Strategic Management CHAPTER-five
Strategic Management CHAPTER-five
Strategic Management CHAPTER-five
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Strategy evolves over a period of time: There are different forces that drive
and constrain strategy and that must be balanced in any strategic decision. An
important aspect of strategic analyses is to consider the possible implications
of routine decisions. Strategy of a business, at a particular point of time, is
result of a series of small decisions taken over an extended period of time. A
manager who makes an effort to increase the growth momentum of an
organization is materially changing strategy.
Balance: The process of strategy formulation is often described as one of the
matching the internal potential of the organization with the environmental
opportunities. In reality, as perfect match between the two may not be feasible,
strategic analyses involve a workable balance between diverse and conflicting
considerations. A manager working on a strategic decision has to balance
opportunities, influences and constraints. There are pressures that are driving
towards a particular choice such as entering a new market. Simultaneously
there are constraints that limit the choice such as existence of a big
competitor. These constraining forces will be producing an impact that will
vary in nature, degree, magnitude and importance. Some of these factors can
be managed to some extent, however, there will be several others that are
beyond the control of a manager.
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risks and assess their consequences. A broad classification of the strategic risk
that requires consideration in strategic analyses is given below:
Also called Grand strategies, master strategies are intended to provide basic
direction for strategic actions. It is a firm's theory of how to gain competitive
advantage by operating in several businesses simultaneously. Grand strategies
are basically about the choice of direction that a firm adopts in order to achieve
its objectives. Is about the basic direction of the firm as a whole.
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A corporate-level strategy is an action taken to gain a competitive advantage
through the selection & management of a mix of businesses competing in
several industries or product markets. It is concerned with two key questions:
What business should the firm be in?, How should the corporate office manage
its group of businesses?
These grand strategies (major Corporate Strategies) can be:
a) Growth strategies - expand the company's activities.
b) Stability strategy - make no change to the company’s current activities.
c) Defensive/decline strategy – reduce the company’s levels of activities.
d) Combination Strategy
a. Growth Strategies
Sometimes called expansion strategies: Growth is a way of life. Almost all
organizations plan to expand, hence it is the most popular strategy in
practical world. The expansion grand strategy is followed when an
organization aims at high growth by substantially broadening its scope in
order to improve its overall performance. A growth strategy is one that an
enterprise pursues when it increases its performance upward significantly
much higher than an exploration of its past achievement level. Growth
Strategies involve the attainment of specific growth objectives by increasing
the level of a firm’s operations. Typical growth objectives for businesses
include: Increase in sales revenues, Increase in earnings or profits and other
performance measures.
Types of Growth Strategy
The following section discuss the different forms of growth strategies.
Expansion through Concentration.
Expansion through Diversification.
Expansion through Integration.
Expansion through Internationalization.
Concentration Strategy (Concentric Expansion)/intensive
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Advantages:
Based on known competencies & same experience
Lowest in risk & additional resources.
Disadvantages:
Slow increases in growth & profitability.
Narrow range of investment options.
It Includes:
Market penetration
Market development, and/or
Product development
Market Development
F Introducing present products or services into new geographic areas.
F The climate for international market development is becoming more
favorable.
F In many industries, such as airlines, it is going to be hard to maintain a
competitive edge by staying close to home.
Attracting other market segments through:
Developing product versions to appeal to other segments.
Entering other channels of distribution.
Advertising in other media
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F Capital and human resources necessary to manage expanded operations
F Excess production capacity
F Basic industry rapidly becoming global
Product Development
A strategy that seeks increased sales by improving or modifying present
products or services.
It usually entails large research and development expenditures.
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F Rapid market penetration: based on two assumptions:
o To lower the price and promotional activities can be increased.
Diversification Strategy
It involves the addition of a business related, but not similar, to the firm in
terms of technology, markets or products. It is seeking growth with new market
& product having meaningful synergy or fit with existing business. There is
some commonality in markets, products, or technology.
F An example of this strategy is AT&T recently spending $120 billion
acquiring cable television companies in order to wire America with fast
Internet service over cable rather than telephone lines.
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F Declining annual sales and profits
F Capital and managerial talent to compete successfully in a new industry
F Financial synergy between the acquired and acquiring firms
F Exiting markets for present products are saturated.
Horizontal Diversification
F Adding new, unrelated products or services for present customers
F This strategy is not as risky as conglomerate diversification because a
firm already should be familiar with its present customers.
Guidelines for Horizontal Diversification
F Revenues would increase by adding new unrelated products
F Highly competitive and/or no-growth industry with low margins and
returns
F Present distribution channels can be used to market new products to
current customers
F New products have counter cyclical sales patterns compared to
existing products
Major Reasons for Diversification
Antitrust regulation.
Tax laws
Low performance
Uncertain future cash flows
Risk reduction for firm
Tangible resources
Intangible resources
Managerial motives for diversification may lead to value reduction.
Diversifying managerial employment risk.
Increasing managerial compensation.
Means of Diversification.
All the previously discussed growth strategies could be implemented
either through internal growth or through acquisition, merger, or joint
ventures.
Internal Growth
Internal growth occurs when a company expands its current market
share, its markets, or its products through the use of internal resources.
Internal growth is generally slower and less traumatic for the
organization. It usually takes place over an extended period, allowing
time to adjust to the change.
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Although exceptions exist, internal growth is generally less risky than an
acquisition or a merger. This is because growth, through internal means,
is incremental and can be terminated at any time.
Thus, if an organization determines that an expansion is not working
out, the project can be dropped.
Generally speaking, internal growth strategies work well for companies
want to grow via product development or market development.
Integration Strategy
2. Horizontal integration
Horizontal integration refers to involvement in a business operating at the
same stage of the production-marketing chain.
Horizontal integration occurs when an organization adds one or more
businesses that produce similar products or services and that are operating at
the same stage in the product market chain. Almost all horizontal integration is
accomplished by buying another organization in the same business.
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Merger and Acquisition
Merger – is a strategy through which two or more firms agree to integrate
their operations on a relatively co-equal basis.
Therefore, in merger, a single new company will be established
with new name, organizational structure, issuing new stock &
other changes. However, the shareholders of the former firms will
become shareholders of the new enlarged organization.
Acquisition – a strategy through which one firm buys a controlling of
100% interest in another firm with the intent of making the acquired firm
a subsidiary business within its portfolio. Therefore, an acquisition is
marriage of unequal partners with one organization buying the other.
The shareholders of the acquired firm cease to be owners of the acquiring
company – unless payment is effect in terms of shares.
o What are the main reasons of an acquisition or merger strategy?
The main reasons why firms use these strategies is to achieve
strategic competitiveness & earn above average returns.
These can be achieved through increasing the market value of the
stock – synergistic effect.
There could be other reasons:
Securing or protecting sources of raw materials/components.
To gain access to distribution channels.
To make use of underutilized resources of the company.
To increase market power – horizontal, vertical & related
acquisitions.
To enter a new market, offer new products & avoiding cost of new
product development (Acquisition as substitute for innovation).
To overcome entry barriers (Cross-border acquisitions) etc.
b. Stability Strategy
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Resources has been exhausted because of earlier growth strategies.
c. Defensive Strategies
Defensive Strategies most often used as a short-term solution to:
Reverse a negative trend.
Overcome a crisis or problem situation.
It could be classified into decline & closure strategies.
Reasons:
The company faced financial problems – certain parts of the
organization are doing poorly.
The company forecasts hard times ahead related to:
o Challenges from new competitors & products.
o Changes in government regulations
Owners are tired of the business or have to have an opportunity to
profit substantially by selling.
It includes:
Retrenchment,
Harvesting,
Divestiture
Liquidation
a. Retrenchment strategy
F Occurs when an organization regroups through cost and asset reduction
to reverse declining sales and profits.
F Sometimes called a turnaround or reorganization strategy
F Is designed to fortify an organization's basic distinctive competence.
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F In this case the firm limits additional investment & expenses but
maximizes short-term profit & cash flow through maintaining market
share over the short-run.
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it occurs when an entire company is either sold or dissolved either by choice
or force.
o When by choice, it can be because the owners are tired of the
business or near retirement; the organization’s future prospect is
not good and sell at this time.
o When by force, the decision often occurs because of a deteriorated
financial condition.
e. Joint Venture
F Two or more companies form a temporary JOINT for purpose of
capitalizing on some opportunity.
F The two or more sponsoring firms form a separate organization and
have shared equity ownership in the new entity.
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F What customer needs, wishes, and desires will we satisfy?
F Why do we want to satisfy them?
F How will we satisfy our customers’ needs?
Generic Business Strategies
▲ There are two fundamentally different generic business strategies—
differentiation and cost leadership.
1. A differentiation strategy seeks to create higher value for customers
than the value that competitors create, by delivering products or services
with unique features while keeping costs at the same or similar levels.
This strategy emphasizes on efficiency. By producing high volumes of
standardized products, the firm hopes to take advantage of economies of
scale. The product is a basic economic product produced at a relatively
low cost and made available to a very large customer base.
Maintaining this strategy requires:-
o A continuous search for cost reductions.
o Most extensive distribution possible.
o Promotional strategy shall cover low cost product features.
o A considerable market share advantage.
o Referential access to raw materials, components, labor, or some
other important input.
2. A cost-leadership strategy, in contrast, seeks to create the same or
similar value for customers by delivering products or services at a lower
cost than competitors, enabling the firm to offer lower prices to its
customers. It involves creating a product that is perceived as unique. The
unique features or benefits should provide superior value for the
customer if this strategy is to be successful. Because customers see the
product as unrivaled and unequaled, the price elasticity of demand tends
to be reduced and customers tend to be more brands loyal. May require a
premium pricing strategy. There must be a valid basis for differentiation
- and that existing competitor products are not meeting those needs and
wants.
3. Focus strategies
F In this strategy the firm concentrates on selected few target markets. It
is also called a niche strategy. Helps to better meet the needs of that
target market. The firm typically looks to gain a competitive advantage
through effectiveness rather than efficiency. It is most suitable for
relatively small firms but can be used by any company.
F Firms shall select targets that are less vulnerable to substitutes
Industry segment of sufficient size
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Good growth potential
Not crucial to success of major competitors
Consumers have distinctive preferences
Rival firms not attempting to specialize in the same target segment.
Niche strategies
Here the organization focuses its effort on one particular segment and becomes
well known within the segment.
Competitive advantage for this niche market can be obtained by either being a
low cost producer or differentiator.
Criticisms of Generic Strategies
lack specificity,
lack flexibility, and
Are limiting.
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F Summarizes the basic input information needed to formulate strategies.
• Stage-2 (Matching stage)
Focuses upon generating feasible alternative strategies by aligning key
external and internal factors. its techniques includes
1. TWOS Matrix (Threats-Opportunities-Weaknesses-Strengths)
2. BCG Matrix (Boston Consulting Group)
3. IE Matrix (Internal and external matrix)
• Stage-3 (Decision stage)
• Involves a single technique, the Quantitative Strategic Planning Matrix
(QSPM).
• A QSPM uses input information from Stage 1 to objectively evaluate
feasible alternatives identified in Stage 2.
• It reveals the relative attractiveness of strategies and, thus, provides an
objective basis for selecting specific strategies.
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WO Strategies: aim at improving internal weaknesses by taking advantage of
external opportunities.
F For example: the firm is in the critical financial problems that is
weakness and firm is availing merger with Multinational Corporation.
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A. Cash cows
F Units with high market share in a slow-growing industry.
F These units typically generate cash in excess of the amount of cash
needed to maintain the business.
F They are regarded as staid and boring, in a "mature" market, and every
corporation would be thrilled to own as many as possible.
F They are to be "milked" continuously with as little investment as
possible, since such investment would be wasted in an industry with low
growth.
B. Dogs
F More charitably called pets, units with low market share in a mature,
slow-growing industry.
F These units typically "break even", generating barely enough cash to
maintain the business's market share.
F Though owning a break-even unit provides the social benefit of
providing jobs and possible synergies that assist other business units,
from an accounting point of view such a unit is worthless, not
generating cash for the company.
F They depress a profitable company's return on assets ratio, used by
many investors to judge how well a company is being managed.
F Dogs, it is thought, should be sold off.
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C. Question marks
F Units with low market share in a fast-growing industry. Such
business units require large amounts of cash to grow their market
share. The corporate goal must be to grow the business to become a
star. Otherwise, when the industry matures and growth slows, the
unit will fall down into the dog’s category.
D. Stars
F Units with a high market share in a fast-growing industry. The hope
is that stars become the next cash cows. Sustaining the business
unit's market leadership may require extra cash, but this is
worthwhile if that's what it takes for the unit to remain a leader.
When growth slows, stars become cash cows if they have been able to
maintain their category leadership
The BCG Matrix-Strategic Actions
As a particular industry matures and its growth slows, all business units
become either cash cows or dogs. The overall goal of this ranking was to
help corporate analysts decide which of their business units to fund, and
how much; and which units to sell. Managers use money generated by
the cash cows to fund the stars and, possibly, the question marks. As
the BCG stated in 1970: Only a diversified company with a balanced
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portfolio can use its strengths to truly capitalize on its growth
opportunities.
The balanced portfolio has:
F Stars whose high share and high growth assure the future;
F Cash cows that supply funds for that future growth; and
F Question marks to be converted into stars with added fund.
Limitations
Viewing every business as a star, cash cow, dog, or question mark is overly
simplistic. Many businesses fall right in the middle of the BCG matrix and
thus are not easily classified. The BCG matrix does not reflect whether or not
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various divisions or their industries are growing over time. That is, the matrix
has no temporal qualities, but rather it is a snapshot of an organization at a
given point in time. Other variables besides relative market share position and
industry growth rate in sales are overlooked.
3. The Internal-External (IE) Matrix
It is related to internal (IFE) and external factor evaluation (EFE). It contains
nine cells. (Positions for divisions). It is developed based on two key
dimensions. Those are:-
F The IFE total weighted scores on the x-axis.
F The EFE total weighted scores on the y-axis.
The total weighted scores of both matrices derived from the divisions allow
construction of the corporate-level IE Matrix.
On the x-axis of the IE Matrix, an IFE total weighted score of 1.0 to 1.99
represents a weak internal position; a score of 2.0 to 2.99 is considered
average; and a score of 3.0 to 4.0 is strong.
Similarly, on the y-axis, an EFE total weighted score of 1.0 to 1.99 is
considered low; a score of 2.0 to 2.99 is medium; and a score of 3.0 to 4.0 is
high.
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4. MICHAEL PORTER'S GENERIC STRATEGIES
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• This strategy emphasizes on efficiency.
• By producing high volumes of standardized products, the firm hopes to
take advantage of economies of scale.
• The product is a basic economic product produced at a relatively low cost
and made available to a very large customer base.
• Maintaining this strategy requires:-
– a continuous search for cost reductions
– Most extensive distribution possible.
– Promotional strategy shall cover low cost product features.
– a considerable market share advantage
– Referential access to raw materials, components, labor, or some
other important input.
2. Differentiation Strategies;
F It involves creating a product that is perceived as unique.
F The unique features or benefits should provide superior value for the
customer if this strategy is to be successful.
F Because customers see the product as unrivaled and unequaled, the
price elasticity of demand tends to be reduced and customers tend to be
more brands loyal.
F May require a premium pricing strategy.
F There must be a valid basis for differentiation - and that existing
competitor products are not meeting those needs and wants.
3. Focus Strategies
In this strategy the firm concentrates on selected few target markets. It is also
called a niche strategy.
Helps to better meet the needs of that target market.
The firm typically looks to gain a competitive advantage through effectiveness
rather than efficiency.
It is most suitable for relatively small firms but can be used by any company.
Firms shall select targets that are less vulnerable to substitutes
F Industry segment of sufficient size
F Good growth potential
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F Not crucial to success of major competitors
F Consumers have distinctive preferences
F Rival firms not attempting to specialize in the same target segment
Niche strategies.
Here the organization focuses its effort on one particular segment and becomes
well known within the segment.
Competitive advantage for this niche market can be obtained by either being a
low cost producer or differentiator.
Criticisms of Generic Strategies
F lack specificity,
F lack flexibility, and
F Are limiting.
Customer Perspective
F How customers view the organization, as well as customer retention and
satisfaction.
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F Focuses on production and operating statistics, internal operations and
core competencies.
McKinsey 7S Model
F This model was developed in the 1980's by Robert Waterman, Tom Peters
and Julien Philips whilst working for McKinsey.
F Intellectually all managers and consultants know that much more goes
on in the process of organizing than the charts, boxes, dotted lines,
position descriptions, and matrices can possibly depict.
F Diagnosing and solving organizational problems means looking not
merely to structural reorganization but to a framework that includes
structure and related factors.
F The 7S Model which they developed is one of the cornerstones of
organizational analysis.
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Essentially the model says that any organization can be best described by the
seven interrelated elements shown above:
Strategy
Plans for the allocation of a firm's resources to reach goals. (Environment,
competition, customers).
Structure
The way the organization's units relate to each other: centralized, functional
divisions; matrix, decentralized (the trend in larger organizations); network,
holding.
Systems
The procedures, processes and routines that characterize how important work
is to be done: (financial systems; hiring, promotion, PA systems; information
systems).
Skills
Distinctive capabilities of personnel or of the organization as a whole.
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Staff
Numbers and types of personnel within the organization.
Style
Cultural style of the organization and how key managers behave in achieving
the organization’s goals.
Shared Value
The interconnecting center of McKinsey's model is: Shared Values. What the
organization stands for and what it believes in.
THE END
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