Chapter 2a - Strategies In Action PDF

CHAPTER TWO Strategies In Action Asres Abitie (PhD) Levels of Strategy 2  Types of Strategies ❖ Growth strategies ❖ Stability strategies ❖ Defensive/Renewal Strategies 3 Growth Strategy  Invo...

CHAPTER TWO Strategies In Action Asres Abitie (PhD) Levels of Strategy 2  Types of Strategies ❖ Growth strategies ❖ Stability strategies ❖ Defensive/Renewal Strategies 3 Growth Strategy  Involves the attainment of specific growth objectives by increasing the level of an organization’s operations.  Typical growth objectives for businesses: ⚫ Increases in sales revenues ⚫ Profits ⚫ Other performance measures (ROI, ROE, etc.)  Growth objectives for not-for-profits: ⚫ Increasing clients served or patrons attracted ⚫ Broadening the geographic area ⚫ Increasing programs offered 4  Possible Growth Strategies International Concentration Organizational Growth Diversification Vertical Integration Related Backward Unrelated Forward Horizontal Integration *A primary reason for pursuing forward, backward, and horizontal integration strategies is to gain cost leadership benefits. 5 Concentration Strategy Organization concentrates on its primary line of business and looks for ways to meet its growth objectives through increasing its level of operation in this primary business. 6  Concentration Options Product(s) Current New Product-Market Product Current Exploitation Development Customers New Market Product/Market Development Diversification* * Not a concentration option! 7  Four Guidelines When Market Penetration May Be An Especially Effective Strategy  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. 8  Six Guidelines When Market Development May Be An Especially Effective Strategy ❖ 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 is available. ❖ Excess production capacity ❖ Basic industry rapidly becoming global 9  Five Guidelines When Product Development May Be An Especially Effective Strategy ❖ 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 10  Vertical an Horizontal Integrations Textile producer Textile producer Shirt manufacturer Shirt manufacturer Clothing store Clothing store Acquisitions or mergers of suppliers or customer businesses are vertical integrations Acquisitions or mergers of competing businesses are horizontal integrations  Vertical Integration Strategy  An organization’s attempt to gain control of: ❑Its inputs (backwards) ❑Its outputs (forwards) ❑Or both 12  Benefits of Vertical Integration Strategy  Allow a firm to gain control over: ⚫ Distributors (forward integration) ⚫ Suppliers (backward integration) 13  Major Benefits and Costs of Vertical Integration Benefits Costs Reduced purchasing and Reduced flexibility as selling costs. organization is locked into product(s) and technology. Improved coordination among Difficulties in integrating functions and capabilities. various operations. Protected proprietary Financial costs of acquiring or technology. starting up. 14  Six Guidelines When Forward Integration May Be An Especially Effective Strategy 1. Present distributors are expensive, unreliable, or incapable of meeting firm’s needs. 2. Availability of quality distributors is limited. 3. When firm competes in an industry that is expected to grow markedly. 4. Organization has both capital and human resources needed to manage new business of distribution. 5. Advantages of stable production are high. 6. Present distributors have high profit margins. 15  Six Guidelines When Backward Integration May Be An Especially Effective Strategy 1. When present suppliers are expensive, unreliable, or incapable of meeting needs. 2. Number of suppliers is small and number of competitors large. 3. High growth in industry sector 4. Firm has both capital and human resources to manage new business. 5. Advantages of stable prices are important. 6. Present supplies have high profit margins. 16  Horizontal Integration Strategy  Combining operations with competitors.  Horizontal integration is appropriate when it: ⚫ Enables the company to meet its growth objectives. ⚫ Can be strategically managed ⚫ Satisfies legal and regulatory guidelines 17  Four Guidelines When Horizontal Integration May Be An Especially Effective Strategy 1. Firm can gain monopolistic characteristics without being challenged by federal government. 2. Competes in growing industry 3. Increased economies of scale provide major competitive advantages. 4. Faltering due to lack of managerial expertise or need for particular resources. 18  Diversification  Organization expands its operations by moving into a different industry.  Related (concentric) diversification.  Unrelated (conglomerate) diversification. 19  Types of Related Diversification Operational Skills-Capabilities Product Related Distribution Similarities Diversification Channels Similar Customer Technology Use 20  Five Guidelines When Concentric Diversification May Be An Effective Strategy ❖ Competes in no- or slow-growth industry ❖ Adding new & related products increases sales of current products (the case of complementary goods). ❖ New & related products offered at competitive prices. ❖ Current products are in decline stage of the product life cycle. ❖ Strong management team (learning management). 21  Four Guidelines When Conglomerate Diversification May Be An Effective Strategy ❖ Declining annual sales and profits ❖ Capital and managerial talent to compete successfully in a new industry. ❖ Financial synergy between the acquired and acquiring firms. ❖ Existing markets for present products are saturated. 22  International Strategy  Organizations can pursue international growth while pursuing other corporate growth strategies.  International growth issues: ⚫ Advantages and drawbacks ⚫ General approach ⚫ Ways to enter a foreign market 23  Approaches to International Expansion High Global Transnational Approach Approach Global Integration of Operations Multidomestic Approach Low Low High Local Market Responsiveness 24  Ways to Enter a Foreign Market ❑Exporting ❑Importing ❑Licensing ❑Franchising ❑Direct investment 25  Implementing Growth Strategies  Mergers-Acquisitions ⚫ Mergers ⚫ Acquisitions ⚫ Takeover  Internal development ⚫ Starting a new business from scratch  Strategic Partnering ⚫ Joint venture ⚫ Long-term contract ⚫ Strategic alliance Research and development partnerships Cross-distribution agreements Cross-licensing agreements Cross-manufacturing agreements 26 Joint-bidding consortia  Six Guidelines When JV May Be An Effective Strategy ❖ Combination of privately held and publicly held can be synergistically combined. ❖ Domestic firms 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. ❖ Two or more smaller firms have trouble competing with larger firm. ❖ A need exists to introduce a new technology quickly. 27  Organizational Stability  Stability strategy – the organization maintains its current size and current level of business operations.  When is stability an appropriate strategic choice? ⚫ In a period of rapid upheaval (mayhem) ⚫ After a period of rapid growth E.g. Apple Computer-lack of managerial resources  Implementing the stability strategy ⚫ Neither slipping backwards nor moving a head! 28  Organizational Renewal  Renewal strategies – used to reverse organizational decline and put the organization back on a more appropriate path to successfully achieving its strategic goals.  Organizational decline – main reason for decline is poor management. 29  Possible Causes of Corporate Decline Inadequate Financial Controls Over expansion Uncontrollable or Too Rapid Costs or Too Growth High Costs Poor Management Slow or No Response to Significant External New or Internal Changes Competitors Unpredicted Shifts in Consumer Demand 30  Techniques for Evaluating Corporate Strategy ❑ Corporate objectives or goals ❑ Efficiency, effectiveness, and productivity measures ❑ Benchmarking ❑ Portfolio analysis 31  Types of Corporate Goals Increased Earnings Increased Maximized Revenues Stockholder Wealth High Increased Product Corporate Market Quality Goals Share Strong Strong Customer Global Satisfaction Presence Positive Increased Reputation- Image Productivity 32  Five Guidelines When Retrenchment May Be An Especially Effective Strategy Required when an organization has grown so large so quickly that major internal reorganization is needed. ❖ 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. 33  Five Guidelines When Divestiture May Be An Especially Effective Strategy Very popular strategy as firms try to focus on their core strengths, lessening their level of diversification. ❖ 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... 34  Three Guidelines When Liquidation May Be An Especially Effective Strategy ❖ 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. 35  Evaluating Corporate Strategies Productivity Measures: ⚫ How many inputs it takes to produce outputs ⚫ Ways of productivity increase Become efficient output increases with little or no increase in input Expand both output and input grow with output growing more rapidly Achieve breakthroughs output increases while input decreases Downsize output remains the same and input is reduced Retrench both output and input decrease, with input decreasing at a faster rate 36  Evaluating Corporate Strategies Efficiency: ⚫ Minimize use of resources in achieving objectives Effectiveness: ⚫ Ability to complete or reach goals Benchmarking: ⚫ Search for best practices contributing to performance 37  When to Change Corporate Strategies? When evaluation shows:  Growth objectives aren’t being attained.  Organizational stability causes organization to fall behind.  Organizational renewal efforts aren’t working. Possible strategies to change: ⚫ Functional ⚫ Competitive ⚫ Corporate direction 38 Examples of Strategies 39 Examples of Strategies 40 Examples of Strategies 41 Examples of Strategies 42 Other Examples of Strategies 43 Other Examples of Strategies 44  Generic and Competitive Strategies  Cost Leadership Strategies  Differentiation Strategies  Focus (Niche Market) Strategies 45  Cost Leadership Strategies  Emphasizes efficiency ⚫ Producing high volumes of standardized products ⚫ Gaining economies of scale and experience curve effects  Requires a continuous search for cost reductions in all aspects of the business: ⚫ Product strategy often a basic no-frills product made available to a very large customer base ⚫ Distribution strategy obtain the most inextensive distribution possible ⚫ Promotional strategy often involves trying to make a virtue out of low cost product features 46  Successful Implementation of Cost Leadership Benefits from ❖ Process engineering skills ❖ Products designed for ease of manufacture ❖ Sustained access to inexpensive capital ❖ Close supervision of labour ❖ Tight cost control ❖ Incentives based on quantitative targets ❖ Market of many price-sensitive buyers ❖ Few ways of achieving product differentiation ❖ Buyers not sensitive to brand differences ❖ Large number of buyers with bargaining power ❖ Pursued in conjunction with differentiation ❖ Economies of scale ❖ Capacity utilization achieved ❖ Linkages with suppliers and distributors 47  Differentiation Strategies ❖ Differentiation involves creating a product that is perceived as unique. ❖ The unique features or benefits should provide superior value for the customer. ❖ Because customers see the product as unrivaled and unequaled, the price elasticity of demand tends to be reduced and customers tend to be more loyal to the brands. ❖ Provides considerable insulation from competition. 48  Maintaining Differentiation Strategy Requires ❖ Strong research and development skills ❖ Strong product engineering skills ❖ Strong creativity skills ❖ Good cooperation with distribution channels ❖ Strong marketing skills ❖ Incentives based largely on subjective measures ❖ Be able to communicating the importance of the differentiating product characteristics ❖ Stress continuous improvement and innovation ❖ Attract highly skilled and creative people ❖ Greater product flexibility ❖ Greater compatibility ❖ Lower costs ❖ Improved service ❖ Greater convenience ❖ More features 49  Focus Strategy - Cost Focus  Firm concentrates on a select few target markets  The firm typically looks to gain a competitive advantage through effectiveness rather than efficiency.  As a focus strategy, it may be used to select targets that are less vulnerable to substitutes or where a competition is weakest to earn above-average ROI. 50  Maintaining Focus Strategy - Cost Focus Requires  Industry segment of sufficient size  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. 51  Abell’s Competitive Strategies Level of Market Segment Differentiation High None Broad Differentiated Undifferentiated Competitive Market Scope Narrow Focus 52  Miles et al. topology of organizational strategy ❑ Miles, Snow, Meyer and Coleman Jr. (1978) and Miles and Snow (1984) proposed four basic types of strategic behavior and supporting organizational characteristics that are linked with business strategies. ▪ They labeled the typologies as defender, prospector, analyzer and reactor. ❑ Defenders have narrow and relatively stable product market domain. The characteristics of defender include limited product line, capital intensive technology, functional structure and cost control. ❑ Prospectors usually search for product market opportunities and are ready to cope with changing environmental trends. Prospectors are characterized by diverse product line, multiple technologies and skill-based in development and research. ❑ Analyzers usually operate in a stable and changing environment. The main characteristics of analyzers include limited product line, cost efficient technology and mixed (matrix) structure. ❑ Finally, reactors are characterized by inconsistency and instability. 53  Porter‘s generic competitive strategies typology  Competitive advantage comes from only 1 of 2 sources: ❑ Having the lowest costs in the industry ❑ Possessing significant and desirable differences from competitors.  The second factor is the scope of product-market  Mix of these factors provide the basis for: Cost leadership strategy (or low-cost strategy) Differentiation strategy Focus strategy 54  Porter‘s generic competitive strategies typology – HRM perspective  From the human resource management perspective, organizations pursuing a cost leadership strategy are likely to use fewer employees, larger operations, lower wages and fringe benefits, increased supervision and increased task specialization (Schuler et al., 2001). Hence, these conditions are the characteristics of the traditional human resource management approach (Kochan & Chalykoff, 1986).  The differentiation strategy emphasizes developing products and services that are different from those of competitors. Overall, differentiation strategy needs people to work differently. For organizations pursuing a differentiation competitive strategy, the profile of employee role behaviors include a high degree of creative behavior, a longer-term focus, a relatively high level of cooperative and interdependent behavior, a moderate degree of concern for quality, a moderate concern for quantity, an equal degree of concern for process and results, a greater degree of risk taking, and a high tolerance of ambiguity and unpredictability (Schuler et al., 2001). 55  Porter‘s generic competitive strategies typology – HRM perspective  From an open system and human competence perspective, the companies using differentiation competitive strategy are more likely to use competence acquisition, competence displacement and behavior coordination (Dunford et al., 2001).  In terms of the HR practices, differentiation strategy requires more investment in training HR to acquire new skills and knowledge, more efforts on building a cooperative management-employee relationship to promote the coordination and interdependence between people (Schuler & Jackson, 1987), more flexibility and incentives in compensation to encourage the creativity of people, but less HR planning especially strict job design to grant people more freedom and less control (Schuler & Jackson, 2005). 56  Strategy and performance – HRM perspective  Four levels of performance outcomes which is posited by Dyer and Reeves (1995); (Boxall et al., 2007; Savaneviciene & Stankeviciute, 2012): 1. Human Resource-related outcomes; such as turnover, absenteeism, job satisfaction & commitment. 2. Organizational outcomes; such as productivity, quality, service, efficiencies & customer satisfaction. 3. Financial accounting outcomes; such as profits, sales, return on assets & return on investment. 4. Capital market outcomes; such as market share, stock price & growth (Boxall et al., 2007; Dyer & Reeves, 1995). 57  Porter’s Generic Competitive Strategies Competitive Advantage Low Costs Product-Service Differences Broad Cost Leadership Differentiation Competitive Market Scope Focus Focus Narrow (Cost) (Differentiation) 58  Contemporary Perspectives on Competitive Strategy ❑ Newer perspectives provide an expanded, and perhaps more realistic, description of what competitive strategies organizations are using: ❖ Integrated low-cost differentiation strategy ❖ Mintzberg’s generic competitive strategies 59 Mintzberg’s Generic Competitive Strategies By Price By Marketing Image Differentiation By Product Design By Product Quality By Product Support Undifferentiated 60  Seventeen Guidelines for the Strategic- Planning Process to Be Effective 1. It should be a people process more than a paper process. 2. It should be a learning process for all managers and employees. 3. It should be words supported by numbers rather than numbers supported by words. 4. It should be simple and nonroutine. 5. It should challenge the assumptions underlying the current corporate strategy. 61  Seventeen Guidelines for the Strategic- Planning Process to Be Effective 7. It should welcome bad news. 8. It should welcome open-mindedness and a spirit of inquiry and learning. 9. It should not be a bureaucratic mechanism. 10. It should not become ritualistic, stilted or orchestrated. 11. It should not be too formal, predictable or rigid. 12. It should not contain jargon or arcane planning language. 62  Seventeen Guidelines for the Strategic- Planning Process to Be Effective 13. It should not be a formal system for control. 14. It should not disregard qualitative information. 15. It should not be controlled by “technicians.” 16. Do not pursue too many strategies at once. 17. Continually strengthen the “good ethics is good business” policy. 63 Chapter Two ? Questions