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

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