Strategic management
Lecture 6.
Strategic alternatives, strategic
options
The most important strategic problems (1)
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Decreasing profitability and low
return on investment
Decreasing market share
Decreasing stockholder wealth
Deteriorating financial position
Rising overall costs
Growing debt and week balance
sheet
The most important strategic problems (2)
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Deterriorating of competitive
advantages
Decreasing quality, and the loyalty of
main customers
The growth rate lower than the
industry avarage
Obsolate facilities and technical
infrastructure
The most important strategic problems (3)
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Decreasing innovativity, slow product
innovation
Weakening the brand image
Lots of underutilised plant capacity
Entry a new strong competitor, or
increasing competition within the
industry
Costly new regulatory requirements
Long-term shift in buyer needs
DEVELOPMENT
STRATEGIES
What
basis?
Bases of competitiv
strategy
Cost
leadership
Differentiation
Which
direction?
Alternative
Directions
Alternative
methods
Protect and build
Internal development
Market penetration
Acquisition
Product development
Joint Development/
alliances
Market development
Focus strategies
How?
Diversification:
related
unrelated
Porter’ generic strategies
Porter’s experience
Differentiation
Cost leadership
Market share
Sources of Competitive Advantage
COST
ADVANTAGE
COMPETITIVE
ADVANTAGE
DIFFERENTIATION
ADVANTAGE
PORTER’S generic strategies
Competitive
Competitive advantages:
advantages: Low cost
Differentiation.
Low cost leadership
Scope of
activities:
broad
Standard products
Differentiation
Unique products
Great volume
Small volume
Low production costs
High production cost
Best cost provider
Scope of
activities:
narrow
Low cost leadership
focus
Differentiation
focus
Low cost leadership
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Production emphasis: ‘nobody could do it
cheaper’
Marketing/production emphasis: ‘Low prices and
outstanding value for money’
Operating culture: no frills, reputation for being
‘lean and mean’
Economies of scale from high volume
Process innovation to cut costs
High productivity per employee
Price cuting as an offensive or defensive weapon
Low profit marginsin return for high volume
Broad differentiation
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Production emphasis: ‘nobody could make it better’
Marketing/production emphasis: ‘Simply the best there is’
Operating culture: many frills – the widest range of options
and features, something for every taste.
Creating something different from competitors
product/services
Product innovation to bring new products with new options
to the market.
Premium pricing to cover cost of differentiation
Low volume but high profit margin
Intensive adertising and sales efforts
Focus strategies
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Production emphasis: ‘we taylor our products to
meet your particular needs’
Production emphasis: ‘Just for you’
Specialization: buyer segments, geographic
areas, final-use applications.
Marketing emphasis: We’ar not a ‘Jack of all
trade’, we are master of one.
Competitive advantage in target segment
depends on either:
1. Low cost leadership (spaecialised experience or
knowledge advantage)
2. Succesfull differentiation (offering somethig unique)
Features of Cost Leadership and
Differentiation Strategies
Generic strategy
COST
LEADERSHIP
DIFFERENTIATION
Key strategy elements
Resource & organizational
requirements
Scale-efficient plants.
Access to capital. Process
Design for manufacture.
engineering skills.
Frequent
Control of overheads &
reports. Tight cost control.
R&D. Avoidance of
Specialization of jobs and
marginal customer
functions. Incentives for
accounts.
quantitative targets.
Emphasis on branding
and brand advertising,
design, service, and
quality.
Marketing. Product
engineering. Creativity.
Product R&D
Qualitative measurement
and incentives. Strong
cross-functional
coordination.
Differentiation and Segmentation
DIFFERENTIATION: is concerned with how a firm distinguishes
its offerings from those of its competitors (i.e. How the firm
competes)
SEGMENTATION: is concerned with which customers, needs,
localities a firm targets (i.e. Where the firm competes)
DOES DIFFERENTIATION IMPLY SEGMENTATION?
—Not necessarily, depends upon the differentiation strategy:
BROAD SCOPE DIFFERENTIATION
Appealing to what is common
between different customers
(McDonalds, Honda, Gillette)
FOCUSED DIFFERENTIATION
Appealing to what distinguishes
different customer groups
(Harley-Davidson, Ralph Lauren)
Drivers of Cost Advantage
ECONOMIES OF SCALE
ECONOMIES OF LEARNING
PRODUCTION TECHNIQUES
PRODUCT DESIGN
INPUT COSTS
CAPACITY UTILIZATION
RESIDUAL EFFICIENCY
• Indivisibli\ties
• Specialization and division of labor
• Increased dexterity
• Improved organizational routines
• Process innovation
• Reengineering business processes
• Standardizing designs & components
• Design for manufacture
• Location advantages
• Ownership of low-cost inputs
• Non-union labor
• Bargaining power
• Ratio of fixed to variable costs
• Speed of capacity adjustment
• Organizational slack; Motivation &
culture; Managerial efficiency
The Nature of Differentiation
DEFINITION: “Providing something unique that is valuable to the
buyer beyond simply offering a low price.” (M. Porter)
THE KEY IS TO CREATE VALUE FOR THE CUSTOMER
TANGIBLE DIFFERENTATION
Observable product characteristics:
• size, color, materials, etc.
• performance
• packaging
• complementary services
INTANGIBLE
DIFFERENTATION
Unobservable and subjective
characteristics that appeal to
customer’s image, status,
identity, and desire for exclusivity
TOTAL CUSTOMER RESPONSIVENESS
Differentiation not just about the product, it embraces the whole
relationship between the supplier and the customer.
Strategy Development Directions
Source: Adapted from H. Ansoff, Corporate Strategy, Penguin, 1988, Chapter 6.
Exhibit 7.1
Protect and Build
Consolidation - Protect and strengthen position in
current markets with current products
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Downsizing or withdrawal from activities
Maintenance of market share
Market penetration - Organisation gains market share
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Leverage competences
Desirability of dominant market share
Market Development
Offer existing products in new markets
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New market segments with similar
CSFs
New uses for existing products
New geographic markets
Issues
• Normally requires some product
development and capability development
• Credibility and expectations
Product Development
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Associated dilemmas
• Expense, risk and potential unprofitability
• Unacceptable consequences of not
developing new products
Diversification
A strategy that takes the organisation away
from both its current markets and products
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Related diversification
Unrelated diversification
Reasons to diversify
Least power to create value
Reduce
risk
Maintain
growth
Most power to create value
Balance
cash
flows
Not recommended as a reason to
diversify
Share
infrastructure
Increase
market
power
Extend
competences
Recommended as a reason to diversify
Related diversification options for a manufacturer
BACKWARD INTEGRATION
Raw materials
manufacture
Raw materials
supply
Components
manufacture
Machinery
manufacture
Product/process
research/design
Machinery
supply
Financing
Components
supply
Transport
HORIZONTAL
INTEGRATION
Competitive
products
Manufacturer
By-products
Complementary
products
FORWARD
INTEGRATION
Distribution
outlets
Transport
Marketing
information
Repairs and
servicing
Methods of Strategy Development
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Internal Development
• Organic development
• Build on and develop an organisation’s own
capabilities
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Mergers and Acquisitions
• Take over ownership of another organisation
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Strategic Alliances
• Two or more organisations share resources and
activities
Advantages and disadvantages of internal
development
Avantages
Disadvantages
Can be relatively cheap
Can be relatively slow
You can manage on your
own
Lower investment than
buy a company
You can learn how to do
You lack of expertise
Its risky to enter a new
field
To learn a new
technology is slow
You can use existing
There are big difference
organization, and culture between two culture
Advantages and disadvantages of aquisition
Avantages
Disadvantages
Can be relatively fast
Premium paid: expensive
Cost savings from
economie of scale
Not alwais easy to dispose
of anwanted parts
Extend to new
geogrephic areas
Human relations problems
that can arise after
Buy market size and
share
Problem of clash of national,
and organizational culture
May reduce competition
from a rival
High risk if wrong company
targeted
Advantages and disadvantages of joint
venture
Avantages
Disadvantages
Builds scale quickly
Control lost to some extent
Obtain special expertise
quickly
Woks best where both parties
contribute something different
Cheaper than acquisition
Can be difficult to manage
Can be use when outright
acquisition not feasible
Profit share with partner
Can be used where similar
product available
Advantages and disadvantages of alliance
Advantages
Disadvantages
Can be build close
contacts with parener
Slow and plodding
approach
Use joint expertise and
commitments
Needs constant work to
keep relationship sound
Allows potential partners Partners may only have
to learn about each other limited commitments
Locks out other
competitors
Unlikely to build
economie of scale
Motives for Internal Development
Environment Capabilities
Expectations
Lack of choice –
breaking new
ground/only one
in field
Develop highly
technical products inhouse to create core
competence
Avoid culture clash
Inability to find
suitable
acquisition target
Develop new markets – Avoid potential
direct involvement to
incompatibility
increase understanding
& create core
competence
Spread cost over time
– easier for companies
with limited resources
Motives for Strategic Alliances
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Need for critical mass
• Cost reduction
• Improved customer offering
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Co-specialisation
• Each partner concentrates on using own
capabilities, e.g. geographical market
entry, value chain activities, Public
Finance Initiative
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Learning
• Helps to develop future competences
Motives for Mergers and Acquisitions
Environment
Capabilities
Expectations
Speed in fast-moving
product/market
Exploit core
competences in
new arena
Institutional
shareholders want
continuing growth
Competitive situation
– static market, avoid
competitor reaction
Address lack of
resources or
competences
Ambitions of senior
managers
Deregulation – created Cost efficiency
suboptimal units ripe
for acquisition
Financial –
Learning
opportunistic
acquisition of firm with
low share value
Speculative to
boost short-term
share value
Most important strategic answers (1)
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Globalization
Implementation of e-business or/and
related management methods
Merger and acquisitions
Create strategic alliances
Divest (harvest) and find new
industry or a new niche
Crisis management and consolidation
Most important strategic answers (2)
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Diversification and re-positioning the
company
Focus and back to basic
Benchmaring and outsourcing
Vertical and horizontal integration
Re-engineering the structure and
processes.
Rebuild the organizational culture
Create a new more competitive corporate
governance structure
Recent Approaches to Cost Reduction
CORPORATE
RESTRUCTURING
BUSINESS
PROCESS
REENGINEERING
Dramatic changes in strategy and structure
to adjust to the business conditions of the
1990’s
Key elements:
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Plant closures
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Outsourcing
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Delayering and cuts in administrative staff
The fundamental rethinking and radical
redesign of business processes to achieve
dynamic improvements in performance. e.g.:
Several jobs combined into one
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Steps of a process combined in natural
order
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Minimizing steps, controls, and
reconciliation
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Use case managers as single points of
contact
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Hybrid centralization/ decentralization
Types of and motives for strategic alliances
FORMS OF
ALLIANCE
INFLUENCES
Asset
management
Asset
separability
Asset
appropriability
Loose (market) Contractual
relationships
relationships
Formalised
ownership/
relationships
Formal
integration
Networks
Opportunistic
alliances
Subcontracted
Licences and
franchises
Consortia
Joint ventures
Acquisitions and
mergers
Assets do not
need joint
management
Asset
management
can be isolated
Assets cannot
be separated
High risk of assets
being appropriated
Assets need to be jointly
managed
Assets/skills can be separated
Low risk of assets being
appropriated
Assets cannot
be separated
High risk of
asset
appropriation