Types of Strategies6

Types of Strategies
Level of strategies
Prof. Dr. Majed El-Farra 2009
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.
Types of Strategies
A Large
Company
Corp
Level
Division Level
Functional Level
Operational Level
3 -Ch 5
Types of Strategies
company
A small
Company
Functional
Level
Operational Level
4 -Ch 5
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.
5
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.
Merger: Two roughly similar size firms combine
into one. To benefit of synergy.
Strategic alliance: Temporary partnerships
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.
Retrenchment strategies
Types:
1- Turnaround:
Eliminating unprofitable outputs,
pruning/cutting assets, reducing size
of work force, rethinking firms
products lines and customer groups.
2- Divestment: sell one of business
units
3- Liquidation: last resort strategy
8
Strategies in Action
Vertical Integration Strategies
Forward integration
Backward integration
Horizontal integration
Forward
Integration
Defined
Gaining
ownership or
increased
control over
distributors or
retailers
10
Example
General Motors is
acquiring 10% of
its dealers.
Guidelines for Forward Integration
11
Present distributors are expensive, unreliable, or

incapable of meeting firms 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
Backward
Integration
Defined
Seeking
ownership or
increased
control of a
firms
suppliers
12
Example
Motel 8 acquired a
furniture
manufacturer.
Guidelines for Backward Integration
13
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
Horizontal
Integration
Example
Defined
Seeking
ownership or
increased
control over
competitors
14
Palestinian Islamic
Bank acquired
Cairo-Amman Bank
Islamic transaction
branch.
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
15
Intensive Strategies
16
Market penetration
Market development
Product development
Market
Penetration
Defined
Example
Ameritrade, the on Seeking

line broker, tripled
its annual
increased
advertising
market share for
expenditures to
present
$200 million to
products or
convince people
services in
they can make their
present markets
own investment
17through greater
Guidelines 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
18
Market
Developmen
t
Defined
Example
19
Introducing
present
products or
services into
new geographic
area
Khuzendar Tiles
maker introduce his
product to Gulf
markets.
Guidelines for Market Development
20
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
Product
Developmen
t
Defined
Example
Seeking
increased sales
by improving
present
products or
services or
developing new
ones
21
Apple developed
the G4 chip that
runs at 500
megahertz.
Khuzendar Tiles
maker introduce
Ceramic as a new
product.
Guidelines for Product Development
22
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
Diversification Strategies
23
Concentric diversification
Conglomerate diversification
Horizontal diversification
Concentric
Diversificati
on
Defined
Adding new, but

related,
products or
services
24
Example
National
Westminister Bank
PLC in Britain
bought the leading
British insurance
company, Legal &
General Group PLC.
Guidelines for Concentric Diversification
25
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
Conglomerate
Diversificati
on
Defined
Adding new,
unrelated
products or
services
26
Example
Consultant
Construction
Engineering
acquired Bisects
factory.
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
27
Horizontal
Diversificati
on
Defined
Adding new,
unrelated
products or
services for
present
customers
28
Example
The El-Awda Co.

provide ice-cream
product to present
customer
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
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
29
Defensive Strategies
30
Joint venture
Retrenchment
Divestiture
Liquidation
Joint Venture
Defined
Two or more
sponsoring firms
forming a
separate
organization for
cooperative
purposes
31
Example
Lucent Technologies
and Philips
Electronic NV
formed Philips
Consumer
Communications to
make and sell
telephones.
Guidelines for Joint Venture
32
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
Retrenchment
(turnaround)
Defined
Regrouping through
cost and asset
reduction to
reverse declining
sales and profit.
Sometimes it is
called turnaround
or reorganizational
strategy.
33
Example
A company sold off

a land and 4
apartments to raise
cash needed. It
introduce expense
effective control
system.
Guidelines for Retrenchment
34
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 organizations strategic managers have
failed
Very quick growth to large organization where a
major internal reorganization is needed.
Divestiture
Defined
Selling a
division or part
of an
organization
35
Example
Harcourt General,
the large US
publisher, is selling
its Neiman Marcus
division.
Guidelines for Divestiture
36
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 firms 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.
Liquidation
Defined
Selling all of a
companys
assets, in parts,
for their
tangible worth
37
Example
El-Ameer Block
factory sold all its
assets and ceased
business.
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 firms assets
38
Michael Porters Generic

Strategies
Cost Leadership Strategies
(Low-Cost & Best-Value)
Differentiation Strategies
Focus Strategies
& (Low-Cost Focus
(Best-Value Focus
39 -Ch 5
Business Unit Strategies

Here we answer the question:
How should we compete in the chosen
industry?
Cost leadership
Differentiation (real or perceived).
Mixed
Focus
40
Business Strategy
Focuses on improving competitive

position of companys products or
services within the specific industry
or market segment
41-6
Porters Competitive Strategies
Generic Competitive Strategies -Lower Cost strategy
Greater efficiencies than competitors
Differentiation strategy
Unique/superior value, quality, features,

service
42-6
Competitive Advantage -Determined by Competitive Scope

Breadth of the target market
43-6
44-6
45 -Ch 5
Cost Leadership -Low-cost competitive strategy

Broad mass market
Efficient-scale facilities
Cost reductions
Cost minimization
46-6
Michael Porters 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.
47 -Ch 5
Cost leadership
Striving to be the low-cost producer in an
industry can be especially effective when
the market is composed of many pricesensitive 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.
48 -Ch 5
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.
49 -Ch 5
Differentiation
Broad mass market
Unique product/service
Premiums charged
Less price sensitivity
50-6
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
51 -Ch 5
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.
52 -Ch 5
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.
53 -Ch 5
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 pricevalue available on the market. This is sometimes
called focused differentiation.
54 -Ch 5
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.
55 -Ch 5
Cost-Focus
Low-cost competitive strategy
Focus on market segment
Niche focused
Cost advantage in market segment
56-6
Differentiation Focus
Specific group or geographic market
focus
Differentiation in target market
Special needs of narrow target market
57-6
Stuck in the middle

No competitive advantage
Below-average performance
58-6
Risks of Generic Strategies
Risks of Cost
Risks of Cost
Leadership
Leadership
Cost
leadership
is not
Cost
leadership
is not
sustained:
:sustained
.Competitors
imitate.
Competitors imitate
.Technology
Technology changes
changes.
Other
Otherbases
basesfor
forcost
cost
leadership
erode.erode
. leadership
Proximity
differentiation
Proximity
in in
differentiation
is lost.
.is lost
Cost
focusers
achieve
Cost focusers achieve
even lower
cost incost in
even lower
segments.
.segments
Risks
ofof
Differentiation
Risks
Differentiation
Differentiation
is not
Differentiation is not
:sustained
sustained:
Competitors imitate.
imitate
.Competitors
Bases
for differentiation
Bases
for differentiation
become less important
to
become less important
. buyers
to
.Cost proximity is lost
buyers.
Differentiation
Cost
proximity isfocusers
lost.
achieve
even
greater
Differentiation focusers
achieve differentiation
even greater in
differentiation .segments
in
segments.
59-6
Risks of Focus
Risks
of
Focus
The focus
strategy is
The focus strategy
is
:imitated
imitated:
The target segment
Thebecomes
target segment
structurally
becomes structurally
:unattractive
unattractive:
.Structure erodes
.Demand
Structuredisappears
erodes.
Demand
disappears.
Broadly
targeted
Broadly
targeted
competitors
overwhelm
competitors
overwhelm
:the segment
the segment:
The segments
differences
The segments
from other
differences
from
other
. segments
narrow
segments
narrow.
The
advantages
of a
. The
advantages
of a
broad
line increase
broad line
increase.
New focusers
subsegment
New focusers
.thesubsegment
industry
the industry.
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.
60
purchasing & materials

management (as example)
Buying materials in quantity, quality
and cost which correspond with the
corp. generic strategies (Business
Unit strategies).
61
What kind of internal factors help managers

determine whether a firm should emphasize
the production and sales of a large number of
low-priced products or a small number of
high-priced products?
The most important factors can be brought out by going through each
62
functional area. For example, under marketing, a strong market research

group may be able to identify the kinds of niches available to the products
or services under consideration.
In terms of finance, the production of a large number of low-priced products
suggests a large capital intensive manufacturing facility.
To produce a few high quality goods with a small amount of capital because
the needed manufacturing facilities may be small, utilizing craft labor. R&D
may be an important consideration also.
In order to produce high-quality products, a fairly sophisticated applied R&D
effort may be needed. An expensive engineering staff may be needed,
In terms of human resource management, a fairly unskilled and low paid
workforce cannot normally be expected to produce a high quality product
on old assembly line machinery. Either the workforce would need to be
replaced or an extensive job training and job enrichment program would
need to be established. Either approach costs both time and money.
Is it possible for a company or business

unit to follow a cost leadership strategy
and a differentiation strategy
?simultaneously? Why or why not
Michael Porter argues that a business unit which is unable to

achieve one of the competitive strategies is likely to be "stuck
in the middle" of the competitive marketplace with no
competitive advantage. That unit, according to Porter, is
doomed to below-average performance.
Research by Greg Dess and Peter Davis as well as by Rod
White, suggests however, that this may not be the case.
Examples can be found of businesses which have been able
to jointly follow overall low cost and high quality
differentiation strategy. Japanese companies such as Toyota
in automobiles and Matsushita (Panasonic and National)
in consumer electronics are good examples. Their offer of low
price and high quality created serious problems for those
companies following only cost leadership in the U.S.
63
How can a company overcome the

limitations of being in a
?fragmented industry
Businesses tend to be local and oriented to market segments.
64
This may occur because the industry is relatively new - based

upon a product in the early stage of its product life cycle.
Entry barriers are probably low and new entrants are constantly
moving into the industry as others leave or go bankrupt. Often,
the trick to be a successful firm in this kind of industry is to find
the key to standardization which allows economies.
Domino's Pizza achieved success in fast food by providing
standardized pizza throughout North America and by guaranteeing
delivery time faster than competition. Before Pizza Hut and
Domino's settled upon standardized pizza appealing to a wide
variety of tastes across North American, the pizza business was a
fragmented industry characterized by many small pizza "parlors"
serving small market segments in cities throughout America .

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Types of Strategies

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

Vertical Integration Strategies

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

Present distributors are expensive, unreliable, or

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

When present suppliers are expensive, unreliable,

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

Ameritrade, the on Seeking

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

New channels of distribution that are reliable,

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

Products in maturity stage of life cycle

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

Adding new, but

Prof. Dr. Majed El-Farra 2009

Competes in no- or slow-growth industry

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

The El-Awda Co.

Prof. Dr. Majed El-Farra 2009

Revenues from current products/services would

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

Combination of privately held and publicly held can

A company sold off

Prof. Dr. Majed El-Farra 2009

Firm has failed to meet its objectives and goals

Prof. Dr. Majed El-Farra 2009

When firm has pursued retrenchment but failed to

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

Prof. Dr. Majed El-Farra 2009

Michael Porters Generic

Prof. Dr. Majed El-Farra 2009

Business Unit Strategies

Prof. Dr. Majed El-Farra 2009

Focuses on improving competitive

Prof. Dr. Majed El-Farra 2009

Porters Competitive Strategies

Generic Competitive Strategies -Lower Cost strategy

Greater efficiencies than competitors

Unique/superior value, quality, features,

Prof. Dr. Majed El-Farra 2009

Porters Competitive Strategies

Competitive Advantage -Determined by Competitive Scope

Prof. Dr. Majed El-Farra 2009

Porters Competitive Strategies

Prof. Dr. Majed El-Farra 2009