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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?
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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

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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) Offering alternative jobs to workers in other units; ii) Providing attractive retrenchment terms to workers so that they would

not easily turn down the offer (the golden handshake).

GENERATING STRATEGIC ALTERNATIVES:

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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:

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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 self-employed individual you often see more pure passion.  That passion hasn’t 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: 

It’s 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:  

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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 part-time 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 customer’s 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 don’t 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.

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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]

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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 owner-managers 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.

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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. 

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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 у 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.

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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.

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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.

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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 under- utilisation 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.

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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.

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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 2007-2013”and 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?

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Since the decision is, bound to affect the organization crucially, the alternatives are of critical, importance. These may include:

i) Buy a generator,ii) Start producing those products which are not very energy intensive,iii) Have a stand-by generator for meeting part of the, requirements; iv) 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. rate of growth of the economy ii. position, regarding foreign exchange iii. rate of inflation iv. rate of unemployment v. ideology of the political party in power vi. rate of change in technology vii. 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

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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.

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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;

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

High risk strategic alternatives

Moderate risk strategic alternatives

Low risk strategic alternatives

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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.

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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

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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.

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CLASSIFICATION BASED ON THE DESIRED RATE OF GROWTH

The various alternatives provided are:

a) Internal expansion (adding more capacity)b) Internal stability (by augmenting resources) c) Internal retrenchment (manpower or assets) d) External retrenchment (by disposing company-owned outlets) e) External expansion through mergers (joining with other business units) f) 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

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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

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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

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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 after-sales 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

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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 technological-related 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.

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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 2005 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.

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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.

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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

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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.

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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

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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

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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).

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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

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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 "co-venturers".

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.

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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

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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.

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Advantages of a Joint Venture:

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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 it’s 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, JV’s 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. 

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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 it’s 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

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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.

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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 Unilever-Unilever, Suziki-Govt. of India (Maruti Motors), Bharti Airteli-Singapore Telecom, ITC-Imperial Tobacco, P&G Home Products, Whirlpool, having

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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 company’s 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

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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:

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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:

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I’m 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 I’m 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.