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
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Suggested readings 1. Strategic Management by Pearce & Robinson, Chapter 8 & 9

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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
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SBU means - Dividing companies into six divisions 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
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Example SBU
HMT - PSU - 24 divisions, 16 production units, 35000 employees - Large basket of products- machine tools, tractors, flexiblemanufacturing systems, tractors, printing machines, lamps, watches, dairy machinery.

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Example SBU
HMT

World bank recommended Four business groups Machine tools Watches Lamps Agricultural machinery
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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

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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 SBUs and not companies.
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BOSTON CONSULTING GROUP (BCG) Margins and the funds generated increase with market share Sales growth demands cash to finance working capital Increases in market share generally need cash to support share
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BCG Matrix Question Marks High growth rate Low market share Cash guzzlers Identify the question marks which can move into stars
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BCG Matrix Stars Rapidly growing markets Large market share Substantial investments to maintain

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BCG Matrix Cash Cows High market share Low growth rates Generate cash in excess of needs Pay corporate overhead, dividends
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BCG Matrix Dogs Low market growth Low market share divested

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BOSTON CONSULTING GROUP (BCG)
- Balanced portfolio of SBUs - Good portfolio Dominance of cash cows and stars - Unbalanced portfolio Dogs and question marks dominate Insufficient cash

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Example: Raymond SBUs 1. Textiles Star 2. Cement Problem child 3. Steel Dog - Raymond divested cement business - Focus on textiles. Why Raymond divested cement?
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ISSUES WITH BCG MODEL
Why was ACC cement sold by Tatas to Holcim? 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?

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STRATEGY FORMULATION - Michael Porters contribution - Three generic strategies 1. Cost leadership 2. Differentiation 3. Focus

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COST LEADERSHIP Focus on reducing costs Reduced prices this is also achieved by The globalization of operations Concentrating the manufacturing effort in few countries Achieving greater labour effectiveness

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COST LEADERSHIP Tata Nano Big Bazaar Southwest Airlines

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DIFFERENTIATION - Mercedes - Sony 1. Creating unique image 2. Branding - Singapore Airlines 1. Superior inflight services 2. Most modern fleet 3. Excellent ground services

Customers willing to pay more

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FOCUS - Narrow segment - Cost based or differentiation based - Low cost artificial limbs made by Jaipur based practitioner - Specialist reputation Dilip Chhabria designer cars Laura Ashley - Respond quickly to requirements - Small firms
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ISSUES WITH PORTERS GENERIC STRATEGIES
Pursue one or more strategies simultaneously Low cost does not mean low prices Organization may charge high prices Still cut costs

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ISSUES WITH PORTERS GENERIC STRATEGIES
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
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Does low cost always means low prices

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INFLUENCE OF MARKET POSITION ON STRATEGY Market leader Market challengers and followers Market nichers

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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
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MARKET 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
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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.

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MARKET LEADER STRATEGIES Need to defend Various methods 1. Expansion of markets 2. Protect market share 3. Increase market share Which is most beneficial Expansion of markets

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Expansion of markets Identifying new users New uses Existing users increasing their usage rates

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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
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EXPANSION OF MARKETS New uses Dupont - First used for parachutes - Now Stockings Shirts Tyres

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EXPANSION OF MARKETS Existing users increasing their usage rates Procter and Gamble Shampoos

Air Tel Value added services MMS 3G

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Protect market share Vulnerable to attack Maruti Suzuki Dominated the 80s and early 90s Attacked by Hyundai and Tata Focus on product launches Indigenization Economies of scale
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Maruti Suzuki Focus on new products launch Reasonable prices Replacement schemes Launch of True Value Enhancing customer value Maintained market leadeship
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Protect market share Modi Xerox(MX) HCL attacked with state-of-the-art copiers Attacked MX MX focused on service Improved its after sales service network HCL gave up.

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Protect market share MILITARY ANALOGIES FOR MARKET LEADERS
Position defence Mobile defence Flanking defence Contraction defence Pre-emptive defence Counter-offensive defence Behaving unconventionally
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POSITION DEFENCE
Argued as least methods of defence Impregnability of a fixed position Not very successful Attackers use indirect approach rather than taking head-on approach Marutis rapid loss of market share in late 90s Unable to defend the attack of Hyundai
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MOBILE DEFENCE Focus on understanding marketing myopia Broadening and diversification of business Cover territories that might in future serve as focal points for offence and defence Build future defences
Xerox focus in after sales service ITC exports movement into e-chaupal
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FLANKING DEFENCE Less protected than other parts Vulnerable to attacks Secondary markets should not be ignored

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FLANKING DEFENCE Coke Cola main business Non-cola areas are vulnerable to attacks Juices Launch of Minute-Maid to protect flanks
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FLANKING DEFENCE Easyjet Low-cost airlines Major players ignored this initially British Airways launch of low-cost airlines Developed into major market
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CONTRACTION DEFENCE Faced with attack Companies realize it is not worthwhile to defend Retreat Concentrate where it is least vulnerable
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CONTRACTION DEFENCE IBM Focused on PC hardware in 80s Entry of low-cost manufacturers Unable to match costs Gradual retreat Focus on software services Failure of British mobike companies
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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
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PRE-EMPTIVE DEFENCE HUL experience Launch of broad range of products Counter competition Anticipation Surf
Launch of variants Pre-empt P & G
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COUNTER OFFENSIVE DEFENCE Once attack has taken place How to respond to attack of competitor Three forms
meet the attack head-on Attack the attackers flank Develop a pincers movement in an attempt to cut off the attackers operational base.
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COUNTER OFFENSIVE DEFENCE
Attacking head-on is most common Cutting attackers operational base is a risky strategy
Jet attacking Sahara Price war initiated by Sahara Jet cut prices on the most profitable routes of Sahara Sahara crippled
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3. Expanding market share Asian Paints - Consistently proactive strategy - Innovation - Focus on semi-urban and rural areas - Intensive advertising - Improved distribution-direct deal with retail - Price incentives - Smaller size products.
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Behaving unconventionally
Appears counter-productive Canon Launched inkjet printer Knowing it would damage its dominant position in laser markets Ensured it remained as the leader in the printer market
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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

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Challenger needs to look into
Sustainable competitive advantage Neutralize leaders advantage Create impediments for leaders to retaliate

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Market Challenger Hero Honda attacking Bajaj Bajaj leader Primarily scooters Entry of Hero-Honda Decides to launch mobikes Mobikes Better aesthetic appeal Better balance Netter mileage Aspirational Educated consumer on these attributes
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Market Challenger Hero Honda attacking Bajaj Technology support of Honda Retaliation of Bajaj Launch of mobikes in collaboration with Kawasaki Finally overtook Bajaj in 2000
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CHOICES Attack the market leader Attacking firms of similar sizes Attacking smaller regional firms

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

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Market Challenger Option will also influenced by
Leaders likely response Availability of resources to launch an effective attack Possible pay-offs

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Eight most common strands for challengers Price discounting Product innovation Distribution innovation Heavy advertising Market development Clearer and more meaningful positioning Product proliferation Higher added value
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Porters thoughts Three most common ways of doing this are Reconfiguration Redefining the market High spending

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Reconfiguration New ways of doing the business Amazon.com selling books via internet

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Redefining the market FedEx Focusing on small packages Overnight delivery Operated its own aircraft EasyJet and Ryanair redefining of low-cost airlines
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High spending Costly and risky Technological infrastructure and brand awareness Amazon.com

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MARKET CHALLENGERS In military analogy it can be
Frontal attack Flanking attack An encirclement attack Bypass attack Guerilla attack
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FRONTAL ATTACK Two types
Pure frontal attack limited frontal attack

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Pure frontal attack market leader product for product price for price Pepsi attacking Coke

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Limited frontal attack Attacking at selected customers Kingfisher attacking Jet Kingfisher class

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FLANK ATTACK
Indirect approach More economical and effective Leader geographically weak or negligible presence Japanese mobike companies attacking European counterparts Hero Honda attacking Bajaj
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Hero Honda attacking Bajaj Scooters the dominant market Mobikes was a smaller market Mobikes
Higher safety Fuel efficient Better looks
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ENCIRCLEMENT ATTACK Attack on many fronts Defenders ability to retaliate is considerably reduced Expensive strategy Short-term losses
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ENCIRCLEMENT ATTACK Titan Watches Multiple products constant changes Occupy many dealer outlets Heavy advertising Tieup with Timex Attack from all fronts

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BYPASS ATTACK Avoid attacks against defenders existing products Focus on unrelated products, new geographical markets

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BYPASS ATTACK XEROX Gestetner the undisputed leader of the duplicating market in 70s Low cost technology Xerox avoided this Focus on building photocopiers Superior finish and easy to use Gestetner decline in mid-80s Consumers preference for faster copiers Xerox the undisputed leader
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GUERILLA ATTACK series of hit-and-run moves Designed to demoralize the opponent Short but intensive Keep competitor off-balance Airtel offering free hand-sets with connection took MTNL/BSNL by surprise
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GUERILLA ATTACK RELIANCE FRESH Early part of 2000 decade Danger for Subiksha How to sell lower than Reliance Concentrate on their strengths Fruits and vegetables
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RELIANCE FRESH Lesser quantity and better quality Defended Reliances attack on Bangalore and Chennai Gained significant market share Eventually leader
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LUX SOAP 80 varieties of Lux toilet soap fake Rural India How to attack fake Introduction of Rs 5 pack in the soap
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MARKET FOLLOWER STRATEGIES - Not interested as leaders - Less proactive - Cost of leadership too high - Avoid confrontation

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MARKET FOLLOWER STRATEGIES Fena Market follower Follows the leader Does not have the resources to challenge the leader
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MARKET FOLLOWER STRATEGIES Followers need to decide How they intend to operate How they following a market leader Three postures possible
Following closely the leader Following at a distance Following selectively in product and market terms
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MARKET FOLLOWER STRATEGIES Following leader too closely is also dangerous. Possibility of retaliation by leader Follow selectively invites the least amount of retaliation

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MARKET NICHER STRATEGIES - What is attractive Market size profitable Growth potential Negligible interest to major competitors Resources to serve niche markets Can defend when attacked. E.g.: Avon mobike tyres.

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MARKET NICHER STRATEGIES Many ways
Specific customer specialist geographic specialist Service specialist

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THE DANGERS OF STRATEGIC WEAR-OUT Successful strategies Began to wear out Lose its impact Strategies need review and modification Kodaks experience in conventional photography Xerox looking at paperless offices
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WHAT EMERGES - Never ignore new competitors - Ignorance of Gestetner - UK mobike makers ignoring Japanese mobike makers - Always exploit competitive advantages Not disappear Exploit new advantages E.g.: Bajajs understanding of two-wheeler market. - Never launch new product without understanding competitors response.
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