01 Porters Generic Strategies and More

8/7/2019 01 Porters Generic Strategies and More

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Prof.Sushil\IITD\Session-VI 1

MANAGEMENT POLICY ANDSTRATEGY

SESSION - VI

Generic and GrandStrategiesProf. Sushil

Department of Management

StudiesIndian Institute of Technology,

DelhiINDIA

Email: [email protected]


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Generic Strategies

Differentiation

Low-costleadership

Focus


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PORTERS GENERIC STRATEGIES

1. CostLeadership

2.Differentiation

3 A. Cost Focus 3 B.

DifferentiationFocus

NarrowTarget

BroadTarget

DifferentiationLower Cost

Compet i t iveAdvantage

Competi t ive Score


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REQUIREMENTS FOR GENERICCOMPETITIVE STRATEGIES

Generic Commodity Required Common OrganizationalStrategy Skills and Resources RequirementsOverall cost Sustained capital investment Tight cost control

leadership access to capital Frequent, detailed controlreports

Process engineering skills Structured organizationand responsibilities

Intense supervision of labour Incentives based on

Products designed for ease meeting strictquantitative

Low-cost distribution system targets in manufactureDifferentiation Strong marketing abilities Strong coordination

Product engineering among functions in R&D,Creative flare product development, andmarketing

s


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REQUIREMENTS FOR GENERIC COMPETITIVESTRATEGIES

CONTD

Strong capability in basic Subjective measurement andresearch incentives instead of

quantitative measures Corporate reputation for Amenities to attract highly

quality or technological skilled labour, scientists, orleadership creative people

Long tradition in the industryor unique combination of skillsdrawn from other businesses

Strong cooperation fromchannels

Focus Combination of the above Combination of the

above policiespolicies directed at the directed at the regular strategicparticular strategic target target

s


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RISKS OF THE GENERIC STRATEGIES

Risks of Cost Leadership Risks of Differentiation Risk of Focus

Cost of leadership is not Differentiation is not The focus strategy issustained initiated

sustained: Competitors imitate The target segments Competitors imitate: Bases for differentiation becomes structurally

unattractives Technology changes becomes less imported to Structure erodess Other bases for cost buyers Demand disappears

leadership erodeProximity in differentiation Cost proximity is lost Broadly targetedis lost competitors overwhelm

the segment: The segments differences

from other segments narrow Theadvantages of a broad line increase

Cost focusers achieve Differentiation focusers New Focusers sub-segmentseven lower cost in segments achieve even greater the industry

differentiation in segments

s


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STAGE OF `INDUSTRY DEVELOPMENT

Keepingahead of thefield

CostleadershipRaise barr iersDeter competitors

Redefine scopeDivestperipheralsEncouragedepartures

Imitation at

lower costJoint v ent ures

Differentia

tion Focus

Differentiatio

nNewopportunities

Leader

Follower

Growth Maturity Decline

Strategicposition of organization


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Types of Grand Strategies

Consortia

Concentrated Growth

Market Development

Product Development

Innovation

Horizontal Integration

Vertical Integration

Concentric Diversification

Conglomerate Diversification

Turnaround

Divestiture

Liquidation

Bankruptcy

Joint Ventures

Strategic Alliances


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Characteristics of a ConcentratedGrowth Strategy

s Involves focusing resources on the profitable growthof a single product, in a single market, with a singledominant technology

s Rationale - Firm develops and exploits its expertise in adelimited competitive arena

s Determinants of competitive market success Ability to assess market needs Knowledge of buyer behavior Customer price sensitivity Effectiveness of promotion


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Conditions Favoring a ConcentratedGrowth Strategy

Firms industry is resistant to major technological advancements

Firms targeted markets are not product saturated

ufficiently distinctive to dissuade competitors in adjacent markets from

nputs are stable in price and quantity and available in amounts and at ti

Firms industry is stable

competitive advantages are based on efficient production or distributio

Success of market generalists


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Strategies of Market and ProductDevelopment

s Market development Consists of marketing present products, often with

only cosmetic modifications, to customers inrelated market areas by

s Adding channels of distribution ors

Changing content of advertising orpromotions Product development

Involves substantial modification of existingproducts or creation of new but related products

Based on penetrating existing markets bys Incorporating product modifications into

existing items ors Developing new products connected to

existing products


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Specific Options for Selected GrandStrategies

Concentration: Increasing use of present products in present

markets1. Increasing present customers rate of use:

a. Increasing size of purchaseb. Increasing rate of product obsolescencec. Advertising other uses

d. Giving price incentives for increased use2. Attracting competitors customersa. Establishing sharper brand differentiationb. Increasing promotional effortc. Initiating price cuts

3. Attracting nonusers to buy the producta. Inducing trial use through sampling, price incentives, and

so onb. Pricing up or downc. Advertising new uses


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Specific Options for Selected GrandStrategies (continued)

Market Development: Selling present products in new markets

1. Opening additional geographic marketsa. Regional expansion

b. National expansionc. International expansion2. Attracting other market segments

a. Developing product versions to appeal to other segments

b. Entering other channels of distributionc. Advertising in other media


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Specific Options for Selected GrandStrategies (concluded)

Product Development: Developing new products for present markets

1. Developing new product featuresa. Adapt (to other ideas, developments)b. Modify (change color, motion, sound, odor, form, shape)

c. Magnify (stronger, loner, thicker, extra value)d. Minify (smaller, shorter, higher e. Substitute (other ingredients, process, power)f. Rearrange (other patterns, layout, sequence, components)g. Reverse (inside out)h. Combine (blend, alloy, assortment, ensemble; combine

units, purposes, appeals, ideas)2. Developing quality variations3. Developing additional models and sizes (productproliferation)


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Innovation Strategy

Involves crea t ing a new product l ifecycle , t her eb y m aking similar exist ing

produ ct s obsole t e


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Strategies of Horizontal and VerticalIntegration

s Horizontal integration Based on growth via acquisition of one or

more similar firms operating at the samestage of the production-marketing chain

Involves eliminating competitors, providingacquiring firm with access to new markets

s Vertical integration

Involves acquiring firmss To supply acquiring firm with inputs - backward integration or

s Are customers for firms outputs - forward integration


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Acquisitions or mergers of suppliers or customer businesses are vertical integrationsvertical integrations

Acquisitions or mergers of competingbusinesses are horizontal integrationshorizontal integrations

Textile producer

Shirt manufacturer

Clothing store

Textile producer

Shirt manufacturer

Clothing store

Vertical and HorizontalIntegrations


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Motivations Related toDiversification Strategies

Increase growth rate of firm

Investment is better use of funds than using them for internal gro

Improve stability of earnings and sales

Balance or fill out product line

Diversify product line

Acquire a needed resource quickly

Achieve tax savings

Increase firms stock value

Increase efficiency and profitability


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Diversification Strategiess

Concentric diversification Involves acquisition of businesses related toacquiring firm in terms of technology,markets, or products

s Conglomerate diversification Involves acquisition of a business because it

represents a promising investment opportunity

Primary motivation is profit pattern of ventures Difference between the approaches

Concentric diversification emphasizescommonality whereas conglomeratediversification emphasizes profits for eachindividual unit


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Turnaround Strategy

Involves a concer t ed e ffort over aper iod of t im e t o for t ify a f irm s

dist inct ive com pet encies , ret urning i tt o prof it abi lit y


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Declining sales

or margins

Imminentbankruptcy

Low

High

Costreductio

n

Assetreduction

Efficiencymaintenanc

e

Entrepreneurialreconfiguration

S t a b i l i t y

R e c o v e r

y

Internalfactors

Externalfactors

Turnaround situation Turnaround responseCause Severity

Retrenchmentphase

Recovery phase

(operating)

(strategic)

A Model of the Turnaround Process


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Divestiture and LiquidationStrategies

s

Divestiture strategy Involves selling a firm or a major component of a

firm Reasons for divestiture

s Partial mismatches between acquired firmand parent firm

s Corporate financial needss Government antitrust action

s Liquidation strategy Involves selling parts of a firm, usually for its

tangible asset value and not as a going concerns


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The Strategy of Bankruptcy

s Two approaches Liquidation - Involves complete distribution

of a firms assets to creditors, most of whom receive a small fraction of amountowed

Reorganization - Involves creditorstemporarily freezing their claims while afirm reorganizes and rebuilds its operationsmore profitably

s Advantage of a reorganization bankruptcy

Proactive option offering maximumrepayment of a firms debt in the future if arecovery strategy is successful


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Corporate Combination Strategies

s Joint venture Involves establishing a third company (child),

operated for the benefit of the co-owners(parents)

s

Strategic alliance Involves creating a partnership between two ormore companies that contribute skills andexpertise to a cooperative project

s Exists for a defined periods

Does not involve the exchange of equitys Consortia, Keiretsus, and Chaebols Defined as large interlocking relationships

between businesses of an industry


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The Top Five Strategic Reasons forOutsourcing

1 . Im pr ove Busine ss Focus

2 . Access t o W orld -Class Capa bilit ie s

3 . Acceler at ed Reen ginee r ing Bene f i ts

4 . Sha re d Risks

5 . Fre e Resource s for Ot he r Purp ose s


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INDIAN BUSINESS HOUSESTATA GROUP

Group Overviews

s Indias largest business houses More than 85 companiess 39 listeds 8% of Indias market capitalizations 2.6 Million shareholderss 2,70,000 employeess Turnover Rs 343 billion (1996-1997)


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INDIAN BUSINESS HOUSESTATA GROUP Contd...

1996-97 Rs(Billion)

322

343302340

% change Over 1995-96

18.818

-7.1- 16

19

FinancialHighl ights

Assets

Turnover PBTPATExports


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s Metalss Automobiless Energys Engineerings Chemicalss Pharmaceuticals

s Consumer Productss Servicess Agro Industriess IT and Communications Exportss Finance


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Tata Heritages Jamsetji Tata

Started textile mill in 1877

Inspired steel and power industry Technical education and philanthropys JRD Tata

Pioneered civil aviation Funded Hom Bhabhas nuclear programme Guided the Tata group for over half a century

s Ratan Tata Present Chairman since 1991

s


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Holding Companiess Tata Sons

Founded by Jamsetji Tata

Promoted many of the present Tata companies 63% held by Tata philanthropic trustss Tata Industries

100% subsidiary of Tata Sons founded in 1945 Managing agency till 1970 Promoted new Tata companies in technology

based businessess Cross holdings among other Tata companiess


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Restructurings Prompted by post 1991 changing environments Need to identify and focus on core businessess Resistance from satraps

Russi Mody, Darbari Seth, Ajit Kerkars Shrink number of companies

From over 85 to about 30

s Shrink number of core businesses From about 25 to around 10 or 12

s Mergers and divestmentss McKinsey hired as a consultants


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Restructuring Strategys Keep and grow

Power, watches, metals, chemicals, telecom,hospitality, financial services, infotech,emerging services, infrastructure, automobiles

s Forge strategic tie ups Tea and beverages, retailing

s Remain only as strategic investors Luxury cars, infotech, printing, cosmetics

s Sell Refrigeration, paints, textiles, trading,

electronics, oil drilling, petrochemicals,pharma, specialty chemicals


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Recent Developmentss Voltas focus on air conditioning and

engineering business

Hive off pesticides business to RalchemPesticides (wholly owned subsidiary of Rallis -largest integrated agrochemical company inIndia)

s Electrolux Voltas - JV between Voltas and AB

Electrolux Refrigerators Washing machines Compressors for refrigerators


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Prof Sushil\IITD\Session VI 34


Recent Developmentss Tata Tea focusing on global agro business

Manages 32 tea gardens in Sri Lanka

Adding tea gardens inTurkey Acquired a 9.5% stake in Asian Coffees Overseas Operations

Automobile assembly in Bangladesh Instant tea operations in the US Chain of hotels across the world Precision tooling operations in Singapore

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01 Porters Generic Strategies and More