Alternative strategies

Vision & Mission and Objectives Generic Alternative Strategies Strategic formulation Strategy Formulation Vision & Mission and Objectives Internal evaluation External evaluation Generic Alternative Strategies Strategy Selection

Developing strategies Once a firm has set out its long term objectives and evaluated its external and internal environment it then has to come up with a potential number of strategies. A number of generic strategies exist and the organisation can look at each possibility to see if it may be suitable. This lecture will look at a broad scope of proposed and when they could be adopted.

Types of Generic Strategies Integration Strategies: related to industrial value chain: suppliers, customers… Intensive Strategies: markets size and market share Diversification Strategies: a movement into other business areas Defensive Strategies: related to those when company is in “trouble”

Horizontal Integration Types of Strategies Forward Integration Integration Strategies Backward Integration Horizontal Integration

Forward Integration Strategies Attempts to gain control over: Distributors and Retailers should be adopted when: Current distributors – expensive or unreliable Availability of quality distributors – limited Firm competing in industry expected to grow markedly Firm has both capital & HR to manage new business of distribution Current distributors have high profit margins

Backward Integration Strategies Control of Firm’s suppliers should be adopted when: Current suppliers – expensive or unreliable number of suppliers is small; High growth in industry sector Firm has both capital & HR to manage the new business Current suppliers have high profit margins

Horizontal Integration Strategies Control of Firm’s Competitors should be adopted when: Competes in growing industry Increased economies of scale – a major competitive advantage by increase in size Competitor is faltering due to lack of managerial expertise or need for particular resource Of course must Gain “lawful” monopolistic characteristics with out government challenge (competition laws)

Types of Strategies Market Penetration Market Development Intensive Strategies Market Development Product Development

Market Penetration Strategies: Increased Market Share of Present products/services or Present markets Strategy should be adopted when : Current markets not saturated Rate of present customers can be increased significantly Shares of competitors declining; industry sales increasing Increased economies of scale (increase units of production cause reduction in average cost to produce a unit) provide major competitive advantage

Market Development Strategies: New Markets -- Present products/services to new geographic areas Strategy should be adopted when : New channels of distribution – reliable, inexpensive, good quality When Firm is successful at what it does Untapped/unsaturated markets Excess production capacity for current market Basic industry rapidly becoming global

Product Development Strategies: Increased Sales -- Improving present products/services or developing new products/services Strategy should be adopted when : Products in maturity stage of life cycle Industry characterized by rapid technological development Competitors offer better-quality products @ comparable prices Strong R&D capabilities

Unrelated Diversification Types of Strategies Related Diversification Diversification Strategies Unrelated Diversification

Related Diversification May be Effective When: An organization competes in a no-growth or a slow growth industry 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

Unrelated Diversification May be Effective When: An organization’s current distribution channels can be used to market new products to existing customers An organization has the capital and managerial talent to compete successfully in a new industry An organization’s basic industry is experiencing declining annual sales and profits An organization has the opportunity to purchase an unrelated business as an attractive investment opportunity

Types of Strategies Retrenchment Divestiture Liquidation Defensive Strategies Divestiture Liquidation

Defensive Strategies Retrenchment: reduce Costs & assets to reverse declining sales & profit Divesture: Selling a division or part of an organization Liquidation: Sell Company’s assets, in parts, for only their tangible worth; not for their copyrights (intangible worth)…

Retrenchment Strategies: reduce Costs Guidelines -- Failed to meet objectives & goals consistency; but has distinctive competencies Inefficiency, low profitability, poor employee morale, pressure for stockholders Strategic managers have failed Rapid growth in size; major internal reorganization necessary

Divestiture Strategies: sell part of firm Guidelines -- Retrenchment (cost cutting) 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

Liquidation Strategies Guidelines -- Retrenchment & divestiture failed Only alternative is bankruptcy Minimize stockholder loss by selling firm’s assets

Cost Leadership Strategies Differentiation Strategies Michael Porter’s Generic Strategies Cost Leadership Strategies Differentiation Strategies Focus Strategies

Low Cost strategy: the basic idea Generic Strategies Low Cost strategy: the basic idea underprice competitors or offer a better value thereby gain market share and sales driving some competitors out of the market entirely.

Low Cost Leadership Ways of ensuring total costs across value chain are lower than competitors’ total costs Perform value chain activities more efficiently than rivals and control factors that drive costs Efficient customer response system (CRM): better link with customers: e.g. Amazon: keeps track of user preferences for purchases, and recommends titles purchased by others Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities Inventory replenishment system sends orders to suppliers when purchase recorded at cash register (SCM): better link with suppliers: e.g. Toyota: uses IS to facilitate direct access from suppliers to production schedules

Cost Leadership Can be especially effective when: Price competition among rivals is vigorous Rival’s products are identical and supplies are readily available There are few ways to achieve differentiation Most buyers use the product in the same way Buyers have low switching costs Buyers are large and have significant power Industry newcomers use low prices to attract buyers

Generic Strategies: Differentiation: (Type 3) Producing new products and services, or greatly change the customer convenience in using your existing products and services allows a firm to charge higher prices Or gain customer loyalty risk of differentiation strategy: unique product may not be valued highly enough by customers to justify the higher price. requirements for a successful differentiation strategy: strong coordination among the R&D and marketing functions Use information systems to customize, personalize products to fit specifications of individual consumers E.g., Nike’s iD program for customized sneakers

Differentiation Can be especially effective when: There are many ways to differentiate and many buyers perceive the value of the differences Few rival firms are following a similar differentiation approach Technology change is fast paced and competition revolves around evolving product features: Google’s continuous innovations, Apple’s iPhone

Focused Strategies (Type 4 & 5) Generic Strategies Focused Strategies (Type 4 & 5) producing products and services that fulfill the needs of small groups of consumers (niche market). two types: products or services to a small range (niche) of customers at the lowest price available on the market. products or services to a small range (niche) of customers at the best value available on the market. (focused differentiation) Can be achieved by: Advertising to smaller and smaller target markets using data mining techniques

Focused Strategy Can be especially effective when for example: The target market niche is large, profitable, and growing Industry leaders do not consider the niche crucial Few, if any, other rivals are attempting to specialize in the same target segment

Questions Discuss the relationship between: integrative, intensive and diversification strategies; and Porter’s strategies' of low-cost, differentiation and focus. Discuss, using simple examples the types of strategy: integration, intensive, diversification or defensive, which you would consider to be most appropriate for the D.I.T. in the current economic climate. Discuss, using examples the type of Information systems than could be used to support two of Porter’s strategies: Low Cost, Differentiation or Focussed strategies for which you would consider to be most appropriate for the D.I.T. in the current economic climate.