business definition 1

8/11/2019 Business Definition 1

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Prof. K. Chander 1

GRAND STRATEGY

Strategic alternatives revolve around thequestion of whether to continue or change thebusiness the enterprise is currently in or ourimprove the efficiency and effectiveness withwhich the firm achieves its corporate objectives.

There are four grand strategic alternatives(1) Stability

(2) Expansion(3) Retrenchment

(4) Combination of above three.


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Prof. K. Chander 2

Possible business definition of an oral company

CUSTOMERGROUPSFluoride

SegmentCosmeticSegment

ALTERNATIVETECHNOLOGIES

Paste/ Powder

Different base material

Different Additives/ flavouring

CUSTOMER FUNCTIONS

Dental/ Oral Health

Freshness

Foam

As per Abell, a business should bedefined, in terms of customer groupsthat will be served, the customersneeds/ customer functions that will bemet and the technology that is used tosatisfy these needs.


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Prof. K. Chander 3

Stability Strategy

Stability Strategy is adopted by an organization

when it attempts at incremental improvement offunctional performance in terms of its customergroups, customer function and alternative

technology. A packaged tea company provides special

service of institutional customers.

A copier machine company provides better aftersales service package.

A Steel company modernizes its plant to improveefficiency and productivity.


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Expansion Strategy

When organization broadens the scope of its

customer groups, customer functions, etc or

technology single or jointly to improve its

performance.

A chocolate company includes middle age groupin addition to children.

A stock broker includes personalized financialservice.

A printing press changes from conventionalprinting to Desk Top Publishing to improve

performance.


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Prof. K. Chander 5

Expansion Strategy..

Expansion strategies are more risk prone.Example

JPA

Construction Hotels Cement Gas Line

Remark

(a) Started Selling Cement units;

(b) Started selling hotels; Sudden expansion canbring collapse


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Prof. K. Chander 6

Retrenchment Strategy

Retrenchment Strategy Is followed wherecompany is making losses and subsequentlyreduces the scope of either

its customer group;

customer function etc.

In this manner retrenchment attempts to Trim the fat and results in slimmer organizations.

In real life situation one has to use combinationof three grand strategies.


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Prof. K. Chander 7

Combination Strategy

When an organization adopts a mixture of

stability, expansion and retrenchment either at

the same time in its different businesses or at

different times in the same business with the aim

of improving its performance.

Example of BEML

1. Stability Dumper 35,50,85,1202. Expansion Rope shovel/ Dragline

3. Retrenchment Dropping of wheel loaders.


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Prof. K. Chander 8

Major reasons for organization adoptingdifferent grand strategies.

A. Stability strategy is adopted because:

1. It is less risky, involves less changes and people

feel comfortable with things as they are.

2. The environment faced is relatively stable.

3. Expansion may be perceived as being threatening.

4. Consolidation is sought after period of rapidexpansion.


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B. Expansion strategy is adopted because:1. It may become imperative when environment

demands increase in pace of activity.2. Psychologically, strategists may feel more

satisfied with the prospects of growth form

expansion; chief executives may take pride inpresiding over organizations perceived to begrowth oriented.

3. Increasing size may lead to more control over themarket vis--vis competitors.

4. Advantages from the experience curve and scaleof operations may accrue.



C. Retrenchment strategy is adopted because:1. The management no longer wishes to remain in

business either partly or wholly due to continuouslosses and un-viability.

2. The environment faced is threatening.

3. Stability can be ensured by reallocation ofresources from unprofitable to profitablebusinesses.

D. Combination strategy is adopted because:

1. The organization is large and faces complexenvironment.

2. The organization is composed of different industry

businesses.

PROS AND CONS OF STRATEGY CHOICES AT IBM



PROS AND CONS OF STRATEGY CHOICES AT IBM

All strategy alternatives have advantages and disadvantages. The option facing IBM are a case in point. Known as ccompany after company now products a personal computer which is compatible with the IBM product. Frequentlcompetitor products claim to be cheaper, faster, and more reliable while they offer simple hardware options and usame software.IBM has considered several strategy option, each which has pros and cons, to deal with the competitor threat from clo

Strategy option Advantage Disadvantage

A. Introduce a low-price replacementfor the basic PC using newer, lessexpensive technology

IBM would regain market share lost toclones and add a model ideal for theeducation market.

IBM might sacrifice gross margins,direct sales from more profitablemodels

B. With new hardware and software,alter the PC to make cloning moredifficult and to prevent clones fromparticipating fully in IBM computernetworks.

IBM would keep major corporatecustomers, rebuilt market share as theyshift to the new technology, reestablishcontrol over prices and margins.

Consumers, especially smallbusinesses, might stick with thecurrent PC for which there arethousands of software packages.

C. Bring out a steady stream of newPCs that include more features,

while cutting prices on oldermodels.

By continuously updating and improvingthe PC, IBM could quickly make most

clones obsolete and improve prices for itsproducts

A rash of new models might makeinventories of IBM PCs obsolete and

could clog the dealer channel. Withdemand slackening new models mightnot sell better than current ones.

D. Withdraw from the low-end,commodity PC market, leavingthe clones to battle each other inlow-margin business.

IBM would be free to concentrate onselling more profitable versions of the PCto large corporations and, by linking thosePCs into company data networks, wouldultimately stimulate demand formainframe computers to support them.

IBM would be walking away from asmuch as $3 billion in annual revenuesSuch a move also would hinder it effot win big shares of the education andhome market.



STRATEGIC ALTERNATIVES

Environment appraisal and organizationalappraisal lead to strategic alternatives.

The choice of strategy will depend on how our

organization perceives its strength and weakness

vis--vis the opportunists and threats the external

environment presents.



STRATEGIC ALTERNATIVES

Major type of strategies adopted by organizations are:

1. Modernization2. Diversification

3. Integration

4. Merger5. Take over

6. Joint venture

7. Turn around

8. Divestment

9. Liquidation

10.Combination strategy



Modernization Strategy

Modernization basically means technological up

gradation and it is used to increase production,lower costs, efficiency and productivity.

Internal stability strategy if the pace of modernization islow to moderate.

Internal expansion strategy if the pace is high. External expansion strategy is the organization merge

with or acquires another company for the purpose ofmodernization.

Internal retrenchment strategy if resources are directedform one are to another with the aim of modernization.

External retrenchment if part of organization is divestedor liquidated with the aim of modernization. Example SAIL.



Diversification and Integration Strategies

Diversification as the name suggests, additional of

new business which may be internal, external,related or unrelated.

Horizontal or vertical and active or passive

dimensions of diversification.

VERTICAL INTEGRATION :-

When organization start new products which serve its own

need. Example Manufacturing of engine, transmission etc.


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Diversification and Integration Strategies

CONGLOMERATE DIVERSIFICATION

When an organization takes up those activitieswhich are unrelated to its existing business.Examples

ITC Cigarettes, Hotels ,

Essar Shipping, Steel

TTK group Pressure cooker, Chemicals and

Pharmaceuticals.



Why are Diversification Strategies Adopted

There are many reasons why organizations adopt

diversification strategies.

The three basic and important reasons are:

1. Diversification strategies are adopted to minimize risk

by spreading it over several businesses.

2. Diversification may be used to capitalize on

organizational strength or minimize weakness.

3. Diversification may be only way out if growth in existing

business is blocked due to environmental and

regulatory factors.



Why are Diversification Strategies Adopted

The different types of diversification strategies

described above are Vertical;

Horizontal;

Concentric; and conglomerate

Each have their own advantages &

disadvantages.



Diversification strategies: Major advantages and disadvantages

Diversification strategy Advantages Disadvantages

Vertical integration Access and control of supply ordemand

Economizing operations

Risk of unfamiliar business

Horizontal integration Eliminating competitors Access to new market

Increase in risk and commitment. Reduction in flexibility

Concentric diversification Attain synergy by exchange andsharing of resources and skills Economies of scale and tax

benefits

Additional investment inmarketing infrastructure or newtechnology.

Untried markets andtechnologies.

Conglomeratediversification

Better management and allocationof cash flows and obtaining highROI

Reducing risk by spreadinginvestment in different businessesand industries

Diversifying resources andattention to other areas, leadingto lack of concentration

Risks of managing entirely newbusinesses.

P f Di ifi i i I di C i



Patten of Diversification in Indian Companies A research study of 72 large public and private sector companies in India, which highlthe pattern of diversification in the Indian industry during the period 1960-75, conclude1. The larger enterprises in the Indian industry in both the private and public sector

very diversified2. Both the private and public sector companies have diversified rapidly but in di

ways. Private sector companies has typically diversified into unrelated areas while penterprises have diversified into related ones.

3. Governmental regulations plays a greater role in diversification strategies thaninterplay of market forces.

4. Private sector companies have followed diversification strategies in response toneed of regulatory mechanisms such as industrial policy resolutions, the IDR Act, M Act, FERA, etc.

5. Public enterprises have adopted diversification in response to the public polinational self-sufficiency and import substitution.

6. Diversification strategies have important implications from the view-point of publiand corporate management.



MERGER, TAKE OVER AND JOINT VENTURE STRATEGIES

Merger and Take Over (Acquisition) basicallyinvolves external approach of expansion.

Two or more companies are involved.

All the three terms used are synonymous.

Merger When buyer and seller objectives are matched

to a large extent.



Acquisition and Take over

It is based on strong desire of the buyer to acquire

(often sprung as a surprise)

Take over a common way of acquisition against

the wishes of present owner (Hostile take over orfriendly take over).

Often these strategies are used for diversification.



Why the Buyer wishes to Merge

To increase the value of stocks.

To increase the growth rate and make good

investment.

To improve stability of earning and sales. To balance, complete or diversify product line.

To reduce competition.

To acquire to needed resource quickly

To avail Tax concession and benefits.



Why Seller wishes to Merge

To increase owner stock value & investment.

To increase growth rate.

To acquire resources to stabilize operations.

To benefits from tax legislation. To deal with top management succession

problems.

IMPORTANT ISSUES IN MERGERS




STRATEGIC ISSUES

Relates to commonality of interests between buyer

& seller firms.

How much synergy is achieved by merger. A merger should ideally lead to the generation of

strength that would help the post merger

organization to achieve its objectives in the bettermanner.





FINANCIAL ISSUES Relate to the valuation of the seller firm and the

sources of financing for merger valuation is drawnon the basis of assts, market standing andopportunity, earnings potential, or stock value.

A common procedure is: Discounted Cash Flow Method. Capital Asset Pricing Method (CAPM)





FINANCIAL ISSUES

The other major financial consideration is thesource of financing.

Acquisition o shares through exchange of debt and

equity is a method used abroad to avoid cash outflow.

Its difficult in India due to provision of Capital Gains

Taxation. Bank, Stock Market & Financial Institute are also

source of finance but not encouraged.



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MANAGERIAL ISSUES

It is important to note that the perception of how themanagement will take place after merger.

Usually merger is followed by changes in staff.

Usually CEO and top manager are changed.



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LEGAL ISSUES

In India the provision relating merger andamalgamations are made under Chapter V of the

Company Act, 1956.

The only section that deals with the transfer of

shares (or take over bids) is section 395.

Apart from Company Act, and MRTP Act, Section72-A (1) of the Income Tax Act is also relevant for

taxation purpose.



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TAKE OVER STRATEGIES

Take over or acquisition is the most popularstrategy being adopted by Indian companies.

Normal route of expansion is licensing and setting

up new projects. Current decade has seen an increasing use of take

over strategies (or simple take over) as the means

of rapid growth.



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TAKE OVER STRATEGIES

Major companies which have been taken over inthe last few years include Shaw Wallace, AshokLeyland, Dunlop, Harrison Malayalam, ICIM, ACC,L&T, Shalimar Paints, Scandia Steamship andmany other others.

Main Players are: Manu Chhabria

Hinduja Brothers

R. P. Goenka

Dhirubhai Amabani; and

Vijaya Mallaya.


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HOW TAKE OVERS TAKES PLACE

Six Step procedure recommended for acquisition:

a) Spell out the objective.

b) Indicate how the objective would be achieved.

c) Assess managerial quality.d) Check the compatibility of business styles.

e) Anticipate and solve problems early.

f) Treat people with dignity and concern.


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Leverage Buy Out (LBO) or Boot Strap Acquisition :

Which involve raising of funds by pledging theassets of the firm to be taken over.

Negotiation are done through trusted intermediary,

lower, development & merchant bankers, etc. Valuation of assets, Business Goodwill, Market

Opportunities, growth potential, etc. are taken into

consideration before fixing the price of shares.(Friendly Take Over.)


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Hostile Take Overs :

Where a take over is opposed by the existing

management follow a different route.

Here the shares are picked from market andcontrolling interest are obtained, with the tacit help

of the other majority shareholders.

It is believed political support matters a lot inmeasure of success.


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Pros & Cons of Take Overs

They ensure management accountability.

Offers easy growth opportunities.

Create mobility of resources.

Avoid gestation period .

Offers chance for sick units to survive.

Open up alternative for select divestment.

The opponents of take over argue:

Professionalism gets replaced by money power.

Take over do not crate any real asset.

Interest of minority shareholder is not protected.


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Pros & Cons of Take Overs

Despite argument against take place over it

becoming quite common & is expected toproliferate into near future.

Take over in India through most of them have

been controversial & have faced adverse publicity are expected to the viable strategic alternativesfor external expansion strategy.

Where take overs are rational, using it toconsolidate capacities, taking assistance indiversification & creating synergy are goodpropositions


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Joint Venture Strategies

Merger refer to a combination of two ormore companies in to one company andmay be possible in two ways absorptionand consolidation.

Absorption take place in merger & Acquisition.

Consolidation take place when two or morecompanies combine to from a new company.

Joint venture are special case of consolidation .


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Conditions for Joint Venture

When an activity is uneconomical for an

organization to do alone. When the risk of Business has to be shared &

therefore is reduced for participating firms.

When the distinctive competence of Two or morecompanies is brought together.

When setting up a organization requires

surmounting hurdles such as import Quotas,tariffs, nationalistic, political interests, and culturalroad blocks.


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Type of Joint Venture

Between two firms in one Industry.

Between two firms across different Industries.

Between Indian company & Foreign company inForeign Country.

Between Indian company & Foreign company inIndia.

Between Indian Company & Foreign companyin Third countries.


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Strategic Issues in Joint Venture

Eliminating, controlling or reducing competition.

Increase Market Share.

Diversification in J. V. is planned across differentIndustries.

Technology Transfer through Joint Venture.

Legal & regulator handle removed through Joint

Venture.


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Strategic Issues in Joint Venture

Many Indian company have formed Joint Venture

to have higher profitability & expansion outside

the ambit of MRTP restriction like, Tatas have

set-up abroad hotels commercial vehicles and

leather manufacturing units. Birlas (Textile, sugar

& viscose staple fibre) etc.

Under liberalization huge investment is expectedthrough Joint Venture route. Also technology up

gradation is on regular basis.


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Benefits & Drawbacks in Joint Venture

The major benefit that are likely to accrual from

Joint Venture include the minimizing risks,reducing an individual company investment,having access to foreign Technology and Equity

participation and synergistic advantages. The disadvantages that may arise in Joint

Venture are problem in equity, foreign exchangeregulations, lack of proper coordination amongparticipating firm, cultural & behavioraldifferences, and the possibility of conflict amongthe partners.

Turnaround Divestments & Liquidation strategies


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Turnaround, Divestments & Liquidation strategies

If the organization chooses to focus on ways

and means to reverse the process of decline, it

adopts a turnaround strategy.

If it cuts off loss making units, divisions, curtails

its product line, it performs divestment strategy.

If none of these actions work then it choose to

abandon the activities totally resulting inliquidation strategy.

Turn Around Strategies


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Turn Around Strategies

There are certain indicators which point out that

the a turn around is needed if the organizationhas to survive. These danger signs are:1. Persistence negative cash flow.

2. Negative Profit.

3. Declining Market share.

4. Deterioration in Physical faculties.

5. Over manning & low morale.

6. Un-competitive product & services.7. Mismanagement

Company which Faces one or more above problems isknown as sick company.

Managing Turn Around


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Managing Turn Around

There are three ways.

1. Existing Management team with advisory support(External Consultant)

2. Existing Team withdraws temporally & a managementconsultant or turn around specialist is employed by

Banks and Financial Institutions.3. The last method The one Most popular involves

replacement of the Existing Team, specially the CEO ormerge the sick unit with healthy

Approach: - a) Surgical b) HumaneExample: - KIMCO Only Management

VIL Full (Partial) Responsibility toturn around

anag ng urn roun


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anag ng urn roun

Action Plan : For the turn around to thesuccessful. It is imperative to follow long term &short term Financial needs. A workable actionplan for Turnaround should include:-

1. Analysis of product, market, production processes,

competition and Market segment positioning.2. Clear thinking about the market place & production line

logic. Implementation by target setting, feed back &remedial action.

Research Study reveals:-1. Primary need for proper management of Turnaround.

2. Than only Financial re-structuring as normally done by

External agencies.

anag ng urn roun


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g g

Role of External Agencies:-

1. Company have to declared sick (Company Act Networth < 50% losses accumulated 1995)

2. BIFR (Board of Industrial & Financial Restriction)acts as corporate Doctor.

3. BIFR prepares re-habitation schemes for revival ofsick units

a) Change of management

b) Amalgamate with other companyc) Undertakes Sale of sick unit.

The elements in a turnaround strategy


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Ten comparable Indian companies, in five

groups of two each, were selected for study. Ineach group, one company seemed to have beenmore successful while the other less successful

in adopting the turnaround strategy. Based onthe set of ten elements that contribute toturnaround, the case studies of these ten

companies were analyzed.



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First, it is important to note what these ten

elements are:1. Changes in the top management;2. Initial credibility-building actions;

3. Neutralizing external pressures;

4. Initial control;

5. Identifying quick payoff activities;

6. Quick cost reductions;

7. Revenue generation;8. Asset liquidation for generating cash;

9. Mobilization of the organizations; and

10.Better internal coordination.




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The comparative analysis of the actions takenby more successful companies and less

successful companies revealed that nosignificant difference was there as far as thefirst three elements were considered.

The crucial different lies in the way thecompanies attempted a turnaround on thebasis of initial control of operation by the newmanagement, quick cost reductions throughvarious means, mobilizing the organization for

improving motivation and morale, and betterinternal coordination.


Rehabilitation package for Metal Box


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Metal Box India Ltd, a reputed company in packaging industry, turneddue to its wrong static move of diversifying into bearings manufacture early eighties. Eight of its nine units closed down as a result of which B

of Industrial and Financial Reconstruction (BIFR) and Industrial CredInvestment Corporation of India (ICICI) formulated a rehabilitation pafor turnaround of the company.The BIFR ICICI package covers the following:

Closure of three unprofitable units at Calcutta, Bombay and Cochin. Retrenchment of 3000 workers drawn from all the nine units thro

compensation. A flat 20 percent cut in wages for the remaining workers. Write off or conversion of outstanding loans from financial institutions

banks. Concessions and relief's of up to 50 percent in sales, octroi, and turnover ta

among others from the state governments. Induction of new promoter in place of the parent multinational Metal Box

UK which wants to diverts it 33.02 percent shareholding.

Divestment Strategies


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Divestment Strategies Divestment Strategy involve the scale of or liquidation of a

portion of business or major division, profit centre of SBU.

Reasons for Divestment1. A business that had been acquired proves to be mismatch & cannot

be integrated with in the company.

2. Persistent negative cash flow.

3. Technological up-gradation required, which a company cannotafford.

4. Divestment by a firm may be part of merger plan.

Approach to Divestment

A firm may choose to divest in two ways:1. A part of the company is divested by spinning it off as a financially

and managerially independent company with parent companyretaining partial ownership.

2. The firm may be sold out right.

Liquidation Strategy


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Liquidation Strategy

A retrenchment Strategy considered the most extreme

and unattractive is liquidation strategy, which involvesclosing down a firm & selling its assets.

Liquidation strategy may be unpleasant as a strategy

alternative but when a Dead Business is worth more than

alive for example Real state owned by firm may fetch it

more money than the actual returns of doing business.

Liquidation done by court or under the supervision of

court.

Liquidation at Empress Mills


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On may 14, 1986, the Bombay High Court appointed a provisional liquidator in the petthe voluntary liquidation of Empress Mills at Nagpur Empress Mills is a 113-year-owned by the Tatas. Behind the liquidation petition lie a host of reasons.

The major strategic cause for liquidation lies in the fact that for nearly the lyears, Empress Mills did not invest in modernization or keep pace with competitionwider context, government policies have not proved to be favorable for the cotton industry. The management of the mill carried the blame for neglect and delayed action. After Ratan Tata took over as Chairman of the company in 1977, some efforts were mamodernization but proved to be grossly insufficient. A proposal to merge the mill witextile units of the Tatas could not materialize. Rationalization of the product mix acrosunits also proved to be non-starter owing to resistance offered by executives. Effonegotiate a voluntary retirement scheme to cut down 6000 workers-employees strengtfailed. Ultimately, the banks and financial institutions delayed the formulation of a rehab

package that could turn the mill around. The state government apparently did not provmuch need political support that could have helped save the jobs of the workers.

The case of Empress Mills provides an important lesson that if timely strategic is not taken and the situation is allowed to drift, oven the largest business group of Indiaas the Tata, cannot save a company from inevitable deaths.

business definition 1

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