CH. 2 Strategies in Action

CHAPTER TWO
Strategies In Action
Yitbarek Takele (PhD, MBA & MA Econ)

Associate Professor of Business Administration
Addis Ababa University
Types of Strategies
 Growth strategies
 Stability strategies
 Renewal Strategies
Yitbarek Takele (PhD) 2

10/21/2017
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
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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 4
10/21/2017 Yitbarek Takele (PhD)
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
Market Product/Market
New 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
 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
 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 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
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
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
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
 Organization 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
• Joint-bidding consortia 24
Yitbarek Takele (PhD)
 10/21/2017
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
 The advice of my friend ……….
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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
 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
 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
cont…
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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Portfolio analysis:
BCG Matrix
Relative Market
Share Position
High Low
High
Stars Question Marks
(faster than
the economy
as a whole)
Industry Growth Rate

(in constant sales dollars)
Cash Cows Dogs
Low
(slower than
the economy
as a whole)
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Portfolio analysis:
McKinsey-GE Stoplight Matrix
Business Strength-Competitive Position
Strong Average Weak
Industry (Product-Market) Attractiveness (5) (3) (1)
Winners Winners
High (5)
Question
marks
Winners Average
Business
Medium (3)
Losers
Profit
Low (1) Producers
Losers Losers
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Portfolio analysis:
Product-Market Evolution Matrix
The Business Unit’s Competitive Position
Strong Average Weak
Development A
C
B
Growth
Industry’s
Stage
Competitive D F
in the Shakeout
Evolutionary E
Life Cycle Maturity

Saturation G
Decline H

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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

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Other Examples of Strategies

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Other Examples of Strategies
(Contd.)

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Generic & 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 extensive 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
 Linkages10/21/2017
with suppliers and distributors
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, creative people
 Greater product flexibility
 Greater compatibility
 Lower costs
 Improved service
 Greater convenience
 More features 50
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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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Porter’s Generic Competitive
Strategies
 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
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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10/21/2017 Yitbarek Takele (PhD)
7. It should welcome bad news.

8. It should welcome open-mindness 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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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 Two
Questions

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CHAPTER TWO

Yitbarek Takele (PhD, MBA & MA Econ)

Yitbarek Takele (PhD) 2

 Involves the attainment of specific growth

Diversification Vertical Integration

Organization concentrates on its primary

Yitbarek Takele (PhD) 5

* not a concentration option

Yitbarek Takele (PhD) 6

 Current markets not saturated

Yitbarek Takele (PhD) 7

 New channels of distribution that are reliable,

Yitbarek Takele (PhD) 8

 Products in maturity stage of life cycle

Yitbarek Takele (PhD) 9

 An organization’s attempt to gain control of

Its inputs (backwards)

Its outputs (forwards)

Yitbarek Takele (PhD) 10

 Allow a firm to gain control over:

Yitbarek Takele (PhD) 11

• Protected proprietary • Financial costs of acquiring or

Yitbarek Takele (PhD) 12

1. Present distributors are expensive, unreliable, or

Yitbarek Takele (PhD) 13

1. When present suppliers are expensive, unreliable, or

Yitbarek Takele (PhD) 14

 Combining operations with competitors

 Horizontal integration is appropriate when it

Yitbarek Takele (PhD) 15

1. Firm can gain monopolistic characteristics without

Yitbarek Takele (PhD) 16

 Organization expands its operations by moving

 Related (concentric) diversification

 Unrelated (conglomerate) diversification

Yitbarek Takele (PhD) 17

Product Related Distribution

Yitbarek Takele (PhD) 18

 Competes in no- or slow-growth industry

Yitbarek Takele (PhD) 19

 Declining annual sales and profits

Yitbarek Takele (PhD) 20

 Organization can pursue international growth

 International growth issues

Yitbarek Takele (PhD) 21

Yitbarek Takele (PhD) 23

 Combination of privately held and publicly held can

 Stability strategy – the organization maintains

 Renewal strategies – used to reverse

 Organizational decline – main reason for decline

Yitbarek Takele (PhD) 27

Over expansion Uncontrollable

 Corporate objectives or goals

 Efficiency, effectiveness, and productivity

Yitbarek Takele (PhD) 29

Yitbarek Takele (PhD) 30

 Firm has failed to meet its objectives and goals

Yitbarek Takele (PhD) 31

 When firm has pursued retrenchment but failed to attain

 When both retrenchment and divestiture have been

Yitbarek Takele (PhD) 33

Yitbarek Takele (PhD) 34

Yitbarek Takele (PhD) 35