Types of Strategies61 (3)

8/10/2019 Types of Strategies61 (3)

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Types of Strategies

Level of strategies

Prof. Dr. Majed El-Farra 20091


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Strategy

A strategy of a corporation forms acomprehensive master plan that states howthe corporation will achieve its mission andobjectives. It maximizes competitiveadvantage and minimizes competitivedisadvantage



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Strategy

Mintzberg (1987) defines strategy in terms of 5Ps. These 5Ps are:1P Perspective: is the main business concept or idea and the means by

which that concept or idea is put into practice or implemented.

2P Plan: is a direction, a guide or a course of action from the present (or

from the past) and into the future. However that future is defined bywhatever the time horizons associated with it.

3P Patterns: are the consistency of firm decision making.4P Position or positioning: where the firm locates itself within its

external and competitive environments; and by which it positions

particular products or services against the demands of the marketsegments it serves.

5P Ploys: are the competition strategies designed to maintain, reinforce,achieve or improve the relative competitive position of the organization

within its sector and markets (Morden,2007.)



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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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Ch 5 -5

Types of Strategies

Operational Level

Functional Level

Division Level

Corp LevelA LargeCompany


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Ch 5 -6

Types of Strategies

FunctionalLevel

Operational Level

companyA small

Company


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Corporate Strategy

The first level of strategy (corporate strategy) is related to determining thecorporate strategy. It is fundamentally and simply concerned with decidingwhat type of business the organization should be in and how the overallgroup of activities should be formed and managed .Corporate strategydeals with issues of strategic management at the level of the firm as awhole. Such issues involve the basic character, capability and competenceof the firm; the direction in which it should develop its activity; the natureof its internal architecture; governors and structure; the nature of itsrelationships with its sector, its competitors and the wider environment.Corporate strategies usually fit within the three main categories of

stability, growth and retrenchment

Ch 5 -7


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Business Strategy

business strategy refers to the actions andapproaches crafted by management to createsuccessful performance in one particular lineof business. It is also concerned with creatingcompetitive advantage in each of the strategicbusiness units of the organization.



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Functional or departmentalstrategy

Functional or departmental strategy concernsthe managerial game plan for running a majorfunctional activity or process within a businesssuch as research and development unit,marketing unit, financial unit, production unit,H R development unit and so on. A business

requires as many functional strategies as it hasstrategically critical activities.



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Corporate strategies

Top level management formulate for overallorganization

The question at the corporate level we shouldanswer when design strategies: In whatindustry should we be operating?

It depends on the outcome of SWOT analysis.



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Growth strategies

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

Internal growth: Increase internal capacity of organizationwithout 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 workforce, rethinking firm s products lines andcustomer groups.

2- Divestment : sell one of business units3- Liquidation : last resort strategy



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Strategies in Action

Vertical Integration Strategies

Forward integration Backward integration

Horizontal integration


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Defined

Gaining

ownership orincreased controlover distributorsor retailers

Example

General Motors isacquiring 10% of itsdealers.

ForwardIntegration


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Guidelines for Forward Integration

Present distributors are expensive, unreliable, or incapable ofmeeting firm s needsAvailability of quality distributors is limitedWhen firm competes in an industry that is expected to growmarkedlyAdvantages of stable production are high

Present distributor have high profit margins



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Defined

Seeking

ownership orincreased controlof a firmssuppliers

Example

Motel 8 acquired afurnituremanufacturer.

BackwardIntegration


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Guidelines for Backward Integration

When present suppliers are expensive, unreliable, or incapableof meeting needs

Number of suppliers is small and number of competitors largeHigh growth in industry sectorFirm has both capital and human resources to manage newbusiness

Advantages of stable prices are importantPresent supplies have high profit margins



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Defined

Seekingownership orincreased controlover competitors

Example

Palestinian IslamicBank acquired Cairo-

Amman Bank Islamictransaction branch.

HorizontalIntegration


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Guidelines for Horizontal Integration

Firm can gain monopolistic characteristics without beingchallenged by federal government

Competes in growing industryIncreased economies of scale provide major competitiveadvantagesFaltering/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 forpresent productsor services inpresent marketsthrough greatermarketing efforts

Example

Ameritrade, the on-line broker, tripled itsannual advertisingexpenditures to $200million to convincepeople they can maketheir own investmentdecisions.

MarketPenetration


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Guidelines for Market Penetration

Current markets not saturatedUsage rate of present customers can be increased significantlyMarket shares of competitors declining while total industrysales increasingIncreased economies of scale provide major competitiveadvantages



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Defined

Introducing

present productsor services intonew geographicarea

Example

Khuzendar Tiles makerintroduce his product

to Gulf markets.

MarketDevelopment


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Guidelines for Market Development

New channels of distribution that are reliable, inexpensive, andgood quality

Firm is very successful at what it doesUntapped or unsaturated marketsCapital and human resources necessary to manage expandedoperations

Excess production capacityBasic industry rapidly becoming global



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Defined

Seeking increasedsales by improving

present productsor services ordeveloping newones

Example

Apple developed theG4 chip that runs at500 megahertz.

Khuzendar Tiles makerintroduce Ceramic as anew product.

ProductDevelopment


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Diversification Strategies

Concentric diversification Conglomerate diversification Horizontal diversification


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Defined

Adding new, butrelated, productsor services

Example

National WestministerBank PLC in Britainbought the leadingBritish insurancecompany, Legal &General Group PLC.

ConcentricDiversification


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Guidelines for Concentric Diversification

Competes in no- or slow-growth industryAdding new & related products increases sales of currentproductsNew & related products offered at competitive pricesCurrent products are in decline stage of the product life cycleStrong management team



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Defined

Adding new,unrelated productsor services

Example

ConsultantConstructionEngineering acquiredBisects factory.

ConglomerateDiversification


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Guidelines for Conglomerate Diversification

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



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Defined

Adding new,

unrelated productsor services forpresent customers

Example

The El-Awda Co.provide ice-creamproduct to presentcustomer

HorizontalDiversification


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Guidelines for Horizontal Diversification

Revenues from current products/services would increasesignificantly by adding the new unrelated products

Highly competitive and/or no-growth industry w/low marginsand returnsPresent distribution channels can be used to market newproducts to current customersNew products have counter cyclical /repeating sales patternscompared 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 separateorganization forcooperativepurposes

Example

Lucent Technologiesand Philips ElectronicNV formed Philips

ConsumerCommunications tomake and selltelephones.

Joint Venture


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Guidelines for Joint Venture

Combination of privately held and publicly held can besynergistically combinedDomestic forms joint venture with foreign firm, can obtain localmanagement to reduce certain risksDistinctive competencies of two or more firms arecomplementaryOverwhelming resources and risks where project is potentiallyvery profitable (e.g., Alaska pipeline)Two or more smaller firms have trouble competing with largerfirmA need exists to introduce a new technology quickly



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Defined Regrouping through

cost and assetreduction to reverse

declining sales andprofit. Sometimes it iscalled turnaround orreorganizationalstrategy.

Example

A company sold off aland and 4 apartmentsto raise cash needed.It introduce expenseeffective controlsystem.

Retrenchment(turnaround)


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Guidelines for Retrenchment

Firm has failed to meet its objectives and goals consistently overtime but has distinctive competencies

Firm is one of the weaker competitorsInefficiency, low profitability, poor employee morale, andpressure from stockholders to improve performance.When an organization s strategic managers have failed

Very quick growth to large organization where a major internalreorganization is needed.



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Defined

Selling a divisionor part of anorganization

Example

Harcourt General, thelarge US publisher, isselling its NeimanMarcus division.

Divestiture


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Guidelines for Divestiture

When firm has pursued retrenchment but failed to attainneeded improvements

When a division needs more resources than the firm canprovideWhen a division is responsible for the firm s overall poorperformanceWhen a division is a misfit with the organizationWhen a large amount of cash is needed and cannot beobtained from other sources.



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Defined

Selling all of a

companys assets,in parts, for theirtangible worth

Example

El-Ameer Block factory

sold all its assets andceased business.

Liquidation


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Guidelines for Liquidation

When both retrenchment and divestiture have been pursuedunsuccessfully

If the only alternative is bankruptcy, liquidation is an orderlyalternativeWhen stockholders can minimize their losses by selling thefirm s assets



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Prof. Dr. Majed El-Farra 2009Ch 5 -44

Michael Porters GenericStrategies

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 leadershipDifferentiation (real or perceived).Mixed

Focus


Business Strategy


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6-46

Focuses on improving competitive position of companys products orservices within the specific industryor market segment


Porters Competitive Strategies


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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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6-48

Competitive Advantage --

Determined by Competitive Scope Breadth of the target market




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6-49 Prof. Dr. Majed El-Farra 2009


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Ch 5 -50Prof. Dr. Majed El-Farra 2009



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6-51

Cost Leadership --

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



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Michael Porters Generic Strategies

Cost leadership emphasizes producing standardized productsat 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 ofcustomers at the best price-value available on the market .



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Cost leadership

Striving to be the low-cost producer in an industrycan be especially effective when the market iscomposed of many price-sensitive buyers, when

there are few ways to achieve productdifferentiation, when buyers do not care much aboutdifferences from brand to brand, or when there are alarge number of buyers with significant bargaining

power.



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Cost leadership

The basic idea behind a cost leadership strategy is tounderprice competitors or offer a better value andthereby gain market share and sales, driving somecompetitors out of the market entirely.

5. To successfully employ a cost leadership strategy,firms must ensure that total costs across the value chainare lower than that of the competition. This can beaccomplished by:

a. performing value chain activities more efficiently

than competition, and b. eliminating some cost-producing activities in thevalue chain.



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Differentiation

Differentiation is aimed at producingproducts that are considered unique. Thisstrategy is most powerful with the source of

differentiation is especially relevant to thetarget market



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Differentiation

A successful differentiation strategy allows a firmto charge higher prices for its products to gaincustomer 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 enoughby customers to justify the higher price.



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Differentiation

Common organizational requirements for asuccessful differentiation strategy includestrong coordination among the R&D and

marketing functions and substantial amenitiesto attract scientists and creative people.



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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 asmall range (niche) of customers at the lowest price availableon 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.



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Focus

Focus strategies are most effective when theniche is profitable and growing, when industry

leaders are uninterested in the niche, when industryleaders feel pursuing the niche is too costly ordifficult, when the industry offers several niches, andwhen there is little competition in the nichesegment .




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Cost-Focus

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




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6-62

Differentiation Focus

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




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6-63

Stuck in the middle

No competitive advantage Below-average performance


Risks of Generic Strategies


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Risks of Cost

LeadershipCost leadership is not

sustained: Competitors imitate. Technology changes. Other bases for cost

leadership erode.

Proximity indifferentiation is lost.Cost focusers achieve

even lower cost insegments.

Risks of Differentiation

Differentiation is notsustained:

Competitors imitate. Bases for differentiation

become less importantto

buyers.Cost proximity is lost.

Differentiation focusersachieve even greater

differentiation insegments.

Risks of Focus

The focus strategy isimitated:

The target segmentbecomes structurally

unattractive: Structure erodes.

Demand disappears.

Broadly targetedcompetitors 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 notsustained: Competitors imitate. Technology changes. Other bases for cost

leadership erode.

Proximity indifferentiation is lost.Cost focusers achieveeven lower cost insegments.

Risks of DifferentiationDifferentiation is notsustained: Competitors imitate. Bases for differentiation

become less importantto

buyers.Cost proximity is lost.Differentiation focusersachieve even greaterdifferentiation insegments.

Risks of FocusThe focus strategy isimitated:The target segmentbecomes structurallyunattractive: Structure erodes.

Demand disappears. Broadly targetedcompetitors overwhelmthe segment: The segments

differences from othersegments narrow.

The advantages of abroad line increase.New focusers subsegmentthe 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.


purchasing & materials management


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purchasing & materials management(as example)

Buying materials in quantity, quality and costwhich correspond with the corp. genericstrategies (Business Unit strategies).


What kind of internal factors help managers determinewhether a firm should emphasize the production and sales of a


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whether a firm should emphasize the production and sales of alarge 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 functionalarea. For example, under marketing, a strong market research group may be ableto identify the kinds of niches available to the products or services underconsideration.

In terms of finance, the production of a large number of low-priced productssuggests a large capital intensive manufacturing facility.

To produce a few high quality goods with a small amount of capital because theneeded manufacturing facilities may be small, utilizing craft labor. R&D may be animportant 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 oldassembly line machinery. Either the workforce would need to be replaced or anextensive 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


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p p ya cost leadership strategy and a differentiation

strategy simultaneously? Why or why not?

Michael Porter argues that a business unit which is unable toachieve one of the competitive strategies is likely to be "stuck in themiddle" of the competitive marketplace with no competitiveadvantage. 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 befound of businesses which have been able to jointly follow overalllow cost and high quality differentiation strategy. Japanese

companies such as Toyota in automobiles and Matsushita (Panasonic and National ) in consumer electronics are goodexamples. Their offer of low price and high quality created seriousproblems for those companies following only cost leadership in theU.S.


H th li it ti


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How can a company overcome the limitationsof being in a fragmented industry?

Businesses tend to be local and oriented to market segments. This mayoccur because the industry is relatively new - based upon a product in theearly 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 asuccessful firm in this kind of industry is to find the key to standardizationwhich allows economies.

Domino's Pizza achieved success in fast food by providing standardizedpizza throughout North America and by guaranteeing delivery time faster

than competition. Before Pizza Hut and Domino's settled uponstandardized pizza appealing to a wide variety of tastes across NorthAmerican, the pizza business was a fragmented industry characterized bymany small pizza "parlors" serving small market segments in citiesthroughout America .

Types of Strategies61 (3)

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