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Wednesday, November 21, 2012

STABILITY STRATEGY


STABILITY OR CONSOLIDATION STRATEGY
 

Nature Of Stability Strategy
 

A firm following stability strategy maintains its current business and product portfolios; maintains the existing level of effort; and is satisfied with incremental growth. It focuses on fine-tuning its business operations and improving functional efficiencies through better deployment of resources. In other words, a firm is said to follow stability/ consolidation strategy if:
 
  1. It decides to serve the same markets with the same products;
  2. It continues to pursue the same objectives with a strategic thrust on incremental improvement of functional performances; and
  3. It concentrates its resources in a narrow product-market sphere for developing a meaningful competitive advantage. 


Adopting a stability strategy does not mean that a firm lacks concern for business growth. It only means that their growth targets are modest and that they wish to maintain a status quo. Since products, markets and functions remain unchanged, stability strategy is basically a defensive strategy. A stability strategy is ideal in stable business environments where an organization can devote its efforts to improving its efficiency while not being threatened with external change. In some cases, organizations are constrained by regulations or the expectations of key stakeholders and hence they have no option except to follow stability strategy. 

Generally large firms with a sizeable portfolio of businesses do not usually depend on the stability strategy as a main route, though they may use it under certain special circumstances. They normally use it in combination with the other generic strategies, adopting stability for some businesses while pursuing expansion for the others. However, small firms find this a very useful approach since they can reduce their risk and defend their positions by adopting this strategy. Niche players also prefer this strategy for the same reasons.
 

Conditions Favouring Stability Strategy 

Stability strategy does entail changing the way the business is run, however, the range of products offered and the markets served remain unchanged or narrowly focused. Hence, the stability strategy is perceived as a non-growth strategy. As a matter of fact, stability strategy does provide room for growth, though to a limited extent, in the existing product-market area to achieve current business objectives. Implementing stability strategy does not imply stagnation since the basic thrust is on maintaining the current level of performance with incremental growth in ensuing periods. An organization’s strategists might choose stability when:
 
  1. The industry or the economy is in turmoil or the environment is volatile. Uncertain conditions might convince strategists to be conservative until they became more certain.
  2. Environmental turbulence is minimal and the firm does not foresee any major threat to itself and the industry concerned as a whole.
  3. The organization just finished a period of rapid growth and needs to consolidate its gains before pursuing more growth.
  4. The firm’s growth ambitions are very modest and it is content with incremental growth.
  5. The industry is in a mature stage with few or no growth prospects and the firm is currently in a comfortable position in the industry 

Rationale for Using Stability Strategy 

There are a number of circumstances in which the most appropriate growth stance for a company is stability rather than growth. Stability strategy is normally followed for a brief period to consolidate the gains of its expansion and needs a breathing spell before embarking on the next round of expansion. Organizations need to ‘cool off’ for a while after an aggressive phase of expansion and must stabilize for a while or they will become inefficient and unmanageable. India Cements went through a rapid expansion by acquiring other cement companies before stabilizing and consolidating its operations. Videocon and BPL had first diversified into new businesses and then started consolidating once faced with stiff competition. 

Managers pursue stability strategy when they feel that the enterprise has been performing well and wish to maintain the same trend in subsequent years. They would prefer to adopt the existing product-market posture and avoid departing from it. Sometimes, the management is content with the status quo because the company enjoys a distinct competitive advantage and hence does not perceive an immediate threat. 

Stability strategy is also adopted in a number of organizations because the management is not interested in taking risks by venturing into unknown terrain. In fact they do not consider any other option as long as the pursuit of existing business activity produces the desired results. Conservative managers believe product development, market development or new ways of doing business entail great risk and therefore, avoid taking decisions, which can endanger the company. A number of managers also pursue consolidation strategy involuntarily. In fact, they do not react to environmental changes and avoid drastic changes in the current strategy unless warranted by extraordinary circumstances. 

Sometimes environmental forces compel an organization to follow the strategy of status quo. This is particularly true for bigger organizations, which have acquired dominant market share. Such organizations are usually not permitted by the government to expand because it may lead to monopolistic and restrictive trade practices detrimental to public interest.
 

Approaches to Stability Strategy 

There are various approaches to developing stability/consolidation strategy. The Management has to select the one that best suits the corporate objective. Some of these approaches are discussed below. In all these approaches, the fundamental course of action remains the same, but the circumstances in which the firms choose various options differ. 

Holding Strategy: This alternative may be appropriate in two situations: (a) the need for an opportunity to rest, digest, and consolidate after growth or some turbulent events - before continuing a growth strategy, or (b) an uncertain or hostile environment in which it is prudent to stay in a “holding pattern” until there is change in or more clarity about the future in the environment. With a holding strategy the company continues at its present rate of development. The aim is to retain current market share. Although growth is not pursued as such, this will occur if the size of the market grows. The current level of resource input and managerial effort will not be increased, which means that the functional strategies will continue at previous levels. This approach suits a firm, which does not have requisite resources to pursue increased growth for a longer period of time. At times, environmental changes prohibit a continuation in growth.
 

Stable Growth: This alternative essentially involves avoiding change, representing indecision or timidity in making a choice for change. Alternatively, it may be a comfortable, even long-term strategy in a mature, rather stable environment, e.g., a small business in a small town with few competitors. It simply means that the firm’s strategy does not include any bold initiatives. It will just seek to do what it already does, but a little better. In this approach, the firm concentrates on one product or service line. It grows slowly but surely, increasingly its market penetration by steadily adding new products or services and carefully expanding its market. 

Harvesting Strategy: Where a firm has the dominant market share, it may seek to take advantage of this position and generate cash for future business expansion. This is termed has harvesting strategy and is usually associated, with cost cutting and price increases to generate extra profits. This approach is most suitable to a firm whose main objective is to generate cash. Even market share may be sacrificed to earn profits and generate funds. A number of ways can be used to accomplish the objective of making profits and generating funds. Some of these are selective price increases and reducing costs without reducing price. In this approach, selected products are milked rather than nourished and defended. Hindustan Lever’s Lifebuoy soap is an example in point. It yielded large profits under careful management. 

Profit or Endgame Strategy: A profit strategy is one that capitalizes on a situation in which old and obsolete product or technology is being replaced by a new one. This type of strategy does not require new investment, so it is not a growth strategy. Firms adopting this strategy decide to follow the same technology, at least partially, while transiting into new technological domains. Strategists in these firms reason that the huge number of product based on older technologies on the market would create an aftermarket for spare parts that would last for years. Sylvania, RCA, and GE are among the firms that followed this strategy. They decided to stay in the vacuum tube market until the “end of the game.” As with most business decisions, timing is critical. All competitors eventually must shelve the old assets at some point of time and move to the new product or technology. The critical question is, “Can we make more money by using these assets or by selling them?” The answer to that question changes as time passes. 

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