CHAPTER FOUR

STRATEGIES IN ACTION

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Strategies in action
 Strategies in action can be categorized into different
actions. These are:
◦ Stability Strategy - holding, endgame/profit, harvest
and stable growth
◦ Declining Strategy – Turnaround, Survival and
liquidation
◦ Growth Strategy - Internal growth and External
growth
◦ Competitive Strategy- Cost leadership,
Differentiation and Focus
◦ Cooperative Strategy – Collision, Licensing, Joint
Venture and Value Chain Partnership
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Strategies in Action
 Strategic actions operationalized in terms
of inter-industry (CLS) and intra-industry
(BLS) variation.
 Corporate-level strategy:
◦ answers the question of what set of businesses
should the company be in or.
◦ Determines the attractiveness of the industry
and develop and coordinate business portfolio.
 CLS has three key components:
◦ Value Creation, Scope and Execution
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Strategies in action
 Types of Corporate level strategies
 There are four types of corporate
level strategies. These are:
◦ Stability Strategy
◦ Growth Strategy
◦ Retrenchment Strategy
◦ Combination Strategy

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1. Stability or Consolidation
strategy
 A firm following stability strategy:
◦ Maintains its current business and
product portfolios
◦ Maintains the existing level of effort just
to maintain an incremental growth
◦ Focuses on fine-tuning its business
operations and improving functional
efficiencies through better deployment
of resources
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When to use stability strategy?

The industry is in turmoil/confusion

The organization just finished a period of
rapid growth and needs to consolidate its
gains before pursuing more growth
The industry is in a mature stage with few
or no growth prospects and the firm is
currently in a comfortable position in the
industry
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Approaches of Stability strategy

 There are various approaches to

developing stability/ consolidation
strategy.
◦ Holding strategy
◦ Stable growth-
◦ Harvesting Strategy
◦ Profit or endgame strategy

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2. Growth/Expansion
Strategies
 Growth is a promising and popular strategy that
tends to be equated with dynamism, vigor,
promise and success.
 It is characterized by:
◦ Significant reformulation of goals and
directions
◦ Major initiatives and moves involving
investments
◦ Exploration into new products, new
technology and new markets
◦ Innovative decisions and actions and so on.
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Growth Strategy –types
 Internal/Organic growth:
◦ implies increase in scale of operations
without joining hands with other firms
◦ is natural and gradual
 External/inorganic growth:
◦ implies increase scope of operations by
joining hands with other firms
◦ is quick and fast

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Forms of internal growth strategies
◦ Intensive growth strategies
 Market penetration, New product development and
New market development.
◦ Integration Strategies
 Vertical Integration
 Horizontal Integration
◦ Diversification Strategies
 Concentric diversification
 Conglomerate diversification

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External growth strategies
 External growth occurs when two or
more firms combine in one firm
 Forms of external growth strategies
◦ Merger
 Acquisition refers to absorption of one company by
another in a friendly manner
 Takeover - absorption of one company by another
in an unfriendly manner
 Amalgamation -creation of new company by
complete consolidation of two or more units
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 is a temporary partnership or consortium between
External growth strategies
 Externalgrowth strategy generates the
following advantages for joining firms
 Growth is very fast or quick
 The firm gets running business units
 The strategy offers economies of scale
and control over the market.
 Wasteful competition can be eliminated
 Synergetic advantages- economic,
competitive, organizational and political
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External growth strategies
Drawbacks of external growth
strategies:
◦ Large amounts of financial resources are
required to take over running units
◦ Drastic changes are required in the
organization structure and management of the
firm.
◦ Co-ordination and control of integrated units
becomes very difficult

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3. Retrenchment Strategy

 Retrenchment Strategy
◦ allows an organization to redefine its
business by divesting a major product
line or market.
◦ is necessary for a firm to cope up
hostile and adverse situations in the
environment
◦ is commonly used when the life cycle of
the industry is in its decline stage
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Retrenchment Strategy

 Retrenchment strategy alternatives

◦ Shrinking selectively
 involves retrieving the value of investment from one
and re-invest it in another
◦ Divestment
 is an endgame strategy that can be done either by
selling or liquation
◦ Cash extraction
 Can be done via budget and cost contraction

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Retrenchment Strategy
 Approaches of Retrenchment
strategy:
◦ Turnaround Strategy
◦ Survival Strategy
◦ Liquidation Strategy

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A. Turnaround Strategy

 A turnaround situation exists when a firm

encounters declining financial
performance after a period of prosperity.
 The strategic causes of performance
downturns may include:
 Increased competition
 Raw material shortages
 Decreased profit margins due to
operating and labor problems.
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Turnaround Strategy

 Turnaround strategy involves a two stage process.

◦ The initial stage focuses on objectives of survival and
achievements of a positive cash flow. To achieve this
objective:
 An emergency plan need to be crafted and
implemented just to stop the firm’s financial
loss and
 A stabilization plan to improve core operations
by making use of the classical retrenchment
actions
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Turnaround Strategy

 The second phase involves a return-to-growth

or recovery stage and
 In this stage the turnaround shifts away
from retrenchment and move towards growth
and development strategy like:
◦ Concentric strategy
◦ Diversification strategy
◦ Inorganic growth strategies

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B. Survival Strategy

 When the company is on the verge of

extinction, it can follow several routes for
renewing the fortunes of the company.
◦ Divestment: - an organization divests when it
sells a business unit to another firm that will
continue to operate.
◦ Spin-off:- in a spin-off, a firm sets up a
business unit as a separate business through a
distribution of stock or a cash deal.

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Survival Strategy
 Re-structuring the business
operations: - the company tries to
survive by:
◦ Restructuring its management team
◦ Financial reengineering or
◦ Overall business reengineering

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C. Liquidation Strategy

 Liquidation strategy:
◦ is the final resort for a declining company.
◦ applied when there is no promising future for
the business
◦ A simple shutdown will prevent owners from
throwing good money after bad once

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4. Combination Strategies

 The above strategies are not mutually

exclusive. It is possible to adopt a mix of
the above to suit particular situations.

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Business level strategy - designed to
address intra-
intra-industry strategic issues.
Business Level Strategies
 Business-level strategy
◦ is the plan of action that strategic managers
adopt to use a company’s resources and
distinctive competences to gain a competitive
advantage over its rivals in a market or an
industry.
◦ focuses on “how to compete in a particular
industry or product-market segment?”
◦ Determines the competitive advantage of a
firm
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Basis of the choice of Business Level
Strategy
 The process of defining a business
involves decisions about:
◦ Customer needs, or what is to be satisfied
◦ Customer groups, or who is to be satisfied
◦ Distinctive competences, or how customer
needs are to be satisfied
 These three decisions determine how a
company will compete in an industry

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Generic Business level strategies
 Forms of generic competitive approaches
◦ Cost leadership
◦ Differentiation, and
◦ Focus
 These strategies results from a company’s
making consistent choices on product,
market, and distinctive competences

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Cost leadership Strategy
 Cost leadership:
 A cost leader chooses a low level of product
differentiation
 A cost leader ignores the different market
segments and positions its product to appeal
to the average customer (mass market)
 Manufacturing and materials management
functions are the centre of attention for a
company pursuing a cost-leadership strategy

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Advantages of Cost Leadership
 The cost leader:
◦ is protected from industry competitors by its
cost advantage.
◦ will be less affected than its competitors by
increases in the price of inputs if there are
powerful suppliers
◦ less affected by a drop in the price it can
charge for its products if there are powerful
buyers.

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Advantages of Cost Leadership
 Usually requires a big market share, the
cost leader purchases in large quantities,
so that it can increase its bargaining
power over suppliers
 If substitute products start to come into
the market, the cost leader can reduce its
price to compete with them and retain its
market share.
 the leader’s cost advantage constitutes a
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Disadvantage of the cost
leadership
 New companies may apply lower-cost
technologies that give them a cost
advantage over the cost leader
 Competitors may also draw a cost
advantage from labor-cost savings
 Cost leadership carries a risk that the cost
leader, in its single minded desire to
reduce costs, may lose sight of changes
in customers’ tastes.
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Disadvantage of the cost leadership
 Competitors’ ability to imitate the cost
leader’s methods is another threat to the
cost-leadership strategy
◦ For example, the ability of IBM-clone
manufacturers to produce IBM-compatible
products at costs similar to IBM’s (but, of
course, to sell them at a much lower price)
was a major factor contributing to IBM’s
troubles.

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Differentiation
 The objective of this strategy is to achieve
a competitive advantage by creating a
product that is perceived by customers to
be unique in some important ways.
 Differentiation strategy:
◦ Involves product differentiation
◦ Involves high level of market segmentation
◦ Research and development, sales and marketing
department are the centre of attention
 Example, Cars made by Mercedes-Benz, BMW, and
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Differentiation strategy
 Theact of product differentiation can
be achieved in three principal ways:
◦ Quality
◦ Innovation
◦ Responsiveness to customers

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Advantages of Differentiation
strategy
 Brand loyalty is a very valuable asset that
protects the company on all fronts.
 Powerful suppliers are rarely a problem
because the differentiator’s strategy is
geared more toward the price it can charge
than toward the costs of production.
 Thus, a differentiator can tolerate
moderate increases in the prices of its
inputs better than the cost leader can.
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Advantages of Differentiation
strategy
 Differentiators are unlikely to experience
problems with powerful buyers because the
differentiator offers the buyer a unique product
 Differentiation and brand loyalty also create a
barrier to entry
 Threat of substitute products depends on the
ability of competitors’ products to meet the same
customer needs as the differentiator’s products
and to break the differentiator’s customers’
brand loyalty
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Disadvantages of Differentiation
Strategy
 The main problems with a differentiation
strategy centre on the company’s long-
term ability to maintain its perceived
uniqueness in customers’ eyes. This is
too challenging because:
◦ Competitors move to imitate and copy
successful differentiators quickly.
◦ Overall quality of products made by all
companies increases and brand loyalty
declines.
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Focus strategy
 Focus:
◦ Customer needs and product Differentiation
 Low to high ( price or uniqueness)
◦ Customer groups and market segmentation
 low (one or few segments)
◦ Distinctive competences
 Any kind of distinctive competences

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Advantages and disadvantages
of A focus strategy
 The firm is protected from rivals to the
extent that it can provide a good or service
that they cannot.
 This ability also gives the focuser power
over its buyers because they cannot get
the same product from anyone else.
 A focused company is at a disadvantage
because it buys inputs in small volume
and thus is in the suppliers’ power.
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Advantages and disadvantages
of a focus strategy
 However, as long as a focuser can pass on
price increases to loyal customers, this
disadvantage may not be a significant
problem.
 Potential entrants and threat of substitute
products cannot overcome the customer
loyalty the focuser has generated.
 A further advantage of the focus strategy
is that it permits a company to stay close
to its customers and to respond to their 1-
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changing needs.
Integrated Cost Leadership and
Differentiation Strategy
 Due to the support of elaborated IT
structure today's global players are using
an integrated cost and differentiation
strategy so as to the global customers.
 Examples:
◦ Amazon
◦ McDonald
◦ Toyota
◦ Wal-Mart
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Small In class Exercise
In class Exercise: How to Keep
the Salsa Hot
 Break up into groups of three to five people, and discuss the
following scenario. Appoint one group member as spokesperson for
the group, who will communicate your findings to the class when
called upon to do so by the instructor.
 You are the managers of a company that has pioneered a new kind of
salsa for chicken that has taken the market by storm. The salsa’s
differentiated appeal has been based on a unique combination of
spices and packaging that has allowed you to charge a premium
price. Within the last 3 years, your salsa has achieved a national
reputation, and now major food companies, seeing the potential of
this market segment, are beginning to introduce salsas of their own,
imitating your product.
◦ 1. Describe the generic business- level strategy you are pursuing.
◦ 2. Describe the industry environment in which you are competing.
◦ 3. What kinds of competitive tactics and maneuvers could you
adopt to protect your generic strategy in this kind of
environment?
◦ 4. What do you think is the best strategy for you to pursue in this
situation?

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 In class Exercise:

 Competing with Microsoft Break up into groups of three to five people, and discuss
the following scenario. Appoint one group member as a spokesperson who will
communicate your findings to the class.
 You are a group of managers and software engineers at a small start-up. You have
developed a revolutionary new operating system for personal computers that offers
distinct advantages over Microsoft’s Windows operating system: it takes up less
memory space on the hard drive of a personal computer; it takes full advantage of
the power of the personal computer’s microprocessor and, in theory, can run
software applications much faster than Windows; it is much easier to install and use
than Windows; and it responds to voice instructions with an accuracy of 99.9%, in
addition to input from a keyboard or mouse. The operating system is the only
product offering that your company has produced.
 Complete the following exercises:
 1. Analyze the competitive structure of the market for personal computer operating
systems. On the basis of this analysis, identify what factors might inhibit adoption
of your operating system by customers.
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 2. Can you think of a strategy that your company might pursue, either alone or in
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conjunction with other enterprises, to “beat Microsoft”? What will it take to
Business Level Strategies
 Cooperative strategies/strategic Alliances
◦ Is a type of business level strategy in which a
particular firm temporarily joins with the
hands of an other firm just to generate the
following advantages:
 Economic, organizational, competitive and political
 Types of Cooperative strategies
◦ Collision
◦ Licensing/franchising
◦ Joint venture
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◦ Value Chain partnership
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End of Chapter
Four

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