A review of the myths and realities surrounding NAFTA reveals the

extent to which its critics have been proven wrong.

Myth 1: NAFTA has not achieved its core goals of expanding
trade and investment between Canada, the United States, and
Mexico.
Reality: Since NAFTA came into effect, trade among the NAFTA
countries has more than tripled, reaching US$949.1 billion. In 2008,
Canada and the United States’ inward foreign direct investment
from NAFTA partner countries reached US$469.8 billion.
Meanwhile, Mexico has become one of the largest recipients of
foreign direct investment among emerging markets, and received
more than US$156 billion from its NAFTA partners between 1993
and 2008.
Myth 2: NAFTA has resulted in job losses.
Reality: Since NAFTA came into effect, the overall job growth has
been strong in all three partner countries. Across North America,
total employment has grown by almost 40 million jobs since 1993.
Myth 3: NAFTA hurts workers by eroding labor standards and
lowering wages.
Reality: The NAFTA partners negotiated and implemented a
parallel agreement on labor cooperation, the North American
Agreement on Labor Cooperation (NAALC). The NAALC adds a
social dimension to NAFTA. Through the NAALC, the regional
trading partners seek to improve working conditions and living
standards, and to protect, enhance, and enforce basic workers’
rights.
Over the years, the NAALC has helped to improve working
conditions and living standards in Canada, the U.S., and Mexico. It
has also raised the public profile of major labor rights issues,
including pregnancy-based discrimination, secret ballot voting,
protection contracts, and protection of migrant workers.
The NAALC promotes the effective enforcement of domestic labor
laws in all three countries and highlights cooperation on labor
matters in three key areas: industrial relations, occupational health
and safety, and employment standards.
 In addition, NAFTA has promoted higher wages. In Mexico, for
example, export firms employ one in five workers; these workers are
paid 40% more on average than those in non-export jobs. Firms
with foreign direct investment employ nearly 20% of the labor force
and pay 26% more than the domestic average manufacturing wage.
For more information, please visit the website of the Commission for
Labor Cooperation (CLC).
Myth 4: NAFTA undermines national sovereignty and
independence.
Reality: NAFTA is a trilateral agreement designed to facilitate trade
and investment between Canada, the United States, and Mexico. It
respects the unique cultural and legal framework of each of the
three countries and allows them to maintain their sovereignty and
independence.
Myth 5: NAFTA does nothing to help the environment.
Reality: The NAFTA partners negotiated a parallel agreement on
environmental cooperation, the North American Agreement on
Environmental Cooperation (NAAEC). The NAAEC commits the
NAFTA partners to work cooperatively to better understand and
improve the protection of their environment. The agreement also
requires that each NAFTA partner effectively enforce its
environmental laws.
The Commission for Environmental Cooperation, established under
the NAAEC, has produced concrete improvements in the
management of North American environmental issues. With a
budget of US$9 million annually, some initiatives of the Commission
include the:
 development of North American management practices for
toxic chemicals;
 establishment of the first Mexican national air emissions
inventory;
 launch of the North American Bird Conservation Initiative,
which provides a resource for bird conservation programs in the
three countries;
 promotion of best practices to address the linkages between
the environment, the economy, and trade.
Additionally, the United States and Mexico created two binational
institutions. The Border Environment Cooperation Commission
provides technical support for the development of environmental
infrastructure projects in the U.S.-Mexico border region
(www.cocef.org). The North American Development Bank finances
these projects (www.nadbank.org). To date, they have provided
nearly US$1 billion for 135 environmental infrastructure projects
with a total estimated cost of US$2.89 billion and allocated US$33.5
million in assistance and US$21.6 million in grants for over 450
other border environmental projects. The Mexican government has
also made substantial new investments in environmental protection,
increasing the federal budget for the environmental sector by 81%
between 2003 and 2008.
For more information on what has been accomplished by the parties
under the NAAEC, please visit the Commission for Environmental
Cooperation website at www.cec.org/.
Myth 6: NAFTA hurts the agricultural sector.
Reality: NAFTA has led to increasingly integrated agricultural and
agri-food trade within the North American market. Since 1993,
agricultural and agri-food trade and investment flows between the
NAFTA partners has grown, with overall agricultural trade reaching
about US$50 billion.
The NAFTA partners are one another’s largest agricultural export
markets: Canada and Mexico are the two largest agricultural
suppliers to the United States, and the United States is the leading
agricultural provider to both the Canadian and Mexican markets.
U.S.-Mexico agricultural trade reached US$26.9 billion in 2008.
As NAFTA has contributed to further integration of the trading
partners’ agricultural sectors, Mexican industries have required
more U.S. agricultural inputs. For example, U.S. feedstuffs have
increased Mexican meat production and consumption; likewise the
importance of Mexican produce to U.S. fruit and vegetable
consumption is growing. Grains, oilseeds, meat and related
products make up three -fourths of U.S. agricultural exports to
Mexico, while beer, vegetables and fruit account for three-fourths of
U.S agricultural imports from Mexico.
Myth 7: NAFTA negatively impacts the North American
manufacturing base.
Reality: Since NAFTA came into effect, North American
manufacturers have enjoyed better access to materials,
technologies, capital, and talent available across the continent.
Thousands of manufacturers have capitalized on this to improve
efficiency and better refine technology, making them more
competitive at home and around the world.
U.S. manufacturing output rose by 62% between 1993 and 2008,
compared with 42% between 1980 and 1993. In 2008,U.S.
manufacturing exports reached an all-time high of US$1.0 trillion.
Canadian manufacturing output (real GDP) increased by 62%
between 1993 and 2008 compared with 23% between 1981 and
1993. Over the same period (1993-2008), Canadian manufacturing
exports grew at a much faster pace (up 103.6%).
NAFTA has empowered Mexico’s industrial base by facilitating
modernization. As a strategic manufacturing center in North
America, Mexico enhances the region’s competitive status in the
global marketplace. Since NAFTA’s implementation, Mexico’s
international presence has been invigorated by the growth of
manufacturing output, which has since tripled. In addition, Mexico’s
manufactured exports have multiplied five times over the past 15
years.
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The North American Free Trade Agreement (NAFTA) revolutionized
trade and investment in North America, helping to unlock our
region’s economic potential. Since it came into effect 15 years ago,
North Americans have enjoyed an overall extended period of strong
economic growth and rising prosperity.
NAFTA has helped to stimulate economic growth and create higher-
paying jobs across North America. It has also paved the way for
greater market competition and enhanced choice and purchasing
power for North American consumers, families, farmers, and
businesses.
Furthermore, NAFTA has provided North American businesses with
better access to materials, technologies, investment capital, and
 talent available across North America. This has helped make our
businesses more competitive, both within North America and around
the world. With rapidly growing economies in Asia and South
America challenging North America’s competitiveness, NAFTA
remains key to sustained growth and prosperity in the region.
NAFTA has proven that trade liberalization plays an important role in
promoting transparency, economic growth, and legal certainty. In the
face of increased global competition, Canada, the United States,
and Mexico will work to strengthen the competitiveness of the North
American region by continuing to pursue trade within the NAFTA
region. The three countries will also continue to expand trade with
other regions. Additionally, Canada, Mexico, and the United States
share common challenges within North America that directly affect
quality of life. At the 2009 North American Leaders’ Summit, our
three countries agreed to “reiterate our commitment to reinvigorate
our trading relationship and to ensure that the benefits of our
economic relationship are widely shared and sustainable.

Did you know?

 Since NAFTA came into effect, merchandise trade among the
NAFTA partners has more than tripled, reaching US$946.1 billion
in 2008. Over that period, Canada-U.S. trade has nearly tripled,
while trade between Mexico and the U.S. has more than
quadrupled. [C$ figure = $1.0 trillion]

 Today, the NAFTA partners exchange about US$2.6 billion in

merchandise on a daily basis with each other. That’s about
US$108 million per hour. [C$ figures = $2.8 billion and $115
million]

 Since NAFTA came into effect, the North American economy

has more than doubled in size. The combined gross domestic
product (GDP) for Canada, the United States, and Mexico
surpassed US$17 trillion in 2008, up from US$7.6 trillion in 1993.
[C$ figures = $18.2 trillion and $9.8 trillion]
 In 2008, Canada and the United States’ inward foreign direct
investment stocks from NAFTA partner countries reached
US$469.8 billion. Meanwhile, Mexico has become one of the
largest recipients of foreign direct investment among emerging
markets, and received US$156 billion from its NAFTA partners
between 1993 and 2008.

 North American employment levels have climbed nearly 23%

since 1993, representing a net gain of 39.7 million jobs.

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Xxxxxxxxx
NAFTA Partners:
Canada and the United States implemented a free trade pact in
1989. In 1994, NAFTA broadened the free trade area to include
Mexico.
NAFTA Economy: Today NAFTA covers a North American
economy with a combined output of US$17.0 trillion.
NAFTA Population: The NAFTA region is home to 444.1 million
people, 33.3 million of whom live in Canada, 304.1 million in the
United States, and 106.7 million in Mexico.
NAFTA Languages: English, Spanish, and French are languages
widely spoken in the NAFTA countries. However, many other
languages are spoken across the continent.
Canada: One in five jobs in Canada is in part linked to international
trade, and Canada’s prosperity is built on its openness to
international trade and investment. As such, the North American
continental partnership is without a doubt an important competitive
advantage for Canada. Canada is using this continental platform as
a way to help Canadian business embrace commercial
opportunities around the world.
The United States: The largest and most diversified economy in
the world, the United States is a market economy whose
businesses are world leaders in the manufacturing and high-tech
sectors, especially computers, medical equipment, and aerospace,
and in services, including financial services and
telecommunications, and in agriculture.
Mexico: Trade liberalization has transformed and modernized
Mexico’s vibrant economy by successfully boosting trade and
investment flows. Within just a few years, Mexico’s exports have
diversified from primarily oil to include an array of manufactured
products, making Mexico one of the largest exporters in the world.
 NAFTA at a Glance

NAFTA Partners Canada U.S. Mexico Combined

Population (July 304.1 106.7

33.3 million 444.1 million
2008 est.) million million

English and
Languages English Spanish
French

Gross Domestic
Product, 2008 14,441 1,087
1,501 billion 17.0 trillion
(Current prices, billion billion
US$)

Trade with NAFTA 570.8 billion 919.9 393.5 946.1 billion

Partners, 2008 billion billion
 NAFTA at a Glance

NAFTA Partners Canada U.S. Mexico Combined

(Current prices,
US$)

Inward Foreign
Direct Investment
229.8 156.0
Among NAFTA 240.0 billion --- 1
billion billion
Countries, 2008
(US$)

Jobs Created 1993-

4.3 25.1 9.3 39.7
2008 (millions)

National
Employment Level, 17.1 145.4 43.2 205.7
2008 (millions)
Sources: Statistics Canada - Canada; Department of Commerce and Bureau of Labour Statistics – United States; Instituto Nacional de Estadística, Geografía e Informática
(INEGI) and Dirección General de Inversión Extranjera de Secretaría de Economía (DGIE-SE)– Mexico.

Growth strategies adopted by MNCs

Growth is a way of life. Almost all organizations plan to expand. This strategy is followed when
an organization aims at higher growth by broadening its one or more of its business in terms of
their respective customer groups, customers functions, and alternative technologies singly or
jointly – in order to improve its overall performance.

There are five types of expansion (Growth) strategies

 1. Expansion through concentration
2. Expansion through integration
3. Expansion through diversification
4. Expansion through cooperation

1. Expansion through concentration

It involves converging resources in one or more of firms businesses in terms of their respective
customer needs, customer functions, or alternative technologies either singly or jointly, in such a
manner that it results in expansions. A firm that is familiar with an industry would naturally like
to invest more in known business rather than unknown business. Concentration can be done
through

 Market Penetration: It involves selling more products to the same market by focusing
intensely on existing markets with its present products, increasing usage by existing
customers and increasing market share and restructures a mature market by driving out
competitors E.g.: Low pricing strategies
 Market Development: It involves selling the same products to new markets by attracting
new users to its existing products. Market development can be geographic wise and
demographic wise. E.g.: XEROX Company educated small business entrepreneurs to
create new markets.
 Product Development: It involves selling new products to the same markets by
introducing newer products in existing markets. E.g.: the tourism industry in India has not
been able to attract new customers in significant numbers. New products such as selling
India as a golfing or ayuerveda-based medical treatment destination are some of the
product development efforts in the tourism industry to attract more tourists.

Advantages of concentration strategies

 Involves minimal organizational changes and is less threatening.

 Enables the firm to specialize by gaining the in-depth knowledge of the businesses.
 Enables the firm to develop competitive advantage.
 Decision-making can be made easily as there is a high level of productivity.
 Systems and processes within the firm become familiar to the people in the organization.

Disadvantages of concentration strategies

 It is dependent on one industry if there is any worse condition in the industry the firm
will be affected.
 Factors such as product obsolescence, fickleness of market, emergence of newer
technologies are threat to concentrated firm
  Mangers may not be able to sustain interest and find the work less challenging.
 It may lead to cash flow problems.

2. Expansion through Integration

It is done where the company attempts to widen the scope of its business definition in such a
manner that it results in serving the same set of customers. The alternative technology of the
business undergoes a change. It is combing activities related to the present activity of a firm.
Such a combination may be done through value chain. A value chain is a set of interrelated
activity performed by an organization right from the procurement of basic raw materials down to
the marketing of finished products to the ultimate customers. E.g.: Several process based
industry such as petro chemicals, steel, textiles of hydrocarbons have integrate firm

A make or buy decision is then made when firms wish to negotiate with the suppliers or buyers.
The cost of making the items used in the manufacture of ones owns products are to be evaluated
against the cost of procuring them from suppliers. If the cost of making is less that the cost of
procurement then the firm moves up the value chain to make the item itself. Like wise if the cost
of selling the finished products is lesser than the price paid to the sellers to do the same thing
then the firm would go for direct selling.

Among the integration strategies are of two type’s vertical and horizontal integration.

 Vertical Integration: when an organization starts making new products that serve its own
needs vertical integration takes place. Vertical integration could be of two types Back
ward and forward integration. Backward integration means moving back to the source of
raw materials while forward integration moves the organization nearer to the ultimate
customer. Generally when firms vertically integrate they do so in a complete manner that
is they move backward or forward decisively resulting in a full integration but when a
firm does not commit it fully it is possible to have partial vertical integration strategies
too. Two such partial vertical integration strategies are ‘taper’ integration and ‘quasi’
integration. Taper integration requires firms to make a part of their own requirements and
to buy the rest from outsiders. Through quasi integration strategies firm purchase most of
their requirements from other firms in which they have an ownership stake. Ancillary
industrial units and outsourcing through sub contracting are adapted forms of quasi
integration.
 Horizontal Integration: when an organization takes up the same type of products at the
same level of production or marketing process, it is said to follow a strategy of horizontal
integration. When a luggage company takes over its rival luggage company, it is
horizontal integration. Horizontal integration strategy may be frequently adopted with a
view to expand geographically by buying a competitors business, to increase the market
share or to benefit from economics of scale.

3. Expansion through Diversification

Diversification is a much used and much talked about set of strategies. It involves a substantial
change in the business definition – singly or jointly- in terms of customer groups or alternative
technologies of one or more of a firm’s businesses. . There are two categories, concentric and
conglomerate diversification.

Concentric Diversification: when an organization takes up an activity in such a manner that is

related to the existing business definition of one or more of firms businesses, either in terms of
customer groups, customer’s functions or alternative technologies, it is called concentric
diversification. Concentric diversification may be of three types:

1. Marketing related concentric diversification: when a similar type of product is offered

with a help of unrelated technology for e.g., a company in the sewing machine business
diversifies in to kitchen ware and household appliances, which are sold to house wives
through a chain of retails stores.
2. Technology- related concentric diversification: when a new type of product or service is
provided with the help of related technology, for e.g., a leasing firm offering hire-
purchase services to institutional customers also starts consumer financing for the
purchase of durable sot individual customers.
3. Marketing- technology related concentric diversification: when a similar type of product
is provided with the help of related technology, for e.g., a rain coat manufacturer makes
other rubber based items, such as water proof shoes and rubber gloves sold through the
same retail outlets

Conglomerate Diversification: when an organization adopts a strategy which requires taking of

those activities which are unrelated to the existing businesses definition of one or more of its
businesses either in terms of their respective customer groups, customer functions or alternative
technologies. Example of Indian company which have adopted apart of growth and expansion
through conglomerate diversification the classic examples is of ITC, a cigarette company
diversifying into the hotel industry

4. Expansion through Cooperation

The term cooperation expresses the idea of simultaneous competition and cooperation among
rival firms for mutual benefits. Cooperative strategies could be of the following types:

1. Mergers
2. Takeovers
3. Joint ventures
4. Strategic alliances

Mergers Strategies: A merger is a combination of two or more organizations in which one

acquires the assets and liabilities of the other in exchange for shares or cash or both the
organization are dissolved and the assets and liabilities are combined and new stock is issued.
For the organization, which acquires another, it is an acquisition. For the organization, which is
acquired, it is a merger. If both the organization dissolves their identity to create a new
organization, it is consolidation. There are different types of mergers they are horizontal merger,
vertical merger, concentric merger and conglomerate merger.

 Horizontal Mergers: it takes place when there is a combination of two or more

organizations in the same business. E.g: A company making footwear combines with
another footwear company, or a retailer of pharmaceutical combines with another retailer
in the same businesses.
 Vertical Mergers: It takes place when there is a combination of two or more
organizations, not necessarily in the same business, which create complementarities
either in terms of supply of raw materials (input) or marketing of goods and services
(outputs). E.g: A footwear company combines with a leather tannery or with a chain shoe
retail stores
 Concentric Mergers: It takes place when there is a combination of two or more
organizations related to each other either in terms of customer functions, customer
groups, or the alternative technologies used. E.g: A footwear company combining with a
hosiery firm making socks or another specialty footwear company, or with a leather
goods company making purse, hand bags and so on
 Conglomerate Mergers: It takes place when there is a combination of two or more
organizations unrelated to each other, either in terms of customer functions, customer
groups, or alternative technologies used. E.g: A footwear company combining with a
pharmaceutical firm.

Takeover Strategies: Takeover or acquisition is a popular strategic alternative adopted by Indian

companies. Acquisitions usually are based on the strong motivation of the buyer firm to acquire.
Takeovers are frequently classified as hostile takeovers (which are against the wishes of the
acquired firm) and friendly takeovers (by mutual consent)

 Friendly takeovers are where a takeover is not resisted or opposed, by the existing
management or professionals. E.g: Tata Tea’s takeover of Consolidated Coffee (a grower
of coffee beans) and Asian Coffee (a processor) is an example of a friendly takeover.
 Hostile takeovers is where a takeover is resisted, or expected to be opposed, by the
existing management or professionals.

Joint Venture Strategies: Joint ventures are a special case of consolidation where two or more
companies from a temporary form a temporary partnership (also called a consortium) for a
specified purpose. They occur when an independent firm is created by at least two other firms.
Joint ventures may be useful to gain access to a new business mainly under these conditions

 When an activity is uneconomical for an organization to do alone.

 When the risk of business has to be shared.
 When the distinctive competence of two or more organization can be brought together.
 When the organization has to overcome the hurdles, such as import quotas, tariffs,
nationalistic – political interests, and cultural roadblocks.
Strategic alliances: They are partnership between firms whereby their resources, capabilities and
core competencies are combined to pursue mutual interest to develop, manufacture, or distribute
goods or services. There are various advantages:

 Two or more firms unite to pursue a set of agreed upon goals but remain independent
subsequent to the formation of the alliances. A pooling of resources, investment and risks
occurs for mutual gain
 The partner firms contribute on a continuing basis in one or more key strategic areas, for
example, technology, product and so forth.
 Strategic alliances offer a growth route in which merging one’s entity, acquiring or being
acquired, or creating a joint venture may not be required
 Global partners can help local firms by developing global quality consciousness, creating
adherence to international quality standards, providing access to state of the art
technology, gaining entry to world wide mass markets, and making funds available for
expansions.

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Stability strategies adopted by MNCs

The stability grand strategy is adopted by an organization when it attempts at an incremental
improvement of its functional performance by marginally changing one or more of its businesses
in terms of their respective customer groups, customer functions, and alternative technologies –
either singly or collectively

E.g: A copier machine company provides better after sales service to its existing customer to
improve its company product image, and increase the sale of accessories and consumables

This strategy may be relevant for a firm operating in a reasonably certain and predictable
environment. Stability strategy can be of three types –No Change Strategy, Profit Strategy,
Pause/ Proceed – with – caution Strategy.

1. No-Change Strategy

It is a conscious decision to do nothing new. The firm will continue with its present business
definition. When a firm has a stable internal and external environment the firm will continue
with its present strategy. The firm has no new strengths and weaknesses within the organization
and there is no opportunities or threats in the external environment. Taking into account this
situation the firm decides to maintain its strategy.

Several small and medium sized firm operating in a familiar market- more often a niche market
that is limited in scope – and offering products or services through a time tested technology rely
on the No – Change Strategy.
2. Profit Strategy

No firm can continue with the No – Change Strategy. Sometimes things do change and the firm
is faced with the situation where it has to do something. A firm may assess the situation and
assume that its problem are short lived and will go away with time. Till then a firm tries to
sustain its profitability by adopting a profit strategy

For instance in a situation when the profit is becoming lower firm takes measures to reduce
investments, cut costs, raise prices, increase productivity and adopt other measures to solve the
temporary difficulties.

The problem arises due to unfavorable situation like economic recession, government attitude,
and industry down turn, competitive pressures and like. During this kind of situation that the firm
assumes to be temporary it would adopt profit strategies

Some firms to overcome these difficulties would sell off assets such as prime land in a
commercial area and move to suburbs. Others have removed some of its non-core business to
raise money, while others have decided to provide outsourcing service to other organizations.

3. Pause/ Proceed with Caution Strategy

It is employed by the firm that wish to test the ground before moving ahead with a full fledged
grand strategy, or by firms that have an intense pace of expansion and wish to rest for a while
before moving ahead. The purpose is to allow all the people in the organization to adapt to the
changes. It is a deliberate and conscious attempt to postpone strategic changes to a more
opportune time.

E.g: In the India shoe market dominated by Bata and Liberty, Hindustan Levers better known for
soaps and detergents, produces substantial quantity of shoes and shoe uppers for the export
market. In late 2000, it started selling a few thousand pairs in the cities to find out the market
reaction. This is a pause proceed with caution strategy before it goes full steam into another
FMCG sector that has a lot of potential

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Retrenchment strategy adopted by MNCs

A retrenchment grand strategy is followed when an organization aims at a contraction of its

activities through substantial reduction or the elimination of the scope of one or more of its
businesses in terms of their respective customer groups, customer functions, or alternative
technologies either singly or jointly in order to improve its overall performance. E.g: A corporate
hospital decides to focus only on special treatment and realize higher revenues by reducing its
commitment to general case which is less profitable.

The growth of industries and markets are threatened by various external and internal
developments (External developments – government policies, demand saturation, emergence of
substitute products, or changing customer needs. Internal Developments – poor management,
wrong strategies, poor quality of functional management and so on.) In these situations the
industries and markets and consequently the companies face the danger of decline and will go for
adopting retrenchment strategies. E.g: fountain pens, manual type writers, tele printers, steam
engines, jute and jute products, slide rules, calculators and wooden toys are some products that
have either disappeared or face decline.

There are three types of retrenchment strategies – Turnaround Strategies, Divestment Strategies
and Liquidation strategies.

1. Turnaround Strategies

Turn around strategies derives their name from the action involved that is reversing a negative
trend. There are certain conditions or indicators which point out that a turnaround is needed for
an organization to survive. They are:

 Persistent Negative cash flows

 Negative Profits
 Declining market share
 Deterioration in Physical facilities
 Over manning, high turnover of employees, and low morale
 Uncompetitive products or services
 Mis management

An organization which faces one or more of these issues is referred to as a ‘sick’ company.

There are three ways in which turnarounds can be managed

 The existing chief executive and management team handles the entire turnaround strategy
with the advisory support of a external consultant.
 In another case the existing team withdraws temporarily and an executive consultant or
turnaround specialist is employed to do the job.
 The last method involves the replacement of the existing team specially the chief
executive, or merging the sick organization with a healthy one.

Before a turn around can be formulated for an Indian company, it has to be first declared as a
sick company. The declaration is done on the basis of the Sick Industrial Companies Act (SICA),
1985, which provides for a quasi judicial body called the Board of Industrial and Financial
Reconstruction (BIFR) which acts as the corporate doctor whenever companies fall sick.

2. Divestment Strategies
A divestment strategy involves the sale or liquidation of a portion of business, or a major
division. Profit centre or SBU. Divestment is usually a part of rehabilitation or restructuring plan
and is adopted when a turnaround has been attempted but has proved to be unsuccessful.
Harvesting strategies a variant of the divestment strategies, involve a process of gradually letting
a company business wither away in a carefully controlled manner

Reasons for Divestment

 The business that has been acquired proves to be a mismatch and cannot be integrated
within the company. Similarly a project that proves to be in viable in the long term is
divested
 Persistent negative cash flows from a particular business create financial problems for the
whole company, creating a need for the divestment of that business.
 Severity of competition and the inability of a firm to cope with it may cause it to divest.
 Technological up gradation is required if the business is to survive but where it is not
possible for the firm to invest in it. A preferable option would be to divest
 Divestment may be done because by selling off a part of a business the company may be
in a position to survive
 A better alternative may be available for investment, causing a firm to divest a part of its
unprofitable business.
 Divestment by one firm may be a part of merger plan executed with another firm, where
mutual exchange of unprofitable divisions may take place.
 Lastly a firm may divest in order to attract the provisions of the MRTP Act or owing to
oversize and the resultant inability to manage a large business.

E.g: TATA group is a highly diversified entity with a range of businesses under its fold. They
identified their non – core businesses for divestment. TOMCO was divested and sold to
Hindustan Levers as soaps and a detergent was not considered a core business for the Tatas.
Similarly, the pharmaceuticals companies of the Tatas- Merind and Tata pharma – were divested
to Wockhardt. The cosmetics company Lakme was divested and sold to Hindustan Levers, as
besides being a non core business, it was found to be a non- competitive and would have
required substantial investment to be sustained.

3. Liquidation Strategies

A retrenchment strategy which is considered the most extreme and unattractive is the liquidation
strategy, which involves closing down a firm and selling its assets. It is considered as the last
resort because it leads to serious consequences such as loss of employment for workers and other
employees, termination of opportunities where a firm could pursue any future activities and the
stigma of failure

The psychological implications

  The prospects of liquidation create a bad impact on the company’s reputation.
 For many executives who are closely associated firms, liquidation may be a traumatic
experience.

Legal aspects of liquidation: Under the Companies Act 1956, liquidation is termed as winding
up. The Act defines winding up of a company as the process whereby its life is ended and its
property administered for the benefit of its creditors and members. The Act provides for a
liquidator who takes control of the company, collect its assets, pay it debts, and finally distributes
any surplus among the members according to their rights.

Xxxxxxxx

Market entry strategies adopted by MNCs

Once the MNC decides to target a particular country, it has to decide the best mode of entry.
Mode of entry means the manner in which the firm would commence its international
operations. There are several entry modes, each with their own sets of advantages and
disadvantages. A firm would have to decide which mode suits its circumstances best before it
could be adopted.

The different entry modes are:

(1) Export entry modes: Under these modes, the firm produces in the home country and
markets in the overseas markets.

 Direct exports do not involve home-country intermediaries and marketing is done either
through direct agent/distributor or through direct branch/subsidiary in the overseas
markets.
 Indirect exports involving intermediaries in the home country and who are responsible for
exporting the firm’s products.

(2) Contractual entry modes: These modes involve non-equity associations between an
international company and a company or any other legal entity in the overseas markets.

 Licensing is an arrangement where the international company transfers knowledge,

technology, patent, and so on for a limited period of time to an overseas entity in return
for some form of payment, usually a royalty payment.
 Franchising: Franchising involves the right to use a business format, usually a brand
name, in the overseas market in return for the franchise receiving some form of payment.
 Other forms of contractual arrangements, such as, technical agreements (for technology
transfers), service contracts (for technical support or expertise provision), contract
manufacturing, production sharing, turnkey operations, build-operate-transfer (BOT)
arrangements, etc.

(3) Investment entry modes: These modes involve ownership of production units in the
overseas market based on some form of equity investment of direct foreign investment.
  Joint venture and strategic alliances involve a cooperative partnership between two or
more firms with financial interests as the basis of cooperation, (These entry options have
been discussed earlier under the heading of cooperative strategies.)
 Independent ventures or wholly-owned subsidiaries are modes in which the parent
international company holds 100 percent equity and is in full control. Such facilities may
be created either through a new venture known as a Greenfield venture or acquired
through takeover strategies.

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Business level strategies are popularly known as generic or competitive strategies. Michael
Porter classified these strategies into overall cost leadership, differentiation and focus. The first
two strategies are broader in concept as their competitive scope is wide enough whereas the third
strategy i.e the focus strategy has a narrower competitive scope.

The experience curve : Cost has been correlated with the accumulated experience by the
experience curve. Let us take the example of production;

The underlying principle behind the experience curve is that as total quantity of production of a
standardized item is increased, its unit manufacturing cost decreases in a systematic manner. The
concept of the experience curve was presented by BCG in 1966 and since then it has been
accepted as an important phenomenon.

Causes of experience curve effect;

 Improved productivity of labour

 Increased specialization
 Innovation in production methods
 Value engineering and fine tuning
 Balancing production line
 Methods and system rationalization

The experience curve relationship provides a good framework for managerial considerations for
predicting industrial scenario with respect to future costs, profit margins, and corresponding cash
flows for the manager’s own as well as his/her competitor’s operations.

Competitive strategies like the below mentioned can be developed based on experience curve;

1. Selling product at most competitive price

 2. Maximising profits by selling at the highest price the market can afford
3. Selling at a higher price initially but crashing the prices later to keep the competition out.

1. Low cost provider strategy

The firms operating in this highly competitive environment are always on the move to become
successful. To strive in this competitive environment the firms should have an edge over the
competitors. To develop competitive advantage, the firms should produce good quality products
at minimum costs, etc. This means that the firms should provide high quality at low cost so that
the customer gets the best value for the product he/she is buying. One such competitive strategy
is overal l cost leadership, which aims at producing and delivering the product or service at a low
cost relative to its competitors at the same time maintaining the quality.

According to Porter, following are the prerequisites of cost leadership –

1. Aggressive construction of efficient scale facilities

2. Vigorous pursuit of cost reduction from experience
3. Tight cost and overhead control
4. Avoidance of marginal customer accounts
5. Cost minimization

To sustain the cost leadership throughout, the firm must be clear about its accomplishment
through different elements of the value chain.

Though low cost can be one of the most important competitive advantages enjoyed by firms all
over the globe it does have its own drawback. Some are
  Initiation by the competitive firms
 Threat of competitive firms from other countries
 Firm losing cost leadership due to fast technological changes, which require high capital
investment
 Threat by competitors to capture still lower cost segments
 Competition based on other than cost.

2. Differentiation Strategy

Every individual customer is unique in itself so is his/her preferences regarding tastes,

preferences, attitudes, etc. These needs of the customers are fulfilled by the firms by producing
differentiated products. In our day-to-day life we see many such examples of differentiated
products. Most of the fast moving consumer goods like biscuits, soaps, toothpastes, oils, etc
come under the category of differentiated products. To satisfy the diverse needs of the customers,
it becomes essential for the firms to adopt a differentiation strategy. To make this strategy
successful, it is necessary for the firms to do extensive research to study the different needs of
the customers. A firm is able to differentiate from its competitors if it is able to position itself
uniquely at something that is valuable to buyers. Differentiation can lead to differentiatial
advantage in which the firm gets the premium in the market, which is more than the cost of
providing differentiation. The extent to which the differentiation occurs depends on the overall
strategy of the firm. Previously differentiation was viewed narrowly by the firms, but in the
present scenario it has become one of the essential components of the firm’s strategy. Reliance
Infocomm, offers varied products like different facilities to its customers in the CDMA
telephones. This is differentiation.

There are a number of factors which result in differentiation. Some of them are;

 To compete against the rivals

 To create entry barriers for newcomers by building a unique product
 To reduce the threats arising from the substitutes
 To develop a differentiation advantage

Different areas of differentiation;

 Purchasing – quality of components and material acquired

 Design – aesthetic appeal
 Manufacturing – minimization of defects
 Delivery – speed in fulfilling customer orders, reliability in meeting promised delivery
items
 HRM – improved training and motivation increases customer service capability
  Technology management – permits responsiveness to the needs of specific customers
 Financial management – improves stability of the firm
 Marketing – building of product and company reputation through advertising
 Customer service – providing pre-sales information to customers

Sources of differentiation – Its not only the low price at which different products are offered,
which creates differentiation, instead the firm can differentiate from its competitors by providing
something unique, which is valuable to the customers of that product. Differentiation occurs
from the specific activities a firm performs and how they affect the buyer.

Some examples of differentiation;

 Ability to serve customers needs anywhere

 Simplified maintenance for the customers
 Single point at which the buyer can purchase
 Superior compatibility among products
 Uniqueness

Factors/Drivers for differentiation;

 Policy choice – every firm decides its own policies regarding the activities to be
performed and the activities to be ignored. The policy choices are basically related to the
type of services to be provided to the customers, the credit policy, to what extent a
particular activity be adopted, the content of activity, skill and experience required by the
employees, etc
 Links – the uniqueness of a product depends to a large extent on the links within the
value chain with suppliers and distribution channels, the firm deals with. If the firm has a
good link with suppliers and has a sound distribution channel, then it becomes easy for
the firm to produce and supply the product to the end users
 Timing – the firms can achieve uniqueness by encashing the opportunities at the right
time. If the timing is perfect then a successful differentiation strategy can be adopted.
 Location – this is one of the important factors for the firms to have uniqueness. For
example a bank may have its branch which is accessible to the customers, then the bank
will gain an edge towards other banks.
 Interrelationships – a better service can be offered to the customers by sharing certain
activities e.g sales force with the firm’s sister concerns.
 Learning – To peform better and better, continuous improvement is necessary and this
comes through continous learning
  Integration – The firm can be termed as unique, if its level of integration is high. The
integration level means the coordination level of value activities
 Scale – Larger the scale, more will be the uniqueness. If small volumes of products are
produced , then the uniqueness of the product will be lost over a longer period of time. A
very good example can be home-delivery services. The type of scale leading to
differentiation varies depending on the individual firm’s activities
 Institutional factors – This factor sometimes play a role in making a firm unique, like
relationship of management with employees

Differentiation is governed by value activities in a value chain and these activities in turn are
governed by certain driving factors which make the form unique Cost of differentiation.

Differentiation generally involves costs. The differentiation adds costs as it involves added
features to cater to the needs of the customers. Usually the cost is incurred in the following cases:

 Increased expenditure on training

 Increased advertising spend to promote the product
 Cost of hiring highly skilled salesforce
 Use of more expensive material to improve the quality of the product, etc

Advantages of differentiation;

 Premium price for the firm

 Increase in number of units sold
 Increase in brand loyalty by the customers
 Sustaining competitive advantage

Disadvantage of differentiation;

 Uniqueness of the product not valued by buyers

 Excess amount of differentiation
 Loss due to differentiation

3. Focus Strategy

The third business level strategy is focus. Focus is different from other business strategies as it is
segment based and has narrow competitive scope. This strategy involves the selection of a
market segment, or group of segments, in the industry and meeting the needs of that preferred
segment (or niche) better than other market competitors. This is also known as niche strategy.
In focus strategy, the competitive advantage can be achieved by optimizing strategy for the target
segments.

Focus strategy has two variants. They are;

a) Cost focus - Cost focus is where a firm seeks a cost advantage in the target segment. This is
basically a niche-low cost strategy whereby a cost advantage is achieved in focuser’s target
segment. According to Porter, cost focus exploits differences in behavior in some segments. In
this the focuser concentrates on a narrow buyer segment and out-competes rivals on the basis of
lower cost.

b) Differentiation focus – Differentiation focus is where a firm seeks differentiation in the target
segment. In this, the firm offers niche buyers something different from rivals. Firm seeks
differentiation in its target segment. Differentiation focus exploits the specific needs of buyers in
specified segments. Eg. MayBach luxury car which is targeted to segment where customers can
afford to pay a sum as large as Rs.5.4 crores.

Following are the situations where a focus strategy is efficient;

 Market segment large enough to be profitable

 Market segment has good growth potential
 Market segment is not significant to the success of major competitors
 Focuser has efficient resources
 Focuser is able to defend against challenges
 High costs are difficult to the competitors to meet the specialized need of the niche
 Focuser is able to choose from different segments

Advantages of focus strategy;

 Focuser can defend against Porters competitive forces

 Focuser can reduce competition from new firms by creating a niche of its own
 Threat from producers producing substitute products is reduced
 The bargaining power of the powerful customers is reduced
 Focus strategy, if combined with low-cost and differentiation strategy, would increase
market share and profitability

Risks of focus strategy;

 Market segment may not be large enough to generate profits

 Segment’s need may become less distinct from the main market
  Competition may take over the target-segment

Aug
13
2010

The stability strategy in management

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Strategic Management Concepts

Stability strategy implies continuing the current activities of the firm without any significant
change in direction. If the environment is unstable and the firm is doing well, then it may believe
that it is better to make no changes. A firm is said to be following a stability strategy if it is
satisfied with the same consumer groups and maintaining the same market share, satisfied with
incremental improvements of functional performance and the management does not want to take
any risks that might be associated with expansion or growth.

Stability strategy is most likely to be pursued by small businesses or firms in a mature stage of
development.

Stability strategies are implemented by ‘steady as it goes’ approaches to decisions. No major

functional changes are made in the product line, markets or functions.

However, stability strategy is not a ‘do nothing’ approach nor does it mean that goals such as
profit growth are abandoned. The stability strategy can be designed to increase profits through
such approaches as improving efficiency in current operations.

Why do companies pursue a stability strategy?

1) the firm is doing well or perceives itself as successful

2) it is less risky

3) it is easier and more comfortable

4) the environment is relatively unstable

5) too much expansion can lead to inefficiencies

Situations where a stability strategy is more advisable than the growth strategy:

a) if the external environment is highly dynamic and unpredictable

b) strategic managers may feel that the cost of growth may be higher than the potential benefits

c) excessive expansion may result in violation of anti trust laws

Types of stability strategies;

1) Pause/Process with caution strategy – some organizations pursue stability strategy for a
temporary period of time until the particular environmental situation changes, especially if they
have been growing too fast in the previous period. Stability strategies enable a company to
consolidate its resources after prolonged rapid growth. Sometimes, firms that wish to test the
ground before moving ahead with a full-fledged grand strategy employ stability strategy first.

2) No change strategy – a no change strategy is a decision to do nothing new i.e continue

current operations and policies for the foreseeable future. If there are no significant opportunities
or threats operating in the environment, or if there are no major new strengths and weaknesses
within the organization or if there are no new competitors or threat of substitutes, the firm may
decide not to do anything new.

3) Profit strategy – the profit strategy is an attempt to artificially maintain profits by reducing
investments and short-term expenditures. Rather than announcing the company’s poor position to
shareholders and other investors at large, top management may be tempted to follow this
strategy. Obviously, the profit strategy is useful to get over a temporary difficulty, but if
continued for long, it will lead to a serious deterioration in the company’s position. The profit
strategy is thus usually the top management’s short term and often self serving response to the
situation.

In general, stability strategies can be very useful in the short run, but they can be dangerous if
followed for too long.

Jun
17
2010

Charactristics of an effective strategic control system

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Strategic Management Concepts

Recommended reading: Strategic Control and Operational Control

Effective strategic control systems tend to have certain qualities in common. These
charactristics/qualities can be stated thus:
Suitable: The control system must be suitable to the needs of an organisation. It must conform
to the nature and needs of the job and the area to be controlled. For example, the control system
used in production department will be different from that used in sales department.

Simple: The control system should be easy to understand and operate. A complicated control
system will cause unnecessary mistakes, confusion and frustration among employees. When the
control system is understood properly, employees can interpret the same in a right way and
ensure its implementation.

Selective: To be useful, the control system must focus attention on key, strategic and important
factors which are critical to performance. Insignificant deviations need not be looked into. By
concentrating attention on important aspects, managers can save their time and meet problems
head-on in an effective manner.

Sound and economical: The system of control should be economical and easy to maintain.
Any system of control has to justify the benefits that it gives in relation to the costs it incurs. To
minimize costs, management should try to impose the least amount of control that is necessary to
produce the desired results.

Flexible: Competitive, technological and other environmental changes force organizations to

change their plans. As a result, control should be necessarily flexible. It must be flexible enough
to adjust to adverse changes or to take advantage of new opportunities.

Forward-looking: An effective control system should be forward-looking. It must provide

timely information on deviations. Any departure from the standard should be caught as soon as
possible. This helps managers to take remedial steps immediately before things go out of gear.

Reasonable: According to Robbins, controls must be reasonable. They must be attainable. If

they are too high or unreasonable, they no longer motivate employees. On the other hand, when
controls are set at low levels, they do not pose any challenge to employees. They do not stretch
their talents. Therefore, control standards should be reasonable-they should challenge and
stretch people to reach higher performance without being demotivating

Objective: A control system would be effective only when it is objective and impersonal. It
should not be subjective and arbitrary. When standards are set in clear terms, it is easy to
evaluate performance. Vague standards are not easily understood and hence, not achieved in a
right way. Controls should be accurate and unbiased. If they are unreliable and subjective,
people will resent them.

Responsibility for failures: An effective control system must indicate responsibility for
failures. Detecting deviations would be meaningless unless one knows where in the organisation
they are occurring and who is responsible for them. The control system should also point out
what corrective actions are needed to keep actual performance in line with planned performance.
Acceptable: Controls will not work unless people want them to. They should be acceptable to
chose to whom they apply, controls will be acceptable when they are (i) quantified, (ii) objective
(iii) attainable and (iv) understood by one and all.

Jun
16
2010

Strategic control process

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Strategic Management Concepts

Recommended reading: Strategic Control and Operational Control

Regardless of the type or levels of control systems an organization needs, control may be
depicted as a six-step feedback model:

1. Determine What to Control: The first step in the control process is determining the
major areas to control. Managers usually base their major controls on the organizational mission,
goals and objectives developed during the planning process. Managers must make choices
because it is expensive and virtually impossible to control every aspect of the organization’s

2. Set Control Standards: The second step in the control process is establishing
standards. A control standard is a target against which subsequent performance will be compared.
Standards are the criteria that enable managers to evaluate future, current, or past actions. They
are measured in a variety of ways, including physical, quantitative, and qualitative terms. Five
aspects of the performance can be managed and controlled: quantity, quality, time cost, and
behavior

Standards reflect specific activities or behaviors that are necessary to achieve organizational
goals. Goals are translated into performance standards by making them measurable. An
organizational goal to increase market share, for example, may be translated into a top-
management performance standard to increase market share by 10 percent within a twelve-month
period. Helpful measures of strategic performance include: sales (total, and by division, product
category, and region), sales growth, net profits, return on sales, assets, equity, and investment
cost of sales, cash flow, market share, product quality, valued added, and employees productivity.

Quantification of the objective standard is sometimes difficult. For example, consider the goal of
product leadership. An organization compares its product with those of competitors and
determines the extent to which it pioneers in the introduction of basis product and product
improvements. Such standards may exist even though they are not formally and explicitly stated.
Setting the timing associated with the standards is also a problem for many organizations. It is
not unusual for short-term objectives to be met at the expense of long-term objectives.
Management must develop standards in all performance areas touched on by established
organizational goals. The various forms standards are depend on what is being measured and on
the managerial level responsible for taking corrective action.

3. Measure Performance: Once standards are determined, the next step is measuring
performance. The actual performance must be compared to the standards. Many types of
measurements taken for control purposes are based on some form of historical standard. These
standards can be based on data derived from the PIMS (profit impact of market strategy)
program, published information that is publicly available, ratings of product / service quality,
innovation rates, and relative market shares standings.

Strategic control standards are based on the practice of competitive benchmarking - the process
of measuring a firm’s performance against that of the top performance in its industry. The
proliferation of computers tied into networks has made it possible for managers to obtain up-to-
minute status reports on a variety of quantitative performance measures. Managers should be
careful to observe and measure in accurately before taking corrective action.

4. Compare Performance to Standards: The comparing step determines the degree of

variation between actual performance and standard. If the first two phases have been done well,
the third phase of the controlling process – comparing performance with standards – should be
straightforward. However, sometimes it is difficult to make the required comparisons (e.g.,
behavioral standards). Some deviations from the standard may be justified because of changes in
environmental conditions, or other reasons.

5. Determine the Reasons for the Deviations: The fifth step of the control process involves
finding out: “why performance has deviated from the standards?” Causes of deviation can range
from selected achieve organizational objectives. Particularly, the organization needs to ask if the
deviations are due to internal shortcomings or external changes beyond the control of the
organization. A general checklist such as following can be helpful:

 Are the standards appropriate for the stated objective and strategies?
 Are the objectives and corresponding still appropriate in light of the current
environmental situation?
 Are the strategies for achieving the objectives still appropriate in light of the current
environmental situation?
 Are the firm’s organizational structure, systems (e.g., information), and resource support
adequate for successfully implementing the strategies and therefore achieving the
objectives?
 Are the activities being executed appropriate for achieving standard?
6. Take Corrective Action: The final step in the control process is determining the need for
corrective action. Managers can choose among three courses of action: (1) they can do nothing
(2) they can correct the actual performance (3) they can revise the standard.

When standards are not met, managers must carefully assess the reasons why and take corrective
action. Moreover, the need to check standards periodically to ensure that the standards and the
associated performance measures are still relevant for the future.

The final phase of controlling process occurs when managers must decide action to take to
correct performance when deviations occur. Corrective action depends on the discovery of
deviations and the ability to take necessary action. Often the real cause of deviation must be
found before corrective action can be taken. Causes of deviations can range from unrealistic
objectives to the wrong strategy being selected achieve organizational objectives. Each cause
requires a different corrective action. Not all deviations from external environmental threats or
opportunities have progressed to the point a particular outcome is likely, corrective action may
be necessary.

Jun
16
2010

Strategic Control and Operational Control

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Strategic Management Concepts

Strategic Control

Strategic control focuses on the dual questions of whether: (1) the strategy is being implemented
as planned; and (2) the results produced by the strategy are those intended.” Strategic control is
“the critical evaluation of plans, activities, and results, thereby providing information for the
future action”. There are four types of strategic control: premise control, implementation control,
strategic surveillance and special alert control

Premise Control: Planning premises/assumptions are established early on in the strategic

planning process and act as a basis for formulating strategies. Premise control has been designed
to check systematically and continuously whether or not the premises set during the planning and
implementation processes are still valid. It involves the checking of environmental conditions.
Premises are primarily concerned with two types of factors:

 Environmental factors (for example, inflation, technology, interest rates, regulation, and
demographic/social changes).
 Industry factors (for example, competitors, suppliers, substitutes, and barriers to entry).
All premises may not require the same amount of control. Therefore, managers must select those
premises and variables that (a) are likely to change and (b) would a major impact on the
company and its strategy if the did.

Implementation Control: Strategic implantation control provides an additional source of

feed forward information. “Implementation control is designed to assess whether the overall
strategy should be changed in light of unfolding events and results associated with incremental
steps and actions that implement the overall strategy.” The two basis types of implementation
control are:

1. Monitoring strategic thrusts (new or key strategic programs). Two approaches are useful
in enacting implementation controls focused on monitoring strategic thrusts: (1) one way
is to agree early in the planning process on which thrusts are critical factors in the success
of the strategy or of that thrust; (2) the second approach is to use stop/go assessments
linked to a series of meaningful thresholds (time, costs, research and development,
success, etc.) associated with particular thrusts.
2. Milestone Reviews. Milestones are significant points in the development of a
programme, such as points where large commitments of resources must be made. A
milestone review usually involves a full-scale reassessment of the strategy and the
advisability of continuing or refocusing the direction of the company. In order to control
the current strategy, must be provided in strategic plans.

Strategic Surveillance: is designed to monitor a broad range of events inside and

outside the company that are likely to threaten the course of the firm’s strategy. The basic idea
behind strategic surveillance is that some form of general monitoring of multiple information
sources should be encouraged, with the specific intent being the opportunity to uncover
important yet unanticipated information. Strategic surveillance appears to be similar in some way
to “environmental scanning.” The rationale, however, is different. Environmental, scanning
usually is seen as part of the chronological planning cycle devoted to generating information for
the new plan. By way of contrast, strategic surveillance is designed to safeguard the established
strategy on a continuous basis.

Special Alert Control: Special alert controls are the need to thoroughly, and often rapidly,
reconsider the firm’s basis strategy based on a sudden, unexpected event. (i.e., natural disasters,
chemical spills, plane crashes, product defects, hostile takeovers etc.). Special alert controls
should be conducted throughout the entire strategic management process.

Operational Control

Operational control systems are designed to ensure that day-to-day actions are consistent
with established plans and objectives. It focuses on events in a recent period. Operational control
systems are derived from the requirements of the management control system. Corrective action
is taken where performance does not meet standards. This action may involve training,
motivation, leadership, discipline, or termination.

Evaluation Techniques for Operational Control:

  Value chain analysis: Firms employ value chain analysis to identify and evaluate the
competitive potential of resources and capabilities. By studying their skills relative to
those associated with primary and support activities, firms are able to understand their
cost structure, and identify their activities through which they can create value.
 Quantitative performance measurements: Most firms prepare formal reports of
quantitative performance measurements (such as sales growth, profit growth, economic
value added, ration analysis etc.) that manager’s review at regular intervals. These
measurements are generally linked to the standards set in the first step of the control
process. For example if sales growth is a target, the firm should have a means of
gathering and exporting sales data. If the firm has identified appropriate measurements,
regular review of these reports helps managers stay aware of whether the firm is doing
what it should do. In addition to there, certain qualitative bases based on intuition,
judgement, opinions, or surveys could be used to judge whether the firm’s performance is
on the right track or not.
 Benchmarking: It is a process of learning how other firms do exceptionally high-quality
things. Some approaches to bench marking are simple and straightforward. For example
Xerox Corporation routinely buys copiers made by other firms and takes them apart to
see how they work. This helps the firms to stay abreast of its competitors’ improvements
and changes.
 Key Factor Rating: It is based on a close examination of key factors affecting
performance (financial, marketing, operations and human resource capabilities) and
assessing overall organisational capability based on the collected information.

Jun
16
2010

Growth strategies followed by MNC’s

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Strategic Management Concepts

Growth is a way of life. Almost all organizations plan to expand. This strategy is followed when
an organization aims at higher growth by broadening its one or more of its business in terms of
their respective customer groups, customers functions, and alternative technologies singly or
jointly – in order to improve its overall performance.

There are five types of expansion (Growth) strategies

1. Expansion through concentration

2. Expansion through integration
3. Expansion through diversification
 4. Expansion through cooperation

1. Expansion through concentration

It involves converging resources in one or more of firms businesses in terms of their respective
customer needs, customer functions, or alternative technologies either singly or jointly, in such a
manner that it results in expansions. A firm that is familiar with an industry would naturally like
to invest more in known business rather than unknown business. Concentration can be done
through

 Market Penetration: It involves selling more products to the same market by focusing
intensely on existing markets with its present products, increasing usage by existing
customers and increasing market share and restructures a mature market by driving out
competitors E.g.: Low pricing strategies
 Market Development: It involves selling the same products to new markets by attracting
new users to its existing products. Market development can be geographic wise and
demographic wise. E.g.: XEROX Company educated small business entrepreneurs to
create new markets.
 Product Development: It involves selling new products to the same markets by
introducing newer products in existing markets. E.g.: the tourism industry in India has not
been able to attract new customers in significant numbers. New products such as selling
India as a golfing or ayuerveda-based medical treatment destination are some of the
product development efforts in the tourism industry to attract more tourists.

Advantages of concentration strategies

 Involves minimal organizational changes and is less threatening.

 Enables the firm to specialize by gaining the in-depth knowledge of the businesses.
 Enables the firm to develop competitive advantage.
 Decision-making can be made easily as there is a high level of productivity.
 Systems and processes within the firm become familiar to the people in the organization.

Disadvantages of concentration strategies

 It is dependent on one industry if there is any worse condition in the industry the firm
will be affected.
 Factors such as product obsolescence, fickleness of market, emergence of newer
technologies are threat to concentrated firm
 Mangers may not be able to sustain interest and find the work less challenging.
 It may lead to cash flow problems.

2. Expansion through Integration

It is done where the company attempts to widen the scope of its business definition in such a
manner that it results in serving the same set of customers. The alternative technology of the
business undergoes a change. It is combing activities related to the present activity of a firm.
Such a combination may be done through value chain. A value chain is a set of interrelated
activity performed by an organization right from the procurement of basic raw materials down to
the marketing of finished products to the ultimate customers. E.g.: Several process based
industry such as petro chemicals, steel, textiles of hydrocarbons have integrate firm

A make or buy decision is then made when firms wish to negotiate with the suppliers or buyers.
The cost of making the items used in the manufacture of ones owns products are to be evaluated
against the cost of procuring them from suppliers. If the cost of making is less that the cost of
procurement then the firm moves up the value chain to make the item itself. Like wise if the cost
of selling the finished products is lesser than the price paid to the sellers to do the same thing
then the firm would go for direct selling.

Among the integration strategies are of two type’s vertical and horizontal integration.

 Vertical Integration: when an organization starts making new products that serve its own
needs vertical integration takes place. Vertical integration could be of two types Back
ward and forward integration. Backward integration means moving back to the source of
raw materials while forward integration moves the organization nearer to the ultimate
customer. Generally when firms vertically integrate they do so in a complete manner that
is they move backward or forward decisively resulting in a full integration but when a
firm does not commit it fully it is possible to have partial vertical integration strategies
too. Two such partial vertical integration strategies are ‘taper’ integration and ‘quasi’
integration. Taper integration requires firms to make a part of their own requirements and
to buy the rest from outsiders. Through quasi integration strategies firm purchase most of
their requirements from other firms in which they have an ownership stake. Ancillary
industrial units and outsourcing through sub contracting are adapted forms of quasi
integration.
 Horizontal Integration: when an organization takes up the same type of products at the
same level of production or marketing process, it is said to follow a strategy of horizontal
integration. When a luggage company takes over its rival luggage company, it is
horizontal integration. Horizontal integration strategy may be frequently adopted with a
view to expand geographically by buying a competitors business, to increase the market
share or to benefit from economics of scale.

3. Expansion through Diversification

Diversification is a much used and much talked about set of strategies. It involves a substantial
change in the business definition – singly or jointly- in terms of customer groups or alternative
technologies of one or more of a firm’s businesses. . There are two categories, concentric and
conglomerate diversification.

Concentric Diversification: when an organization takes up an activity in such a manner that is

related to the existing business definition of one or more of firms businesses, either in terms of
customer groups, customer’s functions or alternative technologies, it is called concentric
diversification. Concentric diversification may be of three types:

1. Marketing related concentric diversification: when a similar type of product is offered

with a help of unrelated technology for e.g., a company in the sewing machine business
diversifies in to kitchen ware and household appliances, which are sold to house wives
through a chain of retails stores.
2. Technology- related concentric diversification: when a new type of product or service is
provided with the help of related technology, for e.g., a leasing firm offering hire-
purchase services to institutional customers also starts consumer financing for the
purchase of durable sot individual customers.
3. Marketing- technology related concentric diversification: when a similar type of product
is provided with the help of related technology, for e.g., a rain coat manufacturer makes
other rubber based items, such as water proof shoes and rubber gloves sold through the
same retail outlets

Conglomerate Diversification: when an organization adopts a strategy which requires taking of

those activities which are unrelated to the existing businesses definition of one or more of its
businesses either in terms of their respective customer groups, customer functions or alternative
technologies. Example of Indian company which have adopted apart of growth and expansion
through conglomerate diversification the classic examples is of ITC, a cigarette company
diversifying into the hotel industry

4. Expansion through Cooperation

The term cooperation expresses the idea of simultaneous competition and cooperation among
rival firms for mutual benefits. Cooperative strategies could be of the following types:

1. Mergers
2. Takeovers
3. Joint ventures
4. Strategic alliances

Mergers Strategies: A merger is a combination of two or more organizations in which one

acquires the assets and liabilities of the other in exchange for shares or cash or both the
organization are dissolved and the assets and liabilities are combined and new stock is issued.
For the organization, which acquires another, it is an acquisition. For the organization, which is
acquired, it is a merger. If both the organization dissolves their identity to create a new
organization, it is consolidation. There are different types of mergers they are horizontal merger,
vertical merger, concentric merger and conglomerate merger.

 Horizontal Mergers: it takes place when there is a combination of two or more

organizations in the same business. E.g: A company making footwear combines with
 another footwear company, or a retailer of pharmaceutical combines with another retailer
in the same businesses.
 Vertical Mergers: It takes place when there is a combination of two or more
organizations, not necessarily in the same business, which create complementarities
either in terms of supply of raw materials (input) or marketing of goods and services
(outputs). E.g: A footwear company combines with a leather tannery or with a chain shoe
retail stores
 Concentric Mergers: It takes place when there is a combination of two or more
organizations related to each other either in terms of customer functions, customer
groups, or the alternative technologies used. E.g: A footwear company combining with a
hosiery firm making socks or another specialty footwear company, or with a leather
goods company making purse, hand bags and so on
 Conglomerate Mergers: It takes place when there is a combination of two or more
organizations unrelated to each other, either in terms of customer functions, customer
groups, or alternative technologies used. E.g: A footwear company combining with a
pharmaceutical firm.

Takeover Strategies: Takeover or acquisition is a popular strategic alternative adopted by Indian

companies. Acquisitions usually are based on the strong motivation of the buyer firm to acquire.
Takeovers are frequently classified as hostile takeovers (which are against the wishes of the
acquired firm) and friendly takeovers (by mutual consent)

 Friendly takeovers are where a takeover is not resisted or opposed, by the existing
management or professionals. E.g: Tata Tea’s takeover of Consolidated Coffee (a grower
of coffee beans) and Asian Coffee (a processor) is an example of a friendly takeover.
 Hostile takeovers is where a takeover is resisted, or expected to be opposed, by the
existing management or professionals.

Joint Venture Strategies: Joint ventures are a special case of consolidation where two or more
companies from a temporary form a temporary partnership (also called a consortium) for a
specified purpose. They occur when an independent firm is created by at least two other firms.
Joint ventures may be useful to gain access to a new business mainly under these conditions

 When an activity is uneconomical for an organization to do alone.

 When the risk of business has to be shared.
 When the distinctive competence of two or more organization can be brought together.
 When the organization has to overcome the hurdles, such as import quotas, tariffs,
nationalistic – political interests, and cultural roadblocks.

Strategic alliances: They are partnership between firms whereby their resources, capabilities and
core competencies are combined to pursue mutual interest to develop, manufacture, or distribute
goods or services. There are various advantages:
  Two or more firms unite to pursue a set of agreed upon goals but remain independent
subsequent to the formation of the alliances. A pooling of resources, investment and risks
occurs for mutual gain
 The partner firms contribute on a continuing basis in one or more key strategic areas, for
example, technology, product and so forth.
 Strategic alliances offer a growth route in which merging one’s entity, acquiring or being
acquired, or creating a joint venture may not be required
 Global partners can help local firms by developing global quality consciousness, creating
adherence to international quality standards, providing access to state of the art
technology, gaining entry to world wide mass markets, and making funds available for
expansions.

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International businesses have the fundamental goals of expanding market share, revenues, and
profits. They often achieve these goals by entering new markets or by introducing new products
into markets in which they already have a presence. A firm’s ability to do this effectively hinges
on its developing a through understanding of a given geographical or product market. To
successfully increase market share, revenue, and profits, firms must normally follow three steps,

1. Assess alternative markets

2. Evaluate the respective costs, benefits, and risks of entering each, and
3. Select those that hold the most potential for entry or expansion.

1. Assessing alternative foreign markets

In assessing alternative foreign market a firm must consider a variety of factor including the
current and potential sizes of the markets, the levels of competition the firm will face, their legal
and political environment, and socio-cultural factors that may affect the firm’s operations and
performance. Information about some of these factors is relatively objective and easy to obtain.

 Market potential: The first step in foreign market selection is assessing market potential.
Many publications such as those listed in “Building Global Skills” provide data about
population, GDP, per capita GDP, public infrastructure, and ownership of such goods as
automobiles and televisions. The decisions a firm draws from these information often
depend upon the positioning of its products relative to those of the competitors. A firm
producing high quality products at premium prices will find richer market attractive but
may have more difficulty penetrating a poorer market. Conversely a firm specializing in
low priced, lower quality goods may find the poorer market even more lucrative than the
richer market.
 Level of competition: Firm must consider in selecting a foreign market is the level of
competition in the market both the current level and the likely future level. To assess the
competitive environment it should identify the number and sizes of firms already
competing in the market, their relative market share, their pricing and their distribution
 strategies, and their relative strength and weaknesses, both individually and collectively.
It must then weigh these factors against actual market conditions and its own competitive
position.
 Legal and political environment: A firm contemplating entry into a particular market
also needs to understand the host country’s trade policies and its general legal and
political environment. A firm may choose to forgo exporting its goods to a country that
has high tariffs and other trade restriction in favor of exporting to one that has fewer or
less significant barriers. Government stability is an important factor in foreign market
assessment.
 Socio-cultural influences: Manger assessing foreign markets must also consider socio-
cultural influences, because of their subjective nature, are often difficult to quantify. To
reduce the uncertainty associated with these factors, firms often focus their initial
internationalization in countries culturally similar to their home markets.

2. Evaluating costs, benefits, and risks

The next step in foreign market assessment is a careful evaluation of the costs, benefits, and
risks associated with doing business in a particular foreign market.

 Costs: Two types of costs are relevant at this point: direct and opportunity. Direct costs
are those firm incurs in entering a new foreign market and include costs associated with
setting up a business operation, transferring managers to run it, and shipping equipment,
and merchandise. The firm also incurs opportunity costs, because the firm has limited
resources, entering one market may preclude or delay its entry in another.
 Benefits: Among the most obvious potential benefits are the expected sales and profits
from the markets. Other includes lower acquisition and manufacturing costs, foreclosing
of markets to competitors, competitive advantage, access to new technology, and the
opportunity to achieve synergy with other operations.
 Risks: Of course, few benefits are achieved without some degree of risk. Generally, a
firm entering a new market incurs the risk of exchange rate fluctuation, additional
operating complexity, and direct financial losses due to inaccurate assessment of market
potential. In extreme cases, it also faces the risk of loss through government seizure of
property or due to war or terrorism.

3. Most potentiality for entry or expansion

The factors of ownership advantages, location advantages and internationalization advantages

are the most potentiality for an organization for entry or expansion. Other factors to be
considered include the firm’s need for control, the availability of resources, and the firm’s global
strategy.

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