Generic Strategy – Porter

THEME 8 GENERIC STRATEGIES 1. Introduction. 2. The Porters approach competitive strategies ( price advantage, differentiation advantage and specialization). 3. The Ansoffs approach the Growth Matrix (market penetration, harvesting development, market development, and diversification). 4. An integrating approach. Alfonso VARGAS SANCHEZ 1 Hope is not a system, specially when internationalizing the company is the lookion 2 Strategic Analysis Compulsory Questions What business is the ecesis in? manufacturing/retail, etc. Who do they compete with, and how do they compete? Who atomic number 18 the organisations stakeholders?Key stakeholders & their influence. What be the external drivers for change? fella model, macro instruction environment. Five Forces model, micro/industry environment. How does the organisation gain place? Resource audit, tangible & intangible. Value Chain and Value System analysis. Assess the balance in the corporate portfolio, BCG matrix. How should I co mpete? Porters generic strategies low cost, differentiation, specialization. What are my strategic lamments? Mergers/Acquisitions, etc. 3 Mission Vision Values PEST analysis Competitive Forces P. C. Industry Attractiveness S C. C. S. P. B (threats & opportunities)Value Chain activities & linkages F. I. T. D. HH. RR. PR. Value System (linkages) other SBUs (synergies) & suppliers buyers value chains schema formulation, at common chord levels CBF Companys Competitive come out (Resourceestablish View) cost advantage or uniqueness (strengths & weaknesses) I. L. OP. O. L. M&S A-S. S. STRATEGY ELEMENTS LEVELS furrow SCOPE RESOURCES & CAPABILITIES COMPETITIVE ADVANTAGES SYNERGIES CORPORATE (1) (1) (1) BUSINESS (2) (2) (2) FUNCTION (3) (3) 5 STRATEGIC ADVANTAGE PORTERS come Exclusivity perceived by the customer Position of low be COMPETITIVE SITUATIONBroad (the whole DIFFERENTIATION sector) Reduced (only one segment) COSTS LEADERSHIP FOCUS or NARROW SEGMENTATION 6 THE minor COST PH ENOMENON Two basic ways -Productivity. -Economies of scale & learning/experience. 7 8 9 COSTS LEADERSHIP RESOURCES AND APTITUDES -Sustained investment of capital and favourable oerture to financial markets. ORGANISATIONAL REQUIREMENTS -Strict control of costs. -Detailed and frequent control reports. RISKS OR LIMITATIONS -Technological change that dealcels out the experience gained or investment made. -Competitors who learn easily and rapidly. -Stagnation of the product or of the trade. ostentatiousness of costs that annuls the previous price differential. -Clearly defined organisation -Special aptitudes for and responsibilities. process engineering. -Incentives based on meeting -Close supervision of quantitative objectives. work and operations. -Products designed for ease of manufacturing. -Low cost of distribution. 10 construe Designers on quest to build $12 computer 11 DIFFERENTIATION RESOURCES AND APTITUDES ORGANISATIONAL REQUIREMENTS RISKS OR LIMITATIONS -Significant aptitu des -Coordination between the functions of R&D, product in marketing and in product engineering. development and marketing. Strong investment -Qualitative assessments in R&D. and incentives. -Prestige in quality -Capacity for and technology. understanding the market -Full cooperation of and how it changes. the distribution -Appropriate channels. organisational structure for -Long tradition in the stimulating and rewarding sector, or a unique creativity. combination of aptitudes obtained in other business activities. -Competitive levels of product prices, in accordance with a strategy of minimal global cost. -The customers no longer value the products factors of differentiation. -As the industry matures, imitation reduces the perceived ifferentiation. 12 Mention some brands for which you are willing to pay a bonus price 13 SPECIALISATION RESOURCES AND APTITUDES -Resources and aptitudes of special application and interest in the companys area of operation. -Dominance of the relevant technology and of the engineering of the product. -Marketing capacity. -Ability in the use of limited resources. -Other competitors are specialized in part of the market of the already specialized company. ORGANISATIONAL REQUIREMENTS -Flexible and efficient organisation structure. -Corporate culture relevant and specific to its areas of specialisation (products and markets).RISKS OR LIMITATIONS -The differences in costs compared with nonspecialized companies are so wide that the advantages of specialisation are eliminated. -Close coordination between -The market in which the functions. company is specialized reduces its differences -Rapid response to changes with respect to the global market. in the environment. 14 15 16 A niche strategy within a declining industry Reading Cassettes linger long after expected demise 17 Segmentation variables Varieties of products. Types of purchaser. Distribution channels. Geographic areas. Example olive oil market. 18Segmentation matrix (1) TYPE O F PURCHASER VARIETIES OF PRODUCTS (QUALITY) Olive Oil perfect(a) Olive Oil unembellished arrant(a) Olive Oil Final customer (bottled product) Restaurants, etc. (bulk product) 19 Segmentation matrix (2) TYPE OF DISTRIBUTION CHANNEL VARIETIES OF PRODUCTS (QUALITY) Olive Oil saturated Olive Oil Extra Virgin Olive Oil Generic Specific 20 Combining segmentation matrixes (1+2) TYPE OF DISTRIBUTION CHANNEL VARIETIES OF PRODUCTS (QUALITY) Virgin Olive Oil for final customers (bottled product) Extra Virgin Olive Oil for final customers (bottled prod. ) Generic Specific 21 Segmentation matrix (3)GEOGRAPHIC AREA VARIETIES OF PRODUCTS (QUALITY) Virgin Olive Oil for final customers using a generic distribution channel Extra Virgin Olive Oil for final customers using a specific distribution channel National Market (a) International Market (c) (b) (d) 22 The choice of a segment/s ATTRACTIVENESS within the aforesaid(prenominal) industry there are segments with different levels of attracter. I NTERRELATIONSHIPS choose the most beneficial combination of segments. SUSTAINABILITY your business scope should lead to a strong (defensible) position. (1) Structural attractiveness (competitive forces). (2) Size and growth. 3) Position of the company. (4) Advantages in costs or in differentiation. (5) Costs of coordination, of commitment and of inflexibility. Against (6) Competitors with broader objectives. (7) Imitation. (8) Substitution. 23 Example olive oil market SEGMENTS / CRITERIA ATTRACTIVENESS INTERRELATIONS SUSTAINABILITY (1) (2) (3) (4) (5) (6) (7) (8) (a) (b) (c) (d) 24 Criticisms of Porters framework Hybrid strategies could be employed without stuck in the middle. Cost leadership alone does not sell products. Differentiation strategies can be used to increase sales volumes rather than to charge a premium price.Price can sometimes be used to differentiate. A generic strategy can not give a competitive advantage. Arguably, the resource based strategy has superseded this g eneric strategy framework. 25 A company must(prenominal) spend a penny at low cost, while also innovating it must deploy the massed resources of a large corporation, while showing the entrepreneurial flair of a small start-up it must carry out high levels of reliability and consistency, while also being flexible (Grant, 2012). 26 OPTIONS FOR GROWTH ANSOFFS APPROACH CURRENT PRODUCTS NEW PRODUCTS ANSOFFS APPROACH CURRENT PRODUCTS NEW PRODUCTS CASE STUDYCURRENT MARKETS Market Penetration Product outgrowth CURRENT MARKETS Expansion of Products NEW MARKETS Market Development variegation NEW MARKETS of Markets variegation 27 The Growth Matrix Sub-strategies Existing Market Penetration -Intensification. -Relaunching. -Imitation. -Reduction of costs/prices. -Disaggregation. Product Development -New products (R&D, innovation). -New product lines. -New services. MARKETS New Market Development -New territoriesINTERNATIONALIZATION. -New segments of purchasers. -New distribution channels. -N ew possibilities for utilization. Diversification -Concentric (or related). By conglomerates (or unrelated). Existing PRODUCTS New 28 INTERNATIONALIZATION & GLOBALIZATION 29 INTERNATIONALIZATION & GLOBALIZATION Reading Chinas develop food industry faces scrutiny 30 International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities Use Core Competence Strategic Competitiveness focal point Outcomes Problems and Risks International Strategies Increased Market Size Return on Investment Economies of Scale and Learning Location Advantage International Business-Level Strategy (*) Multidomestic Strategy global Strategy transnational StrategyModes of Entry Exporting Licensing Strategic Alliances Acquisition Establishment of New Subsidiary Higher Performance Returns Innovation (*) Low cost or Differentiation. Standardization vs Adaptation. Multidomestic vs Global. Management Problems and Risks Strength of Market Drivers Aircraft Comput ers Auto liquids Soft Drinks Toothpaste sell Banking Book Publishing Baked Goods Low Multidomestic High Global Strength of Cost Drivers Pharmaceuticals Aircraft Computers Automobiles Toothpaste Retail Banking Baked Goods Soft Drinks Low Multidomestic High Global Corporate-Level International StrategiesMulti-Domestic Strategy Strategy and operating decisions are decentralized to strategic business units (SBU) in each(prenominal) country. Products and services are tailored to local anaesthetic markets. Business units in each country are independent of each other. It assumes markets differ by country or regions. Focus on competition in each market. Prominent strategy among European firms due to broad variety of cultures and markets in Europe. Corporate-Level International Strategies Global Strategy Products are standardized across national markets. Decisions regarding business-level strategies are centralized in the home office.Strategic business units (SBU) are assumed to be interd ependent. Emphasizes economies of scale. Often lacks responsiveness to local markets. Requires resource sharing and coordination across borders (which also makes it difficult to manage). Corporate-Level International Strategies Transnational Strategy Seeks to achieve both global efficiency and local responsiveness. Difficult to achieve because of simultaneous requirements for strong central control and coordination to achieve efficiency and local flexibility and decentralization to achieve local market responsiveness. Must pursue organisational learning to achieve competitive advantage.International Corporate Strategy When is each strategy appropriate? High Global Strategy Need for Global Integration Transnational MultiDomestic Low Low High Need for Local Market Responsiveness Effective Standardization Coca-Cola McDonalds Barbie The All-American Girl Goes Overseas Barbie is more than 40 years old. exchange in 130 countries. National adaptations Physical features. Costumes. Activ ity sets. Standardized physique Scaled to 62, 110 lbs. 38-18-28. Effective Adaptation McMutton Pie in Australia. Wendys shrimp sandwich in Japan. Campbells noncondensed soups in the UK. Coca-Colas 175 ml containers in Japan.Cadillac Seville 1997 Asian edition Right-hand drive, shorter seats, closer pedals, 10 shorter & retractable mirrors. Limits to International Expansion (beyond political and economic risks) Management Problems Cost of coordination across diverse geographical business units. Institutional and cultural barriers. Understanding strategic intent of competitors. The overall complexity of competition. DIVERSIFICATION Why? Growth, Profitability and Risk Reduction Dont put all your eggs in one ring 42 DIVERSIFICATION Three essential shews for judging diversification (Porter) -The attractiveness test Is the target industry attractive?Use the 5forces model to assess its attractiveness. -The cost-of-entry test Is the cost of the diversification worth it? Will the divers ified firm create enough additional value to justify the cost? -The better-off test Does the diversification move produce opportunities for synergies? Will the company be better off after the diversification than it was before? How and why? Potential advantages 1. Economies of scope (cost savings from using a resource in multiple activities carried out in combination). 2. home(a) market (for capital and staff). Reading Perils of diversification. The era of diversification, 50s-80s. Refocusing, 90s-onwards. 43 DIVERSIFICATION Because of its high risk, umteen companies attempting to diversify have led to failure. However, there are some good examples of successful diversification -Virgin Group moved from music production to travel and mobile phones. -Walt Disney moved from producing animated movies to theme parks and vacation properties. -Canon diversified from a camera-making company into producing an entirely new range of office equipment. 44 DIVERSIFICATION Reading Toyota tunes up violinplaying robot 45 Diversification & PerformanceThe findings of empirical research How do diversified firms perform relative to specialised firms? -No consistent, systematic relationship has been emerged. -High levels of diversification are associated with deteriorating positiveness. -Timing is key. Does related diversification outperform unrelated diversification? -Diversification into related industries should be more profitable than diversification into unrelated industries. -Peters and Watermans golden dominion Stick to the Knitting. Empirical studies have defined relatedness in terms of similarities Operational relatedness.Strategic relatedness. 46 Related Diversification Businesses are distinct but their value chains possess strategic fit in operations, marketing, management, R&D. distribution, labor, etc. Therefore, they tend to exploit economies of scope. Tend to (historically) outperform unrelated diversifications. 47 Unrelated Diversification No common linkage or element of strategic fit among SBUs i. e. , no meaningful value chain interrelationships. Dominant logic spreads businesses risk over multiple industries, stabilizing corporate profitability (in theory).Strategic approach any company that can be acquired on good financial terms & offers good prospects for profitability is a good business for diversification. Conglomerates (clusters of businesses under central, mainly financial, management control), such as GE. 48 Example GE Diversification helps to strengthen General electric automobile when one business is going badly, the other goes well, which contributes to the stability and growth of the company. These words of Ricardo Artigas, Vice President of the General Electric Company, clearly reflect the guts behind this trategic option, the result of which is a company configured into twelve divisions 1. Aircraft Engines 2. Appliances (domestic electrical appliances) 3. Capital Services (financing services for customers) 4. Lighting 5 . Medical Systems 6. NBC (television channel) 7. Plastics 8. Power Systems (electrical energy generation) 9. galvanising Distribution and Control (power cables, transformers, etc. ) 10. Information Services 11. Motors & Industrial Systems 12. Transportation Systems. 49 AN INTEGRATING APPROACH Leadership in costs Differentiation guardianship Growth Restructuring Internal External ExpansionDiversification of Products of Markets Concentric Conglomerate Vertical Integration Horizontal Integration 50 AN INTEGRATING APPROACH GROWTH STRATEGIES Expansion Internal Diversification Expansion External Diversification of Products of Markets Concentric Conglomerate of Products of Markets Concentric Conglomerate Strategic Advantage Costs Differentiation Readings from the textbook Pascual & Lagasa -internal growth based on diversification- Fontaneda & La Casera -external 51 growth based on the expansion of products and markets-. Progress is when things get simpler, not more complicated Bruno Muna ri, Italian artist. 52