BLOCK – 2

Corporate Level Growth Strategy

37
 Block 2 Corporate Level Growth
StrategY
This block deals with the concept of strategy and explains different types
of corporate strategies. Different types of expansion strategies and the
rationale for implementing these strategies are dealt with. It also focuses on
integration and diversification strategies and the rationale of adopting these
strategies. Finally the basic concept of strategic alliances, the trends in the
field of strategic alliances at the global level and the planning process of
successful alliances are discussed. This block has the following three units:
Unit – 3: Intensive Growth Strategies
Unit – 4: Integration and Diversification Growth Strategies
Unit – 5: Strategic Alliances

38
UNIT 3 INTENSIVE GROWTH
STRATEGIES

Objectives
After reading this unit, you should be able to:
•• acquaint yourself with the concept of corporate strategy;
•• familiarize yourself with the various generic corporate strategies;
•• explain the nature, scope and approaches to implementation of
stability and growth strategies; and
•• finally discuss the rationale for adopting these strategies.
Structure
3.1 Introduction
3.2 Nature and Scope of Corporate Strategies
3.3 Nature of Stability Strategy
3.4 Expansion Strategies
3.5 Expansion through Intensification
3.6 Expansion through Integration
3.7 International Expansion
3.8 Summary
3.9 Key Words
3.10 Self-Assessment Questions
3.11 References /Further Readings

3.1 INTRODUCTION
Strategic management deals with the issues, concepts, theories approaches
and action choices related to an organization’s interaction with the external
environment.
Strategy, in general, refers to how a given objective will be achieved.
Strategy, therefore, is mainly concerned with the relationships between
ends and means, that is, between the results we seek and the resources at
our disposal. For the most part, strategy is concerned with deploying the
resources at your disposal whereas tactics is concerned with employing
them. Together, strategy and tactics bridge the gap between ends and means.
Some organizations are groups of different business and functional units,
each of them must be having its own set of goals, which may not necessarily
be same as the goals of the corporate headquarters looking after the interests
of the entire organization.
Since the goals are different and the means to achieve them are different,
strategies are likely to be different. This understanding has led to
the hierarchical division of strategy at two levels: a business-level
(competitive) strategy and a company-wide strategy (corporate
39
Corporate Level Growth strategy) (Porter, 1987). In addition to these strategies, many authors
Strategy also mention functional strategies, practiced by the functional units of a
business unit, as another level of strategy.
Corporate Strategies: These are concerned with the broad, long-term
questions of “what businesses are we in, and what do we want to do with
these businesses?” The corporate strategy sets the overall direction the
organization will follow. It matters whether a firm is engaged in one or
several businesses. This will influence the overall strategic direction,
what corporate strategy is followed, and how that strategy is implemented
and managed. Corporate strategies vary from drastic retrenchment
through aggressive growth. Top management need to carefully assess the
environment before choosing the fundamental strategies the organization
will use to achieve the corporate objectives.
Competitive Strategies: Those decisions that determine how the firm will
compete in a specific business or industry. This involves deciding how the
company will compete within each line of business or strategic business
unit (SBU). Competitive strategies include being a low-cost leader,
differentiator, or focuser. Formulating a specific competitive strategy
requires understanding the competitive forces that determine how intense
the competitive forces are and how best to compete.
Functional Strategies: Also called operational strategies, are the short-
term (less than one year), goal-directed decisions and actions of the
organization’s various functional departments. These are more localized
and shorter-horizon strategies and deal with how each functional area and
unit will carry out its functional activities to be effective and maximize
resource productivity. Functional strategies identify the basic courses of
action that each functional department in a strategic business unit will
pursue to contribute to the attainment of its goals.
In a nutshell, corporate-level strategy identifies the portfolio of businesses
that in total will comprise the corporation and the ways in which these
businesses will relate. The competitive strategy identifies how to build and
strengthen the business’s long-term competitive position in the marketplace
while the functional strategies identify the basic courses of action that each
department will pursue to contribute to the attainment of its goals.
Corporate Strategy
Corporate strategy is essentially a blueprint for the growth of the firm. The
corporate strategy sets the overall direction for the organization to follow. It
also spells out the extent, pace and timing of the firm’s growth. Corporate
strategy is mainly concerned with the choice of businesses, products and
markets. The competitive and functional strategies of the firm are formulated
to synchronize with the corporate strategy to enable it to reach its desired
objectives. Defined formally, a corporate-level strategy is an action taken
to gain a competitive advantage through the selection and management of
a mix of businesses competing in several industries or product markets.
Corporate strategies are normally expected to help the firm earn above-
average returns and create value for the shareholders (Markides, 1997).
Corporate strategy addresses the issues of a multi-business enterprise as
a whole. Corporate strategy addresses issues relating to the intent, scope
40
and nature of the enterprise and in particular has to provide answers to the Intensive Growth Strategies
following questions:
•• What should be the nature and values of the enterprise in the broadest
sense? What are the aims in terms of creating value for stakeholders?
•• What kind of businesses should we be in? What should be the scope
of activity in the future so what should we divest and what should we
seek to add?
•• What structure, systems and processes will be necessary to link the
various businesses to each other and to the corporate centre?
•• How can the corporate centre add value to make the whole worth
more than the sum of the parts?
A primary approach to corporate level strategy is diversification, which
requires the top-level executives to craft a multi-business strategy. In
fact, one reason for the use of a diversification strategy is that managers
of diversified firms possess unique management skills that can be used to
develop multi-business strategies and enhance a firm’s competitiveness
(Collins and Montgomery, 1998). Most corporate level strategies have three
major components:
a) Growth or directional strategy outlines the growth objectives
ranging from drastic retrenchment through stability to varying
degrees of growth and methods and approaches to accomplish these
objectives.
b) Corporations are responsible for creating value through their
businesses. They do so by using a portfolio strategy to manage their
portfolio of businesses, ensure that the businesses are successful over
the long-term, develop business units, and ensure that each business
is compatible with others in the portfolio. Portfolio strategy plans the
necessary moves to establish positions in different businesses and
achieve an appropriate amount and kind of diversification. Portfolio
strategy is an important component of corporate strategy in a multi-
business corporation. The top management views its product lines
and business unit as a portfolio of investments from which it expects a
profitable return. A key part of corporate strategy is making decisions
on how many, what types, and which specific lines of business the
company should be in. This may involve decisions to increase or
decrease the breadth of diversification by closing out some lines of
business, adding others, and changing emphasis among the portfolio
of businesses. A portfolio strategy is concerned not only about choice
of business portfolio, but also about portfolio of geographical markets
for acquisition of inputs, locating various value chain activities and
selling of outputs. In short, a portfolio strategy facilitates efficient
allocation of corporate resources, links the businesses and
geographically dispersed activities and builds synergy leading to
corporate or parenting advantage.
c) Corporate parenting strategy which tries to capture valuable cross-
business strategic fits in a portfolio of business and turn them into
competitive advantages, especially transferring and sharing related
41
Corporate Level Growth technology, procurement leverage, operating facilities, distribution
Strategy channels, and/or customers. In other words, it decides how we allocate
resources and manages capabilities and activities across the portfolio-
where do we put special emphasis, and how much do we integrate our
various lines of business. Corporate parenting views the corporation in
terms of resources and capabilities that can be used to build business
units value as well as generate synergies across business units.
Corporate parenting generates corporate strategy by focusing on the core
competencies of the parent corporation and on the value created from the
relationship between the parent and its businesses. To achieve corporate
parenting advantage a corporation needs to do at least the following:
•• Better choice of business to compete.
•• Superior acquisition and development of corporate resources.
•• Effective deployment, monitoring and controlling of corporate
resources.
•• Sharing and transferring of resources from one business to other
leading to synergy.

3.2 NATURE AND SCOPE OF CORPORATE

STRATEGIES
Growth is essential for an organization. Organizations go through an
inevitable progression from growth through maturity, revival, and eventually
decline. The broad corporate strategy alternatives, sometimes referred to as
grand strategies, are: stability/consolidation, expansion /growth, divestment
/retrenchment and combination strategies. During the organizational life
cycle, managements choose between growth, stability, or retrenchment
strategies to overcome deteriorating trends in performance. Just as every
product or business unit must follow a business strategy to improve its
competitive position, every corporation must decide its orientation towards
growth by asking the following three questions:
•• Should we expand, cut back, or continue our operations unchanged?
•• Should we concentrate our activities within our current industry or
should we diversify into other industries?
•• If we want to grow and expand nationally and/or globally, should we
do so through internal development or through external acquisitions,
mergers, or strategic alliances?
At the core of corporate strategy must be a clear logic of how the corporate
objectives will be achieved. Most of the strategic choices of successful
corporations have a central economic logic that serves as the fulcrum
for profit creation. Some of the major economic reasons for choosing a
particular type of corporate strategy are:
a) Exploiting operational economies and financial economies of scope.
b) Uncertainty avoidance and efficiency.
c) Possession of management skills that help to create corporate
advantage.
42
d) Overcoming the inefficiency in factor markets and Intensive Growth Strategies

e) Long term profit potential of a business.

The non-economic reasons for the choice of corporate strategy elements
include a) dominant view of the top management, b) employee incentives
to diversify (maximizing management compensation), c) desire for more
power and management control, d) ethical considerations and e) corporate
social responsibility.
There are four types of generic corporate strategies. These are:
•• Stability strategies: make no change to the company’s current
activities
•• Growth strategies: expand the company’s activities
•• Retrenchment strategies: reduce the company’s level of activities
•• Combination strategies: a combination of above strategies
Each one of the above strategies has a specific objective. For instance, a
concentration strategy seeks to increase the growth of a single product
line while a diversification strategy seeks to alter a firm’s strategic track
by adding new product lines. A stability strategy is utilized by a firm to
achieve steady, but slow improvements in growth while a retrenchment
strategy (which includes harvesting, turnaround, divestiture, or liquidation
strategies) is used to reverse poor-organizational performance. Once
a strategic direction has been identified, it then becomes necessary for
management to examine business and functional level strategies of the firm to
make sure that all units are moving towards the achievement of the company-wide
corporate strategy.
Stability Strategy
Stability strategy is a strategy in which the organization retains its present
strategy at the corporate level and continues focusing on its present products
and markets. The firm stays with its current business and product markets;
maintains the existing level of effort; and is satisfied with incremental
growth. It does not seek to invest in new factories and capital assets,
gain market share, or invade new geographical territories. Organizations
choose this strategy when the industry in which it operates or the state of
the economy is in turmoil or when the industry faces slow or no growth
prospects. They also choose this strategy when they go through a period of
rapid expansion and need to consolidate their operations before going for
another bout of expansion.
Growth Strategy
Firms choose expansion strategy when their perceptions of resource
availability and past financial performance are both high. The most common
growth strategies are diversification at the corporate level and concentration
at the business level. Reliance Industry, a vertically integrated company
covering the complete textile value chain has been repositioned itself to
be a diversified conglomerate by entering into a range of business such
as power generation and distribution, insurance, telecommunication, and
information and communication technology services. Diversification
is defined as the entry of a firm into new lines of activity, through
43
Corporate Level Growth internal or external modes. The primary reason a firm pursues increased
Strategy diversification is value creation through economies of scale and scope, or
market dominance. In some cases firms choose diversification because of
government policy, performance problems and uncertainty about future
cash flow. In one sense, diversification is a risk management tool, in
that its successful use reduces a firm’s vulnerability to the consequences
of competing in a single market or industry. Risk plays a very vital role
in selecting a strategy and hence, continuous evaluation of risk is linked
with a firm’s ability to achieve strategic advantage (Simons, 1999).
Internal development can take the form of investments in new products,
services, customer segments, or geographic markets including international
expansion. Diversification is accomplished through external modes through
acquisitions and joint ventures. Concentration can be achieved through
vertical or horizontal growth. Vertical growth occurs when a firm takes over
a function previously provided by a supplier or a distributor. Horizontal
growth occurs when the firm expands products into new geographic areas or
increases the range of products and services in current markets.
Retrenchment Strategy
Many firms experience deteriorating financial performance resulting
from market erosion and wrong decisions by management. Managers
respond by selecting corporate strategies that redirect their attempt
to turnaround the company by improving their firm’s competitive
position or divest or wind up the business if a turnaround is not possible.
Turnaround strategy is a form of retrenchment strategy, which focuses on
operational improvement when the state of decline is not severe. Other
possible corporate level strategic responses to decline include growth and
stability.
Combination Strategy
The three generic strategies can be used in combination; they can be
sequenced, for instance growth followed by stability, or pursued
simultaneously in different parts of the business unit. Combination
Strategy is designed to mix growth, retrenchment, and stability strategies
and apply them across a corporation’s business units. A firm adopting the
combination strategy may apply the combination either simultaneously
(across the different businesses) or sequentially. For instance, Tata Iron &
Steel Company (TISCO) had first consolidated its position in the core steel
business, then divested some of its non-core businesses. Reliance Industries,
while consolidating its position in the existing businesses such as textile
and petrochemicals, aggressively entered new areas such as Information
Technology.
Activity 1
a) Explain the various corporate, competitive and functional strategies
followed by a firm of your choice. What is the impact of these
strategies on the firm’s performance?
..............................................................................................................
..............................................................................................................
..............................................................................................................
..............................................................................................................
44
b) Search the website for information on Reliance Group, Tata group and Intensive Growth Strategies
Aditya Birla group of companies. Compare the business models and
briefly explain the type of corporate strategies that these corporates
are following.
..............................................................................................................
..............................................................................................................
..............................................................................................................
..............................................................................................................

3.3 NATURE OF STABILITY STRATEGY

A firm following stability strategy maintains its current business and
product portfolios; maintains the existing level of effort; and is satisfied with
incremental growth. It focuses on fine-tuning its business operations and
improving functional efficiencies through better deployment of resources.
In other words, a firm is said to follow stability/ consolidation strategy if:
•• It decides to serve the same markets with the same products;
•• It continues to pursue the same objectives with a strategic thrust on
incremental improvement of functional performances; and
•• It concentrates its resources in a narrow product-market sphere for
developing a meaningful competitive advantage.
Adopting a stability strategy does not mean that a firm lacks concern for
business growth. It only means that their growth targets are modest and
that they wish to maintain a status quo. Since products, markets and
functions remain unchanged, stability strategy is basically a defensive
strategy. A stability strategy is ideal in stable business environments where
an organization can devote its efforts to improving its efficiency while
not being threatened with external change. In some cases, organizations
are constrained by regulations or the expectations of key stakeholders and
hence they have no option except to follow stability strategy.
Generally large firms with a sizeable portfolio of businesses do not usually
depend on the stability strategy as a main route, though they may use it
under certain special circumstances. They normally use it in combination
with the other generic strategies, adopting stability for some businesses
while pursuing expansion for the others. However, small firms find this
a very useful approach since they can reduce their risk and defend their
positions by adopting this strategy. Niche players also prefer this strategy
for the same reasons.
Conditions Favouring Stability Strategy
Stability strategy does entail changing the way the business is run, however,
the range of products offered and the markets served remain unchanged or
narrowly focused. Hence, the stability strategy is perceived as a non-growth
strategy. As a matter of fact, stability strategy does provide room for growth,
though to a limited extent, in the existing product-market area to achieve
current business objectives. Implementing stability strategy does not imply
stagnation since the basic thrust is on maintaining the current level of
performance with incremental growth in ensuing periods. An organization’s
strategists might choose stability when:
45
Corporate Level Growth •• The industry or the economy is in turmoil or the environment is
Strategy volatile. Uncertain conditions might convince strategists to be
conservative until they became more certain.
•• Environmental turbulence is minimal and the firm does not foresee
any major threat to itself and the industry concerned as a whole.
•• The organization just finished a period of rapid growth and needs to
consolidate its gains before pursuing more growth.
•• The firm’s growth ambitions are very modest and it is content with
incremental growth.
•• The industry is in a mature stage with few or no growth prospects and
the firm is currently in a comfortable position in the industry.
Rationale for Using Stability Strategy
There are a number of circumstances in which the most appropriate growth
stance for a company is stability rather than growth. Stability strategy is
normally followed for a brief period to consolidate the gains of its expansion
and needs a breathing spell before embarking on the next round of expansion.
Organizations need to ‘cool off’ for a while after an aggressive phase of
expansion and must stabilize for a while or they will become inefficient and
unmanageable. India Cements went through a rapid expansion by acquiring
other cement companies before stabilizing and consolidating its operations.
Videocon and BPL had first diversified into new businesses and then started
consolidating once faced with stiff competition.
Managers pursue stability strategy when they feel that the enterprise has
been performing well and wish to maintain the same trend in subsequent
years. They would prefer to adopt the existing product-market posture and
avoid departing from it. Sometimes, the management is content with the
status quo because the company enjoys a distinct competitive advantage
and hence does not perceive an immediate threat.
Stability strategy is also adopted in a number of organizations because
the management is not interested in taking risks by venturing into
unknown terrain. In fact they do not consider any other option as long
as the pursuit of existing business activity produces the desired results.
Conservative managers believe product development, market development
or new ways of doing business entail great risk and therefore, avoid taking
decisions, which can endanger the company. A number of managers also
pursue consolidation strategy involuntarily. In fact, they do not react to
environmental changes and avoid drastic changes in the current strategy
unless warranted by extraordinary circumstances.
Sometimes environmental forces compel an organization to follow the
strategy of status quo. This is particularly true for bigger organizations,
which have acquired dominant market share. Such organizations are
usually not permitted by the government to expand because it may lead to
monopolistic and restrictive trade practices detrimental to public interest.
Approaches to Stability Strategy
There are various approaches to developing stability/consolidation strategy.
The management has to select the one that best suits the corporate objective.
46
Some of these approaches are discussed below. In all these approaches, the Intensive Growth Strategies
fundamental course of action remains the same, but the circumstances in
which the firms choose various options differ.
Holding Strategy: This alternative may be appropriate in two situations:
(a) the need for an opportunity to rest, digest, and consolidate after growth
or some turbulent events - before continuing a growth strategy, or (b) an
uncertain or hostile environment in which it is prudent to stay in a “holding
pattern” until there is change in or more clarity about the future in the
environment. With a holding strategy the company continues at its present
rate of development. The aim is to retain current market share. Although
growth is not pursued as such, this will occur if the size of the market
grows. The current level of resource input and managerial effort will not
be increased, which means that the functional strategies will continue at
previous levels. This approach suits a firm, which does not have requisite
resources to pursue increased growth for a longer period of time. At times,
environmental changes prohibit a continuation in growth.
Stable Growth Strategy: This alternative essentially involves avoiding
change, representing indecision or timidity in making a choice for change.
Alternatively, it may be a comfortable, even long-term strategy in a mature,
rather stable environment, e.g., a small business in a small town with few
competitors. It simply means that the firm’s strategy does not include any
bold initiatives. It will just seek to do what it already does, but a little better.
In this approach, the firm concentrates on one product or service line. It
grows slowly but surely, increasingly its market penetration by steadily
adding new products or services and carefully expanding its market.
Harvesting Strategy: Where a firm has the dominant market share, it may
seek to take advantage of this position and generate cash for future business
expansion. This is termed as harvesting strategy and is usually associated
with cost cutting and price increases to generate extra profits. This approach
is most suitable to a firm whose main objective is to generate cash. Even
market share may be sacrificed to earn profits and generate funds. A number
of ways can be used to accomplish the objective of making profits and
generating funds. Some of these are selective price increases and reducing
costs without reducing price. In this approach, selected products are milked
rather than nourished and defended. Hindustan Lever’s Lifebuoy soap is an
example in point. It yielded large profits under careful management.
Profit or Endgame Strategy: A profit strategy is one that capitalizes on a
situation in which old and obsolete product or technology is being replaced
by a new one. This type of strategy does not require new investment, so it
is not a growth strategy. Firms adopting this strategy decide to follow the
same technology, at least partially, while transiting into new technological
domains. Strategists in these firms reason that the huge number of products
based on older technologies on the market would create an aftermarket for
spare parts that would last for years. Sylvania, RCA, and GE are among
the firms that followed this strategy. They decided to stay in the vacuum
tube market until the “end of the game.” As with most business decisions,
timing is critical. All competitors eventually must shelve the old assets at
some point of time and move to the new product or technology. The critical
47
Corporate Level Growth question is, “Can we make more money by using these assets or by selling
Strategy them?” The answer to that question changes as time passes.
Activity 2
Identify Indian companies following stability strategy. Also identify the
type of stability strategy followed by these firms.
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
………………................................................................................................

3.4 EXPANSION STRATEGIES

Every enterprise seeks growth as its long-term goal to avoid annihilation
in a relentless and ruthless competitive environment. Growth offers ample
opportunities to everyone in the organization and is crucial for the survival
of the enterprise. However, this is possible only when fundamental
conditions of expansion have been met. Expansion strategies are designed to
allow enterprises to maintain their competitive position in rapidly growing
national and international markets. Hence to successfully compete, survive
and flourish, an enterprise has to pursue an expansion strategy. Expansion
strategy is an important strategic option, which enterprises follow to fulfill
their long-term growth objectives. They pursue it to gain significant growth
as opposed to incremental growth envisaged in stability strategy. Expansion
strategy is adopted to accelerate the rate of growth of sales, profits and
market share faster by entering new markets, acquiring new resources,
developing new technologies and creating new managerial capabilities.
Expansion strategy provides a blueprint for business enterprises to achieve
their long-term growth objectives. It allows them to maintain their
competitive advantage even in the advanced stages of product and market
evolution. Growth offers economies of scale and scope to an organization,
which reduce operating costs and improve earnings. Apart from these
advantages the organization gains a greater control over the immediate
environment because of its size. This influence is crucial for survival in
mature markets where competitors aggressively defend their market shares.
Conditions for Opting for Expansion Strategy
Firms opt for expansion strategy under the following circumstances:
•• When the firm has lofty growth objectives and desires fast and
continuous growth in assets, income and profits. Expansion through
diversification would be especially useful to firms that are eager
to achieve large and rapid growth since it involves exploiting new
opportunities outside the domain of current operations.
•• When enormous new opportunities are emerging in the environment
and the firm is ready and willing to expand its business scope.
•• Firms find expansion irresistible since sheer size translates into
superior clout.
48
•• When a firm is a leader in its industry and wants to protect its dominant Intensive Growth Strategies
position.
•• Expansion strategy is opted in volatile situations. Substantive growth
would act as a cushion in such conditions.
•• When the firm has surplus resources, it may find it sensible to grow by
leveraging on its strengths and resources.
•• When the environment, especially the regulatory scenario, blocks
the growth of the firm in its existing businesses, it may resort to
diversification to meets its growth objectives.
•• When the firm enjoys synergy that ensues by tapping certain
opportunities in the environment, it opts for expansion strategies.
Economies of scale and scope and competitive advantage may accrue
through such synergistic operations. Over the last two decades,
in response to economic liberalisation, some companies in India
expanded the scale of existing businesses as well as diversified into
many new businesses.
Growth of a business enterprise entails realignment of its strategies in
product-market environment. This is achieved through the basic growth
approaches of intensive expansion, integration (horizontal and vertical
integration), diversification and international operations. Firms following
intensification strategy concentrate on their primary line of business and
look for ways to meet their growth objectives by increasing their size of
operations in this primary business. A company may expand externally by
integrating with other companies. An organization expands its operations by
moving into a different industry by pursuing diversification strategies. An
organization can grow by “going international”, i.e., by crossing domestic
borders by employing any of the expansion strategies discussed so far.

3.5 EXPANSION THROUGH INTENSIFICATION

Intensification involves expansion within the existing line of business.
Intensive expansion strategy involves safeguarding the present position and
expanding in the current product-market space to achieve growth targets.
Such an approach is very useful for enterprises that have not fully exploited
the opportunities existing in their current product-market domain. A firm
selecting an intensification strategy, concentrates on its primary line of
business and looks for ways to meet its growth objectives by increasing
its size of operations in its primary business. Intensive expansion of a firm
can be accomplished in three ways, namely, market penetration, market
development and product development first suggested in Ansoff’s model.
Intensification strategy is followed when adequate growth opportunities
exist in the firm’s current product-market space. However, while going
in for internal expansion, the management should consider the following
factors.
•• While there are a number of expansion options, the one with the
highest net present value should be the first choice.
•• Competitive behaviour should be predicted in order to determine
how and when the competitors would respond to the firm’s actions.
49
Corporate Level Growth The firm must also assess its strengths and weaknesses against its
Strategy competitors to ascertain its competitive advantages.
•• The conditions prevailing in the environment should be carefully
examined to determine the demand for the product and the price
customers are willing to pay.
•• The firm must have adequate financial, technological and managerial
capabilities to expand the way it chooses.
•• Technological, social and demographic trends should be carefully
monitored before implementing product or market development
strategies. This is very crucial, especially, in a volatile business
environment.
Ansoff’s Product-Market Expansion Grid
The product/market grid first presented by Igor Ansoff (1968), shown in
exhibit 3.1, has proven to be very useful in discovering growth opportunities.
This grid best illustrates the various intensification options available to a
firm. The product/market grid has two dimensions, namely, products and
markets. Combinations of these two dimensions result in four growth
strategies. According to Ansoff’s Grid, three distinct strategies are possible
for achieving growth through the intensification route. These are:
•• Market Penetration: The firm seeks to achieve growth with existing
products in their current market segments, aiming to increase its
markets share.
•• Market Development: The firm seeks growth by targeting its existing
products to new market segments.
•• Product Development: The firm develops new products targeted to
its existing market segments.
•• Diversification: The firm grows by diversifying into new businesses
by developing new products for new markets.
Exhibit 3.1: Ansoff’s Grid
Markets/Products Current Markets New Markets
Current Products Market Penetration Market Development
New Products Product Development Diversification

Market Penetration Strategy

When a firm believes that there exist ample opportunities by aggressively
exploiting its current products and current markets, it pursues market
penetration approach. Market penetration involves achieving growth
through existing production in existing markets and a firm can achieve this
by:
•• Motivating the existing customers to buy its products more frequently
and in larger quantities. Market penetration strategy generally focuses
on changing the infrequent users of the firm’s products or services to
frequent users and frequent users to heavy users. Typical schemes used
for this purpose are volume discounts, bonus cards, price promotion,
heavy advertising, regular publicity, wider distribution and obviously
50
 through retention of customers by means of an effective customer Intensive Growth Strategies
relationship management.
•• Increasing its efforts to attract its competitors’ customers. For this
purpose, the firm must develop significant competitive advantages.
Attractive product design, high product quality, attractive prices,
stronger advertising, and wider distribution can assist an enterprise in
gaining lead over its competitors. All these require heavy investment,
which only firms with substantial resources, can afford. Firms less
endowed may search for niche segments. Many small manufacturers,
for instance, survive by seeking out and cultivating profitable niches
in the market. They may also grow by developing highly specialized
and unique skills to cater to a small segment of exclusive customers
with special requirements.
•• Targeting new customers in its current markets. Price concessions,
better customer service, increasing publicity and other techniques can
be useful in this effort.
In a growing market, simply maintaining market share will result in growth,
and there may exist opportunities to increase market share if competitors
reach capacity limits. While following market penetration strategy, the
firm continues to operate in the same markets offering the same products.
Growth is achieved by increasing its market share with existing products.
However, market penetration has limits, and once the market approaches
saturation another strategy must be pursued if the firm is to continue to
grow. Unless there is an intrinsic growth in its current market, this strategy
necessarily entails snatching business away from competitors. The market
penetration strategy is the least risky since it leverages many of the firm’s
existing resources and capabilities. Another advantage of this strategy is
that it does not require additional investment for developing new products.
Market Development Strategy
Market Development strategy tries to achieve growth by introducing existing
products in new markets. Market development options include the pursuit
of additional market segments or geographical regions. The development
of new markets for the product may be a good strategy if the firm’s core
competencies are related more to the specific product than to its experience
with a specific market segment or when new markets offer better growth
prospects compared to the existing ones. Because the firm is expanding into
a new market, a market development strategy typically has more risk than
a market penetration strategy. This is because managers do not normally
possess sound knowledge of new markets, which may result in inaccurate
market assessment and wrong marketing decisions.
In market development approach, a firm seeks to increase its sales by taking
its product into new markets. The two possible methods of implementing
market development strategy are: (a) the firm can move its present
product into new geographical areas. This is done by increasing its sales
force, appointing new channel partners, sales agents or manufacturing
representatives and by franchising its operation; or (b) the firm can expand
sales by attracting new market segments. Making minor modifications in
the existing products that appeal to new segments can do the trick.
51
Corporate Level Growth Product Development Strategy
Strategy
Expansion through product development involves development of new or
improved products for its current markets. The firm remains in its present
markets but develops new products for these markets. Growth will accrue
if the new products yield additional sales and market share. This strategy
is likely to succeed for products that have low brand loyalty and/or short
product life cycles. A Product development strategy may also be appropriate
if the firm’s strengths are related to its specific customers rather than to
the specific product itself. In this situation, it can leverage its strengths by
developing a new product targeted to its existing customers. Although the
firm operates in familiar markets, product development strategy carries
more risk than simply attempting to increase market share since there are
inherent risks normally associated with new product development.
The three possible ways of implementing the product development strategy
are:
•• The company can expand sales through developing new products.
•• The company can create different or improved versions of the current
products.
•• The company can make necessary changes in its existing products to
suit the different likes and dislikes of the customers.
Combination Strategy
Combination strategy combines the intensification strategy variants i.e.,
market penetration, market development and product development to
grow. In the market development and market penetration strategy, the firm
continues with its current product portfolio, while the product development
strategy involves developing new or improved products, which will satisfy
the current markets.
Activity 3
Search for information about a company of your choice and explain which
of the above intensification strategies it is currently following. Why is the
company following these strategies? Discuss.
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
…………………………………………………………………………........

3.6 EXPANSION THROUGH INTEGRATION

In contrast to the intensive growth, integration strategy involves expanding
externally by combining with other firms. Combination involves association
and integration among different firms and is essentially driven by need for
survival and also for growth by building synergies. Combination of firms
may take the merger or consolidation route. Merger implies a combination
of two or more concerns into one final entity. The merged concerns go out
of existence and their assets and liabilities are taken over by the acquiring
company. A consolidation is a combination of two or more business units
52
to form an entirely new company. All the original business entities cease Intensive Growth Strategies
to exist after the combination. Since mergers and consolidations involve
the combination of two or more companies into a single company, the term
merger is commonly used to refer to both forms of external growth. As is the
case in all the strategies, acquisition is a choice a firm has made regarding
how it intends to compete (Markides, 1999). Firms use integration to 1)
increase market share, 2) avoid the costs of developing new products
internally and bringing them to the market, 3) reduce the risk of entering
new business, 4) speed up the process of entering the market, 5) become
more diversified and 6) quite possibly to reduce the intensity of competition
by taking over the competitor’s business. The costs of integration include
reduced flexibility as the organization is locked into specific products and
technology, financial costs of acquiring another company and difficulties in
integrating various operations. There are many forms of integration, but the
two major ones are vertical and horizontal integration.
i) Vertical Integration: Vertical integration refers to the integration
of firms involved in different stages of the supply chain. Thus, a vertically
integrated firm has units operating in different stages of supply chain starting
from raw material to delivery of final product to the end customer. An
organization tries to gain control of its inputs (called backward integration)
or its outputs (called forward integration) or both. Vertical integration may
take the form of backward or forward integration or both. The concept
of vertical integration can be visualized using the value chain. Consider a
firm whose products are made via an assembly process. Such a firm may
consider backward integrating into intermediate manufacturing or forward
integrating into distribution. Backward integration sometimes is referred to
as upstream integration and forward integration as downstream integration.
For instance, Nirma undertook backward integration by setting up plant
to manufacture soda ash and linear alkali benzene, both important inputs
for detergents and washing soaps, to strengthen its hold in the lower-end
detergents market. Forward integration refers to moving closer to the
ultimate customer by increasing control over distribution activities. For
example, a personal computer assembler could own a chain of retail stores
from which it sells its machines (forward integration).
Some companies expand vertically backward and forward. Reliance
Petrochemicals grew by leveraging backward and forward integration:
it began with manufacturing of textiles and fibres, moved to polymers
and other intermediates then went into the manufacture of fibres, then to
petrochemicals and oil refining. In power, Reliance Energy wants to do the
same thing and the catchphrase that for this vertical integration is ‘from
well-head to wall-socket’. Reliance Energy’s strategy is to straddle the
entire value chain in the power business. It plans to generate power by using
the group’s production of gas, transmit and distribute it to the domestic and
industrial consumers, reaping the returns of not just generating power using
its own gas but selling what it generates not as a bulk supplier but to the
end user.
In essence, a firm seeks to grow through vertical integration by taking
control of the business operations at various stages of the supply chain to
gain advantage over its rivals. The record of vertical integration is mixed
53
Corporate Level Growth and hence, decisions should be taken after a comprehensive and careful
Strategy consideration of all aspects of this form of integration. In most cases the
initial investments may be very high and exiting an arrangement that
does not prove beneficial may be hard. Vertical integration also requires
an organization to develop additional product market and technology
capabilities, which it may not currently possess.
Factors conducive for vertical integration include: a) taxes and regulations
on market transactions, b) obstacles to the formulation and monitoring of
contracts, c) similarity between the vertically-related activities, d) sufficient
large production quantities so that the firm can benefit from economies
of scale and e) reluctance of other firms to make investments specific to
the transaction. Vertical integration may not yield the desired benefit if,
a) the quantity required from a supplier is much less than the minimum
efficient scale for producing the product. b) the product is widely available
commodity and its production cost decreases significantly as cumulative
quantity increases, c) the core competencies between the activities are very
different, d) the vertically adjacent activities are in very different types of
industries (For example, manufacturing is very different from retailing.)
and e) the addition of the new activity places the firm in competition with
another player with which it needs to cooperate. The firm then may be
viewed as a competitor rather than a partner.
Firms integrate vertically to: a) reduce transportation costs if common
ownership results in closer geographic proximity, b) improve supply chain
coordination, c) capture upstream or downstream profit margins, d) increase
entry barriers to potential competitors, for example, if the firm can gain
sole access to scarce resource, e) gain access to downstream distribution
channels that otherwise would be inaccessible, f) facilitate investment in
highly specialized assets in which upstream or downstream players may be
reluctant to invest and g) facilitate investment in highly specialized assets in
which upstream or downstream players may be reluctant to invest.
The downside risks of an integration strategy to a company include: a)
difficulty of effectively integrating the firms involved, b) incorrect evaluation
of target firm’s value, c) overestimating the potential for synergy between
the companies involved, d) creating a combination too large to control, e)
the huge financial burden that acquisition entails, f) capacity balancing
issues. (For instance, the firm may need to build excess upstream capacity
to ensure that its downstream operations have sufficient supply under all
demand conditions), g) potentially higher costs due to low efficiencies
resulting from lack of supplier competition, h) decreased flexibility due to
previous upstream or downstream investments, (however, that flexibility to
coordinate vertically -related activities may increase.), i) decreased ability
of increase product variety if significant in-house development is required,
and j) developing new core competencies may compromise existing
competencies.
There are alternatives to vertical integration that may provide some of the
same benefits with fewer drawbacks. The following are a few of these
alternatives for relationships between vertically related organizations.

54
•• Long-term explicit contracts Intensive Growth Strategies

•• Franchise agreements
•• Joint ventures
•• Co-location of facilities
•• Implicit contracts (relying on firm’s reputation)
ii) Horizontal Combination / Integration: The acquisition of additional
business in the same line of business or at the same level of the value chain
(combining with competitors) is referred to as horizontal integration.
Horizontal growth can be achieved by internal expansion or by external
expansion through mergers and acquisitions of firms offering similar
products and services. A firm may diversify by growing horizontally into
unrelated business. Integration of oil companies, Exxon and Mobil, is an
example of horizontal integration. Aditya Birla Group’s acquisition of L&T
Cements from Reliance to increase its market dominance is an example of
horizontal integration. This sort of integration is sought to reduce intensity
of competition and also to build synergies.
Benefits of Horizontal Integration
The following are some benefits of horizontal integration:
•• Economies of scale-achieved by selling more of the same product, for
example, by geographic expansion.
•• Economies of scope - achieved by sharing resources common to
different products. Commonly referred to as ‘synergies’.
•• Increased bargaining power over suppliers and downstream channel
members.
•• Reduction in the cost of global operations made possible by operating
plants in foreign markets.
•• Synergy achieved by using the same brand name to promote multiple
products.
Hazards of Horizontal Integration
Horizontal integration by acquisition of a competitor will increase a firm’s
market share. However, if the industry concentration increases significantly
then anti-trust issues may arise. Aside from legal issues, another concern is
whether the anticipated economic gains will materialize. Before expanding
the scope of the firm through horizontal integration, management should
be sure that the imagined benefits are real. Many blunders have been made
by firms that broadened their horizontal scope to achieve synergies that
did not exist, for example, computer hardware manufacturers who entered
the software business on the premise that there were synergies between
hardware and software. However, a connection between two products does
not necessarily imply realizable economies of scope. Finally, even when
the potential benefits of horizontal integration exist, they do not materialize
spontaneously. There must be an explicit horizontal strategy in place. Such
strategies generally do not arise from the bottom-up, but rather, must be
formulated by corporate management.

55
Corporate Level Growth
Strategy 3.7 INTERNATIONAL EXPANSION
An organization can “go international” by crossing domestic borders as
it employs any of the strategies discussed above. International expansion
involves establishing significant market interests and operations outside
a company’s home country. Foreign markets provide additional sales
opportunities for a firm that may be constrained by the relatively small
size of its domestic market and also reduces the firm’s dependence on a
single national market. Firms expand globally to seek opportunity to
earn a return on large investments such as plant and capital equipment
or research and development, or enhance market share and achieve
scale economies, and also to enjoy advantages of locations. Other
motives for international expansion include extending the product life
cycle, securing key resources and using low-cost labour. However, to
mould their firms into truly global companies, managers must develop
global mind-sets. Traditional means of operating with little cultural
diversity and without global competition are no longer effective firms
(Kedia and Mukherji, 1999).
International expansion is fraught with various risks such as, political
risks (e.g. instability of host nations) and economic risks (e.g. fluctuations
in the value of the country’s currency). International expansion increases
coordination and distribution costs, and managing a global enterprise entails
problems of overcoming trade barriers, logistics costs, cultural diversity,
etc.
There are several methods for going international. Each method of entering
an overseas market has its own advantages and disadvantages that must be
carefully assessed. Different international entry modes involve a tradeoff
between level of risk and the amount of foreign control the organization’s
managers are willing to allow. It is common for a firm to begin with
exporting, progress to licensing, then to franchising finally leading to direct
investment. As the firm achieves success at each stage, it moves to the next.
If it experiences problems at any of these stages, it may not progress further.
If adverse conditions prevail or if operations do not yield the desired returns
in a reasonable time period, the firm may withdraw from the foreign market.
The decision to enter a foreign market can have a significant impact on a
firm. Expansion into foreign markets can be achieved through:
•• Exporting
•• Licensing
•• Joint Venture
•• Direct Investment
Exporting: Exporting is marketing of domestically produced goods in a
foreign country and is a traditional and well-established method of entering
foreign markets. It does not entail new investment since exporting does not
require separate production facilities in the target country. Most of the costs
incurred for exporting products are marketing expenses.
Licensing: Licensing permits a company in the target country to use the
property of the licensor. Such property usually is intangible, such as
56
trademarks, patents, and production techniques. The licensee pays a fee Intensive Growth Strategies
in exchange for the rights to use the intangible property and possible for
technical assistance. Licensing has the potential to provide a very large RoI
since this mode of foreign entry also does require additional investments.
However, since the licensee produces and markets the product, potential
returns from manufacturing and marketing activities may be lost.
Joint Venture: There are five common objectives in a joint venture:
market entry, risk/reward sharing, technology sharing and joint product
development, and conforming to government regulations. Other benefits
include political connections and distribution channel access that may
depend on relationships.
Joint ventures are favoured when:
•• The partners’ strategic goals converge while their competitive goals
diverge;
•• The partners’ size, market power, and resources are small compared
to the industry leaders; and
•• Partners’ are able to learn from one another while limiting access to
their own proprietary skills.
The critical issues to consider in a joint venture are ownership, control,
length of agreement, pricing, technology transfer, local firm capabilities
and resources, and government intentions. Potential problems include,
conflict over asymmetric investments, mistrust over proprietary knowledge,
performance ambiguity - how to share the profits and losses, lack of parent
firm support, cultural conflicts, and finally, when and how to terminate the
relationship.
Joint ventures have conflicting pressures to cooperate and compete:
•• Strategic imperative; the partners want to maximize the advantage
gained from the joint venture, but they also want to maximize their
own competitive position.
•• The joint venture attempts to develop shared resources, but each firm
wants to develop and protect its own proprietary resources.
•• The joint venture is controlled through negotiations and coordination
processes while each firm would like to have hierarchical control.
Direct Investment: Direct investment is the ownership of facilities in
the target country. It involves the transfer of resources including capital,
technology, and personnel. Direct investment may be made through the
acquisition of an existing entity or the establishment of a new enterprise.
Direct ownership provides a high degree of control in the operations and
the ability to better know the consumers and competitive environment.
However, it requires a high degree of commitment and substantial resources.
Exhibit 3.2 compares different International Market Entry Modes.

57
Corporate Level Growth Exhibit 3.2: Comparison of International Market Entry Modes
Strategy
Mode Conditions Favoring Advantages Disadvantages
this Mode
• Limited sales • Minimizes • Trade barriers
potential in target risk and & tariffs add
country; little investment to costs
Exporting product adaptation
required • Speed of • Transport
entry costs
• High target country;
production costs • Maximizes • Limits access
scale; uses to local market
• Liberal import existing information
policies facilities
• Company
• High political risk viewed as an
outsider
• Import and • Minimizes • Lack of
investment risk and control over
barriers investment use of assets
• Legal protection • Speed of • Licensee
Licensing possible in entry may become
target environment competitor
• Able to
• Low sales potential circumvent • Knowledge
in target country trade barriers leakages
• Large cultural • High RoI • License period
distance is limited
• Licensee lacks
ability to become a
competitor
• Import barriers • Overcomes • Difficult to
ownership manage
Joint • Large cultural restrictions
distance and cultural • Dilution of
Ventures
distance control
• Assets cannot be
fairly priced • Combines • Greater risk
resources than exporting
• High sales potential of two & licensing
• Some political risk companies
• Knowledge
• Potential for spillovers
• Government
restrictions on learning
• Partner may
foreign ownership • Viewed as become a
insider competitor
• Local company
can provide • Less
skills, resources, investment
distribution network, required
brand name, etc.

58
 Intensive Growth Strategies
• Import barriers • Greater • Higher risk
knowledge of than other
Direct • Small cultural local market modes
distance
Investment
• Can better • Requires more
• Assets cannot be apply resources and
fairly priced specialised commitment
skills
• High sales potential • May be
• Minimise difficult
• Low political risk knowledge to manage
spillover the local
resources.
• Can be
viewed as an
insider
There are three major strategy options for going international:
Multi-domestic: The organization decentralizes operational decisions
and activities to each country in which it is operating and customizes its
products and services to each market. For years, U.S. auto manufacturers
maintained decentralized overseas units that produced cars adapted to
different countries and regions. General Motors produced Opel in Germany
and Vauxhall in Great Britain while Chrysler produced the Simca in France
and Ford offered a Canadian Ford.
Global: The organization offers standardized products and uses integrated
operations. Example: Ford is treating its Contour as a car for all world
markets—one that can be produced and sold in any industrialized nation.
Transnational: The organization seeks the best of both the multi-domestic
and global strategies by globally integrating operations while tailoring
products and services to the local market. In other words a company
‘thinks globally but acts locally’. Many authors refer to this concept as
‘Glocalization’. Global electronic communications and connectivity can help
integrate operations while flexible manufacturing enables firms to produce
multiple versions of products from the same assembly line, tailoring them
to different markets. This gives more choice in locating facilities to take
advantage of cheaper labor or to get the best of other factors of production.
Managing Global Supply Chains to Enhance Competitiveness
Logistics capabilities (the movement of supplies and goods) make or
mar global operations. Global operations involve highly coordinated
international flow of goods, information, cash, and work processes. Setting
up a global supply chain to support producing and selling products in many
countries at the right cost and service levels is a very difficult task. However
the benefits of managing this difficult task has many benefits, which include
rationalization of global operations by setting up right number of factories
and distribution centers and integration of far-flung operations under a
unified command to better manage inventory and order filling activities.
Optimizing global supply chain operations can cut the delivery times and
costs drastically and improve global competitiveness. Smart supply chain
planning may result in locating facilities where they make the most logistical

59
Corporate Level Growth sense, while saving on taxes. This is better than simply locating where labor
Strategy is cheapest, but where taxes and other cost may not be most favourable.

3.8 SUMMARY
Strategy refers to how a given objective will be achieved. Therefore,
strategy is concerned with the relationships between ends and means, that
is, between the results we seek and the resources at our disposal. There are
three levels of strategy, namely, corporate strategies, competitive strategies
and functional strategies. Corporate strategies are concerned with the broad,
long-term questions of “what businesses are we in, and what do we want
to do with these businesses?” It sets the overall direction the organization
will follow. On the other hand, competitive strategies determine how the
firm will compete in a specific business or industry. This involves deciding
how the company will compete within each line of business. Functional
strategies, also referred to as operational strategies, are the short-term (less
than one year), goal-directed decisions and actions of the organization’s
various functional departments.
There are various approaches to developing stability strategy. They are:
holding strategy, stable growth strategy, harvesting strategy, profit or
endgame strategy. Growth of business enterprises implies realignment of
its business operations to different product-market environments. This
is achieved through the basic growth approaches of intensive expansion,
integration (horizontal and vertical integration), diversification and
international operations. All these aspects have been covered in this unit.

3.9 KEY WORDS

Corporate Strategy: Corporate strategy is essentially a blueprint for the
growth of the firm.
Competitive Strategies: Strategies that determine how the firm will
compete in a specific business or industry.
Combination Strategy: Combination strategy may include combination
of two alternatives i.e., market penetration and market development or
combination of all the three alternatives.
Diversification: The firm grows by diversifying into new businesses by
developing new products for new markets.
Expansion Strategies: Growth or expansion strategy is the most important
strategic option, which firms pursue to gain significant growth as opposed
to incremental growth envisaged in stable strategy.
Functional Strategies: Also called operational strategies, these are the
short-term, goal-directed decisions and actions of the organization’s various
functional departments.
Generic Corporate Strategies: The four variants of corporate strategy,
namely, stability strategy, growth/expansion strategy, retrenchment/
divestment strategy and combination strategy are called generic corporate
strategies or grand strategies.

60
Harvesting Strategy: The firm has a dominant market share which it wants Intensive Growth Strategies
to leverage to generate cash for future business expansion.
Integration Strategy: The combination or association with other companies
to expand externally is termed as integration strategy.
Intensification Strategy: Intensive expansion strategy involves safeguarding
its present position and expanding in the firm’s current product-market
space to achieve growth targets.
International Expansion: Global expansion involves establishing
significant market interests and operations outside a company’s home
country.
Product Development: The firm develops new products targeted to its
existing market segments.
Stability Strategy: Strategy, which aims to retain present strategy of the
firm at the corporate level by focusing on its present products and markets.

3.10 SELF-ASSESSMENT QUESTIONS

1) What is corporate level strategy? Why is it important for a diversified
firm?
2) What are the various reasons that firms choose to move from either a
single-or a dominant-business position to a more diversified position?
3) What do you mean by stability strategy? Does this strategy mean that
a firm stands still? Explain.
4) Under what circumstances do firms pursue stability strategy? What
are the different approaches to stability strategy?
5) What resources and incentives encourage a firm to pursue expansion
strategies? What are the main problems that affect a firm’s efforts to
use an expansion strategy?
6) Given the advantages of international expansion, why do some firms
choose not to expand internationally?
7) What is the example of a political risk in expanding operations into
Africa or Middle East?

3.11 REFERENCES / FURTHER READINGS

Collins D.J. & Montgomery, C.A. (1998). ‘Creating Corporate Advantage’,
Harvard Business Review, 76(3) 70-83.
Hitt, Michael A., Duane, Ireland R. and Hoskisson, Robert E. (2001)
Strategic Management: Competitiveness and Globalization, 4e, Thomson
Learning.
Kedia, B.L. & Mukherji, A. (1999). ‘Global Managers; Developing a
Mindset for Global Competitiveness’, Journal of World Business, 34 (3);
230-251.
Markides, C.C. (1999). A Dynamic View of Strategy, Sloan Management
Review, 40 (3); 55-63.

61
Corporate Level Growth Markides, C.C. (1999). To Diversify or not Diversify, Harvard Business
Strategy Review, 75(6); 93-99.
Porter, M.E. (1987). From Competitive Advantage to Corporate Strategy,
Harvard Business Review, 65 (3); 43-59.
Ramaswamy, V.S. and Namakumari, S. (1999). Strategic Planning:
Formulation of Corporate Strategy (Texts and Cases)-The Indian Context,
1e, Macmillan India Limited.
Simons R. (1999). How Risky is Your Company? Harvard Business Review;
77 (3); 85-94.
Srivastava, R.M. (1999). Management Policy and Strategic Management
(Concepts, Skills and Practice), 1e, Himalaya Publishing House.

62
UNIT 4 INTEGRATION AND
DIVERSIFICATION GROWTH
STRATEGIES

Objectives
After reading this unit, you should be able to:
•• acquaint yourself with the various diversification strategies;
•• explain the reasons for pursuing diversification strategies;
•• explain the various routes to diversification;
•• state the mechanics of M&A and the basic steps involved in M&A;
•• explain the rationale behind M&A;
•• identify the attributes of successful and effective acquisitions; and
•• present a brief overview of the M&A scenario in India.
Structure
4.1 Diversification
4.2 Related Diversification (Concentric Diversification)
4.3 Unrelated Diversification (Conglomerate Diversification)
4.4 Rationale for Diversification
4.5 Alternative Routes to Diversification
4.6 Mergers and Acquisitions (M&A)
4.7 Merger and Acquisition Strategy
4.8 Reasons for Failure of Merger and Acquisition
4.9 Steps in Merger and Acquisition Deals
4.10 Mergers and Acquisitions: The Indian Scenario
4.11 Summary
4.12 Key Words
4.13 Self-Assessment Questions
4.14 References / Further Readings

4.1 DIVERSIFICATION
Diversification involves moving into new lines of business. When an industry
consolidates and becomes mature, most of the firms in that industry would
have reached the limits of growth using vertical and horizontal growth
strategies. If they want to continue growing any further the only option
available to them is diversification by expanding their operations into a
different industry. Diversification strategies also apply to the more general
case of spreading market risks, adding products to the existing lines of
business can be viewed as analogous to an investor who invests in multiple
stocks to “spread the risks”. Diversification into other lines of business can
especially make sense when the firm faces uncertain conditions in its core
product-market domain. 63
Corporate Level Growth While intensification limits the growth of the firm to the existing businesses
Strategy of the firm, diversification takes it beyond the confines of the current product-
market domain to uncharted and unfamiliar products-market territory. In
other words, this strategy steers the organization away from both its present
products and its present market simultaneously. Of the various routes to
expansion, diversification is definitely the most complex and risky route.
Diversification approach to expansion is complex since it seeks to enter new
product lines, processes, services or markets which involve different skills,
processes and knowledge from those required for the current business. It is
risky since it involves deviating from familiar territory: familiar products
and familiar markets.
Diversification of a firm can take the form of concentric and conglomerate
diversification. Concentric (related) diversification is appropriate when a
firm has a strong competitive position but industry attractiveness is low.
Conglomerate (unrelated) diversification is an appropriate strategy when
current industry is unattractive and that the firm lacks exceptional and
outstanding capabilities or skills in related products or services. Generally,
related diversification strategies have been demonstrated to achieve higher
value creation (profitability and stock value) than unrelated diversification
strategies. The interpretation of this finding is that there must be some
advantage achieved through shared resources, experience, competencies,
technologies, or other value-creating factors. This is the so called synergy
effect of diversification i.e., ‘the whole is greater than the sum of its parts’.
While it is difficult to predict what is a “synergistic” match of a business
to an existing corporate portfolio, the test must be that the business creates
new value when it is added to a corporation’s line of existing businesses.

4.2 RELATED DIVERSIFICATION

(CONCENTRIC DIVERSIFICATION)
In this alternative, a company expands into a related industry, one having
synergy with the company’s existing lines of business, creating a situation in
which the existing and new lines of business share and gain special advantages
from commonalities such as technology, customers, distribution, location,
product or manufacturing similarities, and government access. In essence,
in concentric diversification, the new industry is related in some way to the
current one. This is often an appropriate corporate strategy when a company
has a strong competitive position and distinctive competencies, but its existing
industry is not very attractive. Thus, a firm is said to have pursued concentric
diversification strategy when it enters into new product or service area
belonging to different industry category but the new product or service
is similar to the existing one with respect to technology or production or
marketing channels or customers. Such diversification may be possible in two
ways: internal development through product and market expansion utilizing
the existing resources and capabilities or through external acquisitions
operating in the same market space. Addition of lease financing activity in
India is a case of market-related concentric diversification. Another type of
concentric diversification is technology related in which the firm employs
similar technology to manufacture new products.

64
Addition of tomato ketchup and sauce to the existing ‘Maggi’ brand Integration and Diversification
processed items of Food Specialties Ltd. is an instance of technology- Growth Strategies
related concentric diversification.

4.3 UNRELATED DIVERSIFICATION

(CONGLOMERATE DIVERSIFICATION)
Conglomerate diversification is a growth strategy in which a company
seeks to grow by adding entirely unrelated products and markets to its
existing business. A company that consists of a grouping of businesses from
unrelated streams is called a conglomerate. In conglomerate diversification,
a firm generally introduces new products using different technologies in new
markets. A conglomerate consists of a number of product divisions, which sell
different products, principally to their own markets rather than to each other.
Conglomerates diversify their business risk through profit gained from profit
centers in various lines of business. However, some may become so diversified
and complicated that they are too difficult to manage efficiently. However,
since their huge popularity in the 1960s to 80s, many conglomerates have
reduced their business lines by restricting to a choice of few. The reasons
for considering this alternative are primarily to seek more attractive
opportunities for growth, spread the risk across different industries, and/
or to exit an existing line of business. Further, this may be an appropriate
strategy when, not only the present industry is unattractive, but the company
also lacks outstanding competencies that it could transfer to related products
or industries. However, since it is difficult to manage and excel in unrelated
business units, it is often difficult to realize the expected and anticipated
results.
In India, a large number of companies diversified their operations following
economic liberalization. Gujarat Narmada Valley Fertilizers Ltd. has
diversified from fertilizers to personal transport, chemicals and electronic
industries, while Arvind group, hitherto confined to textiles, diversified into
unrelated activities such as manufacturing of agro-products, floriculture and
export of fresh fruits. Likewise, BPL has decided to venture into sectors like
power generators, cement, steel and agricultural inputs in a big way. Wipro
is another company with wide ranging business interests encompassing
vegetable oils, computer hardware, and software, medical equipment,
hydraulic systems, consumer products, lighting, export of leather shoe
nippers and has recently entered into financial services.

4.4 RATIONALE FOR DIVERSIFICATION

Under strict assumptions of an efficient market theory, there is no convincing
rationale for one company to acquire another, especially less efficient or
unrelated businesses. Since the markets are imperfect and do not follow the
norms of efficient market theory, companies do diversify for several reasons
given below:
Economies of Scale and Scope (Synergy): The merger of two companies
producing similar products should allow the combined firms to pool
resources and attain lower operating costs. By making optimal use of
existing marketing, investment, operating and managerial facilities of the
65
Corporate Level Growth two combining firms and eliminating redundant and overlapping activities,
Strategy the combined entity can lower the operating costs and increase operational
efficiency. The saving may come from reduced overheads or the ability to
spread a larger amount of production over lower (consolidated) fixed costs.
There may also be differential management capabilities: an efficiently
managed firm may acquire a less efficient firm with the intent of bringing
better management to the business. Efficiencies can also be gained through
pooled financial resources or simply through pooled risk.
Widen Market Base and Enhance Market Power: Large number of
collaborations and acquisitions are aimed at expanding the market for
the firm’s products. For instance, HCL and Hewlett Packard Ltd., Tata-
IBM, Ranbaxy Laboratories and Eli Lilly Company, Hindustan Motors
and General Motors and Tata Tea and Tetley of USA, entered into tie-up
arrangements mainly to exploit the market opportunities. Mergers and
acquisitions can increase a firm’s market share when both firms are in the
same business. But, market share does not necessarily translate to higher
profits or greater value for owners unless the merger substantially reduces
the inter-firm rivalry in the industry.
Profit Stability: Acquisition of new business can reduce variations in
corporate profits by expanding the company’s lines of business. This
typically occurs when the core business depends on sales that are seasonal
or cyclical. A large number of organizations pursue diversification strategy
just to avoid instability in sales and profits which can result from events
such as cyclical and seasonal shifts in demand, changes in the life cycles
and other destabilizing forces in the micro and macro environment.
Improve Financial Performance: Large firms generate cash that can be
invested in other ventures. The firm acts as a banker of an internal capital
market. The core business sustains itself on its moneymaking ventures, and
uses this cash flow to create new ventures that generate additional profits. A
firm may also be tempted to exploit diversification opportunities because it
has liquid resources far in excess of the total expansion needs. Sometimes a
company may seek a merger with another organization with the intention of
tiding over its financial problems.
Growth: Diversification is basically a way to grow. Indeed, managers often
cite growth as the principle reason for diversification. The most important
factor that motivates management to diversify is to achieve higher growth
rate than which is possible with intensification strategy. If the management
feels that the existing products and markets do not have the potential to
deliver expected growth, the only alternative they have is to diversify into
new territories. Unlike organic growth, which is slow, an acquisition or
merger (inorganic) can deliver the results rather quickly since resources,
skills, other factors essential for faster growth are immediately available.
Counter Competitive Threats: Organizations are driven at times towards
external diversification through merger by competitive pressures. Such a
strategic move is expected to counter the competitive threats by reducing
the intensity of competition.
Access to Latest Technology: Many Indian firms enter into strategic alliances
with foreign firms to gain access to the latest technologies without spending
66
huge amount of money on R&D. For instance, Johnson and Nicholson India Integration and Diversification
Ltd., a leading domestic paint manufacturer, has strengthened its position in Growth Strategies
the Indian market and also diversified into industrial electronics along with
its German partner, Carl Schevek AG of Germany.
Regulatory Factors: A large number of organizations have diversified their
operations geographically to exploit opportunities in different regions and
countries and also to take advantage of the incentives being offered by the
various governments to attract investment. Many companies enter other
countries to avoid restrictions placed by the regulators in their host country.
Activity 1
Compare and contrast the strategies of Bajaj group and TVS group. Are
they following concentric or conglomerate diversification?
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
……………………………………………………………………………....
....……………………………………………………………………………

4.5 ALTERNATIVE ROUTES TO

DIVERSIFICATION
Once a firm opts for diversification, it must select one of the options
discussed below. There are three broad ways to implement diversification
strategies:
Mergers and Acquisitions
A merger is a legal transaction in which two or more organizations
combine operations through an exchange of stock. In a merger only one
organization entity will eventually remain. An acquisition is a purchase
of one organization by another. There were quite a few acquisitions in
which the target firms resisted the take-over bids. These acquisitions are
referred to as hostile takeovers. It is natural for the target organization’s
management to try to defend against the takeover. Although they are
used synonymously, there is a slight distinction between the terms
‘merger’ and ‘acquisition’. This will be discussed more in detail in the
later sections.
Strategic Partnering
Strategic partnering occurs when two or more organizations establish
a relationship that combines their resources, capabilities, and core
competencies to achieve some business objective. The three major types
of strategic partnerships: joint ventures, long-term contracts, and strategic
alliances are discussed below:
Joint Ventures
In a joint venture, two or more organizations form a separate, independent
organization for strategic purposes. Such partnerships are usually focused
on accomplishing a specific market objective. They may last from a few
months to a few years and often involve a cross-border relationship. One
67
Corporate Level Growth firm may purchase a percentage of the stock in the other partner, but not a
Strategy controlling share. The joint ventures between various Indian and foreign
companies such as Hindustan Motors and General Motors, Hero Cycles
with Honda Motor Company, Wipro and General Electric, etc. are examples
of such strategic partnering.
Long-Term Contracts
In this arrangement, two or more organizations enter a legal contract for
a specific business purpose. Long-term contracts are common between a
buyer and a supplier. Many strategists consider them more flexible and less
inhibiting than vertical integration. It is usually easier to end an unsatisfactory
long-term contract than to end a joint venture. A good example is the
change in supplier relationships that Chrysler’s management undertook
after 1989, when it launched the LH project to create a new generation
of cars. Supplier relationships are critical at Chrysler since outsourced
components constitute about 70 percent of Chrysler’s cars, compared to
about 50 percent for GM and Ford. Japanese automakers also enter into
such arrangements with their vendors frequently.
Strategic Alliances
In a strategic alliance, two or more organizations share resources, capabilities,
or distinctive competencies to pursue some business purpose. Strategic
alliances often transcend the narrower focus and shorter duration of joint
ventures. These alliances may be aimed at world market dominance within
a product category. While the partners cooperate within the boundaries of
the alliance relationship, they often compete fiercely in other parts of their
businesses.

4.6 MERGERS AND ACQUISTIONS (M&A)

Mergers and acquisitions and corporate restructuring – or M&A for short- are
a big part of the corporate finance. One plus one makes three: this equation
is the special alchemy of a merger or acquisition. The key principle behind
buying a company is to create shareholder value over and above that of the
sum of the two companies. Two companies together are more valuable than
two separate companies - at least, that’s the reasoning behind M&A. This
idea is particularly attractive to companies when times are tough. Strong
companies will act to buy other companies to create a more competitive,
cost-efficient company. The companies will come together hoping to gain a
greater market share or achieve greater efficiency. Because of these potential
benefits, target companies will often agree to be purchased when they know
they cannot survive alone.
A corporate merger is essentially a combination of the assets and liabilities
of two firms to form a single business entity. Although they are used
synonymously, there is a slight distinction between the terms ‘merger’ and
‘acquisition’. Strictly speaking, only a corporate combination in which one
of the companies survives as a legal entity is called a merger. In a merger
of firms that are approximate equals, there is often an exchange of stock
in which one firm issues new shares to the shareholders of the other firm
at a certain ratio. In other words, a merger happens when two firms, often
about the same size, agree to unite as a new single company rather than
68
remain as separate units. This kind of action is more precisely referred to Integration and Diversification
as a “merger of equals.” Both companies’ stocks are surrendered, and new Growth Strategies
company stock is issued in its place. When a company takes over another
to become the new owner of the target company, the purchase is called an
acquisition. From the legal angle, the ‘target company’ ceases to exist and
the buyer “gulps down” the business and stock of the buyer continues to be
traded.
In summary, “acquisition” is generally used when a larger firm absorbs a
smaller firm and “merger” is used when the combination is portrayed to be
between equals. For the sake of discussion, the firm whose shares continue
to exist (possibly under a different company name) will be referred to as
the acquiring firm and the firm’s whose shares are being replaced by the
acquiring firm will be referred to as the target firm. However, a merger of
equals doesn’t happen very often in practice. Frequently, a company buying
another allows the acquired firm to proclaim that it is a merger of equals,
even though it is technically an acquisition. This is done to overcome some
legal restrictions on acquisitions.
Synergy is the main reason cited for many M&As. Synergy takes the form
of revenue enhancement and cost savings. By merging, the companies
hope to benefit through staff reductions, economies of scale, acquisition of
technology, improved market reach and industry visibility. Having said that,
achieving synergy is easier said than done-synergy is not routinely realized
once two companies merge. Obviously, when two businesses are combined,
it should result in improved economies of scale, but sometimes it works in
reverse. In many cases, one and one add up to less than two.
Excluding any synergies resulting from the merger, the total post-merger
value of the two firms is equal to the pre-merger value, if the ‘synergistic
values’ of the merger activity are not measured. However, the post-merger
value of each individual firm is likely to be different from the pre-merger
value because the exchange ratio of the shares will not exactly reflect the
firms’ values compared to each other. The exchange ratio is distorted
because the target firm’s shareholders are paid a premium for their shares.
Synergy takes the form of revenue enhancement and cost savings. When
two companies in the same industry merge, the revenue will decline to the
extent that the businesses overlap. Hence, for the merger to make sense for
the acquiring firm’s shareholders, the synergies resulting from the merger
must be more than the value lost initially.
Different forms of Mergers
There are a whole host of different mergers depending on the relationship
between the two companies that are merging. These are:
•• Horizontal Merger: Merger of two companies that are in direct
competition in the same product categories and markets.
•• Vertical Merger: Merger of two companies which are in different
stages of the supply chain. This is also referred to as vertical
integration. A company taking over its supplier’s firm or a company
taking control of its distribution by acquiring the business of its
distributors or channel partners is examples of this type of merger.
69
Corporate Level Growth •• Market-extension Merger: Merger of two companies that sell the
Strategy same products in different markets.
•• Product-extension Merger: Merger of two companies selling
different but related products in the same market.
•• Conglomeration: Merger of two companies that have no common
business areas.
From the finance standpoint, there are three types of mergers: pooling of
interests, purchase mergers and consolidation mergers. Each has certain
implications for the companies and investors involved:
Pooling of Interests: Pooling of interests is generally accomplished by
a common stock swap at a specified ratio. This is sometimes called a tax-
free merger. Such mergers are only allowed if they meet certain legal
requirements. A pooling of interests is generally accomplished by a common
stock swap at a specified ratio. Pooling of interests is less common than
purchase mergers.
Purchase Mergers: As the name suggests, this kind of merger occurs
when one company purchases another one. The purchase is made by
cash or through the issue of some kind of debt investment, and the sale is
taxable. Acquiring companies often prefer this type of merger because it
can provide them with a tax benefit. Acquired assets can be “written up”
to the actual purchase price, and the difference between book value and
purchase price of the assets can depreciate annually, reducing taxes payable
by the acquiring company. Purchase acquisitions involve one company
purchasing the common stock or assets of another company. In a purchase
acquisition, one company decides to acquire another, and offers to purchase
the acquisition target’s stock at a given price in cash, securities or both. This
offer is called a tender offer because the acquiring company offers to pay a
certain price if the target’s shareholders will surrender or tender their shares
of stock. Typically, this tender offer is higher than the stock’s current price
to encourage the shareholders to tender the stock. The difference between
the share price and the tender price is called the acquisition premium. These
premiums can sometimes be quite high.
Consolidation Mergers: In a consolidation, the existing companies are
dissolved, a new company is formed to combine the assets of the combining
companies and the stock of the consolidated company is issued to the
shareholders of both companies. The tax terms are the same as those of a
purchase merger. The Exxon merger with Mobil Oil Company is technically
a consolidation.
Acquisitions
As stated earlier, an acquisition is only slightly different from a merger. Like
mergers, acquisitions are actions through which companies seek economies
of scale, efficiencies, and enhanced market visibility. Unlike all mergers, all
acquisitions involve one firm purchasing another - there is no exchanging
of stock or consolidating as a new company. In an acquisition, a company
can buy another company with cash, stock, or a combination of the two.
In smaller deals, it is common for one company to acquire all the assets of
another company. Another type of acquisition is a reverse merger, a deal that
70
enables a private company to get publicly listed in a relatively short time Integration and Diversification
period. A reverse merger occurs when a private company that has strong Growth Strategies
prospects and is eager to raise finance buys a publicly listed shell company,
usually one with no business and limited assets. The private company
reverse merges into the public company and together they become an
entirely new public corporation with tradable shares. Regardless of the type
of combination, all mergers and acquisitions have one thing in common: they
are all meant to create synergy and the success of a merger or acquisition
hinges on how well this synergy is achieved.
Activity 2
Scan The Economic Times, Business Line, Business Standard or any other
business daily for news on mergers. Classify the mergers you have come
across during your search into various types discussed.
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
..………………………………………………………………………….….
………………………………………………………………………………
……………………………………………………………………….....…...

4.7 MERGER AND ACQUISITION STRATEGY

There are a number of reasons that mergers and acquisitions take place.
These issues generally relate to business concerns such as competition,
efficiency, marketing, product, resources and tax issues. They can also
occur because of some very personal reasons such as retirement and family
concerns. Some people are of the opinion that mergers and acquisitions also
occur because of corporate greed to acquire everything. Various reasons for
M&A include:
Reduce Competition: One major reason for companies to combine is
to eliminate competition. Acquiring a competitor is an excellent way to
improve a firm’s position in the marketplace. It reduces competition and
allows the acquiring firm to use the target firm’s resources and expertise.
However, combining for this purpose is as such not legal and under the
Antitrust Acts it is considered a predatory practice. Therefore, whenever
a merger is proposed, firms make an effort to explain that the merger is
not anti-competitive and is being done solely to better serve the consumer.
Even if the merger is not for the stated purpose of eliminating competition,
regulatory agencies may conclude that a merger is anti-competitive.
However, there are a number of acceptable reasons for combining firms.
Cost Efficiency: Due to technology and market conditions, firms may benefit
from economies of scale. The general assumption is that larger firms are
more cost-effective than are smaller firms. It is, however, not always cost
effective to grow. Inspite of the stated reason that merging will improve cost
efficiency, larger companies are not necessarily more efficient than smaller
companies. Further, some large firms exhibit diseconomies of scale, which
means that the average cost per unit increases, as total assets grow too large.
Some industry analysts even suggest that the top management goes in for
71
Corporate Level Growth mergers to increase its own prestige. Certainly, managing a big company is
Strategy more prestigious than managing a small company.
Avoid Being a Takeover Target: This is another reason that companies
merge. If a firm has a large quantity of liquid assets, it becomes an attractive
takeover target because the acquiring firm can use the liquid assets to
expand the business, pay off shareholders, etc. If the targeted firm invests
existing funds in a takeover, it has the effect of discouraging other firms
from targeting it because it is now larger in size, and will, therefore, require
a larger tender offer. Thus, the company has found a use for its excess liquid
assets, and made itself more difficult to acquire. Often firms will state that
acquiring a company is the best investment the company can find for its
excess cash. This is the reason given for many conglomerate mergers.
Improve Earnings and Reduce Sales Variability: Improving earnings and
sales stability can reduce corporate risk. If a firm has earnings or sales
instability, merging with another company may reduce or eliminate this
provided the latter company is more stable. If companies are approximately
the same size and have approximately the same revenues, then by merging,
they can eliminate the seasonal instability. This is, however, not a very
inefficient way of eliminating instability in strict economic terms.
Market and Product Line Issues: Often mergers occur simply because
one firm is in a market that the other company wants to enter. All of the
target firm’s experience and resources are readily available for immediate
use. This is a very common reason for acquisitions. Whatever may be
the explanation offered for acquisition, the dominant reason for a merger
is always quick market entry or expansion. Product line issues also exert
powerful influence in merger decisions. A firm may wish to expand, balance,
fill out or diversify its product lines. For example, acquisition of Modern
Foods by Hindustan Lever Limited is primarily related product line.
Acquire Resources: Firms wish to purchase the resources of other firms or
to combine the resources of the two firms. These may be tangible resources
such as plant and equipment, or they may be intangible resources such as
trade secrets, patents, copyrights, leases, management and technical skills
of target company’s employees, etc. This only proves that the reasons for
mergers and acquisitions are quite similar to the reasons for buying an asset/
to purchase an asset for its utility.
Synergy: Synergy popularly stated, as “two plus two equals five,” is similar
to the concept of economies of scope. Economies of scope would occur if
two companies combine and the combined company was more cost efficient
at both activities because each requires the same resources and competencies.
Although synergy is often cited as the reason for conglomerate mergers,
cost efficiencies due to synergy are difficult to document.
Tax Savings: Although tax savings is not a primary motive for a combination,
it can certainly “sweeten” the deal. When a purchase of either the assets or
common stock of a company takes place, the tender offer less the stock’s
purchase price represents a gain to the target company’s shareholders.
Consequently, the target firm’s shareholders will usually gain tax benefits.
However, the acquiring company may reap tax savings depending on the
market value of the target company’s assets when compared to the purchase
72
price. Also, depending on the method of corporate combination, further tax Integration and Diversification
savings may accrue to the owners of the target company. Growth Strategies

Cashing Out: For a family-owned business, when the owners wish to retire,
or otherwise leave the business and the next generation is uninterested in
the business, the owners may decide to sell to another firm. For purposes
of retirement or cashing out, if the deal is structured correctly, there can be
significant tax savings.
To summarize, firms take the M&A route to seize the opportunities for
growth, accelerate the growth of the firm, access capital and brands, gain
complementary strengths, acquire new customers, expand into new product-
market domains, widen their portfolios and become a one-stop-shop or end-
to end solution provider of products and services.

4.8 Reasons for failure of merger and

acquisition
The record of M&As world over has not been impressive. Advocates of
M&As argue that they boost revenues to justify the price premium. The
notion of synergy, ‘1+1 = 3’, sounds great, but the assumptions behind this
notion are too simplistic. In real life things are not that simple and rosy. Past
trends show that roughly two thirds of all big mergers have not produced the
desired results. Rationale behind mergers can be flawed and efficiencies from
economies of scale may prove elusive. Moreover, the problems associated
with trying to make merged entities work cannot be overcome easily.
Reasons supporting the use of diversification have been explained in the
previous section. The potential pitfalls of this strategy are explained in this
section. The conclusion that one may draw from this discussion will be
that “successful diversification would involve a well thought strategy in
selecting a target, avoiding over-paying, creating value in the integration
process.”
The potential pitfalls that a firm is likely to encounter during diversification
include:
Integration Difficulties: Integrating two companies following mergers
and acquisition can be quite difficult. Issues such as mending two disparate
corporate cultures, linking different financial and control systems, building
effective financial and control systems, building effective working
relationships, etc., will come to the fore and they have to be contend with.
Faulty Assumptions: A booming stock market encourages mergers, which
can spell danger. Deals done with highly rated stock as currency appear
easy and cheap, but underlying assumptions behind such deals is seriously
flawed. Many top managers try to imitate others in attempting mergers,
which can be disastrous for the company. Mergers are quite often more to
do with personal glory than business growth. The executive ego plays a
major role in M&A decisions, which is fuelled further by bankers, lawyers
and other advisers who stand to gain from the fat fees they collect from
their clients engaged in mergers. Most CEOs and top executives also get a
big bonus for merger deals, no matter what happens to the share price later.

73
Corporate Level Growth Mergers are also driven by fear psychosis: fear of globalization, rapid
Strategy technological developments, or a quickly changing economic scenario that
increases uncertainty can all create a strong stimulus for defensive mergers.
Sometimes the management feels that they have no choice but to acquire a
raider before being acquired. The idea is that only big players will survive
in a competitive world.
Failure to carry out effective due-diligence: The failure to complete due-
diligence often results in the acquiring firm paying excessive premiums. Due
diligence involves a thorough review by the acquirer of a target company’s
internal books and operations. Transactions are often made contingent
upon the resolution of the due diligence process. An effective due-diligence
process examines a large number of items in areas as diverse as those of
financing the intended transaction, differences in cultures between the two
firms, tax concessions of the transaction, etc.
Inordinate increase in debt: To finance acquisitions, some companies
significantly raise their levels of debt. This is likely to increase the likelihood
of bankruptcy leading to downgrading of firm’s credit rating. Debt also
precludes investment in areas that contribute to a firm’s success such as
R&D, human resources development and marketing.
Too much diversification: The merger route can lead to strategic
competitiveness and above-average returns. On the flip-side, firm’s may
lose their competitive edge due to over diversification. The threshold level at
which this happens varies across companies, the reason being that different
companies have different capabilities and resources that are required
to make the mergers work. Crossing these threshold limits can result in
overstretching these capabilities and resources leading to deteriorating
performance. Evidence also suggests that a large size creates efficiencies
in various organizational functions when the firm is not too large. In other
words, at some level the costs required to manage the larger firm exceed the
benefits of efficiency created by economies of scale.
Problems in making M&A work: Mergers can distract them from their
core business, spelling doom for the company. The chances for success
are further hampered if the corporate cultures of the companies are very
different. When a company is acquired, the decision is typically based on
product or market synergies, but cultural differences are often ignored. It’s a
mistake to assume that these issues are easily overcome. A McKinsey study
on mergers concludes that companies often focus too narrowly on cutting
costs following mergers, without paying attention to revenues and profits.
The exclusive cost-cutting focus can divert attention from the day-to-day
business and poor customer service. This is the main reason for the failure
of mergers to create value for shareholders.
However, not all mergers fail. Size and global reach can be advantageous
and tough managers can often squeeze greater efficiency out of poorly
run acquired companies. The success of mergers, however, depends on
how realistic the managers are and how well they can integrate the two
companies without losing sight of their existing businesses. Though the
acquisition strategies do not consistently produce the desired results, some
studies suggest certain decisions and actions that firms may follow which
74
can increase the probability of success. The attributes leading to successful Integration and Diversification
acquisition suggested by various studies are that the: Growth Strategies

•• acquired firm has assets or resources that are complimentary to the

acquiring firm’s core business.
•• acquisition is friendly.
•• acquiring firm selects target firms and conducts negotiation carefully
and methodically.
•• acquiring firm has adequate cash and fovourable debt position.
•• merged firms maintain low to moderate debt position.
•• acquiring firm has experience with change and is flexible and
adaptable.
•• acquiring firm maintains sustained and consistent emphasis on R&D
and innovation.

4.9 Steps in merger and acquisition

deals
A firm that intends to take over another one must determine whether the
purchase will be beneficial to the firm. To do so, it must evaluate the real
worth of being acquired. Logically speaking, both sides of an M&A deal
will have different ideas about the worth of a target company: the seller will
tend to value the company as high as possible, while the buyer will try to
get the lowest price possible. There are, however, many ways to assess the
value of companies. The most common method is to look at comparable
companies in an industry, but a variety of other methods and tools are used
to value a target company. A few of them are listed below.
1) Comparative Ratios
The following are two examples of the many comparative measures
on which acquirers may base their offers:
P/E (price-to-earnings) Ratio: With the use of this ratio, an acquirer
makes an offer as a multiple of the earnings the target company is
producing. Looking at the P/E for all the stocks within the same
industry group will give the acquirer good guidance for what the
target’s P/E multiple should be.
P/S (price-to-sales) Ratio: With this ratio, the acquiring company
makes an offer as a multiple of the revenues, again, while being aware
of the P/S ratio of other companies in the industry.
2) Replacement Cost
In a few cases, acquisitions are based on the cost of replacing the
target company. The value of a company is simply assessed based on
the sum of all its equipment and staffing costs without considering
the intangible aspects such as goodwill, management skills, etc.
The acquiring company can literally order the target to sell at that
price, or it will create a competitor for the same cost. This method of
establishing a price certainly wouldn’t make much sense in a service
75
Corporate Level Growth industry where the key assets—people and ideas—are hard to value
Strategy and develop.
3) Discounted Cash Flow
An important valuation tool in M&A, the discounted cash flow
analysis, determines a company’s current value according to its
estimated future cash flows. Future cash flows are discounted to a
present value using the company’s weighted average cost of capital.
4) Synergy
Quite often, acquiring companies pay a substantial premium on the
stock value of the companies they acquire. The justification for this is
the synergy factor: a merger benefits shareholders when a company’s
post-merger share price increases by the value of potential synergy.
For buyers, the premium represents part of the post-merger synergy
they expect can be achieved. The following equation solves for the
minimum required synergy and offers a good way to think about
synergy and how to determine if a deal makes sense. In other words,
the success of a merger is measured by whether the value of the buyer
is enhanced by the action. The equation:
(Pre-merger value of both firms + synergies)
—————————————————— = Pre-merger stock price
(Post-merger number of shares)
Here the pre-merger stock price refers to the price of the acquiring firm.
Increase in the value of the acquiring firm is a test of success of the merger.
However, the practical aspects of mergers often prevent the anticipated
benefits from being fully realized and the expected synergy quite often falls
short of expectations.
Some more criteria to consider for valuation include:
•• A reasonable purchase price - A small premium of, say, 10% above
the market price is reasonable.
•• Cash transactions- Companies that pay in cash tend to be more careful
when calculating bids, and valuations come closer to target. When
stock is used for acquisition, discipline can be a casualty.
•• Sensible appetite - An acquirer should target a company that is
smaller and in a business that the acquirer knows intimately. Synergy
is hard to create from disparate and unrelated businesses. And, sadly,
companies have a bad habit of biting off more than they can chew in
mergers
The Basic Steps in Mergers and Acquisitions are:
1) Initial Offer by the Intending Buyer
When a company decides to go for a merger or an acquisition, it starts
with a tender offer. Working with financial advisors and investment
bankers, the acquiring company will arrive at an overall price that it’s
willing to pay for its target in cash, shares, or both. The tender offer is
then frequently advertised in the business press, stating the offer price
and the deadline by which the shareholders in the target company
must accept (or reject) it.
76
2) Response from Target Company Integration and Diversification
Growth Strategies
Once the tender offer has been made, the target company can do one
of the several things listed below:
Accept the Terms of the Offer: If the target firm’s management and
shareholders are happy with the terms of the transaction, they can go
ahead with the deal.
Attempt to Negotiate: The tender offer price may not be high enough
for the target company’s shareholders to accept, or the specific terms
of the deal may not be attractive. If target firm is not satisfied with the
terms laid out in the tender offer, the target’s management may try to
work out more agreeable terms. Naturally, highly sought-after target
companies that are the object of several bidders will have greater
latitude for negotiation. Therefore, managers have more negotiating
power if they can show that they are crucial to the merger’s future
success.
Execute a Poison pill or some other Hostile Takeover Defense: A
target company can trigger a poison pill scheme when a hostile suitor
acquires a predetermined percentage of company stock. To execute
its defense, the target company grants all shareholders—except the
acquirer—options to buy additional stock at a hefty discount. This
dilutes the acquirer’s share and stops its control of the company. It can
also call in government regulators to initiate an antitrust suit.
Find a White Knight: As an alternative, the target company’s
management may seek out a friendly potential acquirer, or white
knight. If a white knight is found, it will offer an equal or higher price
for the shares than the hostile bidder.
3) Closing the Deal
Finally, once the target company agrees to the tender offer and
regulatory requirements are met, the merger deal will be executed by
means of some transaction. In a merger in which one company buys
another, the acquirer will pay for the target company’s shares with cash,
stock, or both. A cash-for-stock transaction is fairly straightforward:
target-company shareholders receive a cash payment for each share
purchased. This transaction is treated as a taxable sale of the shares
of the target company. If the transaction is made with stock instead
of cash, then it’s not taxable. There is simply an exchange of share
certificates. The desire to steer clear of the taxman explains why so
many M&A deals are carried out as cash-for-stock transactions.
When a company is purchased with stock, new shares from
the acquirer’s stock are issued directly to the target company’s
shareholders, or the new shares are sent to a broker who manages
them for target-company shareholders. Only when the shareholders of
the target company sell their new shares are they taxed. When the deal
is closed, investors usually receive a new stock in their portfolio—the
acquiring company’s expanded stock. Sometimes investors will get
new stock identifying a new corporate entity that is created by the
M&A deal.
77
Corporate Level Growth
Strategy 4.10 MERGERS AND ACQUISITIONS: THE
INDIAN SCENARIO
M&A activity had a slow take-off in India. Traditionally, Indian promoters
have been very reluctant to sell out their businesses since it was synonymous
with failure and was never viewed as a sensible move. This scenario
changed dramatically in the 90s with the Tatas selling TOMCO and Lakme.
Suddenly selling out had become a sensible option. The second major reason
for the slow take-off of M&A activity was due to the fact that even while
the companies continued to decline, the banks and financial institutions,
normally the biggest stakeholders in most Indian companies were reluctant
to change the managements. Fortunately this situation has changed for
the better. Worried about the spectre burgeoning NPAs, these institutions
are now willing to force the promoters to sell out. The FIs and banks are
flushed with funds and they are willing to assist big companies in acquiring
new companies.
Indian cement industry was trendsetter in M&A in India. The cement
industry was ripe for consolidation in many ways. The industry comprised
of four or five dominant players in addition to a number of small players
having economically viable capacities, but with very small market shares.
Rapid expansion by the bigger players in a capital-intensive industry meant
that these small players would naturally be marginalized. Moreover, the
excess capacity due to rapid expansion of big players meant that the smaller
players would lose money. This situation naturally spurred the merger
activity in the cement industry.
The past few years were record years for M&A globally with mega deals
dwarfing the previous records. M&A has also become a buzzword among
Indian companies as well. HDFC-Times Bank, Gujarat Ambuja-DLF and
ICICI Bank-Centurion Bank mergers were in the news for this reason. The
merger wave in the country was catalyzed by economic liberalization in
1991. M&A activity is on the rise and the Indian industry has witnessed
a spate of mergers and acquisitions in the past few years. Mergers and
acquisitions are here to stay.
Mergers and acquisitions in India, just as in other parts of the world, are
primarily aimed at expanding a company’s business and profits. Acquisitions
bring in more customers and business, which in turn brings in more money
for the companies thus helping in its overall expansion and growth. More
and more companies are, therefore, moving towards acquisitions for a fast-
paced growth. Consolidation has become a compelling necessity to counter
the effects of increasing globalization of businesses, declining tariff barriers,
price decontrols and to please the ever demanding and discerning customers.
And these pressures are expected to intensify and relentlessly batter
every business in the future. The M&A activity is helping the companies
restructure, gain market share or access to markets, rationalize costs and
acquire brands to counter these threats. The shareholders of many companies
are also supporting these moves and sharp increase in share prices is an
indication of this support.

78
Since size and focus are factors that matter for surviving the onslaught of Integration and Diversification
competition, mergers and acquisitions have emerged as key growth drivers Growth Strategies
of Indian business. Tax benefits were the sole reason to justify mergers in
the past but for many Indian promoters, that is no longer an incentive. Indian
companies have taken to M&A for many reasons. Experts feel that Indian
companies look at M&As due to the size factor, the niche factor or for
expanding their market reach. They are also of the opinion that acquisitions
help in the inorganic (and quicker) growth of the business of a company.
Besides these factors, the pricing pressures and consolidation of global
companies by building offshore capabilities have made M&A relevant for
Indian enterprises.
Many Indian companies have also followed the M&A route to grow in
size by adding manpower and to facilitate overall expansion by moving
into new market space. Another reason behind M&A has been to gain new
customers. For instance, vMoksha, an IT firm, saw a rise in the number of its
customers due to acquisitions as it expanded considerably in the US market
and leveraged on the existing customer base. Similarly, Mphasis added
new customers in the Japanese and Chinese markets after the acquisition
of Navion. The need for skill enhancement seems to be another major
reason for companies to merge and make new acquisitions. The Polaris-
OrbiTech merger helped in combining skill sets of both companies, which
consequently led to growth and expansion of the merged entity. Likewise,
Wipro acquired GE Medical Systems Information Technology (India) to
leverage its expertise in the health science domain.

4.11 SUMMARY
Diversification involves moving into new lines of business. Of the various
routes to expansion, diversification is definitely the most complex and
risky route. Diversification of a firm can take the form of concentric
and conglomerate diversification. A firm is said to pursue concentric
diversification strategy when it enters into new product or service areas
belonging to different industry category but the new product or service is
similar to the existing one in many respects.
The two major routes to diversification are mergers and acquisitions and
strategic partnering. One plus one makes three: this equation is the special
alchemy of a merger or acquisition. Although they are used synonymously,
there is a slight distinction between the terms ‘merger’ and ‘acquisition’.
The term acquisition is generally used when a larger firm absorbs a smaller
firm and merger is used when the combination is portrayed to be between
equals.
Firms take the M&A route mainly to seize the opportunities for growth,
accelerate the growth of the firm, access capital and brands, gain
complementary strengths, acquire new customers, expand into new product-
market domains, widen their portfolios and become a one-stop-shop or end-
to-end solution provider of products and services. The three basic steps in
the merger process are- offer by the acquiring firm, response by the target
firm and closing the deal.
M&A activity had a slow take-off in India. However, M&A has become
a buzzword among Indian companies after the economic liberalization in
79
Corporate Level Growth 1991. M&A activity is on the rise and the Indian industry has witnessed a
Strategy spate of mergers and acquisitions in the past few years.

4.12 KEY WORDS

Acquisitions: A company taking over controlling interest in another
company.
Concentric Diversification: A firm is said to have pursued concentric
diversification strategy when it enters into new product or service area
belonging to different industry but the new product or service is similar
to the existing one with respect to technology or production or marketing
channels or customers.
Conglomerate Diversification: Conglomerate diversification is a growth
strategy in which a company seeks to grow by adding entirely unrelated
products and markets to its existing business.
Diversification: Diversification involves moving into new lines of business.
Joint Ventures: Two or more organizations form a separate, independent
organization for strategic purposes.
Mergers: The combining of two or more companies.
Strategic Alliances: Two or more organizations share resources, capabilities,
or distinctive competencies to pursue some business purpose.
Strategic Partnering: Two or more organizations establish a relationship
that combines their resources, capabilities, and core competencies to achieve
some business objective.

4.13 SELF-ASSESSMENT QUESTIONS

1) What is meant by diversification? What are the pros and cons of a
diversification strategy?
2) Explain the mechanics of Mergers and Acquisitions (M&A). What
motivates the top management to go in for M&A?
3) What are the pitfalls that a management should take into consideration
while going for M&A?
4) Explain the basic steps involved in the M&A process.
5) Discuss the M&A trends in Indian business scenario and list out the
various reasons why Indian companies plan to follow M&A strategy.

4.14 References / further readings

Hitt, Michael A. Ireland, Duane R. and Hoskisson, Robert E. (2001).
Strategic management: competitiveness and globalization, 4th ed., Thomson
Learning.
Ramaswamy, V.S. and Namakumari, S. (1999). Strategic Planning:
Formulation of corporate strategy (Texts and Cases)-The Indian context,
1st ed., Macmillan India Limited.
Srivastava, R.M. (1999). Management Policy and Strategic management
(concepts, skills and practice), 1st ed., Himalaya Publishing House.
80
UNIT 5 STRATEGIC ALLIANCES

Objectives
After reading this unit, you should be able to:
•• explain the concept of strategic alliances;
•• acquaint yourself with the worldwide trends in this area;
•• identify the factors responsible for the rise of strategic alliances;
•• develop an awareness of costs and benefits of alliance arrangements;
•• explain the process of planning successful alliances; and
•• discuss the issue of corporate responsibility of the alliance partners.
Structure
5.1 Introduction
5.2 Strategic Alliance Trends
5.3 Factors Promoting the Rise of Strategic Alliances
5.4 Types of Strategic Alliances
5.5 Benefits of Strategic Alliances
5.6 Costs and Risks of Strategic Alliances
5.7 Factors Contributing to Successful Alliances
5.8 Planning for a Successful Alliance
5.9 Corporate Social Responsibility
5.10 Summary
5.11 Key Words
5.12 Self- Assessment Questions
5.13 References / Further Readings

5.1 INTRODUCTION
Gallo, the world’s largest producer of wine, does not grow a single grape
and likewise, Nike, the world’s largest producer of athletic foot-wear, does
not manufacture a single shoe, Boeing, the giant aircraft manufacturer,
makes little more than cockpits and wing bits (Quinn, 1995). “How is this
possible?” These companies, like many other companies have entered into
strategic alliances with their suppliers to do much of their actual production
and manufacturing for them.
From software to steel, aerospace to apparel, the pace of strategic
alliances worldwide is accelerating. Strategic alliances, broadly defined
as arrangements in which two organizations conjoin to pursue common
interests, are a rapidly growing phenomenon in the contemporary business
environment. Alliances represent strategic responses to the powerful forces
of deregulation, globalization, technological change, and time-to-market
concerns. These forces have made the business environment vastly more
competitive, complex, and uncertain than ever before. Companies are
81
Corporate Level Growth turning to strategic alliances in order to manage their uncertainty and risk
Strategy and specifically to access a wide range of competencies, technologies and
markets.
A strategic alliance is an agreement between firms to do business together in
ways that go beyond normal company-to-company dealings, but fall short
of a merger or a full partnership (Wheelen and Hungar, 2000). Strategic
alliances can be as simple as two companies sharing their technological and/
or marketing resources. In contrast, they can be highly complex, involving
several companies, located in different countries. These firms may in turn be
linked with other organizations in separate alliances. The result is a maze of
intertwined companies, which may be competing with each other in several
product areas while collaborating in some. These alliances also range
from informal “handshake” agreements to formal agreements with lengthy
contracts in which the parties may also exchange equity, or contribute capital
to form a joint venture corporation. Much of the discussion in the literature
on strategic alliances revolves around alliances between two companies, but
there is an increasing trend towards multi-company alliances. For instance, a
six-company strategic alliance was formed between Apple, Sony, Motorola,
Philips, AT&T and Matsushita to form General Magic Corporation to
develop Telescript communications software.
In essence, strategic alliance, a form of corporate partnering, is the joining
of two or more companies to exchange resources, share risks, or divide
rewards from a joint enterprise. It can take any number of forms such as:
a strong relationship with a major customer, a partnership with a source of
distribution, a relationship with a supplier of innovation or product, or an
alliance in pursuit of a common goal. Sometimes partners form a new jointly
owned company. In other instances a firm purchases equity in another. Most
often the relationship is defined by a contract. Many features of strategic
alliances are very similar to other forms of partnering. The differences
relate to the greater difficulty of achieving a good partnering relationship or
developing the strategic nature of an alliance. They are harder to do because
of the need to match the expectations of different cultures and business
practices.

5.2 STRATEGIC ALLIANCE TRENDS

Strategic alliances are becoming more and more prominent in the global
economy. According to Peter F. Drucker, the management guru, the greatest
change in corporate culture, and the way business is being conducted, is
the accelerating growth of relationships based not on ownership, but on
partnership (Drucker, 1996). He also observed that there is not just a surge
in alliances but a worldwide restructuring of companies in the shape of
alliances and partnerships. His views are endorsed by the fact that even
a cursory search for strategic alliances in business dailies produces
numerous press releases about companies forming alliances. According to a
survey by the global consulting major, Booz, Allen and Hamilton, strategic
alliances are spreading in every industry and are becoming an essential driver
of superior growth. The number of alliances in the world is surging — The
survey also reveals that more than 20% of the revenue generated from the
top 2,000 U.S. and European companies now comes from alliances, with
82
more predicted in the near future. These same companies also earned higher Strategic Alliances
return on investment (RoI) and return on equity (RoE) on their alliances
than from their core businesses. The report also concludes that leading edge
alliance companies are creating a string of interconnected relationships,
which allows them to overpower the competition (www.boozeallen.com).
Generally two or more companies collaborate to create a new product or a
service in a strategic alliance. Ideally this new product or service will bring
a unique value proposition to the market as agreed by the collaborating
parties. The potential of strategic alliances’ strategy is enormous and
if implemented correctly can dramatically improve an organization’s
operations and competitiveness (Brucellaria, 1997). According to a survey
conducted by Coopers & Lybrand, 54 percent of firms that formed alliances
did so for joint marketing and promotional purposes (Coopers and Lybrand,
1997). Companies are also forming alliances to obtain technology, to gain
access to specific markets, to reduce financial risk, to reduce political risk and
to achieve or ensure competitive advantage (Wheelen and Hungar, 2000).
However, while many organizations often rush to jump on the bandwagon of
strategic alliances, few succeed (Soursac, 1996). The failure rate of strategic
alliances strategy is projected to be as high as 70 percent (Kalmbach and
Roussel, 1999), and hence, an appreciation of the factors that contribute to
strategic alliance success and failure is critically important.
The rest of the unit explores why and how companies are forming strategic
alliances, examine risks and problems associated with entering and
maintaining successful strategic alliances and identify factors that may
impact the success of strategic alliances in an increasingly competitive
marketplace. Important implications for the successful introduction and
implementation of strategic alliances are also discussed.

5.3 FACTORS PROMOTING THE RISE OF

STRATEGIC ALLIANCES
Since the 1980s, strategic alliances have been very popular. Alliances can
be a powerful tool, particularly in today’s world, due to the need to build
differential capabilities in more areas than a company has resources or
time to develop. The legendary Jack Welch, who headed GE in the past,
echoing this sentiment once said, “If you think you can go it alone in
today’s global economy, you are highly mistaken.” It is becoming more
difficult for organizations to remain self-sufficient in an international
business environment that demands both focus and flexibility. As
companies are increasingly feeling the effects of global competition, they
are trying to achieve a sustainable competitive advantage through strategic
alliances.
Competitive boundaries are blurring as advances in communication and the
trend toward global markets link formerly disparate products, markets, and
geographical regions. Competition is no longer confined to a single nation’s
borders -making all firms vulnerable to threats posed by cooperative strategies.
Both, rapid technological shifts and the need for rapid product innovation, are
putting pressure on management to act faster and smarter with fewer resources.
Effectively identifying, protecting, and enhancing one’s core capabilities is
83
Corporate Level Growth the key challenge of our time. In this environment, successful companies
Strategy need to select, build, and deploy the critical capabilities that can come from
strategic alliances, which will enable them to gain competitive advantage,
enhance customer value, and drive their markets.
The alliance approach better matches and responds to the uncertainties and
complexities of today’s globalized business environment. These partnerships
allow access to skills and resources of other parties in order to strengthen
the organization’s competitive strategies. Alliance partnerships are initiated
as effective strategies to overcome the skill and resource gaps encountered
in gaining access to global markets. Establishing strategic alliance
relationships provides access to new markets, accelerates the pace of entry,
encourages the sharing of research and development, manufacturing, and/
or marketing costs, broadening the product line/filling product; and learning
new skills. Dowling et al, suggest “the partners pool, exchange, or integrate
specified business resources for mutual gain. Yet, the partners remain
separate businesses”. In today’s fast changing business landscape, strategic
alliances enable businesses to gain competitive advantage through access to
a partner’s resources, including markets, technologies, capital and people.
Teaming up with others adds complementary resources and capabilities,
enabling participants to grow and expand more quickly and efficiently.
Especially fast-growing companies rely heavily on alliances to extend their
technical and operational resources. In the process, they save time and boost
productivity by not having to develop their own, from scratch. They are thus
freed to concentrate on innovation and their core business.
Many fast-growth technology companies use strategic alliances to benefit
from more-established channels of distribution, marketing, or brand
reputation of bigger, better-known players. However, more-traditional
businesses tend to enter alliances for reasons such as geographic expansion,
cost reduction, manufacturing, and other supply chain synergies. As global
markets open up and competition grows, midsize companies need to be
increasingly creative about how and with whom they align themselves to go
to the market. All these factors have hastened and highlighted the need for
strategic alliances.
To summarize, few companies have everything they need to succeed
in a competitive market place alone. No matter what they need, there is
someone who has it. They can, therefore, either buy what they need or
partner with others. Partnering is frequently quicker and less costly. While
avoiding difficult and time-consuming internal changes, partnering allows
a company to:
•• Rapidly move to decisively seize opportunities before they disappear.
•• Respond more quickly to change with greater flexibility.
•• Increase market share.
•• Gain access to a new market or beat others to that market.
•• Quickly shore up internal weaknesses.
•• Gain a new skill or area of competence.
•• Succeed although the company lacks key resources.

84
 Strategic Alliances
5.4 TYPES OF STRATEGIC ALLIANCES
Firms can enter into a number of different types of strategic alliances. These
could include comparatively simple, more “distant” arrangements in which
firms work with one another on a short-term or a contractually defined basis
where the two parties effectively do not combine their managers, value
chains, core technologies, or other skill sets. Examples of such simpler
alliance vehicles include licensing, cross-marketing deals, limited forms of
outsourcing, and loosely configured customer-supply arrangements. On the
other hand, companies may seek to partner more closely in their cooperative
ventures, combining managers, technologies, products, processes, and other
value-adding assets in varying ways to bring the companies more closely
together. Examples of alliance modes in this league include technology
development pacts, co-production arrangements, and formal joint ventures
in which the partners contribute a defined amount of capital to form a third
party entity. Finally, in even more complex strategic alliance arrangements,
partners can take significant equity-stake holdings in one another, thus
approximating many organizational and strategic characteristics of an
outright merger or acquisition.
In a study by Coopers and Lybrand (1997), they identified the following
types of alliances, and found their clients were engaged in them as follows:
•• joint marketing/promotion, 54 per cent;
•• joint selling or distribution, 42 per cent;
•• production, 26 per cent;
•• design collaboration, 23 per cent;
•• technology licensing, 22 per cent;
•• research and development contracts, 19 per cent; and
•• other outsourcing purposes, 19 per cent.
Technology Associates and Alliances, a strategic alliance consulting
company, lists the following types of alliances:
Marketing and sales alliances:
•• joint marketing agreements;
•• value added resellers.
Product and manufacturing alliances:
•• procurement-supplier alliances;
•• joint manufacturing.
Technology and know-how alliances:
•• technology development;
•• university/industry joint research.

Technology Associates and Alliances, suggests that alliances can be hybrids

between these different types. For example, an R&D alliance may be a cross
between a product and manufacturing alliance and a technology and know-
85
Corporate Level Growth how alliance, and a collaborative marketing agreement is a cross between
Strategy a marketing and sales alliance and a product and manufacturing alliance.
The important thing to remember is that there are various types of alliances,
and they may range from simple licensing arrangement, ad hoc alliance,
joint operations, joint venture, consortia, distribution, and value-chain
partnership alliances to more complex hybrid alliances.
The simplest form of strategic alliance is a contractual arrangement.
Contractual-based strategic alliances generally are short-term arrangements
that are appropriate when a formal management structure is not required.
While the specific provisions of the contract will depend upon the business
arrangement, the contract should address: (i) the duties and responsibilities
of each party; (ii) confidentiality and non-competition; (iii) payment terms;
(iv) scientific or technical milestones; (v) ownership of intellectual property;
(vi) remedies for breach; and (vii) termination. Examples of contractual
strategic alliances are license agreements, marketing, promotion, and
distribution agreements, development agreements, and service agreements.
The most complex form of strategic alliance is a joint venture. A joint
venture involves creating a separate legal entity (generally a corporation,
limited liability company, or partnership) through which the business of
the alliance is conducted. A joint venture may be appropriate if: (i) the
parties intend a long-term alliance; (ii) the alliance will require a significant
commitment of resources by each party; (iii) the alliance will require
significant interaction between the parties; (iv) the alliance will require a
separate management structure; or (v) if the business of the alliance may
be subject to unique regulatory issues. In addition, a joint venture will be
appropriate if the parties expect that the alliance ultimately may be able to
function as a separate business that could be sold or taken public.
Historically, information technology and life sciences companies have sought
minority equity investments from strategic commercial partners. This form
of strategic alliance has gained increased popularity in the current economic
climate. In many cases, the equity investment will also be accompanied by
a contractual arrangement between the parties such as a license agreement
or a distribution agreement. From the company’s perspective, an equity
investment from a strategic commercial partner may be structured on
more favorable terms than those obtained from venture capitalists, and it
may increase the company’s valuation and enhance the company’s ability
to secure future rounds of funding. Venture capitalists and underwriters
generally view these types of strategic alliances as validating an early stage
company’s technology and business model. In some cases, they have even
become a condition to an underwriter taking a life science company public.
The strategic commercial partner may desire this form of alliance to gain a
competitive advantage through access to new technologies and to share in
the upside of the other party’s business through equity ownership.
The following section will focus on three broad types of strategic alliances:
licensing arrangements, joint ventures, and cross-holding arrangements
that include equity stakes and consortia among firms. Each broad type of
strategic alliance is implemented differently and imposes its own set of
managerial skills, constraints, and coordination requirements needed to
build competitive advantage.
86
Licensing Arrangements Strategic Alliances

In most manufacturing industries, licensing represents a sale of technology

or product based knowledge in exchange for market entry. In service-
based firms, licensing is the right to enter a market in exchange for a fee
or royalty. Licensing arrangements have become more pronounced across
both categories. In many ways they represent the least sophisticated and
simplest form of strategic alliance. Licensing arrangements are simple
alliances because they allow the participants greater access to either a
technology or market in exchange for royalties or future technology
sharing than either partner could do on its own. Within the pharmaceutical
industry, for example, many of the technology sharing arrangements that
allow a licensee to produce and sell products developed by the licensor. The
relationship between the companies does not go beyond this level. Unlike
joint ventures or more complex cross-holding/equity stake consortia,
licensing arrangements provide no joint equity ownership in a new entity.
Companies enter into licensing agreements for several reasons. The primary
reasons are: 1) a need for help in commercializing a new technology, and 2)
global expansion of a brand franchise or marketing image.
Nicholas Piramal India Ltd (NPIL), for instance, has entered into a 5-year in-
licensing agreement with Genzyme Corp, USA, for synvisc viscose
supplementation in the Indian market. Synvisc, which is used for the
treatment of osteoarthritis of the knee, has sales of $250 million in
international market. It expects the market size in India to be about Rs.200
Million. Johnson & Johnson is expanding involvement in and commitment
to biotechnology through new partnerships, licensing agreements, equity
investments and acquisitions. Through its excellence centres such as
Centocor and Ortho Biotech, and its global research, development and
marketing operations to form an integrated enterprise that is well positioned
to deliver biotechnology’s extraordinary promise to patients and physicians
around the world.
Joint Ventures
Joint ventures are more complex and formal than licensing arrangements.
Unlike licensing, joint ventures involve partners’ creation of a third entity
representing the interests and capital of the two partners. Both partners
contribute capital, distinctive skills, managers, reporting systems, and
technologies to the venture in certain proportions. Joint ventures often
entail complex coordination between partners in carrying out value chain
activities. Firms enter into joint ventures for four reasons: 1) seeking
vertical integration, 2) needing to learn a partner’s skills, 3) upgrading and
improving skills, and 4) shaping future industry evolution.
Vertical integration is a critical reason why many firms enter joint ventures.
Vertical integration is designed to help firms enlarge the scope of their
operations within a single industry. Yet, for many firms, expanding their
set of activities within the value chain can be an expensive and time-
consuming proposition. Joint ventures can help firms achieve the benefits
of vertical integration without saddling them with higher fixed costs.
This benefit is especially appealing when the core technology used in
the industry is changing quickly. Joint ventures can also help firms retain
87
Corporate Level Growth some degree of control over crucial supplies at a time when investment
Strategy funds are scarce and cannot be allocated to backward integration or when
the company has difficulty in accessing the raw material. By partnering
with the suppliers to form a strategic alliance the firm can increase the
stability of its supplies. The organizations forming the alliance will have a
common goal and be better integrated. This will ensure that they all have a
shared interest in making certain that the alliance is successful, including
ensuring the supplies of materials, information, advice or any other necessary
input to the alliance is met in a timely, efficient and consistent manner. A
case in point is the Jindal Stainless Steel Ltd (JSSL), which plans to source
raw materials from abroad. The company is planning strategic alliances
with companies in South Africa, South East Asia and Europe for long-
term supplies of ferro chrome, chrome ore and nickel. The whole objective
of the alliance is to ensure that supplies are managed efficiently with
resultant improvements in profitability. A strategic alliance can also
rationalize supply chains. By selecting integrated suppliers, the number of
links in a supply chain can be significantly reduced.
Joint ventures are quite common in India. In the highly capital-intensive
industries such as automobiles, chemicals, pharmaceuticals and petroleum
industries, joint ventures are becoming more widespread as firms seek
to overcome the high fixed costs required for managing ever more scale-
intensive production processes. In all these industries, production is highly
committed in nature, which means that it is difficult for firms on their own
to build sufficient scale and profitability in products that often face highly
volatile pricing and deep cyclical downturns when markets collapse.
For instance, Telco (now rechristened as Tata Motors) is the leader in the
commercial vehicle segment with a 54% market share in Light Commercial
Vehicle (LCV) and 63% market share in Medium & Heavy Commercial
Vehicle (M&HCV) (2003 figures). It garnered a market share of 21% in the
utility vehicle (UV) segment and a 9% market share in the passenger car
industry in a short span of three years. The company is open to alliances,
but is not willing to enter into any alliance without a strong underlying
reason. The view of the top management is that a strategic alliance should
bring complementary strengths together. Around 85% of the Indian market
consists of small cars and this trend is expected to continue for the next
10-15 years. Tata Indica, which is one of the best and technologically
contemporary value propositions available, caters to this segment. Hence
the company is primarily interested in an alliance with a global major who
can offer a better proposition in the small car market than the Indica and
who already has a presence in India. Second, the company is looking for a
strategic alliance to enhance their product portfolio in the more premium or
niche segments and to open the overseas markets for them.
Firms often enter into joint ventures to learn another firm’s distinctive skills or
capabilities. In many high-technology industries, many years of development
are required before a company possesses the proprietary technologies and
specialized processes needed to compete effectively on its own. These
skills may already be available in a potential partner. A joint venture can
help firms learn these new skills without retracing the steps of innovation
at great cost. For example, Voltas plans on leveraging its technology-
88
sharing alliances with overseas collaborators, and in seeking fresh ones, Strategic Alliances
for serving the domestic market. In the Air Conditioning and Refrigeration
business, Voltas a new generation of clientele, such as multiplexes,
shopping malls, entertainment centres and establishments in the private
telecom industry and hospitality. More than mere cooling, these clients
seek solutions encompassing controlled environments, with clean and pure
air, and energy-efficient systems. The company is well placed to deliver
these solutions by leveraging the competencies of its range of partners - for
example, the success of the Vertis brand of room and split air conditioners
is yet another example of the success of alliances. The Vertis brand features
advanced technology from Fedders International Inc. USA, one of the
world’s largest manufacturers of air conditioners, with whom the company
has a “manufacturing-only” joint venture. This alliance has resulted in
a brand, which has moved from fifth place to second place in the Indian
market in the space of two years.
Joint ventures are instrumental in helping firms with similar skills improve
and build upon each other’s distinctive competences. Even though some of
these joint ventures are likely to involve rivals competing within the same
industry, companies may still benefit from close cooperation in developing
an underlying cutting-edge technology that could transform the industry. In
anticipation of WTO, MNCs are strengthening their ranks in India (either
setting up new 100% subsidiaries or marketing tie-ups with major domestic
players. Large local players are consolidating through brand acquisitions,
co-marketing/ contract manufacturing tie-ups with MNCs, etc.) and to
counter this threat, Cadilla Healthcare Limited (CHL), for instance, has
formed joint ventures in some of the high growth areas with CHL bringing
to table its strength in manufacturing and marketing and JV partners
bringing in the technology. Firms can cooperate in a joint venture to develop
and commercialize new technologies that may significantly influence an
industry’s future direction. The need to maintain industry dynamism and
momentum in research is a motivating force that drives drug companies to
engage in joint ventures, even when they compete in existing product lines.
Cross-Holdings, Equity Stakes, and Consortia
The third category of strategic alliance includes some of the more complex
forms of alliance arrangements. These alliances bring together companies
more closely than licensing and joint venture mechanism. Broadly
amalgamated together as consortia, these alliances represent highly complex
and intricate linkages among groups of companies. The term consortia is
used to focus on two types of complex alliance evolution: i) multi-partner
alliances designed to share an underlying technology and ii) formal groups
of companies that own large equity stakes in one another. In either case,
consortia represent the most sophisticated form of strategic alliance and
involve complex coordination mechanisms that often go beyond the
boundaries of individual firms.
Activity 1
Scan the various business dailies and magazines and identify the various
types of alliances Indian companies have adopted in the recent past. Also list
out the various reasons which the companies have stated for forming these
89
Corporate Level Growth alliances. What benefits do these companies expect from these partnership
Strategy arrangements?
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………

5.5 BENEFITS OF STRATEGIC ALLIANCES

In the new economy, strategic alliances enable businesses to gain
competitive advantage through access to a partner’s resources, including
markets, technologies, capital and people. Teaming up with others adds
complementary resources and capabilities, enabling participants to grow
and expand more quickly and efficiently. Strategic alliances also benefit
companies by reducing manufacturing costs, and developing and diffusing
new technologies rapidly. Alliances are also used to accelerate product
introduction and overcome legal and trade barriers expeditiously. In this era
of rapid technological changes and global markets forming alliances is often
the fastest, most effective method of achieving growth objectives. However,
companies must ensure that the objectives of the alliance are compatible
and in tune with their existing businesses so their expertise is transferable
to the alliance.
Many fast-growth technology companies use strategic alliances to benefit
from more-established channels of distribution, marketing, or brand
reputation of bigger, better-known players. However, more-traditional
businesses tend to enter alliances for reasons such as geographic expansion,
cost reduction, manufacturing, and other supply-chain synergies. As global
market opens up and competition grows, midsize companies need to be
increasingly creative about how and with whom they align themselves to
go to the market.
Firms often enter into alliances based on opportunity rather than linkage
with their overall goals. This risk is greatest when a company has a surplus
of cash. In recent years, Mercedes-Benz and Toyota Motor Corporation have
been investing surplus funds into seemingly unrelated businesses, with Benz
already facing difficulties as a result. Especially fast-growing companies rely
heavily on alliances to extend their technical and operational resources. In
the process, they save time and boost productivity by not having to develop
their own, from scratch. They are thus freed to concentrate on innovation
and their core business.
Entering New Markets
The Coopers & Lybrand study rates growth strategies and entering new
markets among the top reasons for forming strategic alliances (Coopers and
Lybrand, 1997). As Ohmae (1992) points out, (companies) simply do not
have the time to establish new markets one-by one. In today’s fast-paced
world economy, this is increasingly true. Therefore, forming an alliance
with an existing company already in that marketplace is a very appealing
alternative. Partnering with an international company can make the
90
expansion into unfamiliar territory a lot easier and less stressful for a Strategic Alliances
company. According to the Coopers & Lybrand (1997) study, 50 percent of
firms involved in alliances market their goods and services internationally
versus 30 percent of non-allied participants. For instance, Tata Motors
has short listed Brilliance Automotive Holdings of China to set up a joint
venture for producing cars. Tata Motors, which acquired the commercial
truck facility of Daewoo Motors in South Korea for Rs.465 crore, is also
reported to be scouting for another joint venture in Northern China in order
to have a full-fledged presence in China.
Often a company that has a successful product or service has a desire to
introduce it into a new market. Yet perhaps the company recognizes that it
lacks the necessary marketing expertise because it does not fully understand
customer needs, does not know how to promote the product or service
effectively, or does not understand or have access to the proper distribution
channels. Rather than painstakingly trying to develop this expertise internally,
the company may identify another organization that possesses those
desired marketing skills. Then, by capitalizing on the product development
skills of one company and the marketing skills of the other, the resulting
alliance can serve the market quickly and effectively. Alliances may
be particularly helpful when entering a foreign market for the first time
because of the extensive cultural differences that may abound. They may
also be effective domestically when entering regional or ethnic markets.
Asian Paints, the largest paint-maker in India, acquired a strategic stake in
Singapore-based Berger International in 2002. Asian Paints now appears to
be trying to gain control over the Berger brand in some key regional markets
like Pakistan. Berger International, which is now a subsidiary of Asian
Paints, has entered into a strategic alliance with Karachi-based Berger Paints
Pakistan, which is owned by the Mahmood family. Berger International
will provide technical consultancy and strategic advice to Berger Pakistan,
which is the second- largest paints company in Pakistan. Berger Pakistan
will also have the right to import products from Asian Paints.
Reducing Manufacturing Costs
Strategic alliances may allow companies to pool capital or existing facilities
to gain economies of scale or increase the use of facilities, thereby reducing
manufacturing costs. In the increasingly competitive European automobile
market, when the Japanese are seeking to gain market share as they did in
the U.S. during the 1980s, many European companies have formed joint
ventures to reduce manufacturing costs. Ford and Volkswagan are jointly
planning to make four-wheel-drive vehicles in Portugal, and Nissan and
Ford intent to build a plant in Spain to produce vans. These companies
will benefit from cost sharing and will reduce expenses by building and
operating facilities in relatively low-cost countries, at least by West
European standards. Companies may also reduce costs through strategic
alliances with suppliers or customer reaching agreements to supply products
or services for longer periods and working together, meet customers’ needs,
each partner may apply its expertise, and benefits may be shared in the form
of lower costs or new products.

91
Corporate Level Growth Developing and Diffusing Technology
Strategy
Alliances may also be used to build jointly on the technical expertise of
two or more companies in developing products technologically beyond
the capability of the companies acting independently. Not all companies
can provide the technology that they need to effectively compete in their
markets on their own. Therefore, they are teaming up with other companies
who do have the resources to provide the technology or who can pool their
resources so that together they can provide the needed technology. Both
sides receive benefit from the partnership. Technology transfer is not only
viewed as being significant to the success of a strategic alliance, according
to Hsieh (1997): “host countries now demand more in the way of technology
transfer”. As evidence of this growing trend, Hsieh cites China as a prime
example.
For example, Tata Consultancy Services (TCS) and ANSYS Inc, a global
innovator of simulation software and product development technology,
have entered into an alliance that will help their clients accelerate product
development dramatically and simultaneously enhance the quality and
reliability of their designs through integrated digital prototyping. The
industries that will benefit include automotive, power, heavy machinery,
consumer products and electronics. Customers will derive increased
productivity in the design and production processes by 70-90 percent. By
pooling resources to develop software products built upon the expertise of
each company, TCS and ANSYS Inc intend to create a new market and reap
the associated benefits.
Reduce Financial Risk and Share Costs of Research and Development
Some companies may find that the financial risk that is involved in pursuing
a new product or production method is too great for a single company to
undertake. In such cases, two or more companies come together and agree to
spread the risk among all of them. One example of this is found in strategic
alliance between the Rs.235-crore Elder Pharma, which has 25 international
partners for strategic alliances, has entered into a tie-up with Reliance Life
Sciences. The company is focusing on dermatology and the tie-up with
Reliance is to obtain aloe vera extracts for cosmetics. Elder has launched a
dedicated skincare division with products under El-Dermis brand and plans
to launch a number of over the counter products in the skincare segment.
Achieve or Ensure Competitive Advantage
Alliances are particularly alluring to small businesses because they provide
the tools businesses need to be competitive. For many small companies
the only way they can stay competitive and even survive in today’s
technologically advanced, ever-changing business world is to form an alliance
with another company. Small companies can realize the mutual benefits they
can derive from strategic alliances in areas such as marketing, distribution,
production, research and development, and outsourcing. By forming
alliances with other companies, small businesses are able to accomplish
bigger projects more quickly and profitably, than if they tried to do it on
their own. According to Booz, Allen and Hamilton the world has entered
a new age - an age of collaboration - and that only through allying can
companies obtain the capabilities and resources necessary to win in the
92
changing global marketplace. Self-reliance is an option few companies will Strategic Alliances
be able to afford (Booz, Allen and Hamilton, 1997).

5.6 COSTS AND RISKS OF STRATEGIC

ALLIANCES
Any firm opting for strategic alliance incurs certain costs as well as gains
benefits, compared to a firm that goes on its own. Strategic alliances have
their risks, particularly if the parties are not financial equals. These risks
include the loss of operational control and confidentiality of proprietary
information and technology. Some alliances can involve a clash of corporate
cultures or the perceived diminution of independence. In addition, the parties
may deprive themselves of future business opportunities with competitors
of their strategic partner.
The parties must carefully consider a number of factors in the decision
of whether to enter into a strategic alliance, and how best to govern the
relationship once the alliance is formed. In addition to the parties’ business
objectives, the parties should consider a variety of accounting, tax, antitrust
and intellectual property issues when structuring a strategic alliance. A
properly structured strategic alliance can bring many new opportunities
and enhance the parties’ growth potential. In addition, it can provide an
alternative source of capital during difficult economic times. The various
costs/risks of entering into alliances include:
Cultural and Language Barriers
Cultural clash is probably one of the biggest problems that corporations
in alliances face today. These cultural problems consist of language, egos,
chauvinism, and different attitudes to business can all make the going
rough. The first thing that can cause problems is the language barrier
that they might face. It is important for the companies that are working
together to be able to communicate and understand each other well or they
are doomed before they even start. The importance of communication
becomes even more paramount when operating across the participants to a
strategic alliance. Language barriers at times can be a source for delays and
frustrations. However, English is becoming a common international
language. Communication problems may also arise because job definitions
are much more specific in Western companies than in Asian companies.
Cultural differences often create problems in making strategic alliances
work -especially between Asian and Western companies. For example,
Japanese companies put employee interests ahead of the shareholders’
interests. Western companies, on the other hand, are managed to benefit their
shareholders. Such a difference can cause serious conflict over investment
and dividend policies. The decision process in Asian companies often takes
longer as compared to those in their Western counterparts. Patience rather
than pushing for a decision becomes a helpful strategy. Not only do the
cultural differences exist among international firms seeking alliances, but
also corporate cultures may be different among firms from the same country.
In the final analysis, flexibility and management learning are the greatest
tools in overcoming this barrier.

93
Corporate Level Growth Lack of Trust
Strategy
Risk sharing is the primary bonding tool in a partnership. A sense of
commitment must be generated throughout the partnership. In many alliance
cases one company will point the failure finger at the partnering company.
Shifting the blame does not solve the problem, but increases the tension
between the partnering companies and often leads to alliance ruin. Building
trust is the most important and yet most difficult aspect of a successful
alliance. Only people can trust each other, not the company. Therefore,
alliances need to be formed to enhance trust between individuals. The
companies must form the three forms of trust, which include responsibility,
equality, and reliability. Many alliances have failed due to the lack of
trust causing unsolved problems, lack of understanding, and despondent
relationships.
Loss of Autonomy
The firm gets committed not only to a goal of its own but that of its alliance
partner. This involves cost in terms of goal displacement. The firm also loses
the autonomy and hence its ability to unilaterally control the outcomes. All
the partners in an alliance have control over the performance of the assigned
tasks. No partner, hence, can unilaterally control the outcome of an alliance
activity. Similarly, all the partners in an alliance have to depend on each
other. As against these, the firm benefits in terms of gain of influence over
domain and improvement in competitive positioning. This is because the
firm’s strengths are supplemented by the strengths of its alliance partner as
well as by the synergy additionally created. This improves the value chain
of the firm. The firm may also use its improved competitive position to
penetrate new markets in the same country. The increase in capacities may
also support the firm’s presence in new markets. The firm may also gain
access to the foreign markets by choosing an alliance partner based in or
having operations in such countries.
The firm may not be able to use its own time-tested technology, if the
alliance partner does not subscribe to it. It may have to use the dominant
partner’s technology, which could be different, or the combination of its
own technology and its partner’s. This is likely to have its impact on the
stability of the firm as it gets exposed to the uncertainty of using unfamiliar
technology. On the other hand, the firm develops its ability to manage
uncertainty under real or perceived protective support of its experienced
alliance partner. This helps the firm solve invisible and complex problems
with the help of increased confidence and or support from the alliance
partner. The firm may be able to specialize in its field if its alliance partner
contributes to fill the missing gaps in the value chain of the firm. The firm
may also diversify into other unrelated fields with the support of its alliance
partner. Thus, the firm will be in a better position to ward off its competitors,
who are likely to get immobilized at least for the time being as they would
have to revise their strategies keeping in view the changed competitive
positioning of the firm. This situation could be used by the firm to push its
advantage further.
Lack of Clear Goals and Objectives
Many strategic alliances are formed for the wrong reasons. This will surely
lead to disaster in the future. Many companies enter into alliances to combat
94
industry competitors. Corporate management feels this type of action will Strategic Alliances
deter competitors from focusing on their company. On the contrary, this
action will raise flags that problems exist within the joining companies. The
alliance may put the companies in the spotlight causing more competition.
Alliances are also formed to correct internal company problems. Once
again, management feels that an increase in numbers signifies a quick
fix. In this case, the company is probably already doomed and is just
taking another along for the ride. Many strategic alliances, although entered
into for all the right reasons, do not work. Dissimilar objectives, inability to
share risks and lack of trust lead to an early alliance demise. Cooperation on
all issues is the key to a successful alliance. Many managers enter into an
alliance without properly researching the steps necessary to ensure the basic
principles of cooperation.
Lack of Coordination between Management Teams
Action taken by subordinates that are not congruent with top-level
management can prove particularly disruptive, especially in instances
where companies remain competitors in spite of their strategic alliance. If
it were to happen that one company would go off on its own and do its own
marketing and sell its own product while in alliance with another company
it would for sure be grounds for the two to break up, and they would most
likely end up in a legal battle which could take years to solve if it were
settled at all.
Differences in Management Styles
Failure to understand and adapt to “new style” of management is a barrier
to success in an alliance. Changes are required in management style to run
successful alliances. The adaptation of a new style of management requires
a change in corporate culture, which must be initiated and nurtured from
the top. Companies need to devote more resources to understanding the
alliance management process, from contract negotiations to establishing
effective communications. They need to develop managers with a new set
of competencies, including foreign languages, and other communicating
and team-building skills. Other problems that can occur between companies
in trade alliances are different attitudes among the companies; one company
may deliver its goods or service behind schedule, or do a bad job producing
their goods or service, which may lead to distrust between the two companies.
This could upset the partner and may sometimes lead to a takeover.
Lack of Commitment
The possibility that partner firms lack ironclad commitment to the alliance
could undermine the prospects of an alliance. Partner firms tend to be
interested more in pursuing their self-interest than the common interest of
the alliance. Such opportunistic behavior includes shirking, appropriating
the partner’s resources, distorting information, harboring hidden agendas,
and delivering unsatisfactory products and services. Because these activities
seriously jeopardize the viability of an alliance, lack of commitment
to the alliance is an important component of the overall risk in strategic
alliances. Commitment also gets diluted because the individuals who
negotiated or implemented the initial alliance agreement may have changed
due to promotions, transfers, retirement, or terminations. Continuity of
95
Corporate Level Growth total commitment for the alliance is needed at all levels in the organization
Strategy without which the alliance will fail to reach its full potential.
There is a probability that an alliance may fail even when partner firms
commit themselves fully to the alliance. The sources of such a risk includes
environmental factors, such as government policy changes, war, and
economic recession; market factors, such as fierce competition and demand
fluctuations; and internal factors, such as a lack of competence in critical
areas, or sheer bad luck.
Creating a Potential Competitor
One partner, for example, might be using the alliance to test a market and
prepare the launch of a wholly owned subsidiary. By declining to cooperate
with others in the area of its core competency, a company can reduce the
likelihood of creating a competitor that would threaten its main area of
business; likewise, a company can insist on contractual clauses that constrain
partners from competing against it in certain products or geographic regions.
Problems of Coordination and Loss of Agility
Alliance firms, however, are likely to suffer from delays in solutions due to
problems of coordination and an alert competitor may exploit this weakness
in-built in any alliance to its great advantage. The competitor could use a
combination of strategies which exploit the weakness of all the alliance
partners timing it in such a way that the weakness of one alliance partner
is exploited quickly before another alliance partner comes to its rescue to
defend the alliance. This is how a competitor may induce the synergy to work
in reverse in such strategic alliances. This would improve the competitor’s
competitive position manifold. On the other hand, the firm under strategic
alliance may benefit from the rapidity of the response to the changing market
demands when its new alliance partner readily supplies technologies. The
delay in the use of new technology is reduced which benefits the firm in
creating a competitive edge over its competitors.
Potential for Conflicts
The understanding reached among the alliance partners is crystallized into
an agreement of alliance. However, no agreement can capture all the details
of an understanding. The complexity increases when a situation arises which
is unforeseen or not provided for in the agreement. These may create conflict
over goals, domain, and methods to be followed in the alliance activity
among the alliance partners and might result in setbacks to the alliance.
On the other hand, the group synergy may be beneficial to the alliance
partners in such a way that they support each other mutually and amicably
resolve whatever differences may arise. This leads to a harmonious working
relationship intra and inter alliance firms, which in turn further increases
the synergic benefits and the cycle goes on. The competitor, deprived of
the benefits of group synergy, would lose his competitiveness and, in turn,
cohesiveness and harmony and the cycle goes on.
Difficulty in Managing Alliances
Strategic alliance is a relatively new concept in management. It is also more
difficult to manage, and hence may lead to failure of strategic alliances
formed even by excellent firms. A failure would mean loss of time,
96
money, material, information, reputation, status, technological superiority, Strategic Alliances
competitive position, and financial position. The benefits of success are in
terms of gain of resources like time, money, information, and raw material.
The firm also gains legitimacy and status and benefits through utilization
of unused plant capacity. Above all, the firm has opportunities to learn, to
adapt, develop competencies, or jointly develop new products as well as
share the cost of product development and associated risks.
Other Issues
Experience is the best teacher in alliances but it comes at a very heavy cost.
This blunts the inquisitiveness of any firm to learn through the failure of an
experiment. Strategic alliance provides some security to an inexperienced
firm that even if the experiment goes haywire it can look forward to rescue
by the other experienced alliance partner. When the assigned tasks are to be
carried out by the firm’s partner in alliance, the firm still benefits by the firm
being a witness to the process of implementation of such tasks. Perhaps, the
most important benefit strategic alliance offers to a firm is the opportunities
to learn.
Often, a firm aiming to expand its operations abroad benefits by going in for
an alliance as it helps gain acceptance from the government of the foreign
country. This is so because the government of the foreign country may desire
involvement and development of the local firms. On the other hand, the firm
may suffer restrictions from governmental regulations if the government
feels that such strategic alliances would be detrimental to furtherance of
the public interest. However, it would still be desirable to have strategic
alliance with a foreign firm because it would be knowledgeable about
the complexity of the local conditions as well as be more sensitive to the
changing environmental conditions and so it may raise timely alarm for
the firm to respond appropriately.
Other reasons for underperformance and failure of strategic alliances include
a breakdown in trust, a change in strategy, the champions moved on, the
value did not materialize, the cultures did not mesh, and the systems were not
integrated. Another main reason strategic alliances fail to meet expectations
is the failure to grasp and articulate their strategic intent, which includes the
failure to investigate alternatives to an alliance. Lack of recognition of the
close interplay between the overall strategy of the company and the role of
an alliance in that strategy can also lead to failure of alliance.
Activity 2
A large number of strategic alliances have failed in India. Identify five
such cases from various sources and identify the reasons for their failure.
………………………………………………………………………………
………………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
….…………………………………………………………………………
………………………………………………………………………………
………………………………………………...............................................

97
Corporate Level Growth
Strategy 5.7 FACTORS CONTRIBUTING TO
SUCCESSFUL STRATEGIC ALLIANCES
Senior Management Commitment
The commitment of the senior management of all companies involved in
a strategic alliance is a key factor in the alliance’s ultimate success. For
alliances to be truly strategic they must have a significant impact on the
companies’ overall strategic plans; and must therefore be formulated,
implemented, managed, and monitored with the full commitment of senior
management. Without senior management’s commitment, alliances will not
receive the resources they need. If senior management is not committed
to alliances, adequate managerial resources, in addition to capital,
production, marketing and labor resources, may not be assigned in order for
alliances to accomplish their objectives. Senior management’s commitment
to alliances is important not only to ensure the alliances receive the necessary
resources, but also to convince others throughout the organization of the
importance of the alliance. The biggest hurdle senior management has to
overcome in committing itself to strategic alliances is management’s own
fear of a loss of control. But good partnerships, like good marriages are not
built on the basis of ownership or control. It takes effort and commitment
and enthusiasm from both sides if either is to realize the benefits.
Similarity of Management Philosophies
Successful partnerships are forged between those companies whose
management philosophies, strategies and ideas are most similar to their
own. Indeed, differences in corporate partners’ personalities can often lead
to tragic results. The philosophical differences of unsuccessful alliances
are, in part due to cultural differences, so there is significant potential for
cross-border alliances to include such widespread differences in managerial
philosophies as well. Therefore, in order to ensure the best chance of success,
companies should either seek partners who do have similar management
philosophies, or draft an alliance agreement that adequately addresses the
differences, and provides for their resolution.
The best strategy to grow via alliances may be to move slowly, and start
with simple alliances and the move towards more complex ones as alliance
experience and talent is acquired. Managers of strategic alliances must
create and maintain an environment of trust. This is perhaps easier said than
done. It requires the surrender of at least some managerial control, and it
also takes time to build a high degree of trust in a business partnership.
Frequent Performance Feedback
In order for strategic alliances to succeed, their performance must be
continually assessed and evaluated against the short and long-term goals and
objectives for the alliance. The results of these reviews must be summarized
in briefing reports, which should be distributed to management and also
keyed into a strategic alliance tracking data base.
In order for the feedback monitoring system to be successful, it is important
that the goals of the alliance be well defined and measurable. In addition,
benchmarks for alliance performance should be set to assist management
98
in evaluating alliance results. In general, an alliance is successful if both Strategic Alliances
partners achieve their objectives. Strategic alliances are very tough to
measure and evaluate, but can be done with the help of understanding the
form used and understanding the goals of the companies involved.
Clearly Defined, Shared Goals and Objectives
Some alliances are highly integrated with one or more of the parent
organizations and share such resources as manufacturing facilities,
management staff, and support functions like payroll, purchasing,
and research and development while, others may be autonomous and
independent from their parent organizations. Whatever the relationship
between the partners, it is extremely important that alliances are aligned
with the company strategy. Top management must articulate a clear link
between where it expects the industry’s future profit pools will be, how to
capture a larger share of those, and where, if at all, alliances fit in that plan.
Thorough Planning
Planning, commitment, and agreement are essential to the success of
any relationship. The overall strategy for the alliance must be mutually
developed. Key managing individuals and areas of focus for the alliance
must be identified. The first step is to gain a clear understanding of the
vision and values of each company. The next step is to gain agreement on
the market conditions in the region of the world that the joint venture will
be operating in. The next step is to clearly state the issues, strengths, and
concerns of each organization. These steps allow the participants to bridge
preliminary gaps of understanding at the onset of the process. During this
initial fact finding meetings the partners can learn a great deal about their
potential partner.
The next step is to identify areas of common ground. Here, the commonality
in the strategic direction among the partners can be identified. Next the
partners need to define the internal and external value of the alliance. They
will also need to agree on the strategic opportunities to mutually pursue.
The final step in this planning process is to create a tactical plan to address
the strategic targets. Thorough planning is one of the key ingredients to the
successful formation of strategic alliances.
Clearly Understood Roles
In forming strategic alliances the partners must have clearly understood
roles. It is crucial that the question of control is resolved before the alliance
is formed. A strategic alliance by definition falls short of a merger or a full
partnership. For this reason, control is not dependent on majority ownership.
The degree to which each partner is in control of operations and can offer
influential input for decision making must be determined before the alliance
is formed. Some firms view strategic alliances as a second-best option
that they would prefer to do without. This attitude towards an alliance is
problematic at best. Because of uncertainty and discomfort, the feeling is
that these alliances must be closely managed and controlled so as not to
get out of hand. This is a counterproductive attitude that often leads to an
unsatisfactory outcome for at least one partner. If the partners in an alliance
decide upfront exactly what each partner’s role is in the newly formed
99
Corporate Level Growth business, then there is no misunderstanding or uncertainty as to how
Strategy decisions will be made.
Global Vision
In order to succeed in an international strategic alliance, managers of
firms must incorporate a global strategic vision into their enterprise. the
most effective alliances are not forged simply as a means to complete one
deal. Smart companies spin a web of relationships that open a series of
potential projects, add value to them, and improve risk management. In
order to compete in the growing international market, it will be increasingly
necessary for firms to cooperate on a global level and continually build
international relationships, which will facilitate the process of global
competition.
Partner Selection
Partnership selection is perhaps the most important step in creating a
successful alliance. A successful alliance requires the joining of two
competent firms, seeking a similar goal and both intent on its success. A
strategic alliance must be structured so that it is the intent of both parties
that it will actually succeed - through the need for speed, adaptation, and
facilitated evolution. The foundation of a successful strategic alliance is
laid during the formation process. This process includes partner selection
and the initial agreement between parties. Selecting an appropriate partner
and deciding the agenda of the alliance are the most difficult process in
the formation of an alliance. Yet done correctly, they help ensure a higher
quality, longer lasting relationship. Having selected a partner, the alliance
should be structured so that the firm’s risks of giving too much away to the
partner are reduced to an acceptable level. The safeguards are blocking off
critical technology, establishing contractual safeguards, agreeing to swap
valuable skills and technologies, and seeking credible commitments.
Communication between Partners: Maintaining Relationships
Communication is an essential attribute for the alliance to be successful.
Without effective communication between partners, the alliance will
inevitably dissolve as a result of doubt and mistrust. Ohmae best sums up
the necessity for good communications in building and maintaining a strong
strategic alliance relationship. An alliance is a lot like a marriage. There
may be no formal contract. There is no buying and selling of equity. There
are few, if any, rigidly binding provisions. It is a loose evolving kind of
relationship. Sure, there are guidelines and expectations, but no one expects
a precise, measured return on the initial commitment. Both partners bring
to an alliance a faith that they will be stronger together than they would be
separately. Both believe that each has unique skills and functional abilities
the other likes. And both have to work diligently over time to make the
union successful.
Activity 3
Hero Cycles of India and Honda Motor Company of Japan have successfully
operated their Joint Venture and so did Wipro and GE. List out the reasons
for their success.

100
……………………………………………………………………………… Strategic Alliances
………………………………………………………………………………
………………………………………………………………………………
………………………………………………………………………………
…………………………………………………………………………

5.8 PLANNING FOR A SUCCESSFUL ALLIANCE

Alliance building is now fundamental to the way large companies conduct
business— from technology and product development to manufacturing
and marketing. The world has never been as interdependent as it is now, and
all trends point to cooperation as a fundamental growing force in business.
Businesses are moving from the classic “closed” system which depends on
its internal capabilities and resources to an “open” system in which reliance
on external capabilities and the development of complex relationships with
external entities are becoming commonplace (Steele, 1989).
Strategic Alliance Model
The essence of a strategic alliance is the quest for mutual benefit - the belief
that by working together to address a market need the combined offering will
be more potent / valuable / successful than the contributors could deliver by
themselves or through a lesser partnering relationship. It is commonplace
for the boundaries between the operations of strategic alliance partners to
become blurred as activities are integrated into a focused delivery capability.
All effective partnering relationships have a heavy reliance on trust - for a
strategic alliance to succeed this trust is absolutely fundamental.
It is important to identify the steps and variables involved in the workings
of a typical strategic alliance. Barriers to the success of the alliance should
also be identified. Scanning the environment for opportunities is the
first step in developing strategic alliances. It includes the firm’s analysis
of its own strengths, weaknesses, opportunities and threats (SWOT).
Clear understanding of strengths and opportunities allows the firm to set
the short-term and long-term goals and objectives, while the analysis of
weaknesses and threats provides direction to look for alliances. These may
include competitors, suppliers, or other firms, which could provide the
needed strengths. These firms constitute the group with alliance potential.
The firm should perform similar analyses (SWOT) for the potential alliance
partner. This not only complements the investigation as to the compatibility
of the organization; but, more importantly, enables a firm to assess the
capacity, both financial and physical, to form an integral and harmonious
member of the alliance. The following checklist identifies the key issues to
consider when contemplating entering into a strategic alliance:
1) Choosing the partner carefully - As ever vital to any partnering
relationship absolutely critical if two companies decide to go deeper
into a Strategic Alliance and integrate each other’s business process.
Synergy among partners is the major reason for and the advantage
of the alliance. The partnership is efficient, effective and, as a result,
much more competitive compared to each alliance partner performing
the similar tasks individually.

101
Corporate Level Growth 2) Clarity of purpose - Both parties need to understand what they
Strategy are expecting to get out of the relationship, how they will measure
and recognize success which may not be conventional profit and
revenue measures. Goal compatibility is essential among alliance
partners. If they are striving for the same ends then they are more
likely to achieve their objectives. Without such compatibility, the
alliance partners may pull in different directions. All relationships
require sharing. The foundation of strategic alliance is sharing
benefits according to the agreed expectations, which may differ. A
key component of each alliance that needs to be agreed up front is
the expectations of all the partners in the alliance. They need to be
identified and agreed so that any gaps do not become blockers to
progress in the future. By forming a strategic alliance a firm seeks
to change the nature and the scope of what it does. By upsizing it
may be entering a more intensive and competitive market where the
competition will be more intense. The firm needs to be aware of this
likely situation and plan accordingly. This will influence its choice of
partnering organization. In addition, if the partnering organizations
share common attitudes then this is an additional factor likely to lead
to successful partnering. If the alliance partners think in a similar way
then they are more likely to agree on how to proceed and disputes are
less likely.
3) Select a project - product or market area that could benefit from the
increased strength and flexibility provided by Strategic Alliances.
This should normally relate to an existing operation although it
could be a means of breaking new ground. Select suitable partnering
organizations as set out in detail in this guide. Partnering arrangements
frequently focus on innovative approaches to products and process
reflecting the strategic nature of the relationship as the parties
strives to ensure that they are able to fully meet the objectives of the
partnering agreement. They can then overcome any potential sources
of difficulty in meeting those objectives.
4) Understand each other’s business processes and realizing the full
benefits from a strategic alliance normally require the integration
of business processes in order to optimize the operations and
eliminate duplication - another area for some tough decisions. Clear
understanding of what value each partner will bring to the alliance
is the foundation on which trust and relationships are built for future
success.
5) An alliance plan needs to be formulated, such that it becomes a living
document. It needs to embody both the revenue and the non-revenue
(e.g. market activities, relationship building and levels of satisfaction)
aspects of the alliance, with a set of supporting actions identified
against members of all the partners involved. The arrangements can
often be less formal than in a more normal contractual situation.
This is deliberate, so that the partnering organizations can have
complete flexibility and to avoid the situations of confrontation
and claims arising. Flexibility in establishing and operating any
partnering arrangement is of paramount importance. Again a spirit
102
 of mutual understanding and co-operation that allows for the Strategic Alliances
accommodation of variations in the operation of the agreement will
enhance the benefits derived and the whole outcome of the partnering
arrangement.
6) Balancing contributions of partners in the areas of product
development, manufacturing, and marketing are necessary so that no
one partner dominates the alliance. Absence of such a balance may
result in the takeover of the weaker partner by the dominant firm or
a short-term relationship, usually resulting in breaking the alliance
without achieving its full potential. A strategic alliance requires an
equal standing in the relationship between the respective partners
even though the strategic alliance partners may be of different sizes.
This is not a buyer-seller relationship. Understand each other’s
strengths - combining each other’s strengths and building on these is
a key aspect of gaining the maximum benefit from a strategic alliance.
This often requires tough decisions to be made regarding roles and
responsibilities. Careful consideration must also be given to the most
appropriate formal structure for the strategic alliance to flourish.
7) Complete trust between the partnering organizations is an essential
ingredient. This enables the resolution of confrontations and disputes,
which can arise. The partnering organizations need to be able to
rely implicitly on each other to act in full accord with the aims and
objectives of the partnering arrangement. They need to act in a manner
that will support the totality of the agreement, not their individual
interests at the expense of the overall project. Above all they need
to be able to discuss issues as they arise in an open and positive way
to prevent minor differences becoming major crises. The risks and
rewards of a partnering arrangement should be shared and allocated
in the most appropriate way, in accordance with the key business
drivers of each particular instance.
8) Participation at the top - All partnering relationships require the
commitment from the top to be successful. An essential ingredient
is the commitment and support of senior management of all the
alliance partners. Without that commitment alliances can get into
difficulty or fail. High-level support is needed at the outset to ensure
that potential problems that can arise can be adequately dealt with.
The commitments needed to make the alliance successful needs to
permeate throughout the participating companies for it to succeed.
Before a firm hopes to operate the alliance successfully it needs to gain
full support from within its own organization at every level. In other
words, the management must sell the idea internally. This is especially
the case when contemplating a strategic alliance where the effects on
the existing business will be more marked and unpredictable. This is
going to be more important and challenging if it is the first time the
firm has ever undertaken a partnering arrangement. The management
must be prepared to seek external as well as internal support and
guidance to build up the case for approval. This must include an
assessment of which markets and products will be suitable for such

103
Corporate Level Growth a new venture and why the firm has selected a particular partner or
Strategy partners.
9) Freedom to innovate - Often the motivation to establish a strategic
alliance is to stimulate innovative thinking in the joint activity.
Getting the correct balance between necessary regulation and control
and creative freedom is a key consideration.
10) Have an exit strategy - Given that a strategic alliance is a very deep
relationship, then exit is likely to be a complex and potentially costly
affair. Nevertheless it needs considering at the time of entry.
Recognizing these issues, taking expert advice where appropriate, and
encouraging the chosen strategic alliance partner to do likewise ought
to help secure a firm foundation on which to build the strategic alliance.
A key feature of all successful partnering arrangements is the ability
to refine and develop the processes involved continually so that they
can be improved, enhanced and applied in new or enlarged situations.
They are essential so that progress can be monitored, difficulties
addressed and the partnering arrangement is made to work. Again the
more usual requirements of national partnering apply. Examples of
this are agreeing the style of the relationship, tangible objectives and
continuous improvement as well as an exit strategy. Also important
are such features as agreed key measures, regular joint review and
audit, extension of the programme and developing new partners for
the future.

5.9 CORPORATE SOCIAL RESPONSIBILITY

This is an area of increasing importance in every market and supply chain.
Factors addressed here include cultural differences, differences in perceptions
and beliefs and the effect of a fragile ecology. In a domestic strategic
alliance, as opposed to an international situation, it is expected that there
would be a shared culture; where such issues as say child labor are probably
not an issue at all, because they do not arise. However, there could be just
as fundamental differences between organizations on what at first might not
seem such important issues. Different organizations have different attitudes
and criteria that they apply to such issues as waste disposal. One may have
a very strict and environmentally friendly approach to the disposal of waste
products, especially hazardous ones; while the alliance partner may not.
In such a case, in an alliance, one could become tarnished by the alliance
partner’s lesser concern with such issues. Such differences need to be
ascertained, their treatment explored and a common agreed policy developed.
This is a matter that needs to be addressed at the outset and embodied in
any alliance plan. There will be other issues such as differences in the way
human resources are treated, which will similarly need addressing. They will
be more or less important as circumstances and attitudes dictate. Even more
sensitive can be the effects of large-scale operations, particularly mineral
extraction or even more the oil industry on not only fragile or vulnerable
ecologies but also local populations or economies.
Corporate social responsibility can extend to activities not necessarily
seen as being mainstream or core to your business. This could extend to
104
supporting programmes that, while they may not directly or immediately Strategic Alliances
affect a company’s current business, could raise its profile in an area that
could be of future benefit or even bring goodwill for future projects.

5.10 SUMMARY
From software to steel, aerospace to apparel, the pace of strategic alliances
worldwide is accelerating. A strategic alliance is an agreement between
firms to do business together in ways that go beyond normal company-to-
company dealings, but fall short of a merger or a full partnership. Strategic
alliances can be as simple as two companies sharing their technological and/
or marketing resources. In contrast, they can be highly complex, involving
several companies, located in different countries. Strategic alliances are
becoming more and more prominent in the global economy.
Strategic alliances enable business to gain competitive advantage through
access to a partner’s resources, including markets, technologies, capital
and people. Teaming up with others adds complementary resources and
capabilities, enabling participants to grow and expand more quickly
and efficiently. Strategic alliances also benefit companies by reducing
manufacturing costs, and developing and diffusing new technologies
rapidly. Any firm opting for strategic alliance incurs certain costs and risks
compared to a firm going alone. These risks include the loss of operational
control and confidentiality of proprietary information and technology. In
addition, the parties may deprive themselves of future business opportunities
with competitors of their strategic partner. Alliances also raise the specter
of potential conflicts, loss of autonomy, difficulties in coordination and
management, mismatch of cultures, etc.

5.11 KEY WORDS

Cross-Holdings, Equity Stakes, and Consortia: These alliances bring
together companies more closely than licensing and joint venture mechanism.
Broadly amalgamated together as consortia, these alliances represent highly
complex and intricate linkages among groups of companies.
Joint Ventures: This arrangement involves partners’ creation of a third
entity representing the interests and capital of the two partners. Both
partners contribute capital, distinctive skills, managers, reporting systems,
and technologies to the venture in certain proportions.
Licensing Arrangements: Licensing represents a sale of technology or
product based knowledge in exchange for market entry in a manufacturing
industry. In service-based firms, licensing is the right to enter a market in
exchange for a fee or royalty.
Strategic Alliance: A strategic alliance is an agreement between firms to
do business together in ways that go beyond normal company-to-company
dealings, but fall short of a merger or a full partnership.

5.12 SELF-ASSESSMENT QUESTIONS

1) What do you understand from the term strategic alliances? Explain
the different types of strategic alliances that companies follow? Give
105
Corporate Level Growth examples of Indian companies for each type of strategic alliance.
Strategy
2) Why do companies form strategic alliances? Explain in detail.
3) What are the risks and costs associated with strategic alliances?
4) What are the features of a successful alliance? What are the barriers
to a successful alliance? Discuss.

5.13 REFERENCES / FURTHER READINGS

Booz, Allen and Hamilton (1997). “Cross-border alliances in the age of
collaboration”, Viewpoint.
Brucellaria, M. (1997). Strategic Alliances Spell Success, Management
Accounting, 77,7, 18.
Coopers and Lybrand (1997). “Strategic alliances”, Coopers and Lybrand
Barometer.
Dowling, P., Schuler, R., Welch, D. International Dimensions of Human
Resource Management, Wadsworth Publishing Company.
Hamel, G, Doz, Y, Prahalad, C., Collaborate with your Competitors and
Win, Harvard Business Review, 67, 1, 1989, 133-9.
Kalmbach, C., Roussel, R. (1999). Dispelling Myths about alliances,
www.2c.com
Ohmae, K. “The mind of the strategist”, Art of Japanese Business, McGraw-
Hill, New York, NY, 1987.
Quinn, J.B. (1995). On the edge of outing, The Alliance Analyst, www.
alliance.analyst.com.
Soursac, T. (1996). When the Hub Spoke, The Alliance Analyst, www.
alliance.analyst.com.
Wheelen, T.L, Hunger, D.J. (2000). Strategic Management and Business
Policy, 7th ed, Addison Wesley Publishing Company, New York, NY, 125-
134, 314.

106