CHAPTER FOUR

Strategies In Action

Asres Abitie (PhD)

Levels of Strategy

2
 Types of Strategies

 Growth strategies

 Stability strategies

 Defensive/Renewal Strategies

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Growth Strategy

 Involves the attainment of specific growth

objectives by increasing the level of an
organization’s operations.
 Typical growth objectives for businesses:
 Increases in sales revenues
 Profits
 Other performance measures (ROI, ROE, etc.)
 Growth objectives for not-for-profits:
 Increasing clients served or patrons attracted
 Broadening the geographic area
 Increasing programs offered

4
 Possible Growth Strategies

International Concentration

Organizational
Growth

Diversification Vertical Integration

• Related • Backward
• Unrelated • Forward
Horizontal
Integration
*A primary reason for pursuing forward, backward, and horizontal
integration strategies is to gain cost leadership benefits.
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Concentration Strategy

Organization concentrates on its primary

line of business and looks for ways to
meet its growth objectives through
increasing its level of operation in this
primary business.

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 Concentration Options

Product(s)

Current New

Product-Market Product
Current Exploitation Development
Customers

New
Market Product/Market
Development Diversification*

* Not a concentration option!

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 Four Guidelines When Market Penetration
May Be An Especially Effective Strategy

 Current markets not saturated

 Usage rate of present customers can be increased
significantly.

 Market shares of competitors declining while total

industry sales increasing.

 Increased economies of scale provide major

competitive advantages.

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 Six Guidelines When Market Development
May Be An Especially Effective Strategy

 New channels of distribution that are reliable,

inexpensive and good quality.
 Firm is very successful at what it does.
 Untapped or unsaturated markets.
 Capital and human resources necessary to
manage expanded operations is available.
 Excess production capacity
 Basic industry rapidly becoming global

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 Five Guidelines When Product Development
May Be An Especially Effective Strategy

 Products in maturity stage of life cycle

 Competes in industry characterized by rapid

technological developments.

 Major competitors offer better-quality products at

comparable prices.
 Compete in high-growth industry
 Strong research and development capabilities
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 Vertical an Horizontal Integrations

Textile producer Textile producer

Shirt manufacturer Shirt manufacturer

Clothing store Clothing store

Acquisitions or mergers of suppliers or customer

businesses are vertical integrations

Acquisitions or mergers of competing

businesses are horizontal integrations
 Vertical Integration Strategy

 An organization’s attempt to gain control of:

Its inputs (backwards)

Its outputs (forwards)

Or both

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 Benefits of Vertical Integration
Strategy

 Allow a firm to gain control over:

 Distributors (forward integration)

 Suppliers (backward integration)

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 Major Benefits and Costs of
Vertical Integration

Benefits Costs
• Reduced purchasing and • Reduced flexibility as
selling costs. organization is locked into
product(s) and technology.
• Improved coordination among • Difficulties in integrating
functions and capabilities. various operations.

• Protected proprietary • Financial costs of acquiring or

technology. starting up.

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 Six Guidelines When Forward Integration
May Be An Especially Effective Strategy

1. Present distributors are expensive, unreliable, or incapable

of meeting firm’s needs.
2. Availability of quality distributors is limited.
3. When firm competes in an industry that is expected to grow
markedly.
4. Organization has both capital and human resources needed
to manage new business of distribution.
5. Advantages of stable production are high.
6. Present distributors have high profit margins.

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 Six Guidelines When Backward Integration
May Be An Especially Effective Strategy

1. When present suppliers are expensive, unreliable, or

incapable of meeting needs.
2. Number of suppliers is small and number of competitors
large.
3. High growth in industry sector
4. Firm has both capital and human resources to manage new
business.
5. Advantages of stable prices are important.
6. Present supplies have high profit margins.

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 Horizontal Integration Strategy

 Combining operations with competitors.

 Horizontal integration is appropriate when it:

 Enables the company to meet its growth objectives.
 Can be strategically managed
 Satisfies legal and regulatory guidelines

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 Four Guidelines When Horizontal Integration
May Be An Especially Effective Strategy

1. Firm can gain monopolistic characteristics without being

challenged by federal government.
2. Competes in growing industry
3. Increased economies of scale provide major competitive
advantages.
4. Faltering due to lack of managerial expertise or need for
particular resources.

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 Diversification

 Organization expands its operations by moving

into a different industry.

 Related (concentric) diversification.

 Unrelated (conglomerate) diversification.

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 Types of Related Diversification
Operational
Skills-Capabilities

Product Related Distribution

Similarities Diversification Channels

Similar Customer
Technology Use

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 Five Guidelines When Concentric
Diversification May Be An Effective Strategy

 Competes in no- or slow-growth industry

 Adding new & related products increases sales of current
products (the case of complementary goods).
 New & related products offered at competitive prices.
 Current products are in decline stage of the product life
cycle.
 Strong management team (learning management).

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 Four Guidelines When Conglomerate
Diversification May Be An Effective Strategy

 Declining annual sales and profits

 Capital and managerial talent to compete
successfully in a new industry.
 Financial synergy between the acquired and
acquiring firms.
 Existing markets for present products are
saturated.

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 International Strategy

 Organizations can pursue international growth

while pursuing other corporate growth strategies.

 International growth issues:

 Advantages and drawbacks
 General approach
 Ways to enter a foreign market

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 Approaches to International
Expansion
High
Global Transnational
Approach Approach

Global Integration
of Operations

Multidomestic
Approach
Low
Low High
Local Market
Responsiveness
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 Ways to Enter a Foreign Market

Exporting

Importing

Licensing

Franchising

Direct investment
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 Implementing Growth Strategies

 Mergers-Acquisitions
 Mergers
 Acquisitions
 Takeover
 Internal development
 Starting a new business from scratch
 Strategic Partnering
 Joint venture
 Long-term contract
 Strategic alliance
• Research and development partnerships
• Cross-distribution agreements
• Cross-licensing agreements
• Cross-manufacturing agreements 26
• Joint-bidding consortia
 Six Guidelines When JV May Be An Effective
Strategy

 Combination of privately held and publicly held can be

synergistically combined.
 Domestic firms joint venture with foreign firm, can obtain
local management to reduce certain risks.
 Distinctive competencies of two or more firms are
complementary.
 Overwhelming resources and risks where project is
potentially very profitable.
 Two or more smaller firms have trouble competing with
larger firm.
 A need exists to introduce a new technology quickly.

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 Organizational Stability

 Stability strategy – the organization maintains its current

size and current level of business operations.

 When is stability an appropriate strategic choice?

 In a period of rapid upheaval (mayhem)
 After a period of rapid growth
• E.g. Apple Computer-lack of managerial resources

 Implementing the stability strategy

 Neither slipping backwards nor moving a head!

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 Organizational Renewal

 Renewal strategies – used to reverse organizational

decline and put the organization back on a more
appropriate path to successfully achieving its strategic
goals.

 Organizational decline – main reason for decline is

poor management.

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 Possible Causes of Corporate Decline
Inadequate
Financial
Controls

Over expansion Uncontrollable

or Too Rapid Costs or Too
Growth High Costs
Poor
Management
Slow or No Response
to Significant External New
or Internal Changes Competitors

Unpredicted
Shifts in Consumer
Demand

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 Techniques for Evaluating Corporate
Strategy

 Corporate objectives or goals

 Efficiency, effectiveness, and productivity

measures

 Benchmarking

 Portfolio analysis

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 Types of Corporate Goals

Increased
Earnings

Increased Maximized
Revenues Stockholder
Wealth

High Increased
Product Corporate Market
Quality Goals Share

Strong Strong
Customer Global
Satisfaction Presence

Positive
Increased
Reputation-
Image Productivity

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 Five Guidelines When Retrenchment May Be
An Especially Effective Strategy

Required when an organization has grown so large so quickly

that major internal reorganization is needed.

 Firm has failed to meet its objectives and goals

consistently over time but has distinctive competencies.
 Firm is one of the weaker competitors.
 Inefficiency, low profitability, poor employee morale and
pressure from stockholders to improve performance.
 When an organization’s strategic managers have failed.
 Very quick growth to large organization where a major
internal reorganization is needed.

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 Five Guidelines When Divestiture May Be An
Especially Effective Strategy
Very popular strategy as firms try to focus on their core
strengths, lessening their level of diversification.

 When firm has pursued retrenchment but failed to attain

needed improvements.
 When a division needs more resources than the firm can
provide.
 When a division is responsible for the firm’s overall poor
performance.
 When a division is a misfit with the organization.
 When a large amount of cash is needed and cannot be
obtained from other sources. . .

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 Three Guidelines When Liquidation May
Be An Especially Effective Strategy

 When both retrenchment and divestiture have

been pursued unsuccessfully.

 If the only alternative is bankruptcy, liquidation is

an orderly alternative.

 When stockholders can minimize their losses by

selling the firm’s assets.

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 Evaluating Corporate Strategies

Productivity Measures:
 How many inputs it takes to produce outputs
 Ways of productivity increase
• Become efficient
• output increases with little or no increase in input
• Expand
• both output and input grow with output growing more rapidly
• Achieve breakthroughs
• output increases while input decreases
• Downsize
• output remains the same and input is reduced
• Retrench
• both output and input decrease, with input decreasing at a faster
rate

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 Evaluating Corporate Strategies

Efficiency:
 Minimize use of resources in achieving objectives

Effectiveness:
 Ability to complete or reach goals

Benchmarking:
 Search for best practices contributing to performance

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 When to Change Corporate
Strategies?

When evaluation shows:

 Growth objectives aren’t being attained.
 Organizational stability causes organization to fall behind.
 Organizational renewal efforts aren’t working.

Possible strategies to change:

 Functional
 Competitive
 Corporate direction

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Examples of Strategies

39
Examples of Strategies

40
Examples of Strategies

41
Examples of Strategies

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Other Examples of Strategies

43
Other Examples of Strategies

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 Generic and Competitive Strategies

 Cost Leadership Strategies

 Differentiation Strategies

 Focus (Niche Market) Strategies

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 Cost Leadership Strategies

 Emphasizes efficiency
 Producing high volumes of standardized products
 Gaining economies of scale and experience curve effects
 Requires a continuous search for cost reductions in
all aspects of the business:
 Product strategy
• often a basic no-frills product
• made available to a very large customer base
 Distribution strategy
• obtain the most inextensive distribution possible
 Promotional strategy
• often involves trying to make a virtue out of low cost product
features
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 Successful Implementation of Cost
Leadership Benefits from
 Process engineering skills
 Products designed for ease of manufacture
 Sustained access to inexpensive capital
 Close supervision of labour
 Tight cost control
 Incentives based on quantitative targets
 Market of many price-sensitive buyers
 Few ways of achieving product differentiation
 Buyers not sensitive to brand differences
 Large number of buyers with bargaining power
 Pursued in conjunction with differentiation
 Economies of scale
 Capacity utilization achieved
 Linkages with suppliers and distributors 47
 Differentiation Strategies

 Differentiation involves creating a product that is perceived

as unique.

 The unique features or benefits should provide superior

value for the customer.

 Because customers see the product as unrivaled and

unequaled, the price elasticity of demand tends to be
reduced and customers tend to be more loyal to the brands.

 Provides considerable insulation from competition.

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 Maintaining Differentiation Strategy
Requires

 Strong research and development skills

 Strong product engineering skills
 Strong creativity skills
 Good cooperation with distribution channels
 Strong marketing skills
 Incentives based largely on subjective measures
 Be able to communicating the importance of the differentiating product
characteristics
 Stress continuous improvement and innovation
 Attract highly skilled and creative people
 Greater product flexibility
 Greater compatibility
 Lower costs
 Improved service
 Greater convenience
 More features
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 Focus Strategy - Cost Focus

 Firm concentrates on a select few target markets

 The firm typically looks to gain a competitive

advantage through effectiveness rather than
efficiency.

 As a focus strategy, it may be used to select targets

that are less vulnerable to substitutes or where a
competition is weakest to earn above-average ROI.

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 Maintaining Focus Strategy - Cost
Focus Requires

 Industry segment of sufficient size

 Good growth potential
 Not crucial to success of major competitors
 Consumers have distinctive preferences
 Rival firms not attempting to specialize in the same
target segment.

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 Abell’s Competitive Strategies

Level of Market
Segment Differentiation

High None

Broad Differentiated Undifferentiated

Competitive
Market Scope
Narrow Focus

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 Miles et al. topology of organizational
strategy
 Miles, Snow, Meyer and Coleman Jr. (1978) and Miles and Snow (1984)
proposed four basic types of strategic behavior and supporting organizational
characteristics that are linked with business strategies.
 They labeled the typologies as defender, prospector, analyzer and reactor.
 Defenders have narrow and relatively stable product market domain. The
characteristics of defender include limited product line, capital intensive
technology, functional structure and cost control.
 Prospectors usually search for product market opportunities and are ready to
cope with changing environmental trends. Prospectors are characterized by
diverse product line, multiple technologies and skill-based in development and
research.
 Analyzers usually operate in a stable and changing environment. The main
characteristics of analyzers include limited product line, cost efficient
technology and mixed (matrix) structure.
 Finally, reactors are characterized by inconsistency and instability.

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 Porter‘s generic competitive
strategies typology

 Competitive advantage comes from only 1 of 2 sources:

 Having the lowest costs in the industry
 Possessing significant and desirable differences from
competitors.
 The second factor is the scope of product-market
 Mix of these factors provide the basis for:
 Cost leadership strategy (or low-cost strategy)
 Differentiation strategy
 Focus strategy

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 Porter‘s generic competitive strategies
typology – HRM perspective

 From the human resource management perspective, organizations pursuing a

cost leadership strategy are likely to use fewer employees, larger operations,
lower wages and fringe benefits, increased supervision and increased task
specialization (Schuler et al., 2001). Hence, these conditions are the
characteristics of the traditional human resource management approach
(Kochan & Chalykoff, 1986).
 The differentiation strategy emphasizes developing products and services that
are different from those of competitors. Overall, differentiation strategy needs
people to work differently. For organizations pursuing a differentiation
competitive strategy, the profile of employee role behaviors include a high
degree of creative behavior, a longer-term focus, a relatively high level of
cooperative and interdependent behavior, a moderate degree of concern for
quality, a moderate concern for quantity, an equal degree of concern for
process and results, a greater degree of risk taking, and a high tolerance of
ambiguity and unpredictability (Schuler et al., 2001).

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 Porter‘s generic competitive strategies
typology – HRM perspective
 From an open system and human competence perspective, the
companies using differentiation competitive strategy are more likely to
use competence acquisition, competence displacement and behavior
coordination (Dunford et al., 2001).

 In terms of the HR practices, differentiation strategy requires more

investment in training HR to acquire new skills and knowledge, more
efforts on building a cooperative management-employee relationship to
promote the coordination and interdependence between people (Schuler
& Jackson, 1987), more flexibility and incentives in compensation to
encourage the creativity of people, but less HR planning especially strict
job design to grant people more freedom and less control (Schuler &
Jackson, 2005).

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 Strategy and performance – HRM
perspective
 Four levels of performance outcomes which is posited by Dyer and
Reeves (1995); (Boxall et al., 2007; Savaneviciene & Stankeviciute,
2012):

1. Human Resource-related outcomes; such as turnover, absenteeism,

job satisfaction & commitment.
2. Organizational outcomes; such as productivity, quality, service,
efficiencies & customer satisfaction.
3. Financial accounting outcomes; such as profits, sales, return on
assets & return on investment.
4. Capital market outcomes; such as market share, stock price &
growth (Boxall et al., 2007; Dyer & Reeves, 1995).

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 Porter’s Generic Competitive
Strategies

Competitive
Advantage
Low Costs Product-Service
Differences

Broad Cost Leadership Differentiation

Competitive
Market Scope
Focus Focus
Narrow (Cost) (Differentiation)

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 Contemporary Perspectives on
Competitive Strategy
 Newer perspectives provide an expanded, and perhaps
more realistic, description of what competitive strategies
organizations are using:

 Integrated low-cost differentiation strategy

 Mintzberg’s generic competitive strategies

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Mintzberg’s Generic Competitive
Strategies

By Price

By Marketing Image

Differentiation By Product Design

By Product Quality

By Product Support

Undifferentiated

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 Seventeen Guidelines for the Strategic-
Planning Process to Be Effective

1. It should be a people process more than a paper process.

2. It should be a learning process for all managers and
employees.
3. It should be words supported by numbers rather than
numbers supported by words.
4. It should be simple and nonroutine.
5. It should challenge the assumptions underlying the current
corporate strategy.

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 Seventeen Guidelines for the Strategic-
Planning Process to Be Effective

7. It should welcome bad news.

8. It should welcome open-mindedness and a spirit of inquiry
and learning.
9. It should not be a bureaucratic mechanism.
10. It should not become ritualistic, stilted or
orchestrated.
11. It should not be too formal, predictable or rigid.
12. It should not contain jargon or arcane planning language.

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 Seventeen Guidelines for the Strategic-
Planning Process to Be Effective

13. It should not be a formal system for control.

14. It should not disregard qualitative information.
15. It should not be controlled by “technicians.”
16. Do not pursue too many strategies at once.
17. Continually strengthen the “good ethics is good business”
policy.

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Chapter Four

Questions