Strategic Alternatives for Growth, Stable, Combinations & international strategies05/03/2020
1. Stability Strategy:
When an enterprise is satisfied by its present position, it will not like to change from here and it will be a stability strategy. Stability strategy will be successful when the environment is stable. This strategy is exercised most often and is less risky as a course of action. A stability strategy of a concern for example will be followed when the organization is satisfied with the same product, serving the same consumer groups and maintaining the same market share.
The organization may not be adventurous to try new strategies to change the status quo. This strategy may be possible in a mature industry with static technology. Stability strategy may create complacency among managers. The managers of such an organization may find it difficult to cope with the changes when they come.
Stability strategies can be of the following types:
(i) No-Change Strategy:
Stability strategy is a conscious decision to do nothing new, that is to continue with the present work. It does not mean an absence of strategy, rather taking no decision in itself is a strategy. When external environment is predictable and organizational environment is stable then a businessman may like to continue with the present situation. There may be major opportunities or threats operating in the environment.
There may be no new threat from competitors or no new competing product may be coming into the market, under these circumstances it will be prudent to continue the present strategies. The small and medium firms generally operate in a limited market and supply products and services with the use of time tested technology, such firms will prefer to continue with their present work. Unless otherwise there is a major threat in the environment or occurrence of some major upset in the market, the present strategy will serve the firms well.
(ii) Profit Strategy:
Sometimes things change in such a way that the firm has to adopt changes in its working. There may be unfavorable external factors such as increase in competition, recession in the industry, government attitude, industry down turn etc. Under these situations it becomes difficult to sustain profitability.
A supposition is that the changed situation will be a temporary phase and old situation will again return. The firm will try to sustain profitability by controlling expenses, reducing investments, raise prices, cut costs, increase productivity etc. These measures will help the firm in sustaining current profitability in the short run.
With the opening of markets, Indian industry is facing lot of problems with the presence of multinationals and reduction in tariff on imports. The firms will have to adjust their policies to the changing environment otherwise they will find it difficult to stay in the market.
Profit strategy will be successful for a short period only. In case things do not improve to the advantage of the firms then this strategy will only deteriorate their position. This strategy can work only if problems are temporary.
(iii) Proceed-With Caution Strategy:
Proceed with caution strategy is employed by firms that wish to test the ground before moving ahead with full-fledged grand strategy or by those firms which had a rapid pace of expansion and now wish to rest for a while before moving ahead. The pause is sometimes essential because intervening period will allow consolidation before embracing on further expansion strategies. The main object is to let the strategic changes seep down the organizational levels, allow structural changes to take place and let the system adopt to new strategies.
2. Growth Strategy:
Growth may mean expansion and diversification of operations of the enterprise. The management is not satisfied with their present status, the environment is changing, favourable opportunities are available, in such cases growth strategy will be helpful in expansion as well as diversification. The growth strategy may be implemented through product development, market development, diversification, vertical integration or merger. In product development, new products are added to the existing ones or new products replace the old ones when they are obsolete.
In market development strategy, new customers are approached or those markets are explored which were not covered earlier. In diversification both new products and new markets are added. The enterprise may also enter entirely new lines. In vertificial integration, the backward or forward lines may also be taken up.
A company may start producing its own raw materials or it may start processing its own output before marketing. For example, a weaving unit may start making thread and ginning of cotton (backward integration) or it may start producing readymade garments (forward integration).
In merger, two or more concerns may join their resources to take advantage of financial or marketing factors. Growth should be properly planned and controlled otherwise it may bring adverse results. Since growth is an indication of effective management it is not only essential but desirable too.
Growth strategies may be described as follows:
(i) Growth through Concentration:
Growth involves converging resources in one or more of enterprise’s businesses in terms of their respective customer needs, customer functions or alternative technologies in such a way that it results in growth. This strategy involves the investment of resources in a product line for an identified market with the help of proven technology. It may be done in a number of ways.
The enterprise may focus on existing markets with present products by using market penetration or it may attract new users for existing products or it may introduce newer products in existing markets by concentrating on product development. The concentration strategy will apply when industry possesses high growth potential and the firm should be strong enough to sustain the growth.
(ii) Growth through Integration:
Under integration strategy the firm continues serving the same customers but increases the scope of its business definition. Integration involves taking up more activities than taken up earlier. There can be backward integration as well as forward integration.
There are activities ranging from procurement of raw materials to marketing of finished products. The firm may move up or down of the value chain for increasing its scope of work. Several process based industries such as petrochemicals, steel, textiles etc. have integrated firms. These firms deal with products with a value chain extending from the basic raw materials to ultimate consumer. The firms operating at one end of the value chain attempt to move up or down in the process while integrating activities adjacent to their present activities.
While adopting integration strategy the firm must take into account the alternative cost of make or buy. If the cost of manufacturing one’s product is less than the cost of procuring it from the market only then this activity should be integrated. Similarly, if the cost of selling the finished product is lesser than the price paid to the sellers to do the same thing then it will be profitable to move down on the value chain.
(iii) Growth through Diversification:
Diversification strategy involves a substantial change in the business definition, singly or jointly, in terms of customer functions, customer groups or alternative technologies of one or more of a firm’s business. When an organization takes up an activity in such a manner that it is related to the existing business it is called concentric diversification.
The firm may market more products to the same customers, a new product or service may be offered to the same customers, these are the cases of diversification of business activities. Growth may also be undertaken by taking up those activities which are unrelated to the existing business, a cigarette company may diversify into hotel industry, it will be a case of conglomerate diversification. Diversification strategies are helpful in spreading risk over several businesses. If environmental and regulatory factors block growth then diversification may be a proper way.
(iv) Growth through co-operation:
There is a view that firms operate in a competing market. When one firm gains in its market share then one or more firms lose this share. It is a win-lose situation where if one wins then one or several others have to lose. But thinkers like James Moore, Ray Noorda, Barry J. Nalebuff are of the view that competition could co-exist with co-operation.
The strategies could take into account the possibility of mutual co-operation with competitors while competing with them at the same time so that market potential could expand. The co-operative strategies can take the form of mergers, acquisitions, joint ventures and strategic alliances. All these strategies taken separately or jointly can help the growth of a firm.
(v) Growth through Internationalization:
International strategies are a type of growth strategies that require firms to market their products or services beyond the national or domestic market. A firm would have to assess the international environment and evaluate its own capabilities and to form strategies to enter foreign markets. The firm may start exporting products or services to foreign countries or it may set up a subsidiary in other countries for producing and marketing the products or services there. In such situations the firm would have to implement the strategies and monitor and control its foreign operations. International strategies require a different strategic perspective than the strategies implemented in national context.
3. Retrenchment or Retreat Strategy:
An enterprise may retreat or retrench from its present position in order to survive or improve its performance. Such a strategy may be adopted during a period of recession, tough competition, scarcity of resources and re-organization of company in order to reduce waste. This strategy, though reflecting failure of the company to some degree becomes highly necessary for the survival of the company.
When an organization chooses to focus on ways and means to reverse the process of decline, it adopts a turnaround strategy. If it cuts off the loss-making units, divisions, curtails product line or reduces the functions performed, it adopts a disinvestment strategy. If these actions do not work then the activities may be totally abandoned and the unit may be liquidated.
(i) Turnaround Strategies:
Retrenchment may be done either internally or externally. Internal retrenchment is done to improve internal working. This usually takes the form of an operating turnaround strategy. In contrast, a strategic turnaround is a more serious form of external retrenchment and leads to disinvestment or liquidation.
Turnaround strategies may be adopted in different ways. One way may be that the existing chief executive and management team handles the turnaround strategy with the help of specialist or external consultant. The success of this approach will depend upon the type of credibility the chief executive has with banks and other financing institutions.
In another situation, the present chief executive withdraws from the scene temporarily and the work is done by the outside specialist employed for this job. The third approach to execute the turnaround strategy involves the replacement of the existing team or merging the sick organization with a healthy one.
(ii) Disinvestment Strategies:
It involves the sale or liquidation of a portion of business or major division or profit center etc. Disinvestment is usually a part of rehabilitation or restructuring plan. This strategy is adopted when turnaround strategy has failed. A firm may disinvest in two ways. A part of the company is divested by spinning it off as a financially and managerially independent company, with the parent company retaining or not retaining partial ownership. Alternatively, the firm may sell a unit outright.
(iii) Liquidation Strategies:
It involves the closing down of a firm and selling its assets. It is considered to be the last resort because it leads to serious consequences such as loss of employment for workers and other employees, termination of opportunities where the firm could pursue any future activities and also the stigma of failure which will be attached with this action.
4. Combination Strategy:
A large firm, active in a number of industries may adopt a combined strategy. It represents mix of the three strategies mentioned above. A large concern may adopt growth strategy’ on one side and retreat strategy in the other area. In order to make this strategy effective there should be right people who can take objective and intelligent decisions by considering various factors.
There may not be a concern which has adopted only one strategy throughout. The complexity of doing business demands that different strategies be adopted to suit the situational demands made upon the organization. A company which has adopted a stability strategy for long may like to use expansion strategy later. Similarly a firm which has seen expansion for quite some time may like to consolidate its working. Multi-business companies have to follow multiple strategies.