INTRODUCCTION:

Strategic alternatives refer to different courses of action which an organization

may pursue at a point in time. These alternatives are crucial to the success of the
organization. More often than not, these are influenced by factors external to the
organization and over which -the organization has limited control. For example
consider a situation where a firm is experiencing increased competition of its
products.

How should the organization respond?

Should it reduce price?
Should it improve the quality of the product?
Should it use a mix of' the two?
Should it improve the distribution network?
Should it improve promotional effort?
Is there a set of guidelines which could be followed by the organization?

Alternatives external to the organization such as mergers, acquisitions and joint

ventures may also be considered. The list of alternatives will be incomplete
without the alternative of disinvestment. There are situations when withdrawal
from an existing business is the most suitable course of action. In fact, it may be
wrong to consider that continuing to produce a particular product or service is a
must. A firm may consider withdrawal from a business if the present value of
the anticipated stream of earnings from that business is less than its present
worth. Thus, if the present value of the stream is of earnings from the textile

unit of a corporate group is less than the net worth of the textile business, the 43
organization should withdraw from the textile business.
Sometimes there may be obstacles if the organization wishes to withdraw. The
most serious opposition may come from the Government in its anxiety to
protect workers likely to be rendered unemployed. This kind of a situation is
being faced by the DCM Limited, a highly diversified group. Any organization
contemplating to withdraw from a particular business should attempt to foresee
the constraints and evolve ways to overcome them. Some obvious alternatives
include:
i)
ii)

Offering alternative jobs to workers in other units;

Providing attractive retrenchment terms to workers so that they would
not easily turn down the offer (the golden handshake).

GENERATING STRATEGIC ALTERNATIVES:

How does an organization identify alternative courses of action for its survival
and growth? The procedure may differ from organization to organization
depending upon its size, style of management, work ethos and industry
characteristics.
Small Organizations:
In a small organization all decisions
are made by the owner himself or by
the chief executive. These decisions
deal with what an organization
should
do
under
alternative
situations. What new businesses
should be added or what existing
businesses should be done away with
the success or failure of the
organization depends upon the
experience and technical competence of the chief executive. Thus, in small
organizations strategic alternatives are identified by the owner-manager. Of
course his decision may be influenced by some bureaucrats, industrialists, etc.
with whom he interacts. The procedure used for identifying alternatives may be
intuitive rather than based on a well-defined procedure. The process of
implementing alternatives in small business is however reasonably fast.
Small businesses are normally privately owned corporations, partnerships,
or sole proprietorships. What businesses are defined as "small" in terms of
government support and tax policy varies depending on the country and
industry. Small businesses range from 15 employees under the Australian Fair
Work Act 2009, 50 employees according to the definition used by the European
Union, and fewer than 500 em ployees to qualify for many U.S. Small
Business Administration programs. Small businesses can also be classified
according to other methods such as sales, assets, or net profits.
Small businesses are common in many countries, depending on the economic
system in operation.

Advantages of small business:

Flexibility:
Small businesses experience less
bureaucratic inertia. This enables
them to respond to changes in the
market more quickly than big
companies that have to jump through
their own hoops. Small businesses
can maneuver where big businesses
lack the speed. In a world that is
continually speeding up, businesses
are facing the challenge of adapting
quickly.
Personal:
Small businesses can be personal in ways that big ones cannot. This allows for
more meaningful interactions between businesses and customers. Big
companies spend massive amounts of money trying to create this same level of
personal engagement.
Passion:
When a business is a run by a smaller number of people or just one selfemployed individual you often see more pure passion. That passion hasnt been
diluted by large staff and or altered by a compromised vision.
Independence:
With less bureaucracy comes more independence. Small business entrepreneurs
are able to exercise with much more independence, which is often part of what
got them into running a small business in the first place.
Best in their niche:
Its hard to please everyone, and where super companies are trying to please the
majority a small business can zoom in on a niche and provide them with exactly
what they need.
Local Contributions:

Small businesses typically circulate more of their revenue back into their local
community. This makes the local economy more resilient, which in turn makes
the global economy more resilient.
Diversity:
There are more small businesses than big ones. This means more competition
and more innovation.
Easier Start Up:
It is much lower in cost to start a small business and can be done working parttime hours.
Straight Forward:
Small business owners are far more likely to be directly involved with their
consumers. This enables them to be more in tune with their customers
satisfaction and concerns.
Sustainability:
Small businesses are less likely to harm the environment. They are more likely
to be catering to their locale, which means less driving and more walking. They
are more aware and in control of their energy costs and less likely to engage in
wasteful practices like leaving lights on. They often operate from home and

therefore dont use store or office space.

As a small business owner or self-employed individual it is wise to
use these advantages to the fullest. As a small business transitioning
into a mid to large-sized business it is important to try to maintain the
intimacy and advantages of being smaller.

Disadvantage of small businesses:

Small businesses often face a variety of problems related to their size. A

frequent cause of bankruptcy is undercapitalization. This is often a result of
poor planning rather than economic conditions - it is common rule of thumb that
the entrepreneur should have access to a sum of money at least equal to the
projected revenue for the first year of business in addition to his anticipated
expenses. For example, if the prospective owner thinks that he will generate
$100,000 in revenues in the first year with $150,000 in start-up expenses, then
he should have not less than $250,000 available. Failure to provide this level of
funding for the company could leave the owner liable for all of the company's
debt should he end up in bankruptcy court, under the theory
of undercapitalization.
In addition to ensuring that the business has enough capital, the small business
owner must also be mindful of contribution margin (sales minus variable costs).
To break even, the business must be able to reach a level of sales where the
contribution margin equals fixed costs. When they first start out, many small
business owners underprice their products to a point where even at their

maximum capacity, it would be impossible to break even. Cost controls or price

increases often resolve this problem.
In the United States, some of the largest concerns of small business owners
are insurance costs (such as liability and health), rising energy costs,
taxes and tax compliance. In the United Kingdom and Australia, small business
owners tend to be more concerned with excessive governmental red tape.[11]
Contracting fraud has been an ongoing problem for small businesses in
the United States. Small businesses are legally obligated to receive a fair portion
(23 percent) of the total value of all the government's prime contracts as
mandated by the Small Business Act of 1953. Since 2002, a series of federal
investigations have found fraud, abuse, loopholes and a lack of oversight in
federal small business contracting, which has led to the diversion of billions of
dollars in small business contracts to large corporations.
Another problem for many small businesses is termed the 'Entrepreneurial
Myth' or E-Myth. The mythic assumption is that an expert in a given technical
field will also be expert at running that kind of business. Additional business
management skills are needed to keep a business running smoothly. Some of
this misunderstanding arises from the failure to distinguish between small
business managers as entrepreneurs or capitalists. While nearly all ownermanagers of small firms are obliged to assume the role of capitalist, only a
minority will act as entrepreneur.[12] The line between an owner-manager and an
entrepreneur can be defined by whether or not their business is growth oriented.
In general, small business owners are primarily focused on surviving rather than
growing, therefore not experiencing the five stages of the corporate life cycle
(birth, growth, maturity, revival, and decline) like an entrepreneur would.[13]

Bankruptcy:
When small business fails, the owner may file bankruptcy. In most cases this
can be handled through a personal bankruptcy filing. Corporations can file
bankruptcy, but if it is out of business and valuable corporate assets are likely to
be repossessed by secured creditors there is little advantage to going to the
expense of a corporate bankruptcy. Many states offer exemptions for small
business assets so they can continue to operate during and after personal
bankruptcy. However, corporate assets are normally not exempt, hence it may

be more difficult to continue

operating an incorporated business if
the
owner
files
bankruptcy. Researchers
have
examined small business failures in
some depth, with attempts to model
the predictability of failure.
Social responsibility:
Small businesses can encounter several
problems
related
to corporate
social
responsibility, due to characteristics inherent in
their construction. Owners of small businesses
often participate heavily in the day-to-day
operations of their companies. This results in a
lack of time for the owner to coordinate
socially responsible efforts. Additionally, a
small business owner's expertise often falls outside the realm of socially
responsible practices contributing to a lack of participation. Small businesses
also face a form of peer pressure from larger forces in their respective industries
making
it
difficult
to
oppose
and
work
against
industry
expectations. Furthermore, small businesses undergo stress from shareholder
expectations. Because small businesses have more personal relationships with
their patrons and local shareholders they must also be prepared to withstand
closer scrutiny if they want to share in the benefits of committing to socially
responsible practices or not.
Job quality:
While small businesses employ over half the
workforce and have been established as a main
driving force behind job creation the quality of the
jobs these businesses create has been called into
question. Small businesses generally employ
individuals from the Secondary labour market. As a
result, in the U.S. wages are 49% higher for
employees of large firms. Additionally, many small
businesses struggle or are unable to provide
employees with benefits they would be given at larger firms. Research from the
U.S. Small Business Administration indicates that employees of large firms are
17% more likely to receive benefits including salary, paid leave, paid holidays,

bonuses, insurance, and retirement plans. Both lower wages and fewer benefits
combine to create a job turnover rate among U.S. small businesses that is 3
times higher than large firms. Employees of small businesses also must adapt to
the higher failure rate of small firms. In the U.S. 69% last at least 2 years, but
this percentage drops to 51% for firms reaching 5 years in operation.

Problems face by Small industries in India:

Small scale industries play a vital role in the economic development of our
country.
This sector can stimulate economic activity and is entrusted with the
responsibility of realising various objectives generation of more employment
opportunities with less investment, reducing regional imbalances etc. Small
scale industries are not in a position to play their role effectively due to various
constraints. The various constraints, the various problems faced by small scale
industries are as under:

Finance:
Finance is one of the most important
problem confronting small scale industries
Finance is the life blood of an organisation
and no organisation can function proper in
the absence of adequate funds. The scarcity
of capital and inadequate availability of
credit facilities are the major causes of this
problem.
Firstly, adequate funds are not available and secondly, entrepreneurs due to
weak economic base, have lower credit worthiness. Neither they are having
their own resources nov are others prepared to lend them. Entrepreneurs are
forced to borrow money from money lenders at exorbitant rate of interest and
this upsets all their calculations.

After nationalisation, banks have started financing this sector. These enterprises
are still struggling with the problem of inadequate availability of high cost
funds. These enterprises are promoting various social objectives and in order to
facilitate then working adequate credit on easier terms and conditions must be
provided to them.

Raw Material:
Small scale industries normally tap local
sources
for
meeting
raw
material
requirements. These units have to face
numerous problems like availability of
inadequate quantity, poor quality and even
supply of raw material is not on regular basis.
All these factors adversely affect the
functioning of these units.
Large scale units, because of more resources, normally corner whatever raw
material that is available in the open market. Small scale units are thus forced to
purchase the same raw material from the open market at very high prices. It will
lead to increase in the cost of production thereby making their functioning
unviable.
Idle Capacity:
There is under utilisation of installed capacity to the extent of 40 to 50 percent
in case of small scale industries. Various causes of this under-utilisation are
shortage of raw material problem associated with funds and even availability of
power. Small scale units are not fully equipped to overcome all these problems
as is the case with the rivals in the large scale sector.
Technology:
Small scale entrepreneurs are not fully exposed to the latest technology.
Moreover, they lack requisite resources to update or modernise their plant and
machinery Due to obsolete methods of production, they are confronted with the

problems of less production in inferior

quality and that too at higher cost. They
are in no position to compete with their
better equipped rivals operating modem
large scale units.
Marketing:
These small scale units are also exposed
to marketing problems. They are not in a
position to get first-hand information about the market i.e. about the
competition, taste, liking, disliking of the consumers and prevalent fashion.
With the result they are not in a position to upgrade their products keeping in
mind market requirements. They are producing less of inferior quality and that
too at higher costs. Therefore, in competition with better equipped large scale
units they are placed in a relatively disadvantageous position.
In order to safeguard the interests of small scale enterprises the Government of
India has reserved certain items for exclusive production in the small scale
sector. Various government agencies like Trade Fair Authority of India, State
Trading Corporation and the National Small Industries Corporation are
extending helping hand to small scale sector in selling its products both in the
domestic and export markets.
Infrastructure:
Infrastructure aspects adversely affect
the functioning of small scale units.
There is inadequate availability of
transportation, communication, power
and other facilities in the backward
areas. Entrepreneurs are faced with the
problem of getting power connections
and even when they are lucky enough to
get these they are exposed to unscheduled long power cuts.
Inadequate and inappropriate transportation and communication network will
make the working of various units all the more difficult. All these factors are

going to adversely affect the quantity, quality and production schedule of the
enterprises operating in these areas. Thus their operations will become
uneconomical and unviable.

Under Utilisation of Capacity:

Most of the small-scale units are working below full potentials or there is gross
underutilization of capacities. Large scale units are working for 24 hours a day
i.e. in three shifts of 8 hours each and are thus making best possible use of their
machinery and equipments.
On the other hand small scale units are making only 40 to 50 percent use of
their installed capacities. Various reasons attributed to this gross underutilisation of capacities are problems of finance, raw material, power and
underdeveloped markets for their products.
Project Planning:
Another important problem faced by small
scale entrepreneurs is poor project planning.
These entrepreneurs do not attach much
significance to viability studies i.e. both
technical and economical and plunge into
entrepreneurial activity out of mere
enthusiasm and excitement.
They do not bother to study the demand aspect, marketing problems, and
sources of raw materials and even availability of proper infrastructure before
starting their enterprises. Project feasibility analysis covering all these aspects in
addition to technical and financial viability of the projects, is not at all given
due weight-age.
Inexperienced and incomplete documents which invariably results in delays in
completing promotional formalities. Small entrepreneurs often submit
unrealistic feasibility reports and incompetent entrepreneurs do not fully
understand project details.

Moreover, due to limited financial resources they cannot afford to avail services
of project consultants. This result is poor project planning and execution. There
are both time interests of these small scale enterprises.

Skilled Manpower:
A small scale unit located in a remote
backward area may not have problem
with respect to unskilled workers, but
skilled workers are not available there.
The reason is Firstly, skilled workers may
be reluctant to work in these areas and
secondly, the enterprise may not afford to
pay the wages and other facilities
demanded by these workers.
Besides non-availability entrepreneurs are confronted with various other
problems like absenteeism, high labour turnover indiscipline, strike etc. These
labour related problems result in lower productivity, deterioration of quality,
increase in wastages, and rise in other overhead costs and finally adverse impact
on the profitability of these small scale units.
Managerial:
Managerial inadequacies pose another serious problem for small scale units.
Modern business demands vision, knowledge, skill, aptitude and whole hearted
devotion. Competence of the entrepreneur is vital for the success of any venture.
An entrepreneur is a pivot around whom the entire enterprise revolves.
Many small scale units have turned sick due to lack of managerial competence
on the part of entrepreneurs. An entrepreneur who is required to undergo
training and counselling for developing his managerial skills will add to the
problems of entrepreneurs.
The small scale entrepreneurs have to encounter numerous problems relating to
overdependence on institutional agencies for funds and consultancy services,
lack of credit-worthiness, education, training, lower profitability and host of

marketing and other problems. The Government of India has initiated various
schemes aimed at improving the overall functioning of these units.

Large Organizations:
A large enterprise is defined as an enterprise which either employs more than
250 persons or which has either an annual turnover exceeding 50 million Euro
or an annual balance sheet total exceeding 43 million Euro. Grant aid will only
be provided to these organisations in Assisted Areas, as defined by the Regional
Aid Map. The Eligible wards and corresponding intervention rates have been
extracted from the Regional Aid Map for the East Midlands 2007-2013and
are also available in the document library.
In organizations of medium to large size, the following mechanisms may be
employed for identifying strategic alternatives:

Brain-storming sessions.
Special meetings for the purpose.
Services of outside consultant.
Joint meetings of the consultant and the senior employees of the
organization.

Brain Storming Session:

In most organizations strategic alternatives

are identified during the brain-storming
sessions. In such meetings participants are
encouraged to come out with any course of
action which they feel is possible. At this
stage no importance is attached to relative
merits and demerits of the alternatives. In the
next stage each alternative is reviewed and
subjected to a close scrutiny. The alternatives
which are considered fairly appealing are
further examined and analysed for final
selection of one or more alternatives.
Consider the case of power shortage in an organization which produces an
energy - intensive product such as aluminium. What should the organization do?
Since the decision is, bound to affect the organization crucially, the alternatives
are of critical, importance. These may include:
i)
ii)
iii)
iv)

Buy a generator,
Start producing those products which are not very energy intensive,
Have a stand-by generator for meeting part of the, requirements;
Introduce a change in, the product-mix, with an emphasis on; those
products which, have a higher contribution per unit of investment.

The few alternatives listed above have their own: implications in, terms of
financial, physical facilities, manpower requirements, etc. The chief executive
has to select the alternative which is, the most appropriate in his opinion. The
current resource position of the organization with is a major influencing factor
in this decision.

Special Meetings:

Large organizations, recognizing the

significant
of
generating
strategic
alternatives, hold special meetings away
from the place of their work in a hotel or a
holiday resort. This is to ensure that the
process of thinking, is, not disturbed by
interruptions during the course of
deliberations. The participants present
alternative scenarios along with their
recommended courses of action. Alternative scenarios- may be based upon:
assumptions regarding.
i.

ii.
iii.
iv.
v.
vi.
vii.

rate of growth of the economy

position, regarding foreign exchange
rate of inflation
rate of unemployment
ideology of the political party in power
rate of change in technology
socio-cultural factor having a bearing on the profitability of the
organization.

Depending on the assumptions, regarding the values and future trends of the
above parameters, alternative courses of action, are often recommended. An
attempt is made through the discussions to arrive at a consensus. The
turnaround, strategy of a leading pharmaceutical company Brurroughs Well
come was conceived in. a series of meetings the Chief Executive had with his
senior managers.
Outside Consultants:

This procedure of identifying strategic

alternatives is based on the premise that an
outsider can observe the phenomenon in an
objective manner. It is recognised that the
executives who have been actively
associated with, a particular project, are
often so involved with it that they tend to,
be
subjective
and
overlook
its
shortcomings. Others, from within the
organization may also be unable to see its
limitations. Under such conditions,
engaging outside consultant may be a more
effective way to generate, strategic
alternatives on an objective basis. The
outside viewpoint is expected to, be new and fresh, and thus, can show, up
many new opportunities, to the organization.
Joint Meeting:
Another desired way of generating
alternatives is to hire the services of
a, consultant but also associate some
internal members in the process. This
method is able to combine the
advantages of the new ideas
contributed by outsiders being
blended with workable solutions from
within the organisation. In, any case,
an, outside consultant may like to
seek the opinion of the internal
members on his proposals.

CLASSIFYING STRATEGIC ALTERNATIVES

From the point of view of an organization, strategic alternatives may be
classified on the basis of degree of risk involved. Thus we have:

High risk strategic alternatives

Moderate risk strategic alternatives
Low risk strategic alternatives;

High risk strategic

alternatives
Moderate risk strategic
alternatives
Low risk strategic
alternatives

Within this broad classification there may be a number of specific courses of

action. The above classification provides the following strategic options in that
order of risk:

Niche

Vertical integration-backward and forward

Horizontal expansion

Diversification

Niche Strategy:
Niche means concentrating around a product and market. It is a strategy
involving very low degree of risk and rel5resents the typical behaviour of the

small companies. Such organizations,

in general, are scared of growing big as
it could entail them into legal, labour
and management problems. They are
content with their present position and
wish to capitalise on their superior
knowledge of local conditions and
choose a very narrow segment of
market. 'NIRMA' until recently
followed this alternative with great
success. In India, the Government
policy has always favoured small scale units. Such units have been accorded a
favourable treatment in the matter of licencing, credit and supply of raw
material. Thus, the factors internal to the organization and government policies
have contributed to the growth of small companies in India.
Unless you have millions of dollars
available to launch your small business,
the only chance at winning against a big
competitor is to focus on niche markets.
Niche Marketing entails offering unique
products or services to a few
concentrated markets. It is a less risky
strategy and provides the best
opportunities for small businesses
throughout any marketplace.
Niche marketing entails concentrating your entire business on one or few
specific niches. The key is to focus, focus and focus until you become
irresistible to your buyers. Niche marketing is also the best strategy your small
business can use when a large business moves into your market and territory.
Learn how to use niche marketing and learning how to find profitable niche
markets for your small business and home business.

Vertical Integration:

This can assume two forms: backward and forward.

Backward integration means inhouse
production of critical inputs for the
main business or going in for
marketing of products by opening
retail outlets. The company may also
add to the existing products/processes
by taking up the production of
intermediate goods.
In the case of forward integration the
companies try to reach customers
through their own distributional
network.
Organizations
follow
forward integration to take advantage
of the closer contact with the
customers and to ensure a control over
retail price of their products. Reliance company has pursued this strategy very
effectively. Integration is a moderate risk alternative.
Horizontal Expansion and Diversification:
Horizontal expansion results when a firm adds new products or enters into new
markets. Most pharmaceutical companies follow this strategy. In diversification,
an enterprise takes up new products or business which may related or unrelated
to its existing business.
Diversification, in particular, involves high degree of risk as it amounts to
manufacturing new products or entering into new-markets unfamiliar to the
organization. There are two broad categories of organizations that follow
diversification. The first category includes those which are not doing too well in
the traditional lines and are exploring the possibility of other products or
markets. The second category would include organizations which enjoy
considerable resource strength and would like to expand operation by looking at
new businesses.
Companies in India have followed both vertical integration and diversification.
For instance, Walchand Group's activities cover mainly large construction
projects, heavy engineering, specialised automobiles, Sugar, concrete pipes,

confectionary, machine tools castings, and fabrication etc. Hindustan Lever has
pursued a strategy of vertical integration for soaps and toiletory business. It has
also followed diversification in basic chemicals. Some business houses have
gone in for large scale diversification i.e., DCM, Tatas Group, Birla Group,
Thapar Group, ITC, etc. Larsen and Toubro has had major diversifications in
recent. times by entering into cement and shipping industry.

CLASSIFICATION BASED ON THE DESIRED RATE OF GROWTH

The various alternatives provided are:

a)
b)
c)
d)
e)
f)

Internal expansion (adding more capacity)

Internal stability (by augmenting resources)
Internal retrenchment (manpower or assets)
External retrenchment (by disposing company-owned outlets)
External expansion through mergers (joining with other business units)
A combination of the above strategies

Some of these alternatives are explained as follows:

Internal Retrenchment:
This is also known as 'turnaround' in which the Organization starts generating
profit after incurring losses for a number of years. This may be brought about
through restructuring of capital, changes in manage ' meant personnel and
better control in functional areas. In the Indian context, Hindustan Photo films
presents a good case of turnaround strategy.
Internal expansion:
Internal expansion is the process of growing a business through the use of
resources within the business, and not involving the use of any type of outside
activities to solicit new customers. Growth of this type may come about through
handling customer referrals using in-house staff, or making use of company
resources to manage the internal financing of opening a new location or
expanding existing facilities. The strategies that are used as part of an internal
expansion initiative are different from those used as part of external expansion,
which relies on the use of strategies and resources outside the ownership of the
business. Most companies operate with a limited use of internal expansion, with
company owners and managers often finding that a blend of internal and
external expansion strategies can often be in the best interests of the firm.
One way to understand how internal expansion works is to consider the need of
a business to increase its profits. Internal strategies would involve finding ways
to reduce operational expenses without minimizing quality or support to
customers, allowing the business to retain more profit on each unit sold. Along
the same lines, the company may even expand its customer base by means of
referrals provided by current customers. The actual methods will vary,
depending on how the company is structured, but each internal expansion
strategy would rely upon using resources that are already in-house and
considered the holdings of the business to accomplish the tasks at hand.

The same general approach would apply if the internal expansion project had to
do with opening a new location of the business. Rather than obtaining financing
from a bank or other type of lender, the internal approach would focus on
internal financing options, such as funding the project with the use of assets
contained in a company building fund. Over time, the revenue stream generated
by that new location would be used to replenish the building fund, making it
possible for the company to use that internal asset again in the future.
The concept of internal expansion involves about using what is already in-house
without attempting to go outside those resources to achieve certain types of
goals. This is different from external expansion, which would involve using
outside marketing firms, creating an external sales force of resellers, or using
different forms of advertising to solicit customers. Along the same lines, the use
of external expansion methods for building projects would also be avoided,
meaning the company would not seek external financing from banks, investors,
or other lenders in order to manage those projects.
External expansion through mergers:
An entrepreneur may grow its business
either by internal expansion or by external
expansion. In the case of internal expansion,
a firm grows gradually over time in the
normal course of the business, through
acquisition of new assets, replacement of the
technologically obsolete equipments and the
establishment of new lines of products. But
in external expansion, a firm acquires a
running business and grows overnight through corporate combinations. These
combinations are in the form of mergers, acquisitions, amalgamations and
takeovers and have now become important features of corporate restructuring.
They have been playing an important role in the external growth of a number of
leading companies the world over. They have become popular because of the
enhanced competition, breaking of trade barriers, free flow of capital across
countries and globalisation of businesses. In the wake of economic reforms,
Indian industries have also started restructuring their operations around their
core business activities through acquisition and takeovers because of their
increasing exposure to competition both domestically and internationally.
External Retrenchment:

This expression is used as synonym for divesture. Thus an organization may

like to withdraw from a business incurring a loss over a period of time.
Obviously, the approach is the opposite of mergers. Subject of the clearance of
the 6evernment, the DCM wishes to divest out of its texthes business. ITDC,
about a year back, decided to close Akbar Hotel.
Divesture is prompted by factors such as inadequate market, lower profits and
availability of better alternatives, technological changes requiring investment
which the management is unable to undertake. Divesture may include the
following:

A part of the unit may be floated as an independent unit

It may be sold to employees
It may be sold to an independent buyer
It may be liquidated and its assets sold

Glueck 2 has classified strategic alternatives into the following categories:

i) Stable growth strategies

ii) Profit strategies
iii) Stable growth as pause strategies
iv) Sustainable growth strategies.
Stable growth strategies:
The first alternative is useful when a firm pursues its original objective or
objectives similar to the original one, or when the focus of its main strategic
decision is on the incremental improvement of functional performance. In this
case, achievement level is fixed on the basis of past performance corrected for
known rate of inflation. The underlying premises in this case are:
Reasonably stable environment and
Management not being in favour of undertaking high degree of risk though
it is not risk averse
Modi Xerox, since its inception, has followed a stable growth strategy in India.
It has concentrated on a narrow range of products and quality aspect of aftersales service.
Profit strategies:
The second alternative is followed when the main aim of the strategic business
unit is to generate surplus. In the process other objectives may be sacrificed.
This aspect may get considerable importance during the phase of recession.
Stable growth and pause strategies:
The stable growth alternative applies in those situations where a firm
deliberately slows down to improve efficiency. Such a behavior is observed
among organizations who find it difficult to manage growth. This difficulty is
usually experienced by organizations of small to medium size. But
unmanageable growth has been experienced by large organizations too. A very
large number of television manufacturers in India are f6rced to control their
growth inspite of large market opportunities that exist before them. Since most
of the TV manufacturers are small or medium sized firms lacking substantial
resources, they follow a stable growth strategy by focussing their efforts in
certain geographical markets and around few products.
The sustainable growth alternative includes a modified incremental growth to
take one of the unfavorable external conditions. These include:

a) Internal growth strategies consisting of:

Concentric diversification, and
Conglomerate diversification
b) External growth strategies consisting of
Mergers,
Joint ventures
c) Liquidation
Concentric diversification:
This means that there is a technological
similarity between the industries, which
means that the firm is able to leverage
its technical know-how to gain some
advantage. For example, a company
that manufactures industrial adhesives
might decide to diversify into adhesives
to be sold via retailers. The technology
would be the same but the marketing
effort would need to change.
It also seems to increase its market
share to launch a new product that helps the particular company to earn profit.
For instance, the addition of tomato ketchup and sauce to the existing "Maggi"
brand processed items of Food Specialities Ltd. is an example of technologicalrelated concentric diversification.
The company could seek new products that have technological or marketing
synergies with existing product lines appealing to a new group of customers.
This also helps the company to tap that part of the market which remains
untapped, and which presents an opportunity to earn profit.

Conglomerate diversification:

A conglomerate is a combination of
two or more corporations engaged in
entirely different businesses that fall
under one corporate group, usually
involving a parent company and
many subsidiaries.
Often,
a
conglomerate is a multi-industry
company. Conglomerates are often
large and multinational.
Conglomerates are formed for genuine
interests of diversification rather than manipulation of paper return on
investment. Companies with this orientation would only make acquisitions or
start new branches in other sectors when they believed this would increase
profitability or stability by sharing risks. Flush with cash during the 1980s,
General Electric also moved into financing and financial services, which in 200
5 accounted for about 45% of the company's net earnings.
GE formerly owned a minority interest in NBC Universal, which owns
the NBC television network and several other cable networks. In some ways GE
is the opposite of the "typical" 1960s conglomerate in that the company was not
highly leveraged, and when interest rates went up they were able to turn this to
their advantage. It was often less expensive to lease from GE than buy new
equipment using loans. United Technologies has also proven to be a successful
conglomerate.
With the spread of mutual funds (especially index funds since 1976), investors
could more easily obtain diversification by owning a small slice of many
companies in a fund rather than owning shares in a conglomerate. Another
example of a successful conglomerate is Warren Buffett's Berkshire Hathaway,
a holding company which used surplus capital from its insurance subsidiaries to
invest in a variety of manufacturing and service businesses.
Concentric growth is an alternative where the firm goes into businesses which
are related to the existing ones, say from manufacture of spare parts for
passenger cars to the manufacture of spare parts for tractors. This no doubt is an
example of the product related concentric growth. An example of customer
related concentric growth is when a firm producing farm equipment decides to

enter the business of chemicals and fertilisers. Under the growth alternative of
conglomerate diversification, a firm may acquire another firm which has surplus
cash even though there may be nothing 50 in common with the existing
business. The RPG Enterprises have pursued this alternative within the scope of
its limited resources. Merger is all alternative where two firms join. There are
different objectives of mergers including the need-to tide over the finan6al
crisis. The objectives of mergers and the procedures followed in negotiating a
merger are discussed in detail in another unit in this block. Joint venture is an
alternative which can meet a number of needs such as rapid rate of growth
desired by the firm, maintaining the risk within reasonable limit, and to tide
over the constraint of resources. Thus a firm having constraint of production
capacity can have a joint venture with a firm having surplus production
capacity. Pepsi Cola (a US multi-national company), Voltas and Punjab Agro
have recently joined hands to promote a joint venture in the area of agro
industries. Liquidation indicates a situation where the firm -finds the business
unattractive. There may be a dearth of people who have interest in the
proposition. Neither the employees nor do outside parties find it an attractive
proposition to be revived. Obsolete equipment is the usual cause. Disinvestment
may be considered attractive when the present worth of expected earnings is
less than its present worth.

Merger:
In merger, a firm may acquire another firm or two or more firm may combine
together to improve their competitive strength or to gain control over additional
facilities.
Merger may be of two types:
1. A firm merges with other firms in the same industry having similar or
related products, using similar processes and distributing through similar
channels. Such a merger creates problems of co-ordination between the
merged units.
2. Under this type of merger, firms merging together are engaged in
altogether different lines of business and have little common in their
products, processes and distribution channel. They are known as
conglomerate merger.
Mergers and acquisitions are strategic decisions taken for maximisation of a
company's growth by enhancing its production and marketing operations. They
are being used in a wide array of fields such as information technology,
telecommunications, and business process outsourcing as well as in traditional
businesses in order to gain strength, expand the customer base, cut competition
or enter into a new market or product segment.
Mergers or Amalgamations:

A merger is a combination of two or

more businesses into one business.
Laws in India use the term
'amalgamation'
for
merger.
The Income Tax Act,1961 [Section
2(1A)] defines amalgamation as the
merger of one or more companies
with another or the merger of two or
more companies to form a new
company, in such a way that all
assets and liabilities of the
amalgamating companies become assets and liabilities of the amalgamated
company and shareholders not less than nine-tenths in value of the shares in the
amalgamating company or companies become shareholders of the amalgamated
company.
Thus, mergers or amalgamations may take two forms:Merger through Absorption:Absorption is a combination of two or more companies into an 'existing
company'. All companies except one lose their identity in such a merger.
For example: absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd.
(TCL). TCL, an acquiring company (a buyer), survived after merger while TFL,
an acquired company (a seller), ceased to exist. TFL transferred its assets,
liabilities and shares to TCL.
Merger through Consolidation:-

A consolidation is a combination of two or

more companies into a 'new company'. In
this form of merger, all companies are
legally dissolved and a new entity is
created. Here, the acquired company
transfers its assets, liabilities and shares to
the acquiring company for cash or
exchange of shares. For example, merger of
Hindustan Computers Ltd, Hindustan
Instruments Ltd, Indian Software Company
Ltd and Indian Reprographics Ltd into an
entirely new company called HCL Ltd.
Acquisition or take-over: Acquisition generally refers to buying another firm,
either its assets or as an operating company. In a take-over, or acquisition, one
company gets control over the acquired company. Take-over involves a change
in ownership and management of the acquired company. In pre 1991 India, the
MRTP Act, 51 Industrial Licensing Policy and the companies Act, 1956 etc.
made take-overs difficult to accomplish. The post 1991 scenario 15, of course,
very different. There are several instances of take-overs, both friendly and
hostile are reported since 1992.

Benefits of Mergers:
A merger occurs when two firms join together to form one. The new firm will
have an increased market share, which reduces competition. This reduction in
competition can be damaging to the public interest, but help the firm gain more
profits.
However, mergers can give benefits to the public.

1. Economies of scale. This occurs when a larger firm with increased output
can reduce average costs. Lower average costs enable lower prices for
consumers.

Different economies of scale include:

Technical economies; if the firm has significant fixed costs then the new
larger firm would have lower average costs,

Bulk buying A bigger firm can get a discount for buying large quantities
of raw materials

Financial better rate of interest for large company

Organisational one head office rather than two is more efficient

Note a vertical merger would have less potential economies of scale than a
horizontal merger e.g. a vertical merger could not benefit form technical
economies of scale. However in a vertical merger there could still be financial
and risk-bearing economies.

Some industries will have more economies of scale than others. For example,
car manufacture has high fixed costs and so gives more economies of scale than
two clothing retailers.
International Competition:
Mergers can help firms deal with the threat of multinationals and compete on an
international scale.
Mergers may allow greater investment in R&D:
This is because the new firm will have more profit which can be used to finance
risky investment. This can lead to a better quality of goods for consumers. This
is important for industries such as pharmaceuticals which require a lot of
investment.
Greater Efficiency:
Redundancies can be merited if they can be employed more efficiently.
Protect an industry from closing:
Mergers may be beneficial in a declining industry where firms are struggling to
stay afloat. For example, the UK government allowed a merger between Lloyds
TSB and HBOS when the banking industry was in crisis.
Diversification:
In a conglomerate merger two firms in different industries merge. Here the
benefit could be sharing knowledge which might be applicable to the different
industry. For example, AOL and Time-Warner merger hoped to gain benefit
from both new internet industry and old media firm

Evaluation:
The desirability of a merger will depend upon several factors such as:

Is there scope for economies of scale? Are there high fixed costs?
Will there be an increase in monopoly power and significant reduction in
competition?
Is the market still contestable? (freedom of entry and exit).

Legal Position about Merger:

The Legal Position about Merger is contained in sections 394 to 396 of the
Companies Act. But these sections have to be interpreted in conjunction with
section 94 (Power of limited companies to alter share capital) 95, 97 (dealing
with special resolution for reduction of capital), 101, 102, 104 and 107. Some of
the important provisions of the Companies Act deal with the power of the court,
with whom an application for amalgamation has been pending, to make any
alternation or modification in the scheme for amalgamation. I he most important
aspect is the protection of the interests of the dissenting shareholders. Any
scheme for transfer of whole or any part of an undertaking requires the approval
of the r4ne-tenths in value and three-fourths in number of share holders of the
company. Probably the most important section is 396 dealing with the power of
the Central Government to provide for amalgamation of companies in public
interest. The sick units are being amalgamated with other companies or are
being taken over by the Government.
In actual practice it is difficult to draw a distinction between mergers and
acquisitions. Strictly speaking, in case of mergers, the existing companies lose
their identity and a new company is formed, while in the case of acquisitions it
is the purchase of a company by another company. Madura Coats is a company
born out of the merger of Madura Mills and Coats India Limited in early
seventies.
At times it is profitable to diversify through mergers. The process of mergers
gives the advantage of not having to start from scratch. Amalgamations enable
the companies to have advantage of fast changing technologies: the underlying
assumption in this case is that one of the merged companies enjoys distinct
strength in the area of R&D.
Mergers may also enable reduction in administrative costs. Given the
indivisibility of certain expenditure on personnel, the merger will result in better
utilisation of their time. Further, the merger may facilitate the process of linking
the products and may amount to vertical integration. This could be undertaken
where for various reasons the merging companies individually would not have
been able to implement vertical integration. The process often results in
providing a complete product line. It goes without saying that some companies
undertake merger as a means to plan their tax liability.

Joint Venture:
A joint venture (JV) is a business
agreement in which the parties agree to
develop, for a finite time, a new entity
and new assets by contributing equity.
They
exercise
control
over
the enterprise and consequently share
revenues, expenses and assets. There
are other types of companies such as JV
limited by guarantee, joint ventures
limited by guarantee with partners
holding shares.
In European law, the term 'joint venture'
(or joint undertaking) is an elusive legal concept, better defined under the
rules of company law. In France, the term 'joint venture' is variously
translated 'association
d'entreprises',
'entreprise
conjointe',
'coentreprise' or 'entreprise commune'. In Germany, 'joint venture' is better
represented as a 'combination of companies' (Konzern).
With individuals, when two or more persons come together to form
a temporary partnership for the purpose of carrying out a particular project,
such partnership can also be called a joint venture where the parties are "coventurers".
The venture can be for one specific project only - when the JV is referred to
more correctly as a consortium (as the building of the Channel Tunnel) - or a
continuing business relationship. The consortium JV (also known as a
cooperative agreement) is formed where one party seeks technological expertise
or technical service arrangements, franchise and brand use agreements,
management contracts, rental agreements, for one-time contracts. The JV is
dissolved when that goal is reached.
Some major joint ventures include Dow Corning, MillerCoors, Sony Ericsson,
Penske Truck Leasing, and Owens-Corning.
A joint venture takes place when two parties come together to take on one
project. In a joint venture, both parties are equally invested in the project in
terms of money, time, and effort to build on the original concept. While joint
ventures are generally small projects, major corporations also use this method in

order to diversify. A joint venture can ensure the success of smaller projects for
those that are just starting in the business world or for established corporations.
Since the cost of starting new projects is generally high, a joint venture allows
both parties to share the burden of the project, as well as the resulting profits.
Since money is involved in a joint venture, it is necessary to have a strategic
plan in place. In short, both parties must be committed to focusing on the future
of the partnership, rather than just the immediate returns. Ultimately, short term
and long term successes are both important. In order to achieve this success,
honesty, integrity, and communication within the joint venture are necessary.
Businesses should not engage in joint ventures without adequate planning and
strategy. They cannot afford to, since the ultimate goal of joint ventures is the
same as it is for any type of business operation: to make a profit for the owners
and shareholders. A successful company in any type of business is often
recruited heavily for participation in joint ventures. Thus, they can pick and
choose in which partnerships they would like to engage, if any. They follow
certain ground rules, which have been developed over they years as joint
ventures have grown in popularity.
For example, experience dictates that both parties in a joint venture should
know exactly what they wish to derive from their partnership. There must be an
agreement before the partnership becomes a reality. There must also be a firm
commitment on the part of each member. One of the leading causes for the
failure of joint ventures is that some participants do not reveal their true
intentions in the partnerships. For example, some private companies in
advanced countries have formed partnerships with militant governments to
supply technological expertise and develop products such as chemicals or
nuclear reactors to be used for allegedly peaceful purposes. They learned later
that the products were used for military purposes. Such results can be
detrimental to the companies involved and adversely affect their bottom lines
and reputations, to speak nothing of the direct victims of the military
development.
Businesses should form joint ventures with experienced partners. If the partners
do not have approximately equal experience, one can take advantage of the
other, which can lead to failure. Joint ventures generally do not survive under

this imbalanced dynamic. Nor do they survive if companies jump into them
without testing the partnership first.
Partners in joint ventures would often be better off participating in small
projects as a way to test one another instead of launching into one large
enterprise without an adequate feeling-out process. This is especially true when
companies with different structures, corporate cultures, and strategic plans work
together. Such differences are difficult to overcome and frequently lead to
failure. That is why a "courtship" is beneficial to joint venture participants.

Advantages of a Joint Venture:

There are many good business and accounting reasons to participate in a Joint
Venture (often shortened JV). Partnering with a business that has
complementary abilities and resources, such as finance, distribution channels, or
technology, makes good sense. These are just some of the reasons partnerships
formed by joint venture are becoming increasingly popular.
A joint venture is a strategic alliance between two or more individuals or
entities to engage in a specific project or undertaking. Partnerships and joint
ventures can be similar but in fact can have significantly different implications
for those involved. A partnership usually involves a continuing, long-term
business relationship, whereas a joint venture is based on a single business
project.
Parties enter Joint Ventures to gain individual benefits, usually a share of the
project objective. This may be to develop a product or intellectual property
rather than joint or collective profits, as is the case with a general or limited
partnership.
A joint venture, like a general partnership is not a separate legal entity.
Revenues, expenses and asset ownership usually flow through the joint venture
to the participants, since the joint venture itself has no legal status. Once the
Joint venture has met its goals the entity ceases to exist.
What are the Advantages of forming a Joint Venture?

Provide companies with the opportunity to gain new capacity and

expertise

Allow companies to enter related businesses or new geographic markets

or gain new technological knowledge

access to greater resources, including specialised staff and technology

sharing of risks with a venture partner

Joint ventures can be flexible. For example, a joint venture can have a
limited life span and only cover part of what you do, thus limiting both your
commitment and the business' exposure.

In the era of divestiture and consolidation, JVs offer a creative way for
companies to exit from non-core businesses.

Companies can gradually separate a business from the rest of the

organisation, and eventually, sell it to the other parent company. Roughly
80% of all joint ventures end in a sale by one partner to the other.

Embarking on a Joint Venture can represent a significant reconstruction to your

business. However favourable it may be to your potential for growth, it needs to
fit with your overall business strategy.
It's important to review your business strategy before committing to a joint
venture. This should help you define what you can sensibly expect. In fact, you
might decide there are better ways to achieve your business aims.
You may also want to study what similar businesses are doing, particular those
that operate in similar markets to yours. Seeing how they use joint ventures
could help you decide on the best approach for your business. At the same time,
you could try to identify the skills they use to partner successfully.
You can benefit from studying your own enterprise. Be realistic about your
strengths and weaknesses - consider performing strengths, weaknesses,
opportunities and threats analysis (swot) to identify whether the two businesses
are compatible. You will almost certainly want to identify a joint venture partner
that complements your own skills and failings.
Remember to consider the employees' perspective and bear in mind that people
can feel threatened by a joint venture. It may be difficult to foster effective
working relationships if your partner has a different way of doing business.
When embarking on a joint venture its imperative to have your understanding
in writing. You should set out the terms and conditions agreed upon in a written
contract, this will help prevent misunderstandings and provide both parties with
strong legal recourse in the event the other party fails to fulfil its obligations
while under contract.

Legal Provision for Joint Venture:

A written Joint Venture Agreement should cover:

The parties involved

The objectives of the joint venture

Financial contributions you will each make whether you will transfer any
assets or employees to the joint venture

Intellectual property developed by the participants in the joint venture

Day to day management of finances, responsibilities and processes to be

followed.

Dispute resolution, how any disagreements between the parties will be

resolved

How if necessary the joint venture can be terminated.

The use of confidentiality or non-disclosure agreements is also

recommended to protect the parties when disclosing sensitive commercial
secrets or confidential information.

Joint Venture in India:

JV companies are the preferred form of corporate investment but there are no
separate laws for joint ventures. Companies which are incorporated in India are
treated on par as domestic companies.

The above two parties subscribe to the shares of the JV company in

agreed proportion, in cash, and start a new business.

Two parties, (individuals or companies), incorporate a company in India.

Business of one party is transferred to the company and as consideration for
such transfer, shares are issued by the company and subscribed by that party.
The other party subscribes for the shares in cash.

Promoter shareholder of an existing Indian company and a third party,

who/which may be individual/company, one of them non-resident or both
residents, collaborate to jointly carry on the business of that company and its
shares are taken by the said third party through payment in cash.

Private companies (only about $2500 is the lower limit of capital, no upper
limit) are allowed in India together with and public companies, limited or not,
likewise with partnerships. Sole proprietorship too are allowed. However, the
latter are reserved for NRIs.

Through capital market operations foreign companies can transact on the two
exchanges without prior permission of RBI but they cannot own more than 10
percent equity in paid-up capital of Indian enterprises, while aggregate foreign
institutional investment (FII) in an enterprise is capped at 24 percent.
The establishment of wholly owned subsidiaries (WOS) and project offices and
branch offices, incorporated in India or not. Sometimes, it is understood, that
branches are started to test the market and get its flavor. Equity transfer from
residents to non-residents in mergers and acquisitions (M&A) is usually
permitted under the automatic route. However, if the M&As are in sectors and
activities requiring prior government permission (Appendix 1 of the Policy)
then transfer can proceed only after permission.
Joint ventures with trading companies are allowed together with imports of
second hand plants and machinery. It is expected that in a JV, the foreign partner
supplies technical collaboration and the pricing includes the foreign exchange
component, while the Indian partner makes available the factory or building site
and locally made machinery and product parts. Many JVs are formed as public
limited companies (LLCs) because of the advantages of limited liability.
There are many JVs. lying outside of this discussion Hindusthan UnileverUnilever, Suziki-Govt. of India (Maruti Motors), Bharti Airteli-Singapore
Telecom, ITC-Imperial Tobacco, P&G Home Products, Whirlpool, having
financial participation with the financial institutions and the lay public which
are monitored by SEBI (Securities and Exchange Board of India), also an
autonomous body. This lies outside this discussion.

Dissolution:
The JV is not a permanent structure. It can be dissolved when:

Aims of original venture met

Aims of original venture not met

Either or both parties develop new goals

Either or both parties no longer agree with joint venture aims

Time agreed for joint venture has expired

Legal or financial issues

Evolving market conditions mean that joint venture is no longer

appropriate or relevant
One party acquires the other

Conclusion:
Although in reality every companys situation is unique and the options
available to them vary significantly, there are, however, some high level
strategic options that typically exist in most situations. When considering these
alternatives on a continuum, they include the injection of new capital on the
least disruptive to operations end of the continuum with a complete
liquidation of the assets of the company as being the most disruptive. The table
below provides a high level overhead of the merger alternatives typically
available.

Methodology:
Data Collection Method:

Project is fully based on secondary data.

Secondary data: The data is collected from the Business Magazines, Internet &
Text books.
The various sources that were used for the collection of secondary data are:

1 Websites www.wikepedia.com.
-

www.yourarticlelibrary.com
archive.mu.ac.in.
www.slideshare.net
www.businessworlod.com
www.ris.org.in

Limitation:
Im happy that finally my project got complete on time
with some limitations. I try my best to overcome it almost. For
completing this project I had face many barriers. When Im
preparing this project, all necessary data was not available on
net. For which I have to go through many book to get the right
data for my project. Out of all limitation, one was to make a
prefect project.