types of strategies level of strategies prof. dr. majed el-farra 20091

Types of Strategies

Level of strategies

Prof. Dr. Majed El-Farra 20091

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.


Ch 5- 3

Types of Strategies

Operational Level

Functional Level

Division Level

Corp LevelA Large

Company

Ch 5- 4

Types of Strategies

Functional Level

Operational Level

company

A small Company

Corporate strategies

• Top level management formulate for overall organization

• The 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.


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


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.


Retrenchment strategies

• Types:1- Turnaround: Eliminating unprofitable outputs,

pruning/cutting assets, reducing size of work force, rethinking firm’s products lines and customer groups.

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



Strategies in ActionStrategies in Action

Vertical Integration StrategiesVertical Integration Strategies

• Forward integration• Backward integration• Horizontal integration



DefinedDefined

• Gaining ownership or increased control over distributors or retailers

ExampleExample

• General Motors is acquiring 10% of its dealers.

Forward Forward IntegrationIntegration

Strategies in Action

Guidelines for Forward IntegrationGuidelines for Forward Integration

Present distributors are expensive, unreliable, or incapable of meeting firm’s needs

Availability of quality distributors is limited When firm competes in an industry that is expected to grow

markedly Advantages of stable production are high Present distributor have high profit margins




DefinedDefined

• Seeking ownership or increased control of a firm’s suppliers

ExampleExample

• Motel 8 acquired a furniture manufacturer.

Backward Backward IntegrationIntegration


Guidelines for Backward IntegrationGuidelines for Backward Integration

When present suppliers are expensive, unreliable, or incapable of meeting needs

Number of suppliers is small and number of competitors large High growth in industry sector Firm has both capital and human resources to manage new

business Advantages of stable prices are important Present supplies have high profit margins




DefinedDefined

• Seeking ownership or increased control over competitors

ExampleExample

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

Horizontal Horizontal IntegrationIntegration


Guidelines for Horizontal IntegrationGuidelines for Horizontal Integration

Firm can gain monopolistic characteristics without being challenged by federal government

Competes in growing industry Increased economies of scale provide major competitive

advantages Faltering/losing due to lack of managerial expertise or need for

particular resources




Intensive StrategiesIntensive Strategies

• Market penetration• Market development• Product development



DefinedDefined

• Seeking increased market share for present products or services in present markets through greater marketing efforts

ExampleExample

• Ameritrade, the on-line broker, tripled its annual advertising expenditures to $200 million to convince people they can make their own investment decisions.

Market Market PenetrationPenetration


Guidelines for Market PenetrationGuidelines for Market Penetration

Current 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




DefinedDefined

• Introducing present products or services into new geographic area

ExampleExample

• Khuzendar Tiles maker introduce his product to Gulf markets.

Market Market DevelopmenDevelopmen

tt


Guidelines for Market DevelopmentGuidelines for Market Development

New channels of distribution that are reliable, inexpensive, and good quality

Firm is very successful at what it does Untapped or unsaturated markets Capital and human resources necessary to manage expanded

operations Excess production capacity Basic industry rapidly becoming global




DefinedDefined

• Seeking increased sales by improving present products or services or developing new ones

ExampleExample

• Apple developed the G4 chip that runs at 500 megahertz.

• Khuzendar Tiles maker introduce Ceramic as a new product.

Product Product DevelopmenDevelopmen

tt


Guidelines for Product DevelopmentGuidelines for Product Development

Products in maturity stage of life cycle Competes in industry characterized by rapid technological

developments Major competitors offer better-quality products at comparable

prices Compete in high-growth industry Strong research and development capabilities




Diversification StrategiesDiversification Strategies

• Concentric diversification• Conglomerate diversification• Horizontal diversification



DefinedDefined

• Adding new, but related, products or services

ExampleExample

• National Westminister Bank PLC in Britain bought the leading British insurance company, Legal & General Group PLC.

Concentric Concentric DiversificatiDiversificati

onon


Guidelines for Concentric DiversificationGuidelines for Concentric Diversification

Competes in no- or slow-growth industry Adding new & related products increases sales of current

products New & related products offered at competitive prices Current products are in decline stage of the product life cycle Strong management team




DefinedDefined

• Adding new, unrelated products or services

ExampleExample

• Consultant Construction Engineering acquired Bisects factory.

Conglomerate Conglomerate DiversificatiDiversificati

onon


Guidelines for Conglomerate DiversificationGuidelines for Conglomerate Diversification

Declining annual sales and profits Capital and managerial talent to compete successfully in a new

industry Financial synergy between the acquired and acquiring firms Exiting markets for present products are saturated




DefinedDefined

• Adding new, unrelated products or services for present customers

ExampleExample

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

Horizontal Horizontal DiversificatiDiversificati

onon


Guidelines for Horizontal DiversificationGuidelines for Horizontal Diversification

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

Highly competitive and/or no-growth industry w/low margins and returns

Present distribution channels can be used to market new products to current customers

New products have counter cyclical sales patterns compared to existing products




Defensive StrategiesDefensive Strategies

• Joint venture• Retrenchment• Divestiture• Liquidation



DefinedDefined

• Two or more sponsoring firms forming a separate organization for cooperative purposes

ExampleExample

• Lucent Technologies and Philips Electronic NV formed Philips Consumer Communications to make and sell telephones.

Joint VentureJoint Venture


Guidelines for Joint VentureGuidelines for Joint Venture

Combination of privately held and publicly held can be synergistically combined

Domestic forms joint venture with foreign firm, can obtain local management to reduce certain risks

Distinctive competencies of two or more firms are complementary

Overwhelming resources and risks where project is potentially very profitable (e.g., Alaska pipeline)

Two or more smaller firms have trouble competing with larger firm

A need exists to introduce a new technology quickly




DefinedDefined

• Regrouping through cost and asset reduction to reverse declining sales and profit. Sometimes it is called turnaround or reorganizational strategy.

ExampleExample

• A company sold off a land and 4 apartments to raise cash needed. It introduce expense effective control system.

RetrenchmenRetrenchmentt

(turnaround)(turnaround)


Guidelines for RetrenchmentGuidelines for Retrenchment

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

Firm is one of the weaker competitors Inefficiency, low profitability, poor employee morale, and

pressure from stockholders to improve performance. When an organization’s strategic managers have failed Very quick growth to large organization where a major internal

reorganization is needed.




DefinedDefined

• Selling a division or part of an organization

ExampleExample

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

DivestitureDivestiture


Guidelines for DivestitureGuidelines for Divestiture

When firm has pursued retrenchment but failed to attain needed improvements

When a division needs more resources than the firm can provide

When a division is responsible for the firm’s overall poor performance

When a division is a misfit with the organization When a large amount of cash is needed and cannot be

obtained from other sources.




DefinedDefined

• Selling all of a company’s assets, in parts, for their tangible worth

ExampleExample

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

LiquidationLiquidation


Guidelines for LiquidationGuidelines for Liquidation

When both retrenchment and divestiture have been pursued unsuccessfully

If the only alternative is bankruptcy, liquidation is an orderly alternative

When stockholders can minimize their losses by selling the firm’s assets


Prof. Dr. Majed El-Farra 2009Ch 5- 39

Michael Porter’s Generic Strategies

Cost Leadership Strategies(Low-Cost & Best-Value)

Differentiation Strategies

Focus 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). MixedFocus


6-41

Business Strategy

Focuses on improving competitive position of company’s products or services within the specific industry or market segment


6-42

Porter’s Competitive Strategies

Competitive Strategy --

–Low cost–Differentiation–Direct competition–Focus on niche


6-43


Generic Competitive Strategies --

–Lower Cost strategy•Greater efficiencies than competitors

–Differentiation strategy•Unique/superior value, quality, features, service


6-44


Competitive Advantage --

–Determined by Competitive Scope•Breadth of the target market


6-45



Ch 5- 46Prof. Dr. Majed El-Farra 2009

6-47


Cost Leadership --

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


Michael Porter’s Generic Strategies

• Cost 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.


Cost leadership

• Striving 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.


Cost leadership• The 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.


6-51


Differentiation –

–Broad mass market–Unique product/service–Premiums charged–Less price sensitivity


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


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.


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.


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.


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.


6-57


Cost-Focus –

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


6-58


Differentiation Focus –

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


6-59


Stuck in the middle –

–No competitive advantage–Below-average performance


6-60

Risks of Generic Strategies

Risks of Cost Leadership

Cost 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 segment’s

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 segment’s differences from other segments narrow.• The advantages of a broad line increase.New focusers subsegment the industry.


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 (as example)

Buying materials in quantity, quality and cost which correspond with the corp. generic strategies (Business Unit strategies).


types of strategies level of strategies prof. dr. majed el-farra 20091

Documents

corporate strategies

design strategies

forward integration

backward integration

retrenchment strategies

growth strategy

corporate level

corporate strategy