Lesson 9A – Generic and strategies

Summary• At the end of the lesson, students should be able

to:– Explain the Generic strategies of:

• Low Cost leadership• Differentiation and• Focus

– List describe, Evaluate and give examples of the 15 grand strategies

• Chapter 7 of course text J. Pearce Strategic Management

Generic Strategies• There are many specific strategies of each type

(offensive or defensive), and identifying which is best depends on the circumstances.

• Porter suggests 3 broad or generic strategies for

creating a defendable position in the long-run and outperforming competitors.

• Cost Leadership

• Cost leadership means having the lowest per-unit (i.e., average) cost in the industry – that is, lowest cost relative to your rivals.

Low Cost Leadership• This could mean having the lowest per-unit cost

among rivals in highly competitive industries, in which case returns or profits will be low but nonetheless higher than competitors Or,

• This could mean having lowest cost among a few rivals where each firm enjoys pricing power and high profits.

• Cost leadership is defined independently of market structure.

Low Cost Leadership• Cost leadership is a defendable strategy

because: – It defends the firm against powerful buyers.

Buyers can drive price down only to the level of the next most efficient producer.

– It defends against powerful suppliers. – Cost leadership provides flexibility to absorb an

increase in input costs, whereas competitors may not have this flexibility.

– The factors that lead to cost leadership also provide entry barriers in many instances.

Low Cost Leadership• Economies of scale require potential rivals to enter the

industry with substantial capacity to produce, and this means the cost of entry may be prohibitive to many potential competitors.

• Achieving a low cost position usually requires the following resources and skills:

– Large up-front capital investment in new technology, which hopefully leads to large market share in the long-run, but may lead to losses in the short-run.

– Continued capital investment to maintain cost advantage

through economies of scale and market share.

Low cost Leadership– Process innovation – developing cheaper ways to

produce existing products. – Intensive monitoring of labor, where workers

frequently have an incentive-based pay structure (i.e., a contract which includes some combination of a fixed-wage plus piece-rate pay).

– Tight control of overhead.

Differentiation• Differentiating the product offering of a firm means

creating something that is perceived industry wide as being unique.

• It is a means of creating your own market to some extent. – There are several approaches to differentiation: – Different design– Brand image– Number of features– New technology

• A differentiation strategy may mean differentiating along 2 or more of these dimensions.

Differentiation• Differentiation is a defendable strategy for

earning above average returns because: • It insulates a firm from competitive rivalry by

creating brand loyalty; – it lowers the price elasticity of demand by making

customers less sensitive to price changes in your products.

• Uniqueness, almost by definition, creates barriers and reduces substitutes. – This leads to higher margins, which reduces the need

for a low-cost advantage.

Differentiation– Higher margins give the firm room to deal with

powerful suppliers. – Differentiation also mitigates buyer power since

buyers now have fewer alternatives. • Achieving a successful strategy of differentiation

usually requires the following:– Exclusivity, which unfortunately also precludes

market share and low cost advantage. – Strong marketing skills. – Product innovation as opposed to process innovation. – Applied R&D. – Customer support. – Less emphasis on incentive based pay structure.

Focus or Niche• Here we focus on a particular buyer group, product

segment, or geographical market.

• Whereas low cost and differentiation are aimed at achieving their objectives industry wide, the focus or niche strategy is built on serving a particular target (customer, product, or location) very well.

• Note, however, that a focus strategy means achieving either a low cost advantage or differentiation in a narrow part of the market.

• For reasons discussed above, this creates a defendable position within that part of the market.

Stuck in the Middle• Failure to develop a strategy in one of these 3

directions is a firm that is “stuck in the middle.” • This means you lack the market share, capital,

and overhead control to be a cost leader, and lack the industry wide differentiation necessary to create margins which obviate the need for a low-cost position.

• Being “stuck” implies low profits as a rule: – Profits are bid away to compete with low cost

producers; or, – The firm loses high margin business to firms who

achieve better differentiation.

Stuck in the Middle• Classic examples of this problem are large,

international airline companies, many of which are now bankrupt.

• Depending on a firm’s capabilities and resources, a “stuck” firm must gravitate toward either low cost (usually by buying market share) or focus or differentiation (which may mean decreasing market share).

Risks of Each Strategy• Risks of each Strategy: • Each generic strategy is based on erecting different

kinds of defences against the competitive forces, and hence they involve different risks.

• Cost Leadership: • Maintaining cost leadership can be risky because:

– Innovations nullify past inventions and learning, and hence cost leadership requires continual capital investment to maintain cost advantage.

– Exclusive attention to cost can blind firms to changes in

product requirements.

Risks of Each Strategy• Cost increases narrow price differentials and

reduce ability to compete with competitors’ brand loyalty.

Risks of each Strategy• Differentiation: • Risks are:

– Cost differentiation between low cost firms and differentiating firms becomes too large to hold customer loyalty.

• Buyers trade-off features, service, or image for price.

– Buyers need for differentiation falls. – Imitation decreases perceived differentiation.

End

Grand Strategies

Grand Strategies• Grand strategies are major, over-reaching

strategies that shape the course of a business.

• Unlike tactics, they are focused on the long-term goals of the business.

• Running your own business means pondering grand strategies involving everything from product development to liquidation.

Grand Strategies

• Different strategies will, of course, fit different situations, so it is best to be familiar with a few different approaches.

Grand Strategies• Market Growth

• Market growth is a low-risk strategy compared to other, more encompassing, strategies.

• Instead of investing in research and development to create new product offerings, the market-growth strategy focuses on growing the market for a current product.

Grand Strategies• Market Growth• An example of this is an electronics company

that develops markets for an existing stereo system instead of developing a new system.

• To develop new markets it may be necessary

to sell stereos in other markets as time passes, such as in foreign countries that are less technologically developed.

Grand Strategies• Product Development• Product development is essentially the opposite of

market development.

• While market development focuses on exploitation, product development focuses on exploration.

• This involves investing heavily in research and development in order to create new and innovative product offerings.

Grand Strategies• Product Development

• For example, a food manufacturer may invest heavily in research into healthier foods that can be marketed to the general public, or a car manufacture may develop safer or more fuel-efficient cars through investments in research.

• These advances give firms an advantage over the competition.

Grand Strategies• Turnaround

• The turnaround strategy is used when a firm is experiencing profit stagnation, decline or other serious problems.

• It is an attempt to change the firm's strategy in the hopes of reversing its fortunes.

Grand Strategies• Turnaround

• In order to turn a firm around, managers will often change the direction of the firm.

• For example, a print newspaper might make the switch to online publication in order to adapt to the changing market.

Grand Strategies• Liquidation

• Liquidation is the grand strategy of last resort. When a firm cannot successfully turn itself around and there are no interested buyers, there is no choice but to liquidate the firm.

Grand Strategies• Liquidation• Liquidating the firm involves selling off all its

assets, including physical assets such as factories and merchandise, as well as intellectual assets, like brands and patents.

• The goal of a liquidation strategy is to recoup as much money for the ownership as possible, before shuttering the business.

Grand Strategies• Concentric Diversification• This strategy involves the acquisition of

businesses that are related to the acquiring firm in terms of technology, markets, or products.

• With this strategy, the selected new businesses possess a high degree of compatibility with the firm’s current businesses.

Grand Strategies• Conglomerate Diversification• In this strategy, a firm, particularly a very large

one, plans acquire a business because it represents the most promising investment opportunity available.

• The principal concern of the acquiring firm is the profit pattern of the venture, rather than creating product-market synergy with existing businesses

Grand Strategies• Divestiture• This strategy involves the sale of a firm or a

major component of a firm.

Grand Strategies• Horizontal Integration• In this term strategy there is growth through

the acquisition of one or more similar firms operating at the same stage of the production-marketing chain.

• Such acquisitions eliminate competitors and provide the acquiring firm with access to new markets

Grand Strategies• Vertical Integration• A company’s aim in this strategy is to acquire firms

that supply it with inputs (such as raw materials) or are customers for its outputs (such as warehouses for finished products).

• When supplying firms are acquired, it is called Backward Vertical Integration.

• When output firms are acquired, it is called Forward Vertical Integration.

Grand Strategies• Concentrated Growth• In this strategy, a firm directs it resources to

the profitable growth of a dominant product, in a dominant market, with a dominant technology

Grand Strategies• conglomerate diversification:

• This strategy focuses on expansion through brand new products and new markets.

Grand Strategies• joint venture:

• Through this strategy, two companies form a new company and share its operations.

• Each partner has an equity stake.

Grand Strategies• strategic alliances:

• This strategy is adopt when two or more companies enter in a formal relationship and agree to pursue a common goal.

• There is no equity stake.

Grand Strategies

• consortia: • A consortia or Consortium is formed when

two companies involve yourself in in a common activity next to pooled resources and achieve a common goal.

• Grand Strategy MatrixQuadrant IV•Concentric diversification•Horizontal diversification•Conglomerate diversification•Joint venturesQuadrant III•Retrenchment•Concentric diversification•Horizontal diversification•Conglomerate diversification•LiquidationQuadrant I•Market development•Market penetration•Product development•Forward integration•Backward integration•Horizontal integration•Concentric diversificationQuadrant II•Market development•Market penetration•Product development•Horizontal integration•Divestiture•LiquidationRAPID MARKET GROWTHSLOW MARKET GROWTHWEAK COMPETITIVE POSITIONSTRONGCOMPETITIVE POSITION

The major Grand Strategies are:Market DevelopmentThis strategy consists of marketing present products, often with only cosmetic modifications, to customers in related market areas by adding channels of distribution or by changing the content of advertising or promotion

FORMULATING LONG-TERM OBJECTIVES AND GRAND STRATEGIESLONG-TERM OBJECTIVESStrategic managers recognize that short-run profit maximization is rarely the best approach to achieving sustained corporate growth and profitability. A parallel choice confronts strategic decisions makers:•1. Should they eat the seeds to improve the near-term profit picture and make large dividend payments through cost-saving measures such as laying off workers during periods of slack demand, selling off inventories, or cutting back on research and development?•2. Or should they sow the seeds in the effort to reap long-term rewards by reinvesting profits in growth opportunities, committing resources to employee training, or increasing advertising expenditures?To achieve long-term prosperity, strategic planners commonly establish long-term objectives in seven areas: profitability, productivity, competitive position, employee development, employee relations, technological leadership, and public responsibility. Useful Web site: www.gulfoil.com (Gulf Oil Companies). Exhibit 6-1 explains the role of the e-commerce technology officer.Qualities of Long-Term Objectives Seven criteria that should be used in preparing long-term objectives are:•1. Acceptable. Managers are most likely to pursue objectives that are consistent with their preferences.•2. Flexible. Objectives should be adaptable to unforeseen or extraordinary changes in the firm’s competitive or environmental forecasts.•3. Measurable. Objectives must clearly and concretely state what will be achieved and when it will be achieved.•4. Motivating. Studies have shown that people are most productive when objectives are set at a motivating level—one high enough to challenge but not so high as to frustrate or so low to be easily attained.•5. Suitable. Objectives must be suited to the broad aims of the firm, which are expressed in its mission statement.•6. Understandable. Strategic managers at all levels must understand what is to be achieved.•7. Achievable. Finally, objectives must be possible to achieve.The Balanced ScorecardThe Balanced Scorecard is a set of measures that are directly linked to the company’s strategy. The scorecard allows managers to evaluate the company from four perspectives: financial performance, customer knowledge, internal business processes, and learning and growth.Inside Balanced Scorecard (as shown in Exhibit 6–2) is a concise definition of the company’s vision and strategy. Surrounding the vision and strategy are four additional boxes; each box contains the objectives, measures, targets, and initiatives for one of the four perspectives. A properly constructed scorecard is balanced between short- and long-term measures; balanced between financial and non-financial measures; and balanced between internal and external performance perspectives. The scorecard is a management system that can be used as the central organizing framework for key managerial process. Useful Web site: www.mobil.com (Mobil Corporation)GENERIC STRATEGIESMany planning experts believe that the general philosophy of doing business declared by the firm in the mission statement must be translated into a holistic statement of the firm’s strategic orientation before it can be further defined in terms of a specific long-term strategy. The popular term for this core idea is generic strategy. From a scheme developed by Michael Porter, many planners believe that any long-term strategy should drive from a firm’s attempt to seek a competitive advantage based on one of three generic strategies:•1. Striving for overall low-cost leadership in the industry.•2. Striving to create and market unique products for varied customer groups through differentiation.•3. Striving to have special appeal to one or more groups of consumer or industrial buyers, focusing on their cost or differentiation concerns.Low-cost leaders depend on some fairly unique capabilities to achieve and sustain their low-cost position. Examples of such capabilities are: having secured suppliers of scarce raw materials, being in a dominant market share position, or having a high degree of capitalization.Strategies dependent on differentiation are designed to appeal to customers with a special sensitivity for a particular attribute. By stressing the attribute above other product qualities, the firm attempts to build customer loyaltyA focus strategy, whether anchored in a low-cost base or a differentiation base, attempts to attend to the needs of a particular market segment. A firm pursuing a focus strategy is willing to service isolated geographic areas; to satisfy the needs of customers with special financing, inventory, or servicing problems; or to tailor the product to the somewhat unique demands of the small-to-medium-sized customer.Exhibit 6-3 presents the requirements for generic competitive strategies, while Exhibit 6-4 lists the risks of each strategy.GRAND STRATEGIESGrand strategies, often called master or business strategies, provide basic direction for strategic actions. They are the basis of coordinated and sustained efforts directed toward achieving long-term business objectives.The 15 principal grand strategies are concentrated growth, market development, product development, innovation, horizontal integration, vertical integration, concentric diversification, conglomerate diversification, turnaround, divestiture, liquidation, bankruptcy, joint ventures, strategic alliances, and consortia. Any one of these strategies could serve as the basis for achieving the major long-term objectives of a single firm. But a firm involved with multiple industries, businesses, product lines, or customer groups—as many firms are—usually combines several grand strategies.Concentrated GrowthConcentrated growth is the strategy of the firm that directs its resources to the profitable growth of a single product, in a single market, with a single dominant technology. More details about Kentucky Fried Chicken can be found at www.triconrestaurants.com Rationale for Superior PerformanceConcentrated growth strategies lead to enhanced performance. The ability to assess market needs, knowledge of buyer behavior, customer price sensitivity, and effectiveness of promotion are characteristics of a concentrated growth strategy.A major misconception about the concentrated growth strategy is that the firm practicing it will settle for little or no growth. A firm employing concentrated growth grows by building on its competences and achieves a competitive edge by concentrating in the product-market segment it knows best.Four Conditions That Favor Concentrated Growth•1. The firm’s industry is resistant to major technological advancements.•2. The firm’s targeted markets are not product saturated.•3. The firm’s product-markets are sufficiently distinctive to dissuade competitors in adjacent product-markets from trying to invade the firm’s segment.•4. The firm’s inputs are stable in price and quantity and are available in the amounts and at the times needed.The pursuit of concentrated growth is also favored by a stable market. A firm can also grow while concentrating, if it enjoys competitive advantages based on efficient production or distribution channels. Finally, the success of market generalists creates conditions favorable to concentrated growth. When generalists succeed by using universal appeals, they avoid making special appeals to particular groups of customers. Useful website: www.landsend.comRisk and Rewards of Concentrated GrowthUnder stable conditions, concentrated growth poses lower risk than any other grand strategy, but in a changing environment, a firm committed to concentrated growth faces high risks. The concentrating firm’s entrenchment in a single product market makes it particularly vulnerable to changes in the economic environment of that industry. Entrenchment in a specific product-market tends to make a concentrating firm more adept than competitors at detecting new trends.A firm pursuing a concentrated growth strategy is also vulnerable to the high opportunity costs that result from remaining in a specific product-market and ignoring other options that could employ the firm’s resources more profitably. Over commitment to a specific technology and product-market can also hinder a firm’s ability to enter a new or growing product-market that offers more attractive cost-benefit trade-offs.Concentrated Growth is Often the Most Viable OptionThe firm that chooses a concentrated growth strategy directs its resources to the profitable growth of a narrowly defined product and market, focusing on a dominant technology. The success of a concentration strategy is founded on the firm’s use of superior insights into its technology, product, and customer to obtain a sustainable competitive advantage. John Deere and Company’s home page is: www.deere.com . Exhibit 6-5 lists various options under concentrated growth.Market DevelopmentMarket development consists of marketing present products, often with only cosmetic modifications, to customers in related market areas by adding channels of distribution or by changing the content of advertising or promotion. It also allows firms to practice a form of concentrated growth by identifying new uses for existing products and new demographically, psychographically, or geographically defined markets.Product DevelopmentProduct development involves the substantial modification of existing products or the creation of new but related products that can be marketed to current customers through established channels. The product development strategy is based on the penetration of existing markets by incorporating product modifications into existing items or by developing new products with a clear connection to the existing product line.InnovationThe underlying rationale of the grand strategy of innovation is to create a new product life cycle and thereby make similar existing products obsolete. Few innovative ideas prove profitable because the research, development, and premarketing costs of converting a promising idea into a profitable product are extremely high. Exhibit 6-6 presents the risks of new product ideas.Horizontal IntegrationWhen a firm’s long-term strategy is based on growth through the acquisition of one or more similar firms operating at the same stage of the production-marketing chain, its grand strategy is called horizontal integration. Exhibit 6-7 describes Deutsche Telekom growth strategy of horizontal acquisition.Vertical IntegrationWhen a firm’s grand strategy is to acquire firms that supply it with inputs (such as raw materials) or are a customer for its outputs (such as warehouses for finished products), vertical integration is involved. Backward integration is the desire to increase the dependability of the supply or quality of the raw materials used as production inputs. Forward integration is a preferred grand strategy if great advantages accrue to stable production.Some increased risks are associated with both horizontal and vertical integration. For horizontally integrated firms, the risks stem from increased commitment to one type of business. For vertically integrated firms, the risks result from the firm’s expansion into areas requiring strategic managers to broaden the base of their competence and to assume additional responsibilities. Exhibit 6-8 depicts both horizontal and vertical integration strategies.Concentric DiversificationGrand strategies involving diversification represent distinctive departures from a firm’s existing base of operations, typically the acquisition or internal generation (spin-off) of a separate business with synergistic possibilities counterbalancing the strengths and weaknesses of the two businesses.Regardless of the approach taken, the motivations of the acquiring firms are the same: Increase the firm’s stock value. In the past, mergers have often led to increases in the stock price or the price-earnings ratio. Increase the growth rate of the firm. Make an investment that represents better use of funds than plowing them into internal growth. Improve the stability of earnings and sales by acquiring firms whose earnings and sales complement the firm’s peaks and valleys. Balance or fill out the product line. Diversify the product line when the life cycle of current products has peaked. Acquire a needed resource quickly (e.g., high-quality technology or highly innovative management). Achieve tax savings by purchasing a firm whose tax losses will offset current or future earnings. Increase efficiency and profitability, especially if there is synergy between the acquiring firm and the acquired firm.Concentric diversification involves the acquisition of businesses that are related to the acquiring firm in terms of technology, markets, or products. The ideal concentric diversification occurs when the combined company profits increase strengths and opportunities and decrease weaknesses and exposure to risk.Conglomerate DiversificationIn conglomerate diversification, the principal concern of the acquiring firm is the profit pattern of the venture. Unlike concentric diversification, conglomerate diversification gives little concern to creating product-market synergy with existing businesses.The principal deference between the two types of diversification is that concentric diversification emphasizes some commonality in markets, products, or technology, whereas conglomerate diversification is based principally on profit considerations.Unfortunately, the majority of such acquisitions fail to produce the desired results for the companies involved. Exhibit 6–9 provides seven guidelines that can improve a company’s chances of a successful acquisition. Textron’s home page is: www.textron.com TurnaroundA firm can find itself with declining profits for many reasons such as economic recessions, production inefficiencies, and innovative breakthroughs by competitors. In many cases, strategic managers believe that such a firm can survive and eventually recover if a concerted effort is made over a period of a few years to fortify its distinctive competencies. This grand strategy is known as turnaround. It is typically begun through one of two forms of retrenchment—cost reduction or asset reduction—employed singly or in combination.Strategic management research provides evidence that firms that have used a turnaround strategy have successfully confronted decline. The research findings have been assimilated and used as the building blocks for a Model of the Turnaround Process shown in Exhibit 6–10.A turnaround situation represents absolute and relative-to-industry declining performance of a sufficient magnitude to warrant explicit turnaround actions. Turnaround situations may be the result of years of gradual slowdown or months of sharp decline.The immediacy of the resulting threat to company survival posed by the turnaround situation is known as situation severity. Severity is the governing factor in estimating the speed with which the retrenchment response will be formulated and activated.Turnaround responses among successful firms typically include two stages of strategic activities: retrenchment and the recovery response. Retrenchment consists of cost cutting and asset reducing activities. The primary objective of the retrenchment phase is to stabilize the firm’s financial condition.The primary causes of the turnaround situation have been associated with the second phase of the turnaround process, the recovery response. Recovery is achieved when economic measures indicate that the firm has regained its pre-downturn levels of performance.DivestitureA divestiture strategy involves the sale of a firm or a major component of a firm. When retrenchment fails to accomplish the desired turnaround or when a non-integrated business activity achieves an unusually high market value, strategic managers often decide to sell the firm.The reasons for divestiture vary. They often arise because of partial mismatches between the acquired firm and the parent corporation, because of corporate financial needs, or because of government antitrust action.LiquidationWhen liquidation is the grand strategy, the firm is typically sold in parts, only occasionally as a whole, but for its tangible asset value and not as a going concern.BankruptcyBusiness failures are playing an increasingly important role in the American economy. In an average week, more than 300 companies fail. More than 75 percent of these financially desperate firms file for a “liquidation bankruptcy”—they agree to a complete distribution of their assets to creditors, most of who receive a small fraction of the amount that they are owed.The other 25 percent of these firms refuse to surrender until one final option is exhausted. Choosing a strategy to recapture its viability, such a company asks the courts for a “reorganization bankruptcy.” The firm attempts to persuade its creditors to temporarily freeze their claims while it undertakes to reorganize and rebuild the company’s operations more profitably.If the judgment of the owners of a business is that its decline cannot be reversed, and the business cannot be sold as a going concern, then the alternative that is in the best interest of all may be a liquidation bankruptcy, also known as the Chapter 7 of the Bankruptcy Code. The court appoints a trustee, who collects the property of the company, reduces it to cash, and distributes the proceeds proportionally to creditors on a pro rata basis as expeditiously as possible.A proactive alternative for the endangered company is reorganization bankruptcy. Chosen for the right reasons, and implemented in the right way, reorganization bankruptcy can provide a financially, strategically, and ethically sound basis on which to advance the interests of all of a firm’s stakeholders.CORPORATE COMBINATIONSThe 12 grand strategies discussed above used singly and much more often in combinations represent the traditional alternatives used by firms in the U.S. Recently, three new grand types have gained in popularity; all fit under the broad category of corporate combinations. These three newly popularized grand strategies are joint ventures, strategic alliances, and consortia.Joint VenturesJoint ventures are commercial companies (children), created and operated for the benefit of the co-owners (parents). The joint venture extends the supplier-consumer relationship and has strategic advantages for both partners.Strategic AlliancesStrategic alliances are distinguished from joint ventures because the companies involved do not take an equity position in one another. In many instances strategic alliances are partnerships that exist for a defined period during which partners contribute their skills and expertise to a cooperative project. In other instances, strategic alliances are synonymous with licensing agreements. Exhibit 6-11 presents the key issues in strategic alliance learning. Exhibit 6-12 presents the top five strategic and tactical reasons for exploiting the benefits of outsourcing.Consortia, Keiretsus, and ChaebolsConsortia are defined as large interlocking relationships between businesses of an industry. A Japanese keiretsu is an undertaking involving up to 50 different firms which are joined around a large trading company or bank and coordinated through interlocking directorates and stock exchanges. A South Korean chaebols resembles a consortia of keiretsu except that they are typically financed through government banking groups and are largely run by professional managers trained by participating firms expressly for the job. Exhibit 6-13 elaborates on the keiretsu concept. SELECTION OF LONG-TERM OBJECTIVES AND GRAND STRATEGY SETSStrategic choice is the simultaneous selection of long-range objectives and grand strategies. When strategic planners study their opportunities, they try to determine which are most likely to result in achieving various long-range objectives. Almost simultaneously, they try to forecast whether an available grand strategy can take advantage of preferred opportunities so that the tentative objectives can be met. In essence, then, three distinct but highly interdependent choices are being made at one time. Exhibit 6-14 presents a simplified example of this process.