WELCOME TO:

Strategic Management
Credit hours: 2

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 CHAPTER III:

OPTIONS & ALTERNATIVE STRATEGIES

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 3.1 Competitive advantage

i. What is Competitive Advantage?

• Competitive advantage represents the superior
position enjoyed by the firm with respect to its certain
functions, or activities when compared to its
competitors.
Firm’s strengths emanating from various reasons, e.g.
for manufacturing firm.
1. The firm may be efficient or effective in performing
some activities rather than competitors.
2. It may possess good equipment
3. It may be able to undertake the flexible process and
systems. 3
 ii. How do companies build or acquire competitive
advantage?
1. Incorporating competitive advantage as an essential aspect
of corporate strategy
 Corporate strategy acts as a major source for the achievement
advantage over their rival firms
 By formulating corporate strategy ,strategic actions can be made.
 Such actions if implemented properly enable the firm to gain
competitive advantage.
2. Analysis of internal & industry competition
 Firms need to analyze & compare strengths & weakness with that
of its competitors.
 This helps the firm in strengthening its market position adopting
strategies.
[Link]
 Benchmark is the process of measuring the performance of an
organization against the best in class companies
 and making use of this information for setting organizational targets,
strategies policies & implementations.
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 .co n t

The benchmarking process helps the firm to

 identify its strengths & weakness ,
 To identify successful companies best practices and
to implement in their operations
Types of benchmark
[Link] benchmark, mainly involves with direct
comparison and analysis of the competitors products/services
[Link] benchmarking, focuses on the work process like
billing, employee training or order entry.
It helps the organizations to bring in lots of creative ideas and
innovative techniques for enhancing their process.
[Link] benchmarking, organization studies the way in which
other companies formulate strategies & attain competitive
advantage over other firms in the industry & become successful
in the market.
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 iii. Strategy & competitive advantage
Strategies to be followed for building competitive advantage
includes:
i. Innovation, the company gains competitive advantage by
exercising innovation ,enhancing quality& retaining its flexibility
to bring change and development
ii. Integration (horizontal & vertical)
iii. Alliance, mergers & acquisition
iv. Entry barriers, once the company has gained a leadership
status it develops entry barriers for other firms
v. R&D efforts are applied to gain the competitive advantage
through cost reduction, establishment of unique products,etc.
vi. Benchmarking, allows a firm to standardize the best practice of
its rival firms.
vii. Value chain analysis, the primary & support activities of a firm
focus on improving its value reducing the cost & improving the
performance.
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 Value analysis

The term value indicates economic value.

 Value analysis is a systematic& critical
assessment of all the cost elements of a product or
services for removing the unnecessary costs.
 It is regarded as a cost reduction tool.
• In value analysis ,value refers to the relationship which exist
between function and cost .
Value =Function/cost
• Value can be increased by enhancing the function at constant cost
or by maintaining the same function by decreasing the costs

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 Value chain analysis
 The value chain analysis, deals with the activities which
enhances the capabilities and economic performance of the
firm
 Value chain activities has two parts, primary activities &
support activities.
 The primary activities are those activities which directly relate
with actual creation ,manufacturing development sales & servicing
of products provided to customers.
 The support activities help in supporting the primary activities.

 This activity help the firm in enhancing and coordination and attain
efficiency within the primary the value adding activities of the firm.

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Strategies in Action

Vertical Integration Strategies

• Forward integration
• Backward integration
• Horizontal integration

Ch 5 -9
 Strategies in Action

Forward
Integration Example

Defined • General Motors is

acquiring 10% of its
• Gaining dealers.
ownership or
increased control
over distributors
or retailers

Ch 5 -10
 Strategies in Action
Backward
Integration Example

• Motel 8 acquired a
Defined furniture
manufacturer.
• Seeking
ownership or
increased control
of a firm’s
suppliers

Ch 5 -11
 Strategies in Action
Horizontal
Integration
Example

Defined • Hilton recently

acquired Promus.
• Seeking
ownership or
increased control
over competitors

Ch 5 -12
Strategies in Action

Intensive Strategies

• Market penetration
• Market development
• Product development

Ch 5 -13
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 Strategies in Action
Market
Penetration
Example
Defined • Ameritrade, the on-
line broker, tripled its
• Seeking increased annual advertising
market share for expenditures to $200
present products million to convince
or services in people they can make
present markets their own investment
through greater decisions.
marketing efforts
Ch 5 -15
 Strategies in Action
Market
Development

Example
Defined
• Khuzendar Tiles maker
• Introducing introduce his product
present products to Gulf markets.
or services into
new geographic
area

Ch 5 -16
 Strategies in Action
Product
Development
Example
Defined • Apple developed the
G4 chip that runs at
• Seeking increased 500 megahertz.
sales by improving • Khuzendar Tiles maker
present products introduce Ceramic as a
or services or new product.
developing new
ones
Ch 5 -17
 If we were to map these strategies onto Ansoff’s
matrix , the following would result

Product/services
Mar Present New
Market penetration Product development
ket .Open new branches
Consolidation
Present .Information automation .Over telephone banking
Liquidation
.Close branches

Market development Diversification

New
Open oversea branches .Set up direct sales
insurance company

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Strategies in Action

Diversification Strategies

• Concentric diversification
• Conglomerate diversification
• Horizontal diversification

Ch 5 -19
 Strategies in Action
Concentric
Diversification
Example

Defined • National Westminister

Bank PLC in Britain
• Adding new, but bought the leading
related, products British insurance
or services company, Legal &
General Group PLC.

Ch 5 -20
 Strategies in Action
Conglomerate
Diversification
Example

Defined • Consultant
Construction
• Adding new, Engineering acquired
unrelated products El-Awda Bisects Co.
or services

Ch 5 -21
 Strategies in Action
Horizontal
Diversification

Example
Defined
• The El-Awda Co.
• Adding new, merging with
unrelated products Palestinian Islamic
or services for Bank.
present customers

Ch 5 -22
Strategies in Action

Defensive Strategies

• Retrenchment
• Divestiture
• Liquidation

Ch 5 -23
 Strategies in Action
Retrenchment
(turnaround)

Example
Defined
• Regrouping through
• El-Awda sold off a land
cost and asset and 4 apartments to
reduction to reverse raise cash needed. It
declining sales and introduce expense
profit. Sometimes it is
called turnaround or
effective control
reorganizational system.
strategy.
Ch 5 -24
 Strategies in Action

Divestiture

Example
Defined
• Harcourt General, the
• Selling a division large US publisher, is
or part of an selling its Neiman
organization Marcus division.

Ch 5 -25
 Strategies in Action

Liquidation

Defined Example

• Selling all of a • El-Ameer Block factory

company’s assets, sold all its assets and
in parts, for their ceased business.
tangible worth

Ch 5 -26
 Means for Achieving Strategies

Joint Venture

Example
Defined
• Lucent Technologies
• Two or more and Philips Electronic
sponsoring firms NV formed Philips
forming a separate Consumer
organization for Communications to
cooperative make and sell
purposes telephones.

Ch 5 -27
 Joint Venture
• Joint venture is a popular strategy that
occurs when two or more companies form a
temporary partnership or consortium for the
purpose of capitalizing on some opportunity.
• Other types of cooperative arrangements
include R&D partnerships, cross-distribution
agreements, cross-licensing agreements,
cross-manufacturing agreements, and joint-
bidding consortia.
Ch 5 -28
 Joint Venture
• Joint ventures and cooperative arrangements
are being used increasingly because they
allow companies to improve communications
and networking, to globalize operations and
minimize risk.

Ch 5 -29
 Joint Venture
• Many, if not most, organizations pursue a combination
of two or more strategies simultaneously, but a
combination strategy can be exceptionally risky if
carried too far. No organization can afford to pursue all
the strategies that might benefit the firm. Difficult
decisions must be made. Priorities must be
established. Organizations, like individuals, have
limited resources. Both organizations and individuals
must choose among alternative strategies and avoid
excess indebtedness.

Ch 5 -30
 Joint ventures may fail when:
• Managers who must collaborate regularly
are not involved in the venture.
• The venture may benefit partnering
companies but not the customers.
• Both partners may not support the venture
equally.
• The venture competes with one of the
partners

Ch 5 -31
 Joint ventures are especially effective when:

• A privately owned organization forms one with a public

organization.
• A domestic organization works with a foreign company.
• The distinct competencies of the firms complement
each other especially well.
• Some project is potentially profitable but requires
much risk.
• Two or more smaller firms wish to compete against a
larger firm.
• There is a need to introduce a new technology quickly.

Ch 5 -32
 Mergers and acquisitions
• Mergers and acquisitions are two commonly
used ways to pursue strategies.
• A merger occurs when two organizations of
about equal size unite to form one enterprise.
• An acquisition occurs when a large
organization purchases (acquires) a smaller
firm or vice versa.

Ch 5 -33
 Reasons for mergers and acquisitions
1. To provide improved capacity utilization
2. To make better use of an existing sales force.
3. To reduce managerial staff.
4. To gain economies of scale.
5. To smooth out seasonal trends in sales.
6. To gain access to new suppliers, distributors,
customers, products, and creditors.
7. To gain new technology.
8. To reduce tax obligations.

Ch 5 -34
 Mergers and acquisitions may fail
• due to the following reasons:
1. Integration difficulties
2. Inadequate evaluation of target
3. Large debt
4. Inability to achieve synergy
5. Too much diversification
6. Managers overly focused on acquisitions
7. Too large of an acquisition
8. Difficulty integrating different cultures
9. Reduced employee morale due to layoffs and
relocations

Ch 5 -35
 Leveraged Buyouts (LBOs)
• 1. An LBO occurs when a corporation’s shareholders
are bought out (hence buyout) by the company’s
management and other private investors using borrowed
funds (hence leveraged).
• 2. Besides trying to avoid a hostile takeover, other
reasons for the initiation of an LBO by senior
management are that particular divisions do not fit into
an overall corporate strategy, must be sold to raise cash,
or receive an attractive offering price. A LBO takes a
corporation private

Ch 5 -36
 First Mover Advantages
• 1. First mover advantages refers to the
benefits a firm may achieve by entering a new
market or developing a new product or service
prior to rival firms.
• 2. The advantages of being a first mover
include securing access to rare resources,
gaining new knowledge of key factors and
issues, and carving out market share and a
position that is easy to defend and costly for
rival firms overtake.
Ch 5 -37
 Outsourcing
– Business-Process Outsourcing (BPO): Companies
take over functional operations such as human
resources, information systems, and marketing for
other firms.
– Outsourcing can be less expensive, can allow firms
to focus on core businesses, and enables firms to
provide better services.

Ch 5 -38
 Outsourcing strategy
 Outsourcing refers to the process of assigning work
to an outside company instead of carrying it in
house.
• A company whose internal business activities are
outsourced is termed as’ client company’
• and accompany who Provides outsourcing service
is known as “outsource provider”.
• Drivers of outsourcing/why/reasons:
 Cost-cutting
 Better operational efficiency
 Scarcity of internal resources
 Focus on innovation & core competence(focus on core objectives
& outsource non-core activities)
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 Lack of functional expertise & domain knowledge.
 Pros & cons of outsourcing
Advantages of outsourcing
 Helps to give emphasis for main objectives
 Cost saving especially for “labor”
 Gaining outside expertise, capabilities
 Acquiring outside technology
• Disadvantages of outsourcing
 Loss of control ,create dependence on partners
 Creating future competition

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Michael Porter’s Generic Strategies
Cost Leadership Strategies
(Low-Cost & Best-Value)

Differentiation Strategies

Focus Strategies
(Low-Cost Focus &
Best-Value Focus)

Ch 5 -41
 Focus
1. Focus means producing products and services that
fulfill the needs of small groups of consumers.
There are two types of focus strategies.
• a. A low-cost focus strategy offers products or
services to a small range (niche) of customers at
the lowest price available on the market.
• b. A best-value focus strategy offers products to a
small range of customers at the best price-value
available on the market. This is sometimes called
focused differentiation.
Ch 5 -42
 Focus
Focus strategies are most effective when the niche
is profitable and growing, when industry leaders are
uninterested in the niche, when industry leaders
feel pursuing the niche is too costly or difficult,
when the industry offers several niches, and when
there is little competition in the niche segment.

Ch 5 -43
 Generic strategies for pursuing
competitive advantage
1. Porter’s generics strategies
Competit Competitive Advantage
ive
Low cost Differentiation
scope
Broad Cost leadership Brand
target differentiation

Narrow Cost focus Differentiation

target
focus

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 Cost leadership strategy
• If an organization can achieve & sustain cost leadership,
then it will be an above-average performer in its
industry.
• A successful cost leadership strategy usually permeates
the entire firm, as evidenced by high efficiency, low
overhead, limited perks, intolerance of waste, wide
span of control, etc.
• Some risks of pursuing cost leadership are that
competitors may imitate the strategy, then driving
overall industry profits down.
• Drivers of cost advantages:
-economic of scales, economics of learning, product
design, capacity utilization 45
 Differentiation based strategy
• Here an organization seeks to be unique in its
industry along some dimensions that are valued by
buyers.
• A firm that can achieve & sustain differentiation will
be an above average performer in its industry.
• A risk is that the unique product may not be
valued highly enough by customer to justify the
higher price.
• When this happens, a cost leadership strategy will
defeat a differentiation strategy.
• Another risk is that competitor may develop ways to
copy the differentiating features quickly. 46
The following are
.
some of differentiation
strategies.
i. Product differentiation, based on the various products
/services characteristics as , its features, reliability,
maintenance, etc, the brand can be differentiated.
ii. Personnel differentiation, attain a competitive advantage
over its rival by having experienced and well trained
employees.
iii. Channel differentiation, building their distribution channel
according to the coverage, expertise, and performance.
Iv. Image differentiation, image means what the public
perceives about the firm or products
Mintzberg identify six types of differentiation strategies:
Price, image, support, design, quality & undifferentiated.
-Coping what the competitors are doing is non-differentiated
strategy.

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 Focus based strategy
• A firm may pursue advantage from cost leadership
or differentiation.
• Focus strategies are most effective when
consumers have distinctive preference or
requirements and when rival firms are not
attempting to specialize in the same target
segment.
• Risk of pursuing a focus strategy includes the
possibility that numerous competitors will
recognize the strategy & copy its strategy or
customers will drift/flow to others. 48
 .

End of the chapter

Thanks

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