Alternative strategies

Vision & Mission and Objectives

Strategy Formulation

Internal evaluation

External evaluation

Generic Alternative Strategies

Strategy Selection

Strategic formulation

Developing strategies• Once a firm has set out its long term

objectives and evaluated its external and internal environment it then has to come up with a potential number of strategies.

• A number of generic strategies exist and the organisation can look at each possibility to see if it may be suitable.

• This lecture will look at a broad scope of proposed and when they could be adopted.

Types of Generic Strategies

• Integration Strategies: related to industrial value chain: suppliers, customers…

• 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

IntegrationStrategies

Forward Integration

BackwardIntegration

HorizontalIntegration

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 suppliersshould be adopted when:

Current suppliers – expensive or unreliable

number of suppliers is small;

High growth in industry sector

Firm has both capital & HR to manage the new business

Current suppliers have high profit margins

Horizontal Integration Strategies

Control of Firm’s Competitorsshould be adopted when:

Competes in growing industry

Increased economies of scale – a major competitive advantage by increase in size

Competitor is faltering due to lack of managerial expertise or need for particular resource

Of course must Gain “lawful” monopolistic characteristics with out government challenge (competition laws)

Types of Strategies

IntensiveStrategies

MarketPenetration

MarketDevelopment

ProductDevelopment

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 Penetration Strategies: Increased Market Share of Present products/services or Present markets

New channels of distribution – reliable, inexpensive, good quality

When Firm is successful at what it does

Untapped/unsaturated markets

Excess production capacity for current market

Basic industry rapidly becoming global

Strategy should be adopted when :

Market Development Strategies: New Markets -- Present products/services to new geographic areas

Products in maturity stage of life cycle

Industry characterized by rapid technological development

Competitors offer better-quality products @ comparable prices

Strong R&D capabilities

Product Development Strategies: Increased Sales -- Improving present products/services or developing new products/services

Strategy should be adopted when :

Types of Strategies

DiversificationStrategies

Related Diversification

UnrelatedDiversification

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 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

DefensiveStrategies

Retrenchment

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 (intangible worth)…

Retrenchment Strategies: reduce Costs

Guidelines --

Failed to meet objectives & goals consistency; but has distinctive competencies

Inefficiency, low profitability, poor employee morale, pressure for stockholders

Strategic managers have failed

Rapid growth in size; major internal reorganization necessary

Divestiture Strategies: sell part of firm

Guidelines --

Retrenchment (cost cutting) 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

underprice competitors or offer a better value

thereby gain market share and sales

driving some competitors out of the market entirely.

Low Cost strategy: the basic idea

Low Cost LeadershipWays 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

• Efficient customer response system (CRM): better link with customers: e.g. Amazon: keeps track of user preferences for purchases, and recommends titles purchased by others

2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities

• Inventory replenishment system sends orders to suppliers when purchase recorded at cash register (SCM): better link with suppliers: e.g. Toyota: uses IS to facilitate direct access from suppliers to production schedules

Cost Leadership

• Can be especially effective when:1. Price competition among rivals is vigorous

2. Rival’s products are identical and supplies are readily available

3. There are few ways to achieve differentiation

4. Most buyers use the product in the same way

5. Buyers have low switching costs

6. Buyers are large and have significant power

7. Industry newcomers use low prices to attract buyers

Generic Strategies: Differentiation: (Type 3)

Producing new products and services, or greatly change the customer convenience in using your existing products and services

allows a firm to charge higher prices

Or gain customer loyalty

risk of differentiation strategy:

unique product may not be valued highly enough by customers to justify the higher price.

requirements for a successful differentiation strategy:

strong coordination among the R&D and marketing functions

Use information systems to customize, personalize products to fit specifications of individual consumers

E.g., Nike’s iD program for customized sneakers

Differentiation

• Can be especially effective when:1. There are many ways to differentiate and

many buyers perceive the value of the differences

2. Few rival firms are following a similar differentiation approach

3. Technology change is fast paced and competition revolves around evolving product features:

• Google’s continuous innovations, Apple’s iPhone

Generic Strategies

producing products and services that fulfill the needs of small groups of consumers (niche market).

two types:

products or services to a small range (niche) of customers at the lowest price available on the market.

products or services to a small range (niche) of customers at the best value available on the market. (focused differentiation)

Can be achieved by: Advertising to smaller and smaller target markets using data mining techniques

Focused Strategies (Type 4 & 5)

Focused Strategy • Can be especially effective when for

example:1. The target market niche is large, profitable,

and growing

2. Industry leaders do not consider the niche crucial

3. Few, if any, other rivals are attempting to specialize in the same target segment

Questions• Discuss the relationship between: integrative, intensive and

diversification strategies; and Porter’s strategies' of low-cost, differentiation and focus.

• Discuss, using simple examples the types 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.

• Discuss, using examples the type of Information systems than could be used to support two of Porter’s strategies: Low Cost, Differentiation or Focussed strategies for which you would consider to be most appropriate for the D.I.T. in the current economic climate.