Module 3 (4)

Amity Business School

1

Amity Business SchoolMBA (M&S) Class of 2011, Semester III

Strategic Management

Module-III (Strategic Choice )

Vivek Singh Tomar

[email protected]


• Traditional Approach - Strategic Alternatives

• Various models like BCG, GE Nine Cell Matrix, Hofer’s Model,

Strickland’s Grand Strategy Selection Matrix, Basis of Choice

• Michael Porter’s Approach - Generic competitive strategies, Cost

advantage, differentiation,

• Technology and competitive advantage, substitution, competitor,

complementary products and competitive advantage

• Strategic vision vs. strategic opportunism

• Coevolving and patching.

Module III (Contents)


Learning Objectives

1. Discuss seven different topics for long-term corporate objectives2. Describe the five qualities of long-term corporate objectives that

make them useful to strategic managers3. Explain the generic strategies of low-cost leadership, differentiation,

and focus4. Discuss the importance of the value disciplines5. List, describe, evaluate, and give examples of 15 grand strategies

that decision makers use in forming their company’s competitive plan6. Understand the creation of sets of long-term objectives and grand

strategies options

7-3


Long-Term Objectives

• Strategic managers recognize that short-run profit maximization is rarely the best approach to achieving sustained corporate growth and profitability

• To achieve long-term prosperity, strategic planners commonly establish long-term objectives in seven areas:

– Profitability – Productivity– Competitive Position – Employee Development– Employee Relations – Productivity– Tech Leadership – Public Responsibility

7-4


Qualities of Long-Term Objectives

• There are five criteria that should be used in preparing long-term objectives:

– Flexible– Measurable – Motivating– Suitable– Understandable

7-5


The Balanced Scorecard

• The balanced scorecard is a set of measures that are directly linked to the company’s strategy

– Developed by Robert S. Kaplan and David P. Norton, it directs a company to link its own long-term strategy with tangible goals and actions.

– The scorecard allows managers to evaluate the company from four perspectives:

• financial performance

• customer knowledge

• internal business processes• learning and growth

7-6

Amity Business SchoolThe Balance Scorecard

7-7


Generic Strategies

• A long-term or grand strategy must be based on a core idea about how the firm can best compete in the marketplace. The popular term for this core idea is generic strategy.

• 3 Generic Strategies:

1. Striving for overall low-cost leadership in the industry.

2. Striving to create and market unique products for varied customer groups through differentiation.

3. Striving to have special appeal to one or more groups of consumers or industrial buyers, focusing on their cost or differentiation concerns.

7-8


Low-Cost Leadership

• Low-cost producers usually excel at cost reductions and efficiencies

• They maximize economies of scale, implement cost-cutting technologies, stress reductions in overhead and in administrative expenses, and use volume sales techniques to propel themselves up the earning curve

• A low-cost leader is able to use its cost advantage to charge lower prices or to enjoy higher profit margins

7-9


Differentiation

• Strategies dependent on differentiation are designed to appeal to customers with a special sensitivity for a particular product attribute

• By stressing the attribute above other product qualities, the firm attempts to build customer loyalty

• Often such loyalty translates into a firm’s ability to charge a premium price for its product

• The product attribute also can be the marketing channels through which it is delivered, its image for excellence, the features it includes, and its service network

7-10


Focus

• A focus strategy, whether anchored in a low-cost base or a differentiation base, attempts to attend to the needs of a particular market segment

• A firm pursuing a focus strategy is willing to service isolated geographic areas; to satisfy the needs of customers with special financing, inventory, or servicing problems; or to tailor the product to the somewhat unique demands of the small- to medium-sized customer

• The focusing firms profit from their willingness to serve otherwise ignored or underappreciated customer segments

7-11

Amity Business SchoolRisks of the Generic Strategies

7-12


Competitive Strategies

Competitive Advantage

Lower Cost Differentiation

Co

mp

etitive

S

cop

e

Broad

Target

Cost Leadership

Differentiation

Narrow

Target

Cost Focus Differentiation Focus


The Value Disciplines

• Operational Excellence– This strategy attempts to

lead the industry in price and convenience by pursuing a focus on lean and efficient operations

• Customer Intimacy– Customer intimacy means

continually tailoring and shaping products and services to fit an increasingly refined definition of the customer

• Product Leadership

– Companies that pursue the discipline of product leadership strive to produce a continuous state of state-of-the-art products and services


Grand Strategies

• Grand strategies, often called master or business strategies, provide basic direction for strategic actions

• Indicate the time period over which long-rang objectives are to be achieved

• Any one of these strategies could serve as the basis for achieving the major long-term objectives of a single firm

• Firms involved with multiple industries, businesses, product lines, or customer groups usually combine several grand strategies

7-15


Concentrated Growth

• Concentrated growth is the strategy of the firm that directs its resources to the profitable growth of a dominant product, in a dominant market, with a dominant technology

• Concentrated growth strategies lead to enhanced performance

• Specific conditions favor concentrated growth

• The risks and rewards vary

7-16


Market Development

• Market development commonly ranks second only to concentration as the least costly and least risky of the 15 grand strategies

• It consists of marketing present products, often with only cosmetic modifications, to customers in related market areas by adding channels of distribution or by changing the content of advertising or promotion

• Frequently, changes in media selection, promotional appeals, and distribution are used to initiate this approach

7-17


Product Development

• Product development involves the substantial modification of existing products or the creation of new but related products that can be marketed to current customers through established channels

7-18


Innovation

• These companies seek to reap the initially high profits associated with customer acceptance of a new or greatly improved product

• Then, rather than face stiffening competition as the basis of profitability shifts from innovation to production or marketing competence, they search for other original or novel ideas

• The underlying rationale of the grand strategy of innovation is to create a new product life cycle and thereby make similar existing products obsolete

7-19


Horizontal Integration

• When a firm’s long-term strategy is based on growth through the acquisition of one or more similar firms operating at the same stage of the production-marketing chain, its grand strategy is called horizontal integration

• Such acquisitions eliminate competitors and provide the acquiring firm with access to new markets

7-20


Vertical Integration

• When a firm’s grand strategy is to acquire firms that supply it with inputs (such as raw materials) or are customers for its outputs (such as warehouses for finished products), vertical integration is involved

• The main reason for backward integration is the desire to increase the dependability of the supply or quality of the raw materials used as production inputs

7-21

Amity Business SchoolVertical and Horizontal

Integration

7-22


Concentric Diversification

• Concentric diversification involves the acquisition of businesses that are related to the acquiring firm in terms of technology, markets, or products

• With this grand strategy, the selected new businesses possess a high degree of compatibility with the firm’s current businesses

• The ideal concentric diversification occurs when the combined company profits increase the strengths and opportunities and decrease the weaknesses and exposure to risk

7-23


Conglomerate Diversification

• Occasionally a firm, particularly a very large one, plans acquire a business because it represents the most promising investment opportunity available. This grand strategy is commonly known as conglomerate diversification.

• The principal concern of the acquiring firm is the profit pattern of the venture

• Unlike concentric diversification, conglomerate diversification gives little concern to creating product-market synergy with existing businesses

7-24


Turnaround

The firm finds itself with declining profits• Among the reasons are economic recessions, production

inefficiencies, and innovative breakthroughs by competitors • Strategic managers often believe the firm can survive and

eventually recover if a concerted effort is made over a period of a few years to fortify its distinctive competences. This is turnaround.

• Two forms of retrenchment: – Cost reduction – Asset reduction

7-25


Elements of Turnaround

• A turnaround situation represents absolute and relative-to-industry declining performance of a sufficient magnitude to warrant explicit turnaround actions

• The immediacy of the resulting threat to company survival is known as situation severity

• Turnaround responses among successful firms typically include two stages of strategic activities: retrenchment and the recovery response

• The primary causes of the turnaround situation have been associated with the second phase of the turnaround process, the recovery response

7-26


Divestiture

• A divestiture strategy involves the sale of a firm or a major component of a firm

• When retrenchment fails to accomplish the desired turnaround, or when a nonintegrated business activity achieves an unusually high market value, strategic managers often decide to sell the firm

• Reasons for divestiture vary

7-27


Liquidation

• When liquidation is the grand strategy, the firm typically is sold in parts, only occasionally as a whole—but for its tangible asset value and not as a going concern

• Planned liquidation can be worthwhile

7-28


Bankruptcy

• Liquidation bankruptcy—agreeing to a complete distribution of firm assets to creditors, most of whom receive a small fraction of the amount they are owed

• Reorganization bankruptcy—the managers believe the firm can remain viable through reorganization

• Two notable types of bankruptcy

7-29


Joint Ventures

• Occasionally two or more capable firms lack a necessary component for success in a particular competitive environment

• The solution is a set of joint ventures, which are commercial companies (children) created and operated for the benefit of the co-owners (parents)

• The joint venture extends the supplier-consumer relationship and has strategic advantages for both partners

7-30


Strategic Alliances

• Strategic alliances are distinguished from joint ventures because the companies involved do not take an equity position in one another

• In some instances, strategic alliances are synonymous with licensing agreements

• Outsourcing arrangements vary

7-31


Consortia, Keiretsus, and Chaebols

• Consortia are defined as large interlocking relationships between businesses of an industry

• In Japan such consortia are known as keiretsus, in South Korea as chaebols

• Their cooperative nature is growing in evidence as is their market success

7-32


Selection of Long-Term Objectives and Grand

Strategy Sets

• When strategic planners study their opportunities, they try to determine which are most likely to result in achieving various long-range objectives

• Almost simultaneously, they try to forecast whether an available grand strategy can take advantage of preferred opportunities so the tentative objectives can be met

• In essence, then, three distinct but highly interdependent choices are being made at one time


Sequence of Selection and Strategy Objectives

• The selection of long-range objectives and grand strategies involves simultaneous, rather than sequential, decisions

• While it is true that objectives are needed to prevent the firm’s direction and progress from being determined by random forces, it is equally true that objectives can be achieved only if strategies are implemented

7-34


Strickland Grand Strategy Selection Model


Strategy Analysis & Choice

Grand Strategy Matrix

• Popular tool for formulating alternative strategies• Based on two evaluative dimensions

Competitive position Market growth



Quadrant IV• Concentric

diversification• Horizontal

diversification• Conglomerate

diversification• Joint ventures

Quadrant III• Retrenchment• Concentric

diversification• Horizontal

diversification• Conglomerate

diversification• Liquidation

Quadrant I• Market development• Market penetration• Product development• Forward integration• Backward integration• Horizontal integration• Concentric

diversification

Quadrant II• Market development• Market penetration• Product development• Horizontal integration• Divestiture• Liquidation

RAPID MARKET GROWTH

SLOW MARKET GROWTH

WEAK COMPETITIVE

POSITION

STRONGCOMPETITIVE

POSITION




• Quadrant I Excellent strategic position Concentration on current markets and products Take risks aggressively when necessary




• Quadrant II Evaluate present approach seriously How to change to improve competitiveness Rapid market growth requires intensive strategy




• Quadrant III Compete in slow-growth industries Weak competitive position Drastic changes quickly Cost and asset reduction indicated (retrenchment)




• Quadrant IV Strong competitive position Slow-growth industry Diversification indicated to more promising growth areas


Hofer’s Model


Dimensions

STAGE OF INDUSTRY EVOLUTION

• Early Development

• Rapid Growth/Takeoff

• Shake-Out

• Maturity/Saturation

• Decline/Stagnation

COMPETITIVE POSITION

Life Cycle – Market Evolution Matrix


The business unit competitive position

Strong Average Weak

The Life-Cycle Portfolio Matrix

Development

Growth

Competitive shakeout

Maturity

Decline

Saturation

The

Indu

stry

’s s

tage

in th

e ev

oluti

onar

y lif

e cy

cle


Advantages

• Used to identify developing winners

• Illustrates how businesses are distributed across the stages of industry evolution


BCG Matrix


Strategy Analysis & ChoiceBoston Consulting Group Matrix

(BCG)

• Enhances multidivisional firms’ efforts to formulate strategies

• Autonomous divisions (or profit centers) constitute the business portfolio

• Firm’s divisions may compete in different industries requiring separate strategy


Strategy Analysis & ChoiceBoston Consulting Group Matrix

(BCG)

• Graphically portrays differences among divisions • Focuses on market share position and industry growth

rate• Manage business portfolio through relative market

share position and industry growth rate



Boston Consulting Group Matrix

(BCG)

• Relative market share position defined:

Ratio of a division’s own market share in a particular industry to the market share held by the largest rival firm in that industry.

Amity Business SchoolBCG Matrix

DogsDogs

IVIVCash CowsCash Cows

IIIIII

Question MarksQuestion Marks

IIStarsStars

IIII

Relative Market Share PositionHigh1.0

Medium.50

Low0.0

Ind

ust

ry S

ales

Gro

wth

Rat

e

High+20

Low-20

Medium0



BCG Matrix

• Question Marks • Stars• Cash Cows• Dogs


Strategy Analysis & ChoiceBCG Matrix

• Question Marks Low relative market share position yet compete in

high-growth industry. Cash needs are high Case generation is low

Decision to strengthen (intensive strategies) or divest



BCG Matrix• Stars

High relative market share and high industry growth rate. Best long-run opportunities for growth and profitability

Substantial investment to maintain or strengthen dominant position Integration strategies, intensive strategies, joint ventures


Strategy Analysis & ChoiceBCG Matrix

• Cash Cows High relative market share position, but compete

in low-growth industry Generate cash in excess of their needs Milked for other purposes

Maintain strong position as long as possible Product development, concentric diversification If becomes weak—retrenchment or divestiture



BCG Matrix

• Dogs Low relative market share position and compete in

slow or no market growth Weak internal and external position

Decision to liquidate, divest, retrenchment


GE Nine Cell Matrix

Amity Business SchoolGE Nine-Cell Matrix

Low

High

Medium

AverageStrong Weak

• Market Size• Growth Rate• Profit Margin• Intensity of Competition• Seasonality• Cyclicality• Resource Requirements• Social Impact• Regulation• Environment• Opportunities & Threats• Relative Market Share• Reputation/ Image• Bargaining Leverage• Ability to Match Quality/Service

• Relative Costs• Profit Margins• Fit with KSFs

IndustryAttractiveness

Rating Scale: 1 = Weak ; 10 = Strong

6.7

3.3

10.0

1.0

1.03.36.7


Strategy Implications of Attractiveness/Strength Matrix

• Businesses in upper left corner

– Accorded top investment priority– Strategic prescription is grow and build

• Businesses in three diagonal cells

– Given medium investment priority– Invest to maintain position

• Businesses in lower right corner

– Candidates for harvesting or divestiture– May be candidates for an overhaul and reposition strategy


The Attractiveness/Strength Matrix

• Allows for intermediate rankings between high and low and between strong and weak

• Incorporates a wide variety of strategically relevant variables

• Stresses allocating corporate resources to businesses with greatest potential for

– Competitive advantage and

– Superior performance


Business Level Strategies


Learning Objectives

1. Determine why a business would choose a low-cost, differentiation, or speed-based strategy

2. Explain the nature and value of a market focus strategy3. Illustrate how a firm can pursue both low-cost and differentiation

strategies4. Identify requirements for business success at different stages of

industry evolution5. Determine good business strategies in fragmented and global

industries6. Decide when a business should diversify


Levels of Planning at General Electric

Amity Business SchoolLevels and Types of Planning


What Is Business-Level Strategy?

• Business-level strategy– A plan of action to use the firm’s resources and distinctive

competencies to gain competitive advantage.

• Abell’s “Business Definition” process– Customer needs – product differentiation (what)– Customer groups – market segmentation (who)– Distinctive competencies – competitive actions (how)


Choosing a Generic Business-Level Strategy• Product/Market/Distinctive-Competency Choices and Generic Competitive

Strategies

Cost Leadership Differentiation Focus

ProductDifferentiation

Low(principallyby price)

High(principally by uniqueness)

Low to high(price or uniqueness)

MarketSegmentation

Low(mass market)

High(many market segments)

Low(one or a few segments)

DistinctiveCompetency

Manufacturingand materials management

Research and development, sales and marketing

Any kind of distinctive competency


Choosing a Business-Level Strategy

• Cost-leadership strategy success is affected by:– Competitors producing at equal or lower costs.– The bargaining strength of suppliers.– Powerful buyers demanding lower prices.– Substitute products moving into the market.– New entrants overcoming entry barriers.



• Differentiation strategy success is achieved through:– An emphasis on product or service quality.– Innovation in providing new features for which customers will pay

a premium price. – Responsiveness to customers after the sale.– Appealing to the psychological desires of customers.



• Differentiation strategy success is affected by:– Competitors imitating features and services.– Increases in supplier costs exceeding differentiator’s price

premium. – Buyers becoming less brand loyal.– Substitute products adding similar features.– New entrants overcoming entry barriers related to differentiator’s

competitive advantage.



• Focus strategy success is affected by:– Competitor entry into focuser’s market segment.– Suppliers capable of increasing costs affecting only the focuser.– Buyers defecting from market segment. – Substitute products attracting customers away from focuser’s

segment.– New entrants overcoming entry barriers that are the source of the

focuser’s competitive advantage.


Strategic Groups and Business-Level Strategy

• Implications for business-level strategy– Immediate competitors are companies pursuing same strategy

within the same strategic group.– Different strategic groups can have a different standing with

respect to the effects of the five competitive forces.

• First mover advantage– Benefits are first choice of customers and suppliers, setting

standards, building entry barriers.


Choosing an Investment Strategy at the Business Level

• Investment strategy– The resources (human, functional, and financial) required to gain

sustainable competitive advantage.

• Competitive position– Market share is an indicator of competitive strength.– Distinctive competencies are competitive tools.

• Life Cycle Effects– An industry’s life cycle stage affects its attractiveness to

investment prospects.


Choosing an Investment Strategy at the Business Level

•Stage of the Industry Life Cycle

•Strong CompetitivePosition

•Weak CompetitivePosition

•Embryonic •Share building •Share building

•Growth •Growth •Market concentration

•Shakeout •Share increasing •Market concentration or harvest/liquidation

•Maturity •Hold-and-maintain or profit •Harvest or liquidation/divestiture

•Decline •Market concentration or harvest (asset reduction)

•Turnaround, liquidation,or divestiture


Evaluating and Choosing Business Strategies: Seeking Sustained

Competitive Advantage

• The two most prominent sources of competitive advantage can be found in the business’s cost structure and its ability to differentiate the business from competitors

• Businesses that have one or more sources/capabilities that let them

operate at a lower cost will

consistently outperform their

rivals that don’t


Evaluating Cost Leadership Opportunities

• Business success built on cost leadership requires the business to be able to provide its product or service at a cost below what its competitors can achieve


Sustainable Low-Cost Activities

1. Some low-cost advantages reduce the likelihood of buyers’ pricing pressure

2. Truly sustained low-cost advantages may push rivals into other areas

3. New entrants competing on price must face an entrenched cost leader

4. Low-cost advantages should lessen the attractiveness of substitute products


Sustainable Low-Cost Activities

1. Higher margins allow low-cost producers to withstand supplier cost increases

2. Many cost-saving activities are easily duplicated

3. Exclusive cost leadership can be a trap

4. Obsessive cost cutting can shrink other competitive advantages

5. Cost differences often decline over time


Evaluating Differentiation

• Differentiation requires that the business have sustainable advantages that allow it to provide buyers with something uniquely valuable to them

• Differentiation usually arises from one or more activities in the value chain that create a unique value important to buyers

• Strategists use benchmarking and consider the 5 forces in considering differentiation


Evaluating Speed as a Competitive Advantage

• Speed-based strategies, or rapid response to customer requests or market and technological changes, have become a major source of competitive advantage for numerous firms in today’s intensely competitive global economy


Speed can be created by:

• Customer responsiveness

• Product development cycles

• Product or service improvements

• Speed in delivery or distribution

• Information Sharing and Technology


Risks of Speed-based Strategy

• Speeding up activities that haven’t been conducted in a fashion that prioritizes rapid response should only be done after considerable attention to training, reorganization, and/or reengineering

• Some industries may not offer much advantage to the firm that introduces some forms of rapid response

• Customers in such settings may prefer the slower pace or the lower costs currently available, or they may have long time frames in purchasing


Evaluating Market Focus as a Way to Competitive Advantage

• Market focus: the extent to which a business concentrates on a narrowly defined market

• Small companies, at least the better ones, usually thrive because they serve narrow market niches

• Market focus allows some businesses to compete on the basis of low cost, differentiation, and rapid response against much larger businesses with greater resources


Risks of Market Focus

• The risk of focus is that you attract major competitors who have waited for your business to “prove” the market

• Managers evaluating opportunities to build competitive advantage should link strategies to

• Resources• Capabilities• Value chain activities that exploit low cost,

differentiation, and rapid response


Stages of Industry Evolution and Business Strategy Choices

• The requirements for success in industry segments change over time

• Strategists can use these changing requirements, which are associated with different stages of industry evolution, as a way to isolate key competitive advantages and shape strategic choices around them


Emerging Industries

• Emerging industries are newly formed or re-formed industries that typically are created by technological innovation, newly emerging customer needs, or other economic or sociological changes

• There are no “rules of the game”


Business Strategies in Emerging Industries

• Technologies that are most proprietary to the pioneering firms and technological uncertainty will unfold

• Competitor uncertainty because of inadequate information about competitors, buyers, and the timing of demand

• High initial costs but steep cost declines

• Few entry barriers

• First-time buyers requiring initial inducement to purchase

• Inability to obtain raw materials and components until suppliers gear up to meet the industry’s needs

• Need for high-risk capital because of the industry’s uncertain prospects


Emerging Industries

• For success in this industry setting, business strategies require one or more of these features:

• The ability to shape the industry’s structure • The ability to rapidly improve product quality and performance features • Advantageous relationships with key suppliers and promising distribution

channels • The ability to establish the firm’s technology as the dominant one• The early acquisition of a core group of loyal customers and then the

expansion of that customer base • The ability to forecast future competitors


Competitive Advantages and Strategic Choices in Growing Industries

• Rapid growth brings new competitors into the industry

• At this stage, growth industry strategies that emphasize brand recognition, product differentiation, and the financial resources to support both heavy marketing expenses and the effect of price competition on cash flow can be key strengths


Growth Industries

• For success in this industry setting, business strategies require one or more of the following features:

– The ability to establish strong brand recognition

– The ability and resources to scale up to meet increasing demand

– Strong product design skills to be able to adapt products and services

– The ability to differentiate the firm’s product[s] from competitors entering the market

– R&D resources and skills to create product variations

– The ability to build repeat buying from established customers

– Strong capabilities in sales and marketing


Competitive Advantages and Strategic Choices in Mature Industries

• As an industry evolves, its rate of growth eventually declines • Firms working with the mature industry strategies sell

increasingly to experienced, repeat buyers who are now making choices among known alternatives

• Competition becomes more

oriented to cost and service

as knowledgeable buyers

expect similar price and features


Mature Industries• Strategy elements of successful firms in maturing industries often

include the following: • Product line pricing• Emphasis on process innovation that

permits low-cost product design, manufacturing methods, and distributionsynergy

• Emphasis on cost reduction • Careful buyer selection to focus on

buyers who are less aggressive, more closely tied to the firm, and able to buy more from the firm

• Horizontal integration to acquire rival firms whose weaknesses can be used to gain a bargain price

• International expansion to markets where attractive growth and limited competition still exist


Competitive Advantages and Strategic Choices in Declining Industries

• Declining industries are those that make products or services for which demand is growing slower than demand in the economy as a whole or is actually declining

• Focus on higher growth

or a higher return

• Emphasize product innovation

and quality improvement

• Emphasize production and

distribution efficiency

• Gradually harvest the business


Competitive Advantage in Fragmented Industries

• A fragmented industry is one in which no firm has a significant market share and can strongly influence industry outcomes

• Tightly managed decentralization • “Formula” facilities• Increased value added • Specialization • Bare bones/no frills


Competitive Advantage in Global Industries

• A global industry is one that comprises firms whose competitive positions in major geographic or national markets are fundamentally affected by their overall global competitive positions

– License foreign firms to produce and distribute the firm’s products

– Maintain a domestic production base and export products to foreign countries

– Establish foreign-based plants and distribution to compete directly in the markets of one or more foreign countries


Four Generic GlobalCompetitive Strategies

• Broad-line global competition

• Global focus strategy

• National focus strategy

• Protected niche strategy


Grand Strategy Selection Matrix


Model of Grand Strategy Clusters


Building Value as a Basis for Choosing Diversification or Integration

• The grand strategy selection matrix and model of grand strategy clusters are useful tools to help dominant product company managers evaluate and narrow their choices among alternative grand strategies

• Dominant product company managers who choose diversification or integration eventually create another management challenge

Module 3 (4)

Documents

Transcript of Module 3 (4)