Session 13 & 14
Concluding discussion of grand
strategies
1
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Remember for the Case
Three Scenarios: Worst, Best, Most Likely
Long Term Objective (same for each)
Two Competitive Options
Each Containing:
Corporate Level Strategy Alternative
Business Level Strategy Alternative
Generic Theme
Package of (3-6) Grand Strategies
2
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Types of Grand Strategies
Concentrated Growth
Conglomerate Diversification
Market Development
Turnaround
Product Development
Divestiture
Innovation
Liquidation
Horizontal Integration
Bankruptcy
Vertical Integration
Joint Ventures
Concentric Diversification
Strategic Alliances
Consortia
Irwin/McGraw-Hill
3
2000 The McGraw-Hill Companies, Inc.
Concentrated Growth
Concentrated growth directs its resources to
the profitable growth of a single product, in a
single market, with a single dominant
technology
4
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Market Development
Market development commonly ranks second only
to concentration as the least costly and least risky of
the 15 grand strategies
It consists of marketing present products, often with
only cosmetic modifications, to customers in related
market areas by adding channels of distribution or by
changing the content of advertising or promotion
Frequently, changes in media selection, promotional
appeals, and distribution are used to initiate this
approach
5
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Product Development
Product development
involves the substantial
modification of existing
products or the creation of
new but related products
that can be marketed to
current customers through
established channels
6
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Innovation
These companies seek to reap the initially high profits
associated with customer acceptance of a new or
greatly improved product
Then, rather than face stiffening competition as the
basis of profitability shifts from innovation to
production or marketing competence, they search for
other original or novel ideas
The underlying rationale of the grand strategy of
innovation is to create a new product life cycle and
thereby make similar existing products obsolete
7
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Horizontal Integration
When a firms long-term strategy is based on
growth through the acquisition of one or more
similar firms operating at the same stage of the
production-marketing chain, its grand strategy
is called horizontal integration
Such acquisitions eliminate competitors and
provide the acquiring firm with access to new
markets
8
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Vertical Integration
When a firms grand strategy is to acquire firms that
supply it with inputs (such as raw materials) or are
customers for its outputs (such as warehouses for
finished products), vertical integration is involved
The main reason for backward integration is the
desire to increase the dependability of the supply or
quality of the raw materials used as production inputs
9
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Vertical and Horizontal Integration
10
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Concentric Diversification
Concentric diversification involves the acquisition
of businesses that are related to the acquiring firm in
terms of technology, markets, or products
With this grand strategy, the selected new businesses
possess a high degree of compatibility with the firms
current businesses
The ideal concentric diversification occurs when the
combined company profits increase the strengths and
opportunities and decrease the weaknesses and
exposure to risk
11
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Conglomerate Diversification
Occasionally a firm, particularly a very large one,
plans acquire a business because it represents the
most promising investment opportunity available.
This grand strategy is commonly known as
conglomerate diversification.
The principal concern of the acquiring firm is the
profit pattern of the venture
Unlike concentric diversification, conglomerate
diversification gives little concern to creating productmarket synergy with existing businesses
12
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Turnaround
The firm finds itself with declining profits
Among the reasons are economic recessions,
production inefficiencies, and innovative
breakthroughs by competitors
Strategic managers often believe the firm can survive
and eventually recover if a concerted effort is made
over a period of a few years to fortify its distinctive
competences. This is turnaround.
Two forms of retrenchment:
Cost reduction
Asset reduction
13
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Elements of Turnaround
A turnaround situation represents absolute and relative-toindustry declining performance of a sufficient magnitude to
warrant explicit turnaround actions
The immediacy of the resulting threat to company survival is
known as situation severity
Turnaround responses among successful firms typically
include two stages of strategic activities: retrenchment and the
recovery response
The primary causes of the turnaround situation have been
associated with the second phase of the turnaround process, the
recovery response
14
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Divestiture
A divestiture strategy involves the sale of a
firm or a major component of a firm
When retrenchment fails to accomplish the
desired turnaround, or when a nonintegrated
business activity achieves an unusually high
market value, strategic managers often decide
to sell the firm
Reasons for divestiture vary
15
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Liquidation
When liquidation is the grand strategy, the firm
typically is sold in parts, only occasionally as a
wholebut for its tangible asset value and not
as a going concern
Planned liquidation can be worthwhile
16
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Bankruptcy
Liquidation bankruptcyagreeing to a
complete distribution of firm assets to
creditors, most of whom receive a small
fraction of the amount they are owed
Reorganization bankruptcythe managers
believe the firm can remain viable through
reorganization
Two notable types of bankruptcy
Irwin/McGraw-Hill
Chapter 7
Chapter 11
17
2000 The McGraw-Hill Companies, Inc.
Joint Ventures
Occasionally two or more capable firms lack a
necessary component for success in a
particular competitive environment
The solution is a set of joint ventures, which
are commercial companies (children) created
and operated for the benefit of the co-owners
(parents)
The joint venture extends the supplierconsumer relationship and has strategic
advantages for both partners
18
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Strategic Alliances
Strategic alliances are distinguished from
joint ventures because the companies involved
do not take an equity position in one another
In some instances, strategic alliances are
synonymous with licensing agreements
Outsourcing arrangements vary
19
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
Consortia, Keiretsus, and Chaebols
Consortia are defined as large interlocking
relationships between businesses of an industry
In Japan such consortia are known as
keiretsus, in South Korea as chaebols
Their cooperative nature is growing in
evidence as is their market success
20
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
21
Chapter 8
Strategic Analysis and Choice
in Single- or DominantProduct Businesses:
Building Sustainable
Competitive Advantages
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
22
Chapter 8
Concerned with Proper Selection of
Business Level Generic and Grand
Strategy Alternatives
Based on your SWOT analysis which of
the Generic and Grand Strategies are you
better equipped resources wise to
successfully implement?
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
23
Key Issues: Strategic Choice in Single Businesses
1. What strategies are most effective at building
sustainable competitive advantages for single
business units?
2. Should dominant-product/service businesses
diversify to build value and competitive
advantage? What grand strategies are most
appropriate?
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
24
Prominent Sources of Competitive Advantage
Cost leadership
Sources of
competitive
advantage
Differentiation
Speed
Market focus
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
25
Evaluating A Businesss Cost Leadership Opportunities
A. Skills and Resources Fostering Cost Leadership
Sustained capital investment and access to capital
Process engineering skills
Intense supervision of labor or core technical operations
Products or services designed for ease of manufacture or
delivery
Low-cost distribution system
B. Organizational Requirements Supporting Cost Leadership
Tight cost control
Frequent, detailed control reports
Continuous improvement and benchmarking orientation
Structured organization and responsibilities
Incentives based on meeting strict, usually quantitative targets
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
26
Evaluating A Businesss Cost Leadership Opportunities -C. Examples of Ways Businesses Achieve Competitive Advantage
Process innovations
lowering production costs
Product redesign to reduce
number of components
Safety training for all employees reduces absenteeism,
downtime, and accidents
Technology
development
Human
resource
management
Reduced levels of management Computerized, integrated information General
cuts corporate overhead
system reduces errors and costs
administration
Favorable long-term contracts; captive suppliers or key customer
for supplier
Global, online
suppliers
provide
automatic
restocking of
orders based
on sales
Inbound logistics
Irwin/McGraw-Hill
Economy of
scale in plant
reduces
equipment
costs and
depreciation
Operations
Computerized
routing lowers
transportation
expense
Cooperative
advertising
with
distributors
creates local
cost advantage
in buying
media space
and time
Outbound logistics
Marketing & sales
Procurement
Subcontracted
service
technicians
repair
product
correctly
first time
or bear
costs
2000 The McGraw-Hill Companies, Inc.
27
Advantages of a Cost Leadership Strategy
Low-cost advantages reduce likelihood of pricing
pressure from buyers
Sustained low-cost advantages may push rivals into
other areas, lessening price competition
New entrants must face an entrenched cost leader
without experience to replicate cost advantages
Low-cost advantages should lessen attractiveness of
substitutes
Higher margins allow low-cost producers to
withstand supplier cost increases
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
28
Key Risks of Cost Leadership
Many cost-saving activities are easily duplicated
Exclusive cost leadership can become a trap
Obsessive cost cutting can shrink other competitive
advantages involving key product attributes
Cost differences often decline over time
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
29
Evaluating A Businesss Differentiation Opportunities
A. Skills and Resources Fostering Differentiation
Strong marketing abilities
Product engineering
Creative talent and flair
Strong capabilities in basic research
Corporate reputation for quality or technological leadership
Long tradition in an industry or unique combination of skills
Strong cooperation from channels and suppliers of major components
B. Organizational Requirements Supporting Differentiation
Strong coordination among functions in R&D, product development, and
marketing
Subjective measurement and incentives instead of quantitative measures
Amenities to attract highly skilled labor, scientists, and creative people
Tradition of closeness to key customers
Some personnel skilled in sales and operations - technical and marketing
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
30
Evaluating A Businesss Differentiation Opportunities -C. Examples of Ways Businesses Achieve Competitive Advantage
Cutting edge production technology and product
features to maintain a distinct image and actual product
Technology
development
Programs to ensure technical competence of sales staff
and marketing orientation of service personnel
Human
resource
management
Comprehensive, personalized database to build knowledge of customers General
to be used in customizing how products are sold, serviced, and replaced administration
Quality control presence at key supplier facilities; work with
suppliers new product development activities
Purchase
superior
quality, wellknown
components,
raising quality
and image of
final products
Inbound logistics
Irwin/McGraw-Hill
Careful
inspection of
products at
each step in
production to
improve
performance
and lower
defect rates
Operations
JIT
coordination
with buyers;
use of own or
captive
transportation
service to
ensure
timeliness
Expensive,
informative
advertising
and promotion
to build brand
image
Outbound logistics
Marketing & sales
Procurement
Allowing
service
personnel
considerable
discretion to
credit
customers
for
repairs
2000 The McGraw-Hill Companies, Inc.
31
Advantages of a Differentiation Strategy
Rivalry is reduced when a business successful
differentiates itself
Buyers are less sensitive to prices for effectively
differentiated products
Brand loyalty is hard for new entrants to
overcome
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
32
Key Risks of Differentiation
Imitation narrows perceived differentiation,
rendering differentiation meaningless
Technological changes that nullify past
investments or learning
Cost difference between low-cost competitors and
the differentiated business becomes too great for
differentiation to hold brand loyalty
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
33
Creating a Competitive Advantage Based on Speed
Has become a major source of competitive
advantage for many firms
Involves the availability of a rapid response to
customers by
Providing current products quicker
Accelerating new product development or
improvement
Quickly adjusting production processes
Making decisions quickly
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
34
Evaluating A Businesss Rapid Response Opportunities
A. Skills and Resources Fostering Speed
Process engineering skills
Excellent inbound and outbound logistics
Technical people in sales and customer service
High levels of automation
Corporate reputation for quality or technical leadership
Flexible manufacturing capabilities
Strong downstream partners
Strong cooperation from suppliers of major components
B. Organizational Requirements Supporting Rapid Response
Strong coordination among functions in R&D, product development, and
marketing
Major emphasis on customer satisfaction in incentive programs
Strong delegation to operating personnel
Tradition of closeness to key customers
Some personnel skilled in sales and operations - technical and marketing
Empowered customer service personnel
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
35
Evaluating A Businesss Rapid Response Opportunities -C. Examples of Ways Businesses Achieve Competitive Advantage
Use of companywide technology sharing activities and
autonomous product development teams to speed new
product development
Develop self-managed work teams and decision making
at lowest levels to increase responsiveness
Technology
development
Human
resource
management
Highly automated and integrated information processing system;
include major buyers in the systems on a real-time basis
Preapproved, online suppliers integrated into production
Working very
closely with
suppliers to
include their
choice of
warehouse
location to
minimize
delivery time
Inbound logistics
Irwin/McGraw-Hill
Standardize
dies,
components,
and production
equipment to
allow quick
changeover to
new or special
orders
JIT delivery
plus
partnering
with express
mail services
to ensure very
rapid delivery
Use of laptops
linked directly
to operations
to speed the
order process
and shorten
the sales cycle
Operations
Outbound logistics
Marketing & sales
General
administration
Procurement
Locate
service
technicians
at customer
facilities that
are
geographically
close
2000 The McGraw-Hill Companies, Inc.
36
Advantages of a Speed-Based Strategy
Creates a way to lessen rivalry because firm has the
availability of something a rival may not
Allows firm to charge buyers more, engender loyalty,
or enhance its position relative to its buyers
Generates cooperation and concessions from
suppliers since they benefit from increased revenues
Substitutes and new entrants are trying to keep up
with the rapid changes rather than introducing them
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
37
Key Risks of a Speed-Based Strategy
Speeding up activities that have not been
conducted in a fashion prioritizing rapid
response should only be done after attention to
training, reorganization, and/or reengineering
Some industries - stable, mature ones - may not
offer much advantage to a firm introducing
some forms of rapid response
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
38
Creating a Competitive Advantage Based on Market Focus
Involves building cost, differentiation, and/or speed
competitive advantages targeted to a narrow, market
niche
Allows a firm to
Learn its target customers
Build up organizational knowledge of ways to satisfy
its target market better than larger rivals
Risks of focus strategies
Can attract major competitors to the segment
Believing a focus strategy, by itself, creates success,
rather than a form of low cost, differentiation, or speed
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
39
Industry Environments and Strategy Choices
Emerging Industries
Industries Transitioning to Maturity
Mature and Declining Industries
Fragmented Industries
Global Industries
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
40
Characteristics of Markets in Emerging Industries
Proprietary technology and technological
uncertainty
Competitor uncertainty regarding inadequate
information
High initial cost structure
Few entry barriers
First-time buyers require initial inducement
Inability to easily obtain raw materials and
components
Need for high-risk capital
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
41
Strategic Options for Emerging Industries
1. Ability to shape industrys structure
2. Ability to rapidly improve product quality
3. Establish favorable relations with key suppliers
4. Ability to establish technology as dominant force
5. Acquire a core group of loyal customers
6. Ability to forecast future competitors
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
42
Characteristics of Industries Transitioning to Maturity
Intense
competition for market share
Increased
Greater
emphasis on cost and service
Declining
Irwin/McGraw-Hill
sales to experienced, repeat buyers
profitability
2000 The McGraw-Hill Companies, Inc.
43
Strategic Options for Maturing Industries
1. Prune the product line
2. Emphasize process innovation
3. Emphasize cost reductions
4. Focus on selecting loyal buyers
5. Pursue horizontal integration
6. Expand internationally
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
44
Pitfalls to Avoid in Competing in Maturing Industries
A middle-ground approach to selecting a generic
competitive strategy
Sacrificing market share for short-term profits
Waiting too long to respond to price reductions
Retaining unneeded excess capacity
Engaging in sporadic efforts to boost sales
Placing hopes on new products
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
45
Characteristics of Mature/Declining Industries
Demand grows more slowly than economy,
or even declines
Slowing growth is caused by
Technological substitution
Demographic shifts
Shifts in consumer needs
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
46
Strategic Options for Mature/Declining Industries
1. Focus on key market segments offering
growth opportunities
2. Emphasize product innovation and quality
improvement
3. Emphasize production and distribution
efficiency
4. Gradually harvest the business
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
47
Pitfalls to Avoid in Competing in Mature/Declining Industries
Being overly optimistic about prospects for an
industry revival
Getting trapped in a profitless war of attrition
Harvesting from a weak position
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
48
Characteristics of Fragmented Industries
No firm has a significant market share
No firm can significantly influence industry
outcomes
Examples
Professional services
Retailing
Wood and metal fabrication
Agricultural products
Funeral industry
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
49
Strategic Options for Fragmented Industries
1. Tightly managed decentralization - Intense local
coordination, high personal service, local autonomy
2. Formula facilities - Standardized, efficient, low-cost
facilities at multiple locations
3. Increased value added - Difficult to differentiate
products/services
4. Specialization - Product type, customer type, type of
order, geographic areas
5. Bare bones/no frills - Intense low margin competition
(low overhead, minimum wages, tight cost controls)
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
50
Characteristics of Global Industries
Differences in prices and costs among countries
due to
Currency exchange fluctuations
Differences in wage and inflation rates
Other economic factors
Differences in buyer needs across countries
Differences in competitors and ways of
competing among countries
Differences in trade rules and governmental
regulations across countries
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
51
Strategic Options: Pursuing Global Market Coverage
1. License foreign firms to produce and
distribute a firms products
2. Maintain a domestic production base and
export products
3. Establish foreign-based plants and
distribution in foreign countries
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
52
Strategic Options: Choosing a Generic Competitive Strategy
1. Broad-line global competition
2. Global focus strategy
3. National focus strategy
4. Protected niche strategy
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
53
Grand Strategy Selection Matrix
Overcome weaknesses
Internal
(redirected
resources
within the
firm)
Turnaround or
retrenchment
Divestiture
Liquidation
II
III
Concentrated growth
Market development
Product development
Innovation
Irwin/McGraw-Hill
Vertical integration
Conglomerate diversification
External
(acquisition
I
or merger for
resource
IV
capability)
Horizontal integration
Concentric diversification
Joint venture
Maximize strengths
2000 The McGraw-Hill Companies, Inc.
54
Model of Grand Strategy Clusters
Rapid market growth
1. Concentrated
growth
2. Vertical integration
3. Concentric
diversification
1. Reformulation of
concentrated growth
2. Horizontal integration
3. Divestiture
4. Liquidation
Strong
Weak
I II
competitive
competitive
position
position
IV III
1. Concentric
1. Turnaround or retrenchment
diversification
2. Concentric diversification
2. Conglomerate
3. Conglomerate diversification
diversification
4. Divestiture
3. Joint venture
5. Liquidation
Slow market growth
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
55
Conclusion: Selecting a Business Strategy to
Achieve a Competitive Advantage
Focusing on key sources of
competitive advantage requiring
total, consistent commitment
Selection of
appropriate
business
strategie(s)
involves
Weighing skills, resources,
organizational requirements, and
risks of each source of
competitive advantage
Considering unique effects of the
generic industry environment on a
firms value chain activities
Irwin/McGraw-Hill
2000 The McGraw-Hill Companies, Inc.
