Topic-3 Types of Strategies PDF

Lecture Notes of Strategic Planning and Decision Making:
Topic 3 Types of Strategies
EM-503
Strategic Planning
& Decision Making
Resource Person
Dr. Muhammad Wasif, PMP
Assistant Professor
Deputy Director, Quality Enhancement Cell,
NED University of Engineering and Technology.
Topic # 3
Types of Strategies
Resource Person
Dr. Muhammad Wasif, PMP
Assistant Professor
Department of Industrial and Manufacturing Engineering,
NED University of Engineering and Technology.
(c) Dr. M. Wasif, PMP 1
Strategic Management Framework
External
Audit
Strategy
Types Vision
Generation Strategy Strategy Strategy
of and
And Implementation Execution Monitoring
Strategies Mission
Selection
Internal
Audit
Strategic Planning Strategy Implementation Evaluation

3
Topic 3 ‐ Types of Strategies © Dr. Muhammad Wasif, PMP
Long-Term Objectives
 Results expected from pursuing
certain strategies
 Strategies represent actions to
accomplish long‐term objectives
 Goals will have some degree of
measurability, but are less specific
than objectives associated with an
annual operational plan.
 Usually from 2 to 5 years
4
Long-Term Objectives
In general
 Growth in assets,
1. Quantifiable
 Growth in sales,
2. Measurable  Profitability,
 Market share,
3. Realistic
 Degree and nature of
4. Understandable diversification,
 Degree and nature of
5. Challenging
vertical integration,
6. Hierarchical  Earnings per share, and
 Social responsibility.
7. Obtainable
8. Congruent across departments
5
Benefits of Long-Term Objectives

 Provide direction by revealing expectations
 Allow synergy
 Assist in evaluation by serving as standards
 Establish priorities
 Reduce uncertainty
 Minimize conflicts
 Stimulate exertion
 Aid in allocation of resources
 Aid in design of jobs
 Provide basis for consistent decision making
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Varying Performance Measures by

Organizational Level
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Financial vs. Strategic Objectives

Financial Objectives
 Growth in revenues
 Growth in earnings
 Higher dividends
 Higher profit margins
 Higher earnings per share
 Improved cash flow
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Strategic Objectives
 Larger market share
 Quicker on‐time delivery than rivals
 Quicker design‐to‐market times
than rivals
 Lower costs than rivals
 Higher product quality than rivals
 Wider geographic coverage than rivals
9

Trade‐Off
 Maximize short‐term financial objectives – harm long‐term strategic
objectives
 E.g. Increase in taking order cause bullwhip effect in supply chain
(Toyota car producing capacity in Pakistan)
 Pursue increased market share at the expense of short‐term
profitability
 E.g. Increase market share by providing more profits to distributors
for penetration (Getz Pharma over the other companies)
 Tradeoffs related to risk of actions; concern for business ethics; need
to preserve natural environment; social responsibility issues
 E.g. Pampers and Coke donating more to the African countries to
decrease hunger resulted in more customer sympathy
10
Management by Objectives
Mr. Derek Bok, former President of Harvard
University said;
If you think education is
expensive, try ignorance.
11
Strategists Should Avoid

 Managing by Extrapolation
 What’s happening today will continue in
future (Nokia, Citi Bank, Dawood Yamaha)
 Managing by Crisis
 Fire Fighting (Pakistan Steel, PIA, Pakistan
Railways)
 Managing by Subjective
 Do your own, no synergy between departments
 Managing by Hope
 Without facts, (Govt. Institutions, Altawarki
Steels etc.)
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Types of Common Strategies

 Integration Strategies  Diversification Strategies
 Forward Integration  Related Diversification
 Backward Integration  Unrelated Diversification
 Horizontal Integration
 Defensive Strategies
 Intensive Strategies  Divestiture
 Market Penetration  Retrenchment
 Market Development  Liquidation
 Product Development
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Integration Strategies
Forward
Integration
Gaining ownership or increased
control over distributors or retailers
Integration Backward
Strategies Integration
Seeking ownership or increased
control of a firm’s suppliers
Horizontal
Integration
Seeking ownership or increased
control over competitors
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Vertical Integration Strategies
Gain Control Over
 Distributors
 Suppliers
 Competitors
15
Forward Integration
Gain Control Over
 Distributors
 Retailers
For Example;
 Apple owns the apple stores.
 McDonalds owns 23% of its 32000 restaurants.
 Ford has almost 4,000 dealers compared to Toyota, which has
fewer than 2,000 U.S. dealers.
 Attock Refinery owns its own Petrol Pumps
16
Forward Integration – Guidelines
 Current distributors – expensive or unreliable or incapable
of meeting the firm’s distribution needs.
 Availability of quality distributors – limited
 Firm competing in industry expected to grow markedly
 Firm has both capital & HR to manage new business of
distribution
 The advantages of stable production are particularly high
 Current distributors have high profit margins
17
Backward Integration
Gain Control Over
 Suppliers
 Vendors
For Example;
 Habib Group owns Auvitronics, Agri Autos and Thal
Engineering to facilitate IMC
 Futeh Chemical is almost owned by Unilever to support their
product Surf Excel
 Apple almost owns its supplied in China to shield the
technology.
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Backward Integration - Guidelines
 Current suppliers – expensive or unreliable or incapable
 No. of suppliers is small; No. of competitors is large
 High growth in industry sector
 Firm has both capital & HR to manage new business
 Stable prices are important
 Current suppliers have high profit margins
 An organization needs to quickly acquire a needed resource
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Horizontal Integration
Gain Control Over
 Competitor
For Example;
 Sony acquired Ericsson
 Bank Islamic acquired KASB Bank
 Pharmaceutical Companies acquire their competitors usually
 Walls acquired Polka
 World Call acquired by SAMAA
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Horizontal Integration - Guideline

 Gain monopolistic characteristics w/o federal government
challenge
 Competes in growing industry
 Increased economies of scale – major competitive advantages
 Faltering due to lack of managerial expertise or need for
particular resource
 An organization has both the capital and human talent needed
to successfully manage an expanded organization.
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Intensive Strategies
Intensive Efforts :Improve competitive position with existing products competitors
Market
Penetration
Increase market share for present
products or services in present markets
Intensive Market
Strategies Development
Introducing present products or
services into new geographic area
Product
Development
Increased sales by improving
present products or services or
developing new ones 22
Market Penetration
Increased Market Share
 Present products/services
 Present markets
 Greater marketing efforts
 Market penetration includes increasing the number of
salespersons, increasing advertising expenditures, offering
extensive sales promotion items, or increasing publicity efforts.
 Examples are marketing campaign of soaps, surfs, beverages.
 Discounts and deals of products and services
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Market Penetration - Guidelines

 Current markets not saturated
 Usage rate of present customers can be increased
significantly
 Shares of competitors declining; industry sales
increasing
 Increased economies of scale provide major competitive
advantage
 The correlation between dollar sales and dollar
marketing expenditures historically has been high
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Market Development
New Markets
 Present products/services to new geographic areas.
Such as;
 Hyundai, Renault and KIA are coming to Pakistan
 Hardees and other brands in Pakistan
 Sky and other media companies are entering in Pakistan through
DTH
 Shanghai Electric is acquiring K‐Electric
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Market Development - Guidelines

 New channels of distribution – reliable, inexpensive,
good quality
 Firm is successful at what it does
 Untapped/unsaturated markets
 Excess production capacity
 Basic industry rapidly becoming global
 An organization has the needed capital and human
resources to manage expand operations
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Product Development
New Product/Services
 Increased Sales
 Improving present products/services
 Developing new products/services
Such as;
 Google’s new VR and Smart Glasses
 Food Panda Service
 Daraz.pk and yaywo.com
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Product Development - Guidelines

 Products in maturity stage of life cycle
 Industry characterized by rapid technological
development
 Competitors offer better‐quality products @
comparable prices
 Compete in high‐growth industry
 Strong R&D capabilities
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Diversification Strategies
Moving towards new product or service to earn more profit of available
resource
Related
Diversification
Adding new but related

products or services
Diversification
Strategies
Unrelated
Diversification
Adding new, unrelated
products or services
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Related Diversification
Businesses are said to be related when their value chains
posses competitively valuable cross‐business strategic fits
 Such as;
 IBM is now focused on software development rather
hardware.
 Apple started smart phones, smart watch, smart TV with
the MAC products
 TCS started its own yayvo.com to use its supply chain
effectively
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Related Diversification
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Related Diversification - Guidelines

 An organization competes in a no‐growth or a slow‐growth
industry.
 Adding new, but related, products would significantly enhance
the sales of current products.
 New, but related, products could be offered at highly competitive
prices.
 New, but related, products have seasonal sales levels that
counterbalance an organization’s existing peaks and valleys.
 An organization’s products are currently in the declining stage
of the product’s life cycle.
 An organization has a strong management team.
32
Unrelated Diversification
When business value chains are so dissimilar that no
competitively valuable cross‐business relationships exist.
Such as;
 GE from electric appliance started business in finances to
take advantage of its huge capital
 DESCON started from Dawood Chemicals to capitalize
its project management capabilities
 Adamjee Engineering, Adamjee Pharmaceuticals,
Adamjee Finances are examples of unrelated
diversifications.
33
Unrelated Diversification - Guidelines

 Revenues derived from an organization’s current products or services would increase
significantly by adding the new, unrelated products.
 Organization competes in a highly competitive or a no‐growth industry.
 Organization’s present channels of distribution can be used to market the new products to
current customers.
 New products have countercyclical sales patterns compared to an organization’s present
products.
 Organization’s basic industry is experiencing declining annual sales and profits.
 Organization has the capital and managerial talent needed to compete successfully in a new
industry.
 Organization has the opportunity to purchase an unrelated business that is an attractive
investment opportunity.
 Financial synergy exists between the acquired and acquiring firm.
 Existing markets for an organization’s present products are saturated.
 Antitrust action could be charged against an organization that historically has concentrated
on a single industry.
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Defensive Strategies
Also called reactive strategies
Retrenchment
Regrouping through cost and asset reduction

to reverse declining sales and profit
Defensive Divestiture
Strategies
Selling a division or part of an
organization
Liquidation
Selling all of a company’s assets, in

parts, for their tangible worth
35
Retrenchment
Regrouping
Cost & asset reduction to reverse declining sales & profit
Sometimes called a turnaround or reorganizational strategy,
retrenchment is designed to fortify an organization’s basic
distinctive competence
 Retrenchment can involve selling off land and buildings to
raise needed cash, Pruning product lines, closing marginal
businesses, closing obsolete factories, automating processes,
reducing the number of employees, and instituting expense
control systems.
 Such as; Cisco Systems, Nokia etc.
36
Bankruptcy
 Bankruptcy can allow a firm to avoid major debt
obligations and to void union contracts.
 There are five major types of bankruptcy:
Chapter 10, Chapter 11, Chapter 2, Chapter 12,
and Chapter 13.
37
Retrenchment - Guidelines
 Failed to meet objectives & goals consistency; has
distinctive competencies
 Firm is one of weaker competitors
 Inefficiency, low profitability, poor employee morale,
pressure for stockholders
 Strategic managers have failed
 Rapid growth in size; major internal reorganization
necessary
38
Divestiture
Selling a division or part of an organization
 Businesses that are not part of its core operations so that it can
focus on what it does best.
 To obtain funds
 to create stability
Example;
 Phillips sold its chip facility to NXS.
 Airbus Group NV is in the process of divesting its defense assets
in order to focus solely on its commercial‐airplane business
39
Divestiture - Guidelines
 Retrenchment failed to attain improvements
 Division needs more resources than are available
 Division responsible for firm’s overall poor
performance
 Division is a mis‐fit with organization
 Large amount of cash is needed and cannot be raised
through other sources
 Government antitrust action threatens an
organization
40
Liquidation
Selling
Company’s assets, in parts, for their tangible worth
Such as;
 Alif Textile Industries Limited,
 Apex Fabrics Limited,
 Indus Polyester Company Limited,
 Mehran Jute Mills Limited,
 Norrie Textile Mills Limited,
 Rashid Textile Mills Limited,
 Dadabhoy Leasing Company Limited,
 InterAsia Leasing Company Limited,
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Liquidation - Guidelines
 Retrenchment & divestiture failed
 Only alternative is bankruptcy
 Minimize stockholder loss by selling firm’s assets
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Michael Porter’s Generic Strategies

According to Porter, strategies allow organizations to gain competitive
advantage from three different bases:
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
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44

 Type 1 is a low‐cost strategy that offers products or services to a wide
range of customers at the lowest price available on the market.
 Type 2 is a best‐value strategy that offers products or services to a
wide range of customers at the best price‐value available on the market.
The best‐value strategy aims to offer customers a range of products or
services
 Type 3 is differentiation, a strategy aimed at producing products and
services considered unique industry‐wide and directed at consumers
who are relatively price‐insensitive.
 Type 4 is a low‐cost focus strategy that offers products or services to a
small range of customers at the lowest price available on the market.
 Type 5 is a best‐value focus strategy that offers products or services to
a small range of customers at the best price‐value available on the
market.
45
Cost Leadership
Ways of ensuring total costs across value chain are lower than
competitors’ total costs
1. Perform value chain activities more efficiently than rivals
and control factors that drive costs
2. Revamp the firm’s overall value chain to eliminate or bypass
some cost‐producing activities
Examples are
• Wal‐Mart,
• BIC,
• McDonald’s,
• Black & Decker
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Cost Leadership
Can be especially effective when:
1. Price competition among rivals is vigorous
2. Rival’s products are identical and supplies are
readily available
3. There are few ways to achieve differentiation
4. Most buyers use the product in the same way
5. Buyers have low switching costs
6. Buyers are large and have significant power
7. Industry newcomers use low prices to attract
buyers
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Differentiation (Type 3)
 Greater product flexibility
 Greater compatibility
 Lower costs
 Improved service
 Greater convenience
 More features
Examples are;
Gillete, Volk Wagon etc.
48
Differentiation (Type 3)
1. There are many ways to differentiate and
many buyers perceive the value of the
differences
2. Buyer needs and uses are diverse
3. Few rival firms are following a similar
differentiation approach
4. Technology change is fast paced and
competition revolves around evolving
product features
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Focused Strategies (Type 4 & 5)
 Industry segment of sufficient size
 Good growth potential
 Not crucial to success of major competitors
Examples are
Unilever PLC, Johnson & Johnson, and Colgate‐
Palmolive
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Focused Strategies (Type 4 & 5)

1. The target market niche is large, profitable, and
growing
2. Industry leaders do not consider the niche crucial
3. Industry leaders consider the niche too costly or
difficult to meet
4. The industry has many different niches and
segments
5. Few, if any, other rivals are attempting to specialize
in the same target segment
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52
Means for Achieving Strategies

Cooperative Arrangements
 R&D partnerships
 Cross‐distribution agreements
 Cross‐licensing agreements
 Cross‐manufacturing agreements
 Joint‐bidding consortia
53
Why Joint Ventures Fail
 Managers who must collaborate daily; not
involved in developing the venture
 Benefits the company not the customers
 Not supported equally by both partners
 May begin to compete with one of the partners
54
Joint Ventures
Guidelines
 Synergies between private and publicly held
 Domestic with foreign firm, local management
can reduce risk
 Complementary distinctive competencies
 Resources & risks where project is highly
profitable (e.g. Alaska Pipeline)
 Two or more smaller firms competing w/larger
firm
 Need to introduce new technology quickly
55
Means for Achieving Strategies

Mergers & Acquisitions
 Provide improved capacity utilization
 Better use of existing sales force
 Reduce managerial staff
 Gain economies of scale
 Smooth out seasonal trends in sales
 Gain new technology
 Access to new suppliers, distributors, customers,
products, creditors
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Benefits of Mergers & Acquisitions
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First Mover Advantages

 Benefits a firm may achieve by entering a new
market or developing a new product or service
prior to rival firms
Potential Advantages
58
Outsourcing
Business‐process outsourcing (BPO)
 Companies taking over the functional operations of
other firms
Companies are choosing to outsource their functional
operations more and more for several reasons:
(1) it is less expensive,
(2) it allows the firm to focus on its core businesses,
and
(3) it enables the firm to provide better services.
59

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Lecture Notes of Strategic Planning and Decision Making:

Strategic Management Framework

Strategic Planning Strategy Implementation Evaluation

Benefits of Long-Term Objectives

Varying Performance Measures by

Financial vs. Strategic Objectives

Financial vs. Strategic Objectives

Financial vs. Strategic Objectives

Strategists Should Avoid

Types of Common Strategies

Vertical Integration Strategies

Forward Integration – Guidelines

Backward Integration - Guidelines

Horizontal Integration - Guideline

Market Penetration - Guidelines

Market Development - Guidelines

Product Development - Guidelines

Adding new but related

Related Diversification - Guidelines

Unrelated Diversification - Guidelines

Regrouping through cost and asset reduction

Selling all of a company’s assets, in

Michael Porter’s Generic Strategies

Cost Leadership Strategies

Michael Porter’s Generic Strategies

Michael Porter’s Generic Strategies

Focused Strategies (Type 4 & 5)

Focused Strategies (Type 4 & 5)

Means for Achieving Strategies

Why Joint Ventures Fail

Means for Achieving Strategies

Benefits of Mergers & Acquisitions

First Mover Advantages

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