Session 13 14 Concluding discussion of grand strategies

Session 13 & 14 Concluding discussion of grand strategies 1 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Remember for the Case Three Scenarios: Worst, Best, Most Likely l Long Term Objective (same for each) l Two Competitive Options l Each Containing: Corporate Level Strategy Alternative Business Level Strategy Alternative Generic Theme Package of (3 -6) Grand Strategies l 2 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Types of Grand Strategies Concentrated Growth Conglomerate Diversification Market Development Turnaround Product Development Divestiture Innovation Liquidation Horizontal Integration Bankruptcy Vertical Integration Joint Ventures Concentric Diversification Strategic Alliances Consortia Irwin/Mc. Graw-Hill 3 © 2000 The Mc. Graw-Hill Companies, Inc.

Concentrated Growth l Concentrated growth directs its resources to the profitable growth of a single product, in a single market, with a single dominant technology 4 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Market Development l l l Market development commonly ranks second only to concentration as the least costly and least risky of the 15 grand strategies It 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 Frequently, changes in media selection, promotional appeals, and distribution are used to initiate this approach 5 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Product Development l Product 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 6 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Innovation l l l These companies seek to reap the initially high profits associated with customer acceptance of a new or greatly improved product Then, rather than face stiffening competition as the basis of profitability shifts from innovation to production or marketing competence, they search for other original or novel ideas The underlying rationale of the grand strategy of innovation is to create a new product life cycle and thereby make similar existing products obsolete 7 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Horizontal Integration l l When 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 Such acquisitions eliminate competitors and provide the acquiring firm with access to new markets 8 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Vertical Integration l l When a firm’s grand 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), vertical integration is involved The main reason for backward integration is the desire to increase the dependability of the supply or quality of the raw materials used as production inputs 9 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Vertical and Horizontal Integration 10 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Concentric Diversification l l l Concentric diversification involves the acquisition of businesses that are related to the acquiring firm in terms of technology, markets, or products With this grand strategy, the selected new businesses possess a high degree of compatibility with the firm’s current businesses The ideal concentric diversification occurs when the combined company profits increase the strengths and opportunities and decrease the weaknesses and exposure to risk 11 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Conglomerate Diversification l l l Occasionally a firm, particularly a very large one, plans acquire a business because it represents the most promising investment opportunity available. This grand strategy is commonly known as 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 productmarket synergy with existing businesses 12 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Turnaround The firm finds itself with declining profits l Among the reasons are economic recessions, production inefficiencies, and innovative breakthroughs by competitors l Strategic managers often believe the firm can survive and eventually recover if a concerted effort is made over a period of a few years to fortify its distinctive competences. This is turnaround. l Two forms of retrenchment: l l Cost reduction Asset reduction 13 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Elements of Turnaround l l A turnaround situation represents absolute and relative-toindustry declining performance of a sufficient magnitude to warrant explicit turnaround actions The immediacy of the resulting threat to company survival is known as situation severity Turnaround responses among successful firms typically include two stages of strategic activities: retrenchment and the recovery response The primary causes of the turnaround situation have been associated with the second phase of the turnaround process, the recovery response 14 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Divestiture l l l A 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 nonintegrated business activity achieves an unusually high market value, strategic managers often decide to sell the firm Reasons for divestiture vary 15 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Liquidation l l When liquidation is the grand strategy, the firm typically is sold in parts, only occasionally as a whole—but for its tangible asset value and not as a going concern Planned liquidation can be worthwhile 16 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Bankruptcy l l l Liquidation bankruptcy—agreeing to a complete distribution of firm assets to creditors, most of whom receive a small fraction of the amount they are owed Reorganization bankruptcy—the managers believe the firm can remain viable through reorganization Two notable types of bankruptcy l l Irwin/Mc. Graw-Hill Chapter 7 Chapter 11 17 © 2000 The Mc. Graw-Hill Companies, Inc.

Joint Ventures l l l Occasionally two or more capable firms lack a necessary component for success in a particular competitive environment The solution is a set of joint ventures, which are commercial companies (children) created and operated for the benefit of the co-owners (parents) The joint venture extends the supplierconsumer relationship and has strategic advantages for both partners 18 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Strategic Alliances l l l Strategic alliances are distinguished from joint ventures because the companies involved do not take an equity position in one another In some instances, strategic alliances are synonymous with licensing agreements Outsourcing arrangements vary 19 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

Consortia, Keiretsus, and Chaebols l l l Consortia are defined as large interlocking relationships between businesses of an industry In Japan such consortia are known as keiretsus, in South Korea as chaebols Their cooperative nature is growing in evidence as is their market success 20 Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

21 Chapter 8 Strategic Analysis and Choice in Single- or Dominant. Product Businesses: Building Sustainable Competitive Advantages Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

22 Chapter 8 Concerned with Proper Selection of Business Level Generic and Grand Strategy Alternatives Based on your SWOT analysis which of the Generic and Grand Strategies are you better equipped – resources wise – to successfully implement? Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

23 Key Issues: Strategic Choice in Single Businesses 1. What strategies are most effective at building sustainable competitive advantages for single business units? 2. Should dominant-product/service businesses diversify to build value and competitive advantage? What grand strategies are most appropriate? Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

24 Prominent Sources of Competitive Advantage Cost leadership Sources of competitive advantage Differentiation Speed Market focus Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

25 Evaluating A Business’s Cost Leadership Opportunities A. Skills and Resources Fostering Cost Leadership • Sustained capital investment and access to capital • Process engineering skills • Intense supervision of labor or core technical operations • Products or services designed for ease of manufacture or delivery • Low-cost distribution system B. Organizational Requirements Supporting Cost Leadership • Tight cost control • Frequent, detailed control reports • Continuous improvement and benchmarking orientation • Structured organization and responsibilities • Incentives based on meeting strict, usually quantitative targets Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

26 Evaluating A Business’s Cost Leadership Opportunities -C. Examples of Ways Businesses Achieve Competitive Advantage Process innovations lowering production costs Product redesign to reduce number of components Safety training for all employees reduces absenteeism, downtime, and accidents Technology development Human resource management Irwin/Mc. Graw-Hill Operations ce Marketing & sales rvi Outbound logistics Se Computerized routing lowers transportation expense ma Inbound logistics Economy of scale in plant reduces equipment costs and depreciation service technicians repair product correctly first time or bear costs r g in Global, online suppliers provide automatic restocking of orders based on sales Cooperative advertising with distributors creates local cost advantage in buying media space and time t Favorable long-term contracts; captive suppliers or key customer for supplier Procurement Subcontracted ofi Pr Reduced levels of management Computerized, integrated information General cuts corporate overhead system reduces errors and costs administration © 2000 The Mc. Graw-Hill Companies, Inc.

27 Advantages of a Cost Leadership Strategy Low-cost advantages reduce likelihood of pricing pressure from buyers Sustained low-cost advantages may push rivals into other areas, lessening price competition New entrants must face an entrenched cost leader without experience to replicate cost advantages Low-cost advantages should lessen attractiveness of substitutes Higher margins allow low-cost producers to withstand supplier cost increases Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

28 Key Risks of Cost Leadership Many cost-saving activities are easily duplicated Exclusive cost leadership can become a trap Obsessive cost cutting can shrink other competitive advantages involving key product attributes Cost differences often decline over time Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

29 Evaluating A Business’s Differentiation Opportunities A. Skills and Resources Fostering Differentiation • • Strong marketing abilities Product engineering Creative talent and flair Strong capabilities in basic research Corporate reputation for quality or technological leadership Long tradition in an industry or unique combination of skills Strong cooperation from channels and suppliers of major components B. Organizational Requirements Supporting Differentiation • Strong coordination among functions in R&D, product development, and marketing • Subjective measurement and incentives instead of quantitative measures • Amenities to attract highly skilled labor, scientists, and creative people • Tradition of closeness to key customers • Some personnel skilled in sales and operations - technical and marketing Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

30 Evaluating A Business’s Differentiation Opportunities -C. Examples of Ways Businesses Achieve Competitive Advantage Cutting edge production technology and product features to maintain a distinct image and actual product Technology development Programs to ensure technical competence of sales staff and marketing orientation of service personnel Human resource management ce Marketing & sales rvi Outbound logistics Se Expensive, informative advertising and promotion to build brand image ma Irwin/Mc. Graw-Hill Operations JIT coordination with buyers; use of own or captive transportation service to ensure timeliness t Inbound logistics Careful inspection of products at each step in production to improve performance and lower defect rates r g in Purchase superior quality, wellknown components, raising quality and image of final products Procurement Allowing service personnel considerable discretion to credit customers for repairs ofi Quality control presence at key supplier facilities; work with suppliers’ new product development activities Pr Comprehensive, personalized database to build knowledge of customers General to be used in customizing how products are sold, serviced, and replaced administration © 2000 The Mc. Graw-Hill Companies, Inc.

31 Advantages of a Differentiation Strategy Rivalry is reduced when a business successful differentiates itself Buyers are less sensitive to prices for effectively differentiated products Brand loyalty is hard for new entrants to overcome Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

32 Key Risks of Differentiation Imitation narrows perceived differentiation, rendering differentiation meaningless Technological changes that nullify past investments or learning Cost difference between low-cost competitors and the differentiated business becomes too great for differentiation to hold brand loyalty Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

33 Creating a Competitive Advantage Based on Speed l Has become a major source of competitive advantage for many firms l Involves the availability of a rapid response to customers by l Providing current products quicker l Accelerating new product development or improvement l Quickly adjusting production processes l Making decisions quickly Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

34 Evaluating A Business’s Rapid Response Opportunities • • A. Skills and Resources Fostering Speed Process engineering skills Excellent inbound and outbound logistics Technical people in sales and customer service High levels of automation Corporate reputation for quality or technical leadership Flexible manufacturing capabilities Strong downstream partners Strong cooperation from suppliers of major components B. Organizational Requirements Supporting Rapid Response • Strong coordination among functions in R&D, product development, and marketing • Major emphasis on customer satisfaction in incentive programs • Strong delegation to operating personnel • Tradition of closeness to key customers • Some personnel skilled in sales and operations - technical and marketing • Empowered customer service personnel Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

35 Evaluating A Business’s Rapid Response Opportunities -C. Examples of Ways Businesses Achieve Competitive Advantage Human resource management Operations Outbound logistics Marketing & sales ce Use of laptops linked directly to operations to speed the order process and shorten the sales cycle ma Irwin/Mc. Graw-Hill JIT delivery plus partnering with express mail services to ensure very rapid delivery t Inbound logistics Standardize dies, components, and production equipment to allow quick changeover to new or special orders r g in Working very closely with suppliers to include their choice of warehouse location to minimize delivery time Procurement Locate service technicians at customer facilities that are geographically close ofi Preapproved, online suppliers integrated into production General administration Pr Highly automated and integrated information processing system; include major buyers in the systems on a real-time basis rvi Develop self-managed work teams and decision making at lowest levels to increase responsiveness Technology development Se Use of companywide technology sharing activities and autonomous product development teams to speed new product development © 2000 The Mc. Graw-Hill Companies, Inc.

36 Advantages of a Speed-Based Strategy Creates a way to lessen rivalry because firm has the availability of something a rival may not Allows firm to charge buyers more, engender loyalty, or enhance its’ position relative to its buyers Generates cooperation and concessions from suppliers since they benefit from increased revenues Substitutes and new entrants are trying to keep up with the rapid changes rather than introducing them Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

37 Key Risks of a Speed-Based Strategy Speeding up activities that have not been conducted in a fashion prioritizing rapid response should only be done after attention to training, reorganization, and/or reengineering Some industries - stable, mature ones - may not offer much advantage to a firm introducing some forms of rapid response Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

38 Creating a Competitive Advantage Based on Market Focus Involves building cost, differentiation, and/or speed competitive advantages targeted to a narrow, market niche l Allows a firm to l l “Learn” its target customers Build up organizational knowledge of ways to satisfy its target market better than larger rivals Risks of focus strategies l l Can attract major competitors to the segment Believing a focus strategy, by itself, creates success, rather than a form of low cost, differentiation, or speed Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

39 Industry Environments and Strategy Choices Emerging Industries Transitioning to Maturity Mature and Declining Industries Fragmented Industries Global Industries Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

40 Characteristics of Markets in Emerging Industries Proprietary technology and technological uncertainty l Competitor uncertainty regarding inadequate information l High initial cost structure l Few entry barriers l First-time buyers require initial inducement l Inability to easily obtain raw materials and components l Need for high-risk capital l Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

41 Strategic Options for Emerging Industries 1. Ability to shape industry’s structure 2. Ability to rapidly improve product quality 3. Establish favorable relations with key suppliers 4. Ability to establish technology as dominant force 5. Acquire a core group of loyal customers 6. Ability to forecast future competitors Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

42 Characteristics of Industries Transitioning to Maturity l Intense competition for market share l Increased l Greater emphasis on cost and service l Declining Irwin/Mc. Graw-Hill sales to experienced, repeat buyers profitability © 2000 The Mc. Graw-Hill Companies, Inc.

43 Strategic Options for Maturing Industries 1. Prune the product line 2. Emphasize process innovation 3. Emphasize cost reductions 4. Focus on selecting loyal buyers 5. Pursue horizontal integration 6. Expand internationally Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

44 Pitfalls to Avoid in Competing in Maturing Industries A middle-ground approach to selecting a generic competitive strategy Sacrificing market share for short-term profits Waiting too long to respond to price reductions Retaining unneeded excess capacity Engaging in sporadic efforts to boost sales Placing hopes on new products Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

45 Characteristics of Mature/Declining Industries l Demand grows more slowly than economy, or even declines l Slowing growth is caused by l Technological substitution l Demographic shifts l Shifts in consumer needs Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

46 Strategic Options for Mature/Declining Industries 1. Focus on key market segments offering growth opportunities 2. Emphasize product innovation and quality improvement 3. Emphasize production and distribution efficiency 4. Gradually harvest the business Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

47 Pitfalls to Avoid in Competing in Mature/Declining Industries Being overly optimistic about prospects for an industry revival Getting trapped in a profitless war of attrition Harvesting from a weak position Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

48 Characteristics of Fragmented Industries l No firm has a significant market share l No firm can significantly influence industry outcomes l Examples l Professional services l Retailing l Wood and metal fabrication l Agricultural products l Funeral industry Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

49 Strategic Options for Fragmented Industries 1. Tightly managed decentralization - Intense local coordination, high personal service, local autonomy 2. Formula facilities - Standardized, efficient, low-cost facilities at multiple locations 3. Increased value added - Difficult to differentiate products/services 4. Specialization - Product type, customer type, type of order, geographic areas 5. Bare bones/no frills - Intense low margin competition (low overhead, minimum wages, tight cost controls) Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

50 Characteristics of Global Industries l Differences in prices and costs among countries due to l l l Currency exchange fluctuations Differences in wage and inflation rates Other economic factors Differences in buyer needs across countries l Differences in competitors and ways of competing among countries l Differences in trade rules and governmental regulations across countries l Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

51 Strategic Options: Pursuing Global Market Coverage 1. License foreign firms to produce and distribute a firm’s products 2. Maintain a domestic production base and export products 3. Establish foreign-based plants and distribution in foreign countries Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

52 Strategic Options: Choosing a Generic Competitive Strategy 1. Broad-line global competition 2. Global focus strategy 3. National focus strategy 4. Protected niche strategy Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

53 Grand Strategy Selection Matrix Overcome weaknesses Internal (redirected resources within the firm) Turnaround or retrenchment Divestiture Liquidation II III Concentrated growth Market development Product development Innovation Irwin/Mc. Graw-Hill Vertical integration Conglomerate diversification External (acquisition or I merger for IV resource capability) Horizontal integration Concentric diversification Joint venture Maximize strengths © 2000 The Mc. Graw-Hill Companies, Inc.

54 Model of Grand Strategy Clusters Rapid market growth 1. Concentrated growth 2. Vertical integration 3. Concentric diversification 1. Reformulation of concentrated growth 2. Horizontal integration 3. Divestiture 4. Liquidation Strong Weak I II competitive IV III position 1. Concentric 1. Turnaround or retrenchment diversification 2. Concentric diversification 2. Conglomerate 3. Conglomerate diversification 4. Divestiture 3. Joint venture 5. Liquidation Slow market growth Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

55 Conclusion: Selecting a Business Strategy to Achieve a Competitive Advantage Focusing on key sources of competitive advantage requiring total, consistent commitment Selection of appropriate business strategie(s) involves Weighing skills, resources, organizational requirements, and risks of each source of competitive advantage Considering unique effects of the generic industry environment on a firm’s value chain activities Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.