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Lesson#19

TYPES OF STRATEGIES-2

Objectives:
This lecture brings strategic management to life with many contemporary examples. Sixteen types of
strategies are defined and exemplified, including Michael Porter's generic strategies: cost leadership,
differentiation, and focus. Guidelines are presented for determining when different types of strategies
are most appropriate to pursue. An overview of strategic management in nonprofit organizations,
governmental agencies, and small firms is provided. After reading this lecture you will be able to know
about:
. Types of Strategies
. Integration strategies

Horizontal Integration:

Seeking ownership or increased control over competitors
Horizontal integration
refers to a strategy of seeking ownership of or increased control over a firm's
competitors. One of the most significant trends in strategic management today is the increased use of
horizontal integration as a growth strategy. Mergers, acquisitions, and takeovers among competitors
allow for increased economies of scale and enhanced transfer of resources and competencies.
Increased control over competitors means that you have to look for new opportunities either by the
purchase of the new firm or hostile take over the other firm. One organization gains control of other
which functioning within the same industry.

It should be done that every firm wants to increase its area of influence, market share and business.

Guidelines for Horizontal Integration:

Four guidelines when horizontal integration may be an especially effective strategy are:
. Firm can gain monopolistic characteristics without being challenged by federal government
. Competes in growing industry
. Increased economies of scale provide major competitive advantages
. Faltering due to lack of managerial expertise or need for particular resources
When an organization can gain monopolistic characteristics in a particular area or region without being
challenged by the federal government for "tending substantially" to reduce competition
When an organization competes in a growing industry
When increased economies of scale provide major competitive advantages
When an organization has both the capital and human talent needed to successfully manage an
expanded organization
When competitors are faltering due to a lack of managerial expertise or a need for particular resources
that an organization possesses; note that horizontal integration would not be appropriate if competitors
are doing poorly because overall industry sales are declining

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Michael Porter's Generic Strategies

Probably the three most widely read books on competitive analysis in the 1980s were Michael Porter's
Competitive Strategy
, Competitive Advantage and Competitive Advantage of Nations. According to Porter,
strategies allow organizations to gain competitive advantage from three different bases: cost leadership,
differentiation, and focus. Porter calls these bases generic strategies. Cost leadership emphasizes producing
standardized products at very low per-unit cost for consumers who are price-sensitive. Differentiation is a
strategy aimed at producing products and services considered unique industry wide and directed at
consumers who are relatively price-insensitive. Focus means producing products and services that fulfill
the needs of small groups of consumers.
Porter's strategies imply different organizational arrangements, control procedures, and incentive
systems. Larger firms with greater access to resources typically compete on a cost leadership and/or
differentiation basis, whereas smaller firms often compete on a focus basis.
Porter stresses the need for strategists to perform cost-benefit analyses to evaluate "sharing
opportunities" among a firm's existing and potential business units. Sharing activities and resources
enhances competitive advantage by lowering costs or raising differentiation. In addition to prompting
sharing, Porter stresses the need for firms to "transfer" skills and expertise among autonomous business
units effectively in order to gain competitive advantage. Depending upon factors such as type of
industry, size of firm, and nature of competition, various strategies could yield advantages in cost
leadership, differentiation, and focus.

Cost Leadership Strategies

This strategy emphasizes efficiency. By producing high volumes of standardized products, the firm
hopes to take advantage of economies of scale and experience curve effects. The product is often a
basic no-frills product that is produced at a relatively low cost and made available to a very large
customer base. Maintaining this strategy requires a continuous search for cost reductions in all aspects
of the business.

The associated distribution strategy is to obtain the most extensive distribution
possible. Promotional strategy often involves trying to make a virtue out of low cost product features.
To be successful, this strategy usually requires a considerable market share advantage or preferential
access to raw materials, components, labour, or some other important input. Without one or more of
these advantages, the strategy can easily be mimicked by competitors. Successful implementation also
benefits from:
. Process engineering skills
. Products designed for ease of manufacture
. Sustained access to inexpensive capital
. Close supervision of labour
. Tight cost control
. Incentives based on quantitative targets
. Market of many price-sensitive buyers
. Few ways of achieving product differentiation
. Buyers not sensitive to brand differences
. Large number of buyers with bargaining power
. Pursued in conjunction with differentiation
. Economies or diseconomies of scale
. Capacity utilization achieved
. Linkages with suppliers and distributors
A primary reason for pursuing forward, backward, and horizontal integration strategies is to gain cost
leadership benefits. But cost leadership generally must be pursued in conjunction with differentiation. A
number of cost elements affect the relative attractiveness of generic strategies, including economies or
diseconomies of scale achieved, learning and experience curve effects, the percentage of capacity
utilization achieved, and linkages with suppliers and distributors. Other cost elements to consider in
choosing among alternative strategies include the potential for sharing costs and knowledge within the
organization, R&D costs associated with new product development or modification of existing
products, labor costs, tax rates, energy costs, and shipping costs.
Striving to be the low-cost producer in an industry can be especially effective when the market is
composed of many price-sensitive buyers, when there are few ways to achieve product differentiation,
when buyers do not care much about differences from brand to brand, or when there are a large
number of buyers with significant bargaining power. The basic idea is to under price competitors and
thereby gains market share and sales, driving some competitors out of the market entirely.
A successful cost leadership strategy usually permeates the entire firm, as evidenced by high efficiency,
low overhead, limited perks, intolerance of waste, intensive screening of budget requests, wide spans of
control, rewards linked to cost containment,

and broad employee participation in cost control efforts.
Some risks of pursuing cost leadership are that competitors may imitate the strategy, thus driving
overall industry profits down; technological breakthroughs in the industry may make the strategy
ineffective; or buyer interest may swing to other differentiating features besides price. Several example
firms that are well known for their low-cost leadership strategies are Wal-Mart, BIC, McDonald's, Black
and Decker, Lincoln Electric, and Briggs and Stratton.

Low Cost Producer Advantages

The first point depends upon the condition of the price fluctuation in the market; this can also be
understood with the help of elasticity of demand. In any market, the demand is sensitive to price this is
called price sensitivity of demand.
For example, if price of any commodity increases, the customer carry on to buy the things. It means
these customers neither are price sensitive. Other is the case where customers move towards the
alternates with an increase in demand.
The second is the case where there are few ways of achieving product differentiation either by changing
features, price, cost or quality of the product.

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Where there are high end products, there are the customers who are brand sensitive, because, people
want to express their choices or personality through that brand.
In Bargaining power, low price products have more customers, more suppliers and more bargaining but
high priced products there are low bargaining power due to the fewer customers.

Differentiation Strategies:

Differentiation involves creating a product that is perceived as unique. The unique features or benefits
should provide superior value for the customer if this strategy is to be successful. Because customers
see the product as unrivaled and unequaled, the price elasticity of demand tends to be reduced and
customers tend to be more brands loyal. This can provide considerable insulation from competition.
However there are usually additional costs associated with the differentiating product features and this
could require a premium pricing strategy.
To maintain this strategy the firm should have:
. Strong research and development skills
. Strong product engineering skills
. Strong creativity skills
. Good cooperation with distribution channels
. Strong marketing skills
. Incentives based largely on subjective measures
. Be able to communicate the importance of the differentiating product characteristics
. Stress continuous improvement and innovation
. Attract highly skilled, creative people
. Greater product flexibility
. Greater compatibility
. Lower costs
. Improved service
. Greater convenience
. More features
Differentiation strategies Allow firm to charge higher price gain customer loyalty

In the differentiation focus strategy, a business aims to differentiate within just one or a small number
of target market segments. The special customer needs of the segment means that there are
opportunities to provide products that are clearly different from competitors who may be targeting a
broader group of customers. The important issue for any business adopting this strategy is to ensure
that customers really do have different needs and wants - in other words that there is a valid basis for
differentiation
- and that existing competitor products are not meeting those needs and wants.

Focus Strategy - Cost Focus

In this strategy the firm concentrates on a select few target markets. It is also called a focus strategy or
niche strategy. 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. It is most suitable for relatively small firms but can be used by any company. As a
focus strategy it may be used to select targets that are less vulnerable to substitutes or where a
competition is weakest to earn above-average return on investments.
. Industry segment of sufficient size
. Good growth potential
. Not crucial to success of major competitors
. Consumers have distinctive preferences
. Rival firms not attempting to specialize in the same target segment
Here a business seeks a lower-cost advantage in just on or a small number of market segments. The
product will be basic - perhaps a similar product to the higher-priced and featured market leader, but
acceptable to sufficient consumers. Such products are often called "me-too's".

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Niche strategies

Here the organization focuses its effort on one particular segment and becomes well known for
providing products/services within the segment. They form a competitive advantage for this niche
market and either succeeds by being a low cost producer or differentiator within that particular
segment.

Recent developments

Michael Treacy and Fred Wiersema (1993) have modified Porter's three strategies to describe three
basic "value disciplines" that can create customer value and provide a competitive advantage. They are
operational excellence, product innovation, and customer intimacy.

Criticisms of generic strategies

Several commentators have questioned the use of generic strategies claiming they lack specificity, lack
flexibility, and are limiting. In many cases trying to apply generic strategies is like trying to fit a round
peg into one of three square holes: You might get the peg into one of the holes, but it will not be a
good fit.
In particular, Millar (1992) questions the notion of being "caught in the middle". He claims that there is
a viable middle ground between strategies. Many companies, for example, have entered a market as a
niche player and gradually expanded. According to Baden-Fuller and Stop ford (1992) the most
successful companies are the ones that can resolve what they call "the dilemma of opposites".

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