Types of Strategies

1. Types of Strategies Level of strategies Prof. Dr. Majed El-Farra 2009

2. Strategy hierarchy • Corporate strategy: 1) growth strategy, 2) stability strategy, 3) retrenchment strategy. • Business unit strategy: 1) cost leadership, 2) differentiation, 3) focus, 4) mixed. • Functional strategy. Prof. Dr. Majed El-Farra 2009

3. Types of Strategies Corp Level A Large Company Division Level Functional Level Operational Level

4. Functional Level Operational Level Types of Strategies company A small Company

5. Corporate strategies • Top level management formulate for overall organization • The question at the corporate level we should answer when design strategies: In what industry should we be operating? • It depends on the outcome of SWOT analysis. Prof. Dr. Majed El-Farra 2009

6. 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 Prof. Dr. Majed El-Farra 2009

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. Prof. Dr. Majed El-Farra 2009

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. Strategies in Action • Vertical Integration Strategies • Forward integration • Backward integration • Horizontal integration Prof. Dr. Majed El-Farra 2009

10. Strategies in Action • Example • General Motors is acquiring 10% of its dealers. Forward Integration • Defined • Gaining ownership or increased control over distributors or retailers Prof. Dr. Majed El-Farra 2009

11. 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 Prof. Dr. Majed El-Farra 2009

12. Strategies in Action • Example • Motel 8 acquired a furniture manufacturer. Backward Integration • Defined • Seeking ownership or increased control of a firm’s suppliers Prof. Dr. Majed El-Farra 2009

13. 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 Prof. Dr. Majed El-Farra 2009

14. Strategies in Action Horizontal Integration • Example • Palestinian Islamic Bank acquired Cairo-Amman Bank Islamic transaction branch. • Defined • Seeking ownership or increased control over competitors Prof. Dr. Majed El-Farra 2009

15. 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 Prof. Dr. Majed El-Farra 2009

16. Strategies in Action • Intensive Strategies • Market penetration • Market development • Product development Prof. Dr. Majed El-Farra 2009

17. Strategies in Action Market Penetration • Example • Ameritrade, the on-line broker, tripled its annual advertising expenditures to $200 million to convince people they can make their own investment decisions. • Defined • Seeking increased market share for present products or services in present markets through greater marketing efforts Prof. Dr. Majed El-Farra 2009

18. 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 Prof. Dr. Majed El-Farra 2009

19. Strategies in Action Market Development • Example • Khuzendar Tiles maker introduce his product to Gulf markets. • Defined • Introducing present products or services into new geographic area Prof. Dr. Majed El-Farra 2009

20. 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 Prof. Dr. Majed El-Farra 2009

21. Strategies in Action Product Development • Example • Apple developed the G4 chip that runs at 500 megahertz. • Khuzendar Tiles maker introduce Ceramic as a new product. • Defined • Seeking increased sales by improving present products or services or developing new ones Prof. Dr. Majed El-Farra 2009

22. 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 Prof. Dr. Majed El-Farra 2009

23. Strategies in Action • Diversification Strategies • Concentric diversification • Conglomerate diversification • Horizontal diversification Prof. Dr. Majed El-Farra 2009

24. Strategies in Action • Example • National Westminister Bank PLC in Britain bought the leading British insurance company, Legal & General Group PLC. Concentric Diversification • Defined • Adding new, but related, products or services Prof. Dr. Majed El-Farra 2009

25. 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 Prof. Dr. Majed El-Farra 2009

26. Strategies in Action • Example • Consultant Construction Engineering acquired Bisects factory. Conglomerate Diversification • Defined • Adding new, unrelated products or services Prof. Dr. Majed El-Farra 2009

27. 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 Prof. Dr. Majed El-Farra 2009

28. Strategies in Action Horizontal Diversification • Example • The El-Awda Co. provide ice-cream product to present customer • Defined • Adding new, unrelated products or services for present customers Prof. Dr. Majed El-Farra 2009

29. 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 sales patterns compared to existing products Prof. Dr. Majed El-Farra 2009

30. Strategies in Action • Defensive Strategies • Joint venture • Retrenchment • Divestiture • Liquidation Prof. Dr. Majed El-Farra 2009

31. Strategies in Action Joint Venture • Example • Lucent Technologies and Philips Electronic NV formed Philips Consumer Communications to make and sell telephones. • Defined • Two or more sponsoring firms forming a separate organization for cooperative purposes Prof. Dr. Majed El-Farra 2009

32. 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

33. Strategies in Action Retrenchment (turnaround) • Example • A company sold off a land and 4 apartments to raise cash needed. It introduce expense effective control system. • Defined • Regrouping through cost and asset reduction to reverse declining sales and profit. Sometimes it is called turnaround or reorganizational strategy. Prof. Dr. Majed El-Farra 2009

34. 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. Prof. Dr. Majed El-Farra 2009

35. Strategies in Action Divestiture • Example • Harcourt General, the large US publisher, is selling its Neiman Marcus division. • Defined • Selling a division or part of an organization Prof. Dr. Majed El-Farra 2009

36. 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. Prof. Dr. Majed El-Farra 2009

37. Strategies in Action Liquidation • Example • El-Ameer Block factory sold all its assets and ceased business. • Defined • Selling all of a company’s assets, in parts, for their tangible worth Prof. Dr. Majed El-Farra 2009

38. 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 Prof. Dr. Majed El-Farra 2009

39. Michael Porter’s Generic Strategies Cost Leadership Strategies (Low-Cost & Best-Value) DifferentiationStrategies Focus Strategies(Low-Cost Focus & Best-Value Focus) Prof. Dr. Majed El-Farra 2009

40. Business Unit Strategies • Here we answer the question: How should we compete in the chosen industry? Cost leadership Differentiation (real or perceived). Mixed Focus Prof. Dr. Majed El-Farra 2009

41. Business Strategy Focuses on improving competitive position of company’s products or services within the specific industry or market segment Prof. Dr. Majed El-Farra 2009

42. Porter’s Competitive Strategies • Competitive Strategy -- • Low cost • Differentiation • Direct competition • Focus on niche Prof. Dr. Majed El-Farra 2009

43. Porter’s Competitive Strategies • Generic Competitive Strategies -- • Lower Cost strategy • Greater efficiencies than competitors • Differentiation strategy • Unique/superior value, quality, features, service Prof. Dr. Majed El-Farra 2009

44. Porter’s Competitive Strategies • Competitive Advantage -- • Determined by Competitive Scope • Breadth of the target market Prof. Dr. Majed El-Farra 2009

45. Porter’s Competitive Strategies Prof. Dr. Majed El-Farra 2009

46. Prof. Dr. Majed El-Farra 2009

47. Porter’s Competitive Strategies • Cost Leadership -- • Low-cost competitive strategy • Broad mass market • Efficient-scale facilities • Cost reductions • Cost minimization Prof. Dr. Majed El-Farra 2009

48. 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. Prof. Dr. Majed El-Farra 2009

49. 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. Prof. Dr. Majed El-Farra 2009

50. Cost leadership • The basic idea behind a cost leadership strategy is to underprice competitors or offer a better value and thereby gain market share and sales, driving some competitors out of the market entirely. • 5. To 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. Prof. Dr. Majed El-Farra 2009