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MANAGEMENT POLICY AND STRATEGYSESSION - VI
Generic and Grand StrategiesProf. Sushil
Department of Management StudiesIndian Institute of Technology, Delhi
INDIAEmail: [email protected]
Prof.Sushil\IITD\Session-VI 1
Generic Strategies
Prof.Sushil\IITD\Session-VI 2
Differentiation
Low-cost
leadership
Focus
PORTER’S GENERIC STRATEGIES
Prof.Sushil\IITD\Session-VI 3
1. Cost
Leadership2. Differentiation
3 A. Cost Focus 3 B. Differentiation
FocusNarrow
Target
Broad
Target
DifferentiationLower Cost
Competitive
Advantage
Competitive Score
REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIES
Generic Commodity Required Common OrganizationalStrategy Skills and Resources Requirements
Overall cost Sustained capital investment Tight cost control
leadership access to capital Frequent, detailed control reports
Process engineering skills Structured organization and responsibilities
Intense supervision of labour Incentives based on
Products designed for ease meeting strict quantitative
Low-cost distribution system targets in manufacture
Differentiation Strong marketing abilities Strong coordination Product engineering among functions in R&D,
Creative flare product development, and marketing
Prof.Sushil\IITD\Session-VI 4
REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIESCONTD…
Strong capability in basic Subjective measurement and
research incentives instead of
quantitative measures
Corporate reputation for Amenities to attract highly
quality or technological skilled labour, scientists, or
leadership creative people
Long tradition in the industry
or unique combination of skills
drawn from other businesses
Strong cooperation from
channels
Focus Combination of the above Combination of the above policies
policies directed at the directed at the regular strategic
particular strategic target target
Prof.Sushil\IITD\Session-VI 5
RISKS OF THE GENERIC STRATEGIES
Risks of Cost Leadership Risks of Differentiation Risk of Focus
Cost of leadership is not Differentiation is not The focus strategy is sustained initiated
sustained: Competitors imitate The target segment • Competitors imitate: Bases for differentiation becomes structurally
unattractive• Technology changes becomes less imported to Structure erodes• Other bases for cost buyers Demand disappears
leadership erodeProximity in differentiation Cost proximity is lost Broadly targeted is lost competitors overwhelm
the segment: The segment’s differences
from other segments narrow The advantages of a broad
line increaseCost focusers achieve Differentiation focusers New Focusers sub-segmentseven lower cost in segments achieve even greater the industry
differentiation in segments
Prof.Sushil\IITD\Session-VI 6
STAGE OF `INDUSTRY’ DEVELOPMENT
Prof.Sushil\IITD\Session-VI 7
Keeping
ahead of the
field
Cost leadership
Raise barriers
Deter
competitors
Redefine scope
Divest
peripherals
Encourage
departures
Imitation at
lower cost Joint
ventures
Differentiati
on FocusDifferentiation
New
opportunities
Leade
r
Follower
Growth Maturity Decline
Strategic
position of
organizatio
n
Types of Grand Strategies
Prof.Sushil\IITD\Session-VI 8
Consortia
Concentrated Growth
Market Development
Product Development
Innovation
Horizontal Integration
Vertical Integration
Concentric Diversification
Conglomerate Diversification
Turnaround
Divestiture
Liquidation
Bankruptcy
Joint Ventures
Strategic Alliances
Characteristics of a Concentrated Growth Strategy
• Involves focusing resources on the profitable growth of a single product, in a single market, with a single dominant technology
• Rationale - Firm develops and exploits its expertise in a delimited competitive arena
• Determinants of competitive market success
– Ability to assess market needs
– Knowledge of buyer behavior
– Customer price sensitivity
– Effectiveness of promotion
Prof.Sushil\IITD\Session-VI 9
Conditions Favoring a Concentrated Growth Strategy
Prof.Sushil\IITD\Session-VI 10
Firm’s industry is resistant to major technological advancements
Firm’s targeted markets are not product saturated
Firm’s markets are sufficiently distinctive to dissuade competitors in adjacent markets from entering firm’s segment
Firm’s inputs are stable in price and quantity and available in amounts and at times needed
Firm’s industry is stable
Firm’s competitive advantages are based on efficient production or distribution channels
Success of market generalists
Strategies of Market and Product Development
• Market development
– Consists of marketing present products, often with only cosmetic modifications, to customers in related market areas by
• Adding channels of distribution or
• Changing content of advertising or promotion
• Product development
– Involves substantial modification of existing products or creation of new but related products
– Based on penetrating existing markets by
• Incorporating product modifications into existing items or
• Developing new products connected to existing products
Prof.Sushil\IITD\Session-VI 11
Specific Options for Selected Grand Strategies
Prof.Sushil\IITD\Session-VI 12
Concentration: Increasing use of present products in present markets
1. Increasing present customers’ rate of use:
a. Increasing size of purchase
b. Increasing rate of product obsolescence
c. Advertising other uses
d. Giving price incentives for increased use
2. Attracting competitors’ customers
a. Establishing sharper brand differentiation
b. Increasing promotional effort
c. Initiating price cuts
3. Attracting nonusers to buy the product
a. Inducing trial use through sampling, price incentives, and so on
b. Pricing up or down
c. Advertising new uses
Specific Options for Selected Grand Strategies (continued)
Prof.Sushil\IITD\Session-VI 13
Market Development: Selling present products in new markets
1. Opening additional geographic markets
a. Regional expansion
b. National expansion
c. International expansion
2. Attracting other market segments
a. Developing product versions to appeal to other segments
b. Entering other channels of distribution
c. Advertising in other media
Specific Options for Selected Grand Strategies (concluded)
Prof.Sushil\IITD\Session-VI 14
Product Development: Developing new products for present markets
1. Developing new product features
a. Adapt (to other ideas, developments)
b. Modify (change color, motion, sound, odor, form, shape)
c. Magnify (stronger, loner, thicker, extra value)
d. Minify (smaller, shorter, higher
e. Substitute (other ingredients, process, power)
f. Rearrange (other patterns, layout, sequence, components)
g. Reverse (inside out)
h. Combine (blend, alloy, assortment, ensemble; combine units, purposes, appeals, ideas)
2. Developing quality variations
3. Developing additional models and sizes (product proliferation)
Innovation Strategy
Prof.Sushil\IITD\Session-VI 15
Involves creating a new product life cycle,
thereby making similar existing products
obsolete
Strategies of Horizontal and Vertical Integration
• Horizontal integration
– Based on growth via acquisition of one or more similar firms operating at the same stage of the production-marketing chain
– Involves eliminating competitors, providing acquiring firm with access to new markets
• Vertical integration
– Involves acquiring firms
• To supply acquiring firm with inputs - backward integration or
• Are customers for firm’s outputs - forward integration
Prof.Sushil\IITD\Session-VI 16
Vertical and Horizontal Integrations
Prof.Sushil\IITD\Session-VI 17
Acquisitions or mergers of suppliers or customer businesses are vertical integrations
Acquisitions or mergers of competing businesses are horizontal integrations
Textile producer
Shirt manufacturer
Clothing store
Textile producer
Shirt manufacturer
Clothing store
Motivations Related to Diversification Strategies
Prof.Sushil\IITD\Session-VI 18
Increase growth rate of firm
Investment is better use of funds than using them for internal growth
Improve stability of earnings and sales
Balance or fill out product line
Diversify product line
Acquire a needed resource quickly
Achieve tax savings
Increase firm’s stock value
Increase efficiency and profitability
Diversification Strategies
• Concentric diversification
– Involves acquisition of businesses related to acquiring firm in terms of technology, markets, or products
• Conglomerate diversification
– Involves acquisition of a business because it represents a promising investment opportunity
– Primary motivation is profit pattern of venture
• Difference between the approaches
– Concentric diversification emphasizes commonality whereas conglomerate diversification emphasizes profits for each individual unit
Prof.Sushil\IITD\Session-VI 19
Turnaround Strategy
Prof.Sushil\IITD\Session-VI 20
Involves a concerted effort over a period of
time to fortify a firm’s distinctive
competencies, returning it to profitability
A Model of the Turnaround Process
Prof.Sushil\IITD\Session-VI 21
Declinin
g sales
or
margins
Imminent
bankruptc
y
Low
High
Cost
reductio
n
Asset
reductio
n
Efficiency
maintenanc
e
Entrepreneuria
l
reconfiguratio
nS
tab
ilit
y
Reco
very
Internal
factors
External
factors
Turnaround situation Turnaround response
Cause Severity Retrenchment phase Recovery phase
(operating)
(strategic)
Divestiture and Liquidation Strategies
• Divestiture strategy
– Involves selling a firm or a major component of a firm
– Reasons for divestiture
• Partial mismatches between acquired firm and parent firm
• Corporate financial needs
• Government antitrust action
• Liquidation strategy
– Involves selling parts of a firm, usually for its tangible asset value and not as a going concern
Prof.Sushil\IITD\Session-VI 22
The Strategy of Bankruptcy
• Two approaches
– Liquidation - Involves complete distribution of a firm’s assetsto creditors, most of whom receive a small fraction ofamount owed
– Reorganization - Involves creditors temporarily freezing theirclaims while a firm reorganizes and rebuilds its operationsmore profitably
• Advantage of a reorganization bankruptcy
– Proactive option offering maximum repayment of a firm’sdebt in the future if a recovery strategy is successful
Prof.Sushil\IITD\Session-VI 23
Corporate Combination Strategies
• Joint venture
– Involves establishing a third company (child), operated for the benefit of the co-owners (parents)
• Strategic alliance
– Involves creating a partnership between two or more companies that contribute skills and expertise to a cooperative project
• Exists for a defined period
• Does not involve the exchange of equity
• Consortia, Keiretsus, and Chaebols
– Defined as large interlocking relationships between businesses of an industry
Prof.Sushil\IITD\Session-VI 24
The Top Five Strategic Reasons for Outsourcing
Prof.Sushil\IITD\Session-VI 25
1. Improve Business Focus
2. Access to World-Class Capabilities
3. Accelerated Reengineering Benefits
4. Shared Risks
5. Free Resources for Other Purposes
INDIAN BUSINESS HOUSES TATA GROUP
Group Overview
• India’s largest business house
• More than 85 companies
• 39 listed
• 8% of India’s market capitalization
• 2.6 Million shareholders
• 2,70,000 employees
• Turnover Rs 343 billion (1996-1997)
Prof.Sushil\IITD\Session-VI 26
INDIAN BUSINESS HOUSES TATA GROUP Contd...
1996-97 Rs (Billion)
322
343
30
23
40
Prof.Sushil\IITD\Session-VI 27
% change Over 1995-
96
18.8
18
-7.1
- 16
19
Financial Highlights
Assets
Turnover
PBT
PAT
Exports
INDIAN BUSINESS HOUSES TATA GROUP Contd...
• Metals
• Automobiles
• Energy
• Engineering
• Chemicals
• Pharmaceuticals
• Consumer Products
• Services
• Agro Industries
• IT and Communication
• Exports
• Finance
Prof.Sushil\IITD\Session-VI 28
INDIAN BUSINESS HOUSES TATA GROUP Contd...
Tata Heritage
• Jamsetji Tata– Started textile mill in 1877
– Inspired steel and power industry
– Technical education and philanthropy
• JRD Tata– Pioneered civil aviation
– Funded Hom Bhabha’s nuclear programme
– Guided the Tata group for over half a century
• Ratan Tata– Present Chairman since 1991
Prof.Sushil\IITD\Session-VI 29
INDIAN BUSINESS HOUSES TATA GROUP Contd...
Holding Companies
• Tata Sons– Founded by Jamsetji Tata
– Promoted many of the present Tata companies
– 63% held by Tata philanthropic trusts
• Tata Industries– 100% subsidiary of Tata Sons founded in 1945
– Managing agency till 1970
– Promoted new Tata companies in technology based businesses
• Cross holdings among other Tata companies
Prof.Sushil\IITD\Session-VI 30
INDIAN BUSINESS HOUSES TATA GROUP Contd...
Restructuring
• Prompted by post 1991 changing environment
• Need to identify and focus on core businesses
• Resistance from satraps– Russi Mody, Darbari Seth, Ajit Kerkar
• Shrink number of companies– From over 85 to about 30
• Shrink number of core businesses– From about 25 to around 10 or 12
• Mergers and divestments
• McKinsey hired as a consultants
Prof.Sushil\IITD\Session-VI 31
INDIAN BUSINESS HOUSES TATA GROUP Contd...
Restructuring Strategy
• Keep and grow– Power, watches, metals, chemicals, telecom, hospitality, financial
services, infotech, emerging services, infrastructure, automobiles
• Forge strategic tie ups– Tea and beverages, retailing
• Remain only as strategic investors– Luxury cars, infotech, printing, cosmetics
• Sell– Refrigeration, paints, textiles, trading, electronics, oil drilling,
petrochemicals, pharma, specialty chemicals
Prof.Sushil\IITD\Session-VI 32
INDIAN BUSINESS HOUSES TATA GROUP Contd...
Recent Developments
• Voltas focus on air conditioning and engineering business– Hive off pesticides business to Ralchem Pesticides (wholly owned
subsidiary of Rallis - largest integrated agrochemical company in India)
• Electrolux Voltas - JV between Voltas and AB Electrolux– Refrigerators
– Washing machines
– Compressors for refrigerators
Prof.Sushil\IITD\Session-VI 33
INDIAN BUSINESS HOUSES TATA GROUP Contd...
Recent Developments
• Tata Tea focusing on global agro business– Manages 32 tea gardens in Sri Lanka
– Adding tea gardens inTurkey
– Acquired a 9.5% stake in Asian Coffee
• Overseas Operations– Automobile assembly in Bangladesh
– Instant tea operations in the US
– Chain of hotels across the world
– Precision tooling operations in Singapore
Prof.Sushil\IITD\Session-VI 34