ICAI Notes: Strategic Choices | Financial Management & Strategic Management for CA Intermediate PDF Download

 Page 1


 
?
LEARNING OUTCOMES 
a    
 
 
CHAPTER 
4 
 
 
 
STRATEGIC CHOICES 
 
 
 
 
 
After studying this chapter, you will be able to: 
? Describe and discriminate between strategic choices such as 
strategic intensification, strategic diversification and strategic 
exits.  
? Formulate strategic options. 
? Explain the reasons for- relative costs & risks and benefits of 
the adoption of various types of corporate strategies. 
? Describe the circumstances necessitating pursuit of 
combination strategies and strategic alliances.  
 
Know about combination strategies and strategic alliances. 
Chance favours the prepared mind. Louis Pasteur 
Strategy is a deliberate search for a plan of action that will 
develop a business competitive advantage and compound it. 
 Bruce D. Henderson 
 
  
© The Institute of Chartered Accountants of India
Page 2


 
?
LEARNING OUTCOMES 
a    
 
 
CHAPTER 
4 
 
 
 
STRATEGIC CHOICES 
 
 
 
 
 
After studying this chapter, you will be able to: 
? Describe and discriminate between strategic choices such as 
strategic intensification, strategic diversification and strategic 
exits.  
? Formulate strategic options. 
? Explain the reasons for- relative costs & risks and benefits of 
the adoption of various types of corporate strategies. 
? Describe the circumstances necessitating pursuit of 
combination strategies and strategic alliances.  
 
Know about combination strategies and strategic alliances. 
Chance favours the prepared mind. Louis Pasteur 
Strategy is a deliberate search for a plan of action that will 
develop a business competitive advantage and compound it. 
 Bruce D. Henderson 
 
  
© The Institute of Chartered Accountants of India
 
STRATEGIC MANAGEMENT 
a
 4.2 
 
 
4.1 INTRODUCTION 
Strategies are formulated at different levels of an organization. Strategy 
formulation involves well thought of decision making and cover actions dealing 
with the objective of the firm, shareholders and allocation of resources and 
coordination of strategies of various business units for optimal performance. Top 
management of the organization makes strategic decisions, which pan down for 
delegation at middle management level and finally the functional level managers 
execute the same with their teams. 
Strategic Choices
Broad Strategies
Stability
Growth/Expansion
Retrenchment
Combination
Strategic Exits
Turnaround
Divestment
Liquidation
Strategic Options
Portfolio Analysis 
Models
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
Page 3


 
?
LEARNING OUTCOMES 
a    
 
 
CHAPTER 
4 
 
 
 
STRATEGIC CHOICES 
 
 
 
 
 
After studying this chapter, you will be able to: 
? Describe and discriminate between strategic choices such as 
strategic intensification, strategic diversification and strategic 
exits.  
? Formulate strategic options. 
? Explain the reasons for- relative costs & risks and benefits of 
the adoption of various types of corporate strategies. 
? Describe the circumstances necessitating pursuit of 
combination strategies and strategic alliances.  
 
Know about combination strategies and strategic alliances. 
Chance favours the prepared mind. Louis Pasteur 
Strategy is a deliberate search for a plan of action that will 
develop a business competitive advantage and compound it. 
 Bruce D. Henderson 
 
  
© The Institute of Chartered Accountants of India
 
STRATEGIC MANAGEMENT 
a
 4.2 
 
 
4.1 INTRODUCTION 
Strategies are formulated at different levels of an organization. Strategy 
formulation involves well thought of decision making and cover actions dealing 
with the objective of the firm, shareholders and allocation of resources and 
coordination of strategies of various business units for optimal performance. Top 
management of the organization makes strategic decisions, which pan down for 
delegation at middle management level and finally the functional level managers 
execute the same with their teams. 
Strategic Choices
Broad Strategies
Stability
Growth/Expansion
Retrenchment
Combination
Strategic Exits
Turnaround
Divestment
Liquidation
Strategic Options
Portfolio Analysis 
Models
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
STRATEGIC CHOICE 
a a
    
 
 
4.3 
4.2 STRATEGIC CHOICES  
Businesses follow different types of strategies to enter the market, to stay relevant 
and grow in the market. A large number of strategies with different nomenclatures 
have been employed by different businesses and also suggested by different 
authors on strategy. For instance, William F Glueck and Lawrence R Jauch discussed 
four generic strategies including stability, growth, retrenchment and combination. 
These strategies have also been called Grand Strategies/Directional Strategies by 
many other authors. Michael E. Porter suggested competitive strategies including 
Cost Leadership, Differentiation, Focus Cost Leadership and Focus Differentiation 
which could be used by the corporates for their different business units. Besides 
these, we come across functional strategies in the literature on Strategic 
Management and Business Policy. Functional Strategies are meant for strategic 
management of distinct functions such as Marketing, Financial, Human Resource, 
Logistics, Production etc. 
We can classify the different types of strategies on the basis of levels of the 
organisation, stages of business life cycle and competition as given in the  
Table –1. 
Table: 1- Different types of strategies on the basis of their classification 
Basis of Classification Types 
Level of the 
organisation 
Corporate Level 
Business Level 
Functional Level 
Stages of Business Life 
Cycle 
Entry/Introduction Stage - Market Penetration Strategy 
Growth Stage - Growth/Expansion Strategy 
Maturity Stage - Stability Strategy 
Decline Stage - Retrenchment/ Turnaround Strategy 
Competition oriented Competitive Strategies - Cost Leadership, Differentiation, 
Focus 
Collaboration Strategies - Joint Venture, Merger & 
Acquisition, Strategic Alliance 
 
© The Institute of Chartered Accountants of India
Page 4


 
?
LEARNING OUTCOMES 
a    
 
 
CHAPTER 
4 
 
 
 
STRATEGIC CHOICES 
 
 
 
 
 
After studying this chapter, you will be able to: 
? Describe and discriminate between strategic choices such as 
strategic intensification, strategic diversification and strategic 
exits.  
? Formulate strategic options. 
? Explain the reasons for- relative costs & risks and benefits of 
the adoption of various types of corporate strategies. 
? Describe the circumstances necessitating pursuit of 
combination strategies and strategic alliances.  
 
Know about combination strategies and strategic alliances. 
Chance favours the prepared mind. Louis Pasteur 
Strategy is a deliberate search for a plan of action that will 
develop a business competitive advantage and compound it. 
 Bruce D. Henderson 
 
  
© The Institute of Chartered Accountants of India
 
STRATEGIC MANAGEMENT 
a
 4.2 
 
 
4.1 INTRODUCTION 
Strategies are formulated at different levels of an organization. Strategy 
formulation involves well thought of decision making and cover actions dealing 
with the objective of the firm, shareholders and allocation of resources and 
coordination of strategies of various business units for optimal performance. Top 
management of the organization makes strategic decisions, which pan down for 
delegation at middle management level and finally the functional level managers 
execute the same with their teams. 
Strategic Choices
Broad Strategies
Stability
Growth/Expansion
Retrenchment
Combination
Strategic Exits
Turnaround
Divestment
Liquidation
Strategic Options
Portfolio Analysis 
Models
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
STRATEGIC CHOICE 
a a
    
 
 
4.3 
4.2 STRATEGIC CHOICES  
Businesses follow different types of strategies to enter the market, to stay relevant 
and grow in the market. A large number of strategies with different nomenclatures 
have been employed by different businesses and also suggested by different 
authors on strategy. For instance, William F Glueck and Lawrence R Jauch discussed 
four generic strategies including stability, growth, retrenchment and combination. 
These strategies have also been called Grand Strategies/Directional Strategies by 
many other authors. Michael E. Porter suggested competitive strategies including 
Cost Leadership, Differentiation, Focus Cost Leadership and Focus Differentiation 
which could be used by the corporates for their different business units. Besides 
these, we come across functional strategies in the literature on Strategic 
Management and Business Policy. Functional Strategies are meant for strategic 
management of distinct functions such as Marketing, Financial, Human Resource, 
Logistics, Production etc. 
We can classify the different types of strategies on the basis of levels of the 
organisation, stages of business life cycle and competition as given in the  
Table –1. 
Table: 1- Different types of strategies on the basis of their classification 
Basis of Classification Types 
Level of the 
organisation 
Corporate Level 
Business Level 
Functional Level 
Stages of Business Life 
Cycle 
Entry/Introduction Stage - Market Penetration Strategy 
Growth Stage - Growth/Expansion Strategy 
Maturity Stage - Stability Strategy 
Decline Stage - Retrenchment/ Turnaround Strategy 
Competition oriented Competitive Strategies - Cost Leadership, Differentiation, 
Focus 
Collaboration Strategies - Joint Venture, Merger & 
Acquisition, Strategic Alliance 
 
© The Institute of Chartered Accountants of India
 
STRATEGIC MANAGEMENT 
a
 4.4 
Above are the various types of strategies available for an organisation to adopt. 
The organisation adopts either of these depending upon their needs and 
requirements. For instance, a start-up or a new enterprise might follow either a 
competitive strategy i.e., entering the market where a number of rivals are already 
operating, or a collaborative strategy, i.e., enter into a joint venture with an 
established company. However, majority of startups are launched on a small scale 
and their main strategy is to penetrate the market and to reach the breakeven stage 
at the earliest and later pursue growth strategy. While a going concern can continue 
with the competitive strategy or resort to collaborative strategy to ensure business 
growth. 
Business conglomerates having multiple product folios formulate strategies at 
different levels, viz., corporate, business unit and functional. Corporate level 
strategies are meant to provide ‘direction’ to the company. Business level strategies 
are formulated for each product/process division known as strategic business unit. 
While for implementation of the corporate and business strategies, functional 
strategies are formulated in business areas like production/operations, marketing, 
finance, human resources etc. In fact, big corporates follow an elaborate system of 
strategy formulation, implementation and control at different levels in the company 
to survive and grow in the turbulent business environment. In this chapter, we shall 
discuss the corporate level strategies.  
The corporate strategies a firm can adopt may be classified into four broad 
categories: 
1.  Stability strategy 
2.  Expansion strategy 
3.  Retrenchment strategy 
4.  Combination strategy 
 
Figure:-Types of Corporate Strategies 
Corporate Strategy
Stability Growth/Expansion Retrenchment Combination
© The Institute of Chartered Accountants of India
Page 5


 
?
LEARNING OUTCOMES 
a    
 
 
CHAPTER 
4 
 
 
 
STRATEGIC CHOICES 
 
 
 
 
 
After studying this chapter, you will be able to: 
? Describe and discriminate between strategic choices such as 
strategic intensification, strategic diversification and strategic 
exits.  
? Formulate strategic options. 
? Explain the reasons for- relative costs & risks and benefits of 
the adoption of various types of corporate strategies. 
? Describe the circumstances necessitating pursuit of 
combination strategies and strategic alliances.  
 
Know about combination strategies and strategic alliances. 
Chance favours the prepared mind. Louis Pasteur 
Strategy is a deliberate search for a plan of action that will 
develop a business competitive advantage and compound it. 
 Bruce D. Henderson 
 
  
© The Institute of Chartered Accountants of India
 
STRATEGIC MANAGEMENT 
a
 4.2 
 
 
4.1 INTRODUCTION 
Strategies are formulated at different levels of an organization. Strategy 
formulation involves well thought of decision making and cover actions dealing 
with the objective of the firm, shareholders and allocation of resources and 
coordination of strategies of various business units for optimal performance. Top 
management of the organization makes strategic decisions, which pan down for 
delegation at middle management level and finally the functional level managers 
execute the same with their teams. 
Strategic Choices
Broad Strategies
Stability
Growth/Expansion
Retrenchment
Combination
Strategic Exits
Turnaround
Divestment
Liquidation
Strategic Options
Portfolio Analysis 
Models
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
STRATEGIC CHOICE 
a a
    
 
 
4.3 
4.2 STRATEGIC CHOICES  
Businesses follow different types of strategies to enter the market, to stay relevant 
and grow in the market. A large number of strategies with different nomenclatures 
have been employed by different businesses and also suggested by different 
authors on strategy. For instance, William F Glueck and Lawrence R Jauch discussed 
four generic strategies including stability, growth, retrenchment and combination. 
These strategies have also been called Grand Strategies/Directional Strategies by 
many other authors. Michael E. Porter suggested competitive strategies including 
Cost Leadership, Differentiation, Focus Cost Leadership and Focus Differentiation 
which could be used by the corporates for their different business units. Besides 
these, we come across functional strategies in the literature on Strategic 
Management and Business Policy. Functional Strategies are meant for strategic 
management of distinct functions such as Marketing, Financial, Human Resource, 
Logistics, Production etc. 
We can classify the different types of strategies on the basis of levels of the 
organisation, stages of business life cycle and competition as given in the  
Table –1. 
Table: 1- Different types of strategies on the basis of their classification 
Basis of Classification Types 
Level of the 
organisation 
Corporate Level 
Business Level 
Functional Level 
Stages of Business Life 
Cycle 
Entry/Introduction Stage - Market Penetration Strategy 
Growth Stage - Growth/Expansion Strategy 
Maturity Stage - Stability Strategy 
Decline Stage - Retrenchment/ Turnaround Strategy 
Competition oriented Competitive Strategies - Cost Leadership, Differentiation, 
Focus 
Collaboration Strategies - Joint Venture, Merger & 
Acquisition, Strategic Alliance 
 
© The Institute of Chartered Accountants of India
 
STRATEGIC MANAGEMENT 
a
 4.4 
Above are the various types of strategies available for an organisation to adopt. 
The organisation adopts either of these depending upon their needs and 
requirements. For instance, a start-up or a new enterprise might follow either a 
competitive strategy i.e., entering the market where a number of rivals are already 
operating, or a collaborative strategy, i.e., enter into a joint venture with an 
established company. However, majority of startups are launched on a small scale 
and their main strategy is to penetrate the market and to reach the breakeven stage 
at the earliest and later pursue growth strategy. While a going concern can continue 
with the competitive strategy or resort to collaborative strategy to ensure business 
growth. 
Business conglomerates having multiple product folios formulate strategies at 
different levels, viz., corporate, business unit and functional. Corporate level 
strategies are meant to provide ‘direction’ to the company. Business level strategies 
are formulated for each product/process division known as strategic business unit. 
While for implementation of the corporate and business strategies, functional 
strategies are formulated in business areas like production/operations, marketing, 
finance, human resources etc. In fact, big corporates follow an elaborate system of 
strategy formulation, implementation and control at different levels in the company 
to survive and grow in the turbulent business environment. In this chapter, we shall 
discuss the corporate level strategies.  
The corporate strategies a firm can adopt may be classified into four broad 
categories: 
1.  Stability strategy 
2.  Expansion strategy 
3.  Retrenchment strategy 
4.  Combination strategy 
 
Figure:-Types of Corporate Strategies 
Corporate Strategy
Stability Growth/Expansion Retrenchment Combination
© The Institute of Chartered Accountants of India
 
 
STRATEGIC CHOICE 
a a
    
 
 
4.5 
Before proceeding further, let us discuss the basic features of all the types of 
corporate strategies to get the bird’s eye view. The basic features of the corporate 
strategies are as follows: 
Table:2- Basic Features of Corporate Strategies 
Strategy Basic Feature 
Stability  The firm stays with its current businesses and product 
markets; maintains the existing level of effort; and is 
satisfied with incremental growth. 
Expansion Here, the firm seeks significant growth-maybe within the 
current businesses; maybe by entering new business that 
are related to existing businesses; or by entering new 
businesses that are unrelated to existing businesses. 
Retrenchment  The firm retrenches some of the activities in some 
business (es), or) or drops the business as such through 
sell-out or liquidation. 
Combination The firm combines the above strategic alternatives in 
some permutation/combination so as to suit the specific 
requirements of the firm. 
4.2.1. Stability Strategy 
One of the important goals of a business enterprise is stability strategy is to 
stabilise- it may be opted to safeguard its existing interests and strengths, to 
pursue well established and tested objectives, to continue in the chosen business 
path, to maintain operational efficiency on a sustained basis, to consolidate the 
commanding position already reached, and to optimise returns on the resources 
committed in the business.  
A stability strategy is pursued by a firm when: 
? It continues to serve in the same or similar markets and deals in same or 
similar products and services. 
? This strategy is typical for those firms whose product have reached the 
maturity stage of product life cycle or those who have a sufficient market 
share but need to retain that. They have to remain updated and have to pace 
© The Institute of Chartered Accountants of India