Strategic Management Lesson 3

BUSINESS STRATEGY:
• The third lesson explains what business strategy is as well as different
strategic alternatives which can be adopted to continuously lead any
organization to better productivity.
• It clarifies that a business can opt for diversification of products,
retrenchment or come up with a new product in business strategy.
 Definition of Business Strategy
Before defining the concept business strategy, it is very important to
know the meaning of Business. Therefore, the word’ business’ can be
defined in terms of three dimensions:
• Customer groups: Any professional activity undertaken by an
individual or a group.
• Customer needs: company defines business in term of product, and
• Technology: The study and knowledge, use of scientific discoveries with
computer
• In general, a business, known as enterprise or firm, is an organization
involved in the trade of goods, services, or both to consumers.
 Definition of Business Strategy Cont….
• A business can be also defined as an organization or economic system
where goods and services are exchanged for one another or for money.
• Every business requires some form of investment and enough
customers to whom its output can be sold on a consistent basis in order
to make a profit.
• Businesses can be privately owned, not-for-profit or state-owned.
• Business related to trade is the activity of making, buying, selling or
supplying goods or services for money.
• For the company, a business is a commercial organization such as,
shop/store or factory.
 Business strategy
• A business strategy is a business plan that takes place long term in order to help
achieve a specific goal or objective.
• It aims at strengthening a particular business so that business performance
increases and become more profitable.
• Without a business strategy, a business has no guide to follow and has an
increased risk of not succeeding.
• A business strategy is necessary to maintain a business performance.
• Business strategies are motivating, informational and change-stimulating activities.
• Moreover, it is a wonderful tool to use when monitoring how well a business is
doing over time and deciding the next step to take in order to be and remain
successful.
 Business strategy
• Its function is that a business strategy is used to increase earning potential
and success of a particular business.
• Business strategies often have profitable results for business owners just
starting out.
• Business strategies can range from choosing the most profitable niche (an
opportunity to sell a particular product to a particular group of people) for
a market to successful ways the business owners can promote a business.
• Many times, business strategies are used to improve a business or make a
business better than its competitors by making use of one or more
techniques.
 Single Business Strategy
• From the definition of Business Strategy, a single business strategy is
defined as a corporate strategy level which refers to its level of
diversification.
• A single business strategy focuses on a cohesive set of operational
procedures and goals that applies across the entirety of a business or
a particular product.
• Gathering efforts of small company by using a single business strategy
has advantages for ground level employees, personnel management
and relationships between company’s departments.
 Integrating multiple departments
• A single business strategy helps small business integrate its various
departments and workforce populations including sales team,
information technology professionals and personnel management.
• It allows a business to function as a more cohesive entity and achieve
a higher level of productivity, because all departments are working
towards same overarching goals and objectives.
• This can also mitigate a sense of competition between various
workforce populations in your small business and create more of a
team atmosphere.
 Greater Strategy Focus
• Devoting small company’s efforts towards a single business strategy
allows management team to create a more comprehensive plan.
• A company can achieve this depth of planning because personnel
management has over-arching strategy to focus efforts in. In addition,
there is less ambiguity about company’s organizational focus and
direction with a single business strategy.
 Approving New Plans/Operations

• Approving and rejecting new business plans and operations within a

small business is easier with one business strategy because it has only
one set of rules to abide by.
• There is no need of checking how a proposal from a given department
(e.g marketing) affects the strategy of the product development
department or sales team because all departments work under the
same strategy.
 Changing the Strategy
• A business strategy must be part of a dynamic strategic management process to
allow a company adjust operations midstream (middle part of something or
doing something) to keep up with the ever-changing landscape (everything that
you can see when you look across a large area of land) of the modern business
world.
• Operating from a single business strategy provides the small business the ability
to adjust the overall business plan quickly, because you're not also tweaking
(making slight change) separate business strategies and operational procedures
for all of the company's various departments. This mobility can make keeping up
with the competition more feasible and reduce the downtime for your
company's different departments to implement changes.
 
 Diversification strategy
• The word diversification especially of a business or a company means
developing a wider range of product, interests, skills, etc., in order to
be more successful or reduce risk.
• Diversification also can be defined as strategy that takes a company
into new market with new product or services.
• Considering different definitions of diversification, diversification
strategies are used to expand firms’ operations by adding markets,
products, services, or stages of production to the existing business.
• The purpose of diversification is to allow the company to enter lines
of business that are different from current operations.
 Diversification strategy Cont….
• The goal of diversification is to reduce risk in a portfolio.
• Volatility is limited by the fact that not all asset classes or industries or
individual companies move up and down in value at the same time or
at the same rate.
• Diversification reduces both upside and downside potential and
allows more consistent performance under a wide range of economic
conditions.
 Concentric diversification
• This means that there is a technological similarity among industries
which means that the firm is able to leverage its technical know-how
to gain some advantage.
• For example, a company that manufactures industrial adhesives might
decide to diversify into adhesives to be sold via retailers.
• The technology would be the same but the marketing effort would
need to change.
• It also seems to increase its market share to launch a new product
that helps a particular company for profit maximization.
 Concentric diversification Cont….
• Company could seek new products that have technological or 
marketing synergies with existing product lines appealing to a new 
group of customers.
• This also helps the company to tap that part of the market which remains
untapped, and which presents an opportunity to earn profits.
• Concentric diversification occurs when a firm adds related products or
markets.
• We also talk about concentric diversification when the new venture is
strategically related to the existing lines of business, it is called concentric
diversification.
 Horizontal diversification

• The company adds new products or services that are often technologically
or commercially unrelated (not related) to current products but that may
appeal to current customers.
• This strategy tends to increase the firm's dependence on certain market
segments (a part of something that is separate from the other parts or can
be considered separately).
• For instance, a company that was making notebooks earlier may include
pens market as its new product.
• This type of diversification is desirable if the present customers are loyal
(remaining faithful) to the current products and if the new products have a
good quality and are well promoted and priced.
 Horizontal diversification Cont….
• Moreover, the new products are marketed to the same economic
environment as the existing products, which may lead to rigidity and
instability.
• Diversification strategies are used to expand firms' operations by
adding markets, products, services, or stages of production to the
existing business.
• The purpose of diversification is to allow the company to enter lines
of business that are different from current operations.
 Conglomerate diversification

• Conglomerate diversification occurs when there is no common thread

(an idea or a feature that is part of something greater) of strategic fit
or relationship between the new and old lines of business; the new
and old businesses are unrelated. Conglomerate diversification occurs
when a firm diversifies into areas that are unrelated to its current line
of business. Synergy may result through the application of
management expertise or financial resources, but the primary
purpose of conglomerate diversification is improved profitability of
the acquiring firm.
 Conglomerate diversification Cont….

• Little, if any, concern is given to achieving marketing or production

synergy with conglomerate diversification.
• One of the most common reasons for pursuing a conglomerate growth
strategy is that opportunities in a firm's current line of business are
limited.
• Finding an attractive investment opportunity requires the firm to
consider alternatives in other types of business.
• Philip Morris's acquisition of Miller Brewing was a conglomerate move.
• Products, markets, and production technologies of the brewery were
quite different from those required to produce cigarettes.
 Conglomerate diversification Cont….
• Firms may also pursue a conglomerate diversification strategy as a means
of increasing the firm's growth rate.
• As discussed earlier, growth in sales may make the company more
attractive to investors.
• Growth may also increase the power and prestige of the firm's executives.
• Conglomerate growth may be effective if the new area has growth
opportunities greater than those available in the existing line of business.
• The goal of such diversification is to achieve strategic fit. Strategic fit
allows an organization to achieve synergy.
 Conglomerate diversification Cont….
• In essence, synergy is the ability of two or more parts of an
organization to achieve greater total effectiveness together than would
be experienced if the efforts of the independent parts were summed.
• Synergy may be achieved by combining firms with complementary
marketing, financial, operating, or management efforts.
• Breweries have been able to achieve marketing synergy through
national advertising and distribution.
• By combining a number of regional breweries into a national network,
beer producers have been able to produce and sell more beer than had
independent regional breweries.
 Conglomerate diversification Cont….
• Probably the biggest disadvantage of a conglomerate diversification
strategy is the increase in administrative problems associated with
operating unrelated businesses.
• Managers from different divisions may have different backgrounds
and may be unable to work together effectively.
• Competition between strategic business units for resources may entail
shifting resources away from one division to another.
• Such a move may create rivalry and administrative problems between
the units.
 Conglomerate diversification Cont….
• Caution must also be exercised in entering businesses with seemingly promising
opportunities, especially if the management team lacks experience or skill in the new
line of business.
• Without some knowledge of the new industry, a firm may be unable to accurately
evaluate the industry's potential.
• Even if the new business is initially successful, problems will eventually occur.
• Executives from the conglomerate will have to become involved in the operations of
the new enterprise at some point.
• Without adequate experience or skills (Management Synergy) the new business may
become a poor performer.
• Talking about diversification efforts we can distinguish between internal and external
diversification.
 Internal diversification
• Internal diversification occurs when a firm introduces a different but
related line of business by developing the new line. Internal
diversification frequently involves expanding a firm’s product or
market base.
 Internal diversification Cont….
• One form of internal diversification is to market existing products in
new markets. A firm may elect to broaden its geographic base to
include new customers, either within its home country or in
international markets. A business could also pursue an internal
diversification strategy by finding new users for its current product.
Internal diversification Cont….
• Finally, firms may attempt to change markets by increasing or
decreasing the price of products to make them appeal to consumers
of different income levels. Another form of internal diversification is
to market new products in existing markets. Generally this strategy
involves using existing channels of distribution to market new
products. Retailers often change product lines to include new items
that appear to have good market potential.
 Internal diversification Cont….
• External diversification occurs when a firm looks outside of its current
operations and buys access to new products or markets.
• Mergers are one common form of external diversification.
• Mergers occur when two or more firms combine operations to form one
corporation, perhaps with a new name.
• These firms are usually of similar size.
• One goal of a merger is to achieve management synergy by creating a
stronger management team.
• This can be achieved in a merger by combining the management teams
from the merged firms.
 Internal diversification Cont….
• Acquisitions, a second form of external growth, occur when the purchased
corporation loses its identity.
• The acquiring company absorbs it.
• The acquired company and its assets may be absorbed into an existing business
unit or remain intact as an independent subsidiary within the parent company.
• Acquisitions usually occur when a larger firm purchases a smaller company.
• Acquisitions are called friendly if the firm being purchased is receptive to the
acquisition. (Mergers are usually "friendly.")
• Unfriendly mergers or hostile takeovers occur when the management of the
firm targeted for acquisition resists being purchased.
 Internal diversification Cont….
• Diversification may achieve the same result; however, the company
enters a new area of business by purchasing another company or
business unit.
• Mergers and acquisitions are common forms of external
diversification.
 Evaluation of diversification strategy
• Strategy evaluation is the process of addressing a problem or
competitive scenario by either implementing or adjusting a particular
approach. Many different people can benefit from strategic
evaluation, including business leaders, government policymakers and
individuals who face ongoing challenges in their daily lives. Strategic
evaluation takes different forms based on the nature of the situation,
but generally includes some common techniques.
 Evaluation of diversification strategy
Cont….
• Evaluating a strategy of a diversified company requires studying its
earnings reports, following coverage of the company in the financial
papers and studying the company's product and/or service line.
• Once the strategic options open to the organization have been
generated there must exist a framework within which they can be
evaluated for suitability, feasibility and fit to the organization.
• The process involves rational, analytical techniques or a more
subjective and implicit process.
 E-tivity 3.2.1 Business strategy
Numbering, pacing and sequencing 3.2.1

Title Business strategy

Purpose The purpose of this e-tivity is to enable you understand business strategies and its implications on businesses

Brief summary of overall task Watch video on this link:

https://www.youtube.com/watch?v=0cMdPH6jZCM

Individual task a) Discuss about different business strategies and its importance

Interaction begins a) Post two themes that are common to the importance of business strategy. Provide positive and constructive feedback on
discussion forum 3.2.1

E-moderator interventions a) Ensure that learners are focused on the contents and context of discussion.
b) Stimulate further learning and generation of new ideas.
c) Provide feedback on the learning progress.
d) Round-up the e-tivity

Schedule and time The task should take two hours

Next Strategic analysis

 Assessment questions

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 References
 
• Dess, L., (2005), Strategic Management, Creating Competitive Advantage,
University of Texas at Dallas.
• Barnes, S., & Milton, N. (2015). Designing a successful KM strategy: A guide for
the knowledge management professional. Medford: Information Today, Inc.
• Barney, J. B. (2011). Gaining and sustaining competitive advantage. New York: Phi
Learning.
• Capgemini. (2011). Channel strategy: Framework for success: How to maximize
internal and customer benefits through effective channel management.
Capgemini consulting.