Types of Strategies

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

2. Strategy A strategy of a corporation forms a comprehensive master plan that states how the corporation will achieve its mission and objectives. It maximizes competitive advantage and minimizes competitive disadvantage Prof. Dr. Majed El-Farra 2009

3. Strategy • Mintzberg (1987) defines strategy in terms of 5Ps. These 5Ps are: • 1P Perspective: is the main business concept or idea and the means by which that concept or idea is put into practice or implemented. • 2P Plan: is a direction, a guide or a course of action from the present (or from the past) and into the future. However that ‘future’ is defined by whatever the time horizons associated with it. • 3P Patterns: are the consistency of firm decision making. • 4P Position or positioning: where the firm ‘locates’ itself within its external and competitive environments; and by which it positions particular products or services against the demands of the market segments it serves. • 5P Ploys: are the competition strategies designed to maintain, reinforce, achieve or improve the relative competitive position of the organization within its sector and markets (Morden, 2007). Prof. Dr. Majed El-Farra 2009

4. 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

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

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

7. Corporate Strategy • The first level of strategy (corporate strategy) is related to determining the corporate strategy. It is fundamentally and simply concerned with deciding what type of business the organization should be in and how the overall group of activities should be formed and managed .Corporate strategy deals with issues of strategic management at the level of the firm as a whole. 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

8. Business Strategy business strategy refers to the actions and approaches crafted by management to create successful performance in one particular line of business. It is also concerned with creating competitive advantage in each of the strategic business units of the organization. Prof. Dr. Majed El-Farra 2009

9. Functional or departmental strategy • Functional or departmental strategy concerns the managerial game plan for running a major functional activity or process within a business such as research and development unit, marketing unit, financial unit, production unit, H R development unit and so on. A business requires as many functional strategies as it has strategically critical activities. Prof. Dr. Majed El-Farra 2009

10. 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

11. 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

12. 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

13. 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

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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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 Prof. Dr. Majed El-Farra 2009

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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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

42. 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

43. 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

44. 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

45. 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

46. 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

47. 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

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

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

50. Prof. Dr. Majed El-Farra 2009