strategy

1. GROWTH STRATEGY
Indian Institute of Management
Nov. 2006

2. Growth Imperatives
• Growth Is Defining Characteristic Of
Modern Age (Unlike Earlier Epochs)
• Capitalist Firm Is The Main Actor In This
Process
• The Laws Of Market Compel Firms To
Seek Continuous Growth Through (Re) -
Investment

3. Growth Imperative
• Growth Is Essential To Meet Stakeholder
Expectations
• Survival Depends On How Flexible The
Firm Is To Cope With Changes In
Environment
• Flexibility And Growth Are Essential For
Survival

4. KEY QUESTIONS
• SHOULD WE GROW IN OUR CURRENT
BUSINESS (existing Product-Market Scope) or
SHALL WE DIVERSIFY?
• EXPANSION
• Is My Current Industry Attractive and Provides
Scope for Expansion?

5. KEY QUESTIONS
• DIVERSIFICATION
• How To Identify Businesses That Are
Attractive?
• What Skills Or Assets Will Make Entry
Profitable / Successful?
• What is the Risk?

6. GROWTH OPTIONS
• Market Expansion
– Selling the Same Product into New Markets
• Product Expansion
– Adding New Products in the Same Industry
Thru Widening Product Scope
• Concentric Diversification
• Expansion into Related Product-Markets
– Adding Similar Products to Same Products to
Related markets.
• Conglomerate Diversification

7. DIVERSIFICATION
• DEFINED AS "ENTRY INTO NEW
PRODUCT LINES INVOLVING
MARKETS AND PRODUCTS THAT
ARE NEW TO THE DIVERSIFYING
FIRM".

8. Diversification Alternatives
Product/
Market
Similar
Technlgy
New
Technolgy
Same
Sell to
firm
Horizontal Diversifn
Vertical Integration.
New
markets
Tech.
related
Unrelated

9. Horizontal Diversification
• MOVES WITHIN THE ECONOMIC
ENVIRONMENT OF DIVERSIFYING
FIRM.
• LOW ON FLEXIBILITY & DOES NOT
ADD TO STABILITY OF EARNING
• COMMON THREAD - MARKETING
SYNERGY

10. Vertical Diversification
• MEASURED BY VALUED
ADDED/SALES
• SENSITIVE TO INSTABILITY SINCE
INCREASES DEPENDENCE ON SAME
SEGMENT OF ECONOMIC DEMAND
• FLEXIBILITY LOW
• SYNERGY STRONG IF TECHNOLOGY
RELATED NEGATIVE IF
TECHNOLOGY IS UNRELATED.

11. Vertical Diversification
• DANGER IF FIRM CANNOT ABSORB
ALL OUTPUT
• MUST LEARN TO SELL TO
COMPETITORS
• HORIZONTAL & VERTICAL
INTEGRATION FAVOURED IF
PRESENT P-M SCOPE IS HEALTHY &
GROWING

12. Concentric Diversification
• COMMON THREAD OF MARKETING
OR TECHNOLOGY FAMILIARITY
• SOME SYNERGY
• FLEXIBILITY HIGH
• RISK MODERATE TO HIGH
DEPENDING ON EXTENT OF
SYSNERGYAND FAMILIARITY

13. Conglomerate Diversification
• NO COMMON THREAD
• HIGH FLEXIBILITY
• VERY HIGH RISK AS NO SYNERGY
• ENSURES STABILITY BUT EXPOSES
FIRM TO HIGH RISK

14. CHOICES
• Which Kind of Diversification will we
choose?
• What are the motivations for
diversification?
– Lack of Growth Opportunities in Existing P-M?
– Underutilized Capabilities Resources?

15. Diversification and Growth
• HISTORICALLY, GROWTH OF LARGE
FIRMS DUE TO SUCCESSFUL
PRODUCT-MARKET DIVERSIFICATION
• DIVERSIFICATION ALSO LINKED TO
CRISIS AND COLLAPSE
• IS DIVERSIFICATION AN ATTRACTIVE
& VIABLE STRATEGY?

16. GENERIC ENTRY
STRATEGIES
• INTERNAL DEVELOPMENT
• ACQUISITION
• JOINT VENTURE
• STRATEGIC ALLIANCE

17. INTERNAL DEVELOPMENT
• CREATES A NEW BUSINESS UNIT IN
THE INDUSTRY
– Faces Structural Entry Barriers
• (Five Forces Model for Analysis)
– Reaction of Incumbent Firms
• (Retaliation -- Severe or Mild)

18. INTERNAL DEVELOPMENT
• COST OF ENTRY
– Investment in Facilities (Capacity Creation)
– Cost of Distribution Network, Sales Force,
Brand, Advertising, Service
– Technology Costs
– Start up Costs
– Sourcing of Managers/Inputs

19. COST OF RETALIATION
• Lower Prices (Cost Structure)
• Increase in Marketing Cost
• Warranty Extension
• Longer Credit
• Effect of Entry on the Industry Demand -
Supply Cost Structure

20. EVALUATION OF ENTRY
DECISION
• Probability of Retaliation Higher if :
– Slow industry Growth
– Commodity Like Product
– High Fixed Costs
– High Industry Concentration
– Strategic Imp. Of Position to Incumbent
– Management Style & Ownership

21. ATTRACTIVENESS TEST
• Industry in Dis-equilibrium
• Slow or Ineffective Retaliation
– Cost Benefit of Retaliation
– Paternal dominant firm
– Need to Protect Existing Business
• Firm Has Lower Entry Costs(than others
• Ability to Influence Industry Structure

22. GENERIC ENTRY CONCEPTS
• Reduce Product Cost
• Buy-In With Lower Price
• Differentiate your Offering
• Superior Product
• Discover a New Niche
• Marketing Innovation

23. ENTRY THRU ACQUISITION
• Does Not Add a New Player
• Speed of Entry
• Synergy
• Evaluation :
– Projected Cash Flow & Cost of Acquisition
– Acquisition Price Determined by Market for
Firms

24. ENTRY THRU ACQUISITION
• Seller will Sell Only if Bid Above Present
Value
• Sale Only At Premium
• Will Acquisition Change Value
– Synergy ??
– Horizontal Intgn/Market Power
– Vertical Integration
– Strategic

25. ACQUISTION PROFITABLE
• If Floor Price Low
• Market for Firms Imperfect
• Bidder Has Unique Resources / Ability to
Operate Business & Enhance value

26. Strategic Alliances
• Joint Ventures
• Minority Equity Stake
• Management Contracts
• Legal Long Term Contracts
• Franchise

27. Cross Border Alliances:
Motivation
• Access New Markets
• Gain Skills, Technology, Products,
• Share Fixed Costs
• Share Risk (Oil Exploration)
• Access Complementary Products
• Access Skills Not Available in the
Organisation

28. Asian Firms : Motivation
• Access International Brands
• Access Global Markets
• Access International Financial Markets
• Access Proprietary Technology

29. Issues in Managing Growth
• Growth Usually Means Starting New Business
• Probability of Failure is High (50-60% Fail)
• Organizational Culture as Barrier – Most Firms
Geared to Mature Businesses with Predictable
parameters; New Business Usually Exploratory
with No Clear Strategy
• Creating Separate Organisations Does Not Always
Help Due to Culture Clash
• Experimentation Key to Evolving Viable Strategy
• Distinct Stages of Business Development

30. Risks
• Internal Development –
– Clash of Culture & System
• Acquisition –
– Price of Acquisition
– Understanding New Business
– Culture of Acquired Firm
– Integration with Existing Business for Synergy

31. Risks
• Joint Ventures & Strategic Alliances
– Joint Control
– Complementarities or Overlap?
– Lack of Clarity on Strategic Goals of Two
Partners

32. Global Experience With Cross
Border Alliances
• 50 % of Alliances Fail
• 75 % End With Acquisition by One Partner
• 75 % of Alliances Where Partners Have
Overlapping Product-market Positions Fail

33. Causes of failure
• Differences in Strategic Intent and Vision
of Partners
• Alliances Unable to Evolve Beyond Initial
Expectations and Objectives
• Alliances Between Strong and Weak
Companies

34. Causes of failure
• One Partner Brings More to the Table
• Gains From Alliance Are Unclear and
Changes in the Environment Negates Initial
Assumptions
• Gains Unequally Shared

35. Preconditions for Successful
Alliances
• Clarity and Agreement on Strategy
• Equal, Proportional Sharing of Gains
• Partners of Equal Size and Capabilities That
Are Complimentary
• More Than Financial Stake Is Clear
Management Control

36. Preconditions for Successful
Alliances
• Cross Border Alliances to Access Global
Markets Better Than Acquisition or New
Greenfield Unit.
• Cross Border Alliances Used to Expand
Core Business or Access New Geographical
Markets Highly Successful--core
Competence Is the Key Factor

37. Criteria for success
• Both Partners Achieve Their Strategic
Objectives
– (Market Share, New Product Development,
Risk Sharing Etc)
• Both Recover Their Financial Costs
• Both Share in Gains Proportionately

38. Choosing Partners
• Capitalise on the Distinct Competence of
Partner (Technology, Brand, Distribution
Network)
• Capitalise on His Geographical Position
• Clarity and Agreement on Strategic Goals
and Sharing of Benefits
• Look for Synergy/complementarities in
Competence or P-M Position

39. Integrating JV
• Devise Appropriate Integration Policies So
That JV Remains Within the Umbrella
• Provide Adequate Operational Autonomy
• Ensure That Both Partners Get What They
Expected Out of Alliance
• Mutual Respect and Trust