Types of Strategies6

Types of StrategiesLevel of strategies

Prof. Dr. Majed El-Farra 2009*

Prof. Dr. Majed El-Farra 2009

Strategy hierarchyCorporate strategy: 1) growth strategy, 2) stability strategy, 3) retrenchment strategy.Business unit strategy: 1) cost leadership, 2) differentiation, 3) focus, 4) mixed.Functional strategy.Prof. Dr. Majed El-Farra 2009*


Ch 5 -*Types of StrategiesOperational LevelFunctional LevelDivision LevelCorp LevelA Large Company


Ch 5 -*Types of StrategiescompanyA small Company


Corporate strategiesTop level management formulate for overall organizationThe 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. Prof. Dr. Majed El-Farra 2009*


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 Prof. Dr. Majed El-Farra 2009*


Corporate RestructuringThe 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.Prof. Dr. Majed El-Farra 2009*


Retrenchment strategiesTypes:1- Turnaround: Eliminating unprofitable outputs, pruning/cutting assets, reducing size of work force, rethinking firms products lines and customer groups. 2- Divestment: sell one of business units3- Liquidation: last resort strategy Prof. Dr. Majed El-Farra 2009*


Prof. Dr. Majed El-Farra 2009*Strategies in ActionVertical Integration Strategies

Forward integrationBackward integrationHorizontal integration


Prof. Dr. Majed El-Farra 2009*Strategies in ActionDefined

Gaining ownership or increased control over distributors or retailersExample

General Motors is acquiring 10% of its dealers.

Forward Integration


Strategies in ActionGuidelines for Forward Integration

Present distributors are expensive, unreliable, or incapable of meeting firms needsAvailability of quality distributors is limitedWhen firm competes in an industry that is expected to grow markedlyAdvantages of stable production are highPresent distributor have high profit marginsProf. Dr. Majed El-Farra 2009*



Seeking ownership or increased control of a firms suppliersExample

Motel 8 acquired a furniture manufacturer.

Backward Integration


Strategies in ActionGuidelines for Backward Integration

When present suppliers are expensive, unreliable, or incapable of meeting needsNumber of suppliers is small and number of competitors largeHigh growth in industry sectorFirm has both capital and human resources to manage new businessAdvantages of stable prices are importantPresent supplies have high profit marginsProf. Dr. Majed El-Farra 2009*



Seeking ownership or increased control over competitorsExample

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

Horizontal Integration


Strategies in ActionGuidelines for Horizontal Integration

Firm can gain monopolistic characteristics without being challenged by federal governmentCompetes in growing industryIncreased economies of scale provide major competitive advantagesFaltering/losing due to lack of managerial expertise or need for particular resourcesProf. Dr. Majed El-Farra 2009*


Prof. Dr. Majed El-Farra 2009*Strategies in ActionIntensive Strategies

Market penetrationMarket developmentProduct development



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


Strategies in ActionGuidelines for Market Penetration

Current markets not saturatedUsage rate of present customers can be increased significantlyMarket shares of competitors declining while total industry sales increasingIncreased economies of scale provide major competitive advantagesProf. Dr. Majed El-Farra 2009*



Introducing present products or services into new geographic area

Example

Khuzendar Tiles maker introduce his product to Gulf markets.

Market Development


Strategies in ActionGuidelines for Market Development

New channels of distribution that are reliable, inexpensive, and good qualityFirm is very successful at what it doesUntapped or unsaturated marketsCapital and human resources necessary to manage expanded operationsExcess production capacityBasic industry rapidly becoming globalProf. Dr. Majed El-Farra 2009*



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


Strategies in ActionGuidelines for Product Development

Products in maturity stage of life cycleCompetes in industry characterized by rapid technological developmentsMajor competitors offer better-quality products at comparable pricesCompete in high-growth industryStrong research and development capabilities



Prof. Dr. Majed El-Farra 2009*Strategies in ActionDiversification Strategies

Concentric diversificationConglomerate diversificationHorizontal diversification



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


Strategies in ActionGuidelines for Concentric Diversification

Competes in no- or slow-growth industryAdding new & related products increases sales of current productsNew & related products offered at competitive pricesCurrent products are in decline stage of the product life cycleStrong management teamProf. Dr. Majed El-Farra 2009*



Adding new, unrelated products or services

Example

Consultant Construction Engineering acquired Bisects factory.Conglomerate Diversification


Strategies in ActionGuidelines for Conglomerate Diversification

Declining annual sales and profitsCapital and managerial talent to compete successfully in a new industryFinancial synergy between the acquired and acquiring firmsExiting markets for present products are saturated




Adding new, unrelated products or services for present customers

Example

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


Strategies in ActionGuidelines for Horizontal Diversification

Revenues from current products/services would increase significantly by adding the new unrelated productsHighly competitive and/or no-growth industry w/low margins and returnsPresent distribution channels can be used to market new products to current customersNew products have counter cyclical sales patterns compared to existing productsProf. Dr. Majed El-Farra 2009*


Prof. Dr. Majed El-Farra 2009*Strategies in ActionDefensive Strategies

Joint ventureRetrenchmentDivestitureLiquidation



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


Strategies in ActionGuidelines for Joint Venture

Combination of privately held and publicly held can be synergistically combinedDomestic forms joint venture with foreign firm, can obtain local management to reduce certain risksDistinctive competencies of two or more firms are complementaryOverwhelming resources and risks where project is potentially very profitable (e.g., Alaska pipeline)Two or more smaller firms have trouble competing with larger firmA need exists to introduce a new technology quickly




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)


Strategies in ActionGuidelines for Retrenchment

Firm has failed to meet its objectives and goals consistently over time but has distinctive competenciesFirm is one of the weaker competitorsInefficiency, low profitability, poor employee morale, and pressure from stockholders to improve performance.When an organizations strategic managers have failedVery quick growth to large organization where a major internal reorganization is needed.Prof. Dr. Majed El-Farra 2009*



Selling a division or part of an organization

Example

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


Strategies in ActionGuidelines for Divestiture

When firm has pursued retrenchment but failed to attain needed improvementsWhen a division needs more resources than the firm can provideWhen a division is responsible for the firms overall poor performanceWhen a division is a misfit with the organizationWhen a large amount of cash is needed and cannot be obtained from other sources.Prof. Dr. Majed El-Farra 2009*



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

Example

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


Strategies in ActionGuidelines for Liquidation

When both retrenchment and divestiture have been pursued unsuccessfullyIf the only alternative is bankruptcy, liquidation is an orderly alternativeWhen stockholders can minimize their losses by selling the firms assets Prof. Dr. Majed El-Farra 2009*


Prof. Dr. Majed El-Farra 2009Ch 5 -*Michael Porters Generic StrategiesCost Leadership Strategies(Low-Cost & Best-Value)Differentiation StrategiesFocus Strategies (Low-Cost Focus & Best-Value Focus)


Business Unit Strategies Here we answer the question: How should we compete in the chosen industry? Cost leadershipDifferentiation (real or perceived). MixedFocusProf. Dr. Majed El-Farra 2009*


6-*Business StrategyFocuses on improving competitive position of companys products or services within the specific industry or market segmentProf. Dr. Majed El-Farra 2009


6-*Porters Competitive StrategiesGeneric Competitive Strategies --

Lower Cost strategyGreater efficiencies than competitors

Differentiation strategyUnique/superior value, quality, features, service



6-*Porters Competitive StrategiesCompetitive Advantage --

Determined by Competitive ScopeBreadth of the target marketProf. Dr. Majed El-Farra 2009


6-*Porters Competitive StrategiesProf. Dr. Majed El-Farra 2009


Ch 5 -*Prof. Dr. Majed El-Farra 2009


6-*Porters Competitive StrategiesCost Leadership --

Low-cost competitive strategyBroad mass marketEfficient-scale facilitiesCost reductionsCost minimizationProf. Dr. Majed El-Farra 2009


Michael Porters Generic StrategiesCost 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. Prof. Dr. Majed El-Farra 2009Ch 5 -*


Cost leadershipStriving 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. Prof. Dr. Majed El-Farra 2009Ch 5 -*


Cost leadershipThe 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.Prof. Dr. Majed El-Farra 2009Ch 5 -*


6-*Porters Competitive StrategiesDifferentiation

Broad mass marketUnique product/servicePremiums chargedLess price sensitivityProf. Dr. Majed El-Farra 2009


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 Prof. Dr. Majed El-Farra 2009Ch 5 -*


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. Prof. Dr. Majed El-Farra 2009Ch 5 -*


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. Prof. Dr. Majed El-Farra 2009Ch 5 -*


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. Prof. Dr. Majed El-Farra 2009Ch 5 -*


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.Prof. Dr. Majed El-Farra 2009Ch 5 -*


6-*Porters Competitive StrategiesCost-Focus

Low-cost competitive strategyFocus on market segmentNiche focusedCost advantage in market segmentProf. Dr. Majed El-Farra 2009


6-*Porters Competitive StrategiesDifferentiation Focus

Specific group or geographic market focusDifferentiation in target marketSpecial needs of narrow target marketProf. Dr. Majed El-Farra 2009


6-*Porters Competitive StrategiesStuck in the middle

No competitive advantageBelow-average performanceProf. Dr. Majed El-Farra 2009


6-*Risks of Generic StrategiesRisks 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 segments differences from other segments narrow. The advantages of a broad line increase.New focusers subsegment the industry.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 segments differences from other segments narrow. The advantages of a broad line increase.New focusers subsegment the industry.Prof. Dr. Majed El-Farra 2009


Level of StrategyFunctional/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.



purchasing & materials management (as example)Buying materials in quantity, quality and cost which correspond with the corp. generic strategies (Business Unit strategies). Prof. Dr. Majed El-Farra 2009*


What kind of internal factors help managers determine whether a firm should emphasize the production and sales of a large number of low-priced products or a small number of high-priced products?

The most important factors can be brought out by going through each functional area. For example, under marketing, a strong market research group may be able to identify the kinds of niches available to the products or services under consideration. In terms of finance, the production of a large number of low-priced products suggests a large capital intensive manufacturing facility.To produce a few high quality goods with a small amount of capital because the needed manufacturing facilities may be small, utilizing craft labor. R&D may be an important consideration also. In order to produce high-quality products, a fairly sophisticated applied R&D effort may be needed. An expensive engineering staff may be needed, In terms of human resource management, a fairly unskilled and low paid workforce cannot normally be expected to produce a high quality product on old assembly line machinery. Either the workforce would need to be replaced or an extensive job training and job enrichment program would need to be established. Either approach costs both time and money.



Is it possible for a company or business unit to follow a cost leadership strategy and a differentiation strategy simultaneously? Why or why not?Michael Porter argues that a business unit which is unable to achieve one of the competitive strategies is likely to be "stuck in the middle" of the competitive marketplace with no competitive advantage. That unit, according to Porter, is doomed to below-average performance. Research by Greg Dess and Peter Davis as well as by Rod White, suggests however, that this may not be the case. Examples can be found of businesses which have been able to jointly follow overall low cost and high quality differentiation strategy. Japanese companies such as Toyota in automobiles and Matsushita (Panasonic and National) in consumer electronics are good examples. Their offer of low price and high quality created serious problems for those companies following only cost leadership in the U.S.



How can a company overcome the limitations of being in a fragmented industry?Businesses tend to be local and oriented to market segments. This may occur because the industry is relatively new - based upon a product in the early stage of its product life cycle. Entry barriers are probably low and new entrants are constantly moving into the industry as others leave or go bankrupt. Often, the trick to be a successful firm in this kind of industry is to find the key to standardization which allows economies. Domino's Pizza achieved success in fast food by providing standardized pizza throughout North America and by guaranteeing delivery time faster than competition. Before Pizza Hut and Domino's settled upon standardized pizza appealing to a wide variety of tastes across North American, the pizza business was a fragmented industry characterized by many small pizza "parlors" serving small market segments in cities throughout America .



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Types of Strategies6

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