Formulating Long Term Objectives and Grand Strategies Long Term Objectives There are seven areas in which long term objectives have to be established 1. Profit Profitabilit ability y •
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The ability of any firm to operate in the long term depends on attaining an acceptable level of profits. Strategically managed firms have a long term objective, usually expressed in earnings per share or return on equity.
1. Pro Produc ductiv tivity ity –
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Commonly used productivity objectives are the number of items produced or the number of services rendered per unit of input. They are also, sometimes, defined in terms of desired cost decrease.
3. Co Comp mpet etit itiv ive e posi positi tion on –
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This is in terms of relative dominance in the marketplace. Companies often use total sales or market share as a measure of competitive position.
4. Em Empl ploy oyee ee Dev Devel elop opme ment nt –
Employee development in terms of training which increases productivity and decreases employee turnover.
5. Em Empl ploy oyee ee re rela lati tion ons s –
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Proactive steps in anticipating the employee needs and expectations are characteristics of good strategic management. This builds employee loyalty leading to increase in productivity. Such programs include safety training, employee stock option and worker representation on management committees.
6. Te Tech chno nolo logi gica call le lead ader ersh ship ip –
Firms have to adopt different strategies depending on its intention of being a leader or a follower of technology leadership. •
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e.g., Companies like Intel and Microsoft have an advantage of being known as technological leaders in their domains. e-commerce technology will lead to emergence of new n ew leaders who are better positioned to take advantage of internet technology to improve productivity and innovation.
7. Pu Publ blic ic resp respon onsi sibi bili lity ty –
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Corporates ensure that their responsibility go beyond providing good products and services to include corporate social responsibility. They donate to educational projects, nonprofit organizations, charities and other socially relevant activities. •
e.g. MindTree is involved with Spastics Society of Karnataka, Tata Steel in credited with development of Jamshedpur
Qualities of long-term objectives 1. Acce Accepta ptable ble –
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The long term objectives should be consistent with the preferences of the employees. They may ignore or even obstruct an objective that offend them or that they believe to be inappropriate and unfair. The long term objectives should also be designed to be acceptable to groups external to the firm. •
e.g. development of hybrid cars
1. Fle Flexib xible le –
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Objectives should be adaptable to unforeseen or extraordinary extr aordinary changes in the firm's competitive or environmental forecasts. Such flexibility is at the expense of specificity. One way of providing flexibility while minimizing its negative effects is to allow for adjustments in the level, rather than in the nature, of objectives. •
e.g. there may be some flexibility in the growth rate in terms of revenues in times of recession
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The objectives must clearly state what will be achieved and by when it will be achieved. •
e.g. Adobe wants to increase its revenues from India to 5% of their total revenue in the next five years
4. Motivating –
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The objectives have to be set to a motivating level which is high enough to challenge, but not so high enough as to frustrate, and also it should not be so low as to be easily e asily attained. Since different group of people have different levels of motivatio motivation, n, different long term objectives should be set to motivate the groups.
5. Suitable –
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Long term objective objective must be suited to to the broad aims aims of the firm, firm, which are expressed in its mission statement. Each of the objectives should help the firm to move closer to achieving its mission. •
e.g. companies with mission of global reputation cannot do anything which is unethical
6. Und nder erst stan anda dabl ble e –
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All the people involved in the execution of the objectives must be able to clearly understand the objectives. They should also understand the major criteria by which their performance would be evaluated. The objectives must be clear, meaningful and unambiguous.
7. Achievable –
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Objectives must be possible to achieve. The objectives have be set to be achievable under normal conditions, when extreme changes in the external and internal environments are not expected.
Grand Strategies Grand strategies provide basic direction for strategic actions. They are the basis for coordinated and sustained efforts directed towards achieving long-term business objectives. They indicate a time period over which long-term objectives are to be achieved. Firms involved with multiple industries, businesses, product lines or customer groups usually combine several grand strategies. •
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The fifteen grand principles are: 1. Concentra Concentrated ted growth growth e.g. e.g. e-bay e-bay in online online auctio auction n 2. Mark Market et developme development nt e.g. J&J caterin catering g to the adults, adults, using sachet sachets s for market penetration 3. Produ Product ct developme development nt e.g. personal personal care care products products from HUL, HUL, newer newer version of books, 4. In Inn nov ova ati tion on 5. Hor Horizo izonta ntall int integr egrati ation on 6. Ve Vert rtic ical al integ integra rati tion on 7. Con Concen centric tric dive diversi rsific ficati ation on 8. Con Conglo glome merat rate e div divers ersifi ifica catio tion n 9. Tu Turn rna aro rou und 10.Divestiture e.g. Sale of TOMCO by Tata, selling of cement division by L&T 11.Liquidation 12.Bankruptcy 13.Joint ventures 14.Strategic alliances 15.Consortia e.g. Mitsubishi, LG
Innovation •
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Innovation is needed since both consumer and industrial markets expect periodic changes and improvements in the products offered. Firms seeking to making innovation as their grand strategy seek to reap the initially high profits associated with customer acceptance of a new or greatly improved product. As the products enters the maturity stage these companies start looking for a new innovation. The underlining rationale is to create a new product life cycle and thereby make similar existing products obsolete. This strategy is different from the product development strategy in which the product life cycle of an existing product is extended. e.g. Polaroid which heavily promotes each of its new cameras until competitors are able to match its technological innovation; by this time Polaroid normally is prepared to introduce a dramatically new or improved product. Intel, 3M –
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Horizontal integration It is a strategy in which a firms long term strategy is based on growth through acquisition of one or o r more similar firms operating at the same stage of the production-marketing chain. E.g. Acquisition of Arcrol by Mitta Steels Such acquisitions eliminate competitors and provide the acquiring firm with access to new markets. The acquiring firm is able to greatly expand its operations, thereby achieving greater market share, improving economics of scale, and increasing the efficiency of capital use. •
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e.g. acquisition of Arcerol by Mittal steels, acquisition of VoiceStream Wireless by Deutsche Telekom
The risk associated with horizontal integration is the increased commitment to one type of business.
Vertical integration It is a process in which a firm's grand strategy is to acquire firms that supply it with inputs (such as raw materials) or are customers for its outputs (such as warehouses for finished products). The acquiring of suppliers is called backward integration. The main reason for backward integration is the desire to increase the dependability of the supply or quality of the raw materials used in the production inputs. This need is particularly great when the number of suppliers are less and the number of competitors is large. In these conditions a vertically integrated firm can better control its costs and, thereby, improve the profit margin. •
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e.g. acquiring of textile producer by a shirt manufacturer
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The acquiring of customers is called forward integration. –
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e.g. acquiring of clothing store by a shirt manufacturer
Forward integration is preferred if great advantages accrue to stable production. It also helps in greater predictability of demand for its outputs. Vertical integration has a risk which results from the firm's expansion into areas requiring strategic manager to broaden the base of their competences and to assume additional responsibilities.
Concentric diversification It involves the acquisition of businesses that are related to the acquiring firm in terms of technology, markets, or products. The selected new business must possess a very high degree of compatibility with the firm's existing business. The ideal concentric diversification occurs when the combined company profits increase the strengths and opportunities and decreases the weaknesses and exposure to risk. Thus, the acquiring firm searches for new businesses whose products, markets, distribution channels, technologies and resource requirements are similar to but not identical with its own, whose acquisition results in synergies but not complete interdependence. •
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e.g. acquiring of Spice Telecom by Idea
Conglomerate Diversification It is a grand strategy in which a very large firm plans to acquire a business because it represents the most promising investment opportunity available. The principal concern, and often the sole concern, of the acquiring firm is the profit pattern of the venture. It gives little concern to creating product-market synergy with existing business. They may seek a balance in their portfolio between current businesses with cyclical sales and acquired businesses with countercyclical sales, between highcash/low-opportunity and low-cash/high-opportunity businesses or between debt-free and high leveraged businesses. •
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e.g. acquisition of Adlabs by Anil Dirubhai Ambani Group
Turnaround Sometimes the profit of a company decline due to various reasons like economic recession, production inefficiencies and innovative breakthrough by competitors. In many cases the management believes that such a firm can survive and eventually recover if a concerted effort is made over a period of a few years to fortify its i ts distinctive competences. This is known as turnaround strategy. •
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Turnaround typically is begun with one or both of the following forms of retrenchment being employed either singly or in combination.
1. Cos Costt reductio reduction n –
It is done by decreasing the workforce through employee attrition, leasing rather than purchasing equipment, extending the life of machinery, eliminating promotional activities, laying off employees, dropping items from a production line and discontinuing low-margin customers.
2. Asse Assett reduction reduction –
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This includes sale of land, buildings and equipment not essential to the basic activity of the firm.
Research have showed that turnaround almost always was associated with changes in top management. New managers are believed to introduce new perspectives, raise employee morale and facilitate drastic actions like deep budgetary cuts in established programs.
Turnaround situation The model begins with the depiction of external and internal factors as causes of a firm's performance downturn. When these factors continue to detrimentally impact the firm, its financial health is threatened. Unchecked decline places the firm in a turnaround situation. A turnaround situation represents absolute and relative to the industry declining performance of a sufficient magnitude to warrant explicit turnaround actions. Turnaround situations may be a result of years of gradual slowdown or months of sharp decline. For a declining declining firm, stabilizing operations operations and restoring profitability almost always entail strict s trict cost reduction followed by shrinking back to those segments of the business that have been the best prospects of attractive profit margins. •
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Situation severity The urgency of the resulting threat to company survival posed by the turnaround situation is known as situation severity. Severity is the governing factor in estimating the speed with which the retrenchment response will be formulated and activated. When severity is low stability can be achieved through cost reduction alone. When severity is high cost reduction must be supplemented with more drastic asset reduction measures. Assets targeted for divestiture are those determined to be underproductive. More productive resources are protected and will become the core business in the future plan of the company. E.g . strategy adopted by Citibank •
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Turnaround response Turnaround response among successful firms typically include two strategic activities: •
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Retrenchment phase Recovery phase
Retrenchment phase •
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It consists of cost-cutting and asset-reducing activities. The primary objective of this process is to stabilize the firm's financial condition. Firms in danger of bankruptcy or failure attempt to halt decline through cost and asset reductions. It is very important to control the retrenchment process in a effective and efficient manner for any turnaround to be successful. After the stability has been attained through retrenchment, the next step of recovery phase begins.
Recovery phase The primary causes of the turnaround situation will be associated with the recovery phase. For firms that declined as a result of external problems, turnaround most often has been achieved through creative new entrepreneurial strategies. For firms that declined as a result of internal problem, turnaround has been mostly achieved a chieved through efficiency strategies. Recovery is achieved when economic measures indicate that the firm has regained its i ts predownturn levels of performance. •
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Tailoring strategy to fit specific industry and company situations Strategies based on industry situation •
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Strategies for emerging industries Strategies for competing in turbulent, high-velocity markets Strategies for competing in maturing industries Strategies for firms in stagnant or declining industries Strategies for competing in fragmented industries
Strategies based on company situation •
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Strategies for sustaining rapid company growth Strategy for industry leaders Strategies for runner-up firms Strategies for weak and crisis-ridden businesses
Strategies for emerging industries An emerging industry is one which is in its formative stage. The two critical strategic issues confronting firms in an emerging industry are: 1. How to finance finance initial operations operations until sales and revenues take off 2. What market market segments segments and competitive competitive advantages to go after in trying to secure a frontrunner position. •
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Challenges when competing in emerging industries 1. Because the market is new and unproven, unproven, there is speculation speculation about how it will function, how fast it will grow and how big it will get. –
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It is difficult to make sales and profit projections. There will be guess work about how rapidly customers would be attracted and how much they would be willing to pay.
1. Much of the the technological technological know-how for for the products products of emerging industries is proprietary and closely guarded. –
Patents and unique technical expertise are key factors in securing competitive advantage.
1. Often, there there is no consensus consensus regarding which of the several several competing technologies will win or which product attributes will prove decisive in winning buyer favor. –
e.g. The mobile service providers are using both GSM and a nd CDMA technologies and they are not sure which technology will be the winner.
4. Entry Entry barrier barriers s tend tend to be low, low, even for for entrepre entrepreneu neurial rial start-up companies. –
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Large companies with ample resources will enter the market if they find the promise for explosive growth or if its emergence their existing business. e.g. entry of large number of players to the mobile services market
5. Strong Strong learn learning ing and and experie experience nce curve curve effec effects ts may may be present, allowing significant price reductions as volume builds and costs fall. 6. The market marketing ing task task is to to induce induce initial purcha purchases ses and to overcome customer concerns about product features, performance reliability and conflicting claims of rival firms. 7. Poten Potential tial buyers expect first first-gener -generation ation produc products ts to be rapidly improved, so they delay purchase till second or third generation products are released.
8. It will will take take time time for com compan panies ies to sec secure ure amp ample le raw materials and components. Till suppliers gear up to meet the industry's needs. 9. A lot of merg mergers ers and acqu acquisi isitio tions ns happ happen en as as many small companies not able to fund R&D will be willing to be acquired.
Strategic avenues for competing in an emerging market 1. Try and win early early race for industry leadership leadership with risk-taking entrepreneurship entrepreneurship and a bold creative strategy. Broad or focused differentiation strategies with emphasis on technology or product superiority offers the best chance for early competitive advantage. 2. Push to perfect perfect the technology, technology, improve product product quality and develop additional attractive performance features. 3. As technological uncertainty clears clears and a dominant technology emerges, adopt it quickly. 4. Form strategic strategic alliances with with key suppliers suppliers to gain access to specialized skills, technological capabilities and critical materials or components.
5. Acquire Acquire of form allian alliances ces with with compani companies es that have have related related or or complementary technological technological expertise as a means of helping outcompete rivals on the basis of technological superiority. 6. Try to capture capture any any first-mo first-mover ver advantag advantage e associated associated with with early commitments to promising technologies. 7. Pursu Pursue e new customer customer groups groups,, new user user applicat applications ions and and entry entry into new geographical areas. 8. Make it it easy and cheap cheap for for first-t first-time ime buyers buyers to try the industry's first generation product. Then, as the product becomes familiar to a large section of the market, shift advertisement emphasis to increasing frequency of use and building brand loyalty. 9. Use price price cuts to attract attract the the next layer layer of priceprice-sensi sensitive tive buyer buyers s into the market.
Strategies for competing in turbulent, high-velocity markets The characteristics of the turbulent, high-velocity markets is the occurrence of all the following things at once: •
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rapid technological change short product life cycles entry of new rivals into the marketplace frequent launches of new competitive moves by rivals fast evolving customer requirements e.g. mobile services, cell phones,
Strategies for coping with rapid changes The central strategy-making challenge in a turbulent market environment is managing change. A company can assume assume any any of the three strategic strategic postures in dealing with high-velocity change. Ideally a company's approach should incorporate all three postures, in different proportions. The best-performing companies in high-velocity markets consistently seek to lead change with proactive strategies, at the same time anticipating and preparing for the future and reacting quickly to unpredictable and uncontrollable new developments. •
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1. It ca can n rea react ct to ch chan ange ge The company can respond to a rival's rival 's new product with a better product. It can counter unexpected shift in buyer tastes and buyer demand by redesigning or repacking its product. •
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Disadvantages Reacting is a defensive strategy. It is unlikely to create fresh opportunity. •
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2. It can anticipate change, make plans for dealing with the
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expected change and follow its plans as changes occur (fine-tuning them as may be needed) It entails looking ahead to analyze what is likely to occur and then preparing and positioning for that future. It entails studying buyer behavior, buyer needs, and buyer expectations expectation s to get insight into how the market will evolve, then preparing for the necessary production and distribution capabilities ahead of time.
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It can open new opportunities and thus is a better way to manage change than just pure reaction.
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Anticipating change is fundamentally a defensive strategy.
3. It can lead change It entails initiating the market and competitive forces that others must respond to. It means being the first to market with an important new product or service. It means being technological leader. It means having products whose features and attributes shape customer preferences and expectations It means proactively seeking to shape the rules of the game. •
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Advantage It is a offensive strategy aimed at putting a company in the driver's seat. •
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The strategic moves depends on the company's ability to –
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Improvise Experiment Adapt Reinvent regenerate
It has to constantly reshape its strategy and its basis for competitive advantage. Cutting-edge know-how and first-to-market capabilities are very valuable competitive assets. A company has to have quick reaction time and should have flexible and adaptable resources. Organizational agility would be a competitive asset. When a company's strategy are not doing well, it has to quickly regroup probing, experimenting, improvising and trying again and again, until it finds something that is acceptable by customers.
The following five strategic moves provide the best payoff between altering offensive and defensive strategies and fast-obsolescing strategy. 1. Invest aggressively in R&D to stay on the leading edge edge of technological know-how •
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If technology is the primary driver of change, it is important to translate technological advances into innovative new products and remaining close to whatever advancements and features are pioneered by rivals. It is desirable to focus the R&D effort on a few critical areas to: –
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- avoid stretching the company's resources too thin - deepen the firm's expertise - master the technology - fully capture learning curve effects - become a dominant player in a particular technology area or product category.
2. Develo Develop p qui quickck-res respon ponse se cap capabi abilit lity y Since it will not be possible to anticipate all the changes that can happen, having an organizational capability to react quickly becomes very crucial. This means: •
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shifting resources internally adapting existing competencies and capabilities creating new competencies and capabilities not falling far behind rivals
3. Rely on strateg strategic ic partnersh partnerships ips with with outside outside suppl suppliers iers and and with companies making tie-in products As discussed earlier specialization and focus are desirable, even though technology in high-velocity market creates new paths and product categories continuously. It helps to Partner with suppliers making state-of-the-art parts and components and collaborating closely with developers of related technologies and makers of tie-in products. •
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e.g. PC manufacturers rely heavily on suppliers of components and software for innovative advances. Suppliers stay on the cutting edge of their specialization and can achieve economics of scale.
The managerial challenge is to strike a good balance between building a rich internal resource base that keeps the firm from being at the mercy of the suppliers and allies and at the same time maintain organizational organizational agility by relying on resources and expertise of outsiders.
4. Initia Initiate te fresh fresh action actions s every every few month months, s, not not just when when a competitive response is needed A company can be proactive by making proactive timepaced moves - introducing a new or improved product every few months rather than when the market declines or when rivals introduce new models. It can enter a new market every few months rather wait for opportunity to present itself. It can refresh existing brands often rather wait for its popularity to wane. The key to successfully using time pacing strategy is the right interval. •
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e.g. 3M had pursued a objective of having 25 percent of its revenues come from products less than four years old. The target has been revised to 30 percent to have more focus on innovation.
5. Keep Keep the comp company any's 's produ products cts and and servi services ces fres fresh h and exiting enough to stand out in the midst of all the change that is taking place. The marketing challenges for companies in fast changing markets is to keep the firm's products and services in limelight. The products should be innovative and well matched to the changes that are occurring in the marketplace. •
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Strategies for competing in maturing industries What are the characters of an maturing industry? It is moving from a rapid growth to a significantly slower growth. Nearly all its potential buyers are already users of the industry's products. Demand consists mainly of replacement sales to existing users, the growth is restricted to the industry's ability to attract the remaining few new buyers and in convincing existing buyers to up the usage. Consumer goods industries that are mature typically have a growth rate roughly equal to the growth of the consumer base or economy as a whole. •
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What are the changes we can see in an industry as it enters the mature stage? 1. Slowing growth growth in buyer demand demand generates generates more competition for market share –
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Firms looking for higher growth will try to take customers away from competitors. Price cutting, increased advertising and other aggressive tactics are seen as markets mature.
1. Buyers become become more sophisticated, sophisticated, often often driving a harder bargain on repeat purchases –
Since buyers have already experienced the product and are familiar with competing brands, they evaluate different brands and can negotiate for a better deal with seller
1. Competitio Competition n often produces produces a greater emphasis emphasis on cost and service –
As sellers add all features in a product, the sellers focus shifts to combination of price and service.
4. Firms Firms are not read ready y to add new fac facili ilitie ties s 5. Prod Product uct innovat innovation ion and new new end-use end-use applicat application ions s are harder harder to come by 6. Int Intern ernati ation onal al competi competiti tion on increas increases es –
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Firms start looking for foreign markets for growth. E.g. Vodafone Production activity will be shifted to countries where products can be produced at best cost. E.g. Automobile companies starting operations in India Product standardization and diffusion of technical know-how lowers barrier and encourages foreign companies to enter the market. The focus for most global players will be to capture the large geographic markets. E.g. P&G entering India
4. Industry Industry profit profitabili ability ty falls falls temporari temporarily ly or permanen permanently tly 5. Stif Stiffeni fening ng competit competition ion induc induces es a number number of mergers mergers and and acquisitions among competitors, competitors, weaker firms are driven out and consolidation is seen. E.g. Vodafone acquired Hutch
What strategic moves can be adopted for maturing industries? 1. Pruning marginal marginal products and models e.g. HUL reducing its number of brands –
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A wide variety of products is suitable for growth stage, when consumer tastes are still evolving. E.g. cellphone handset market A variety of products in a mature industry means additional costs in terms of maintaining more inventory, not able to reach economics of scale, and distribution costs. Pruning marginal products helps the firms to cut cost, concentrate on a few items with highest margins and where firms have competitive advantage. •
e.g. HUL pruning its many brands to concentrate on only a few power brands
2. Mor More e emphas emphasis is on val value ue chain chain inno innovat vation ion e.g. Maruti Suzuki asking its vendors to invest in R&D, Vendors involved in Nano, setting up company owned retail shops by companies like Reliance (Vimal) Value chain innovation can lead to:
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lower costs better product and service quality greater ability to produce customized products shorter design-to-market time
Innovation in production technology by using better technology, labor efficiency, flexible manufacturing, redesign of assembly lines can lead to saving and customization. E.g. using robots in automobile manufacturing Better collaboration with suppliers and distributors can increase quality of service.
3. Trimmi Trimming ng costs costs e.g. reduc reductio tion n in employ employees ees throug through h automation
4. Increasing Increasing sales to present present custom customers ers e.g. Credit card companies offering multiple cards to same customers –
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This is a more easier option as compared to converting customers loyal to rival companies. This may include finding new applications for the products and sales promotions. E.g. Johnson making soaps for mothers also
5. Acq Acquir uiring ing riva rivall firms firms at barg bargain ain pri prices ces e.g. Acquisition of Modern Breads by HUL, acquisition of Kissan jams by HUL, acquisition of Merrill Lynch by Bank of America Rival firms which are not doing well can be targets for acquisition at bargain prices. Acquisitions helps in:
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increasing the customer base by adding acquired customers reaching economics of scale, if possible using new technologies from acquired firms
The acquisition must be done carefully to ensure the overall competitive strength of the firm increases.
6. Expandin Expanding g interna internation tionally ally e.g. Voda Vodafone fone acqu acquisitio isition n of Hutch –
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Firms should look for markets which have attractive growth potential and competitive pressures are less. It is more suitable when the firm's skills, reputation and products can be readily transferable to foreign markets.
7. Build Building ing new new or more more flex flexibl ible e capabi capabiliti lities es e.g. e.g. Toyota building multiple model of cars from a single platform –
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Firms need to strengthe strengthen n their competitive capabilities making them harder to imitate. New competencies and capabilities can be added. Existing competencies can be made more adaptable to changing customer requirements. E.g. ITC using its expertise in running five star hotels to customize food products like atta
What can be the strategic pitfalls in an maturing industry? 1. A company should should not choose a middle middle path between between low cost, differentiation and focusing. 2. Slow to mounting mounting a defense defense against against stiffening competit competitive ive pressures. E.g. HTM watches against Titan 3. Concentra Concentrating ting more on short-term short-term profitability profitability rather rather than building long-term competitive position. E.g. Unilever losing market share to local brands like Babool in toothpaste 4. Waiting for for too long to respond to price cutting cutting by rivals. E.g. Ambassador not responding to introduction of smaller cars 5. Over expanding expanding in the the face of of slowing growth. 6. Over spending spending on advertising advertising and sales sales promotion promotion efforts in a losing effort to combat the growth slowdown. 7. Failing to pursue pursue cost reduction reduction at the earliest and and aggressively.
Strategies for firms in stagnant or declining industries Characteristics: •
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Demand is growing slower than economy-wide average. Harvesting the business to obtain cash flow e.g. e .g. selling of Gillette to P&G, selling out Preparing for closedown is a strategy for uncommitted firms. E.g. government selling Modern Breads to HUL Closing operations is always the last resort. The performance targets should be consistent with available market opportunities. E.g. Khadi garments Cash flow and return-on-investment criteria are more appropriate than growth-oriented performance measures. Acquisition or exit of weaker firms creates opportuniti opportunities es for the remaining companies to capture greater market share. s hare.
Strategies that can be followed 1. Pursue a focused focused strategy aimed at the fastest fastest growing segment within the industry –
Focusing on the segment within the industry which is growing will help companies to escape stagnating sales and profits and even gain competitive advantage. E.g. Polyester Khadi
1. Stress differentiation based on quality improvement and product innovation. –
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Innovation can create important new growth segments. Differentiating based on innovation helps in being different and making it difficult for rivals to imitate.
3. Strive Strive to driv drive e cost costs s down down and and beco become me the the industry's low-cost leader Potential cost-saving actions include: •
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cutting marginally beneficial activities out of the value chain outsourcing functions and activities that can be performed more cheaply by outsiders redesigning internal business processes to exploit costc ostcutting consolidating underutilized production facilities adding more distribution channels to ensure the unit volume needed for low-cost production closing low-volume, high-cost retail outlets pruning marginal products from the firm's offerings
The most common strategic mistakes 1. Getting trapped trapped in a profitless war of attrition 2. Diverting too much much cash out of of the business business too quickly 3. Being over optimistic optimistic about the the industry's future and spending too much on improvements in anticipation that things will improve.
Strategies for competing in fragmented industries Characteristics: Hundreds of small and medium sized companies, many privately held and none with a substantial share of total industry sale. Absence of market leaders with large market share or widespread buyer recognition. e.g. restaurants, computer hardware assemblers, hospitals •
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Reasons for supply-side fragmentation 1. Market demand is so extensive and so diverse that very large number of firms can easily coexist trying to accommodate the range and variety of buyer preferences and requirements and to cover all the needed geographic locations. E.g. hotels and eateries catering to various tastes and budgets of customers 2. Low entry barriers barriers allow small small firms to enter quickly and and cheaply. E.g. starting a real estate business just needs a contact number and a small office 3. An absence of scale scale economics economics permits small small companies companies to compete on an equal footing with larger firms. 4. Buyers require relatively relatively small quantities quantities of customized customized products. products. 5. The market for for the industry's product product or service is becoming becoming more global, putting companies in more and more countries in the same competitive market arena. e.g. interest shown by automobile manufacturers the world over to launch of Nano
6. The tec techno hnolog logies ies emb embodi odied ed in the the indus industry try's 's value chain are exploding into so many new areas and along so many different paths that specialization is essential just to keep abreast in any one area of expertise. E.g restaurants specializing in a particular variety 7. The ind indust ustry ry is youn young g and crow crowded ded with with aspir aspiring ing contenders, with no firm having yet developed the resource base, competitive capabilities and market recognition to command a significant market share.
Strategic options for a fragmented industry 1. Constr Constructing ucting and operating operating "formula" facilities facilities –
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This approach is frequently employed in restaurant and retailing businesses operating at multiple locations. It involves constructing standardized outlets in favorable locations at minimum cost and then operating them cost effectively. •
e.g. Pizza Hut, Cafe Coffee Day, Adiga's, MTR
1. Becom Becoming ing a low-cost low-cost operator operator –
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Companies can stress no-frills operations featuring low overhead, high-productivity, low-cost labor, lean capital budgets. E.g. low cost eateries like Darshinis Successful low-cost producers can use price-discounting and still earn profit above industry average.
1. Specia Specializing lizing by product product type type –
Focus on one product or service. •
e.g. Dosa Corners, auto-repair shops specializing in only one brand of vehicles
4. Sp Spec ecia ializ lizin ing g by cu cust stom omer er typ type e –
Cater to customers interested in low cost or unique product attributes or customized features. •
e.g. Only outdoor caterers
4. Fo Focus cusing ing on lim limite ited d geog geograp raphic hic are area a –
Concentrating company efforts on a limited geographical area can produce greater operating efficiency, speed of delivery and customer service and promote strong brand •
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Strategies based on company position in the industry Strategies for sustaining rapid company growth e.g. Airtel Companies that are focused on growing their revenues and earnings at a rapid or above-average pace year after year generally have to draft a portfolio of strategic initiatives covering three horizons. Horizon 1 •
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"Short-jump" strategic initiatives to fortify and extend the company's position in existing businesses e.g. price cutting by Airtel Short jump initiatives typically include adding new items to the company's present product line, expanding into new geographic areas where the company does not yet have a market presence, and launching offensives to take market share away from rivals. E.g. prepaid cards and low price strategies s trategies of Airtel The objective is to capitalize fully on whatever growth potential exists in the company's company' s present business arenas.
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"Medium-jump" strategic initiatives to leverage existing resources and capabilities by entering new businesses with promising growth potential e.g. entering into 3G segment and the DTH segment by Airtel These initiatives become more important as the present businesses enter maturity stage with the growth rate slowing down.
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"Long-jump" strategic initiatives to plant the seeds for ventures in businesses that do not yet exist e.g. failed attempt by Airtel to acquire MTN, foray into Sri Lanka by Airtel It includes putting funds in R&D projects, investing in promising start-up companies creating industries of the future, looking for new products. •
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e.g. Intel invests multibillion dollar in start-up companies. Shell encourages its employees to come up with new ideas Tata’s entering defense production
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The tendency of many firms is to focus on Horizon 1 strategies and devote only sporadic and uneven attention to Horizon 2 and 3 strategies. A study by McKinsey & Company shows that a relatively balanced portfolio of strategic initiatives covering all the three horizons are critical to maintain above the industry growth. E.g. initiatives by GE to look for potential business in 2025 A portfolio of initiatives also provides some protection against unexpected adversity in present or newly entered businesses.
The risks of pursuing multiple strategy horizons 1. A company cannot pursue all the opportunities opportunities that are are available in in the environment because of resource constraints. c onstraints. 2. Medium-jump and long-jump long-jump initiatives can cause a company to to stray far from its core competence and may end up trying to compete in businesses for which it may be ill-suited. E.g. L&T entering cement manufacturing business 3. It is difficult to achieve competitive competitive advantage in medium medium and long jump businesses, if those businesses do not mesh with the present businesses and resource strengths. E.g. L&T entering cement manufacturing business 4. The payoff's of long-jump long-jump initiatives initiatives often prove elusive; elusive; not all the initiatives are successful, only a few may evolve into significant contributors to the company's revenue and profit growth. 5. The losses from unsuccessful long-jump initiatives initiatives may may be substantial to erode gains from successful succe ssful initiatives.
Strategies for industry leaders Characteristics The competitive positions of industry leaders range from "stronger than average" to "powerful“ e.g. Google and Microsoft are powerful, Airtel is stronger than average Leaders have proven strategies. E.g. acquiring and turning capabilities of Arcerol Mittal The main concern for a leader revolves around how to defend and strengthen its leadership position. The pursuit of industry leadership and large market share is primarily important because of the competitive advantage and profitability that accrue to being the industry's biggest company. E.g . it helps in reaching economics of scale, being a technology leader •
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Some of the strategies that can be followed are: 1. Stay-o Stay-on-then-the-offen offensive sive strategy –
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The central goal of this strategy is to be a first-mover and a proactive market leader. E.g. Microsoft, Google It rests on the principle that staying a step ahead and forcing rivals to follow is the surest path to industry prominence and potential market dominance. E.g. Intel Being the industry standard setter entails relentless pursuit of continuous improvements and innovation. E.g. Google Innovation involves technical improvements, new and better products, more attractive features, quality enhancements, improved customer service and cutting costs. Initiatives to expand overall industry demand - spurring creation of new families of products, making products more customer friendly, discovering new use for the product and attracting new users. E.g. Nokia in mobile handset
2. Fort Fortif ifyy-an andd-de defe fend nd strate strategy gy The essence of this strategy is to make it harder for challengers to gain ground and for new firms to enter. E.g. Microsoft in operating system The goals of a strong defense are: To hold on to the present market share Strengthen the current market position Protect the competitive advantage Some of the defense actions can be: Attempting to raise the competition for challengers and new entrants through increased spending for advertising, higher levels of customer service and bigger R&D spending. –
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Introducing more product versions or brands to match the product attributes that challengers brands have or to fill vacant niches. E.g. Nokia Adding personalized services and other extras that boost customer loyalty and make it harder or more costly for customers to switch to rival products. E.g. earning points system by credit cards Keeping prices reasonable and quality attractive Building new capacity ahead of market demand to discourage smaller competitors from adding capacity of their own. E.g. Nokia starting manufacturing unit in India Investing enough to remain cost-competitive and technologically progressive. Patenting the feasible alternative technologies Signing exclusive contracts with the best suppliers and dealer distributors.
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This strategy is best suited for companies that have already achieved industry dominance dominance and don't wish to risk antitrust action. E.g. Microsoft, Google It is also suitable for conditions where a firm wishes to use its position for profits and cash flow because the industry's prospects for growth are low and further gains in market share do not appear profitable enough to go after.
3. Mu Muscl sclee-fl flexi exing ng str strat ateg egy y –
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Here the dominant player plays tough when smaller rivals challenge with price cuts or mount new market offensives that directly threaten its position. E.g. Microsoft’s reaction to Netscape browser Specific response can include: •
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Quickly matching and exceeding challengers challengers price cuts. E.g. 1 paise per second offers by Aircel in response to Tata Docomo offer Using larger promotional campaign and offering better deals to their major customers. E.g. bundling of free browser by Microsoft The leaders may also dissuade distributors distributors from carrying carrying rivals products. products. Provide salespersons with documented information about the weaknesses of competing firms
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Try to fill any vacant position in their own firms by making attractive offers to the better executives of rival firms. Use various arm-twisting tactics to put pressure on present customers not to use the products of rivals. like: •
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agreeing for exclusiv exclusive e arrangements in return for better prices e.g. types sold to automobile manufacturers charging them higher price if they use competito competitor's r's products e.g. chargers levied by BSNL for calls originating from a competitor to their customer landline give special discounts to certain customers e.g. corporate discounts discounts offered by five star hotels preferred treatment if they do not use any products of rivals e.g. no checkins for frequent flyers offered by major airlines
Risks Running afoul of the antitrust laws. Alienating customers with bullying tactics Arousing adverse public opinion. •
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Strategies for runner-up firms Characteristics Runner-up or "second-tier" firms have smaller market share than market leaders. E.g. Microsoft and Yahoo in online search Some of the runner-up firms can be market challengers by employing offensive strategies to gain market share and build a stronger market position. E.g. Microsoft in online search Other runner-up competitors are focusers, seeking to improve their lot by concentrating their attention on serving a limited portion of their market. E.g. Cavincare in hair care segment Some runner-up firms may be termed termed perennial perennial runnerup,, because they lack the resources and competitive up strengths to do more than continue in trailing positions. E.g. Nirma in detergents •
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Obstacles for firms with small market shares 1. Less access access to economics economics of scale in manufacturing, distributing, or marketing and sales promotion 2. Difficulty in gaining customer customer recognition recognition 3. Weaker ability to use mass media advertising advertising 4. Difficulty in funding capital requirements requirements
Strategic approaches for runner-up companies 1. Offensive strategies to to build market share e.g. Microsoft in online search –
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A cardinal rule in offensive strategy is to avoid attacking a leader head-on with an imitative strategy regardless of the resources and staying power of the runner-up firm. Some of the offensives can be: •
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Pioneering a leapfrog technological technological breakthrough breakthrough e.g. K6 processor from from AMD Getting new or better products into the market consistently ahead of rivals and building a reputation reputation for product leadership e.g. e.g. Tata Motors in passenger car segment Being more agile and innovative in adapting to evolving market conditions and customer expectations. E.g. Cavincare adopted sachets before HUL Forging attractive strategic alliances with key distributors and dealers. E.g. Acquiring of graphics chip design company by AMD Finding innovative ways to dramatically drive down costs and then using the attraction of lower prices prices to win customers. customers. E.g. ITC in foods in distribution distribution Crafting an attractive differentiation strategy based on premium quality, technological superiority, outstanding customer service, rapid product innovation or online shopping. E.g. Hyundai in cars
2. Growth Growth via acquis acquisition ition strat strategy egy e.g. Wipro consu consumer mer care acquiring Chandrika brand 1. Va Vaca cant nt ni nich che e st stra rate tegy gy e.g. successful strategy of Paramount –
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airlines This strategy focuses on some s ome niches in customer requirements which have been overlooked by the market leader. The niche should be: •
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of sufficient size Profitable has growth potential well suited to the firms ability is hard for the leading firm to serve
2. Sp Spec ecia iali list st stra strate tegy gy e.g e.g.. SAP SAP –
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A specialist firm will focus on one technology, product or product family, end use or market share. The aim is to use company's resource strengths and capabilities on building competitive edge through leadership in a specific area. a rea.
5. Su Supe peri rior or pro produ duct ct str strat ateg egy y e.g. Mercedes Benz in passenger car –
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Here the firm uses differentiation based focused strategy with emphasis emphas is on superior product quality or unique attributes. Sales and marketing efforts are aimed directly at quality conscious and performance oriented buyers.
5. Di Dist stin inct ctiv ive e imag image e stra strate tegy gy –
Some of the ways to create a distinct image are: •
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creating a reputation for charging the lowest prices e.g. Big Bazaar providing best quality at good price e.g. Toyota with Lexus going all out to give superior customer service e.g. Oberoi Hotels designing unique product attributes e.g. Apple being a leader in new product introduction e.g. Apple
7. Co Cont nten entt foll follow ower er str strat ateg egy y e.g. HMT in watches –
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The firm deliberately refrain from initiating trendsetting strategic moves and aggressive attempts to take customers from leaders. They do not want to compete with the t he leader directly. They prefer defense to offense. They would rather react than be proactive.
GE nine cell planning grid •
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General Electric with the assistance of McKinsey and Company developed this matrix. This martix includes 9 cells based on long-term industry attractiveness(on attractiveness(o n Y-axis) and business strength/ strength/competit competitive ive position (on X-axis). The industry attractiveness includes Market size, Market growth rate, Market profitability, Pricing trends, Competitive intensity / rivalry, Overall risk of returns in the industry, Entry barriers, Opportunity to differentiate differentiat e products and services, Demand variability, Segmentation, Distribution structure, Technology development Business strength and competitive position includes Strength of assets and competen competencies, cies, Relative brand strength (marketing), Market share, Market share growth, Customer loyalty, Relative cost position (cost structure compared compared with competit competitors), ors), Relative profit margins (compared to competitors), Distribution strength and production capacity, Record of technological or other innovation, Quality, Access to financial and other investment resources, Management strength
Plotting the Information: 1. Select factors to rate the industry industry for each product line or business unit. Determine the value of each factor on a scale of 1 (very unattractive) to 5 (very attractive), and multiplying that value by a weighting factor. Industry attractiveness + . . . +
factor value2
= factor value1 x factor weighting1
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factor valueN x factor weightingN
2. Select Select the the key key factor factors s needed needed for succ success ess in each each of the product line or business unit. Determine the value of each key factor in the criteria on a scale of 1 (very unattractive) to 5 (very attractive), and multiplying that value by a weighting factor. Business strengths/c strengths/competitive ompetitive position = key factor value1 factor weighting1 + key factor value2 x factor weighting2 . . . + key factor valueN x factor weightingN
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3. Plot Plot each prod product uct line' line's s or busin business ess unit's unit's cur current rent position on a matrix. 4. The indi individu vidual al produ product ct lines lines or busin business ess units units is identified by a letter and plotted as circles on the GE Business Screen. 5. The area area of of each each circle circle is is in prop proporti ortion on to the size size of of the industry in terms of sales. The pie slice within the circles depict the market share of each product line or business unit. 6. Plo Plott the firm firm's 's future future portf portfoli olio o assumin assuming g that pres present ent corporate and business strategies remain unchanged. This is shown as an arrow which starts from the circle representing the current position and the tip of the arrow will be the tentative center of the future circle.
Strategic Implications •
Resource allocation recommendations recommendations can be made to grow, hold, or harvest a strategic business unit based on its position on the matrix as follows:
1. Grow strong strong business business units in: in: –
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attractive industries average business units in attractive industries strong business units in average industries.
1. Hold average average business business units in: –
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average industries strong businesses in weak industries weak business in attractive industies.
1. Harves Harvestt weak business business units in: in: –
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unattractive industries average business units in unattractive u nattractive industries weak business units in average industries.
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There are strategy variations within these three groups. For example, within the harvest group the firm would be inclined to quickly divest itself of a weak business in an unattractive industry, whereas it might perform a phased harvest of an average business unit in the same industry. GE business screen represents an improvement over the more simple BCG growth-share matrix.
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It presents a somewhat limited view by not considering interactions among the business units It neglects to address the core competencies leading to value creation Rather than serving as the primary tool for resource allocation, portfolio matrices are better suited to displaying a quick synopsis of the strategic business units.
