Chapter 4

Strategies in Action
Introduction

 The ultimate question is whether the strategy formulated

is the appropriate one(would take the firm to its
objectives).
 Contd..

 The alternative strategies that an enterprise could pursue

can be categorized into thirteen actions:
Forward integration
 Backward integration
Horizontal integration
 Market penetration
 Market development
 Product development
Contd..
Concentric diversification,
Conglomerate Diversification
Horizontal Diversification,
Joint venture
Retrenchment
Divestiture, and liquidation—and a combination strategy.
Levels of Strategy
 Corporate Level/Master strategies

 Grand /Corporate/Master strategies- provide a

comprehensive general approach guiding major actions
designed to accomplish long-term business objectives.

Types of Grand/ Corporate level strategies

 The grand strategies (major Corporate Strategies) can be:

Stability strategy
Growth strategy
Defensive strategy
Combination Strategy
 Contd..
A. Stability strategy-occurs when an organization is
satisfied with its current situation & wants to maintain the
status quo.

 Thus, basic approach in the stability strategy is “maintain

present course: steady as it goes”.
 Contd…
When to Pursue Stability Strategy?
 Using stability strategy is appropriate when:

 The organization is serving its defined market segments

according to its mission.

 If the organization continues to pursue same objectives.

 When organizational resources have been exhausted

because of earlier growth strategies.

 When the organization decided to do nothing new—a

choice to continue current operations.
Contd..
B. Growth/Expansion strategies
 Is situation when organization wishes to pursues

significant increment or much higher than its past

achievement level.

 The following are types expansion strategy:

Expansion through Concentric Expansion
Expansion through Diversification
Expansion through Integration
Contd..

Concentric Expansion
 Also called intensive strategy
 The first route of growth is to expand the present line

of business also known as growth through

intensification using the following strategies :
Market Penetration
Market Development &
Product Development.
 Contd…
Discuss in group on the following expansion
strategies:

1. What does it mean market penetration, Market

development and product development strategies?

2. When the use of each strategy is more

appropriate and desirable?
Contd…
Contd….

 Thus, penetration focuses on:

Increasing present customers’ rate of usage
Attracting competitors’ customers through price
cuts
Attracting non-users through advertising, price
incentives etc.
Contd…

 Market Development is selling present products in

new markets – additional regional, national &
international expansions.
Guidelines for Market Development
 New channels of distribution available 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

 Contd….

 Product Development is developing new products

for present markets.

 This involves:
Developing new product features
Modifying (change color, form, shape, etc.)
Magnify & minify
Rearrange (layout, patterns, etc.)
Developing additional models & sizes (product
proliferation)

 Examples of product development can be:

◦ A revised edition of a college textbook
◦ A new car style
◦ A second formula of shampoo for oily air etc.
Guidelines 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

 Contd….
Diversification Strategies is the process of entry into a
business which is new to an organization either market-wise
or technology wise or both.

 Diversification strategy refers to an attempt to change the

characteristics of the business through either of new
products, markets & technology or all the three.

 Diversification may be related or unrelated, horizontal.

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

Guidelines for Conglomerate Diversification
 Declining annual sales and profits

 Capitaland managerial talent to

compete successfully in a new industry.

 Financial
synergy between the acquired
and acquiring firms

 Exiting markets for present products

are saturated
Guidelines for Horizontal Diversification

 Revenues from current products/services

would increase significantly by adding the
new unrelated products

 Presentdistribution channels can be used

to market new products to current
customers
Contd..

 Forward integration means purchasing or

developing a distributor for a product. For
instance, Nike now has its own retail stores
in various locations.
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
Contd..

 Backward integration means owning a

supply source for production. For instance,
recently garment producers in Sri Lanka
began seeking to purchase textile mills in
India.
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
Contd…

 Backward integration means owning a

supply source for production. For instance,
recently garment producers in Sri Lanka
began seeking to purchase textile mills in
India.
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
 Contd…
C. Defensive Strategy is one that an enterprise
pursues when it decides to improve its
performance in reaching its objectives by focusing
on:
Functional improvement
Specially reduction in cost
Reducing the number of functions it performs
by becoming a captive company
Reducing the number of the products and
markets it serves up to and including liquidation
of the business.
 Contd..

Defensive Strategies

 Retrenchment
 Divestiture
 Liquidation
What is Retrenchment ?
 Contd…

 A Retrenchment grand strategy followed when an

organization aims at a contraction of its activities
through substantial reduction or the elimination of
the scope of one or more its businesses, in terms of
their respective customer groups, customer functions
or alternatives technologies either singly or  jointly
on order to improve its overall performance.
What drives Retrenchment?
Examples of Retrenchment
Contd…
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.
 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.
 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
 Business level Strategies
 It focus on improving the competitive position of a
company’s or business unit’s products or services.

 are action firms take to gain competitive advantages in a

market or industry.

 It is a deliberate choice about how a firm will perform

activities in ways that create unique value.
 Contd…

 Thus, the essence of a firm’s business-level strategy is

choosing to perform:

◦ Perform activities differently than rivals – to achieve

lowest cost
◦ Perform different (valuable) activities – being able to
differentiate

 Business-level strategies are called “ generic

strategies.
Contd…
 Business-level strategy/Michael Porter’s Generic
Strategies are :
Cost leadership

 Cost leadership strategy -is an integrated set

of actions designed to produce or deliver
goods or services at the lowest cost relative to
competitors.

 Cost leadership emphasizes producing

standardized products at a very low per-unit
cost for consumers who are price-sensitive.
 Cost leadership

 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

◦ Thus, cost leadership includes:

Lowest competitive price
Features acceptable to many customers
Relatively standardised products
 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.
Contd..

 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.
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.

 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.
Contd..

 The firm produces non-standardized

products for customers who value
differentiated features more than they value
low cost

 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

 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 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.

Functional Level strategy
• Is the approach a functional area takes to
achieve corporate and business unit
objectives and includes:

 Marketing Strategy-deals with pricing, selling

and distributing a product.
 Financial Strategy-examines and identifies

the best financial course of action.

 Research and Development Strategy-deals

with product and process innovation and

improvement.
Contd..

 Operations Strategy-determines how and where a

product or service is to be manufactured, the
deployment of physical resources.
 Purchasing strategy-deals with obtaining the raw
materials, parts, and supplies needed to perform
the operations function.
 Logistics Strategy-deals with the flow of products
into and out of the manufacturing process.
Contd…
 HRM Strategy -among other things,
addresses the issue of whether a company or
business unit should hire a large number of
low-skilled employees who receive low pay,
perform repetitive jobs, and most likely quit
after a short time or hire skilled employees
who receive relatively high pay and are cross
trained to participate.

 Information Systems Strategy provide

business units a competitive advantage. Ex.
Fed. Express, DHL