Week-6: Strategic Formulation

6.1. Corporate Strategy Formulation and Direction

6.2. Growth Strategies - Strategic Planning Gap (SPG)
6.3. Mergers and Acquisitions: As Growth Strategies
6.4. Horizon and Vertical Growth Strategies
6.5. Retrenchment Strategies and Corporate Parenting

6.1. Corporate Strategy Formulation and Direction:

6.1.1. Definition of Strategy Formulation:
Strategy formulation is a critical phase in the strategic management process where
organizations define clear objectives and develop a blueprint to achieve them. It involves
analysing the internal and external environment to identify strengths, weaknesses,
opportunities, and threats (SWOT). This phase necessitates the integration of insights from
various functional areas like marketing, finance, and operations to craft strategies aligned with
the organization’s mission and vision.

• Peter F. Drucker: "Strategy formulation is the continuous process of making present

entrepreneurial (risk-taking) decisions systematically and with the greatest knowledge
of their futurity."
• According to Alfred Chandler, strategy formulation as "the determination of the basic
long-term goals of an enterprise and the adoption of courses of action and the allocation
of resources necessary for carrying out these goals."
• According to Kenneth R. Andrews, strategy formulation as "the pattern of objectives,
purposes or goals and major policies and plans for achieving these goals, stated in such
a way as to define what business the company is in or is to be in and the kind of company
it is or is to be."
6.1.2. Steps of Strategy Formulation:

➢ Establishing Organizational Objectives: This involves establishing long-term goals of

an organization. Strategic decisions can be taken once the organizational objectives are
determined.
➢ Analysis of Organizational Environment: This involves SWOT analysis, meaning
identifying the company’s strengths and weaknesses and keeping vigilance over
competitors’ actions to understand opportunities and threats.
➢ Strengths and weaknesses are internal factors which the company has control over.
Opportunities and threats, on the other hand, are external factors over which the
company has no control. A successful organization builds on its strengths, overcomes
its weakness, identifies new opportunities and protects against external threats.
➢ Forming quantitative goals: Defining targets so as to meet the company’s short-term
and long-term objectives. Example, 30% increase in revenue this year of a company.
➢ Objectives in context with divisional plans: This involves setting up targets for every
department so that they work in coherence with the organization as a whole.
➢ Performance Analysis: This is done to estimate the degree of variation between the
actual and the standard performance of an organization.
➢ Selection of Strategy: This is the final step of strategy formulation. It involves
evaluation of the alternatives and selection of the best strategy amongst them to be the
strategy of the organization.

6.1.3. Levels of Strategy Formulation:

➢ Corporate-level strategy: Corporate-level strategy is the action plan of the company,

i.e., 'what the company wants to achieve as a whole'. At this level strategic decisions
are concerned with extensive organization policies and are useful mostly in sectional
companies, which have wide-ranging business interests. The nature of strategic
decisions at the corporate-level tends to be value-oriented, theoretical and less concrete
than decisions at the business or functional level. There is a greater risk, cost and profit
potential as well as greater need for adaptability associated with corporate-level
strategic activities. These are the natural outcomes of the futuristic, innovative and
pervasive character of corporate-level strategy.
➢ Business unit strategy. At the business level, decision-makers are primarily concerned
with direct industry or product market issues and bearing their impact on the integration
 of the functional units. Business-level strategic decisions transform the general abstract
statements of direction and intent created at the corporate-level into concrete functional
objectives. They further develop strategies meant for divisions or SBUS. SBU-level or
the business-level strategy is lined to achieve the objectives of the SBUs that are in turn
lined with the company objectives. It covers resource allocation among functional areas
along with functional strategies, which again are in line with the functional strategies
of the corporate-level.
➢ Functional Strategy: Functional strategy involves decision-making about particular
functional sections like; production, marketing, personnel, finance, etc. Decisions the
functional level are often described as 'tactical' decisions. Whereas corporate and
business strategies are concerned with "doing the right things", functional strategy
emphasises on "doing things right. These decisions are, however, guided by overall
strategic considerations and must be consistent with the framework of business strategy.
Thus, for example, marketing policy decisions should provide guidelines for marketing
management in accordance with the chosen strategy providing the overall direction of
business.

6.1.4. Strategic Intent:

Strategic Intent refers to a predetermined set of aspirations that an organisation desires to

achieve it. It forms the core of strategic management by building a framework that provides a
direction to achieve the organisational ambitions. Strategic intent of an organisation defines
what the organisation wants to achieve in the long term. Strategic Intent envisions a desired
leadership positioning and establishes the criterion the Organisation will use for charting its
progress.

In addition to ambitions of the Organisation; it encompasses active Management Process that

includes focussing the organisation’s attention on winning. It covers motivating the people by
communicating the values, targets. The intent encourages individual and team contributions
and attempts sustaining enthusiasm by providing new operational definitions. The Strategic
Intent guides the organisation through changing circumstances and guides use of resource
allocations.
6.1.4.1. Strategic Intent Hierarchy

✓ Vision: Vision implies the blueprint of the company’s future position. It describes where
the organization wants to land. It is the dream of the business and inspiration, base for
the planning process. It depicts the company’s aspirations for the business and provides
a peep of what the organization would like to become in future. Every single component
of the organization is required to follow its vision.
✓ Mission: Mission delineates the firm’s business, its goals and ways to reach the goals.
It explains the reason for the existence of the business. It is designed to help potential
shareholders and investors understand the purpose of the company. A mission statement
helps to identify, ‘what business the company undertakes.’ It defines the present
capabilities, activities, customer focus and business makeup.
✓ Business Definition: It seeks to explain the business undertaken by the firm, with
respect to customer needs, target audience, and alternative technologies. With the help
of business definition, one can ascertain the strategic business choices. The corporate
restructuring also depends upon the business definition.
✓ Business Model: Business model, as the name implies is a strategy for the effective
operation of the business, ascertaining sources of income, desired customer base, and
financing details. Rival firms, operating in the same industry relies on the different
business model due to their strategic choice.
✓ Goals and Objectives: These are the base of measurement. Goals are the end results,
that the organization attempts to achieve. On the other hand, objectives are time-based
measurable actions, which help in the accomplishment of goals. These are the end
results which are to be attained with the help of an overall plan, over the particular
period.
 6.2. Growth Strategies - Strategic Planning Gap (SPG)

6.2.1. Strategic Planning Gap:

A strategic gap analysis is one method that is used to help a company or any other organization
determine whether it is getting the best return from its resources. It identifies the gap between
the status quo and the best possible result. Performing a strategic gap analysis can point to
potential areas for improvement and identify the resources that are required for an organization
to achieve its strategic goals.

Strategic gap analysis emerges from a variety of performance assessments, most notably
benchmarking. When the performance level of an industry or a project is known, that
benchmark can be used to measure whether a company's performance is acceptable or if it
needs improvement. Such a comparison informs a strategic gap analysis.

A strategy gap refers to the gap between the current performance of an organization and its
desired performance as expressed in its mission, objectives, goals and the strategy for achieving
them. Strategic planning gap is the dissimilarity between preferred goals and the real goals of
a company.

The strategic planning gap is the disjunction or variance between an organization's current
position or performance and its desired future state as outlined in its strategic plan or objectives.
It represents the difference between where an organization aims to be and where it currently
stands in terms of accomplishments, capabilities, resources, market presence, or competitive
positioning.

6.2.2. Need for Strategic Planning Analysis

Strategic planning analysis serves as the backbone of organizational decision-making and long-
term success. Several reasons underscore its importance:

1. Direction Setting: Strategic planning analysis helps define a clear direction and purpose for
the organization. It sets specific goals and objectives that guide actions and decisions across all
levels, ensuring everyone is working towards a common vision.

2. Resource Allocation: It assists in effective resource allocation by identifying strengths,

weaknesses, opportunities, and threats (SWOT analysis), enabling organizations to invest
resources where they are most needed and where they can generate the highest returns.
3. Risk Mitigation: Through analysis, organizations can anticipate potential risks and
challenges, allowing them to develop contingency plans and strategies to mitigate those risks
and adapt to unforeseen circumstances.

4. Adaptation to Change: It enables organizations to adapt to a rapidly changing environment

by constantly evaluating market trends, technological advancements, and customer
preferences. This allows for agile adjustments to strategies to stay relevant and competitive.

5. Performance Measurement: Strategic planning analysis establishes benchmarks and key

performance indicators (KPIs) to measure progress. It provides a basis for evaluating the
success of implemented strategies and facilitates course corrections when necessary.

6. Alignment and Coordination: It aligns different departments and functions within an

organization toward common objectives. This coordination enhances efficiency and minimizes
conflicts arising from disparate goals or approaches.

6.2.3. Strategic Planning Gap Analysis:

Strategic Planning Gap Analysis helps recognize the performance gap with admiration to the
approach the company follows to achieve its goals, whether the performance is associated with
the mission and vision of the company. If a company does not know of its agreement in relation
to their goals that the company is not likely to achieve the desired outcomes. So, proper
strategic gap investigation would necessitate overcoming situations like this. The results of this
investigation assist categorize the errors in reserve allotment and what steps need to be taken
further to help get better performance through better consumption of the input resources.

1. Intensive Growth Opportunities

Intensive growth opportunities are those present in the current product market. Management
should first try to identify whether there are any opportunities in the company’s current
product-market activities. Three opportunities can exist in the current product market;

➢ Market penetration;
➢ Market development; and
➢ Product development.
 ➢ Market Penetration

In a market penetration strategy, a company attempts to fill an existing market’s needs with its
present products. This type of strategy may use several approaches.

Market Development

A market development strategy occurs when the marketing manager attempts to find new
markets for its existing products or services.

Product Development

A product development strategy exists when the manager attempts to develop new or improved
products for customers in its present markets.

2.Integrative Growth Opportunities

Integrative growth opportunities are those present in the other parts of the core marketing
system. It makes sense for a company if the basic industry has a strong growth future and/or
the company can increase its profitability, efficiency, or control by moving backward, forward,
or horizontally within the industry. There could be three types of integration.

➢ Backward Integration
 If a company seeks ownership or increased control of its supply system, it is called
backward integration. A garment manufacturing company, for example, may exercise
control over the suppliers of fabrics or own fabric manufacturing plants.
➢ Forward Integration
If a company seeks ownership or increased control of its distribution system, it can be
termed as forward integration. The same company may own transport facilities to
distribute its product or exert control over the physical distribution firms to integrate
forward.
➢ Horizontal Integration
If a company seeks to own or exert control over some of its competitors, it can be called
horizontal integration. The above-mentioned garment manufacturer may buy a few of
its competitors, thus integrate horizontally.

3.Diversification Growth

Diversification growth opportunities are those present completely outside the core marketing
system of the company.

✓ Concentric Diversification
If a company seeks to add new products in its product line (s) with technological and/or
marketing synergies with the existing product line/s, it is named concentric
diversification.
✓ Horizontal Diversification
If a company seeks to add new products to its existing product line(s) that could appeal
to its present customers, it is termed horizontal diversification.
✓ Conglomerate Diversification
If a company plans to add new products into the existing product line (s) for new
customers, it is called conglomerate diversification
 6.3. Mergers and Acquisitions: As Growth Strategies

6.3.1. Definition of Mergers and Acquisitions:

Merger and Acquisition Strategy is a process in which one corporate buys, sells, or combines
with the other corporate to achieve certain goals and attain rapid growth in the competitive
market. The process takes into consideration different factors like market value of corporate’s
stock, the financial health of both the companies, threats of both the companies, new
opportunities arising along with market conditions.

Merger and Acquisition is a strategy that is applied by businesses when they see the benefits of
merging or acquiring firms. In the process, the bigger companies in the market hunt for smaller
companies for the acquisition process. Companies have different policies for mergers &
acquisitions like expanding an existing business, research, development, etc.

All these policies should be kept in mind while entering the M&A Strategy by both companies.
Failure to implement proper planning, study, and lack of strategies, also fails the merger &
acquisition strategy. The resulting company cannot survive in the long run. Hence, proper
planning, understanding of the market and the business of both companies, and proper
strategies should be done well in advance before implementing merger & acquisition strategies.

According to David DePamphilis, defines mergers as the combination of two or more

companies into a single entity. Acquisitions, in his view, involve one company taking control
of another and becoming the new owner.

According to Bruce R. Hopkins, describes mergers as the union of two or more organizations
to form a single entity, while acquisitions involve one organization taking over another, which
may or may not continue to exist separately after the acquisition.

According to Andrew J. Sherman, defines mergers as the combination of two or more

companies to create a new legal entity. Acquisitions involve one company buying a controlling
interest in another, which can result in the acquired company maintaining some autonomy or
being fully integrated into the acquiring company.
6.3.2. Issues in Mergers and Acquisitions:

Mergers and acquisitions are complex processes that involve combining two or more
organizations. The process typically involves various stages, including strategic planning, due
diligence, negotiations, and integration. Investment management firms can engage in different
types of M&A activities, including mergers, acquisitions, joint ventures, and strategic alliances.

1. Integration of Systems: The integration of systems and new technology is one of the
most significant operational challenges that investment managers face during M&A.
This includes but is not limited to, the integration of portfolio management, accounting,
compliance, trading, performance and attribution, CRM, billing, and risk management
systems. Integration of systems can take time, and if not done correctly, it can result in
data discrepancies, which can negatively impact investment decisions, performance,
and client servicing.
2. 2. Data Migration, Management, and Integration: Merging investment firms may have
large amounts of data that need to be migrated to a single system or data warehouse.
This can be a complex and arduous process, and if not done properly, it can result in
data corruption or loss. It is important to have a well-designed data migration plan in
place to ensure that all data is transferred securely and accurately. Data may be stored
in different formats, databases, or file systems, making it difficult to integrate and
analyse the information. It is essential to ensure that the data is accurate, complete, and
can be accessed by the relevant parties.
3. Investment Performance: Investment performance is what clients “eat”, what firms
sell, and is often a significant factor in how portfolio managers are compensated. To
say that it is essential to get it right is an understatement. M&A activity can cause
numerous challenges for performance. Even if all the data is available, when migrating
to a new system it is nearly impossible to recalculate performance and arrive at
precisely the same numbers. Different systems treat various transactions slightly
differently, creating challenges in making the number match. Attempting to do so is a
sure way to spend a lot of time and nurture incredible amounts of frustration.
4. Organizational Structure Integration: One of the first things firms must determine is
how the new organization will be structured. In the case of an acquisition, it may be as
simple as adding the acquired firm’s people and functions to their counterparts in the
acquiring firm. In the case of a merger, or when an acquired firm represents new
business lines or products, careful thought must be given to how the pieces will fit
 together. If efficiencies are to be realized, duplicate functions should be consolidated
and integrated as quickly as possible.
5. Cultural Integration: Investment managers have unique cultures, shaped by their values,
behaviours, priorities, and decision-making processes. It governs how work is done and
how employees interact with internal and external parties. When two firms merge or
acquire each other, they must reconcile their corporate cultures to ensure a smooth
transition and avoid potential conflicts. In recent conversations, culture was identified
as the top concern firms face and the one requiring extensive due diligence at all levels
and not limited to speaking to senior-level staff.
6. Client Retention: Client retention is another operational challenge investment managers
face during M&A transactions. Clients are the lifeblood of investment managers, and
any disruption or uncertainty during the M&A process can cause clients to withdraw
their assets, leading to significant revenue losses. Projected client retention is one of
the drivers of many M&A transactions, so it is essential to ensure the retention of the
maximum number of clients.
7. Consolidating Investment Strategies: Another challenge faced by investment managers
during M&A is the integration of investment strategies. The investment managers of
the acquiring firm may have a different investment philosophy and strategy from the
investment managers of the target company. Therefore, it is important to align the
investment strategies of both firms to ensure a smooth transition.
8. Trading: Merging the trading function and activity of two firms presents opportunities
as well as challenges. Increased lot sizes may yield better executions for smaller firms.
At the same time, if the merged firm is very large, it may find it more difficult to
minimize market impact. Another benefit from a merger or acquisition is the sharing of
knowledge and strategies. While not limited to the trading function, the increased
knowledge base can be quite valuable.

6.3.3. Difference between Mergers & Acquisitions:

Mergers and acquisitions are instruments of growth for a company. A business may consider
the merger or acquisition of another business to access the market through an established brand,
eliminate competition, get a market share, acquire competence, reduce tax liabilities or set off
accumulated losses of one company against the profits of another company.
1. Ownership Structure:

• In mergers, two companies agree to combine and form a new entity, sharing
ownership in the newly created company.

• Acquisitions involve one company taking over another, resulting in the

acquiring company owning the acquired company.

2. Nature of Transaction:

• Mergers are generally seen as a more collaborative process where both parties
agree to combine their resources.

• Acquisitions can be either friendly, with the agreement of the target company,
or hostile, where the acquiring company pursues ownership without the target's
consent.

3. Survival of Identity:

• In mergers, there's often a creation of a new identity or entity, and the original
companies might cease to exist as separate entities.

• Acquisitions usually result in the survival of the acquiring company's identity,

while the acquired company may retain its name, become a subsidiary, or
integrate into the acquiring company.

4. Decision Making:

• In mergers, decisions are usually made jointly by representatives of both

merging companies.

• In acquisitions, decision-making power often resides primarily with the

acquiring company, influencing the direction and management decisions of the
acquired company.

5. Stock Exchange:

• Mergers involve the exchange of stocks, where the shares of both companies
are surrendered, and new shares are issued for the merged entity.

• Acquisitions may involve a cash transaction, stock purchase, or a combination

of both, but the acquiring company's stock might remain unaffected.
6. Purpose and Motivation:

• Mergers are often aimed at achieving synergy, combining strengths, and

reducing weaknesses to create a stronger, more competitive entity.

• Acquisitions may be driven by the desire to access new markets, gain

technology, eliminate competition, or increase market share.

7. Regulatory Requirements:

• Mergers may face stringent regulatory scrutiny, especially if the resulting entity
poses antitrust concerns due to market dominance.

• Acquisitions also undergo regulatory reviews, especially if they raise concerns

about monopolistic behaviour or unfair market advantages.

8. Cultural Integration:

• Mergers require integrating the cultures, processes, and operations of both

companies, often leading to a longer and more complex integration process.

• Acquisitions also involve cultural integration but may face greater resistance
from the acquired company due to perceived differences in organizational
culture.

9. Risk and Control:

• Mergers distribute risk and control more equally between the merging entities.

• Acquisitions might concentrate more control and risk with the acquiring
company, potentially leading to greater influence and responsibility.

10. Execution Complexity:

• Mergers tend to be more complex in execution due to the need for creating a new
organizational structure and aligning strategies.

• Acquisitions can be comparatively quicker to execute, especially if the acquired

company is smaller and integration plans are clear.
6.3.4. Situations demanding M&A

• Market Expansion: Companies might merge or acquire others to expand their market
reach, gain access to new geographies, or enter new customer segments.
• Diversification: Seeking diversification, companies might merge with or acquire firms
in different industries to spread risk or capitalize on emerging markets.
• Technology Acquisition: Acquiring firms with innovative technologies can provide a
competitive edge or accelerate product development.
• Synergy Creation: Merging companies can capitalize on synergies, reducing costs
through economies of scale, shared resources, or streamlining operations.
• Eliminating Competition: Acquiring competitors helps consolidate market share and
eliminate rivals, solidifying a company's position in the market.
• Access to Talent: Acquiring firms with skilled teams or specialized talent can be crucial
for companies aiming to enhance their workforce or capabilities.
• Financial Gain: M&A can be financially driven, aiming to create shareholder value by
buying undervalued companies or selling at a premium.
• Strategic Realignment: Companies may undergo M&A to realign their core business
focus, shedding non-core assets or acquiring ones that align more closely with their
strategy.
• Access to Resources: Acquiring companies can gain access to unique resources like
patents, intellectual property, or distribution channels.
• Regulatory or Legal Reasons: Sometimes, companies might merge or acquire others to
comply with regulations, improve their legal standing, or handle liabilities.
 6.4. Horizontal and Vertical Growth Strategies

6.4.1. Horizontal Growth Strategy:

Horizontal integration is a competitive strategy where business entities operating at the value
chain level and within the same industry merge to increase the production of goods and
services. The overall gain from a horizontal integration is an increase in the market power and
minimal loss for being non-integrated.

Horizontal integration can be contrasted with vertical integration, where a company takes
control of its supply chain and value by owning its suppliers, distributors, or retail locations.
Horizontal integration is a competitive strategy that can result in economies of scale,
competitive edge, increased market share, and business expansion. Businesses in strategic
alliances target outcomes that provide more resources, market, competence, and efficiency. The
two amalgamated entities should be better positioned to realize more revenue than they would
have when operated independently.

Horizontal integration may also involve the optimization of activities or the consolidation of
strategic business activities within the firm’s scope of processes and activities. It may arise
from expansion to new market segments, economies of scale, economies of scope and
experience, and the price difference in the factors of production.

According to Richard Lynch, defines horizontal integration as "the process by which a

company grows by combining with competitors or similar firms within the same industry or
stage of production."

According to David A. Aaker, describes horizontal integration as "a strategy that involves
acquiring or merging with competitors to increase market share and achieve economies of scale
or scope."

According to Gerry Johnson & Kevan Scholes, describes horizontal integration is "the strategy
where a company seeks ownership or control over its competitors or firms operating at the
same stage in the value chain."

6.4.2. Vertical Integration:

Vertical growth strategy, also known as vertical integration, is a business approach where a
company expands its operations either upstream (towards the sources of supply) or downstream
(towards the distribution or customer end) within the same industry's value chain.
Vertical growth involves either backward integration (expanding into areas of production or
supply) or forward integration (expanding into areas of distribution or customer interface).
Backward integration occurs when a company acquires or controls its suppliers, while forward
integration involves ownership or control of distribution channels or retail outlets.

The strategy aims to gain more control over the supply chain, improve efficiency, reduce costs,
enhance quality control, increase bargaining power, and sometimes secure access to critical
resources or markets. However, it can also present challenges related to managing diverse
operations, potential conflicts of interest, and regulatory scrutiny, particularly if it leads to
monopolistic practices.

5.4.3. Types of Vertical Integration

• BACKWARD INTEGRATION

Backward integration is a vertical integration that runs upstream of the supply

chain. Companies expand their business operations back to the earlier stages of the supply
chain. They take control of the raw material and intermediate products involved in producing
the end product that the company makes.

This integration consists of purchasing the supplier outright or entering into a joint venture or
partnership with the supplier. A company can also integrate the supplier’s operations into its
own. Alternatively, a company may backward integrate by establishing its production facilities
for raw materials or intermediate products.

Backward integration gives a company greater control over its operations and supply chain. It
can lower costs by eliminating the need to purchase raw materials or intermediate products
from other companies.

• FORWARD INTEGRATION

Forward integration is a business strategy in which a company controls the downstream supply
chain operations. It expands its operations by taking control of the distribution and sales of its
products.

A company might acquire a company involved in distributing or selling its products, either
through a purchase of the company’s assets or through a merger. Alternatively, a company
might build its distribution or production facilities by constructing new buildings or acquiring
existing ones.
Forward integration can give a company control over the quality of its products and the costs
associated with producing them. This integration can help a company to increase its efficiency,
improve its profitability, and strengthen its competitive edge in its market by eliminating the
downstream intermediaries. It also helps with procurement process and procurement strategy.

• BALANCED INTEGRATION

Balanced integration is a vertical integration strategy that controls a supply chain’s upstream
and downstream operations. It allows a company to have more control over the entire value
chain of its products, from the production of raw materials, assembly, and distribution to sales.

A company can achieve balanced integration by purchasing or merging with smaller companies
that provide the raw materials needed to produce its end product. It also connects existing
distribution operations as a platform for offering its products to customers. The company gets
to acquire suppliers and retailers as the middleman.

Balanced integration allows a company to better control the quality of its products, as it
provides more direct control over the production process. It also helps reduce costs by
eliminating intermediaries in the production and distribution process. Cost reduction can lead
to customer attraction and increase the company’s market share.

6.4.4. Advantages of Horizontal Integration:

• Economies of Scale: As a company expands through horizontal integration, it can

leverage the economies of scale, which leads to lower per-unit costs. This cost
advantage arises due to increased production.

• Increased market share: By acquiring or merging with other players in the same
industry, a company can have a larger slice of the market pie. This greater market share
might translate into greater bargaining power with suppliers or buyers, and a better
ability to dictate market trends.

• Diversification of product or service offerings: Horizontal integration can enable a

company to expand its product range. For example, a chocolate manufacturer might
acquire a company that produces caramel sweets to add more variety to its product
lineup.
 • Reduction in competition: The elimination of competitors through acquisition helps to
remove hurdles to market dominance. This reduction in competition can make it
possible for the company to more freely adjust prices to improve profitability.

• Access to new markets: Sometimes, the motive behind horizontal integration is the
desire to enter new markets. Acquiring a company that operates in another region or
country, for example, can be an easier way to broaden a business’s geographical reach.

6.4.5. Disadvantages of Horizontal Integration:

• Regulatory scrutiny and potential legal issues: Given the substantial market
concentration that can result from horizontal integration, such moves often attract the
attention of regulatory bodies, which can lead to antitrust issues. In such cases, the
integration could be blocked, altering or even reversing the company's strategic move.

• Integration challenges: Merging two separate corporate cultures, systems, and

processes can be a daunting and costly task. Inefficiencies, miscommunications, and
conflicts can arise during this phase, hindering operational effectiveness.

• Increased financial risk: Financing an acquisition or merger usually involves

substantial capital outlay or debt, which can increase a company's financial risks. If
the returns from the integrated entity do not meet expectations, this can lead to serious
financial issues.

• Customer backlash: Sometimes, customers of the acquired company may not respond
positively to the acquisition, especially if they perceive the quality of goods or services
to have been compromised. Such reactions can negatively affect sales and revenues.

• Loss of focus: Diversifying too broadly through multiple acquisitions can lead to a lack
of focus on the core business, possibly affecting its competitiveness and profitability in
the long run.

6.4.6. Advantages Of Vertical Integration

• CONTROL OF THE SUPPLY CHAIN

Vertical integration gives a company control over the production of raw materials,
assembly, distribution, and sales of its products. It allows a company to implement its
supply chain, logistics, and operations through centralized management.
 A company can reduce its reliance on external suppliers by owning and controlling
these operations. Companies that gain control of their supply chain will be able to meet
the changing demands of their customers and put more effort into managing their costs.
It also gives companies a competitive edge over their competitors.
• LOWER OPERATION COSTS
Vertical integration helps companies enjoy economies of scale. It can control the quality
of raw materials or intermediate products in manufacturing products. This control
allows the company to adopt a lean production strategy that reduces waste in the supply
chain. It also enables agile and just-in-time production reducing inventory holding
costs.
Companies also can lower costs by eliminating redundant supply chain operations and
consolidating or streamlining them. Vertical integration allows a company to pass on
its savings to the end product that it produces. It also allows a company to reduce costs
by eliminating intermediaries within the supply chain.
• BETTER COORDINATION
Through vertical integration, companies can monitor, manage, and control the various
operations within their supply chain. This coordination and fluent flow of information
through the supply chain allow an efficient process from raw material production to
product distribution to customers saving time.
For example, a company that owns its raw material suppliers can ensure that the
materials it needs are available when needed, which helps prevent production delays. It
can also closely coordinate the distribution and sale of its products, which can help to
improve customer satisfaction.
• BETTER FEEDBACK
Through vertical integration, companies can get immediate feedback on the
performance of their supply chain operations. The information companies receive from
their raw materials suppliers and distribution partners is also accurate as they receive it
themselves.

Coordination achieved by vertical integration helps a company to improve its response time
by reducing the problems arising from delays in communication. Vertical integration also
allows companies to increase their responsiveness to and flexibility concerning changes in
their customer’s requirements or needs.
6.4.7. Disadvantages Of Vertical Integration

• LONG-TERM PROCESS

The process involved in vertical integration causes the supply chain and logistics organizations
to be longer-term. A company must maintain its operations for an extended period which
provides its competitors a longer time than they need to adjust and make their strategy in
response.

The slow process is particularly true if a company acquires or establishes new facilities or
business units to house its supply chain operations. This integration would also include training
employees who take time to learn and understand the newly integrated processes and
procedures.

• HEAVY INITIAL INVESTMENT

The vertical integration process calls for significant initial capital. For a company to be fully
vertically integrated, it may need to invest in new facilities and equipment, such as building a
new manufacturing plant or acquiring a supplier. It also needs to integrate new operations into
an existing business, such as training employees and incorporating new systems.

Similarly, suppose a company wants to vertically integrate by acquiring a supplier. In that case,
it will need to pay for the acquisition and may also need to invest in upgrading or improving
the supplier’s operations.

• LESS FLEXIBILITY

The integration of vertical operations into a single business unit can create rigidity in the supply
chain. It can also prevent a company from taking advantage of cost savings and efficiency
improvements when its supply chain operations run independently. A company that owns its
distribution channels may need more time to pivot to new tracks. In contrast, a company that
relies on external suppliers and distributors may have more flexibility to respond to changes in
the market because it is less committed to a particular production and distribution process.

• BALANCING ISSUES

Integrating supply chain operations into a single business unit can make it difficult for
companies to balance the tradeoffs between cost and quality. Companies can also experience
difficulty dealing with issues like supply shortages or fluctuations in demand.
A company that vertically integrates its production may need help to capture most of the cost
savings from using better materials or finding new suppliers. It may also fail to take advantage
of other benefits, such as obtaining better feedback on operations or learning to manage issues
that arise in the production process.

6.5. Retrenchment strategy

6.5.1 Retrenchment strategy

Retrenchment is a corporate strategy that aims to decrease the scale of operations of the
company. It can also involve cutting down the expenditure of the company so that it becomes
financially viable. It can involve reducing the number of product lines or businesses,
withdrawing from certain geographical markets so that the company becomes financially
sustainable.

Definition of Retrenchment strategy

"A strategy that involves cutting costs and restructuring operations, often through downsizing,
in order to restore profitability and financial health."

"A strategic response to external or internal pressures where a company reduces its activities,
shedding unprofitable divisions or operations to focus on its core strengths."

"A strategy aimed at reducing the size or diversity of an organization's operations, often through
downsizing, divestiture, or liquidation, to improve its competitive position or financial
performance."

6.5.2. Types of Retrenchment strategy

➢ Turnaround Strategy:
Turnaround strategies can encompass various tactics such as cost-cutting measures,
restructuring debt, management changes, product/service repositioning, or
organizational restructuring. The focus is on quickly reversing negative trends,
improving financial performance, and restoring investor and stakeholder confidence.
This strategy involves comprehensive changes aimed at restoring the company to
profitability and stability.
 Turnaround Strategy – from loss-
making to profit earning

Contraction – Contract to reduce loss

by selling one or more products/SBUs

Consolidation – Making the remaining

ones profitable through increased
strategic focus and control

Figure No.1: Types of Retrenchment strategy

➢ Contraction Strategy:
Contraction is often undertaken to enhance efficiency, refocus on core competencies,
or eliminate underperforming segments to improve overall performance and
profitability. This strategy entails downsizing, divesting non-core assets, discontinuing
unprofitable product lines, or withdrawing from specific markets. A contraction strategy
involves reducing the size or scope of a company's operations deliberately.
➢ Consolidation Strategy
The aim of consolidation is to strengthen market position, increase efficiency, reduce
costs through synergies, and create a more robust and competitive business entity. This
strategy includes merging with or acquiring other companies to expand market share,
eliminate competition, achieve economies of scale, or enhance synergies. Consolidation
involves bringing together various aspects of a company's operations, often through
mergers, acquisitions, or internal streamlining.
6.5.3. Disinvestment strategy:

Disinvestment is the action of an organization or government selling or liquidating an asset or

subsidiary. Absent the sale of an asset, disinvestment also refers to capital expenditure (CapEx)
reductions, which can facilitate the re-allocation of resources to more productive areas within
an organization or government-funded project.

The term ‘divestment’ refers to the process of selling off a business or an asset class that
is consistently failing to meet the expectations of investors and other stakeholders. It is also
known as divestiture.

“Investment refers to the conversion of money or cash into securities, debentures, bonds or
another claims on money. As follows, disinvestment involves the conversion of money claims
or securities into money or cash.” Disinvestment can also be defined as the action of an
organization (or government) selling or liquidating an asset or subsidiary. It is also referred to
as ‘divestment’ or ‘divestiture. ‘In most contexts, disinvestment typically refers to sale from
the government, partly or fully, of a government-owned enterprise. A company or a government
organisation will typically disinvest an asset either as a strategic move for the company, or for
raising resources to meet general/specific needs

6.5.4. Three approaches to Disinvestment:

• Equity Carve-Out

In equity carve-outs, the company launches an initial public offering (IPO) to proceed with the
sale of a portion of its subsidiaries, business sectors, or divisions. But, there's an important
factor to take into consideration. The parent organisation will have complete control and will
remain the most important shareholder in the business unit that has been divested.

• Demergers

Demerger is another type of divestment. Splitting up of an organisation leads to the creation of

two or more independent corporations. It also dissolves the identity of the parent company very
gradually. Companies can also opt for the spin-off method of divestment, where the business
entity gets subdivided into multiple subsidiaries, but the parent company continues operating.

• Sell-Offs

When a company sells off a few of its business units, divisions, or subsidiaries, it's known as a
sell-off. Some of the reasons behind this type of divestment are the poor performance of a
subsidiary unit, failure of a business division, a lot of capital requirements, and non-alignment
with core business operations.

6.5.5. Liquidation Strategy

Liquidation strategy is the process of closing down a business and selling off its assets to pay
off its debts and obligations. It is a viable option for companies that are unable to pay their
debts, and their assets are not enough to cover their liabilities. The primary aim of liquidation
strategy is to maximize the value of the company’s assets to pay off its creditors and
shareholders. Liquidation strategies refer to the various plans or methods used to close a
business, sell off its assets, or convert those assets into cash. These strategies are typically
employed when a company decides to cease operations, dissolve, or when it enters bankruptcy.

✓ Types of Liquidation Strategy

There are two types of liquidation strategies – voluntary and involuntary.

Voluntary Liquidation

Voluntary liquidation is initiated by the company’s shareholders when they believe that the
company cannot continue its operations profitably. It can either be a creditors’ voluntary
liquidation or a members’ voluntary liquidation.

• Creditors’ Voluntary Liquidation: This type of liquidation occurs when the company is
unable to pay its debts, and the creditors decide to liquidate the company to recover
their money.

• Members’ Voluntary Liquidation: This type of liquidation occurs when the company is
solvent, and the shareholders decide to wind up the company.

Involuntary Liquidation

Involuntary liquidation is initiated by external parties, such as creditors or the court. It can
either be a compulsory liquidation or a court-ordered liquidation.

• Compulsory Liquidation: This type of liquidation occurs when the company is unable
to pay its debts, and the court orders the liquidation of the company.

• Court-Ordered Liquidation: This type of liquidation occurs when the court orders the
liquidation of the company due to illegal activities, such as fraud or misconduct.