Lesson 3 4 stm

STRATEGIC MANAGEMENT- LESSON 3

Dr S Sarangapani

STRATEGIC MANAGEMENT- LESSON 3

Dr S Sarangapani

Strategy- Introduction Strategy- IntroductionCan all companies have same strategies? GDA company will need strategy at various levels, as there is a different need at each

level. A company may have a different business with a central corporate office. Thus,

there will be multiple strategies at different levels.The three main levels of strategy are:

• Corporate level strategy• Competitive strategy

• Functional/Departmental strategy

Corporate level strategy

It is every business must choose the number of businesses in which it will compete and the relationships that will exist among those businesses.Corporate level strategy occupies the highest level of strategic decision-making and covers actions dealing with the objective of the firm, acquisition and allocation of resources and coordination of strategies of various SBUs for optimal performance. Corporate level strategy makers analyze the commonalities of various business units and work to add value to the whole besides individual growth of participating business units to enhance stakeholders’ value. Assessing the value of a business unit in the overall portfolio of activities is also a corporate level decision alongside with optimal resource allocation for units (Ex: BCG Matrix).

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Types of Types of Corporate level StrategiesStrategies

Corporate level strategies

•Stability Strategies

•Growth/Expansion Strategies

•Retrenchment Strategies

•Combination Strategies.

Sability strategiesSability strategies

• Stability Strategy: -stability is to consolidate(strengthen or secure) rather than taking chances of exploring new areas.

• When used? when an economy is slowing down,

• particular industry forecast show rapid changes and needs to safeguard the same against possible threat of new entrants, etc.,

• Under stability strategies the following are the variants:

• ---------------------------------------------------------------------------

• No change strategy: the firm shall concentrate on protecting the present position for sometime rather taking charge to expand and diversify.

• This normally happens when there is a major shift in the top management

and it shall take sometime for the new management to understand the current situation of the business.

Stability strategiesStability strategies

• Pause and proceed:

• Slow growth is preferred rather than sudden expansion. • The basic idea is to watch the changes of these forces to asses the

positive/negative impacts and then formulate the strategy. • when major changes are expected in the political and economical factors that

have a bearing on the business, the management adopts to ‘pause and proceed’ strategy.

• Profit strategy:

• When the firm is in a turbulent (unstable) business environment with uncertainty,

• it prefers to defend its markets and safeguard the present profitability through cutting costs and reduction in wastage of resources, etc.

Growth StrategiesGrowth Strategies

• When an economy is booming and the industry indexes are showing positive signs a firm shall embark on growth strategies

1. Concentration strategy (Growth through concentration):

• expanding the existing business to the maximum possible extent. The firm wishes to exploit the business to the maximum extent by concentrating on its products and markets.

• Example:Instant food sellers want to expand into rural markets of Oman

• The variants of this strategy are developed by Ansoff .

a. Market penetration strategy : aimed to cover the existing markets to the full extent with existing products to enhance the market share.

• backed by advertising and sales promotion ; It is a process to pull the customers from competitors and convert non users into users.

Growth StrategiesGrowth Strategies

Market development strategy: This is done with developing new markets for existing products, which are so far unexploited (unused) with new channel partners and expanding globally.

Product development strategy : It is aimed to develop new products for existing markets in the form of substitutes and compliments.

Example: a toothpaste manufacturer can expand by adding tooth powder (substitute), tooth brushes and mouth fresheners (compliments)

• Diversification (Diffusion): This involves the process of developing new products and venturing into new markets

2. Growth thro Integration(Vertical & horizontal integration)2. Growth thro Integration(Vertical & horizontal integration)

• Vertical integration strategy: If the firm venture backwards or manufacture its own raw material and components, it is vertical integration.

• Backward integration: • Example: a steel plant may acquire iron ore mines—• Forward integration: when a firm starts its own

distribution channels and warehousing, it is forward integration.

• Example: (For example, a consumer electronic firm opens own showrooms to sell the products directly to consumers.

• Horizontal integration : When a firm acquires competing firms in the same line of business to increase the size, sales, profits, and potential market share.

Diversification

• Diversification means a strategy of expanding into related or unrelated products or market segments.

• Advantages of Diversification: 1. It helps to move the organisation into other businesses, or new product line.

2. It helps the organisations to diversify their risk. • Disadvantages: • 1. It forces the organisation to split its attention &

resources among many products or markets instead of one.

• 2. If too much diversification is followed it may undermine(weaken) the organisation’s ability to compete successfully in its chosen markets.

• Types of diversifications:• Related diversification• Conglomerate diversification

• .

Related diversification means diversifying into other business, industry or product line in such a way that an organisation’s line of businesses still possess some kind of fit/ match. Example: A Television channel diversifying into radio.

Conglomerate diversification means diversifying into products or markets that are not related to the organisation’s present business.Example: a company diversifying into unrelated fields like real estate, hotels, paper, edible oils, etc.

(d)Growth through internationalization: This is the result of the firm’s search to explore the international markets with its existing products or by manufacturing products that are in demand in global target markets.

Red Bull entered from Austria to Germany and other European countries and then throughout the world.

Growth thorough cooperation: Strategic alliances form part of this type of expansion. Firms come together with their distinct advantages like market access, financial capability, and technological supremacy and HR skills to share the benefit among them.

Retrenchment StrategiesRetrenchment Strategies

3. Retrenchment Strategies: This alternative is opted under a situation when a firm wishes to apply contraction of or wind up (closing) of its operations. This is done through:

• (i)Turnaround;

• (ii) Divestment;

• (iii)Liquidation

•

(Exercise for testing your understanding)(Exercise for testing your understanding)

• Which is one of the methods of Growth/Expansion Strategy-?• A Diversification B Ownership

• C Concentric D Conglomerate

• Corporate Strategy is keen to care about –

• A Market B Divestment

• C Management D Investment

• Which is not the type of stability strategy-?

• A pause with caution strategy B profit strategy• C market research strategy D no change strategy

• Which element is not related with turnaround management-?• A changes in the top management B review of old strategies

• C control D better internal coordination•

Retrenchment strategies Retrenchment strategies • Turnaround Strategy: Turnaround strategy is for

reversing a negative trend in business by cutting the costs, reducing the distribution and selling expenses, and finding other useful ways to get out of unprofitable products and transforming the company into profit making and efficient organisation. (turning sick company into good company)

• (ii) Divestment Strategy: This involves the sale of those units or parts of a business that no longer contribute to the profits and growth of the business.

• Example, a longstanding labour dispute may be one reason for starting a spin off (removal)firm.

• Liquidation Strategy: Liquidation involves closing down a firm and selling its assets.When both turnaround and divestment attempts fail to improve the firm’s position, as a last resort the firm opts for liquidation.

4) Combination Strategies: If the SBU follows more than one strategy say in one SBU the stability strategy, another SBU following diversification, and yet another SBU retrenchment strategy may be applied.

Hence, it is called combination strategies and they are a common feature of modern business.

II. Competitive Strategies (Business Level Strategies)• According to Michael Porter, competitive strategy is a

plan to establish a profitable and long-term competitive position against competition. According to Porter, 3 basic or generic competitive strategic options are possible:

• 1. Cost Leadership, 2. Differentiation and 3. Focus

Cost Leadership • The objective is to become the lowest cost producer in the industry.

Sometimes such organizations also give discounts to maximize sales and further increase the market share.

• Cost leadership requires tight cost and overhead control, cost minimisation in areas like R&D, etc.. Once achieved, the low cost position provides high margin which can be re-invested to build up the resources in order to maintain the cost leadership.

• Differentiation • It involves differentiating the product or service giving customers clear

reasons to prefer the product over competitor’s products. • Example of Differentiation: Samsung S5 differentiates from other mobiles in

scanning the person for identity and adding many features • Mercedes-Benz emphasizes quality, Oman Air emphasizes safety and

punctuality. So many toilet soaps, still Dove soap is known for soft facial appearance

• This strategy involves selecting one or more important features of product as preferred by buyers. Approaches to differentiation can take many forms such as:

• Design or brand image • Technology , Customer service

Focus strategyFocus strategy

• A business pursuing a focus strategy selects a market segment and builds its competitive strategy on serving the customers in its market better and sometimes more cheaply than its competitors. This is also called niche marketing, concentrating on single segment Example: In USA, there are certain readymade cloth manufacturers who focus on very tall or fat people.

• This strategy is focusing on a particular buyer group, segment of product line, or geographical market.

• The entire focus strategy is build around serving a particular target very well, and each functional policy is

developed with this in mind.

Competitive Strategy and Michael Porter’s 5 Forces Model


• To formulate a competitive strategy, the manager should

1. understand the competitive forces that determine how intense (strong) the industry’s rivalries are and how to best compete.

2. Based on that analysis, the organization must find a sustainable competitive advantage.

According to Porter, competitive strategy depends on competitive intensity.



Tutor Peter Considine. (Core Text Exploring Corporate Strategy, Seventh Edition, ©Pearson Education Ltd 2005) 3

The Five Forces Framework

Source: Adapted from M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors©1980, Free Press, 1980, p. 4. Copyright 1980,1988 by The Free Press, a division of Simon & Schuster Inc. Reproduced with permission.

Exhibit 2.5



• Threat of entry: There are several barriers which can make it difficult for new entrants to enter the business.

• Example: to enter automobile industry (to manufacture cars or trucks), high investment required for plant, equipment and technology. Not easy.

• Government rules and regulations make it more difficult. For example, in Oman before, there was only one mobile service provider because except Oman Mobile, no other company had the license. Now there are several mobile service providers because the government allows more licenses for the other providers

• Competitive Rivalry among existing competitors

• Rivalry among existing competitors results in tactics like price competition, advertising battles(wars), and increased customer services.

• Example: the competition among competitors in the housing sector in Dubai was not so intense (more) a decade ago. But the level of competition has changed with the entry of more property developers. Even in Muscat, Wave Muscat….



• Pressure from substitute products:• substitute products performs the same or similar functions. The more

substitutes available for a product, the more would be the competition. every company wants to retain its customers from moving to substitute products by offering lower prices, discounts, schemes, etc.

• Example: Coffee and tea are good examples of substitute products.• Bargaining power of buyers Power to negotiate in buying

• example, a buyer group is powerful if it purchases large volumes of the company sales. Wal-Mart purchases huge volumes of products for it s stores all over the world. Wal-Mart naturally dictates the terms.

• Bargaining power of the suppliers. Suppliers can also influence an industry’s competitive intensity

• Example, by threatening to raise prices or reduce quality, The bargaining power of the suppliers increases when:

• There are only a few firms supplying the item--electricity• few substitutes are available-petrol

Functional Strategies

Functional Strategies

• The functional level of the organization is the level of the operating divisions and departments. The strategic issues at the functional level are related to business processes and the value chain. Functional level strategies in marketing, finance, operations, human resources, and R&D involve the development and coordination of resources through which business unit level strategies can be executed efficiently and effectively.

• Defensive taking care of customers lest a competitor takes them away.

That calls for a defensive marketing strategy designed to retain customers and continually win their business. CRM and customer loyalty programs are two excellent marketing tactics for improving markets and revenues around your best customers. Ex: Apple & Blackberry

• Offensive • Offensive strategy is to be carefully adopted as you are

about to touch the competitor and may invite resistance from competitors in the form of improved advertisements/price reductions/better value products. Best example of offensive strategy is the smart phone leadership of Samsung, which made the company market leader due to sustained R & D and product.

• Flanking • All-out marketing assaults are too costly and too risky. Instead you

have to pick your battles carefully• Duckwall-ALCO, a national chain of discount and variety stores,

found one such weakness10 years ago. It target towns less than 5,000 residents that is too small for a Wal-Mart store. Duckwall has been expanding its stores in small towns across America and pleasing stakeholders ever since.

• Guerrilla • The principles of guerrilla warfare are:• (i) Find a segment of the market small enough to defend,• (ii) No matter how successful you become, never act like the leader• (iii) Withdraw if the strategy fails and adopt a new strategy. • For example, small retailers in India offer credit for the monthly

groceries and customers feel it convenient to buy from them avoiding the BIG Hypermarkets due to ease in the payment. Thus guerrilla marketing is low cost, quick hit initiatives that either succeed or fail without fear of sinking the ship.

• •

Lesson 4Lesson 4

Value chain analysis & Core competency

Significance of Value Chain Analysis: Significance of Value Chain Analysis:

• eliminates waste and contributes to lower cost and high profits.

• Improved production methods contributes to quality enhancement and less defectives

• creates value all long the chain of activities for better value service to customers.

• The process aims at time management in procurement and dispatch.

• Improved performance with emphasis on employee training results in employee satisfaction /less absenteeism and attrition.

• in competitive advantage to a firm both through overall cost leadership and improved attributes of product

• improved coordination among various activities for synergy.• prompt a firm to take out-sourcing decisions all along the value

chain activities, such as make or buy, manufacture or assemble, etc.

The core competencyThe core competency

• The core competency is the strategic advantage a business firm enjoys over its rival competitors to gain market position.

• It is that strength through which a firm can dictate terms of its own in the market. (Competition finds it difficult to imitate this particular advantage in the short run.)

• The area of core competency can be a low price, market coverage, product features, brand and customer base, etc.

• example, Toyota cars are known for the quality and market coverage.

• Sony products are known for quality. Samsung for Technology and features

Developing the core competencyDeveloping the core competency

• Learning Curve Effect: It is the efficiencies acquired by a firm through the passage of time. As the same business activity is done time and again, the chances of improving the technology, methodology and employee skills are bright, compared to a new business . (In Diploma how u found it to do presentation and now how you do it) This practice makes the business achieve better and develops competencies like patents, cost leadership and superior quality goods and services. This is core competency.

• Acquisition advantage: A core competency may be the result of acquisition of another business venture.

• Example, an existing steel plant without its own iron ore mines -- acquires a company with iron ore mines

• thus, can develop competency to deliver the product at cheaper cost.• Alliance: A competency may be acquired through partnership with

other businesses, which are strong in a particular area of expertise. For example, Fiat of Italy has formed its alliance with TaTa Motors, which has strong dealer network in India to distribute its cars.

• Innovation: A core competency may be because of constant R&D activity and creativity on the part of the business to invent new technology, methods of operation, etc. Example Samsung mobile