Department of Management

College of Business and Economics

Addis Ababa University

Strategic Management
Short Note

Yohannes Neda

Strategic Management – Chapter Five Yohannes Neda

 Chapter Five

Strategy Analysis and Choice

Chapter Objectives Contents

At the end of this lesson students will be able to:  Strategic Issues
Describe strategic issues  Strategic goals and objectives
Set goals and objectives  The nature of strategy analysis and choice
Explain the nature of strategy analysis and  Types of strategy
choice.  Corporate level strategy
 Describe corporate, business and functional  Major corporate strategies (growth, stability &
level strategies defensive)
 Identify various strategic alternatives  Business level strategy
The five generic competitive strategies
Functional Level Strategy (Reading Assignment)
 BSC model
Strategic Management – Chapter Five  The 7’S model
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 Chapter Five: Strategy Analysis and Choice

Identifying critical /Strategic Issues

 Strategic issue is a Fundamental policy questions/critical challenges
that affect: mission, values, level or mix of services, clients, donors,
Benefits of strategic issues identification
cost, financing, structure or management.
 Enables focusing attention on important issue
 Strategic issues are issues which if not addressed will severely
handicap the organization’s ability to function effectively.  Attention is focused on issues not answers (there are several
instances where serious conflicts arise over solutions to problems
 Strategic issues are fundamental policy or program concerns that
that have not been clearly defined)
define the most important situations and choices an organization
faces now and in the future.  Provides useful clues about how to resolve them
 Enables to see the consequences of not meeting them

How to Identify Strategic Issues?

 In some instances, an organization is already aware of the critical

issues that the strategic planning process must help it address.
 In most situations, the planning team discern critical issues as they
work on external, market and internal assessments.
 Identified by reviewing the SWOT analysis and determining the factors
which are crucial in their success.
 6-8most important issues:
 Which have the biggest impact
 Which are the most immediate
 Which are closest to the shared values

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 Chapter Five: Strategy Analysis and Choice

Strategic Goals and Objectives

What are Strategic Goals?
What Should Strategic Goals Reflect in
 Strategic goals are statements of what you wish to achieve over
the period of the strategic plan (e.g. over the next years, five
Terms of Strategic Planning?
years, ten years.)
 They reflect the analysis that starts with creating a vision, a  Strategic goals, as part of the strategic planning process MUST
mission statement, and then your analysis of the environment, reflect the analyses used in the strategic planning process
strengths, weaknesses, opportunities and threats. (otherwise all that work is wasted). Strategic goals should:
 Strategic goals are the desired outcome of addressing strategic
issues. Each strategic goal should be a direct outcome of a • reflect the general themes of a company's vision, role
and mission
strategic issue, each of which is directly related to the
organization’s mission statement. • reflect the business realities outside of a company's
What are Objectives and Are They Different from Strategic (as identified in its environmental scan)
Goals?  Reflect the business and capabilities internal to an
 Objectives are usually specific statements (they are actually a organization(also as identified in an organization's environmental
particular kind of goal) that contribute to the achievement of scan)
"bigger" goals. In other words they are actually goals, but they  Reflect strengths, weaknesses, and opportunities and threats
are more specific. identified in the SWOT analysis.
 Another term for objectives within a strategic planning  Remember managers want the entire organization to be aligned,
framework is to call these "enabling goals", since, if all objectives or aimed at the achievement of their strategic goals, and for this
are hit, they will contribute to the achievement of the larger to happen the strategic goals need to be aligned with (or
strategic goal(s), they enable. consistent with and supporting of) all the other parts of the
strategic plan.

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 Chapter Five: Strategy Analysis and Choice

Objective Setting Goals vs. Objectives Summary

 Quantification (if possible) of more precise statement of the goal.
 Indicate how the mission can be achieved GOALS OBJECTIVES
 Represent specific planned levels of achievement
 Provide precise points or states to be achieved
 Allow review and appraisal of achievement
Very short statement, few Longer statement, more
 Make clear:
words descriptive
• What is to be accomplished
Broad in scope Narrow in scope
• How much is to be accomplished
Directly relates to the Indirectly relates to the
• By when it is to be accomplished Mission Statement Mission Statement
• By whom it is to be accomplished Covers long time period Covers short time period (such
In short an objective should be Specific, Measurable, Achievable,
(such as 5 years) 1 year budget cycle)
Relevant and Time bound (SMART)

 Specificity indicates clearly what needs to be achieved. Example: Analyzing and Choosing Strategies
reduce delay.
 Measurability indicates the possibility to determine if the desired
condition is fulfilled. Example: Reduce delays by 40% by the end of  Management develops a strategy by evaluating options available
2020. to the organization and choosing one or more of the options.
 Achievability indicates a consensus and commitment to the  Strategies exist at different levels in an organization and are
objectives among the major stakeholders. classified in to tree major categories according to their scope of
 Relevance indicates objectives need to be achievable. It answers coverage i.e. they are classified into:
feasibility, the availability of authority of the managers and the • Corporate,
means of realization.
 Time bound indicates a clear understanding of the time scales • Business and
associated with each objective as defined. It is difficult to have
• Functional level strategies
commitment without time frame.
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 Chapter Five: Strategy Analysis and Choice

Corporate-Level Strategy 1. Growth Strategies

 Corporate strategy is primarily about the choice of direction for a firm  Growth Strategies involve the attainment of specific growth
as a whole and the management of its business or product portfolio. objectives by increasing the level of a firm’s operations.
This is true whether the firm is a small company or a large
multinational corporation. Typical growth objectives for businesses include:
 In a large multiple-business company, in particular, corporate strategy  Increase in sales revenues
is concerned with managing various product lines and business units  Increase in earnings or profits
for maximum value. In this instance, corporate headquarters must  Other performance measures
play the role of the organizational “parent,” in that it must deal with  A corporation can grow internally by expanding its operations
various product and business unit “children.” both globally and domestically, or it can grow externally through
 Even though each product line or business unit has its own mergers, acquisitions, and strategic alliances.
competitive or cooperative strategy that it uses to obtain its own
competitive advantage in the marketplace, the corporation must Growth is a very attractive strategy for two key reasons:
coordinate these different business strategies so that the corporation  Growth based on increasing market demand may mask
as a whole succeeds as a “family.” flaws in a company - flaws that would be immediately evident
in a stable or declining market. A growing flow of revenue into a
A corporate-level strategy is concerned with two key questions: highly leveraged corporation can create a large amount of
 What business should the firm be in? organization slack (unused resources) that can be used to
 How should the corporate office manage its group of businesses?
quickly resolve problems and conflicts between departments and
 Corporate strategies are often called grand/master strategies
 These grand strategies (major Corporate Strategies) can be: divisions. Growth also provides a big cushion for turnaround in
1. Growth strategies - expand the company's activities. case a strategic error is made. Larger firms also have more
bargaining power than do small firms and are more likely to
2. Stability strategy - make no change to the company’s obtain support from key stakeholders in case of difficulty.
current activities
3. Defensive strategy – reduce the company’s levels of  A growing firm offers more opportunities for
activities advancement, promotion, and interesting jobs. Growth
itself is exciting and ego-enhancing for CEOs. The marketplace
 Having chosen the general orientation (such as growth), a company’s
managers can select from several more specific corporate strategies and potential investors tend to view a growing corporation as a
such as concentration within one product line/industry or “winner” or “on the move.” Executive compensation tends to get
diversification into other products/industries. bigger as an organization increases in size. Large firms are also
more difficult to acquire than are smaller ones; thus an
executive’s job in a large firm is more secure.
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 Chapter Five: Strategy Analysis and Choice

1. Growth Strategies

An organization’s growth strategies may include: Advantages of Concentration Strategy

1. Concentration  Focuses on doing one thing very well
2. Product Development  More clearly identifies specific needs of specific customers
3. Market Development  More readily anticipates changes and trends in customer needs
and is ready to respond when they occur
4. Integration  Achieves proficiency in developing new approaches to customer
5. Diversification needs, in meeting stiff competition, and in reacting to industry
trends and developments
 Creates a strategic advantage through market reputation and
gains competitive strength by developing distinctive competence
Concentration Strategy  Gains an experience curve much sooner

 Concentration strategy will be appropriate when the company Disadvantages of Concentration Strategy
concentrates on the current business.
 The firm directs its resources to the profitable growth of a single  An organization puts all its eggs in one basket
product, in a single market, with a single technology.  Changing customer needs, technological innovations, or new
 If a company’s current product lines have real growth potential, substitute products can undermine, or virtually destroy, a single
concentration of resources on those product lines makes sense as business firm.
a strategy for growth.  By concentrating in a specialized market, an organization may
 In general, firms that use this strategy gain competitive eventually lose the expertise to diversify.
advantage in production skill, marketing know-how & reputation
in the market place  Slow increases in growth & profitability
 In fact, it refers to marketing present products with only  Narrow range of investment options
cosmetic modifications.
When concentration will not provide the basis for achieving the
Thus, concentration focuses on: company mission there are two options that involve moderate
 Increasing present customers’ rate of usage
cost & risk. They are:
 Attracting competitors’ customers through price cuts
 Market development
 Attracting non-users through advertising, price incentives etc.  Product development
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 Chapter Five: Strategy Analysis and Choice

1. Growth Strategies
Market Development Strategy Integration Strategies
 Market development strategy involves increasing sales of existing
products or services on previously unexplored markets. Integration strategy focuses on moving to different industry level,
 It involves selling present products in new markets – additional different product & technology but the basic market remains the
regional, national & international expansions. same.
 Attracting other market segments through:  Integration strategies allow a firm to gain control over
 Developing product versions to appeal to other segments distributors, suppliers, and/or competitors.
 Entering other channels of distribution There are two types of integrative growths:
 Advertising in other media 1. Vertical integration

Product Development Strategy 2. Horizontal integration

 Product development is developing new products for present Vertical integration

markets. This involves:  Vertical Integration involves extending an organization’s present
business in two possible directions.
 Developing new product features:
• Forward integration moves the organization into
 Modifying (change color, form, shape, etc.) distributing its own products or services .
 Magnify & minify
• Backward integration moves an organization into
 Rearrange (layout, patterns, etc.) supplying some or all of the products or services used
 Developing additional models & sizes (product proliferation) in producing its present products or services.
 Thus, it involves substantial modification of existing products or
Horizontal integration
creation of new but related items that can be marketed to current
customers through established channels.  Horizontal integration occurs when an organization adds one or
 The idea is to attract satisfied customers to new products as a
result of their positive experience with company’s initial offering. more businesses that produce similar products or services and
 The product development strategy is often adopted either to that are operating at the same stage in the product market chain.
prolong the life cycle of current products or to take advantage of  Almost all horizontal integration is accomplished by buying
favorable reputation & brand name. another organization in the same business.
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 Chapter Five: Strategy Analysis and Choice

1. Growth Strategies

Guidelines for when forward integration strategy may be Guidelines for when backward integration strategy may be
effective: effective:
 When an organization’s present distributors are especially  When an organization’s present suppliers are especially
expensive, or unreliable, or incapable of meeting the firm’s
expensive, or unreliable, or incapable of meeting the firm’s needs
distribution needs.
for parts, components, assemblies, or raw materials.
 When the availability of quality distributors is so limited as to  When the number of suppliers is small and the number of
offer a competitive advantage to those firms that integrate
competitors is large.
forward.  When an organization competes in an industry that is growing
 When an organization competes in an industry that is growing
rapidly; this is a factor because integrative-type strategies
and is expected to continue to grow markedly; this is a factor
(forward, backward, and horizontal) reduce an organization’s
because forward integration reduces an organization’s ability to ability to diversify in a declining industry.
diversify if its basic industry falters.
 When an organization has both capital and human resources to
 When an organization has both the capital and human resources manage the new business of supplying its own raw materials.
needed to manage the new business of distributing its own
 When the advantages of stable prices are particularly important;
products.
this is a factor because an organization can stabilize the cost of
 When the advantages of stable production are particularly high; its raw materials and the associated price of its product(s)
this is a consideration because an organization can increase the
through backward integration.
predictability of the demand for its output through forward  When present supplies have high profit margins, which suggests
integration.
that the business of supplying products or services in the given
 When present distributors or retailers have high profit margins;
industry is a worthwhile venture.
this situation suggests that a company profitably could distribute  When an organization needs to quickly acquire a needed
its own products and price them more competitively by
resource.
integrating forward.

Guidelines for when horizontal integration strategy may be effective:

 When an organization can gain monopolistic characteristics in a particular area or region without being challenged by government for
“tending substantially” to reduce competition.
 When an organization competes in a growing industry.
 When increased economies of scale provide major competitive advantages.
 When an organization has both the capital and human talent needed to successfully manage an expanded organization.
 When competitors are faltering due to a lack of managerial expertise or a need for particular resources that an organization possesses; note
that horizontal integration would not be appropriate if competitors are doing poorly, because in that case overall industry sales are
declining.
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 Chapter Five: Strategy Analysis and Choice

1. Growth Strategies
Diversification Strategies
 The entry of a firm or business unit into new lines of activity,  Related diversification could be achieved through economies of
either by processes of internal business development or scope & market power
acquisition, which entail changes in its administrative structure,  Firms that have selected related diversification as their corporate-
systems and other management processes. level strategy seek to exploit economies of scope between
business units and get market power.
Diversification growth strategy is classified into two  Economies of scope are cost savings attributed to transferring the
categories: capabilities and competencies developed in one business to a new
 Concentric (Related) business. It involves sharing activities & transferring of core
 Conglomerate (Unrelated) competencies: operational & corporate relatedness.

Operational relatedness – sharing activities:

Concentric (Related) Diversification  Requires strategic control over business units

 Primary & support activities can be shared efficiently
 Its main limitation is the difficulty to explicitly differentiate the
 Diversifying into a different industry but one that’s related in outcomes of each firm.
some ways to the organization’s current operations
 Search for strategic “synergy”, which is the performance of the Corporate relatedness – transferring of core competencies:
whole is greater than the sum of the parts.  Corporate core competencies are complex sets of resources &
− The idea that 2 + 2 = 5 capabilities that link different businesses trough: Managerial &
 Synergy happens because of the interactions and the technological knowledge, experience & expertise.
interrelatedness of the combined operations and the sharing of
resources, capabilities, & distinctive competencies

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 Chapter Five: Strategy Analysis and Choice

1. Growth Strategies

Market power exists when a firm is able to:

Conglomerate (Unrelated) Diversification
 Sell its products above the existing competitive level  Diversifying into completely different industry from the firm’s
 Reduce the costs of its primary & support activities below the current operations
competitive level  Firm move into industries where there is
 Blocking competitors through multi-point competition
• No strategic fit to be exploited
Market power could be gained through:
• No meaningful value chain relationships
 Multi point competition
 Vertical integration • No unifying strategic theme
Multi-point competition exists when:
Approach is venture into any business with good profitability
 Two or more diversified firms compete in the same product areas prospects
or geographic markets  Unrelated diversification could be achieved through financial
• Multipoint competition will not create potential gains when there economies
is excessive competitive activity  These are cost savings realized through improved allocations of
financial resources and based on investments inside or outside
• Therefore, firms develop mutual forbearance to create value by the firm.
engaging in less competitive rivalry. Value is created through two types:
Vertical integration  Efficient internal capital allocations
 Exists when a firm produces its own inputs (backward integration) • Development of a portfolio of businesses with different risk
or owns its source of distribution of outputs (forward integration) profiles thereby reducing the business risk for the total
 A firm pursuing vertical integration usually is motivated to corporation
strengthen its position in its core business by gaining market  Purchasing other corporations and restructuring their assets
power over competitors
• Buying and selling businesses in the external market with the
intent of increasing the total value of the firm.
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 Chapter Five: Strategy Analysis and Choice

1. Growth Strategies
Major Reasons for Diversification 1.Internal growth
 Antitrust regulation  Internal growth occurs when a company expands its current
 Tax laws market share, its markets, or its products through the use of
 Low performance internal resources.
 Uncertain future cash flows  Internal growth is generally slower and less traumatic for the
 Risk reduction for firm organization. It usually takes place over an extended period,
 Tangible resources allowing time to adjust to the change.
 Intangible resources  Although exceptions exist, internal growth is generally less risky
than an acquisition or a merger. This is because growth, through
Managerial motives for diversification may lead to value internal means, is incremental and can be terminated at any
reduction time.
 Diversifying managerial employment risk  Thus, if an organization determines that an expansion is not
 Increasing managerial compensation working out, the project can be dropped.
 Generally speaking, internal growth strategies work well for
companies want to grow via product development or market
development.
Means of Diversification

 All the previously discussed growth strategies could be

implemented mostly either through:
1. Internal growth
2. Acquisition, merger,
3. Joint ventures.

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 Chapter Five: Strategy Analysis and Choice

1. Growth Strategies
2. Merger and Acquisition There could also be other reasons for merger and acquisition:

 Securing or protecting sources of raw materials/components

 Merger – is a strategy through which two or more firms agree  To gain access to distribution channels
to integrate their operations on a relatively co-equal basis  To make use of underutilized resources of the company
 Therefore, in merger, a single new company will be  To increase market power – horizontal, vertical & related
established with new name, organizational structure, acquisitions
issuing new stock & other changes  To enter a new market, offer new products & avoiding cost of new
 However, the shareholders of the former firms will product development (Acquisition as substitute for innovation)
become shareholders of the new enlarged organization  To overcome entry barriers (Cross-boarder acquisitions) etc.
 Acquisition – a strategy through which one firm buys a
controlling of 100% interest in another firm with the intent of
making the acquired firm a subsidiary business within its
portfolio.
 Therefore, an acquisition is a marriage of unequal
Problems in Achieving Success with Merger
partners with one organization buying the other. and Acquisition
 The shareholders of the acquired firm cease to be owners
of the acquiring company – unless payment is effect in
terms of shares.  As stated, the main reasons for acquisition and merger strategies
What are the main reasons of an acquisition or merger are to achieve strategic competitiveness & to improve the
strategy? possibility of earning above-average returns. However, acquisition
and merger strategies are not free of risk. Some of the possible
 The main reasons why firms use these strategies is to achieve
risks are discussed as follows:
strategic competitiveness & earn above average returns.
 These can be achieved through increasing the market value of the
stock – synergistic effect.

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 Chapter Five: Strategy Analysis and Choice

1. Growth Strategies

Integration difficulties:
 Two different cultures- incompatibility of culture
 Linking two different financial & control systems
 Different management styles-lack of effective working
r/ships
 Lack of communication b/n the target & acquiring
Integration company
difficulties  Resolving problems regarding the status of the newly
acquired firm’s executives.
Too large
Inadequate evaluation:
Inadequate
evaluation of  Lack of complete knowledge about the target
target
Merger and Managers company – no adequate research
Acquisitions overly focused  As a result, facing financial risk – paying too much for
on acquisitions the acquired company
 Tax consequences of the transaction.

Large or Large or extraordinary debt:

extraordinary
debt  Lead to negative outcomes such as:
Too much
Inability diversification  Postponing or eliminating investments on R&D
to that are necessary to maintain strategic
achieve competitiveness over the long term
synergy  Increasing the likelihood of bankruptcy
 Precluding investments in human resource
training & marketing.

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 Chapter Five: Strategy Analysis and Choice

1. Growth Strategies

Inability to achieve synergy: Too large:

 Synergy exists when the value created by units working together  Additional costs required to manage the larger firm exceed the
exceeds the value those units could create working independently benefits of efficiency created by economies of scale
 There will be no synergy when  Leads to bureaucratic controls-relatively rigid & standardized to
 The assets of two firms are non-complementary ensure consistency of decisions & actions
 The capabilities & core competencies could not be integrated  Leads to less innovation which can have a detrimental effect on
 There is loss of key personnel in the target company after performance
integration.

Too much diversification: Implementing Acquisition Successfully

 Leads to relying on financial control rather than strategic control
in evaluating business units’ performances-short-term successes  Successful acquisitions involve a well thought out strategy in
 Leads to divestiture those underperforming firms
selecting the target, avoiding over-paying, & creating value in the
 Lack of internal R & D activities that hinders innovations integration process
 In implementing acquisition strategies successfully the following
Managers overly focused on acquisitions: points should be considered:
 Specify the gains of the stockholders
 Requires substantial managerial time & energy  Analyze the target firm’s financial condition - soundness
 Searching for viable acquisition candidates  Ensure competency of the management of the target
 Completing due-diligence processes company
 Preparing for negotiations  Create a climate of trust – friendly acquisitions &
 Fail to assess objectively the value of outcomes achieved afterwards
compared with outcomes that might be achieved by  Exercise minimum control & improve the status of
concentrating on using the firm’s other strategies more managers
effectively  In general, analyze strengths & weaknesses vs.
opportunities & threats
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1. Growth Strategies

Attributes of Successful Acquisition 3. Joint Ventures

 Acquired firm has assets that are complementary to the acquiring  A joint Venture occurs when two or more organizations pool their
firm’s core business resources for a give project or a business product.
 Acquisition is friendly  A joint venture can be on either a temporary or permanent basis
 Acquiring firm selects, negotiates carefully  Joint ventures are especially popular between firms in different
countries
 Acquiring firm has financial slack (cash or favorable debt
position) There are a number of reasons why a joint venture may be
attractive to respective participants:
 After acquisition, the firm maintains low to moderate debt
position  By pooling their resources, the organizations may be capable of
 Acquiring firm has experience with change, is flexible & adaptable doing things that they could not do separately

 Sustained & constant emphasis on R&D and innovation.  By joining with another firm or firms, the companies share the
risk of the venture.
 High probability of synergy & competitive advantage by
maintaining strengths  Certain government-sponsored projects have aggressively
encouraged joint ventures for the purpose of involving minority
 Firms with strong complementarities are acquired & businesses.
overpayment is avoided
 International companies are often encouraged by host countries
 Financing (debt equity) is easier & less costly to obtain to enter into joint ventures with local companies.
 Lower financing cost, lower risk of bankruptcy, avoidance of
trade-offs associated with high debt
 Faster & more effective integration & achievement of synergy
 Maintain long-term competitive advantage in markets

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 Chapter Five: Strategy Analysis and Choice

2. Stability Strategies

 A corporation may choose stability over growth by continuing its

current activities without any significant change in direction.
No-Change Strategy
Although sometimes viewed as a lack of strategy, the stability
family of corporate strategies can be appropriate for a successful  A no-change strategy is a decision to do nothing new—a choice to
corporation operating in a reasonably predictable environment. continue current operations and policies for the foreseeable
 They are very popular with small business owners who have future.
found a niche and are happy with their success and the  Rarely articulated as a definite strategy, a no-change strategy’s
manageable size of their firms. success depends on a lack of significant change in a corporation’s
 Stability strategies can be very useful in the short run, but they situation.
can be dangerous if followed for too long.  The relative stability created by the firm’s modest competitive
 Some of the more popular of these strategies are the position in an industry facing little or no growth encourages the
pause/proceed-with-caution, no-change, and profit strategies company to continue on its current course, making only small
adjustments for inflation in its sales and profit objectives.
 There are no obvious opportunities or threats, nor is there much
Pause/Proceed with Caution Strategy in the way of significant strengths or weaknesses. Few aggressive
new competitors are likely to enter such an industry. The
 A pause/proceed-with-caution strategy is, in effect, a timeout—an corporation has probably found a reasonably profitable and stable
opportunity to rest before continuing a growth or retrenchment niche for its products.
strategy.
 Unless the industry is undergoing consolidation, the relative
 It is a very deliberate attempt to make only incremental comfort a company in this situation experiences is likely to
improvements until a particular environmental situation changes. encourage the company to follow a no-change strategy in which
It is typically conceived as a temporary strategy to be used until the future is expected to continue as an extension of the present.
the environment becomes more hospitable or to enable a
company to consolidate its resources after prolonged rapid
growth.

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 Chapter Five: Strategy Analysis and Choice

2. Stability Strategies

A Profit Strategy

 A profit strategy is a decision to do nothing new in a worsening

situation but instead to act as though the company’s problems are
only temporary.
 The profit strategy is an attempt to artificially support profits
when a company’s sales are declining by reducing investment and
short term discretionary expenditures.
 Rather than announce the company’s poor position to
shareholders and the investment community at large, top
management may be tempted to follow this very seductive
strategy.
 The profit strategy is useful only to help a company get through a
temporary difficulty.
 Unfortunately, the strategy is seductive and if continued long
enough it will lead to a serious deterioration in a corporation’s
competitive position. The profit strategy is typically top
management’s passive, short-term, and often self-serving
response to a difficult situation. In such situations, it is often
better to face the problem directly by choosing a retrenchment
strategy.

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3. Defensive Strategies
 Defensive Strategies most often used as a short-term solution to
reverse a negative trend or Overcome a crisis or problem
Retrenchment Strategy
situation.

Reasons:  Retrenchment occurs when an organization regroups through cost

 The company faced financial problems – certain parts of the and asset reduction to reverse declining sales and profits.
organization are doing poorly Sometimes called a turnaround or reorganizational strategy,
retrenchment is designed to fortify an organization’s basic
 The company forecasts hard times ahead related to:
distinctive competence.
 Challenges from new competitors & products
 During retrenchment, strategists work with limited resources and
 Changes in government regulations
face pressure from shareholders, employees, and the media.
 Owners are tired of the business or have to have an opportunity
Retrenchment can entail selling off land and buildings to raise
to profit substantially by selling.
needed cash, pruning product lines, closing marginal businesses,
Defensive strategies include: closing obsolete factories, automating processes, reducing the
 Retrenchment Strategy number of employees, and instituting expense control systems.

 Captive Company Strategy

 Divestment/ Sell-Out Strategy
 Bankruptcy/Liquidation Strategy

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 Chapter Five: Strategy Analysis and Choice

3. Defensive Strategies

Captive Company Strategy Bankruptcy/Liquidation Strategy

 A captive company strategy involves giving up independence in exchange for  When a company finds itself in the worst possible
security. A company with a weak competitive position may not be able to situation with a poor competitive position in an
engage in a full-blown turnaround strategy. The industry may not be sufficiently industry with few prospects, management has only
attractive to justify such an effort from either the current management or a few alternatives—all of them distasteful. Because
investors. no one is interested in buying a weak company in
 Nevertheless, a company in this situation faces poor sales and increasing losses an unattractive industry, the firm must pursue a
unless it takes some action. Management desperately searches for an “angel” bankruptcy or liquidation strategy. Bankruptcy
involves giving up management of the firm to the
by offering to be a captive company to one of its larger customers in order to
guarantee the company’s continued existence with a long-term contract. courts in return for some settlement of the
corporation’s obligations. Top management hopes
 In this way, the corporation may be able to reduce the scope of some of its that once the court decides the claims on the
functional activities, such as marketing, thus significantly reducing costs. company, the company will be stronger and better
 The weaker company gains certainty of sales and production in return for able to compete in a more attractive industry.
becoming heavily dependent on another firm for at least 75% of its sales.  In contrast to bankruptcy, which seeks to
perpetuate a corporation, liquidation is the
termination of the firm. When the industry is
Divestment/ Sell-Out Strategy unattractive and the company too weak to be sold
as a going concern, management may choose to
 If the corporation has multiple business lines and it chooses to sell off a division convert as many saleable assets as possible to
with low growth potential, this is called divestment. Divestiture can be part of cash, which is then distributed to the shareholders
an overall retrenchment strategy to rid an organization of businesses that are after all obligations are paid. Liquidation is a
unprofitable, that require too much capital, or that do not fit well with the firm’s prudent strategy for distressed firms with a small
other activities. Divestiture has also become a popular strategy for firms to number of choices, all of which are problematic.
focus on their core businesses and become less diversified.
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 Chapter Five: Strategy Analysis and Choice

Portfolio Analysis

How to Plan a Corporate Portfolio?  The best business portfolio is one that fits the company’s
strengths & helps exploit the most attractive opportunities
 Companies with multiple product lines or business units must ask
themselves how these various products and business units should  There are different types of portfolio techniques / matrixes in use,
be managed to boost overall corporate performance: the most well known of which are:

 How much of our time and money should we spend on our  The Boston Consulting Group – BCG-Matrix
best products and business units to ensure that they  The General Electric Screen – GE-Matrix
continue to be successful?
 How much of our time and money should we spend Regardless of the type of matrix used, companies must:
developing new costly products, most of which will never
be successful?  Analyse their current business portfolios & decide which
 One of the most popular aids to developing corporate strategy in businesses should receive more or less investment.
a multiple-business corporation is portfolio analysis.  Develop growth strategies for adding new businesses to the
 In portfolio analysis, top management views its product lines and portfolio, while at the same time deciding which businesses
business units as a series of investments from which it expects a should no longer be retained.
profitable return.
 The business portfolio is the collection of businesses (SBUs) &
products that make up the company.
A SBU:

 Is a unit of the company that has a separate mission & objectives

 Can be a company division, a product line or even individual
brands.

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 Chapter Five: Strategy Analysis and Choice

The Boston Consulting Group (BCG) Matrix

 One of the most common and long-standing ways of conceiving of RELATIVE MARKET SHARE
the balance of a portfolio of businesses is the Boston Consulting
High Low
Group (BCG) matrix.

MARKET GROWTH RATE

 The BCG is also known as The Growth-Share Matrix or Product STARS QUESTION MARKS
Portfolio Matrix.

High
 It helps to identify the cash flow requirements of different
businesses in a company’s portfolio
The BCG matrix has three main steps:
1. Dividing the company into SBUs – identification
 a company must create an SBU for each economically
distinct business area in which it operates

Low
 a company defines its SBUs in terms of its product CASH COWS DOGS
markets
Stars
2. Assessing the prospects of each SBU & comparing them by means  A star is a business unit which has a high market share in a growing
of a matrix: The criteria of assessing SBUs: market.
 The SBU’s relative market share / relative competitive  The leading SBUs in a company’s portfolio. They offer attractive long-term
strength profit & growth opportunities – still growing but not generating high profit
 The growth rate of the SBU’s industry / stages of the industry
life-cycle. Question marks
 A question mark is a business unit in a growing market, but not yet with
3. Developing strategic objectives for each SBU. high market share.
 can become a star if nurtured properly. To become a market leader, a
question mark requires substantial net injections of cash – it is cash
hungry.
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 Chapter Five: Strategy Analysis and Choice

The Boston Consulting Group (BCG) Matrix

Cash cows  Dogs having reached the end of their useful life, are
 A cash cow is a business unit with a high market share in a mature generally best put to sleep unless they are still performing a
useful function – not merely making a contribution to
market.
overheads
 Cash cows are cost leaders in their industries. The capital investment
requirements of cash cows are not substantial – such businesses  The portfolio must be balanced – when there are sufficient
cash cows, stars & question marks
generate a strong positive cash flow.
Dogs  If the company lacks sufficient number of these
businesses, it should consider acquisitions & new
 Dogs are business units with a low share in static or declining ventures to build a more balanced portfolio
markets and are thus the worst of all combinations.
 Dogs are unlikely to generate a positive cash flow & may become
cash hogs. They may require substantial capital investments just to Limitations of BCG
maintain their low market share.

 The Model is simplistic, only two factors are assessed

 The BCG matrix has several advantages. It provides a good way of (market share & industry growth)
visualizing the different needs and potential of all the diverse
 The connection between relative market share & cost
businesses within the corporate portfolio.
savings is not as straightforward as BCG suggests
 The cash surplus from any cash cows should be used to support the
 A business having a low market share can be very profitable
development of selected question marks & nurture stars
& could have a strong competitive position in certain
 The long-term objective is to consolidate the positions of stars and segments of a market (e.g., The motor vehicle manufacturer
turn favoured question marks into stars, thus making the company’s BMW is in this position)
portfolio more attractive.
 A high market share in a low-growth industry does not
 Question marks with the weakest or most uncertain long-term necessarily result in the large positive cash flow
prospects should be divested to reduce demands on a company’s characteristic - cash cow business
cash resources.
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 Chapter Five: Strategy Analysis and Choice

Industry Attractiveness-Competitive Strength Matrix (GE Matrix)

 The GE matrix eliminates the majority of
the inherent weaknesses of the BCG GE Industry Attractiveness - Competitive Strength Matrix
matrix by employing composite measures
of business strengths and industry
attractiveness.
 With the GE matrix, a strategist may plot a
business in any of nine positions, as
Business Unit Competitive Strength
100 Strong 66.7 Average 33.3 Weak 0

Industry Attractiveness
opposed to the BCG’s four positions. GE’s
matrix also includes a corresponding
increase in the number of advisable
strategies identified. High
 The GE matrix consists of nine cells of
different colors that indicate appropriate 66.7
strategies for different businesses or
products. Medium
 The vertical axis represents industry
attractiveness while the horizontal axis
represents the strength of the business or 33.
product. Both axes have high, medium, 3
and low locations. Low

0
High priority for investment Medium priority for investment

Low priority for investment

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 Chapter Five: Strategy Analysis and Choice

Industry Attractiveness-Competitive Strength Matrix (GE Matrix)

 In GE matrix each of the company’s business units is rated on  The calculation is done subjectively by identifying the two
multiple sets of strategic factors within each axis of the grid: dimensions
 Factors identified as enhancing Industry Attractiveness include: • First, the strategist has to identify those important
factors contributing much to industry attractiveness &
• Sales/market growth business strength
• Size & industry profitability • Second, assigning each factor a weight that reflects its
perceived importance relative to other factors
• Demand cyclicality
• Third, unfavorable & favorable future conditions for those
• Social, environmental, legal, etc., factors are forecasted & rated based on some scale (0 to
1 scale)
• Competition: Porter’s Five-force model
• Finally, a weighted composite score is then obtained for a
 Factors identified as enhancing business/competitive strength: business
• Market share
• Profit margin Example for Industry Attractiveness
• Customer & market knowledge Industry attractiveness factor Weight Rating Score
• Technological know-how & management caliber
Market size 20 0.5 10
• Brand image
• Cost structure & distinctive competencies etc. Industry profitability 35 1.0 35

 Thus, in contrast to the BCG, the GE uses composite measures. A few large competitors 30 0 0
 Accordingly, quantitative measures of industry attractiveness &
Political & regulatory factors 15 1.0 15
business strength are used to plot location of each business in the
matrix. Total 100 60
Note: 1.0 = High; 0.5 = Medium; 0 = Low

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 Chapter Five: Strategy Analysis and Choice

Industry Attractiveness-Competitive Strength Matrix (GE Matrix)

Example for Business Unit Competitive Strength  What matters is, after rating & weighting all strategic business
Business strength factor Weight Rating Scale units, they will be positioned in the nine cells accordingly.
 Each business unit appears as a circle in its respective cell &
Relative market share 20 0.5 10 position.
 Area of a circle is positioned to size of business as a percent of
Production company revenues or relative size of industry with pie slice
• Capacity 10 1.0 10 showing the company’s market share.
• Efficiency 10 1.0 10
• Location 20 0.0 0 Strategic Implication of the GE Matrix
Technological capability 20 0.5 10
 Three basic strategic approaches are suggested for any business
depending on its location within the grid:
Marketing
1. Businesses in upper left corner
• Sales organization 15 1.0 5
• Accorded top investment priority
• Promotion advantage 5 0 0 • Strategic prescription – invest to grow & build
Total 100 55 2. Businesses in three diagonal cells
• Given medium investment priority
• Invest selectively to maintain position & manage for
 These examples illustrate how one business within a corporate earnings
portfolio might be assessed using the GE planning grid 3. Businesses in lower right corner
It is a matter of management judgment: • Candidates for harvesting or divestiture

• What should be included or excluded as a factor • May, on occasion, be candidates for an overhaul &
repositioning strategy
• How it should be rated & weighted

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 Chapter Five: Strategy Analysis and Choice

Industry Attractiveness-Competitive Strength Matrix (GE Matrix)

Strategic Implication of the GE Matrix Overall Summary

Resource Allocation  The portfolio approach is useful for examining alternative corporate
 The resource allocation decisions remain quite similar to those in level strategies in multi-industry companies
the BCG approach:  Portfolio planning offers three potential benefits:
• Businesses classified as invest to grow would be treated
like the stars in the BCG-Matrix – to pursue growth- 1. It aids in generating good strategies by promoting
oriented strategies competitive & comparative analysis across the company’s
• Businesses classified in the invest selectively to maintain business units.
position would either be managed as cash cows – providing
maximum earnings or as question marks – selectively
chosen for investment or divestment. 2. It promotes selective resource allocation trade-offs by
• Businesses classified in the harvest / divest category would providing a visualization of the corporate-wide strategic issues
be managed like dogs – provide net resources for use in
other business units.
3. It helps in the implementation of corporate strategy because
 While the strategic recommendations of both GE & BCG are similar, increased focus & objectivity enhance commitment.
the GE-Matrix has three fundamental improvements & advantages:

1. The terminology associated with the GE grid is preferable

because it is less offensive & more universally understood –
Build, hold, harvest, withdraw, etc.
2. Use of more multiple measures (incorporating several factors)
associated with each dimensions (market attractiveness &
business strength) of the GE than simply market share &
market growth of BCG – broader assessment
3. The nine-cell format allows finer distinction b/n portfolio
positions than does the four-cell BCG format

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 Chapter Five: Strategy Analysis and Choice

Business-level Strategy
 Business-level strategy: is a strategy designed to gain competitive  Competitive scope refers to the scope of activities that the firm
advantage by exploiting core competencies in specific product market seeks to achieve the competitive advantages. Firms may choose
for the purpose of providing value to customers. to compete across a broad market or a focused/narrow market.
 It is a deliberate choice about how a firm will perform the value • Broad target – refers to a wide array of customers, i.e.,
all potential customers
chain’s primary & support activities in ways that create unique value.
 It reflects where & how the firm has an advantage over its rivals • Narrow target – a specific market segment, i.e.,
particular customers
 It is intended to create differences b/n the firm’s position relative to
those of its rivals.
 Competitive Advantage refers to either cost or uniqueness
 Thus, the essence of a firm’s business-level strategy is choosing to:
• Cost – refers to lowest cost with standardized products &
• Perform activities differently than rivals – to achieve lowest services
cost or
• Uniqueness – refers to high quality (differentiated)
• Perform different (valuable) activities – being able to products & services
differentiate
 Hence, competitive advantage is achieved within some scope – firms
should prefer one of the two.
Cost Differentiation

Competitive Scope
 The two basic types of competitive advantages a firm can posses are

Target
Broad
low cost or differentiation Leadership
• they are important to cope with the five forces based on an
industry structure
Integrated Cost
 The two basic types of competitive advantage combined with the Leadership/Differentiation
competitive scope lead to three generic strategies for achieving
above-average performance-cost leadership, differentiation & Focused

Narrow
Focused

Target
focus- which further produce five alternative strategies at the
Cost
business-level. Differentiation
 The focus strategy has two variants: cost focus & differentiation Leadership
focus. Thus, a focus strategy is an integrated set of actions designed
to produce & deliver goods/services that serve the needs of a Low Cost Uniqueness
particular competitive segment Competitive Advantage
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 Chapter Five: Strategy Analysis and Choice

Business-level Strategy
Combining the competitive scope and the competitive advantage the five
business-level strategies are:
Cost-Leadership Strategy
1. Cost leadership: lowest cost to produce acceptable features to all
customers
Definition
2. Differentiation: differentiated features rather than low cost for
customers who value differentiation  A cost leadership strategy is an integrated set of actions
3. Focused cost leadership: refers to targeting those specific customers designed to produce or deliver goods or services at the lowest
with low cost cost relative to competitors, with features that are acceptable to
4. Focused differentiation: refers to targeting those specific customers customers
with a differentiated product (e.g., Rolls Royce motor cars, Ferrari • Lowest competitive price
sport cars, Italian shoes from natural materials & man work ship) • Features acceptable to many customers
5. Integrated cost leadership & differentiation: according to porter, • Relatively standardised products
this strategy was referred initially as “stuck in the middle” Meaning,
neither the lowest cost nor a differentiated firm.
Cost saving actions required by this strategy:
Note:
 Building efficient scale facilities
 None of the five business-level strategies is inherently or universally  Tightly controlling production costs and overhead
superior to others  Simplifying production processes and building efficient
 The effectiveness of each strategy is contingent both on the manufacturing facilities
opportunities & threats in a firm’s external environment & on the  Minimising costs of sales, R&D and service
possibilities provided by the firm’s unique resources & capabilities  Monitoring costs of activities provided by outsiders
(core competencies)  Gaining a unique access to a large source of lower cost
 It is critical, therefore, for the firm to select an appropriate strategy materials.
in light of its external conditions & competencies  Making optimal outsourcing
 Vertical integration decisions
 Economies of Scope
 Accumulated Experience

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 Chapter Five: Strategy Analysis and Choice

Business-level Strategy
Cost Leadership Strategy and the Five Competitive Forces
Differentiation Strategy
Potential entrants
 Firm can frighten off potential new entrants due to:
• Their need to enter on a large scale in order to be cost Definition
competitive
• The time it takes to move down the learning curve  A differentiation strategy is an integrated set of actions
Bargaining power of suppliers & buyers designed to produce goods or services that customers perceive
 Can mitigate suppliers’ power by: as being different in ways that are important to them.
• Being able to absorb cost increases due to low cost position  The firm produces non-standardized products for customers
• Being able to make very large purchases, reducing chance of
suppliers using power who value differentiated features more than they value low
 Can mitigate buyers’ power by: cost.
• Driving prices far below competitors and causing them to  Continuous success with the differentiation strategy results
exit, thus shifting the power of the buyers back to the firm. when the firm consistently upgrades differentiated features that
Product substitutes & rivalry among existing competitors
 Cost leader is well positioned to: customers value, without significant cost increases.
• Make investments to be first to create substitutes  The ability to sell goods or services at a price that substantially
• Buy patents developed by potential substitutes exceeds the cost of creating its differentiated features allows
• Lower prices in order to maintain value position the firm to outperform rivals and earn above-average returns
 Due to cost leader’s advantageous position:
• Rivals hesitate to compete on the basis of price Examples of Approach for Differentiation
• Lack of price competition leads to greater profits  Products with unusual features
 Responsive customer service
Competitive Risks of the Cost Leadership Strategy  Rapid product innovation and technological leadership
 Processes used to produce & distribute goods or services may  Perceived prestige and status
become obsolete due to competitors’ innovations.  Different tastes
 Focus on cost reductions may occur at the expense of customers’  Engineering design and performance
perceptions of differentiation encouraging them to purchase A firm’s value chain can be analyzed to determine whether the firm
competitors’ products & services. is able to link the activities required to create value by using the
 Competitors, using their own core competencies, may learn to differentiation strategy
successfully imitate the cost leader’s strategy.

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 Chapter Five: Strategy Analysis and Choice

Business-level Strategy
Differentiation Strategy and the Five Competitive Forces
Focus Strategy
Potential entrants
 Can defend against new entrants because:
• Entrants’ new products must surpass proven products Definition
• Entrants’ new products must be at least equal to  A focus strategy is an integrated set of actions designed to
performance of proven products, but offered at lower prices
Bargaining power of suppliers & buyers produce or deliver goods or services that serve the needs of a
 Can mitigate suppliers’ power by: particular competitive segment.
• Absorbing price increases due to higher margins  Firms choose a focus strategy when they want their core
• Passing along higher supplier prices because buyers are loyal competencies to serve the needs of a particular industry
to differentiated brand
 Can mitigate buyers’ power by: segment or niche at the exclusion of others.
• Well differentiated products reduce customer sensitivity to Examples of specific market segments that can be targeted
price increases by a focus strategy:
Product substitutes & rivalry among existing competitors  Particular buyer group (e.g. youths or senior citizens)
 Well positioned relative to substitutes because:  Different segments of a product line (e.g. professional
• Brand loyalty to a differentiated product tends to reduce
customers’ testing of new products or switching brands craftsmen versus do-it-yourselves)
 Well positioned relative to competitors because:  Different geographic markets
• Brand loyalty to a differentiated product tends to offset price
competition Types of focused strategies:
1. Focused cost leadership strategy
Competitive Risks of the differentiation Strategy 2. Focused differentiation strategy
 The price differential between the differentiator’s product and the  To implement a focus strategy, the firm must be able to
cost leader’s product becomes too large complete various primary and support value chain activities in a
 Differentiation ceases to provide value for which customers are competitively superior manner, in order to develop and sustain
willing to pay a competitive advantage and earn above-average returns
 Experience narrows customers’ perceptions of the value of a  Competitor firms may overlook small niches
product’s differentiated features  The firm lacks resources needed to compete in the broader
 Counterfeit goods replicate differentiated features of the firm’s market, but serves a narrow segment more effectively than
products at significantly reduced prices industry-wide competitors.
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 Chapter Five: Strategy Analysis and Choice

Business-level Strategy Functional-level Strategy

Competitive Risks of the Focus Strategy  How Does a Firm Actually Go About Achieving a Position of
 The focuser firm may be ‘out focused’ by its competitors Cost-leadership, Differentiation or Focus?
 A firm competing on an industry-wide basis decides to pursue the niche
market of the focuser firm.  Through the functional-level strategies of:
 Customer preferences in the niche market may change to more closely • superior efficiency
resemble those of the broader market. As a result, the advantages of a • superior quality
focus strategy are either reduced or eliminated. • superior innovation
• superior customer responsiveness

 Functional-level strategy involves choosing strategies that will

Integrated Cost Leadership /Differentiation Strategy enable functional units to best perform their functions for the
business they belong to.
 A firm that successfully uses the integrated cost leadership/differentiation
strategy should be in a better position to:
• Adapt quickly to environmental changes
• Learn new skills and technologies more quickly
• Effectively leverage its core competencies while competing against
its rivals
 A commitment to strategic flexibility is necessary for successful use of this
strategy Read More on
Competitive Risks of the Focus Strategy
 Often involves compromises and becoming neither the lowest cost nor the Functional-
most differentiated firm
 Becoming ‘stuck in the middle’
• Lacking the strong commitment and expertise that accompanies
level
•
•
firms following either a cost leadership or a differentiated strategy
Earning below-average returns
Competing at a disadvantage
Strategies
 Even so, the integrated strategy is an appropriate choice for firms
possessing the core competencies to produce somewhat differentiated
products at relatively low prices

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