Strategic formulation
Strategy Formulation
Vision & Mission
External Opportunities & Threats
Internal Strengths & Weaknesses
Long term objectives
Alternative Strategies
Strategy Selection
Strategies in Action
Strategies for taking the hill won’t
necessarily hold it. –
Amar Bhide
The early bird may get the worm, but the
second mouse gets the cheese. –
Unknown
Types of Generic Strategies
• Integration Strategies: related to industrial
value chain
• Intensive Strategies: markets size and
market share
• Diversification Strategies: a movement into
other business areas
• Defensive Strategies: related to those
when company is in “trouble”
Types of Strategies
Forward
Integration
Integration
Strategies
Backward
Integration
Horizontal
Integration
Forward Integration Strategies
Attempts to gain control over:
Distributors and Retailers
should be adopted when:
Current distributors – expensive or unreliable
Availability of quality distributors – limited
Firm competing in industry expected to grow
markedly
Firm has both capital & HR to manage new
business of distribution
Current distributors have high profit margins
Backward Integration
Strategies
Control of Firm’s suppliers
should be adopted when:
Current suppliers – expensive or unreliable
# of suppliers is small; # of competitors is large
High growth in industry sector
Firm has both capital & HR to manage new
business
Stable prices are important
Current suppliers have high profit margins
Horizontal Integration
Strategies
Control of Firm’s Competitors
should be adopted when:
Gain “lawful” monopolistic characteristics with
out government challenge
Competes in growing industry
Increased economies of scale – a major
competitive advantage by increase in size
Faltering due to lack of managerial expertise or
need for particular resource
Types of Strategies
Market
Penetration
Intensive
Strategies
Market
Development
Product
Development
Market Penetration Strategies: Increased
Market Share of Present products/services
or Present markets
Strategy should be adopted when :
Current markets not saturated
Rate of present customers can be increased
significantly
Shares of competitors declining; industry sales
increasing
Increased economies of scale (increase units of
production cause reduction in average cost to
produce a unit) provide major competitive advantage
Market Development Strategies: New
Markets -- Present products/services to
new geographic areas
Strategy should be adopted when :
New channels of distribution – reliable, inexpensive,
good quality
When Firm is successful at what it does
Untapped/unsaturated markets
Excess production capacity
Basic industry rapidly becoming global
Product Development Strategies:
Increased Sales -- Improving present
products/services or developing new
products/services
Strategy should be adopted when :
Products in maturity stage of life cycle
Industry characterized by rapid technological
development
Competitors offer better-quality products @
comparable prices
Strong R&D capabilities
Types of Strategies
Related
Diversification
Diversification
Strategies
Unrelated
Diversification
Related Diversification Preferred
To Capitalize on:
• Combining the related activities of
separate businesses into a single
operation to lower costs
• Cross-business collaboration to create
competitively valuable resource strengths
and capabilities
Related Diversification May be Effective
When:
• An organization competes in a no-growth
or a slow growth industry
• New, but related, products have seasonal
sales levels that counterbalance an
organization’s existing peaks and valleys
• An organization’s products are currently in
the declining stage of the product’s life
cycle
Unrelated Diversification
• Favours capitalising on a portfolio of
businesses that are capable of delivering
excellent financial performance
• Entails hunting to acquire companies:
– Whose assets are undervalued
– That are financially distressed
– With high growth potential but are short on
investment capital
Unrelated Diversification May be Effective
When:
• An organization’s current distribution channels
can be used to market new products to existing
customers
• An organization has the capital and managerial
talent to compete successfully in a new industry
• An organization’s basic industry is experiencing
declining annual sales and profits
• An organization has the opportunity to purchase
an unrelated business as an attractive
investment opportunity
Types of Strategies
Retrenchment
Defensive
Strategies
Divestiture
Liquidation
Defensive Strategies
 Retrenchment: reduce Costs & assets to
reverse declining sales & profit
Divesture: Selling a division or part
of an organization
Liquidation: Sell Company’s assets,
in parts, for only their tangible worth;
not for their copyrights …
Retrenchment Strategies
Guidelines -Failed to meet objectives & goals consistency; has
distinctive competencies
Firm is one of weaker competitors
Inefficiency, low profitability, poor employee morale,
pressure for stockholders
Strategic managers have failed
Rapid growth in size; major internal reorganization
necessary
Divestiture Strategies
Guidelines -Retrenchment failed to attain improvements
Division needs more resources than are available
Division responsible for firm’s overall poor
performance
Division is a mis-fit with organization
Large amount of cash is needed and cannot be
raised through other sources
Liquidation Strategies
Guidelines -Retrenchment & divestiture failed
Only alternative is bankruptcy
Minimize stockholder loss by selling firm’s assets
Michael Porter’s Generic Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
Generic Strategies
Low Cost strategy: the basic idea
underprice competitors or offer a better value
thereby gain market share and sales
 driving some competitors out of the market entirely.
Cost Leadership: lowest/best price
•
Ways of ensuring total costs across value
chain are lower than competitors’ total
costs
1. Perform value chain activities more efficiently
than rivals and control factors that drive costs
2. Revamp the firm’s overall value chain to
eliminate or bypass some cost-producing
activities
Cost Leadership: lowest/best price
•
Can be especially effective when:
1. Price competition among rivals is vigorous
2. Rival’s products are identical and supplies
are readily available
3. Most buyers use the product in the same way
4. Buyers are large and have significant power
5. Industry newcomers use low prices to attract
buyers
Differentiation: Unique products
producing products that are considered unique
allows a firm to charge higher prices
gain customer loyalty

risk associated with differentiation strategy:
unique product may not be valued highly enough by customers to
justify the higher price.:
Some of the requirements for a successful differentiation strategy:
strong coordination among the R&D and marketing functions
substantial amenities to attract scientists and creative people.
Differentiation
•
Can be especially effective when:
1. There are many ways to differentiate and
many buyers perceive the value of the
differences
2. Buyer needs and uses are diverse
3. Few rival firms are following a similar
differentiation approach
4. Technology change is fast paced and
competition revolves around evolving product
features
Generic Strategies
Focused Strategies (Type 4 & 5)
two types:
producing products and services that fulfill the
needs of small groups of consumers (niche
market).
 products or services to a small range (niche) of
customers at the lowest price available on the
market. (focused differentiation)
Focused Strategy
•
Can be especially effective when:
1. The target market niche is large, profitable,
and growing
2. Industry leaders do not consider the niche
crucial
3. Industry leaders consider the niche too costly
or difficult to meet
4. The industry has many different niches and
segments
5. Few, if any, other rivals are attempting to
specialize in the same target segment
Using Information Systems to Achieve Competitive
Advantage
• Low-cost leadership
 Use information systems to achieve the lowest operational
costs and the lowest prices
 E.g., Walmart
• Inventory replenishment system sends orders to
suppliers when purchase recorded at cash register
• Minimizes inventory at warehouses, operating costs
• Efficient customer response system
Using Information Systems to Achieve Competitive Advantage
• Example
• Supermarkets and large retail stores such as Walmart use sales data
captured at the checkout counter to determine which items have sold
and need to be reordered.
•
Walmart’s continuous replenishment system transmits orders to
restock directly to its suppliers. The system enables Walmart to keep
costs low while fine-tuning its merchandise to meet customer
demands.
Using Information Systems to Achieve
Competitive Advantage
• Product differentiation
 Use information systems to enable new products and
services, or greatly change the customer convenience in
using your existing products and services
 E.g., Google’s continuous innovations, Apple’s iPhone
 Use information systems to customize, personalize products
to fit specifications of individual consumers
• E.g., Nike’s iD program for customized sneakers
Using Information Systems to Achieve
Competitive Advantage
• Focus on market niche
 Use information systems to enable specific market focus,
and serve narrow target market better than competitors
• Analyzes customer buying habits, preferences
• Advertising pitches to smaller and smaller target
markets
 E.g., Hilton Hotel’s OnQ System
• Analyzes data collected on guests to determine
preferences and guest’s profitability
Using Information Systems to Achieve
Competitive Advantage
• Strengthen customer and supplier intimacy
 Strong linkages to customers and suppliers increase
switching costs and loyalty
 Toyota: uses IS to facilitate direct access from suppliers to
production schedules
• Permits suppliers to decide how and when to ship supplies to
plants, allowing more lead time in producing goods.
 Amazon: keeps track of user preferences for purchases,
and recommends titles purchased by others
Using Information Systems to Achieve
Competitive Advantage
• Successfully using IS to achieve
competitive advantage requires precise
coordination of:
– technology,
– organizations,
– and people
Question
• Describe three of the following types of generic
strategies: integration, intensive, diversification
or defensive
(9 marks)
• Explain, using suitable example, when any two
of these strategies could be used. (8 marks)
• Discuss the type of strategy: integration,
intensive, diversification or defensive, which you
would consider to be most appropriate for the
D.I.T. in the current economic climate.
(13 marks)
Questions
• Describe three of the following types of generic
strategies: integration, intensive, diversification or
defensive
(10 marks)
• Describe two of Porter’s strategies’s: low-cost,
differentiation and focus.
(8 marks)
• Explain the relationship between these two strategies
and the size of the market.
(6 marks)
• Compare, using examples, any one of the generic
strategies with any one of Porter’s strategies (6 marks)