Strategic management

1. Strategic management Lecture 6. Strategic alternatives, strategic options

3. The most important strategic problems (1) • Decreasing profitability and low return on investment • Decreasing market share • Decreasing stockholder wealth • Deteriorating financial position • Rising overall costs • Growing debt and week balance sheet

4. The most important strategic problems (2) • Deterriorating of competitive advantages • Decreasing quality, and the loyalty of main customers • The growth rate lower than the industry avarage • Obsolate facilities and technical infrastructure

5. The most important strategic problems (3) • Decreasing innovativity, slow product innovation • Weakening the brand image • Lots of underutilised plant capacity • Entry a new strong competitor, or increasing competition within the industry • Costly new regulatory requirements • Long-term shift in buyer needs

6. DEVELOPMENT STRATEGIES What basis? Which direction? How? Alternative Directions Alternative methods Bases of competitiv strategy Protect and build Internal development Cost leadership Market penetration Acquisition Product development Joint Development/ alliances Differentiation Market development Focus strategies Diversification: related unrelated

7. Porter’ generic strategies Porter’s experience ROI Differentiation Cost leadership Market share

8. Sources of Competitive Advantage COST ADVANTAGE Similar product at lower cost COMPETITIVE ADVANTAGE Price premium from unique product DIFFERENTIATION ADVANTAGE

9. Competitive advantages: Low cost Competitive advantages: Differentiation. Scope of activities:broad Low cost leadership Standard products Great volume Low production costs Differentiation Unique products Small volume High production cost Scope of activities: narrow Low cost leadership focus Differentiation focus PORTER’S generic strategies Best cost provider

10. Low cost leadership • Production emphasis: ‘nobody could do it cheaper’ • Marketing/production emphasis: ‘Low prices and outstanding value for money’ • Operating culture: no frills, reputation for being ‘lean and mean’ • Economies of scale from high volume • Process innovation to cut costs • High productivity per employee • Price cuting as an offensive or defensive weapon • Low profit marginsin return for high volume

11. Broad differentiation • Production emphasis: ‘nobody could make it better’ • Marketing/production emphasis: ‘Simply the best there is’ • Operating culture: many frills – the widest range of options and features, something for every taste. • Creating something different from competitors product/services • Product innovation to bring new products with new options to the market. • Premium pricing to cover cost of differentiation • Low volume but high profit margin • Intensive adertising and sales efforts

12. Focus strategies • Production emphasis: ‘we taylor our products to meet your particular needs’ • Production emphasis: ‘Just for you’ • Specialization: buyer segments, geographic areas, final-use applications. • Marketing emphasis: We’ar not a ‘Jack of all trade’, we are master of one. • Competitive advantage in target segment depends on either: • Low cost leadership (spaecialised experience or knowledge advantage) • Succesfull differentiation (offering somethig unique)

13. Features of Cost Leadership and Differentiation Strategies Generic strategy Key strategy elements Resource & organizational requirements COST Scale-efficient plants. Access to capital. Process LEADERSHIP Design for manufacture. engineering skills. Frequent Control of overheads & reports. Tight cost control. R&D. Avoidance of Specialization of jobs and marginal customer functions. Incentives for accounts. quantitative targets. DIFFERENTIATION Emphasis on branding Marketing. Product and brand advertising, engineering. Creativity. design, service, and Product R&D quality. Qualitative measurement and incentives. Strong cross-functional coordination.

14. Differentiation and Segmentation DIFFERENTIATION: is concerned with how a firm distinguishes its offerings from those of its competitors (i.e. How the firm competes) SEGMENTATION: is concerned with which customers, needs, localities a firm targets (i.e. Where the firm competes) DOES DIFFERENTIATION IMPLY SEGMENTATION? —Not necessarily, depends upon the differentiation strategy: BROAD SCOPE DIFFERENTIATION Appealing to what is common between different customers (McDonalds, Honda, Gillette) FOCUSED DIFFERENTIATION Appealing to what distinguishes different customer groups (Harley-Davidson, Ralph Lauren)

15. Drivers of Cost Advantage • Indivisibli\ties • Specialization and division of labor ECONOMIES OF SCALE • Increased dexterity • Improved organizational routines ECONOMIES OF LEARNING • Process innovation • Reengineering business processes PRODUCTION TECHNIQUES • Standardizing designs & components • Design for manufacture PRODUCT DESIGN • Location advantages • Ownership of low-cost inputs • Non-union labor • Bargaining power INPUT COSTS CAPACITY UTILIZATION • Ratio of fixed to variable costs • Speed of capacity adjustment • Organizational slack; Motivation & • culture; Managerial efficiency RESIDUAL EFFICIENCY

16. The Nature of Differentiation DEFINITION: “Providing something unique that is valuable to the buyer beyond simply offering a low price.” (M. Porter) THE KEY IS TO CREATE VALUE FOR THE CUSTOMER • TANGIBLE DIFFERENTATION • Observable product characteristics: • size, color, materials, etc. • performance • packaging • complementary services INTANGIBLE DIFFERENTATION Unobservable and subjective characteristics that appeal to customer’s image, status, identity, and desire for exclusivity TOTAL CUSTOMER RESPONSIVENESS Differentiation not just about the product, it embraces the whole relationship between the supplier and the customer.

17. Strategy Development Directions Source: Adapted from H. Ansoff, Corporate Strategy, Penguin, 1988, Chapter 6. Exhibit 7.1

18. Protect and Build Consolidation - Protect and strengthen position in current markets with current products • Downsizing or withdrawal from activities • Maintenance of market share Market penetration - Organisation gains market share • Leverage competences • Desirability of dominant market share

19. Market Development Offer existing products in new markets • New market segments with similar CSFs • New uses for existing products • New geographic markets • Issues • Normally requires some product development and capability development • Credibility and expectations

20. Product Development • Associated dilemmas • Expense, risk and potential unprofitability • Unacceptable consequences of not developing new products

21. Diversification A strategy that takes the organisation away from both its current markets and products • Related diversification • Unrelated diversification

22. Reasons to diversify Least power to create valueMost power to create value Reduce risk Maintain growth Balance cash flows Share infrastructure Increase market power Extend competences Not recommended as a reason to diversify Recommended as a reason to diversify

23. Related diversification options for a manufacturer BACKWARD INTEGRATION Machinery manufacture Components manufacture Product/process research/design Raw materials manufacture Components supply Machinery supply Raw materials supply Financing Transport HORIZONTAL INTEGRATION Competitive products Manufacturer By-products Complementary products FORWARD INTEGRATION Repairs and servicing Marketing information Distribution outlets Transport

24. Methods of Strategy Development • Internal Development • Organic development • Build on and develop an organisation’s own capabilities • Mergers and Acquisitions • Take over ownership of another organisation • Strategic Alliances • Two or more organisations share resources and activities

25. Advantages and disadvantages of internal development

26. Advantages and disadvantages of aquisition

27. Advantages and disadvantages of joint venture

28. Advantages and disadvantages of alliance

29. Motives for Internal Development

30. Motives for Strategic Alliances • Need for critical mass • Cost reduction • Improved customer offering • Co-specialisation • Each partner concentrates on using own capabilities, e.g. geographical market entry, value chain activities, Public Finance Initiative • Learning • Helps to develop future competences

31. Motives for Mergers and Acquisitions

32. Most important strategic answers (1) • Globalization • Implementation of e-business or/and related management methods • Merger and acquisitions • Create strategic alliances • Divest (harvest) and find new industry or a new niche • Crisis management and consolidation

33. Most important strategic answers (2) • Diversification and re-positioning the company • Focus and back to basic • Benchmaring and outsourcing • Vertical and horizontal integration • Re-engineering the structure and processes. • Rebuild the organizational culture • Create a new more competitive corporate governance structure

34. Recent Approaches to Cost Reduction Dramatic changes in strategy and structure to adjust to the business conditions of the 1990’s Key elements: • Plant closures • Outsourcing • Delayering and cuts in administrative staff The fundamental rethinking and radical redesign of business processes to achieve dynamic improvements in performance. e.g.:- • Several jobs combined into one • Steps of a process combined in natural order • Minimizing steps, controls, and reconciliation • Use case managers as single points of contact • Hybrid centralization/ decentralization CORPORATE RESTRUCTURING BUSINESS PROCESS REENGINEERING

35. Types of and motives for strategic alliances

36. Three ways to grow a business • Whether a business brings in $10,000 a year or $10m, they can start to grow by using three simple strategies, says Terri Levine, a business mentoring expert. • Increase prospects:Establish internally why customers should be turning to you instead of competitors. Then, make that message the core of advertising and marketing campaigns, and use it to dictate which customers you target. • Increase conversion rate:Most small firms don't track the conversion rate from prospects to sales, but it can be worth investing in software that does. Once you know the real rate, you can better reach out to those who got away to determine your weaknesses. • Increase customer worth:Look to increase sales by offering more or raising the value of your services. "Don't be afraid to raise prices," says Levine, who notes that even in this economy, businesses providing wanted services have been able to raise their rates by 10%.