CHAPTER FIVE

5. STRATEGIC OPTIONS AND STRATEGIC CHOICE

5.1. Strategic Options

Strategies are the means by which long term objectives will be achieved. They are major course
of action that the organizational plans to take in order to achieve objectives. Strategies do not
attempt to outline exactly how the organization is to achieve its objectives. They finish a
framework for guiding thinking and action. It is important to notice that every objective must
have at least one strategy. This means that management should at least have one stated course of
action to accomplish every objective.
There are different strategic alternatives/opinions/ which could be broadly categorized into four
major groups: integration strategies, intensive strategies, diversification strategies and defensive
strategies which are further discussed in detail.
1. Integration Strategies
Integration strategies consists forward integration, backward integration and horizontal
integration.
I. Forward Integration: involves gaining ownership or increased control over distributors and
retailers. Six guidelines for when forward integration may be an especially effective strategy
are.
 When an organization’s present distributors are especially expensive, or unreliable, or
incapable of meeting the firm’s distribution needs.
 When the availability of quality distributors is so limited as to offer a competitive advantage
to those firms that integrate forward.
 When an organization competes in an industry that is growing and is expected to continue to
grow markedly; this is a factor because forward integration reduces an organization’s ability
to diversify if its basic industry falters.
 When an organization has both the capital and human resources needed to manage the new
business of distributing its own products.

1
  When the advantages of stable production are particularly high; this is a consideration
because an organization can increase the predictabi8ltiy of the demand for its output through
forward integration.
 When present distributors or retailers have high profit margins; this situation suggests that a
company profitably could distribute its own products and price them more competitively by
integrating forward.
II. Backward Integration: - is a strategy of seeking ownership or increased control of a firm’s
suppliers. This strategy can be especially appropriate;
 When an organization’s present suppliers are especially expensive, or unreliable, or
incapable of meeting the firm’s needs for parts, components, assemblies, or raw materials.
 When the number of suppliers is small and the number of competitors is large.
 When an organization competes in an industry that is growing rapidly; this is a factor
because integrative-type strategies (forward, backward, and horizontal) reduce an
organization’s ability to diversify in a declining industry.
 When an organization has both capital and human resources to manage the new business of
supplying its own raw materials.
 When the advantages of stable prices are particularly important; this is a factor because an
organization can stabilize the cost of its raw materials and the associated price of its
product(s) through backward integration.
 When present supplies have high profit margins, which suggests that the business of
supplying products or services in the given industry is a worthwhile venture,
 When an organization needs to acquire a needed resource quickly.
III. Horizontal Integration: - refers to a strategy of seeking ownership of or increased control
over a firm’s competitors. Mergers, acquisition, and takeover among competitors allow for
increased economies of scale and enhanced transfer of resources and competencies.
Five guidelines for when horizontal integration may be an especially effective strategy are:
 When an organization can gain monopolistic characteristics in a particular area or region
without being challenged by the federal government for “tending substantially” to reduce
competition.
 When an organization competes in a growing industry.

2
  When increased economies of scale provide major competitive advantages.
 When an organization has both the capital and human talent needed to successfully mange an
expanded organization.
 When competitors are faltering due to a lack of managerial expertise or a need for particular
resources that an organization possesses; note that horizontal integration would not be
appropriate if competitors are doing poorly, because in that case overall industry sales are
declining.
1. Intensive Strategies: - implies firms’ effort to improve its competitive position with
existing product. Market penetration, market development, and product development are
sometimes referred as intensive strategies because they require intensive efforts if a firm’s
competitive position with existing products is to improve.
I. Market Penetration: - seeks to increase market share for present products or services in
present markets through greater marketing efforts. This strategy is widely used alone and in
combination with other strategies. Market penetration includes increasing the number of
salespersons, increasing advertising expenditures, offering extensive sales promotion items,
or increasing publicity efforts.
 Market penetration involves heavy advertising to promote and build product differentiation
Five guidelines for when market penetration may be an especially effective strategy are:
 When current markets are not saturated with a particular product or service.
 When the usage rate of present customers could be increased significantly.
 When the market shares of major competitors have been declining while total industry sales
have been increasing.
 When the correlation between dollar sales and dollar marketing expenditures historically has
been high.
 When increased economies of scale provide major competitive advantages.
II. Market Development: - involves introducing present products or services into new
geographic areas. It is all about finding new market segments for a company's products. A
company pursuing this strategy wants to capitalize on the brand name it has developed in one
market segment by locating new market segments in which to compete.
Six guidelines for when market development may be an especially effective strategy are:

3
  When new channels of distribution are available that are reliable, inexpensive, and of good
quality.
 When an organization is very successful at what it does.
 When new untapped or unsaturated markets exist.
 When an organization has the needed capital and human resources to manage expanded
operations.
 When an organization has excess production capacity.
 When an organization’s basic industry is becoming rapidly global in scope.
III. Product Development: - is the creation of new or improved products to replace existing one.
It is a strategy that seeks increased sales by improving or modifying present products or
services. Product development is important for maintaining product differentiation and
building market share. Product development usually entails large research and development
expenditures.
Five guidelines for when product development may be an especially effective strategy to pursue
are:
 When an organization has successful products that are in the maturity stage of the product
life cycle; the idea here is to attract satisfied customers to try new (improved) products as a
result of their positive experience with the organization’s present products or services.
 When an organization competes in an industry that is characterized by rapid technological
developments.
 When major competitors offer better-quality products at comparable prices.
 When an organization has especially strong research and development capabilities.
2. Diversification Strategies: - allowing a company to enter additional line of business that is
different from the current product, services and market.
While diversification can create value for a company, it often ends up doing just the opposite.
Extensive diversification tends to depress rather than improve a company's profitability.
One reason for the failure of diversification to achieve its aims is that all too often the
bureaucratic costs of diversification exceed the value created by strategy. The level of
bureaucratic costs in a diversified organization is a function of two factors:
I. The number of businesses in a company's portfolio.

4
II. The extent of coordination required among the different businesses of the company in order
to realize value from a diversification strategy. The risk inherent in a diversification strategy
can be reduced somewhat by following five general guidelines.
 Make sure that management understand the significance of a diversification strategy and
selects it because of distinctive skills.
 Ensure that the firm’s skills match those needed for success in the new situation.
 Test the decision before taking action, for instance by evaluating the market size, market
access, reactions of potential customers, and production problems.
 Identify the point of no return before too many resources are allocated.
 Evaluate potential human problems and the possible influence of the strategy on corporate
identity.
Diversification strategies can also be categorized as concentric diversification, horizontal
diversification, and conglomerate diversification. Each of these are briefly discussed here under
I. Concentric Diversification
Adding new, but related, products or services is widely called concentric diversification.
Concentric diversification involves seeking growth by appealing to new markets with new
products that have a meaningful technological or marketing fit or synergy with existing products.
The key to concentric diversification is to take advantage to at least one of the firm’s major
internal strengths.
Six guidelines for when concentric diversification may be an effective strategy are provided
below.
 When an organization competes in a no-growth or a slow-growth industry.
 When adding new, but related, products would significantly enhance the sales of current
products.
 When new, but related, products could be offered at highly competitive prices.
 When new, but related, products have seasonal sales levels that counterbalance an
organization’s existing peaks and valleys.
 When an organization’s products are currently in the declining stage of the product’s life
cycle.
 When an organization has a strong management team.
II. Horizontal Diversification

5
 Adding new, unrelated products or services for present customers is called horizontal
diversification. This strategy is not as risky as conglomerate diversification because a firm is
already familiar with its present customers.
Four guidelines for when horizontal diversification may be an especially effective strategy are:
 When revenues derived from an organization’s current products or services would increase
significantly by adding the new, unrelated products.
 When an organization competes in a highly competitive and/or a no-growth industry, as
indicated by low industry profit margins and returns.
 When an organization’s present channels of distribution can be used to market the new
products to current customers.
 When the new products have countercyclical sales patterns compared to an organization‘s
present products.
III. Conglomerate Diversification
Adding new, unrelated products or services is called conglomerate diversification. Conglomerate
diversification involves seeking growth by appealing to new markets with new products that
have no technological relationship to current products. Conglomerate diversification is a growth
strategy that involves adding new products or services that are significantly different from the
organization’s present products or services. Conglomerate diversification can be pursued
internally or externally. Most frequently, however, it is achieved through mergers, and
acquisitions.
Six guidelines for when conglomerate diversification may be an especially effective strategy to
pursue are listed below.
 When an organization’s basic industry is experiencing declining annual sales and profits.
 When an organization has the capital and managerial talent needed to compete successfully
in a new industry.
 When an organization has the opportunity to purchase an unrelated business that is an
attractive investment opportunity.
 When there exists financial synergy between the acquired and acquiring firm (note that a key
difference between concentric and conglomerate diversification is that the former should be
based on some commonality in markets, products, or technology, whereas the latter should be
based more on profit considerations).

6
  When existing markets for an organization’s present products are saturated.
 When antitrust action could be charged against an organization that historically has
concentrated on a single industry.
3. Defensive Strategies: - In addition to integrative, intensive, and diversification strategies,
organizations also could opt for pursue retrenchment, divestiture, or liquidation.
I. Retrenchment: - is a temporary or short-run strategy that focuses on a turnaround, or the
alleviation of organization inefficiencies or temporary environmental problems. Sometimes
called a turnaround or reorganization strategy, retrenchment is designed to fortify an
organization’s basic distinctive competence. It occurs when an organization regroups through
cost and asset reduction to reverse declining sales and profits. It is an effort to reduce cash
outflows, and increase cash inflows.
Six guidelines for when retrenchment (turnarounds) may be an especially effective strategy to
pursue are as follows.
 When an organization has a clearly distinctive competence but has failed to meet its
objectives and goals consistently over time.
 When an organization is one of the weaker competitors in a given industry
 When an organization is plagued by inefficiency, low profitability, poor employee morale,
and pressure from stockholders to improve performance.
 When an organization has failed to capitalize on external opportunities, minimize external
threats, take advantage of internal strengths, and overcome internal weaknesses over time;
that is, when the organization’s strategic managers have failed (and possibly will be replaced
by more competent individuals).
 When an organization has grown so large so quickly that major internal reorganization is
needed.
II. Divestiture: - is the marketing for sale of a business or a major component of a business. Simply
it refers to selling a division or part of an organization. It occurs when a firms sells or closes one
of its businesses to achieve a permanent change in the scope of operations. Divestiture often is
used to raise capital for further strategic acquisitions or investments. Divestiture can be part of an
overall retrenchment strategy to get rid-off business units that are unprofitable, that require too
much capital, or that do not fit well with the firm’s other activities.

7
 Six guidelines for when divestiture may be an especially effective strategy to pursue are listed
below.
 When an organization has pursued a retrenchment strategy and failed to accomplish needed
improvements.
 When a division needs more resources to be competitive than the company can provide.
 When a division is responsible for an organization’s overall poor performance.
 When a division is a misfit with the rest of an organization; this can result from radically
different markets, customers, managers, employees, values, or needs.
 When a large amount of cash is needed quickly and cannot be obtained reasonably from
other sources.
 When government antitrust action threatens an organization.
III. Liquidation: - selling all of a company’s assets, in parts, for their tangible worth is called
liquidation. Liquidation occurs when the entire firm ceases to exist, either through sale or
dissolution. Although liquidation can occur because of court-ordered bankruptcy
proceedings, planned liquidations can occur in an orderly manner. For example, a firm might
decide that it cannot compete successfully in the current industry and recognizes that it does
not have the resources necessary to pursue other promising strategies. Liquidation is
recognition of defeat and consequently can be an emotionally difficult strategy. However, it
may be better to cease operating than to continue losing large sums of money.
Three guidelines for when liquidation may be an especially effective strategy to pursue are;
 When an organization has pursued both a retrenchment strategy and a divestiture strategy,
and neither has been successful.
 When an organization’s only alternative is bankruptcy; liquidation represents an orderly and
planned means of obtaining the greatest possible cash for an organization’s assets. A
company can legally declare bankruptcy first and then liquidate various divisions to raise
needed capital.
 When the stockholders of a firm can minimize their losses by selling the organization’s
assets.

8
5.2. Michael Porter’s Generic Strategies

In the 1980s Michael Porter had identified three strategies; namely cost leadership strategies,
differentiation strategies and focus strategies.
1. Cost Leadership Strategies
A primary reason for pursuing forward, backward, and horizontal integration strategies is to gain
cost leadership benefits. But cost leadership generally must be pursued in conjunction with
differentiation. A number of cost elements affect the relative attractiveness of generic strategies,
including economies or diseconomies of scale achieved, learning and experience curve effects,
the percentage of capacity utilization achieved, and linkages with suppliers and distributors.
Other cost elements to consider in choosing among alternative strategies include the potential for
sharing costs and knowledge within the organization, R&D costs associated with new product
development or modification of existing products, labor costs, tax rates, energy costs, and
shipping costs.
Striving to the low-cost producer in an industry can be especially effective when the market is
composed of many Price-sensitive buyers, when there are few ways to achieve product
differentiation, when buyers do not care much about differences from brand to brand, or when
there are a large number of buyers with significant bargaining power.
Requirements of cost leadership strategy are:
 Strive for longer production
 Offering uniform product (narrow)
 Experience
 Minimum cost in R & D, service, promotion
 Production of satisfactory product
 Decreasing advertising and promotion
 Being positioned at lower ladder in the product
2. Differentiation Strategies: - Differentiation strategy is concerned with pursuing a
competitive advantage by attempting to create unique product /service. Differentiation does
not guarantee competitive advantage, especially if standard products sufficiently meet
customer needs or if rapid imitation by competitors is possible.

9
 Requirements for differentiation include -
 Clear understanding of customers
 Knowledge of values of customers and stakeholders
 Being in the unique position
 Clear definition of competition
 Awareness of environmental change
 Making sure the base of differentiation is difficult to imitate
 Identification of potentially available base of differentiation
 Determine industry growth rate (at maturity, imitation is common)
3. Focus Strategies: - a successful focus strategy depends on an industry segment that is of
sufficient size, has good growth potential, and is not crucial to the success of other major
competitors. Strategies such as market penetration and market development offer substantial
focusing advantages.
An organization using a focus strategy may concentrate on a particular group of customers,
geographic markets, or on particular product-line segments in order to serve a well-defined but
narrow market better than competitors who serve a broader market. In other words, focus
strategy resets on the choice of a narrow competitive scope within in the industry; may be a
particular buyer, group, a segment of the product line of a geographic market. It is concerned
with serving a particular target market very well and designed to get cost advantage in the target
segment Focus strategy is suit when:
 Customer in the niche have special needs
 Many underserved of over served market segment exist
 Segment have enough customer that can at least finance operational cost
 Niches must be profitable
 Niches have good growth potential
 Strong competences and capacity to serve the niche exist
 Difficult for competitors to serve the niche
 The firm has limited resources to serve broad market
 Viable entry barriers exist

10
5.3. Managing the Corporate Portfolio

There are many techniques used to manage corporate portfolios. Here are two among many: the
industry life cycle (product life cycle model) and the BCG matrix.
5.3.1. Industry Life Cycle Model
Over time most industries pass through a series of well-defined stages, from growth through
maturity and eventually into decline. These stages have different implications for the form of
competition. The strength and nature of each of Porter's five competitive forces typically changes
as an industry evolves. The changes in the strength and nature of these forces give rise to
different opportunities and threats at each stage of an industry's evolution.
Industries follow the same pattern as the product life cycle. Industry life cycle, however, is
longer than product life cycle. The industry life cycle model is a useful tool for analyzing the
effects of an industry's evolution on competitive forces. Using the industry life cycle model, we
can identify five industry environments, each linked to a distinct stage of an industry's evolution:
(1) an embryonic industry environment, (2) a growth industry environment, (3) a shakeout
industry environment, (4) a mature industry environment, and (5) a declining industry
environment.
1) Embryonic Industry Environment
An embryonic industry is one that is just beginning to develop. Growth at this stage is slow
because of such factors as buyers' unfamiliarity with the industry's product, high prices due to the
inability of companies to reap any significant economies of scale, and poorly developed distri-
bution channels. Barriers to entry at this stage in an industry's evolution tend to be based on
access to key technological know-how rather than cost economies or brand loyalty. Generally, at
the introductory stage the industry exhibits the following features.
 Sales volume low
 Market penetration rate is low
 Product is little known
 Few customers
 Small production scale
 No experience

11
 Quality is low
 Cost and price is high
 Product technology advance rapidly
 Customers are affluent, innovation oriented and risk accepting
2) Growth Industry Environment
Once demand for the industry's product begins to take off, the industry develops the
characteristics of a growth industry. In a growth industry first-time demand expands rapidly as
many new consumers enter the market. Typically, an industry grows when consumers become
familiar with the product, when prices fall because experience and economies of scale have been
attained, and when distribution channels develop.
During an industry's growth stage, rivalry tends to be low. Rapid growth in demand enables
companies to expand their revenues and profits without taking market share away from
competitors. A company has the opportunity to expand its operations. In addition, a strategically
aware company takes advantage of the relatively benign environment of the growth stage to
prepare itself for the intense competition of the coming shakeout industry environment.
At growth stage the industry is generally characterized by:
 Market penetration rate increase
 Product standardized and price fail
 Mass market
 Product is known to more people
3) Shakeout Industry Environment
Explosive growth cannot be maintained indefinitely. Sooner or later the rate of growth slows,
and the industry enters the shakeout stage. In a shakeout industry, demand approaches the
saturation level. In a saturated market, there are few potential first-time buyers left. Most of the
demand is limited to replacement demand.
As an industry enters the shakeout stage, rivalry between companies becomes intense. What
typically happens is that companies that have become accustomed to rapid growth during an
industry's growth phase continue to add capacity at rates consistent with past growth. Managers
use historic growth rates to forecast future growth rates, and they plan expansions in productive
capacity accordingly. As an industry approaches maturity, however, demand no longer grows at
historic rates. The consequence is the emergence of excess productive capacity.

12
4) Mature Industry Environment
The shakeout stage ends when the industry enters its mature stage. In a mature industry the
market is totally saturated and demand is limited to replacement demand.
During this stage, growth is low or zero. Little growth comes from population expansion that
might bring new consumers into the market. As industries enters maturity, barriers to entry
increase and the threat of entry from potential competitors’ decreases. As growth slows during
the shakeout stage, companies can no longer maintain historic growth rates merely by holding on
to their market share.
Competition for market share develops, driving down prices. Often the result is a price war. To
survive the shakeout, companies begin to focus both on cost minimization and on building brand
loyalty. By the time an industry matures, the surviving companies are those that have brand
loyalty and low-cost operations. Because both these factors constitute a significant barrier to
entry, the threat of entry by potential competitors is greatly diminished. High barriers to entry in
mature industries give companies the opportunity to increase prices and profits.
At maturity stage generally:
 New demand gives way to replacement demand
 Old product replaced with new product
5) Declining Industry Environment
Eventually, most industries enter a decline stage. In a declining industry growth becomes
negative for a variety of reasons, including technological substitution, (for example, air travel for
rail travel), social changes (for example, greater health consciousness hitting tobacco sales),
demographics (for example, the declining birthrate hurting the market for baby and child
products), and international competition. Within a declining industry, the degree of rivalry
among established companies usually increases. The main problem in a declining industry is that
falling demand leads to the emergence of excess capacity. In trying to utilize this capacity,
companies begin to cut prices, thus sparking a price war. Exit barriers play a part in adjusting
excess capacity.
At declining stage; new industries are established and there are superior product substitute.
Here it is important to note that growth of demand and production and diffusion of knowledge
are the two fundamental factors that drive industry evolution.

13
A. Strategies in Embryonic and Growth Industries
Embryonic industries are typically created by the innovations of pioneering companies that
becomes the first movers in a new market. In most cases, the pioneering company can initially
earn enormous profits from its innovation because it is the only company in the industry for the
time.
However, innovators' high profits also attract potential imitators and second movers, as the
companies who enter the market later are known. Typically, second movers enter during the
growth stage of an industry and may cause the pioneering, first-mover company to lose its
commanding competitive position.
Three strategies are available to the company: (1) to develop and market the innovation itself, (2)
to develop and market the innovation jointly with other companies through a strategic alliance or
joint venture, and (3) to license the innovation to others and let them develop the market.
a. Complementary Assets
Complementary assets are those required to exploit a new innovation and gain a competitive
advantage successfully. Among the most important complementary assets are competitive
manufacturing facilities capable of handling rapid growth in customers’ demand while
maintaining high product quality.
Complementary assets also include marketing know-how, an adequate sales force, access to
distribution systems, and an after sales service and support network. All these assets can help an
innovator build brand loyalty. They also help the innovator achieve market penetration more
rapidly. In turn, the resulting increases in volume facilitate more rapid movement down the
experience curve.
b. Height of Barriers to Imitation
Barriers to imitation are factors that prevent rivals from imitating a company's distinctive
competencies. Barriers to imitation also prevent rivals, particularly second or late movers, from
imitating a company's innovation. Although ultimately any innovation can be copied, the higher
the barriers, the longer it takes for rivals to imitate.
Barriers to imitation give an innovator time to establish a competitive advantage and build more
enduring barriers to entry in the newly created market. Patents, for example, are among the most
widely used barriers to imitation.

14
c. Capable Competitors
Capable competitors are companies that can move quickly to imitate the pioneering company.
Competitors' capability to imitate a pioneer's innovation depends primarily on two factors: (1)
R&D skills and (2) access to complementary assets. In general, the greater the number of capable
competitors with access to the R&D skills and complementary assets needed to imitate an
innovation, the more rapid is imitation likely to be.
B. Strategy in Mature Industries
As a result of fierce competition in the shakeout stage, an industry becomes consolidated, and so
a mature industry is often dominated by a small number of large companies. Although a mature
industry may also contain many medium-sized companies and a host of small specialized ones,
the large companies determine the nature of the industry's competition because they can
influence the five competitive forces. Indeed, these are the companies that developed the most
successful generic business-level strategies in the industry.
In fact, the main issue facing companies in a mature industry is to adopt a competitive strategy
that simultaneously allows each individual company to protect its competitive advantage while
preserving industry profitability. No generic strategy will generate above-average profits if
competitive forces in an industry are so strong that companies are at the mercy of each other,
potential entrants, powerful suppliers, powerful customers, and so on. As a result, in mature
industries, competitive strategy revolves around understanding how large companies try
collectively to reduce the strength of the five forces of industry competition to preserve both
company and industry profitability.
Companies can utilize three main methods to deter entry by potential rivals and hence maintain
and increase industry profitability. These methods are product proliferation, price cutting, and
excess capacity.
a) Product Proliferation: - Companies seldom produce just one product. Most commonly, they
produce a range of products aimed at different segments so that they have broad product
lines. Sometimes, to reduce the threat of entry, companies expand the range of products they
make to fill a wide variety of niches. This creates a barrier to entry because potential
competitors now find it harder to break into an industry in which all the niches are filled.
This strategy of pursuing a broad product line to deter entry is known as product
proliferation.

15
b) Price Cutting: - In some situations, pricing strategies involving price cutting can be used to
deter entry by other companies, thus protecting the profit margins of companies already in an
industry. One price-cutting strategy, for example, is to charge a high price initially for a
product and seize short-term profits but then to cut prices aggressively in order to build
market share and deter potential entrants simultaneously. This pricing strategy also allows a
company to ride down the experience curve and obtain substantial economies of scale. Since
costs fall with prices, profit margins could still be maintained.
Most evidence suggests that companies first skim the market and charge high prices during the
growth stage, maximizing short-run profits. Then they move to increase their market share and
charge a lower price to expand the market rapidly; develop a reputation; and obtain economies of
scale, driving down costs and barring entry.
c) Maintaining Excess Capacity: - this allows companies to deter entry involves maintaining
excess capacity, which is, producing more of a product than customers currently demand.
Existing industry companies may deliberately develop some limited amount of excess
capacity because it serves to warn potential entrants that if they enter the industry, existing
firms can retaliate by increasing output and forcing down prices until entry would become
unprofitable. However, the threat to increase output has to be credible, that is, companies in
an industry must collectively be able to raise the level of production quickly if entry appears
likely.
Beyond seeking to deter entry, companies also wish to develop a competitive strategy to manage
their competitive interdependence and decrease rivalry. As we noted earlier, unrestricted
competition over prices or output reduces the level of company and industry profitability.
Several competitive tactics and gambits are available to companies to manage industry relations.
The most important are price signaling, price leadership, non price competition, and capacity
control.
d) Price Signaling: - Most industries start out fragmented, with small companies battling for
market share. Then, over time, the leading players emerge, and companies start to interpret
each other's competitive moves. Price signaling is the first means by which companies
attempt to structure competition within an industry in order to control rivalry among
competitors. Price signaling is the process by which companies’ increase or decrease product
prices to communicate their intentions to other companies and so influence the way they

16
 price their products. There are two ways in which companies use price signaling to help
defend their generic competitive strategies.
First, companies may use price signaling to announce that they will respond vigorously to hostile
competitive moves that threaten them.
e) Price Leadership: - Price leadership, the taking on by one company of the responsibility for
setting industry prices, is a second tactic used to enhance the profitability of companies in a
mature industry. Formal price leadership, or price setting by companies jointly, is illegal
under some laws, so the process of price leadership is often very subtle. In the auto industry,
for example, auto prices are set by imitation. The price set by the weakest company, that is,
the one with the highest costs, is often used as the basis for competitors' pricing.
f) Non-price Competition: - It is s the strategy of using mechanisms like Market Penetration,
Product Development and market. The following table indicates the mechanisms used in this
strategy.
B. Strategies in Declining Industries
There are four main strategies that companies can adopt to deal with decline: (1) a leadership
strategy, by which a company seeks to become the dominant player in a declining industry; (2) a
niche strategy, which focuses on pockets of demand that are declining more slowly than the
industry as a whole; (3) a harvest strategy, which optimizes cash flow; and (4) a divestment
strategy, by which a company sells off the business to others.
Not all segments of an industry typically decline at the same rate. The point, then, is that there
may be pockets of demand in an industry in which demand is declining more slowly than in the
industry as a whole or not declining at all. Price competition thus may be far less intense among
the companies serving such pockets of demand than within the industry as a whole.
 Leadership Strategy: - a leadership strategy aims at growing in a declining industry by picking
up the market share of companies that are leaving the industry. A leadership strategy makes most
sense (1) when the company has distinctive strengths that allow it to capture market share in a
declining industry and (2) when the speed of decline and the intensity of competition in the
declining industry are moderate.
The tactical steps companies might use to achieve a leadership position include aggressive
pricing and marketing to build market share; acquiring established competitors to consolidate the
industry; and raising the stakes for other competitors, for example, by making new investments

17
in productive capacity. Such competitive tactics signal to other competitors that the company is
willing and able to stay and compete in the declining industry. These signals may persuade other
companies to exit the industry, which would further enhance the competitive position of the in-
dustry leader.
 Niche Strategy. A niche strategy focuses on those pockets of demand in the industry in
which demand is stable or declining less rapidly than the industry as a whole. The strategy
makes sense when the company has some unique strength relative to those niches where
demand remains relatively strong.
 Harvest Strategy. A harvest strategy is the best choice when a company wishes to get out of
a declining industry and perhaps optimize cash flow in the process. This strategy makes the
most sense when the company foresees a sudden decline and intense future competition or
when it lacks strengths relative to remaining pockets of demand in the industry. A harvest
strategy requires the company to cut all new investments in capital equipment, advertising,
R&D, and the like. The inevitable result is that the company will lose market share, but
because it is no longer investing in this business, initially its positive cash flow will increase.
Ultimately, however, cash flows will start to decline, and at this stage it makes sense for the
company to liquidate the business.
 Divestment Strategy: - divestment strategy rests on the idea that a company can maximize
its net investment recovery from a business by selling it early, before the industry has entered
into a steep decline. This strategy is appropriate when the company has little strength relative
to whatever pockets of demand are likely to remain in the industry and when the competition
in the declining industry is likely to be intense. The best option may be to sell out to a
company that is pursuing a leadership strategy in the industry.
5.3.2. The BCG Matrix
To ensure long-term value creation, a company should have a portfolio of products that contains
both high-growth products in need of cash inputs and low-growth products that generate a lot of
cash. The BCG matrix is -developed by Boston Consulting Group (BCG) - a tool that can be
used to determine what priorities should be given in the product portfolio of a business unit. It
has 2 dimensions: market share and market growth. The basic idea behind it is that the bigger the
market share a product has or the faster the product’s market grows the better it is for the
company.

18
 Relative market share refers to the ratio of the firm’s market share to that of its largest
competitor. It is a better indicator of the position of a firm in the market than simple market
share.
The BCG Plot results in Four Quadrants
 Y- axis – Relative growth rate low to high
 X-axis- Relative market share high to low

STAR QUESTION MARK

Earnings: High Earning: low, stable ?
(High) Growth: Stable growth Cash flow: Negative
Cash flow: Neutral Strategy : analyze to determine whether business
Strategy : Invest for growth can be grow into star or will degenerate into dog
CASH COW DOG
(Low)
Earning: High and stable Earning: Low, unstable
Cash flow: High, stable Cash flow: Neutral or negative

growth
Strategy : Milk Strategy: Divest
High Relative Market Share Low
of market
Real Rate

1.
Annual

1. Question Mark (= high growth, low market share)

 Low market shares but compete in a high growth industry.
 Have the worst cash characteristics of all, because high demands and low returns due to
low market share.
 Needs high cash for growth and cash generation is low.
 If nothing is done to change the market share, question marks will simply absorb great
amounts of cash and later, as the growth stops, a dog.
 Intensive strategy or sell them (increase market share or deliver cash).
 Identify SBU most that benefit from extra resource and can move to star. If it is not
possible, divest.

19
2. Stars (= high growth, high market share)
 Use large amounts of cash and are leaders in the business so they should also generate
large amounts of cash.
 Best long-run opportunity from growth and profitability.
 Higher market shares and high industry growth.
 Rapidly growing industry, large market share.
 Require sound investment.
 Needs investment to maintain or strengthen their dominant position.
 Forward integration, backward integration, horizontal integration and intensive strategies
are appropriate.
3. Cash Cows (= low growth, high market share)
 High relative market share but compete in a low growth industry.
 Generate cash in excess of their needs; so milk them.
 Minimal investment for growth.
 Source of resource for development elsewhere (star and question mark).
 Try to maintain the position so much as possible.
 Product development, concentric diversification may be attractive where it can be weak,
retrenchment or divestiture can be more appropriate.
4. Dogs (= low growth, low market share)
 Low market shares and compete in a slow or no growth industry.
 Avoid and minimize the number of dogs in a company.
 Often liquidate or divested or retrenched.
 Retrenchment is best in case chance to bounce back and become profitable (properly.
            managed).

20