Types of Strategies Level of strategies Prof. Dr. Majed El-Farra 2009 1
Dec 20, 2015
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.
Prof. Dr. Majed El-Farra 20092
Ch 5- 3
Types of Strategies
Operational Level
Functional Level
Division Level
Corp LevelA Large
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.
Prof. Dr. Majed El-Farra 20095
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
Prof. Dr. Majed El-Farra 20096
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.
Prof. Dr. Majed El-Farra 20097
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 20098
Prof. Dr. Majed El-Farra 20099
Strategies in ActionStrategies in Action
Vertical Integration StrategiesVertical Integration Strategies
• Forward integration• Backward integration• Horizontal integration
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Strategies in ActionStrategies in Action
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
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Strategies in ActionStrategies in Action
DefinedDefined
• Seeking ownership or increased control of a firm’s suppliers
ExampleExample
• Motel 8 acquired a furniture manufacturer.
Backward Backward IntegrationIntegration
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
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Strategies in ActionStrategies in Action
DefinedDefined
• Seeking ownership or increased control over competitors
ExampleExample
• Palestinian Islamic Bank acquired Cairo-Amman Bank Islamic transaction branch.
Horizontal Horizontal IntegrationIntegration
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 Increased economies of scale provide major competitive
advantages Faltering/losing due to lack of managerial expertise or need for
particular resources
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Strategies in ActionStrategies in Action
Intensive StrategiesIntensive Strategies
• Market penetration• Market development• Product development
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Strategies in ActionStrategies in Action
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
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
sales increasing Increased economies of scale provide major competitive
advantages
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Strategies in ActionStrategies in Action
DefinedDefined
• Introducing present products or services into new geographic area
ExampleExample
• Khuzendar Tiles maker introduce his product to Gulf markets.
Market Market DevelopmenDevelopmen
tt
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 Untapped or unsaturated markets Capital and human resources necessary to manage expanded
operations Excess production capacity Basic industry rapidly becoming global
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Strategies in ActionStrategies in Action
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
Strategies in Action
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
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Strategies in ActionStrategies in Action
Diversification StrategiesDiversification Strategies
• Concentric diversification• Conglomerate diversification• Horizontal diversification
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Strategies in ActionStrategies in Action
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
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
products New & related products offered at competitive prices Current products are in decline stage of the product life cycle Strong management team
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Strategies in ActionStrategies in Action
DefinedDefined
• Adding new, unrelated products or services
ExampleExample
• Consultant Construction Engineering acquired Bisects factory.
Conglomerate Conglomerate DiversificatiDiversificati
onon
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
industry Financial synergy between the acquired and acquiring firms Exiting markets for present products are saturated
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Strategies in ActionStrategies in Action
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
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 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
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Strategies in ActionStrategies in Action
Defensive StrategiesDefensive Strategies
• Joint venture• Retrenchment• Divestiture• Liquidation
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Strategies in ActionStrategies in Action
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
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 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
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Prof. Dr. Majed El-Farra 200933
Strategies in ActionStrategies in Action
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)
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.
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Strategies in ActionStrategies in Action
DefinedDefined
• Selling a division or part of an organization
ExampleExample
• Harcourt General, the large US publisher, is selling its Neiman Marcus division.
DivestitureDivestiture
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 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.
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Strategies in ActionStrategies in Action
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
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 alternative
When stockholders can minimize their losses by selling the firm’s assets
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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
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Business Strategy
Focuses on improving competitive position of company’s products or services within the specific industry or market segment
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Porter’s Competitive Strategies
Competitive Strategy --
–Low cost–Differentiation–Direct competition–Focus on niche
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Porter’s Competitive Strategies
Generic Competitive Strategies --
–Lower Cost strategy•Greater efficiencies than competitors
–Differentiation strategy•Unique/superior value, quality, features, service
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Porter’s Competitive Strategies
Competitive Advantage --
–Determined by Competitive Scope•Breadth of the target market
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Porter’s Competitive Strategies
Cost Leadership --
–Low-cost competitive strategy–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
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.
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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.
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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.
Prof. Dr. Majed El-Farra 2009Ch 5- 50
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Porter’s Competitive Strategies
Differentiation –
–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 target market
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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.
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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.
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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.
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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.
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Porter’s Competitive Strategies
Cost-Focus –
–Low-cost competitive strategy–Focus on market segment–Niche focused–Cost advantage in market segment
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Porter’s Competitive Strategies
Differentiation Focus –
–Specific group or geographic market focus–Differentiation in target market–Special needs of narrow target market
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Porter’s Competitive Strategies
Stuck in the middle –
–No competitive advantage–Below-average performance
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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.
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.
Functional strategies are interrelated.Functional strategies e.g.: purchasing &
materials management, production, finance, R&D, HR, IT, and marketing.
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