Strategic Options for Different Industries and Company Situations

Strategic Options for Different Industries and Company Situations

Strategy Options for A Diversified Company

Once a company gets diversified, it becomes a critical obligation on the part of the corporate managers to manage the affairs of the diversified lines of business effectively.

In order to improve the performance of different lines of businesses, a diversified company may consider any or a combination of the following corporate strategies:

  1. Divestiture Strategy.
  2. Harvest Strategy.
  3. Liquidation Strategy.
  4. Turnaround Strategy.
  5. Restructuring Strategy.
  6. Multinational Strategy.

1. Divestiture Strategy

Divestiture strategy is the strategy of selling off a business unit or a division of a unit because of its failure 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 own management – commonly known as ‘management buyout’. Company’s own managers buy the unit.

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 through 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.

2. Harvest Strategy

Also known as ‘asset reduction strategy’, 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.

3. Liquidation Strategy

Liquidation strategy is the strategy of writing off a business unit’s investment. This strategy is usually adopted when it becomes difficult to find a buyer for a losing unit.

Generally, the business units that are weak (financially or in terms of managerial performance) follow a liquidation strategy.

If a turnaround is not possible, a liquidation (or divestiture) strategy is the last resort.

4. Turnaround Strategy

A company is a weak competitive position may apply a turnaround strategy. Turnaround strategy is the strategy of reverting a weak business unit back to profitability.

This strategy aims at restoring a losing business unit to profitability. In order to make a poor company profitable, management may redeploy additional resources, 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.’

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.

5. Restructuring Strategy

Restructuring strategy involves 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, if a diversified company, over a 4 or 5-year period time, sells off 2 units, closes down 3 weak units, and adds 4 new lines of business to its business-portfolios, these efforts of the company can be called restructuring strategy.

Thompson and Strickland have identified seven conditions that prompt a diversified company to undertake 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.

6. 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.

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 dominating competitive positions in the industry.

Some global industry leaders are;

IndustryLeader
Razor bladesGillette
Detergent powderP&G
Motor carToyota
Television setSony
Computer softwareMicrosoft
Soft drinkCoca-Cola

The main strategic intent of the industry leaders is focused on defending the existing market position and steadily strengthening the position.

To retain the leadership position in the industry, the leaders might follow;

  1. Offensive Strategy.
  2. Defensive Strategy.
  3. 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 hew or better products;
  • Adding unique features in 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:

  1. Increasing expenditures for marketing promotion and better customer service to outcompete the competitors. ,
  2. Introducing more product versions (e g., toothpaste may have three versions: family size, small size, and mini-pack).
  3. Adding customized services that have a personal touch of the provider.
  4. 4 Charging reasonable prices.
  5. Making product quality attractive to customers.
  6. Adding new production capacity ahead of competitors to discourage them from entering into the market with additional capacity.
  7. Making enough investments for technology development.
  8. 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:

  1. Respond to price cuts of small competitors very quickly.
  2. Undertake aggressive marketing campaigns to halt compe­titor moves to expand market share.
  3. Offer better facilities to big customers (large-quantity buyers).
  4. Dissuade distributors/dealers from selling competitors pro­ducts.
  5. Employ the successful executives of the competing companies by offering attractive benefits;
  6. Create pressure on present big customers not to use the products of the competitors (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).
  7. 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 routinely pressure customers and crush competitors, they will simply 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 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;

  1. Offensive Strategy.
  2. Growth Strategy.
  3. Market-Niche Strategy/Focus Strategy.
  4. Specialist Focus Strategy.
  5. 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 through 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 reasonable growth potential.

Specialist Focus Strategy

A runner-up firm can employ specialist focus strategy to build competitive advantage through leadership in a specific area or product or technology

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, 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;

  1. Turnaround Strategy.
  2. Defensive Strategy.
  3. Liquidation Strategy.
  4. 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 poor performance of the company.

There can be a wide array of causes such as high costs, resource constraints, inefficiency and ineffectiveness of managers/ employees, debt-burden, weak eebnomy^of the country of a natural disaster.

After proper identification of the causes, if it appears that the company is worth rescuing, then the company 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.

Defensive Strategy

Some weak companies use ‘fortify and defend’ strategy to protect their current 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 liquidate 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 to 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