Alternative strategies

Vision & Mission and Objectives Strategy Formulation Internal evaluation External evaluation Generic Alternative Strategies Strategy Selection Strategic formulation

Developing strategies Once a firm has set out its long term objectives and evaluated its external and internal environment it then has to come up with a potential number of strategies. A number of generic strategies exist and the organisation can look at each possibility to see if it may be suitable. This lecture will look at a broad scope of proposed and when they could be adopted.

Types of Generic Strategies Integration Strategies: related to industrial value chain: suppliers, customers… Intensive Strategies: markets size and market share Diversification Strategies: a movement into other business areas Defensive Strategies: related to those when company is in “trouble”

Types of Strategies Integration Strategies Forward Integration Backward Integration Horizontal Integration

Forward Integration Strategies  Attempts to gain control over: Distributors and Retailers  should be adopted when:  Current distributors – expensive or unreliable  Availability of quality distributors – limited  Firm competing in industry expected to grow markedly  Firm has both capital & HR to manage new business of distribution  Current distributors have high profit margins

Backward Integration Strategies  Control of Firm’s suppliers  should be adopted when:  Current suppliers – expensive or unreliable  number of suppliers is small;  High growth in industry sector  Firm has both capital & HR to manage the new business  Current suppliers have high profit margins  (note the similarity in reasons for adoption).

Horizontal Integration Strategies  Control of Firm’s Competitors  should be adopted when:  Competes in growing industry  Increased economies of scale – a major competitive advantage by increase in size  Competitor is faltering due to lack of managerial expertise or need for particular resource Of course must Gain “lawful” monopolistic characteristics (Europe antitrust legislation) with out government challenge (competition laws)Europe antitrust legislation

Types of Strategies Intensive Strategies Market Penetration Market Development Product Development

Strategy should be adopted when :  Current markets not saturated  Rate of present customers can be increased significantly  Shares of competitors declining; industry sales increasing  Increased economies of scale (increase units of production cause reduction in average cost to produce a unit) provide major competitive advantage Market Penetration Strategies: Increased Market Share of Present products/services or Present markets

 New channels of distribution – reliable, inexpensive, good quality  When Firm is successful at what it does  Untapped/unsaturated markets  Excess production capacity for current market  Basic industry rapidly becoming global Strategy should be adopted when : Market Development Strategies: New Markets -- Present products/services to new geographic areas

 Products in maturity stage of life cycle  Industry characterized by rapid technological development  Competitors offer better-quality comparable prices  Strong R&D capabilities  Do you think antitrust legislation is applicable in these types of strategies. Product Development Strategies: Increased Sales -- Improving present products/services or developing new products/services Strategy should be adopted when :

Types of Strategies Diversification Strategies Related Diversification Unrelated Diversification

Related Diversification May be Effective When: An organization competes in a no-growth or a slow growth industry An organization’s products are currently in the declining stage of the product’s life cycle New, but related, products have seasonal sales levels that counterbalance an organization’s existing peaks and valleys (e.g. summer v winter): Can you think of any examples for an I.T. organisation

Unrelated Diversification May be Effective When: An organization’s basic industry is experiencing declining annual sales and profits An organization’s current distribution channels can be used to market new products to existing customers An organization has the capital and managerial talent to compete successfully in a new industry An organization has the opportunity to purchase an unrelated business as an attractive investment opportunity

Types of Strategies Defensive Strategies Retrenchment Divestiture Liquidation

Defensive Strategies  Retrenchment: reduce Costs & assets to reverse declining sales & profit  Divesture: Selling a division or part of an organization  Liquidation: Sell Company’s assets, in parts, for only their tangible worth; not for their copyrights (intangible worth)…

Retrenchment Strategies: reduce Costs Guidelines --  Failed to meet objectives & goals consistency; but has distinctive competencies  Inefficiency, low profitability, poor employee morale, pressure for stockholders  Strategic managers (strategic management processes) have failed  Rapid growth in size; major internal reorganization necessary

Divestiture Strategies: sell part of firm Guidelines --  Retrenchment (cost cutting) failed to attain improvements  Division needs more resources than are available  Division responsible for firm’s overall poor performance  Large amount of cash is needed and cannot be raised through other sources

Liquidation Strategies Guidelines --  Retrenchment & divestiture failed  Only alternative is bankruptcy.bankruptcy  Minimize stockholder loss by selling firm’s assets

Sample Exam Question Describe of the following types of generic strategies: integration, intensive, diversification or defensive. (12 marks) Explain, using suitable examples, at least 2 circumstances when each of these generic strategies should be adopted or may prove effective. (18 marks)