Corporate Level Strategies – CA Inter SM Study Material

Corporate Level Strategies – CA Inter SM Notes is designed strictly as per the latest syllabus and exam pattern.

Corporate Level Strategies – CA Inter SM Study Material

Question 1.
Explain the meaning of Directional Strategy. (May 2018; 2 Marks)
Answer:

• Directional Strategies provide basic directions for strategic actions provided towards achieving strategic goals are also called as grand strategies.
• Such strategies when formulated at the corporate level so are known as corporate strategies. A firm can adopt these corporate strategies which have been classified into four broad categories: stability, expansion, retrenchment, and combination.
• Michael E. Porter suggested competitive strategies including Cost Leadership, Differentiation, Focus Cost Leadership and Focus Differ-entiation which could be used by the corporates for their different business units.
• Besides these, In the literature on strategic management and business policy, we come across functional strategy. Meant for strategic man-agement of distinct functions, Functional strategies manage functions such as marketing, financial, human resources, logistics, production etc.

Question 2.
What is stability strategy? What are the reasons to pursue stability strategy? (RIP Nov. 2019)
Answer:
Meaning

• A strategy said to be stability when the product has reached the maturity stage of the product life cycle.
• There are lesser changes involved due to which it is less risky and also makes the staff feel comfortable with the way things are.

Reasons

• Due to the environment faced is relatively stable, the expansion may be perceived as being threatening.
• After a period of rapid expansion, stabilization is sought to be consol-idated.

Question 3.
What is Meant By Concentric Diversification.
Answer:

1. Concentric diversification too amounts to related diversification.
2. Linking of new business to an existing business is done through con-centric diversification. Linking is done through process, technology or marketing.
3. The new product is a spin-off from the existing facilities and products/ processes.
4. Concentric diversification too has the benefits of synergizing with the current operations.
5. The nature of the linkage of the new product through concentric diversification to the existing ones is different from vertically inte-grated diversification.
6. Concentric diversification departs from the vertical linkage in which through vertically integrated diversification the new product falls within the firm’s current process-product chain.
7. The new product is only connected in a loop-like manner at one or more points in the firm’s existing process/technology/product chain.

Question 4.
Vastralok Ltd., was started as a textile company to manufacture cloth. Currently, they are in the manufacturing of silk cloth. The top management desires to expand the business in the cloth manufacturing. To expand they decided to purchase more machines to manufacture cotton cloth.
Identify and explain the strategy opted by the top management of Vastralok Ltd. (RTP Nov. 2018)
Answer:

• Vastralok Ltd. is currently manufacturing silk cloth and its top man-agement has decided to expand its business by manufacturing cotton cloth as both the products are similar in nature and within the same industry.
• Vastralok Ltd. were in manufacturing silk and now top managements decision of manufacturing cotton as well is in nature of concentric diversification.
• Concentric diversification amounts to related diversification; wherein Vastralok limited will be using existing infrastructure and distribution channel.
• In concentric diversification, the new business is linked to the existing businesses through process, technology or marketing.
• The new product is a spin-off from the current facilities and products / processes.
• This means that in concentric diversification too, there are benefits of synergy with the current operations.

Question 5.
Explain Conglomerate Diversification
Answer:

1. Conglomerate diversification is a totally unrelated diversification wherein no linkages exist between the new businesses/products from the existing businesses/products in any way as they are disjoint.
2. The new products are neither by process or technology or function connected to the existing ones.
3. Conglomerate diversification has no common thread at all with the firm’s present position.
4. For example, A cement manufacturer diversifies into the manufacture
   of steel and rubber products.

Question 6.
Gautam and Siddhartha two brothers are the owners of a cloth manufacturing unit located in Faridabad. They are doing well and have % substantial surplus funds available within the business. They have different approaches regarding corporate strategies to be followed to be more competitive and profitable in future.

Gautam is interested in acquiring another industrial unit located in Faridabad manufacturing stationery items such as permanent markers, notebooks, pencils and pencil sharpeners, envelopes and other office supplies.
On the other hand, Siddhartha desires to start another unit to produce readymade garments. Discuss the nature of corporate strategies being suggested by two brothers and risks involved in it. (May 2019; 5 Marks)
Answer:

Gautam wishes to diversify in a business that is not related to their existing line of product and can be termed as conglomerate diversi-fication.

He is interested in acquiring another industrial unit located in Farid-abad manufacturing stationery items such as permanent markers, notebooks, pencils and pencil sharpeners, envelopes and other office supplies, which is not related to their existing product. In conglomerate diversification, the new businesses/products are disjointed from the existing businesses/products in every way; it is a unrelated diversification. In process/technology/function, there is no connection between the new products and the existing ones. Conglomerate diversification has no common thread at all with the firm’s present position.

On the other hand, Siddhartha seeks to move forward in the chain of existing product by adopting vertically integrated diversification/ forward integration. The cloth being manufactured by the existing processes can be used as raw material of garments manufacturing business. In such diversification, firms opt to engage in businesses that are related to the existing business of the firm. The firm remains vertically within the same process and moves forward or backward in the chain. It enters specific product/process steps with the intention of making them into new businesses for the firm. The characteristic feature of vertically integrated diversification is that here, the firm does not jump outside the vertically linked product-process chain.

Both types of diversifications have their own risks. In conglomerate diversification, there are no linkages with customer group, customer marketing functions and technology used, which is a risk. In the case of vertical integrated diversification, there is a risk of lack of continued focus on the original business.

Question 7.
Explain Co-generic Merger (May 2018; 2 Marks)
Answer:

1. In Co-generic merger two or more merging organizations are asso-ciated in some way or the other related to the production processes, business markets, or basic required technologies.
2. Such merger include the extension of the product line or acquiring components that are required in the daily operations.
3. It offers great opportunities to businesses to diversify around a com-mon set of resources and strategic requirements.
4. For example, an organization in the white goods category such as refrigerators can diversify by merging with another organization having business in kitchen appliances.

Question 8.
Strategic alliances are formed if they provide an advantage to all the parties in the alliance. Do you agree? Explain in brief the advantages of a strategic alliance. (RTP May 2019, RTP May 2019)
OR
List the advantages of Strategic Alliance. (Nov. 2018; 2 Marks)
OR
Explain Strategic Alliance. Describe the advantages of Strategic Alliance. (Nov. 2019; 5 Marks)
Answer:
A strategic alliance is a relationship between two or more businesses that enables each to achieve certain strategic objectives which neither would be able to achieve on its own. The strategic partners maintain their status as independent and separate entities, share the benefits and control over the partnership, and continue to make contributions to the alliance until it is terminated.

Strategic alliance usually are only formed if they provide an advantage to all the parties in the alliance. These advantages can be broadly categorised as follows:

1. Political:
   • Sometimes strategic alliances are formed with a local foreign business to gain entry into a foreign market either because of local prejudices or legal barriers to entry.
   • Forming strategic alliances with politically-influential partners may also help improve your own influence and position.
2. Economic:
   • There can be reduction in costs and risks by distributing them across the members of the alliance.
   • Greater economies of scale can be obtained in an alliance, as produc-tion volume can increase, causing the cost per unit to decline.
   • Finally, partners can take advantage of co-specialization, creating additional value, such as when a leading computer manufacturer bundles its desktop with a leading monitor manufacturer’s monitor.
3. Strategic:
   • Rivals can join together to cooperate instead of compete.
   • Vertical integration can be created where partners are part of supply chain.
   • Strategic alliances may also be useful to create a competitive advantage by the pooling of resources and skills.
   • This may also help with future business opportunities and the devel-opment of new products and technologies.
   • Strategic alliances may also be used to get access to new technologies or to pursue joint research and development.
4. Organizational:
   • Strategic alliance helps to learn necessary skills and obtain certain capabilities from strategic partners.
   • Strategic partners may also help to enhance productive capacity, provide a distribution system, or extend supply chain.
   • Strategic partners may provide a good or service that complements thereby creating a synergy.
   • Having a strategic partner who is well-known and respected also helps add legitimacy and creditability to a new venture.

Question 9.
What are the Disadvantages of Strategic Alliance?
Answer:

1. The Major Disadvantage Is SHARING. Strategic alliances require sharing of resources and profits, and also sharing knowledge and skills that otherwise organizations may not like to share. Sharing knowledge and skills can be problematic if they involve trade secrets. Agreements can be executed to protect TRADE SECRETS, but they are only as good as the willingness of parties to abide by the agreements or the courts willingness to enforce them.
2. Strategic alliances MAY ALSO CREATE A POTENTIAL COMPETITOR. An ally may become a competitor in future when it decides to separate out.

Question 10.
XYZ Ltd. is a multi-product company, suffering from continuous losses since last few years and has accumulated heavy losses which have eroded its net worth.
What strategic option is available to the management of this sick company? Advise with reasons. (May 2018; 5 Marks)
Answer:
The company may consider retrenchment strategy.

Retrenchment Strategy:

1. It is followed when an organization substantially reduces the scope of its activity.
2. This is done through an attempt to find out the problem areas and diagnose the causes of the problems.
3. Next, steps are taken to solve the problems.
4. These steps result in different kinds of retrenchment strategies.
   • If the organization chooses to focus on ways and means to reverse the process of decline, it adopts at TURNAROUND STRATEGY.
   • If it cuts off the loss-making units, divisions, or SBUs, curtails its product line, or reduces the functions performed, it adopts a DIVESTMENT (OR DIVESTITURE) STRATEGY.
   • If none of these actions work, then it may choose to abandon the activities totally, resulting in a LIQUIDATION STRATEGY.

Question 11.
With the global economic recession Soft Cloth Ltd. incurred significant losses in all its previous five financial years. Currently, they are into manufacturing of cloth made of cotton, silk, polyester, rayon, Lycra and blends. Competition is also intense on account of cheap imports.
The company is facing cash crunch and has not been able to pay the salaries to its employees in the current month. Suggest a grand strategy that can be opted by Soft Cloth Ltd. (RTP May 2019)
Answer:
Turnaround Strategy:

1. Retrenchment may be done either internally or externally.
2. For internal retrenchment to take place, emphasis is laid on improving internal efficiency, known as turnaround strategy.
3. There are certain conditions or indicators which point out that a turnaround is needed if the company has to survive.
4. These danger signals are:
   • Persistent negative cash flow from business(es)
   • Uncompetitive products or services
   • Declining market share
   • Deterioration in physical facilities
   • Over-staffing, high turnover of employees, and low morale
   • Mismanagement

Question 12.
Pizza Galleria was India’s first pizza delivery chain enjoying monopoly for several years. However, after entry of Modino and Uncle Jack it is struggling to compete. Both Modino and Uncle Jack have opened several eateries and priced the product aggressively. In last four years the chain has suffered significant losses. The chain wishes to know whether they should go for turnaround strategy. List out components of action plan for turnaround strategy. (RTP Nov. 2019)
OR
An XYZ Company is facing continuous losses. There is decline in sales and product market share. The products of the company became uncompetitive and there is persistent negative cashflow. The physical facilities are deteriorating and employees have low morale. At the board meeting, the board members decided that they should continue the organization and adopt such measures that the company functions properly. The board has decided to hire young executive Shayamli for improving the functions of the organization. What corporate strategy should Shayamli adopt for this company and what steps to be taken to implement the corpor a;e strategy adopted by Shayamli? (Nov. 2019; 5 Marks)
OR
General public is discerning from buying air conditioning units based on the Health Ministry guidelines regarding emergence of a contagious viral pandemic. Consequently, Nebula Pvt. Ltd., a manufacturer of evaporation coils used in air conditioning units has faced significant loss in working capital due to sharp fall in demand. The company conducted financial assessment and developed a workable action plan based on short and long term financial needs. But for immediate needs, an emergency plan has been implemented. It includes selling scrap, asset liquidation and overheads cost reduction. Further, to avoid any such untoward event in future, they plan to diversify into newer business areas along with its core business. Identify and explain the strategy opted by M/s. Nebula Pvt. Ltd.? (RTPNov. 2020)
Answer:
Pizza Chain/Nebula/XYZ Company may choose to have turnaround strategy if there are:

• Persistent negative cash flow from business.
• Uncompetitive products or services.
• Declining market share.
• Deterioration in physical facilities.
• Over-staffing, high turnover of employees, and low morale.
• Mismanagement.

For turnaround strategies to be successful, it is vital to emphasis on the short and long-term financing needs as well as on strategic matters. The chain may attempt to influence the potential Indian market by engaging a new logistics partner. It may bring improvement in food items, as well as quality and improvements in the overall dine-in and delivery experience. During the turnaround, the “product mix” may be changed, requiring the organization to do some repositioning.

A workable action plan for turnaround would involve the following stages:

• Stage One – Assessment of current problems:
  • Get to the root causes and the level of damage the problem has caused.
  • Resources should be dedicated toward those areas critical to efficiently work on correcting and repairing any immediate issues.
• Stage Two – Analyze the situation and develop a strategic plan:
  • Before you make any key changes; determine the chances of the business’s survival.
  • Identify suitable strategies and develop a primary action plan.
  • For this one should look for the feasible core businesses, suitable bridge financing and available organizational resources.
  • Analyze the strengths and weaknesses in the areas of competitive position.
  • Once major complications and opportunities are identified, develop a strategic plan with specific goals and comprehensive functional actions.
• Stage Three – Implementing an emergency action plan:
  • If the organization is in a critical stage, an appropriate action plan must be developed to stop the bleeding and enable the organization to survive.
  • The plan typically includes human resource, financial, marketing and operations actions to restructure debts, improve working capital, reduce costs, improve budgeting practices, prune product lines and accelerate high potential products.
  • -and enough funds to implement the turnaround strategies must be raised.
• Stage Four – Restructuring the business:
  • The financial state of the organization’s core business is predom-inantly significant.
  • If the core business is irreparably damaged, then the outlook for the entire organization may be miserable.
  • Prepare cash forecasts, analyze assets and debts, review profits and analyze other key financial functions to position the organi-zation for rapid improvement.
  • During the turnaround, the “product mix” may be changed, requiring the organization to do some repositioning. Core products neglected over time may require immediate attention to remain competitive.
• Stage Five – Returning to normal:
  • In the final stage of turnaround strategy process, the organization should begin to show signs of profitability, return on investments and enhancing economic value-added.
  • Emphasis is placed on a number of strategic efforts such as carefully adding new products and improving customer service, creating alliances with other organizations, increasing the market share, etc.

OR

M/s. Nebula Pvt Ltd. has opted Turnaround Strategy as the company while facing serious working capital crunch persistently conducted an assessment of current problem and developed a workable action plan based on short and long term financial needs and strategic issues. A workable action plan for turnaround would involve:

Stage One – Assessment of current problems: In the first step, assess the current problems and get to the root causes and the extent of damage.

Stage Two – Analyze the situation and develop a strategic plan: Identify major problems and opportunities, develop a strategic plan with specific goals and detailed functional actions.

Stage Three – Implementing an emergency action plan: If the organization is in a critical stage, an appropriate action plan must be developed to stop the bleeding and enable the organization to survive.

Stage Four – Restructuring the business: If the core business is irreparably damaged, then the outlook for the entire organization may be bleak. Efforts to be made to position the organization for rapid improvement.

Stage Five – Returning to normal: In the final stage of turnaround strategy process, the organization should begin to show signs of profitability, return on investments and enhancing economic value-added.

Question 13.
What is Divestment strategy? When is it adopted? (RTP Nov. 2018; RTP Nov. 2020)
Answer:

1. Divestment strategy involves the sale or liquidation of a portion of
   • business,
   • or a major division,
   • profit centre or SBU.
2. Divestment is usually a part of rehabilitation or restructuring plan and is adopted when a turnaround has been attempted but has proved to be unsuccessful.
3. The option of a turnaround may even be ignored if it is obvious that divestment is the only answer.
4. A divestment strategy may be adopted due to various reasons:
   • A business that had been acquired proves to be a mismatch and cannot be integrated within the company.
   • When a Turnaround has been attempted, but proved to be unsuccessful.
   • Persistent negative cash flows from a particular business create financial problems for the whole company, creating the need for divestment of that business.
   • Severity of competition and the inability of a firm to cope with it may cause it to divest.
   • Technological upgradation is required if the business is to survive but where it is not possible for the firm to invest in it, a preferable option would be to divest.
   • A better alternative may be available for investment, causing a firm to divest a part of its unprofitable businesses.

Question 14.
Distinguish between Cost Leadership and Differentiation Strategies. (RTP Nov. 2020)
Answer:
Cost leadership emphasizes producing standardized products at a very low per-unit cost foi’ consumers who are price-sensitive. Differentiation is a strategy aimed at producing products and services considered unique industry wide and directed at consumers who are relatively price-insensitive.

A primary reason for pursuing forward, backward, and horizontal integration strategies is to gain cost leadership benefits. But cost leadership generally must be pursued in conjunction with differentiation. Different strategies offer different degrees of differentiation.

A differentiation strategy should be pursued only after a careful study of buyers’ needs and preferences to determine the feasibility of incorporating one or more differentiating features into a unique product.

A successful differentiation strategy allows a firm to charge a higher price for its product and to gain customer loyalty.

Question 15.
Organo is a large supermarket chain. It is considering the purchase of a number of farms that provides Organo with a significant amount of its fresh produce. Organo feels that by purchasing the farms, it will have greater control over its supply chain. Identify and explain the type of diversification opted by Organo? (RTP May 2020)
Answer:
Organo is a large supermarket chain.
By opting backward integration and purchase a number of farms, it will have greater control over its supply chain.
Backward integration is a step towards, creation of effective supply by entering business of input providers.
Strategy employed to expand profits and gain greater control over production of a product whereby a company will purchase or build a business that will increase its own supply capability or lessen its cost of production.