Chapter Two
Strategies in Action
• Many firms have to use strategic planning in order to earn
revenues and more profits.
• Strategists should avoid the following alternative ways to
"not managing by objectives’’.
• Managing by Extrapolation: adheres the idea is to keep on
doing about the same things in the same ways because things
are going well.
• Managing by Crisis is actually a form of reacting rather than
acting and of letting events dictate what’s and when’s of
management decisions.
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Cont….
• Managing by Subjective: built on the idea that there is no general
plan for which way to go and what to do; just do the best you can to
accomplish what you think should be done.
• Managing by Hope: based on the fact that the future is laden with
great uncertainty, and that if we try and do not succeed, then we hope
our second attempt will succeed.
Types of Strategies
There are four major types of strategies
1. Integration strategies
2. Intensive strategies
3. Diversification strategies and
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4. Defensive strategies
1. Integration strategies
Integration strategy is divided in to 3
a. Forward integration
b. Backward integration and
c. Horizontal Integration
a. Forward integration: gaining ownership or increased control
over distributors or retailers.
Guidelines for forward integration strategies
• Present distributors are incapable of meeting firm’s needs
• Availability of quality distributors is limited
• Advantages of stable production are high
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Cont….
b. Backward integration is a strategy of seeking ownership or
increased control of a firm's suppliers.
Guidelines for Backward Integration
• Present suppliers are expensive, or incapable of meeting needs
• Number of suppliers is small and number of competitors large
• High growth in industry sector
C. Horizontal integration refers to a strategy of seeking ownership of
or increased control over a firm's competitors.
Guidelines for Horizontal Integration
• Firm can gain monopolistic characteristics
• Competes in growing industry
• Increased economies of scale
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2. Intensive Strategies
Intensive strategy is classified in to 3
a . Market penetration seeks to increase market share for present
products or services in present markets through greater
marketing efforts.
Guidelines for Market Penetration
• Current markets not saturated
• Usage rate of present customers can be increased
• Market shares of competitors declining
b. Market development involves introducing present products or
services into new geographic areas.
Guidelines for Market Penetration
• Untapped or unsaturated markets
• Excess production capacity
• Basic industry rapidly becoming global 5
C. Product Development
C. Product development is a strategy that seeks increased sales by
improving or modifying present products or services.
Guidelines for Product Development
Products in maturity stage of life cycle
Compete in high-growth industry
Strong research and development capabilities
3. Diversification Strategies
Diversification strategy is divided in to three strategies
a. Concentric diversification: adding new, but related, products or
services.
Guidelines for Concentric Diversification
• New & related products offered at competitive prices
• Current products are in decline stage of the product life cycle
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• Strong management team
Cont….
b. Conglomerate diversification: adding new, unrelated products
or services.
Guidelines for Conglomerate Diversification
Declining annual sales and profits.
Financial synergy between the acquired and acquiring firms.
Exiting markets for present products are saturated.
c. Horizontal Diversification: adding new, unrelated products or
services for present customers.
Guidelines for Horizontal Diversification
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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4. Defensive Strategies
Defensive strategy is divided in to four strategies
a. Retrenchment occurs when an organization reforms through cost
and asset reduction to reverse declining sales & profits.
- Retrenchment can entail selling off land and buildings to raise
needed cash, reducing product lines, closing obsolete factories,
reducing the number of employees, and instituting expense
control systems.
Guidelines for Retrenchment
Firm is one of the weaker competitors
Inefficiency, low profitability, poor employee morale
When an organization’s strategic managers have failed
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Cont….
b. Divestiture is selling a division or part of an organization.
- It is used to raise capital for further strategic acquisitions or
investments.
Guidelines for Divestiture
When a division needs more resources than the firm can provide
When a division is responsible for the firm’s overall poor
performance
C. Liquidation is selling all of a company's assets, in parts, for their
tangible worth.
Guidelines for Liquidation
• When both retrenchment and divestiture have been pursued
unsuccessfully
• If the only alternative is bankruptcy, liquidation is an orderly
alternative 9
Cont….
D. Joint venture is a popular strategy that occurs when two or more
companies form a temporary partnership or consortium for the
purpose of capitalizing on some opportunity.
Guidelines for Joint Ventures
Distinctive competencies of two or more firms are
complementary
Two or more smaller firms have trouble competing with larger
firm
A need exists to introduce a new technology quickly
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Michael Porter’s generic strategies
According to Porter, strategies allow organizations to
gain competitive advantage from three different bases:
• Differentiation
• Cost leadership
• Focus
a. Differentiation Strategy
Differentiation involves creating a product that is perceived as unique.
The unique features or benefits should provide superior value for the
customer if this strategy is to be successful.
the process of adding meaningful and valued differences to distinguish
the company’s offering from the competition.
an organization seeks to provide a unique or superior value to the buyer
in terms of product quality, special features, or after sale service. 11
A firm can differentiate along 5 dimensions
1. Product Differentiation
• performance quality, conformance quality (ability to meet
designed specifications) , durability, reliability, reparability,
style, design form, attractive pricing customization, bundling,
additional packing materials not required in bulk case shipments
to wholesalers and retailers.
2. Service Differentiation
• ordering ease, delivery, installation, customer training, customer
consulting, maintenance and repair, miscellaneous services
• customer service can be enhanced by 24-hour customer
feedback and the ability to respond more rapidly to customer
concerns.
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Cont.....
3. Personnel Differentiation
• competence, courtesy, credibility, reliability, responsiveness,
communication
• automated processes, reduced dependence on personnel, lower
transaction cost.
4. Channel Differentiation
• Typically around half the price paid for a product by a customer is
absorbed by the activities involved in getting that product to the
customer
• Direct channel, where the company sales its products directly to
the final consumers
• Indirect channel, but shorter one
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Cont....
5. Image Differentiation
A company can differentiate itself by creating a unique experience
A company or brand image should convey the product’s distinctive benefit and
positioning
Through experience branding firms can better retain customers, target key segments,
and enhance profitability.
The most commonly used specific differentiation strategies include
• Being the first to enter the market.
• Owning a product attribute in the mind of the consumer.
• Demonstrating product leadership.
• Utilizing an impressive company history or heritage.
• Supporting and demonstrating the differentiating idea.
• Communicating the difference. 14
b. Cost leadership strategy
Cost leadership Strategies emphasizes
producing standardized products at very low
per unit cost for consumers who are price
sensitive.
- This strategy emphasizes efficiency.
An organization attempts to design, produce and market
a comparable product more efficiently than its
competitors
Low-cost-position relative to a firm’s peers
Manage relationships throughout the entire value chain
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Cont...
Integrated tactics to attain cost leadership
• Aggressive construction of efficient-scale facilities
• Vigorous pursuit of cost reductions from experience
• Tight cost and overhead control
• Avoidance of marginal customer accounts
• Cost minimization in all activities in the firm’s value
chain, such as R&D, service, sales force, and
advertising
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c. Focus strategy
Focus strategy refers an organization concentrates on a
specific regional market, product line, or a specific market
segment.
Narrow product lines, buyer segments, or targeted geographic
markets.
Attain advantages either through differentiation or cost
leadership.
Focus is based on the choice of a narrow competitive scope within an
industry.
Firm selects a segment or group of segments (niche) and tailors its
strategy to serve them.
Firm achieves competitive advantages by dedicating itself to these
segments exclusively. 17