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Strategic Management - Strategy Formulation

Growth Strategies - Strategic Alternatives & Choice of Strategy

   Posted On :  26.06.2018 03:53 am

Organizations usually seek growth in sales, profits, market share, or some other measure as a primary objective.

Growth Strategies
 
 
Organizations usually seek growth in sales, profits, market share, or some other measure as a primary objective. The different grand strategies in this category are:
 
1. Concentration
 
2. Integration
 
3. Diversification
 
4. Mergers and acquisitions
 
5. Joint Ventures
 

Concentration

 
The most common grand strategy is concentration on the current business. A concentration strategy is one in which an organization focuses on a single line of business The firm directs its resources to the profitable growth of a single product, in a single market, and with a single technology. Some of America’s largest and most successful companies have traditionally adopted the concentration approach. For example, Mc Donald’s concentrates on the fast food industry and Holiday Inns. Other examples include W.K. Kellogg and Gerber Foods, which are known for their product; Shaklee, which concentrates on geographic expansion; and Lincoln Electric, which bases its growth on technological advances.
 
Concentration strategies succeed for so many businesses – including the vast majority of smaller firms – because of the advantages of business – level specialization. By concentrating on one product, in one market, and with one technology, a firm can gain competitive advantages over its more diversified competitors in production skill, marketing know-how, customer sensitivity, and reputation in the marketplace. The reasons for selecting a concentration grand strategy are easy to understand. Concentration is typically lowest in risk and in additional resources required. It is also based on the known competencies of the firm. On the negative side, for most companies concentration tends to result in steady but slow increases in growth and profitability and a narrow range of investment options. Further, because of their narrow base of competition, concentrated firms are especially susceptible to performance variations resulting from industry trends.
 

Integration

 
Integration may take two forms: vertical and horizontal integration.
 

Vertical Integration

 
 
Vertical integration strategy involves growth through acquisition of other organizations in a channel of distribution. When an organization purchases other companies that supply it, it engages in backward integration. The organization that purchases other firms that are closer to the end users of the product (such as wholesalers and retailers) engages in forward integration. Vertical integration is used to obtain greater control over a line of business and to increase profits through greater efficiency or better selling efforts.
 

Horizontal Integration

 
 
This strategy involves growth through the acquisition of competing firms in the same line of business. It is adopted in an effort to increase the size, sales, profits, and potential market share of an organization. This strategy is sometimes used by smaller firms in an industry dominated by one or a few large competitors, such as the soft drink and computer industries.
 
BHEL had undertaken the path of backward integration for the manufacture of assorted equipments such as, switchgears and transformers, to the full-fledged production of thermal, hydel, and nuclear power generation equipment.
 
 

Diversification

 
This strategy involves growth through the acquisition of firms in other industries or lines of business as explained below.

1. Organizations in slow-growth industries may purchase firms in faster-growing industries to increase their overall growth rate.
 
2. Organizations with excess cash often find investment in another industry (particularly a fast-growing one) a profitable strategy.
 
3. Organizations may diversify in order to spread their risks across several industries.

4. The acquiring organization may have management talent, financial and technical resources, or marketing skills that it can apply to a weak firm in another industry in the hope of making it highly profitable.
 

Diversification may be of different types

 
Related or concentric diversification When the acquired firm has production technology, products, channels of distribution, and /or markets similar to those of the firm purchasing it, the strategy is called concentric diversification.. This strategy is useful when the organization can acquire greater efficiency or market impact through the use of shared resources. A case of related or concentric diversification is the tie-up of McDonald with Coco-cola.
 
McDONALD'S India Pvt Ltd (MIPL), the wholly-owned subsidiary of the US-based fast-food giant McDonald's Corporation, along with Coca-Cola, is developing a fruit-based beverage, to be retailed exclusively at McDonald's outlets. The beverage will be made available under the Maaza brand name, but will be different from the regular Maaza brand.
 
McDonald's has an international tie-up with Coca-Cola, which extends to the domestic market as well. Apart from Coca-Cola, in India, McDonald's has an existing tie-up with Cadbury India, for McSwirl ice-cream cones. McDonald's India is also running a promotion with foods major Nestle, specific to the KitKat chocolate brand. The quick service chain, meanwhile, is in talks with synergistic marketers for similar associations. McDonald's currently operates through 48 outlets in the country, and has set a target of 100 restaurants by 2005.
 
The quick service chain is looking to set up larger format restaurants for now, rather than exploring the option of setting up smaller format convenience outlets. The company will consider the small format stores option in the second stage of expansion. For the time being, the focus is on setting up larger restaurants. In addition to setting up standalone outlets in residential areas and entertainment complexes, they have set up outlets on highways and railway stations
 
Unrelated or conglomerate diversification When the acquired firm is in a completely different line of business, the strategy is called unrelated or conglomerate diversification An example of unrelated conglomerate diversification is Marico’s venture into cooling oil segment.
 
TAKING a cue from Dabur's recent entry into the cooling oil segment with its Himsagar brand, the market leader in hair oils, Marico Industries, has decided to venture into the same segment with its Shanti brand. Under the sub brand of `Thanda Tel', the Shanti brand will soon see an extension from its existing Amla hair oil. Pegged at Rs 38 for 100 ml, the `value-added' oil will have ingredients such as neem and camphor to induce the cooling effects.
 
"Cooling oil is the fastest growing segment under hair oils pegged at 16 per cent. It is a category that is growing even faster than shampoos." Even the coconut oil market is pegged to grow at 0-2 per cent while the hair oil segment has been generally stagnant. The market leader in hair oils with its leading brand of Parachute has thus decided to venture into the category previously untapped except for a few players with brands such as Himsagar, Himtej and Navratan. They intend spending heavily behind this brand and the ad agency Triton is developing a new campaign for the brand. Its existing Shanti Amla brand of hair oil enjoys a 13 per cent volume and has a second position in the amla segment after Dabur Amla. Besides, in the overall non-coconut oil segment, the company enjoys a 15 per cent share together with its brands such as Mediker. In fact, in the recent past, Mediker did stretch the franchise of its Mediker shampoo with an anti-lice oil, including the same cooling ingredients such as neem and camphor. Marico claims it has made a success of its Parachute Jasmine variant with a turnover of Rs 23 crore. It also withdrew Parachute anti-dandruff hair oil since it was not generating the necessary volumes

Mergers and Acquisitions

 
In a merger, a company joins with another company to form a new organization.

There are several examples of mergers. Ponds, Lakme, Lipton, Brooke bond India, Milk food ice creams etc have merged with Hindustan Lever Ltd. More examples are given in the lesson on Mergers and Acquisitions in the same Unit..
 

Joint Ventures

 
In a joint venture, an organization works with another company on a project too large to handle by itself, such as some elements of the space program. Similarly, organizations in different countries may work together to overcome trade barriers in the international market or to share resources more efficiently.
 
For example, GMF Robotics is a joint venture between General Motors Corporation and Japan’s Fanuc Ltd. to produce industrial robots. 
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