Chapter 2.2 Types of strategies (3).ppt teaching material

Chapter Three Types of strategy

1. 1

2. A comprehensive Strategic Management Model

3. Long Term Objectives
Quantitative
Measurable
Realistic
Understandable
Challenging
Hierarchical
Obtainable
Congruent
Ch 5 -3

4. Ch 5 -4

5. Financial vs. Strategic Objectives
Financial Objective
Growth in revenues
Growth in earnings
Higher dividends
Larger profit margins
Greater ROI
Higher earnings per share
Rising stock price
Improved cash flow
Strategic Objectives
A larger market share
Quicker on-time delivery than rivals
Shorter design-to-market times than
rivals
Lower costs than rivals
Higher product quality than rivals
Wider geographic coverage than rivals
Achieving technological leadership
Consistently getting new or improved
products to market ahead of rivals

6. Types of strategies
6

7. Integration Strategies-Gaining ownership/control over
suppliers, distributors and/or competitors
Forward integration,
backwardintegration,and
horizontalintegrationare
sometimes collectively
referredtoasvertical
integrationstrategies.
Verticalintegration
strategiesallowafirm
togaincontrolover
distributors,suppliers,
and/orcompetitors.
Ch 5 -7

8. Intensive Strategy
Marketpenetration,marketdevelopment,and
productdevelopmentaresometimesreferred
toasintensivestrategiesbecausetheyrequire
intensiveeffortsifafirm’scompetitiveposition
withexistingproductsistoimprove.
Ch 5 -8

9. Diversification Strategies
Therearetwo
generaltypesof
diversification
strategies:related
andunrelated.
Businessesaresaidtobe
relatedwhentheirvalue
chainspossescompetitively
valuablecross-business
strategicfits;
Businessesaresaidtobe
unrelatedwhentheirvalue
chainsaresodissimilar
thatnocompetitively
valuablecross-business
relationshipsexist.
Ch 5 -9

10. Ch 5 -10
Types of Strategies
Integration
Strategies
Forward
Integration
Backward
Integration

11. Integration Strategies
Forward
Integration
Gainingownershiporincreased
controloverdistributorsorretailers
Backward
Integration
Seekingownershiporincreased
controlofafirm’ssuppliers
Ch 5 -11

12. 12
Types of Strategies
Intensive
Strategies
Market
Penetration
Market
Development
Product
Development

13. Intensive Strategies
Market
Penetration
Seekingincreasedmarketshareforpresent
productsorservicesinpresentmarkets
throughgreatermarketingefforts
Market
Development
Introducingpresentproductsorservices
intonewgeographicareas
Product
Development
Seekingincreasedsalesbyimproving
presentproductsorservicesordeveloping
newones
Ch 5 -13

14. Ch 5 -14
Types of Strategies
Diversification
Strategies
Related
Diversification
Unrelated
Diversification

15. Diversification Strategies
Related
Diversification
Adding new but related products or
services
Unrelated
Diversification
Adding new, unrelated products or
services
Ch 5 -15

16. Ch 5 -16
Types of Strategies
Defensive
Strategies
Retrenchment
Divestiture
Liquidation

17. Defensive Strategies
Retrenchme
nt
Regroupingthroughcostandassetreductiontoreversedeclining
salesandprofit.
Retrenchmentoccurswhenanorganizationregroupsthroughcostandassetreductiontoreverse
decliningsalesandprofits.Sometimescalledaturnaroundorreorganizationalstrategy,
retrenchmentisdesignedtofortifyanorganization’sbasicdistinctivecompetence.
Duringretrenchment,strategistsworkwithlimitedresourcesandfacepressurefrom
shareholders,employees,andthemedia.Retrenchmentcanentailsellingofflandandbuildings
toraiseneededcash,pruningproductlines,closingmarginalbusinesses,closingobsolete
factories,automatingprocesses,reducingthenumberofemployees,andinstitutingexpense
controlsystems.
Divestiture
Selling a division or part of an organization
Divestitureoftenisusedtoraisecapitalforfurtherstrategicacquisitionsor
investments.Divestiturecanbepartofanoverallretrenchmentstrategyto
ridanorganizationofbusinessesthatareunprofitable,thatrequiretoo
muchcapital,orthatdonotfitwellwiththefirm’sotheractivities.
Liquidation
Selling all of a company’s assets, in parts, for their tangible worth
Liquidationisarecognitionofdefeatandconsequentlycanbean
emotionallydifficultstrategy.However,itmaybebettertoceaseoperating
thantocontinuelosinglargesumsofmoney.

18. Copyright © 2011 Pearson Education, Inc.
Publishing as Prentice Hall Ch 5 -18

19. Levels/Hierarchies of Strategy
Corporate-Level Strategy
The level of strategy concerned with the question, “What
business are we in?”. Pertains to the organization as a whole
and the combination of business units and product lines that
make it up.
Business-Level Strategy
The level of strategy concerned with the question, “How do
we compete?”. Pertains to each business unit or product line
within the organization.
Functional-Level Strategy
The level of strategy concerned with the question, “How do
we support the business-level strategy?”. Pertains to all of the
organization’s major departments.

20. 1.Corporate strategy:
a) growth strategy,
b) stability strategy,
c) Defensive strategy.
2.Business unit strategy:
a)cost leadership
b)differentiation,
c)focus,
d)mixed.
3.Functional strategy.
20

21. 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.
21

22. Corporate Level
CorporateLevelStrategyoccupiesthehighestlevelof
strategicdecision-makingandcoversactionsdealing
withtheobjectiveofthefirm,acquisitionandallocation
ofresourcesandcoordinationofstrategiesofvarious
SBUsforoptimalperformance.
Suchdecisionsaremadebytopmanagementofthe
organization.
Topmanagementoftheorganizationisresponsibilityto
achievetheplannedfinancialperformanceofthe
companyinadditiontomeetingthenon-financialgoals
viz.socialresponsibilityandtheorganizationalimage.
22

23. Corporatestrategydefinesthebusinessinwhicha
companywillcompetepreferablyinawaythatfocuses
resourcestoconvertdistinctivecompetenceinto
competitiveadvantage.’
Corporatestrategyisnotthesumtotalofbusiness
strategiesofthecorporationbutitdealswithdifferent
subject-matter.
Thecorporatelevelstrategiestranslatetheorientation
ofthestakeholdersandthesocietyintotheformsof
strategiesforfunctionalorbusinesslevels.
CorporateLevelStrategiesisthelevelwherevision
statementofthecompaniesemerges
23

24. 24
Strategies in Action
Integration Strategies
•Forward integration
•Backward integration
•Horizontal integration

25. 25
Strategies in Action
Defined
•Gaining
ownership or
increasedcontrol
overdistributors
orretailers
Example
•General Motors is
acquiring 10% of its
dealers.
Forward
Integration

26. Strategies in Action
Guidelines 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
26

27. 27
Strategies in Action
Defined
•Seeking
ownership or
increased control
of a firm’s
suppliers
Example
•SheratonAddishotel
acquireda 3F
furniture
manufacturerforits
hotel.
Backward
Integration

28. Strategies in Action
Guidelines 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
28

29. 29
Strategies in Action
Defined
•Seeking
ownership or
increased control
over competitors
Example
•If Oromia
InternationalBank
acquires40%of
AwashInternational
Bankshares.
Horizontal
Integration

30. Strategies in Action
Guidelines 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
30

31. 31
Strategies in Action
Intensive Strategies
•Market penetration
•Market development
•Product development

32. 32
Strategies in Action
Defined
•Seeking increased
market share for
present products
or services in
present markets
through greater
marketing efforts
Example
•EastAfricanTrading
tripleditsannual
advertising
expendituresto$2
milliontoconvince
peopletheycanmake
theirowninvestment
decisions.
Market
Penetration

33. Strategies in Action
Guidelines for Market Penetration
Current markets are 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
33

34. 34
Strategies in Action
Defined
•Introducing
present products
or services into
new geographic
area
Example
•Chinese tiles maker
introduce its product
to Ethiopian markets.
Market
Development

35. Strategies in Action
Guidelines 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
35

36. 36
Strategies in Action
Defined
•Seeking increased
sales by improving
present products
or services or
developing new
ones
Example
•Tiles maker introduce
Ceramic as a new
product.
Product
Development

37. Strategies in Action
Guidelines for Product Development
Competes in industry characterized by rapid technological
developments
Products in maturity stage of life cycle
Major competitors offer better-quality products at
comparable prices
Compete in high-growth industry
Strong research and development capabilities
37

38. 38
Strategies in Action
Diversification Strategies
•Concentric diversification
•Conglomerate diversification
•Horizontal diversification

39. 39
Strategies in Action
Defined
•Adding new, but
related, products
or services
Example
IfSamsung mobile
diversifiesproductsto
Minitab(computer).
Concentric
Diversification

40. Strategies in Action
Guidelines 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
40

41. 41
Strategies in Action
Defined
•Adding new,
unrelated products
or services
Example
•IBM in 2009
enteredthewater
management
business
Conglomerate
Diversification

42. Strategies in Action
Guidelines 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
42

43. 43
Strategies in Action
Defined
•Adding new,
unrelated products
or services for
present customers
Example
Google’s organize all the
world’s information into
searchable form,
diversifying the firm beyond
its roots as a Web search
engine
that sells advertising.
Horizontal
Diversification

44. Strategies in Action
Guidelines for Horizontal Diversification
Revenues from current products/services would increase
significantly by adding the new unrelated products
Highly competitive and/or no-growth industry with 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
44

45. 45
Strategies in Action
Defensive Strategies
•Retrenchment
•Divestiture
•Liquidation

46. 46
Strategies in Action
Defined
•Regrouping through
cost and asset
reduction to reverse
declining sales and
profit. Sometimes it is
called turnaround or
reorganizational
strategy.
Example
•A company sold off a
land and 4 apartments
to raise cash needed.
It introduce expense
effective control
system.
Retrenchment
(turnaround)

47. Strategies in Action
Guidelines 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.
47

48. 48
Strategies in Action
Defined
•Selling a division
or part of an
organization
Example
To raise cash,
Motorola divested
its Good Technology
mobile e-mail
divisionin2009
Divestiture

49. Strategies in Action
Guidelines 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.
49

50. 50
Strategies in Action
Defined
•Selling all of a
company’s assets,
in parts, for their
tangible worth
Example
•Block factory sold all
its assets and ceased
business.
Liquidation

51. Strategies in Action
Guidelines 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
Itmaybebettertoceaseoperatingthanto
continuelosinglargesumsofmoney
51

52. Ch 5 -52
Michael Porter’s Generic Strategies
Cost Leadership Strategies
(Low-Cost & Best-Value)
DifferentiationStrategies
Focus Strategies
(Low-Cost Focus &
Best-Value Focus)

53. Business Unit Strategies
Here we answer the question:
How should we compete in the chosen
industry?
Cost leadership
Differentiation (real or perceived).
Mixed
Focus
53

54. 6-54
Business Strategy
Focusesonimprovingcompetitiveposition
ofcompany’sproductsorserviceswithin
thespecificindustryormarketsegment

55. 6-55
Porter’s Competitive Strategies
Competitive Strategy --
–Low cost
–Differentiation
–Direct competition
–Focus on niche

56. 6-56
Porter’s Competitive Strategies
Generic Competitive Strategies --
–Lower Cost strategy
•Greater efficiencies than competitors
–Differentiation strategy
•Unique/superior value, quality, features,
service

57. 6-57
Porter’s Competitive Strategies

58. Ch 5 -58

59. 6-59
Porter’s Competitive Strategies
Cost Leadership --
–Low-cost competitive strategy
–Broad mass market
–Efficient-scale facilities
–Cost reductions

60. Michael Porter’s Generic Strategies
Costleadershipemphasizesproducingstandardized
productsataverylowper-unitcostforconsumerswhoare
price-sensitive.
There are two types of cost leadership strategies.
Alow-coststrategyoffersproductstoawiderangeof
customersatthelowestpriceavailableonthemarket.
Abest-valuestrategyoffersproductstoawiderangeof
customersatthebestprice-valueavailableonthe
market.
Ch 5 -60

61. 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,
There are few ways to achieve product
differentiation,
Buyers do not care much about differences from
brand to brand, or
There are a large number of buyers with
significant bargaining power.
Ch 5 -61

62. Cost leadership
Thebasicideabehindacostleadershipstrategyisto
underpricecompetitorsorofferabettervalueand
therebygainmarketshareandsales,drivingsome
competitorsoutofthemarketentirely.
Tosuccessfullyemployacostleadershipstrategy,firms
mustensurethattotalcostsacrossthevaluechainare
lowerthanthatofthecompetition.Thiscanbe
accomplishedby:
Performing value chain activities more efficiently than
competitors, and
Eliminating some cost-producing activities in the value chain.
Ch 5 -62

63. 6-63
Porter’s Competitive Strategies
Differentiation –
–Broad mass market
–Unique product/service
–Premiums charged
–Less price sensitivity

64. Differentiation
Differentiationisaimedatproducingproductsthatare
consideredunique.
Thisstrategyismostpowerfulwhenthesourceof
differentiationisespeciallyrelevanttothetarget
market
Ch 5 -64

65. Differentiation
Asuccessfuldifferentiationstrategyallowsafirm
tochargehigherpricesforitsproductstogain
customerloyaltybecauseconsumersmaybecome
stronglyattachedtothedifferentiationfeatures.
Ariskofpursuingadifferentiationstrategyisthat
theuniqueproductmaynotbevaluedhighly
enoughbycustomerstojustifythehigherprice.
Ch 5 -65

66. Focus
Focus means producing products and services that
fulfill the needs of small groups of consumers.
There are two types of focus strategies.
Alow-costfocusstrategyoffersproductsorservicestoa
smallrange(niche)ofcustomersatthelowestprice
availableonthemarket.
Abest-valuefocusstrategyoffersproductstoasmall
rangeofcustomersatthebestprice-valueavailableon
themarket.
Thisissometimescalledfocuseddifferentiation.
Ch 5 -66

67. Focus
Focusstrategiesaremosteffectivewhen
Thenicheisprofitableandgrowing,
Industryleadersareuninterestedintheniche,
Industryleadersfeelpursuingthenicheistoocostlyor
difficult,
Theindustryoffersseveralniches,and
Thereislittlecompetitioninthenichesegment.
Ch 5 -67

68. 6-68
Porter’s Competitive Strategies
Cost-Focus –
–Low-cost competitive strategy
–Focus on market segment
–Niche focused
–Cost advantage in market segment

69. 6-69
Porter’s Competitive Strategies
Differentiation Focus –
–Specificgrouporgeographic market
focus
–Differentiationintargetmarket
–Specialneedsofnarrowtargetmarket

70. 6-70
Porter’s Competitive Strategies
Stuck in the middle –
–No competitive advantage
–Below-average performance

71. 6-71
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 Differentiation
Differentiation 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 Focus
The 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
Leadership
Cost leadership is not
sustained:
• Competitors imitate.
• Technology changes.
• Other bases for cost
leadership erode.
Cost focusers achieve
even lower cost in
segments.
Risks of
Differentiation
Differentiation is not
sustained:
• Competitors imitate.
• Bases for
differentiation
become less
important to
buyers.
Differentiation focusers
achieve even greater
differentiation in
segments.
Risks of Focus
The focus strategy is
imitated:
The target segment
becomes structurally
unattractive:
• 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 sub
segment the industry.

72. Level of Strategy
Functional/operationalStrategies:
Concernedwithorg.internalresourcesandprocesses
whicheffectivelydeliverthecorporateandbusiness
strategicdirection.
Functionalstrategiesareinterrelated.
Functionalstrategiese.g.:purchasing&materials
management,production,finance,R&D,HR,IT,and
marketing.
72

73. THANK YOU!!!
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