Unit 5- Strategic options and choice techniques

Unit-5
Strategic option and choice techniques
Strategic options generation is the process of establishing a choice of possible future strategies.Strategic
choice is a key step within the strategic planning process.It involves in Generation of strategic options,
e.g. growth, acquisition, diversification or concentration, Evaluation of the options to assess their
relative merits and feasibility.,Selection of the strategy or option that the organisation will pursue. There
could be more than one strategy chosen but there is a chance of an inherent danger or disadvantage to
any choice made. Although there are techniques for evaluating specific options, the selection is often
subjective and likely to be influenced by the values of managers and other groups with an interest in the
organisation. In addition to deciding the scope and direction of an organisation,choices also need to be
made about how to achieve the goal. Five main qualitative areas should be examined when considering
strategic options:consistency, validity, feasibility, business risk and flexibility.

Generation of strategic options:
Three key questions
There are three main areas to consider.
• Porter describes certain
generic competitive strategies (lowest
cost or differentiation) that an
organisation may pursue for competitive
advantage They determine how you
compete.
• Ansoff describes product-market
strategies (which markets you should
enter or leave). They determine where
you compete and the direction of growth.
• When considering the method of growth
the choice may be between models
involving 100% ownership (acquisition v
organic growth) or a joint strategy (e.g.
franchising, joint ventures, etc).
Compiled by Roshan pant-MBM Nepal
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Porters five generic strategies(way of
competing)
• These strategies were first set out by Michael Porter in 1985 in his book,
"Competitive Advantage: Creating and Sustaining Superior Performance."
• These strategies are so called "generic strategies," because they can be applied to
products or services in all industries, and to organizations of all sizes
• Michael Porter has described a category scheme consisting of three general types
of strategies which include ‘overall cost leadership’, ‘differentiation’, and ‘focus’.
that are commonly used by businesses to achieve and maintain competitive
advantage. He has subdivided the Focus strategy into two parts: "Cost Focus" and
"Differentiation Focus.
• These three generic strategies are defined along two dimensions: strategic scope
and strategic strength.
• Strategic scope is a demand-side dimension and looks at the size and composition
of the market you intend to target. Strategic strength is a supply-side dimension
and looks at the strength or core competency of the firm.
• In particular he identified two competencies that he felt were most important:
product differentiation and product cost (efficiency).
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Porters five generic strategies:
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1.Cost leadership strategy
Maintaining this strategy requires a continuous search for cost reductions in
all aspects of the business
• In cost leadership, a firm sets out to become the low cost producer in its industry.
• The sources of cost advantage are varied and depend on the structure of the industry.
• They may include the pursuit of economies of scale, proprietary technology, preferential access to
raw materials and other factors. A low cost producer must find and exploit all sources of cost
advantage.
• if a firm can achieve and sustain overall cost leadership, then it will be an above average performer
in its industry, provided it can command prices at or near the industry average.
There are two main ways of achieving this within a Cost Leadership strategy:
• Increasing profits by reducing costs, while charging industry-average prices.
• Increasing market share through charging lower prices, while still making a reasonable profit on
each sale because you've reduced costs.
Companies that are successful in achieving Cost Leadership usually have:
• Access to the capital needed to invest in technology that will bring costs down.
• Very efficient logistics.
• A low-cost base (labor, materials, facilities), and a way of sustainably cutting costs below those of
other competitors.
• Examples include low-cost airlines such as EasyJet and Southwest Airlines, and supermarkets such
as KwikSave
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Cost leadership type
Type 1: Cost leadership – low cost strategy
• Produces products/services at lowest cost and
offers them to a wide range of customers at
the lowest price available on the market
Type 2: Cost leadership – best value strategy
• Produces products/services at lowest cost and
offers them to a wide range of customers at
the lowest price compared to a rivals products
with similar attributes
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Pitfalls(Risk of Cost leadership)
Positioning a firm as a low cost manufacturer or service
provider places a severe burden on the firm. Cost
leadership is vulnerable to risks such as:
• Technological change that erases past investments and
outdates past learning.
• Risk of imitation by late entrants who have advantage of
low cost learning.
• Lack of attention to the needs and preferences of customer
due to excessive concerns for cost minimization.
• Unexpected inflation in costs that reduces the firm‟s ability
to offset product differentiation through cost leadership.
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2. Differentiation strategy
• In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are
widely valued by buyers
• Differentiation involves making your products or services different from and more attractive
than those of your competitors.
• How you do this depends on the exact nature of your industry and of the products and services
themselves, but will typically involve features, functionality, durability, support, and also brand
image that your customers value.
• It selects one or more attributes that many buyers in an industry perceive as important, and
uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium
price.
To make a success of a Differentiation strategy, organizations need:
• Good research, development and innovation.
• The ability to deliver high-quality products or services.
• Effective sales and marketing, so that the market understands the benefits offered by the
differentiated offerings.
• Examples of the successful use of a differentiation strategy are Hero Honda, Asian Paints, HLL,
Nike athletic shoes, Apple Computer, and Mercedes-Benz automobiles.
• Research does suggest that a differentiation strategy is more likely to generate higher profits than is
a low cost strategy because differentiation creates a better entry barrier. A low-cost strategy is
more likely, however, to generate increases in market share
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Risk of differentiation strategy
A differentiation strategy is vulnerable to the following risks:
• Increased cost differential between low cost producers and
the differentiating firm will motivate brand loyalty
customers to switch brands. Thus, buyers would sacrifice
some additional features and image for huge savings in
cost.
• Imitation might narrow down the perceived difference. If a
differentiating firm lags behind too much, a low cost firm
may take over the market of the differentiating firm.
• Example, the Japanese motor cycle producer Kawasaki,
made inroads into the territory of differentiated players
such as Harley-Davidson and Triumph by offering big cost
savings to buyers.
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3.Focus Strategy
In this strategy the firm concentrates on a select few target markets
• Companies that use Focus strategies concentrate on particular niche markets and,
by understanding the dynamics of that market and the unique needs of customers
within it, develop uniquely low-cost or well-specified products for the market.
• Because they serve customers in their market uniquely well, they tend to build
strong brand loyalty amongst their customers. This makes their particular market
segment less attractive to competitors.
• It is hoped that by focusing your marketing efforts on one or two narrow market
segments and tailoring your marketing mix to these specialized markets, you can
better meet the needs of that target market. The firm typically looks to gain a
competitive advantage through effectiveness rather than efficiency
• As with broad market strategies, it is still essential to decide whether you will
pursue Cost Leadership or Differentiation once you have selected a Focus strategy
as your main approach: Focus is not normally enough on its own.
• But whether you use Cost Focus or Differentiation Focus, the key to making a
success of a generic Focus strategy is to ensure that you are adding something
extra as a result of serving only that market niche.
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Types of focus strategy
• The focus strategy has two variants.
• (a) In cost focus a firm seeks a cost advantage in its target segment
• (b) Differentiation focus a firm seeks differentiation in its target segment.
Type I: Focus – low cost strategy
• Offers products/services to a small range of customers (niche group) at the lowest
price available on the market
Type II: Focus – best value
• Offers valuable products/services to a small range of customers even if they are
relatively expensive. It is also known as “focused differentiation
• Both variants of the focus strategy rest on differences between a focuser's target
segment and other segments in the industry. The target segments must either
have buyers with unusual needs or else the production and delivery system that
best serves the target segment must differ from that of other industry segments.
Cost focus exploits differences in cost behavior in some segments, while
differentiation focus exploits the special needs of buyers in certain segments.
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Risk of focus strategy
• A focus strategy is vulnerable to the following risks:
• Increasing cost differentiated between broad-range
competitors and the focus firm might offset the
differentiation achieved through focus and turn the
customers towards firms that offer a broad range of
products. Perceived or actual differences between
products and services might disappear.
• Other firms might find submarkets within the target
market of the focus firm and out focus the focuser.
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GRAND STRATEGIES
• A grand strategy states the means that will be used to achieve long-
term objectives.
• Comprehensive, long-term plan of essential actions by which a firm
plans to achieve its major objectives.
• Key factors of this strategy may include market, product, and/or
organizational development through acquisition, divestiture,
diversification, joint ventures, or strategic alliances.
• Grand strategy blends the disciplines of history (what happened
and why?), political science (what underlying patterns and causal
mechanisms are at work?), public policy (how well did it work and
how could it be done better?), and economics (how are national
resources produced and protected?).
• The Grand Strategies are also called as Master Strategies or
Corporate Strategies.
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Types of grand strategies
Concentration strategy
 Market development strategy
 Product development
 Vertical and horizontal integration
Innovation
Diversification strategy
 Concentric Diversification strategy
 Conglomerate diversification
 Horizontal diversification
Defensive strategies
 Retrenchment/turnaround strategy
 Divesture
 Liquidation
Other Strategies
 Bankruptcy
 Joint venture
 Strategic alliance
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Concentration strategy
• A strategic approach in which a business focuses on a single market or
product. This allows the company to invest more resources in production
and marketing in that one area, but carries the risk of significant losses in
the event of a drop in demand or increase in the level of competition.
• with a single focus, management can develop in-depth knowledge of the
business, the market, the organization, the organization’s competitors, and
its customers
• Within concentration strategies, there are three sub-strategies: (1) market
penetration, (2) market development, and (3) product development The
firm directs its resources to the profitable growth of a single product, in a
single market, and with a single technology
• the business can attempt to capture a large market share by increasing
present customer's rate of usage, by attracting competitors' customers, or
by interesting nonusers in the products or services
• for e.g. only one product and one variety is concentration
strategy:McDonald’s, Starbucks, and Subway are three firms that have
relied heavily on concentration strategies to become dominant players.
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Market development strategy
• offering existing products in new market. A popular way to reach a new market is by entering a new retail channel.
• There are a variety of ways that this strategy can be achieved.
New geographical markets
This could involve expanding outside of your region or selling to a new country or a new continent.
• New distribution channels
Many companies have transformed themselves from high street retailers into Internet retailers. As a manager you could be
expected to outline the internal and financial implications of such a change. Senior management would be looking for you to
provide the details of how to make this approach a success.
Different pricing policies to create a new market segment
The important aspect of this approach is whether or not current users can easily alter their purchases to take advantage of the
new market pricing. A good example of how to protect your existing market whilst developing a new one is Adobe
Photoshop. It protected its price difference of hundreds of dollars of its original professional product by offering a reduced
'home' version that had a restricted set of functions.
Other ways are :
with existing capabilities
• follow changing customer needs
• short product life cycles
• exportation of core competence in market analysis
with new capabilities
• change of emphasis in customer need
• change in critical success factors (CSF)
Associated Dilemmas
• expense, risk and potential profitability
• unacceptable consequences of not developing new products
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Product development Strategy
• Developing new products or modifying existing products so they appear new, and offering those products to
current or new markets is the definition of product development strategy.
• strategy development beyond current products and markets, but within the capabilities or value network of an
organization.
• strategy will help you organise your product planning and research, capture your customers' views and
expectations, and accurately plan and resource your NPD project.
Your strategy will also help you avoid:
• overestimating and misreading your target market
• launching a poorly designed product, or a product that doesn't meet the needs of your target customers
• incorrectly pricing products
• spending resources you don't have on higher-than-anticipated development costs
• exposing your business to risks and threats from unexpected competition
How it is developed?
with existing capabilities
• follow changing customer’s need
• short product cycle
• exploitation of core competence in market analysis
with new capabilities
• change of emphasis in customer need
• change in critical success factors
• In the 1940s, Disney developed its products within the film business venturing out of cartoons and creating
movies featuring real actors.
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Horizontal integration
• Expanding by acquiring or merging with one of the rival
organizations is known as horizontal integration.
• An acquisition occurs when an organization buys another
organization. Generally, the acquired organization is smaller than
the buyer organization.
• A merger joins two companies into one. Mergers occur with similar
sized companies.
• Horizontal integration is preferable and attractive for many reasons.
Horizontal integration may lower costs by gaining a greater
economies of scale. Fitting horizontal integration alongside Porter’s
five forces model, it means that such moves also reduces the
intensity of rivalry and can make the industry more profitable.
• Horizontal integration can also offer new distribution channels,
where a firm may produce or acquire production units that are
similar—either complementary or competitive.
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Vertical integration
• Vertical integration is a growth strategy that involves extending an organization's present business
in two possible directions i.e backward and forward
• If a business integrates by moving into an area that serves as suppliers, the process is referred to as
backward integration. In internal backward integration, the firm creates its own sources of supply,
perhaps by establishing a subsidiary company. The external approach involves the purchase or
acquisition of an existing supplier.
• If a business integrates by mowing into an area that serves as a customer or user of its products or
services, the process is referred to as forward integration. A firm can accomplish forward
integration internally by establishing it own production facility (if it is a supplier of raw materials),
sales force, wholesale system, or retail outlets. External forward integration can be accomplished
by acquiring firms that presently perform the desired function.
• the main reason for backward integration is the desire to increase the dependability of supply or
quality of raw materials or production inputs.
• The rationale for forward vertical integration is similar: cost and effectiveness. Greater control over
marketing and closer coordination between distribution channels and manufacturing may improve
sales. Forward integration is a preferred strategy if the advantages of stable production are
particularly high.
• If a firm believes that it is paying more for materials than it would cost to produce its own, the
temptation to integrate vertically is great. The attraction is still greater if getting materials from a
supplier on time has been a problem or is expected to become problem.
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Innovation strategy
• An innovation strategy is a plan to grow market share or profits through product
and service innovation.
• encourage advancements in technology or services, usually by investing in
research and development activities.
• An innovative strategy guides decisions on how resources are to be used to meet a
business's objectives for innovation, deliver value and build competitive
advantage.
• create new devices or process resulting from the study and experimentation
• brings something new to the market
• number of new products compared to competitors
• increase in employees’ skills
• Reduce number of competitors
• open additional avenues for diversification (diversification means not only
product’s design but all such as process, brand and so on. Diversification is the
strategy which takes the organization into new markets and products or services
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Diversification strategy
• Diversification occurs when a business develops a new product or
expands into a new market.
• The basic idea is to expand into a business activity that doesn't
negatively react to the same economic downturns as your current
business activity. If one of your business enterprises is taking a hit in
the market, one of your other business enterprises will help offset
the losses and keep the company viable.
• Reasons for diversification
• value creation
• increase market power from diverse/ products/ service range
• spread risks across range of business
• applying corporate managerial capabilities to new markets,
products and services.
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Types of Diversification
1.Related diversification: Strategy development beyond current products and markets, but
within the capabilities or value network of the organization.There are two category of related
diversification i.e vertical integration and horizontal integration
• Vertical integration:- backward integration into input activities; forward integration into
output activities
• Horizontal integration:- develop into activities complementary to existing ones; exploit
strategic capabilities in new markets.
2.Unrelated diversification :develop the products and services beyond the current capabilities or
value network (holistic approach need to be developed) the types of unrelated diversification
are concentric diversification and conglomerate diversification.
• Concentric Diversification (CD):-CD occurs when a company expands by entering into an
industry related to its current operations.resources sharing is one example of concentric
diversification like cold storage facilities sharing by a farmers
• Conglomerate diversification:-conglomerate diversification could be contemplated when
concentric diversification is not attractive,a conglomerate is a corporation that is made up of
different companies.one company owns a controlling stake of smaller companies, which
conducts business separately
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Concentric diversification
Concentric Diversification
• Adding new, but related, products or services
• Adding new, but related, products or services is widely called concentric
diversification. An example of this strategy is AT&T recently spending $120 billion
acquiring cable television companies in order to wireAmerica with fast Internet
service over cable rather than telephone lines. AT&T's concentric diversification
strategy has led the firm into talks with America Online (AOL) about a possible
joint venture or merger to provide AOL customers cable access to the Internet.
• Guidelines for Concentric Diversification
Five guidelines when concentric diversification may be an effective strategy are
provided below:
• Competes in no- or slow-growth industry
• Adding new & related products increases sales of current products
• New & related products offered at competitive prices
• Current products are in decline stage of the product life cycle
• Strong management team
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Conglomerate Diversification
• Conglomerate Diversification:Adding new, unrelated products or
services.Adding new, unrelated products or services is called
conglomerate diversification. Some firms pursue.conglomerate
diversification based in part on an expectation of profits from
breaking up acquired firms and selling divisions piecemeal.
• Guidelines for Conglomerate Diversification
Four guidelines when conglomerate diversification may be an effective
strategy are provided below:
• Declining annual sales and profits
• Capital and managerial talent to compete successfully in a new
industry
• Financial synergy between the acquired and acquiring firms
• Exiting markets for present products are saturated
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Horizontal Diversification
• Horizontal Diversification;-Adding new, unrelated products or
services for present customers is called horizontal diversification.
This strategy is not as risky as conglomerate diversification because
a firm already should be familiar with its present customers.
• Guidelines for Horizontal Diversification
Four guidelines when horizontal diversification may be an especially
effective strategy are:
• Revenues from current products/services would increase
significantly by adding the new unrelated products
• Highly competitive and/or no-growth industry w/low margins and
returns
• Present distribution channels can be used to market new products
to current customers
• New products have counter cyclical sales patterns compared to
existing products
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Retrenchment Strategy
• Retrenchment occurs when an organization regroups through cost and asset reduction to
reverse declining sales and profits.
• Typically the strategy involves withdrawing from certain markets or the discontinuation of
selling certain products or service in order to make a beneficial turnaround
• This strategy is often used in order to cut expenses with the goal of becoming a more
financial stable business.for eg The institute may offer a distance learning programme for a
particular subject, despite teaching the students in the classrooms. This may be done to cut
the expenses or to use the facility more efficiently, for some other purpose
• Sometimes called a turnaround or reorganization strategy, retrenchment is designed to
fortify an organization's basic distinctive competence.
• During retrenchment, strategists work with limited resources and face pressure from
shareholders, employees, and the media.
• Retrenchment can entail selling off land and buildings to raise needed cash, pruning product
lines, closing marginal businesses, closing obsolete factories, automating processes, reducing
the number of employees, and instituting expensecontrol systems.
• In other words, the strategy followed, when a firm decides to eliminate its activities through
a considerable reduction in its business operations, in the perspective of customer groups,
customer functions and technology alternatives, either individually or collectively is called as
Retrenchment Strategy. Compiled by Roshan pant-MBM Nepal
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• Guidelines for Retrenchment
Four guidelines when retrenchment may be an
especially effective strategy to pursue are as
follows:
• Firm has failed to meet its objectives and goals
consistently over time but has distinctive
competencies Firm is one of the weaker
competitors Inefficiency, low profitability, poor
employee morale and pressure from stockholders
to improveperformance.
• When an organization's strategic managers have
failed Very quick growth to large organization
• where a major internal reorganization is needed
• When an organization has grown so large so quickly
that major internal reorganization is needed
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Types of retrechment strategy
1.Turnaround Strategies:Turnaround strategy means backing out,
withdrawing or retreating from a decision wrongly taken earlier in
order to reverse the process of decline.
• There are certain conditions or indicators which point out that a
turnaround is needed if the organization has to survive. These
danger signs are as follows:
a) Persistent negative cash flow
b) Continuous losses
c) Declining market share
d) Deterioration in physical facilities
e) Over-manpower, high turnover of employees, and low morale
f) Uncompetitive products or services
g) Mismanagement
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2. Divestment strategy: It involves the sale or liquidation of a
portion of business, or a major division, profit centre or
SBU. Divestment is usually a restructuring plan and is
adopted when a turnaround has been attempted but has
proved to be unsuccessful or it was ignored. A divestment
strategy may be adopted due to the following reasons:
a) A business cannot be integrated within the company.
b) Persistent negative cash flows from a particular business
create financial problems for the whole company.
c) Firm is unable to face competition
d) Technological up gradation is required if the business is to
survive which company cannot afford.
e) A better alternative may be available for investment
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3. Liquidation Strategies:Liquidation strategy means closing down the entire firm and selling its
assets. It is considered the most extreme and the last resort because it leads to serious
consequences such as loss of employment for employees, termination of opportunities
where a firm could pursue any future activities, and the stigma of failure.
• Generally it is seen that small-scale units, proprietorship firms, and partnership, liquidate
frequently but companies rarely liquidate. Liquidation strategy may be unpleasant as a
strategic alternative but when a “dead business is worth more than alive”, it is a good
proposition. For instance, the real estate owned by a firm may fetch it more money than the
actual returns of doing business.
• Liquidation strategy may be difficult as buyers for the business may be difficult to find.
Moreover, the firm cannot expect adequate compensation as most assets, being unusable,
are considered as scrap.
Reasons for Liquidation include:
(i) Business becoming unprofitable
(ii) Obsolescence of product/process
(iii) High competition
(iv) Industry overcapacity
(v) Failure of strategy
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Bankruptcy strategy
• Many companies file for bankruptcy when they run out of short-term liquidity.
• When debts mount and you have no way to pay back you may begin considering bankruptcy court.
Bankruptcy amounts to a formal declaration from a court that you are unable to pay your bills.
• You and your lawyer file papers, including a list of all your debts. You and your lawyer then appear with a
trustee before a judge. After your assets and debts have been inventoried, you may have to make some
repayment of the debt. Most of your debt, however, will be forgiven through a process known as
“discharge.” When debt is discharged you are no longer legally liable for it. In fact, you can sue creditors
who attempt to collect debts that have been discharged through the bankruptcy courts.
• Any organization if facing declines in sales and revenue, this strategy is thus applied in order to overcome
any loss and to reverse the declining situation of the firm accordingly.
• This is thus termed as an effective and innovative strategy that helps in re designing and re structuring the
financial position of any firm and it helps in making the firm strong enough to gain profits in the long run.
Therefore this strategy is known as a long run strategy and it also take some time but the outcomes are
the best one.
• By following this strategy, a firm will suffer and will face some losses but in the end, it will be the effective
and efficient one too. This is thus known as a strategy with the help of which stakeholders can reduce the
sales as well as revenues in order to make their firms consistent. This practice is adopted in order to enjoy
profits in the end and to minimize the risk of any further losses.
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Joint venture strategy
• A joint venture is a strategic alliance between two or more individuals or entities
to engage in a specific project or undertaking.
• This is also called consortium
• Each company contributes assets, own equity, and shares risk
• Provide companies with the opportunity to gain new capacity and expertise
• Allow companies to enter related businesses or new geographic markets or gain
new technological knowledge
• access to greater resources, including specialised staff and technology
• sharing of risks with a venture partner
• Joint ventures can be flexible. For example, a joint venture can have a limited life
span and only cover part of what you do, thus limiting both your commitment and
the business' exposure.
• In the era of divestiture and consolidation, JV’s offer a creative way for companies
to exit from non-core businesses.
• Companies can gradually separate a business from the rest of the organisation,
and eventually, sell it to the other parent company. Roughly 80% of all joint
ventures end in a sale by one partner to the other.
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Strategic alliance strategy
• If complete ownership of a foreign company is not desirable, strategic alliance is a way to make
foreign direct investment possible.
• Under a strategic alliance, a firm contracts with another firm to work on a specific project
• A strategic alliance is an arrangement between two companies that have decided to share
resources to undertake a specific, mutually beneficial project. A strategic alliance is less involved
and less permanent than a joint venture, in which two companies typically pool resources to create
a separate business entity. In a strategic alliance, each company maintains its autonomy while
gaining a new opportunity.
Advantages :
• Making it possible for each partner to concentrate on activities which best match their capabilities.
• Gaining knowledge from partners & developing competences which may be more widely exploited
elsewhere.
• Adequate suitability of the resources & competencies of an organization for it to survive.
• Speed to market is vital, and strategic alliances considerably improve it.
• Partnerships facilitate access to global markets.
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The balance score card:Creating Strategy Map to Drive
Corporate Performance
• The Balanced Scorecard is a strategic planning and management system used to
align business activities to the vision and strategy of the organization by
monitoring performance against strategic goals.
• A balanced scorecard is a performance metric used in strategic management to
identify and improve various internal functions of a business and their resulting
external outcomes.
• It is used to measure and provide feedback to organizations. Data collection is
crucial to providing quantitative results, as the information gathered is interpreted
by managers and executives, and used to make better decisions for the
organization.
• The balanced scorecard is used to analyze four separate areas. These four areas,
involve learning and growth, business processes, customers, and finance.
Traditional performance measurement only focused on external accounting
data.This approach is to provide ‘balance’ to the financial persperctive.
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Why Use a Balanced Scorecard?
• Improve organizational performance by measuring
what matters
• Increase focus on strategy and results
• Align organization strategy with workers on a day-to-
day basis
• Focus on the drivers key to future performance
• Improve communication of the organization’s Vision
and Strategy
• Prioritize Projects / Initiatives
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Four balanced scorecard perspectives
The balanced scorecard approach
examines performance from four
perspectives.
• Financial analysis, which includes
measures such as operating income,
sales growth and return on
investment.
• Customer analysis, which looks at
customer satisfaction and retention.
• Internal analysis, which looks at how
business processes are linked to
strategic goals.
• Learning and growth analysis, which
assesses employee satisfaction and
retention, as well as information
system performance.
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Balanced Scorecard Measurements
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Balance score card strategy map
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Corporate level analytical tools-BCG
Matrix
• The BCG Matrix (Growth-Share Matrix) was designed In the late 1960s the Boston Consulting
Group, a leading management consulting company.
• It was designed a four-cell matrix to help his clients with efficient allocation of resources
among different business units.It has since been used as a portfolio planning and analysis tool
for marketing, brand management and strategy development.
• In order to ensure successful long-term operation, every business organization should have a
portfolio of products/services rather than just one product or service. This portfolio should
contain both high-growth and low-growth products/services.
• High-growth products have the potential to generate lots of cash but also require substantial
amounts of investment. Low-growth products with high market share, on the other hand,
generate lots of cash while needing minimal investment.
• The BCG Matrix presents graphically the differences among these business units in terms of
relative market share and industry growth rate in four cells.
The BCG Matrix helps managers classify business units/products as low or high performers
using the following criteria:
1. Relative market share (strength of a business unit’s position in that market) Relative
market share (RMS) is the percentage of the total market that is being controlled by the
company being analyzed.
2. Market growth rate (attractiveness of the market in which a business unit operates)Compiled by Roshan pant-MBM Nepal
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BCG matrix places business units/products in the
following four categories:
• 1. Stars – BUs/products characterized by high-
growth and high- market share. They often
require heavy external investment to sustain
their rapid growth as they may not be
producing any positive cash flow. Eventually,
their growth will slow, and they will turn into
cash cows.
Strategic choices: Vertical integration, horizontal
integration, market penetration, market
development, product development
• 2.Cash Cows – BUs/products characterized by
low-growth, high-market share. These are well
established and successful BUs that do not
require substantial investment to keep their
market share. They produce a lot of cash to be
used for other business units (Stars and
Question Marks) of the company.
Strategic choices: Product development,
diversification, divestiture, retrenchment
• 3. Question Marks – BUs/products
characterized by low-market share in high-
growth markets. They require a lot of financial
resources to increase their share since they
cannot generate enough cash themselves. The
crucial decision is to decide which Question
Marks to phase out and which ones to grow
into Stars.
Strategic choices: Market penetration, market
development, product development,
divestiture
• 4. Dogs – BUs/products with low-growth, low-
market share. In addition, they often have
poor profitability. The business strategy for a
Dog is most often to divest. However,
occasionally management might make a
decision to hold a Dog for possible strategic
repositioning as a Question Mark or Cash Cow.
Strategic choices: Retrenchment, divestiture,
liquidation
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Strengths and weaknesses of BCG
model
Strengths
• The BCG Matrix allows for a visual presentation
of the competitive position of all units in a
business portfolio.
• The BCG model allows companies to develop a
customized strategy for each product or
business unit instead of having a one-size-fits-
all approach.
• Simple and easy to understand.
• It works well for companies with multiple
divisions and products
• Allows for quick and simple screening of
business opportunities in order to determine
investment priorities in the portfolio of
products/business units.
• It is used to identify how corporate cash
resources can be best allocated to maximize a
company’s future growth and profitability.
Weakness
• Business can only be classified to four
quadrants. It can be confusing to classify an
SBU that falls right in the middle.
• It does not define what ‘market’ is. Businesses
can be classified as cash cows, while they are
actually dogs, or vice versa.
• Does not include other external factors that
may change the situation completely.
• Market share and industry growth are not the
only factors of profitability. Besides, high
market share does not necessarily mean high
profits.
• It denies that synergies between different units
exist. Dogs can be as important as cash cows to
businesses if it helps to achieve competitive
advantage for the rest of the company.
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Corporate level analytical tools-GE
nine cell matrix
• The GE Matrix was developed jointly by McKinsey and General Electric in the early
1970s as a derivation of the BCG Matrix.
• GE-McKinsey nine-box matrix is a strategy tool that offers a systematic approach
for the multi business corporation to prioritize its investments among its business
units.
• BCG Matrix showed to have some limitations. It was considered not flexible
enough to include all the broader issues that a company was facing while
operating in a fast changing global environment. The GE/McKinsey Matrix solves
most of the issues of the BCG model and proposes a more sophisticated and
comprehensive approach to investment decision making.
• The GE/McKinsey Matrix is a nine-cell (3 by 3) matrix and it is primary used to
perform business portfolio analysis on the strategic business units (SBU) of a
corporation
• The nine-box matrix plots the BUs on its 9 cells that indicate whether the company
should invest in a product, harvest/divest it or do a further research on the
product and invest in it if there’re still some resources left. The BUs are evaluated
on two axes: industry attractiveness and a competitive strength of a unit. Each axis
is then divided into Low, Medium and High.
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Contd..
• In the business world, much like anywhere else, the problem of
resource scarcity is affecting the decisions the companies make.
• With limited resources, but many opportunities of using them, the
businesses need to choose how to use their cash best.
• The fight for investments takes place in every level of the company:
between teams, functional departments, divisions or business
units. The question of where and how much to invest is an ever
going headache for those who allocate the resources
• At least, it was hard until the BCG matrix and its improved version
GE-McKinsey matrix came to help. These tools solved the problem
by comparing the business units and assigning them to the groups
that are worth investing in or the groups that should be harvested
or divested.
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Axis in GE matrix(x and y axis components)
• Industry Attractiveness:The vertical axis
denotes industry attractiveness, which is a
weighted composite rating based on eight
different factors. Industry attractiveness
indicates how hard or easy it will be for a
company to compete in the market and
earn profits. The more profitable the
industry is the more attractive it becomes.
Industry attractiveness consists of many
factors that collectively determine the
competition level in it. There’s no definite
list of which factors should be included to
determine industry attractiveness, but
some are the most common.
• Competitive strength of a business unit or
a product:It indicates business strength or
in other words competitive position, which
is again a weighted composite rating based
on several factors in the next slide
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Factors of industries attractiveness and
competitive strength of a business
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Advantages and disadvantages
Advantages
• Helps to prioritize the limited
resources in order to achieve
the best returns.
• Managers become more aware
of how their products or
business units perform.
• It’s more sophisticated business
portfolio framework than the
BCG matrix.
• Identifies the strategic steps the
company needs to make to
improve the performance of its
business portfolio.
Disadvantages
• Requires a consultant or a highly
experienced person to
determine industry’s
attractiveness and business unit
strength as accurately as
possible.
• It is costly to conduct.
• It doesn’t take into account the
synergies that could exist
between two or more business
units
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Using the tool GE matrix(steps)
• Step 1. Determine industry attractiveness of each business units_ for the sake of
simplicity in the table we have taken only two but there can be many( First Make
a list of factors-second Assign weights from 0.01 (not important) to 1.0 (very
important)- third Rate the factors in say 5 point likert scale- finally Calculate the
total scores by multiplying weights and ratings
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• Step 2. Determine the competitive strength of each business unit
• ‘Step 2’ is the same as ‘Step 1’ only this time, instead of industry
attractiveness, the competitive strength of a business unit is
evaluated
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• Step 3. Plot the business units on
a matrix
• Each business unit is represented
as a circle. The size of the circle
should correspond to the
proportion of the business
revenue generated by that
business unit. For example,
‘Business unit 1’ generates 20%
revenue and ‘Business unit 2’
generates 40% revenue for the
company. The size of a circle for
‘Business unit 1’ will be half the
size of a circle for ‘Business unit 2’.
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• Step 4. Analyze the
information
• There are different
investment implications
you should follow,
depending on which
boxes your business units
have been plotted.
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• Step 5. Identify the future direction of each business
unit
• the company should consult with the industry
analysts to determine whether the industry
attractiveness will grow, stay the same or decrease in
the future. You should also discuss with your
managers whether your business unit competitive
strength will likely increase or decrease in the near
future.
• For example, our previous evaluations show that the
‘Business Unit 1’ belongs to invest/grow box, but
further analysis of an industry reveals that it’s going
to shrink substantially in the near future. Therefore,
in the near future, the business unit will be in
harvest/divest group rather than invest/grow box.so
the investment decision will be NO
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Step 6. Prioritize your investments
• The last step is to decide where and how to invest the company’s
money. While the matrix makes it easier by evaluating the business
units and identifying the best ones to invest in, it still doesn’t
answer some very important questions:
• Is it really worth investing into some business units?
• How much exactly to invest in?
• Where to invest into business units (more to R&D, marketing, value
chain?) to improve their performance?
• Doing the GE McKinsey matrix and answering all the questions
takes time, effort and money, but it’s still one of the most important
product portfolio management tools that significantly facilitate
investment decisions.
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Business level analytical tools-Grand
strategy selection matrix
• Grand strategy matrix is a last matrix of matching strategy formulation framework. It same as
important as BCG, IE and other matrices.
• Grand strategy matrix it is popular tool for formulating alternative strategies.
• In this matrix all organization divides into four quadrants.
• Any organization should be placed in any one of four quadrants. Appropriate strategies for an
organization to consider are listed in sequential order of attractiveness in each quadrant of the
matrix.
• It is based two major dimensions
1. Market growth
2. Competitive position
• Every firm fall any one four quadrants and if the firm fall in quadrant-1 it must follow the list
ofstrategies given in it. As further if the firm falls in quarrant-2 must adopt the strategies given in
quadrant-2 and so on
• The technique is based on the idea that the situation of a business is defined in terms of the growth
rate of the general market and the firm’s competitive position in that market. When these factors
are considered simultaneously, a business can be broadly categorized in one of four quadrants: (I)
strong competitive position in a rapidly growing market, (II) weak position in a rapidly growing
market, (III) weak position in a slow-growth market, or (IV) strong position in a slow-growth market.
Each of these quadrants suggests a set of promising possibilities for the selection of a grand
strategy.
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• Qurdant-1 contains that company's strong having competitive situation and rapid market growth.
Firms located in Quadrant I of the Grand Strategy Matrix are in an excellent strategic position.
Thesefirms must focus on current market and appropriate to follow market penetration, market
development and products development are appropriate strategies.
• Qurdant-2 contains that company's having weak competitive situation and rapid market growth.
Firms positioned in Quadrant II need to evaluate their present approach to the marketplace
seriously. Although their industry is growing, they are unable to compete effectively, and they need
to determine why the firm's current approach is ineffectual and how the company can best change
to improve its competitiveness. Because Quadrant II firms are in a rapid-market-growth industry, an
intensive strategy(as opposed to integrative or diversification) is usually the first option that should
be considered.
• Qurdant-3 contains that company's weak competitive situation and slow market growth. The firms
fall in this quadrant compete in slow-growth industries and have weak competitive positions. These
firms must make some drastic changes quickly to avoid further demise and possible liquidation.
Extensive cost and asset reduction (retrenchment) should be pursued first. An alternative strategy
is to shift resources away from the current business into different areas. If all else fails, the final
options for Quadrant III businesses are divestiture or liquidation.
• Qurdant-4 contains that company's strong competitive situation and slow market growth.
Finally,Quadrant IV businesses have a strong competitive position but are in a slow-growth industry.
These firms have the strength to launch diversified programs into more promising growth areas.
Quadrant IV firms have characteristically high cash flow levels and limited internal growth needs
and often can pursue concentric, horizontal, or conglomerate diversification successfully. Quadrant
IV firms also may pursue joint ventures
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sources
• https://www.strategicmanagementinsight.co
m/tools/
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Unit 5- Strategic options and choice techniques

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