5.

2 TYPES OF STRATEGY

Corporate Strategy

Corporate strategy helps to exercise the choice of direction that an organization adopts. There
could be a small business firm involved in a single business or a large, complex and diversified
conglomerate with several different businesses. The corporate strategy in both these cases
would be about the basic direction of the firm as a whole. According to Gluek, there are four
strategic alternatives:
a) Concentration Strategies

b) Expansion strategies

c) Stability strategies

d) Retrenchment Strategies

e) Combination strategies

An organization can choose from a wide variety of general strategies:

a) Concentration strategies - is one in which an organization focuses on a single

line of business. This strategy is used by firms seeking to gain competitive advantage
through specialized knowledge and efficiency and to avoid the problems involved in
managing many businesses.

b) Stability strategy - focus on its existing line or lines of business and attempts to
maintain them. This strategy is useful in;

(i) Organization that is large and dominates its markets may choose a stability
strategy to avoid government controls or penalties for monopolizing the industry

(ii) Organization may find that further growth is too costly and have detrimental
effects on profitability
(iii)Organization in slow-growth or no-growth industry that has no other viable options
may be forced to select a stability strategy.

c) Growth strategies.

May be pursued by means of vertical integration, horizontal integration, diversification

and mergers and joint ventures.

(i) Horizontal integration - involves growth through acquisition of competing firms in

the same lines of business. It is adopted to increase the size, sales, profits and
potential market space of an organization.
(ii) Vertical integration - involves growth through acquisition of other organization in
the channel of distribution. When an organization purchases other companies that
supply it, it engages in back ward integration. The organization that purchases
other firms that are closer to the end user of the product (such as wholesalers and
retailers) engages in forward integration.
(iii) Diversification - involves growth through acquisition of firms in other industries or
lines of business. When acquired firm has production technology, products,
channels of distribution and make similar to those of firm purchasing it, the
strategy is known as related or concentric diversification. When the acquired firm
is in a completely different line of business, the strategy is known as unrelated
conglomerate diversification.
This strategy is used for the following reasons:
(i) Organizations in slow-growth industries may purchase firms in faster
growing industries to increase their overall growth rate.
(ii) Organizations with excess cash often find investment in another industry
(particularly a faster-growing one) a profitability strategy.
(iii) Organizations may diversify in order to spread their risks across several
industries
(iv) The acquiring organization may have management talent
financial and technical resources, or marketing skills that it can
 apply to a weak firm in another industry in the hope of making it highly
profitable.
(v) Managers and joint ventures - in a merger, a company joins with another
to form a new organization, while joint ventures an organization works with
another company on a project too large to handle itself, such as the space
program.
(vi) Leverage buyouts - the stockholders of a public company are offered a
premium for their shares over the going market price. The buyers of the
firm use little cash in the transaction.

d) Retrenchment strategies – when an organization’s survival is threatened and it is not

competing effectively, retrenchment strategies are needed. The types of retrenchment
include:

(i) Turn around strategy - used when an organization is performing poorly but has not
reached a critical stage. Normally this strategy involves getting rid of unprofitable
products, pruning the work force, trimming and distribution outlets.
(ii) Divestment strategy - involves selling business or selling it up as a separate
corporation. It is used when a particular business doesn’t fit well in the
organization or consistently fails to reach the objectives set for it.
(iii) Liquidation strategy - business is terminated and its assets sold off. Liquidation is
the least desirable retrenchment strategy, because it involves losses for both
stockholders and employees.

e) Combination strategies

Large organizations commonly use these strategies in combination (i.e. an organization may
seek growth through acquisition of new business, employ a stability strategy for some of
existing business, and divest itself of other business.
5.3 BUSINESS LEVEL STRATEGIES
Business level strategy concerns the actions and the approaches crafted to produce
successful performance in one specific line of business. The key focus here is crafting
responses to changing market circumstances and initiating actions to strengthen
market position, build competitive advantage, and develop strong competitive
capabilities. Orchestrating the development of business-level strategy is the
responsibility of the manager in charge of the business.

Formulating the Business model: Customer needs and product Differentiation

1. Customer needs: are desires, wants that can be satisfies by means of the attributes or
characteristics of a product a good or service. For Example: A person‟s craving for something
sweet can be satisfied by chocolates, ice-cream, spoonful of sugar. Factors that determine
which products a customer chooses to satisfy these needs:
The way a product is differentiated from other products of its type so that it appeals to
customers

The price of the product

All companies must differentiate their products to a certain degree to attract customer

Some companies however decide to offer customers a low prices products and do not
engage in much product differentiation

Companies that seek to create something unique about their product differentiate their
products to a much greater degree than others so that they satisfy customer’s needs in ways
other products cannot.
Product differentiation: It is the process of designing products to satisfy customer’s needs. A
company obtains a competitive advantage when it creates makes and sells a product in a way
that better satisfies customer needs than its rivals do. If managers devise strategies to
differentiate a product by innovation, excellent quality, or responsiveness to customers they
are creating a business model based on offering customers differentiated products.
3. Customer groups: The second main choice involved in formulating a successful business
model is to decide which kind of products to offer to which customer groups. Customer groups
are the sets of people who share a similar need for a particular product. Because a particular
product usually satisfies several different kinds of desires and needs, many different customer
groups normally exist in a market. In the car market, for example some customers want basic
transportation and others want the thrill of driving a sports car. Some want for luxury purpose.

4. Identifying customer groups and market segments: In the athletic shoe market the two
main customer groups are those people who use them for sporting purposes and those who
like to wear them because they are casual and comfortable. Within each customer group
there are often subgroups composed of people who have an even more specific need for a
product. Inside the group of people who buy athletic shoes for sporting purposes, for example
are subgroups of people who buy shoes suited to a specific kind of activity, such as running,
aerobics, walking and tennis.

A company searching for a successful business model has to group customers according to the
similarities or differences in their needs to discover what kinds of products to develop for
different kinds of customers. Once a group of customers who share similar or specific need
for a product has been identified, this group is treated as a market segment.

Three Approaches to Market Segmentation:

a) No Market segmentation: First a company might choose not to recognize that
different market segments exist and make a product targeted at the average or typical
customer. In this case customer responsiveness is at a minimum and the focus is on
price, not differentiation.
b) High Market segmentation: Second a company can choose to recognize the
differences between customer groups and make a product targeted toward most or
all of the different market segments. In this case customer responsiveness is high and
products are being customized to meet the specific needs of customers in each group,
so the emphasis is on differentiation not price.

c) Focused Market segmentation: Third a company might choose to target just one or
two market segments and decide its resources to developing products for customers
 in just these segments. In this case, it may be highly responsive to the needs of
customers in only these segments, or it may offer a bare-bones product to undercut
the prices charged by companies who do focus on differentiation.

Generic business level strategies

Michael porter identified the following generic business level strategies:-

(a)Overall cost leadership strategy.

A firm can obtain average returns in an industry despite the presence of strong competitive
forces it can concentrate on overall cost leadership. However this strategy requires high
relative market share and other advantages such as favorable access raw materials or ready
availability of cash to purchase the most efficiency equipment.

(b)Differentiation strategy.

This involves production and marketing of unique products for mass Markets. Approaches
to differentiation include developing unique brand images, unique customer service, unique
product features and unique distribution channels.

Example: Chrysler Reintroduces the Hemi Engine

Chrysler has exploited several bases of differentiation with its reintroduction of the
Hemi engine. Reintroduced in 2002, this engine was actually developed in the 1960’s. It was
used in Chrysler’s muscle cars in the late 60’s and 70’s. In 1996, an engineering team headed
by Robert E. Lee was assigned to develop a high power engine to use in Dodge pickups. At
the time, Dodge pickups lagged behind Ford and GM pickups in power.
Lee and his team decided to use the old Hemi design which gets its name from the
hemispherical shape of the top of the engines cylinders. This hemispherical shape serves to
concentrate the fuel and air at the top of the cylinder. Lee’s team also used two spark plugs
in each cylinder. The shape of the cylinder head and the two spark plugs makes the engine
much more powerful and efficient than other engines the same size. They also designed the
new Hemi to be even more fuel efficient on the highway by shutting down four of the eight
cylinders at highway cruising speeds. These product features added very little cost to the
engine.

Chrysler embarked on a marketing campaign that has met with huge success. This campaign
attempts to tap into the nostalgia for the muscle cars of the 60’s and 70’s. Phrases from
advertisements like “Well, it’s a Hemi”; “That thing got a Hemi?; and “It’s got a Hemi” have
become popular, even among young people who had no idea what a Hemi engine was before
the advertisements appeared.

The Hemi engine is a pricey option, but customers are clamoring for the engine. On a Dodge
Magnum, the Hemi adds about $5,000 to the price tag. Remember, the incremental cost to
Chrysler is miniscule. Most of that $5,000 is pure profit. Forty-one percent of the Chrysler
300’s, 46% of Dodge Magnum’s, 72% of the new Dodge Charger’s, and 52% of the Dodge
Durango’s are sold with the Hemi. In 2004, Chrysler sold almost 300,000 cars and pickups
with the Hemi engine. The company had profits of $1.9 billion in 2004, when Ford and GM
had large losses.

The Hemi brand has become very popular. Chrysler decided to offer the engine in the Jeep
Grand Cherokee, but it didn’t put the Hemi badge on the car. Jeep customers began calling
Chrysler asking for the badges so they could put one on their cars. In response, Chrysler now
puts the Hemi badge on the Grand Cherokee. In fact, Chrysler recently increased the size of
the Hemi badge.

Chrysler seems to have successfully differentiated its products by combining several bases of
differentiation such as product features, links within the organization, reputation, and
consumer marketing. Chrysler recognized that the full value of the product feature (Hemi
engine) would not be realized without a focus on consumer marketing that played on the
reputation of the product feature. Chrysler also realized that the value of the differentiated
product could be increased by spreading the product feature and the reputation across
multiple car lines (links with the organization).

(Wall Street Journal, 17 June 2005, Power Play: Chrysler’s Storied Hemi Motor Helps It Escape
Detroit’s Gloom, by Neal E. Boudette)

Question
Discuss the approached used by Chysler to differentiate its product.

c) Focus strategy.

This is essentially a strategy of segmenting markets and appealing to only one or a few group
of consumers or industrial buyers. The logic of this approach is that a firm that limits its
attention to one or only a few market segments can serve those markets better.

5.4 FORMULATING FUNCTIONAL STRATEGIES

Functional strategy Concerns the actions, approaches, and practices to be employed
in managing particular functions or business processes or key activities within a
business. Functional-area strategies add specifics to the hows of business-level
strategy. The primary role of a functional-area strategy is to support the company’s
overall business strategy and competitive approach. Lead responsibility for
functional-area strategies within a business is normally delegated to the heads of
the respective functions, with the general manager of the business having final
approval and perhaps even exerting a strong influence over the content of
particular pieces of functionalarea strategies.

Functional strategies shows out the specific tasks that must be performed to implement the
business strategy- business level and functional-area managers should coordinate their
activities to ensure that strategies pursued are consistent. The major functional areas are:
(i)Operations

(ii)Finance

(iii) Marketing, and

(iv) Human resources

v) Research and development

(a) Research and development

Organizations cannot grow without new products. It is the responsibility of the research and
development specialists to come up with new products for the business and organization. The
process involves concept generation and screening, product planning and development, and
actual test marketing.

(b) Operations strategy - specialists in this area focus on making decisions about required
plant capacity, plant layout, manufacturing and production process and inventory
requirements. They also focus on controlling costs and improving the efficiency of plant
operations.
(c) Financial strategy - specialists are responsible for forecasting and financing planning for
various investment proposals, securing financing for various investments and controlling
financial resources. The specialists contribute to strategy formulation by assessing the
potential profit impact of various strategic alternatives and evaluating the financial
conditions of the business.

(d) Marketing strategy - focuses on determining the appropriate markets for business
offerings and on developing effective marketing mixes (marketing mixers includes four
strategic elements: price, product, promotion and channels of distribution. (e) Human
resource strategy - is concerned with attracting, assessing, motivating and retaining the
number and types of employees required to run the business effectively.
GLOBALIZATION
Globalization is characterized by increasing homogenization of markets worldwide and
increasing interdependence between nations.
Drivers of Globalization

There are a number of principal factors that contribute to globalization:

a) Greater understanding of the economic and business theories that emphasize the benefits
of international trade and convergence in economic ideology worldwide as a result. E.g
pressure from international organizations.
b) Technology including developments in communications and transportation technologies
e.g ecommerce through internet, fiber optics, satellites that enable TV broadcasting, World
Wide Web etc.
c) Increasing levels of international travel
d) Reduction in worldwide conflict and social integration in the form of greater country links
e.g cross national marriages, economic integrations etc
e) Availability of a legal and financial infrastructure that enables international trade e.g
common currencies

Before a manager is able to practice strategic management successfully in international

context it is important for him/her to understand the basic principles of international
management. To engage in international management is to perform management
activities across national boundaries. In such cases the firm accomplishes its mission
at least partially by conducting business activities in a foreign country. Such activities
can be as simple as selling a product in a foreign country or entering into an agreement
with a foreign partner to sell products throughout the world. Advances in
transportation technology and communication have made it possible for managers to
do business elsewhere.
Advantages of international business
a) The firm will be able to lower its operating costs relative to those of competitor’s
by purchasing raw materials from foreign concerns.
b) It can increase its sales and profits by becoming involved in less competitive
situations.
c) It can ensure continuous growth in relation to competitors.
d) The company might need a large consumer base in order to achieve the economies
of scale.
e) The company might want to reduce dependency on one market in order to reduce
risks.
 f) The company customers may be going abroad and may require international
servicing.
g) It can offer better understanding of problems and needs to customers in overseas
market.
h) It can overcome the effects of tariffs and non-tariffs barriers to imports.
i) For firms producing bulky products it can reduce storage and transportation costs.

Disadvantages of international business

a) The company is confronted by many different political, economic and cultural
environments that change at different rates.
b) The company becomes involved in situations much more difficult to keep track
of competitors due to differences in language, distances between countries and
varying national attitudes as well as different communication media.
c) The company must deal with two or more monitory systems, which
complicates accounting systems.
d) The organization significantly increases political risk of doing business. This is
defined as the potential loss of control over ownership or benefits of an
enterprise due to actions of a foreign country.
e) Huge foreign debts by some countries risks international business.
f) Foreign government entry requirements, tariffs and bureaucracy complicate
international business.
g) Corruption by officials in foreign countries affects bidding and tendering.
h) Technological piracy where foreign managers learn how to make a company
product and running away to complete openly can result.
i) High cost of product and communication adaptability can arise.

STRATEGIES OF GOING ABROAD

Import and export
Licensing
Piggy Backings
Franchising
Joint Ventures
Mergers and acquisition
FDI