Strategic Management: Strategy In Action

By
Feleke Solomon
Assistant professor
Senior lecturer, Researcher and business advisor
3/30/2024 OSU, MBA, ASM by Feleke Solomon(Asst. Professor) 1

Types of Strategy
 Achieving superior
 Efficiency
 Quality
 Innovation and
 Customer Responsiveness
 Building Competitive Advantage
 Its build via
 Functional Level Strategy
 Business Level Strategies
 Corporate Strategy

3
 Business-level strategy: is a strategy designed to gain competitive
advantage by exploiting core competencies in specific product
market for the purpose of providing value to customers
Focus questions:
 What issues do firms consider when evaluating customers?
 What are the five types of business-level strategy?
 How can firms use a certain type of business-level strategy?
 What are competitive risks associated with each type of
business –level strategy?
3/30/2024 OSU, MBA, ASM by Feleke Solomon(Asst. Professor)
Business-level strategy

4
A. Customers: who, what and how
 Business-level strategy – Key issues
Business-level
Strategy
Which Products( goods or
Services) to offer
Customers?
How to
manufacture or
create it?
How to
distribute it?

8
B. Types of business-level strategy
 is a deliberate choice about how a firm will perform the
value chain’s primary & support activities in ways that
create unique value
 Reflects where & how the firm has an advantage over its
rivals
 Is intended to create differences b/n the firm’s position
relative those of its rivals
 Thus, the essence of a firm’s business-level strategy is chosen:
 Perform activities differently than rivals – to achieve
lowest cost or
 Perform different (valuable) activities – being able to
differentiate
 Hence, competitive advantage is achieved within some scope –
firms should prefer one of the two.

 VRIO is an initialism for the four question framework
asked about a resource or capability to determine its
competitive potential:
The question of Value
 The question of Rarity,
The question of Imitability (Ease/Difficulty to Imitate),&
The question of Organization’ (ability to exploit the
resource or capability objectively).

10
Five Business-level Strategies
Competitive Scope Integrated Cost L/ship
/ Differentiation
Narrow Target
Broad Target
Competitive Advantage
Cost Uniqueness
Cost L/Ship Differentiation
Focused Cost
L/ship
Focused
Differentiation

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Cost Leadership Strategy
 A cost leadership strategy is an integrated set of actions designed to produce or deliver
goods or services at the lowest cost relative to competitors, with features that are
acceptable to customers
• Lowest competitive price
• Features acceptable to many customers
• Relatively standardised products
 Cost saving actions required by this strategy:
• Building efficient scale facilities
• Tightly controlling production & overhead costs
• Simplifying production processes & building efficient manufacturing
facilities
• Minimising costs of sales, R&D & service
• Monitoring costs of activities provided by outsiders

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Economies of Scope
 Economies of scope occur through a firm’s ability to spread costs associated
with one element of the value chain across multiple products, thereby
reducing costs.
 For example, Sharp achieves economies of scope through spreading the costs
of running their distribution networks etc across a range of products.
Accumulated Experience
 As a person or a firm gains experience in completing a task, they become more
efficient at doing it.
 This process can occur through:
• learning or experience
• technical progress

14
Competitive risks of the cost-leadership strategy
 Processes used to produce & distribute goods or
services may become obsolete due to competitors’
innovations.
 Focus on cost reductions may occur at expense of
customers’ perceptions of differentiation encouraging
them to purchase competitors’ products & services
 Competitors, using their own core competencies, may
learn to successfully imitate the cost leader’s strategy

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 A differentiation strategy is an integrated set of actions designed to
produce goods or services that customers perceive as being different
in ways that are important to them.
 Products that provide superior value for customers
 The firm produces non-standardized products for customers who
value differentiated features more than they value low cost.
 The ability to sell goods or services at a price that substantially
exceeds the cost of creating its differentiated features allows the firm
to outperform rivals & earn above-average returns.
Potential entrants
 Can defend against new entrants because:
• Entrants’ new products must surpass proven products
• Entrants’ new products must be at least equal to performance of
proven products, but offered at lower prices
Differentiation strategy

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Differentiation strategy
• Bargaining power of suppliers & buyers
• Can mitigate suppliers’ power by:
• Absorbing price increases due to higher margins
• Passing along higher supplier prices because buyers are loyal
to differentiated brand
• Can mitigate buyers’ power by:
• Well differentiated products reducing customer sensitivity to
price increases
 Product substitutes
• Well positioned relative to substitutes because:
• Brand loyalty to a differentiated product tends to reduce
customers’ testing of new products or switching brands

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 A focus strategy is an integrated set of actions designed to produce or
deliver goods or services that serve the needs of a particular
competitive segment.
 Target specific industry segment via ignoring the rest
 Examples of specific market segments that can be targeted by a
focus strategy:
 Particular buyer group (e.g. youths or senior citizens)
 Different geographic markets
 Types of focused strategies:
 Focused cost leadership strategy
 Focused differentiation strategy
Focus strategy

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• To implement a focus strategy:
• The firm must be able to complete various primary and support value chain
activities in a competitively superior manner, in order to develop & sustain a
competitive advantage and earn above-average returns
• Competitor firms may overlook small niches
• The firm lacks resources needed to compete in the broader market, but serves a
narrow segment more effectively than industry-wide competitors
• Competitive risks of focus strategies
• A firm competing on an industry-wide basis decides to pursue the niche market
of the focuser firm
• Customer preferences in the niche market may change to more closely
resemble those of the broader market
Focus strategy

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 A firm that successfully uses the integrated cost
leadership/ differentiation strategy should be in a better
position to:
• Adapt quickly to environmental changes
• Learn new skills and technologies more quickly
• Effectively leverage its core competencies while competing
against its rivals
 A commitment to strategic flexibility is necessary for
successful use of this strategy
Integrated Cost Leadership / Differentiation Strategy

25
Corporate-level Strategy
 Corporate-level strategy is an action taken to gain a
competitive advantage through the selection & management
of a mix of businesses competing in several industries or
product markets.
 A corporate-level strategy is concerned with two key
questions:
• What business should the firm be in?
• How should the corporate office manage its group of
businesses?

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A. Grand Strategies
 Corporate strategies are often called grand/master strategies
 These grand strategies (major Corporate Strategies) can be:
 Growth strategy
 Stability strategy
 Defensive strategy
 Decline (retrenchment, harvesting, turn around & divestiture)
 Closure (liquidation & filing bankruptcy)
 Growth strategies are:
 Concentration
 Market development
 product development
 Innovation
 Joint venture
 Integration
 Diversification: concentric (related), horizontal, & unrelated

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1. Concentration strategy will be appropriate when the company
concentrates on the current business.
 The firm directs its resources to the profitable growth of a single
product, in a single market, with a single technology
 Advantages:
• Based on known competencies & same experience
• Lowest in risk & additional resources
 Disadvantages:
• Steady but slow increases in growth & profitability
• Narrow range of investment options
 In general, firms that use this strategy gain competitive
advantage in production skill, marketing know-how & reputation
in the market place
 In fact, it refers to marketing present products with only cosmetic
modifications

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 Thus, concentration focuses on:
• Increasing present customers’ rate of usage
• Attracting competitors’ customers through price cuts
• Attracting non-users through advertising, price incentives etc.
 Note: when concentration will not provide the basis for achieving
the company mission there are two options that involve moderate
cost & risk: market development & product development
2. Market development: is selling present products in new
markets – additional region, national & international expansions
 Attracting other market segments through:
• Developing product versions to appeal to other segments
• Entering other channels of distribution
• Advertising in other media

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3. Product development: is developing new products for
present markets. This involves:
• Developing new product features:
• Modifying (change color, form, shape, etc.)
• Developing additional models & sizes (product
proliferation/produce).
 Thus, it involves substantial modification of existing
products or creation of new but related items that can be
marketed to current customers through established channels.
 The idea is to attract satisfied customers to new products as
a result of their positive experience with company’s initial
offering
 The product development strategy is often adopted either to
prolong the life cycle of current products or to take
advantage of favorable reputation & brand name

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 Examples of product development can be:
• A revised edition of a college textbook
• A new car style
• A second formula of shampoo for oily air etc.
4. Innovation strategy: refers to original or novel ideas when
firms shift from market & product development as the basis for
profitability
 Thus, the main philosophy of innovation strategy is creating a
new product life cycle, thereby making any similar existing
products obsolete
 Examples of innovation can be:
• In automotive industry, manufacturing a different & new
brand of car (electric based cars)
• In photo camera industry, digital cameras instead of analog

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 However, innovation is costly & risky – few innovative ideas prove
profitable because R&D, marketing, & other costs are extremely high
5. Joint Venture strategy: takes place when two or more companies
want to operate for success in a particular competitive environment
 Joint venture arrangements result in joint ownership & specially it is
an important strategy to enter international markets
 It is also important in transferring & enhancing the skills,
employment, growth & profits of local businesses

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6. Integration strategy: focuses on moving to different industry level,
different product & technology but the basic market remains the same
 There are two types of integrative growths:
• Vertical integration
• Horizontal integration
 Vertical Integration
• Exists when a firm produces its own inputs (backward
integration) or owns channels of distribution of outputs (forward
integration)
• A firm pursuing vertical integration usually is motivated to
strengthen its position in its core business by gaining market power
over competitors
 Horizontal integration refers to the acquisition of similar products &
services
 The two corporate tools to achieve integrative growth are:
• Acquisition
• Internal development

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 Diversification growth strategy: refers to an attempt to change
the characteristics of the business through either of new
products, markets & technology or all the three
 Diversification growth strategy is classified into three
categories:
 Concentric: seeking growth with new market & product
having meaningful synergy or fit with existing business
(tapes into discs, ski sports into summer sporting)
 – Related Diversification
 There is some commonality in markets, products, or technology
 Horizontal: seeking growth by appealing to current market,
with new products that are technologically unrelated to
present products (hotels & tour operators)

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 Conglomerate: seeking growth by appealing to new markets
with new product that have no technology relationships to
current product – Unrelated Diversification
• Most of the acquisitions are principally done on profit
considerations
Related & Unrelated Diversification
 Related diversification could be achieved through economies
of scope & market power
 Economies of scope refers to sharing activities &
transferring of core competencies: operational & corporate
relatedness
• The main purpose is creating value by saving costs
attributed by transferring the core competencies developed
in one business to a new (other) business

35
 Operational relatedness – sharing activities:
• Require strategic control over business units
• Primary & support activities can be shared efficiently
• Its main limitation is the difficulty to explicitly differentiate
the outcomes of each firm
 Corporate relatedness – transferring of core competencies:
• Corporate core competencies are complex sets of resources &
capabilities that link different businesses trough:
 Managerial & technological knowledge, experience & expertise
 Market power could be gained through:
• Multi point competition
• Vertical integration

36
 Market power exists when a firm is able to:
• Sell its products above the existing competitive level
• Reduce the costs of its primary & support activities below the
competitive level
• Blocking competitors through multi-point competition
 Multi-point competition exists when:
• Two or more diversified firms compete in the same product
areas or geographic markets
 Multipoint competition will not create potential gains when there is
excessive competitive activity
 Therefore, firms develop mutual forbearance to create value by
engaging in less competitive rivalry
3/30/2024
OSU, MBA, ASM by Feleke Solomon(Asst.
Professor)

37
 Unrelated diversification could be achieved through financial
economies
 Financial economics refers to cost savings realized through
improved allocations of financial resources
 The two value creation approaches are:
• Efficient internal capital allocations: development of
portfolio of business with different risk profiles thereby
reducing the business risk for the total corporation
• Purchasing other corporations & restructuring their
assets: buying & selling of businesses in the external market
with the intent of increasing the total value of the firm
 Therefore, selling under-performing divisions & placing the
remaining divisions under the discipline of rigorous financial
controls is often used
 Creating financial economies through the purchase of other
companies & restructuring their assets requires an understanding of
significant trade-offs

38
 Managerial motives for diversification
• Diversifying managerial employment risk
• Increasing managerial compensation
 These motives may lead to value reduction
B. Stability Strategy
 It is also called neutral strategy: occurs when an organization
is satisfied with its current situation & wants to maintain the
status quo
 Reasons for using stability strategy:
• The company is doing well “if it works, don’t fix it”
• The management wants to avoid additional hassles associated
with growth
• Resources have been exhausted because of earlier growth
strategies

39
C. Defensive Strategy
 Could be classified into decline & closure strategies
 It can be used as a short-term solution to:
• Reverse a negative trend
• Overcome a crisis or problem situation
 Reasons:
• The company faced financial problems – certain parts of the
organization are doing poorly
• The company forecasts hard times ahead related to:
 Challenges from new competitors & products
 Changes in government regulations
• Owners are tired of the business or have to have an
opportunity to profit substantially by selling.
 Decline strategy includes:
• Retrenchment, harvesting, turn around & divestiture

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a. Retrenchment strategy will be used when the company wants to
reduce its operations – primarily, by reducing product lines
• The main purpose of retrenchment is economizing through cutting
production costs
b. Harvesting occurs when future growth appears doubtful or not
cost effective – the main reason could be because of new
competition or changes in consumer preferences
• In this case the firm limits additional investment & expenses but
maximizes short-term profit & cash flow through maintaining market
share over the short-run
 Conditions for harvesting strategy:
• The business is not a major contributor of sales, stability, or prestige to the
organization
• The management may use the freed-up resources for other attractive
uses

41
c. Turn -around strategy- designed to reverse a negative trend &
get the organization back on the track or profitability – a
temporary measure until things improve
 Major actions should be taken are:
 Reducing the size of operations
 Eliminating low-margin products
 Selling machineries
 Laying off employees
 Cutting back employee compensation or benefits
 Replacing higher-paid employees with lower-paid employees
 Leasing rather than buying equipment
 Cutting back marketing expenses

42
d. Divestiture strategy occurs when an organization sells or divests
or dislocate itself of a business or part of a business – previous
diversification is not successful (weak growth prospects & poor
profitability)
 Moreover, when the firm is highly indebted – it might prefer to
survive by selling some of its businesses by raising sufficient
capital to:
• Increase the performance of the remaining businesses
• Settle its debt – liquidity
 Closure strategy consists of liquidation & filing of bankruptcy
a. Liquidation occurs when an entire company is either sold or
dissolved either by choice or force
 When by choice, it can be because the owners are tired of the
business or near retirement; the organization’s future prospect is
not good and sell at this time

43
 When by force, the decision often occurs because of a
deteriorated financial condition:
• Such circumstances leave the seller in a weak bargaining
position or by court decision
• It is the last resort measure & generally is forced by financial
institutions

49
Portfolio Analysis
How to plan a corporate portfolio?
 The business portfolio is the collection of businesses (SBUs) &
products that make up the company.
 An SBU:
• Is a unit of the company that has a separate mission & objectives
• Can be a company division, a product line or even individual
brands
 It all depends on how the company is organized
 The best business portfolio is one that fits the company’s strengths &
helps exploit the most attractive opportunities
 There are different types of portfolio techniques/matrixes in use, the
most well known of which are:
• The Boston Consulting Group – BCG-Matrix (Hedley, 1977)
• The General Electric Screen – GE-Matrix (Hofer and Schendel, 1978)
 Regardless of the type of matrix used, companies must:
• Analyse their current business portfolios & decide which businesses
should receive more or less investment
• Develop growth strategies for adding new businesses to the
portfolio, whilst at the same time deciding which businesses should
no longer be retained

50
The Boston Consulting Group Matrix
 The BCG is also known as the” The Growth-Share Matrix
or Product Portfolio Matrix”
 It helps to identify the cash flow requirements of different
businesses in a company’s portfolio
 The BCG matrix has three main steps:
• Dividing the company into SBUs – identification
• Assessing the prospects of each SBU & comparing them by means
of a matrix
• Developing strategic objectives for each SBU
 Identifying Strategic Business Units - According to the
BCG:
• a company must create an SBU for each economically distinct
business area in which it operates
• a company defines its SBUs in terms of its product markets

51
 Assessing and Comparing SBUs – the whole portfolio
 The criteria of assessing SBUs:
• The SBU’s relative market share / relative competitive strength
• The growth rate of the SBU’s industry / stages of the industry life-
cycle
 Relative Market Share is the ratio of an SBU’s market share to the market
share held by the largest rival company in the industry
• A share greater than the largest competitor is considered high
• A share less than the largest competitor would be rated a low
 Note: Only the largest competitor would have a high share
 Industry / Market growth rate is the percentage growth of the market in
the most recent year: 10% is the cut-off point b/n high & low growth
 In the BCG-Matrix:
• The vertical axis represents the rate of industry growth, an
important environmental factor – if the industry is growing, there
are favourable prospects
• The horizontal axis shows that market share relative to that of
the biggest competitor, an indicator of strength in the market
place

BCG explanation
 Classifies Products into four simple categories:
 Stars – products in markets experiencing high growth
rates with a high or increasing share of the market
- Potential for high revenue growth
 Cash Cows:
 High market share
 Low growth markets – maturity stage of PLC
 Low cost support
 High cash revenue – positive cash flows
52

contd
 Dogs:
 Products in a low growth market
 Have low or declining market share (decline stage of PLC)
 Associated with negative cash flow
 May require large sums of money to support
 Is your product starting to embarrass your company?
53

contd
 Problem Child (Question mark)
- Products having a low market share in a high growth
market
- Need money spent to develop them
- May produce negative cash flow
- Potential for the future
- Problem children
worth spending
good money on?
54
3/30/2024
OSU, MBA, ASM by Feleke Solomon(Asst.
Professor)

55
The BCG - Matrix
 Stars: The leading SBUs in a company’s portfolio. They offer attractive long-
term profit & growth opportunities – still growing but not generating high
profit
 Question marks: can become a star if nurtured properly. To become a
market leader, a question mark requires substantial net injections of cash –
it is cash hungry
 Cash cows: are cost leaders in their industries. The capital investment
requirements of cash cows are not substantial – such businesses generate a
strong positive cash flow
 Dogs: are unlikely to generate a positive cash flow & may become cash hogs.
They may require substantial capital investments just to maintain their low
market share
Strategic Implications of the BCG-Matrix
 The cash surplus from any cash cows should be used to support the
development of selected question marks & nurture stars
 The long-term objective is to consolidate the positions of stars and turn
favoured question marks into stars, thus making the company’s portfolio
more attractive

56
Strategic Implications of the BCG-Matrix
 Question marks with the weakest or most uncertain long-term prospects
should be divested to reduce demands on a company’s cash resources
 Dogs having reached the end of their useful life, are generally best put to
sleep unless they are still performing a useful function – not merely making
a contribution to overheads
• Thus, the company should exit from any industry where the SUB is a
dog
 The portfolio must be balanced – when there are sufficient cash cows,
stars & question marks
• If the company lacks sufficient number of these businesses, it should
consider acquisitions & new ventures to build a more balanced portfolio
 Thus, a portfolio should contain enough:
• Stars & question marks to ensure a healthy growth & profit outlook for
the company
• Cash cows to support the investment requirements of the stars &
question marks

57
Industry Attractiveness – Competitive Strength matrix
(GE-Matrix)
 The GE Nine-Cell Planning Grid is an adaptation of the BCG
approach that attempts to overcome some of the limitations of BCG
 In the GE-Screen, the two main dimensions are presented by: Industry
(product-market) Attractiveness & Business (competitive) Strength
 Furthermore, each of the company’s business units is rated on
multiple sets of strategic factors within each axis of the grid:
• Factors identified as enhancing Industry Attractiveness:
 Sales/market growth
 Size & industry profitability
 Demand cyclicality
 Social, environmental, legal, etc.,
 Competition: Porter’s Five-force model

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 Factors identified as enhancing business/competitive strength:
• Market share
• Profit margin
• Customer & market knowledge
• Technological know-how & management caliber
• Brand image
• Cost structure distinctive competencies etc.
 Thus, in contrast to the BCG, the GE uses composite measures
 Accordingly, quantitative measures of industry attractiveness &
business strength are used to plot location of each business in
matrix
 The calculation is done subjectively by identifying the two
dimensions
• First, the strategist has to identify those important factors
contributing much to industry attractiveness & business strength

59
 These examples illustrate how one business within a corporate portfolio
might be assessed using the GE planning grid
 It is a matter of management judgment:
• What should be included or excluded as a factor
• How it should be rated & weighted
 What matters is, after rating & weighting all strategic business units, they
will be positioned in the nine cells accordingly
 Each business unit appears as a circle in its respective cell & position
• Area of a circle is positioned to size of business as a percent of
company revenues or
• Area of a circle can represent relative size of industry with pie slice
showing the company’s market share.
3/30/2024
OSU, MBA, ASM by Feleke Solomon(Asst. Professor)

Strategic Management: Strategy In Action

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