CHAPTER TWO

Strategies in Action
 Chapter objective
– At the end of the chapter students able to know
types of strategies
– You will understand guidelines for pursuing
strategies
– Michael Porter’s generic strategies
Three Levels of Strategy in Organizations
 Strategy hierarchy
1. Corporate strategy: 1) growth strategy, 2)
stability strategy, 3) retrenchment strategy.
2. Business unit strategy: 1) cost leadership, 2)
differentiation, 3) focus, 4) mixed.
3. Functional strategy.

4
 Cont….
1.Corporate-level strategy: The level of strategy concerned
with the question “What business are we in?”
• Pertains to the organization as a whole and the
combination of business units and product lines that
make it up.
2. Business-Level Strategy: The level of strategy concerned
with the question “How do we compete?”
3. Functional-Level Strategy: The level of strategy
concerned with the question “How do we support the
business-level strategy?”
• It pertains to the major functional departments within
the business unit.
 Corporate Strategy
• Corporate strategy defines what business or businesses the firm is in or
should be in, how each business should be conducted, and how it relates to
society.
• This strategy is for the company and all of its business as a whole.
• Corporate strategies are established at the highest levels in the
organization; they generally involve a long-range time horizon and focus on
the entire organization.
• Such issues involve the basic character, capability and competence of the
firm; the direction in which it should develop its activity; the nature of its
internal architecture; governors and structure; the nature of its
relationships with its sector, its competitors and the wider environment.
• Corporate strategies usually fit within the three main categories of stability,
growth and retrenchment
 Growth strategies
Growth strategies:
They result increase in sales, market share and profit: the types:
• Internal growth: Increase internal capacity of organization
without acquiring other firms.
• Conglomerate Diversification: Acquiring unrelated business.
• Merger: Two roughly similar size firms combine into one. To
benefit of synergy.
• Strategic alliance: Temporary partnerships

7
 Corporate Restructuring
The change in a broad set of actions and decisions, e.g.,
changing relationships and organization of work.
• The aim of restructuring is to improve effectiveness.
• Restructuring could be growth, stability or retrenchment.
This depends on why we use it.

8
 Retrenchment strategies
• Types:
1- Turnaround:
Eliminating unprofitable outputs,
pruning/cutting assets, reducing size of work
force, rethinking firm’s products lines and
customer groups.
2- Divestment: sell one of business units
3- Liquidation: last resort strategy

Prof. Dr. Majed El-Farra 2009 9

 Business Strategy
• Business strategy defines how each individual
business will attempt to achieve its mission within
its chosen field of endeavor.
• This strategy referred to each separate business
unit (SBU) or strategic planning unit (SPU).
• At this level strategy two critical issues are
specified:
(1) the scope or boundaries of each business and the
operational links with corporate strategy, and
(2) the basis on which the business unit will achieve and
maintain a competitive advantage within its industry
 Functional or departmental strategy
• Functional strategy focuses on supporting the
corporate and business strategies.
• This strategy is the a strategy for each specific
functional unit within a business.
• Functional strategies primarily are concerned
with the activities of the functional areas of a
business (i.e., operations, finance, marketing,
personnel, etc.) will seaport the desired
competitive business level strategy and
complement each other.
 purchasing & materials management (as
example)
Buying materials in quantity, quality and cost
which correspond with the corp. generic
strategies (Business Unit strategies).

12
Strategies in Action

Vertical Integration Strategies

• Forward integration
• Backward integration
• Horizontal integration

13
 Strategies in Action

Forward
Integration Example

Defined • General Motors is

acquiring 10% of its
• Gaining dealers.
ownership or
increased control
over distributors
or retailers
 Strategies in Action

Guidelines for Forward Integration

 Present distributors are expensive, unreliable, or incapable of

meeting firm’s needs
 Availability of quality distributors is limited
 When firm competes in an industry that is expected to grow
markedly
 Advantages of stable production are high
 Present distributor have high profit margins

15
 Strategies in Action
Backward
Integration
Example

Defined
• Shemu acquired a
Plastic manufacturer.
• Seeking
ownership or
increased control
of a firm’s
suppliers

Prof. Dr. Majed El-Farra 2009 16

 Strategies in Action
Guidelines for Backward Integration

 When present suppliers are expensive, unreliable, or incapable

of meeting needs
 Number of suppliers is small and number of competitors large
 High growth in industry sector
 Firm has both capital and human resources to manage new
business
 Advantages of stable prices are important
 Present supplies have high profit margins

17
 Strategies in Action
Horizontal
Integration Example

• Palestinian Islamic
Defined Bank acquired Cairo-
Amman Bank Islamic
• Seeking transaction branch.
ownership or
increased control
over competitors

18
 Strategies in Action

Guidelines for Horizontal Integration

 Firm can gain monopolistic characteristics without being

challenged by federal government
 Competes in growing industry
 Increased economies of scale provide major competitive
advantages
 Faltering/losing due to lack of managerial expertise or need for
particular resources

19
Strategies in Action

Intensive Strategies

• Market penetration
• Market development
• Product development

20
 Strategies in Action
Market
Penetration
Example
Defined • Xyz comp., the on-line
broker, tripled its
• Seeking increased annual advertising
market share for expenditures to $200
present products million to convince
or services in people they can make
present markets their own investment
through greater decisions.
marketing efforts
21
 Strategies in Action

Guidelines for Market Penetration

 Current markets not saturated

 Usage rate of present customers can be increased significantly
 Market shares of competitors declining while total industry
sales increasing
 Increased economies of scale provide major competitive
advantages

22
 Strategies in Action
Market
Development

Example
Defined
• Coke introduce his
• Introducing product to totally new
present products market
or services into
new geographic
area

23
 Strategies in Action

Guidelines for Market Development

 New channels of distribution that are reliable, inexpensive, and

good quality
 Firm is very successful at what it does
 Untapped or unsaturated markets
 Capital and human resources necessary to manage expanded
operations
 Excess production capacity
 Basic industry rapidly becoming global

24
 Strategies in Action
Product
Development

Defined Example

• Seeking increased • Apple developed the

sales by improving G4 chip that runs at
present products 500 megahertz.
or services or
developing new
ones
25
 Strategies in Action

Guidelines for Product Development

 Products in maturity stage of life cycle

 Competes in industry characterized by rapid technological
developments
 Major competitors offer better-quality products at comparable
prices
 Compete in high-growth industry
 Strong research and development capabilities

26
Strategies in Action

Diversification Strategies

• Concentric diversification
• Conglomerate diversification
• Horizontal diversification

27
 Strategies in Action
Concentric
Diversification
Example

Defined • National Westminister

Bank PLC in Britain
• Adding new, but bought the leading
related, products British insurance
or services company, Legal &
General Group PLC.

28
 Strategies in Action

Guidelines for Concentric Diversification

 Competes in no- or slow-growth industry

 Adding new & related products increases sales of current
products
 New & related products offered at competitive prices
 Current products are in decline stage of the product life cycle
 Strong management team

29
 Strategies in Action
Conglomerate
Diversification
Example

Defined • Consultant
Construction
• Adding new, Engineering acquired
unrelated products Bisects factory.
or services

30
 Strategies in Action

Guidelines for Conglomerate Diversification

 Declining annual sales and profits

 Capital and managerial talent to compete successfully in a new
industry
 Financial synergy between the acquired and acquiring firms
 Exiting markets for present products are saturated

31
 Strategies in Action
Horizontal
Diversification

Defined Example

• Adding new, • The coke Co. provide

unrelated products Dasan water product
or services for to present customer
present customers

32
 Strategies in Action
Guidelines for Horizontal Diversification

 Revenues from current products/services would increase

significantly by adding the new unrelated products
 Highly competitive and/or no-growth industry w/low margins
and returns
 Present distribution channels can be used to market new
products to current customers
 New products have counter cyclical /repeating sales patterns
compared to existing products

33
Strategies in Action

Defensive Strategies

• Joint venture
• Retrenchment
• Divestiture
• Liquidation

34
 Strategies in Action

Joint Venture

Example
Defined
• Lucent Technologies
• Two or more and Philips Electronic
sponsoring firms NV formed Philips
forming a separate Consumer
organization for Communications to
cooperative make and sell
purposes telephones.

35
 Strategies in Action
Guidelines for Joint Venture

 Combination of privately held and publicly held can be

synergistically combined
 Domestic forms joint venture with foreign firm, can obtain local
management to reduce certain risks
 Distinctive competencies of two or more firms are
complementary
 Overwhelming resources and risks where project is potentially
very profitable (e.g., Alaska pipeline)
 Two or more smaller firms have trouble competing with larger
firm
 A need exists to introduce a new technology quickly

Prof. Dr. Majed El-Farra 2009 36

 Strategies in Action
Retrenchment
(turnaround)

Example
Defined
• Regrouping through
• A company sold off a
cost and asset land and 4 apartments
reduction to reverse to raise cash needed.
declining sales and It introduce expense
profit. Sometimes it is
called turnaround or
effective control
reorganizational system.
strategy.
37
 Strategies in Action
Guidelines for Retrenchment

 Firm has failed to meet its objectives and goals consistently over
time but has distinctive competencies
 Firm is one of the weaker competitors
 Inefficiency, low profitability, poor employee morale, and
pressure from stockholders to improve performance.
 When an organization’s strategic managers have failed
 Very quick growth to large organization where a major internal
reorganization is needed.

38
 Strategies in Action

Divestiture

Example
Defined
• Harcourt General, the
• Selling a division large US publisher, is
or part of an selling its Neiman
organization Marcus division.

39
 Strategies in Action
Guidelines for Divestiture

 When firm has pursued retrenchment but failed to attain

needed improvements
 When a division needs more resources than the firm can
provide
 When a division is responsible for the firm’s overall poor
performance
 When a division is a misfit with the organization
 When a large amount of cash is needed and cannot be
obtained from other sources.

40
 Strategies in Action

Liquidation

Defined Example

• Selling all of a • El-Ameer Block factory

company’s assets, sold all its assets and
in parts, for their ceased business.
tangible worth

41
 Strategies in Action

Guidelines for Liquidation

 When both retrenchment and divestiture have been pursued

unsuccessfully
 If the only alternative is bankruptcy, liquidation is an orderly
alternative
 When stockholders can minimize their losses by selling the
firm’s assets

42
Michael Porter’s Generic Strategies

Cost Leadership Strategies

(Low-Cost & Best-Value)

Differentiation Strategies

Focus Strategies
(Low-Cost Focus &
Best-Value Focus)

43
Porter’s Competitive Strategies

44
Porter’s Competitive Strategies

Cost Leadership --

– Low-cost competitive strategy

– Broad mass market
– Efficient-scale facilities
– Cost reductions
– Cost minimization

45
 Michael Porter’s Generic Strategies

• Cost leadership emphasizes producing standardized products

at a very low per-unit cost for consumers who are price-
sensitive.
• There are two types of cost leadership strategies.
• a. A low-cost strategy offers products to a wide range of
customers at the lowest price available on the market.
• b. A best-value strategy offers products to a wide range of
customers at the best price-value available on the market.

46
 Cost leadership
• Striving to be the low-cost producer in an industry
can be especially effective when the market is
composed of many price-sensitive buyers, when
there are few ways to achieve product
differentiation, when buyers do not care much about
differences from brand to brand, or when there are a
large number of buyers with significant bargaining
power.

47
 Cost leadership
• The basic idea behind a cost leadership strategy is to under
price competitors or offer a better value and thereby gain
market share and sales, driving some competitors out of
the market entirely.
• 5To successfully employ a cost leadership strategy, firms
must ensure that total costs across the value chain are
lower than that of the competition. This can be
accomplished by:
a. performing value chain activities more efficiently than
competition, and
b. eliminating some cost-producing activities in the value chain.

48
Porter’s Competitive Strategies

Differentiation –

– Broad mass market

– Unique product/service
– Premiums charged
– Less price sensitivity

6-49
 Differentiation
• Differentiation is aimed at producing products
that are considered unique. This strategy is most
powerful with the source of differentiation is
especially relevant to the target market
• A successful differentiation strategy allows a firm
to charge higher prices for its products to gain
customer loyalty because consumers may
become strongly attached to the differentiation
features.

50
 Differentiation
• A risk of pursuing a differentiation strategy is that the
unique product may not be valued highly enough by
customers to justify the higher price.
• Common organizational requirements for a successful
differentiation strategy include strong coordination
among the R&D and marketing functions and
substantial amenities to attract scientists and creative
people.
 Focus

•Focus strategies are most effective when the

niche is profitable and growing, when industry
leaders are uninterested in the niche, when
industry leaders feel pursuing the niche is too
costly or difficult, when the industry offers
several niches, and when there is little
competition in the niche segment.

52
Porter’s Competitive Strategies

Cost-Focus –
– Low-cost competitive strategy
– Focus on market segment
– Niche focused
– Cost advantage in market segment
Differentiation Focus –

– Specific group or geographic market focus

– Differentiation in target market
– Special needs of narrow target market

Stuck in the middle –

– No competitive advantage
– Below-average performance
53
.Blue Ocean Strategy
( W. Kim and R. Mauborgne )

• The best way to drive profitable growth is to

stop competing in overcrowded industries.
• In Red oceans, companies try to outperform
rivals to grab bigger slices of existing demand.
• In Blue oceans, you invent and capture new
demand, and you offer customers a leap in
value while also streamlining your costs.

54
 Red ocean strategy Blue ocean strategy

• Compete in existing • Create uncontested

market space market space.
• Beat the competition • Make the competition
• Exploit existing demand irrelevant.
• Make the value/cost • Create and capture new
trade-off demand.
• Align the whole system • Break the value/cost
of a company’s activities trade-off.
with its strategic choice • Align the whole system
of differentiation or low of a company’s activities
cost in pursuit of
differentiation and low
cost.
55
Blue Ocean Strategy as the Simultaneous Pursuit of
Differentiation and Low Cost

56
 Kim and Mauborgne suggest the following towards creating blue
oceans
• UNDERSTAND THE LOGIC BEHIND BLUE OCEAN STRATEGY: The
logic behind blue ocean strategy is counterintuitive:
– It’s not about technology innovation. Blue oceans seldom result
from technological innovation. Often, the underlying technology
already exists—and blue ocean creators link it to what buyers
value.
– You don’t have to venture into distant waters to create blue
oceans. Most blue oceans are created from within, not beyond,
the red oceans of existing industries. Incumbents often create
blue oceans within their core businesses.
• APPLY BLUE OCEAN STRATEGIC MOVES: To apply blue ocean
strategic moves:
– Never use the competition as a benchmark.
– Reduce your costs while also offering customers more value.
57