Chapter Two Strategies in Action
Chapter Two Strategies in Action
STRATEGIES IN ACTION
2.1 Types of strategies
Alternative strategies that an enterprise could pursue can be categorized in to thirteen actions:
forward integration, backward integration, horizontal integration, market penetration, market
development, product development, concentric diversification, conglomerate diversification,
horizontal diversification, joint venture, retrenchment,, divesture, liquidation, and a combination
strategy.
I. INTEGRATION STRATEGIES
These types of strategies require intensive efforts to improve a firm’s competitive position with
existing products.
a) Market Penetration: this strategy seeks to increase market share for present products or
service in present market through grater marketing efforts. It includes increasing the
There are three general types of diversification strategies: concentric, horizontal, and
conglomerate. However diversification strategies are becoming less and less popular as
organizations are finding it more and more difficult to manage diverse business activities.
a) Concentric Diversification: adding new, but related, products or service is widely called
concentric diversification. E.g. entry of Bell Corporation, a telephone company, in to
video programming business.
b) Horizontal diversification: adding new, unrelated products or service for present
customers is called horizontal diversification. This strategy is not as risky as
conglomerate diversification, because a firm should already be familiar with its present
customers.
c) Conglomerate Diversification: Adding new, unrelated products or services is called
conglomerate diversification. Some firms pursue this strategy based on an expectation of
profits from breaking up acquired firms and selling divisions piecemeal. It is based on a
stand that there is some kind of anti-synergy, the whole being worth less that the parts.
The guideline for pursuing strategies reveals situations, conditions, and guideline for when
various alternative strategies are appropriate to pursue. For example, a market development
strategy is generally most appropriate when new channels of distribution are available that are
reliable, inexpensive, and of good quality.
Liquidation
When neither retrenchment nor divestiture
strategy has been successful
When an organization’s only strategy is
bankruptcy
When stockholders can minimize their loss
by selling the organization’s asset.
According to porter, strategies allow organizations to gain competitive advantage from three
different bases: cost leadership, differentiation, and focus. Porter calls these bases generic
strategies.
Cost leadership emphasizes producing standardized products at very low per-unit cost for
consumers who are price sensitive.
Differentiation is a strategy aimed at producing products and services considered unique
industry wide and directed at consumers who are relatively price insensitive.
Focus means producing products and services that fulfill the needs of small groups of
consumers.
Porter strategies imply different organizational arrangements, control procedures, and incentive
systems. Larger firms with greater access to resources typically compete on a cost leadership
and/or differentiation basis; whereas smaller firms often compete on a focus basis. Porter stresses
the need for strategists to perform cost-benefit analysis to evaluate “sharing opportunities”
among firm’s business units. He also stresses the need for firms to “transfer” skills and expertise
among autonomous business units effectively in order to gain competitive advantage.
The aim of this strategy is to operate the business in highly cost effective manner and open up a
sustainable cost advantage over rivals. Successful low-cost leaders are exceptionally good at
finding ways to drive costs out of their business. A primary reason for pursuing forward,
backward, and horizontal integration strategies is to gain cost leadership benefits. But cost
leadership generally must be pursued in conjunction with differentiation. It is appealing to a
broad spectrum of customers based on being the overall low cost provider of a product or
service. A number of cost elements affect the relative attractiveness of generic strategies includes
economies or diseconomies of scale achieved, learning and experience curve effects, the
percentage of capacity utilization achieved, linkage with suppliers and distributors, the potential
for sharing costs and knowledge, labor costs, tax rates, energy costs, and shipping costs.
Striving to be low cost leader is effective when the market is comprised of many price-sensitive
buyers, when there are few ways to achieve product differentiation, when buyers do not care
A successful cost leadership strategy usually permeates the entire firm, as evidenced by high
efficiency, low overhead, limited perks, intolerance of waste, intensive screening of budget
requests, wide span of control, reward linked to cost containment, and broad employee
participation in cost control efforts. The Some risks of pursuing cost leadership are
DIFFERENTIATION STRATEGIES
The essence of a differentiation strategy is to be unique in ways that are valuable to customers
and that can be sustained. Successful differentiation can mean greater product flexibility, greater
compatibility, lower costs, improved service, less maintenance, greater convenience, or more
features. Differentiation does not guarantee competitive advantage, especially if standard
products sufficiently meet customer needs or if rapid imitation by competitors is possible. A
differentiation strategy should be pursued only after careful study of buyers’ needs and
preferences. A successful differentiation strategy allows a firm to charge a higher price for its
product and to gain customers loyalty since customers may become strongly attached to the
differentiation features. Features include superior service, spare parts availability, engineering
design, product performance, useful life, or ease of use. Common organizational requirements
for a successful differentiation strategy include strong coordination among the R&D (Research
and Development) and marketing functions and substantial amenities to attract scientists and
creative people. Some of the risks of this strategy are;
Unique product may not valued by customer to justify the higher price
Competitors may develop ways to quickly copy the differentiating feature
This strategy focuses on concentrating attention on a narrow piece of the total market. A
successful focus strategy depends upon an industry segment that is of sufficient size, has good
growth potential, and is not crucial to the success of other major competitors. Midsize and large
firms can effectively pursue focus based strategies only in conjunction with differentiation or
cost leadership-based strategies. All firms follow a differentiated strategy. This strategy is
effective when consumers have distinctive preferences or requirements and when rival firms are
not attempting to specialize in the same target segment. A focus strategy may concentrate on a
particular group of customers, geographic markets, or product line segments in order to serve a
well defined narrow market. A focuser’s basis for competitive advantage is either (1) lower costs
than competitors in serving the market niche or (2) an ability to offer niche members something
they perceive is better. This strategy is effective when;
This strategy aims at giving customers more value for the money. It combines a strategic
emphasis on low cost with a strategic emphasis on more than minimally acceptable quality,
service, features, and performance. The idea is to create superior value by meeting or exceeding
buyers’ expectation on key quality-service-features-performance attributes and by beating their
expectation on price. The aim is to become the low cost provider of a product or service with
good excellent attributes, then use the cost advantage to underpriced brands with comparable
attributes. The most powerful competitive approach a company can pursue is to strive
relentlessly to become a lower-and-lower cost producer of a higher-and-higher-caliber product,
According to porter, the business of a firm can best be described as a value chain in which total
revenues minus total cost of all activities undertaken to develop and market a product or service
yields value. All firms in a given industry have a similar value chain, which includes activities
such as obtaining raw materials, designing products, building manufacturing facilities,
developing cooperative agreements, and providing customer service. Firms should strive to
understand not only their own value chain operations, but also their competitors’, suppliers’, and
distributors’ value chain.