Chapter 4 BUSINESS STRATEGIES

Because of the volatility of the environment, business survival has become more
challenging than ever. There is a greater demand for an honest review of functional activities and
development of a proactive mindset through various strategic modes of growth and
competitiveness. Realignment, enhancement, reinventing, strategizing, and refocusing have
become more imperative to any organization. In this chapter, we will discuss value chain analysis
and the different types of business strategies. These include growth strategies, competitive
strategies, life cycle strategies, stability strategies, and turnaround strategies.
Value Chain Analysis
As global markets widen, businesses have to pay closer attention to where their raw
materials come from, how they are produced, how finished products are stored and transported,
and what their end products users are really asking for. The main business definition of any
organization is to produce goods or render services, and to achieve these set goals and objectives,
it engages in a series of activities. If an organization wants to be profitable, it has to sell value to
its buyers value that is worth paying for. Thus, the whole concept of value chain analysis comes
to the picture. Value chain is a general term that refers to a sequence of interlinked undertakings
that an organization operating in a specific Industry engages in. It looks at every phase of the
business from the time of procurement of raw materials to the time its products reaches its
eventual end users or consumers. The value chain concept is concretized in supply chain
management. Here, value creation is greatly emphasized.
Supply Chain Management
Supply chain management is a broad continuum of specific activities employed by a
company, it consists of the following:

 purchasing or supply management which includes the sourcing, ordering, and inventory
storing of raw materials, parts, and services;
 production and operations, also known as manufacturing and assembly;
 logistics which is the efficient warehousing, inventory tracking, order entry, management,
distribution and delivery to customers; and
 marketing and sales which includes promoting and selling to customers.
 Logistics
- Warehousing
- Scheduling
- Transportation
- Delivery

Supply Management
- Sourcing and Marketing & Sales
Ordering Organization - Promotion
- Inventory - Selling
Management

Production/ Operations
- Manufacturing
- Assembly
Figure 4.1 Supply Chain Management

Supply Management
Supply management is now a popular term used for purchasing which was formerly
termed as procurement. It is a key business function that is responsible for: (1) identifying
material and service needs; (2) locating and selecting suppliers; negotiating and closing contracts;
(3) acquiring the needed materials, services, and equipment; (4) monitoring inventory stock
keeping units; and (5) tracking supplier performance.
In this stage, it is important to create “value” by establishing and managing supplier
relationships, identifying strategic sources, accurately forecasting demand requirements, and
understanding inventory management. Thus, the goal of supply management is to obtain the
right materials by meeting quality requirements in the right quantity, for delivery at the right
time and the right place, from the right source, with the right service, and at the right price. In
addition, supply management objectives include improving the organization’s competitive
position, providing uninterrupted flow of materials, supplies, and services, keeping inventory and
loss at a minimum, maintaining and improving quality, finding best-in-class suppliers, purchasing
at lowest total costs, and achieving harmonious relations with suppliers.
Sourcing and Ordering
Following are the steps to take when an organization needs to source out raw materials
or parts.
1. Specify the need clearly by writing down the details. Normally, the stock keeping unit
(SKU) is coded with brief but complete details like date, identification number, the
originating department, the account to be charged, complete description of the raw
material/services, date needed, any special instruction, and signature of authorized
person making the request.

2. Identity and analyse sources of supply. Generally, more than one supplier should be
considered. The criteria for choosing suppliers are sound business sense and attitude,
good record of accomplishment, sound financial base, suitable technical capability,
quality orientation, customer service mentality, and effective logistical arrangements.

a. Use a Request for Quotation when the need is clear, the commodities are in
constant use, and quotations are easily obtainable.

b. Use a Request for Proposal when the buyer has complex requirements and plans
to use negotiation to determine price and terms.

c. Lastly, use a Request for Bid When the desire is a competitive bid process

3. Ask potential suppliers for their respective quotations, proposals, and bids.

4. Compare and evaluate submitted documents, then select the suppliers. Both buyers and
suppliers agree and determine the terms of the contract. Correspondingly, the negotiated
order placements follow.

5. Prepare, place, follow up, and expedite the purchase order (PO). The purchase order is a
written requisition placement to purchase supplies.

6. Confirm that the order placed has actually arrived in good condition and at the quantity.
Forward the shipment to its destination, properly document and register the receipt, and
forward it to the accepting party/parties.

7. Lastly, invoice clearing and payment follows.

In sourcing and ordering, value is generated when supplier relationships are created and
managed in delivering quality products, delivering on time, delivering at competitive prices,
providing good service back-up when needed, and keeping promises.
Inventory Management
Another facet of supply management is inventory management. The role of inventory is
to buffer uncertainty. It includes all purchased materials and goods, partially completed materials
and component parts, and finished goods. There are four broad categories of inventories.
1. All unprocessed purchased input or raw materials for manufacturing. Companies
purchase supplies for any of the following reasons: to avail of quantity discounts, to
anticipate future price increases, to safeguard against supplier problems, to minimize
transportation costs, and to avoid supply shortage.
2. Work-in-process (WIP)
3. Finished goods include all completed products for shipment.
4. Maintenance, repair, and operating supplies (MRO) include the materials and supplies
used when producing the products but are not parts of the products.
Inventory Models
Inventory management is ordering the right quantity of stock keeping units at minimum
inventory costs. Inventory cost is the sum total of ordering costs and carrying costs. Ordering
costs (set-up costs) are variable costs associated with placing an order with the supplier like
managerial and clerical costs in preparing the purchase. While carrying costs (holding costs) are
costs incurred for holding inventory in storage like handling charges, warehousing expenses,
insurance, pilferage, shrinkage, taxes, and costs of capital.
The inventory model answers two questions: “how much to order?” and “when to order?”
The question, how much to order, is answered by determining the economic order quantity
(EOQ). EOQ seeks to determine an optimal order quantity where the sum of the annual order
costs and annual carrying costs is minimized. On the other hand, the question, when to order, is
answered by computing for the reorder point (RP).
The application of the EOQ Model presupposes that the following are known and
constant: demand, order lead time, price, carrying cost, and ordering cost. Likewise, this model
assumes that replenishment is instantaneous and stockouts are not allowed. Lead time refers to
the span of time (in days) it takes for a stock to be delivered from the time It was ordered, while
instantaneous replenishment is delivery of stocks all at the same time.
The value of inventory management is evidently reflected in the minimization of costs.
This is achieved when organizations develop efficient ways of procuring their raw materials like
accurately forecasting demand and ordering in bulk to avail of quantity discounts. Reduction in
carrying costs lower handling costs, storage expenses, and costs of capital. Optimum ordering of
stocks increases efficiency while scheduled purchases contribute to a decrease in inventory costs.
Toyota, for example, espouses the concept of just-in-time. Just-in-time (JIT) is an
operational strategy whereby the company estimates its demand for raw materials and makes
sure that they are delivered on time. To effectively implement JIT, Toyota found it necessary to
establish good supplier relationships. As a result, Toyota’s operational costs largely decreased. It
sold its cars in the United States at prices lower than Ford, General Motors, and Chrysler. Thus,
it can be inferred that minimization in costs by an organization in its supply management
activities like sourcing, ordering, and inventory management is a form of value creation where
savings made by the organization can translate into lower prices for the consumers.
Production and Operations
Production and operations are processes that transform operational input into output to
satisfy consumer needs and requirements. This transformational process consists of
manufacturing and assembly.

Transformational
Input Output
Process

Figure 4.2 Production and Operations Model

Manufacturing is the process of producing goods using people or machine resources. It

commonly refers to industrial production where raw materials are converted into finished goods.
Assembly is the process of putting together raw materials into a desired output. Quality raw
materials and parts, efficient production layouts and processes, and employees with skills and
motivation are essential to effective transformational processes. Once achieved, value can be
generated through appealing product designs, quality and reliability, efficient service
performance, accessible location site, attractive store displays, affordable prices, and good
customer service.
The Logistics Circle
Now a popular term in supply chain management, logistics management includes the
supervision of certain sequential processes. These include warehousing, scheduling, dispatching,
transportation, and delivery.
 (1)
Warehousing

(5) (2)
Delivery Scheduling
Logistics
Circle

(4) (3)
Transportation Dispatching

Figure 4.3 The Logistics Circle

1. Warehousing is the function of physically packing finished goods or merchandises in a

building, room, or any space for temporary storage. While these items are stocked in
storerooms, they are timetabled for release to customers or buyers.

2. Scheduling is the act of organizing these inventory units and booking them for delivery.

3. Dispatching products are for transfer, this may include posting, mailing, shipping out,
transmitting, forwarding, or releasing commodities.

4. Transportation scheduling and other logistics are necessary to make dispatching cost
efficient. The goal is to minimize transportation costs. Therefore, considerations have to
be prioritized in terms of location site, ease, or gravity of traffic, safety, and labour
requirements.

5. Delivery to the specified site is undertaken. It closes the entire logistics circle.
Marketing and Sales
Products are produced and services are rendered for ultimate release to customers.
Therefore, there is a need to market these merchandise to interested buyers. Companies can
adopt different modes of marketing to attract and sell to customers. They can study the unique
purchasing patterns of buyers and determine what will translate their desire for the products
into actual purchase. Aside from coming up with good and distinct products, businesses can offer
competitive pricing like special offers, quantity discounts, and volume sales, among others. They
can aggressively promote the products through advertisements in newspapers, magazines, radio,
television, and other form of promotional mediums. In all instances, while marketing their
products and services, companies will need to complement their efforts with developing
salespeople through result-oriented sales trainings, giving competitive salaries that will motivate
them to contract sales, providing good waking conditions for better productivity coupled with
inspirational leadership.
In summary, supply chain management is a complete sequence of processes that includes
purchasing, production and operations, delivery, and marketing and sales. It is actually a
complete management cycle where efficiency between and among the procedures essentially
brings about optimum output.

Questions 4.1
1. What is the concept of value chain analysis?
2. What are the four components of supply chain management?
3. In what ways are sourcing and ordering related to inventory management? Give at least
two examples.
4. Describe the production and operations model. What is the relationship between
manufacturing and assembly?
5. What are the components of the logistics circle? What possible problems can companies
encounter in managing their logistics?
6. How should companies conduct the marketing and sales of their products and services?

Growth Strategies
The adoption and implementation of a growth strategy is one of the most important
considerations for every organization. Particularly, growth strategies are carefully studied and
deliberately carried out by organizations for the following reasons: they want to survive the
hypercompetitive environment and not perish; they want to increase their earnings or income;
they want to create their advantage among competitors; or they may want to increase their
market leadership in a given industry. Growth strategy is a mode adopted by an organization to
achieve its main objectives of increasing in volume and turnover. Growth strategies can be
internal or integrative. This chapter will discuss internal growth strategies.
Internal Growth Strategies
Internal growth strategies are approaches adopted within the company. These broad
growth strategies can be any of the following: market penetration, market development, product
development, and diversification. The interrelationships of these four constructs are shown in
Table 4.1. In this table, the two main variables considered are products and markets, possessing
two properties: current and new.
Table 4.1 Product/Market Mix Internal Growth Strategy

Current Products “New” Products

Current Markets Market Penetration Product Development
New Markets Market Development Diversification

 Market penetration suggests that for an organization to increase its growth, market
penetration can be actualized by selling more of its current products/services to its
current customers or buyers. It is the least risky for any company to pursue. For example,
if we are selling a six pack of Coca Cola, then we can push for a 12-pack, and so on.

 Market development is the process where a company can sell more of its current products
by seeking and tapping new markets. It is a little more challenging. For example, if a
company has a chicken fast food chain in Luzon, then it can open new outlets in Visayas
and eventually, in Mindanao.

 Product development is an internal growth strategy where the company sells “new”
products to an existing market. In this strategy, there is a need for the organization to be
more creative in coming up with differentiated products and services. The products or
services need not be new in its truest essence but instead, may be results of
product/service enhancement, redesign, or reinvention. For example, a company
develops a versatile shampoo product that can be used without wetting the hair.

 Diversification is a product/market mix growth strategy that involves creating

differentiated products for new customers. In short, it is “new” products for new
customers. Oftentimes, it is going to another product/ service area that is NOW related
to one’s current business or operations. For example, an aircraft manufacturer can
diversify and go into the restaurant business or an accounting firm can manufacture a
new robot pilot for airline companies.
In summary, growth strategies are adopted by organizations to deal with the
competitiveness in the industry milieu. There are different forms of growth strategies like market
development, product development, and diversification. The interplay of these strategies may
greatly help these organizations.

Questions 4.2
 1. What are growth strategies? What are internal growth strategies?
2. When is market penetration a good growth strategy? Give at least two examples.
3. What specific strategies (at least two) will you propose to a company of your choice to
implement market development?
4. What does it entail to pursue product development? Come up with a new or
differentiated product for an existing company.
5. Is it easy to adopt diversification internal growth strategy? Give the challenges allied to
pursuing this strategy. Use an existing company.

Competitive Strategies
Organizations cannot avoid the permeating competition existing in the business
environment. Thus, competitive strategies are designed to deal with this so-called reality of
hypercompetition. Competitive strategies are essentially long-term action plans prepared with
the end goal of directing how an organization will survive and compete. These strategies are
formulated to help organizations gain competitive advantage after evaluating and comparing
their strengths and weaknesses against their competitors.
Competition comes in distinctive forms, it may be in the product/service of the company like
design, functionality, and versatility, pricing of products/services offered, and the benefits
accompanying the product/service offerings like warranties and after-sales services. Types of
competitive strategies consist of low-cost leadership strategy, broad differentiation strategy,
best-cost provider strategy, focused/market-niche strategy based on lower cost, and
focused/market-niche strategy based on differentiations.
Table 4.2 Competitive Strategies (Porter 2008)

Competitive Cost Leadership Differentiation Market Niche

Strategies
Cost Leadership Low-cost leadership Best-cost provider Focused/market-
strategy strategy niche lower cost
strategy
Differentiation Best-cost provider Broad differentiation Focused/market-
strategy strategy niche differentiation
strategy

 Low-cost Leadership Strategy. The objective of the low cost leadership competitive
strategy is to offer products and services at the lowest cost possible in the industry. This
strategy is implemented when the organization makes every effort to be the most
effective, if not the overall, low-cost provider of a service or product. For example, Cebu
 Pacific Airlines uses the low-cost leadership strategy to capture the broadest reach of air
traveling customers by offering airfares at low prices.

 Broad Differentiation Strategy. The objective of the broad differentiation competitive

strategy is to provide a variety of products, services or product/service features that
competitors do not offer or are not able to offer to consumers. This strategy is
implemented when the organization offers a unique product/service with distinct traits
and features that will appeal better to its customers/buyers. A mobile phone with a
television feature is a broad differentiation strategy product. This is true of fast foods with
playgrounds like slides and see-saws.

 Best-cost Provider Strategy. This strategy is a combination of the low-cost leadership and
broad differentiation strategies. It is implemented when the organization gives its
customers more value for money by emphasizing both low-cost products and services
with unique features. The end goal is keeping its customers. For example, Baclaran
increases its customer base by selling varied, wide-ranged numbers, and low-cost
products in large quantities.

 Focused/market-niche Lower Cost Strategy. This strategy is implemented when the

organization concentrates on a limited market segment and creates a market niche based
on lower costs. For example, there are low-cost condominium units that cater to middle
class employees. An affordable and relaxed dwelling residence is an example of using a
focused/market-niche lower cost strategy. Another example is a specialized audio and
video equipment store that sells only these two types of products. Being dedicated, the
store can purchase stocks in bulk, avail of price discounts, and therefore, sell at low prices.

 Focused/market-niche Differentiation Strategy. This strategy is implemented when the

organization concentrates on a limited market segment and creates a market niche based
on differentiated features like design, utility, and practicality. An example of this
focused/market-niche differentiation strategy is Rolex. Rolex has an elite clientele base.
It sells limited editions of watches. One look and one can immediately say that the person
is wearing a Rolex watch. Cost, design, quality, and branding are distinct features of Rolex
watches.
Other Competitive Strategies
Other competitive strategies include innovation strategy, operational effectiveness
strategy, economies of scale, and technology strategy.

 Innovation Strategy. Although innovation, in the strictest sense of the word, is anything
that is new and original, this strategy is difficult to implement. The goal of a competitive
innovation strategy is to radically catapult or leapfrog the organization by introducing
 completely new and highly differentiated products and services that give an organization
a competitive posturing. Robotics is a concrete example where automation, engineering,
science, computing, and manufacturing are collaboratively used to create a cybernetics
product.

 Operational Effectiveness Strategy. Some organizations operate with a high degree of

inefficiencies in their internal business processes like wastes, downtime, longer cycle
times, complaints, rejects, loses, absences, and others. These forms of incompetence,
wastefulness, and inadequacies translate into financial leaks and reduction in potential
profits. The objective of an operational effectiveness strategy is to make an organization
perform better by making the structure lean, streamlining wasteful and inefficient
processes, harnessing better facility and equipment maintenance, and Increasing work
force productivity.

 Economies of Scale. When applied as a competitive strategy, economies of scale lowers

costs because of volume. In other words, the more a product/service is produced, the
lower the costs are for producing the product and rendering the service.

 Technology Strategy. The advantage of gearing toward technology cannot be

overemphasized. Technology can be applied system-wise through digital Integration. As
organizations realize the benefits of going digital, they aggressively pursue this thrust.
Functional activities like accounting, marketing, purchasing, human resource
management, production, and operations are interconnected using enterprise resource
planning.
Enterprise resource planning facilitates processes to radical speed by shortening
completion time. Technology applications allow organizations to perfect their products and
services to a high degree of accuracy and quality, thus, adding to marketability. A technological
organization naturally creates a monopolistic paradigm and as a result, allows the organization
to dictate prices in the business world. These are generally true for technology start-up
organizations to bring about significant improvements by redesigning through research and
development and re-engineering their products and services.

Questions 4.3
1. How do you define competitive strategies?
2. When is adopting cost leadership strategy advantageous to the company? Explain your
answer.
3. What does a company get when it pursues a competitive differentiation strategy? Give
an example to support your answer.
 4. Is the market-niche strategy better than the cost leadership and differentiation
strategies? Why?
5. Is innovation strategy a practical strategy to pursue? Explain your answer.
6. What do economies of scale do to a company? Give at least two examples.
7. In what ways do implementing technology strategies help companies?
8. Is operational effectiveness always a practical competitive strategy? Explain your answer.
9. Can you think of any company that used innovation as a competitive strategy?

Life Cycle Strategies

In the context of the horizontal boundaries of the firm, it is worth reviewing the product
life cycle. The life cycle of any product/service refers to the lifespan that a commodity/service
undergoes from its introduction stage to its growth, maturity, and decline stages.

The phases in the life cycle of a product/service are sequential in development. While a
product undergoes its life cycle, external and internal forces in the environment affect the
product/service ranging from consumer expectations, technological development, and
competition to other wide-ranging issues and challenges. In many instances, organizations have
little control over forces. Take note too, that products and services have different life cycle
patterns.

 The introduction stage is the period of launching the product/service for acceptance. In
this phase, the product/service is new; hence, there is a need to create awareness.
 Strategies include promotions, giving discounts, and market development, among others.
Depending on the type of product/service, the acceptance phase may either be short or
long.

 The growth stage is the phase where the product/service gains acceptance by the
consumers. In this phase, sales and profit slowly increase and emphasis is now on
continuous market development and improvement. Competition becomes more
challenging. Here, the organization can focus on branding, building customer loyalty, and
promoting repeat business through customer patronage.

 The maturity stage is the period where the product has reached its penultimate level.
Here, the established product tends to remain steady and the number competitors
increases. Although sales and profits generally reach their peak, it is in this phase the
organization should start reinventing its products/services to maintain their current
levels. Product differentiation is recommended in this stage, as well as efficient
operations and formulation of creative marketing strategies.

 The decline stage is the period where the product/service begins to reach or is reaching
its lowest point. Here, sales and profits decline and price competition is intense. An
organization can choose to keep the status quo, reduce prices to generate more
consolidate with other organizations, or simply exit the market. Implementing sum like
product/service reinvention and aggressive marketing can be helpful.
Not all products follow the S-shaped product life cycle curve. Some products are briefly
introduced but die quickly. Others stay in the maturity stage for a long time. Some enter the stage
and then are recycled back into the growth stage through strong promotion and repositioning.
Stability Strategies
For organizations that are doing fine or are doing better in their existing businesses, they
may choose not to implement any growth strategy. They may not want to apply any competitive
strategy and hence, decide to keep the status quo. Not adopting any growth or competitive
strategy is a choice that organizations make. Stable with their current businesses, some
organizations are comfortable with their current market niche and any loud strategy may attract
the attention of competitors.
For example, there are businesses that are successful monopolies in their own right with
no new entrants. They continue to enjoy their profits. On the other hand, there are organizations
that have not decided to expand and become big. They are just content with what they have.
Retrenchment Strategies
 Sometimes, companies encounter serious difficulties. When a company’s survival is
threatened or when it is not competing effectively, it usually takes time to sit down and review
its current situation. There are different modes of dealing with this situation. They are the
following:
1. Liquidation is the most radical action a company takes when the company is losing money
and thus, is further compounded by a disinterest on the part of the stockholders to do
anything more to save it. In such cases, the business may be terminated and its assets
sold.

2. Divestments implemented when a company consistently fails to reach the set objectives
or when the company does not fit well in the organization. Thus, the stockholders would
preferably sell it or set is as a separate corporation.

3. A turnaround strategy is adopted when the organization has reached a significant level of
non-performance, non-productivity, demoralization, and unprofitability, and therefore,
has to implement restorative strategies. Organizations in this level have serious problems
that may lead to possible closure. Once an organization decides to continue, turnaround
strategies are implemented. In a turnaround strategy, the organization should focus on
the following areas: climate and culture, products and services, production and
operations, infrastructure, and finances.

Finances

Productions &
Infrastucture
Operations
Turnaround
Strategy

Climate & Products &

Culture Service

Figure 4.5 Turnaround Strategy Model

a. Climate and Culture. The toughest and most challenging area for any organization
undergoing a turnaround strategy is the climate and culture. Generally, a new chief
executive officer comes in and takes over the critical organization. With a generally
demoralized and uncertain workforce, employees feel a certain ambiguity and hesitancy.
Aside from job security, they are unsure how the new CEO will manage the organization.
Essentially, the strategy is to first study the organization and audit the job descriptions of
each of the employees vis-a-vis their functionality in their departments or business units.
After in-depth study is done, certain people strategies can be adopted.

b. Products and Services. A review of the products offered and services rendered is needed;
ask questions like what products/services are marketable in the industry, which of these
products and services need some improvements or major redesign, and what distinct
features can be introduced to attract buyers. Note that some products and services that
were once saleable and attractive may eventually lose their customer appeal. Because of
rivalries among competitors, these goods may have become obsolete, dysfunctional, too
expensive, of low quality and therefore, not competitive. When the organization gives
due and serious attention to these concerns, the product/service competitiveness aspect
would have been half addressed.

c. Production and Operations. In the implementation of turnaround strategies, this is the

easiest phase to sort out and manage. The CEO can look into the processes of the
organization, determine which processes are redundant and defective, and undertake
piecemeal improvements. Questions asked will include finding out whether the processes
are lean and efficient, whether there is a need to conduct facility, equipment, production,
and operation review, whether the percentage of wastes, rejects, and downtime is high,
and whether cycle time is high or very high. Once the organization competently reviews
and addresses these areas, financial savings can easily be generated.

d. Infrastructure. Turnaround strategies can easily achieve significant improvements when

the infrastructure is correctly assessed and appropriate interventions are introduced or
reinforced. Technology is the best infrastructure strategy that can bring about radical
improvements. An organization seeking to turn itself around can look at its structure and
system and implement needed step-ups and enhancements.

e. Finances. When an organization needs a turnaround strategy, it is because its finances

are waving a “red flag.” This may mean that the organization ls losing money or is
marginally profitable, causing concerns to investors. Once the aspects of climate and
culture, products and services, production and operations, and infrastructure have been
 adequately confronted and substantial interventions have been successfully
implemented, the financial aspect will take care of itself.
Products generally follow a life cycle-introduction, growth, maturity, and decline. In every
stage, certain unique strategies can be adopted to bring about greater sales. Some companies
are able to prevent atrophy (death of a business/organization) if more creative strategies are
implemented. In addition, there are organizations that opt for maintaining the status by applying
stability strategies. For organizations that seem to be on the verge of closing because of certain
reasons, retrenchment strategies can be employed.

Questions 4.4
1. What are the different phases of the life cycle of a product or a service? Suggest additional
strategies for each phase of the life cycle. Give examples.
2. Why do some organizations decide to adopt stability strategies? Explain your answer.
3. Given the three types of retrenchment strategies, what are the advantages and
disadvantages of implementing liquidation or divestment?
4. When is an organization in need of a turnabout? Cite examples of turnaround strategies.
Which is the easiest to implement and the hardest to actualize?