Chapter 3
STRATEGY FORMULATION: Understanding Different Strategies
After studying this chapter, you should be able to:
1. Identify and understand the levels of strategy
2. Learn and understand Porter's Generic Strategies: Cost Leadership,
Differentiation, and Focus
3. Learn how Porter’s generic strategies can be applied in various business
scenarios to achieve a sustainable competitive advantage.
4. Identify and understand the different growth strategies used by organizations.
5. Identify and understand different integration strategies.
STRATEGY LEVELS
Strategic initiatives are implemented in 3 levels:
1. Corporate level
Corporate-level strategy focuses on the overall direction and scope of the
entire organization. It involves top-level decision-making that defines the
company's mission, vision, and objectives. Corporate strategies are essential for
gaining a competitive advantage, entering new markets, or diversifying the
business. E.g. Google's corporate strategy involves diversification into various
businesses beyond its core search engine, such as artificial intelligence, cloud
computing, and autonomous vehicles. This diversification allows Alphabet Inc. to
mitigate risks and explore new revenue streams
2. Business level
Business-level strategy focuses on how a company competes in a particular
industry or market segment. It deals with strategic decisions related to products,
target audience, pricing, and competition. Business-level strategies are crucial for
creating a competitive advantage within a specific market. For instance, Apple's
business strategy revolves around innovation, premium pricing, and a seamless
ecosystem. By consistently launching innovative products like the iPhone, iPad,
and MacBook, Apple targets high-end consumers willing to pay a premium for
quality and design, thereby gaining a competitive advantage in the consumer
electronics industry.
3. Functional level
Functional-level strategy involves specific actions and decisions within each
functional area of the organization, such as marketing, finance, operations, and
human resources. These strategies are designed to support the overall corporate
and business-level strategies and ensure efficient operations within each
department.
Procter & Gamble, a consumer goods company, employs a marketing-
focused functional strategy. Each of its brands has a unique marketing approach
tailored to the target audience. For example, the marketing strategy for Pampers
(baby diapers) is entirely different from that of Gillette (razors). By tailoring
marketing strategies to individual products, P&G maximizes the appeal of each
brand to its specific market segment.
The three levels of strategy (Corporate, Business, and Functional) work together to drive
the company toward its goals. Corporate strategy gives overall direction, business
strategy outlines the competitive approach, and functional strategies ensure that day-to-
day activities match with the wider strategic objectives.
PORTER’S GENERIC STRATEGIES
1. Cost Leadership - focuses on being the cheapest in the industry. Companies cut
costs and streamline operations to offer products or services at lower prices than
competitors.
E.g. Jollibee Foods Corporation, a leading fast-food chain in the Philippines,
employs cost leadership by offering affordable, locally tailored menu items,
catering to the mass market.
2. Differentiation – focuses on offering unique, special, or high-quality products or
services that stand out. Customers are willing to pay more because of the
perceived value.
Apple's strategy centers on innovation, design, and user experience, evident
in products like iPhone, iPad, and MacBook. Renowned for sleek design, intuitive
interfaces, and seamless integration, Apple commands a premium price.
Customers willingly pay more for these distinctive features, enabling Apple to
sustain substantial profit margins.
3. Focus - Concentrate on a specific market segment or niche. Companies tailor
products or services to meet the unique needs of a particular group of customers.
E.g. Rags2Riches, a social enterprise in the Philippines, focuses on creating
eco-ethical fashion products, catering to environmentally conscious consumers
who value ethically sourced goods, thus carving a niche market.
Rustan's Supermarket, a high-end grocery chain, adopts a focus strategy
by catering to the premium market segment. They target customers seeking
premium, gourmet, and international products, as well as exceptional customer
service and a luxurious shopping experience.
GROWTH STRATEGIES
Growth strategies are strategies that firms used to realize a substantial increase in
sales, profits and assets by optimizing business functions and mobilizing financial
resources. These strategies are pursued by most organizations to grow their business.
Growth can be achieved by choosing any of the following strategies:
1. Market Penetration
Market penetration involves selling more of the existing products or
services to the current customer base in the existing market. It is applicable
when there is a potential to increase market share by attracting existing
customers from competitors or by encouraging current customers to buy
more.
2. Market Development
Market development involves introducing existing products or
services to new markets. It is suitable when the organization identifies
untapped markets, either geographically or demographically, where their
current offerings can be sold successfully.
3. Product Development
Product development entails creating new products or services to
cater to existing markets. This strategy is applicable when there is a demand
for enhanced or modified versions of existing products, or when
technological advancements allow the organization to create innovative
offerings.
4. Diversification
Diversification is the development of new products for new markets.
A firm is diversified when it has two or more lines of business that operate
in diverse market environments. Retailers are said to follow a diversification
strategy when it launches a new offering in a new market. Firms usually
think of diversification under certain specific situations. When a firm has
possibility to expand into industries whose technology or product
complement existing business, it thinks of related diversification.
Types of diversification strategy:
a. Related Diversification — Diversifying into business lines in the same
industry. Volkswagen acquiring Audi is an example.
b. Unrelated Diversification — Diversifying into new industries, such as
Amazon entering the grocery store business with its purchase of Whole
Foods.
c. Geographic Diversification — Operating in various geographic
markets.
INTEGRATION STRATEGIES
1. Vertical Integration - Is a strategy that allows a company to gain control over
distributors and suppliers.
Types of Vertical Integration
a. Backward Integration – is a strategy of seeking ownership or
increased control of a company’s supplier. This is used to reduced
dependency to suppliers.
b. Forward Integration – involves gaining ownership or increased control
over distributors or retailers.
2. Horizontal Integration - Horizontal integration is the strategy of a company to
expand its business into different products that are similar to current lines. Usually
done through mergers, acquisition or consolidation.
Example: SM Investments Corporation is one of the largest conglomerates in the
Philippines with interests in retail, banking, and property. SMIC has pursued vertical
integration within the retail sector through its subsidiary, SM Retail, which operates
various retail chains like SM Department Store, SM Supermarket, and numerous specialty
stores. They have also engaged in horizontal integration by diversifying into the banking
industry through BDO Unibank, one of the largest banks in the Philippines.
Figure 3.1 AYALA Corporation and Subsidiaries
Ayala Corporation's development and diversification strategy entails diversifying
into many industries through its subsidiaries. For example, Ayala Healthcare Holdings,
Inc. (AC Health) reflects their entry into the healthcare market, meeting the Philippines'
expanding need for healthcare services. This move not only diversifies their portfolio but
also corresponds with the market's expanding requirements.
Ayala Corporation also prioritizes innovation and market expansion. They stimulate
growth and access into growing markets through investing in technology, real estate,
banking, and renewable energy industries through companies such as Ayala Land, Bank
of the Philippine Islands, and ACEN RES (Renewables Energy Solutions). This strategy
approach allows Ayala Corporation to react to changing market dynamics, improve their
offers, and assure long-term success in a variety of businesses.
