Chapter Five: Types of Strategy

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 Corporate - Level Strategies

 A corporate-level strategy is an action taken to gain a

competitive advantage through the selection &
management of a mix of businesses competing in
several industries.

 A corporate-level strategy is concerned with two key

questions:
 What business should the firm be in?
 How should the corporate office manage its group of
businesses?
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 Corporate - Level Strategy

 Corporate - Level Strategy can be

categorized :
 Integration strategies
 Intensive strategies
 Diversification strategies
 Defensive strategies

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 Integration Strategy

Integration strategy focuses on moving to

different industry level, different product &
technology but the basic market remains the same.
There are two types of integration:
 Vertical integration
 Horizontal integration

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 Integration Strategy cont’d …

 Vertical Integration
 Vertical Integration involves extending an organization’s present
business in two possible directions.

• Forward integration moves the organization into

distributing its own products or services .
• Backward integration moves an organization into
supplying some or all of the products or services
used in producing its present products or services.
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 Integration Strategy cont’d …
Horizontal integration
 Horizontal integration occurs when an organization
adds one or more businesses that produce similar
products or services and that are operating at the same
stage in the product market chain.

 Almost all horizontal integration is accomplished by

buying another organization in the same business.

 Example: The acquisition of construction bank by CBE

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 Forward Integration Guidelines

 When an organization’s present distributors are especially expensive

 When the availability of quality distributors is so limited as to offer a

competitive advantage

 When an organization competes in an industry that is growing

 When present distributors or retailers have high profit margins

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 Backward Integration Guidelines

 When an organization’s present suppliers are especially

expensive or unreliable

 When the number of suppliers is small and the number of

competitors is large

 When the advantages of stable prices are particularly

important

 When an organization needs to quickly acquire a needed

resource
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 Horizontal Integration Guidelines

 When an organization can gain monopolistic

characteristics in a particular area or region without being
challenged by the federal government.

 When an organization competes in a growing industry

 When increased economies of scale provide major
competitive advantages

 When competitors are faltering due to a lack of managerial

expertise.
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 Intensive Strategy

 Intensive strategy will be appropriate when the

company concentrates on the current business.

 firms that use this strategy gain competitive advantage

in production skill, marketing know-how & reputation in
the market place.

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 Intensive Strategies
 Market penetration strategy
 seeks to increase market share for present
products or services in present markets through
greater marketing efforts
 Market development
 involves introducing present products or services
into new geographic areas
 Product development strategy
 seeks increased sales by improving or modifying
present products or services
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 Market Penetration Guidelines

 When current markets are not saturated with a particular

product or service

 When the usage rate of present customers could be

increased significantly.

 When the market shares of major competitors have been

declining while total industry sales have been increasing

 When increased economies of scale provide major

competitive advantages
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 Market Development Guidelines

 When new channels of distribution are available that

are reliable, inexpensive, and of good quality

 When an organization is very successful at what it

does

 When new untapped or unsaturated markets exist

 When an organization has excess production
capacity
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 Product Development Guidelines

 When an organization has successful products that are in

the maturity stage of the product life cycle

 When an organization competes in an industry that is

characterized by rapid technological developments.

 When major competitors offer better-quality products at

comparable prices

 When an organization competes in a high-growth industry

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 Diversification Strategy

 Diversification : refers to an attempt to change the

characteristics of the business through either of new
products, markets & technology or all the three
 Expansion into new businesses that are outside the current
businesses and markets.
 Allows a firm to create value by wisely using excess
resources

 Diversification growth strategy is classified into two

categories:
• Concentric (Related)
• Conglomerate (Unrelated)
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 Concentric (Related)/ Synergetic Diversification

 Related Diversification is when the organization chooses a

market to enter that is related to its present operations.

 value chains possess competitively valuable cross-

business strategic fits
 Clothing manufacture entering into the shoe market.
 Search for strategic “synergy”, which is the performance of the
whole is greater than the sum of the parts.
• The idea that 2 + 2 = 5

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 Concentric (Related) Diversification cont’d

Synergy happens because of the interactions and the

interrelatedness of the combined operations and the sharing of
resources, capabilities, & distinctive competencies
Related diversification could be achieved through economies of
scope & market power

 Seek to exploit economies of scope between business units and get

market power.

Economies of scope are cost savings attributed to transferring

the capabilities and competencies developed in one
business to a new business.

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 Concentric (Related) Diversification cont’d

Economies of scope refers to sharing activities & transferring of core

competencies: operational & corporate relatedness.

Value is created from economies of scope through operational

relatedness and corporate relatedness.
Operational relatedness – sharing activities:
 Require strategic control over business units

 Primary & support activities can be shared efficiently

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 Concentric (Related) Diversification
cont’d …

 Corporate relatedness - transferring of core

competencies:

 Corporate core competencies are complex sets of

resources & capabilities that link different
businesses trough:

• Managerial & technological knowledge,

experience & expertise.

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Concentric (Related) Diversification
cont’d …

 Market power exists when a firm is able

to:
 Sell its products above the existing competitive
level
 Reduce the costs of its primary & support activities
below the competitive level

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Related Diversification Guidelines

 When an organization competes in a no-growth or

a slow-growth industry
 When adding new, but related, products would
significantly enhance the sales of current products.
 Ex Suit and Shoes
 When new, but related, products could be offered at
highly competitive prices
 When an organization has a strong management
team

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 Unrelated Diversification

 is when the market chosen to enter is

dissimilar, sometimes intended to create a
portfolio of separate products/service.
 value chains are so dissimilar that no
competitively valuable cross-business
relationships exist
Example
Clothing manufacturer entering into the electronics
market.

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 Conglomerate(Unrelated) Diversification

 Diversifying into completely different industry from the firm’s

current operations.

 Example MIDROC Ethiopia

 Firm move into industries where there is:

 No strategic fit to be exploited

 No meaningful value chain relationships

 No unifying strategic theme

 Approach is venture into any business with good profitability prospects

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Conglomerate(Unrelated) Diversification
cont’d …

 Unrelated diversification could be achieved through

financial economies

 These are cost savings realized through improved

allocations of financial resources and based on
investments inside or outside the firm

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 Conglomerate(Unrelated) Diversification cont’d

Value is created through two types:

 Efficient internal capital allocations
• Development of a portfolio of businesses with different risk
profiles thereby reducing the business risk for the total
corporation

 Purchasing other corporations and restructuring

their assets
• Buying and selling businesses in the external market with

the intent of increasing the total value of the firm.

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 Unrelated Diversification
Guidelines
 When revenues derived from an organization’s
current products would increase significantly by
adding the new, unrelated products
 When an organization’s present channels of
distribution can be used to market the new
products to current customers
 When an organization’s basic industry is
experiencing declining annual sales and profits

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 Unrelated Diversification
Guidelines (cont.
 When an organization has the opportunity to
purchase an unrelated business that is an
attractive investment opportunity
 When existing markets for an organization’s
present products are saturated
 When antitrust action could be charged
against an organization that historically has
concentrated on a single industry

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 Defensive Strategies

 Defensive Strategies most often used as a short-

term solution to:
 Reverse a negative trend
 Overcome a crisis or problem situation

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 Defensive Strategies cont’d …

Reasons:
The company faced financial problems – certain parts of
the organization are doing poorly

The company forecasts hard times ahead related to:

Challenges from new competitors & products
Changes in government regulations

Owners are tired of the business or have to have an

opportunity to profit substantially by selling

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 Defensive Strategies
 Categories of defensive Strategies:
 Retrenchment,
 Divestiture
 Liquidation
 Retrenchment
 occurs when an organization regroups through cost
and asset reduction to reverse declining sales and
profits
 also called a turnaround or reorganizational strategy
 designed to fortify an organization’s basic distinctive
competence
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 Retrenchment Guidelines

 When an organization is one of the weaker

competitors in a given industry
 When an organization is plagued by
inefficiency, low profitability, and poor
employee morale
 When an organization has grown so large so
quickly that major internal reorganization is
needed

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 Defensive Strategies

 Divestiture
 Selling a division or part of an organization
 often used to raise capital for further strategic
acquisitions or investments

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 Divestiture Guidelines

 When an organization has pursued a

retrenchment strategy and failed to accomplish
needed improvements
 When a division needs more resources to be
competitive than the company can provide
 When a division is responsible for an
organization’s overall poor performance
 When a division is a misfit with the rest of an
organization

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 Defensive Strategies

 Liquidation
 selling all of a company’s assets, in parts, for
their tangible worth
 can be an emotionally difficult strategy

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 Liquidation Guidelines

 When an organization has pursued both a

retrenchment strategy and a divestiture
strategy, and neither has been successful
 When an organization’s only alternative is
bankruptcy
 When the stockholders of a firm can
minimize their losses by selling the
organization’s assets

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 Business-Level Strategy
Business-level strategy: an integrated and coordinated
set of commitments and actions the firm uses to gain a
competitive advantage by exploiting core competencies
in specific product markets.

Key Issues:
 What good/service to offer customers?
 How to manufacture or create the good or service?
 How to distribute the good/service in the
marketplace?

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 Business-level strategy
The Five business-level Strategies
Competitive Advantage

Lower Cost Uniqueness

Competitive Scope

Broad Target
(Market Target)

Cost L/Ship Differentiation

Integrated Cost L/ship

/ Differentiation

Focused Cost Focused

Narrow Target
L/ship Differentiation

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 The Five cont’d …

The fiveB-L strategies are:

 Cost leadership
 Differentiation
 Focused cost leadership
 Focused differentiation
 Integrated cost leadership &
differentiation
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 The Five cont’d …

 Cost leadership: lowest cost to produce

acceptable features to all customers

 Differentiation: differentiated features

rather than low cost for customers who
value differentiation

 Focused cost leadership: refers to

targeting those specific customers with low
cost

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 The Five cont’d …

Focused differentiation: refers to targeting those

specific customers with a differentiated product
Integrated cost leadership & differentiation:
according to Porter, this strategy was referred initially
as “stuck in the middle”
 Meaning, neither the lowest cost nor a differentiated
firm

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 Cost Leadership Strategy

Definition
 A cost leadership strategy is an integrated set of
actions designed to produce or deliver goods or
services at the lowest cost relative to competitors,
with features that are acceptable to customers

 Lowest competitive price

 Features acceptable to many customers

 Relatively standardised products

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 Cost Leadership Strategy cont’d …

Cost saving actions required by this strategy:

Building efficient scale facilities
Tightly controlling production costs and overhead
Simplifying production processes and building efficient
manufacturing facilities
Minimising costs of sales, R&D and service
Monitoring costs of activities provided by outsiders
Gaining a unique access to a large source of lower cost
materials.
Making optimal outsourcing
Vertical integration decisions
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 Differentiation Strategy
Definition
 A differentiation strategy is an integrated set of actions designed
to produce goods or services that customers perceive as being
different.

 The firm produces non-standardized products for

customers who value differentiated features more than
they value low cost.

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 Differentiation Strategy cont’d …

 Continuous success with the differentiation strategy

results when the firm consistently upgrades differentiated
features that customers value, without significant cost
increases.

 The ability to sell goods or services at a price that

substantially exceeds the cost of creating its
differentiated features allows the firm to outperform rivals
and earn above-average returns
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 Approaches for Differentiation
Examples
 Products with unusual features
 Responsive customer service
 Rapid product innovation and technological
leadership
 Perceived prestige and status
 Different tastes
 Engineering design and performance

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 Focus Strategy
Definition
 A focus strategy is an integrated set of actions
designed to produce or deliver goods or services that
serve the needs of a particular competitive segment.
 Firms choose a focus strategy when they want
their core competencies to serve the needs of a
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 Focus Strategy cont’d …

Examples of specific market segments that can be

targeted by a focus strategy:
 Particular buyer group (e.g. youths or senior citizens)

 Different geographic markets

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 Focus Strategy cont’d …

 Types of focused strategies:

 Focused cost leadership strategy
 Focused differentiation strategy
Key success factors
 Competitor firms may overlook small niches
 The firm lacks resources needed to compete in
the broader market, but serves a narrow
segment more effectively than industry-wide
competitors.

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 Competitive Risks of the Focus
Strategies
 The focuser firm may be ‘out focused’ by its
competitors
 A firm competing on an industry-wide basis
decides to pursue the niche market of the focuser
firm.
 Customer preferences in the niche market may
change to more closely resemble those of the
broader market.

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 Best Cost Provider/Integrative Strategy
Objective
 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
Keys to Success
 Create superior value by MEETING OR
EXCEEDING buyer expectations on product
attributes and BEATING their price expectations
 Be the low-cost producer of a product with GOOD-
TO-EXCELLENT product attributes, then use cost
advantage to UNDERPRICE comparable brands

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 Integrative Strategy: A Hybrid or the “Mega-
Strategy”?
 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

**The most powerful competitive approach a company can

pursue is to strive relentlessly to become a lower-and-lower
cost producer of a higher-and-higher caliber product.
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Integrated Cost Leadership /Differentiation Strategy

 A firm that successfully uses the integrated cost

leadership/differentiation strategy should be in a
better position to:
 Adapt quickly to environmental changes
 Learn new skills and technologies more quickly
 Effectively leverage its core competencies while
competing against its rivals

 A commitment to strategic flexibility is necessary for

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 Integrated Low Cost/Differentiation Strategy
Southwest Airlines- Best Example for
Integrated

Low Cost Differentiation

Use a single aircraft model
(Boeing 737)
Focus on customer
satisfaction
Use secondary airports
High level of employee
Fly short routes
dedication
No meals
Focus on making the
25 minute turnaround time
flying experience fun
No reserved seats
No travel agent reservations 53
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