4. Diversification & Porters Generic Stategies

8/3/2019 4. Diversification & Porters Generic Stategies

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Diversification Strategies

Diversification

Strategies

Concentric Diversification

Conglomerate Diversification

Horizontal Diversification


Becoming less popular as organizations are

finding it more difficult to manage diverse

business activities


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Concentric Diversification Adding new, but related, products or services

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

Strong management team


Conglomerate Diversification

Adding new, unrelated products or services

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


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Horizontal Diversification Adding new, unrelated products or services for

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 with 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

Diversification StrategiesAdding

New

Products

HORIZONTAL

DIVERSIFICATIONCONGLOMERATE

DIVERSIFICATION

ew ro uc s

Similar Customers

CONCENTRIC

DIVERSIFICATION

Similar Products

HORIZONTAL

INTEGRATION

Similar Products

New Customers

Serving New

Customers

ew us omers


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Defensive Strategies

Defensive

Strategies

Retrenchment

Divestiture

Liquidation


Retrenchment

Regrouping through cost and asset reduction to

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. en an organ za on s s ra eg c managers ave a e

Very quick growth to large organization where a majorinternal reorganization is needed


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Divestiture Selling a division or part of an organization

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 firms overall poor

When a division is a misfit with the organization When a large amount of cash is needed and cannot be

obtained from other sources.


Liquidation

Selling all of a companys assets, in parts, for their

tan ible worth

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 firms assets


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Competitive Strategies

Competitive Position

Strong Weak Market penetration

Product develo ment Market penetration

Growth

Rapid

Slow

Market development

Forward integration

Backward integration

Horizontal integration

Concentric diversification

ro uct eve opment

Market development

Horizontal integration

Divestiture

Liquidation

Retrenchment


Horizontal diversification


Horizontal diversification

Con lomerate diversification

Divestiture

Liquidation

Joint ventures

Porters Generic Strategy

If the primary determinant of a firm's profitability is the attractiveness of the

industry in which it operates, an important secondary determinant is its

position within that industry. Even though an industry may have below-

average pro ta ty, a rm t at s opt ma y pos t one can generate super or

returns.

A firm positions itself by leveraging its strengths and its strengths ultimately

fall into one of two headings: cost advantage and differentiation.

By applying these strengths in either a broad or narrow scope, three generic

strategies result: cost leadership, differentiation , andfocus. These strategies are

.they are not firm or industry dependent.


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Porter's Generic Strategies

Target

Scope

Advantage

Low Cost Product Uniqueness

Broad

(Industry

Wide

Cost Leadership

Strategy

Differentiation

Strategy

Narrow

(Market

Segment)

Focus

Strategy

(low cost)

Focus

Strategy

(differentiation)

Cost Leadership Strategy

This generic strategy calls for being the low cost producer in an industry for a given

level of quality. The firm sells its products either at average industry prices to earn a

profit higher than that of rivals, or below the average industry prices to gain market share.

In the event of a price war, the firm can maintain some profitability while the competition

suffers losses . Even without a price war, as the industry matures and

prices decline, the firms that can produce more cheaply will remain profitable for a longer

period of ti me. Th e co st leadershi p strat egy u su ally t arget s a bro ad mark et.

Some of the ways that firms acquire cost advantages are by improving process efficiencies,

gaining unique access to a large source of lower cost materials, making optimal outsourcing

and vertical integration decisions, or avoiding some costs altogether. If competing firms are

unable to lower their costs by a similar amount, the firm may be able to sustain a

competitive advantage based on cost leadership.

Cost Leadership Strategy

Firms that succeed in cost leadership often have the following internal strengths:

Access to the capital required to make a significant investment in production assets; thisinvestment represents a barrier to entry that many firms may not overcome.

Skill in designing products for efficient manufacturing, for example, having a smallcomponent count to shorten the assembly process.

High level of expertise in manufacturing process engineering.

Efficient distribution channels.

e r s assoc a e w s s ra egy s, o er rms may e a e o ower e r cos s as we .

As technology improves, the competi tion may be able to leapfrog the product ion

capabilities, thus eliminating the competitive advantage. Additionally, several firms

following a focus strategy and targeting various narrow markets may be able to achieve an

even lower cost within their segments and as a group gain s ignificant market share .


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A differentiation strategy calls for the development of a product or service that offers unique

attributes that are valued by customers and that customers perceive to be better than or different

from the products of the competition. The value added by the uniqueness of the product may allowthe firm to charge a premium price for it.

v

Differentiation Strategy

unique product. Because of the product's unique attributes, if suppliers increase their prices the

firm may be able to pass along the costs to its customers who cannot find substitute products

easily.

Firms that succeed in a differentiation strategy often have the following internal strengths:

Access to leading scientific research.

Highly skilled and creative product development team.

Strong sales team with the ability to successfully communicate the perceived strengths of theproduct.

Corporate reputation for quality and innovation.

The risks associated with a differentiation strategy include imitation by competitors andchanges in customer tastes. Additionally, various firms pursuing focus strategies may be ablet o a c h ie v e e v en g re a t e r d if f e r e n t ia t io n i n t h ei r m a r k et s e g me n ts .

The focus strategy concentrates on a narrow segment and within that segmentattempts to achieve either a cost advantage or differentiation. The premise isthat the needs of the group can be better serviced by focusing entirely on it. Afirm using a focus strategy often enjoys a high degree of customer loyalty,and this entrenched loyalty discourages other firms from competing directly.

Focus Strategy

Because of their narrow market focus, firms pursuing a focus strategy havelower volumes and therefore less bargaining power with their suppliers.However, firms pursuing a differentiation-focused strategy may be able topass higher costs on to customers since close substitute products do not exist.

Firms that succeed in a focus strategy are able to tailor a broad range ofproduct development strengths to a relatively narrow market segment thatthey know very well.

ome r s s o ocus strateg es nc u e m tat on an c anges n t e targetsegments. Furthermore, it may be fairly easy for a broad-market cost leader toadapt its product in order to compete directly. Finally, other focusers may beable to carve out sub-segments that they can serve even better.


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These generic strategies are not necessarily compatible with one another. Forexample, if a firm differentiates itself by supplying very high quality products, it

risks undermining that quality if it seeks to become a cost leader. Even if the qualitydid not suffer, the firm would risk projecting a confusing image.

For this reason, to be successful over the long-term, a firm must select only one of

Combination of Generic Strategies

these three generic strategies. Otherwise, with more than one single generic strategythe firm will be "stuck in the middle" and will not achieve a competitive advantage.

Firms that are able to succeed at multiple strategies often do so by creating separatebusiness units for each strategy. By separating the strategies into different unitshaving different policies and even different cultures, a corporation is less likely tobecome "stuck in the middle."

A single generic strategy is not always best because within the same productcustomers often seek multi-dimensional satisfactions such as a combination ofualit st le convenience and rice., , , .

There have been cases in which high quality producers faithfully followed a singlestrategy and then suffered greatly when another firm entered the market with alower-quality product that better met the overall needs of the customers.

These generic strategies each have a ttributes that can serve to defend against competitive forces. The following

table compares some characteristics of the generic strategies in the context of the Porter's f ive forces.

Industry

Force

Generic Strategies

Generic Strategies and Industry Forces

Cost Leadership Differentiation Focus

Entry

Barriers

Ability to cut price in

retaliation deters potential

entrants.

Customer loyalty can

discourage potential entrants.

Focusing develops core

competencies that can act as

an entry barrier.

Buyer

Power

Ability to offer lower price to

powerful buyers.

Large buyers have less power

to negotiate because of few

close alternatives.

Large buyers have less power

to negotiate because of few

alternatives.

Supplier Better insulated from Better able to pass on supplier

Suppliers have power because

of low volumes, but a

differentiation-focused firm isower ower u supp ers. r ce ncreases to customers. better able to pass on supplierprice increases.

Threat of

Substitutes

Can use low price to defend

against substitutes.

Customer's become attached

to differentiating attributes,

reducing threat of substitutes.

Specialized products & core

competency protect against

substitutes.

RivalryBetter able to compete on

price.

Brand loyalty to keep

customers from rivals.

Rivals cannot meet

differentiation-focused

customer needs.


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Formulating Strategies

Porters Generic Strategies

Differentiation strategy

An organization seeks to distinguish itself from competitors through

the quality of its products or services.

Overall cost leadership strategy

An organization attempts to gain competitive advantage by reducing

its costs below the costs of competing firms.

Focus strategy

An organization concentrates on a specific regional market, product

line, or group of buyers.

Value Chain Analysis

Firm InfrastructureSU

P

AA

CC

TT

II

VV

Technology Development

Procurement

P

O

R

T

II

TT

II

EE

SS

Primary Activities


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Porters Generic Strategies

Strategy Type Definition Examples

Differentiation Distinguish products orse rvices

Rolex (watches)

-Mercedes-Benz Cars

Nikon Digital Cameras

Sony Vaio Laptops

Overall cost leadership Reduce manufacturingrand other costs

TimexHyundai CarsCasio Digital CamerasParker PensAcer Laptops

Focus Concentrate on specific

regional market, product

market, or group of buyers

Tag HeuerToyota CarsCanon Digital Cameras

Hewlett Packard Laptops

Implementing Porters Generic StrategiesDifferentiation Strategy

Marketing and sales must emphasize high-quality, high-value

image of the organizations products or services.

vera os ea ers p ra egy

To support cost leadership, marketing and sales are likely to focus

on simple product attributes and how these product attributes meet

customer needs in a low-cost and effective manner.

Focus Strategy

This strategy is implemented via the same approaches used for

differentiation and cost leadership, depending on which one(differentiation or cost leadership) is the proper basis for competing

in or for a specific market segment, product category, or group

buyers.

4. Diversification & Porters Generic Stategies

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