MANAGEMENT POLICY AND STRATEGY SESSION - VI

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MANAGEMENT POLICY AND STRATEGYSESSION - VI

• Generic and Grand Strategies
• Prof. Sushil
• Department of Management Studies
• Indian Institute of Technology, Delhi
• INDIA
• Email sushil_at_dms.iitd.ernet.in

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Generic Strategies
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PORTERS GENERIC STRATEGIES
Competitive Advantage
Lower Cost
Differentiation
Broad Target
1. Cost Leadership
2. Differentiation
Competitive Score
3 B. Differentiation Focus
3 A. Cost Focus
Narrow Target
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REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIES

• Generic Commodity Required Common
  Organizational
• Strategy 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 RD, ? Creative flare
  product development, and marketing

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REQUIREMENTS FOR GENERIC COMPETITIVE
STRATEGIES CONTD

• ? 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

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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 initiat
  ed
• 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 erode
• Proximity in differentiation Cost proximity is
  lost Broadly targeted
• is lost competitors overwhelm
• the segment
• ? The segments differences
  from other segments narrow ? The
  advantages of a broad line
  increase
• Cost focusers achieve Differentiation focusers
  New Focusers sub-segments
• even lower cost in segments achieve even
  greater the industry
• differentiation in segments

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STAGE OF INDUSTRY DEVELOPMENT
Maturity
Decline
Growth
Redefine scope Divest peripherals Encourage
departures
Cost leadership Raise barriers Deter competitors
Keeping ahead of the field
Leader
Strategic position of organization
Imitation at lower cost Joint ventures
Differentiation Focus
Differentiation New opportunities
Follower
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Types of Grand Strategies
Concentrated Growth
Conglomerate Diversification
Market Development
Turnaround
Product Development
Divestiture
Innovation
Liquidation
Horizontal Integration
Bankruptcy
Vertical Integration
Joint Ventures
Concentric Diversification
Strategic Alliances
Consortia
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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

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Conditions Favoring a Concentrated Growth
Strategy
Firms industry is resistant to major
technological advancements
Firms targeted markets are not product saturated
Firms markets are sufficiently distinctive to
dissuade competitors in adjacent markets from
entering firms segment
Firms inputs are stable in price and quantity
and available in amounts and at times needed
Firms industry is stable
Firms competitive advantages are based on
efficient production or distribution channels
Success of market generalists
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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

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Specific Options for Selected Grand Strategies
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
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Specific Options for Selected Grand Strategies
(continued)
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
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Specific Options for Selected Grand Strategies
(concluded)
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)
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Innovation Strategy
Involves creating a new product life cycle,
thereby making similar existing products obsolete
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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 firms outputs - forward
  integration

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Vertical and Horizontal Integrations
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Motivations Related to Diversification Strategies
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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

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Turnaround Strategy
Involves a concerted effort over a period of time
to fortify a firms distinctive competencies,
returning it to profitability
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A Model of the Turnaround Process
Turnaround situation
Turnaround response
Cause
Severity
Retrenchment phase
Recovery phase
(operating)
Internal factors
Declining sales or margins
Cost reduction
Efficiency maintenance
Low
Stability
Recovery
High
Imminent bankruptcy
Asset reduction
Entrepreneurial reconfiguration
External factors
(strategic)
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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

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The Strategy of Bankruptcy

• Two approaches
• Liquidation - Involves complete distribution of a
  firms assets to creditors, most of whom receive
  a small fraction of amount owed
• Reorganization - Involves creditors temporarily
  freezing their claims while a firm reorganizes
  and rebuilds its operations more profitably
• Advantage of a reorganization bankruptcy
• Proactive option offering maximum repayment of a
  firms debt in the future if a recovery strategy
  is successful

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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

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The Top Five Strategic Reasons for Outsourcing
1. Improve Business Focus
2. Access to World-Class Capabilities
3. Accelerated Reengineering Benefits
4. Shared Risks
5. Free Resources for Other Purposes
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INDIAN BUSINESS HOUSES TATA GROUP

• Group Overview
• Indias largest business house
• More than 85 companies
• 39 listed
• 8 of Indias market capitalization
• 2.6 Million shareholders
• 2,70,000 employees
• Turnover Rs 343 billion (1996-1997)

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INDIAN BUSINESS HOUSES TATA GROUP Contd...
Financial Highlights Assets Turnover PBT PAT Expo
rts
change Over 1995-96 18.8 18 -7.1 - 16 19

• 1996-97 Rs (Billion)
• 322
• 343
• 30
• 23
• 40

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INDIAN BUSINESS HOUSES TATA GROUP Contd...

• Metals
• Automobiles
• Energy
• Engineering
• Chemicals
• Pharmaceuticals

• Consumer Products
• Services
• Agro Industries
• IT and Communication
• Exports
• Finance

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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 Bhabhas nuclear programme
• Guided the Tata group for over half a century
• Ratan Tata
• Present Chairman since 1991

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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

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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

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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

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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

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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