Types of Strategies
Level of strategies
1
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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.
2
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Types of Strategies
A Large
Company
Corp
Level
Division Level
Functional Level
Operational Level
3Ch 5 -
Types of Strategies
company
A small
Company
Functional
Level
Operational Level
4Ch 5 -
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.
5
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Growth strategies
Growth strategies:
Their results 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
6
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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 because of growth,
stability or retrenchment. This depends on
why we use it.
7
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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
8
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Vertical Integration Strategies
•
•
•
9
Forward integration
Backward integration
Horizontal integration
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Forward
Integration
Defined
•
Gaining
ownership or
increased control
over distributors
or retailers
10
Example
•
General Motors is
acquiring 10% of its
dealers.
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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
11
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Backward
Integration
Defined
•
Example
•
Seeking
ownership or
increased control
of a firm’s
suppliers
12
Prof. Dr. Majed El-Farra 2012
Motel 8 acquired a
furniture
manufacturer.
16 ،‫ آذار‬23
Strategies in Action
Guidelines for Backward Integration






13
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
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Horizontal
Integration
Defined
•
Example
•
Seeking
ownership or
increased control
over competitors
14
Prof. Dr. Majed El-Farra 2012
Palestinian Islamic
Bank acquired CairoAmman Bank Islamic
transaction branch.
16 ،‫ آذار‬23
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
15
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Intensive Strategies
•
•
•
16
Market penetration
Market development
Product development
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Market
Penetration
Defined
•
Seeking increased
market share for
present products
or services in
present markets
through greater
marketing efforts
17
Example
•
Ameritrade, the online broker, tripled its
annual advertising
expenditures to $200
million to convince
people they can make
their own investment
decisions.
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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
18
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Market
Development
Defined
Example
•
•
19
Introducing
present products
or services into
new geographic
area
Khuzendar Tiles maker
introduce his product
to Gulf markets.
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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
20
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Product
Development
Example
Defined
•
Seeking increased
sales by improving
present products
or services or
developing new
ones
21
•
•
Apple developed the
G4 chip that runs at
500 megahertz.
Khuzendar Tiles maker
introduce Ceramic as a
new product.
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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
22
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Diversification Strategies
•
•
•
23
Concentric diversification
Conglomerate diversification
Horizontal diversification
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Concentric
Diversification
Defined
•
Adding new, but
related, products
or services
24
Example
IUG introduce a PhD
program in Art.
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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
25
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Conglomerate
Diversification
Example
Defined
•
Adding new,
unrelated products
or services
26
•
Consultant
Construction
Engineering acquired
Biscuits factory.
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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
27
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Horizontal
Diversification
Defined
Example
•
•
Adding new,
unrelated products
or services for
present customers
28
Construction materials
factory began to
produce animal food,
to be sold to present
customers.
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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 sales
patterns compared to existing products
29
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Defensive Strategies
•
•
•
•
30
Joint venture
Retrenchment
Divestiture
Liquidation
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Joint Venture
Defined
Example
•
•
Two or more
sponsoring firms
forming a separate
organization for
cooperative
purposes
31
Lucent Technologies
and Philips Electronic
NV formed Philips
Consumer
Communications, to
make and sell
telephones.
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Guidelines for Joint Venture






32
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., Salah Eddeen Street in
Gaza)
Two or more smaller firms have trouble competing with
larger firm
A need exists to introduce a new technology quickly
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Retrenchment
(turnaround)
Defined
•
Regrouping through
cost and asset
reduction to reverse
declining sales and
profit. Sometimes it is
called turnaround or
reorganizational
strategy.
33
Example
•
A company sold off a
land and 4 apartments
to raise cash needed.
It introduce expense
effective control
system.
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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.

34
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Divestiture
Defined
Example
•
•
Selling a division
or part of an
organization
35
Harcourt General, the
large US publisher, is
selling its Neiman
Marcus division.
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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.
36
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Strategies in Action
Liquidation
Defined
•
Selling all of a
company’s assets,
in parts, for their
tangible worth
37
Example
•
El-Ameer Block factory
sold all its assets and
ceased business.
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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
38
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Michael Porter’s Generic
Strategies
Cost Leadership Strategies
(Low-Cost & Best-Value)
Differentiation Strategies
Focus Strategies
(Low-Cost Focus &
Best-Value Focus)
39Ch 5 -
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Business Unit Strategies
• Here we answer the question:
How should we compete in the chosen industry?
Cost leadership
Differentiation (real or perceived).
Mixed
Focus
40
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Business Strategy
Focuses on improving competitive
position of company’s products or
services within the specific industry
or market segment
416-
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Porter’s Competitive Strategies
Generic Competitive Strategies -–Lower Cost strategy
•Greater efficiencies than
competitors
–Differentiation strategy
•Unique/superior value, quality,
features, service
426-
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Porter’s Competitive Strategies
Competitive Advantage -–Determined by Competitive Scope
•Breadth of the target market
436-
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Porter’s Competitive Strategies
446-
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Prof. Dr. Majed El-Farra 2012
16
45Ch
،‫آذار‬523-
Porter’s Competitive Strategies
Cost Leadership -–Low-cost competitive strategy
–Broad mass market
–Efficient-scale facilities
–Cost reductions
–Cost minimization
466-
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Michael Porter’s Generic Strategies
• Cost leadership emphasizes producing standardized products
at a very low per-unit cost for consumers who are pricesensitive.
• 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.
47Ch 5 -
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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.
48Ch 5 -
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Cost leadership
• The basic idea behind a cost leadership strategy is to
underprice competitors or offer a better value and
thereby gaindriving some competitors out market share
and sales, of the market entirely.
• 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.
49Ch 5 -
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Benefits
•
•
•
50
Provides a defense against competitors
Provides a barrier to entry
Generates increased market share
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Corporate Value Chain
51
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Porter’s Competitive Strategies
Differentiation –
–Broad mass market
–Unique product/service
–Premiums charged
–Less price sensitivity
526-
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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
53Ch 5 -
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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.
54Ch 5 -
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Differentiation
•
Common organizational requirements for a
successful differentiation strategy include
strong coordination among the R&D and
marketing functions and substantial
amenities/incentives to attract scientists and
creative people.
55Ch 5 -
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Benefits
•
•
•
•
56
Lowers customers sensitivity to price
Increases buyer loyalty
Barrier to entry
Can generate higher profits
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Focus
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.
• 1.
57Ch 5 -
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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.
58Ch 5 -
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Porter’s Competitive Strategies
Cost-Focus –
–Low-cost competitive
strategy
–Focus on market segment
–Niche focused
–Cost advantage in market
segment
596-
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Porter’s Competitive Strategies
Differentiation Focus –
–Specific group or geographic
market focus
–Differentiation in target
market
–Special needs of narrow
target market
606-
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Porter’s Competitive Strategies
Stuck in the middle –
–No competitive advantage
–Below-average performance
616-
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
6-62
Prentice Hall, Inc.
©2012
Risks of Generic Strategies
Risks of Cost
Risks
ofof
Differentiation
Risks
Differentiation
Leadership
Differentiation
is not
Risks of Cost
Leadership Differentiation
is not
Cost
leadership
is not
sustained:
Cost
leadership
is not
sustained:
sustained:
Competitorsimitate.
imitate.
sustained:
• • Competitors
Competitorsimitate.
imitate.
• Bases for
•• Competitors
• Bases for differentiation
Technologychanges.
changes.
•• Technology
becomedifferentiation
less important
Otherbases
bases for
for cost
cost
become
less
important
•• Other
to buyers.
leadership
erode.
to
leadership
erode.
•Cost proximity is lost.
in
buyers.
•Proximity inProximity
differentiation
•Differentiation focusers
differentiation is lost.
Cost proximity
is lost.
is lost.
achieve
even greater
Costfocusers/competitors
focusers achieve
Differentiationinfocusers
•Cost
differentiation
even
lower
cost
in in
achieve even greater
achieve
even
lower
cost
segments.
segments.
differentiation in
segments.
segments.
636-
Prof. Dr. Majed El-Farra 2012
Risks
of Focus
Risks of
Focus
focus
strategy
TheThe
focus
strategy
is is
imitated:
imitated:
target
segment
The The
target
segment
becomes
structurally
becomes
structurally
unattractive:
unattractive:
• Structure
erodes.
• Structure
erodes.
Demand disappears.
disappears.
•• Demand
targeted
BroadlyBroadly
targeted
competitors overwhelm
overwhelm
competitors
the segment:
the segment:
The segment’s
• The•segment’s
differences
differencesfrom
fromother
other
segments
narrow.
segments narrow.
•
The advantages
advantages of
of a
a
• The
broadline
lineincrease.
increase.
broad
New
focusers
subsegment
New
focusers
subsegment
the
the industry. industry.
16 ،‫ آذار‬23
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.
64
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
purchasing & materials management
(as example)
Buying materials in quantity, quality and cost
which correspond with the corp. generic
strategies (Business Unit strategies).
65
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
Hyper-competition and Competitive
Advantage Sustainability
Competitive advantage in a hyper-competitive
market is characterized by a continuous series
of multiple short- term initiatives that replace
current products with new products before
competitors can do so.
• Leads to an over emphasis on short-term
tactics
6-66
Prentice Hall, Inc.
©2012
Competitive Tactics
Tactic- a specific operating plan that details
•
6-67
how a strategy is going to be
implemented in terms of when and
where it is to be put into action
Narrower in scope and shorter in time
horizon than strategies
Prentice Hall, Inc.
©2012
Timing Tactics: When to Compete
Timing Tactics- when a company implements a
strategy
•
•
6-68
First movers
Late movers
Prentice Hall, Inc.
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Cooperative Strategies- used to gain a
competitive advantage within an
industry by working with other firms
6-69
Prentice Hall, Inc.
©2012
Collusion- the active cooperation of firms/
suppliers within an industry to reduce
output and raise prices to avoid
economic law of supply and demand
6-70
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©2012
Strategic Alliances- a long-term cooperative
arrangement between two or more
independent firms or business units that
engage in business activities for mutual
economic gain Used to:
• Obtain or learn new capabilities
• Obtain access to specific markets
• Reduce financial risk
• Reduce political risk
6-71
Prentice Hall, Inc.
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Types of Cooperative Agreements
•
•
•
•
6-72
Mutual Service Consortia
Joint Venture
Licensing Arrangements
Value-Chain Partnerships
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©2012
1.What industry forces might cause a favorable
niche to disappear?
2.Is it possible for a company or business unit
to follow
a cost leadership and a differentiation strategy
simultaneously? Why or why not?
3. Why are strategic alliances temporary?
6-73
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©2012
• What kind of internal factors help
managers determine whether a firm
should emphasize the production
and sales of a large number of lowpriced products or a small number
of high-priced products?
74
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
• 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.
75
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
• low-priced products suggests a large capital
intensive manufacturing facility.
• 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
76
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
• Is it possible for a company or
business unit to follow a cost
leadership strategy and a
differentiation strategy
simultaneously? Why or why
not?
77
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
• 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 belowaverage performance.
78
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
• 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.
79
Prof. Dr. Majed El-Farra 2012
16 ،‫ آذار‬23
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.
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How can a company overcome the limitations
of being in a fragmented industry?
• 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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