Types of Strategies Level of strategies Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Case Study CASE 17: CHRYSLER IN TROUBLE Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Strategy hierarchy Corporate strategy: 1) growth strategy, 2) stability strategy, 3) retrenchment strategy. Business unit strategy: 1) cost leadership, 2) differentiation, 3) focus, 4) mixed. Functional strategy. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Types of Strategies A Large Company Corp Level Division Level Functional Level Operational Level

Types of Strategies A small Company company Functional Level Operational Level company A small Company

Corporate strategies Top level management formulate for overall organization The question at the corporate level we should answer when design strategies: In what industry should we be operating? It depends on the outcome of SWOT analysis. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Growth strategies Growth strategies: They result increase in sales, market share and profit: the types: Internal growth: Increase internal capacity of organization without acquiring other firms. Conglomerate Diversification: Acquiring unrelated business. Merger: Two roughly similar size firms combine into one. To benefit of synergy. Strategic alliance: Temporary partnerships Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Corporate Restructuring The change in a broad set of actions and decisions, e.g., changing relationships and organization of work. The aim of restructuring is to improve effectiveness. Restructuring could be growth, stability or retrenchment. This depends on why we use it. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Retrenchment strategies Types: 1- Turnaround: Eliminating unprofitable outputs, pruning/cutting assets, reducing size of work force, rethinking firm’s products lines and customer groups. 2- Divestment: sell one of business units 3- Liquidation: last resort strategy Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Strategies in Action Vertical Integration Strategies Forward integration Backward integration Horizontal integration Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Strategies in Action Forward Integration Example Defined General Motors is acquiring 10% of its dealers. Forward Integration Defined Gaining ownership or increased control over distributors or retailers Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Guidelines for Forward Integration Strategies in Action Guidelines for Forward Integration Present distributors are expensive, unreliable, or incapable of meeting firm’s needs Availability of quality distributors is limited When firm competes in an industry that is expected to grow markedly Advantages of stable production are high Present distributor have high profit margins Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Strategies in Action Backward Integration Example Defined Motel 8 acquired a furniture manufacturer. Backward Integration Defined Seeking ownership or increased control of a firm’s suppliers Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Guidelines for Backward Integration Strategies in Action Guidelines for Backward Integration When present suppliers are expensive, unreliable, or incapable of meeting needs Number of suppliers is small and number of competitors large High growth in industry sector Firm has both capital and human resources to manage new business Advantages of stable prices are important Present supplies have high profit margins Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Horizontal Integration Strategies in Action Horizontal Integration Example Palestinian Islamic Bank acquired Cairo-Amman Bank Islamic transaction branch. Defined Seeking ownership or increased control over competitors Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Guidelines for Horizontal Integration Strategies in Action Guidelines for Horizontal Integration Firm can gain monopolistic characteristics without being challenged by federal government Competes in growing industry Increased economies of scale provide major competitive advantages Faltering/losing due to lack of managerial expertise or need for particular resources Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Strategies in Action Intensive Strategies Market penetration Market development Product development Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Strategies in Action Market Penetration Example Defined Ameritrade, the on-line broker, tripled its annual advertising expenditures to $200 million to convince people they can make their own investment decisions. Defined Seeking increased market share for present products or services in present markets through greater marketing efforts Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Guidelines for Market Penetration Strategies in Action Guidelines for Market Penetration 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 Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Strategies in Action Market Development Example Defined Khuzendar Tiles maker introduce his product to Gulf markets. Defined Introducing present products or services into new geographic area Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Guidelines for Market Development Strategies in Action Guidelines for 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 Excess production capacity Basic industry rapidly becoming global Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Strategies in Action Product Development Example Defined Apple developed the G4 chip that runs at 500 megahertz. Khuzendar Tiles maker introduce Ceramic as a new product. Defined Seeking increased sales by improving present products or services or developing new ones Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Guidelines for Product Development Strategies in Action Guidelines for 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 Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Strategies in Action Diversification Strategies Concentric diversification Conglomerate diversification Horizontal diversification Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Concentric Diversification Strategies in Action Concentric Diversification Example National Westminister Bank PLC in Britain bought the leading British insurance company, Legal & General Group PLC. Defined Adding new, but related, products or services Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Guidelines for Concentric Diversification Strategies in Action Guidelines for Concentric Diversification Competes in no- or slow-growth industry Adding new & related products increases sales of current products New & related products offered at competitive prices Current products are in decline stage of the product life cycle Strong management team Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Conglomerate Diversification Strategies in Action Conglomerate Diversification Example Consultant Construction Engineering acquired Bisects factory. Defined Adding new, unrelated products or services Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Guidelines for Conglomerate Diversification Strategies in Action Guidelines for Conglomerate Diversification Declining annual sales and profits Capital and managerial talent to compete successfully in a new industry Financial synergy between the acquired and acquiring firms Exiting markets for present products are saturated Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Horizontal Diversification Strategies in Action Horizontal Diversification Example The El-Awda Co. provide ice-cream product to present customer Defined Adding new, unrelated products or services for present customers Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Guidelines for Horizontal Diversification Strategies in Action Guidelines for Horizontal Diversification Revenues from current products/services would increase significantly by adding the new unrelated products Highly competitive and/or no-growth industry w/low margins and returns Present distribution channels can be used to market new products to current customers New products have counter cyclical sales patterns compared to existing products Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Strategies in Action Defensive Strategies Joint venture Retrenchment Divestiture Liquidation Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Strategies in Action Joint Venture Defined Example Lucent Technologies and Philips Electronic NV formed Philips Consumer Communications to make and sell telephones. Defined Two or more sponsoring firms forming a separate organization for cooperative purposes Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Guidelines for Joint Venture Strategies in Action Guidelines for Joint Venture Combination of privately held and publicly held can be synergistically combined Domestic forms 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 (e.g., Alaska pipeline) Two or more smaller firms have trouble competing with larger firm A need exists to introduce a new technology quickly Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Strategies in Action Retrenchment (turnaround) Defined Example A company sold off a land and 4 apartments to raise cash needed. It introduce expense effective control system. Defined Regrouping through cost and asset reduction to reverse declining sales and profit. Sometimes it is called turnaround or reorganizational strategy. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Guidelines for Retrenchment Strategies in Action Guidelines for Retrenchment 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. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Strategies in Action Divestiture Defined Example Harcourt General, the large US publisher, is selling its Neiman Marcus division. Defined Selling a division or part of an organization Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Guidelines for Divestiture Strategies in Action Guidelines for Divestiture 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. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Strategies in Action Liquidation Defined Example El-Ameer Block factory sold all its assets and ceased business. Defined Selling all of a company’s assets, in parts, for their tangible worth Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Guidelines for Liquidation Strategies in Action Guidelines for Liquidation 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 Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Michael Porter’s Generic Strategies Cost Leadership Strategies (Low-Cost & Best-Value) Differentiation Strategies Focus Strategies (Low-Cost Focus & Best-Value Focus) Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Business Unit Strategies Here we answer the question: How should we compete in the chosen industry? Cost leadership Differentiation (real or perceived). Mixed Focus Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Business Strategy Focuses on improving competitive position of company’s products or services within the specific industry or market segment Prof. Dr. Majed El-Farra 2012 19 نيسان، 18 Prentice Hall 2006

Generic Competitive Strategies -- Porter’s Competitive Strategies Generic Competitive Strategies -- Lower Cost strategy Greater efficiencies than competitors Differentiation strategy Unique/superior value, quality, features, service Prof. Dr. Majed El-Farra 2012 19 نيسان، 18 Prentice Hall 2006

Competitive Advantage -- Porter’s Competitive Strategies Competitive Advantage -- Determined by Competitive Scope Breadth of the target market Prof. Dr. Majed El-Farra 2012 19 نيسان، 18 Prentice Hall 2006

Porter’s Competitive Strategies Prof. Dr. Majed El-Farra 2012 19 نيسان، 18 Prentice Hall 2006

Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Cost Leadership -- Low-cost competitive strategy Broad mass market Porter’s Competitive Strategies Cost Leadership -- Low-cost competitive strategy Broad mass market Efficient-scale facilities Cost reductions Cost minimization Prof. Dr. Majed El-Farra 2012 19 نيسان، 18 Prentice Hall 2006

Michael Porter’s Generic Strategies Cost leadership emphasizes producing standardized products at a very low per-unit cost for consumers who are price-sensitive. There are two types of cost leadership strategies. a. A low-cost strategy offers products to a wide range of customers at the lowest price available on the market. b. A best-value strategy offers products to a wide range of customers at the best price-value available on the market. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Cost leadership Striving to be the low-cost producer in an industry can be especially effective when the market is composed of many price-sensitive buyers, when there are few ways to achieve product differentiation, when buyers do not care much about differences from brand to brand, or when there are a large number of buyers with significant bargaining power. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Cost leadership The basic idea behind a cost leadership strategy is to underprice competitors or offer a better value and thereby gaindriving some competitors out market share and sales, of the market entirely. To successfully employ a cost leadership strategy, firms must ensure that total costs across the value chain are lower than that of the competition. This can be accomplished by: a. performing value chain activities more efficiently than competition, and b. eliminating some cost-producing activities in the value chain. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Benefits Provides a defense against competitors Provides a barrier to entry Generates increased market share Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Corporate Value Chain Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Differentiation – Broad mass market Unique product/service Porter’s Competitive Strategies Differentiation – Broad mass market Unique product/service Premiums charged Less price sensitivity Prof. Dr. Majed El-Farra 2012 19 نيسان، 18 Prentice Hall 2006

Differentiation Differentiation is aimed at producing products that are considered unique. This strategy is most powerful with the source of differentiation is especially relevant to the target market Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Differentiation A successful differentiation strategy allows a firm to charge higher prices for its products to gain customer loyalty because consumers may become strongly attached to the differentiation features. 3. A risk of pursuing a differentiation strategy is that the unique product may not be valued highly enough by customers to justify the higher price. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Differentiation Common organizational requirements for a successful differentiation strategy include strong coordination among the R&D and marketing functions and substantial amenities/incentives to attract scientists and creative people. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Benefits Lowers customers sensitivity to price Increases buyer loyalty Barrier to entry Can generate higher profits Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Focus 1. Focus means producing products and services that fulfill the needs of small groups of consumers. 2. There are two types of focus strategies. a. A low-cost focus strategy offers products or services to a small range (niche) of customers at the lowest price available on the market. b. A best-value focus strategy offers products to a small range of customers at the best price-value available on the market. This is sometimes called focused differentiation. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Focus Focus strategies are most effective when the niche is profitable and growing, when industry leaders are uninterested in the niche, when industry leaders feel pursuing the niche is too costly or difficult, when the industry offers several niches, and when there is little competition in the niche segment. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Cost-Focus – Low-cost competitive strategy Focus on market segment Porter’s Competitive Strategies Cost-Focus – Low-cost competitive strategy Focus on market segment Niche focused Cost advantage in market segment Prof. Dr. Majed El-Farra 2012 19 نيسان، 18 Prentice Hall 2006

Differentiation Focus – Porter’s Competitive Strategies Differentiation Focus – Specific group or geographic market focus Differentiation in target market Special needs of narrow target market Prof. Dr. Majed El-Farra 2012 19 نيسان، 18 Prentice Hall 2006

Stuck in the middle – No competitive advantage Porter’s Competitive Strategies Stuck in the middle – No competitive advantage Below-average performance Prof. Dr. Majed El-Farra 2012 19 نيسان، 18 Prentice Hall 2006

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Risks of Generic Strategies Risks of Cost Leadership Cost leadership is not sustained: • Competitors imitate. • Technology changes. • Other bases for cost leadership erode. Proximity in differentiation is lost. Cost focusers achieve even lower cost in segments. Risks of Differentiation Differentiation is not sustained: • Competitors imitate. • Bases for differentiation become less important to buyers. Cost proximity is lost. Differentiation focusers achieve even greater differentiation in segments. Risks of Focus The focus strategy is imitated: The target segment becomes structurally unattractive: • Structure erodes. • Demand disappears. Broadly targeted competitors overwhelm the segment: • The segment’s differences from other segments narrow. • The advantages of a broad line increase. New focusers subsegment the industry. Risks of Differentiation Differentiation is not sustained: • Competitors imitate. • Bases for differentiation become less important to buyers. Cost proximity is lost. Differentiation focusers achieve even greater differentiation in segments. Risks of Focus The focus strategy is imitated: The target segment becomes structurally unattractive: • Structure erodes. • Demand disappears. Broadly targeted competitors overwhelm the segment: • The segment’s differences from other segments narrow. • The advantages of a broad line increase. New focusers subsegment the industry. Risks of Cost Leadership Cost leadership is not sustained: • Competitors imitate. • Technology changes. • Other bases for cost leadership erode. Proximity in differentiation is lost. Cost focusers achieve even lower cost in segments. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18 Prentice Hall 2006

Level of Strategy Functional/operational Strategies: Concern with org. internal resources and processes which effectively deliver the corporate and business strategic direction. Functional strategies are interrelated. Functional strategies e.g.: purchasing & materials management, production, finance, R&D, HR, IT, and marketing. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

purchasing & materials management (as example) Buying materials in quantity, quality and cost which correspond with the corp. generic strategies (Business Unit strategies). Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Hyper-competition and Competitive Advantage Sustainability Competitive advantage in a hyper-competitive market is characterized by a continuous series of multiple short- term initiatives that replace current products with new products before competitors can do so. Leads to an over emphasis on short-term tactics Prentice Hall, Inc. ©2012

Competitive Tactics Tactic- a specific operating plan that details how a strategy is going to be implemented in terms of when and where it is to be put into action Narrower in scope and shorter in time horizon than strategies Prentice Hall, Inc. ©2012

Timing Tactics: When to Compete Timing Tactics- when a company implements a strategy First movers Late movers Prentice Hall, Inc. ©2012

Cooperative Strategies- used to gain a competitive advantage within an industry by working with other firms Prentice Hall, Inc. ©2012

Collusion- the active cooperation of firms within an industry to reduce output and raise prices to avoid economic law of supply and demand Prentice Hall, Inc. ©2012

Obtain or learn new capabilities Obtain access to specific markets Strategic Alliances- a long-term cooperative arrangement between two or more independent firms or business units that engage in business activities for mutual economic gain Used to: Obtain or learn new capabilities Obtain access to specific markets Reduce financial risk Reduce political risk Prentice Hall, Inc. ©2012

Types of Cooperative Agreements Mutual Service Consortia Joint Venture Licensing Arrangements Value-Chain Partnerships Prentice Hall, Inc. ©2012

What industry forces might cause a favorable niche to disappear? Is it possible for a company or business unit to follow a cost leadership and a differentiation strategy simultaneously? Why or why not? 3. Why are strategic alliances temporary? Prentice Hall, Inc. ©2012

 What kind of internal factors help managers determine whether a firm should emphasize the production and sales of a large number of low-priced products or a small number of high-priced products? Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

 The most important factors can be brought out by going through each functional area. For example, under marketing, a strong market research group may be able to identify the kinds of niches available to the products or services under consideration. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

 low-priced products suggests a large capital intensive manufacturing facility. In order to produce high-quality products, a fairly sophisticated applied R&D effort may be needed. An expensive engineering staff may be needed, In terms of human resource management, a fairly unskilled and low paid workforce cannot normally be expected to produce a high quality Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Is it possible for a company or business unit to follow a cost leadership strategy and a differentiation strategy simultaneously? Why or why not? Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Michael Porter argues that a business unit which is unable to achieve one of the competitive strategies is likely to be "stuck in the middle" of the competitive marketplace with no competitive advantage. That unit, according to Porter, is doomed to below-average performance. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

Research by Greg Dess and Peter Davis as well as by Rod White, suggests however, that this may not be the case. Examples can be found of businesses which have been able to jointly follow overall low cost and high quality differentiation strategy. Japanese companies such as Toyota in automobiles and Matsushita (Panasonic and National) in consumer electronics are good examples. Their offer of low price and high quality created serious problems for those companies following only cost leadership in the U.S. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

How can a company overcome the limitations of being in a fragmented industry?  Businesses tend to be local and oriented to market segments. This may occur because the industry is relatively new - based upon a product in the early stage of its product life cycle. Entry barriers are probably low and new entrants are constantly moving into the industry as others leave or go bankrupt. Often, the trick to be a successful firm in this kind of industry is to find the key to standardization which allows economies. Prof. Dr. Majed El-Farra 2012 19 نيسان، 18

How can a company overcome the limitations of being in a fragmented industry?   Domino's Pizza achieved success in fast food by providing standardized pizza throughout North America and by guaranteeing delivery time faster than competition. Before Pizza Hut and Domino's settled upon standardized pizza appealing to a wide variety of tastes across North American, the pizza business was a fragmented industry characterized by many small pizza "parlors" serving small market segments in cities throughout America . Prof. Dr. Majed El-Farra 2012 19 نيسان، 18