porters generic-strategies-and-more

MANAGEMENT POLICY AND STRATEGYSESSION - VI

Generic and Grand StrategiesProf. Sushil

Department of Management StudiesIndian Institute of Technology, Delhi

INDIAEmail: sushil@dms.iitd.ernet.in

Prof.Sushil\IITD\Session-VI 1

Generic Strategies

Differentiation

Low-cost

leadership

PORTER’S GENERIC STRATEGIES

1. Cost

Leadership2. Differentiation

3 A. Cost Focus 3 B. Differentiation

FocusNarrow

Target

DifferentiationLower Cost

Competitive

Advantage

Competitive Score

REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIES

Generic Commodity Required Common OrganizationalStrategy Skills and Resources Requirements

Overall cost Sustained capital investment Tight cost control

leadership access to capital Frequent, detailed control reports

Process engineering skills Structured organization and responsibilities

Intense supervision of labour Incentives based on

Products designed for ease meeting strict quantitative

Low-cost distribution system targets in manufacture

Differentiation Strong marketing abilities Strong coordination Product engineering among functions in R&D,

Creative flare product development, and marketing

REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIESCONTD…

Strong capability in basic Subjective measurement and

research incentives instead of

quantitative measures

Corporate reputation for Amenities to attract highly

quality or technological skilled labour, scientists, or

leadership creative people

Long tradition in the industry

or unique combination of skills

drawn from other businesses

Strong cooperation from

channels

Focus Combination of the above Combination of the above policies

policies directed at the directed at the regular strategic

particular strategic target target

RISKS OF THE GENERIC STRATEGIES

Risks of Cost Leadership Risks of Differentiation Risk of Focus

Cost of leadership is not Differentiation is not The focus strategy is sustained initiated

sustained: Competitors imitate The target segment • Competitors imitate: Bases for differentiation becomes structurally

unattractive• Technology changes becomes less imported to Structure erodes• Other bases for cost buyers Demand disappears

leadership erodeProximity in differentiation Cost proximity is lost Broadly targeted is lost competitors overwhelm

the segment: The segment’s differences

from other segments narrow The advantages of a broad

line increaseCost focusers achieve Differentiation focusers New Focusers sub-segmentseven lower cost in segments achieve even greater the industry

differentiation in segments

STAGE OF `INDUSTRY’ DEVELOPMENT

Keeping

ahead of the

Cost leadership

Raise barriers

competitors

Redefine scope

Divest

peripherals

Encourage

departures

Imitation at

lower cost Joint

ventures

Differentiati

on FocusDifferentiation

opportunities

Follower

Growth Maturity Decline

Strategic

position of

organizatio

Types of Grand Strategies

Consortia

Concentrated Growth

Market Development

Product Development

Innovation

Horizontal Integration

Vertical Integration

Concentric Diversification

Conglomerate Diversification

Turnaround

Divestiture

Liquidation

Bankruptcy

Joint Ventures

Strategic Alliances

Characteristics of a Concentrated Growth Strategy

• Involves focusing resources on the profitable growth of a single product, in a single market, with a single dominant technology

• Rationale - Firm develops and exploits its expertise in a delimited competitive arena

• Determinants of competitive market success

– Ability to assess market needs

– Knowledge of buyer behavior

– Customer price sensitivity

– Effectiveness of promotion

Conditions Favoring a Concentrated Growth Strategy

Firm’s industry is resistant to major technological advancements

Firm’s targeted markets are not product saturated

Firm’s markets are sufficiently distinctive to dissuade competitors in adjacent markets from entering firm’s segment

Firm’s inputs are stable in price and quantity and available in amounts and at times needed

Firm’s industry is stable

Firm’s competitive advantages are based on efficient production or distribution channels

Success of market generalists

Strategies of Market and Product Development

• Market development

– Consists of marketing present products, often with only cosmetic modifications, to customers in related market areas by

• Adding channels of distribution or

• Changing content of advertising or promotion

• Product development

– Involves substantial modification of existing products or creation of new but related products

– Based on penetrating existing markets by

• Incorporating product modifications into existing items or

• Developing new products connected to existing products

Specific Options for Selected Grand Strategies

Concentration: Increasing use of present products in present markets

1. Increasing present customers’ rate of use:

a. Increasing size of purchase

b. Increasing rate of product obsolescence

c. Advertising other uses

d. Giving price incentives for increased use

2. Attracting competitors’ customers

a. Establishing sharper brand differentiation

b. Increasing promotional effort

c. Initiating price cuts

3. Attracting nonusers to buy the product

a. Inducing trial use through sampling, price incentives, and so on

b. Pricing up or down

c. Advertising new uses

Specific Options for Selected Grand Strategies (continued)

Market Development: Selling present products in new markets

1. Opening additional geographic markets

a. Regional expansion

b. National expansion

c. International expansion

2. Attracting other market segments

a. Developing product versions to appeal to other segments

b. Entering other channels of distribution

c. Advertising in other media

Specific Options for Selected Grand Strategies (concluded)

Product Development: Developing new products for present markets

1. Developing new product features

a. Adapt (to other ideas, developments)

b. Modify (change color, motion, sound, odor, form, shape)

c. Magnify (stronger, loner, thicker, extra value)

d. Minify (smaller, shorter, higher

e. Substitute (other ingredients, process, power)

f. Rearrange (other patterns, layout, sequence, components)

g. Reverse (inside out)

h. Combine (blend, alloy, assortment, ensemble; combine units, purposes, appeals, ideas)

2. Developing quality variations

3. Developing additional models and sizes (product proliferation)

Innovation Strategy

Involves creating a new product life cycle,

thereby making similar existing products

obsolete

Strategies of Horizontal and Vertical Integration

• Horizontal integration

– Based on growth via acquisition of one or more similar firms operating at the same stage of the production-marketing chain

– Involves eliminating competitors, providing acquiring firm with access to new markets

• Vertical integration

– Involves acquiring firms

• To supply acquiring firm with inputs - backward integration or

• Are customers for firm’s outputs - forward integration

Vertical and Horizontal Integrations

Acquisitions or mergers of suppliers or customer businesses are vertical integrations

Acquisitions or mergers of competing businesses are horizontal integrations

Textile producer

Shirt manufacturer

Clothing store

Textile producer

Shirt manufacturer

Clothing store

Motivations Related to Diversification Strategies

Increase growth rate of firm

Investment is better use of funds than using them for internal growth

Improve stability of earnings and sales

Balance or fill out product line

Diversify product line

Acquire a needed resource quickly

Achieve tax savings

Increase firm’s stock value

Increase efficiency and profitability

Diversification Strategies

• Concentric diversification

– Involves acquisition of businesses related to acquiring firm in terms of technology, markets, or products

• Conglomerate diversification

– Involves acquisition of a business because it represents a promising investment opportunity

– Primary motivation is profit pattern of venture

• Difference between the approaches

– Concentric diversification emphasizes commonality whereas conglomerate diversification emphasizes profits for each individual unit

Turnaround Strategy

Involves a concerted effort over a period of

time to fortify a firm’s distinctive

competencies, returning it to profitability

A Model of the Turnaround Process

Declinin

g sales

margins

Imminent

bankruptc

reductio

Efficiency

maintenanc

Entrepreneuria

reconfiguratio

Internal

factors

External

factors

Turnaround situation Turnaround response

Cause Severity Retrenchment phase Recovery phase

(operating)

(strategic)

Divestiture and Liquidation Strategies

• Divestiture strategy

– Involves selling a firm or a major component of a firm

– Reasons for divestiture

• Partial mismatches between acquired firm and parent firm

• Corporate financial needs

• Government antitrust action

• Liquidation strategy

– Involves selling parts of a firm, usually for its tangible asset value and not as a going concern

The Strategy of Bankruptcy

• Two approaches

– Liquidation - Involves complete distribution of a firm’s assetsto creditors, most of whom receive a small fraction ofamount owed

– Reorganization - Involves creditors temporarily freezing theirclaims while a firm reorganizes and rebuilds its operationsmore profitably

• Advantage of a reorganization bankruptcy

– Proactive option offering maximum repayment of a firm’sdebt in the future if a recovery strategy is successful

Corporate Combination Strategies

• Joint venture

– Involves establishing a third company (child), operated for the benefit of the co-owners (parents)

• Strategic alliance

– Involves creating a partnership between two or more companies that contribute skills and expertise to a cooperative project

• Exists for a defined period

• Does not involve the exchange of equity

• Consortia, Keiretsus, and Chaebols

– Defined as large interlocking relationships between businesses of an industry

The Top Five Strategic Reasons for Outsourcing

1. Improve Business Focus

2. Access to World-Class Capabilities

3. Accelerated Reengineering Benefits

4. Shared Risks

5. Free Resources for Other Purposes

INDIAN BUSINESS HOUSES TATA GROUP

Group Overview

• India’s largest business house

• More than 85 companies

• 39 listed

• 8% of India’s market capitalization

• 2.6 Million shareholders

• 2,70,000 employees

• Turnover Rs 343 billion (1996-1997)

INDIAN BUSINESS HOUSES TATA GROUP Contd...

1996-97 Rs (Billion)

% change Over 1995-

Financial Highlights

Assets

Turnover

Exports

• Metals

• Automobiles

• Energy

• Engineering

• Chemicals

• Pharmaceuticals

• Consumer Products

• Services

• Agro Industries

• IT and Communication

• Exports

• Finance

Tata Heritage

• Jamsetji Tata– Started textile mill in 1877

– Inspired steel and power industry

– Technical education and philanthropy

• JRD Tata– Pioneered civil aviation

– Funded Hom Bhabha’s nuclear programme

– Guided the Tata group for over half a century

• Ratan Tata– Present Chairman since 1991

Holding Companies

• Tata Sons– Founded by Jamsetji Tata

– Promoted many of the present Tata companies

– 63% held by Tata philanthropic trusts

• Tata Industries– 100% subsidiary of Tata Sons founded in 1945

– Managing agency till 1970

– Promoted new Tata companies in technology based businesses

• Cross holdings among other Tata companies

Restructuring

• Prompted by post 1991 changing environment

• Need to identify and focus on core businesses

• Resistance from satraps– Russi Mody, Darbari Seth, Ajit Kerkar

• Shrink number of companies– From over 85 to about 30

• Shrink number of core businesses– From about 25 to around 10 or 12

• Mergers and divestments

• McKinsey hired as a consultants

Restructuring Strategy

• Keep and grow– Power, watches, metals, chemicals, telecom, hospitality, financial

services, infotech, emerging services, infrastructure, automobiles

• Forge strategic tie ups– Tea and beverages, retailing

• Remain only as strategic investors– Luxury cars, infotech, printing, cosmetics

• Sell– Refrigeration, paints, textiles, trading, electronics, oil drilling,

petrochemicals, pharma, specialty chemicals

Recent Developments

• Voltas focus on air conditioning and engineering business– Hive off pesticides business to Ralchem Pesticides (wholly owned

subsidiary of Rallis - largest integrated agrochemical company in India)

• Electrolux Voltas - JV between Voltas and AB Electrolux– Refrigerators

– Washing machines

– Compressors for refrigerators

Recent Developments

• Tata Tea focusing on global agro business– Manages 32 tea gardens in Sri Lanka

– Adding tea gardens inTurkey

– Acquired a 9.5% stake in Asian Coffee

• Overseas Operations– Automobile assembly in Bangladesh

– Instant tea operations in the US

– Chain of hotels across the world

– Precision tooling operations in Singapore

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