Lesson 9A Generic and strategies

Summary
At the end of the lesson, students should be able to: Explain the Generic strategies of: Low Cost leadership Differentiation and Focus List describe, Evaluate and give examples of the 15 grand strategies

Chapter 7 of course text J. Pearce Strategic Management

Generic Strategies
There are many specific strategies of each type (offensive or defensive), and identifying which is best depends on the circumstances. Porter suggests 3 broad or generic strategies for creating a defendable position in the long-run and outperforming competitors. Cost Leadership Cost leadership means having the lowest per-unit (i.e., average) cost in the industry that is, lowest cost relative to your rivals.

Low Cost Leadership

This could mean having the lowest per-unit cost among rivals in highly competitive industries, in which case returns or profits will be low but nonetheless higher than competitors Or, This could mean having lowest cost among a few rivals where each firm enjoys pricing power and high profits.

Cost leadership is defined independently of market structure.

Low Cost Leadership

Cost leadership is a defendable strategy because:
It defends the firm against powerful buyers. Buyers can drive price down only to the level of the next most efficient producer. It defends against powerful suppliers. Cost leadership provides flexibility to absorb an increase in input costs, whereas competitors may not have this flexibility. The factors that lead to cost leadership also provide entry barriers in many instances.

Low Cost Leadership

Economies of scale require potential rivals to enter the industry with substantial capacity to produce, and this means the cost of entry may be prohibitive to many potential competitors. Achieving a low cost position usually requires the following resources and skills:
Large up-front capital investment in new technology, which hopefully leads to large market share in the long-run, but may lead to losses in the short-run. Continued capital investment to maintain cost advantage through economies of scale and market share.

Low cost Leadership

Process innovation developing cheaper ways to produce existing products. Intensive monitoring of labor, where workers frequently have an incentive-based pay structure (i.e., a contract which includes some combination of a fixed-wage plus piece-rate pay). Tight control of overhead.

Differentiation
Differentiating the product offering of a firm means creating something that is perceived industry wide as being unique. It is a means of creating your own market to some extent.
There are several approaches to differentiation: Different design Brand image Number of features New technology

A differentiation strategy may mean differentiating along 2 or more of these dimensions.

Differentiation
Differentiation is a defendable strategy for earning above average returns because: It insulates a firm from competitive rivalry by creating brand loyalty;
it lowers the price elasticity of demand by making customers less sensitive to price changes in your products.

Uniqueness, almost by definition, creates barriers and reduces substitutes.

This leads to higher margins, which reduces the need for a low-cost advantage.

Differentiation
Higher margins give the firm room to deal with powerful suppliers. Differentiation also mitigates buyer power since buyers now have fewer alternatives.

Achieving a successful strategy of differentiation usually requires the following:

Exclusivity, which unfortunately also precludes market share and low cost advantage. Strong marketing skills. Product innovation as opposed to process innovation. Applied R&D. Customer support. Less emphasis on incentive based pay structure.

Focus or Niche
Here we focus on a particular buyer group, product segment, or geographical market.

Whereas low cost and differentiation are aimed at achieving their objectives industry wide, the focus or niche strategy is built on serving a particular target (customer, product, or location) very well.
Note, however, that a focus strategy means achieving either a low cost advantage or differentiation in a narrow part of the market. For reasons discussed above, this creates a defendable position within that part of the market.

Stuck in the Middle

Failure to develop a strategy in one of these 3 directions is a firm that is stuck in the middle. This means you lack the market share, capital, and overhead control to be a cost leader, and lack the industry wide differentiation necessary to create margins which obviate the need for a lowcost position. Being stuck implies low profits as a rule:
Profits are bid away to compete with low cost producers; or, The firm loses high margin business to firms who achieve better differentiation.

Stuck in the Middle

Classic examples of this problem are large, international airline companies, many of which are now bankrupt. Depending on a firms capabilities and resources, a stuck firm must gravitate toward either low cost (usually by buying market share) or focus or differentiation (which may mean decreasing market share).

Risks of Each Strategy

Risks of each Strategy: Each generic strategy is based on erecting different kinds of defences against the competitive forces, and hence they involve different risks. Cost Leadership: Maintaining cost leadership can be risky because:
Innovations nullify past inventions and learning, and hence cost leadership requires continual capital investment to maintain cost advantage. Exclusive attention to cost can blind firms to changes in product requirements.

Risks of Each Strategy

Cost increases narrow price differentials and reduce ability to compete with competitors brand loyalty.

Risks of each Strategy

Differentiation: Risks are:
Cost differentiation between low cost firms and differentiating firms becomes too large to hold customer loyalty.
Buyers trade-off features, service, or image for price.

Buyers need for differentiation falls. Imitation decreases perceived differentiation.

End

Grand Strategies

Grand Strategies
Grand strategies are major, over-reaching strategies that shape the course of a business. Unlike tactics, they are focused on the longterm goals of the business. Running your own business means pondering grand strategies involving everything from product development to liquidation.

Grand Strategies

Different strategies will, of course, fit different situations, so it is best to be familiar with a few different approaches.

Grand Strategies
Market Growth Market growth is a low-risk strategy compared to other, more encompassing, strategies. Instead of investing in research and development to create new product offerings, the market-growth strategy focuses on growing the market for a current product.

Grand Strategies
Market Growth An example of this is an electronics company that develops markets for an existing stereo system instead of developing a new system. To develop new markets it may be necessary to sell stereos in other markets as time passes, such as in foreign countries that are less technologically developed.

Grand Strategies
Product Development Product development is essentially opposite of market development. the

While market development focuses on exploitation, product development focuses on exploration. This involves investing heavily in research and development in order to create new and innovative product offerings.

Grand Strategies
Product Development

For example, a food manufacturer may invest heavily in research into healthier foods that can be marketed to the general public, or a car manufacture may develop safer or more fuelefficient cars through investments in research. These advances give firms an advantage over the competition.

Grand Strategies
Turnaround The turnaround strategy is used when a firm is experiencing profit stagnation, decline or other serious problems. It is an attempt to change the firm's strategy in the hopes of reversing its fortunes.

Grand Strategies
Turnaround In order to turn a firm around, managers will often change the direction of the firm. For example, a print newspaper might make the switch to online publication in order to adapt to the changing market.

Grand Strategies
Liquidation Liquidation is the grand strategy of last resort. When a firm cannot successfully turn itself around and there are no interested buyers, there is no choice but to liquidate the firm.

Grand Strategies
Liquidation Liquidating the firm involves selling off all its assets, including physical assets such as factories and merchandise, as well as intellectual assets, like brands and patents. The goal of a liquidation strategy is to recoup as much money for the ownership as possible, before shuttering the business.

Grand Strategies
Concentric Diversification This strategy involves the acquisition of businesses that are related to the acquiring firm in terms of technology, markets, or products. With this strategy, the selected new businesses possess a high degree of compatibility with the firms current businesses.

Grand Strategies
Conglomerate Diversification In this strategy, a firm, particularly a very large one, plans acquire a business because it represents the most promising investment opportunity available. The principal concern of the acquiring firm is the profit pattern of the venture, rather than creating product-market synergy with existing businesses

Grand Strategies
Divestiture This strategy involves the sale of a firm or a major component of a firm.

Grand Strategies
Horizontal Integration In this term strategy there is growth through the acquisition of one or more similar firms operating at the same stage of the production-marketing chain. Such acquisitions eliminate competitors and provide the acquiring firm with access to new markets

Grand Strategies
Vertical Integration A companys aim in this strategy is to acquire firms that supply it with inputs (such as raw materials) or are customers for its outputs (such as warehouses for finished products). When supplying firms are acquired, it is called Backward Vertical Integration. When output firms are acquired, it is called Forward Vertical Integration.

Grand Strategies
Concentrated Growth In this strategy, a firm directs it resources to the profitable growth of a dominant product, in a dominant market, with a dominant technology

Grand Strategies
conglomerate diversification: This strategy focuses on expansion through brand new products and new markets.

Grand Strategies
joint venture: Through this strategy, two companies form a new company and share its operations. Each partner has an equity stake.

Grand Strategies
strategic alliances: This strategy is adopt when two or more companies enter in a formal relationship and agree to pursue a common goal. There is no equity stake.

Grand Strategies
consortia: A consortia or Consortium is formed when two companies involve yourself in in a common activity next to pooled resources and achieve a common goal.

 Grand Strategy MatrixQuadrant IVConcentric diversificationHorizontal diversificationConglomerate diversificationJoint venturesQuadrant IIIRetrenchmentConcentric diversificationHorizontal diversificationConglomerate diversificationLiquidationQuadrant IMarket developmentMarket penetrationProduct developmentForward integrationBackward integrationHorizontal integrationConcentric diversificationQuadrant IIMarket developmentMarket penetrationProduct developmentHorizontal integrationDivestitureLiquidationRAPID MARKET GROWTHSLOW MARKET GROWTHWEAK COMPETITIVE POSITIONSTRONGCOMPETITIVE POSITION

The major Grand Strategies are: Market Development This strategy consists of marketing present products, often with only cosmetic modifications, to customers in related market areas by adding channels of distribution or by changing the content of advertising or promotion

Product development involves the substantial modification of existing products or the creation of new but related products that can be marketed to cu Innovation The underlying rationale of the grand strategy of innovation is to create a new product life cycle and thereby make similar existing products obsolete. Horizontal Integration When a firms long-term strategy is based on growth through the acquisition of one or more similar firms operating at the same stage of the productio Vertical Integration When a firms grand strategy is to acquire firms that supply it with inputs (such as raw materials) or are a customer for its outputs (such as warehouse Some increased risks are associated with both horizontal and vertical integration. For horizontally integrated firms, the risks stem from increased com Concentric Diversification Grand strategies involving diversification represent distinctive departures from a firms existing base of operations, typically the acquisition or internal Regardless of the approach taken, the motivations of the acquiring firms are the same: Increase the firms stock value. In the past, mergers have often led to increases in the stock price or the price-earnings ratio. Increase the growth rate of the firm. Make an investment that represents better use of funds than plowing them into internal growth. Improve the stability of earnings and sales by acquiring firms whose earnings and sales complement the firms peaks and valleys. Balance or fill out the product line. Diversify the product line when the life cycle of current products has peaked. Acquire a needed resource quickly (e.g., high-quality technology or highly innovative management). Achieve tax savings by purchasing a firm whose tax losses will offset current or future earnings. Increase efficiency and profitability, especially if there is synergy between the acquiring firm and the acquired firm. Concentric diversification involves the acquisition of businesses that are related to the acquiring firm in terms of technology, markets, or products. Th Conglomerate Diversification In conglomerate diversification, the principal concern of the acquiring firm is the profit pattern of the venture. Unlike concentric diversification, conglom The principal deference between the two types of diversification is that concentric diversification emphasizes some commonality in markets, products Unfortunately, the majority of such acquisitions fail to produce the desired results for the companies involved. Exhibit 69 provides seven guidelines t Turnaround A firm can find itself with declining profits for many reasons such as economic recessions, production inefficiencies, and innovative breakthroughs by Strategic management research provides evidence that firms that have used a turnaround strategy have successfully confronted decline. The researc A turnaround situation represents absolute and relative-to-industry declining performance of a sufficient magnitude to warrant explicit turnaround actio The immediacy of the resulting threat to company survival posed by the turnaround situation is known as situation severity. Severity is the governing Turnaround responses among successful firms typically include two stages of strategic activities: retrenchment and the recovery response. Retrench The primary causes of the turnaround situation have been associated with the second phase of the turnaround process, the recovery response. Reco Divestiture A divestiture strategy involves the sale of a firm or a major component of a firm. When retrenchment fails to accomplish the desired turnaround or wh The reasons for divestiture vary. They often arise because of partial mismatches between the acquired firm and the parent corporation, because of co Liquidation When liquidation is the grand strategy, the firm is typically sold in parts, only occasionally as a whole, but for its tangible asset value and not as a goin Bankruptcy Business failures are playing an increasingly important role in the American economy. In an average week, more than 300 companies fail. More than The other 25 percent of these firms refuse to surrender until one final option is exhausted. Choosing a strategy to recapture its viability, such a compa