Makerere University Business SchoolStrategic Management Course

STRATEGIC CHOICE

Need for a strategy/strategies How do we get there? What direction should we take? No single strategy is the best in all

situations and at all times Align strategic choices to the situation Need for a consistent set of choices

Decisions and actions / tactics in order to outwin our rivals

Without this consistent set of tactics, synergy is lost

Strategy Selection

Selecting the best strategy that will enable a firm achieve its goals.

Some strategy options are more appropriate than others.

Strategists should evaluate the existing alternatives before choosing the best strategy

Evaluation and selection criteria

Sustainable competitive advantage Corporate goals & objectives Organization policies and culture Cost of strategy failure Feasibility of the strategy Stakeholders reactions

The Generic Strategy Alternatives

These are the common strategic approaches that can give a firm sustainable competitive advantage.

There are several approaches: Michael Porter’s approach Igor Ansoff’s approach Glueck’s approach Kotler’s approach Tailor-made strategies

Michael Porter’s approach

Overall cost leadership Differentiation Focus strategy

1.Overall cost leadership: Aim at being the lowest cost producer

relative to competitors Increases a firm’s profitability The market can enjoy affordable prices

Making oneself different from others Adding to customers perceived value of

the firm and its products Calls for continuous innovations

(customer- centred)

2. Differentiation strategy

How to differentiate

Image building High quality and distinctive products Superior customer services Unique design and packaging Convenient terms to customers

3. Focus strategy

Involves segmenting the market Focusing on a given market

segment Calls for specialization in a

specific market segment (niche marketing)

Why focus strategy?

Different groups of buyers with different needs

No other rival is attempting to specialize in the same segment

A firm’s resources don’t allow it to spread over the entire segment

Where some segments are more attractive than others

ANSOFF’S APPROACH

Provides four strategic approaches based on product and market information

Presented as a product/market matrix.

Existing Products

New Products

Existing Markets

Strategies based on existing markets and existing products

Strategies based on launching new or improved products into existing markets

New Markets

Strategies based on finding new markets for existing products

Strategies based on launching new products into new markets

Existing Products-Existing Markets1. Divestiture - It has reached maturity/you need

money for other ventures/in order to concentrate on your core or more beneficial business

2. Consolidation - You are enjoying a comfort zone/need to go back to the basic (status quo)

3. Retrenchment - You have over expanded or diversified ,you need to reduce your operating costs; sell part of the business

4. Market penetration - Enter new markets with a more attractive offer/buy out your close rival through say an acquisition/use a strategic alliance

New products-Existing markets No or less resources needed to develop the

market You need to develop a new product or

modify the current one for that market A product development strategy is the best

strategy Bench-mark this generic strategy and fine-

tune it to your competitive situation

Existing products-New markets No or less resources needed to develop the

product You need to develop the new market for

your product (s) A market development strategy is needed

using say; CRM tactics/customer care practices/taking your products (services) near your customers

Refer to the current stage in the marketing cycle as you fine tune this generic strategy

New product-New market

A lot of risks and uncertainties involved; you need to develop the new product for the new market

Minimize such risks through using a competitive stepping stone

Commonly used strategies in such situations include; buying franchises, strategic alliances, and use of pilot projects among others

GLUECK’S APPROACH

Stability strategy Expansion strategy Retrenchment strategy Combination

Stability Strategies:

Strategies pursued with no or few changes made in the firm’s products, markets or functions.

Ideal for those firms that are already consolidated in the market.

Why stabilize?

The strategy is less riskyWhen a firm is doing wellExecutives aren't creative and innovativeFear to disrupt routinesEnvironment is relatively stableFear of inefficiencies due to expansion

Expansion Strategies Ideal where a firm wants to improve

its growth performance A firm adds to its markets and

functions. The firm increases the pace of its

activities

Why Expand?

To survive in a volatile environment To provide variety to the market Sign of good performance Need to re-invest profits To enjoy economies of scale Motivates the firm

Retrenchment strategies:

A firm reduces its product lines, abandons some market territories, reduces its functions.Looks like lean managementFirm reduces activities in those units with negative or little cash flows.The pace of operation and scope of activities greatly reduces.

Why retrench? The firm is performing poorly The firm has tried all strategies and still

failed to succeed The firm needs funds to pursue better

opportunities elsewhere Turbulent environment External pressure

Combination strategies: A firm uses several of the above strategies

simultaneously to different portfolios of a firm.

Kotler’s strategies.

Looks at market positions of competing firms

The competitors are at war over these competitive positions

Different competitive positions require different competitive strategies

The positions include; market leader, challenger, follower, and nicher positions

Market leader’s strategies Use strategies that help to expand or protect

market share Strategy depends on the situation at hand

In internal and external environment “Apply the best science and art of war” You are the target for the challenger’s strategic

attacks. Those you lead also want to get where you are and/or even overtake you;

a) Expanding the total market

1. Acquisitions and mergers

2. Franchises and / or international trade

3. Increase usage of your products

4. Finding new users/creating new demand

b) Protecting market share

Strategies involved:• Defending your leading position and

competitive business walls• Pro-reactive protection of your weak

flanks / pre-emptive defending• Counter offensive defense• Enter new markets for future defense• Strategic withdrawal

Exhibit 17.9

Strategic Choices for Share Leaders in Growth Markets

COMPETITOROR

POTENTIALCOMPETITOR

Contractionor strategicwithdrawal

Market expansion

Flanker strategy - ProactiveFlanker strategy - Reactive

LEADER

Fortressor position

defensestrategy

Confrontationstrategy

ProactiveReactive

Source: Adapted from P. Kotler and R. Singh Achrol, “Marketing Warfare in the 1980’s” Reprinted with permission from Journal of Business Strategy, Winter 1981, pp. 30-41. Copyright © 1981 by Warren, Gorham & Lambert, Inc., 210 South Street, Boston MA 02111. All rights reserved.

Market Challengers’ strategies They want to overtake the share leaders BUT

should also aggressively differentiate themselves from fellow challengers using the following alternatives;

1. Frontal / head-on / direct attack (strengths)2. Flanking / indirect attack ( weak points)3. By pass/ Leapfrogging4. Encirclement / Guerrilla attack

Note

The market leader Is usually better in terms of resources & expertise Is also watching your attacking activities and looking

for strategies of how to deal with your challenge May react to swallow the attacker/challenger

To improve your market share, you need to build a distinctive competitive advantage of your own; not just imitating your market leader

Exhibit 17.12

Strategic Choices for Challengers in Growth Markets

MARKET LEADER

Flanking attack

Frontalattack

Encirclement strategy

Leapfrog strategy/By Pass

Source: Adapted from P. Kotler and R. Singh Achrol, “Marketing Warfare in the 1980’s” Reprinted with permission from Journal of Business Strategy, Winter 1981, pp. 30-41. Copyright © 1981 by Warren, Gorham & Lambert, Inc., 210 South Street, Boston MA 02111. All rights reserved.

CHALLENGER

Market followers' strategies Sometimes overlooked by the market

leader and challenger BUT may become challenger and/or even overtake the market share leader

Their commonly used strategies;1. Cloner (making a duplicate, replica, copy) 2. Imitator3. Adaptor

Market Followers-cont Commonly found in oligopolistic industries Try to compete on dimensions other than

price (avoid price competition) Product value/quality Customer service Promotional effectiveness Distribution, etc

Market nichers Operate on high profit margins vs. high

volume Compete in well-defined market segments

(niches) They tend to specialize in that niche in terms of

customer category, products/services, geographical area

Successful nichers usually have a large share of their niche

How to select a few from the many generic/bench-market strategies

The common approaches;

1. The strategic choice matrix

2. SWOT analysis

3. Portfolio analysis

Factors determining the final acceptance of the proposed strategy by top management

1. Top management’s attitude towards risk2. Top executives’ preference for past

strategy in relation to past performance3. Their values including the shared values,

chief executive's beliefs and personal intentions

4. CEO’s power relationship with other top executives and subordinates