Strategic  Options  and  Choice  Techniques

Unit  5

Strategic  OptionConcept• Strategies  are  the  broad  action  plans  formulated  and  implemented  for  achieving  long  term  objectives  of  an  organization.• The  strategies  that  are  likely  to  be  pursued  by  an  organization  are  known  as  strategic  options.• Strategic  options  are  developed  analyzing  the  internal  and  external  environment.• Before  selecting  a  particular  strategies,  an  organization  develops  a  number  of  alternative  strategies.  They  are  developed  based  on  market  conditions  and  internal  capabilities.• SWOT  analysis  is  the  foundation  for  developing  strategic  options.  

Strategic  options  through  SWOT  AnalysisStrength and  Opportunity Strength  and  ThreatIssueHow  can  strength  be  used  to  take  advantage  of  the  opportunities  ?Possible Strategiesü Expansionü Product  developmentüMarket  development

IssueHow  can  strength  be  used  to  avoid  current and  potential  threats  ?Possible  StrategiesüDiversificationü ConsolidationüMarket  penetration

Weakness and  Opportunity Weakness  and  ThreatIssueHow can  opportunities  be  used  to  overcome  the  weakness  you  are  experiencing  ?Possible  Strategiesü Strategic  allianceü Collaboration

IssueHow can  weakness  be  minimized  to  avoid  threats  ?Possible  strategiesüDownsizeüDivestiture

Grand  Strategies  /  Corporate  Level  Strategy

• Grand  strategies   are  the  decisions  or  choices   of  long  term  plans  from  available  alternatives.

• Grand  strategies   also  called  as  master  or  corporate  level  strategy.

• It  is  based  on  analysis  of  internal  and  external  environment.

• This  direct  the  organization  towards  achievement   of  overall  long  term  objectives  (strategic   intent).

• They  involve  Expansion,  Quality   Improvement,  Market  Development,  Innovation,  Liquidation,   etc.

• Usually  they  are  selected   by  top  level  managers  such   as  directors,  executives etc.

• It  is  classified  into  following:-­‐‑• Stability  Strategy• Growth  Strategy• Retrenchment  Strategy• Combination  /  Mixed  Strategy

Classification  of  Grand  Strategy

Grand  Strategy

Stability Growth Retrenchment Combination  /  Mixed

Stability  Strategy

Stability  Strategy

• Under  stability  strategy,  an  organization  continues  its  current  activities  without  any  significant  change  in  direction.• The  organization  does  not  make  significant  change  in  its  product,  market,  and  activities.• It  is  sometimes  viewed  as  a  lack  of  strategy.• Stability  strategy  can  be  very  useful  in  the  short  run,  however  it  can  be  dangerous  if  followed  for  too  long.  

When  do  organization  followStability  Strategy• It  is  common  for  most  of  the  organizations  to  follow  this  strategy  at  some  point  of  time  in  their  life  cycle.

• When  a  firm  serves  defined  market  and  its  segments  to  fulfills  its  mission.

• When  a  firm  can  relate  itself  with  the  environment  and  environmental  factors  do  not  show  any  appreciable  change.  This  is  possible  for  most  of  the  firms  in  a  short  run,  but  for  a  few  in  long  runs.

• When  organization  continues  to  pursue  the  same  objectives  by  adjusting  to  the  same  level  of  achievement  about  the  same  percentage.  Thus  stability  does  not  mean  absence  of  growth  but  the  growth  is  limited  within  specified  limitsand  there  is  no  substantial  addition  of  facilities.

• When  management  perception  about  performance  in  the  present  business   is  satisfactory,   they  tend  to  follow  stability   strategy  because   they  are  not  always  sure  of  a  set  of  factors  attributing   to  success.   Thus  they  decide  to  continue  the  same  business.

• This  strategy   involves  low  risk  unless  there   is  a  major  change   in  the  environment.  So  it  provides  safe  business.   Therefore   it  is  preferred  by  risk  avoiding  managers.

• “Slow  or  resistant  to  change”   organizations  follow  this  strategy.  As  they  become  larger  and  more  successful,   they  develop  such  tendency  &  prefer  stability.

• Organization’s   past  history  may  be  full  of  changes,   so  to  reap  the  advantages  of  such  past,  stability   is  preferred  for  some  time,  usually  after  growth  strategy.

Why  do  organization  followStability  Strategy

Incremental  growth  strategy

• It  is  one  in  which  a  firm  sets   its  objectives/achievement   levels  based  on  past  accomplishment   adjusted  for  inflation.  It  may  be  average  achievement   level  of  industry  or  even  low.  It  is  followed  when  environmental  factors  are  more  or  less  stable.• The  organization   is  doing  well  or  perceives  as  doing  well  in  its  present  form.

• It  being  a  less  risky  and  the  organization  does  not  go  for  higher   risk.• The  organization   is  change  resistant   and  prefers  change   only  in  extraordinary  times.

• It  is  easier  to  pursue  as  it  does  not  disturb  the  organizational   routines.

Alternatives  of  stability  strategy.

Profit  strategy  /  End  game  strategy  /  Harvesting  strategy

• It  is  one  in  which  organization  or  its  SBU  aims  at  generating  profit/cash,   sometimes   at  the  cost  of  market  share  also  because  • the  product  is  not  prestigious,• its  market  share  &  also  contribution   to  total  sales  are  very  small.

• The  product  is  in  stable   or  declining  market• Here,  company  wants  to  increase  as  much  profit  as  possible  before  retrenchment.

Cont….

Sustainable   growth  strategy

• It  is  one  in  which  a  firm  tries  to  maintain   its  existence   in  unfavorable  critical   conditions like  constraints   on  finance  resources,  raw  material   resources  etc.,  govt.  policy,  cheaper  imports,  competitor   by  big  and  capable  competitors   etc.

Stability   as  a  pause/breathing   spell/proceed  with  caution   strategy

• It  is  one  in  which  organization  has   followed  growth  strategy  aggressively   in  recent  past  and  want  a  pause  on  growth  to  consolidate   its  position  by  allowing  structured   changes   to  take  place  and  the  system  to  adopt  to  new  strategies   ,thereby  it  wants  to  take  full  advantage  of  future  growth opportunities  and  strong  present  factors.  Thus  this  strategy  becomes   intermediate   choice  between  past  &  future,   for  some  time.

Cont….

• Growth  Strategies  are  means  by  which  an  organization  plans  to  achieve  the  increased  level  of  objective that  is  much  higher  than  its  past  achievement  level.

• Organizations  may  select  a  growth  strategy• to  increase  their  profits,  sales  or  market  share.• to  reduce  cost  of  production  per  unit.• increase  in  performance  objectives.

Growth  Strategy

• In  the  long  run,  growth  is  necessary  for  the  very  survival  of  the  organizations.  The  organization  that  does  not  grow  may  be  pushed  out  of  the  business  because• Of  the  new  entrants  in  the  field• Higher  wages,  higher  costs  of  other  inputs,  and  lower  level  of  efficiency  because  of  certain  obsolete  /  outdate  and  no  longer  used  in  plant  and  machinery.

• Growth  offers  many  economies  because  of  large-­‐‑scale  operations.• Per  unit  cost  of  production  can  be  very  low  • The  economies  of  increasing  scale  enhance  degrees  of  specialization.  •With  more  people  available  to  do  the  different  kinds  of  work• Greater  penetration  can  be  made

These  eventually  lead  to  certain  competitive  advantage  to  the  organization  concerned.

Reasons  for  following

• Growth  strategy  is  taken  up  because  of  managerial  motivation  to  do  so.  Managers  with  high  degree  of  achievement  and  recognition  always  prefer  to  grow.  • There  are  certain  intangible  advantages  of  growth.  These  may  be  in  the  form  of• Increased  prestige  of  the  organization• Satisfaction  to  employees  and  • Social  benefits• Preferred  by  investorsGrowing  companies  have  high  level  of  prestige  in  the  corporate  world.  

Cont….

A  )  Concentric  Expansion  Strategy

• It  means  investing  the  resources   in  one  or  more  of  a  firm’s  business   so  as  to  expand  its  present  business.

• i.e.  doing  more  what  we  are  already  doing  and  where  we  are  best  at  doing;  when  potential   for  growth,  attractiveness   and  maturity   factors  are  favorable in  the   industry  of  the  firm.

• It  can  be  aimed  at-­‐‑• Market  penetration (capture  the  market  share   in  the  existing   product  and  expand  its  business   at  rate  higher  than  the   industry  growth)

• Market  development (increase  sales  by  developing  new  markets,  geography-­‐‑wise  or  segment-­‐‑wise)

• Product  development (achieve  growth  through   product  innovation  to  penetrate   in  new  segment)

Alternatives  of  Growth  Strategy

Market  Penetration•Market  penetration  refers  to  the  market  share  of  existing  product  in  existing  market  to  protect  and  build  market  position.• It  is  possible  through  aggressive  marketing  tactics  like  

qallowances,  qadvertising,  qprice  reduction,  and  qpackage  improvement.

• It  is  also  possible  through  sustaining  or  improving  quality  and  innovation.  

Ways  of  Market  penetration

• There  are  basically  three  ways  a  company  can  penetrate  a  market.

1. Stimulating  customers  to  increase  there  current  rate  of  usages.

2. Attracting  non-­‐users  by  using  promotion  incentives,  advertising  and  price  up  or  down.

3. Influencing  competitor's  customers  by  brand  differentiation  and  stepping  up  promotional  activities.

Conditions  for  Marketing  Penetration  

v The  existing  markets  are  not  saturated  with  the  industry  performance.  

vThe  usage  rate  of  present  customers  can  be  significantly  increased.

vThe  market  of  major  competitors  is  decreasing  while  total  industry  sales  are  stable  or  increasing.

vIncrease  economies  of  scale  provide  major  competitive  advantage.

Market  Development

• An  organization  can  also  increase  sales  of  its  existing  product  by  market  development  strategy.  • Market  development  implies  a  firms’  entry  into  new  market  with  existing  product.  • This  is  required  when  there  are  no  further  opportunities  in  existing  markets  or  organization  has  excess  production  capacity.  • Using  a  market  development  strategy,  a  company  can  capture  a  large  share  of  an  existing  market  for  current  products  through  market  penetration  and  develop  new  use  or  markets  for  current  products.  

Implementing  market  development  strategy

• Extending  into  new  market  segments,  which  are  not  currently  served  • Opening  up  additional  geographical  markets• Resorting  to  new  channels  of  distribution• Developing  new  use  of  existing  products.  

Market  development  strategies  are  suitable  under  the  following  conditions• The  new  reliable  and  inexpensive  channels  of  distribution  are  available.• The  organization  is  highly  effective  and  efficient  in  its  activities.• The  untapped  or  unsaturated  market  exists.• The  firm  has  excess  production  capacity.• The  firm  has  potential  ability  to  create  new  usage  of  existing  products.  

Product  Development

• An  organization  can  achieve  growth  through  product  development  strategy.• It  includes  delivery  of  modified  or  new  products  to  the  existing  market.• The  new  product  can  be  brought  by  :

1. Innovation  :  Product  new  to  the  world2. Modification  :  Product  new  to  the  market3. Imitation  :  Product  new  to  the  organization

Conditions  for  pursuing  product  development

• The  organization  has  successful  products  that  are  in  the  maturity  stage  of  life  cycle.• The  organization  holds  a  high  market  share  and  has  strong  brand  position  and  enjoys  distinctive  competitive  advantages  in  the  market.• There  is  a  high  growth  potentials  in  the  market.• Major  competitors  offer  better  quality  products  at  comparable  price.  • There  is  a  need  to  react  to  technological  development.• The  organization  has  a  strong  research  and  development  capability.

B  )  Diversification  Strategy• It  is  the  process  of  entry  into  a  business  which  is  new  to  an  organization.  i.e.  it  is  a  decision  to  enter  into  the  new  business.

• Diversified  organizations  can  be  classified  into  following• Concentric  Diversification  (Related  diversification)• Market-­‐‑wise• Technology  –wise• Both

• Conglomerate  Diversification  (Unrelated  diversification)

Alternatives  of  Growth  StrategyCont….

Concentric  (  Related  )  diversification

• It  is  diversifying  into  a  industry  related  to  the  current  one.• It  may  be  a  very  appropriate  strategy  when  the  firm  has  a  strong  competitive  position  but  industry  attractiveness  is  low.• It  may  be  achieved  through  two  ways:

1. Vertical  integration  2. Horizontal  integration  

Implementing  Growth  Strategy

üAcquisition  and  MergerüJoint  development  and  Strategic  Alliance

Acquisition  and  Merger

• Acquisition  :  It  is  strategy  in  which  one  firms  buys  a  other.  In  acquisition,  an  existing  organization  takes  over  another  organization  through  purchase  of  share  or  ownership.• Merger  :  A  merger  is  a  strategy  through  which  two  firms  agree  to  integrate  their  operations.  It  is  the  combination  of  two  or  more  organization  into  one  single  organization.  • Merger  can  be  horizontal,  vertical,  concentric  and  conglomerate  .  

Types  of  merger

1. Horizontal  merger  :  It  is  the  merger  between  firms  in  the  same  line  of  business  such  as  a  merger  between  two  commercial  banks.

2. Vertical  merger  :  Under  this,  two  firms  producing  complementary  products  merge  and  form  a  firm,  such  as  merger  between  leather  processing  firms  and  Shoe  Company.  

3. Concentric  merger  :  If  two  firms  serving  the  same  customer  group  merge  each  other,  it  is  called  concentric  merger.  For  example,  merger  of  two  colleges.

4. Conglomerate  merger  :  If  two  firms  with  different  products  merge  each  other,  it  is  called  conglomerate  merger.  For  example,  merger  between  school  and  hotel.  

Reason  of  Acquisition  and  Merger  (  A&M  )  

Increase  Market  power

Overcoming  entry  barriers

Increased  speed  to  market

Low  risk Increase  diversification

Reshaping  the  firms'  competitive  

scope

Learning  &  developing  new  capabilities.

Increased  market  power

•Achieving  greater  market  power  is  a  primary  reason  for  acquisitions.•Market  power  is  determined  by  he  size  of  firm  and  its  resources  and  capabilities  to  compete  in  the  marketplace.  • It  is  also  affected  by  the  firms'  share  of  the  market.  

Overcoming  entry  barriers

• Barriers  to  entry  are  difficulties  new  firms  encounter  when  tying  to  enter  particular  market.• The  established  firms  may  have  economic  of  scales.• Good  relationship  with  customer  often  create  product  loyalty  that  also  make  new  entrants  difficult.• In  such  a  situation,  new  entrant  may  acquire  an  established  company  to  be  more  effective  than  entering  the  market  as  a  competitor  offering  a  product  that  is  unfamiliar  to  current  buyers.  • The  acquiring  firms  gains  immediate  access  to  the  market.  

Increased  speed  to  market

• Developing  new  products  internally  and  successfully  introducing  them  into  the  marketplace  often  requires  significant  investment  and  other  resources.  • Internal  product  development  may  be  high  risk  activity.  • Acquisition  are  the    means  for  a    firms  to  gain  access  to  new  products.  • Acquisition  provides  more  predictable  returns  as  well  as  faster  market  entry.  

Low  Risk

•Acquisition  are  viewed  less  risky  because  the  outcomes  of  an  acquisition  can  be  estimated  more  easily  and  accurately.•Acquisitions  strategies  are  a  common  means  of  avoiding  risk  and  becomes  a  substitute  for  innovation.  

Increased  diversification

•Acquisitions  are  also  used  to  diversify  firms.• It  is  difficult  for  companies  to  develop  products  that  differ  from  their  current  line  for  market  in  which  they  lack  experiences.  Thus,  it  is  relatively  uncommon  for  a  firm  to  develop  new  products  internally  to  diversify  its  product  line.•Acquisition  strategies  can  be  used  to  support  both  the  unrelated  and  related  diversification  strategies.  

Reshaping  the  firm’s  competitive  scope

•Firms  may  use  acquisitions  to  reduce  or  decrease  their  dependence  on  one  or  more  products  or  markets  and  reduce  the  negative  effect  of  an  intense  rivalry.  

Learning  and  developing  new  capabilities

•Firms  sometimes  follow  acquisitions  to  gain  access  to  capabilities  they  lack.•Firm  should  seek  to  acquire  companies  with  different  but  related  and  complementary  capabilities  in  order  to  build  their  own  knowledge  base.  

Top  10  Merger  and  Acquisition

Joint  Development  and  Strategic  Alliance

• A  company  uses  competitive  strategies  to  gain  competitive  advantages  within  an  industry  by  battling  against  other  firms.• A  company  can  also  use  cooperative  strategies  to  gain  competitive  advantages  within  industry  by  working  with  other  firms.  • A  cooperative  strategy  is  a  strategy  in  which  firms  work  together  to  achieve  share  objectives.  Under  it,  company  attempts  to  get  competitive  advantages  in  cooperation  with  other  firms.  • The  main  aim  of  joint  development  and  strategic  alliance  is  to  build  and  share  competencies  for  mutual  benefits.  

Type  of  cooperative  strategies  

Collusion Strategic  Alliances

Collusion

• Collusion  is  the  active  cooperation  of  firms  within  an  industry  to  reduce  output  and  raise  prices.  • It  may  be  explicit,  in  which  firms  cooperate  through  direct  communication  and  negotiation.  • Collusion  in  an  industry  is  most  likely  to  be  successful  if  there  are  a  small  number  of  identifiable  competitors  and  costs  are  similar  among  firms.    

Strategic  Alliance

• Strategic  alliance  is  a  cooperative  strategy  in  which  firms  combine  some  of  their  resources  and  capabilities  to  create  a  competitive  advantages.• It  involves  some  degree  of  exchange  and  sharing  of  resources  and  capabilities  to  develop,  sell  and  serve  goods  or  services.• Strategic  alliance  allow  firms  to  use  their  existing  resources  and  capabilities  while  working  with  partners  to  develop  additional  resources  and  capabilities  as  the  foundation  for  new  competitive  advantages.  • The  success  from  strategic  alliance  is  more  likely  when  partners  behave  cooperatively  to  solve  mutual  problems.

Type  of  Strategic  Alliances

Ø Joint  VentureØEquity  AllianceØNon-­‐equity  Alliance

Joint  Venture

• A  joint  venture  is  a  strategic  alliance  in  which  two  or  more  firms  create  a  legally  independent  company  to  share  some  of  their  resources  and  capabilities  to  develop  a  competitive  advantages.• It  is  effective  in  establishing  long  term  relationship  and  in  transferring    knowledge  &  experience  .  • Normally,  the  partners  own  equal  percentage  and  contribute  equally  to  venture’s  operations.  

Equity  Alliance

•Under  this,  two  or  more  firms  own  different  percentages  of  the  company  they  have  formed  by  combining  some  of  their  resources  and  capabilities  to  create  a  competitive  advantages.  

Non  equity  alliance

•A  non  equity  alliance  involves  two  or  more  firms  develop  a  contractual  relationship  to  share  some  of  their  unique  resources  and  capabilities  to  create  competitive  advantages.  •Under  it  ,  firms  do  not  established  separate  independent  company  and  therefore  do  not  take  equity  positions.  

Reason  for  Strategic  Alliance

• To  obtain  or  lean  new  capabilities.• To  obtain  access  to  specific  market• To  reduce  financial  risk• To  reduce  political  risk• Co  specilization

1.  To  obtain  or  learn  new  capabilities

• Strategic  alliance  is  very  much  helpful  in  obtaining  or  learning  new  capabilities.• It  is  even  more  important  if  the  desired  knowledge  or  capabilities  is  based  on  new  technology.• Research  shows  that  films  with  strategic  alliance  had  more  modern  manufacturing  technologies

2.  To  obtain  access  to  specific  market

• Strategic  alliance  helps  obtain  access  to  specific  market.• It  is  often  achieved  by  forming  value  chain  alliance  with  other  companies  either  as  parts  suppliers  or  sub-­‐contractors.•One  of  the  reason  of  forming  strategic  alliances  is  to  achieve  fast  and  low  cost  expansion  to  new  markets.  

3.  To  reduce  financial  risk• Alliance  takes  less  financial  resources  than  acquisitions  or  going  alone.  Hence  it  reduces  financial  risk.

4.  To  reduce  political  Risk:  • Forming  alliance  with  local  partners  is  good  way  to  overcome  deficiencies  in  resources  and  capabilities  when  expanding  into  international  markets.• Forming  strategic  alliance  with  local  partner  helps  build  positive  image  and  reduce  political  risk.  

5.  Co-­‐specialization

• Strategic  alliance  promotes  specialization  within  each  partner.• It  results  in  product  innovation  as  well  as  productivity.  

Home  Work

• Find  any  5  company  Nepalese  company  /  institution  that  goes  through  Acquisition  and  Merger.  Find  the  reason  for  such  activity  of  those  company.  • Find  any  5  international  company  /  institution  that  have  strategic  alliance  with  other  company.  Find  out  their  goals  for  strategic  alliance.  

Retrenchment  Strategy

• Retrenchment  :  A  decision  to  reduce  the  scope  of  business  partially.  • A  company  may  pursue  retrenchment  strategies  when  it  has  a  weak  competitive  position  in  some  or  its  entire  product  line  resulting  in  poor  performance.  • This  strategy  my  be  useful  if  the  product  is  in  its  declining  stage  of  life  cycle.

Type  of  retrenchment  strategy

1. Turnaround  strategy2. Captive  company  strategy3. Sell-­‐out/  Divestment  strategy4. Bankruptcy  and  Liquidation  strategy

• Turnaround  Strategy  :  It  emphasizes  the  improvement  of  operational  efficiency.  This  can  be  achieved  by  cutting  cost  and  expenses  and  selling  assets.• Captive  company  strategy:  It  involves  giving  up  independences  in  exchange  for  security.  A  company  with  competitive  advantage  may  not  be  able  to  take  turnaround  strategy.  

• Sell  out  /  divestment  strategy:  If  a  company  has  a  weak  competitive  position  and  is  not  in  position  to  adopt  turnaround  or  captive  company  strategy,  it  is  better  for  it  to  sell  our  the  business.  • Bankruptcy  and  liquidation  strategy  :  Bankruptcy  involves  giving  up  management  of  the  firm  to  the  courts  in  return  for  some  settlement  of  the  company’s  obligation.  

Corporate  level  Analytical  Tools

• Boston  Consulting  Group  (  BCG)  Matrix• The  General  Electric  (GE)  Matrix  /  MackinseyMatrix

Boston  Consulting  Group  (  BCG  )  Matrix

• The  BCG  /  Growth  share  matrix  is  the  simplest  way  to  portray  a  company’s  portfolio  investment.  • In  BCG  Matrix,  each  of  the  company’s  product  line  or  business  units  is  plotted  according  to  the  growth  rate  of  the  industry  in  which  it  competes  and  its  relative  market  share.  

BCG  Matrix  

Stars

• It  is  those  business  units  which  are  rapidly  growing  in  the  market,  with  large  market  share.  • They  represent  the  best  long  run  opportunities,  i.e.  growth  and  profitability  in  the  firms'  portfolio.  • They  are  usually  able  to  generate  enough  cash.  

Cash  cows

• Cash  cows  are  those  business  units  which  have  high  market  share  but  low  market  growth  rate.  • Cows  were  yesterday’s  star.• They  generate  enough  cash  needed  to  maintain  their  market  share.  • They  have  low  cost  relative  to  competitors.• They  do  not  require  future  investment  because  of  stable  growth.

Dogs

• They  are  the  business  units  with  low  market  share  and  long  growth  rate.• They  poses  very  low  competitive  position  because  of  high  cost,  low  quality  and  low  profit.• They  have  no  future  prospects  because  low  market  growth  and  low  market  share.  • Retrenchment,  liquidation  etc.  may  be  suitable  strategies  for  these  business  units.  

Question  marks

• It  is  sometimes  called  ’Problem  children’  or  ‘wildcats’.• It  is  those  business  units  or  products  with  potential  for  success,  but  they  need  a  lot  of  cash  for  development.• They  are  the  business  units  with  high  market  growth  but  low  market  share.• They  require  a  high  investment  for  advertisement,  product  reformulation  and  distribution.

The  General  Electric  (  GE)  Matrix  /  McKinsey  Matrix  • General  electric,  with  the  assistance  of  the  McKinsey  &  company  consulting  firm,  developed  GE  matrix.  • It  includes  nine  cells  based  on  long  term  industry  attractiveness  and  business  strength  /  competitive  position.  

Industry  attractiveness(Long  term  market  attractiveness)• It  refers  to  the  subjective  assessment  based  on  the  broadest  possible  range  of  external  opportunities  and  threats  beyond  the  strict  control  of  management.  • The  high  /  median  /  low  portfolio  shows  how  attractive  the  industry  is  to  invest  or  divest  or  in  between  that  depends  on  the  long  term  attractiveness.  • The  choice  of  a  certain  portfolio  is  determined  by  the  size,  market  growth,  market  diversity,  resource  etc.  

Competitive  or  business  position

• It  refers  to  the  subjective  assessment  of  how  strong  a  competitive  advantage  created  by  a  broad  range  of  the  firm’s  internal  strengths  and  weakness  is.  • High  /  medium  /  low  the  criteria  such  as  size,  growth  share,  position,  profitability,  margin  etc.  will  determine  the  competitiveness  or  business  positions  of  a  firm.  

Business  Strength Industry  Attractiveness1. Market  share2. Sales  force3. Marketing4. R &  D5. Manufacturing6. Distribution7. Financial  resources8. Managerial  competence9. Competitive  position  in  term  of  goodwill,  product  line,  quality  and  reliability  and  customer  service

1. Market  size2. Market  growth rate3. Competitive  structure4. Barriers  to  entry5. Industry  profitability6. Technology7. Regulations8. Workforce  availability9. Environmental  issues10.Political  issues11.Legal  issues

Business  level  Strategy  

• Porter’s  Generic  /  Competitive  Strategies• Strategic  Clock  Oriented  Market  based  Generic  Strategies

Porter's  generic  strategies

• Generic  strategies  are  dependent  on  the  corporate  strategy.• They  are  a  prerequisite  for  long  term  profitability  and  suceess that  organization  choose  from  three  strategic  models  :  -­‐

1. Cost  leadership2. Differentiation  3. Focus

1.  Cost  leadership  Strategy

• The  cost  leadership  strategy  is  an  attempt  to  produce  goods  or  services  with  features  that  are  acceptable  to  customers  at  the  lowest  cost,  relative  to  that  of  competitors.• It  aims  to  offer  standardized  products  to  the  customers  at  price  lower  than  the  competitors.• It  attempts  to  reduce  cost  and  increase  the  market  share  by  providing  acceptable  product.• Under  this,  the  overall  profit  increase  due  to  higher  sales  irrespective  of  the  lower  price.• This  strategy  is  successful  when  the  customers  are  price  sensitive.  

Ways  of  cost  reductions

1. Economics  of  scales2. Capacity  utilization3. Resource  sharing4. Lower  cost  material5. Direct  marketing6. Simple  product  design  and  process.

Benefits  of  Cost  leadership  Strategy

• Minimize  or  Reduce  the  competitive  pressure  of  the  firm• Low  risk  of  substitution• Less  chance  of  new  entrants• Increase  in  market  share• Address  to  customers  bargaining

2.  Differentiation  Strategy  

• The  differentiation  strategy  is  an  actions  produce  goods  or  services  (at  acceptable  cost)  that  customers  perceive  as  being  different  in  way  that  are  important  to  them.• Under  this  strategy,  an  organization  tries  to  offer  the  products  which  are  distinct  in  the  perception  of  customers.• The  differentiation  may  be  based  on  product  parameters,  services  back  up,  promotion  and  image.

Bases  of  Differentiation

• Unique  product  performance• Unique  product  features• Unique  service• Detailed  information

3.  Focus  strategy

• The  focus  strategy  is  an  integrated  set  of  actions  taken  to  produce  goods  or  services  that  serves  the  need  of  a  particular  competitive  segment.• It  focuses  on  a  narrow  segment  of  customers.• A  firms  attempts  to  achieve  either  cost  advantage  or  product  and  service  differentiation.• Under  this,  firm  can  earn  customer  loyalty.• The  firm  focuses  on  market  segment  with  high  profitability  and  growth.• They  focus  on  two  strategy:  Focus  low  cost  and  focus  differentiation.  

Business  Level  Analytical  Tools

Business  Level  Analytical  ToolsQuadrant I• Meant for those firms which are in a strong competitive position and flourishing withrapid market growth. Firms located in this quadrant are in excellent strategic position andthey need to concentrate on current markets and products.

• Concentration on current markets reveals the adoption of strategies such as marketpenetration and market development and likewise concentration on current productscalls for adoption of product development strategy.

• These firms or divisions should continue to ponder upon current competitive advantageand must avoid from loosing the focus from the competitive advantage gained over thetime.

• In case quadrant one firms have excessive resources, than, it would be wise to adopt theexpansion program and indulge in backward, forward, or horizontal integration.

• Identifying the risk associated mainly if it is committed to a single product line.• Afford to exploit the external opportunities and magnify the wealth in numerous areas ofdealings.

Business  Level  Analytical  ToolsQuadrant II• Characterized with a weak competitive position in fast growing market.• Must click in the minds of the management and they need to weigh up the firms’ presentmarket place critically. The opportunity lagging here is that such firms are operating in agrowing industry but the problem area is that they are competing ineffectively. An in-­‐depth analysis is necessary to identify the gray areas of incompetence and the reasonsbehind such ineffectiveness. Moreover, adoption of counteractive measures is alsoindispensable so that ability to compete effectively is strengthen and firm can find itsspace in the more competitive environment.

• An intensive strategy, more appropriately, can be classified as the first option to adopt.The dilemma in espousing the intensive strategy arises when the firms is lackingdistinctive competence or competitive advantage. In this scenario the most enviablesubstitute is horizontal integration.

• Divestiture of some divisions can be considered as another option. Such an arrangementmay avail the desired funding to buy back the shares or to invest in the current venturein other divisions to strengthen the competitive position. Moreover, as last resort,liquidation should be considered so that another business can be acquired.

Business  Level  Analytical  ToolsQuadrant III• Operating in a slow growth industry with a weak competitive position.• Prone to further decline which may result possibly in liquidation. To avoidsuch situations quadrant three firms needs introduce drastic changes inalmost all the areas of managing the company. The management has tochange its philosophy and should necessarily adopt new approaches ofgoverning the firm. The management should be willing to incur someextensive costs in the overall revamp of the organization.• Strategically retrenchment (assets reduction) would be the best option tobe considered first. Secondly diversifying the overall business throughshifting the resources should be evaluated as another choice (related orunrelated diversification). The final option is again divesture or liquidation.

Business  Level  Analytical  ToolsQuadrant IV• Characterized as having a strong competitive position but areoperating in a slow growth industry. These firms have to quest for thepromising growth areas and to exploit the opportunities in thegrowing markets as they possess the strengths to instigate diversifiedprograms in growing industries.• Ideally quadrant four firms have limited requirements of funds forinternal growth whereas they enjoy the high cash flows due to thecompetitiveposition they are characterized for.• Therefore, these firms can often hunt for related or unrelateddiversification fruitfully. Due to availability of excessive fundsquadrant IV firms can also pursue joint ventures.

Strategic  Clock  Oriented  Market  Based  Strategies.  • Strategic  Clock  is  a  way  of  looking  the  Porter’s  strategies  in  a  different  way.• It  was  developed  by  Bowman  and  Faulkner  in  1996.• It  extends  Porter’s  three  business  strategies  to  eight  options  and  identifies  like  likelihood  of  success  of  each  strategy.  • Strategic  Clock  is  important  to  understand  how  companies  compete  in  the  market  place.  • This  is  a  powerful  way  to  establish  and  sustain  a  competitive  position  in  a  competitive  market.

Strategic  Clock  Oriented  Market  based  strategies

45

6

78

1

2

3

No  Frills

Low  Price

Hybrid

Differentiation

Focused  Differentiation

Increased  price  /  Standard  Value

Increased  price  /  Low  Value

Standard  price  /  Low  Value

High

HighLow

Perceived  added  Value

Price

Position  1:  No  Frills  (Low  price  /  Low  value)

• It  is  the  combination  of  low  price  with  low  perceived  added  value.• It  focuses  to  price  sensitive  customers.• This  products  are  inferior  but  the  prices  are  attractive  enough  to  convince  consumers  to  try  them  once.• Firms  do  not  usually  choose  to  compete  in  this  category.  

Position  2:  Low  price

• It  is  the  combination  of  low  price  with  similar  perceived  added  value  as  the  competitors.• It  aims  to  maintain  the  quality  with  low  price.  • Companies  competing  in  this  category  are  low  cost  leader.  • They  sustain  with  very  low  margins  and  high  volume.  If  companies  have  large  sales  volume  or  strong  strategic  reason  for  their  positions,  they  can  sustain  this  approach.  

Position  3:  Hybrid  (Moderate  price  /  Moderate  differentiation  )  • It  is  the  combination  of  low  price  with  differentiation.• The  customer  perceives  high  value  with  low  price.• Companies  offer  products  at  low  cost  competitors.• Companies  build  a  reputation  of  offering  fair  prices  for  reasonable  goods.• Discount  department  stores  come  under  this  category.  • The  quality  and  value  is  good  and  the  consumer  is  assured  of  reasonable  price.• This  can  build  customer  loyalty.  

Position  4:  Differentiation

• It  aims  to  offer  products  and  services  having  unique  characteristics.  • It  can  be  with  or  without  price  premium.• Companies  that  differentiate  offer  high  perceived-­‐value  of  the  customers.  To  be  able  to  afford  to  do  this  they  either  increase  their  price  and  sustain  themselves  through  higher  margins,  or  they  keep  their  price  low  and  seek  grater  market  share.  • Branding  is  important  with  differentiation  strategies  as  it  allows  a  company  to  become  synonymous  with  quality  as  well  as  price.  

Positon  5:  Focused  differentiation  

• It  combines  high  price  with  high  perceived  value  and  focuses  in  a  particular  segment.  • The  product  may  not  have  any  more  real  value,  but  the  perception  of  value  is  enough  to  charge  very  high  premiums.  • The  market  is  highly  targeted  and  margins  are  also  high.  

Positons  6:  Increased  price  /  Standard  product• It  combines  the  high  price  with  standard  perceived  value.• Sometimes  companies  increase  their  price  without  any  increase  in  the  value.  • When  the  price  increase  is  accepted,  they  enjoy  higher  profitability.  • This  strategy  may  work  in  the  short  term  only  and  likely  to  fail  in  long  run.  

Positon  7:  High  price  /  Low  value

• It  combines  high  price  with  low  perceived  value.  • This  strategy  is  only  suitable  in  monopoly  market.• Adding  value  is  not  the  concern  because,  the  customer  are  ready  to  accept  the  product  for  any  price.

Position  8:  Low  value  /  Standard  price

• It  combines  the  high  price  with  low  perceived  value.• The  company  that  pursues  this  type  of  strategy  will  lose  market  share.

• Self  Study  :  Difference  between  BCG  and  GE  Matrix