MB0052 SLM Unit 08 PDF

Strategic Management and Business Policy
Unit 8
Unit 8
Stability Strategies
Structure
8.1 Introduction
8.2 Caselet
Objectives
8.3 What is Stability Strategy?
8.4 BCG Portfolio Model
8.5 Four Generic Strategies
8.6 Mass Customization
8.7 Strategies for Industry Leaders
8.8 Concentration Strategy
8.9 Corporate Parenting
8.10 When Best to Pursue Stability Strategy
8.11 Stability Strategies in Practice
8.12 Case Study
8.13 Summary
8.14 Glossary
8.15 Terminal Questions
8.16 Answers
8.17 References
8.1 Introduction
Definition of corporate mission, objectives or goals, analyses of internal
competences and resources and the external environment lead to the generation
of business strategies or strategic alternatives. In strategic management literature,
various corporate strategies are mentioned and analysed. Some of these strategies
are corporate-level strategies; some are business-level strategies. Some of these
strategies are more appropriate under certain circumstances than in others. All
these strategies are available to organizations to consider, adopt or pursue. All
such strategies can be broadly classified into three categories: stability strategies,
strategies for managing change and growth or expansion strategies. These are
also called master, grand, generic or basic strategies. These three strategies
along with their major elements or components are shown in Figure 8.1.
We shall discuss stability strategies in this chapter. In this, we shall analyse
portfolio models and other generic strategies, strategies for industry leaders,
Sikkim Manipal University
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strategies for challengers or runner-up companies, strategies for followers,

simulation strategy, concentration strategy, corporate parenting, etc. We shall
discuss strategies for managing change and strategies for growth and
diversification in Units 9 and 10 respectively.
Figure 8.1 Corporate Strategies: Stability Strategy, Strategy for

Change and Expansion Strategy
8.2 Caselet
It has been rightly pointed out that if an organization aims for growth, it may
at least achieve stability. Companies have to regularly review their
competence levels, resource base, product portfolios, cost structure or cost
management and, react or respond timely to market developments. Such
an approach has helped Maruti maintains its leadership in the market. The
year 1984 saw the beginning of the biggest success story in the Indian
automobile industry. It all started with the launch of the Maruti 800, a car
that revolutionized the car market in India. The company has not looked
back since then, having sold more than 2.5 million 800s and becoming
Indias best selling car.
Having attained leadership position, a leaders most strategic concern is to
maintain stability or defend its market position for continuing dominance in
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the industry. Maruti, too, has not rested on its laurels several new brands
have been launched, including the Maruti 1000, Indias first sedan. Examples
of innovative initiatives include the Maruti Driving School, partnership with
State Bank of India to launch an auto finance scheme and insurance services
at low premium schemes. It is these innovations that have helped Maruti
retain its leadership in the industry and continue its success story.
Objectives
After studying this unit, you should be able to:
Discuss the concept and meaning of stability strategies
Analyse the portfolio model the BCG
Differentiate among four generic strategies and modern modifications
Analyse defensive strategies for a leader
Illustrate the concept of corporate parenting
8.3 What is Stability Strategy?

Stability strategy is most commonly used by organizations. But, the nomenclature,
stability strategy often creates confusion among managers, planners and
strategists. Stability does not mean static. Most organizations, which follow
stability strategy, look for growth and do not remain stable or static for a long
period of time. Therefore, some prefer to call it stable growth strategy. The
basic approach in stability is to maintain present course; steady as it goes.
Stability strategy can be defined as below:
In an effective stability strategy, companies will concentrate their
resources where the company presently has or can rapidly develop a
meaningful competitive advantage in the narrowest possible product
market scope consistent with the firms resources and market
requirements.1
As the definition indicates, stability strategy implies that an organization

will continue in the same or similar business as it currently pursues with the
same or similar objectives and resource base. Three distinctive features of a
stability strategy are:
1. No major change takes place in the product, market, service or functions;
2. Focus is on developing and maintaining competitive advantage consistent
with present resources and market requirements;
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3. The strategy thrust is not only on maintenance of the present level of

performance, but also on ensuring that the rate of improvement achieved
in the past is sustained.2
In following stability strategies, companies pursue certain objectives which
are consistent with overall corporate stability. Companies generally have one or
more of the four objectives in view:
1. Incremental growth: Small incremental growth in sales or market share,
sometimes to offset the effects of inflation, is quite consistent with general
corporate stability. This is different from quantum or discontinuous growth
targeted in expansion strategies.
2. Profitability: The purpose is to sustain profitability if it is tending to drift.
The objective is to achieve stability, if not increase in profit.
3. Sustainability in growth: Past growth in sales or revenue should be
maintained so that the company does not become static.
4. Pause or caution: Stability is a phase of caution or consolidation before
an organization embarks on expansion strategies. This can also be a
period of pause or rest after a blistering pace of expansion.
Organizations follow stability strategies because they neither go for any
major internal changes or restructuring nor embark upon any ambitious
expansion strategies. But, stability or sustenance also is neither simple nor to
be taken for granted. It is often said, and correctly too, that if an organization
aims for growth, it may at least achieve stability, but, if it aims at stability, it is
most likely to slip into deceleration. Companies have, therefore, to regularly
review their competence levels, resource base, product portfolios, cost structure
or cost management and, react or respond timely to market developments.
Many models, techniques or strategies pertaining to these are available which
can be important ingredients of stability strategies. We shall now discuss such
techniques or strategies. At the end, we shall make more observations on stability
strategies with reference to these models or techniques and, also as final remarks
on the use of these (stability strategies).
Self-Assessment Questions
1. The basic approach in _________is to maintain present course; steady
as it goes.
2. In stability strategy, the focus is on _____and _______competitive
advantage consistent with present resources and market requirements.
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3. Organizations that follow stability strategy remain stable or static for a

long period of time. (True/False)
4. Organizations follow stability strategies because they neither go for any
expansion strategies. (True/False)
8.4 BCG Portfolio Model

The Boston Consulting Group (BCG) model is a growth-market share matrix,
depicting a companys competitiveness (cash flow generation or profitability) in
terms of market growth rate, and, its relative market share. The model is also
known as a portfolio matrix because, on the basis of the BCG matrix, a company
can determine its optimal product portfolio on the basis of cash flow or profitability
analysis of each of its products or product groups in terms of two dimensions,
i.e., market growth and market share. The BCG model is based on the
assumption that relative market share is a good indicator of profitability of a
product or product group.
The BCG model was originally conceived and developed in the early 1970s
for analysis of performance or cash flow generation of strategic business unit
(SBU) of a company. A strategic business unit is a division or a product/product
group unit which operates as a separate profit centre that has its own set of
market and competitors and its own business strategies. The company or the
corporate unit consists of related businesses and/or products grouped into SBUs
which are homogenous enough to manage and control most factors which affect
their performance. Resources are allocated to the SBUs in relation to their
contributions to the corporate objectives, growth and profitability.
The original BCG formulation had used cash use for growth rate3 and
cash generation for market share. Four performance situations of product
groups of SBUs were identified as four quadrants in the matrix, namely, stars,
cash cows, question marks (also called wild cats or problem children) and
dogs. The BCG matrix is shown in the Figure 8.2.
Stars are high market share products or SBUs operating in high-growth
markets. The model predicts that stars will have very strong need to support
their growth. But, because they are in a strong competitive positionthey are,
in fact, the highest-share competitorsit is assumed that they will produce high
margin and generate large amounts of cash. Therefore, they will be both users
and generators of large cash flows. On balance, they should generally be selfsupporting with respect to their cash needs.
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Figure 8.2 The BCG Matrix: Stars, Cash Cows, Questions Marks, Dogs
Cash cows are high-share products or SBUs operating in a low-growth

market. Because of their market position, their cash generation should be high,
but, because the market is assumed to be mature, their cash investment needs
to be small. And these products or businesses should be a source of substantial
amounts of cash which can be channelled to other areas or businesses.
Question marks/problem children are low-share businesses in high-growth
markets. They are assumed to have cash needs because they need to finance
growth. But, they generate little cash. If a question marks/problem childs market
share cannot be changed, it will continue to absorb cash. If, however, market
share can be adequately improved, a question mark/problem child can be
converted into a star. Usually, such a strategy will require heavy investment in
the short run. Improved position should enable it to generate cash, become a
star and ultimately a cash cow.
Dogs are low-share businesses in low-growth markets. Because of their
low share, it is assumed that their progress is low and, therefore, their profits
will also be low or non-existent. Since growth is low, expansion of share is
assumed to be very costly. Dogs are cash users and probably even cash traps
products or businesses that perpetually absorb cash.
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Activity 1
Choose a multi-business company and construct a BCG model for this
company.
5. In the BCG model, BCG stands for
(a) Business contact group
(b) Boston Consulting Group
(c) Boston Communication Group
(d) Business Consulting Group
6. The BCG model is also known as _________.
7. The BCG model was originally conceived and developed in the early _____
for analysis of performance or cash flow generation of strategic business
unit.
8. In a BCG model, _______are high-share products or SBUs operating in a
low-growth market, while __________are low-share businesses in lowgrowth markets.
8.5 Four Generic Strategies

Porter (1985) evolved the theory that there are four generic strategic options
available to companies. These are:
Cost leadership
Focused cost leadership
Differentiation
Focused differentiation
Porters theory is based on the concepts of niche marketing and mass
marketing and product proposition to be offered by different companies. Two
dimensions of the strategy analysis are market coverage and basis of product
performance. Porters theory or the strategy option matrix is shown in Figure 8.3.
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Figure 8.3 Porters Four Strategy Options Matrix
Cost leadership strategy is based on exploiting some aspects of the

production process, which can be executed at a cost significantly lower than
that of competitors. There can be various sources of this cost advantage:
i. lower input costs, (e.g., the price paid by New Zealand timber mills for the logs
produced by the countrys highly efficient forestry industry or cheap source of
high quality bauxite for National Aluminium Company (NALCO) in India from its
mines); ii. in-plant production costs, (e.g., lower labour costs enjoyed by Japanese
companies locating their video assembly operations in Thailand); iii. lower delivery
cost because of proximity of key markets, (e.g., the practice of major beer
producers in Europe to locate micro-breweries in or around major metropolitan
cities).
Focused cost leadership exploits the same advantages as in cost
leadership strategy, but the company occupies a specific niche or niches serving
only a part of the total market. For example horticulture enterprise, which operates
an onsite farm shop, offers low-priced fresh vegetables to the inhabitants in the
immediate neighborhood area.
Porter has mentioned that cost leadership and focused cost leadership
represent a low scale advantage because it is quite likely that eventually a
companys capabilities will be eroded by rising costs (labour cost in particular)
or its market position will be challenged by an even lower cost producer of
goods, (e.g., Russias post-Perestroika entry in the world arms market offering
extremely competitive prices).
Differentiation strategy is based on offering superior performance, and
Porter argues that this is a high scale advantage because, first, the producer
can usually command a premium price for its product and, second, competitors
are less of a threat, because to be successful, they must be able to offer an
even higher performance product.
Focused differentiation, which is typically a strategy of smaller and most
specialist companies, is also based on superior performance. The only difference
is that in this strategy, a company specializes in serving the needs of a specific
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market or markets. For, e.g., the Cray Corporation supplies super computers
to the aerospace and defence industries.
8.5.1 Best-cost Strategy

Thompson, Strickland and Gamble (2005) have extended Porters four strategic
options framework to include a fifth generic strategy, i.e., best-cost provider
strategy. Best-cost provider strategy is deemed to be a central strategy striking
a middle course between low-cost advantage and differentiation advantage on
the one hand and broad or mass market and narrow or niche market, on the
other (Figure 8.4). Best-cost provider strategy is designed to provide customers
more value for money by incorporating good-to-excellent product features at
lower cost than competitors; the objective is to offer the lowest (best) costs and
prices with same or comparable product attributes as those offered by rivals.
Figure 8.4 Five Generic Competitive Strategies

Source: A A Thompson Jr, A J Strickland III, and J E Gamble, Executing Strategy: The
Quest for Competitive Advantage (New Delhi: Tata McGraw Hill, 2005), 116.
Box 8.1: Toyotas Best-cost Strategy for Its Lexus Models

Toyota is widely known as a low-cost producer among motor car
manufacturers of the world. Toyota has achieved low-cost leadership,
simultaneously with its product quality, because it has developed
considerable skills in supply chain management and low-cost assembly
capabilities. Its models are also positioned in the low-to-medium end of the
price spectrum where high production volume can lead to low unit cost.
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When Toyota decided to launch its new Lexus models to compete in the
luxury car market, it adopted a best-cost provider strategy and, not a low
cost strategy. Toyota took four significant steps for designing and
implementing its Lexus strategy:
1. Designing and incorporating a series of high performing characteristics
and upscale features into the Lexus models. This made these car
comparable in performance and luxury to other high-end models like
Mercedes, BMW, Jaguar, Cadillac and others in the same category.
2. Transferring the companys capabilities in making high-quality Toyota
models at low cost to making premium quality Lexus models at a cost
lower than those of luxury car manufacturers. Toyotas supply chain
capabilities and low-cost assembly know-how allowed it to incorporate
high-tech performance features and upscale quality into Lexus models
at substantially less cost than Mercedes and BMW.
3. Establishing a new price point for Lexus by using Toyotas relatively
lower manufacturing cost and beating Mercedes and BMW on pricing.
Toyota believed that with its cost advantage, it could price Lexus cars
low enough to attract price-conscious buyers away from Mercedes and
BMW and also induce dissatisfied Lincoln and Cadillac users (or
potential buyers) to move up to Lexus.
4. Establishing a new network of Lexus dealers, separate form Toyota
dealers, dedicated to providing personalized customer service
unmatched in the industry. This was a very innovative differentiation.
Lexus models have consistently been ranked among the top 10 models
in J D Power and Associates quality survey. In terms of cost and price
competitiveness, Lexus models are several thousand dollars cheaper
than those of comparable Mercedes and BMW models. This is a clear
indication that Toyota has succeeded in becoming a best cost producer
with its Lexus cars.
Source: Adapted from A A Thompson Jr, A J Strickland III, and J E Gamble (2005),
131 (Illustration Capsule 5.3).
9. In Porters theory the four generic strategic options available to companies
include cost leadership, focused cost leadership, differentiation and
______.
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10. Porters theory is based on the concepts of ______ and mass marketing
and product proposition to be offered by different companies.
11. Differentiation strategy is based on offering superior performance.
(True/False)
12. Best-cost provider strategy is deemed to be a central strategy striking a
middle course between low-cost advantage and differentiation advantage
on the one hand and broad or mass market and narrow or niche market,
on the other. (True/False)
8.6 Mass Customization

Porters four strategic options matrix provides a good conceptual framework. It
can be the basis or starting point for formulation of competitive strategies by
companies. But, because of its simple form, the usefulness of the model today,
as a practical tool of analysis, may be rather limited. Also, the model may involve
major risks if the users act on the assumption that the four alternative strategic
propositions are mutually exclusive, which has been presumed in the model. It
is true that in the 1980s, many western companies assumed that one should
strive to be either a low-cost leader or the producer or supplier of differentiated
goods. Thus, German companies concentrated on premium price, superior goods
market segments. In Spain, on the other hand, lower labour cost stimulated the
establishment of manufacturing processes for serving downmarket pricesensitive sectors.
But, this is in sharp contrast to the situations in the Pacific Rim countries
like Japan and South Korea. In these countries, introduction of flexible
manufacturing processes enabled companies to develop products which offer
both high standards of performance and a low price. Through appropriate cost
performance (technology) mix, these companies succeeded in gaining major
market share in product areas such as cars, televisions, VCRs, video cameras
and watches and, thus gave rise to strategic options not postulated in the
Porterian model. One such option is mass customization. More and more
companies are now adopting flexible manufacturing processes and mass
customization as strategy. Motorola offers more than 29 million different
combinations of pager features to suit specific customer needs. L&T is one of
the engineering companies to adopt flexible manufacturing technologies. Even
McGraw Hill, the book publishing company, customizes specialized textbooks
in quantities or numbers of 100 or more.
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On the basis of such developments, it is logical to argue that companies

can increase the nature and number of strategic options available to them by
adding the choices of multi-performance and mass customization to traditional
Porterian strategic options matrix. Such modified matrix may increase the number
of options from four to nine. Chaston (2000) has suggested one such expanded
matrix. This is shown in Figure 8.5.
Figure 8.5 An Expanded Strategic Options Matrix

Source: I Chaston, New Marketing Strategies (New Delhi: Response Books, 2000), 55.
13. Development of products which offer both high standards of performance
and a low price has been made possible through
(a) appropriate technology mix
(b) mass customization
(c) flexible manufacturing processes
(d) All the above
14. The usefulness of Porters model today, as a practical tool of analysis,
may be rather limited because of its
(a) simple form
(b) complex form
(c) flexibility
(d) None of the above
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8.7 Strategies for Industry Leaders

Industry or market leaders typically employ proven strategies linked either to
low cost or differentiation or best cost or mass customization; these strategies
are, in turn, based on their core competence or distinctive competence or
capabilities. We have many examples of companies which have demonstrated
this: Walmart, Microsoft, McDonalds, Gillette, Nokia, AT&T, Intel, Dell Computer,
Kodak, Levi Strauss, Sony, Maruti, Hindustan Unilever, Titan and others.
Stability strategies are very relevant for industry leaders. Having attained
leadership position, a leaders most strategic concern is to maintain stability or
defend its market position for continuing dominance in the industry. Leaders
generally employ one of the four defensive strategies (Figure 8.6).
Position defence
Counter offensive
Retreat
Pre-emptive defence
Figure 8.6 Four Defensive Strategies

Source: I Chaston, New Marketing Strategies (Response Books, 2000), 80.
We shall discuss each of these strategies below with particular focus on

pre-emptive strategies.
8.7.1 Defensive Strategies

The classic form of retaining existing (civil) territory is to mount a position defence
by constructing strong ramparts to keep out the enemy. In business, position
defence is typically built by developing high levels of customer loyalty. But, the
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problem with many organizations is that the defender often becomes complacent
and, does not realize that the enemy is making slow, but steady, inroads into
the customer base. One of the unfortunate examples of this situation is IBM.
The company built a big global business in the computer industry based on
unmatched customer loyalty. But, IBM ignored the threats, may be unknowingly,
posed by the advent of the networked PC and more powerful operating systems.
The company realized, rather late in the 1990s, that customer loyalty had been
completely eroded by competitors who were more strongly committed to fulfilling
the changing needs of customers.
Counter-offensive strategy has a different advantage. It has the advantage
of not having to respond before one measures up the real nature of the
competitive threat. Nevertheless, it is a belated response, and there is always
the risk that by waiting until you see the whites of the enemys eyes, a company
may be forced to spend massive resources to recover lost grounds. Xerox
Corporation is an example. Xerox had been forced to make large investments
in R&D, technology, manufacturing process and organizational structure during
the last few years to regain some of the lost ground in the photocopier market
to competitors such as Canon.
Retreat is sometimes a good defence. After a careful review of
circumstances, if it is evident that the competitor has the potential to overwhelm
the company, then there may be very little logic in defending a position which
will be eventually lost to the enemy. Under these conditions, the defender may
well withdraw to a more protected segment of the market; and in the meantime,
try to determine how the development of new superior product/service packages
might make a recovery of the lost market position possible at a later stage.
Lotus is a good example of this. During the 1980s, Lotus lost its dominant position
in the computer-based spreadsheet market to new software products such as
Microsofts excel package. After being acquired by IBM, Lotus is now using its
world beating Lotus Notes as a platform from where it can reposition itself as
the leading provider of Internet-based group ware communication systems.
8.7.2 Pre-emptive Strategies

Attack is the best form of defence is the basis of pre-emptive defence strategies.
As the name indicates, in pre-emptive defence strategies, companies, after
having identified a possible threat, take action ahead of competitors. An excellent
example of this strategy is Microsoft. Microsoft watches advances made by
competitors in the software industry and quickly moves to introduce another
upgrade to sustain its market leadership position.
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Pre-emption is considered by many as one of the smartest strategies.

Pre-emption, as a strategy, requires a close understanding of the planned and
potential moves of competitors for slowing down or blocking those moves. To
develop pre-emptive strategies, companies need to consider five steps.
1. Ascertain where the market or competitors are moving or might move;
2. Identify potential strategies for getting there first or for blocking the
competitors moves;
3. Ascertain whether these strategies are consistent with the companys
current strategic goals;
4. Determine whether these strategies are feasible in terms of resources
and competences;
5. Determine whether and how far they are likely to affect the competitors
objectives, actions and reactions.
The ability to pre-empt requires companies to be creative or innovative.
In fact, creativity or innovation is often a key resource in pre-emption. It allows
companies to see the unexpected opportunity, threat or competition and design
the strategy in advance.
15. In business, _______is typically built by developing high levels of customer
loyalty.
16. When companies, after having identified a possible threat, take action
ahead of competitors, it is called________.
17. Brainstorming sessions, analogies and war games and simulations are
aids or approaches for generating _____strategies (through creativity).
18. _______involve analysis of analogous situations in other markets,
products, industries and countries.
8.8 Concentration Strategy

We have enumerated above a number of models, techniques and strategies,
which can be used by companies to remain in business or sustain stability, and,
also to secure growth (incremental). Different companies may adopt different
strategies or some combinations of these strategies depending on the particular
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product, market and environmental situations. The use of these strategies should
help companies to concentrate better in their present markets.
One of the commonest stability strategies is concentration on the current
business. An organization directs its resources to the profitable growth of a
single product, in a single market and with a single technology4 or a narrowly
defined product and market focusing on a dominant technology.5
The concentration strategy works under certain specific environmental
conditions. First is a market condition in which the demand for the product is
stable and the industry is resistant to major technological change. Paper
manufacturing, for which the basic technology has not changed for almost a
century, is a good example. A second favourable situation for concentration
strategy is when a companys product markets are sufficiently distinctive, and,
the company is strong enough to retaliate if a potential competitor plans to
invade its territory. John Deere abandoned its plans for entering into the
construction machinery business when mighty Caterpillar threatened to enter
farm machinery business, Deeres mainstay, in retaliation. A third favourable
condition for concentration growth exists when a company has stable sourcing
of inputs in terms of price, quantity and timely availability. Maryland-based Giant
Foods is able to concentrate on the grocery business largely because of its
stable long-term arrangements with suppliers of private label goods.
A fourth situation for favourable concentrated growth prevails if market
generalists are effective operators and thrive on general market segments leaving
particular pockets or segments for the specialists. For example, hardware store
chains like, Home Depot, concentrate mostly on routine household repairs and
leave special solutions to the specialists. This also gives the generalists a big
customer base. Finally, concentrated growth becomes successful if the market
is stable and, not subject to seasonal or cyclical fluctuations. Many products
like seeds, pesticides, fertilizers and agricultural equipment have a seasonal
demand and manufacturers of these products may need to diversify into other
products and markets.6
Many companies have been successful by following a concentration strategy.
We have given some examples above. Some other examples are McDonalds,
Dominos Pizza, Good year and Apple Computers. Small and medium enterprises
(SMEs ) are generally more successful with concentration strategy because they
have a clearly defined market and are mostly content with it.
Under stable conditions, concentrated growth poses lower risk than any
other strategy, but, in a changing market environment, this may not produce
desired results. Concentrating in a single-product market segment makes a
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company vulnerable to changes in that segment. In the fast changing computer

software market, manufacturers of IBM clones faced such a problem when IBM
adopted OS/2 operating system for its PC line. The change made existing clones
out of date. If the strategic management team feels that the combination of
their current product(s) and market(s) will no longer provide the basis for
achieving organizational objectives or goals, they have two options which involve
both cost and risk: market development and product development. These are
discussed later in Unit 10.
19. The _______strategy works under market condition in which the demand
for the product is stable and the industry is resistant to major technological
change.
20. _______enterprises are generally more successful with concentration
strategy.
8.9 Corporate Parenting

In multi-business or multi-SBU organizations, corporate parenting becomes an
important subject for analysis because of its bearing on stability strategies (and
also strategies for change and expansion strategies). Corporate parenting relates
to the manner in which the corporate headquarters or centre manages and
nurtures individual businesses or SBUs. Corporate parent can also be described
as the level(s) of management above business units, and, without direct
interaction with customers and competitors. In corporate parenting, the total
organization is viewed in terms of resources and capabilities which can be
used to develop individual business, and, also create synergies among
businesses. The objective of corporate parenting is to focus on value creation
from the relationship between the parent and the SBUs.
For strategic corporate parenting, Campbell and others have suggested
that multi-SBU corporations should address three issues:
(a) Which businesses should the corporation own and why?
(b) What organizational structure, management systems and strategies would
ensure superior performance of the SBUs?
(c) What should be the proper relationship or fit between the parent
corporation and the business units?
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On the basis of the answers to these questions, a parenting fit matrix may
be constructed to depict the positive contributions and negative effects of
parenting characteristics and SBU success factors. Such a matrix is shown in
Figure 8.7. SBU performance is presented through critical success factors
(CSFs). Critical success factors, also called key success factors, are those
which are vital for organizational success. Strategists consciously look for or
identify such factors to become successful. For example, one of the CSFs for
Tata Motors for Indica is to capture the tourist vehicle segment.
As can be seen in Figure 8.7, there are five types of business possibilities
or fit (or misfit) situations: Heartland businesses, edge-of-heartland businesses,
ballast businesses, value-trap businesses and alien territory businesses.
Figure 8.7 A Parenting Fit Matrix

Source: Adapted from M Alexander, A Campbell, and M Goold, A New Model for
Reforming the Planning Review, Planning Review (JanFeb 1995), 17.
Heartland businesses are ideal businesses in terms of parenting fit

businesses where the fit between parenting opportunities and parenting
characteristics is high and the fit between critical success factors and parenting
characteristics is also high. Such businesses should have strong influence on
formulation of corporate strategy because the parent understands their CSFs
well and good opportunities exist for the parent to make improvements.
Expansion strategies are recommended for heartland businesses. Stability
strategies can be used only as a pause.
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Edge-of-heartland businesses show some parenting characteristics which

fit the business well but others do not. The parent has to understand and analyse
these businesses further. With additional investment in terms of resources and
capabilities, such businesses may elevate to heartland category . In the case
of such businesses, the parent has a special responsibility for value addition.
Ballast businesses fit well with parenting characteristics but, do not provide
enough opportunities to the parent for improvement. These are somewhat like
cash cows. Ballast businesses are those which have been established for long
and contribute well to corporate revenue. Such businesses should generally
adopt stability strategies, but, care should be taken to ensure that these do not
slip to alien territory.
Value trap businesses fit reasonably well with parenting opportunities,
but fit poorly with parents understanding of business units CSFs. This may
mean two things; either these businesses do not match the core competences
of the corporation or organizational capabilities or the CSFs need re-examination.
If the CSFs cannot be redefined or reworked, these businesses should be milked,
and, eventually divested. Such businesses can adopt stability strategies for
prolonging the period of milking.
Alien territory businesses show very little promise or opportunity because
there is a misfit between parenting characteristics and business units and also,
poor fit between parenting opportunities and characteristics. Such businesses
can often be the results of misguided diversifications in the past and, are best
candidates for withdrawal or divestment.
As shown in Figure 8.7 and explained above, if there is lack of fit between
parenting opportunities and characteristics and, also between business units
CSFs and parenting characteristics, corporate parenting may not add value to
businesses. In fact, a story is told in a major multinational corporation that,
historically, there had never been a business within their portfolio which, having
been divested, had not done better on its own or with someone else.7
This implies that activities of corporate parents may not always be moving
in the right directions. If parenting does not add enough value to businesses,
the parent may become a cost to those businesses, and may reduce or destroy
value created by them instead of adding to it. There is a clear difference of
opinion among strategic management analysts on whether parenting adds value
or destroys it.
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21. The manner in which the corporate headquarters or centre manages and
nurtures individual businesses or SBUs is called________.
22. Ideal businesses in terms of parenting fit are_________.
23. _______businesses fit well with parenting characteristics but, do not
provide enough opportunities to the parent for improvement.
24. _________businesses show very little promise or opportunity because
there is a misfit between parenting characteristics and business units.
8.10 When Best to Pursue Stability Strategy

Good parenting can help SBUs to follow any strategy effectively including stability
strategies. In large multi-business organizations, some SBUs may follow stability
strategy; some other SBUs may have to adopt strategy for internal change and
restructuring; other SBUs may pursue expansion strategy. Stability strategies
are followed by organizations as corporate-level strategy also. In fact, most
organizations (single business or multi-business) follow stability strategies for a
period of time; some organizations follow this for a longer period than others. It
has been generally observed that as companies/corporations grow older, they
get more rooted in structures and systems and, are more likely to follow a
stability strategy. L&T is an example. We can also identity some specific situations
when it is best to pursue stability strategy:
(a) Perception of management about performance: If the management is
satisfied with present performance and, is not willing to take market risks,
they may like to adopt stability strategy and continue with it. The
management may consider change of strategy only if results are not
forthcoming.
(b) Slowness to change: Some organizations are slow to change or resistant
to change. This is particularly true of public sector companies. Many such
companies are not organizationally equipped for fast or sudden change
and lack the ability to cope with risk and uncertainty inherent in such
change.
(c) Frequent past changes: If a company had made frequent strategic changes
in the past, it should follow stability strategy for some period for more
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efficient management. In fact, it is always recommended that, after a

period of internal change and restructuring or expansions, stability strategy
should be pursued as a pause or rehabilitation. Otherwise, the organization
may show signs of destabilization.
(d) Strategic advantage: If an organizations strategic advantage lies in the
present business and market, it should pursue stability strategy. If, for
example, an organization has high market share, it can continue in the
same business and defend its position through incremental strategic
changes.
(e) Profit objective/maximization: Every company has some profit objective
which is commensurate with the level of investment, output level, market
structure, willingness to take risk, etc. If the stability strategy helps the
company achieve its profit objective, the company should stick to this.
Sometimes, stability strategy may even help in profit maximization.
(f) Stable environment: Given the organizational resources and capabilities,
the nature of environment determines, to a large extent, the kind of strategy
to be followed by a company.
If the environment is generally stable in terms of macroeconomic situation,
government policy regulations and competition, stability strategy may be the
best. The particular strategy to be followed depends on the precise nature of
the environmental impact. If the environment is hostile or volatile, stability strategy
is not recommended.
25. Sometimes, stability strategy may even help in profit_________.
26. Stability strategy is not recommended if the environment is
_______or_______.
8.11 Stability Strategies in Practice

In practice, many companies in India and various other countries follow stability
strategies. The reasons or situations can be those mentioned above. Such factors
and circumstances relate to conditions in a particular country. In India, in addition
to the situations mentioned above, reasons for pursuit of stability strategy by
companies are of three types:
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1. Overcapacity or underutilization of capacity;

2. Regulatory restrictions or controls;
3. Lack or withdrawal of budgetary support for expansion.
The steel industry, cement industry and coal industry in India have
overcapacity. This is one of the most important reasons why companies like
SAIL, Coal India and ACC are adopting the stability strategy. Such companies
cannot go for expansion strategies. Instead, they are concentrating on improving
their operational efficiency. Cigarette and alcoholic beverages industries are
subject to regulatory restrictions and there is strict control over expansion of
these industries. Companies in the cigarette industry, like ITC, are going for
growth and diversification in agri business, hospitality business and export.
Many companies in the public sector are forced to adopt stability strategy
because of governments policy of privatization or divestment and curtailing or
stopping budgetary support for any expansion programme. Many public sector
companies in India also adopt stability strategies because of their size, slowness
to change, unwillingness to take risk and the accountability system. Examples
are many: BHEL, BPCL, HPCL, IOC, HCL, RCF, STC, MMTC, etc., in addition
to SAIL and Coal India.
Activity 2
Many examples of stability strategies have been given in the unit. Choose
any two companies and compare the nature of their stability strategies.
27. The steel industry, cement industry and coal industry in India pursue
stability strategy because they have _______.
28. Many companies in the public sector are forced to adopt stability strategy
because of governments policy of __________.
8.12 Case Study

Larsen and Toubro: Growth with Stability
Larsen & Toubro (L&T), founded in 1938, is one of the largest engineering
companies and one of the top five private sector companies in India. Over
the years, L&T has acquired a very high reputation for its capabilities in
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executing engineering projects. In 1994, Kulkarni took over as the CEO of

L&T and announced that the company would fulfil its mission of being a
`10,000 crore entity by the end of the century. An independent survey named
L&T to be one of the best managed companies in Asia and another by
Business India mentioned L&T as one of the most transparent companies
and a leader in corporate governance. The company adopts a combination
business strategycombination of growth strategy and stability strategy
or growth with stability.
L&T has been setting new challenges in defining core capabilities and core
competence. Generally speaking, core competence of the company lies in
its ability to synthesize, integrate and harmonize its diverse world-class
engineering, manufacturing, procurement, construction and fabrication skills
around turnkey projects mostly in core sectors. This is backed by a world
class vendor base, high quality technological alliances, excellent IT
infrastructure, sophisticated fabrication facilities and its people. People
L&Ts dedicated team of managers/employeesstand for one of the
companys key capabilities.
L&T implements its vision and business philosophy through effective
management approaches. In terms of structure, the company adopts
decentralized decision making and a less hierarchical system. The concept
of SBUs is actively encouraged and implemented. Budget allocations are
made in the beginning of a financial year and SBUs are assigned
responsibilities, along with necessary delegation of powers to achieve the
targets. The CEO directly gets involved only in matters like diversification,
restructuring, business divestment, etc.
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The company strongly believes in empowerment, teamwork and continuous

training of employees. According to Kulkarni: Only through empowerment
and decentralized decision making can a highly diversified company like
L&T be managed.
The TQM movement, initiated in 1993, has taken firm roots in L&T. Training
of a large number of employees has facilitated the launch of many quality
improvement programmes. A large number of managers and staff have
participated in continuous improvement (Kaizen) and small group activities.
Several cross-functional teams regularly operate in the area of design,
manufacturing, marketing and services. The principles of TQM are applied
to customer service also. The TQM Awareness Programmes have also
been extended to the stockists and vendors to bring improvement in
operations and customer service.
L&T is consolidating its business in four major areasengineering,
construction, cement and equipment manufacture. The company has
identified Engineering Project Construction (EPC) as a thrust business for
the future. In the EPC business, major domestic competitors are BHEL,
Punj & Lloyd and RITES. The core infrastructure sectors such as power,
telecom, and roads are the key focus areas for the country. Most players in
project/construction business have specific competences which cater to
specialized areas. L&T is perhaps the only company which competes in
almost every sector by virtue of its diversified technical competence and
expertise.
L&Ts achievement so far has been highly impressive. It has set a good
example of growth with stability. Its growth has hardly been unbalanced.
However, there are some points of caution or concern. First is global
competition. In international EPC business, the company faces tough
competition from global majors, like Hyundai, Kematsu and Caterpillar. L&T
has partially overcome this through strategic and technological alliances
with major international players. Some of its alliances in certain countries
are even with companies like Caterpillar and Marubeni, which are
competitors in other countries. Another area of concern for L&T is its low
productivity in certain businesses compared to international benchmarks.
Lack of strong/ enough cost competitiveness or cost efficiency is another
relatively weak area. The company needs to take necessary corrective
measures to remain strong in its growth trajectory.
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Unit 8
8.13 Summary
Let us recapitulate the important concepts discussed in this unit:
Organizations follow stability strategies because they neither go for any
expansion strategies. In following stability strategies, companies pursue
certain objectives which are consistent with overall corporate
The BCG model is a growthmarket share matrix, a matrix depicting a
companys competitiveness (cash flow generation or profitability) in terms
of market growth rate and, its relative market share. The model is also
known as a portfolio matrix, a company can determine its optimal product
portfolio in terms of stars, cash cows, question marks and dogs.
Porter (1985) evolved the theory that there are four generic strategic
options available to companies cost leadership (mass market), focused
cost leadership (niche market), differentiation (mass market) and focused
differentiation (niche market).
Thompson, Strickland and Gamble have extended Porters framework to
include a fifth generic strategy, i.e., best-cost provider strategy. Best-cost
strategy strikes a middle course between the mass market and niche
market on the one hand and, low-cost advantage and differentiation
advantage, on the other.
Stability strategies are very relevant for industry leaders. Having attained
leadership position, a leaders strategic concern is to maintain stability or
defend its market position for continuing dominance in the industry.
Leaders generally employ one of the four defensive strategies: position
defence, counter-offensive, retreat and pre-emptive defence.
Concentration strategy is one of the commonest stability strategies. In
concentration strategy, an organization directs its resources to the
profitable growth of a single product in a single market and with a single
technology or, a narrowly defined product and market focusing on a
dominant technology.
Corporate parenting relates to the manner in which the corporate
headquarters or centre in amulti-business organization manages and
nurtures individual businesses or SBUs. A corporate parent may be value
adding or value destroying.
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8.14 Glossary
BCG matrix (Boston Consulting Group model): A growth-market share
matrix, depicting a companys competitiveness (cash flow generation or
profitability) in terms of market growth rate, and, its relative market share.
Cash cows: High-share products or SBUs operating in a low-growth
market.
Dogs: Low-share businesses in low-growth markets.
Pre-emptive defence strategy: A strategy under which a company, after
having identified a possible threat, takes action ahead of competitors.
Question marks/problem children: Low-share businesses in highgrowth markets.
Stability strategy: A strategy in which companies will concentrate their
resources where the company presently has or can rapidly develop a
meaningful competitive advantage in the narrowest possible product
market scope consistent with the firms resources and market
requirements.
Strategic business unit: A product/product group unit which operates
as a separate profit centre that has its own set of market and competitors
and its own business strategies.
8.15 Terminal Questions

1. Define stability strategy. Does stability mean being static? Explain with
reference to the objectives of stability strategy.
2. What is the BCG model? Explain stars, cash cows, question marks,
and dogs in the context of this model.
3. What are the four generic strategies? What is the best-cost provider
strategy? Explain.
4. What is the general strategy for the industry leader? Explain, with
examples, the four defensive strategies.
5. What is concentration strategy? Is concentration strategy a stability
strategy? Explain with details.
6. Define corporate parenting. Illustrate both the value-adding role and the
value-destroying role of corporate parent.
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Unit 8
7. Discuss six situations when it is good/best to pursue stability strategy.

Give some Indian examples.
8.16 Answers
Answers to Self-Assessment Questions
1. Stability
2. Developing, maintaining
3. False
4. True
5. Boston Consulting Group
6. portfolio matrix
7. 1970s
8. Cash cows, dogs
9. Focused differentiation
10. niche marketing
11. True
12. True
13. (d)
14. (a)
15. position defence
16. pre-emptive defence strategies
17. pre-emptive
18. Analogies
19. Concentration
20. Small and medium
21. Corporate parenting
22. Heartland businesses
23. Ballast
24. Alien territory
25. maximization
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Unit 8
26. Hostile, volatile

27. Overcapacity
28. privatization or divestment
Answers to Terminal Questions

1. Stability strategy implies that an organization will continue in the same or
similar business as it currently pursues with the same or similar objectives
and resource base. Refer to Section 8.3 for further details.
2. The Boston Consulting Group (BCG) model is a growth-market share
matrix, depicting a companys competitiveness in terms of market growth
rate, and, its relative market share. Refer to Section 8.4 for further details.
3. Porter (1985) evolved the theory that there are four generic strategic
options available to companies. Refer to Section 8.5 for further details.
4. Industry or market leaders typically employ proven strategies linked either
to low cost or differentiation or best cost or mass customization. Refer to
Section 8.7 for further details.
5. One of the commonest stability strategies is concentration on the current
business. Refer to Section 8.8 for further details.
6. Corporate parenting relates to the manner in which the corporate
headquarters or centre manages and nurtures individual businesses or
SBUs. Refer to Section 8.9 for further details.
7. There are some specific situations when it is best to pursue stability
strategy. Refer to Section 8.10 for further details.
8.17 References
1. Campbell, A, M Goold, and M Alexander. 1994. Corporate Level Strategy:
Creating Value in the Multibusiness Company. New York: John Wiley &
Sons.
2. Hasperlag, P. Portfolio PricingUses and Limits. Harvard Business
Review, JanFeb, 1982.
3. Nag, A. 2008. Strategic Marketing. New Delhi: Macmillan India.
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Unit 8
4. Pearce II, J A, and R B Robinson Jr. 2005. Strategic Management:

Formulation, Implementation and Control. 9th edn, New Delhi: Tata
McGraw Hill.
5. Porter, M. 1980. Competitive Strategy: Techniques for Analysing Industries
and Competitors. New York: The Free Press.
6. Thompson, Jr, A A, A J Strickland III, and J E Gamble. 2005. Crafting and
Executing Strategy: The Quest for Competitive Advantage. New Delhi:
Tata McGraw Hill.
Endnotes
1
R L Katz, Management of Total Enterprise (New Jersey: Prentice Hall, 1970).
P K Ghosh, Strategic Planning and Management (New Delhi: Sultan Chand & Sons,
2003), 204 5.
More cash would be required to support high growth and less cash would be used to
finance low growth
J A Pearce II, and R B Robinson Jr, Strategic Management: Strategy Formulation and
Implementation (New Delhi: AITBS Publishers and Distributors, 2002), 251.
J A Pearce II, R B Robinson Jr, Strategic Management: Strategy Formulation and

Implementation and Control , 9 th ed. (New Delhi: Tata McGraw Hill, 2005), 203.
J A Pearce, and R B Robinson Jr (2005), 201 02.
G Johnson and K Scholes, Exploring Corporate Strategy (2005), 270.
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Strategic Management and Business Policy

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strategies for challengers or runner-up companies, strategies for followers,

Figure 8.1 Corporate Strategies: Stability Strategy, Strategy for

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8.3 What is Stability Strategy?

As the definition indicates, stability strategy implies that an organization

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3. The strategy thrust is not only on maintenance of the present level of

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3. Organizations that follow stability strategy remain stable or static for a

8.4 BCG Portfolio Model

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Cash cows are high-share products or SBUs operating in a low-growth

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8.5 Four Generic Strategies

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Figure 8.3 Porters Four Strategy Options Matrix

Cost leadership strategy is based on exploiting some aspects of the

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8.5.1 Best-cost Strategy

Figure 8.4 Five Generic Competitive Strategies

Box 8.1: Toyotas Best-cost Strategy for Its Lexus Models

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8.6 Mass Customization

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On the basis of such developments, it is logical to argue that companies

Figure 8.5 An Expanded Strategic Options Matrix

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8.7 Strategies for Industry Leaders

Figure 8.6 Four Defensive Strategies

We shall discuss each of these strategies below with particular focus on

8.7.1 Defensive Strategies

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8.7.2 Pre-emptive Strategies

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Pre-emption is considered by many as one of the smartest strategies.

8.8 Concentration Strategy

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