MGT703: STRATEGIC MANAGEMENTDec 10, 2008 · Weak or crisis-ridden firms Launch an offensive...

MGT703: STRATEGIC MANAGEMENT

Module 3C: Positioning Strategy in Different Industry Environments &

Diversification – Strategies for managing a group of businesses

Chapter 8 and 9DR AHMAD FAISAL

Doc: MGT703 – M3C December 2008 Dr Ahmad FaisalNon-Commercial Use Only

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The information is merely for informative purposes and any statements made or issues highlighted in this document shall not in any circumstances constitute or be deemed to constitute a guarantee or warranty by the author and the publisher as to the accuracy of such statements or issues. Copyrighted materials provided in this document belongs to the respective individuals and or entities. The material is issued in non-commercial confidence and must not be produced in whole or in part for any reason to any third party by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without the prior written consent. The information is merely for informative purposes and without any contractual obligations whatsoever. The author and the publisher shall not be liable for any loss, expenses, damage or claim arising out of statements and or issues and expressly disclaims all responsibility for the material in this document and all liability to any person in relation to any action that person may take or fail to take in reliance, whether in whole or in part, on this document.

Disclaimer and copyright notices


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Module Overview

• Strategies for • Competing in Emerging Industries• Competing in Turbulent, High Velocity

Markets• Competing in Maturing Industries• Firms in Stagnant or Declining Industries• Competing in Fragmented Industries• Sustaining Rapid Company Growth • Industry Leaders• Runner-up Firms• Weak and Crisis-Ridden Businesses

• Ten Commandments for Crafting Successful Business Strategies

• Grand strategies

• Diversification as a corporate-level strategy

• Related and unrelated diversification

• Strategy evaluation of a diversified company

• Use of BCG Matrix and Nine-cell Matrix

• Evaluation of cross-business strategic fits

• A corporation as a portfolio of core competencies

Chapter 8 Chapter 9Doc: MGT703 – M3C December 2008 Dr Ahmad FaisalNon-Commercial Use Only

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Matching strategy to a company’s situation

The most important

drivers shaping a firm’s

strategic options fall into two categories

Firm’s competitive capabilities,

market position, best opportunities

Nature of industry and competitive conditions


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Glimpse at Industry

Emerging Industry: e.g.• New and unproven market• Proprietary technology• Lack of consensus regarding which of

several competing technologies will win out

• Low entry barriers• Experience curve effects may permit

cost reductions as volume builds• Buyers are first-time users and marketing

involves inducing initial purchase and overcoming customer concerns

• First-generation products are expected to be rapidly improved so buyers delay purchase until technology matures

• Possible difficulties in securing raw materials• Firms struggle to fund R&D, operations and

build resource capabilities for rapid growth

High-Velocity Markets/Industry: e.g.• Rapid-fire technological change• Short product life-cycles• Entry of important new rivals• Frequent launches of

new competitive moves• Rapidly evolving

customer expectations


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Emerging Industry

Industry leadership through bold, creative strategyWork on technology, improve product quality, and develop attractive performance featuresForm strategic alliances with key suppliers or companies having related technological expertiseCapture potential first-mover advantagesPursue new customer (new applications) or enter into new geographical areasFocus on advertising and creating brand loyaltyUse price cuts to attract price-sensitive buyers

Strategy Options


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Hi Velocity Industry

Invest aggressively in R&DDevelop quick response capabilities

Shift resourcesAdapt competenciesCreate new competitive capabilitiesSpeed new products to market

Use strategic partnerships to developspecialized expertise and capabilitiesInitiate fresh actions every few monthsKeep products/services fresh and exciting

Strategy Options


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The industry life cycleSource: Hofer as cited in Hill, Jones & Galvin (2004, p. 93)

Development of distinctive competenciesRequires significant capitalMarket share-building strategyCompanies in weak competitive positions may exit industry during shake-out

Consolidate market position and existing market nichesMany new entrants and this may dilute market shareFirst movers require capital infusionEnter new market niches

Secure existing market shareTarget resources to draw market share away from weak companiesInitiate, or defend against, price warsWithdrawal to a focused strategy

Rewards to investorsContinue to invest in the development of distinctive competenciesHigher levels of commitment to cost-leadership or differentiationProfit strategy

Market and product concentrationAsset reduction (harvest strategy)Turnaround strategiesLiquidationDivestiture

Emer

ging

Indu

stry

St

rate

gic

Cho

ice Industry leadership through bold, creative strategy

Work on technology, improve product quality, and develop attractive performance featuresForm strategic alliances with key suppliers or companies having related technological expertiseCapture potential first-mover advantagesEnter into new geographical areasFocus on advertising and creating brand loyaltyUse price cuts to attract price-sensitive buyers


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Competing in a mature industry

Strategic Choice:• Trim / cut back marginal products and

models• Emphasize innovation in the value chain • Strong focus on cost reduction• Increase sales to present customers• Purchase rivals at bargain prices• Expand internationally• Build new, more flexible competitive

capabilities

Strategies for creating entry barriers :

• Product Proliferation• Price Cutting• Maintain Excess Capacity

Source: Hill, Jones & Galvin (2004, pp. 230~237)

Managing Rivalry


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Competing in a decline industrySource: Hill, Jones & Galvin (2004, pp. 241~243)

Intensity of competitionSpeed of declineHeight of exit barriersLevel of fixed costCommodity nature of product

Strategic choice


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Fragmented industries

Absence of market leaders with large market sharesBuyer demand is diverse and geographically scatteredLow entry barriers and absence of scale economiesBuyers require small amounts of customised productsMarket for industry’s product/service may be globalising, thus putting many companies across the world in same market arenaExploding technologies force firms to specialise just to keep up in their area of expertise Industry is young and crowded with no firm having yet developed recognition to command a large market share

CharacteristicsConstruction & operation of standardised outlets in favourable locations Become a low-cost operatorSpecialize by product typeSpecialize by customer typeFocus on limited geographic area

Strategic choice


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Sustaining Growth

3 Strategy Horizons Company’s position

1

2

Industry Leader

Runner-Up Firms

Weak or crisis-ridden firms


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Industry Leader1Characteristics: Strong market position Well-known reputation Proven strategyBut can this leadership be sustained?

Be a first-mover, leading industry changeBest defense is a good offenseRelentlessly pursue continuous improvement and innovationForce rivals to jumble to keep upLaunch fresh initiatives to keep rivals off balanceGrow faster than industry, taking market share from rivals

Stay on the Offensive

make it difficult for new firms to enter, maintain current market share and market position, and protect competitive advantage are:

Increase advertising and R&DProvide higher levels of customer service Introduce more brands to match attributes of rivalsAdd personalized services to boost buyer loyaltyKeep prices reasonable and quality attractiveBuild new capacity ahead of market demandInvest enough to remain cost competitivePatent feasible alternative technologiesSign exclusive contracts with best suppliers and distributors

Fortify-and-defend

Be quick to meet price cuts of rivalsCounter with large-scale promotional campaigns if rivals boost advertisingOffer better deals to rivals’major customers Dissuade distributors from carrying rivals’ productsProvide salespersons with documentation about weaknesses of competing productsMake attractive offers to key executives of rivalsUse arm-twisting tactics to pressure present customersnot to use rivals’ products

Muscle Flexing

Strategy OptionsDoc: MGT703 – M3C December 2008 Dr Ahmad FaisalNon-Commercial Use Only

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Runner-Up Firms2Types: Market challengers Use offensive strategies to gain market share

Focusers Concentrate on serving a limited portion of market

Perennial runners-up Lack competitive strength to do more than continue in trailing positionFirms with small market share need to overcome obstacles in trying to strengthen their positions: e.g. economies of scale, customer recognition, mass media advertising, capital requirements.

Build market share to overcome cost advantage of larger rivals

Use lower prices to win customers from weak, higher-cost rivalsMerge with or acquire rivals to achieve size needed to capture greater scale economiesInvest in new cost-saving facilities and equipment, perhaps relocating operations to countries where costs are lowerPursue technological innovations or radical value chain revamping to achieve cost-savings

Strategic Options

Offensive strategies to build market shareGrowth-via-acquisition strategyVacant-niche strategySpecialist strategySuperior product strategyDistinctive image strategy Content follower strategy

Strategy


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Weak or crisis-ridden firms

Launch an offensive turnaround strategy (if resources permit)Employ a fortify-and-defend strategy(to the extent resources permit)Pursue a fast-exit strategyAdopt an end-game strategy

Strategic Options

• Turnaround• Sell off assets to generate cash and/or reduce

debt • Revise existing strategy• Launch efforts to boost revenues• Cut costs• Combination of efforts

Liquidation• Wisest strategic option in certain situations

Lack of resources Dim profit prospects May serve stockholder interests better than bankruptcy

• Unpleasant strategic optionHardship of job eliminations Effects of closing

on local community• End Game

• Steers middle course between status quo and exiting quickly

• Involves gradually sacrificing market positionin return for bigger near-term cash flow/profit

• Objectives Short-term Generate largestfeasible cash flow Long-term Exit market


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commandments 101. Always put top priority on crafting and executing strategic moves that enhance a firm’s

competitive position for the long-term and that serve to establish it as an industry leader.

2. Be prompt in adapting and responding to changing market conditions, unmet customer needs and buyer wishes for something better, emerging technological alternatives, and new initiatives of rivals. Responding late or with too little often puts a firm in the precarious position of playing catch-up.

3. Invest in creating a sustainable competitive advantage - it is a most dependable contributor to above-average profitability.

4. Avoid strategies capable of succeeding only in the most optimistic circumstances.

5. Don’t underestimate the reactions and the commitment of rival firms.

6. Address the competitive weaknesses of competitors - usually more profitable than competing against competitive strengths.

7. Be judicious in cutting prices without an established cost advantage.

8. Strive to open up very meaningful gaps in quality or service or performance features when pursuing a differentiating strategy.

9. Avoid “stuck in the middle” strategies

10. Be aware that aggressive strategic moves to extract crucial market share away from rivals often provoke aggressive retaliation in the form of a price war Doc: MGT703 – M3C December 2008 Dr Ahmad Faisal

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Diversification – Strategies for managing a group of

businesses


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Overview

•Grand strategies

•Diversification as a corporate-level strategy

•Related and unrelated diversification

•Strategy evaluation of a diversified company

•Use of BCG Matrix and Nine-cell Matrix

•Evaluation of cross-business strategic fits

•A corporation as a portfolio of core competencies


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Overview

Corporate-LevelStrategy

The overall organisational strategy that addresses the question “What business(es) are we in or should we be in?”

Acquisitions, unrelated diversification, related diversification, single businesses

BCG MatrixStarsQuestion marksCash cowsDogs

PORTFOLIO STRATEGY

Growth

Stability

Retrenchment/recovery

GRAND STRATEGIES


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Corporate strategy

addresses what business units the organisation will operate, how the strategies of those business units will be coordinated to strengthen the organisation’s competitive position and how resources will be allocated among the business units


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Grand strategies

Grand strategies are those that provide strategic direction at the corporate level where a firm has several business units (Hitt, Ireland & Palia 1982)

Grand strategies have also been referred to as master strategies (Newman & Logan 1971) and primary strategies (Bourgeois 1980)

(Glueck 1976),Grand strategies are:

• Internal growth – leveraging existing resource strengths

• External growth – acquisitions, mergers, joint ventures, strategic alliances

• Stability – focus on existing product/market

• Retrenchment – cost reduction, divestment


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single-business strategy

Competitive strengths• Less ambiguity about – “Who we are”, “What we do”, “Where we are

headed”• Resources can be focused on

• Improving competitiveness• Expanding into new geographic markets• Responding to changing market conditions• Responding to evolving customer preferences

Risks• Devoting resources to only one area• If market becomes unattractive, the firm suffers• Unforeseen changes can undermine a single business firm’s prospects

• Technological innovation• New products• Changing customer needs• New substitutes


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Why diversify?

• To build shareholder value and thereby create synergy

• Diversification is capable of building shareholder value if it passes three tests:

1. Industry attractiveness test — the industry presents good long-term profit opportunities

2. Cost of entry test — the cost of entering is not so high as to spoil the profit opportunities

3. Better-Off Test — the company’s different businesses should perform better together than as stand-alone enterprises, such that company A’s diversification into business B produces a 1 + 1 = 3 effect for shareholders

Creating value through diversification

• Superior internal governance (acquisition and restructuring strategy)

• Transferring competencies

• Economies of scope

Bureaucratic costs and the limits of diversification

• Number of businesses

• Coordination among businesses

Diversification can be conglomerate or concentric (Pearce 1982)


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Strategy Alternatives – diversify

Involves diversifying into businesses whose value chains possess competitively valuable “strategic fits” with the value chain(s) of the present business(es)

Capturing the “strategic fits” makes related diversification a 1 + 1 = 3 phenomenon

Involves diversifying into businesses with No strategic fit, No meaningful value chainrelationships, No unifying strategic theme

Basic approach – Diversify into any industry where potential exists to realise good financial results

While industry attractiveness and cost-of-entry tests are important, better-off test is secondary


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Diversify – relatedStrategic Fit

Exists whenever one or more activities in the value chains of different businesses are sufficiently similar to present opportunities for:

•Transferring competitively valuable expertise or technological know-how from one business to another

•Combining performance of common value chain activities to achieve lower costs

•Exploiting use of a well-known brand name

•Cross-business collaboration to create competitively valuable resource strengths and capabilities

Economies of scope

Stem from cross-business opportunities to reduce costs

•Arise when costs can be cut by operating two or more businesses under same corporate umbrella

•Cost saving opportunities can stem from interrelationships anywhere along the value chains of different businessesDoc: MGT703 – M3C December 2008 Dr Ahmad Faisal

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Diversify – unrelatedReverse of related

No strategic fit or Economies of scope

Appeal

• Business risk scattered over different industries

• Financial resources can be directed to thoseindustries offering best profit prospects

• If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced

• Stability of profits – Hard times in one industrymay be offset by good times in another industry

Drawback

• Demanding Managerial Requirements

• Limited Competitive Advantage Potential


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Diversify – Combined

• Dominant-business firms – one major core business accounting for 50 -80 percent of revenues, with several small related or unrelated businesses accounting for remainder

• Narrowly diversified firms – Diversification includes a few (2 - 5) related or unrelated businesses

• Broadly diversified firms – Diversification includes a wide collection of either related or unrelated businesses or a mixture

• Multi-business firms – Diversification portfolio includes several unrelated groups of related businesses

• Related Diversification – Strategy drivenapproach in creating shareholders’ value

• Unrelated Diversification – Finance drivenapproach in creating shareholders’ value


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Evaluate Diversified Co’s Strategy

Step 1: Assess long-term attractiveness of each industry firm is in

Step 2: Assess competitive strength of firm’s business units

Step 3: Check competitive advantage potential of cross-business strategic fits among business units

Step 4: Check whether firm’s resources fit requirements of present businesses

Step 5: Rank performance prospects of businesses and determine priority for resource allocation

Step 6: Craft new strategic moves to improve overall company performance


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Evaluate Diversified Co’s Strategy

Industry attractiveness factors• Market size and projected growth

• Intensity of competition

• Emerging opportunities and threats

• Presence of cross-industry strategic fits

• Resource requirements

• Seasonal and cyclical factors

• Social, political, regulatory, and environmental factors

• Industry profitability

• Degree of uncertainty and business risk

Competitive strength factors• Relative market share

• Costs relative to competitors

• Ability to match/beat rivals on key product attributes

• Ability to benefit from strategic fits with sister businesses

• Ability to exercise bargaining leverage with key suppliers or customers

• Calibre of alliances and collaborative partnerships

• Brand image and reputation

• Competitively valuable capabilities

• Profitability relative to competitors


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Industry Attractiveness-Competitive Strength Matrix – Mckinsey 9 cell matrix


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Portfolio Strategy – BCG Matrix

High

Low

Small Large


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Evaluate portfolio for competitively valuable cross-business strategic fits

Identify businesses which have value chain match-ups offering opportunities to

• Reduce costs – Purchasing, Manufacturing, Distribution

• Transfer skills / technology / intellectual capital from one business to another

• Transfer use of a well-known and competitively powerful brand name from one business to another

• Create valuable new competitive capabilities


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A corporation as a portfolio of core competencies

Source: Hamel & Prahalad (1994, p. 227)


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Strategies for Entering New Businesses / Diversification

Acquisition of an existing companyMost popular approach to diversification with following advantages:

• Quicker entry into target market• Easier to overcome certain entry barriers• Acquiring technological know-how• Establishing supplier relationships• Becoming big enough to match rivals’ efficiency and

costs• Having to spend large sums on introductory advertising

and promotion• Securing adequate distribution access

More attractive when• Parent firm already has most of needed resources to

build a new business• Ample time exists to launch a new business• Internal entry has lower costs than entry via acquisition• New start-up does not have to go head-to-head

against powerful rivals• Additional capacity will not adversely impact supply-

demand balance in industry • Existing firms are slow in responding to new entry

Internal Start-Up

Joint ventures and strategic partnershipsGood way to diversify when

• Uneconomical or risky to go it alone• Pooling competencies of two partners provides more

competitive strength• Only way to gain entry into a desirable foreign market

Foreign partners are needed to• Overcome tariff barriers and import quotas• Offer local knowledge about

• Market conditions• Customs and cultural factors• Customer buying habits• Access to distribution outlets


MGT703: STRATEGIC MANAGEMENTDec 10, 2008 · Weak or crisis-ridden firms Launch an offensive...

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Transcript of MGT703: STRATEGIC MANAGEMENTDec 10, 2008 · Weak or crisis-ridden firms Launch an offensive...