gowth strategy (1)

http://macy.ba.ttu.edu/5491/week8/Week 8 Strategy.ppt Slide #1

Syllabus• Overview of Strategic management Process

• Establishment of Strategic Intent » Mission,Vision,Goals,Objectives

Strategy Formulation

• Environment Analysis

» Environment Appraisal (SWOT Analysis» PEST,ETOP,Core Competency, Michael Porter 5 force model

• Organizational Appraisal » Internal Environment,OB,Competency,» Methods 7 Techniques for Organizational Appraisal

• Corporate Level Strategy » Concentration, Integration,Diversification,» Internationalization, Cooperation (M&A,JV), Digitalisation» Stability, Retrenchment and Restructuring

• Strategic Analysis and Choices


Syllabus• Strategic Implementation

• Structural Implementation (Functional/Divisional/Matrix/SBU)

• Behavioural Implementation ( Corporate Governance,Corporate Culture,Business Ethics)

• Functional & Operational Implementation (Marketing/Finance/Operations)

• Strategy Evaluation and Control


Chapter-4Corporate Growth Strategies


Organizational Growth: External and/or Internal

• External and Internal Growth Strategy

– One that involves the attainment of specific growth objectives by increasing the level of an organization’s capabilities

– Typical growth strategies include goals for:

• Increase in sales revenues

• Profits


Corporate Growth Strategy

3-18

Expansion Strategy

Stability Strategy

Retrenchment Strategy

Combination Strategy


Expansion Strategy

3-18

This is followed when an organization aims at high growth by substantially broadening the scope of one or more of its businesses in terms of their respective customer groups, customer functions and alternative technologies in order to improve overall performance.

Example :-

•Chocolate manufacturer expands customer group to include middle aged and old people

•Stockbroker firm offers personalized financial services to small investors apart from dealing in shares and debentures.

•Printing firm changes from traditional letter press printing to desk-top publishing


Stability Strategy

3-18

This is followed by an organization when it attempts at incremental improvement of its performance by marginally changing one or more of its businesses in terms of their respective customer groups, customer functions and alternative technologies in order to improve overall performance.

Example :-

• Packaged tea company provides special services to institutional buyers in order to encourage bulk buying.

•A copier machine company provides better after sales service to existing customers.

• A steel company modernizes its plants to improve efficiency and productivity.


Retrenchment Strategy

3-18

This is followed when an organization aims at contraction of its activities through a substantial reduction or elimination of the scope of one or more of its businesses in terms of their respective customer groups, customer functions and alternative technologies in order to improve overall performance.

Example :-

• A Pharmaceutical firm pulls out from retail selling to concentrate on institutional selling & reduce sales force.

•A corporate hospital decides to focus only specialty treatment than general treatment.



3-18

• Expansion Strategy :- Followed by organization with aim for high growth

ConcentrationIntegrationDiversificationCooperationInternationalizationDigitalization

•Stability Strategy :- Adopted to improve functional performance

•No change strategy

•Profit Strategy

•Pause/Proceed with caution strategy



3-18

Retrenchment Strategy :- Followed by Organization with an aim to contraction of activities.

•Divestment,Liquidation

• Compulsory winding up

•Voluntary Winding up

•Winding Up under court supervision

• Combination Strategy :- Combination of stability,expansion and retrenchment either at same time in different business or different time in the same business.


Types of Growth Strategies

Organizational

Growth

HorizontalIntegration:

Along Value Chain

International Concentration

Diversification•Related Businesses•Unrelated Businesses

Vertical Integration•Related Businesses•Unrelated Businesses


Corporate Strategy:Concentration


Concentration

Organization concentrates on its primary lines of business and looks for ways to meet its growth objectives through increasing its level of capability in this primary business


Concentration

Product-Market Exploitation

Product Development

Market Focused Development

Product/Market Diversification

Cu

stom

ers

Product(s)


Ansoff Matrix


Background

• Long-term business strategy is dependant on planning for their introduction

• Ansoff Matrix represents the different options open to a marketing manager when considering new opportunities for sales growth


Variables in the matrix

Two variables in Strategic marketingDecisions:

– The market in which the firm was going to operate– The product intended for sale

In terms of the market, managers had two options:

– Remain in the existing market– Enter new ones


In terms of the product, the two options are:– selling existing products– developing new ones


Existing PRODUCTS New

INCREASING RISK

INC

REA

SIN

G R

ISK

Existing

MARKETS

New

MARKET PENETRATION

Sell more in existing Markets

MARKET EXTENSION

Achieve higher sales/market share of existing products in new markets

PRODUCT DEVELOPMENT

Sell new products in existing markets

DIVERSIFICATION

Sell new products in new markets



INCREASING RISKIN

CR

EA

SIN

G R

ISK

Existing

MARKETS

New

MARKET PENETRATION



MARKET PENETRATION

• This is the objective of higher market share in existing markets

– E.g. in 2000, Mitsubishi announced a 10% reduction in prices in the UK in order to encourage purchases



INCREASING RISKIN

CR

EA

SIN

G R

ISK

Existing

MARKETS

New

MARKET PENETRATION


MARKET EXTENSION



MARKET EXTENSION

• This is the strategy of selling an existing product to new markets. This could involve selling to an overseas market, or a new market segment

– Tractor company focussing on haulage transportation apart from Agriculture segment.



INCREASING RISK

INC

REA

SIN

G R

ISK

Existing

MARKETS

New

MARKET PENETRATION


MARKET EXTENSION


PRODUCT DEVELOPMENT



PRODUCT DEVELOPMENT

• Least risky of all four strategies• This involves taking an existing product and

developing it in existing markets– E.g. Coca-Cola. This has been developed to have

vanilla, lime, cherry and diet varieties (amongst others) in the SOFT DRINKS market



INCREASING RISK

INC

REA

SIN

G R

ISK

Existing

MARKETS

New

MARKET PENETRATION


MARKET EXTENSION


PRODUCT DEVELOPMENT


DIVERSIFICATION

Sell new products in new markets


DIVERSIFICATION

• This is the process of selling different, unrelated goods or services in unrelated markets

• This is the most risky of all four strategies


Summary

• Risks involved differ substantially• The matrix identifies different strategic areas

in which a business COULD expand• Managers need to then asses the costs,

potential gains and risks associated with the other options


Corporate Strategy:Integration


Horizontal Integration

• When an organization takes up the same type of product at the same level of production or marketing process, it is called Horizontal Integration.

• It results in bigger size and greater competitive position in the Industry.

• This is similar to mergers and acquisitions.

Example:-• Shoe Manufacturer---Bigger Shoe manufacturer• Cat food + Dog Food---Animal Feed Industry


Horizontal Integration-Benefits

• Economies of Scale:- Spread fixed cost over larger base of products…Unit cost reduction

• Economies of Scope :- Better utilization of assets through sharing of resources.

• Increased product Differentiation:- Offer customers with

wide range of products.• Increased Market power :- Bigger size of operation…More

bargaining power with suppliers and customers.

• Reduction in Industry Rivalry:- Fewer competiton


FIGURE 9.1

Stages in the Raw-Material-to-Consumer Value Chain

Upstream Downstream


Stages in the Raw-Material-to-Consumer Value Chain in the Personal Computer

Industry

FIGURE 9.2

End userDistributionAssemblyIntermediatemanufacturer

Raw materials

Examples:Examples:Dow ChemicalDow ChemicalUnion CarbideUnion CarbideKyoceraKyocera

Examples:Examples:IntelIntelSeagateSeagateMicronMicron

Examples:Examples:AppleAppleCompaqCompaqDellDell

Examples:Examples:Computer WorldComputer WorldOffice MaxOffice Max


Vertical Integration

• Integration backward into supplier functions– Assures constant supply of inputs.– Protects against price increases.

• Integration forward into distributor functions– Assures proper disposal of outputs.– Captures additional profits beyond activity costs.

• Integration choice is that of which value-adding activities to compete in and which are better suited for others to carry out.


FIGURE 9.4

Structure of a Company Sharing Marketing Between Two Business Units


Creating Value Through Vertical Integration

• Advantages of a vertical integration strategy:– Builds entry barriers to new competitors by

denying them inputs and customers.– Protects product quality through control of

input quality and distribution and service of outputs.

– Improves internal scheduling (e.g., JIT inventory systems) responses to changes in demand.


Creating Value Through Vertical Integration

• Disadvantages of vertical integration– Cost disadvantages of internal supply purchasing.– Remaining tied to obsolescent technology.– Aligning input and output capacities with

uncertainty in market demand is difficult for integrated companies.


Corporate Strategy:Diversification


Another Way: Diversification

Related

Diversification

Product

Similarities

Distribution

Channels

Value Chain Capabilities/

Core Competencies

Customer

Use

Similar

Technology


Diversification

• Two Types

– Related Businesses

– Unrelated Businesses


Related Diversification and Competitive Advantage

• Competitive advantage can result from related diversification if opportunities exist to– Transfer expertise / capabilities / technology– Combine related activities into a single operation and

reduce costs– Leverage use of firm’s brand name reputation– Conduct related value chain activities in a

collaborative fashion to create valuable competitive capabilities


What is Unrelated Diversification?

• Involves diversifying into businesses with

– NO strategic fit

– NO meaningful value chain relationship

– NO unifying strategic theme

• Approach is to venture into “any business in which we think we can make a profit”

• Firms pursuing unrelated diversification are often referred to as conglomerates


Drawbacks of Unrelated Diversification

• Difficulties of competently managing many diverse businesses

• Lack of strategic fits which can be leveraged into competitive advantage– Consolidated performance of unrelated businesses

tends to be no better than sum of individual businesses on their own (and it may be worse)

• Likely effect is 1 + 1 = 1.5, not 1 + 1 = 3

– Promise of greater sales-profit stability over business cycles seldom realized


Diversification and Corporate Strategy

• A company is diversified when it is in two or more lines of business

• Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business– A diversified company needs a multi-industry, multi-

business strategy– A strategic action plan must be developed and

implemented for several different businesses competing in diverse industry environment


Levels and Types of DiversificationLow Levels of Diversification

Moderate to High Levels of Diversification

Very High Levels of Diversification

Related linked (mixed) < 70% of revenues from dominant business, and only limited links exist

AA

BB CC

Single business > 95% of revenues from a single business unit

AA

Dominant business Between 70% and 95% of revenues from a single business unit BB

AA

Unrelated-DiversifiedUnrelated-Diversified Business units not closely related

AA

BB CC

< 70% of revenues from dominant business; all businesses share product, technological and distribution linkages

Related constrainedAA

BB CC


When to Diversify

• Some companies do EXCELLENTLY and are not diversified– McDonald’s, Coca-Cola, Domino’s Pizza, Wal-Mart,

FedEx, Timex, – Why stay single business

• Clear understanding of who we are/what we do• No Dilution of management’s attention

– Risks of a single business strategy• Putting all the “eggs” in one industry basket• Unforeseen changes can undermine a single

business firm’s prospects


Key Characteristics:

Example: Using a common physical distribution system and sales force such as Procter & Gamble’s disposable diaper and paper towel divisions

Example: General Electric’s costs to advertise, sell and service major appliances are spread over many different products

Sharing ActivitiesAlternative Diversification Strategies

Achieves economies of scale

Boosts efficiency of utilization

Helps move more rapidly down Learning Curve

Sharing Activities often lowers costs or raises differentiation

Sharing Activities can lower costs if it:


Example: Shared order processing system may allow new features customers value or make more advanced remote sensing technology available

Example: Procter & Gamble’s sharing of sales and physical distribution for disposable diapers and paper towels is effective because these items are so bulky and costly to ship

Key Characteristics:

Sharing ActivitiesAlternative Diversification Strategies

Sharing Activities can enhance potential for or reduce the cost of differentiation

Must involve activities that are crucial to competitive advantage

gowth strategy (1)

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