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Types of Strategies

Level of strategies

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Strategy
A strategy of a corporation forms a
comprehensive master plan that states how
the corporation will achieve its mission and
objectives. It maximizes competitive
advantage and minimizes competitive
disadvantage

2 Prof. Dr. Majed El-Farra 2009


Strategy
Mintzberg (1987) defines strategy in terms of 5Ps. These 5Ps are: •
1P Perspective: is the main business concept or idea and the means by •
which that concept or idea is put into practice or implemented.
2P Plan: is a direction, a guide or a course of action from the present (or •
from the past) and into the future. However that ‘future’ is defined by
whatever the time horizons associated with it.
3P Patterns: are the consistency of firm decision making. •
itself within its ’locates‘P Position or positioning: where the firm 4 •
external and competitive environments; and by which it positions
particular products or services against the demands of the market
.segments it serves
P Ploys: are the competition strategies designed to maintain, reinforce, 5 •
achieve or improve the relative competitive position of the organization
.)2007within its sector and markets (Morden,
3 Prof. Dr. Majed El-Farra 2009
Strategy hierarchy
1. Corporate strategy: 1) growth strategy, 2)
stability strategy, 3) retrenchment strategy.
2. Business unit strategy: 1) cost leadership, 2)
differentiation, 3) focus, 4) mixed.
3. Functional strategy.

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Types of Strategies
Corp
A Large Level

Company
Division Level

Functional Level

Operational Level

5Ch 5 -
Types of Strategies
company
A small
Company Functional
Level

Operational Level

6Ch 5 -
Corporate Strategy
• The first level of strategy (corporate strategy) is related to determining the
corporate strategy. It is fundamentally and simply concerned with deciding
what type of business the organization should be in and how the overall
group of activities should be formed and managed .Corporate strategy
deals with issues of strategic management at the level of the firm as a
whole. Such issues involve the basic character, capability and competence
of the firm; the direction in which it should develop its activity; the nature
of its internal architecture; governors and structure; the nature of its
relationships with its sector, its competitors and the wider environment.
Corporate strategies usually fit within the three main categories of
stability, growth and retrenchment

7Ch 5 -
Business Strategy
business strategy refers to the actions and
approaches crafted by management to create
successful performance in one particular line
of business. It is also concerned with creating
competitive advantage in each of the strategic
.business units of the organization

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Functional or departmental
strategy
Functional or departmental strategy concerns •
the managerial game plan for running a major
functional activity or process within a business
such as research and development unit,
marketing unit, financial unit, production unit,
H R development unit and so on. A business
requires as many functional strategies as it has
strategically critical activities.

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Corporate strategies
• Top level management formulate for overall
organization
• The question at the corporate level we should
answer when design strategies: In what
industry should we be operating?
• It depends on the outcome of SWOT analysis.

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Growth strategies
Growth strategies:
They result increase in sales, market share and profit: the types:
• Internal growth: Increase internal capacity of organization
without acquiring other firms.
• Conglomerate Diversification: Acquiring unrelated business.
• Merger: Two roughly similar size firms combine into one. To
benefit of synergy.
• Strategic alliance: Temporary partnerships

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Corporate Restructuring
The change in a broad set of actions and decisions, e.g.,
changing relationships and organization of work.
• The aim of restructuring is to improve effectiveness.
• Restructuring could be growth, stability or retrenchment.
This depends on why we use it.

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Retrenchment strategies
• Types:
1- Turnaround:
Eliminating unprofitable outputs,
pruning/cutting assets, reducing size of work
force, rethinking firm’s products lines and
customer groups.
2- Divestment: sell one of business units
3- Liquidation: last resort strategy

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Strategies in Action

Vertical Integration Strategies

• Forward integration
• Backward integration
• Horizontal integration

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Strategies in Action

Forward
Integration Example

Defined • General Motors is


acquiring 10% of its
• Gaining dealers.
ownership or
increased control
over distributors
or retailers

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Strategies in Action

Guidelines for Forward Integration

 Present distributors are expensive, unreliable, or incapable of


meeting firm’s needs
 Availability of quality distributors is limited
 When firm competes in an industry that is expected to grow
markedly
 Advantages of stable production are high
 Present distributor have high profit margins

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Strategies in Action
Backward
Integration Example

• Motel 8 acquired a
Defined furniture
manufacturer.
• Seeking
ownership or
increased control
of a firm’s
suppliers

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Strategies in Action
Guidelines for Backward Integration

 When present suppliers are expensive, unreliable, or incapable


of meeting needs
 Number of suppliers is small and number of competitors large
 High growth in industry sector
 Firm has both capital and human resources to manage new
business
 Advantages of stable prices are important
 Present supplies have high profit margins

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Strategies in Action
Horizontal
Integration Example

• Palestinian Islamic
Defined Bank acquired Cairo-
Amman Bank Islamic
• Seeking transaction branch.
ownership or
increased control
over competitors

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Strategies in Action

Guidelines for Horizontal Integration

 Firm can gain monopolistic characteristics without being


challenged by federal government
 Competes in growing industry
 Increased economies of scale provide major competitive
advantages
 Faltering/losing due to lack of managerial expertise or need for
particular resources

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Strategies in Action

Intensive Strategies

• Market penetration
• Market development
• Product development

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Strategies in Action
Market
Penetration
Example
Defined • Ameritrade, the on-
line broker, tripled its
• Seeking increased annual advertising
market share for expenditures to $200
present products million to convince
or services in people they can make
present markets their own investment
through greater decisions.
marketing efforts
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Strategies in Action

Guidelines for Market Penetration

 Current markets not saturated


 Usage rate of present customers can be increased significantly
 Market shares of competitors declining while total industry
sales increasing
 Increased economies of scale provide major competitive
advantages

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Strategies in Action
Market
Development

Example
Defined
• Khuzendar Tiles maker
• Introducing introduce his product
present products to Gulf markets.
or services into
new geographic
area

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Strategies in Action

Guidelines for Market Development

 New channels of distribution that are reliable, inexpensive, and


good quality
 Firm is very successful at what it does
 Untapped or unsaturated markets
 Capital and human resources necessary to manage expanded
operations
 Excess production capacity
 Basic industry rapidly becoming global

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Strategies in Action
Product
Development
Example
Defined
• Apple developed the
G4 chip that runs at
• Seeking increased 500 megahertz.
sales by improving • Khuzendar Tiles maker
present products introduce Ceramic as a
or services or new product.
developing new
ones
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Strategies in Action

Guidelines for Product Development

Products in maturity stage of life cycle 


 Competes in industry characterized by rapid technological
developments
 Major competitors offer better-quality products at comparable
prices
 Compete in high-growth industry
 Strong research and development capabilities

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Strategies in Action

Diversification Strategies

• Concentric diversification
• Conglomerate diversification
• Horizontal diversification

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Strategies in Action
Concentric
Diversification
Example

Defined • National Westminister


Bank PLC in Britain
• Adding new, but bought the leading
related, products British insurance
or services company, Legal &
General Group PLC.

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Strategies in Action

Guidelines for Concentric Diversification

 Competes in no- or slow-growth industry


 Adding new & related products increases sales of current
products
 New & related products offered at competitive prices
 Current products are in decline stage of the product life cycle
 Strong management team

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Strategies in Action
Conglomerate
Diversification
Example

Defined • Consultant
Construction
• Adding new, Engineering acquired
unrelated products Bisects factory.
or services

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Strategies in Action

Guidelines for Conglomerate Diversification

 Declining annual sales and profits


 Capital and managerial talent to compete successfully in a new
industry
 Financial synergy between the acquired and acquiring firms
 Exiting markets for present products are saturated

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Strategies in Action
Horizontal
Diversification

Example
Defined
• The El-Awda Co.
• Adding new, provide ice-cream
unrelated products product to present
or services for customer
present customers

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Strategies in Action
Guidelines for Horizontal Diversification

 Revenues from current products/services would increase


significantly by adding the new unrelated products
 Highly competitive and/or no-growth industry w/low margins
and returns
 Present distribution channels can be used to market new
products to current customers
 New products have counter cyclical /repeating sales patterns
compared to existing products

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Strategies in Action

Defensive Strategies

• Joint venture
• Retrenchment
• Divestiture
• Liquidation

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Strategies in Action

Joint Venture

Example
Defined
• Lucent Technologies
• Two or more and Philips Electronic
sponsoring firms NV formed Philips
forming a separate Consumer
organization for Communications to
cooperative make and sell
purposes telephones.

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Strategies in Action
Guidelines for Joint Venture

 Combination of privately held and publicly held can be


synergistically combined
 Domestic forms joint venture with foreign firm, can obtain local
management to reduce certain risks
 Distinctive competencies of two or more firms are
complementary
 Overwhelming resources and risks where project is potentially
very profitable (e.g., Alaska pipeline)
 Two or more smaller firms have trouble competing with larger
firm
 A need exists to introduce a new technology quickly

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Strategies in Action
Retrenchment
(turnaround)

Example
Defined
• Regrouping through • A company sold off a
cost and asset land and 4 apartments
reduction to reverse to raise cash needed.
declining sales and It introduce expense
profit. Sometimes it is
called turnaround or
effective control
reorganizational system.
strategy.
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Strategies in Action
Guidelines for Retrenchment

 Firm has failed to meet its objectives and goals consistently over
time but has distinctive competencies
 Firm is one of the weaker competitors
 Inefficiency, low profitability, poor employee morale, and
pressure from stockholders to improve performance.
 When an organization’s strategic managers have failed
 Very quick growth to large organization where a major internal
reorganization is needed.

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Strategies in Action

Divestiture

Example
Defined
• Harcourt General, the
• Selling a division large US publisher, is
or part of an selling its Neiman
organization Marcus division.

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Strategies in Action
Guidelines for Divestiture

 When firm has pursued retrenchment but failed to attain


needed improvements
 When a division needs more resources than the firm can
provide
 When a division is responsible for the firm’s overall poor
performance
 When a division is a misfit with the organization
 When a large amount of cash is needed and cannot be
obtained from other sources.

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Strategies in Action

Liquidation

Defined Example

• Selling all of a • El-Ameer Block factory


company’s assets, sold all its assets and
in parts, for their ceased business.
tangible worth

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Strategies in Action

Guidelines for Liquidation

 When both retrenchment and divestiture have been pursued


unsuccessfully
 If the only alternative is bankruptcy, liquidation is an orderly
alternative
 When stockholders can minimize their losses by selling the
firm’s assets

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Michael Porter’s Generic
Strategies

Cost Leadership Strategies


(Low-Cost & Best-Value)

Differentiation Strategies

Focus Strategies
(Low-Cost Focus &
Best-Value Focus)

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Business Unit Strategies
• Here we answer the question:
How should we compete in the chosen industry?
Cost leadership
Differentiation (real or perceived).
Mixed
Focus

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Business Strategy

Focuses on improving competitive


position of company’s products or
services within the specific industry
or market segment

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Porter’s Competitive Strategies

Generic Competitive Strategies --

–Lower Cost strategy


•Greater efficiencies than competitors

–Differentiation strategy
•Unique/superior value, quality, features,
service

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Porter’s Competitive Strategies

Competitive Advantage --

–Determined by Competitive Scope


•Breadth of the target market

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Porter’s Competitive Strategies

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Prof. Dr. Majed El-Farra 2009 50Ch 5 -
Porter’s Competitive Strategies

Cost Leadership --

–Low-cost competitive strategy


–Broad mass market
–Efficient-scale facilities
–Cost reductions
–Cost minimization

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Michael Porter’s Generic Strategies

• Cost leadership emphasizes producing standardized products


at a very low per-unit cost for consumers who are price-
sensitive.
• There are two types of cost leadership strategies.
• a. A low-cost strategy offers products to a wide range of
customers at the lowest price available on the market.
• b. A best-value strategy offers products to a wide range of
customers at the best price-value available on the market.

52Ch 5 - Prof. Dr. Majed El-Farra 2009


Cost leadership
• Striving to be the low-cost producer in an industry
can be especially effective when the market is
composed of many price-sensitive buyers, when
there are few ways to achieve product
differentiation, when buyers do not care much about
differences from brand to brand, or when there are a
large number of buyers with significant bargaining
power.

53Ch 5 - Prof. Dr. Majed El-Farra 2009


Cost leadership
• The basic idea behind a cost leadership strategy is to
underprice competitors or offer a better value and
thereby gain market share and sales, driving some
competitors out of the market entirely.
• 5. To successfully employ a cost leadership strategy,
firms must ensure that total costs across the value chain
are lower than that of the competition. This can be
accomplished by:
• a. performing value chain activities more efficiently
than competition, and
• b. eliminating some cost-producing activities in the
value chain.

54Ch 5 - Prof. Dr. Majed El-Farra 2009


Porter’s Competitive Strategies

Differentiation –

–Broad mass market


–Unique product/service
–Premiums charged
–Less price sensitivity

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Differentiation
• Differentiation is aimed at producing
products that are considered unique. This
strategy is most powerful with the source of
differentiation is especially relevant to the
target market

56Ch 5 - Prof. Dr. Majed El-Farra 2009


Differentiation
• A successful differentiation strategy allows a firm
to charge higher prices for its products to gain
customer loyalty because consumers may become
strongly attached to the differentiation features.
• 3. A risk of pursuing a differentiation strategy is that
the unique product may not be valued highly enough
by customers to justify the higher price.

57Ch 5 - Prof. Dr. Majed El-Farra 2009


Differentiation
• Common organizational requirements for a
successful differentiation strategy include
strong coordination among the R&D and
marketing functions and substantial amenities
to attract scientists and creative people.

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Focus

• 1. Focus means producing products and services that fulfill


the needs of small groups of consumers.
• 2. There are two types of focus strategies.
• a. A low-cost focus strategy offers products or services to a
small range (niche) of customers at the lowest price available
on the market.
• b. A best-value focus strategy offers products to a small range
of customers at the best price-value available on the market.
This is sometimes called focused differentiation.

59Ch 5 - Prof. Dr. Majed El-Farra 2009


Focus

• Focus strategies are most effective when the


niche is profitable and growing, when industry
leaders are uninterested in the niche, when industry
leaders feel pursuing the niche is too costly or
difficult, when the industry offers several niches, and
when there is little competition in the niche
segment.

60Ch 5 - Prof. Dr. Majed El-Farra 2009


Porter’s Competitive Strategies

Cost-Focus –

–Low-cost competitive strategy


–Focus on market segment
–Niche focused
–Cost advantage in market segment

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Porter’s Competitive Strategies

Differentiation Focus –

–Specific group or geographic market


focus
–Differentiation in target market
–Special needs of narrow target market

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Porter’s Competitive Strategies

Stuck in the middle –

–No competitive advantage


–Below-average performance

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Risks of Generic Strategies

Risks of Cost Risks


Risks ofof
Differentiation
Differentiation Risks of Focus
Risks of Cost Leadership
Leadership Differentiation is not Risks
The of Focus
focus strategy is
Cost leadership is not Differentiation is not The focus strategy is
Cost leadership is not sustained: sustained: imitated:
sustained: sustained: imitated:
•• Competitors • • Competitors
Competitorsimitate.
imitate. The target segment
Thebecomes
target segment
Competitorsimitate.
imitate. • Bases for
• Bases for differentiation structurally
•• Technology
Technologychanges.
changes. becomes structurally
•• Other becomedifferentiation
less important unattractive:
unattractive:
Other bases for
bases for cost
cost tobecome less important • Structure erodes.
leadership erode.
leadership erode. to •• Structure erodes.
Demand disappears.
Proximity in Proximity in buyers. • Demand disappears.
differentiation is lost. Cost proximity isbuyers.
lost. Broadly
Broadly
targeted
targeted
differentiation is lost. Cost proximity is lost.
Differentiation focusers competitors overwhelm
Cost focusers achieve
Cost focusers achieve Differentiation focusers competitors overwhelm
the segment:
even lower cost incost in achieve even greater the segment:
even lower achieve even
differentiation in greater • The segment’s
segments. segments. differentiation in • differences
The segment’sfrom other
segments. differences from other
segments. segments narrow.
• segments narrow.
The advantages of a
• The advantages
broad of a
line increase.
broad line
New focusers increase.
subsegment
New focusers thesubsegment
industry.
the industry.

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Level of Strategy
• Functional/operational Strategies:
Concern with org. internal resources and
processes which effectively deliver the
corporate and business strategic direction.
Functional strategies are interrelated.
Functional strategies e.g.: purchasing &
materials management, production, finance,
R&D, HR, IT, and marketing.

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purchasing & materials management
(as example)
Buying materials in quantity, quality and cost
which correspond with the corp. generic
strategies (Business Unit strategies).

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What kind of internal factors help managers determine
whether a firm should emphasize the production and sales of a
large number of low-priced products or a small number of high-
priced products?

• The most important factors can be brought out by going through each functional
area. For example, under marketing, a strong market research group may be able
to identify the kinds of niches available to the products or services under
consideration.
• In terms of finance, the production of a large number of low-priced products
suggests a large capital intensive manufacturing facility.
• To produce a few high quality goods with a small amount of capital because the
needed manufacturing facilities may be small, utilizing craft labor. R&D may be an
important consideration also.
• In order to produce high-quality products, a fairly sophisticated applied R&D effort
may be needed. An expensive engineering staff may be needed,
• In terms of human resource management, a fairly unskilled and low paid
workforce cannot normally be expected to produce a high quality product on old
assembly line machinery. Either the workforce would need to be replaced or an
extensive job training and job enrichment program would need to be established.
Either approach costs both time and money.
67 Prof. Dr. Majed El-Farra 2009
Is it possible for a company or business unit to follow
a cost leadership strategy and a differentiation
strategy simultaneously? Why or why not?
• Michael Porter argues that a business unit which is unable to
achieve one of the competitive strategies is likely to be "stuck in the
middle" of the competitive marketplace with no competitive
advantage. That unit, according to Porter, is doomed to below-
average performance.
• Research by Greg Dess and Peter Davis as well as by Rod White,
suggests however, that this may not be the case. Examples can be
found of businesses which have been able to jointly follow overall
low cost and high quality differentiation strategy. Japanese
companies such as Toyota in automobiles and Matsushita
(Panasonic and National) in consumer electronics are good
examples. Their offer of low price and high quality created serious
problems for those companies following only cost leadership in the
U.S.
68 Prof. Dr. Majed El-Farra 2009
How can a company overcome the limitations
of being in a fragmented industry?
• Businesses tend to be local and oriented to market segments. This may
occur because the industry is relatively new - based upon a product in the
early stage of its product life cycle.
• Entry barriers are probably low and new entrants are constantly moving
into the industry as others leave or go bankrupt. Often, the trick to be a
successful firm in this kind of industry is to find the key to standardization
which allows economies.
• Domino's Pizza achieved success in fast food by providing standardized
pizza throughout North America and by guaranteeing delivery time faster
than competition. Before Pizza Hut and Domino's settled upon
standardized pizza appealing to a wide variety of tastes across North
American, the pizza business was a fragmented industry characterized by
many small pizza "parlors" serving small market segments in cities
throughout America .
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