Types of Strategies
Level of strategies
1
Prof. Dr. Majed El-Farra 2009
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.
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Prof. Dr. Majed El-Farra 2009
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.
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Prof. Dr. Majed El-Farra 2009
Growth strategies
Growth strategies:
They result 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
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Prof. Dr. Majed El-Farra 2009
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 growth, stability or retrenchment.
This depends on why we use it.
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Prof. Dr. Majed El-Farra 2009
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
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Prof. Dr. Majed El-Farra 2009
Strategies in Action
Vertical Integration Strategies
•
•
•
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Forward integration
Backward integration
Horizontal integration
Prof. Dr. Majed El-Farra 2009
Strategies in Action
Forward
Integration
Defined
•
Gaining
ownership or
increased control
over distributors
or retailers
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Example
•
General Motors is
acquiring 10% of its
dealers.
Prof. Dr. Majed El-Farra 2009
Strategies in Action
Guidelines for Forward Integration
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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
Prof. Dr. Majed El-Farra 2009
Strategies in Action
Backward
Integration
Defined
•
Example
•
Seeking
ownership or
increased control
of a firm’s
suppliers
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Prof. Dr. Majed El-Farra 2009
Motel 8 acquired a
furniture
manufacturer.
Strategies in Action
Guidelines for Backward Integration
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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 2009
Strategies in Action
Horizontal
Integration
Defined
•
Example
•
Seeking
ownership or
increased control
over competitors
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Prof. Dr. Majed El-Farra 2009
Palestinian Islamic
Bank acquired CairoAmman Bank Islamic
transaction branch.
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
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Prof. Dr. Majed El-Farra 2009
Strategies in Action
Intensive Strategies
•
•
•
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Market penetration
Market development
Product development
Prof. Dr. Majed El-Farra 2009
Strategies in Action
Market
Penetration
Defined
•
Seeking increased
market share for
present products
or services in
present markets
through greater
marketing efforts
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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 2009
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
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Prof. Dr. Majed El-Farra 2009
Strategies in Action
Market
Development
Defined
Example
•
•
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Introducing
present products
or services into
new geographic
area
Khuzendar Tiles maker
introduce his product
to Gulf markets.
Prof. Dr. Majed El-Farra 2009
Strategies in Action
Guidelines for Market Development
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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
Prof. Dr. Majed El-Farra 2009
Strategies in Action
Product
Development
Example
Defined
•
Seeking increased
sales by improving
present products
or services or
developing new
ones
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•
•
Apple developed the
G4 chip that runs at
500 megahertz.
Khuzendar Tiles maker
introduce Ceramic as a
new product.
Prof. Dr. Majed El-Farra 2009
Strategies in Action
Guidelines for Product Development
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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
Prof. Dr. Majed El-Farra 2009
Strategies in Action
Diversification Strategies
•
•
•
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Concentric diversification
Conglomerate diversification
Horizontal diversification
Prof. Dr. Majed El-Farra 2009
Strategies in Action
Concentric
Diversification
Example
Defined
•
Adding new, but
related, products
or services
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•
National Westminister
Bank PLC in Britain
bought the leading
British insurance
company, Legal &
General Group PLC.
Prof. Dr. Majed El-Farra 2009
Strategies in Action
Guidelines for Concentric Diversification
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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
Prof. Dr. Majed El-Farra 2009
Strategies in Action
Conglomerate
Diversification
Example
Defined
•
Adding new,
unrelated products
or services
26
•
Consultant
Construction
Engineering acquired
Bisects factory.
Prof. Dr. Majed El-Farra 2009
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
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Prof. Dr. Majed El-Farra 2009
Strategies in Action
Horizontal
Diversification
Defined
•
Adding new,
unrelated products
or services for
present customers
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Example
•
Prof. Dr. Majed El-Farra 2009
The El-Awda Co.
provide ice-cream
product to present
customer
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
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Prof. Dr. Majed El-Farra 2009
Strategies in Action
Defensive Strategies
•
•
•
•
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Joint venture
Retrenchment
Divestiture
Liquidation
Prof. Dr. Majed El-Farra 2009
Strategies in Action
Joint Venture
Defined
Example
•
•
Two or more
sponsoring firms
forming a separate
organization for
cooperative
purposes
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Lucent Technologies
and Philips Electronic
NV formed Philips
Consumer
Communications to
make and sell
telephones.
Prof. Dr. Majed El-Farra 2009
Strategies in Action
Guidelines for Joint Venture
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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., Alaska pipeline)
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 2009
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.
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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 2009
Strategies in Action
Guidelines for Retrenchment
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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.
Prof. Dr. Majed El-Farra 2009
Strategies in Action
Divestiture
Defined
Example
•
•
Selling a division
or part of an
organization
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Harcourt General, the
large US publisher, is
selling its Neiman
Marcus division.
Prof. Dr. Majed El-Farra 2009
Strategies in Action
Guidelines for Divestiture
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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.
Prof. Dr. Majed El-Farra 2009
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 2009
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
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Prof. Dr. Majed El-Farra 2009
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 2009
Business Unit Strategies
• Here we answer the question:
How should we compete in the chosen industry?
Cost leadership
Differentiation (real or perceived).
Mixed
Focus
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Prof. Dr. Majed El-Farra 2009
Business Strategy
Focuses on improving competitive
position of company’s products or
services within the specific industry
or market segment
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Prof. Dr. Majed El-Farra 2009
Porter’s Competitive Strategies
Generic Competitive Strategies -–Lower Cost strategy
•Greater efficiencies than competitors
–Differentiation strategy
•Unique/superior value, quality, features,
service
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Prof. Dr. Majed El-Farra 2009
Porter’s Competitive Strategies
Competitive Advantage -–Determined by Competitive Scope
•Breadth of the target market
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Prof. Dr. Majed El-Farra 2009
Porter’s Competitive Strategies
446-
Prof. Dr. Majed El-Farra 2009
Prof. Dr. Majed El-Farra 2009
45Ch 5 -
Porter’s Competitive Strategies
Cost Leadership -–Low-cost competitive strategy
–Broad mass market
–Efficient-scale facilities
–Cost reductions
–Cost minimization
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Prof. Dr. Majed El-Farra 2009
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 2009
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 2009
Cost leadership
• The basic idea behind a cost leadership strategy is to
underprice competitors or offer a better value and
thereby gain market share and sales, driving some
competitors out of the market entirely.
• 5. 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 2009
Porter’s Competitive Strategies
Differentiation –
–Broad mass market
–Unique product/service
–Premiums charged
–Less price sensitivity
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Prof. Dr. Majed El-Farra 2009
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
51Ch 5 -
Prof. Dr. Majed El-Farra 2009
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.
52Ch 5 -
Prof. Dr. Majed El-Farra 2009
Differentiation
•
Common organizational requirements for a
successful differentiation strategy include
strong coordination among the R&D and
marketing functions and substantial amenities
to attract scientists and creative people.
53Ch 5 -
Prof. Dr. Majed El-Farra 2009
Focus
• 1. 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.
54Ch 5 -
Prof. Dr. Majed El-Farra 2009
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.
55Ch 5 -
Prof. Dr. Majed El-Farra 2009
Porter’s Competitive Strategies
Cost-Focus –
–Low-cost competitive strategy
–Focus on market segment
–Niche focused
–Cost advantage in market segment
566-
Prof. Dr. Majed El-Farra 2009
Porter’s Competitive Strategies
Differentiation Focus –
–Specific group or geographic market
focus
–Differentiation in target market
–Special needs of narrow target market
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Prof. Dr. Majed El-Farra 2009
Porter’s Competitive Strategies
Stuck in the middle –
–No competitive advantage
–Below-average performance
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Prof. Dr. Majed El-Farra 2009
Risks of Generic Strategies
Risks of Cost
Risks of Cost
Leadership
Leadership
Cost
leadership
is not
Cost
leadership
is not
sustained:
sustained:
•• Competitors
Competitorsimitate.
imitate.
•• Technology
Technologychanges.
changes.
•• Other
bases
Other bases for
for cost
cost
leadership
erode.
leadership
erode.
Proximity in Proximity in
differentiation
is lost.
differentiation
is lost.
Cost
focusers
achieve
Cost focusers achieve
even lower
cost incost in
even lower
segments.
segments.
596-
Risks
ofof
Differentiation
Risks
Differentiation
Differentiation
is not
Differentiation is not
sustained:
sustained:
Competitorsimitate.
imitate.
• • Competitors
• Bases for
• Bases for differentiation
becomedifferentiation
less important
become
less
important
to
to
buyers.
Cost proximity isbuyers.
lost.
Cost
proximity
is lost.
Differentiation focusers
Differentiation
focusers
achieve
even greater
achieve even
differentiation
in greater
differentiation in
segments.
segments.
Prof. Dr. Majed El-Farra 2009
Risks of Focus
Risks
Focus
The of
focus
strategy is
The focus strategy
is
imitated:
imitated:
The target segment
Thebecomes
target segment
structurally
becomes structurally
unattractive:
unattractive:
• Structure erodes.
•• Structure
erodes.
Demand disappears.
• Demand
disappears.
Broadly
targeted
Broadly
targeted
competitors
overwhelm
competitors
overwhelm
the segment:
the segment:
• The segment’s
• differences
The segment’s
from other
differences
from
other
segments
narrow.
narrow.
• segments
The advantages
of a
• The
advantages
of a
broad
line increase.
broad line
increase.
New focusers
subsegment
New focusers
thesubsegment
industry.
the industry.
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.
60
Prof. Dr. Majed El-Farra 2009
purchasing & materials management
(as example)
Buying materials in quantity, quality and cost
which correspond with the corp. generic
strategies (Business Unit strategies).
61
Prof. Dr. Majed El-Farra 2009
What kind of internal factors help managers determine
whether a firm should emphasize the production and sales of a
large number of low-priced products or a small number of highpriced products?
•
•
•
•
•
62
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.
In terms of finance, the production of a large number of low-priced products
suggests a large capital intensive manufacturing facility.
To produce a few high quality goods with a small amount of capital because the
needed manufacturing facilities may be small, utilizing craft labor. R&D may be an
important consideration also.
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 product on old
assembly line machinery. Either the workforce would need to be replaced or an
extensive job training and job enrichment program would need to be established.
Either approach costs both time and money.
Prof. Dr. Majed El-Farra 2009
Is it possible for a company or business unit to follow
a cost leadership strategy and a differentiation
strategy simultaneously? Why or why not?
• 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.
• 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.
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Prof. Dr. Majed El-Farra 2009
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.
• 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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Prof. Dr. Majed El-Farra 2009