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STRATEGY FORMULATION

STRATEGY FORMULATION. At the end of this module the learning outcomes are The concept of SBU and its importance Models of portfolio analysis Various types of generic strategies Influence of market position on strategy Ways to attack and defend organizations. STRATEGY FORMULATION.

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STRATEGY FORMULATION

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  1. STRATEGY FORMULATION At the end of this module the learning outcomes are • The concept of SBU and its importance • Models of portfolio analysis • Various types of generic strategies • Influence of market position on strategy • Ways to attack and defend organizations

  2. STRATEGY FORMULATION Suggested readings 1. Strategic Marketing Management by Pearson & Gilligan, Chapter 9 & 10 2. Strategic marketing by Cravens, Chapter 10

  3. STRATEGY FORMULATION • Concept of SBU – Strategic business units • Historically, companies followed a division orientation. Problems were: • Closely related products were coming under separate division • Each division dealt differently • Similar products getting different treatment • Dissimilar products getting identical treatment • Sub-optimal results

  4. STRATEGY FORMULATION • SBU means • Dividing companies into six division’s is not six different businesses • It may be only four businesses • A multi-business corporation groups its businesses into a few distinct strategic business units • Every SBU • Own set of competitors • Own distinct strategies

  5. STRATEGY FORMULATION • Example – SBU • HMT • PSU • 24 division’s, 16 production units, 35000 employees • Large basket of products- machine tools, tractors, flexible-manufacturing systems, tractors, printing machines, lamps, watches, dairy machinery. • World bank recommended • Four business groups • Machine tools • Watches • Lamps • Agricultural machinery

  6. STRATEGY FORMULATION • Problems with World Bank guidelines • Each business group • Vastly different market and technology attributes • E.g: Machine tools included printing press and other general industrial machinery • SBU concept • Five SBUs • Machine tools • Consumer products • Tractors • Engineering components & industrial machinery. • Technology and information

  7. STRATEGY FORMULATION • SBU characteristics • Is a single business or a collection of related businesses, which offer scope for independent planning. • Own set of competitors • Has a manager who has responsibility for strategic planning and profit performance • Is saleable • E.g.: passenger cars and commercial vehicles are different SBUs • Mergers and acquisitions of SBU’s and not companies.

  8. STRATEGY FORMULATION • BOSTON CONSULTING GROUP (BCG) • Balanced portfolio of SBU’s • Good portfolio • Dominance of cash cows and stars • Unbalanced portfolio • Dogs and question marks dominate • Insufficient cash

  9. STRATEGY FORMULATION • Example: Raymond • SBU’s • Textiles – Star • Cement – Problem child • Steel – Dog • Raymond divested cement business • Focus on textiles. • Why Raymond divested cement?

  10. STRATEGY FORMULATION • ISSUES WITH BCG MODEL • Why was Captain Cook brand sold by DCW to International Bestfoods? • Was models a criteria • Too much emphasis on market-share and market growth • What do you do when portfolios are border cases • Over simplified • Are the two parameters enough to judge business • What about environmental factors • Return on investment • Where are strategic issues accommodated?

  11. STRATEGY FORMULATION • STRATEGY FORMULATION • Michael Porter’s contribution • Three generic strategies • Cost leadership • Differentiation • Focus

  12. STRATEGY FORMULATION • COST LEADERSHIP • Bajaj Auto-scooters • Maruti-cars • Zen • Cost minimizations • Japan in 60’s • Lowest cost producer • Later Taiwan and Korea lower cost producers • Moved to differentiation • Success due to quality management

  13. STRATEGY FORMULATION • DIFFERENTIATION • Mercedes • Sony • Creating unique image • Branding • Singapore Airlines • Superior inflight services • Most modern fleet • Excellent ground services • Customers willing to pay more

  14. STRATEGY FORMULATION • FOCUS • Narrow segment • Specialist reputation • Dilip Chhabria designer cars • Laura Ashley • Respond quickly to requirements • Small firms

  15. STRATEGY FORMULATION • ISSUES WITH PORTER’S GENERIC STRATEGIES • Pursue one or more strategies simultaneously • Low cost does not mean low prices • E.g.: Boeing • Low cost • Sells on quality service • E.g.: IBM • Large producer – keeps costs low • Sells on image • Higher prices • E.g.: Dilip Chhabria • Focus • Differentiation

  16. STRATEGY FORMULATION • INFLUENCE OF MARKET POSITION ON STRATEGY • Market leader • Market challengers and followers • Market nichers

  17. STRATEGY FORMULATION • MARKET LEADER • Largest market share • By virtue of • Pricing • Advertising intensity • Distribution coverage • Rate of new product introduction • Dominant player • E.g.: Intel, Asian paints, HLL in detergents

  18. STRATEGY FORMULATION • 2MARKET CHALLENGERS AND FOLLOWERS • Firms with lesser market share • Aggressive and attack market leader • Dominate (market challengers) • Less aggressive (market followers) • Market challenger • Pepsi, Procter and Gamble in India. • Market followers • Campa, Fena

  19. STRATEGY FORMULATION • 3 MARKET NICHERS • Small firms • Niche markets • Too small of interest to big firms • Avoid expensive head on fights with larger companies • E.g.: Dilip Chhabria, Ritu Beri designer wear.

  20. STRATEGY FORMULATION • MARKET LEADER STRATEGIES • Need to defend • Various methods • Expansion of markets • Protect market share • Increase market share • Which is most beneficial • Expansion of markets

  21. STRATEGY FORMULATION • EXPANSION OF MARKETS • Identifying new users • New users • Intel in India • Educating end-users about computers use in schools • Cadbury in India • Repositioning • Included adults

  22. STRATEGY FORMULATION • New uses • Dupont • First used for parachutes • Now • Stockings • Shirts • Tyres

  23. STRATEGY FORMULATION • Existing users increasing their usage rates • Procter and Gamble • Shampoos • Air –Tel • Value added services • Florist • Share prices

  24. STRATEGY FORMULATION • 2. Protect market share • Vulnerable to attack • E.g.: American cars in 60’s and 70’s • Ignored small car market. • Japanese developed this market. • Oil shock in 70’s • Fuel efficient cars • Increased market share • Setback for GM / Ford • Joint venture with Japanese • Ford with Mazda • Chyrsler with Mitsubishi • GM taking over Daewoo

  25. STRATEGY FORMULATION • Modi Xerox(MX) • HCL attacked • MX focused on service • Improved its after sales service network • HCL gave up.

  26. STRATEGY FORMULATION • 3. Expanding market share • Asian Paints • Consistently proactive strategy • Innovation • Intensive advertising • Improved distribution-direct deal with retail • Price incentives • Smaller size products.

  27. STRATEGY FORMULATION MILITARY ANALOGIES FOR MARKET LEADERS • Position defence • Mobile defence • Flanking defence • Contraction defence • Pre-emptive defence • Counter-offensive defence

  28. STRATEGY FORMULATION POSITION DEFENCE • Impregnability of a fixed position • Not very successful • Attackers use indirect approach rather than taking head-on approach • Maruti’s rapid loss of market share in late 90’s • Unable to defend the attack of Hyundai

  29. STRATEGY FORMULATION MOBILE DEFENCE • Focus on understanding ‘marketing myopia’ • Broadening and diversification of business • Build future defences • Surf gearing for launch of Ariel • ITC movement into non-tobacco businesses

  30. STRATEGY FORMULATION FLANKING DEFENCE • Less protected than other parts • Vulnerable to attacks • Secondary markets should not be ignored

  31. STRATEGY FORMULATION FLANKING DEFENCE Coke • Cola main business • Non-cola areas are vulnerable to attacks • Juices • Launch of Minute-Maid to protect flanks

  32. STRATEGY FORMULATION CONTRACTION DEFENCE • Faced with attack • Companies realize it is not worthwhile to defend • Retreat • Concentrate where it is least vulnerable

  33. STRATEGY FORMULATION CONTRACTION DEFENCE IBM • Focused on PC hardware in 80’s • Entry of low-cost manufacturers • Unable to match costs • Gradual retreat • Focus on software services Failure of British mobike companies

  34. STRATEGY FORMULATION PRE-EMPTIVE DEFENCE • Limitations of contraction and position defence • Pre-emptive strikes • Decimate competitor • Labeled as FUD marketing -that is spreading ‘fear uncertainty and despair

  35. STRATEGY FORMULATION PRE-EMPTIVE DEFENCE HUL experience • Launch of broad range of products • Counter competition • Anticipation Surf • Launch of variants • Pre-empt P & G

  36. STRATEGY FORMULATION COUNTER OFFENSIVE DEFENCE • Once attack has taken place • How to respond to attack of competitor • Three forms • meet the attack head-on • Attack the attacker’s flank • Develop a pincer’s movement in an attempt to cut off the attacker’s operational base.

  37. STRATEGY FORMULATION • Attack head-on is the most common • Attack at the weak areas of attacker is the second way of doing it. • Fighting by hitting at the attacker’s base is the counter-offensive Jet responding to Sahara price war

  38. STRATEGY FORMULATION • MARKET CHALLENGERS STRATEGIES • Not market leaders • Challenge market leaders • Try to achieve leadership • Look at weaknesses of leaders • Issues • Cost of attacking • Likelihood of success

  39. STRATEGY FORMULATION • Challenger needs to look into • Sustainable competitive advantage • Neutralize leader’s advantage • Create impediments for leaders to retaliate

  40. STRATEGY FORMULATION • Michelin’s entry in US market • Early 70’s • U.S. players leaders • Use of non-radial tyres • Supplied to car manufacturers • Michelin • Leader in radials • Attacked replacement mkt. • 1973, Arab –Israel war • Oil shock • Consumers preference for fuel efficient tyres • Radial tyres more fuel efficient

  41. STRATEGY FORMULATION • Michelin attacked car manufacturers • Gained market share • U.S. players slow in reaction • Michelin became market leader at the expense of Goodyear, Goodrich.

  42. STRATEGY FORMULATION CHOICES • Attack the market leader • Attacking firms of similar sizes • Attacking smaller regional firms

  43. STRATEGY FORMULATION Studies found that • Attacking smaller regional firms proves to be most profitable • Attacking market leader is a high risk high return strategy

  44. STRATEGY FORMULATION MARKET CHALLENGERS In military analogy it can be • Frontal attack • Flanking attack • An encirclement attack • Bypass attack • Guerilla attack

  45. STRATEGY FORMULATION FRONTAL ATTACK • Two types • Pure frontal attack • limited frontal attack

  46. STRATEGY FORMULATION Pure frontal attack • market leader • product for product • price for price • Xerox attacking Gestetner

  47. STRATEGY FORMULATION Limited frontal attack • Attacking at selected customers • Kingfisher attacking Jet • Kingfisher class

  48. STRATEGY FORMULATION FLANK ATTACK • Indirect approach • More economical and effective • Japanese mobike companies attacking European counterparts • Hero Honda attacking Bajaj

  49. STRATEGY FORMULATION ENCIRCLEMENT ATTACK • Attack on many fronts • Defender’s ability to retaliate is considerably reduced • Expensive strategy • Short-term losses

  50. STRATEGY FORMULATION ENCIRCLEMENT ATTACK SEIKO watches • Multiple products • constant changes • Occupy many dealer outlets • Heavy advertising • Left many British and US watch companies in bad shape • Attack from all fronts

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