lectures module 4 types of strategies

Skill Development at it’s Best

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Strategic ManagementMBA & BBA

Lectures Module 4

Types of Strategies

Course Lecturer: Farhan Mir


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Strategy hierarchy

1. Corporate strategy: 1) growth strategy, 2) stability strategy, 3) retrenchment strategy.

2. Business unit strategy: 1) cost leadership, 2) differentiation, 3) focus, 4) mixed.

3. Functional strategy.

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Three levels of Strategies

https://www.youtube.com/watch?v=xcJf_UCjIg0

https://www.youtube.com/watch?v=xcJf_UCjIg0


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Ch 5 -5

Types of Strategies

Operational Level

Functional Level

Division Level

CorpLevelA Large

Company


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Ch 5 -6

Types of Strategies

Functional Level

Operational Level

company

A small Company


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Types of Strategies

https://www.youtube.com/watch?v=isVsG6d9dmw

https://www.youtube.com/watch?v=isVsG6d9dmw


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Corporate strategies

• Top level management formulate for overall organization

• The question at the corporate level we should answer when design strategies: In what industry should we be operating?

• It depends on the outcome of SWOT analysis.

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Growth strategiesGrowth strategies:

They result increase in sales, market share and profit: the types:

• Internal growth: Increase internal capacity of organization without acquiring other firms.

• Conglomerate Diversification: Acquiring unrelated business.

• Merger: Two roughly similar size firms combine into one. To benefit of synergy.

• Strategic alliance: Temporary partnerships

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Corporate Restructuring

The change in a broad set of actions and decisions, e.g., changing relationships and organization of work.

• The aim of restructuring is to improve effectiveness.

• Restructuring could be growth, stability or retrenchment. This depends on why we use it.

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Retrenchment strategies

• Types:

1- Turnaround:

Eliminating unprofitable outputs, pruning/cutting assets, reducing size of work force, rethinking firm’s products lines and customer groups.

2- Divestment: sell one of business units

3- Liquidation: last resort strategy

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Four Broad Categories of Strategies• Integration

– Forward– Backward– Horizontal

• Intensive– Market Penetration– Market Development– Product Development

• Diversification– Related – Unrelated

• Defensive– Retrenchment– Divestiture– Liquidation


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Strategies in Action

Integration Strategies

• Forward integration• Backward integration• Horizontal integration


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Defined

• Gaining ownership or increased control over distributors or retailers

Example

• General Motors is acquiring 10% of its dealers.

Forward Integration


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Guidelines for Forward Integration

✓ Present distributors are expensive, unreliable, or incapable of meeting firm’s needs

✓ Availability of quality distributors is limited

✓ When firm competes in an industry that is expected to grow markedly

✓ Advantages of stable production are high

✓ Present distributor have high profit margins

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Defined

• Seeking ownership or increased control of a firm’s suppliers

Example

• Motel 8 acquired a furniture manufacturer.

Backward Integration


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Guidelines for Backward Integration

✓ When present suppliers are expensive, unreliable, or incapable of meeting needs

✓ Number of suppliers is small and number of competitors large

✓ High growth in industry sector

✓ Firm has both capital and human resources to manage new business

✓ Advantages of stable prices are important

✓ Present supplies have high profit margins

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Defined

• Seeking ownership or increased control over competitors

Example

• Palestinian Islamic Bank acquired Cairo-Amman Bank Islamic transaction branch.

Horizontal Integration


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Guidelines for Horizontal Integration

✓ Firm can gain monopolistic characteristics without being challenged by federal government

✓ Competes in growing industry

✓ Increased economies of scale provide major competitive advantages

✓ Faltering/losing due to lack of managerial expertise or need for particular resources

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Intensive Strategies

• Market penetration• Market development• Product development


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Defined

• Seeking increased market share for present products or services in present markets through greater marketing efforts

Example

• Ameritrade, the on-line broker, tripled its annual advertising expenditures to $200 million to convince people they can make their own investment decisions.

Market Penetration


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Guidelines for Market Penetration

✓ Current markets not saturated

✓ Usage rate of present customers can be increased significantly

✓ Market shares of competitors declining while total industry sales increasing

✓ Increased economies of scale provide major competitive advantages

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Defined

• Introducing present products or services into new geographic area

Example

• Khuzendar Tiles maker introduce his product to Gulf markets.

Market Development


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Guidelines for Market Development

✓ New channels of distribution that are reliable, inexpensive, and good quality

✓ Firm is very successful at what it does

✓ Untapped or unsaturated markets

✓ Capital and human resources necessary to manage expanded operations

✓ Excess production capacity

✓ Basic industry rapidly becoming global

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Defined

• Seeking increased sales by improving present products or services or developing new ones

Example

• Apple developed the G4 chip that runs at 500 megahertz.

• Khuzendar Tiles maker introduce Ceramic as a new product.

Product Development


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Guidelines for Product Development

✓ Products in maturity stage of life cycle

✓ Competes in industry characterized by rapid technological developments

✓ Major competitors offer better-quality products at comparable prices

✓ Compete in high-growth industry

✓ Strong research and development capabilities

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Diversification Strategies

• Concentric diversification• Conglomerate diversification• Horizontal diversification


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Defined

• Adding new, but related, products or services

Example

• National Westminister Bank PLC in Britain bought the leading British insurance company, Legal & General Group PLC.

Concentric Diversification


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Guidelines for Concentric Diversification

✓ Competes in no- or slow-growth industry

✓ Adding new & related products increases sales of current products

✓ New & related products offered at competitive prices

✓ Current products are in decline stage of the product life cycle

✓ Strong management team

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Defined

• Adding new, unrelated products

or services

Example

• Nokia being an exporter of wood and wood pulp jumped into telecommunication business

Conglomerate Diversification


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Guidelines for Conglomerate Diversification

✓ Declining annual sales and profits

✓ Capital and managerial talent to compete successfully in a new industry

✓ Financial synergy between the acquired and acquiring firms

✓ Exiting markets for present products are saturated

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Defined

• Adding new, unrelated products or services for

present customers

Example

• The El-Awda Co. provide ice-cream product to present customer

Horizontal Diversification


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Guidelines for Horizontal Diversification

✓ Revenues from current products/services would increase significantly by adding the new unrelated products

✓ Highly competitive and/or no-growth industry w/low margins and returns

✓ Present distribution channels can be used to market new products to current customers

✓ New products have counter cyclical sales patterns compared to existing products

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Defensive Strategies

• Joint venture• Retrenchment• Divestiture• Liquidation


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Defined

• Two or more sponsoring firms forming a separate organization for cooperative

purposes

Example

• Lucent Technologies and Philips Electronic NV formed Philips Consumer Communications to make and sell telephones.

Joint Venture


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Guidelines for Joint Venture

✓ Combination of privately held and publicly held can be synergistically combined

✓ Domestic forms joint venture with foreign firm, can obtain local management to reduce certain risks

✓ Distinctive competencies of two or more firms are complementary

✓ Overwhelming resources and risks where project is potentially very profitable (e.g., Alaska pipeline)

✓ Two or more smaller firms have trouble competing with larger firm

✓ A need exists to introduce a new technology quickly

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Defined

• Regrouping through cost and asset reduction to reverse declining sales and profit. Sometimes it is called turnaround or reorganizational strategy.

Example

• A company sold off a land and 4 apartments to raise cash needed. It introduce expense effective control system.

Retrenchment(turnaround)


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Guidelines for Retrenchment

✓ Firm has failed to meet its objectives and goals consistently over time but has distinctive competencies

✓ Firm is one of the weaker competitors

✓ Inefficiency, low profitability, poor employee morale, and pressure from stockholders to improve performance.

✓ When an organization’s strategic managers have failed

✓ Very quick growth to large organization where a major internal reorganization is needed.

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Defined

• Selling a division or part of an

organization

Example

• Harcourt General, the large US publisher, is selling its Neiman Marcus division.

Divestiture


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Guidelines for Divestiture

✓ When firm has pursued retrenchment but failed to attain needed improvements

✓ When a division needs more resources than the firm can provide

✓ When a division is responsible for the firm’s overall poor performance

✓ When a division is a misfit with the organization

✓ When a large amount of cash is needed and cannot be obtained from other sources.

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Defined

• Selling all of a company’s assets, in parts, for their

tangible worth

Example

• El-Ameer Block factory sold all its assets and ceased business.

Liquidation


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Guidelines for Liquidation

✓ When both retrenchment and divestiture have been pursued unsuccessfully

✓ If the only alternative is bankruptcy, liquidation is an orderly alternative

✓ When stockholders can minimize their losses by selling the firm’s assets

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Ch 5 -43

Michael Porter’s Generic Strategies

Cost Leadership Strategies(Low-Cost & Best-Value)

Differentiation Strategies

Focus Strategies(Low-Cost Focus & Best-Value Focus)


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Business Unit Strategies

• Here we answer the question:

How should we compete in the chosen industry?

Cost leadership

Differentiation (real or perceived).

Mixed

Focus

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6-46

Business Strategy

Focuses on improving competitiveposition of company’s products orservices within the specific industryor market segment


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Porter’s Competitive Strategies

Competitive Strategy --

–Low cost–Differentiation–Direct competition–Focus on niche


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Generic Competitive Strategies --

–Lower Cost strategy•Greater efficiencies than competitors

–Differentiation strategy•Unique/superior value, quality, features, service


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Competitive Advantage --

–Determined by Competitive Scope•Breadth of the target market


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Cost Leadership --

–Low-cost competitive strategy–Broad mass market–Efficient-scale facilities–Cost reductions–Cost minimization


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Michael Porter’s Generic Strategies – Cost

Leadership

• Cost leadership emphasizes producing standardized products at a very low per-unit cost for consumers who are price-sensitive.

• There are two types of cost leadership strategies.

• a. A low-cost strategy offers products to a wide range of customers at the lowest price available on the market.

• b. A best-value strategy offers products to a wide range of

customers at the best price-value available on the market.

Ch 5 -53


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Cost leadership

• Striving to be the low-cost producer in an industry can be especially effective when the market is composed of many price-sensitive buyers, when there are few ways to achieve product differentiation, when buyers do not care much about differences from brand to brand, or when there are a large number of buyers with significant bargaining

power.

Ch 5 -54


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Cost leadership• The basic idea behind a cost leadership strategy is to

underprice competitors or offer a better value and thereby gain market share and sales, driving some competitors out of the market entirely.

• 5. To successfully employ a cost leadership strategy, firms must ensure that total costs across the value chain are lower than that of the competition. This can be accomplished by:

• a. performing value chain activities more efficiently than competition, and

• b. eliminating some cost-producing activities in the value chain.

Ch 5 -55


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6-56


Differentiation –

–Broad mass market–Unique product/service–Premiums charged–Less price sensitivity


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Differentiation

• Differentiation is aimed at producing products that are considered unique. This strategy is most powerful with the source of differentiation is especially relevant to the target market

Ch 5 -57


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Differentiation

• A successful differentiation strategy allows a firm to charge higher prices for its products to gain customer loyalty because consumers may become strongly attached to the differentiation features.

• 3. A risk of pursuing a differentiation strategy is that the unique product may not be valued highly enough by customers to justify the higher price.

Ch 5 -58


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Differentiation

• Common organizational requirements for a successful differentiation strategy include strong coordination among the R&D and marketing functions and substantial amenities to attract scientists and creative people.

Ch 5 -59


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Focus

• 1. Focus means producing products and services that fulfill the needs of small groups of consumers.

• 2. There are two types of focus strategies.

• a. A low-cost focus strategy offers products or services to a small range (niche) of customers at the lowest price available on the market.

• b. A best-value focus strategy offers products to a small range of customers at the best price-value available on the market. This is sometimes called focused differentiation.

Ch 5 -60


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Focus

• Focus strategies are most effective when the niche is profitable and growing, when industry leaders are uninterested in the niche, when industry leaders feel pursuing the niche is too costly or difficult, when the industry offers several niches, and when there is little competition in the niche

segment.

Ch 5 -61


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6-62


Cost-Focus –

–Low-cost competitive strategy–Focus on market segment–Niche focused–Cost advantage in market segment


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6-63


Differentiation Focus –

–Specific group or geographic market focus–Differentiation in target market–Special needs of narrow target market


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Stuck in the middle –

–No competitive advantage–Below-average performance


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Risks of Generic Strategies

Risks of Cost LeadershipCost leadership is not sustained:• Competitors imitate.• Technology changes.• Other bases for cost

leadership erode.Proximity in differentiation is lost.Cost focusers achieve even lower cost in segments.

Risks of DifferentiationDifferentiation is not sustained:• Competitors imitate.• Bases for differentiation

become less important to

buyers.Cost proximity is lost.Differentiation focusers achieve even greater differentiation in segments.

Risks of FocusThe focus strategy is imitated:The target segment becomes structurally unattractive:• Structure erodes.• Demand disappears.Broadly targeted competitors overwhelm the segment:• The segment’s

differences from othersegments narrow.

• The advantages of a broad line increase.

New focusers subsegment the industry.

Risks of Cost Leadership

Cost leadership is not sustained:• Competitors imitate.• Technology changes.• Other bases for cost

leadership erode.Proximity in differentiation is lost.Cost focusers achieve even lower cost in segments.

Risks of DifferentiationDifferentiation is not sustained:• Competitors imitate.• Bases for differentiation

become less important to

buyers.Cost proximity is lost.Differentiation focusers achieve even greater differentiation in segments.

Risks of FocusThe focus strategy is imitated:The target segment becomes structurally unattractive:• Structure erodes.• Demand disappears.Broadly targeted competitors overwhelm the segment:• The segment’s

differences from othersegments narrow.

• The advantages of a broad line increase.

New focusers subsegment the industry.


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Level of Strategy

• Functional/operational Strategies:

Concern with org. internal resources and processes which effectively deliver the corporate and business strategic direction.

Functional strategies are interrelated.

Functional strategies e.g.: purchasing & materials management, production, finance, R&D, HR, IT, and marketing.

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Ways to Achieve Strategies

• Partnerships with Competitors (Synergies)

• Strategic Alliances and Joint Ventures

• Mergers

• Acquisitions


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Tactics to Support Strategies

• First Mover Advantage

– First to Introduce Products, Services, Technology, Approaches

– Build Repute as Market Leaders

– Generate Customer Loyalty

• Outsourcing and Reshoring

– Cost and Supply Benefits Vs Control and Brand Building at Home


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Strategic Management for Non Profit Organizations

• In most of the ways Strategic Landscape is similar for both type of organizations i.e. profit vs non-profit

– Both have customers, employees, and certain challenges posted by competitors

– Non-profit organizations however may be totally dependent on outside funding and therefore may require a more carefully crafted strategic management process


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Strategic Management for Non Profit Organizations

• Education– Challenge of Online Classes– US change in demographics – Shift of Population towards eastern and

western states– Rely on More Funding

• Medical– Threat to Hospital Industries– Service to Home emerging– Integration by acquiring ambulance, Waste Disposal and Diagnostics

Services

• Government– Restricted approach towards Strategic Management as being the public

sector – especially cannot go for unrelated diversification– Government sector departments are gradually allowing employees to

participate in strategic management process – Strategic plans are made lure funding on multiple projects


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purchasing & materials management (as example)

Buying materials in quantity, quality and cost which correspond with the corp. generic strategies (Business Unit strategies).

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lectures module 4 types of strategies

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