Chapter 12: Strategic Options

Very Short Questions Answer

1. What do you mean by corporate strategy?

Corporate strategy is the master strategy for an organization. It follows the vision and mission of an organization. A corporate strategy involves selecting and managing a group of different businesses which are competing in different product markets to gain competitive advantage.

2. Enlist the types of corporate strategy.

The different corporate level strategies are mentioned below,

• Stability strategy
• Expansion strategy
• Retrenchment strategy
• Combination strategy

3. What do you mean by no change strategy?

No change strategy is a decision of an organization to do nothing new, rather to continue with the present business condition. There are no changes in policies, process, and procedures. This strategy is followed if there is no obvious opportunity or threat, nor significant strength or weakness.

4. Define profit strategy.

It is an attempt to artificially support profits when a company’s sales are declining by reducing investment and short term discretionary expenditures. Under this, management defers investments and/or cuts expenses to stabilize profits during the inverse time.

5. What do you mean by stability strategy?

Stability strategy refers to the organization’s decision to continue with the same business and activities. The organization that adopts a stability strategy focuses on its existing lines or lines of business and attempts to maintain them.

Short Question Answer

1. What is market penetration strategy? Why is it adopted? Write.

Market penetration refers to increasing the market share of existing product in existing markets to protect and build market position. It is possible through aggressive marketing tactics like trade allowances, advertising, price reduction, package improvements etc. There are basically three ways a company can penetrate a market. They are:

• Stimulating customers to increase their current rate of usages.
• Attracting non-users by using promotional incentives, advertising, pricing up or down etc.
• Swaying competitor’s customers by brand differentiation and stepping up promotional activities etc.

It is adopted when,

•  The existing markets are not saturated with the industry performance.
• The usage rate of present customers can be significantly increased.
• The market of major competitors is decreasing while total industry sales are stable or increasing.
• The correlation between sales and marketing expenditure has historically been highly positive.
• Increased economies of scale provide major competitive advantage.
• Market penetration is not a costly processing
• The existing market leaders are complacent.

2. What are the conditions of success of focused strategy? Write.

Focused strategy refers to the situation when organizations get concentrated on a particular niche of the market to offer its product. The conditions of success of focused strategy are as follows:

• The focused market segment is profitable with growth potential.
• The competitors are not focused in the particular segment.
• The business has necessary resources and capability to fulfill the customer demand of the particular segment.
• The customers in the focused segment are loyal to the product and are ready to pay premium price.
• Intensive research and development are carried out to assess customer needs and preferences.

3. Write in brief about Porter’s competitive strategies.

Competitive strategy creates the base in which a business competes in the 307 marketplace. Michael E. Porter has suggested the following market based competitive strategies.

• Cost leadership strategy: It emphasizes producing and delivering the product or services at low cost relative to competitors, while not neglecting quality and service. In cost leadership strategy, the organization adopts the lowest de cost provider strategy in the industry. This strategy is operationalized over the long period by scrutinizing drivers of each cost creating activities to reduce the cost that the competitor cannot imitate. Under this, the overall profit increases due to higher sales irrespective of the lower price.
• Differentiation strategy: In differentiation strategy, the organization tries to offer its products in the market as distinct in the customers perception than its competitors. To sustain and operationalize this strategy, the changing needs and preferences are tailored. The differentiation, technique of competitors is analyzed and distinct technique difficult to imitate is adopted. Internal competencies and tactical plans are developed. Innovation through R & D, quality products through TQM, use of most advanced technology etc. are regularly adopted.
• Focus strategy: It refers to the situation when organizations get concentrated on a particular niche of the market to offer its product. Focused strategy may be low-cost differentiation. In the process of sustaining and operationalizing the focused strategy, profitable with growth potential niche is selected from the target segment of the market. Customers’ needs and preferences are identified, analyzed and accordingly low cost or differential approaches are identified. If the niche is found unsuitable due to any reason, new niche is identified to sustain the same strategy.

4. What are the conditions of success of cost leadership strategy? Write.

Cost leadership strategy emphasizes producing and delivering the product or services at low cost relative to competitors, while not neglecting quality and service. The conditions of success of cost leadership strategy are as follows:

• High price competition: If the level of competition among the firms in the industry is high, a firm can increase its sales and profit through cost leadership strategy.
• Standardized products: If the competing firms deal with standardized products; cost leadership strategy turns to be a successful strategy.
• Price sensitive customers: The price sensitive customers prefer the products with low cost. In such a situation, cost leadership strategy is an effective strategy.
• Similar products: If the products are similar in terms of usage and quality, cost leadership strategy might be an effective strategy.
• Low switching cost: If the switching cost of the present usage is low, cost leadership strategy is more effective.
• High buyer power: If the bargaining power of the buyer is high, they become price sensitive. Under such situation, cost leadership strategy becomes successful.

5. Write the benefits of cost leadership strategy.

The benefits of cost leadership strategy are as follow.

• Minimization of competitive pressure: The cost leadership strategy attempts to offer products and services at the price lower than the competitors. It reduces the competitive pressure of the firm.
• Low risk of substitution: Under this strategy, the customers are likely to continue their present consumption. Hence the risk of substitution is low.
• Less chance of new entrants: It is difficult for the new firms to maintain or economies of scale and offer products at lower price than the competitors This is important in markets where customers can switch suppliers easily or where customers tend to shop around for lower prices. Hence, the chance of new entrants is low.
• Increase in market share: Cost leadership strategy may attract m more customers by offering products at low price which results in increase market share
• Address to customers bargaining: Cost leadership strategy provides price flexibility due to which the firm can address customer bargaining. Customer will be attracted to the firm because of low cost.

Long Question Answer

1. Define strategic options and discuss the direction for strategy development.

Strategic options are the strategic alternatives that are likely to be pursued by an organization. They are developed through SWOT analysis.

Directions for Strategic Development

There are a number of strategic directions that an organization can pursue. These directions are available to the organizations in terms of market coverage, products, and competence base of the organization. The product/market matrix is used to analyze options concerning directions. Strategic development follows the below mentioned directions:

1. Consolidation: Consolidation is concerned with protecting and strengthening the organization’s position in the existing market with existing products. It aims to maintain market share. In this strategy, organizations adopt and develop their resources and competencies to maintain their competitive position. Consolidation does not mean rigidness since the market situation is likely to be changing. It requires attention to the extent to which the organization’s resources and competencies continue to fit the market needs and how they should be developed to maintain the competitive position of the organization.

2. Market penetration: Market penetration refers to increasing the market share of existing products in existing markets to protect and build the market is possible through aggressive marketing tactics like trade allowances, position. It includes advertising, price reduction, package improvements etc. There are basically three ways a company can penetrate a market. They are:

• Stimulating customers to increase their current rate of usages.
• Attracting non-users by using promotional incentives, advertising, pricing up or down etc.
• Swaying competitor’s customers by brand differentiation and stepping up grad promotional activities etc.
• The market penetration is contemplated under the following condition:
• If existing markets are not saturated with the industry performance.
• If the usage rate of present customers could be significantly increased.
• If the market of major competitors is decreasing while total industry sales is stable or increasing.
• If the correlation between sales and marketing expenditure has historically been highly positive.
• If increased economies of scale provide a major competitive advantage.

3. Product Development: An organization can achieve growth through product development strategy. This implies delivering new products to existing markets. The new product can be brought about by:

• Innovation: Product new to the world.
•  Modification: Product new to the market.
• Imitation: Product new to the organization .

This strategy retains the present mission and develops products with new and different characteristics to improve performance. It requires core competences and R & D efforts. Therefore, product development can be risky and unprofitable. However, it is the essence of survival and growth for an organization.

The following conditions are essential for pursuing product development:

• The organisation has successful products that are in the maturity stage of life cycle.
• It holds a high relative share of the market and has a strong brand position and enjoys distinctive competitive advantages in the market.
• There is a high growth potential in the market.
• Major competitors offer better quality products at comparable prices.
• The changing needs of customer demand new products
• It needs to react to technological development.
• The organisation has strong R & D capability.
• The industry is strategically attractive.

4. Market development: An organization can increase sales of its existing product by market development strategy. Market development implies a firms’ entry into a new market with existing products. This is required when there are no further opportunities in existing markets and/or the organization has excess production capacity. This strategy can be adopted in the following ways:

• By extending into new market segments, which are not currently served.
•  By opening additional geographical markets.
• By resorting to new channels of distribution.
• By developing new uses of existing products.

The following conditions are essential to pursue the market development strategy.

• The new channels of distribution are available that are reliable and inexpensive.
• The organisation is highly effective and efficient in its activities.
• New untapped or unsaturated market exists.
• The firm has excess production capacity.
• The firm has the potential ability to create new usage of existing products.

5. Diversification: Diversification is the deployment of an organization’s resources into new products and new markets. Thus, the organization involves itself in activities that differ from its currently involved activities. Diversification strategy takes the organization away from its existing markets and products.

Diversification takes place when a firm undertakes production of a new product, without ceasing production of its existing products. This strategy is pursued by organizations due to the following reasons:

• Diversification spreads risk or compensate for seasonal or cyclical fluctuations in demand for the existing products.
•  There is the existence of spare management or productive capacity or excess funds.
• The organisation desires to grow and earn greater profits since the existing market may be declining or expected to decline.
• Some special opportunities exist in diversification.

Hence, diversification is the process of expanding the business activities into new areas. The diversification may be related or unrelated. The related diversification involves adding new products or services in the related field. Under this strategy existing skills and facilities are shared whereas unrelated diversification is related to the existing line of business.

2. Explain with examples different types of competitive strategies.

There are different types of competitive strategies. They are mentioned below.

1. Low-cost leadership strategy: In this strategy, the organization becomes the industry’s lowest cost provider of the products. The organization becomes the lowest cost provider from its competitors by finding ways to reduce the cost. The ways to reduce the cost of products may be control of cost drivers and revamping the value chain from the traditional value chain etc. The following are some of the notable benefits of cost leadership strategy.

• Minimization of Competitive Pressure
• Low Risk of Substitution
• Less Chances of New Entrants
• Increase in Market Share
• Address to Customers Bargaining

2. Broad differentiation strategy: Under this strategy, the organization tries to offer the products which are distinct in the perception of customers’. The differentiation may be based on product parameters, services back up, promotion and image. The product is differentiated through the unique product performance features, and services, adopting new technologies or providing detail information about the product.

The following are some of the notable benefits of differentiation strategy.

• Reduction of competitive pressure through unique products.
• Increased brand loyalty
• Difficult for the new firms to enter .
• Low chances of substitution
• Above average return through price premium

3. Best cost provider strategy: Under this strategy, the organization tries to provide the best cost compared to its competitors. This strategy is targeted to providing value to customers by providing more value for money. Under this strategy, products are differentiated and qualitative products are delivered in the hands of customers at as low cost as possible.

4. Focused strategy: This strategy intends to focus on a certain market or customer. There are two types of focused strategy.

5. Focused low-cost strategy: This strategy focuses on a particular niche of the market. The competition level and the products offered by close competitors are analyzed. The cost of the product is lowered in comparison to the competitors.

6. Focused differentiation strategy: This strategy also focuses on a particular niche of the market. Competitor tries to overcome the competition by the PL product differentiation. The product is attributed to the unique features or tastes or preferences in comparison to its competitors.

The following are some of the notable benefits of focused strategy.

• Better understanding of the customer needs and preferences
• High customer loyalty due to focus in a particular market
• Specialization may be achieved
• Development of new capabilities through specialization

3. With suitable examples, write about the different methods of strategy development.

There are three methods of strategic development. They are:

1. Internal development: Internal development is the primary method of strategy development. Under this method, internal strategic factors are developed for strategic success. It is also called organic development as it involves building up an organization’s own resources and competencies.

This method of strategy development is appropriate for small companies or many public services, which may not have the resources available for major investment. Generally, internal development is done by developing new products and new markets, building competence through learning, spreading the cost and addressing the environmental issues.

There are different methods of internal development. They are mentioned below.

• Product developmental
• Market development
• Competence building through learning
• Cost spread

2. Acquisitions and mergers: Acquisitions and mergers are the combination of two or more organizations in which one acquires assets and liabilities of another in exchange of shares or cash. More specifically, acquisition is the case of absorption and merger is the case of amalgamation. In acquisition, an existing organization takes over another organization through purchase of shares or ownership. The acquired organization generally, keeps its separate identity. In merger, one organization merges with another. It is the combination of two or more organization into one single organization.

Merger can be of different types as given below.

• Horizontal merger
• Vertical merger
• Concentric merger
• Conglomerate merger

The reasons for initiating acquisition and merger are:

• To fill the gap in the existing product line.
• To have quick access to resources and competences not held in house.
• To build market power.
• To reduce competition.
• To attain a higher growth rate.
• To improve the efficiency of operation and attain higher profitability through potential synergistic effects.
• To secure tax advantage by acquiring other firms with accumulated losses, which can be set off against the current or future profit.
•  To overcome market entry barrier.
• To increase in profit earning ratio and market price of shares.

3. Joint development and strategic alliances: Business environment is getting complex day by day. Internal resources and competences alone may not be 9% sufficient to cope with complex environmental forces. Cooperation with other organizations can provide access to materials, skills, finance, technology and market. So joint development and strategic alliances help to cope with the complex and dynamic environment.

Joint development and strategic alliance is a partnership between two or more we companies to achieve strategic objectives that are mutually beneficial. It may gribe both short term and long-term partnership for mutual success.

In joint development, two or more organizations share resources and bon activities to develop strategy. Joint development tends to be time bound, hence of a temporary nature.

In strategic alliance, two or more firms create a partnership among them whose resources, capabilities and core competencies are combined to pursue mutual interest to develop/manufacture and distribute products. The joint development and strategic alliances are followed by companies due to the following reasons:

• To increase manufacturing capabilities
• To provide specific markets.
• To achieve competitive advantages.
• To exploit current resources and competencies
• To reduce production and distribution costs
• To achieve specialization in their activities
• To access new market
• To learn each other
• To manage financial, technological and political risks.