Strategy Choice Dr. Fred Mugambi Mwirigi JKUAT 1

Overview  There are many strategies.  The most appropriate among the different strategies depends on several factors like: 1.The mission and long term objectives of the company 2.Growth rates of related markets 3.Competitive position of the company  So, where does strategy come in……? 2

Recap 3 Vision Medium term objectives Mission Strategic Objectives Short term objectives Operational Policies Grand Strategy Tactical Policies Strategic Policies Tactical Strategies Operational Strategies C.Vs

Strategy Alternatives 1.Stable growth strategy alternatives 2.Growth strategy alternatives 3.Harvesting strategy alternatives 4.Defensive strategy alternatives 5.Combination strategy alternatives 4

Stable Growth strategy  Used by companies that are satisfied by their past performances and so intend to pursue the same or similar objectives.  Expected performance of the company is raised by a similar margin each year.  A low risk strategy- most stable organizations do not need to modify their products or services or to allocate extra resources.  Generally organizations that pursue this strategy concentrate on one product/service. They grow by maintaining their % share of the market and slowly increase the market share. 5

Growth strategy The growth strategy has three main options: 1. Concentration strategies 2. Integration Strategies 3. Diversification Strategies 6

1. Concentration strategy Two main options: i.Market development strategy- the company invests in the expansion of the market of its current business. This can be achieved by expanding into new geographic areas ii.Product development strategy- involves altering the basic product or adding a closely related product that can be sold through the existing channels. 7

2. Integration  Integration- this strategy involves extending business operations into any one or both of the two possible directions i.e. forward and/or backward integration.  In forward integration the organization ventures into the distribution of its own products.  In backward integration the organization begins to supply to itself 8

3. Diversification  Concentric diversification- expanding into a related but distinct area. For example a flourmill that processes flour for human consumption could venture into animal feeds.  Conglomerate diversification- adding new products that are significantly different from the company’s present products in to the company’s product portfolio 9

Harvesting strategies  Products eventually reach a point where further growth appears doubtful or not cost-effective.  The logical thing to do is to ‘harvest’ as much as possible from the product.  Organizations do this by limiting further investment and maximizing short-term profits and cash flow. 10

Harvesting strategies contd. This strategy should be considered if: 1.The product is in a saturated or declining market 2.The current market share is small and cannot be cost-effectively increased 3.Profit prospects are poor 4.There are better investment prospects 5.A decrease in expense and investment will not cause a sharp decline in sales 6.The product is not a major contributor of sales, prestige or stability of the company 11

Defensive strategies  Also referred to as retrenchment strategies.  Used when the company needs to reduce its operations.  They are popular when a company needs to reverse a negative trend or to overcome a crisis.  They serve as short-term remedies to problematic situations or as the only avenues out of situations when no other options seem feasible. 12

Defensive strategies Contd. Reasons that could prompt a company to use defensive strategies: 1.If the company is having financial problems 2.If the company forecasts difficult times ahead 3.If the company stands to benefit immensely by selling the business 13

Defensive strategies Contd. Defensive strategies include: 1.Turnaround strategy 2.Divestment strategy 3.Liquidation strategy 4.Filing for bankruptcy 5.Becoming a captive (tying down property) 14

Defensive strategies contd.  Turnaround strategy- reversing a negative trend to get the organization back on the track of profitability. Turnaround strategies are intended to reduce the costs of operations at the same time increasing efficiency.  Divestment strategy- selling off part of the business, e.g. an SBU, a product line or a division. Can happen if a recent diversification did not work. It could also pursue divestiture if it intends to change its core business or business direction. 15

Defensive strategies contd.  Liquidation- liquidation occurs when an entire company is either sold out or dissolved. The decision to sell may come by choice or force.  Filling for bankruptcy- sometimes a company will file for bankruptcy as a defensive strategy, especially if has developed a very big creditor portfolio. This would give the company an opportunity to reconstitute or reinvent itself. 16

Combination strategy  Most entities use some form of combination strategy or the other especially when they are serving several different markets.  Some strategies are much easier to combine than others. 17

Combination strategy Contd. Some strategy combinations: 1.Divesting a product line while adding other product lines 2.Combining a turnaround strategy in one area with a growth strategy in another area 3.Using a harvesting strategy in one area and a growth strategy in another 4.Using a growth strategy for a specified time and then a stable growth strategy for another period of time 18

Other strategies…. 1.Cost leadership strategies 2.Differentiation strategies 3.Product focus strategies 19

Cost Leadership strategies  These strategies aim to produce products at a lower cost  This is achieved by building some absolute or relative advantages in the company  This strategy is ideal when: 1.The company wants to surmount stiff direct and indirect competition 2.The market is very price sensitive 3.The company wants to penetrate a new market 4.It is already the strongest player and wants to assert its position 20

Differentiation strategies  The process of creating uniqueness in a product relative to other competitor products in the same market.  One can differentiate products on the basis of brand image, customer service, technology, etc. The intention of this strategy is to create customer loyalty on the product. 21

Differentiation strategies  Some forms of differentiation are relatively costly, although this need not always be the case.  Differentiation can also be combined with other strategies like product focus strategy to create a very specific (sometimes small) but sustainable market. For example, luxury cars may have a very small market that is, nevertheless, sustainable. 22

Product Focus strategies  A company may decide to focus its product on a specific market segment as opposed to serving the entire market with that product.  The basic reason for this strategy would be to gain a least-cost position or differentiation or both within a narrow market. 23

Summary of strategy options 1. Stable growth strategies 2. Growth strategies a. Concentration strategies i. Market development strategies ii. Product development strategies b. Integration strategies c. Diversification strategies i. Concentric diversification strategy ii. Conglomerate diversification strategy 3. Harvesting strategies 24

Summary of strategy options 4. Defensive strategies a. Turnaround strategies b. Divestment strategy c. Liquidation strategy d. Filing for bankruptcy 5. Combination strategies (combining different options) 6. Cost leadership strategies 7. Differentiation strategies 8. Product focus strategies 25

Integrating Policies, Control and Evaluation into Strategy Implementation  The manager should ensure that the interplay of policies and functional strategies is right.  Functional strategies identify specific immediate functions that must be conducted to implement the grand strategy  Policies provide a means for directing and controlling behavior, decisions and actions in a manner consistent with its functional, business and corporate strategies.  Effective policies channel actions, behavior, decisions and practices to promote strategic accomplishment. 26

Integration Contd.  Firms implement strategies in changing environments, which have the capacity to affect the outcome of the strategies. So, there is need to control and evaluate strategies on a continuous basis.  Control systems should be designed to steer execution of the strategy, monitor performance, evaluate deviations and initiate corrective action where necessary. 27

Thank you 28