ISL457U-STRATEGIC MANAGEMENT
Chapter 5: Types of Strategies
Generic Strategies
Generic strategies are three basic strategies applicable to any business: cost leadership, differentiation and focus (sometimes called niche). According to Porter, the competitive advantage stems from the selection of the general strategy that best suits the competitive environment of the organization, and then organizing value-added activities to support the chosen strategy (Stonehouse & Houston, 2003). There are three main options (Porter, 1985), as you can see in Figure 5.1: 1. Cost Leadership 2. Differentiation 3. Focus
Cost Leadership: Producing standard products or services at low cost per part or unit for price sensitive consumers. Two different types of cost leadership strategies are expressed: low-cost strategy and best-value strategy. The low-cost strategy provides a wide range of customers with products and services at the lowest cost and price in the market . Best-value strategy provides a wide range of customers with products or services in the best price-value range on the market.
Differentiation Strategy: Differentiation is a strategy aiming at distinguishing a firm’s products or services from other similar products or services offered by the competitors. This strategy involves the development of products or services unique for customers in terms of product design, features, brand image, quality, or customer service. When the organization can differentiate its products and services, it can demand a higher price than the average price in the market. Differentiation gives such a privilege to the organization. The main benefits of a successful differentiation strategy are as follows:
• The firm will provide its products and services at a high price, • The demand for its products and services will have less price elasticity than competitors’ products, • The firm can make a profit above average, • The strategy could create an additional barrier of entry for new businesses wishing to enter the sector.
There will be two possible problems with differentiation strategies (Lynch & Smith, 2006):
• Recovering the extra costs arising from differentiation from customers by demanding a higher price is quite difficult. • Differentiation can attract competitors to copy differentiated products and services and enter the market segment. There are costs to enter a market first, so it can provide additional cost advantages to the second competitor-sourced from the supplier, marketing, etc.
Focus Strategy: A strategy that meets the needs of one or more specific customer groups or segments. Strategic focus is the third generic strategy which refers to a
strategy that meets the needs of one or more specific customer groups or segments. For example, Ferrari uses a focus strategy that targets the high-performance sports vehicle segment (with relatively few customers). Ferrari, unlike Volkswagen or Toyota, is not concerned with the production of “off-road” vehicles, family type or “public transport”. Among the main shortcomings in the focus strategy are introduction of new technology, products and services, dramatic fall or growth of the niche market, and the threat of strong competitors seeking opportunities in saturated and intense competition in the main market segments. Highly customized market niches are always sensitive to technological change, new products and processes, or other sources of innovation. Famous “MP3 player” manufacturers are a good example.
Integration Strategies
Forward Integration: Increasing ownership or control over distributors or retailers (going forward in the value chain in an industry). Example: Companies such as Desa, YKM, Mavi Jeans, Benetton, Beymen, Linens have increased their number of stores remarkably in the past 15 years. Some companies such as Kiğılı have completely left the dealership system. Business firms generally prefer forward integration when they
• have enough capital to establish their own distribution system, • experience problems and delays in distribution channels • face high price increases demanded by marketing channel members • produce very technical products • lack competent and specialized distribution channels • perform in a fast-growing industry
Backward Integration: Increasing ownership or control over firm’s suppliers (going back to the value chain in an industry). Backward integration occurs when a company wants proprietorship or greater control of supply systems to make sure and underwrite the flow of raw materials. Example: Some large-scale retailers such as Migros and Carrefour purchase products directly from producers, skipping wholesalers. Moreover, some companies prefer contract manufacturing or switch to direct production.
Horizontal Integration: Pursuing ownership or increased control over competitors. Example: Google has quietly acquired Superpod, a startup that had built a question-and- answer mobile app. Google paid less than $60 million to “acqui-hire” the founders and purchase some of Superpod’s assets. The following five elements indicates when horizontal integration can be a particularly successful strategy (Davidson, 1987):
• When a firm benefits monopolistic features in a specific area or territory, without being alerted by the state that it “trends considerably” to decrease competition.
• When a business wants to gain a competitive advantage in a flourishing industry. • When the business is expected to provide great competitive advantages in emerging economies. • When an organization intends to have both the necessary capital and human capability to successfully operate, which take over a developed organization. • While competitors are struggling because they lack administrative knowledge or the need for specific resources owned by an organization (horizontal integration will not be suitable if competitors perform inadequately, because in this circumstance overall sales are decreasing.)
Concentration Strategies
Market Penetration: Increasing the sales of the firm’s existing products through intensive marketing efforts. Example: Porland, the leading brand of the porcelain industry, opened its 32th store in Gaziantep. The 845 square meter concept store in Forum Gaziantep Shopping Center is the brand’s second store in Gaziantep. Firms employ various types of tactics to penetrate the markets. Among these are the following:
• Price Adjustment: One of the most common tactics used by the firms is to lower the prices of the products to increase the sales. However, firms need to be careful about this tactic since decreasing the price frequently would cause customers to believe that products are of sub- standard quality. • Product or Service Promotions: Advertising can be an effective way of increasing sales through brand awareness. For example, in the retail-sales industry, BİM spent more than 10% of its sales incomes on advertising to maintain and possibly increase its market share in 2019. These enormous advertising expenses were also made to prevent the entry of potential competitors. This strategic option is especially appropriate for not only huge companies but also small organizations that focus their sales attempts on certain marketplace niches. Also, promotions on quantity such as “buy one and get one for free” may boost the sales. • Distribution Channels: Firms may add new distribution channels to existing ones. For example, if selling through retail outlets is a firm’s only channel, new channels such as telemarketing, e-mail marketing, online marketing, etc. can be used. • Investment in Human Resources: Firms can employ more salespeople to increase the sales. Moreover, pay structure can be modified in a way to motivate salespeople towards selling more. Also, quality and quantity of employee training programs can be enhanced.
Market Development: Selling existing products of the firm in the new markets. Example: German FlixMobility, carried 45 million passengers in 2018 in Europe and in the U.S., acquired Kamil Koç, one of the intercity bus operators (listed among the top 500 firms in Turkey, serving 61 cities all over Turkey. Market development is often another comparatively low-risk strategy; so, the idea behind it is to market existing goods to consumers in the marketplaces connected to potential changes and segmentation increases. Changes in marketing and distribution channels will usually support this strategy. In short, the key issues for this strategy to be successful are (Thompson & Martin, 2010):
• changes to increase appeal to different segments or niches, • providing new experiences for a manufactured goods or services, • being suitable for various territories in conjunction with specific preferences, tastes or needs.
Product Development: Offering transformed or new goods or services in present markets. Example: Gemtasonic launches its new product, Winpoint® personal sound system, with technology that only one person can hear.
Diversification Strategies
Diversification has two modes: related diversification and unrelated diversification.
Related Diversification: Expanding firm’s activities into product lines that are similar to those it currently offers. Example: Owned by world-renowned businessman Jeff Bezos, Amazon acquired Datarow, an Istanbul-based Turkish company. Datarow was founded in 2017 by Turkish entrepreneurs for software and storage solutions. Related diversification has two alternatives (Lynch, 2015); close-relaated and distant-related diversification.
With close-related diversification, different firms within the business group may possibly have unique goods or services, yet they may have a proximity, such as common consumers, dealers, or business costs.
In distant-related diversification, dissimilar businesses in the group would likely share the same core competencies or other technology or service areas, even though they have completely different goods or services that utilize completely different technologies that will be assisted by synchronization by the head office.
Unrelated Diversification: Expanding firm’s activities into product lines that are unrelated to those it produces and sells. Example: Global Investment Holding (GYH), which has investments in the energy, port, real estate and finance sectors, has also stepped into the mining sector. Holding bought 75 percent stake in the Straton mine company, located in the western Aegean region of Turkey.
Unrelated diversification is always high-level risk, the predictable explanations for failure are:
• The synergy and collaboration capability is overestimated by managers, • Administrative troubles and obstacles are misjudged. • Crucial administrators are left behind after acquisition. • The hidden weaknesses of the business are realized too late. • A lot of costs are funded, and the profit is not taken back soon.
Three main reasons why a business concept centered on both of diversification strategies causes malfunction of competitive advantage are listed below (Hill & Jones, 2011):
1. Changes over time within the company or industry 2. Diversification made as a result of incorrect evaluations. 3. Excessive diversification leading to boosted bureaucratic expenditures.
Defensive Strategies
Among the causes of employing defensive strategies are:
• Insufficient strategic management (inadequate administration, acquisitions that do not meet the expectations, inadequate management of large projects, fraud or false pretenses, etc.). • Weak financial administration (inadequate fiscal control, loss of cost advantage, etc.). • Competitive powers (The negative impact of competitive conditions, supply issues, inadequate or poorly managed marketing department, etc.)
Defensive strategies include three strategies: retrenchment, divestiture and liquidation:
Retrenchment: Reducing firm’s one or more business operations with the view to cut expenses and reach a more stable financial position. Example: Turkey’s Boyner Perakende, owned by Boyner Holding and the Boyner Family, sold a 43.91% share for $405 million with a contract with Qatari investment fund Mayhoola in May.
Divestiture: Selling a department or unit in an organization. Example: Essity is divesting its 50% stake in the partly owned company SCA Yildiz in Turkey to its partner Yildiz. Yildiz is now fully owned by the Turkish company.
Liquidation: Selling the whole properties of the company in parts. Example: Turkish holiday group Anex Tour owned the travel giant Thomas Cook’s (in liquidation) German leg, Öger Tours and Bucher Reisen.
The Means for Achieving Strategies
Joint Ventures and Alliances: A joint venture is an arrangement among business firms to pool their resources
for accomplishing a specific task. This task can be a new project or any other business activity. Joint ventures are comparatively official coalitions and can take various types.
The strategic alliance (partnership) is a form of relationship intended to ensure a transnational initiative not including a stockholding. In recent years, this strategy has been widely used by businesses: for the reason that the rising expenditure of R&D has put stress to share these expenses; as strategic alliances were discovered to provide reduction of expenses via divided markets of scale and scope; finally, strategic alliances have brought other expense advantages as a consequence of strategic alliance associates who concentrate or rationalize their activities.
Types of Alliances: There are three types of alliances: joint ventures, consortia, and networks. Joint venture is described earlier.
Consortia might include two or more companies in a joint venture agreement that normally concentrates more on an initiative or project. Networks are fewer strict agreements in which companies work in cooperation without being dependent on cross-proprietorship agreements and official deals.
Other strategic alliance agreements are often contractual and not likely to include property: Franchising involves the franchisee who is engaged in certain actions for example production, distribution and sales while the franchiser is accountable for trademark, advertising and possibly training. For example, many retail market chains have a franchising agreement in Turkey. Licensing is widespread in knowledge-based businesses in which the right to produce a patented product is approved for a payment. By way of subcontracting, a business prefers to subcontract certain services or pieces of the procedure. For instance, IT services, cleaning or security may possibly be subcontracted (or ‘outsourced’) to other businesses.
Mergers and Acquisitions
Merger: An agreement where two existing companies unite to form a new company
An acquisition occurs when a large organization purchases (acquires) a smaller firm or vice versa (David and David, 2017).