Learn the many types of company-level strategy in this free video series. A corporate level strategy deals with the whole scope of a business. It is a “wide view” of the company and includes determining where to compete in product or service markets and where to operate in geographic areas.
At the corporate level, the resource allocation procedure – how cash, personnel, equipment, and other resources are allocated – is established for a multi-business firm.
Corporate strategy is the art of making big choices about the overall scope and direction of a corporation, as well as how its various business units collaborate to achieve certain objectives. A corporate-level strategy is a plan to obtain an edge over competitors by choosing and managing the combination of businesses that operate in various industries or product markets.
Types of Corporate Level Strategies
The goal of a corporation’s strategy is normally to produce above-average earnings and create value for shareholders. A corporate strategy focuses on the challenges of a multi-business company as a whole.
Some of the types of corporate level strategies are as follows:-
- Stability Strategy
- Expansion Strategy
- Retrenchment Strategy
- Combination Strategy
- Merger Strategy
- Restructure Strategy
- Diversification Strategy
- Defensive Strategy
- 9. Stability Strategy.
Types of Corporate Level Strategy: Stability Strategy, Expansion Strategy, Retrenchment Strategy and Few Other Strategies:
Types of Corporate Level Strategy 4 Major Types:
- Stability Strategy
- Expansion Strategy
- Retrenchment Strategy and
- Combination Strategy
At the corporate level, generic strategies pertain to determining which companies the firm will be involved in. They set out the company’s route in order to achieve its goals. There could be a little single-business firm or a big, complex and diversified enterprise with numerous branches.
The corporate strategy is concerned with the overall direction of the company in each instance. It might be beneficial for a small business to track the courses of action that would result in higher earnings. The corporate plan for a large corporation entails managing all of the companies to achieve overall corporate goals while optimizing their contributions.
Abell has created a company by aligning it with three dimensions: client type, customer service, and alternative technologies. The decision to maintain or alter the business the firm is presently in or improve efficiency and effectiveness in achieving corporate goals in its chosen business sector is known as strategic alternatives.
According to Glueck, there are four basic ways that alternatives can be considered: stability, growth, retrenchment, and combination. These broad strategies are known as grand strategies. Firms evaluate generic strategy options while developing their corporate strategy since no other way will lead them to the ideal path for attaining their intended development goal.
A small company’s business definition would be straightforward, whereas that of a large complex and diversified firm made up of numerous enterprises would be quite tough. Customer group, customer functions, and alternative technologies might all be used to define each firm. The business definition of large businesses is complicated since they must define each subsidiary in terms of goods, markets, and operations on the four dimensions of generic strategies.
Corporate level strategy is concerned with two main questions:
(1) How can a business maximize its long-term profitability while limiting its time commitment?
(2) What tactics should it use to get into and leave several lines of business?
In other words, corporate-level tactics are all about decisions concerning the allocation of resources among a firm’s various divisions, the distribution of resources from one set of businesses to others, and the management of a portfolio of enterprises in such a way that corporate goals are met. A business definition provides a list of strategic alternatives for an organization to consider.
When a firm discovers that it should continue in its present line of business and is doing well in it, but there’s no potential for significant expansion, the strategy to pursue is stability.
The authors of The Wall Street Journal opine that ‘a stability plan is a strategy that a company uses when- 1. It continues to serve the clients in the same product or service, market, and function sectors as defined in its business definition, or in very similar industries. 2. Its main strategic decisions are concerned with functional performance improvement via incremental change.’
The stability plan is not a “do nothing” approach. It may include modest improvements. Reinvestment, R& D, and innovation are also critical components of a long-term strategy. The company definition, on the other hand, remains the same.
Reasons for Adopting Stability Strategy:
In the absence of a signal, the company is confident in its position and believes it will continue to be successful. The risk is less hazardous. Firm failure can be caused by frequent upgrades of goods or new methods of doing things. The more established and successful the business, the greater its resistance to risk.
Because the executives prefer action to thinking and are unwilling to explore different possibilities, the stability plan may change. Many businesses that use a stability plan do so without even realizing it. These firms react to changes in external factors by changing their methods. When tasks are done in a specific pattern, it’s more efficient and easier for everyone concerned.
The management focusing on stability is not thinking of a strategist and taking advantage of the possibilities in the environment. The firm with basic expertise in the present operation does not want to take a chance of diverting attention from it by expanding.
It’s a popular approach to do so. When an organization wants to boost its functional performance but only modest modifications are required to one or more of its businesses in terms of their customers, functions, or alternative technologies, it is said to have adopted a stability strategy. Its emphasis is on increasing functional efficiencies in an incrementally progressive way by means of increased deployment and usage of resources.
The stability approach does not imply a lack of attention to company development and profit increase. The stability path is taken by businesses that are concerned about business expansion and profit improvement.
When a firm is doing well and the environment is stable, it’s time to execute a stability plan. A stability plan isn’t intended to change the company’s overall business concept. Because products, markets, and functions remain unchanged, the company definition does not alter either.
Jauch and Glueck defines expansion strategy ‘as a strategy that a firm pursues when- 1. It serves the public in additional product or service sectors or adds markets or functions to its definition. 2. It focuses its strategic decisions on major increases in the pace of activity within its present business definition.’
This technique entails redefining the company in terms of expanding the scope or intensity of current activities.
The addition of new products, new markets, and/or additional functions might result from an expansion strategy. Many businesses have implemented significant increases in the rate of activity without changing their corporate definition.
The term “expansion” refers to the process of increasing market share through product development and introduction, as well as market penetration in order to grow share. Expansion is commonly seen as a means for firms to improve their performance.
Expandability is a fine thing, but strategists must determine the difference between desirable and harmful growth.
Reasons for Adopting Expansion Strategy:
- If business environments are volatile, expansion may be a necessary strategy for survival.
- Many executives may feel more satisfied with the prospects of growth expansion.
- Chief Executive Officer may feel pride in presiding over organizations perceived to be growth-oriented.
- Some executives believe that expansion is in the benefit of the society.
- Expansion provides more financial and other rewards.
- Expansions allow you to take advantage of the experience curve and scale of your operations.
Retrenchment solutions may call for a firm to restructure its operations, resulting in the sale of a major product line or an SBU, abandonment of certain markets, or curtailment of activities. A reduction in speed might necessitate firms using layoffs, reducing R&D or marketing expenditures, increasing receivables collection, and so on.
Efforts to redefine the company and cut back on operations may improve a company’s performance. It’s not unusual for retrenchment to go hand-in-hand with growth. “Retrenchment alone is probably the least utilized generic strategy,” says Whiting (2004).
Retrenchment is a strategy that includes the withdrawal of part or all of one’s businesses from products, markets, or functions.
Retrenchment is a strategy used to attempt to return profit to a firm when it is believed that it is feasible. Controlled divestment may be used if the prospects of regaining profitability are poor.
Reasons for following retrenchment strategy:
- The company is having difficulties.
- If there are several stakeholders calling for improvements in performance.
- In today’s market, a company must respond to the challenges of competition and change. If better prospects for doing business exist elsewhere, a firm may more effectively utilize its strengths.
- Retrenchment planning is frequently used in the wake of calamities.
- Due to the small nature of most problems, pace retrenchment will work for them; however, divestiture of certain divisions or units may be required in moderate crises, and a liquidation method will be needed in severe crises.
When an organization employs a mix of stability, growth, and retrenchment to improve its performance, it is said to utilize the combination generic strategy. The strategists in combination strategies deliberately use several generic techniques across different parts of the business or across various future periods.
“The logical possibilities for a simultaneous approach are stability in some areas, expansion in others; stability in some area, retrenchment in others; retrenchment in some areas, expansion in other; and all three strategies in different areas of the company. The logical possibilities for time-phased combinations are greater, especially when the products, markets, and functions are considered and when the choice occurs through changing the pace or the business definition.”
When a paint firm adds new colors to its product line and expands its product range to include industrial and automobile paints in order to meet the demands of its clients (stability) and increase the variety of products it offers (expansion), it also disbands the paint-contracting division (retrenchment).
Reasons for following Combination strategies:
- When the company is large and operates in a rapidly changing complex environment.
- The firm’s goods are at various stages of the lifecycle.
- A combination approach is appropriate for a company that has operations in several sectors during a recession.
- The combination approach is ideal for businesses that perform unevenly or do not have the same future potential.
Types of Corporate Level Strategy:
- Stability Strategies
- Expansion Strategies
- Retrenchment Strategies and
- Combination Strategies
Stability techniques are measures taken by a firm in order to improve functional performance incrementally. This approach is more suited to a business operating in a stable environment. Small and medium-sized enterprises that are happy with their current success rate typically utilize stability techniques.
Hunger and Wheelen visualize three types of stability strategies:
- Pause/Proceed with caution strategy
- No change strategy
- Profit strategy
A pause/proceed with caution approach is essentially a time-out, giving businesses an opportunity to regroup before continuing with their expansion or retrenchment strategy. This method is used by firms who want to test the market without committing to a comprehensive generic strategy.
When embarking on a big expansion effort, following this approach is required. The aim is to ensure that the strategic adjustments are implemented at all levels of the business, as well as structural changes, and that the organizational systems adapt to new strategies.
The pause/proceed with caution strategy is also a short-term deliberate and intentional endeavor to put off significant strategic adjustments for a more convenient time. Bata India, for example, and Liberty Shoes in the Indian shoe market use this method.
A no change plan is a choice to maintain the status quo and continue with current methods and policies for an extended period of time. A no change approach is rarely stated as a concrete strategy, but its effectiveness hinges on the absence of significant change in a company’s environment.
Because the company’s small competitive position in an industry with limited or no growth allows it to manage its direction, the firm is more likely to stick to its present path and make only minor adjustments for inflation in its sales and profit goals.
There are no obvious prospects or dangers, and there isn’t much in the way of major assets or liabilities. An industry with so few competitive new entrants is unlikely to attract many aggressive newcomers. The business has probably discovered a lucrative and sustainable market for its goods.
If the sector is consolidating, a company in this situation will probably follow a no-change approach, in which the future is expected to continue as an extension of the present. Before Wal-Mart enters their towns, most small-town companies likely adopt this strategy.
The business environment is not as stable as a company may believe. A firm cannot keep going without making any changes, but it must do something. When a firm’s profitability begins to drop, the stability plan can be utilized to boost earnings by increasing efficiency in current operations and implementing cost-cutting, productivity-boosting techniques like as lowering investment and raising price to overcome short-term challenges. This could be a short-term strategy of hiding below the radar and keeping profits afloat by using what you have right now.
Expansion plans are the most widely used business tactics. Almost every company intends to grow.
A company can adopt expansion strategy in the following five ways:
Concentration is the process of bringing together resources in one or more of a firm’s operations in terms of products, markets, or functions such that they result in development. Concentration methods are known as concentration, focus, and specialisation.
In the vernacular of today’s landing pages, “sticking to the knitting’ is a phrase that refers to sticking to one’s primary audience and message. In other words, concentration tactics are the ‘stick to the knitting’ methods. Excellent businesses often concentrate on doing what they’re great at. Concentration involves the use of proven technology to invest resources in a product line for an identified market.
This may be done following through the below strategies:
- Market penetration
- Market development
- Product development
For a company attempting to grow a market, penetration is an intentional strategy that involves gaining market share through higher quality or productivity and increasing marketing activity. This is true for the long-term desirability of obtaining a strong market presence. The nature of the market and the position of rivals, on the other hand, influence how simple it is for a firm to pursue such a plan.
In a rapidly expanding market, it may be simpler for firms with a small stake or new competitors to increase their share in the market since the overall amount of sales by existing businesses may still be rising; and in some cases, those firms might be unable or unwilling to satisfy the new demand.
Market penetration in static markets may be considerably more difficult. The market penetration in mature markets is still more challenging owing to the market leader’s better cost structure, which prevents new entrants from rapidly entering the market with lower market share. Smaller-share competitors, on the other hand, may gain share or establish a reputation in a market segment of little interest to the marketplace leader, from which it penetrates into other areas of business.
Collaboration with others, in some cases, may help firms achieve market penetration in mature markets. In recessionary areas, market penetration is feasible to the extent that additional competitors depart the marketplace. It may be relatively simple for a firm to boost its market share if other businesses leave the market.
It is an organization’s efforts to maintain the integrity of its existing goods while expanding into new market areas. It comprises of three steps:
- entering new market segments,
- developing innovative uses for the product, and
- going global.
In capital-intensive industries, a firm with unique assets may have a distinct competence with the product rather than the market, thus maintaining exploitation of the product through market development would be preferred. By broadening foreign markets, most capital goods firms have followed this path by expanding old sectors as old markets have grown saturated.
Exporting is a strategy for increasing trade. However, there are several reasons why businesses may choose to expand their operations internationally by relocating some of their manufacturing, distribution, or marketing activities overseas.
Product development entails the creation of new or enhanced goods to replace existing ones. The firm protects its current markets while simultaneously altering products and creating new ones.
The wet shaving industry is an example of a market that requires product development to create successive swells of consumer demand. For example, in 1989, Gillette debuted its innovative Sensor shaving technology, which significantly expanded its market share. Wilkinson Sword then produced a version of the gadget in response.
Integration is the process of bringing together activities that are currently being done by a company, based on its value chain. A value chain is a sequence of linked functions that an organization performs from beginning to end, starting with the acquisition of basic raw materials and progressing through to retailing finished goods to final clients. Integration as a growth strategy results in the definition of a company’s business scope being broadened.
Diversification is a widely discussed and utilized idea. Diversifying entails identifying both new product and market directions that will take the company away from both its present offerings and markets.
In fact, it is not a single plan but rather a combination of techniques for dealing with various aspects of strategic alternatives such as internal or external, related or unrelated, horizontal or vertical diversification.
In business tactics, the notion of competition co-existing with collaboration is conceivable. The term “co-opetition” refers to a rivalry between competing businesses attempting to achieve mutual benefit through collaboration.
The strategic alternatives based on cooperation among firms could take the following forms:
- Takeover or Acquisitions
- Joint Ventures
- Strategic Alliances
Expand into foreign markets is a type of international expansion strategy in which businesses must promote their products or services outside of their own country. To do so, a business would need to assess the worldwide market, evaluate its own skills, and develop plans for entering foreign markets.
When their home markets slow down or become limited, several businesses expand into new countries. This has been a major driving force behind Japanese expansion. Firms must consider and assess a critical mass of GNP, population growth, market competitiveness, and domestic production capacity before exploring international markets further. Foreign markets are often slower to accept new goods than domestic ones. Pharmaceutical firms based in the United States, for example, have done so.
A firm may discover that producing in a certain location is more advantageous than exporting to a specific country. For example, if there is a particular amount of “domestic-content” production in operation, the host government might limit imports to that nation.
Because these protective measures act as trade barriers, businesses generally establish production and sales facilities in each major nation where they do business. Some nations, on the other hand, provide incentives to develop manufacturing facilities there. For the same reason, suppliers will frequently establish new factories in countries where their consumers are located. Japanese automobile manufacturers established manufacturing operations in the United States.
Another one of the most significant reasons for businesses to choose to establish manufacturing operations in another country is because of a scarcity or lack of supply of raw materials or technology. Canadian companies, for example, have invested in countries where new deposits of critical metals or other resources were discovered.
It’s worth noting that international market expansion is typically incremental. The most common method for firms to export is one that requires a relatively low investment and risk. After establishing a presence in another country, the business may choose to expand its operations. Expansion at this stage may involve the development of unique items, additional local manufacturing investment, or direct foreign market investment.
When an organization intends to significantly limit its operations, it uses the retrenchment basic approach. The issue locations and the reasons for them are determined in this step. Then, various sorts of retrenchment ideas are implemented to tackle the issues that cause them.
External and internal factors are jeopardizing the prospects of businesses and markets. In declining industries, companies face a variety of risks including decreasing demand, the arrival of more appealing substitutes, unfavorable government measures, customer needs and preferences changing. In addition to external changes, there are company-specific developments such as poor management, ineffective management, and mistaken strategies that result in company failure.
Declines are a very big concern for businesses since it puts the industries, markets, and firms at risk. Many goods have vanished or are in danger of declining, including black & white TVs, VCRs, jute and jute products, calculators, and wooden toys. The companies in these sectors and markets had no choice but to cease operations or close down as a result of this.
Declines manifest in a variety of symptoms reflected in corporate performance indicators such as declining profitability, cash flow, sales, market share and debt. A vigilant management can create an effective monitoring and control system to receive the warning signal of trouble as soon as it arises and check the malady. Recovery enters into consideration as a viable strategic alternative in this case.
Slatter has postulated four types of recovery situations:
- In a realistically non-recoverable situation, with little prospect of survival because the firm is unprofitable, the potential for improvement is low, there is a cost disadvantage, and demand for basic goods or services is in terminal decline.
- A turnaround is a procedure of obtaining or restoring lost profit levels, as well as increasing the level of profitability. A situation that lasts for only a short period of time following a retrenchment in which there may be initial success but no long-term turn around. This might happen when the product’s repositioning is feasible, now that competitive advantages can be found, or costs may be reduced and sales generated.
- A company trapped in a severe survival posture can expect growth over the long run, but there isn’t much potential for future development. The industry may be entering its twilight years. If a firm sees an attractive market niche where it believes there are possibilities of eventually becoming the industry leader, it may either divest or undergo a turnaround.
- In a sustained recovery scenario, when there is new product development and/or market repositioning, and the industry is still attractive enough, a genuine and successful turnaround is conceivable. It’s possible that the fall was more due to internal issues than external circumstances.
A retrenchment strategy can take any of the following forms:
- Turnaround strategy
- Divestment or divestiture strategy
- Liquidation strategy
When a company is in decline but has potential, it employs a turnaround approach. While utilizing a divestiture technique, an organization shuts down loss-making units, divisions, or SBUs, restricts its product line, or eliminates the activities performed. If none of these measures work, the activity may be completely discontinued and liquidation becomes an option.
An overview of combination techniques is provided, Combination methods are a mix of expansion, stability, and retrenchment tactics employed simultaneously in different firms or at different times in the same firm. A single technique has never grown or persisted as an organization.
Because businesses are complex, they necessitate the implementation of varied methods to fit the circumstances. Divestments, for example, must be accompanied by expansion plans focused on growing existing ones or making acquisitions as businesses shed enterprises.
When it comes to expansion, an organization that has been following a stability strategy for a long time must weigh the pros and drawbacks of doing so. Multi-business firms must apply many methods in tandem or one after the other.
Types of Corporate Level Strategy:
- Stability Strategy
- Expansion or Growth Strategy
- Retrenchment Strategy
- Combination Strategy
- Merger Strategy and
- Restructure Strategy
Those businesses that are sailing smoothly and whose environment is neither tumultuous nor hostile follow a consistent development path. In such instances, stability strategy will be utilized, where no significant changes in the company’s goals or objectives are required, and there is no significant change in the organization’s approach.
The business will also continue to provide the same specialized clients with no significant modifications in product or service offerings. It’s also worth noting that, during this time, the climate was such that a status quo could be maintained in marketing policy or company. For stability strategy, additional sub-strategies are defined.
Forms of Stability Strategy
Some more sub-strategies are formed for stability strategies are:
Incremental Growth Strategy
In this approach, the businesses usually focus on one product or service line and develop slowly and gradually by expanding into new areas, incorporating new product lines, etc.
When a firm’s objective is to generate cash right away for itself or for the stock holder, profit-making methods are used. The profit approach is often referred to as the end game strategy.
A company may limit its growth to a certain balanced level if it feels that greater development is inefficient and unmanageable, or if it needs to catch its breath before taking on a new objective. To reach higher efficiency levels, it might focus on sources of utility, improved operations, and so forth.
Expansion or Growth Strategy
There is a business conundrum in which it has become necessary to say “Grow or Die,” and it has become the driving force behind company development efforts. Any manager’s number one goal is growth, therefore any management must do so as well. Internal diversification and external expansion transactions, or joint ventures, are all potential methods for growth.
Growth is seen as the simplest method of life. Because all businesses seek for expansion, the most frequent and usual corporate strategies are growth plans. Companies strive for significant development. Rapid market growth, increasing consumer demand for new ways to satisfy needs, and innovative technologies provide numerous chances for firms to expand their operations. A company that follows an expansion plan attempts to achieve high growth. This may be accomplished by a substantial increase in one or more of its divisions.
The business’s scope is broadened in terms of its clients groups, functions, and alternative technologies, alone or together, in order to improve overall performance. An expansion plan has a big and lasting influence on a firm’s internal structure and procedures, resulting in changes across the majority of internal processes.
When the demand for a product or service in the market increases at a faster rate than the supply, it’s time to put together an Expansion plan. When activity levels rise, due to an expanding market size and significant possibilities, the environment demands more of what you have. Managers are more pleased with expansion prospects; employees take pride in working for companies that are seen as growth-oriented. Alternatively, businesses frequently feel they can take advantage of their expertise to pursue growth after a lengthy time in the industry. There may be enough resources generated by existing activities that companies believe the greatest approach to utilize these resources is to expand.
Reducing the scope or variety of company activities is known as retrenchment. Diversification was reduced to a smaller number of firms through retrenchment tactics. It happens when an organization regroups by cutting costs and assets in order to reverse declining sales and profits. This approach aims to strengthen an organization’s basic distinctive competence. In some situations, bankruptcy may be a suitable kind of retrenchment method.
A firm might be able on account of bankruptcy to avoid huge debt obligations and union contracts. To achieve a higher level of efficiency, a reduction in the existing operations of a company is employed in this technique. This method is only used in rare circumstances.
The situations which warrant the deployment of such strategy are:
- The level of performance is presently far worse than in the past, i.e., there has been a deterioration in performance.
- The management aims to wipe-out a previous year’s deficit.
- The goal of this policy is to provide certain products/services to the public through retrenching existing ones.
- Because of administrative reasons, it is prohibited from selling certain items/services (such as generating environmental pollution, breaching the law of the land, etc.).
Combination strategy is involving the blending up of different types of strategies for the company or its sub-units. Naturally, the deployment of this strategy is based on the premise that a company should have different strategies for different environments. A small company cannot get advantage of this strategy and only large groups of companies can derive advantage of this strategy.
A company pursues a combination strategy if it adopts more than one strategy, i.e., stability, growth or retrenchment simultaneously. Usually, a combination strategy results from environmental changes and redefining the business.
Economic implications of mergers and acquisitions have long been an interest to economics. A Merger by definition combines two firms leaving one surviving firm. An Acquisition, on the other hand, describes the purpose of one firm by another.
Mergers are also often classified based on the type of merger firms’ activities as:
- Vertical Mergers
- Horizontal Mergers
- Conglomerate Mergers.
A merger is classified as Vertical if integrating firms belong to the neighbouring stages of production such as a wine maker purchasing a bottle or cork factory. A Horizontal merger, on the other hand, describes the case where firms who are involved in the same business line get together and form a separate firm.
The third category of mergers is called conglomerate and they occur between firms with unrelated lines of business.
Restructure strategy involves expansion or contraction of the portfolio or changes in the ownership pattern and control. In case of real estate business, profit is earned by buying properties at lesser prices, restructuring them and selling at higher prices. This restructuring approach usually entails buying the firm, selling its corporate headquarters and terminating corporate staff members.
Restructuring normally not required only when a business is sick rather than it required for improving the performance of the units. Restructuring is important for growth and expansion of the companies and it is necessary to prevent a unit from becoming sick. Selling unhealthy business divisions and placing the remaining divisions under the right track of careful financial controls is an additional restructuring that is often used.
Types of Corporate Level Strategy
Their are two types of Corporate Level Strategy:
Growth Strategy and Diversification Strategy
Corporate level strategy addresses the entire strategic scope of the firm. It is a “big picture” view of the organisation and includes deciding in which, product or service markets to compete and in which, geographic regions to operate. For a multi-business firm, the resource allocation process-how cash, staffing, equipment and other resources are distributed – is established at the corporate level.
In addition to this, the corporate level managers are responsible for diversification and the addition of new products of services to the existing products or service line-up.
Similarly, with regard to competition, whether to compete directly with other firms or to selectively establish relationships-strategic alliances, joint ventures (JV), are also are in the purview of corporate level strategy.
- Growth strategies,
- Stability strategies,
- Retrenchment strategies, and
All these strategies are also known as “grand strategies”, “basic strategies” or “generic strategies”.
Most of the directional strategies of an organisation are aimed to achieve growth. Usually the growth may be measured in terms sales, profits, product mix, services mix, market coverage, market share, and other accounting and market based variables.
Reducing cost of products sold is also a growth variable, because it increases sales and profits. Liberalisation, globalisation and privatisation (LPG), forced companies to reduce manufacturing cost and produce quality products.
There are a good number of companies which are running profitably by concentrating on a single business. Xerox, Ford Motor, Apple Computers, McDonald’s are few examples of single business companies doing very well. But by concentrating and sticking to one industry, investing huge amount in one industry is risky. It is just like putting all eggs in one basket.
If anything happens to the basket all eggs are going to be broken. To avoid this situation, managers have to diversify into other business which, have potential for growth. Diversification is a form of growth strategy.
Nature of Diversification
Diversification is the process of adding new business to the firm that is distinct from its present operations. A diversified company is the one that is involved in two or more business that are different from one another. Diversification of business is preferable when the firm has free cash flows (excess of investment in present business).
Excess capital is available when firm retains net profits (fully or partly) instead declaring as dividends to equity shareholders.
Managers should retain funds for diversification when expected return on diversification business is higher than the shareholders return (opportunity cost) that could be earned by investing expected dividends in other investment avenues like stocks, bonds, fixed deposits.
Types of Corporate Level Strategy
5 Main Strategies:
- Stability Strategy
- Expansion Strategy
- Retrenchment Strategy
- Defensive Strategy and
- Growth Strategy
If the answer to the question whether the company should continue in the existing business is affirmative and if the company is doing reasonably well in that business but no scope for significant growth, the strategy to be adopted is stability. (The stability strategy is sometimes referred to as neutral strategy).
As Jauch and Glueck observe, a stability strategy is a strategy that a firm pursues when:
- It continues to serve the customers in the same product or service, market, and functional sectors as defined in its business definition, or in very similar sectors.
- Its main strategic decisions focus on incremental improvement of functional performance.
The stability strategy is not a “do nothing” strategy. As indicated above, it may involve incremental improvements. It also requires adoption of appropriate competitive strategies to remain successful in the business. It may also have to make offensive and defensive moves vis-a- vis the competitors.
Long-term stability strategy also requires reinvestment, R&D and innovation. However, the business definition remains the same.
In short, this “do-the-same thing” strategy endeavours to “do-the-same thing better.”
This strategy is common with large and dominant companies in mature industries where the important challenge is to maintain the current position. Another category of industries this strategy is common with is the regulated industries such as alcoholic beverages, tobacco products, etc. Many family dominated small and medium companies also prefer this strategy.
If the answer to the question ‘Should the company increase the level of activities in the current business and/or enter new businesses)?’ is affirmative, a growth (expansion) strategy is called for.
The growth strategy amounts to redefining the business by adding new products/services or new markets or by substantially increasing the current business.
In other words, a company pursues a growth strategy when:
- It enters new business (including functions) or market.
- Effects major increase in its current business.
A company may pursue either or both internal or external growth strategies.
Retrenchment strategy, also known as defensive strategy, involves contraction of the scope or level of business or function. In some cases, it amounts to a redefinition of the business.
A firm pursues a retrenchment strategy when:
- It drops product line(s), market(s), market segment(s) or function(s).
- Focuses on functional improvements or reversing certain deteriorating trends.
Defensive strategies include:
- Becoming a captive and
A divestiture strategy is pursued when a company sells or divests itself of a business or part of a business. It may be because of loss, less than target rate of return, urgency to mobilise funds, managerial problems, or redefinition of the business of the company.
Liquidation occurs when an entire company is sold or dissolved. The reasons for divestiture mentioned above could also be reasons for liquidation.
When there are no buyers for a company that wants to be sold, its assets may be sold and company may be wound up.
Becoming a Captive
A firm becomes a captive of another firm when it subjects itself to the decision of the other firm in return for a guarantee that a certain amount of the captive’s product will be purchased by the other firm.
A turnaround strategy involves management measures designed to reverse certain negative trends and to bring the firm back to normal health and profitability.
A company pursues a combination strategy when it adopts more than one grand strategy (i.e., stability, growth and retrenchment) simultaneously or sequentially.
The reason for pursuing a combination strategy is the existence of a combination of reasons for any two or more of the other three generic strategies.
Under the combination strategy, a company adopts any one of the following:
- Stability and growth strategies.
- Stability and retrenchment strategies.
- Growth and retrenchment strategies.
Growth, retrenchment and stability strategies
A combination strategy results from environmental changes and redefinition of the business portfolio of the company.
Types of Corporate Level Strategy
4 Most Important Types:
- Growth Strategy, Stability Strategy
- Retrenchment Strategy and
- Combination Strategy
Corporate strategy is about strategic decisions about determining overall scope and direction of a corporation and the way in which its various business units work together to attain particular goals.
Corporate-level strategy is an action taken to gain a competitive advantage through the selection and management of combination of businesses competing in several industries % or product markets.
Corporate strategies are normally expected to help the firm earn above- average profits and create value for the shareholders. Corporate strategy addresses the issues of a multi-business firm as a whole.
Growth strategies are widely pursued strategies globally. Corporation can grow through diverse ways. Two basic growth strategies are concentration or intensification on the current products and business operations and diversification into other product lines and industries.
i) Concentration or Intensification:
Managers use corporate-level strategy to recognize which industries their firm should compete in to maximize its long-run profitability. For many firms, profitable growth and expansion often pursued or sought within a single market or industry over time. Concentration or intensification strategy is the one in which organization seeks growth by focusing on single line of business.
Simply put, a company limits its business activities to just one business or industry. Firm tries to use its specialized knowledge to build competitive advantage in that industry.
For Example – McDonald’s restricted itself to global fast-food restaurant business, Infosys remained focused on IT & ITES since its inception and Wal-Mart, with its focus on global discount retailing.
Staying in one industry allows a firm to concentrate its total managerial, financial, technological, and functional resources and capabilities on competing successfully in one business domain. A second advantage of staying in a single industry is that a company stays focused on what it knows and does best. It does not make the mistake of entering new industries where its existing resources and capabilities generate little value.
According to strategist Richard Rumelt, companies begin thinking about diversification when their growth has stagnant and opportunities for growth in the original business have been exhausted. This usually occurs when an industry consolidates, becomes mature, and most of the surviving firms have reached the limits of growth though vertical and horizontal growth strategies.
Unless the firm is able to expand internationally into less mature markets, it may have no choice but to diversify into different industries if they want to continue growing.
Diversification is the process of venturing into new industries, distinct from a company’s core or original industry, to make new categories of products that can be sold profitably to customers in these new markets.
Diversification means moving into new lines of business. When an industry consolidates and becomes mature, most of the firms in that industry would have scaled the limits of growth using vertical and horizontal growth strategies.
If they want to grow further the only option available to them is diversification by expanding their business activities into different industry. Diversification strategies are also pursued in normal case to spread risks so that company’s performance is cushioned out as various industries goes through different cycles.
Of the various growth strategies, diversification is definitely the most complex and risky course. Diversification approach to growth is complex since it seeks to enter in new product lines, processes, services or markets which need different skills, competencies and knowledge from those needed for the current business. It is risky as it involves deviating from current products and markets.
iii) Issues & Controversies in Directional Growth Strategies:
When it comes to selecting growth option, strategic managers do have so many dilemmas-
- Is vertical growth better than horizontal growth?
- Is concentration better than diversification?
The purpose of corporate-level strategy is to increase long-term profitability. A company should pursue any and all strategies as long as strategic managers have weighed the advantages and disadvantages of those strategies and arrived at an option that justifies them.
As of now lot of growth strategies and firm have two options to pursue these strategies. A firm may pursue these growth avenues through internal developments (organic growth) or through external manner (inorganic growth) that is mergers, acquisitions, strategic alliances, joint venture, etc.
B. Stability Strategy:
A firm may choose stability over growth by continuing its current activities without any significant change in its path.
A firm following stability strategy continues its current business and product portfolios; maintains the existing level of effort; and is satisfied with incremental marginal growth. It focuses on improving its business operations and improving functional efficiencies through better deployment of resources.
In other words, a firm is said to follow stability/ consolidation strategy if:
It decides to serve the same markets with the same products. It continues to pursue the same objectives with a strategic push for incremental improvement of functional performances; and
It focuses on its resources in a narrow product-market sphere for developing a meaningful competitive advantage.
Following stability strategy does not mean that a firm lacks concern for business growth. It only means that their growth targets are modest and that they wish to maintain a status quo. Since products, markets and functions remain unchanged, stability strategy is basically a defensive strategy.
Stability strategy is perceived as a non-growth strategy. As a matter of fact, stability strategy does provide space for growth, though to a limited extent, in the existing product- market area to achieve current business objectives. Implementing stability strategy does not imply stagnation as the basic drive is to maintain the current level of performance with incremental growth.
Businesses are like human beings. If excessive sugar (growth strategy in business perspective) is consumed then we become diabetic (loss making or poor performance in business point of view). To recover from diabetic situation, we have to cut down unnecessary things. This cutting down in personal lives are known as retrenchment in business parlance.
Retrenchment is a short-run renewal strategy designed to overcome organizational weaknesses that are contributing to declining performance. It is meant to refill and rejuvenate the organizational resources and capabilities so that the organization can regain its competitiveness. Retrenchment may be thought as a minor surgery to correct a problem. Managers often try a minimal treatment first-cost cutting or a small layoff-hoping that nothing more painful will be needed to turn the firm around.
When performance measures reveal a more serious situation, more radical action is needed to restore performance. Even sometimes organization also needs to exit from businesses to cut down the losses and improve performance.
Turnaround strategy is mainly appropriate when firm’s problems are pervasive but not severely critical. It is a strategy adopted by firms to stop the decline and revive their growth. Robbins and Pearce has suggested comprehensive model for turnaround process.
A turnaround situation exists when a firm encounters several years of declining financial performance subsequent to a period of prosperity. In simple words, turnaround situation is nothing but absolute and relative-to-industry declining performance of a sufficient degree to warrant explicit turnaround actions.
Turnaround situations are caused by combinations of external and internal factors. But it has been largely observed that root cause of turnaround situation lies internally only. Firms wrong decisions or delay in taking decisions or underestimation of external / competitive threat or complacency may lead to turnaround situation.
The immediacy of the resulting threat to company continued existence caused by the turnaround situation is known as turnaround situation severity. Low levels of severity are indicated by declines in sales or income margins, while extremely high severity would be indicated by impending bankruptcy.
The recognition of a relationship between cause and response is very important for a turnaround process and hence, the importance of properly assessing the cause of the turnaround situation so that it could be the focus of the appropriate recovery response is very important.
The response to turnaround situation can be broken down to two phases i.e. retrenchment (contraction) phase & recovery (consolidation) phase.
The retrenchment phase is focused on the firm’s survival and achievement of a positive cash flow. The means to achieve this objective needs an emergency plan to stop the firm’s financial bleeding. It involves the classic retrenchment activities such as liquidation, divestment, product elimination, and downsizing the workforce.
Retrenchment strategies are also characterized by the revenue generating, product/market refocusing or cost cutting and asset reduction activities. When severity is low, a firm has some financial buffer. Stability may be achieved through cost reduction alone. When the turnaround situation severity is high, a firm must immediately arrest the decline or bankruptcy is imminent.
Cost reductions must be supplemented with more drastic asset reduction measures. Assets targeted for reduction are those ones which are underproductive. In contrast, more productive resources are protected from cuts and further reconfigured as critical elements of the future core business plan of the company, i.e. the intended recovery response.
After retrenchment phase, organization has to sink in these bitter steps and for that purpose a stabilization plan is required to streamline and improve core operations.
The second phase involves a return-to-growth or recovery stage and the turnaround process shifts away from retrenchment and move towards growth and development. It is often seen that those firm declined due to external factors needs entrepreneurial reconfiguration i.e. top management’s creative intervention. Recovery through efficiency maintenance (maintaining leaner/efficient organization post retrenchment) would be possible if turnaround causes are internal.
Means such as acquisitions, new products, new markets, and increased market penetration would fall under entrepreneurial reconfiguration. Recovery is said to have been achieved when economic measures indicate that the firm has regained its pre-downturn levels of performance.
Between these two stages, a clear strategy is needed for a firm. As the financial decline stops, the firm must decide whether it will pursue recovery in its retrenchment reduced form through a scaled-back version of its pre-existing strategy, or whether it will move to a return-to-growth stage.
It is at this point that the ultimate direction of the turnaround strategy becomes clear. Essentially, the firm must choose either to continue to pursue retrenchment as its dominant strategy or to couple the retrenchment stage with a new recovery strategy that emphasizes growth. The degree and duration of the retrenchment phase should be based on the firm’s financial health.
One can find lot of similarities between ailing bedridden human being and firm in turnaround situation. That is why; author has drawn parallels between turnaround processes and medical treatment process.
Captive Company Strategy
Captive strategy means relinquishing independence in exchange for security. Company with very weak position or company is operating in such industry which is not sufficiently attractive or both may not initiate full blown turnaround strategy. In this circumstances company’s management search an angel by offering to be captive company to one of its larger customers in order to guarantee company’s existence through long term contract. By this way company may reduce its cost and scope of some functional activities.
For Example – Before declaring itself as a sick company in 2013, Ambassador Car maker Hindustan Motors (HM) was involved in contract manufacturing. In the process HM became captive company as it secured two long term contracts (through JVs) with Japanese auto makers Mitsubishi and Isuzu. HM used to assemble Mitsubishi’s Cedia, Outlander, Pajero and Montero.
Its tie up with Isuzu Motors was for sports utility vehicles (SUVs) and pickup trucks. During these times, a very small production capacity was used for HM’s own products. Besides Ambassador, HM also was involved in manufacturing ‘Winner’ light commercial vehicles. But all the HM’s efforts to revive (by HM’s management & BIFR i.e. Board for Industrial and financial restructuring) its business failed leading to its liquidation.
Sell out / Divestment Strategy
Divestment strategy involves the sale of a company or major component of it. This option is suitable for those corporations operating with weak competitive position in the industry. If turnaround and captive strategies are not viable then this strategy is adopted. The sellout strategy makes sense if management can obtain a good price for its shareholders and the employees can keep their jobs.
For Example – Ford sold its ailing jaguar and Land Rover unit to Tata Motors in 2008 for $2 billion. In year 2013-14 /aiprakash Associates sold some Cement manufacturing facilities.
Liquidation / Bankruptcy Strategy
Liquidation is the termination of the company. This is the last resort to any company when all other attempts of turnaround, captive company, sell out fails. In case of liquidation firm has to go through tedious and complex legal formalities. Sometimes firm’s management is given to courts in return for some settlement of its obligations.
This is referred as bankruptcy. While the terms bankruptcy and liquidation are often used together, they technically mean two different things. Liquidation is part of bankruptcy, but it is not the entire process. Bankruptcy deals with a much more broad scope of events that lead to the eventual discharge of firm’s debts.
Lot of American companies became bankrupt especially after Sub Prime crisis. Here is the list of top 10 bankruptcies.
In reality all the directional strategies are simultaneously used. Rather, the effectiveness of these strategies is more if corporation follows multi-pronged approach towards organizational direction. In the word of late Sumantra Ghoshal of the London Business School.
Winners (winning companies) are like chefs, they must learn how to cook sweet (growth strategies) and sour (retrenchment strategies)
Too much of emphasize on growth will make your company diabetic. Companies should seek growth simultaneously with retrenchment (it is like exercising to remain fitter, leaner and healthier).
Under combination strategy corporate strategic planning is aimed at achieving multiple goals through combination of retrenchment, growth, and stability.