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  • 1. Business Strategies Professor Lai MGMT 497
  • 2. Strategy levels Top Management Business Unit #1 Business Unit #2 Business Unit #3 R&D, Marketing & Sales, Finance, Information Systems, Human Resources Procurement, Marketing & Sales, Manufacturing, Information Systems, Human Resources R&D, Manufacturing, Marketing & Sales, Logistics, Human Resources Functional (secure effective & efficient operations in each area) Corporate-level (define the overall scope & direction of the company) Business-level (secure competitive advantage for each business unit)
  • 3. Issues addressed by corporate strategies
    • Scope of operations
      • Which product or service markets should the company compete in?
      • Which geographic markets should the company serve?
    • Extent and type of diversification
      • How broad should the corporate portfolio of businesses be?
      • Should related or unrelated diversification be pursued?
      • Are there new businesses the company should enter?
      • Are there existing businesses the company should terminate or divest?
    • Organizational structure and integration
      • How should the company be structured?
      • How much should the company integrate its various lines or units of business?
    • Deployment of resources
      • How should the company allocate resources among business units?
      • Which business units will be stressed?
  • 4. Corporate portfolio strategy
    • This guides decisions on which business to expand, maintain or exit:
      • STARS are businesses with a high market share in a fast-growing market. They can generate significant cash flows but may also need a lot of resources to sustain their growth.
      • QUESTION MARKS are businesses with little market share but a high growth potential. These businesses are cash users and can be risky.
      • CASH COWS are businesses that have a high market share in a slow-growth market. They generate dependable cash flows to fund business units with better growth. Invest just to maintain their market positions.
      • DOGS are businesses with a low market share in a slow-growth market. Such businesses can still be profitable but the company will not invest in them any further and may even consider selling them.
    DOGS CASH COWS Low QUESTION MARKS STARS High Market Growth Low High Market Share Boston Consulting Group (BCG) Matrix:
  • 5. Corporate directional (grand) strategies
    • Growth strategies
      • Type : Concentration vs. diversification
      • Level : Vertical integration vs. horizontal integration
      • Geographic Location : International growth vs. domestic growth
    • Stability strategies
      • Pause, digest, and consolidate after rapid growth or some turbulent events
    • Retrenchment strategies
      • Turnaround through cost cutting, downsizing, divestment, or spin-off
      • Bankruptcy and restructuring
      • Liquidation (last resort)
  • 6. Corporate growth strategies Vertical Integration Forward or Backward International Global or Multi-domestic Horizontal Integration Diversification Related or Unrelated Corporate Growth Concentration
  • 7. Concentration strategy
    • Focusing on expanding the company’s primary lines of business
    • Examples : Merck, Walgreen, Cisco, Starbucks, UPS
    • Potential benefits of concentration
      • Allows the company to specialize in and master one business
      • No dilution of management’s attention – the management can focus on what the company knows and does best
    • Drawbacks of concentration
      • The current industry may become mature and even decline
      • The industry conditions can be too unstable
      • Too much dependence on a single industry makes the company vulnerable to risks of product obsolescence (due to changes in, e.g., technology or consumer preferences)
      • Miss the opportunity to leverage resources and capabilities to other businesses
  • 8. Horizontal integration strategy
    • Seeking ownership or increased control over competitors
    • Examples : Oracle, Unitedhealth, Washington Mutual
    • Potential benefits of horizontal integration
      • Gain scale economies in production
      • Cost savings from economics of scope by combining similar operations (e.g., marketing and distribution) of different companies and reducing duplication of resources
      • Create value through product bundling, total solution and cross selling
      • Reduce the threat from substitutes
      • Increase market power over suppliers and buyers
      • May help increase market penetration and/or expand market coverage geographically
    • Drawbacks of horizontal integration
      • Not easy to integrate operations of companies with different cultures
      • Synergies may be more imaginary than real
      • Reduction in competition can generate antitrust issues
  • 9. Vertical integration strategy
    • Seeking ownership or increased control over distributors (forward integration) or over suppliers (backward integration)
    • Examples : Exxon Mobil, General Motors
    • Potential benefits of backward integration
      • Lower transaction (purchasing) costs and capture additional profits from expanded operations
      • Have better control over the supply of inputs
      • Reduce the bargaining power of supplier
    • Potential benefits of forward integration
      • Lower transaction (selling) costs and capture additional profits
      • Have better control over the distribution of products and services
      • Reduce the bargaining power of distributors/buyers
    • Drawbacks of vertical integration
      • Product costs may rise if best-cost external suppliers are not used
      • Susceptible to industry fluctuations and cycles
      • May face risks with growing maturity of the industry
      • Increase bureaucratic costs
  • 10. Related (concentric) diversification strategy
    • Diversify into related businesses under some coherent strategic theme
    • Examples : Johnson & Johnson, Pepsico, Time Warner, Citigroup
    • Potential benefits of related diversification
      • Cross-business sharing of expertise, capabilities and technology
      • Exploit economics of scope and capture synergy benefits from combining similar operations (e.g., manufacturing, sales and marketing, distribution, R&D, information systems, and managerial support) of different businesses
      • Enable collaboration to develop new strengths and create mew competitive capabilities (including new products and new services)
      • Leverage use of a company’s brand name
      • Increase market power
    • Drawbacks of related diversification
      • Difficulties of integrating the operations of businesses with different cultures
      • Strategic fits may be overestimated
  • 11. Unrelated (conglomerate) diversification strategy
    • Diversifying into unrelated businesses with no unifying strategic theme (this is more finance-driven and less strategy-driven)
    • Examples : General Electric, 3M, Honeywell, Berkshire Hathaway
    • Potential benefits of unrelated diversification
      • Spreading business risks over a wider variety of industries
      • Promote efficient allocation of internal capital by allowing capital to be allocated toward industries with best profit prospects
      • Purchase any businesses with undervalued assets and turn them around
    • Drawbacks of unrelated diversification
      • Difficult to manage and excel in unrelated businesses
      • Dilution of management’s attention often leads to underperformance of some lines of business
      • Lack of strategic fits which can be leveraged into competitive advantage
  • 12. Implementation of growth strategies
    • Can take a long time
    • High development costs with uncertain outcomes
    • Lack of needed technical expertise and know-how
    • Capture all the value created
    • Encourage innovation
    • Full management control
    Internal Development
    • Potential conflicts in cultures and management personalities
    • No full management control
    • Quick entry to a market
    • Bypass barriers to entry
    • Less capital investment
    • Allow risk sharing
    • Combine strengths & capabilities of two companies
    Strategic Alliances & Partnerships
    • Takeover premium
    • Excessive borrowing
    • Integration difficulties
    • Overestimate synergy
    • Possible antitrust problems
    • Quick to obtain proven expertise & market positions
    • Bypass barriers to entry
    • Increase market power
    • Economies of scale
    Mergers & Acquisitions Cons Pros Options
  • 13. International growth strategy
    • Ways to enter foreign markets
      • Exporting
      • Licensing or franchising
      • Direct investment (joint ventures or wholly-owned subsidiaries)
    • These alternative options vary in their degree of speed, control, and risk, as well as the required level of investment and market knowledge.
    • Types of cross-border market differences
      • Differences in consumer tastes and preferences
      • Differences in buying habits
      • Differences in infrastructure and distribution channels
      • Differences in government regulations
  • 14. Potential benefits from international growth Gain access to new markets with attractive growth Capitalize on resource strengths and competencies Enable cost reduction Diversify business risks across a wider market base Get access to valuable natural resources and raw materials
  • 15. Basic strategic alternatives for international growth Global Strategy Transnational Strategy Multi-domestic Strategy High Low Pressures for Local Responsiveness Cost Pressures Low High
  • 16. Global strategy for international growth
    • It deemphasizes national differences, having products standardized across national markets. This works best when buyer tastes and preferences are similar across countries or can be standardized through marketing efforts.
    • Examples : Coca-Cola, MacDonald’s, Sony, Panasonic
    • Benefits of the Global strategy
      • Standardization enables the company to exploit economies of scale in manufacturing and marketing, thus lowering product costs
      • Allow transfers of the company’s competencies across national markets
      • Permit resource sharing and coordinated strategic moves across countries
      • Faster and less costly product development by focusing on global brands
      • Successful global brands can enhance the company’s bargaining power over distributors
    • Drawbacks of the Global strategy
      • Highly centralized control and so low responsiveness to local markets
      • Ignored the local needs can limit market penetration and may allow other locally responsive competitors to capture market share
      • Developing new global brands can take a long time and a lot of capital
  • 17. Multi-domestic strategy for international growth
    • It embraces national differences, with products customized for local markets. This can be effective when buyer tastes and preferences differ vastly across countries.
    • Examples : Nestle, Philips Electronics, Procter & Gamble, Toyota
    • Benefits of the multi-domestic strategy
      • Less centralized control and so high local responsiveness
      • Customization offers product differentiation
    • Drawbacks of the multi-domestic strategy
      • Poses problems of transferring competencies across borders
      • Higher costs due to tailored products and duplication across countries
      • Slower and more costly product development
  • 18. Generic business-level strategies (positioning)
    • Positioning the company based on strategic strength and strategic scope:
      • Cost leadership
      • Differentiation
      • Focus (Segmentation)
    Focus (Segmentation) Narrow Differentiation Cost Leadership Broad Competitive Scope Uniqueness Low Cost Sources of Competitive Advantage
  • 19. Cost leadership strategy
    • This strategy underscores the company’s strength in efficiency
    • Example : Wal-Mart
    • To be successful, the cost leadership strategy requires:
      • Relatively standardized products
      • Products serve needs of buyers in the broadest market segment
      • Strong price competition with highly price-sensitive buyers
      • Constant tight control of production costs and overhead costs
      • Mass production to achieve economies of scale
      • Efficient manufacturing processes
      • Superior operating efficiency that is hard for competitors to match
    • Risks
      • Loss of cost advantage due to, e.g., imitation or technological advances of competitors
      • Too fixated on reducing costs and ignoring buyers’ needs
      • Customer preferences change toward more differentiated products
  • 20. Differentiation strategy
    • This strategy underlines the company’s strength in offering unique products
    • Examples : Apple Inc., Harley-Davidson, Walt Disney
    • To be successful, the differentiation strategy requires:
      • Perceived uniqueness in product attributes
      • Customers have low price sensitivity and are willing to pay a premium price
      • Strong R&D and fast-paced product innovation
      • Superior product engineering
      • Strong marketing skills to sustain a distinct brand image and maintain customer loyalty
      • Constant review of market trends
    • Risks
      • Prices are too high to be justified by the product’s differentiated features
      • Over-differentiating such that product attributes exceed buyers’ needs
      • Loss of differentiation due to imitation by competitors
      • Customer tastes can change toward more standardized products
      • May overlook cost control efforts, which can still be important
  • 21. Focus (segmentation) strategy
    • To gain a competitive advantage by meeting the specialized needs of a narrow market segment
    • Examples : Porsche AG (focused differentiation)
    • Credit unions and community banks (focused cost)
    • To be successful, the focus strategy requires:
      • The industry has many market segments, creating focusing opportunities
      • Ability to identify right niche markets that are less vulnerable to substitutes or where competition is weakest
      • Few other rivals are focusing on the same target market
      • High degree of product customization
      • Strong customer loyalty
      • Relevant factors that support a cost leadership or differentiation strategy
    • Risks
      • The broad-market leader may find effective ways to serve the target market
      • The market segment may become appealing enough to attract other rivals, depressing the profitability in serving the already small market segment
  • 22. Functional strategies
    • These aim to secure effective and efficient operations within specific functional areas so that they support business-level and corporate-level strategies:
      • Marketing & Sales
      • Decide on product choices, pricing, distribution, promotion, and customer service
      • Financial management
      • Deal with capital acquisition, capital allocation, dividend policy, investment, and cash flow management
      • Production & operations management
      • Address choices about where and how product will be manufactured, technology to be used, management of resources, purchasing, quality control, inventory control, and relations with suppliers
      • R&D
      • Process development and product development
      • Information systems
      • Deal with office automation, decision support, and operational support
      • Human resources management
      • Deal with work flow control, pay and incentives, recruiting, orientation, training, staffing, and labor relations