types of strategies6 -...
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Strategy hierarchy
�� Corporate strategy: �) growth strategy, �)
stability strategy, �) retrenchment strategy�
�� Business unit strategy: �) cost leadership, �)
differentiation, �) focus, #) mixed�differentiation, �) focus, #) mixed�
�� Functional strategy�
Prof. Dr. Majed El-Farra 2009٢
Types of Strategies
Division Level
CorpLevelA Large
Company
Ch 5 -٣
Operational Level
Functional Level
Types of Strategies
Functional Level
Operational Level
company
A small Company
Ch 5 -٤
Operational Level
Corporate strategies
• Top level management formulate for overall
organization
• The question at the corporate level we should
answer when design strategies: In what answer when design strategies: In what
industry should we be operating?
• It depends on the outcome of SWOT analysis�
Prof. Dr. Majed El-Farra 2009٥
Growth strategies
Growth 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� • Conglomerate Diversification: Acquiring unrelated business�
• Merger: Two roughly similar size firms combine into one� To
benefit of synergy�
• Strategic alliance: Temporary partnerships
Prof. Dr. Majed El-Farra 2009٦
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�This depends on why we use it�
Prof. Dr. Majed El-Farra 2009٧
Retrenchment strategies
• Types:
�- Turnaround:
Eliminating unprofitable outputs, pruning/cutting assets, reducing size of work pruning/cutting assets, reducing size of work force, rethinking firm’s products lines and customer groups�
�- Divestment: sell one of business units
�- Liquidation: last resort strategy
Prof. Dr. Majed El-Farra 2009٨
Strategies in ActionStrategies in Action
Vertical Integration StrategiesVertical Integration Strategies
Prof. Dr. Majed El-Farra 2009٩
• Forward integration• Backward integration• Horizontal integration
Strategies in ActionStrategies in Action
DefinedDefined
ExampleExample
Forward Forward IntegrationIntegration
Prof. Dr. Majed El-Farra 2009١٠
DefinedDefined
• Gaining ownership or increased control over distributors or retailers
• General Motors is acquiring 10% of its dealers.
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� 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
Prof. Dr. Majed El-Farra 2009١١
Strategies in ActionStrategies in Action
DefinedDefined
ExampleExample
• Motel 8 acquired a
Backward Backward IntegrationIntegration
Prof. Dr. Majed El-Farra 2009١٢
DefinedDefined
• Seeking ownership or increased control of a firm’s suppliers
• Motel 8 acquired a furniture manufacturer.
Strategies in Action
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
Prof. Dr. Majed El-Farra 2009١٣
Strategies in ActionStrategies in Action
ExampleExample
• Palestinian Islamic
Horizontal Horizontal IntegrationIntegration
Prof. Dr. Majed El-Farra 2009١٤
DefinedDefined
• Seeking ownership or increased control over competitors
• Palestinian Islamic Bank acquired Cairo-Amman Bank Islamic transaction branch.
Strategies in Action
Guidelines for Horizontal IntegrationGuidelines for Horizontal Integration
� Firm can gain monopolistic characteristics without being
challenged by federal government
� Competes in growing industry� 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
Prof. Dr. Majed El-Farra 2009١٥
Strategies in ActionStrategies in Action
Intensive StrategiesIntensive Strategies
Prof. Dr. Majed El-Farra 2009١٦
• Market penetration• Market development• Product development
Strategies in ActionStrategies in Action
DefinedDefined
ExampleExample
• Ameritrade, the on-line broker, tripled its
Market Market PenetrationPenetration
Prof. Dr. Majed El-Farra 2009١٧
• Seeking increased market share for present products or services in present markets through greater marketing efforts
line broker, tripled its annual advertising expenditures to $200 million to convince people they can make their own investment decisions.
Strategies in Action
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 � Market shares of competitors declining while total industry
sales increasing
� Increased economies of scale provide major competitive
advantages
Prof. Dr. Majed El-Farra 2009١٨
Strategies in ActionStrategies in Action
DefinedDefinedExampleExample
Market Market DevelopmentDevelopment
Prof. Dr. Majed El-Farra 2009١٩
DefinedDefined
• Introducing present products or services into new geographic area
• Khuzendar Tiles maker introduce his product to Gulf markets.
Strategies in Action
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� 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
Prof. Dr. Majed El-Farra 2009٢٠
Strategies in ActionStrategies in Action
DefinedDefined
ExampleExample
• Apple developed the
Product Product DevelopmentDevelopment
Prof. Dr. Majed El-Farra 2009٢١
DefinedDefined
• Seeking increased sales by improving present products or services or developing new ones
• Apple developed the G4 chip that runs at 500 megahertz.
• Khuzendar Tiles maker introduce Ceramic as a new product.
Strategies in Action
Guidelines for Product DevelopmentGuidelines for Product Development
�Products in maturity stage of life cycle
� Competes in industry characterized by rapid technological
developmentsdevelopments
� Major competitors offer better-quality products at comparable
prices
� Compete in high-growth industry
� Strong research and development capabilities
Prof. Dr. Majed El-Farra 2009٢٢
Strategies in ActionStrategies in Action
Diversification StrategiesDiversification Strategies
• Concentric diversification
Prof. Dr. Majed El-Farra 2009٢٣
• Concentric diversification• Conglomerate diversification• Horizontal diversification
Strategies in ActionStrategies in Action
ExampleExample
Concentric Concentric DiversificationDiversification
Prof. Dr. Majed El-Farra 2009٢٤
DefinedDefined
• Adding new, but related, products or services
• National Westminister Bank PLC in Britain bought the leading British insurance company, Legal & General Group PLC.
Strategies in Action
Guidelines for Concentric DiversificationGuidelines for Concentric Diversification
� Competes in no- or slow-growth industry
� Adding new & related products increases sales of current
productsproducts
� New & related products offered at competitive prices
� Current products are in decline stage of the product life cycle
� Strong management team
Prof. Dr. Majed El-Farra 2009٢٥
Strategies in ActionStrategies in Action
ExampleExample
Conglomerate Conglomerate DiversificationDiversification
Prof. Dr. Majed El-Farra 2009٢٦
DefinedDefined
• Adding new, unrelated products
or services
• Consultant Construction Engineering acquired Bisects factory.
Strategies in Action
Guidelines for Conglomerate DiversificationGuidelines for Conglomerate Diversification
� Declining annual sales and profits
� Capital and managerial talent to compete successfully in a new
industryindustry
� Financial synergy between the acquired and acquiring firms
� Exiting markets for present products are saturated
Prof. Dr. Majed El-Farra 2009٢٧
Strategies in ActionStrategies in Action
DefinedDefinedExampleExample
Horizontal Horizontal DiversificationDiversification
Prof. Dr. Majed El-Farra 2009٢٨
DefinedDefined
• Adding new, unrelated products or services for
present customers
ExampleExample
• The El-Awda Co. provide ice-cream product to present customer
Strategies in Action
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 returnsand 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
Prof. Dr. Majed El-Farra 2009٢٩
Strategies in ActionStrategies in Action
Defensive StrategiesDefensive Strategies
• Joint ventureRetrenchment
Prof. Dr. Majed El-Farra 2009٣٠
• Retrenchment• Divestiture• Liquidation
Strategies in ActionStrategies in Action
DefinedDefinedExampleExample
Joint VentureJoint Venture
Prof. Dr. Majed El-Farra 2009٣١
DefinedDefined
• Two or more sponsoring firms forming a separate organization for cooperative
purposes
• Lucent Technologies and Philips Electronic NV formed Philips Consumer Communications to make and sell telephones.
Strategies in Action
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 risksmanagement 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
Prof. Dr. Majed El-Farra 2009٣٢
Strategies in ActionStrategies in Action
DefinedDefined ExampleExample
RetrenchmentRetrenchment(turnaround)(turnaround)
Prof. Dr. Majed El-Farra 2009٣٣
• Regrouping through cost and asset reduction to reverse declining sales and profit. Sometimes it is called turnaround or reorganizational strategy.
• A company sold off a land and 4 apartments to raise cash needed. It introduce expense effective control system.
Strategies in Action
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�
Prof. Dr. Majed El-Farra 2009٣٤
Strategies in ActionStrategies in Action
ExampleExample
DivestitureDivestiture
Prof. Dr. Majed El-Farra 2009٣٥
DefinedDefined
• Selling a division or part of an
organization
ExampleExample
• Harcourt General, the large US publisher, is selling its Neiman Marcus division.
Strategies in Action
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
provideprovide
� 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�
Prof. Dr. Majed El-Farra 2009٣٦
Strategies in ActionStrategies in Action
DefinedDefined ExampleExample
LiquidationLiquidation
Prof. Dr. Majed El-Farra 2009٣٧
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.
Strategies in Action
Guidelines for LiquidationGuidelines for Liquidation
� When both retrenchment and divestiture have been pursued
unsuccessfully
� If the only alternative is bankruptcy, liquidation is an orderly � 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 2009٣٨
Michael Porter’s Generic Strategies
Cost Leadership Strategies(Low-Cost & Best-Value)
Differentiation Strategies
Prof. Dr. Majed El-Farra 2009Ch 5 -٣٩
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 leadership
Differentiation (real or perceived)� Differentiation (real or perceived)�
Mixed
Focus
Prof. Dr. Majed El-Farra 2009٤٠
Business Strategy
Focuses on improving competitiveposition of company’s products or
6-٤١
position of company’s products orservices within the specific industryor market segment
Prof. Dr. Majed El-Farra 2009
Porter’s Competitive Strategies
Competitive Strategy --
–Low cost
6-٤٢
–Low cost–Differentiation–Direct competition–Focus on niche
Prof. Dr. Majed El-Farra 2009
Porter’s Competitive Strategies
Generic Competitive Strategies --
–Lower Cost strategy•Greater efficiencies than competitors
6-٤٣
•Greater efficiencies than competitors
–Differentiation strategy•Unique/superior value, quality, features, service
Prof. Dr. Majed El-Farra 2009
Porter’s Competitive Strategies
Competitive Advantage --
6-٤٤
–Determined by Competitive Scope•Breadth of the target market
Prof. Dr. Majed El-Farra 2009
Porter’s Competitive Strategies
Cost Leadership --
–Low-cost competitive strategy–Broad mass market
6-٤٧
–Broad mass market–Efficient-scale facilities–Cost reductions–Cost minimization
Prof. Dr. Majed El-Farra 2009
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 • 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 2009Ch 5 -٤٨
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 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�
Prof. Dr. Majed El-Farra 2009Ch 5 -٤٩
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�
• >� To successfully employ a cost leadership strategy, firms must ensure that total costs across the value chain 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�
Prof. Dr. Majed El-Farra 2009Ch 5 -٥٠
Porter’s Competitive Strategies
Differentiation –
–Broad mass market
6-٥١
–Broad mass market–Unique product/service–Premiums charged–Less price sensitivity
Prof. Dr. Majed El-Farra 2009
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 differentiation is especially relevant to the
target market
Prof. Dr. Majed El-Farra 2009Ch 5 -٥٢
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�
• �� 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�
Prof. Dr. Majed El-Farra 2009Ch 5 -٥٣
Differentiation
• Common organizational requirements for a
successful differentiation strategy include
strong coordination among the R&D and
marketing functions and substantial amenities marketing functions and substantial amenities
to attract scientists and creative people�
Prof. Dr. Majed El-Farra 2009Ch 5 -٥٤
Focus
• �� Focus means producing products and services that fulfill the needs of small groups of consumers�
• �� There are two types of focus strategies�
• a� A low-cost focus strategy offers products or services to a • 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�
Prof. Dr. Majed El-Farra 2009Ch 5 -٥٥
Focus
• Focus strategies are most effective when the
niche is profitable and growing, when industry
leaders are uninterested in the niche, 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�
Prof. Dr. Majed El-Farra 2009Ch 5 -٥٦
Porter’s Competitive Strategies
Cost-Focus –
–Low-cost competitive strategy
6-٥٧
–Low-cost competitive strategy–Focus on market segment–Niche focused–Cost advantage in market segment
Prof. Dr. Majed El-Farra 2009
Porter’s Competitive Strategies
Differentiation Focus –
–Specific group or geographic market
6-٥٨
–Specific group or geographic market focus–Differentiation in target market–Special needs of narrow target market
Prof. Dr. Majed El-Farra 2009
Porter’s Competitive Strategies
Stuck in the middle –
6-٥٩
–No competitive advantage–Below-average performance
Prof. Dr. Majed El-Farra 2009
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
Risks of DifferentiationDifferentiation is not
sustained:• Competitors imitate.
• Bases for differentiation
become less important to
buyers.
Risks of FocusThe focus strategy is
imitated:The target segment becomes structurally
unattractive:• Structure erodes.
• Demand disappears.Broadly targeted
Risks of Cost LeadershipCost leadership is not sustained:• Competitors imitate.• Technology changes.• Other bases for cost leadership erode.
Proximity in differentiation is lost.
Risks of DifferentiationDifferentiation is not sustained:• Competitors imitate.• Bases for differentiation become less important
to buyers.
Cost proximity is lost.
Risks of FocusThe focus strategy is imitated:The target segment becomes structurally unattractive:• Structure erodes.• Demand disappears.Broadly targeted
6-٦٠
Proximity in differentiation is lost.Cost focusers achieve
even lower cost in segments.
buyers.Cost proximity is lost.
Differentiation focusers achieve even greater
differentiation in segments.
Broadly targeted competitors overwhelm
the segment:• The segment’s
differences from othersegments narrow.
• The advantages of a broad line increase.
New focusers subsegment the industry.
differentiation is lost.Cost focusers achieve even lower cost in segments.
Cost proximity is lost.Differentiation focusers achieve even greater differentiation in segments.
Broadly targeted competitors overwhelm the segment:• The segment’s differences from othersegments narrow.
• The advantages of a broad line increase.
New focusers subsegment the industry.
Prof. Dr. Majed El-Farra 2009
Level of Strategy
• Functional/operational Strategies:
Concern with org� internal resources and processes which effectively deliver the corporate and business strategic direction�corporate and business strategic direction�
Functional strategies are interrelated�
Functional strategies e�g�: purchasing & materials management, production, finance, R&D, HR, IT, and marketing�
Prof. Dr. Majed El-Farra 2009٦١
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