Strategic responses of firms to economic liberalisation

Abstract

The study is an attempt to investigate the antecedents and consequences of strategic response of firms in India to economic liberalization. The specific objectives of the study were to (a) explore the extent of change in the business environment after economic liberalization. (b) categories and record the various strategic responses, and lc) examine the links among environment, organizational resource. demographics. strategic response and performance of firms. Data ofll0 large and medium sized manufacturing fin-ns. collected by a questionnaire survey and from the CMIE computer database, were used. The sample of firms had a representative distribution across ownership and rankings and showed wide variations in age, sin. location and industry. Several bivariate and multivariate hypotheses were tend using complementary statistical techniques such as Z test of mean. analysis of variance. correlation, and multiple regression analyses. Structural Equation Modeling (SEM) was also attempted taking all the exogenous and endogenous variables together. Some important findings of the study are: Change in Business Environment: Economic liberalization has resulted in a more munificent environment characterized by higher growth and return opportunities_ greater availability of various resources and easier access to international market both for imports and exports. The Indian market has also become intensely competitive with sophisticated mid demanding customers and greater domestic and foreign com petition. However. little improvement was observed in the areas of infrastructure and efficiency of the government departments and institution. Strategic Response: Firms, in general. (a) aimed for higher growth and return compared to pre liberalized era, (b) increased the scale of operation; (c) diversified into new products and business lines; (d) expanded the geographical base both in the domestic and international markets; (e) offered wider range of products, (f) catered to diverse customer segments and laid increased emphasis on lg) sharing of tangible and intangible resources across divisions and business units. Determinants of Strategic Response rind Performance: Characteristics of business environment such as business availability of resources, competition. regulatory control and demanding customers, had strong influence on strategic responses and performance of firms. While strategic responses of firms seemed to be more influenced by the availability of higher business opportunities. raw material, technology, finance and other resources, their performance was more influenced by the competitive dynamics of the market and institutional and infrastructural efficiency. The demographic variables such as age and size that are believed to abet organizational inertia to strategic change had significant negative influence on strategic response and predominance of firms. Younger and smaller firms showed greater responsiveness and performed better than their older and larger counterparts. Moderately diversified firms with single dominant business were most responsive and performed better than die single business and highly diversified firms. Ownership did not have significant effect on strategic responses and performance of firms, Indian private sector firms showed marginally better responsiveness. Initial resource position seemed to have limited influence on the strategic responses and growth performance of firms. However, it had impact on return performance of firms. While greater entrepreneurial capability helped firms expand geographically in the domestic market. marketing capability helped strengthen international operation. Firms endowed with higher entrepreneurial capability also implemented the strategy of scale expansion much better and earned higher profits than others. However. reputation built in pre-liberalization era did not help firms either in diversification or in achieving profit. Similarly. firms endowed with higher growth management capability targeted lower returns and actually earned lower returns than others. Most of the strategic response variables had significant impact on either of the growth, return and market performance of firms. For achieving higher growth firms increased the scale of operation and expanded the operational base both in domestic and international markets. However, it was increase in export and expansion domestic operation business scope and scale of operation increase sharing of resource that helped firms achieve faster growth. Similarly for generating higher return firms increased the diversity in operation. However it However. It was increase in the scale of operation and diversification into new product and business lines that yielded higher Return Firms that set an objective of earning above average return, put more emphasis over increase in scale of opeiicnoverdiversificatioriandacuiallyacliievedliiglierretumwererewandedbytliestockmarltia. With significant impact on all performances indicators increase in scale of operation came out to be the most effective strategic response. Results of SEM suggest that environment was the most dominant exogenous factor having significant influence on almost all strategic response and performance variables. Thus external control model found maximum support from the data. Strategic management model also got very good support as it was found that strategic response variables had influence on all performances parameters and impact of environment on performance was moderated by strategies adopted by firms. The demographic variables also had impact on strategic response and performance indicating good support for initial model. The resource based model. However, received least support as initial resource Position had no significant influence on any strategic response and performances variables, except return performances. Overall, in the liberalized regime those firms which compared to others were (a) younger, smaller. And moderately diversified with one dominant business, and (b) having higher entrepreneurial capability, (c) had a greater recognition of the favourable changes in the environment and were operating in a more munificent. And efficient and less competitive environment, (d) increased the scale of operation, introduced new product lines in the existing businesses or diversified into new related businesses, expanded the geographical reach both in India and abroad, increased the sharing of resources across departments, divisions, business units. etc., achieved superior performance.

Some major implications of the study are: The objective of liberalization policies to transform the industrial environment in India towards a more market oriented corporative one, to an extent, has beat fulfilled. Policies are in right direction. However, the government should carry out the implementation of liberalization policies more vigorously, particularly in the areas of regulation. Much more need to be done in state level policies as majority of the firms felt that the spirit of economic liberalization was yet to be reflected in the state level policies and administration. Policy makers also need to pay more attention on improving infrastructural facilities related to road and port and efficiency in the governmental departments and institutions as not much improvement was perceived in these areas. Effective strategies such as change in business scope and geographical scope indicate the positioning of a firm in the environmental, and change in scale and sharing of resources relate to acquiring, building and deploying resources. Also environment played the most influential role on strategic response and performance, hater recognition of the changes in the environment is crucially important in the liberalized era. Thus, better Recognition of the changes in environment by managers and acting on them by positioning the firm in profitable niches and stretching and leveraging resources hold die key to superior performance. All these, however, indicate the increased importance of environment scanning and strategic planning systems, and critical role of boundary spanning managers in strategic decision making of firms. With regard to the efficacy of various strategies, expansion in scale of operation, increase in geographical scope by greater thrust on export and domestic expansion, and diversification in the related business were the most effective ones and may be followed by all prudent firms. To gain competitive advantage firms should also promote greater sharing of tangible and intangible resources among different divisions and business units. For filing favourable responses from the stock investors firms need to target and achieve higher profit and emphasis more on scale expansion rather than diversification as growth strategy. This study also contributes to the literature on organizational adaptation to environment in general and strategic management in particular in various ways. 'L1iis is one among the initial attempts to investigate the corporate level strategic responses of a cross section of firms to economic liberalization. The study is also a rare systematic attempt at using a multivariate framework to empirically verify the contingency theory of corporate strategy and perhaps is the first attempt to identify major dimensions of corporate strategy of firms and empirically validate them. In the process a measurement scheme of strategy has been developed which can capture diversification, consolidation and divestment decisions of firms by a set of dimensions. This gives us the opportunity to marry theories of diversification and corporate restructuring would help in developing a unified theory of corporate strategy.