Introduction
IDENTIFYING
STRATEGIC
ALTERNATIVES
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Strategies
The corporate world is in the process of a
global transformation.
Mergers, acquisitions, outsourcing and
downsizing are becoming common word
everywhere.
Privatization is allowing free enterprise to take
on functions that previously were the domain
of government.
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Levels(Hierarchy) of Strategy
A strategy of a corporation forms a
comprehensive master plan stating how the
corporation will achieve its mission and
objectives.
It maximizes competitive advantage and
minimizes competitive disadvantage.
Strategy may be formulated at the
corporate level, business level and
functional level.
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Corporate strategy
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Corporate strategies regard broad decisions
about the scope, direction and position of the
organization in the long-term.
In general, this level of strategy formulation
defines the organizational growth objectives
and the actions to achieve them.
In addition, it also regards the portfolio of
different line of business and its degree of
diversification and integration within the
portfolio.
Corporate strategy is one, which decides
what business the organization should be in,
and how the overall group of activities
should be structured and managed.
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In other words, corporate strategies are
formulated to define what we do sell and where
we do sell it.
From the classic point of view of markets and
competition, this becomes the strategy
defining what is (are) our product(s), how
diversified and integrated is production, and
the place in the market in which the
organization will compete.
Stability strategies
Stability Strategies - continuing activities without
any significant change in direction.
No change strategy - continuance of current
operations and policies
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Therefore, one of the important goals of a
business enterprise is stability to safeguard its
existing interests and strengths, to pursue well
established and tested objectives, to continue in
the chosen business path, to maintain
operational efficiency on a sustained basis, to
consolidate the commanding position already
reached, and to optimise returns on the
resources committed in the business.
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Retrenchment strategies
This strategy is used when the firm has a weak
competitive position in some or all of its product lines
from poor performance;
Focusing on functional improvement – reducing cost
Reducing the number of functions
Reducing the number of markets and products.
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Growth strategy
A business organization can redefine its
business by divesting a major product line or
market.
The nature, extent and timing of retrenchment
are matters to be carefully decided by
management,
depending
upon
each
contingency.
The enterprise has several options open to it in
designing and acting upon its strategy.
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Growth strategy is a corporate level strategy,
designed to achieve increase in sales, assets and
profits.
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Corporate growth strategies
Growth can be promoted internally by investing
in expansion or externally by acquiring
additional business divisions.
Internal growth = can include development of new
or changed products
External growth = typically involves diversification
– businesses related to current product lines or
into new areas
Horizontal Integration
Concentration
Vertical Integration
Forward or Backward
Corporate
Growth
Diversification
Related or Unrelated
International
Global or Multi-domestic
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Seeking ownership or increased control
over competitors
Horizontal integration strategy
Potential benefits of horizontal integration
A firm is said to follow horizontal integration
if it acquires another firm that produces the
same type products with similar production
process/marketing practices.
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Reduce the threat
from substitutes
Increase market power over suppliers
and buyers
May help increase market penetration
and/or expand market coverage
geographically
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Gain scale economies in production
Cost savings from economics of scope by
combining
similar
operations
(e.g.,
marketing and distribution) of different
companies and reducing duplication of
resources;
Create value through product bundling,
total solution and cross selling.
Drawbacks of horizontal integration
Not easy to integrate
operations of
companies with different cultures
Synergies may be more imaginary
than real
Reduction
in
competition
can
generate antitrust issues
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Vertical integration Strategy
Vertical integration occurs when a company
produces its own inputs or disposes of its own
outputs.
Seeking ownership or increased control over
distributors (forward integration) or over
suppliers (backward integration).
Diversification
Diversification is considered to be a complex
one because it involves a simultaneous
departure from current business, familiar
products and familiar markets.
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Firms choose diversification when the growth
objectives are very high and it could not be
achieved within the existing product/market
scope.
Mergers, Acquisitions
& Mutual service
Consortia
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Mergers
Mergers & Acquisitions
Mergers and acquisitions represent the
ultimate in change for a business.
No other event is more difficult, challenging,
or chaotic as a merger and acquisition.
It is imperative that everyone involved in the
process has a clear understanding of how the
process works.
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A transaction where two firms agree to
integrate their operations on a relatively
coequal basis because they have resources
and capabilities that together may create a
stronger competitive advantage.
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Mergers can be categorized as follows:
Vertical: Two firms are merged along the valuechain, such as a manufacturer merging with a
supplier.
Vertical mergers are often used as a way to gain a
competitive advantage within the marketplace.
For example, Merck, a large manufacturer of
pharmaceuticals, merged with Medco, a large
distributor of pharmaceuticals, in order to gain an
advantage in distributing its products.
Horizontal: Two firms are merged across similar
products or services.
Horizontal mergers are often used as a way for a
company to increase its market share by merging
with a competing company.
For example, the merger between BP and Mobil will
allow both companies a larger share of the oil and
gas market.
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Acquisitions
Reasons for M & A
A transaction where one firm buys another
firm with the intent of more effectively using
a core competence by making the acquired
firm a subsidiary within its portfolio of
businesses.
Every merger has its own unique reasons why
the combining of two companies is a good
business decision.
The joining or merging of the two companies
creates additional value which we call
"synergy“ value.
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Synergy value can take three forms:
1. Revenues: By combining the two companies,
we will realize higher revenues than if the two
companies operate separately.
2. Expenses: By combining the two companies,
we will realize lower expenses than if the two
companies operate separately.
3. Cost of Capital: By combining the two
companies, we will experience a lower overall
cost of capital
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For the most part, the biggest source of synergy
value is lower expenses.
Many mergers are driven by the need to cut
costs.
Cost savings often come from the elimination
of redundant services, such as Human
Resources,
Accounting,
Information
Technology, etc.
However, the best mergers seem to have
strategic reasons for the business combination.
These strategic reasons include:
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Positioning - Taking advantage of future
opportunities that can be exploited when the
two companies are combined.
For example, a telecommunications company
might improve its position for the future if it
were to own a broad band service company.
Companies need to position themselves to
take advantage of emerging trends in the
marketplace.
Gap Filling - One company may have a
major weakness (such as poor distribution)
whereas the other company has some
significant strength.
By combining the two companies, each
company fills-in strategic gaps that are
essential for long-term survival.
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Organizational
Competencies
Acquiring
human
resources and
intellectual capital can help improve
innovative thinking and development
within the company.
Broader Market Access - Acquiring a
foreign company can give a company
quick access to emerging global markets.
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Mutual service consortia
A mutual service consortium is a partnership
of similar companies in similar industries who
pool their resources to gain a benefit that are
too expensive to develop alone such as access
to advance technology. – refer UMOJA ATM
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Business Strategy
Business strategy focuses in improving the
competitive position of a company or a business
unit’s product or service within its industry or within
the market segment the company serves.
Business strategy can be competitive (battling with
all the competitors for advantage) or cooperative
(combining with one or two competitors to compete
with other competitors).
Business strategy
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At this level, the main objective is to develop and sustain
competitiveness in all the lines of business the
organization has decided to participate.
A popular theoretical and conceptual framework in
businesses that regards this strategic level is competitive
advantage.
One can say that, a firm that generates profit over the
average of its industry has a competitive advantage over
rival firms.
From a strategic point of view, the objective is to sustain
such an advantage over time as long as possible.
Strategic business unit
As the number and diversity of products increases the
structure is likely to be centered upon division called
Strategic Business Unit (SBU).
SBU are responsible individually for developing,
manufacturing and marketing their own product or
group of products.
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Strategic Business Area (SBA)
SBA is a distinctive segment of the
environment in which the firm does want to
do business.
A company instead of trying to compete in all
the area, it selects the area of its competitive
advantage and invest its money and strategies
in that area.
This helps the company to concentrate
its strategies in a particular area and to
reduce the unnecessary expenses in nonprofitable area.
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PORTER’S GENERIC
COMPETITIVE STRATEGY
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Porter has defined three generic strategies to
cope up with the five competitive forces and to
outperform other companies in the industry:
To outperform other companies in the
industry, the company has to follow any
of the above said three strategies.
Overall cost leadership
Differentiation
Focus
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This strategy underscores the company’s strength in
efficiency
Example: Wal-Mart
Cost leadership strategy
The objective of this kind of strategy is
to achieve overall cost leadership in the
industry through cost focus on various
functional areas.
The low cost strategy requires the player to gain
relatively higher market share than any other
competitors, which requires production in higher
volumes.
This requires higher initial investment of the company
for state-of-the-art production, aggressive pricing and
start up price losses to build the market share.
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To be successful, the cost leadership strategy
requires:
Relatively standardized products
Products serve needs of buyers in the
broadest market segment
Strong price competition with highly pricesensitive buyers
Constant tight control of production costs
and overhead costs
Mass production to achieve economies of
scale
Superior operating efficiency that is hard
for competitors to match
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Differentiation strategy
Risks
Loss of cost advantage due to, e.g.,
imitation or technological advances of
competitors
Too fixated on reducing costs and ignoring
buyers’ needs
Customer preferences change toward more
differentiated products
This strategy underlines the company’s
strength in offering unique products
Examples: Apple Inc.,
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uniqueness either in the product or the
service offered by the company.
This differentiation could be achieved in
technology, design or brand image, features,
customer service, dealer network etc.
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Differentiation provides the company with
increased customer loyalty.
This insulates the firm from the other
competitors and also from the new entrants.
Differentiation yields higher margins and it
clearly mitigates buyer power, since buyers
lack alternative for comparison.
To be successful, the differentiation strategy
requires:
Perceived uniqueness in product attributes
Customers have low price sensitivity and are
willing to pay a premium price
Strong marketing skills to sustain a distinct
brand image and maintain customer loyalty
Constant review of market trends
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Focus (segmentation) strategy
Risks
Prices are too high to be justified by the
product’s differentiated features
Over-differentiating such that product
attributes exceed buyers’ needs
Loss of differentiation due to imitation by
competitors
Customer tastes can change toward more
standardized products
The final generic strategy is focusing on a particular
buyer group, segment of the product line, or
geographic market.
To gain a competitive advantage by meeting the
specialized needs of a narrow market segment
The entire focus or niche strategy is built around
serving a particular target fully.
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To be successful, the focus strategy requires:
The industry has many market segments,
creating focusing opportunities
Ability to identify right niche markets that are
less vulnerable to substitutes or where
competition is weakest.
Few other rivals are focusing on the same target
market
Strong customer loyalty.
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Risks
The broad-market leader may find effective
ways to serve the target market
The market segment may become
appealing enough to attract other rivals,
depressing the profitability in serving the
already small market segment
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Portfolio analysis
in which the firm
The industries or markets
Portfolio analysis: BCG
matrix
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BOSTON CONSULTING GROUP
MATRIX ( BCG )
competes through its products and business
units.
In portfolio analysis, top management views
its product lines and business units as a series
of portfolio investment and constantly keep
analyzing for a profitable return.
Two of the most popular strategies are the BCG
Growth Share matrix and GE business screen.
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CORPORATE PORTFOLIO STRATEGY
Boston
Consulting
Group (BCG) Matrix:
This technique is particularly useful for
multi-divisional or multiproduct companies.
The divisions or products compromise the
organizations “business portfolio”.
The composition of the portfolio can be
critical to the growth and success of the
company.
Market Share
High
Low
High
STARS
QUESTION MARKS
Low
CASH COWS
DOGS
Market Growth
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Stars
Question Marks ???
Businesses with a high market share in a
fast-growing market.
They can generate significant cash flows
but may also need a lot of resources to
sustain their growth.
Strategy Implications
Businesses with little market share but a
high growth potential.
These businesses are cash users and can
be risky.
Strategy Implications
Continue to increase market share—even at
the expense of short-term earnings
If possible to dominate segment, go after
share. If not, redefine the business or
withdraw
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Cows
Businesses that have a high market share
in a slow-growth market.
They generate dependable cash flows to
fund business units with better growth.
Strategy Implications
Maintain market share and cost leadership
until further investment becomes marginal
The BCG is simple and useful technique for
strategic analysis.
It is convenient for multi-product or
multi-divisional companies.
It focuses on cash flow and is useful for
investment and marketing decisions.
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Dogs
with a low market
Businesses
share in a
slow-growth market.
Such businesses can still be profitable but
the company will not invest in them any
further and may even consider selling them.
Strategy Implications
Plan an orderly withdrawal to maximize cash
flow
Managers manage portfolio (or collection) of businesses
using a corporate portfolio matrix such as the BCG
Matrix.
BCG Matrix
o Developed by the Boston Consulting Group
o Considers market share and industry growth rate
o Classifies firms as:
Cash cows: low growth rate, high market share
Stars: high growth rate, high market share
Question marks: high growth rate, low market
share
Dogs: low growth rate, low market share
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Functional strategies
Strategy that is related to each functional area
of business such as production, marketing and
personnel is called functional strategy.
Developing functional
strategies
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It is designed and managed in a coordinated
way so that they interrelate with each other
and at the same time collectively allow the
competitive strategy to be implemented
properly.
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These aim to secure effective and efficient
operations within specific functional areas so
that they support business-level and
corporate-level strategies:
Marketing & Sales
Decide
on
product
choices,
pricing,
distribution, promotion, and
customer
service
Financial management
Deal with capital acquisition, capital
allocation,
dividend
policy,
investment, and cash flow management
Production & operations management
Address choices about where and how product
will be
manufactured, technology to be
used, management of resources, purchasing,
quality control, inventory control, and relations
with suppliers.
R&D
Process development and product development
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Concluding remarks
Know what’s happening with strategies currently
being used by monitoring and measuring results.
Information systems
Deal with office automation, decision
support, and operational support
Human resources management
Deal with work flow control, pay and
incentives,
recruiting,
orientation,
training, staffing, and labor relations
Encourage employees to be open about
disclosing and sharing negative information.
Get new ideas and perspectives from outside the
organization.
Have multiple alternatives
strategic decisions.
when
making
Learn from mistakes.
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8–70
This marks the end of this
topic
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