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Session 13 & 14Session 13 & 14

Concluding discussion of grand strategies

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Remember for the CaseRemember for the Case

Three Scenarios: Worst, Best, Most LikelyLong Term Objective (same for each)Two Competitive OptionsEach Containing:

Corporate Level Strategy Alternative

Business Level Strategy Alternative

Generic Theme

Package of (3-6) Grand Strategies

2

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Types of Grand StrategiesTypes of Grand Strategies

Consortia Consortia

Concentrated Growth Concentrated Growth

Market Development Market Development

Product DevelopmentProduct Development

InnovationInnovation

Horizontal Integration Horizontal Integration

Vertical Integration Vertical Integration

Concentric Diversification Concentric Diversification

Conglomerate Diversification Conglomerate Diversification

TurnaroundTurnaround

DivestitureDivestiture

LiquidationLiquidation

Bankruptcy Bankruptcy

Joint Ventures Joint Ventures

Strategic Alliances Strategic Alliances

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Concentrated GrowthConcentrated Growth

Concentrated growth directs its resources to the profitable growth of a single product, in a single market, with a single dominant technology

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Market DevelopmentMarket 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

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Product DevelopmentProduct 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

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InnovationInnovation

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

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Horizontal IntegrationHorizontal 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

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Vertical IntegrationVertical 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

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Vertical and Horizontal IntegrationVertical and Horizontal Integration

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Concentric DiversificationConcentric 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

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Conglomerate DiversificationConglomerate 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

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TurnaroundTurnaround

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

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Elements of TurnaroundElements 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

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DivestitureDivestiture

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

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LiquidationLiquidation

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

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BankruptcyBankruptcy

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 Chapter 7 Chapter 11

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Joint VenturesJoint 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

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Strategic AlliancesStrategic 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

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Consortia, Keiretsus, and Chaebols 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

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Chapter 8Chapter 8

Strategic Analysis and Choice in Single- or Dominant-Product Businesses: Building Sustainable

Competitive Advantages

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Chapter 8

Concerned with Proper Selection of Business Level Generic and Grand Strategy Alternatives

Based on your SWOT analysis which of the Generic and Grand Strategies are you better equipped – resources wise – to successfully implement?

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Key Issues: Strategic Choice in Single BusinessesKey Issues: Strategic Choice in Single Businesses

1. What strategies are most effective at building sustainable competitive advantages for single business units?

2. Should dominant-product/service businesses diversify to build value and competitive advantage? What grand strategies are most appropriate?

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Prominent Sources of Competitive AdvantageProminent Sources of Competitive Advantage

Cost leadership

Differentiation

Speed

Market focus

Sources of competitive advantage

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Evaluating A Business’s Evaluating A Business’s Cost LeadershipCost Leadership Opportunities Opportunities

A. Skills and Resources Fostering Cost Leadership• Sustained capital investment and access to capital• Process engineering skills• Intense supervision of labor or core technical operations• Products or services designed for ease of manufacture or

delivery• Low-cost distribution system

B. Organizational Requirements Supporting Cost Leadership• Tight cost control• Frequent, detailed control reports• Continuous improvement and benchmarking orientation• Structured organization and responsibilities• Incentives based on meeting strict, usually quantitative targets

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Evaluating A Business’s Evaluating A Business’s Cost LeadershipCost Leadership Opportunities -- Opportunities --C. Examples of Ways Businesses Achieve Competitive AdvantageC. Examples of Ways Businesses Achieve Competitive Advantage

Technology development

Process innovations lowering production costs

Product redesign to reduce number of components

Global, online suppliers provide automatic restocking of orders based on sales

Inbound logistics Operations Outbound logistics Marketing & sales

Serv

iceEconomy of

scale in plant reduces equipment costs and depreciation

Computerized routing lowers transportation expense

Cooperative advertising with distributors creates local cost advantage in buying media space and time

Subcontractedservicetechniciansrepairproductcorrectlyfirst timeor bearcosts

Reduced levels of management cuts corporate overhead

Computerized, integrated information system reduces errors and costs

Safety training for all employees reduces absenteeism, downtime, and accidents

Human resource

management

General administration

Favorable long-term contracts; captive suppliers or key customer for supplier Procurement

margin

Profit

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Advantages of a Cost Leadership StrategyAdvantages of a Cost Leadership Strategy

Low-cost advantages reduce likelihood of pricing pressure from buyers

Low-cost advantages reduce likelihood of pricing pressure from buyers

Sustained low-cost advantages may push rivals into other areas, lessening price competition

Sustained low-cost advantages may push rivals into other areas, lessening price competition

New entrants must face an entrenched cost leader without experience to replicate cost advantages

New entrants must face an entrenched cost leader without experience to replicate cost advantages

Low-cost advantages should lessen attractiveness of substitutes

Low-cost advantages should lessen attractiveness of substitutes

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

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

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Key Risks of Cost LeadershipKey Risks of Cost Leadership

Many cost-saving activities are easily duplicated Many cost-saving activities are easily duplicated

Exclusive cost leadership can become a trapExclusive cost leadership can become a trap

Obsessive cost cutting can shrink other competitive advantages involving key product attributes

Obsessive cost cutting can shrink other competitive advantages involving key product attributes

Cost differences often decline over timeCost differences often decline over time

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Evaluating A Business’s Evaluating A Business’s DifferentiationDifferentiation Opportunities Opportunities

A. Skills and Resources Fostering Differentiation• Strong marketing abilities• Product engineering• Creative talent and flair• Strong capabilities in basic research• Corporate reputation for quality or technological leadership• Long tradition in an industry or unique combination of skills• Strong cooperation from channels and suppliers of major components

B. Organizational Requirements Supporting Differentiation• Strong coordination among functions in R&D, product development, and

marketing• Subjective measurement and incentives instead of quantitative measures• Amenities to attract highly skilled labor, scientists, and creative people• Tradition of closeness to key customers• Some personnel skilled in sales and operations - technical and marketing

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Evaluating A Business’s Evaluating A Business’s DifferentiationDifferentiation Opportunities -- Opportunities --C. Examples of Ways Businesses Achieve Competitive AdvantageC. Examples of Ways Businesses Achieve Competitive Advantage

Technology development

Cutting edge production technology and product features to maintain a distinct image and actual product

Purchase superior quality, well-known components, raising quality and image of final products

Inbound logistics Operations Outbound logistics Marketing & sales

Serv

ice

Careful inspection of products at each step in production to improve performance and lower defect rates

JIT coordination with buyers; use of own or captive transportation service to ensure timeliness

Expensive, informative advertising and promotion to build brand image

Allowing servicepersonnelconsiderablediscretion tocreditcustomersforrepairs

Comprehensive, personalized database to build knowledge of customers to be used in customizing how products are sold, serviced, and replaced

Programs to ensure technical competence of sales staff and marketing orientation of service personnel

Human resource

management

General administration

Quality control presence at key supplier facilities; work with suppliers’ new product development activities Procurement

margin

Profit

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Advantages of a Differentiation StrategyAdvantages of a Differentiation Strategy

Rivalry is reduced when a business successful differentiates itself

Rivalry is reduced when a business successful differentiates itself

Buyers are less sensitive to prices for effectively differentiated products

Buyers are less sensitive to prices for effectively differentiated products

Brand loyalty is hard for new entrants to overcome

Brand loyalty is hard for new entrants to overcome

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Key Risks of DifferentiationKey Risks of Differentiation

Imitation narrows perceived differentiation, rendering differentiation meaningless

Imitation narrows perceived differentiation, rendering differentiation meaningless

Technological changes that nullify past investments or learning

Technological changes that nullify past investments or learning

Cost difference between low-cost competitors and the differentiated business becomes too great for differentiation to hold brand loyalty

Cost difference between low-cost competitors and the differentiated business becomes too great for differentiation to hold brand loyalty

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Creating a Competitive Advantage Based on SpeedCreating a Competitive Advantage Based on Speed

Has become a major source of competitive advantage for many firms

Involves the availability of a rapid response to customers by Providing current products quicker

Accelerating new product development or improvement

Quickly adjusting production processes

Making decisions quickly

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Evaluating A Business’s Evaluating A Business’s Rapid Response Rapid Response OpportunitiesOpportunities

A. Skills and Resources Fostering Speed• Process engineering skills• Excellent inbound and outbound logistics• Technical people in sales and customer service• High levels of automation• Corporate reputation for quality or technical leadership• Flexible manufacturing capabilities• Strong downstream partners• Strong cooperation from suppliers of major components

B. Organizational Requirements Supporting Rapid Response• Strong coordination among functions in R&D, product development, and

marketing• Major emphasis on customer satisfaction in incentive programs• Strong delegation to operating personnel• Tradition of closeness to key customers• Some personnel skilled in sales and operations - technical and marketing• Empowered customer service personnel

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Evaluating A Business’s Evaluating A Business’s Rapid ResponseRapid Response Opportunities -- Opportunities --C. Examples of Ways Businesses Achieve Competitive AdvantageC. Examples of Ways Businesses Achieve Competitive Advantage

Technology development

Use of companywide technology sharing activities and autonomous product development teams to speed new product development

Working very closely with suppliers to include their choice of warehouse location to minimize delivery time

Inbound logistics Operations Outbound logistics Marketing & sales

Serv

iceStandardize

dies, components, and production equipment to allow quick changeover to new or special orders

JIT delivery plus partnering with express mail services to ensure very rapid delivery

Use of laptops linked directly to operations to speed the order process and shorten the sales cycle

Locate servicetechniciansat customerfacilities thataregeograph-icallyclose

Highly automated and integrated information processing system; include major buyers in the systems on a real-time basis

Develop self-managed work teams and decision making at lowest levels to increase responsiveness

Human resource

management

General administration

Preapproved, online suppliers integrated into productionProcurement

margin

Profit

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Advantages of a Speed-Based StrategyAdvantages of a Speed-Based Strategy

Creates a way to lessen rivalry because firm has the availability of something a rival may not

Creates a way to lessen rivalry because firm has the availability of something a rival may not

Allows firm to charge buyers more, engender loyalty, or enhance its’ position relative to its buyers

Allows firm to charge buyers more, engender loyalty, or enhance its’ position relative to its buyers

Generates cooperation and concessions from suppliers since they benefit from increased revenues

Generates cooperation and concessions from suppliers since they benefit from increased revenues

Substitutes and new entrants are trying to keep up with the rapid changes rather than introducing them

Substitutes and new entrants are trying to keep up with the rapid changes rather than introducing them

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Key Risks of a Speed-Based Strategy Key Risks of a Speed-Based Strategy

Speeding up activities that have not been conducted in a fashion prioritizing rapid response should only be done after attention to training, reorganization, and/or reengineering

Speeding up activities that have not been conducted in a fashion prioritizing rapid response should only be done after attention to training, reorganization, and/or reengineering

Some industries - stable, mature ones - may not offer much advantage to a firm introducing some forms of rapid response

Some industries - stable, mature ones - may not offer much advantage to a firm introducing some forms of rapid response

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Creating a Competitive Advantage Based on Market FocusCreating a Competitive Advantage Based on Market Focus

Involves building cost, differentiation, and/or speed competitive advantages targeted to a narrow, market niche

Allows a firm to “Learn” its target customers Build up organizational knowledge of ways to satisfy

its target market better than larger rivalsRisks of focus strategies

Can attract major competitors to the segment Believing a focus strategy, by itself, creates success,

rather than a form of low cost, differentiation, or speed

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Industry Environments and Strategy ChoicesIndustry Environments and Strategy Choices

Emerging IndustriesEmerging Industries

Industries Transitioning to MaturityIndustries Transitioning to Maturity

Mature and Declining IndustriesMature and Declining Industries

Fragmented IndustriesFragmented Industries

Global IndustriesGlobal Industries

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Characteristics of Markets in Emerging IndustriesCharacteristics of Markets in Emerging Industries

Proprietary technology and technological uncertainty

Competitor uncertainty regarding inadequate information

High initial cost structureFew entry barriersFirst-time buyers require initial inducement Inability to easily obtain raw materials and

componentsNeed for high-risk capital

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Strategic Options for Emerging IndustriesStrategic Options for Emerging Industries

1. Ability to shape industry’s structure 1. Ability to shape industry’s structure

2. Ability to rapidly improve product quality 2. Ability to rapidly improve product quality

3. Establish favorable relations with key suppliers 3. Establish favorable relations with key suppliers

4. Ability to establish technology as dominant force 4. Ability to establish technology as dominant force

5. Acquire a core group of loyal customers 5. Acquire a core group of loyal customers

6. Ability to forecast future competitors 6. Ability to forecast future competitors

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Characteristics of Industries Transitioning to MaturityCharacteristics of Industries Transitioning to Maturity

Intense competition for market share

Increased sales to experienced, repeat buyers

Greater emphasis on cost and service

Declining profitability

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Strategic Options for Maturing IndustriesStrategic Options for Maturing Industries

1. Prune the product line1. Prune the product line

2. Emphasize process innovation2. Emphasize process innovation

3. Emphasize cost reductions3. Emphasize cost reductions

4. Focus on selecting loyal buyers4. Focus on selecting loyal buyers

5. Pursue horizontal integration5. Pursue horizontal integration

6. Expand internationally6. Expand internationally

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Pitfalls to Avoid in Competing in Maturing Industries Pitfalls to Avoid in Competing in Maturing Industries

A middle-ground approach to selecting a generic competitive strategy

Sacrificing market share for short-term profits

Waiting too long to respond to price reductions

Retaining unneeded excess capacity

Engaging in sporadic efforts to boost sales

Placing hopes on new products

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Characteristics of Mature/Declining IndustriesCharacteristics of Mature/Declining Industries

Demand grows more slowly than economy,or even declines

Slowing growth is caused by

Technological substitution

Demographic shifts

Shifts in consumer needs

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Strategic Options for Mature/Declining IndustriesStrategic Options for Mature/Declining Industries

1. Focus on key market segments offering growth opportunities

1. Focus on key market segments offering growth opportunities

2. Emphasize product innovation and quality improvement

2. Emphasize product innovation and quality improvement

3. Emphasize production and distribution efficiency

3. Emphasize production and distribution efficiency

4. Gradually harvest the business4. Gradually harvest the business

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Pitfalls to Avoid in Competing in Mature/Declining Industries Pitfalls to Avoid in Competing in Mature/Declining Industries

Being overly optimistic about prospects for an industry revival

Getting trapped in a profitless war of attrition

Harvesting from a weak position

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Characteristics of Fragmented IndustriesCharacteristics of Fragmented Industries

No firm has a significant market shareNo firm can significantly influence industry

outcomesExamples

Professional services Retailing Wood and metal fabrication Agricultural products Funeral industry

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Strategic Options for Fragmented IndustriesStrategic Options for Fragmented Industries

1. Tightly managed decentralization - Intense local coordination, high personal service, local autonomy

1. Tightly managed decentralization - Intense local coordination, high personal service, local autonomy

2. Formula facilities - Standardized, efficient, low-cost facilities at multiple locations

2. Formula facilities - Standardized, efficient, low-cost facilities at multiple locations

3. Increased value added - Difficult to differentiate products/services

3. Increased value added - Difficult to differentiate products/services

4. Specialization - Product type, customer type, type of order, geographic areas

4. Specialization - Product type, customer type, type of order, geographic areas

5. Bare bones/no frills - Intense low margin competition (low overhead, minimum wages, tight cost controls)

5. Bare bones/no frills - Intense low margin competition (low overhead, minimum wages, tight cost controls)

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Characteristics of Global IndustriesCharacteristics of Global Industries

Differences in prices and costs among countries due to Currency exchange fluctuations Differences in wage and inflation rates Other economic factors

Differences in buyer needs across countriesDifferences in competitors and ways of

competing among countriesDifferences in trade rules and governmental

regulations across countries

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Strategic Options: Pursuing Global Market Coverage Strategic Options: Pursuing Global Market Coverage

1. License foreign firms to produce and distribute a firm’s products

1. License foreign firms to produce and distribute a firm’s products

2. Maintain a domestic production base and export products

2. Maintain a domestic production base and export products

3. Establish foreign-based plants and distribution in foreign countries

3. Establish foreign-based plants and distribution in foreign countries

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Strategic Options: Choosing a Generic Competitive Strategy Strategic Options: Choosing a Generic Competitive Strategy

1. Broad-line global competition 1. Broad-line global competition

2. Global focus strategy 2. Global focus strategy

3. National focus strategy 3. National focus strategy

4. Protected niche strategy 4. Protected niche strategy

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Grand Strategy Selection MatrixGrand Strategy Selection Matrix

Overcome weaknesses

Maximize strengths

External (acquisition

or merger for resource

capability)

Internal (redirected resources within the

firm)

Turnaround or retrenchmentDivestitureLiquidation

Vertical integrationConglomerate diversification

Concentrated growthMarket developmentProduct developmentInnovation

Horizontal integrationConcentric diversificationJoint venture

IIIIVIII

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Model of Grand Strategy ClustersModel of Grand Strategy Clusters

Rapid market growth

Slow market growth

Weak competitive

position

Strong competitive

position

1. Concentrated growth

2. Vertical integration3. Concentric

diversification

1. Reformulation of concentrated growth

2. Horizontal integration3. Divestiture4. Liquidation

1. Concentric diversification

2. Conglomerate diversification

3. Joint venture

1. Turnaround or retrenchment2. Concentric diversification3. Conglomerate diversification4. Divestiture5. Liquidation

IIIIIIIV

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Conclusion: Selecting a Business Strategy toConclusion: Selecting a Business Strategy toAchieve a Competitive AdvantageAchieve a Competitive Advantage

Focusing on key sources of competitive advantage requiring

total, consistent commitment

Weighing skills, resources, organizational requirements, and

risks of each source of competitive advantage

Considering unique effects of the generic industry environment on a

firm’s value chain activities

Selection of appropriate business strategie(s) involves