STRATEGIC MANAGEMENT

The art of maximizing competitive advantage & minimizing

competitive disadvantage
The science of how formulating, implementing & evaluating
the ‘the plans of actions’ designed to achieve business
objectives.

By Shakeela Kousar
Department of Management Sciences
The Islamia University of Bahawalpur
David Ch. 4: TYPES OF STRATEGIES
 Long Term Objectives
• Financial Objectives: Growth and revenue,
earnings, dividend, profits, return on
investment, earning for share, stock price and
cash flow
• Strategic Objectives: larger market share,
quicker on time delivery on rivals, shorter
design to market times, high product quality,
geographic coverage, technological leadership,
and lower cost than rivals.
Levels of Strategies –
Large Company

Copyright © 2011 Pearson Education, Inc.

Ch 5 -4
Publishing as Prentice Hall
Level of Strategies in a Small Company
 Types of Strategies
1. Integration
a) Forward
b) Backward
c) Horizontal
2. Intensive Strategies
a) Market Penetration
b) Market Development
c) Product Development
3. Diversification Strategies
d) Related Diversification
e) Unrelated Diversification
4. Defensive Strategies
f) Retrenchment Strategies
g) Divestiture
h) Liquidation
 1a. VERTICAL INTEGRATION STRATEGIES: FORWARD
INTEGRATION
Increasing ownership and control over distributors and retail partners.
E.g. Apple Stores, K&N Stores, Gul Ahmed Stores (since 2003), Amazon (online selling through websites), Wal-
Mart allows its customers to buy the merchandise online at (www.walmart.com) and gets it delivered free of
charge by urban FedEx Corp. locations, Disney has started purchasing the stores which sold its merchandise
based on Disney Characters and Movies.

-Franchising as a method of forward integration

In 1996 KFC was started at Karachi through a franchisee agreement
Forward Integration is favorably done when:
1. When present distributors, retailers are expensive, unreliable, incapable of meeting firms
present needs.
2. When retailers make more profit and correct pricing can benefit the company.
3. When quality distributors are limited
4. When efficient and correct demand prediction is needed for operations
5. When the company is expected to grow
6. When the company has the necessary capital and HR available to run the distributing
operations.
 1b. VERTICAL INTEGRATION STRATEGIES: BACKWARD
INTEGRATION

Increasing ownership and control over firm’s suppliers.

E.g. An ice cream company that buys a dairy farm, A bakery buy its own wheat processor or wheat
farm, Amazon.com when it became not only a bookseller but a book publisher, Nestle (Switzerland) the
world largest coffee manufacturer is training its farmers over coffee tree implantation to grow its
own raw material, Mitchell farms, Ford Motor created subsidies (suppliers)that provide its key
inputs such as rubber, glass & metal. Starbucks is best known as a chain of coffee shops -- It
backward vertically integrated when it bought a coffee farm in China,
De-integration—Globalized operations allow buying best deal from best suppliers.
Backward Integration is favorably done when:
1. When present suppliers are expensive, unreliable, incapable of meeting firms present needs of
parts, assemblies, components and other raw material
2. When suppliers make more profit, and the company can attain stable price advantage
3. When quality suppliers are limited
4. When the organization needs to acquire new resources
5. When the company is expected to grow
6. When the company has the necessary capital and HR available to run the supplying operations.
1c. VERTICAL INTEGRATION STRATEGIES: HORIZONTAL INTEGRATION

Increasing ownership and control over firm’s competitors

through forming alliances, mergers, acquisitions, and
takeovers.
E.g Walls acquired Polka, Mobilink & Warid merged, Microsoft
& Nokia merged
Horizontal Integration is favorably done :
1. To gain monopolistic characteristics
2. When the organization competes in the growing industry
3. When EOS can be achieved for competitive advantage
4. When the company has the necessary capital and HR available to run the
bigger operations.
5. When competitors are faltering due to any resource deficiency or
managerial expertise that company is already proficient in.
 Horizontal Integration Strategies

• Merger-friendly combination of two companies of equal size

to form one (however merger with indirect competitors
reduces the duplication of resources)
Merger between Daimler, Benz, and Chrysler (car developer,
manufacturer & retailer)
• Acquisition-A company purchases or completely absorbs
another company
• Takeover- Hostile Acquisitions
2a. Intensive Strategies: Market Penetration
Seeking increased market share for present products or services in
present markets through greater marketing efforts
It is pursued in combination with increasing sales personals, increasing advertising
expenditures, sales promotions & increasing publicity efforts.
• Since 1971 Pepsi (originally headquartered in NewYork) is aggressively
advertising and sponsoring cricket in Pakistan to become no1 beverage of
Pakistan (product line-Pepsi cola, Mirinda, Mountain Dew, Sting, 7up (foodie))
• Coca Cola does Coke Studio
• Nestlé's Nescafe does Nescafe basement
Market penetration is favorably done when :
1. Current market is not saturated with the present product or service
2. When the usage rate of present customers could be enhanced
3. When the market share of major competitors is declining and industry sales potential is
expected to increase
4. When increased EOS can act as a major competitive advantage
 2b. Intensive Strategies: Market Development

Introducing present products or services into new geographic areas

• Yum Brands (parent company)--- Pizza Hut, KFC, Taco Bell expanding geographically
• PepsiCo in China is the second largest beverage market; sells Lays with Beijing duck flavor etc.
• Japanese automakers Toyota (in Pakistan its popular cars are COROLLA XLI, COROLLA GLI,
SALOON, PARADO, LANDCRUISER, CAMRY), Nissan, Honda compete in the global markets with
US automakers General Motors, Ford, Chryslers, also with the German automakers Porche,
Mercedes, BMW, VW.
• Starbucks used to sell its coffee beans in its own stores initially, but now it reaches its customer
(who does not visit Starbucks coffee house) by selling its beans to the retail stores in different areas.

Market Development is favorably done :

1. New channels of distribution that are reliable, inexpensive, and good quality
2. Firm is very successful at what it does
3. Untapped or unsaturated markets exist
4. Capital and human resources necessary to manage expanded operations is available
5. Excess production capacity is available
6. Basic industry rapidly becoming global
 2c. Intensive Strategies: Product Development

Seeking increased sales by improving present products or services or

developing new ones through research & development.
• Lifebuoy’s hand washes, shampoos and scented soaps like lifebuoy gold and
lemon
• Fanta Lemon
• McDonalds burgers
• Coca-Cola..Diet coke

Product Development is favorably done :

1. Products in maturity stage of life cycle
2. Competes in industry characterized by rapid technological developments
3. Major competitors offer better-quality products at comparable prices
4. When the organization is competing in high-growth industry
5. When the organization has strong research and development capabilities
 3. Diversification Strategies
• Having core businesses operations is smooth but risky. Diversification
spreads the risk across different industries and strives for greater return
over investments.
• Involves transferring competitively valuable expertise and
technological know how from one business to another
• Combining the related activities of separate businesses into single
operation to achieve low costs
• Exploiting the common use of a well known brand name
• Cross business collaboration to create competitively valuable resource
strengths & capabilities
• Unilever Pakistan 1958 (started RYK and shifted to Khi in 60’s)) Largest
FMCG multinational operating in Pakistan, diversifies both relatedly and
unrelatedly
3a. Diversification Strategies: Related Diversification: Adding new but related
products or services.
Almarai diversified from milk production to laban, yogurt, cheese, butter and
other dairy products.
Mehran Foods-Mehran Masala Mixes, Mehran Rice Exports (Pakistan’s
number 1 exporter).

It is possible when the organization:

1. Transferring competitively valuable expertise , technological know how and
capabilities from one business to another.
2. Competes in no- or slow-growth industry
3. Adding new & related products increases sales of current products
4. New & related products offered at competitive prices
5. Current products are in decline stage of the product life cycle
6. When the organization has a strong management team
3b. Diversification Strategies: Unrelated Diversification

Adding new, unrelated products or services (from different industries) for better financial
performance rather than capitalizing on value chain strategic fits . Normally involves acquiring
the companies under performing, financially distressed, and high growth potential.
Example:
• Engro Fertilizers and Foods, Nishat being a textile buisness entity investing in power
houses, Dalda oils & cupshup, Google is making driverless cars and Google Glass. Walt
Disney owns ABC, GE owns NBC, Dell, Lenovo moved into smart phones
• Nike-the maker of athletic shoes, in 1995 diversified into (golf, jogging, volleyball, tennis,
basketball, soccer) apparel (endorsed by TigerWoods), balls & equipment and succeeded
by setting up distribution channels with suppliers and later moved into global distribution.
• PepsiCo investing in the production of mineral water Aqua fina at Pakistan. Russia is
PepsiCo’s largest revenue generating food & beverage company due to its diversification
(most recently it entered into dairy market).
• P&G headquartered in Karachi since 1991 it is operating to deliver products such as
Ariel, Bounty, Braun, Dawn, Gillette, Head & Shoulders, Olay, Oral B, Pampers,
Pantene, Pringles, Tide.
 The Giants
Conglomerates:
• Samsung (Asia’s largest Conglomerate)
1. Samsung Products: Apparel, chemicals, consumer electronics,
electronic components, medical equipment, semiconductors, ships,
telecommunication equipment 
2. Samsung Services: Advertising, construction, entertainment, financial
services, hospitality, information and communications technology, medical and
health care services, retail, shipbuilding
• GE: Software, aircraft engines, Electrical Distribution,
Electric Motors, Energy, Finance, Gas, Health Care,
Lighting, Locomotives, Oil, Water, Weapons, Wing Turbines
 Diversification Strategies: Unrelated
Diversification (CONT’D)
Unrelated Diversification happens when
1. Profit Consideration: Revenues from current products/services
would increase significantly by adding the new unrelated products
(an investment opportunity).
2. When the organization competes in highly competitive and/or no-
growth industry with low margins and returns
3. Present distribution channels can be used to market new products to
current customers
4. Declining annual sales and profits are encountered in basic industry
5. Capital and managerial talent (strategic planning) is available to
compete successfully in a new industry
6. Exiting markets for present products are saturated
 Defensive Strategies:
Retrenchment/Turnaround/Reorganizational strategy
Regrouping through cost and asset reduction to reverse declining sales and
profit, to fortify CA.
It Involves:
• Pressures from Shareholders, employees, media
• Selling off land/building to raise cash
• Pruning product lines
• Closing marginal businesses
• Closing obsolete factories
• Automating processes
• Laying off employees
• Controlling institutional expense
Starbucks started closing company operated stores in US & Australia during
global economic recession
 Retrenchment/Turnaround/Reorganizational
strategy CONT’D
It can be effective strategy when:
1. Firm has failed to meet its objectives and goals
consistently over time but has distinctive competencies
2. Firm is one of the weaker competitors
3. Inefficiency, low profitability, poor employee morale,
and pressure from stockholders increase to improve
performance.
4. When an organization’s strategic managers have failed
5. Organization has grown so large that a major internal
reorganization is needed.
 Defensive Strategies: Divestiture
Selling a (poorly performing) division or part of an organization,
can be done for any further strategic acquisitions or investments
• Part of an overall retrenchment strategy
• Encourages lesser diversification and focus on the core business
Examples:
• Cadbury PLC divested its Australian drinks business to Asahi Breweries (largest
brewer maker by market share) of Japan.
• VW divested its Brazilian truck and bus operations and MAN AG acquired it
• Toni & Guy divested TIGI Hair-care schools and products and Unilever acquired it
• Ebay is about to divest Skype
• Pakistan Steel Mills
 Divestiture CONT’D

It can be effective strategy when:

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.
 Defensive Strategies: Liquidation
Selling all of a company’s assets, in parts, for their tangible
worth when organization gets defeated (losses a lot).
Going Bankrupt: Bankruptcy is involves selling all the
organizational assets at their tangible worth
Example: Bahawalpur Textile Mill
It can be effective strategy when:
• 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
 Types of Strategies Part 2
Porter’s Five Generic Strategies
• Type 1 Cost Leadership – Low cost
• Type 2 Cost Leadership – Best value
• Type 3 Differentiation
• Type 4 Focus – Low cost
• Type 5 Focus – Best value
Type 1 & 2 Cost Leadership: Producing standardized products at
very low cost per unit for consumers who are price sensitive.
(targets a large market to gain competitive advantage through EOS by
forward, backward and horizontal integration.)
• Type1 low cost strategy: offering the product/service to a wide
range of customers at the lowest price available on the market
• Involves underpricing the competitors
• Examples: Wal-Mart, McDonalds
• Q1. What are the cost leadership methods that are hard to imitate? Will
aggressive cost cuts work?
• Value chain Analysis, plant layout, product design, relocating manufacturing
facilities (offshoring, outsourcing), utilizing cost saving technological
breakthroughs, changing suppliers and distributors, fetching raw materials globally.
• Type2 best value strategy: offering the product/service to a wide range
of customers at the best price-value available on the market. E.g. Lifebuoy
 Type3 Differentiation (either small or large Market) involves product
development

Producing unique industrial products and services for

the relatively price insensitive consumers.
Challenge: Justifying the higher price, the perceived
value should exceed the price paid
• BMW offers engineering designs
This strategy is effective when:
• There are many ways to differentiate a product and the buyers
consider those differences valuable
• When buyers needs and uses are diverse
• When few other rival firms are following differentiation approach.
• When industry is tech savvy and competitive.
 Type 4 & 5 Focus (targets the small market)

• Type 4 Low cost focus strategy: targeting the

niche group of customers at the lowest price
available on the market
• Example: Almaida (Pizza)
• Type 5 Best value focus strategy/ focused
differentiation: targeting the niche group of
customers at higher prices but best value.
• Example: Subway
 The low cost (type4) or best value (type 5)
focus is effective when:
• When a 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 acre of their mainstream customers.
• When the industry ahs many different niches and segments,
thereby by 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.
 Joint Venture
• Joint venture is a popular strategy that occurs when two or more
companies form a temporary partnership or consortium for the
purpose of capitalizing on some opportunity.
• Example: The world’s largest cellphone maker, Nokia Corp.,
recently formed a partnership with the world’s largest software
company, Microsoft, whereby the finish company will receive
billions of dollars from Microsoft to develop and market
smartphones using Microsoft's operating systems. Nokia still has
the largest market share in the handset business but is losing
ground. The partnership is designed to compete with Google’s
Android mobile-phone operating system and with Apple’s iPhone.
Nokia’s new smartphones will use windows phone as their principal
operating system, replacing its own Symbian software and Intel’s
MeeGo operating system.
 Joint Venture
Nestle Switzerland (operating since 1980’s in Pakistan
(Sheikupura plant-Lahore, Kabirwala plant-Multan which has its
popular products as Cerelac, KitKat, Nestle fruit juices, Nestle
coffee Nescafe, Nestle Pure life, Polo) and MilkPak did a joint
venture in 1988.
 First Mover Advantage
Entering a market or developing a new product prior to the rivals gives the company
the first mover advantage; which may benefit the company in:
• securing rare resources for the first time
• developing brand image, loyalty and commitments
• gaining market share and positions in best locations
• establishing secure and long term relationships with customers, suppliers,
distributors and investors
• gaining knowledge of critical success factors and issues.
Examples:
• RedBull
• Mobilink- headquatered in Islamabad was the first GSM cellular mobile service
provider, hence has the largest customer base for:
• Intel has always been the first mover in micro-processors, now it is upgrading itself
to produce chips for smart phones
• Apple has always been the first mover in the smart phones, then comes Nokis and
HP (2011 launched smart phone)
 OUTSOURCING
• Business-process outsourcing (BPO) involves companies
taking over the functional operations , such as human
resources, information systems, payroll, accounting,
customer service and even marketing of other firms.
• Cost savings – access lower wages in foreign countries.
• Focus on core business – focus resources on developing
the core business rather than being distracted by other
functions.
• Cost restructuring – outsourcing changes the balance of
fixed costs to variable costs by moving the firm more to
variable costs.
 OUTSOURCING
• Improve quality – improve quality by contracting out various
business functions to specialists.
• Knowledge – gain access to intellectual property and wider
experience and knowledge.
• Reduce time to market – accelerate development and/or
production of a product through additional capability
brought by the supplier.
• Risk management - manage risk by partnering with an
outside firm.
• Tax benefit – capitalize on tax incentives to locate
manufacturing plants to avoid high taxes in various
countries.