STRATEGIC MANAGEMENT: MG 851

TOPIC FOUR
ORGANIZATIONAL STRATEGY
4.1 Generic Corporate strategy Alternatives
 Stability
 Growth
 Retrenchment
 Combination
4.2 Corporate Strategies Analysis Techniques
 BCG Growth Share Matrix
 GE Business Portfolio Matrix
4.3 Alternative Type of Strategy (Ansoff’s Product/Market Growth Matrix)
 Market penetration
 Market Development
 Product Development
 Diversification
4.4 Business Strategy/Analysis
4.4.1 Porter’s Generic Business Strategies
 Cost Leadership
 Differentiation
 Focus
4.4.2 Strategies Contingencies Model: Product Life Cycle Stage

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4.1 GENERIC CORPORATE STRATEGIES ALTERNATIVES
A corporate strategy deals with decisions on how much the company’s resources
should be invested in the existing or new business that the company plans to add
in its portfolio.
There are four principle generic corporate strategy alternatives that a company
could choose for achieving its mission and strategic objectives, stability strategy,
growth strategy, retrenchment strategy, combination strategy.
Stability strategy
This suggests that the organization should continue doing what is currently doing,
assuming that the environment will not change significantly in the future. The
stability strategy is effective under the following conditions.
 The firm in mature industry
 The firm is currently successful
 The environment of the firm is changing very slowly
There are many reasons why the manager may choose the stability strategy
 The organization is currently performing at high level that is therefore no
need of disturbing it.
 Why not learn from the mistakes of other firms by adopting a new strategy
– risk averse as followers.
 May be the organization has recently undergone major changes and needs
time to stabilize and develop a routine.
However, the stability strategy is sometimes dangerous when managers are
relaxing and not environmental changes. By the time, management
recognizes the change it may be too late for the organization to capitalize
on new opportunities. The stability strategy adopts the attitude of “wait and
sees’. This attitude may be an advantage or disadvantage depending on the
effective system of monitoring environmental changes.

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 Growth strategy
Growth of a firm must always result from firm financial resources, its products and
services, its environment conditions and the management skills, May managers believe
that growing organization is a healthy organization and it can grow internally and
externally.
Internal growth means continue with its current strategy but emphasis strengths and
tries to improve strength by increasing resources needed, internal growth can be through.
Penetration, which is done by increase in market share, sales and profits of the current
products.
What are the advantages and disadvantages a firm is getting by using this type of
strategy?

Internal growth can also be by expansion, which allow for more variation of strategy by
penetration where by firm expand by moving into new geographical area with a currently
successful product.
What are the advantages and disadvantages a firm is getting by using this type of
strategy?

Another form of expansion may occur by modifying the product in some way to provide
new product features that may satisfy buyer preference or offer better customer services.
External growth this means adding functions or operations to the current organization,
and this can be done in two ways Integrations and Diversification.
Integration strategy can also be Horizontal integration whereby a firm acquires other
forms or products that can use existing facilities; usually the acquired firm is a
competitor. This is a strategy of seeking ownership of or increased control over a firm’s
competitor.
Guidelines for Horizontal Integration
 Firm can gain monopolistic characteristics without being challenged by federal
government

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  Compete in a growing Industry
 Increase economy of scale provides major competitive advantages.
 Faltering due to lack of managerial expertise or need for a particular resources.
Vertical forward integration whereby the buys the distributors. This allows the firm to
control the flow of finished products services to the customers and reduce promotion cost
by reducing intermediaries.
Vertical backward integration in which the firm acquires its dominant raw material
supplier.

Diversification can be defined simply an alternative way of committing ones resources.

It implies that an organization moves into similar or new products or services, while at
the same time exploiting the existing product or services.
What do you consider to be the major reasons for the diversification? Mention not less
than five reasons. There are two types of diversification: concentric diversification and
Conglomerate diversification.
i. Concentric diversification – The firm buys a business whose product, services
or technology is similar to or related to the product, services or technology of
the current product.
Guidelines for Concentric diversification
 Compete in no or slow growing industry
 Adding new and related products increases sales of the product life
cycle
 Strong management team
ii. Conglomerate diversification - This involve the acquisition of a firm whose
products, services or technology is unrelated to its present products, services or
technology.
Guidelines for Conglomerate diversification
 Decline annual sales and profit

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  Capital and managerial talent to compete successfully in a new industry

 Financial synergy between the acquiring and the acquiring firm.

 Existing market for the present products are saturated
Conglomerate should add synergy to the present organization, that is the total and
profits of the conglomerate should be greater than the combined sales and profits
of two separate firms.
Retrenchment
With this strategy a company a company reduces its scales of operations when it
perceives that it is not meeting its basic objective via its current strategies.

An organization regroups through cost and assets reduction to reverse declining sales and
profits.
Retrenchment can entail the followings
- Selling off land and buildings to raise needed cash
- Pruning product lines
- Closing marginal businesses
- Closing obsolete factories
- Automating processes
- Reducing the number of employees
- Instituting expenses control system
Think out under what situation/guidelines a firm can undertake this type of strategy!!!!!
 Firm has failed to meet its objectives and goals consistently overtime but
has distinctive competency
 Firm is one of the weaker competitors.
 Inefficiency, low profitability, poor employee’s morale and pressure from
stockholders to improve performance.

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  When an organization’s strategic managers have failed

 Very quick growth to large organization where a major internal

reorganization is needed.
What are the advantages and disadvantages a firm is getting by using this type of
strategy?
Types of retrenchment
i. Cutback and Turnaround strategy
This is utilized effectively when the current strategy is threatened by
short-term environmental changes, such as reduced sales or the
cutting of operational costs if they are out of control.
This is considered temporality strategy, which consists firm reducing
the internal costs of operational in sales, production and
administrative costs.
ii. Divestment
Selling a division or part of an organization
Divestment can be part of an overall retrenchment strategy to rid an
organization of business that are unprofitable that require much
capital, or that do not fit well with the firm’s other activities.
iii. Liquidation
This is the most severe part of all retrenchment; it involves selling
the company’s entire asset in parts for their tangible worth.
Liquidation is recognition of defeat and consequently, can be an
emotionally difficult strategy. However, it may be better to cease
operation than to continue losing large sums of money.
Guideline for Liquidation
 When both retrenchment and divestment have been pursued
unsuccessfully

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  If the only alternative is bankruptcy, liquidation is an orderly
alternatives

 When stakeholders can minimizes their losses by selling the

firm’s assets.

Combination strategy
This strategy pursued by a company with many products or businesses in their portfolio
in which some products may be in growth phase, and a few may be undergoing
retrenchment. This is top management grand design for managing the whole organization
What is the aim?
Is to manage company’s current and future portfolios of business to the effect of
fulfillment of the company strategic objectives. It decides the set of business the
organization should be in as well as the scope and resources deployment among business.

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4.2 CORPORATE STRATEGIES ANALYSIS TECHNIQES
 BCG Growth Share Matrix
 GE Business Portfolio Matrix
Autonomous divisions (or profit centers) of an organization make up what is
called a business portfolio. When a firm’s divisions compete in different
industries, a separate strategy often must be developed for each business. The
Boston Consulting Group (BCG) Matrix and GE (General Electric) Business
Portfolio Matrix are designed specifically to enhance multidivisional firm’s efforts
to formulate strategies,
Note: Hofer and Schendel recommended that BCG Growth Matrix and GE
business Portfolio Matrix they should be used in two stages.
i. In the first stage BCG should be used to obtain, a tentative plot not certain
agreed, of the corporate portfolio because it is the simplest and requires the
least data.
ii. Either during stage two GE Portfolio Matrix may be used to highlight those
businesses, which requires special attention because of their importance, or
they do not perform as expected on the initial BCG plot.
Portfolio techniques are equally applicable in less diversified and single business
firms in which the main concern is not getting a “good” mix of business to
improve performance, but assessing whether the firm should consider entering
new businesses and or de-emplacing the current business.
BCG Growth Matric is a tool that can help corporate strategists to obtain the
optimum business portfolio
- The optimum business portfolio is the one that represent an
acceptable balance between risks and return i.e. a balanced portfolio.

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 Corporate strategists can obtain such kind of portfolio by using
corporate strategy analysis techniques.
- Such a balanced portfolio enables an organization to achieve its
strategic objectives especially in the areas of profitability, the
growth, financial performance etc.

BCG Growth – Share Matrix /The Product Portfolio Matrix

STARS (Cash Neutral) QUESTION MARKS
 Backward, Forward, Horizontal (??????) (Cash user)
Integration  Market penetration
 Market Penetration  Market development
 Market Development  Product Development
 Product Development  Divestiture

CASH COWS (Cash Generator) DOGS (Cash Neutral_

 Product development  Retrenchment
 Diversification  Divestiture
 Retrenchment  Liquidation
 Divesture

High 1.0 Low

Relative Market Share

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Relative market share is the ratio of the business’s market share units sold to the market
share of the largest competitors.
Market growth rate, for each product the market growth rate of each category.
So the principle of the BCG GROWTH Matric model is that business above the dividing
line should be growing rapid and those below the dividing line ought to be growing
slowly, they are in the maturity stage or declining stage PLC. As for the Relative Market
share, share the business to the left of dividing line have strong market positions – not
necessarily leadership – and those to the right of it have a relative weak market share.

A STAR
- This is a business that is growing rapidly and having a high market share, hence it
may need large amount of cash to maintain its relative market share position.
- Being a leader, it might generate large amount of cash. Therefore, a star business
may be generating sufficient cash flow to provide for its cash needs.
- It represents superior growth and investment opportunity and deserves resources
needed to maintain its position in the market.
- Forward, backward and horizontal integration; market penetration; marked
development. and product development are appropriate strategies for this division
to consider.

CASH COW
- This business has a high market share position, but in a low growth business.
- Such business generate large amount of cash for more than they can profitably
invest.
- Because of their superior market position, their costs are expected to be low and
their position in the low growth market reduces their need for cash investments in
plants and equipment.

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 - Hence, sources of income businesses generally generate large amounts of cash and
are quite profitable. Cash Cow are milked for the cash to pay dividends and
interest on corporate debts, corporate overheads, finance R & D, finance new
acquisitions, support stars, and provide cash to the question mark.
- Product development or diversification may be attractive strategies for strong cash
cow. However, as Cow, division becomes weak, retrenchment or divestiture can
become more appropriate.

QUESTION MARK
- These businesses have high growth but a low market share.
- Their low market share means they generate low profits and they have weak cash
flow from operations.
- At the same time because they are in a rapid growing markets, they require large
amount of cash to maintain market share and even larger amount to increase
market share, hence these business are called question marks because the
organization must decide whether to strengthen them by pursing an intensive
strategy (market penetration, market development or product development or to
sell them)

DOGS
- These have low growth rate and low market share
- Their poor competitive position put them into poor profitable position
- The generate low cash and normally DOGS businesses are called CASH TRAPS
- Hence, BCG recommends that unless exceptional circumstances demand that they
are to be retained, dog businesses ought to be harvested, divested, or liquidated;
depending on which alternative provide the alternative cash flow.
The major benefit of the BCG Matrix is that it draws attention to the cash flow,
investment characteristics, and needs of an organization’s various divisions. The
divisions of many firms evolve over time: Dogs become Question Marks. Question

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Marks becomes Star, Star become Cash Cows, and Cash Cows become Dogs in an
ongoing counterclockwise motion. Less frequently, Star becomes Question Marks,
Question Marks become Dogs, and Dogs become Cash Cows and Cash Cow become
Stars (in a clockwise motion).
Consequently, BCG recommends that a company’s business portfolio should be
balanced, that is, there should be enough source of income businesses to support the star.
Furthermore, there should be an ample number of stars because they will eventually turns
into source of income.

LIMITATION OF BCG Matrix

 The High – Low classification system does not give enough attention to businesses
in an intermediate position, i.e not all business fall neatly/exactly within one cell
(star, dogs, question mark and cash cow)
 The two factor comparison do not give explicit consideration to other important
strategic factors such as strategic fit across products or competitive advantage.
 Growth rate and Market share factor are not always good indicator of cash flows,
profitability and business attractiveness.
 The matrix is not a helpful in comparing relative investment opportunities across
businesses for example is star always better than cash cow?
 There is sufficient evidence that not all dog businesses deserve to be so described.
 Firm often find it difficult to define the scope of the strategic business units; how
it define its business in term of its scope determines its market share ranking in the
matrix.
 It is often difficult to define the scope of the market segments served. The business
growth rate positioning of a business in the matrix depends on how much market
segmentation is involved .

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4.3 ALTERNATIVE TYPE OS STRATEGY (ANSOFF’S PRODUCT/MARKER
GROWTH MATRIX)
 Market penetration
 Market development
 Product Development
 Diversification
These strategies can be well explained by the help of Ansoff Growth matric that
help the business to decide their product and market growth strategies.
Ansoff’s product/market growth matric suggests that a business’ attempts to grow
depend on whether it markets new or existing products in new or existing markets.

Product

Marker Present /Existing New

Present/Existing Market penetration Product Development

New Market Development Diversification

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Market Penetration
Emphasis growth by increasing a firm’s market share for the present products in the
existing markets through greater marketing efforts like intensive distribution, aggressive
promotion, and competitive pricing.
The application of market penetration is suitable under the following conditions:
 There exists unmet demand for a firm’s product in the existing market
 The correlation between a firm’s revenue and a firm’s marketing expenditure has
historically very high.
 Economies of scale would provide a firm grater scope for competitive advantage
 There is greater scope for an increasing the existing customers present
consumption and
 The market share of major competitors is declining despite the increase in the
overall consumption in the industry.
Market development
Which involves introducing existing products into new market or segments that have not
been tried in the past by the firm. i.e. selling the existing products to new types of
consumers.
Marketing strategy may be especially effective under the following situations;
 When new channels of distribution are available that are reliable inexpensive and
of good quality.
 When an organization is very successful at what it does
 When new untapped or unsaturated market exists
 When an organization has the needed capital and human resources to manage
expanded operations.

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  When an organization has excess production capacity
 When an organization’s basic industry is rapidly becoming global in scope

Product development strategy

Is strategy seeks increased sales by improving or modifying present products or services.
A firm offers new or improved products in the existing markets through established
channels. i.e a business aims to introduce new products into existing market. Product
development usually entails large research and development expenditures.
The following are five guidelines that indicate when product development may be an
especially effective strategy.
 When an organization has successful products that are in maturity stage of the
product life cycles; the idea here is to attract satisfied customers to try new
(improved) products because of their positive experience with the organization’s
present product or services.
 When an organization competes in an industry that is characterized by rapidly
technological developments.
 When an organization competes in a high growth industry
 When an organization has an especially strong research and development
capabilities
Diversification
 Selling new products to new consumers.

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4.4 BUSINESS STRATEGY ANALYSIS
GENERIC COMPETITIVE STRATEGIES: HOW TO COMPETE IN THE
INDUSTRY
The focus of business strategy is well known so far, it is aiming at explain how the
firm should compete in a particular industry or product/marker segment to obtain a
strategic advantage over the competition. Porter has identified three generic
strategic approaches to obtain a competitive advantage designed to outperform
competitors.
Competitive strategy means taking offensive actions to create a dependable
position in an industry, to cope successfully with ………..competitive forces and
thereby yield a superior return on investment for the firm. Firms have discovered
many different approaches to this end, and the best strategy for a given firms is
ultimately a unique construction reflecting its particular circumstances (Porter)
The choice of competitive strategy
Porter believes there are three generic strategies for competitive advantage.
a. Cost leadership emphasizes producing standardize products at a very low per
unit cost for consumer who are price sensitive.
b. Differentiation a strategy aimed at producing products and services considered
unique industry wide and directed at consumers who are relatively price-
insensitive.
c. Focus involves a restriction of activities to only part of a market (segment) i.e.
producing products and services that fulfill the needs of small groups of
consumers through
i. Provides goods and /services at lower cost to that segment (cost focus)

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 ii. Providing a differentiated product or service to that segment
(differentiating).
Cost leadership and differentiation are industry wide strategies. Focus involves
segmentation but involve pursuing with the segment only a strategy of cost
leadership or differentiation.
A. Overall, cost leadership. A low cost position yields above average returns in
the industry in spite of strong competition. This is so because in such cases i.e
when there is strong competition can expect to make money.
A strategy to obtain cost leadership involves
- Construction of efficient – scale facilities,
- Vigorous efforts to get cost decreases from learning an experiencing curve effects,
- Severe cost and overhead control,
- Dropping of marginal profitable customers and minimization of cost in areas such
as R & D costs associated with new product development or modification of
existing products, energy costs, shipping costs, service, sales force and
advertising.
- Give favorable access to source of supply
- Relocate to cheaper areas and
- Use the latest technology to reduce costs and /or enhance productivity (or use
cheap labor if available)
Companies employing low cost leadership strategy must achieve their competitive
advantages in the ways that are difficult for competitors to copy or match. If rivals fing it
relatively easy or inexpensive to imitate the leader’s cost leadership methods, the leader’s
advantage will not last long enough to yield a valuable edge in the market place. To
employ a cost leadership strategy successfully, a firm must ensure that its total cost
across its overall value chain are lower than competitors’ total costs. There are two ways
a company can accomplish this
1. Perform the value chain activities more efficiently than rivals and control the
factors that drive the costs of value chain activities. Such activities could include

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 altering the plant layout, mastering newly introduced technologies, using common
parts or components in different products simplifying product design, finding
ways to operate close to full capacity year – round. And so on.
2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing
activities. Such activities could include securing new suppliers or distributors,
selling products online, relocating manufacturing facilities avoid the use of union
labor and so on.
When employing cost leadership strategy, a firm must be careful not to use such
aggressive price cuts that their own profits are low or nonexistent. Constantly be mindful
of cost saving technological breakthroughs or any other value chain advancements that
could erode or destroy the firm’s competitive advantage.
Cost leadership strategy can be especially effective under the following conditions
 When price competition among rivals sellers is especially vigorous
 When the products of rival sellers are essentially identical and supplies are readily
available from any of several sellers.
 When there are few ways to achieve product differentiation that have value to
buyers
 When most buyers use the product in the same ways
 When buyers incur low costs in switching their purchases from one seller to
another.
 When buyers are large and have significant power to bargain down prices
 When industry newcomers use introductory low prices to attract buyers and build
a customer base
Case example:
Large stores specializing in one particular category of product are able to secure
economies of scale over other retailer.
B. Differentiation

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A differentiation strategy assumes that the competitive advantage can be gained
through particular characteristics of a firm’s product. Differentiation foes not
guarantee competitive advantage, especially if standard products sufficiently meet
customer needs or if rapid imitation by competitors is possible. Durable products
protected by barriers to quick copying by competitors are best.
Successful differentiation can mean grater product flexibility, greater
compatibility, lower costs and improved services, less maintenance, grater
convenience or more features, product development is an example of strategy that
offers the advantages of differentiation.
Products may be categorized as follows:
i. Breakthrough products offer a radical performance advantage over
competition, perhaps at drastic lower price.
ii. Improved products are not radically different from their completion but are
obviously superior in terms of better performance at competitive price (e.g.
microchips)
iii. Competitive products derive their appeal from particular compromise of
cost and performance
How to differentiate?
- Build up a brand image that offer (psych benefit) Buyers will not
pay the higher differentiation price unless their perceived value
exceeds the price they are paying
- Give the product special features to make it standout.
- Exploit other activities of the value chain
Differentiation strategy can be especially effective under the following conditions
 When there are many ways to differentiate the product or services
and many buyers perceive these differences are having value
 When buyer needs and uses are diverse
 When few rival firms are following a similar differentiating
approach
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  When technological change is fast paced and competition revolve
around rapidly evolving product features
C. Focus
The strategy involves focusing the firm’s attention on a particular buyer
groups, segment of the product line or geographical area, Aim is to serve a
well-defined but narrow market better than competitors who serve a broader
market. Consequently the firm is able to achieve low cost, differentiation or
both from the perspective of its narrow market target, if not from industry wide
perspective.
A successful focus strategy depends on an industry segment that is of sufficient
size, has good growth potential, and is not crucial to the success.
Focus strategy can be especially attractive under the following conditions
 When the target market niche is large, profitable and growing
 When industry leaders do not consider the niche to be crucial to their own
success
 When industry leaders consider it too costly or difficult to meet the
specialized needs of the target market niche while taking care of their
mainstream customers,
 When the industry has many different niches and segments, thereby
allowing a focuser to pick a competitively attractive niche suited to its own
resources
 When few, if any other rivals are attempting to specialize in the same target
segment.
Implementing the three types of generic business strategies requires different
resources and skills and different organizational, control and incentive system

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LECTURE NOTES: BY MASSAE R.S

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