CORPORATE STRATEGIES
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:
v Should we expand, cut back, or continue our operations
unchanged?
v Should we concentrate our activities within our current industry
or should we diversify into other industries?
v 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:
- Stability strategies: make no change to the company’s current activities
- Growth strategies: expand the company’s activities
- Retrenchment strategies: reduce the company’s level of activities
- 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.
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.
EXPANSION OR 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 adopting the combination strategy may apply the combination either
simultaneously (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.
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