Types of Strategies6 - site.iugaza.edu.pssite.iugaza.edu.ps/melfarra/files/2010/02/Types-of-Strategies6.pdf · stability strategy, ˛) retrenchment strategy ... •It depends on the

Types of Strategies

Level of strategies

Prof. Dr. Majed El-Farra 2009١

Strategy hierarchy

�� Corporate strategy: �) growth strategy, �)

stability strategy, �) retrenchment strategy�

�� Business unit strategy: �) cost leadership, �)

differentiation, �) focus, #) mixed�differentiation, �) focus, #) mixed�

�� Functional strategy�

Prof. Dr. Majed El-Farra 2009٢

Types of Strategies

Division Level

CorpLevelA Large

Company

Ch 5 -٣

Operational Level

Functional Level

Types of Strategies

Functional Level

Operational Level

company

A small Company

Ch 5 -٤

Operational Level

Corporate strategies

• Top level management formulate for overall

organization

• The question at the corporate level we should

answer when design strategies: In what answer when design strategies: In what

industry should we be operating?

• It depends on the outcome of SWOT analysis�

Prof. Dr. Majed El-Farra 2009٥

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� • Conglomerate Diversification: Acquiring unrelated business�

• Merger: Two roughly similar size firms combine into one� To

benefit of synergy�

• Strategic alliance: Temporary partnerships

Prof. Dr. Majed El-Farra 2009٦

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�This depends on why we use it�

Prof. Dr. Majed El-Farra 2009٧

Retrenchment strategies

• Types:

�- Turnaround:

Eliminating unprofitable outputs, pruning/cutting assets, reducing size of work pruning/cutting assets, reducing size of work force, rethinking firm’s products lines and customer groups�

�- Divestment: sell one of business units

�- Liquidation: last resort strategy

Prof. Dr. Majed El-Farra 2009٨

Strategies in ActionStrategies in Action

Vertical Integration StrategiesVertical Integration Strategies

Prof. Dr. Majed El-Farra 2009٩

• Forward integration• Backward integration• Horizontal integration


DefinedDefined

ExampleExample

Forward Forward IntegrationIntegration

Prof. Dr. Majed El-Farra 2009١٠

DefinedDefined

• Gaining ownership or increased control over distributors or retailers

• General Motors is acquiring 10% of its dealers.

Strategies in Action

Guidelines for Forward IntegrationGuidelines for Forward Integration

� Present distributors are expensive, unreliable, or incapable of

meeting firm’s needs

� Availability of quality distributors is limited� 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 2009١١


DefinedDefined

ExampleExample

• Motel 8 acquired a

Backward Backward IntegrationIntegration

Prof. Dr. Majed El-Farra 2009١٢

DefinedDefined

• Seeking ownership or increased control of a firm’s suppliers

• Motel 8 acquired a furniture manufacturer.


Guidelines for Backward IntegrationGuidelines for Backward Integration

� 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 2009١٣


ExampleExample

• Palestinian Islamic

Horizontal Horizontal IntegrationIntegration

Prof. Dr. Majed El-Farra 2009١٤

DefinedDefined

• Seeking ownership or increased control over competitors

• Palestinian Islamic Bank acquired Cairo-Amman Bank Islamic transaction branch.


Guidelines for Horizontal IntegrationGuidelines for Horizontal Integration

� Firm can gain monopolistic characteristics without being

challenged by federal government

� Competes in growing industry� 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

Prof. Dr. Majed El-Farra 2009١٥


Intensive StrategiesIntensive Strategies

Prof. Dr. Majed El-Farra 2009١٦

• Market penetration• Market development• Product development


DefinedDefined

ExampleExample

• Ameritrade, the on-line broker, tripled its

Market Market PenetrationPenetration

Prof. Dr. Majed El-Farra 2009١٧

• Seeking increased market share for present products or services in present markets through greater marketing efforts

line broker, tripled its annual advertising expenditures to $200 million to convince people they can make their own investment decisions.


Guidelines for Market PenetrationGuidelines for Market Penetration

� Current markets not saturated

� Usage rate of present customers can be increased significantly

� Market shares of competitors declining while total industry � Market shares of competitors declining while total industry

sales increasing

� Increased economies of scale provide major competitive

advantages

Prof. Dr. Majed El-Farra 2009١٨


DefinedDefinedExampleExample

Market Market DevelopmentDevelopment

Prof. Dr. Majed El-Farra 2009١٩

DefinedDefined

• Introducing present products or services into new geographic area

• Khuzendar Tiles maker introduce his product to Gulf markets.


Guidelines for Market DevelopmentGuidelines for Market Development

� New channels of distribution that are reliable, inexpensive, and

good quality

� Firm is very successful at what it does� 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 2009٢٠


DefinedDefined

ExampleExample

• Apple developed the

Product Product DevelopmentDevelopment

Prof. Dr. Majed El-Farra 2009٢١

DefinedDefined

• Seeking increased sales by improving present products or services or developing new ones

• Apple developed the G4 chip that runs at 500 megahertz.

• Khuzendar Tiles maker introduce Ceramic as a new product.


Guidelines for Product DevelopmentGuidelines for Product Development

�Products in maturity stage of life cycle

� Competes in industry characterized by rapid technological

developmentsdevelopments

� Major competitors offer better-quality products at comparable

prices

� Compete in high-growth industry

� Strong research and development capabilities

Prof. Dr. Majed El-Farra 2009٢٢


Diversification StrategiesDiversification Strategies

• Concentric diversification

Prof. Dr. Majed El-Farra 2009٢٣

• Concentric diversification• Conglomerate diversification• Horizontal diversification


ExampleExample

Concentric Concentric DiversificationDiversification

Prof. Dr. Majed El-Farra 2009٢٤

DefinedDefined

• Adding new, but related, products or services

• National Westminister Bank PLC in Britain bought the leading British insurance company, Legal & General Group PLC.


Guidelines for Concentric DiversificationGuidelines for Concentric Diversification

� Competes in no- or slow-growth industry

� Adding new & related products increases sales of current

productsproducts

� 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 2009٢٥


ExampleExample

Conglomerate Conglomerate DiversificationDiversification

Prof. Dr. Majed El-Farra 2009٢٦

DefinedDefined

• Adding new, unrelated products

or services

• Consultant Construction Engineering acquired Bisects factory.


Guidelines for Conglomerate DiversificationGuidelines for Conglomerate Diversification

� Declining annual sales and profits

� Capital and managerial talent to compete successfully in a new

industryindustry

� Financial synergy between the acquired and acquiring firms

� Exiting markets for present products are saturated

Prof. Dr. Majed El-Farra 2009٢٧



Horizontal Horizontal DiversificationDiversification

Prof. Dr. Majed El-Farra 2009٢٨

DefinedDefined

• Adding new, unrelated products or services for

present customers

ExampleExample

• The El-Awda Co. provide ice-cream product to present customer


Guidelines for Horizontal DiversificationGuidelines 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 returnsand 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

Prof. Dr. Majed El-Farra 2009٢٩


Defensive StrategiesDefensive Strategies

• Joint ventureRetrenchment

Prof. Dr. Majed El-Farra 2009٣٠

• Retrenchment• Divestiture• Liquidation



Joint VentureJoint Venture

Prof. Dr. Majed El-Farra 2009٣١

DefinedDefined

• Two or more sponsoring firms forming a separate organization for cooperative

purposes

• Lucent Technologies and Philips Electronic NV formed Philips Consumer Communications to make and sell telephones.


Guidelines for Joint VentureGuidelines for Joint Venture

� 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 risksmanagement 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 2009٣٢


DefinedDefined ExampleExample

RetrenchmentRetrenchment(turnaround)(turnaround)

Prof. Dr. Majed El-Farra 2009٣٣

• Regrouping through cost and asset reduction to reverse declining sales and profit. Sometimes it is called turnaround or reorganizational strategy.

• A company sold off a land and 4 apartments to raise cash needed. It introduce expense effective control system.


Guidelines for RetrenchmentGuidelines for Retrenchment

� 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 2009٣٤


ExampleExample

DivestitureDivestiture

Prof. Dr. Majed El-Farra 2009٣٥

DefinedDefined

• Selling a division or part of an

organization

ExampleExample

• Harcourt General, the large US publisher, is selling its Neiman Marcus division.


Guidelines for DivestitureGuidelines for Divestiture

� When firm has pursued retrenchment but failed to attain

needed improvements

� When a division needs more resources than the firm can

provideprovide

� 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 2009٣٦


DefinedDefined ExampleExample

LiquidationLiquidation

Prof. Dr. Majed El-Farra 2009٣٧

DefinedDefined

• Selling all of a company’s assets, in parts, for their

tangible worth

ExampleExample

• El-Ameer Block factory sold all its assets and ceased business.


Guidelines for LiquidationGuidelines for Liquidation

� When both retrenchment and divestiture have been pursued

unsuccessfully

� If the only alternative is bankruptcy, liquidation is an orderly � If the only alternative is bankruptcy, liquidation is an orderly

alternative

� When stockholders can minimize their losses by selling the

firm’s assets

Prof. Dr. Majed El-Farra 2009٣٨

Michael Porter’s Generic Strategies

Cost Leadership Strategies(Low-Cost & Best-Value)

Differentiation Strategies

Prof. Dr. Majed El-Farra 2009Ch 5 -٣٩

Differentiation Strategies

Focus Strategies(Low-Cost Focus & Best-Value Focus)

Business Unit Strategies

• Here we answer the question:

How should we compete in the chosen industry?

Cost leadership

Differentiation (real or perceived)� Differentiation (real or perceived)�

Mixed

Focus

Prof. Dr. Majed El-Farra 2009٤٠

Business Strategy

Focuses on improving competitiveposition of company’s products or

6-٤١

position of company’s products orservices within the specific industryor market segment

Prof. Dr. Majed El-Farra 2009

Porter’s Competitive Strategies

Competitive Strategy --

–Low cost

6-٤٢

–Low cost–Differentiation–Direct competition–Focus on niche



Generic Competitive Strategies --

–Lower Cost strategy•Greater efficiencies than competitors

6-٤٣

•Greater efficiencies than competitors

–Differentiation strategy•Unique/superior value, quality, features, service



Competitive Advantage --

6-٤٤

–Determined by Competitive Scope•Breadth of the target market



6-٤٥ Prof. Dr. Majed El-Farra 2009

Ch 5 -٤٦Prof. Dr. Majed El-Farra 2009


Cost Leadership --

–Low-cost competitive strategy–Broad mass market

6-٤٧

–Broad mass market–Efficient-scale facilities–Cost reductions–Cost minimization


Michael Porter’s Generic Strategies

• Cost leadership emphasizes producing standardized products

at a very low per-unit cost for consumers who are price-

sensitive�

• There are two types of cost leadership strategies�

• a� A low-cost strategy offers products to a wide range of • 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�

Prof. Dr. Majed El-Farra 2009Ch 5 -٤٨

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 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�

Prof. Dr. Majed El-Farra 2009Ch 5 -٤٩

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�

• >� To successfully employ a cost leadership strategy, firms must ensure that total costs across the value chain 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�

Prof. Dr. Majed El-Farra 2009Ch 5 -٥٠


Differentiation –

–Broad mass market

6-٥١

–Broad mass market–Unique product/service–Premiums charged–Less price sensitivity


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 differentiation is especially relevant to the

target market

Prof. Dr. Majed El-Farra 2009Ch 5 -٥٢

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�

• �� 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�

Prof. Dr. Majed El-Farra 2009Ch 5 -٥٣

Differentiation

• Common organizational requirements for a

successful differentiation strategy include

strong coordination among the R&D and

marketing functions and substantial amenities marketing functions and substantial amenities

to attract scientists and creative people�

Prof. Dr. Majed El-Farra 2009Ch 5 -٥٤

Focus

• �� Focus means producing products and services that fulfill the needs of small groups of consumers�

• �� There are two types of focus strategies�

• a� A low-cost focus strategy offers products or services to a • 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�

Prof. Dr. Majed El-Farra 2009Ch 5 -٥٥

Focus

• Focus strategies are most effective when the

niche is profitable and growing, when industry

leaders are uninterested in the niche, 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�

Prof. Dr. Majed El-Farra 2009Ch 5 -٥٦


Cost-Focus –

–Low-cost competitive strategy

6-٥٧

–Low-cost competitive strategy–Focus on market segment–Niche focused–Cost advantage in market segment



Differentiation Focus –

–Specific group or geographic market

6-٥٨

–Specific group or geographic market focus–Differentiation in target market–Special needs of narrow target market



Stuck in the middle –

6-٥٩

–No competitive advantage–Below-average performance


Risks of Generic Strategies

Risks of Cost Leadership

Cost leadership is not sustained:

• Competitors imitate.• Technology changes.• Other bases for cost

leadership erode.Proximity in

Risks of DifferentiationDifferentiation is not

sustained:• Competitors imitate.

• Bases for differentiation

become less important to

buyers.

Risks of FocusThe focus strategy is

imitated:The target segment becomes structurally

unattractive:• Structure erodes.

• Demand disappears.Broadly targeted

Risks of Cost LeadershipCost leadership is not sustained:• Competitors imitate.• Technology changes.• Other bases for cost leadership erode.

Proximity in differentiation is lost.

Risks of DifferentiationDifferentiation is not sustained:• Competitors imitate.• Bases for differentiation become less important

to buyers.

Cost proximity is lost.

Risks of FocusThe focus strategy is imitated:The target segment becomes structurally unattractive:• Structure erodes.• Demand disappears.Broadly targeted

6-٦٠

Proximity in differentiation is lost.Cost focusers achieve

even lower cost in segments.

buyers.Cost proximity is lost.

Differentiation focusers achieve even greater

differentiation in segments.

Broadly targeted competitors overwhelm

the segment:• The segment’s

differences from othersegments narrow.

• The advantages of a broad line increase.

New focusers subsegment the industry.

differentiation is lost.Cost focusers achieve even lower cost in segments.

Cost proximity is lost.Differentiation focusers achieve even greater differentiation in segments.

Broadly targeted competitors overwhelm the segment:• The segment’s differences from othersegments narrow.

• The advantages of a broad line increase.

New focusers subsegment the industry.


Level of Strategy

• Functional/operational Strategies:

Concern with org� internal resources and processes which effectively deliver the corporate and business strategic direction�corporate and business strategic direction�

Functional strategies are interrelated�

Functional strategies e�g�: purchasing & materials management, production, finance, R&D, HR, IT, and marketing�

Prof. Dr. Majed El-Farra 2009٦١

purchasing & materials management

(as example)

Buying materials in quantity, quality and cost

which correspond with the corp� generic

strategies (Business Unit strategies)�

Prof. Dr. Majed El-Farra 2009٦٢

Documents

Types of Strategies6 - site.iugaza.edu.pssite.iugaza.edu.ps/melfarra/files/2010/02/Types-of-Strategies6.pdf · stability strategy, ˛) retrenchment strategy ... •It depends on the