CHAPTER 6

Strategic Options

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 Chapter Outline
• Generic Strategies
– Low-Cost Leadership Strategy
– Differentiation Strategies
– Best-Cost Provider Strategies
– Focused Strategy

• Grand Strategies
– Concentration
– Market development
– Product development
– Innovation
2
 Chapter Outline (Cont’d)
• Grand Strategies (Cont’d)
- Horizontal integration
- Vertical integration
- Joint Venture
- Concentric diversification
- Conglomerate diversification
- Retrenchment/turnaround
- Divestiture
- Liquidation

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 SWOT Analysis

• It is historically popular
technique through which the
managers create a quick
overview of a company’s
strategic situation.

• It is based on the assumption

that an effective strategy derives
from a sound “ fit” between a
firms internal resources(strength
and weakness) and its external
situation(opportunities and
threats ).
 Swot analysis is necessary to:
• Analyze opportunities:
An opportunity is a situation where a company will gain
something by planning and exploiting resources strategically.
• To understand market threats:
Threats represent unfavorable situation for a company
restraining to compete and make profit.
• Strengths :
They represent internal resources, competencies and
capabilities to exploit the external opportunities.
• Weakness:
They represent limitation to compete in the market.
 What to look for while sizing up
company’s SWOT
Potential resource strengths and
competitive capabilities
•A powerful strategy with competitively
valuable skills and expertise in key areas.
•A strong financial condition; ample
financial resources to grow the business
•A widely recognized market leadership
and an attractive customers base
•Ability to take advantage of economic of
scale or learning and experience curve
effect
•Proprietorship technology, superior
technology, important patent
Potential resources weakness and
competitive deficiencies
•No clear strategic direction.
 
 
•Obsolete facilities
 
 
•A weak balance sheet, burden with too
much debt
 
•High overall unit costs relative to key
competitors
•Missing some key skills or competencies/
lack of management depth/ a deficiency
of intellectual capital relative to leading
rivals
Potential company opportunities
Sending additional groups or expanding
into new geographic markets or product
segment
Expanding the company’s product line to
meet a broader range of customer need
Utilizing existing company skills or
technological know-how to enter new
product lines or new business
Integrating forward or backward
Failing trade barriers in attractive foreign
markets
Potential external threats to company’s
well being
Likely entry of potent new competitors
 
 
Loss of sale to substitute products
 
Mounting competition from new internet
startup companies pursuing e-commerce
strategy
 
Increasing intensity of competition among
industry rivals causing a squeeze on profit
margins
Technological changes or product
innovations that undermine demand for
the firms products
 Resource based view of strategic
analysis
Numerous environmental
opportunities

Cell cellCCell3:supports a CellCell1:supports an

turnaround oriented strategy aggressive strategy
Critical internal Substantial/internal
weakness Cell4:supports a defensive Cell2:supports a strategy
strategy diversification strategy

Major environmental threats

The resource-based view of strategy selection is a “logical framework guiding a systematic
discussion of the firm’s resources and the basic strategic alternatives which emerge from
this resource-based view.”
1.Aggressive or growth-oriented strategy
2.Diversification strategy
3.Turnaround oriented strategy
4.Defensive strategy
 The Five Generic Competitive Strategies
Type of Advantage
Sought
Lower Cost Differentiation

Broad Overall Low-Cost Broad

Range of Leadership Differentiation
Market Target

Buyers Strategy Strategy

Best-Cost
Provider
Strategy
Narrow
Buyer Focused Focused
Segment Low-Cost Differentiation
or Niche Strategy Strategy

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Distinctive Features of
Generic Competitive
Strategies
Which hat
is unique?

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 Low-Cost Leadership
Keys to Success
• Make achievement of low-cost relative to rivals is
the theme of firm’s business strategy
• Find ways to drive costs out of business year-after-
year

Low-cost
Low-costleadership means
leadership low low
means
OVERALL
overall costs,
costs, not just not
lowjust low
manufacturing
manufacturing or production
or production costs!
costs!
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 Options: Achieving a Low-Cost Strategy

• Open up a sustainable cost

advantage over rivals, using lower-
cost edge to either

– Under-price rivals and reap

market share gains

or

– Earn higher profit margin

selling at going price
12
Figure : Reconfiguring Value Chain Systems to Lower
Costs -- Software Industry
A. Value Chain System of Software Developers Using Traditional
Wholesale-Retail Channels - Highest Cost

Warehousing
CD-ROM
Marketing and shipping
Software production
and of
development and
promotion of wholesaler-
activities packaging
software retailer
activities
orders

Activities of
Technical Activities of wholesale
support software distributors
activities retailers of software
products
13
Figure : Reconfiguring Value Chain Systems to Lower Costs
-- Software Industry

B. Value Chain System of Software Developers Using Direct Sales

and Physical Delivery of CDs

Direct and
CD-ROM Ware- Technical
online
Software production housing and support and
marketing
development and shipping of customer
and
activities packaging customer service
promotion
activities orders activities
activities

14
Figure : Reconfiguring Value Chain Systems to Lower
Costs -- Software Industry

C. Value Chain System of Software Developers Using Online

Sales and Internet Delivery - Lowest Cost

Systems to
accept credit Technical
Online
Software card support and
marketing
development payment and customer
and allow
activities service
promotion immediate activities
activities download

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 Approaches for Securing a Cost Advantage

Approach 1
Do a better job than rivals of
performing value chain activities
efficiently and cost effectively
Approach 2 Control
costs!
Revamp value chain to bypass cost-
By-pass
producing activities that add little costs!
value from the buyer’s perspective
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 Approach 1: Controlling the Cost Drivers
• Capture scale economies; avoid scale diseconomies
• Capture learning and experience curve effects
• Manage costs of key resource inputs
• Consider linkages with other activities in value chain
• Find sharing opportunities with other business units
• Compare vertical integration vs. outsourcing
• Assess first-mover advantages vs. disadvantages
• Control percentage of capacity utilization
• Make prudent strategic choices related to operations
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 Approach 2: Revamping the Value Chain
• Abandon traditional business methods and shift to e-business
technologies and use of Internet
• Use direct-to-end-user sales/marketing methods
• Simplify product design
• Offer basic, no-frills product/service
• Shift to a simpler, less capital-intensive, or more flexible
technological process
• Find ways to bypass use of high-cost raw materials
• Relocate facilities closer to suppliers or customers
• Drop “something for everyone” approach and focus on a
limited product/service
• Reengineer core business processes
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 Keys to Success in Achieving
Low-Cost Leadership
• Scrutinize each cost-creating activity, identifying cost
drivers
• Use knowledge about cost drivers to manage costs of
each activity down year after year
• Find ways to reengineer how activities are performed
and coordinated—eliminate the costs of unnecessary
work steps
• Be creative in cutting low value-added activities out of
value chain system—re-invent the industry value chain

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 Characteristics of a Low-Cost Provider

• Cost conscious corporate culture

• Employee participation in cost-control efforts
• Ongoing efforts to benchmark costs
• Intensive scrutiny of budget requests
• Programs promoting continuous cost improvement

Low-cost producers champion

Successful low-cost producers not only become
FRUGALITY
champion whileeconomical)
frugality(being aggressivelybut also wisely and
INVESTING in cost-saving
aggressively invest in cost-savingimprovements!
improvements !
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 When Does a Low-Cost
Strategy Work Best?
• Price competition is vigorous
• Product is standardized or readily available
from many suppliers
• There are few ways to achieve
differentiation that have value to buyers
• Most buyers use product in same ways
• Buyers incur low switching costs
• Buyers are large and have significant bargaining
power
• Industry newcomers use introductory low prices
to attract buyers and build customer base

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 Pitfalls of Low-Cost Strategies
• Being overly aggressive in cutting price
• Low cost methods are easily imitated by rivals
• Becoming too fixated on reducing costs
and ignoring
– Buyer interest in additional features
– Declining buyer sensitivity to price
– Changes in how the product is used
• Technological breakthroughs open up cost
reductions for rivals
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 Differentiation Strategies
Objective
• Incorporate differentiating features that cause buyers to
prefer firm’s product or service over brands of rivals

Keys to Success
• Find ways to differentiate that create value for buyers
and that are not easily matched or cheaply copied by
rivals
• Not spending more to achieve differentiation than the
price premium that can be charged

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 Appeal of Differentiation Strategies
• A powerful competitive approach when
uniqueness can be achieved in ways that
– Buyers perceive as valuable and are willing to
pay for
– Rivals find hard to match or copy
– Can be incorporated Which hat
is unique?
at a cost well below
the price premium
that buyers will pay
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 Benefits of Successful Differentiation

A product / service with unique and appealing

attributes allows a firm to
 Command a premium price and/or
 Increase unit sales and/or
 Build brand loyalty
= Competitive Advantage

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 Types of Differentiation Themes
• Unique taste -- Dr. Pepper
• Multiple features -- Microsoft Windows and Office
• Wide selection and one-stop shopping -- Home Depot
and Amazon.com
• Superior service -- FedEx, Ritz-Carlton(Hotel &Resort)
• Spare parts availability -- Caterpillar
• More for your money -- McDonald’s, Wal-Mart
• Prestige -- Rolex
• Quality manufacture -- Honda, Toyota
• Technological leadership -- 3M Corporation, Intel
• Top-of-the-line image -- Ralph Lauren(Clothing),
Chanel(Fashion Designing)
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 Sustaining Differentiation: The Key to
Competitive Advantage
• Most appealing approaches to differentiation
– Those hardest for rivals to match or imitate
– Those buyers will find most appealing
• Best choices for gaining a longer-lasting, more
profitable competitive edge
– New product innovation
– Technical superiority
– Product quality and reliability
– Comprehensive customer service
– Unique competitive capabilities
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 Where to Find Differentiation
Opportunities in the Value Chain

• Purchasing and procurement activities

• Product R&D and product design activities
• Production process / technology-related activities
• Manufacturing / production activities
• Distribution-related activities
• Marketing, sales, and customer service activities
Internally
Activities, Activities, Costs, &
Performed
Costs, & Margins of Forward Buyer/User Value
Activities,
Margins of Channel Allies & Chains
Costs, &
Suppliers Strategic Partners
Margins
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 How to Achieve a
Differentiation-Based Advantage
Approach 1
Incorporate product features/attributes that lower
buyer’s overall costs of using product
Approach 2
Incorporate features/attributes that raise the
performance a buyer gets out of the product
Approach 3
Incorporate features/attributes that enhance buyer
satisfaction in non-economic or intangible ways
Approach 4
Compete on the basis of superior capabilities 29
 Signaling Value as Well as
Delivering Value
• Buyers seldom pay for value that is not
perceived
• Signals of value may be as important as
actual value when
– Nature of differentiation is hard to
quantify
– Buyers are making first-time purchases
– Repurchase is infrequent
– Buyers are unsophisticated
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 When Does a Differentiation
Strategy Work Best?
• There are many ways to differentiate a product
that have value and please customers

• Buyer needs and uses are diverse

• Few rivals are following a similar differentiation

approach

• Technological change and product innovation

are fast-paced

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 Pitfalls of Differentiation Strategies
• Trying to differentiate on a feature buyers do not
perceive as lowering their cost or enhancing their well-
being
• Over-differentiating such that product
features exceed buyers’ needs
• Charging a price premium that
buyers perceive is too high
• Failing to signal value
• Not understanding what buyers want or prefer and
differentiating on the “wrong” things

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 For Discussion: Your Opinion
A low-cost provider strategy can defeat a
differentiation strategy when buyers are
satisfied with a basic product and don’t think
“extra” attributes are worth a higher price. True
or false? Explain.

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– True. A company employing a differentiation
strategy may differentiate on the basis of
some attribute that does not deliver adequate
value to buyers, i.e. such as lowering a buyer’s
cost to use the product or enhancing a buyer’s
well being. If potential buyers look at a
differentiated product offering and conclude
“so what?”, buyers are indicating they are
satisfied with a basic product.

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 Competitive Strategy Principle

A low-cost producer strategy can defeat

a differentiation strategy when buyers
are satisfied with a standard product
and do not see extra attributes as
worth paying additional money to
obtain!
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 Best Cost Provider Strategies
• Combine a strategic emphasis on low-cost with a
strategic emphasis on differentiation
– Make an upscale product at a lower cost
– Give customers more value for the money

Objectives
• Deliver superior value by meeting or exceeding buyer
expectations on product attributes and beating their
price expectations
• Be the low-cost provider of a product with good-to-
excellent product attributes, then use cost advantage to
underprice comparable brands
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 How a Best-Cost Strategy
Differs from a Low-Cost Strategy
• Aim of a low-cost strategy--Achieve lower costs
than any other competitor in the industry
• Intent of a best-cost strategy--Make a more
upscale product at lower costs than the makers
of other brands with comparable features and
attributes
– A best-cost provider cannot be the industry’s absolute
low-cost leader because of the added costs of
incorporating the additional upscale features and
attributes that the low-cost
leader’s product doesn’t have
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 Competitive Strength of a
Best-Cost Provider Strategy
• A best-cost provider’s competitive advantage comes
from matching close rivals on key product attributes
and beating them on price
• Success depends on having the skills and capabilities to
provide attractive performance and features at a lower
cost than rivals
• A best-cost producer can often out-compete both a low-
cost provider and a differentiator when
– Standardized features/attributes won’t meet the
diverse needs of buyers
– Many buyers are price and value sensitive
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 Risk of a Best-Cost Provider Strategy

• Risk – A best-cost provider may get squeezed

between strategies of firms using low-cost and
differentiation strategies

– Low-cost leaders may be able to siphon

customers away with a lower price

– High-end differentiators may be able to steal

customers away with better product attributes

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 Focus / Niche Strategies
• Involve concentrated attention on a narrow piece of
the total market
Objective
Serve niche buyers better than rivals

Keys to Success
• Choose a market niche where buyers have
distinctive preferences, special requirements, or
unique needs
• Develop unique capabilities to serve needs of target
buyer segment
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 Focus / Niche Strategies
and Competitive Advantage

Approach 1
Achieve lower costs than
rivals in serving the segment --
A low-cost strategy

Which hat
Approach 2 is
unique?
Offer niche buyers something
different from rivals --
A differentiation strategy
 Examples of Focus Strategies
• eBay
– Online auctions
• Porsche
– Sports cars
• Horizon and Comair (customer airlines)
– Link major airports with small cities
• Jiffy Lube International
– Maintenance for motor vehicles
• Bandag
– Specialist in truck tire recapping
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 What Makes a Niche
Attractive for Focusing?
• Big enough to be profitable and offers good growth
potential
• Not crucial to success of industry leaders
• Costly or difficult for multi-segment competitors to
meet specialized needs of niche members
• Focuser has resources and capabilities to effectively
serve an attractive niche
• Few other rivals are specializing in same niche
• Focuser can defend against challengers via superior
ability to serve niche members
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 Risks of a Focus Strategy
• Competitors find effective ways to match a
focuser’s capabilities in serving niche
• Niche buyers’ preferences shift towards product
attributes desired by majority of buyers - niche
becomes part of overall market
• Segment becomes so attractive
it becomes crowded with rivals,
causing segment profits to
be splintered

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 Requirements for Generic Competitive
Strategies

Generic Commonly Required Skills Common

Strategy and Resources Organizational
Requirements
Overall Cost •Sustained capital •Tight cost control
Leadership investment •Frequent, detailed
and access to capital control reports
•Process engineering skills •Structured
•Intense supervision of labor organization and
•Products designed for ease responsibilities
in manufacture •Incentives based on
•Low-cost distribution system meeting strict
quantitative targets
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 Contd…
Generic Commonly Required Skills Common Organizational
Strategy and resources Requirements
Differentiation •Product engineering •Strong coordination among
•Creative flare functions in R&D, product
•Strong capability in basic development, and marketing
research •Subjective measurement
•Corporate reputation for and incentives instead of
quality or technological quantitative measures
leadership •Facilities to attract highly
•Unique combination of skills skilled labor, scientists, or
•Strong cooperation from creative people
channels
•Strong marketing abilities
Focus Combination of above policies Combination of above
directed at the particular policies directed at the
strategic target particular strategic target
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 Risks of the Generic Strategies
Risks of Cost Risks of Risks of Focus
Leadership Differentiation
Cost leadership is not Differentiation is not Target segment becomes
sustained when sustained when unattractive when
•Competitors imitate •Competitors imitate •Focus strategy is imitated
•Technology changes •Bases for •Structure erodes
•Other bases for cost differentiation •Demand disappears
leadership erode become less •Broadly target
•Cost proximity is lost important to buyers competitors overwhelm
•Proximity in segments
•Cost focusers achieve
differentiation is lost •Segment’s differences
even lower cost in
segments •Others achieve from others narrow
greater market
differentiation •Advantages of broad line
increase

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 Types of Grand Strategies

1. Concentrated growth 8. Concentric

2. Market development diversification
3. Product development 9. Conglomerate
diversification
4. Innovation
10. Retrenchment/
5. Horizontal integration Turnaround
6. Vertical integration 11. Divestiture
7. Joint ventures 12. Liquidation

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 1. Concentrated Growth Strategy
Characteristics
• Involves focusing resources on the profitable growth of
a single product, in a single market, with a single
dominant technology
• Rationale – Firm develops and exploits its expertise in a
delimited competitive arena
• Determinants of competitive market success
• Ability to assess market needs
• Knowledge of buyer behavior
• Customer price sensitivity
• Effectiveness of promotion
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 Conditions Favoring a Concentrated
Growth Strategy
 Firm’s industry is resistant to major technological advancements
 Firm’s target markets are not product saturated
 Firm’s markets are sufficiently distinctive to influence against
competitors in adjacent markets from entering firm’s segment
 Firm’s inputs are stable in price and quantity and available in the
amounts and at the times needed
 Firm’s industry is stable
 Firm’s competitive advantages are based on efficient production
or distribution channels

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 Options for Concentration Strategy
1. Increasing present customers’ rate of use
a. Increasing size of purchase
b. Advertising other uses
c. Giving price incentives for increased use
2. Attracting competitors’ customers
a. Establishing sharper brand recognition
b. Increasing promotional effort
c. Initiating price cuts
3. Attracting non-users to buy the product
a. Introducing trial use through sampling, price incentives, etc.
b. Pricing up or down
c. Advertising new uses

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2. Market Development

It Consists of marketing present products,

often with only cosmetic modifications to
customers in related market areas by
• Adding channels of distribution or
• Changing content of advertising or promotion

52
Options for Market Development Strategies

Market Development (Selling present products in

new markets.)
1. Opening additional geographic markets
a. Regional expansion
b. National expansion
c. International expansion
2. Attracting other market segments
a. Developing product versions to appeal to other segments
b. Entering other channels of distribution
c. Advertising in other media

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 3. Product Development

• It involves substantial modification of existing

products or creation of new but related products
• Based on penetrating existing market by
• Incorporating product modifications into existing items
or
• Developing new products connected to existing
products

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Options for Product Development Strategies
1. Developing new product features
a. Adapt (to other ideas, developments)
b. Modify (change color, motion, sound, odor, form, shape)
c. Magnify (stronger, longer, thicker, extra value)
d. Minify (smaller, shorter, lighter)
e. Substitute (other ingredients, process, power)
f. Rearrange (other patterns, layout, sequence, components)
g. Reverse (inside out)
h. Combine (blend, mixture, combine units, etc.)
2. Developing quality variations
3. Developing additional models and sizes (product
proliferation)
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 4. Innovation Strategy

Involves creating a new product life

cycle, thereby making similar existing
products obsolete

56
 5. Vertical Integration Strategy
• Vertical integration extends a firm’s competitive scope within
same industry
• Involves acquiring firms
• That supply acquiring firm with inputs (backward integration)
or
• Are customers for firm’s outputs (forward integration)
• Can aim at either full or partial integration

Internally Activities, Costs,

Activities,
Performed & Margins of Buyer/User
Costs, &
Activities, Forward Channel Value
Margins of
Costs, & Allies & Chains
Suppliers
Margins Strategic Partners
57
 Vertical Integrations

Textile producer Textile producer

Shirt manufacturer Shirt manufacturer

Clothing store Clothing store

Acquisitions or mergers of suppliers or customer businesses are vertical integration

58
 Strategic Advantages of
Backward Integration
• Generates cost savings only if volume needed is big
enough to capture efficiencies of suppliers
• Potential to reduce costs exists when
– Suppliers have sizable profit margins
– Item supplied is a major cost component
– Resource requirements are easily met
• Can produce a differentiation-based competitive
advantage when it results in a better quality part
• Reduces risk of depending on suppliers of crucial raw
materials / parts / components
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 Strategic Advantages of
Forward Integration
• Advantageous for a firm to establish its own distribution
network if
– Unreliable distribution channels weaken steady production
operations
• However, lacking a broad enough product line to justify
integrating forward into stand-alone distributorships or
retail outlets, a firm may sell directly to end users
• Direct sales and Internet retailing may
– Lower distribution costs
– Produce a relative cost advantage over rivals
– Enable lower selling prices to end users
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 Strategic Disadvantages of
Vertical Integration
• Boosts resource requirements
• Locks firm deeper into same industry
• Results in fixed sources of supply and less
flexibility in accommodating
buyer demands for product variety
• Poses problems of balancing capacity at each stage of
value chain
• May require radically different skills / capabilities
• Reduces manufacturing flexibility, lengthening design
time and ability to introduce new products
61
 6. Horizontal Integration Strategies

Horizontal Integration
• Based on growth via acquisition of one or more similar
firms operating at the same stage of the production-
marketing chain

62
 Horizontal Integrations

Textile producer Textile producer

Shirt manufacturer Shirt manufacturer

Clothing store Clothing store

Acquisitions or mergers of suppliers or customer businesses are vertical integration

Acquisitions or mergers of competing businesses are horizontal integrations
63
 7. Joint Venture
Involves establishing a third company (child), operated for
the benefit of the co-owners (parents).
Guidelines for Joint Ventures –
 Combination of privately held and publicly held can be
synergistically combined
 Domestic firm’s joint venture with foreign firm, can
obtain local management to reduce certain risks
 Distinctive competencies of two or more firms are
complementary
 Two or more smaller firms have trouble competing with
larger firm
 A need exists to introduce a new technology quickly

64
 8. Concentric Diversification

Concentric Diversification
• Involves acquisition of businesses related to
acquiring firm in terms of technology, markets, or
products

65
 9. Conglomerate Diversification

Conglomerate Diversification
• Involves acquisition of a business of unrelated product
because it represents a promising investment opportunity
• Primary motivation is profit pattern of venture

• Difference between the approaches

• Concentric diversification emphasizes commonality
whereas conglomerate diversification emphasizes
profits for each individual unit

66
 Motivations for Diversification

 Increases firm’s stock value

 Increases growth rate of firm
 Investment is better use of funds than using them for
internal growth
 Improves stability of earnings and sales
 Balance or fill out product line
 Acquire a needed resource quickly
 Achieve tax savings
 Increase efficiency and profitability

67
 10. Turnaround/Retrenchment Strategy

Involves a concentrated effort over a period of

time to strengthen a firm’s distinctive
competencies, returning it to profitability.
The believe is that the firm can survive and
eventually recover if a concentrated effort is made
over a period of few years for declining profits due
to economic recessions, production inefficiencies
and innovative breakthroughs by competitors.

68
Turnaround/Retrenchment Strategy

A turnaround strategy is done through

Cost reduction Asset reduction

69
 Terms Used in Turnaround Strategy
– Regrouping through cost and asset reduction to
reverse declining sales and profit.
– Retrenchment can entail selling off land and buildings
to raise needed cash, closing obsolete factories,
automating processes and reducing the number of
employees.
– It is typically accomplished in one of two ways:
• Cost reduction
• Asset reduction
– Since the underlying purpose of retrenchment is to
reverse current negative trends, the method is often
referred as a turnaround strategy.

70
 11. Divestiture
- Selling a division or part of an organization
- Divestiture can be part of an overall
retrenchment strategy to free an businesses that
are unprofitable, that require too much capital,
or that do not fits well with the firm’s other
activities.
- Examples: a) Motorola, part being divested is
semiconductor operations b) Magna, part being
divested is Real estate operations. c) GE, part
being divested is Financial guaranty Insurance
etc.

71
 12. Liquidation Strategies

– Selling all of a company’s assets, in parts, for

their tangible worth (only occasionally as a
whole)
– Liquidation is usually seen as the least attractive
of all grand strategies.
– Liquidating business tries to develop a planned
and orderly system that will result in the greatest
possible returns and cash conversion as the
business slowly turn down its market share.
Example: Enron Corp., Kodak

72
 Thank
You
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