Session 13 & 14 Revised

8/10/2019 Session 13 & 14 Revised

1/55

2000 The McGraw-Hill Companies, Inc.Irwin/McGraw-Hill

1

Session 13 & 14

Concluding discussion of grandstrategies


2/55


Remember for the Case

Three Scenarios: Worst, Best, Most Likely Long Term Objective (same for each)

Two Competitive Options

Each Containing:

Corporate Level Strategy Alternative

Business Level Strategy Alternative

Generic Theme

Package of (3-6) Grand Strategies

2


3/55


3

Types of Grand Strategies

Consortia

Concentrated Growth

Market Development

Product Development

Innovation

Horizontal Integration

Vertical Integration

Concentric Diversification

Conglomerate Diversification

Turnaround

Divestiture

Liquidation

Bankruptcy

Joint Ventures

Strategic Alliances


4/55


4

Concentrated Growth

Concentrated growthdirects its resources tothe profitable growth of a single product, in a

single market, with a single dominant

technology


5/55


5

Market Development

Market developmentcommonly ranks second onlyto concentration as the least costly and least risky ofthe 15 grand strategies

It consists of marketing present products, often with

only cosmetic modifications, to customers in relatedmarket areas by adding channels of distribution or bychanging the content of advertising or promotion

Frequently, changes in media selection, promotional

appeals, and distribution are used to initiate thisapproach


6/55


6

Product Development

Product developmentinvolves the substantial

modification of existingproducts or the creation ofnew but related productsthat can be marketed to

current customers throughestablished channels


7/55 2000 The McGraw-Hill Companies, Inc.Irwin/McGraw-Hill

7

Innovation

These companies seek to reap the initially high profitsassociated with customer acceptance of a new orgreatly improved product

Then, rather than face stiffening competition as the

basis of profitability shifts from innovation toproduction or marketing competence, they search forother original or novel ideas

The underlying rationale of the grand strategy of

innovation is to create a new product life cycle andthereby make similar existing products obsolete



8

Horizontal Integration

When a firms long-term strategy is based ongrowth through the acquisition of one or more

similar firms operating at the same stage of the

production-marketing chain, its grand strategyis called horizontal integration

Such acquisitions eliminate competitors and

provide the acquiring firm with access to new

markets



9

Vertical Integration

When a firms grand strategy is to acquire firms thatsupply it with inputs (such as raw materials) or are

customers for its outputs (such as warehouses for

finished products), vertical integrationis involved

The main reason for backward integration is thedesire to increase the dependability of the supply or

quality of the raw materials used as production inputs



10

Vertical and Horizontal Integration



11

Concentric Diversification

Concentric diversificationinvolves the acquisitionof businesses that are related to the acquiring firm interms of technology, markets, or products

With this grand strategy, the selected new businesses

possess a high degree of compatibility with the firmscurrent businesses

The ideal concentric diversification occurs when thecombined company profits increase the strengths and

opportunities and decrease the weaknesses andexposure to risk



12

Conglomerate Diversification

Occasionally a firm, particularly a very large one,plans acquire a business because it represents themost promising investment opportunity available.This grand strategy is commonly known asconglomerate diversification.

The principal concern of the acquiring firm is theprofit pattern of the venture

Unlike concentric diversification, conglomeratediversification gives little concern to creating product-

market synergy with existing businesses



13

Turnaround

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

production inefficiencies, and innovativebreakthroughs by competitors

Strategic managers often believe the firm can surviveand eventually recover if a concerted effort is madeover a period of a few years to fortify its distinctivecompetences. This is turnaround.

Two forms of retrenchment:

Cost reduction Asset reduction



14

Elements of Turnaround

A turnaround situationrepresents absolute and relative-to-industry declining performance of a sufficient magnitude towarrant explicit turnaround actions

The immediacy of the resulting threat to company survival isknown assituation severity

Turnaround responses among successful firms typicallyinclude two stages of strategic activities: retrenchment and therecovery response

The primary causes of the turnaround situation have beenassociated with the second phase of the turnaround process, therecovery response



15

Divestiture

A divestiture strategyinvolves the sale of afirm or a major component of a firm

When retrenchment fails to accomplish the

desired turnaround, or when a nonintegratedbusiness activity achieves an unusually high

market value, strategic managers often decide

to sell the firm

Reasons for divestiture vary



16

Liquidation

When liquidation is the grand strategy, the firmtypically is sold in parts, only occasionally as a

wholebut for its tangible asset value and not

as a going concern Planned liquidation can be worthwhile



17

Bankruptcy

Liquidation bankruptcyagreeing to acomplete distribution of firm assets to

creditors, most of whom receive a small

fraction of the amount they are owed

Reorganization bankruptcythe managers

believe the firm can remain viable through

reorganization

Two notable types of bankruptcy

Chapter 7

Chapter 11



18

Joint Ventures

Occasionally two or more capable firms lack anecessary component for success in a

particular competitive environment

The solution is a set ofjoint ventures, whichare 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



19

Strategic Alliances

Strategic alliancesare distinguished fromjoint ventures because the companies involved

do not take an equity position in one another

In some instances, strategic alliances aresynonymous with licensing agreements

Outsourcing arrangements vary


20/55


20

Consortia, Keiretsus, and Chaebols

Consortiaare defined as large interlockingrelationships 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


21/55


21

Chapter 8

Strategic Analysis and Choice

in Single- or Dominant-

Product Businesses:

Building Sustainable

Competitive Advantages


22/55


22

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 youbetter equippedresources wiseto

successfully implement?


23/55


23

Key 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 competitiveadvantage? What grand strategies are most

appropriate?


24/55


24

Prominent Sources of Competitive Advantage

Cost leadership

Differentiation

Speed

Market focus

Sources of

competitive

advantage


25/55


25

Evaluating A Businesss Cost LeadershipOpportunities

A. Skil ls and Resources Foster ing 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


26/55


26

Evaluating A Businesss Cost LeadershipOpportunities --

C. Examples of Ways Busin esses Ach ieve Competi t ive Ad vantage

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

I nbound logistics Operations Outbound logistics Marketing & sales

Economy of

scale in plant

reduces

equipment

costs and

depreciation

Computerized

routing lowers

transportation

expense

Cooperativeadvertisingwith

distributorscreates localcost advantagein buyingmedia spaceand time

Subcontractedservicetechniciansrepairproduct

correctlyfirst 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

Humanresource

management

Generaladministration

Favorable long-term contracts; captive suppliers or key customer

for supplier Procurement


27/55


27

Advantages of a Cost Leadership Strategy

Low-cost advantages reduce likelihood of pricingpressure from buyers

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

New entrants must face an entrenched cost leaderwithout experience to replicate cost advantages

Low-cost advantages should lessen attractiveness ofsubstitutes

Higher margins allow low-cost producers towithstand supplier cost increases


28/55


28

Key Risks of Cost Leadership

Many cost-saving activities are easily duplicated

Exclusive cost leadership can become a trap

Obsessive cost cutting can shrink other competitive

advantages involving key product attributes

Cost differences often decline over time


29/55


29

Evaluating A Businesss DifferentiationOpportunities

A. Ski l ls and Resources Foster ing 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 Di fferentiation

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


30/55


30

Evaluating A Businesss DifferentiationOpportunities --

C. Examples of Ways Busin esses Ach ieve Competi t ive Ad vantage

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


Carefulinspection of

products at

each step inproduction toimprove

performanceand lowerdefect rates

JITcoordinationwith buyers;

use of own orcaptivetransportationservice toensuretimeliness

Expensive,

informative

advertising

and promotion

to build brand

image

Allowing servicepersonnelconsiderablediscretion tocredit

customersforrepairs

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

Humanresource

management


Quality control presence at key supplier facilities; work with

suppliers new product development activities Procurement


31/55


31

Advantages of a Differentiation Strategy

Rivalry is reduced when a business successful

differentiates itself

Buyers are less sensitive to prices for effectively

differentiated products

Brand loyalty is hard for new entrants to

overcome


32/55


32

Key Risks of Differentiation

Imitation narrows perceived differentiation,

rendering differentiation meaningless

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


33/55


33

Creating a Competitive Advantage Based on Speed

Has become a major source of competitiveadvantage for many firms

Involves the availability of a rapid responseto

customers by

Providing current products quicker

Accelerating new product development or

improvement

Quickly adjusting production processes

Making decisions quickly

34


34/55


34

Evaluating A Businesss Rapid Response Opportunities

A. Skil ls and Resources Foster ing 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 Requi rements 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

35


35/55


35

Evaluating A Businesss Rapid ResponseOpportunities --C. Examples of Ways Busin esses Ach ieve Competi t ive Ad vantage

Technology

development

Use of companywide technology sharing activities and

autonomous product development teams to speed newproduct development

Working veryclosely withsuppliers to

include theirchoice ofwarehouselocation tominimizedelivery time


Standardizedies,components,

and productionequipment toallow quickchangeover tonew or specialorders

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 service

technicians

at customer

facilities that

are

geograph-ically

close

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

Humanresource

management


Preapproved, online suppliers integrated into productionProcurement

36


36/55


36

Advantages of a Speed-Based Strategy

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

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

37


37/55


37

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

Some industries - stable, mature ones - may notoffer much advantage to a firm introducing

some forms of rapid response

38


38/55


38

Creating a Competitive Advantage Based on Market Focus

Involves building cost, differentiation, and/or speedcompetitive advantages targeted to a narrow, market

niche

Allows a firm to

Learnits target customers

Build up organizational knowledgeof ways to satisfy

its target market better than larger rivals

Risksof 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

39


39/55


39

Industry Environments and Strategy Choices

Emerging Industries

Industries Transitioning to Maturity

Mature and Declining Industries

Fragmented Industries

Global Industries

40


40/55


40

Characteristics of Markets in Emerging Industries

Proprietary technology and technologicaluncertainty

Competitor uncertainty regarding inadequate

information

High initial cost structure

Few entry barriers

First-time buyers require initial inducement Inability to easily obtain raw materials and

components

Need for high-risk capital

41


41/55


41

Strategic Options for Emerging Industries

1.Ability to shape industrys structure

2.Ability to rapidly improve product quality

3.Establish favorable relations with key suppliers

4.Ability to establish technology as dominant force

5.Acquire a core group of loyal customers

6.Ability to forecast future competitors

42


42/55


42

Characteristics of Industries Transitioning to Maturity

Intense competition for market share

Increased sales to experienced, repeat buyers

Greater emphasis on cost and service

Declining profitability

43


43/55


43

Strategic Options for Maturing Industries

1.Prune the product line

2.Emphasize process innovation

3.Emphasize cost reductions

4.Focus on selecting loyal buyers

5.Pursue horizontal integration

6.Expand internationally

44


44/55


44

Pitfalls to Avoid in Competing in Maturing Industries

A middle-ground approach to selecting a genericcompetitive 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

45


45/55


Characteristics 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

46


46/55


Strategic Options for Mature/Declining Industries

1.Focus on key market segments offeringgrowth opportunities

2.Emphasize product innovation and qualityimprovement

3.Emphasize production and distribution

efficiency

4.Gradually harvest the business

47


47/55


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

48


48/55


Characteristics of Fragmented Industries

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

outcomes

Examples

Professional services

Retailing

Wood and metal fabrication

Agricultural products

Funeral industry

49


49/55


Strategic Options for Fragmented Industries

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

2. Formula faci l ities- Standardized, efficient, low-costfacilities at multiple locations

3. I ncreased value added- Difficult to differentiateproducts/services

4. Specialization- Product type, customer type, type oforder, geographic areas

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

50


50/55


Characteristics of Global Industries

Differences in prices and costs among countriesdue to

Currency exchange fluctuations

Differences in wage and inflation rates

Other economic factors

Differences in buyer needs across countries

Differences in competitors and ways ofcompeting among countries

Differences in trade rules and governmental

regulations across countries

51


51/55


Strategic Options: Pursuing Global Market Coverage

1.License foreign firms to produce anddistribute a firms products

2.Maintain a domestic production base andexport products

3.Establish foreign-based plants anddistribution in foreign countries

52


52/55


Strategic Options: Choosing a Generic Competitive Strategy

1.Broad-line global competition

2.Global focus strategy

3.National focus strategy

4.Protected niche strategy

53


53/55


Grand Strategy Selection Matrix

Overcome weaknesses

Maximize strengths

External(acquisition

or merger forresource

capability)

Internal(redirectedresourceswithin the

firm)

Turnaround orretrenchment

DivestitureLiquidation

Vertical integrationConglomerate diversification

Concentrated growthMarket developmentProduct developmentInnovation

Horizontal integrationConcentric diversificationJoint venture

III

IVIII

54


54/55


Model of Grand Strategy Clusters

Rapid market growth

Slow market growth

Weakcompetitive

position

Strongcompetitive

position

1. Concentratedgrowth

2. Vertical integration

3. Concentric

diversification

1. Reformulation ofconcentrated growth

2. Horizontal integration

3. Divestiture

4. Liquidation

1. Concentricdiversification

2. Conglomeratediversification

3. Joint venture

1. Turnaround or retrenchment

2. Concentric diversification

3. Conglomerate diversification

4. Divestiture

5. Liquidation

III

IIIIV

55


55/55

Conclusion: Selecting a Business Strategy toAchieve a Competitive Advantage

Focusing on key sources ofcompetitive advantage requiring

total, consistent commitment

Weighing skills, resources,organizational requirements, and

risks of each source ofcompetitive advantage

Considering unique effects of the

generic industry environment on a

firms value chain activities

Selection of

appropriate

business

strategie(s)

involves

Documents

Session 13 & 14 Revised