Strategic Choices- Growth Directions- Mar 13

Strategic Choices: Growth Directions

7-*Orientation Toward Growth- DirectionalManagers decide on 3 grand strategies based on the following questions:Expand, cut back, or stays the same (status quo)?Concentrate within current industry or diversify into other industries?If expansion then decide if through internal development, acquisitions, mergers, or strategic alliances?

Exploring Corporate Strategy, Seventh Edition, Pearson Education Ltd 2005

To avail of opportunities in the external and internal environment.To avail economies of large scale production & distribution. To build entry barriers To build capacity to survive during periods of recession and depression.


Development directions are the strategic options available to an organisation, in terms of products and market coverage, taking into account the strategic capability of the organisation and the expectations of stakeholders


Internal MethodsBuild on and develop an organisations own capabilitiesOrganic developmentExternal methodsMergers and AcquisitionsTake over ownership of another organisationStrategic AlliancesTwo or more organisations share resources and activities


Strategies used by companies to grow and expand in their existing industry/industries are are known as concentration strategies.The focus is to enhance organisational growth by concentrating on core business and staying in the same industry. Focus is on building the existing competences to achieve competitive advantage.


Product-line gap: a firm may not have a complete product line. This gap can be filled by increasing the width and depth of the range. Eg: P& G hair care products.

Distribution gap: the firms distribution network may not have the required coverage.

Usage gap: The entire market is not using the product. Encourage new users.


Knowledge of market and customers: the organisation knows its markets and customers and therefore can devise functional and competitive strategies to gain a _competitive advantage.Specialisation: allows the organisation to focus its attention on doing a few things but doing them well to gain a competitive advantage.


Lack of diversity in products: concentration on a few products/ markets does not spread the risk and can put the company in a weak positionLimited growth


Exhibit 7.1Source: Adapted from H. Ansoff, Corporate Strategy, Penguin, 1988, Chapter 6.


Market penetration refers to a strategy of increasing share of current markets with the current product range.This strategy:builds on established strategic capabilities; means the organisations scope is unchanged; leads to greater market share and increased power with buyers and suppliers;and provides greater economies of scale; and experience curve benefits.

Guidelines for Market PenetrationCurrent 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


Product development refers to a strategy by which an organisation delivers modified or new products to existing markets.This strategy :involves varying degrees of related diversification (in terms of products); can be an expensive and high riskmay require new strategic capabilities


When an organization has successful products that are in the maturity stage of the product life cycleWhen an organization competes in an industry that is characterized by rapid technological developmentsWhen major competitors offer better-quality products at comparable pricesWhen an organization competes in a high-growth industry5-*


Normally requires some product development and capability developmentcan take the form of attracting new users (e.g. extending the use of aluminium to the automobile industry);can take the form of new geographies (e.g. extending the market covered to new areas international markets being the most important);must meet the critical success factors of the new market if it is to succeed;

Offer existing products in new markets


When new channels of distribution are available that are reliable, inexpensive, and of good qualityWhen an organization is very successful at what it doesWhen new untapped or unsaturated markets existWhen an organization has excess production capacity

5-*


A strategy that takes the organisation away from both its current markets and productsRelated diversification involves diversifying into products or services with relationships to the existing business.Conglomerate (unrelated) diversification involves diversifying into products or services with no relationships to the existing businesses.


Exploiting economies of scope efficiency gains through applying the organisations existing resources or competences to new markets or services.Exploiting superior internal processes.Increasing market power.Responding to market decline, Spreading risk


Figure 7.3 Diversity and performance


When an organization competes in a no-growth or a slow-growth industryWhen adding new, but related, products would significantly enhance the sales of current productsWhen new, but related, products have seasonal sales levels that counterbalance an organizations existing peaks and valleys.When an organizations products are currently in the declining stage of the products life cycle.When an organization has a strong management team5-*


Conglomerate (or unrelated) diversification takes the organisation beyond both its existing markets and its existing products and radically increases the organisations scope.

This is pursued when an organization has the opportunity to purchase an unrelated business that is an attractive investment opportunity


Figure 7.4 Diversification and integration options: car manufacturer example


Allow a firm to gain control over:

Distributors

Suppliers

competitors


Vertical integration describes entering activities where the organisation is its own supplier or customer.Backward integration refers to development into activities concerned with the inputs into the companys current business.Forward integration refers to development into activities concerned with the outputs of a companys current business.


Objective: Seeking ownership or increased control over competitors

Guidelines for Horizontal Integration

Firm can gain monopolistic characteristics without being challenged by federal governmentCompetes in growing industryIncreased economies of scale provide major competitive advantagesFaltering due to lack of managerial expertise or need for particular resources


While staying in the same business, efforts are made to improve functional efficiencies through better deployment and utilisation of resources.Organisation aims at modest growth.It is basically a safe strategy and carries low risk.It permits the firm to concentrate on its resources and focus on the present products and markets.


Environment is stable & firm is serving a well-defined market/ segment.The firm is not in a position to generate additional investments for market or product development.This strategy is at times used by the firms as a Pause strategy , when the firms has had good growth and expansion in the past and want to rest for a while before moving ahead.


Three elements of strategic choiceCompetitive strategyDirection of developmentMethod of developmentFour categories of development directionsMarket PenetrationProduct developmentMarket developmentDiversification

Prentice Hall 2006*** When an organization has successful products that are in the maturity stage of theproduct life cycle; the idea here is to attract satisfied customers to try new (improved)products as a result of their positive experience with the organizations present productsor services. When an organization competes in an industry that is characterized by rapid technologicaldevelopments. When major competitors offer better-quality products at comparable prices. When an organization competes in a high-growth industry. When an organization has especially strong research and development capabilities.** When new channels of distribution are available that are reliable, inexpensive, and of goodquality. When an organization is very successful at what it does. When new untapped or unsaturated markets exist. When an organization has the needed capital and human resources to manage expandedoperations. When an organization has excess production capacity. When an organizations basic industry is rapidly becoming global in scope.*** When an organization competes in a no-growth or a slow-growth industry. When adding new, but related, products would significantly enhance the sales of currentproducts. When new, but related, products could be offered at highly competitive prices. When new, but related, products have seasonal sales levels that counterbalance an organizationsexisting peaks and valleys. When an organizations products are currently in the declining stage of the products lifecycle. When an organization has a strong management team.M05_******

Strategic Choices- Growth Directions- Mar 13

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