Session 13 & 14

Concluding discussion of grand

strategies

1
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2000 The McGraw-Hill Companies, Inc.

Remember for the Case

Three Scenarios: Worst, Best, Most Likely
Long Term Objective (same for each)
Two Competitive Options
Each Containing:
Corporate Level Strategy Alternative
Business Level Strategy Alternative
Generic Theme
Package of (3-6) Grand Strategies

2
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2000 The McGraw-Hill Companies, Inc.

Types of Grand Strategies

Concentrated Growth

Conglomerate Diversification

Market Development

Turnaround

Product Development

Divestiture

Innovation

Liquidation

Horizontal Integration

Bankruptcy

Vertical Integration

Joint Ventures

Concentric Diversification

Strategic Alliances

Consortia
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2000 The McGraw-Hill Companies, Inc.

Concentrated Growth

Concentrated growth directs its resources to

the profitable growth of a single product, in a
single market, with a single dominant
technology

4
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Market Development

Market development commonly ranks second only

to concentration as the least costly and least risky of
the 15 grand strategies
It consists of marketing present products, often with
only cosmetic modifications, to customers in related
market areas by adding channels of distribution or by
changing the content of advertising or promotion
Frequently, changes in media selection, promotional
appeals, and distribution are used to initiate this
approach

5
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2000 The McGraw-Hill Companies, Inc.

Product Development

Product development
involves the substantial
modification of existing
products or the creation of
new but related products
that can be marketed to
current customers through
established channels
6

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2000 The McGraw-Hill Companies, Inc.

Innovation

These companies seek to reap the initially high profits

associated with customer acceptance of a new or
greatly improved product
Then, rather than face stiffening competition as the
basis of profitability shifts from innovation to
production or marketing competence, they search for
other original or novel ideas
The underlying rationale of the grand strategy of
innovation is to create a new product life cycle and
thereby make similar existing products obsolete

7
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2000 The McGraw-Hill Companies, Inc.

Horizontal Integration

When a firms long-term strategy is based on

growth through the acquisition of one or more
similar firms operating at the same stage of the
production-marketing chain, its grand strategy
is called horizontal integration
Such acquisitions eliminate competitors and
provide the acquiring firm with access to new
markets

8
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2000 The McGraw-Hill Companies, Inc.

Vertical Integration

When a firms grand strategy is to acquire firms that

supply it with inputs (such as raw materials) or are
customers for its outputs (such as warehouses for
finished products), vertical integration is involved
The main reason for backward integration is the
desire to increase the dependability of the supply or
quality of the raw materials used as production inputs

9
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Vertical and Horizontal Integration

10
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Concentric Diversification

Concentric diversification involves the acquisition

of businesses that are related to the acquiring firm in
terms of technology, markets, or products
With this grand strategy, the selected new businesses
possess a high degree of compatibility with the firms
current businesses
The ideal concentric diversification occurs when the
combined company profits increase the strengths and
opportunities and decrease the weaknesses and
exposure to risk

11
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2000 The McGraw-Hill Companies, Inc.

Conglomerate Diversification

Occasionally a firm, particularly a very large one,

plans acquire a business because it represents the
most promising investment opportunity available.
This grand strategy is commonly known as
conglomerate diversification.
The principal concern of the acquiring firm is the
profit pattern of the venture
Unlike concentric diversification, conglomerate
diversification gives little concern to creating productmarket synergy with existing businesses

12
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2000 The McGraw-Hill Companies, Inc.

Turnaround
The firm finds itself with declining profits

Among the reasons are economic recessions,

production inefficiencies, and innovative
breakthroughs by competitors

Strategic managers often believe the firm can survive

and eventually recover if a concerted effort is made
over a period of a few years to fortify its distinctive
competences. This is turnaround.

Two forms of retrenchment:

Cost reduction
Asset reduction

13
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2000 The McGraw-Hill Companies, Inc.

Elements of Turnaround

A turnaround situation represents absolute and relative-toindustry declining performance of a sufficient magnitude to
warrant explicit turnaround actions
The immediacy of the resulting threat to company survival is
known as situation severity
Turnaround responses among successful firms typically
include two stages of strategic activities: retrenchment and the
recovery response
The primary causes of the turnaround situation have been
associated with the second phase of the turnaround process, the
recovery response

14
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2000 The McGraw-Hill Companies, Inc.

Divestiture

A divestiture strategy involves the sale of a

firm or a major component of a firm
When retrenchment fails to accomplish the
desired turnaround, or when a nonintegrated
business activity achieves an unusually high
market value, strategic managers often decide
to sell the firm
Reasons for divestiture vary
15

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2000 The McGraw-Hill Companies, Inc.

Liquidation

When liquidation is the grand strategy, the firm

typically is sold in parts, only occasionally as a
wholebut for its tangible asset value and not
as a going concern
Planned liquidation can be worthwhile

16
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2000 The McGraw-Hill Companies, Inc.

Bankruptcy

Liquidation bankruptcyagreeing to a
complete distribution of firm assets to
creditors, most of whom receive a small
fraction of the amount they are owed
Reorganization bankruptcythe managers
believe the firm can remain viable through
reorganization
Two notable types of bankruptcy

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Chapter 7
Chapter 11

17
2000 The McGraw-Hill Companies, Inc.

Joint Ventures

Occasionally two or more capable firms lack a

necessary component for success in a
particular competitive environment
The solution is a set of joint ventures, which
are commercial companies (children) created
and operated for the benefit of the co-owners
(parents)
The joint venture extends the supplierconsumer relationship and has strategic
advantages for both partners
18

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2000 The McGraw-Hill Companies, Inc.

Strategic Alliances

Strategic alliances are distinguished from

joint ventures because the companies involved
do not take an equity position in one another
In some instances, strategic alliances are
synonymous with licensing agreements
Outsourcing arrangements vary

19
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2000 The McGraw-Hill Companies, Inc.

Consortia, Keiretsus, and Chaebols

Consortia are defined as large interlocking

relationships between businesses of an industry
In Japan such consortia are known as
keiretsus, in South Korea as chaebols
Their cooperative nature is growing in
evidence as is their market success

20
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2000 The McGraw-Hill Companies, Inc.

21

Chapter 8
Strategic Analysis and Choice
in Single- or DominantProduct Businesses:
Building Sustainable
Competitive Advantages
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2000 The McGraw-Hill Companies, Inc.

22

Chapter 8
Concerned with Proper Selection of
Business Level Generic and Grand
Strategy Alternatives
Based on your SWOT analysis which of
the Generic and Grand Strategies are you
better equipped resources wise to
successfully implement?
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2000 The McGraw-Hill Companies, Inc.

23

Key Issues: Strategic Choice in Single Businesses

1. What strategies are most effective at building

sustainable competitive advantages for single
business units?

2. Should dominant-product/service businesses

diversify to build value and competitive
advantage? What grand strategies are most
appropriate?
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2000 The McGraw-Hill Companies, Inc.

24

Prominent Sources of Competitive Advantage

Cost leadership

Sources of
competitive
advantage

Differentiation
Speed
Market focus

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2000 The McGraw-Hill Companies, Inc.

25

Evaluating A Businesss Cost Leadership Opportunities

A. Skills and Resources Fostering Cost Leadership

Sustained capital investment and access to capital
Process engineering skills
Intense supervision of labor or core technical operations
Products or services designed for ease of manufacture or
delivery
Low-cost distribution system

B. Organizational Requirements Supporting Cost Leadership

Tight cost control
Frequent, detailed control reports
Continuous improvement and benchmarking orientation
Structured organization and responsibilities
Incentives based on meeting strict, usually quantitative targets
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2000 The McGraw-Hill Companies, Inc.

26

Evaluating A Businesss Cost Leadership Opportunities -C. Examples of Ways Businesses Achieve Competitive Advantage
Process innovations
lowering production costs

Product redesign to reduce

number of components

Safety training for all employees reduces absenteeism,

downtime, and accidents

Technology
development
Human
resource
management

Reduced levels of management Computerized, integrated information General

cuts corporate overhead
system reduces errors and costs
administration
Favorable long-term contracts; captive suppliers or key customer
for supplier
Global, online
suppliers
provide
automatic
restocking of
orders based
on sales
Inbound logistics
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Economy of
scale in plant
reduces
equipment
costs and
depreciation

Operations

Computerized
routing lowers
transportation
expense

Cooperative
advertising
with
distributors
creates local
cost advantage
in buying
media space
and time

Outbound logistics

Marketing & sales

Procurement
Subcontracted
service
technicians
repair
product
correctly
first time
or bear
costs

2000 The McGraw-Hill Companies, Inc.

27

Advantages of a Cost Leadership Strategy

Low-cost advantages reduce likelihood of pricing
pressure from buyers
Sustained low-cost advantages may push rivals into
other areas, lessening price competition

New entrants must face an entrenched cost leader

without experience to replicate cost advantages
Low-cost advantages should lessen attractiveness of
substitutes
Higher margins allow low-cost producers to
withstand supplier cost increases
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2000 The McGraw-Hill Companies, Inc.

28

Key Risks of Cost Leadership

Many cost-saving activities are easily duplicated

Exclusive cost leadership can become a trap

Obsessive cost cutting can shrink other competitive
advantages involving key product attributes

Cost differences often decline over time

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2000 The McGraw-Hill Companies, Inc.

29

Evaluating A Businesss Differentiation Opportunities

A. Skills and Resources Fostering Differentiation

Strong marketing abilities

Product engineering
Creative talent and flair
Strong capabilities in basic research
Corporate reputation for quality or technological leadership
Long tradition in an industry or unique combination of skills
Strong cooperation from channels and suppliers of major components

B. Organizational Requirements Supporting Differentiation

Strong coordination among functions in R&D, product development, and
marketing
Subjective measurement and incentives instead of quantitative measures
Amenities to attract highly skilled labor, scientists, and creative people
Tradition of closeness to key customers
Some personnel skilled in sales and operations - technical and marketing
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2000 The McGraw-Hill Companies, Inc.

30

Evaluating A Businesss Differentiation Opportunities -C. Examples of Ways Businesses Achieve Competitive Advantage
Cutting edge production technology and product
features to maintain a distinct image and actual product

Technology
development

Programs to ensure technical competence of sales staff

and marketing orientation of service personnel

Human
resource
management

Comprehensive, personalized database to build knowledge of customers General

to be used in customizing how products are sold, serviced, and replaced administration

Quality control presence at key supplier facilities; work with

suppliers new product development activities
Purchase
superior
quality, wellknown
components,
raising quality
and image of
final products
Inbound logistics
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Careful
inspection of
products at
each step in
production to
improve
performance
and lower
defect rates
Operations

JIT
coordination
with buyers;
use of own or
captive
transportation
service to
ensure
timeliness

Expensive,
informative
advertising
and promotion
to build brand
image

Outbound logistics

Marketing & sales

Procurement
Allowing
service
personnel
considerable
discretion to
credit
customers
for
repairs

2000 The McGraw-Hill Companies, Inc.

31

Advantages of a Differentiation Strategy

Rivalry is reduced when a business successful
differentiates itself

Buyers are less sensitive to prices for effectively

differentiated products
Brand loyalty is hard for new entrants to
overcome
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32

Key Risks of Differentiation

Imitation narrows perceived differentiation,
rendering differentiation meaningless
Technological changes that nullify past
investments or learning

Cost difference between low-cost competitors and

the differentiated business becomes too great for
differentiation to hold brand loyalty
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2000 The McGraw-Hill Companies, Inc.

33

Creating a Competitive Advantage Based on Speed

Has become a major source of competitive

advantage for many firms

Involves the availability of a rapid response to

customers by

Providing current products quicker

Accelerating new product development or

improvement

Quickly adjusting production processes

Making decisions quickly

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2000 The McGraw-Hill Companies, Inc.

34

Evaluating A Businesss Rapid Response Opportunities

A. Skills and Resources Fostering Speed

Process engineering skills
Excellent inbound and outbound logistics
Technical people in sales and customer service
High levels of automation
Corporate reputation for quality or technical leadership
Flexible manufacturing capabilities
Strong downstream partners
Strong cooperation from suppliers of major components

B. Organizational Requirements Supporting Rapid Response

Strong coordination among functions in R&D, product development, and
marketing
Major emphasis on customer satisfaction in incentive programs
Strong delegation to operating personnel
Tradition of closeness to key customers
Some personnel skilled in sales and operations - technical and marketing
Empowered customer service personnel
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2000 The McGraw-Hill Companies, Inc.

35

Evaluating A Businesss Rapid Response Opportunities -C. Examples of Ways Businesses Achieve Competitive Advantage
Use of companywide technology sharing activities and
autonomous product development teams to speed new
product development

Develop self-managed work teams and decision making

at lowest levels to increase responsiveness

Technology
development
Human
resource
management

Highly automated and integrated information processing system;

include major buyers in the systems on a real-time basis
Preapproved, online suppliers integrated into production
Working very
closely with
suppliers to
include their
choice of
warehouse
location to
minimize
delivery time
Inbound logistics
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Standardize
dies,
components,
and production
equipment to
allow quick
changeover to
new or special
orders

JIT delivery
plus
partnering
with express
mail services
to ensure very
rapid delivery

Use of laptops
linked directly
to operations
to speed the
order process
and shorten
the sales cycle

Operations

Outbound logistics

Marketing & sales

General
administration

Procurement
Locate
service
technicians
at customer
facilities that
are
geographically
close

2000 The McGraw-Hill Companies, Inc.

36

Advantages of a Speed-Based Strategy

Creates a way to lessen rivalry because firm has the
availability of something a rival may not
Allows firm to charge buyers more, engender loyalty,
or enhance its position relative to its buyers
Generates cooperation and concessions from
suppliers since they benefit from increased revenues
Substitutes and new entrants are trying to keep up
with the rapid changes rather than introducing them
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37

Key Risks of a Speed-Based Strategy

Speeding up activities that have not been
conducted in a fashion prioritizing rapid
response should only be done after attention to
training, reorganization, and/or reengineering

Some industries - stable, mature ones - may not

offer much advantage to a firm introducing
some forms of rapid response
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2000 The McGraw-Hill Companies, Inc.

38

Creating a Competitive Advantage Based on Market Focus

Involves building cost, differentiation, and/or speed

competitive advantages targeted to a narrow, market
niche
Allows a firm to

Learn its target customers

Build up organizational knowledge of ways to satisfy
its target market better than larger rivals

Risks of focus strategies

Can attract major competitors to the segment

Believing a focus strategy, by itself, creates success,
rather than a form of low cost, differentiation, or speed

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2000 The McGraw-Hill Companies, Inc.

39

Industry Environments and Strategy Choices

Emerging Industries
Industries Transitioning to Maturity

Mature and Declining Industries

Fragmented Industries

Global Industries
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40

Characteristics of Markets in Emerging Industries

Proprietary technology and technological

uncertainty
Competitor uncertainty regarding inadequate
information
High initial cost structure
Few entry barriers
First-time buyers require initial inducement
Inability to easily obtain raw materials and
components
Need for high-risk capital

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2000 The McGraw-Hill Companies, Inc.

41

Strategic Options for Emerging Industries

1. Ability to shape industrys structure
2. Ability to rapidly improve product quality
3. Establish favorable relations with key suppliers

4. Ability to establish technology as dominant force

5. Acquire a core group of loyal customers
6. Ability to forecast future competitors
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2000 The McGraw-Hill Companies, Inc.

42

Characteristics of Industries Transitioning to Maturity

Intense

competition for market share

Increased

Greater

emphasis on cost and service

Declining

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sales to experienced, repeat buyers

profitability
2000 The McGraw-Hill Companies, Inc.

43

Strategic Options for Maturing Industries

1. Prune the product line

2. Emphasize process innovation

3. Emphasize cost reductions
4. Focus on selecting loyal buyers
5. Pursue horizontal integration
6. Expand internationally
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2000 The McGraw-Hill Companies, Inc.

44

Pitfalls to Avoid in Competing in Maturing Industries

A middle-ground approach to selecting a generic
competitive strategy
Sacrificing market share for short-term profits
Waiting too long to respond to price reductions
Retaining unneeded excess capacity
Engaging in sporadic efforts to boost sales
Placing hopes on new products
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2000 The McGraw-Hill Companies, Inc.

45

Characteristics of Mature/Declining Industries

Demand grows more slowly than economy,

or even declines

Slowing growth is caused by

Technological substitution

Demographic shifts

Shifts in consumer needs

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2000 The McGraw-Hill Companies, Inc.

46

Strategic Options for Mature/Declining Industries

1. Focus on key market segments offering

growth opportunities
2. Emphasize product innovation and quality
improvement
3. Emphasize production and distribution
efficiency
4. Gradually harvest the business
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2000 The McGraw-Hill Companies, Inc.

47

Pitfalls to Avoid in Competing in Mature/Declining Industries

Being overly optimistic about prospects for an

industry revival

Getting trapped in a profitless war of attrition

Harvesting from a weak position

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2000 The McGraw-Hill Companies, Inc.

48

Characteristics of Fragmented Industries

No firm has a significant market share

No firm can significantly influence industry

outcomes

Examples

Professional services

Retailing

Wood and metal fabrication

Agricultural products

Funeral industry

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2000 The McGraw-Hill Companies, Inc.

49

Strategic Options for Fragmented Industries

1. Tightly managed decentralization - Intense local
coordination, high personal service, local autonomy

2. Formula facilities - Standardized, efficient, low-cost

facilities at multiple locations

3. Increased value added - Difficult to differentiate

products/services

4. Specialization - Product type, customer type, type of

order, geographic areas

5. Bare bones/no frills - Intense low margin competition

(low overhead, minimum wages, tight cost controls)
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50

Characteristics of Global Industries

Differences in prices and costs among countries

due to

Currency exchange fluctuations

Differences in wage and inflation rates
Other economic factors

Differences in buyer needs across countries

Differences in competitors and ways of
competing among countries
Differences in trade rules and governmental
regulations across countries

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2000 The McGraw-Hill Companies, Inc.

51

Strategic Options: Pursuing Global Market Coverage

1. License foreign firms to produce and

distribute a firms products
2. Maintain a domestic production base and
export products
3. Establish foreign-based plants and
distribution in foreign countries
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2000 The McGraw-Hill Companies, Inc.

52

Strategic Options: Choosing a Generic Competitive Strategy

1. Broad-line global competition

2. Global focus strategy

3. National focus strategy
4. Protected niche strategy
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2000 The McGraw-Hill Companies, Inc.

53

Grand Strategy Selection Matrix

Overcome weaknesses

Internal
(redirected
resources
within the
firm)

Turnaround or
retrenchment
Divestiture
Liquidation

II
III
Concentrated growth
Market development
Product development
Innovation

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Vertical integration
Conglomerate diversification
External
(acquisition
I
or merger for
resource
IV
capability)
Horizontal integration
Concentric diversification
Joint venture

Maximize strengths

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54

Model of Grand Strategy Clusters

Rapid market growth

1. Concentrated
growth
2. Vertical integration
3. Concentric
diversification

1. Reformulation of
concentrated growth
2. Horizontal integration
3. Divestiture
4. Liquidation
Strong
Weak
I II
competitive
competitive
position
position
IV III
1. Concentric
1. Turnaround or retrenchment
diversification
2. Concentric diversification
2. Conglomerate
3. Conglomerate diversification
diversification
4. Divestiture
3. Joint venture
5. Liquidation
Slow market growth
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2000 The McGraw-Hill Companies, Inc.

55

Conclusion: Selecting a Business Strategy to

Achieve a Competitive Advantage

Focusing on key sources of

competitive advantage requiring
total, consistent commitment
Selection of
appropriate
business
strategie(s)
involves

Weighing skills, resources,

organizational requirements, and
risks of each source of
competitive advantage

Considering unique effects of the

generic industry environment on a
firms value chain activities
Irwin/McGraw-Hill

2000 The McGraw-Hill Companies, Inc.