types of strategies level of strategies prof. dr. majed el-farra 2012119 أيار، 15 19 أيار،...

Types of Strategies

Level of strategies

Prof. Dr. Majed El-Farra 20121 / /١٤٤٤ ٠٩ ٢٨ 18:55

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


Prof. Dr. Majed El-Farra 20129

Strategies in ActionStrategies in Action

Vertical Integration StrategiesVertical Integration Strategies

• Forward integration• Backward integration• Horizontal integration

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DefinedDefined

• Gaining ownership or increased control over distributors or retailers

ExampleExample

• General Motors is acquiring 10% of its dealers.

Forward Forward IntegrationIntegration

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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)

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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

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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

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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 2012Ch 5- 39

Michael Porter’s Generic Strategies

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). 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

Generic Competitive Strategies --

–Lower Cost strategy•Greater efficiencies than competitors

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


6-43


Competitive Advantage --

–Determined by Competitive Scope•Breadth of the target market


6-44



Ch 5- 45Prof. Dr. Majed El-Farra 2012 / /١٤٤٤ ٠٩ ٢٨ 18:55

6-46


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.

Prof. Dr. Majed El-Farra 2012Ch 5- 47 / /١٤٤٤ ٠٩ ٢٨ 18:55

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 gaindriving some competitors out market share and sales, of the market entirely.

• 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.


Benefits

• Provides a defense against competitors

• Provides a barrier to entry• Generates increased market share

/ /١٤٤٤ ٠٩ ٢٨ 18:55Prof. Dr. Majed El-Farra 201250


Corporate Value Chain

6-52


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/incentives to attract scientists and creative people.


Benefits

• Lowers customers sensitivity to price

• Increases buyer loyalty• Barrier to entry• Can generate higher profits


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.


6-59


Cost-Focus –

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


6-60


Differentiation Focus –

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


6-61


Stuck in the middle –

–No competitive advantage–Below-average performance


6-63

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).



Hyper-competition and Competitive Advantage Sustainability

Competitive advantage in a hyper-competitive market is characterized by a continuous series of multiple short- term initiatives that replace current products with new products before competitors can do so.

• Leads to an over emphasis on short-term tactics


Competitive Tactics

Tactic- a specific operating plan that details how a strategy is going to be implemented in terms of when and where it is to be put into action

• Narrower in scope and shorter in time horizon than strategies


Timing Tactics: When to Compete

Timing Tactics- when a company implements a strategy

• First movers• Late movers


Cooperative Strategies- used to gain a competitive advantage within an industry by working with other firms


Collusion- the active cooperation of firms/ suppliers within an industry to reduce output and raise prices to avoid economic law of supply and demand


Strategic Alliances- a long-term cooperative arrangement between two or more independent firms or business units that engage in business activities for mutual economic gain Used to:

• Obtain or learn new capabilities• Obtain access to specific markets• Reduce financial risk• Reduce political risk


Types of Cooperative Agreements

• Mutual Service Consortia• Joint Venture• Licensing Arrangements• Value-Chain Partnerships


1.What industry forces might cause a favorable niche to disappear?

2.Is it possible for a company or business unit to followa cost leadership and a differentiation strategysimultaneously? Why or why not?3. Why are strategic alliances temporary?

• 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.


• low-priced products suggests a large capital intensive manufacturing facility.

• 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


• 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.


How can a company overcome the limitations of being in a fragmented industry?

• 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 .


types of strategies level of strategies prof. dr. majed el-farra 2012119 أيار، 15 19 أيار،...

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