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Session 13 & 14
Concluding discussion of grandstrategies
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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
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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
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Concentrated Growth
Concentrated growthdirects its resources tothe profitable growth of a single product, in a
single market, with a single dominant
technology
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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
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Product Development
Product developmentinvolves the substantial
modification of existingproducts or the creation ofnew but related productsthat can be marketed to
current customers throughestablished channels
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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
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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
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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
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Vertical and Horizontal Integration
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Chapter 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 youbetter equippedresources wiseto
successfully implement?
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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?
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Prominent Sources of Competitive Advantage
Cost leadership
Differentiation
Speed
Market focus
Sources of
competitive
advantage
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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
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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
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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
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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
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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
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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
I nbound logistics Operations Outbound logistics Marketing & sales
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
Generaladministration
Quality control presence at key supplier facilities; work with
suppliers new product development activities Procurement
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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
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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
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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
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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
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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
I nbound logistics Operations Outbound logistics Marketing & sales
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
Generaladministration
Preapproved, online suppliers integrated into productionProcurement
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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
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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
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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
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Industry Environments and Strategy Choices
Emerging Industries
Industries Transitioning to Maturity
Mature and Declining Industries
Fragmented Industries
Global Industries
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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
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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
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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
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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
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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
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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
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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
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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 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
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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)
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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
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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
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Strategic Options: Choosing a Generic Competitive Strategy
1.Broad-line global competition
2.Global focus strategy
3.National focus strategy
4.Protected niche strategy
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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
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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
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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