Strategies: Stability, Expansion, Retrenchment and Combination strategies
Growth is essential for an organization. Organizations go through an inevitable progression from growth through maturity, revival, and eventually decline. The broad corporate strategy alternatives, sometimes referred to as grand strategies, are: stability/consolidation, expansion/growth, divestment/ retrenchment and combination strategies. During the organizational life cycle, managements choose between growth, stability, or retrenchment strategies to overcome deteriorating trends in performance.
At the core of strategy must be a clear logic of how the corporate objectives, will be achieved. Most of the strategic choices of successful corporations have a central economic logic that serves as the fulcrum for profit creation.
Some of the major economic reasons for choosing a particular type strategy are:
(a) Exploiting operational economies and financial economies of scope.
(b) Uncertainty avoidance and efficiency.
(c) Possession of management skills that help create corporate advantage.
(d) Overcoming the inefficiency in factor markets and
(e) Long term profit potential of a business.
The non-economic reasons for the choice of strategy elements include :
(a) Dominant view of the top management,
(b) Employee incentives to diversify (maximizing management compensation),
(c) Desire for more power and management control,
(d) Ethical considerations and
(e) Corporate social responsibility.
Stability strategy is a strategy in which the organization retains its present strategy at the corporate level and continues focusing on its present products and markets. The firm stays with its current business and product markets; maintains the existing level of effort; and is satisfied with incremental growth. It does not seek to invest in new factories and capital assets, gain market share, or invade new geographical territories. Organizations choose this strategy when the industry in which it operates or the state of the economy is in turmoil or when the industry faces slow or no growth prospects. They also choose this strategy when they go through a period of rapid expansion and need to consolidate their operations before going for another bout of expansion.
Firms choose expansion strategy when their perceptions of resource availability and past financial performance are both high. The most common growth strategies are diversification at the corporate level and concentration at the business level. Reliance Industry, a vertically integrated company covering the complete textile value chain has been repositioning itself to be a diversified conglomerate by entering into a range of business such as power generation and distribution, insurance, telecommunication, and information and communication technology services.
Diversification is defined as the entry of a firm into new lines of activity, through internal or external modes. The primary reason a firm pursues increased diversification are value creation through economies of scale and scope, or market dominance. In some cases firms choose diversification because of government policy, performance problems and uncertainty about future cash flow. In one sense, diversification is a risk management tool, in that its successful use reduces a firm’s vulnerability to the consequences of competing in a single market or industry. Risk plays a very vital role in selecting a strategy and hence, continuous evaluation of risk is linked with a firm’s ability to achieve strategic advantage (Simons, 1999). Internal development can take the form of investments in new products, services, customer segments, or geographic markets including international expansion. Diversification is accomplished through external modes through acquisitions and joint ventures. Concentration can be achieved through vertical or horizontal growth. Vertical growth occurs when a firm takes over a function previously provided by a supplier or a distributor. Horizontal growth occurs when the firm expands products into new geographic areas or increases the range of products and services in current markets.
Many firms experience deteriorating financial performance resulting from market erosion and wrong decisions by management. Managers respond by selecting corporate strategies that redirect their attempt to turnaround the company by improving their firm’s competitive position or divest or wind up the business if a turnaround is not possible. Turnaround strategy is a form of retrenchment strategy, which focuses on operational improvement when the state of decline is not severe. Other possible corporate level strategic responses to decline include growth and stability.
The three generic strategies can be used in combination; they can be sequenced, for instance growth followed by stability, or pursued simultaneously in different parts of the business unit. Combination Strategy is designed to mix growth, retrenchment, and stability strategies and apply them across a corporation’s business units. A firm adopting the combination strategy may apply the combination either simultaneously (across the different businesses) or sequentially. For instance, Tata Iron & Steel Company (TISCO) had first consolidated its position in the core steel business, then divested some of its non-core businesses. Reliance Industries, while consolidating its position in the existing businesses such as textile and petrochemicals, aggressively entered new areas such as Information Technology.