A strategy gives the business a clear direction. A good strategy gives a clear course of action for success, but these are nimble and flexible. It understands the business’s market position within the external environment and moves the organization to actions that get results.
Meaning of Strategic Options
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Different Industries and Company Situations and Strategic Options for them
Strategic options are the alternative directions and methods for formulating the business strategy and giving the business a clear direction and purpose for success and market domination.
Strategy Options for A Diversified Company
Once a company gets diversified, it becomes a critical obligation for the corporate managers to manage the affairs of the diversified lines of business effectively.
To improve the performance of different lines of business, a diversified company may consider any or a combination of the following corporate strategies:
- Divestiture Strategy.
- Harvest Strategy.
- Liquidation Strategy.
- Turnaround Strategy.
- Restructuring Strategy.
- Multinational Strategy.
Divestiture Strategy
Divestiture strategy is the strategy of selling off a business unit or a division of a unit because it fails to fetch enough profits for the company or because of its dim prospect of profitability and growth in the future, or for some other reasons.
Divestment or selling off a business unit to ‘independent investors’ is called spinoff. Sometimes, a business unit is sold off to its management – commonly known as a ‘management buyout.’ The company’s managers buy the unit.
Divestment strategies involve the sale of a portion of the business or a major division/profit center. It is usually a part of a restructuring plan and is adopted when a turnaround strategy has been attempted but proved unsuccessful.
Usually, the managers raise cash by issuing bonds and then use the cash to buy the shares/stocks of the business unit.
It was found that some companies had difficulties in managing a large number of business units. They have divested certain business units to focus their resources on the core business.
Divestiture strategy enables a company to narrow down its diversification base by divesting some business units that have no (or little) strategic fit with its main businesses or that have no ability to make a substantial combination to the earnings of the company.
The option of a turnaround may be overlooked if it is obvious that divestment is the only answer in the given situation.
A divestment strategy may be adopted in the following situations:
- There is a cultural mismatch between an acquired entity and a parent company.
- The business is unable to compete in the marketplace leading to diminished profitability.
- Huge investment is required to revive the business, and the organization/division/unit is cash-strapped.
- To balance its strategic portfolio and transfer funds from poorly performing divisions to more attractive ones.
- The industry in which the organization/division competes is declining, and no further growth is possible.
A part of the company is divested as a financially and managerially independent company (split-off), or the firm may sell a unit outright (selloff).
Split-off involves a divorce of two approximately equal-sized business units or divisions. They also opt for retrenchment to free-locked resources used in more profitable areas.
Divestment may not be a standalone strategy in multi-business organizations such as GE. Instead, divestment may be a route for resource diversion from non-profitable to profitable businesses.
Organizations such as GE have achieved their current position not only by vigorously pursuing growth but also by divesting from some businesses that either weren’t profitable or where GE did not enjoy a commanding position.
Divestment leads to the loss of jobs and prestige for those responsible for managing. For these reasons, divestment is as much a behavioral issue as a financial one.
Harvest Strategy
Also known as the ‘asset reduction strategy,’ the harvest strategy entails decreasing the investment in a business unit and extracting the investment as much as it can.
The company tries to harvest all the returns it can. It reduces the assets to a minimum.
When a company adopts a harvest strategy, it halts investment in a business unit to maximize short-term cash flow from the unit. Subsequently, the unit is liquidated.
Liquidation Strategy
Liquidation strategy is the strategy of writing off a business unit’s investment. This strategy is usually adopted when finding a buyer for a losing unit becomes difficult.
Generally, weak business units (financially or in terms of managerial performance) follow a liquidation strategy. A liquidation (or divestiture) strategy is the last resort if a turnaround is impossible.
The liquidation strategy is an extreme retrenchment strategy. It involves closing all operations and selling assets.
Liquidation is the least preferred among the cutback strategies because it leads to large-scale job losses and is seen as a manifestation of managerial failure.
Liquating an organization requires the involvement of banks, financial institutions, other debtors, labor unions, and government agencies. Liquidation may be implemented by the court, voluntary liquidation by the firm, or under the supervision of the court.
At times, the company’s liquidation may dissolve the legal entity, but the business with the same managers/owners, products/markets may resume under a different name and entity. Liquidation may be voluntary or forced by an enforcement agency.
Turnaround Strategy
A company in a weak competitive position may apply a turnaround strategy. A turnaround strategy is a strategy of reverting a weak business unit to profitability. This strategy aims at restoring a losing business unit to profitability.
Management may redeploy additional resources to make a poor company profitable instead of divestment or liquidation. However, the company must have enough resources and capable managers to turn the business unit around.
Lee Iacocca applied a turnaround strategy to regain the position of Chrysler Corporation (one of the giant American car manufacturers) in the 1990s and was tremendously successful.
This strategy works best when ‘the reasons for poor performance are short term, the ailing businesses are in attractive industries, and divesting the money-losers does not make long-term strategic sense.’
A turnaround strategy may include the following actions:
- Selling or closing down a losing unit having a poor prospect.
- Changing the present strategy and adopting a different business-level strategy.
- Creating a new venture to earn greater returns.
- Undertaking measures for cost reduction.
It may be noted that a turnaround strategy can be applied for both a single business company and a diversified company.
Restructuring Strategy
Restructuring strategy involves the divestment of one or more business units of a diversified company and acquiring new business units.
Thus, the business makeup of the diversified company takes a new shape. This strategy calls for reorganizing the business portfolio of the company.
For this purpose, ailing business units are sold off, and prospective new business endeavors are undertaken.
For example, suppose a diversified company, over a 4 or 5-year period, sells off 2 units, closes down three weak units, and adds 4 new lines of business to its business portfolios. In that case, these company efforts can be called a restructuring strategy.
Thompson and Strickland have identified seven conditions that prompt a diversified company to undertake a restructuring strategy:
- When the long-term performance prospects of the company have become unattractive.
- When one or more of the company’s business units have been facing hard times.
- When a newly-appointed CEO decides to restructure the company.
- When the diversified company wants to build up a strong presence in a potentially attractive new industry.
- When the company needs huge cash for acquiring a very prospective business and so needs to sell off some units.
- When environmental changes force the company to shake up the existing portfolio to improve corporate performance.
- When changes in markets and/or technologies compel the company to split the company into separate pieces rather than remaining together.
Multinational Diversification Strategy
A company may follow a strategy of diversifying its business into foreign markets. When a company faces hard times in the domestic market or finds a high prospect in foreign markets, it may undertake a multinational diversification strategy.
A multinational diversification strategy warrants cross-country collaboration and strategic coordination.
This strategy becomes effective when it results in competitive advantage and increased profitability. Multinational diversification offers several ways to build a competitive advantage:
- Full capture of economies of scale and experience curve effects.
- Opportunities to capitalize on cross-business economies of scope.
- Opportunities to transfer competitively valuable resources from one business to another.
- Ability to leverage the use of a well-known and competitively powerful brand name.
- Ability to capitalize on opportunities for cross-business and cross-country collaboration and strategic coordination.
- Opportunities to use cross-business or cross-country subsidization to outcompete the competitors.
Strategy Options for Industry Leaders
Industry leaders are those firms that enjoy a larger market share than the average industry players. Some firms in an industry are simply leaders because they are stronger than average competitors, but they cannot dominate the industry.
Some firms are dominant leaders because of their competitive industry positions. Some global industry leaders are;
| Industry | Leader |
|---|---|
| Razor blades | Gillette |
| Detergent powder | P&G |
| Motor car | Toyota |
| Television set | Sony |
| Computer software | Microsoft |
| Soft drink | Coca-Cola |
The industry leaders’ main strategic intent is to defend the existing market position and steadily strengthen the position.
To retain the leadership position in the industry, the leaders might follow the following;
- Offensive Strategy.
- Defensive Strategy.
- Muscle-flexing Strategy.
Offensive Strategy
A leader can follow an offensive strategy to stay a step ahead in the market. Offensive strategists are always proactive. They undertake competitive action earlier than competitors.
Thus, they force the competitors to become reactive. Offensive strategies usually include such actions as:
- The relentless pursuit of continuous improvement of products;
- Continuous innovation for introducing new or better products;
- Adding unique features to the products;
- Improving customer services;
- Reducing operating costs;
- Devising ways to attract customers or runner-up firms;
- Undertaking initiatives to expand overall demand in the industry by producing new families of products, discovering new uses of products, attracting new users, and promoting more frequent use.
Defensive Strategy
A defensive strategy is suitable in situations where a company wishes to make the most profit out of its present market position.
Such a strategy requires enough capital to spend on strategic actions to protect the company’s ability to compete in the market.
The major objectives of the defensive strategy include protecting the present market share, strengthening the market position, and protecting the company’s existing competitive advantages.
The defensive strategy entails several defensive actions:
- Increasing expenditures for marketing promotion and better customer service to outcompete the competitors. ,
- Introducing more product versions (e.g., toothpaste may have three versions: family size, small size, and mini-pack).
- Adding customized services that have a personal touch of the provider.
- 4 Charging reasonable prices.
- Making product quality attractive to customers.
- Adding new production capacity ahead of competitors to discourage them from entering into the market with additional capacity.
- Making enough investments for technology development.
- Building a strong relationship in the supply chain (especially with suppliers and dealers/distributors).
Muscle-flexing Strategy
An industry leader may undertake a strategy of muscling smaller competitors and customers to bolster its competitive position.
Dominant market leaders may adopt the following approaches:
- Respond to price cuts of small competitors very quickly.
- Undertake aggressive marketing campaigns to halt competitor moves to expand market share.
- Offer better facilities to big customers (large-quantity buyers).
- Dissuade distributors/dealers from selling competitors’ products.
- Employ the successful executives of the competing companies by offering attractive benefits;
- Create pressure on present big customers not to use the competitors’ products (Microsoft Corporation did so with its major customers like IBM and Gateway – Microsoft asked these two companies not to use competitors’ products on their PCs).
- Offer special discounts to certain customers (or grant preferred treatment) if they use only the company’s products (not the products of rivals).
However, market leaders need to be highly ethical in using the above tactics.
If they use bullying tactics to pressure customers and crush competitors routinely, they will alienate customers and arouse adverse public opinion.
Strategy Options for Runner-up Companies
The position of runner-up firms is next to the market leaders in the marketplace. Some of these; firms are up-and-coming market- challengers.
Some are market niches. The market challengers use offensive strategies to expand their market share.
The market niches or market-focusers concentrate their operations in limited market segments.
The possible strategic approaches for the runner-up firms are;
- Offensive Strategy.
- Growth Strategy.
- Market-Niche Strategy/Focus Strategy.
- Specialist Focus Strategy.
- Content-Follower Strategy.
Offensive Strategy
This strategy is useful to a market-challenger runner-up firm. The firm wishing to build a competitive advantage may adopt an offensive strategy through;
- Innovating products,
- Building a good brand image,
- Introducing better products ahead of the competitors,
- Forming strategic alliances with the key intermediaries,
- Establishing a long-term business relationship with the marketers of complementary products, and
- Devising ways to reduce costs.
Growth Strategy
Another viable strategy for market-challenger is to follow the strategy of growing by acquiring other similar firms. This helps expand the market share.
Focus Strategy / Market-Niche Strategy
A runner-up firm may look for a vacant-niche market. The niche market that has been bypassed or neglected by the market leaders is suitable for the runner-up firms.
However, to be viable, the niche should have enough customers to be profitable and have reasonable growth potential.
Specialist Focus Strategy
For example, a firm may concentrate on producing only glass sheets for a window. Another firm may specialize in transparent ballpen.
Content-Follower Strategy
The firms that follow the paths of market leaders are. Content-followers. They simply imitate what the leaders do.
They don’t challenge the leaders but rather follow them. They don’t imitate any trendsetting moves. They react and respond to the leaders’ actions. They are defensive, never offensive.
Strategy Options for Weak Firms
The firms that are competitively weak or plagued by crisis conditions may follow;
- Turnaround Strategy.
- Defensive Strategy.
- Liquidation Strategy.
- End-Game Strategy.
Turnaround Strategy
Weak firms may launch an offensive turnaround strategy (based on low cost or unique differentiation) to improve their market position.
Before formulating this strategy, managers need to identify the causes of the company’s poor performance.
There can be a wide array of causes, such as high costs, resource constraints, inefficiency and ineffectiveness of managers/employees, debt burden, the weak economy of the country, or a natural disaster.
After properly identifying the causes, if the company is worth rescuing, it can go for a turnaround strategy to get the business out of the crisis.
Actions may include revising existing strategy, devising ways for cost reduction, or selling some assets for cash to save the remaining part of the business.
Some crisis-ridden companies may require a combination of these efforts.
The turnaround strategy is the “infuse efficiency strategy.” Underperformance is an outcome of operational inefficiency and neglect. There is a possibility that the situation may be reversed with managerial perseverance.
The organization tries
- to increase productivity by restoring employee morale,
- introducing quality control mechanisms with reward systems,
- exercising strict control over expenditure, eliminating unproductive functions,
- outsourcing non-critical functions,
- up-grading technology, and use of technology to reduce costs, for example, email instead of print mail,
- installing ERP to track costs and exercise control.
In addition, the organization also improves its debtor collection, reschedules its loan payments, and shifts towards low-cost funds, improvisation in product quality, and after-sales service.
The organization tries to improve its financial health because divesting from the business may not be strategically wise.
This strategy is followed when the industry outlook is promising but organizational inefficiencies have crept in. The organization tries to come on track and be profitable in the long run through cost reduction and revenue generation measures.
Defensive Strategy
Some weak companies use the ‘fortify and defend’ strategy to protect their market position.
The objectives of this strategy are to keep the sales volume at the current level, maintain the present market share, sustain the existing profitability, and protect the current competitive position.
Liquidation Strategy
When turnaround or defensive strategy is not pragmatic due to reasons beyond the control of the management, it is better to go for closing the business and liquidating the assets.
Such a strategy is the last resort when hopeless situations prevail in the company.
End-Game Strategy
Weak companies also can employ endgame strategies.
Such strategies entail undertaking actions to maximize short-term cash flows and gradually exit the market. An end-game strategy is suitable in certain situations:
- The unattractive prospect of the industry (examples: video cassettes, VCRs, inch floppy disk, and ‘Walkman’ businesses).
- Opportunity to use the freed resources in much better areas;
- Very high costs of rejuvenating the existing business; and
- Maintaining market share too costly, etc
