strategy formulation

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STRATEGY FORMULATION

At the end of this module the learning outcomes are

• The concept of SBU and its importance• Models of portfolio analysis• Various types of generic strategies• Influence of market position on strategy• Ways to attack and defend organizations

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Suggested readings

1. Strategic Marketing Management

by Pearson & Gilligan, Chapter 9 & 10

2. Strategic marketing

by Cravens, Chapter 10

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1. Concept of SBU – Strategic business units- Historically, companies followed a division

orientation. Problems were:• Closely related products were coming under

separate division• Each division dealt differently• Similar products getting different treatment• Dissimilar products getting identical treatment• Sub-optimal results

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SBU means- Dividing companies into six division’s is not six

different businesses- It may be only four businesses- A multi-business corporation groups its

businesses into a few distinct strategic business units

- Every SBU• Own set of competitors• Own distinct strategies

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STRATEGY FORMULATIONExample – SBUHMT

- PSU

- 24 division’s, 16 production units, 35000 employees

- Large basket of products- machine tools, tractors, flexible-manufacturing systems, tractors, printing machines, lamps, watches, dairy machinery.

- World bank recommended

Four business groups

• Machine tools

• Watches

• Lamps

• Agricultural machinery

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STRATEGY FORMULATIONProblems with World Bank guidelines- Each business group

• Vastly different market and technology attributes

E.g: Machine tools included printing press and other general industrial machinery

SBU concept

- Five SBUs

• Machine tools

• Consumer products

• Tractors

• Engineering components & industrial machinery.

• Technology and information

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STRATEGY FORMULATIONSBU characteristics- Is a single business or a collection of related

businesses, which offer scope for independent planning.

- Own set of competitors- Has a manager who has responsibility for strategic

planning and profit performance- Is saleable

E.g.: passenger cars and commercial vehicles are different SBUs

Mergers and acquisitions of SBU’s and not companies.

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BOSTON CONSULTING GROUP (BCG)- Balanced portfolio of SBU’s- Good portfolio

• Dominance of cash cows and stars- Unbalanced portfolio

1. Dogs and question marks dominate

2. Insufficient cash

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Example: RaymondSBU’s

1. Textiles – Star

2. Cement – Problem child

3. Steel – Dog- Raymond divested cement business- Focus on textiles.

Why Raymond divested cement?

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STRATEGY FORMULATIONISSUES WITH BCG MODEL- Why was Captain Cook brand sold by DCW to International

Bestfoods?

- Was models a criteria

- Too much emphasis on market-share and market growth

- What do you do when portfolios are border cases

- Over simplified

- Are the two parameters enough to judge business

- What about environmental factors

- Return on investment

- Where are strategic issues accommodated?

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STRATEGY FORMULATION- Michael Porter’s contribution- Three generic strategies

1. Cost leadership

2. Differentiation

3. Focus

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COST LEADERSHIP• Bajaj Auto-scooters- Maruti-cars

• Zen- Cost minimizations- Japan in 60’s

1. Lowest cost producer

2. Later Taiwan and Korea lower cost producers

3. Moved to differentiation

4. Success due to quality management

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DIFFERENTIATION- Mercedes- Sony

1. Creating unique image

2. Branding- Singapore Airlines

1. Superior inflight services

2. Most modern fleet

3. Excellent ground services

Customers willing to pay more

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FOCUS- Narrow segment - Specialist reputation

• Dilip Chhabria designer cars• Laura Ashley

- Respond quickly to requirements- Small firms

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STRATEGY FORMULATIONISSUES WITH PORTER’S GENERIC STRATEGIES- Pursue one or more strategies simultaneously

- Low cost does not mean low prices

- E.g.: Boeing

• Low cost

• Sells on quality service

- E.g.: IBM

• Large producer – keeps costs low

• Sells on image

• Higher prices

- E.g.: Dilip Chhabria

• Focus

• Differentiation

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INFLUENCE OF MARKET POSITION ON STRATEGY

• Market leader• Market challengers and followers• Market nichers

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1. MARKET LEADER- Largest market share- By virtue of

• Pricing• Advertising intensity• Distribution coverage• Rate of new product introduction

- Dominant player

E.g.: Intel, Asian paints, HLL in detergents

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2 MARKET CHALLENGERS AND FOLLOWERS- Firms with lesser market share

• Aggressive and attack market leader• Dominate (market challengers)• Less aggressive (market followers)

- Market challenger• Pepsi, Procter and Gamble in India.

- Market followers• Campa, Fena

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3 MARKET NICHERS- Small firms- Niche markets- Too small of interest to big firms- Avoid expensive head on fights with larger

companies

E.g.: Dilip Chhabria, Ritu Beri designer wear.

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MARKET LEADER STRATEGIES• Need to defend• Various methods

1. Expansion of markets

2. Protect market share

3. Increase market share• Which is most beneficial

• Expansion of markets

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1. EXPANSION OF MARKETS

Identifying new users• New users

- Intel in India• Educating end-users about computers use

in schools- Cadbury in India

• Repositioning• Included adults

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- New uses• Dupont

- First used for parachutes- Now

• Stockings• Shirts• Tyres

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Existing users increasing their usage rates

Procter and Gamble• Shampoos

Air –Tel- Value added services

• Florist• Share prices

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STRATEGY FORMULATION2. Protect market shareVulnerable to attack

- E.g.: American cars in 60’s and 70’s• Ignored small car market.• Japanese developed this market.• Oil shock in 70’s• Fuel efficient cars• Increased market share• Setback for GM / Ford• Joint venture with Japanese

- Ford with Mazda- Chyrsler with Mitsubishi- GM taking over Daewoo

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Modi Xerox(MX)• HCL attacked• MX focused on service• Improved its after sales service network• HCL gave up.

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3. Expanding market share

Asian Paints- Consistently proactive strategy- Innovation- Intensive advertising- Improved distribution-direct deal with retail- Price incentives- Smaller size products.

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MILITARY ANALOGIES FOR MARKET LEADERS

• Position defence• Mobile defence• Flanking defence• Contraction defence• Pre-emptive defence• Counter-offensive defence

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POSITION DEFENCE• Impregnability of a fixed position• Not very successful• Attackers use indirect approach rather than

taking head-on approach• Maruti’s rapid loss of market share in late

90’s• Unable to defend the attack of Hyundai

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MOBILE DEFENCE

• Focus on understanding ‘marketing myopia’

• Broadening and diversification of business

• Build future defences– Surf gearing for launch of Ariel– ITC movement into non-tobacco businesses

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FLANKING DEFENCE

• Less protected than other parts

• Vulnerable to attacks

• Secondary markets should not be ignored

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FLANKING DEFENCE

Coke

• Cola main business

• Non-cola areas are vulnerable to attacks

• Juices

• Launch of Minute-Maid to protect flanks

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CONTRACTION DEFENCE

• Faced with attack

• Companies realize it is not worthwhile to defend

• Retreat

• Concentrate where it is least vulnerable

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CONTRACTION DEFENCE

IBM• Focused on PC hardware in 80’s• Entry of low-cost manufacturers• Unable to match costs• Gradual retreat • Focus on software services

Failure of British mobike companies

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PRE-EMPTIVE DEFENCE

• Limitations of contraction and position defence

• Pre-emptive strikes

• Decimate competitor

• Labeled as FUD marketing -that is spreading ‘fear uncertainty and despair

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PRE-EMPTIVE DEFENCE

HUL experience• Launch of broad range of products• Counter competition• Anticipation

Surf– Launch of variants

– Pre-empt P & G

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COUNTER OFFENSIVE DEFENCE

• Once attack has taken place

• How to respond to attack of competitor

• Three forms• meet the attack head-on

• Attack the attacker’s flank

• Develop a pincer’s movement in an attempt to cut off the attacker’s operational base.

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• Attack head-on is the most common

• Attack at the weak areas of attacker is the second way of doing it.

• Fighting by hitting at the attacker’s base is the counter-offensive

Jet responding to Sahara price war

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MARKET CHALLENGERS STRATEGIES- Not market leaders

- Challenge market leaders

• Try to achieve leadership

• Look at weaknesses of leaders

- Issues

• Cost of attacking

• Likelihood of success

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• Challenger needs to look into• Sustainable competitive advantage

• Neutralize leader’s advantage

• Create impediments for leaders to retaliate

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STRATEGY FORMULATION Michelin’s entry in US market

• Early 70’s

- U.S. players leaders

- Use of non-radial tyres

- Supplied to car manufacturers

- Michelin

• Leader in radials

• Attacked replacement mkt.

• 1973, Arab –Israel war

• Oil shock

• Consumers preference for fuel efficient tyres

• Radial tyres more fuel efficient

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- Michelin attacked car manufacturers

- Gained market share

- U.S. players slow in reaction

Michelin became market leader at the expense of Goodyear, Goodrich.

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CHOICES

• Attack the market leader

• Attacking firms of similar sizes

• Attacking smaller regional firms

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Studies found that

• Attacking smaller regional firms proves to be most profitable

• Attacking market leader is a high risk high return strategy

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MARKET CHALLENGERS

In military analogy it can be– Frontal attack– Flanking attack– An encirclement attack– Bypass attack– Guerilla attack

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FRONTAL ATTACK

• Two types– Pure frontal attack– limited frontal attack

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Pure frontal attack

• market leader

• product for product

• price for price

• Xerox attacking Gestetner

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Limited frontal attack

• Attacking at selected customers

• Kingfisher attacking Jet

• Kingfisher class

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FLANK ATTACK

• Indirect approach

• More economical and effective

• Japanese mobike companies attacking European counterparts

• Hero Honda attacking Bajaj

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ENCIRCLEMENT ATTACK

• Attack on many fronts

• Defender’s ability to retaliate is considerably reduced

• Expensive strategy

• Short-term losses

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ENCIRCLEMENT ATTACKSEIKO watches• Multiple products• constant changes• Occupy many dealer outlets• Heavy advertising• Left many British and US watch companies in bad

shape• Attack from all fronts

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BYPASS ATTACK

• Avoid attacks against defender’s existing products

• Focus on unrelated products

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BYPASS ATTACK XEROX• Gestetner the undisputed leader of the duplicating market

in 70’s• Low cost technology• Xerox avoided this• Focus on building photocopiers• Superior finish and easy to use• Gestetner decline in mid-80’s• Consumers preference for faster copiersXerox the undisputed leader

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GUERILLA ATTACK

• series of hit-and-run moves

• Designed to demoralize the opponent

• Keep competitor off-balance

• Airtel offering free hand-sets with connection took MTNL/BSNL by surprise

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AIRTEL

• In 90s

• Offering free hand sets with connection

• Took market leaders MTNL/BSNL by surprise

• Gained significant market share

• Eventually leader

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STRATEGY FORMULATIONMARKET FOLLOWER STRATEGIES- Not interested as leaders- Less proactive- Cost of leadership too high- Avoid confrontation

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MARKET FOLLOWER STRATEGIES

Fena

• Market follower

• Follows the leader

• Does not have the resources to challenge the leader

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MARKET FOLLOWER STRATEGIES Followers need to decide• How they intend to operate• How they following a market leader• Three postures possible

• Following closely the leader• Following at a distance• Following selectively in product and market terms

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STRATEGY FORMULATIONMARKET NICHER STRATEGIES- What is attractive

• Market size profitable• Growth potential• Negligible interest to major competitors• Resources to serve niche markets• Can defend when attacked.

E.g.: Avon mobike tyres.

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THE DANGERS OF STRATEGIC WEAR-OUT• Successful strategies• Began to wear out• Lose its impact• Strategies need review and modification

Kodak’s experience in conventional photography

Xerox looking at paperless offices

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STRATEGY FORMULATIONWHAT EMERGES- Never ignore new competitors- Ignorance of Gestetner- UK mobike makers ignoring Japanese mobike makers- Always exploit competitive advantages

• Not disappear• Exploit new advantages

E.g.: Bajaj’s understanding of two-wheeler market.- Never launch new product without understanding

competitor’s response.

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