Persistent negative cash flow
❖ b) Continuous losses
❖ c) Declining market share
❖ d) Deterioration in physical facilities
❖ e) Over-manpower, high turnover of employees, and low morale
❖ f) Uncompetitive products or services
❖ g) Mismanagement
 MANAGING TURNAROUND
 The existing chief executive and management team handles
the entire turn around strategy, with the advisory support of
a specialist external consultant. The use of this method can
only be successful if the chief executive has a reasonable
amount of creditability left with the banks and financial
institutions and a qualified consultant is available. Rarely
attempted
 In another situation, the existing team withdraws
temporarily and an executive consultant or turnaround
specialist is employed to do the job. The person usually
deputed by the banks and financial institutions and after the
job is over reverts to the original position. Very rarely used
in India.
 The last method – The one most difficult to attempt but that
is most often used – involves replacement of the existing
team, specially the chief executive, or merging the sick
organization with a healthy one.
 ACTION PLANS FOR TURNAROUND
 For turnaround strategies to be successful, it is imperative to
focus on the short and long term financing needs as well as
on strategic issues.
 1. An analysis of product, market, production processes,
competition and market segment positioning.
 2. Clear thinking about the market place and production
logic.
 3. Implementation of plans by target-setting, feedback and
remedial action.
 DIVESTMENT STRATEGIES
Divestment strategy involves the sale or liquidation of a portion
of business, or a major division, profit centre or SBU.
Divestment is usually a restructuring plan and is adopted when a
turnaround has been attempted but has proved to be unsuccessful
or it was ignored. A divestment strategy may be adopted due to
the following reasons:

a) A business cannot be integrated within the company.

b) Persistent negative cash flows from a particular business
create financial problems for the whole company.
c) Firm is unable to face competition
d) Technological up gradation is required if the business is to
survive which company cannot afford.
e) A better alternative may be available for investment
 APPROACHES TO DIVESTMENT
 The organization may choose to divest in two ways
 1. A part of the company is divested by spinning it off as a
financially and managerially independent company, with the
parent company retaining partial ownership or not.
 The organization sell a unit outright.
 E.g.
 Asian Paints undertook an international divestment when it
is decided to divest in its operations in Queensland and
Australian units.
 Hisdustan Unilivers divested its marine foods business to
Mumbai-based Temptation foods.
 Tata groups TOMCO was divested and sold to Hindustan
Unilivers as soaps and detergents as considered as non core
businesses for Tatas.
 LIQUIDATION STRATEGIES

Liquidation strategy means closing down the entire firm and

selling its assets. It is considered the most extreme and the last
resort because it leads to serious consequences such as loss of
employment for employees, termination of opportunities where a
firm could pursue any future activities, and the stigma of failure.

Liquidation strategy may be difficult as buyers for the business

may be difficult to find. Moreover, the firm cannot expect adequate
compensation as most assets, being unusable, are considered as
scrap.
REASONS FOR LIQUIDATION INCLUDE:

(i) Business becoming unprofitable

(ii) Obsolescence of product/process
(iii) High competition
(iv) Industry overcapacity
(v) Failure of strategy
EXAMPLES OF LIQUIDATION
 Alpic Finance, a non banking finance company was
ordered to be liquidated by the Bombay High Court
when it defaulted its outstanding payments to its
investors. The liquidation was ordered on a petition
filed by the Small Industrial Development Bank of
India, which was one of the investors.
 Punjab Wireless Systems (Punwire) was put under
liquidation under the orders of the Punjab and
Haryana High court on a private petition, owing to
the companies inability to discharge its debts and
liabilities.
 The co-operative banking sector in the various Sates
of India has faced massive liquidation owing to
rampant mismanagement and corruption.
i. DOWNSIZING
ii. VOLUNTARY RETIREMENT SCHEMES
iii. HR OUTSOURCING
iv. EARLY RETIREMENT PLANS
v. PROJECT BASED EMPLOYMENT