SM CH 4 SM Smu 2023

CHAPTER FOUR
LEVELS OF STRATEGY
Strategies in action
• Strategic actions can be categorized into
different types:
– integration, liquidation, spine off, restructuring, diversification,
holding, divesting, end game, stable growth, , focus, differentiation,
cost leadership, market development and so on.
• Strategic actions can be operationalized either

in terms of inter-industry (corporate level
strategies) or intra-industry variation
(business level strategies) .
1-2
Corporate level strategies
• Corporate-level strategy(strategic issues,
development of business portfolio and
management of business portfolio)
– answers the question of what set of businesses should
the company be in or.
– determines the attractiveness of the industry and
develop and coordinate business portfolio.
• It has three key components:
– Value Creation
– Scope and
Types of Corporate Strategies
• There are four types of corporate level
strategy:
– Stability Strategy
– Growth Strategy
– Retrenchment Strategy
– Combination Strategy
1. Stability or Consolidation strategy
• A firm following stability strategy:
– maintains its current business and product
portfolios
– maintains the existing level of effort; and is
satisfied with incremental growth
– focuses on fine-tuning its business operations
and improving functional efficiencies
through better deployment of resources
When to use stability strategy?
 The industry is in turmoil/confusion or the environment is volatile in

other words when the environmental instability is minimal
 The organization just finished a period of rapid growth and needs to
consolidate its gains before pursuing more growth
 The industry is in a mature stage with few or no growth
prospects and the firm is currently in a comfortable position
in the industry
Approaches of Stability strategy
• There are various approaches to developing

stability/ consolidation strategy.
– Holding strategy
– Stable growth
– Harvesting strategy
– Profit or endgame strategy
2. Growth/Expansion Strategies
• Growth is a promising and popular strategy that tends

to be equated with dynamism, vigor, promise and
success.
• It is characterized by:
– significant reformulation of goals and directions
– major initiatives and moves involving investments
– exploration into new products, new technology and
new markets
– innovative decisions and actions and so on.
Growth strategy –types
• Internal/organic growth:
– implies increase in scale of operations
without joining hands with other firms
– is natural and gradual
• External/inorganic growth:
– implies increase scope of operations by
joining hands with other firms
– is quick and fast
Forms of internal growth strategies
– Intensive growth strategies
• Igor Ansof identified three different types of intensive
strategies. These are market penetration, new product
development and new market development.
– Concentric/Integration Strategies
• Vertical Integration
• Horizontal Integration
– Diversification Strategies
• Concentric diversification (for related)
• Conglomerate diversification (unrelated)
External growth strategies
• External growth occurs when two or more

firms combine in one firm
• Forms of external growth strategies
– Merger
• Acquisition/ takeover (absorption) of one company by
another
• Amalgamation -creation of new company by complete
consolidation of two or more units
– Joint Venture
• is a temporary partnership or consortium between two or
more companies for a specified purpose
Advantages
Growth is very fast or quick
The firm gets running business units
The strategy offers economies of scale and
control over the market.
Wasteful competition can be eliminated
1-12
Disadvantages:
– Large amounts of financial resources are required
to take over running units
– Drastic changes are required in the organization
structure and management of the firm.
– Co-ordination and control of integrated units
becomes very difficult
1-13
3. Retrenchment Strategy
• Retrenchment Strategy
– Allows an organization to redefine its
business by divesting a major product line
or market.
– is necessary for a firm to cope up hostile
and adverse situations in the environment
– is commonly used when the life cycle of the
industry is in its decline stage
Retrenchment Strategy
• Retrenchment strategy alternatives

– Shrinking selectively –
• involves retrieving the value of investment from one
and re-invest it in another
– Divestment
• Is an endgame strategy that can be done either by
selling or liquidation
– Cash extraction
• Can be done via budget and cost contraction
Retrenchment Strategy
• Approaches of Retrenchment strategy:
A. Turnaround strategy
B. Survival strategy
C. Liquidation strategy
1-16
A. Turnaround Strategy
• A turnaround situation exists when a firm

encounters declining financial performance after
a period of prosperity.
• The strategic causes of performance downturns
may include:
• increased competition
• raw material shortages
• decreased profit margins due to operating
and labor problems.
5-17
Turnaround Strategy
• It is typically accomplished through a two stage

process.
• The initial stage focuses on objectives of survival
and achievements of a positive cash flow.
– To achieve this objective:
• An emergency plan need to be crafted and
implemented just to stop the firm’s financial
loss and
• A stabilization plan to improve core
operations
5-18
Turnaround Strategy
• The second phase involves a return-to-growth or

recovery stage and the turnaround shifts away
from retrenchment and move towards growth and
development
5-19
B. Survival Strategy
• When the company is on the verge of

extinction, it can follow several routes for
renewing the fortunes of the company.
– Divestment: - an organization divests when it sells
a business unit to another firm that will continue to
operate it.
– Spin-off:- in a spin-off, a firm sets up a business
unit as a separate business through a distribution of
stock or a cash deal.
5-20
Survival Strategy
• Restructuring the business operations: - the
company tries to survive by
– restructuring its management team
– financial reengineering or
– overall business reengineering
5-21
C. Liquidation Strategy
• Liquidation strategy:
– is the final resort for a declining company.
– applied when there is no promising future for the
business
– a simple shutdown will prevent owners from
throwing good money after bad once
5-22
4. Combination Strategies
• The above strategies are not mutually

exclusive. It is possible to adopt a mix of the
above to suit particular situations.
5-23
Business Level Strategies
5-24
Generic Business-Level Strategy:
Cost Leadership
• Establish a cost structure that allows the
company to provide goods and services at
lower unit costs than competitors
• Advantages
– If rivals charge similar prices, the cost leader
achieves superior profitability
– The cost leader is able to charge a lower price than
competitors
Cost Leadership Strategic Choices
• The cost leader does not try to be the industry
innovator
• The cost leader positions its products to appeal
to the “average” customer
• The overriding goal of the cost leader is to
increase efficiency and lower its costs relative
to its rivals
Cost Leadership Advantages
• Protected from industry competitors by cost advantage
• Less affected by increased prices of inputs if there are powerful
suppliers
• Less affected by a fall in price of outputs if there are powerful
buyers
• Purchases in large quantities increase bargaining power over
suppliers
• Ability to reduce price to compete with substitute products
• Low costs and prices are a barrier to entry
Cost Leadership Disadvantages
• Competitors may lower their cost structures
• Competitors may imitate the cost leader’s
methods
• Cost reductions may affect demand i.e.
perceive it as low quality
Generic Business-Level Strategy:
Differentiation
• Create a product that customers perceive as
different or distinct in an important way.
• Advantages
– Premium price
– Increased revenues = superior profitability
Differentiation Advantages
• Customers develop brand loyalty
• Powerful suppliers are not a problem because the company
is geared more toward the price it can charge than its costs
• Differentiators can pass price increases on to customers
• Powerful buyers are not a problem because the product is
distinct
• Differentiation and brand loyalty are barriers to entry
• The threat of substitute products depends on competitors’
ability to meet customer needs
Differentiation Strategic Choices
• Quality, innovation, responsiveness to customer
needs
• A differentiator strives to differentiate itself
along as many dimensions as possible
• A differentiator entsegms its market into many
niches
• A differentiated company concentrates on the
organizational functions that provide the source
of differentiation advantage
Differentiation Disadvantages
• Difficulty in maintaining long-term
distinctness in customers’ eyes b/c
– Agile competitors can quickly imitate
– Patents and first-mover advantage are limited
• Difficulty of maintaining premium price
Generic Business-Level Strategy: Cost
Leadership and Differentiation
• Pursuing the business models of the cost

leader and differentiator simultaneously.
Cost Leadership and Differentiation
Strategic Choices
• Using robots and flexible manufacturing cells reduces costs
while producing different products
• Standardizing component parts used in different end products
can achieve economies of scale
• Limiting customer options reduces production and marketing
costs
• JIT inventory can reduce costs and improve quality and
reliability
• Using the Internet and e-commerce can provide information to
customers and reduce costs
• Low-cost and differentiated products are often both produced
in countries with low labor costs
Generic Business-Level Strategy: Focus
• Serving the needs of a specific market segment

– Geographic
– Type of customer
– Segment of the product line
• After choosing a market segment, a focused
company positions itself using either
– Low-cost or differentiation
Why Focus Strategies Are Different
Focus Advantages
• The focuser is protected from rivals to the extent it
can provide a product or service they cannot
• The focuser has power over buyers because they
cannot get the same thing from anyone else
• The threat of new entrants is limited by customer
loyalty to the focuser
• Customer loyalty lessens the threat from substitutes
• The focuser stays close to its customers and their
changing needs
Focus Disadvantages
• The focuser is at a disadvantage with regard to
powerful suppliers because it buys in small volume
(but it may be able to pass costs along to loyal
customers)
• Because of low volume, a focuser may have higher
costs than a low-cost company
• The focuser’s niche may disappear because of
technological change or changes in customers’ tastes
• Differentiators will compete for a focuser’s niche
End of Chapter
Four

SM CH 4 SM Smu 2023

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CHAPTER FOUR

• Strategic actions can be operationalized either

 The industry is in turmoil/confusion or the environment is volatile in

• There are various approaches to developing

• Growth is a promising and popular strategy that tends

• External growth occurs when two or more

• Retrenchment strategy alternatives

• A turnaround situation exists when a firm

• It is typically accomplished through a two stage

• The second phase involves a return-to-growth or

• When the company is on the verge of

• The above strategies are not mutually

• Pursuing the business models of the cost

• Serving the needs of a specific market segment

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