levels of strategy · growth strategies: are grand strategies that involve organizational expansion...

STM. Nhek Sokun, Senior Lecturer 1

Chapter 5

Levels of Strategy


Level of Strategy

Corporate-level strategy

Business-level strategy

Functional-level strategy


Corporate-level strategyGrowth Strategies: Are grand strategies that involve organizational expansion along some major dimension. Three major growth strategies are: Concentration, Integration, and Diversification.

Stability Strategies: A strategy that involves maintaining the status quo or growing in a methodical, but slow, manner.

Defensive Strategies: Are strategies that focus on the desire or need to reduce organizational operations usually through cost and/or asset reductions (such as cutting back on nonessential expenditures and instituting hiring freezes) and / or asset reductions (such as selling land, equipment, and business). They include Turnaround, Divestiture, Bankruptcy, and Liquidation.


Growth strategiesConcentration Strategies: is a strategy which emphasizes growth through focusing on a single product or market. The idea is to focus on what you know best which could be either a particular product / service or a particular Customer group / market. There are 3 forms of concentration which are:Market Penetration: Focuses on capturing greater market share vis-a-vis competitors. Methods used to penetrate the market include special promotions, increasing the number of sales representatives, etc.


Growth strategiesConcentration Strategies: Product Development: Focuses on slightly modifying or improving products / services to gain greater market share. For example an ice cream company might introduce new flavors of ice cream in order to increase its market share. Market Development: Focuses on expanding market for existing product lines. Example: EDC expands its markets for electricity sales to the provinces through out Cambodia.


Growth strategiesDiversification Strategies: Occurs when a company expands outward from its core business by adding new but related products/services (concentric diversification), or by adding new but unrelated products/services (conglomerate diversification).

Diversification can occur through the creation and development of new business divisions or by direct purchase of other companies/businesses (either related or unrelated).


Growth strategiesIntegration Strategies: Include both vertical and horizontal integration strategies.Vertical integration: Includes both backward integration, (i.e. moving into business activities which are closer to the raw materials, production / supply stage) and forward integration (i.e. moving into business activities which are closer to the end user/customer stage). Companies can be either "partially integrated" (expanding, either forward or backward) or "fully integrated" (including virtually all forward and backward linkages).


Growth strategies

Integration Strategies: Include both vertical and horizontal integration strategies.Horizontal Integration: Involves the acquisition or taking over of competing companies in the same line of business. Example: a manufacturer of personal computer (PC's) purchases another computer manufacturing company. The results of this strategy are similar to concentration (market penetration) in that the main aim is to gain a larger market share.


Growth strategiesMerger and Acquisition: Mergers involve the joining together of 2 or more companies into one organization. Mergers can be described as a "corporate marriage" in that the ownership and top management of both companies usually agree to the merger which they view as creating a stronger entity.

Acquisitions involve one company buying or taking-over another company (i.e. through direct purchase or an offer to purchase common shares at above market rates).


Growth strategiesMerger and Acquisition: Such actions often occur without the agreement/consent of the management of the acquired firm.The rationale for M&A is that it can be used as a quick way to achieve other growthstrategies such as diversification and integration. In addition, mergers can also be used as a defensive strategy (i.e. a weak company merges with a strong company in order to ensure it survival).


Growth strategiesJoint Venture:Joint venture occurs when two or more companies agree to join together to form a separate entity for purposes of producing a product or service. Joint ventures are often temporary arrangements or alliances (see next slide) used to enter a foreign market, gain access to technology and expertise, etc. For example, a U.S. company might enter a joint venture arrangement with a Chinese company in order to set up a production facility in China. The Joint Venture agreement enables the U.S. Company to gain direct access to the Chinese market, while the Chinese company gains up-to-date technology and managerial expertise.


Growth strategiesAlliance:An alliance occurs when two or more companies / organizations unite for purposes of achieving a common goal. Examples of common goals include: Influencing government policy (e.g. taxation, trade, etc.)Product promotion with regards to a particular industry (e.g. the dairy industry). Improving competitiveness of two or more companies (e.g. the airline industry). Entry into new markets (e.g. Joint Ventures)


Stability strategies

A strategy that seeks to maintain the status quo to deal with the uncertainty of a dynamic environment, when the industry is experiencing slow- or no-growth conditions, or if the owners of the firm elect not to grow for personal reasons.


Defensive strategies

Retrenchment: often involves reducing cost through a process of "down-sizing" or "re-engineering." Examples include the closing of manufacturing plants (or stores in the case of a large retail chain), laying-off of staff, reductions in salaries, etc.

Divestiture: involves the selling off of business units or divisions of a company in order to regain a more strategic focus. Divestiture is the direct opposite of acquisition.


Defensive strategiesBankruptcy: is a legal means by which a company can seek protection from its creditors when it is unable to pay its debts and meet other contractual obligations. The company then has a short period of time to try to restructure and regain financial stability.

Liquidation: occurs when the company is forced to sell off all of its assets in order to pay its outstanding creditors. Companies which are able to file for bankruptcy but unable to successfully restructure, are forced to liquidate. It represents the end of the company.


Business level strategies

Cost leadership strategy:A cost leadership strategy places a strong emphasis on achieving the lowest possible cost levels relative to industry competitors.The idea is to reduce costs throughout the company (in every department) through such means as economies of scale, cost controls, reducing the bargaining power of labor and suppliers, etc.


Business level strategiesCost leadership strategy:Cost leadership often translates into price leadership, as company which have lower costs than its competitors can also offer lower, more competitive, prices to customers, thus increasing market share. Pursuing a corporate level strategy of vertical integration can help a company to achieve a cost leadership position in that it enables a company to control its supply and distribution networks, which also translates into better control over costs/prices.


Business level strategiesDifferentiation strategy:A differentiation strategy places a strong emphasis on product/service "Uniqueness". A product or service can be considered different or unique based on brand image, quality, special product features, special or extra customer service/support, etc.Advertising is important in pursuing a differentiation strategy as it is important to convince the customer that your product is different (i.e. better than) the competitors' products, even if in reality it is very similar.


Business level strategiesDifferentiation strategy:Remember that Customer perception determines degree of product/service "uniqueness." Customers will often pay a slightly higher price for a product/service which they consider to be different or unique. Generally, there is a good fit between a corporate level strategy of concentration (Product Development) and a business level strategy of differentiation.


Business level strategiesFocus strategy:Focus strategy places a strong emphasis on serving a narrow target group or small market segment / niche. The market segment can be a geographic area or a particular group of customers (e.g. university students, senior citizens, etc.).


Business level strategiesFocus strategy: Focus strategies can be classified into Cost Focus and Differentiation Focus strategies. A Cost focus strategy serves a small market segment by offering lower cost/priced products/services relative to industry competitors. An example would include Oshkosh Truck which produces heavy-duty trucks for the military. A Differentiation focus strategy serves a small market segment by offering more differentiated or unique) products/services compared to industry competitors. Examples include: Rolls-Royce, Ferrari, Rolex watches,


Functional level strategies

A strategy that focuses on the formulation of strategies at the functional level of the organization. (e.g. setting strategies for such functions as production, marketing, finance, human resources, etc.).It is essential that functional level strategies are developed in such a way that they are consistent with other functional level strategies while at the same time supporting the overall corporate and business level strategies of the company.



Production/Operation: 1) Quality: The strategic message here should be: "Quality,

Quality, Quality! " A strong emphasis on quality is important for

achieving a business level strategy of differentiation and cost leadership strategy.

The practice of Total Quality of Management (TQM) leads to a reduction in costs associated with production mistakes and customer returns.


Functional level strategies Production/Operation: 2) Capacity: The issue of capacity is very important with

regards to a manufacturing strategy. Capacity refers to the maximum amount which

can be produced. Decisions with regards to capacity should be

made in relation to corporate and business level strategies.

Companies pursuing cost leadership strategies need to pay particular attention to issues of capacity.



Production/Operation: 3) Facilities: While facilities are related to the

question of capacity, key issue here is location.Centralized or decentralized?

4) Inventory Control: For companies pursuing a cost leadership business level strategy, inventory control systems are very important.For example, Japanese companies have been very successful in lowering inventory related costs by using a Just-In-Time (JIT) inventory system.


Functional level strategies Marketing: The following is a list of some important issues and

questions which need to be considered by the marketing function.

Emphasis here is placed on issues relating to the marketing mix: Product/Service, Price, Place (i.e. distribution), Promotion.

Product design for example can be considered from both a manufacturing and marketing perspective. "A good design appeals to the eye, but it must also be reliable, easy, and economical to operate and service.


Functional level strategies Marketing: Should the company use its own distribution

network or should it use outside channels or distributors? What is the impact on cost, brand image, etc.?

Should the company develop its own in-house advertising unit or should it hire an outside advertising firm?

Does the image of the product conveyed in the advertising fit the business level strategy? (i.e. focus, differentiation).


Functional level strategies Finance: Consistency is again important at the Financial

level. In other words, the financial strategy must be in harmony with the other strategic decisions made by senior management at the corporate and business levels.

For example, a failure in terms of lack of consistency / harmony could occur if the finance function placed a strong emphasis on monitoring and improving profitability ratios while the company is pursuing a corporate level strategy of market penetration, trying to achieve greater market share through price reductions and special promotions.


Functional level strategies Finance: Another example would include a corporate level

decision to increase leverage (debt), in order to defend against a hostile take-over of their company. Such a decision would affect the firm's profitability (through incurring large-debt service payments), while also having a negative impact on the company's debt to equity ratio.

In summary, it is very important for the finance function to clearly state its financial objectives in terms of financial ratios which are consistent or in line with the overall corporate and business level strategies of the company.


Functional level strategies Human Resource: Recruitment and Selection: Are the recruiting

decisions made by the human resource department in conformity with the company's corporate/business strategies?

For example, a corporate level strategy of concentration (market penetration) might translate into the need to recruit new employees with strong marketing skills.

Should the recruitment and selection process be handled in- house or should the company contract with an external firm for a purpose of recruitment? (Cost considerations).


Functional level strategies Human Resource: Training: Is the training process effective in providing

employees with the necessary skills for achieving the corporate and business level goals/strategies of the company?

Should the training be handled in-house or contracted out external agency?

Compensation: Is compensation based on performance? Are the company's employee compensation

packages (salary, benefits, etc.) competitive with regards to other firms in the same industry.


Functional level strategies Human Resource: Job Security: Is there a company commitment with regard to

job security for all of its employees? Is such a commitment consistent with the overall

corporate and business level strategies? Labor Relations: Are the company's employees members of a

union? Is the union cooperative or confrontational?

Strong unions can create obstacles to the company's pursuit of corporate level strategies such as restructuring (e.g. retrenchment).



Research and Development: Is the purpose of R & D to develop new

products or to seek improvements in the existing manufacturing process?

The answer, to this question and the following questions very much depends the overall corporate level strategy.

Should R & D be organized as an independent function or should it be included as a sub-unit within the manufacturing function?


Functional level strategies Research and Development: How should expenditure levels (budgets) for R

& D be determined? (i.e. according to a fixed amount, or according to % of sales relative to industry averages?)

Are R & D decisions based on "customer pull or "R & D push' "Customer pull" occurs when a project is started based on customer demand, while "R & D push" occurs when projects are started based on the fact that someone within the function want to initiate a particular project.

levels of strategy · growth strategies: are grand strategies that involve organizational expansion...

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