1

BUSINESS POLICY AND STRATEGIC MANAGEMENT

Module 4 Semester VI

Strategic Choice
2

Introduction Strategic alternatives at corporate level: expansion, stability, retrenchment and combination Strategic choice models for dominant single-business companies- Stricklands Grand Strategy Selection Matrix, Model of Grand Strategy Clusters Strategic choice models for multi-business companies- BCG, GE Nine Cell Matrix, Hofers Model. Coevolving, Patching Strategy as simple rules Strategic alternatives at business level: Michael Porters Generic competitive strategies.

Building Sustainable Competitive Advantage

Structure for Making Strategic Choice

3 What Options are available?

Options about products, markets and services

Options to improve resources & capabilities

Options of method on how to progress

Choice Criteria -Assessment -Intent Who should be involved in the Choice?

Linking into available strategic options Theoretical Frameworks for making strategic choice

Making the Choice

Chosen Strategy

Strategic Choice
4

Process of Strategic Choice:

1.

The evaluation of alternative strategies and selection of the best alternative Devils Advocate Dialectical Inquiry

2.

3.

Evaluation of Alternatives
5

The process of evaluation of strategic alternatives begins by limiting the choice of alternatives to a few which are considered feasible. This is done by :

Focusing on the business definition or Analyzing the Strategic Gap Ability to meet four criteria:

Mutual exclusivity Success Completeness Internal consistency

Strategic alternatives: Corporate Level Strategies

6

It is related to:
Allocating resources among the different businesses of a firm Transferring resources from one set of businesses to others Managing & nurturing a portfolio of business.

Corporate-Level Strategies
7

Valuable strengths

Concentric Diversification (Economies of Corporate Scope) growth strategies Conglomerate Diversification (Risk Mgt.) Corporate stability strategies Corporate retrenchment strategies Can still go for business-level growth (economies of scale) Environmental Status
Critical environmental threats

Firm Status

Critical weaknesses Abundant environmental opportunities

Grand Strategies
8

According to Glueck, there are 4 strategic alternatives:

Stability Expansion Retrenchment (Divestment) Combination

Strategic Alternatives
9

Stability

Expansion

Retrenchment

Combination

Concentration
Market Penetration Market Development Product Development Vertical Integration Horizontal

Diversification
Concentric Diversification Conglomerate Diversification

Integration

Forward

Backward

Expansion Strategy
10

When an organization aims at high growth by substantially broadening the scope of one or more of its businesses in terms of:

Respective customer groups Customer functions Alternative technologies

These strategies have profound effect on the companys internal configuration, causing extensive changes in almost all aspects of internal functioning

Circumstances Under Which Expansion Strategy is Adopted:

11

When the environment demands increase in pace of activity Strategists may feel more satisfied with the prospect of growth from expansion: CEOs take pride Increasing size may lead to more control over the market vis--vis competitors Advantages from the scale of operations may accrue. Example: Reliance, Infosys, HUL etc.

Stability Strategy
12

Adopted by an organization when it attempts at incremental improvement of its performance by marginally changing one or more of its businesses Stability Strategy is adopted because:

It is less risky, involves less changes and people feel comfortable with things as they are The environment faced is relatively stable Expansion may be perceived as threatening Consolidation is sought through stabilizing after a period of rapid expansion

Retrenchment Strategy
13

Followed when an organization aims at contraction of its activities through a substantial reduction or elimination of the scope of one or more of its businesses Retrenchment Strategy is adopted because:

The management no longer wishes to remain in business either partly or wholly, due to continuous losses and the organization becomes unviable The environment faced is threatening Stability can be ensured by re allocation of resources from unprofitable business to profitable ones

Combination Strategy
14

When an organization adopts a mixture of stability, expansion and retrenchment strategies, either at the same time in different businesses or at different times in one of its businesses, with the aim of improving its performance Complex solutions that strategists have to offer when faced with the challenge of real-life business Combination Strategy is adopted because

The organization is large and faces complex environment The organization is composed of different businesses, each of which lies in a different industry, requiring a different response

Possible Expansion Strategies

15

Concentration Ansoff Product-market matrix

Integration Vertical Horizontal Cooperation M&A JV Strategic Alliance

Digitalisation

Organizational Growth

Diversification Concentric/Related Conglomerate/Unrelated

Internationalization

16

PRODUCT EXPANSION STRATEGIES

1.Expansion through Concentration

1.Expansion through Concentration

17

Ansoffs Product-Market Expansion Grid

Current Products Current Markets 1.Market-penetration strategy New Products 3.Product-development strategy Diversification Strategy

New Markets

2.Market-development strategy

Expansion through Concentration contd

18

Means firm concentrates on its primary business. Is the simplest and the least ambiguous

It has four options: 1. Market penetration

Focusing on increasing sales of current products in current markets

Attracting nonusers to buy the product

Inducing trial use through sampling, price incentive, etc. Pricing up or down Advertising new uses

Expansion through Concentration contd

19

2. Product Development
Developing

new products for current customers.

Existing

products - improved or modified

Eg: Refrigerator with automatic defreezing, Johnson & Johnsonbaby toys added

Expansion through Concentration contd

20

3. Market Development:

Selling current products in new markets New markets - additional geographic areas, different market segments

4. Product/Market Proliferation:

Expanding both into new products and into new markets

Expansion through Concentration contd

21

Advantages:

Allows the firm to master one business Allows top managers to specialize in one business Allows all organization resources to be allocated to one business and put under less strain

Disadvantages:

Is risky when environments are unstable Is vulnerable to risks of product obsolescence and industry maturity May lead to cash flow problems

22

PRODUCT EXPANSION STRATEGIES

2.Expansion through Integration

2. Expansion through Integration

23

Integrative strategies means combining activities related to the present activity of a firm. Horizontal Integration

Vertical Integration

Forward integration

Backward integration

Horizontal Integration
24

Means investing in the purchase of one or more competitors. Purpose is to gain market share, expand geographically, augment product or service lines. Example: BMWs Rover acquisition

Vertical Integration Strategies

25

Vertical integration extends a firms competitive scope within same industry

Backward into sources of supply Forward toward end-users of final product

Can aim at either full or partial integration

Activities, Costs, & Margins of Suppliers

Internally Performed Activities, Costs, & Margins

Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

Buyer/User Value Chains

Appeal of Backward Integration

26

Reduces risk of depending on suppliers of crucial raw materials / parts / components Ensures smoother and better coordinated operations Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers Potential to reduce costs exists when

Suppliers have sizable profit margins Item supplied is a major cost component Resource requirements are easily met

Can produce a differentiation-based competitive advantage when it results in a better quality part

Appeal of Forward Integration

27

Advantageous for a firm to establish its own distribution network if:

Undependable distribution channels undermine steady production operations

Integrating forward into distribution and retailing may:

Be cheaper than going through independent distributors Help achieve stronger product differentiation, allowing escape from price competition Provide better access to users

28

PRODUCT EXPANSION STRATEGIES

3.Expansion through Diversification

3. Expansion through Diversification

29

Diversification Strategy takes place when new products/services are made for new markets. Example: ITC (Tobacco) also in Hotels, paper, packaging, food beverage There are two strategies that can be considered for diversification growth:
1. 2.

Concentric/Related Conglomerate/Unrelated

Levels and Types of Diversification

30

Source: Adapted from R. P. Rumelt, 1974, Strategy, Structure and Economic Performance, Boston: Harvard Business School.

Expansion through Diversification

31

Related/ Concentric diversification: When an organization does an activity which is related to the existing business, either in terms of customer groups, customer functions or alternative technologies. Example: L&T majorly an Engineering & Construction Industry. Its minor businesses are electrical & electronics, information technology & machinery and industrial products. Yet its focus is on major business for instance, machinery & industrial products make cement and mining machinery used for construction. Thus focus on related diversification.

Types of Concentric Diversification :

32

Marketing related concentric diversification: a similar type of product is offered with the help of a unrelated technology.

Eg: Sewing Machine business further diversified into kitchenware & household appliances sold through common distribution channel.

Technology related concentric diversification: a new type of product or service is offered with the help of related technology. Addition of soup + Maggi Marketing- and technology- related concentric diversification: a similar type of product or service is provided with the help of a related technology.

Unrelated Diversification?
33

Involves diversifying into businesses with

No strategic fit

No meaningful value chain relationships

Approach is to venture into any business in which we think we can make a profit

Firms pursuing unrelated diversification are often referred to as conglomerates

Expansion through Diversification

34

Conglomerate/ Unrelated Diversification: The company markets new products or services that have no technological or commercial synergies with current product, but which may appeal to new group of customers. Example: Aditya Birla Group in a variety of businesses like: Aluminum, BPO, Carbon black, Cement, Chemicals, Copper, fertilizers, gas, insulators, mining, retail, software, telecom & Textiles.

35

PRODUCT EXPANSION STRATEGIES

4.Expansion through Internationalization

4. Expansion through Internationalization

36

Factors responsible for expansion through Internalization are technological developments, enabling better contact between trading & investing nations.
Factors affecting a firms decision to adopt International strategies are:

Cost pressure: Demand on a firm to minimise its unit cost from economies of scale & location economies. Pressure for local responsiveness: Tailor its strategies to respond to national level differences in terms of variables like customer preferences, tastes, govt. policies.

Expansion through Internationalization

37

Global Strategy

Transnational Strategy

Pressures for Cost Reduction

International Strategy

Multi domestic Strategy

Pressures for Local Responsiveness

(Based on C.A. Barlett & S. Ghoshal, Managing Across Borders)

Expansion through Internationalization

38

International strategy : - transferring valuable skills & products and services to foreign markets where these products and services are not available. -Product development, R&D is centralized. Eg: Microsoft, IBM, Kellogg develops core competences of its product in Washington but permits foreign subsidiaries to marketing & distribution strategy.

Multi domestic strategy: Firms adopt a when they try to achieve a high level of local responsiveness by matching their product and offerings to the national conditions operating in their countries of operation- require a high cost structureR&D, Production, marketing Eg: panner burger by McDonalds

Expansion through Internationalization

39

Global strategy:

Firms adopt a when they rely on a low-cost approach based on reaping the benefits of experience-curve effects and location economies and offering standardized products and services across different countries. Eg: Motorola, General Motors

Transnational strategy:

Firms adopt a when they adopt a combined approach of low cost and high local responsiveness simultaneously, for their products and services. Eg: KFC started selling Vegetarian meal

International Entry Modes

40 1)

Export Entry Modes

1) 2)

Direct Exports Indirect Exports

2)

Contractual Entry Modes

1) 2) 3) 4) 5) 6)

Licensing Franchising Turnkey Projects Management Contracts Strategic Alliances Contract Manufacturing

3)

Investment Entry Modes

1) 2)

Joint Ventures & Strategic Alliances Wholly- owned Foreign Subsidiaries

Strategic Decisions in Internationalization

41

Which International Markets to Enter? Timing of Entry into International Markets Scale of Entry into International Markets

42

PRODUCT EXPANSION STRATEGIES

5.Expansion through Digitalization

5. Expansion through Digitalization

43

Electronization denotes progressive conversion of physical data into electronic data through digitalization. Digitalization denotes the conversion of analogue electric signals into digital signals. Computerization helps in compressing volumes of analogue data into digital data making it possible for organizations to amplify, transmit, modulate, store, retrieve, and reconvert data. Computerization + Electronization + Digitalization + Networking + Telecommunications Convergence Digitalization has not only transformed the industries but has created electronic markets which have transformed the complete business definitions in terms of customer groups, customer functions and alternative technologies.

Digitalization transforming the Value Chain

44

Deconstruction

The total product is broken into components some of which can be delivered digitally. Eg: A PC manual, warranty card can be delivered digitally.

Disintermediation & Cannibalization

When some process in the value chain can be eliminated.

Re-intermediation

When processes in the value chain can be supplemented by more intermediaries. Eg: Online booksellers never own the books, they sell, provide info to buyers

Digitalization transforming the Value Chain

45

Industry morphing

Entirely different ways of providing the same products & services Eg: Banking services

Techno-intensification

More intensive use of technology. Eg: ATM

Re-channeling

Takes place when some of the processes are outsourced and some activities are chosen to specialize in them.

46

PRODUCT EXPANSION STRATEGIES

6.Expansion through Cooperation

6. Expansion through Cooperation

47

Why should companies cooperate with others?

Types of Strategies for Cooperation Joint ventures Strategic alliances Merger & Acquisition

Reduce risk and uncertainty Share different and scare resources Learn know-how and market knowledge Share the benefits of complementary assets

Cooperation strategies
48

Mergers & Acquisitions

It means a combination of two or more organization in which one acquires the assets & liabilities of other in exchange for shares or cash or both the organization are dissolved & assets & liabilities are combined & new stock is issued. For the acquired organization its a merger and for an acquiring organization its an acquisition. Example: Tatas takeover of Corus US $ 10 billion- 2007 Hutch-Essaar to Vodafone for US $ 11.1 bn

Strategic Objectives of M & A

49

To create a more cost-efficient operations out of the combined companies To expand a companys geographic coverage To extend the companys business in new product categories To gain quick access to new technologies or other resources or capabilities To try to invent a new industry and lead the convergence of industries whose boundaries are blurred by new market opportunities

Types
50

Horizontal mergers

Combination of two or more organizations in similar business

Vertical Mergers

Creating complentarities either in terms of supply of materials or marketing of goods & services

Concentric mergers

Combination of two or more companies in terms of customer functions, customer groups or alternative technologies

Conglomerate mergers

Combination of two or more organizations unrelated to each other

De-mergers or spin off

Cooperation strategies
51

Joint venture (joint ownership)

A child company created and operated for the benefits of the co-owners (parent companies) Advantages: easy access to capital, raw materials and foreign markets Disadvantages: limited discretion, control, & profits Parents: Chrysler Corp. (US) & Mitsubishi (Japanese); Child: Diamond Star Company (US) Maruti Udyog & Suzuki of Japan

Joint Ventures (JV)

52

A JV could be considered as an entity resulting from

A long-term contractual agreement between two or more parties, To undertake mutually beneficial economic activities, Exercise joint control & Contribute equity and share in the profits or losses of the entity

5 Triggers for a JV
53 1.

Technology

Foreign partner can bring in the technology whereas the local partner knows the market. Example: Telecom & Automobiles

2.

Geography

Where the foreign partner is a global player and needs a particular country to complete the picture

3.

Regulation
When a highly regulated sector opens up

4.

Sharing of risk & Capital Intellectual exchange

5.

Cooperation strategies
54

Strategic Alliances

Long term mutually beneficial cooperation beyond supplier-customer relationship, but without any kind of equity sharing

Licensing: transfer of some industrial property rights (patents, trademark, know-how, etc.) in return for a favor (royalty payment, or avoiding tariffs or quotas)

Subcontracting: manufacturing done by contractor having comparative advantages in factors (inputs) of production

Franchising: marketing done by franchisee having comparative advantages in local markets

Outsourcing: supporting activities done by different outer providers having comparative advantages in any one of them

Types
55

Pro-competitive alliances (Low interaction-Low conflict)

Inter-industry, vertical value chain relationships

Non-competitive alliances (High interaction-Low conflict)

Intra-industry; between firms that do not perceive the other as a rival; generally for firms that have carved out niche for themselves geographically

Competitive alliance (High interaction-High conflict)

Rival firms agree to cooperate

Pre-competitive alliances (Low interaction-high conflict)

From different industries working on a well defined activities

JV vs. Strategic Alliance

56

Joint Venture

Strategic Alliance

Contractual Separate legal entity Significant matters of operating and financial policy are predetermined and owned by the JV Exist for a specific time

May or may not be contractual Generally, not a separate legal entity Significant matters of operating and financial policy may or may not be predetermined but are owned by the individual participants Indefinite life or a specific time Fluid and allows for greater amounts of ambiguity

Exist for a specific project or purpose

Limited with respect to future expectations

Stability Strategies
57

It is relevant for organization operating in certain & predictable environment, usually followed by medium & small size organization Strategies are:

No change Strategy: face predictable & certain external environment organization decides to continue with its present strategy. Profit strategy: When profitability is drifting lower due to unfavorable external factors like recession, govt. norms organization reduce investments, cut costs, raise prices, increase productivity etc. Pause/Proceed with caution: Test the ground before moving with full fledged corporate strategy.

Retrenchment Strategies
58

External
New organizational forms New dominant technologies
New Business Models Demand saturation

Internal
Ineffective top management Inappropriate strategies Continual resistance to change Wrong organizational design Ineffective marketing & sales High costs Unproductive new product development

Adverse government policies Changing customer needs & preferences

Emergence of substitute products

Retrenchment Strategies:
59

Turnaround: Turning around the organization to profitability

If strategists believe that stability and recovery are possible, they may follow either way:

Cost reduction by getting rid off some employees, promotional activities, and low-margin customers Asset reduction by getting rid of unproductive assets, i.e. some land, buildings, cars, equipment

Turnaround Strategies
60

Managing turnaround:

With the existing CEO and the management and advisory support of a specialist external consultant Existing teams withdraws temporarily & an executive consultant steps in Replacing existing team/ merging with a healthy organization

Divestment Strategies
61

Involves the sale or liquidation of a portion of business Employed when internal retrenchment fails to accomplish the desired turnaround Reasons:

Mismatch between the acquired firm & the parent corporation Persistent negative cash flows from a business Severity of competition Better chances of survival Better alternative investment opportunities Mutual exchange of units with some other organization

Divestment Strategies
62

Approaches:

A part of the company is divested by spinning it off with the parent company partially ownership Selling a unit outright

Divestment may be the result of failures. But they may also be the result of a prudent thinking & divesting unprofitable lines

Liquidation & Bankruptcy A. U.S. perspective

63

Liquidation involves the sale of assets of business for their salvage value

Minimizes losses for all stakeholders

Liquidation Bankruptcy:
The court appoints a trustee, who collects the property of the company which reduces it to cash and distribute the proceeds to the creditors Terminates the business Reduces the negative impact of the business failure

Liquidation & Bankruptcy - A U.S. perspective

64

Reorganization Bankruptcy:

When the realistic possibility of long term survival exists Allows a business debtor to restructure its debts & with the agreement of creditors & approval of court, to continue a viable business Use future earnings to pay of the creditors

Liquidation & Bankruptcy - An Indian Perspective

65

Medium sized & large organizations rarely liquidate owing to a number of reasons Planned liquidation involve a systematic plan to reap the maximum benefits for the organization & its shareholders Legal Aspects: Under the Companies Act, 1956, liquidation is termed as winding up

A liquidator is appointed Can be done in three ways

Compulsory winding up under an order of the Court Voluntary winding up Voluntary winding up under the supervision of the Court

66

Corporate Strategies

Expansion

Stability

Retrenchment

Combination

67

STRATEGIC CHOICE MODELS FOR DOMINANT SINGLE-BUSINESS COMPANIES

68

Levels of Strategy-Making in a Single Business Company

Business-Level Managers Business Strategy
Two-Way Influence

Functional Managers

Functional Strategies
Two-Way Influence

Operating Managers

Operating Strategies

Levels of Strategy-Making in a Diversified Company

69

Corporate-Level Managers Business-Level Managers

Corporate Strategy
Two-Way Influence

Business Strategies
Two-Way Influence

Functional Managers

Functional Strategies
Two-Way Influence

Operating Managers

Operating Strategies

Dominant Product/Service Business: evaluating & choosing to diversify to build value

70

Grand Strategy Selection Matrix

Model of Grand Strategy Clusters

Stricklands Grand Strategy Selection Matrix

71

Overcome weakness Turnaround or retrenchment Divestiture Liquidation Vertical integration Conglomerate diversification

Internal External II I (redirected (acquisition or III IV resources merge for Concentrated growth Horizontal Integration within the firm) resource Market development Concentric diversification capability) Product development Joint venture Innovation Maximize strengths

Model of Grand Strategy Clusters

72

Rapid Market Growth

1. Concentrated Growth 2. Vertical Integration 1. Reformulation of concentrated growth 2. Horizontal Integration 3. Divestiture
II I

Strong Competitive Position

3. Concentric Diversification 1. Concentric Diversification 2. Conglomerate Diversification 3. Joint ventures

III IV

4. Liquidation

Weak Competitive Position

1. Turnaround or retrenchment 2. Concentric diversification 3. Conglomerate diversification 4. Divestiture 5. Liquidation

Slow Market Growth

73

STRATEGIC CHOICE MODELS FOR MULTI-BUSINESS COMPANIES

Strategic Choice in the Multi-business Company

74

Portfolio Approach
The

BCG Growth-Share Matrix

The

Industry Attractiveness-Business Strength Matrix (GE Matrix) Evolution Portfolio Matrix-Hofers Model

Product/Market

Portfolio Analysis
75

Company has a complex & multitude of operations. Compelling needs to take decisions on resources, cash flows, financial requirements. This multi-prolonged approach is called portfolio analysis.

BCG growth-share matrix

76

Created by Bruce Henderson in 1970 Examines different businesses on the basis of their relative market share & Industry growth rate

BCG Growth- Share Matrix

77

BCG Growth- Share Matrix

78

Stars : Expansion strategy Cash cows:

Can adopt Stability strategy Generally mature- reap benefits of experience curve If long-term prospects are good- can adopt expansion. If loses attractiveness- retrenchment Cash generated reinvested- stars & question marks

BCG Growth- Share Matrix

79

Question Marks:

Problem child Require large amount of cash to maintain market share Worst cash conditions because of low returns May become stars if enough investments are made or dogs if ignored.

Dogs:

Neither generate nor require large cash Usually in late maturity or a declining stage Called PETS

Problems with BCG Approach

80

Oversimplifies complex decisions Only two factors considered so creates risk Uncertainty in market and SBU definition Only considers current businesses no dynamics

GE-Nine Cell Matrix

81

By GE company with the aid of McKinsey & co. of US pioneered a 9 cell strategic business. Business Strength Factors: Industry Attractiveness:

Market size & growth rate Industry profit margin Competitive Intensity Seasonality Economies of scale Environmental Legal & human aspects

Market share, profit margin, ability to compete on price & quality Competitive strengths & weaknesses Technological capability & caliber of management

GE-Nine Cell Matrix

82

INDUSTRY ATTRACTIVENESS

MEDIUM

HIGH

INVEST

GROW

IMPROVE OR QUIT

TRY HARDER

PROCEED WITH CARE

WITHDRAW IN PHASES

LOW

GENERATE CASH HIGH

WITHDRAW IN PHASES MEDIUM

WITHDRAW LOW

ENTERPRISE STRENGTH

Product / Market Evolution Portfolio Matrix- Hofers Model

COMPETITIVE POSITION STRONG AVERAGE WEAK

STAGE OF PRODUCT/MARKET EVOLUTION

DEVELOPMENT GROWTH B SHAKEOUT MATURITY SATURATION DECLINE F D

A C

83

Coevolving
84

Key organizations selectively cooperate and compete to achieve both their individual and collective goals, which they could not achieve on their own.

The Patching Approach

85

Patching is the process by which corporate executives routinely remap businesses to match rapidly changing market opportunities It can take the form of adding, splitting, transferring, exiting, or combining chunks of businesses Patching is not seen as critical in stable, unchanging markets When markets are turbulent and rapidly changing, patching is seen as critical to the creation of economic value in a multi-business company

86

STRATEGIC ALTERNATIVES AT BUSINESS LEVEL

Business Level Strategies

87

An integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets

Generic strategies

All businesses can pursue them regardless of whether they are manufacturing, service, or nonprofit Can be pursued in different kinds of industry environments Results from a companys consistent choices on product, market, and distinctive competencies

Business Level Strategies

88

Business strategy is dependent on:

Industry Structure Positioning of firm in industry

Sustainable competitive advantage can arise due to two factors: Low cost & Differentiation

Porters Generic Competitive Strategies

89

Cost Leadership Strategy

90

Emphasizes efficiency by providing high volume of standardized products, firm hopes to take advantage of economies of scale & experience curve effects. Obtain most extensive distribution possible. Requires considerable market advantage or preferential access to raw-material, labor etc. Example: Wal-Mart, Amul,

Differentiation
91

Special features incorporated into product /service demanded by customers willing to pay for it. Able to charge a premium price for its products/services that is perceived as unique. Because of design, brand loyalty, technology, dealers, networks or customer service buyers loyalty acts as a barrier for new firms to enter. More likely to generate profits because of entry barriers.

Integrated Low Cost/Differentiation Strategy

Southwest Airlines
Low Cost Use a single aircraft model (Boeing 737) Use secondary airports High level of employee dedication Fly short routes No meals No reserved seats No travel agent reservations
92

Differentiation

Focus on customer satisfaction

New flight services for business travelers (phones and faxes)

Focused Strategies
93

Provide concentrated attention on a narrow part of the total market. The target market can be defined by geographic uniqueness, by specialized requirements in using the product, or by special product attributes that appeal only to niche members. A Focused Low-Cost Strategy aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than rival competitors. A Focused Differentiation Strategy aims at securing a competitive advantage with a product offering carefully designed to appeal to the unique preferences and needs of a narrow, well-defined group of buyers.

When a Focused Low-Cost or Focused Differentiation Strategy works best...

94

Target market niche is big enough to be profitable and offers good growth potential. Industry leaders do not consider presence in niche crucial for their success. The industry has many different niches and segments, thereby allowing a company to competitively attractive niche suited to its resource strength and capabilities.

Companies can guard their turf from other organizations on the basis of customer relations and loyalty.

It is costly or difficult for multi-segment competitors to put capabilities in place to meet the specialized needs of the niche and at the same time satisfy the expectations of their mainstream customers.

95

BUILDING SUSTAINABLE COMPETITIVE ADVANTAGE

Building Sustainable Competitive Advantage

96

Competing in Emerging Industries Competing in industries from Transition to Maturity

Strategies for Sustaining Rapid Company Growth Strategies for Industry Leaders Strategies for Runner-up Firms Strategies for Weak & Crisis ridden business

Competitive Advantage in Mature & Declining Industries Competitive Advantage in Fragmented (patchy) Industries Competitive Advantage in Global Industries Competing in Turbulent, High-Velocity Markets

Competing in Emerging Industries

Unique characteristics

No rules of the game- both a risk and an opportunity Lack of market information and competitor uncertainty Technological know-how is proprietary and closely guarded Few entry barriers Inability to obtain raw materials and components Undercapitalized companies High initial costs First-time buyers require initial inducement to purchase

97

Competing in Emerging Industries

98

Strategy Options

Push to perfect the technology, improve product quality and develop additional attractive performance features Early acquisition of a core group of loyal customers and expansion of that customer base through model changes, alternative pricing and advertising Advantageous relationships with key suppliers and promising distribution channels Acquisition or alliance formation with companies having related or complementary technological expertise for maintaining technological superiority

Competing in industries from Transition to Maturity

99

Unique characteristics

Strategy Options

Intense competition for market share Competition orients to cost and service as buyers become knowledgeable Lack of new products and new applications Increase in international competition due to cost pressures Fall in profitability owing to pressure to lower price and build/maintain market share

Emphasis on cost reduction to attract new customers Emphasis on product innovation Expanding the companys geographic coverage Horizontal integration Product line modifications

Competitive Advantage in Mature & Declining Industries

100

Where demand is growing slower than demand in the economy as a whole or it is declining Strategies

Focus on segments within an industry that offer a chance for higher growth Emphasize product innovation & quality improvement Emphasize production & distribution efficiency Gradually Harvest the business generate cash, reducing models, shrinking channels & making no new investments

Competitive Advantage in Fragmented Industries

101

A fragmented industry is one in which no firm has a significant market share and cannot strongly influence industry outcomes Strategists pursue low cost, differentiation or focus competitive advantage in the following ways

Tightly managed decentralization Increased value added services Specialization: narrow focus

Competitive Advantage in Global Industries

102

Comprises firms whose competitive positions in major geographic or national markets are fundamentally affected by their overall global competitive positions Four unique strategies shaping differences in terms of prices, buyer needs, competitors and Trade rules To gain global market coverage

Licensing Exporting Foreign Direct Investment

Competitive Advantage in Global Industries

103

Strategists must scrutinize the condition of global industry features to implement the following:

Broad-line global competition: directing at competing worldwide in the full product line achieving differentiation or overall low cost production Global focus strategy: targeting a particular segment on a worldwide basis National focus strategy: taking advantage of differences in national markets that give the firm an edge over global competitors on a nation-by-nation basis Protected niche strategy: countries in which governmental restraints exclude or inhibit global competitors or allow concessions

Competing in Turbulent, High-Velocity Markets

104

Industries characteristics
Rapid technological change Short product life cycles Entry of important new rivals Fast evolving customer requirements and expectations

Three strategic postures to deal with change

Reacting to change Anticipating change Leading change

Strategies for Sustaining Rapid Company Growth

105

Companies that strive to grow their revenues continuously, have to craft a portfolio of strategic initiatives:

Short Jump initiatives to fortify and extend the companys position in existing business including

Adding to the product line Expanding into new geographic areas Launching offensives to take market share away from its rivals

Medium Jump strategic initiatives:

Jumping into new businesses where their experience will be valuable

Long Jump strategic initiatives to plant seeds for ventures in businesses that do not exist

Tendency of most companies is to focus on Horizon 1 strategies

Strategies for Industry Leaders

106

Main strategic concern revolves around how to defend and strengthen the leadership Stay on the offensive strategy Fortify & Defend Strategy

Strategies for Industry Leaders

107

Muscle Flexing Strategy:

Dominant leader plays competitive hardball when smaller rivals directly threaten their positions Responses can include severe price cuts, larger promotional campaigns, influencing distributors, etc Risks are running into antitrust laws

Strategies for Runner-up Firms

108

Obstacles for firms with small market shares

Less access to economies of scale Difficulty in gaining customer recognition Less money to spend on mass-media advertising Limited funds for capital expenditure

Offensive strategies to build market share

Growth via acquisition (banks, publishers) Driving down costs & then prices Differentiation strategy Pioneering a technological breakthrough Being first-to-market new or better products

Strategies for Runner-up Firms

109

Other Strategic Approaches

Vacant-Niche strategy: concentrating on such customer groups that have been bypassed by the market leader Specialist Strategy: Trains its competitive effort on one technology, product, end use or market segment Superior Product Strategy: Aiming quality conscious buyers Distinctive Image Strategy: Building ways to stand out from competitors Content Follower Strategy: Prefer defense to offense. Opt for focus and differentiation strategies that keep them out of leaders path.

Strategies for Weak & Crisis ridden business

110

Launch a turnaround strategy

Selling off assets to raise cash to save the remaining part of business Revising the existing strategy Launching efforts to boost revenues Pursuing cost reduction Using a combination of these efforts

Fast-exit strategy, selling off to another firm Slow-exit strategy, keeping re-investment to the bare minimum & taking actions to maximize short-term cash flows for orderly withdrawal from market

111

Thank You