UNIT 4 - The Role and Functions of Competitive Strategies

An organization’s strategy involves developing a strategic mission and vision. That vision is then
transformed into organizational success, which is evident through measurement and performance
evaluations. Competitive strategies play an intensive role in an organization’s culture,
performance and long-term sustainability. When referring to the strategic management process,
strategy formulation, implementation and evaluation are contingent on strategic managers
making decisions to position an organization competitively. Senior managers, or persons/groups
who operate above the level of the business units/corporate parent which makes strategic
decisions about the scope of the organization, design the corporate strategies, which will target a
business’ range of products and the international diversity of its business units - Johnson, Scholes
& Whittington (2005).

Examining Types of Organizational Business Strategies

Strategic planning is led by the corporate parent (also known as the corporate leader/top
executive) responsible for determining the type of organizational strategy that an organization
will implement. There are four (4) types of organizational strategies: integration, intensive,
diversification and defensive strategies. Within these four (4) types of strategies, corporate
parents must strategically implement one, or a combination of eleven corporate strategies which
are discussed below.

Understanding the Corporate Parent

Strategy must address the “hows” of managing a business entity successfully. Corporate leaders
(the corporate parent) must add value to strategies created at the business unit level. Some argue
that the corporate parent creates difficulties for business units. It is clear that the corporate parent
has a specific set of roles. Johnson, Scholes & Whittington (2005, p. 303 - 306) identify these
roles and sub-roles as follows:

1
1. Envisioning the overall role and expectations of the organization or establishing a clear
strategic intent, which provides focus and clarity to external stakeholders and clarity to
business units. This helps in the setting of clear expectations and standards.

2. Intervening within business units to improve performance or to develop business unit

strategy, and covers such actions as:

• Monitoring the performance of business units and their senior executives against the
standards they have set.

• Acting to improve business-unit level performance, for example by replacing under-

performing managers, selling off businesses or ensuring turnaround of poorly
performing divisions or businesses.

• Coaching and training of people and managers in business units to develop a strong
leadership pipeline.

• Helping develop the strategic capabilities of the business units. • Achieving synergies
across business units and encouraging collaboration and coordinating across business
units. This could result in products and services which a single unit could not deliver.

3. Offering central services and resources to help the business unit such as:

• Investment, particularly during the early days of new ventures.

• Scale advantages from resource sharing, particularly in the use of infrastructure, support
services and other overhead items.

• Transferable managerial capabilities such as moving executives across business units

around the globe to gain experience of different international markets and operations,
and strengthen its succession management system.

4. Helping the business units by providing expertise and services such as:

• Personnel and financial services, estates management and IT infrastructure. Other

competences exist in human resources, management development and succession
planning.
2
 • Knowledge creation and sharing processes that might help foster innovation and
learning through centrally organized knowledge management systems.

• Leverage through combined purchasing power of the business units.

While the corporate parent has a specific role, some analysts argue that this level of management
can destroy value among business units and can add cost due to the systems and hierarchies that
delay decisions. The corporate parent can shield executives from being fully answerable for the
performance of their businesses, while diversity and large size may create a blurred vision of the
business entity’s strategic intent. Corporate hierarchies provide a focus for managerial ambition.

A hierarchy is an opportunity for climbing the corporate ladder. It is a vehicle for empire
building where executives seek to grow the number of businesses and the size of the corporation
for motives of personal ambition.

Types of Strategies

Corporate-level strategy involves allocating resources among all the business units and defining
the boundaries of a company. Corporate-level strategy analyses the mix of businesses and makes
decisions about whether the mix should change to earn the best sustainable return on the
company’s capital. Bossidy & Charan (2002) point out those corporate level strategies should not
be simply the sum of their parts. If they are, then the business units could do just as well standing
on their own.

Types of Alternative Organizational Strategies - David (2007)

Strategy Definition 2005 Examples

Integration Strategies (3)
3
Forward Gaining ownership or Budget Rent-a-Car is opening car rental
Integration increased control over shops in Wal-Mart stores.
distributors or retailers.

Backward Seeking ownership or Hotels, Inc. purchased a furniture producer.

Integration increased control of a firm’s
suppliers.

Horizontal Seeking ownership or Federated Department Stores, the parent of

Integration increased control over Macy’s and Bloomingdale’s acquired May
competitors. Department stores.

Intensive Strategies (3)

Market Seeking increased market share Coca-Cola Co. is spending millions to
Penetration for present products or advertise its new zero calorie drink called
services in present markets Coca-Cola.
through greater marketing
efforts.

Market Introducing present products Bank of America recently purchased a 9%

Development or services into new stake in China Construction Bank, China’s
geographic area. fourth largest lender. This is Bank of
America’s first big move into China.

Product Seeking increased sales by Advanced Medical Optics is using

Development improving present products acquisition to obtain all medical aspects of
or services or developing new eye care, from laser surgery to contacts to
ones. implants for all ages.

Diversification Strategies (2)

Related Adding new, but related UPS acquired Overnight to diversify its
Diversification products or services. packaging business. Now UPS carries
packages over 150 lbs, which for 98 years it
has not done.

Unrelated Adding new, unrelated Tupperware Corp., the direct seller of

Diversification products or services kitchenware, has entered and is growing its
skin and beauty business through
BeautiControl.

Defensive Strategies (3)

4
Retrenchment Regrouping through cost and Viacom is selling noncore assets including
asset reduction to reverse its theme parks, publishing business, radio
declining sales and profits. stations, and movies theaters.

Divestiture Selling a division or part of an Good Year Tire & Rubber Co. sold its North
organization American farm-tire business to Titan
International.

Liquidation Selling all the company’s Britain’s last major car manufacturer, MG
assets, in parts, for their Rover Group Ltd., liquidated in 2005 and
tangible worth. laid off its 5,000 employees. The firm had
major manufacturing facilities at
Longbridge in central England.

NB: Each strategy has countless variations.

Example - Market Penetration can include adding salespersons, increasing advertising

expenditures, couponing, and using similar actions to increase market share in a given
geographic area.

Many, if not most organizations, simultaneously pursue a combination of two or more strategies,
but a combination strategy can be exceptionally risky if carried too far. No organization can
afford to pursue all the strategies that might benefit the firm. Difficult decisions must be made
and priorities must be established. Organizations, like individuals, have limited resources. Both
organizations and individuals must choose among alternative strategies and avoid excessive
indebtedness (David, 2007).

Concentration and Diversification Strategies

Concentration Strategy

5
Most organizations begin with what is termed a concentration strategy - “the organizations begin
with a single or small group of products and services and a single market” (Harrison & St. John,
2008, p. 110-111).

Advantages of using a Concentration Strategy

 It enables an organization to become experts in one business and industry environment,

thereby reducing strategic mistakes. Example - Coca Cola demonstrated that capability for
nearly a century of operations.

 Since all resources are directed at doing one thing well, the organization may gain a
sustainable competitive advantage by developing specific capabilities. Example - Coca Cola
has shown that ability in the soft drink industry.

 It can prevent the proliferation of management levels and staff functions, often associated
with large multi-business firms that add overhead costs and limits flexibility of business
units.

 It allows a firm to invest profits back into the business, rather than competing with other
corporate holdings for the investment funds.

Conversely, a concentration has some inherent risks, especially when environments are
unstable.

 Firms that depend on one product or business area to sustain themselves can experience a
substantial drop in organizational performance when their environments change. Example -
The airline industry had such an experience when their industry was deregulated. Prior to
deregulation in the airline industry, most of the major carriers were profitable. They had
protected routes and fixed prices. Deregulation and the ensuing increase in competition hurt
the profitability of all domestic carriers. Several airlines were acquired or went bankrupt.

 Product obsolescence and industry maturity (e.g. McDonalds), an uneven cash flow, and
profitability. As a result, many businesses often abandon their concentration strategy or
evolve from concentration to some form of vertical integration or diversification of products
and services.
6
Diversification Strategy

Johnson et. al (2005) define diversification as a strategy, which involves the organization in new
markets, products or services, and therefore increases the range and scope that a corporate parent
must oversee. Diversification might be undertaken for the following reasons:

1. Diversification may result in efficiency gains from utilizing existing resources or

capabilities in the creation of new markets, products or services, which are described as
economies of scope, in contrast to economies of scale.

2. There may be gains from applying corporate managerial capabilities to new markets,
products and services. Managers may develop a capability to manage a range of different
products and services which may not share resources at the operational unit level.

3. Diversification can increase market power. When an organization has a wide and varied
range of products or services, the organization can afford to subsidize one product from the
surpluses earned by another. This can be done in a way that competitors may not be able to.
This can give an organization a competitive advantage for the subsidized product, and the
long-run effect may be to drive out other competitors, leaving the organization with a
monopoly from which good profits can then be earned. While profitable for the
organization, this may be less beneficial for consumers.

Note the examples given on page 114 of the Unit

Types of Diversification Strategies

Related Strategies - Businesses are said to be related when their industries or value chains
possess valuable cross-business strategic fits that can operate competitively. Thompson &
Strickland, 2003, (p. 296) point out that a strategic fit exists when the value chains provide
opportunities for:

• Transferring valuable expertise, technological know-how, or other capabilities from one

business to another.

7
• Combining the related activities of separate businesses into a single operation to achieve
lower costs.

• Exploiting common use of a well-known brand name.

• Cross-business collaboration to create competitively valuable resource strengths and

capabilities.

Example - Amazon.com Inc’s most recent move to sell personal computers through its online
store. Rather than keeping the computers in its warehouses, Amazon will simply transmit orders
for computers to wholesaler Ingram Micro, based in Santa Ana, California. Ingram will package
and send the computers to customers, so Amazon is minimizing its own risk in this
diversification initiative.

When is Related Diversification most effective?- Very important to know

• When an organization competes in a no-growth or a slow-growth industry.

• When adding new, but related, products would significantly enhance the sales of current
products.

• When new, but related, products could be offered at highly competitive prices.

• When new, but related, products have seasonal sales levels that counterbalance an
organization’s existing peaks and valleys.

• When an organization’s products are currently in the declining stage of the product’s life
cycle.

• When an organization has a strong management team.

Related diversification is strategy development beyond current products and markets, but within
the capabilities or value network of the organization. Examples - Procter and Gamble and
Unilever are diversified corporations, but virtually all of their interests are in fast-moving
consumer goods distributed to retailers, and increasingly in building global brands in that arena.
They benefit from capabilities in research and development, consumer marketing, building
relationships with powerful retailers and global brand development. Drawing on the idea of the
8
value network, Figure 4.1 – Related Diversification Options for a Manufacturer - Page 116
shows one way of thinking of different forms of related diversification.

Vertical Integration describes either backward or forward integration into adjacent activities in
the value network.

Backward Integration involves activities concerned with the inputs into the company’s current
business. This includes raw materials, machinery and labour.

Forward Integration refers to activities, which are concerned with a company’s outputs such as
transport, distribution, repairs and servicing, which are considered further forward in the value
system.

Horizontal Integration describes activities which are developed and are complementary to
current activities. Example - The Automobile Association (AA) was founded as a members’ club
for motorists in the UK and extended into providing rescue services for breakdowns. As this
market came under attack from specialist breakdown organizations, the AA extended into new
markets by exploiting its expertise in rapid response to crisis. It launched a home service for
electrical and plumbing emergencies, a development pioneered by similar motoring
organizations in Australia.

Problems with Related Diversification

 The time and cost involved in top management trying to ensure that benefits of relatedness
are achieved through sharing or transfer across business units.

 Business unit managers may have difficulty in sharing resources with other business units,
or adapting to corporate-wide policies, especially when they are incentivized and rewarded
primarily on the basis of the performance of their own business alone. It is becoming clear
that distinguishing bases of relatedness in terms of the value network and strategic
capabilities is of strategic importance.

Unrelated Diversification (often described as a ‘Conglomerate Strategy’)

Businesses are said to be unrelated when their value chains are so dissimilar that there is no
value cross-business relationship. Most companies favour related diversification strategies in
9
order to capitalize on synergies. If related diversification involves development within current
capabilities or the current value system, unrelated diversification is the development of products
or services beyond the current capabilities or value network (Johnson et al, 2005, pg. 288).
David (2007, pg. 182) opines that an unrelated diversification strategy favours capitalizing upon
a portfolio of businesses that can be profitable, rather than trying to capitalize on value chain
strategic fits among the businesses.

When is Unrelated Diversification most effective?- Very important to know

 When revenues derived from an organization’s current products or services would increase
significantly by adding the new, unrelated products.

It is also effective when the following conditions apply:

• An organization competes in a highly competitive and/or a no-growth industry, as indicated by

low industry profit margins and returns.

• An organization’s present channels of distribution can be used to market the new products to
current customers.

• The new products have counter-cyclical sales patterns compared to an organization’s present
products.

• An organization’s basic industry is experiencing declining annual sales and profits.

• An organization has the capital and managerial talent needed to compete successfully in a new
industry.

• An organization has the opportunity to purchase an unrelated business that is an

attractive investment opportunity.

• There exists financial synergy between the acquired and acquiring firm. (Note that a key
difference between related and unrelated diversification is that the former should be based
on some commonality in markets, products, or technology, whereas the latter should be
based more on profit considerations.)

• Existing markets for an organization’s present products are saturated.

10
• Antitrust action could be charged against an organization that historically has concentrated on
a single industry.

Note the example given on page 118 of the Unit

The case against conglomerates can be exaggerated and there are certainly instances where
unrelated diversification seems to pay, such as when conglomerates exploit dominant logics.

Note the example given on page 118 of the Unit - Berkshire Hathaway

Conglomerates

 May be effective in countries with underdeveloped markets.

 Can work effectively as internal markets for capital and managerial talent where the
external capital and labour markets do not yet work well.

Example - Korean conglomerates (the chaebol), have been successful in part because they are
able to mobilize investment and develop managers in a way that standalone companies in South
Korea have traditionally not been able to.

Defensive Strategies

Integrative, intensive, and diversification strategies contribute to the firm’s growth and at times, a
firm must resort to defensive strategies to survive difficult market conditions.

Retrenchment - Sometimes called a turnaround or reorganizational strategy

Retrenchment occurs when an organization regroups through cost and asset reduction to reverse
declining sales and profits. It is designed to fortify an organization’s basic distinctive
competence. During retrenchment, strategists work with limited resources and face pressure
from shareholders, employees, and the media. Retrenchment can entail selling of land and
buildings to raise needed cash, pruning product lines, closing marginal businesses, closing
obsolete factories, automating processes, reducing the number of employees, and instituting
expense controls systems.

When is Retrenchment most effective to pursue?- Very important to know

11
 When an organization has a clearly distinctive competence but has failed consistently to meet
its objectives and goals overtime.

 When an organization is one of the weaker competitors in a given industry.

 When an organization is plagued by inefficiency, low profitability, poor employee morale,

and pressure from stockholders to improve performance.

 When an organization has failed to capitalize on external opportunities, minimize external

threats, take advantage of internal strengths, and overcome internal weaknesses over time;
that is, when the organization’s strategic managers have failed (and possibly will be replaced
by more competent individuals).

 When an organization has grown so large so quickly that major internal reorganization is
needed.

Divestiture

Divestiture often is used to raise capital for further strategic acquisitions or investments, and can
be part of an overall retrenchment strategy to rid an organization of businesses that are
unprofitable, that require too much capital, or that do not fit well with the firm’s other activities.

When is Divestiture most effective to pursue?- Very important to know

 When an organization has pursued a retrenchment strategy and failed to accomplish needed
improvements.

 A division needs more resources than the company can provide to be competitive.

 A division is responsible for an organization’s overall poor performance.

 A division is a misfit with the rest of an organization; this can result from radically different
markets, customers, managers, employees, values, or needs.

 Large amount of cash is needed quickly and cannot be obtained reasonably from other
sources.

12
 Government antitrust action threatens an organization.

Liquidation

Liquidation is recognition of defeat and consequently can be an emotionally difficult strategy. It

may be better to cease operating than to continue losing large sums of money.

When is Liquidation most effective to pursue?- Very important to know

 When an organization has pursued both a retrenchment strategy and a divestiture strategy,
and neither has been successful.

 An organization’s only alternative is bankruptcy. Liquidation represents an orderly and

planned means of obtaining the greatest possible cash for an organization’s assets. A
company can legally declare bankruptcy first and then liquidate various divisions to raise
needed capital.

 The stockholders of a firm can minimize their losses by selling the organization’s assets.

International Strategies - Reasons why companies expand into foreign markets/expansion

outside of their domestic market - Thompson and Strickland (2003, p. 200)

 Gain access to new customers since it offers potential for increased revenues, profits and
long-term growth. This becomes an especially attractive option when a company’s home
markets mature.

 Achieve lower costs and enhance the firm’s competitiveness because the sales volume
achieved in the domestic markets is not large enough to fully capture manufacturing
economies of scale and experience curve effects, which would therefore substantially
improve a firm’s cost competitiveness.

13
 Capitalize on its core competencies. Nokia’s competencies and capabilities in mobile
phones have propelled it to global market leadership in the wireless telecommunications
business.

 Spread its business risks across a wider market base so that if the economies in one part
of the world (Asia) have financial difficulties, the company can still be sustained by
buoyant sales in another part of the world (Latin America).

Strategy-making Challenges in International Competition

 Such strategies have to be situation-driven because cultural, demographic, and market

conditions vary significantly among countries of the world. Cultures and lifestyles are the
most obvious country-by-country differences. Consumers in Greece have different tastes,
preferences and buying habits than those in Chile.

 Second the potential for rapid market growth varies significantly from country to country.
Market growth potential is far higher in emerging markets such as India, China, Brazil and
Angola than in mature markets such as Britain, U.S.A, and Japan.

 There are locational advantages that derive from country-to-country variations. Thompson
and Strickland (2003) inform that differences in wage rates, worker productivity, inflation
rates, energy costs, tax rates, government regulations and such, create sizable variations in
manufacturing costs from country to country.

 The quality of a country’s business environment offers locational advantages – governments

of some countries are anxious to attract foreign investments and go all out to create a
business climate that outsiders will view as favourable. Example - Ireland offers one of the
world’s lowest corporate tax rates. Another challenge is fluctuating exchange rates.

 The volatility of exchange rates greatly complicates the issue of geographic cost advantages.
Currency exchange rates can turn a usually high cost market into a competitive-cost
location.

14
 One pervasive constraint on entering foreign markets is the numerous host government
restrictions and requirements. Foreign operators often face a web of regulations regarding
technical standards, product certification, prior approval of capital spending projects, and
ownership rights by local citizens. Host governments may impose tariffs and quotas on
imports. Example - China is hostile to the Internet and imposes severe restrictions. At the
beginning of 2010, Google was threatening to pull out of China because of that country’s
attempt to control the content of Google’s search engines.

International Expansion Tactics - Harrison and St. John, (2008)

The most common approaches are:

1. Exporting which means transferring goods to other countries for sale through wholesalers
or a foreign company.

2. Licensing which provides the right to produce and/or sell a brand-name product in a foreign
country.

3. Franchising which is the services counterpart to a licensing strategy wherein a foreign firm
buys the legal right to use the name and operating methods of a foreign firm in its home
country.

4. Joint Venture which is defined as a cooperative agreement among two or more companies to
pursue common business objectives in foreign countries.

5. Greenfield Venture which is the creation of a wholly owned foreign subsidiary.

As the international diversity of organizations grows, these organizations are confronted with

two (2) key questions.

1. The so-called global-local dilemma and relates to the extent to which products and services
may be standardized across national boundaries or need be adapted to meet the requirements
of specific national markets (Johnson et al, 2005, pg.300). The success of McDonald’s on the
Champs Elysées in Paris and pervasiveness of Coca-Cola and Pepsi-Cola are evidence of a
15
 global convergence of customer tastes and needs, which requires the provision of
standardized products and an emphasis on cost-based competition on a worldwide basis.

2. The extent to which their assets and productive capabilities are concentrated in a limited set
of locations, particularly their home base, or are decentralized and distributed internationally.
The degree to which an organization’s assets and productive capabilities are concentrated
will depend on the extent to which the organization aims to exploit economies of scale
achievable through centralization and relies on the locational advantages of its home base or,
seek to access the locational advantages available in countries across the globe.

In light of the two (2) broad strategic questions, two (2) generic international strategies can be

distinguished;

• In a multi-domestic strategy most, if not all value-adding activities are located in

individual national markets served by the organization, and products and/ or services are
adapted to the unique local requirements. A multi-domestic approach involves custom
tailoring products and services around individual market needs and may involve conducting
the design, assembly, and marketing on a country-by-country or region-by-region basis -
Harrison and St. John (2008).

• In a global strategy, standardized products are developed and produced in centralized

locations. With a greater emphasis on exploiting economies of scale, value-adding activities
are typically concentrated in a more limited set of locations than for multi-domestic
strategies. This strategy has traditionally been associated with steel and other commodity
materials, personal and mainframe computers, athletic shoes, and some high-end
automobiles.

Note the examples given on page 122 of the Unit

A multi-country strategy is useful when:

1. There are significant country-to-country differences in customers’ needs and buying habits.

2. Buyers in a country insist on special-order or highly customized products.

16
3. Host governments enact regulations requiring that products sold locally meet strict
manufacturing specifications or performance standards.

4. Trade restrictions of host government are so diverse and complicated that they preclude a
uniform, coordinated worldwide market approach.

NB: With a multi-country strategy, it is difficult to transfer a company’s competencies and

resources across country boundaries, and it does not promote building a single, unified
competitive advantage.

A global strategy is useful when:

1. Building resource strengths to secure a sustainable low-cost or differentiation- based

competitive advantage over both domestic and global rivals racing for world market
leadership.

2. Country-to-country differences are small enough to be accommodated within the framework

of a global strategy, thus uniting a company’s efforts worldwide to create strong,
competitively valuable competencies and capabilities not readily matched by rivals.

3. There is a global market for a product or service.

4. There are economic efficiencies associated with global strategy.

5. There are no external constraints such as government regulation that will prevent a global
strategy from being implemented.

NB: In practice, organizations rarely, if ever, fall neatly into the basic categories of pure global or
multi-domestic strategies. Instead they seek to develop their own specific ways to take advantage
of the issue of standardization and adapt products and/or services, while at the same time,
exploiting the opportunities provided by unique locational characteristics and economies of
scale. Requirements for adaptation may be minimal, such as the fitting of appropriate national
keyboards to laptop computers, or more substantial such as development of different language
versions of software interfaces. Cross-national differences can be very substantial, and requiring
the provision of significantly different product or service offerings.

17
Note the example given on page 123 of the Unit

Examining Various Levels of Organizational Strategies

Organizational strategies are implemented at various stages of the strategic management process,
and by various decision makers, who operate at different organizational levels, and are capable,
yet limited, in the types of organizational strategies that can be implemented. Level of Strategies
vary by organizational size and states that “in large firms, there are actually four levels of
strategy…[and] in small firms, there are actually three levels of strategy,” David (2007) p. 172).

Within large firms, the four (4) levels of organizational strategies are:

1. Corporate

2. Divisional

3. Functional

4. Operational

Within smaller firms, the three (3) levels of organizational strategies – Company; Functional
and Operational, “all persons responsible for strategic planning at the various levels ideally
participate and understand the strategies at the other organizational levels to help ensure
coordination, facilitation, and commitment while avoiding inconsistency, inefficiency and
miscommunication,” David (2007) (p. 173)

Note the following on page 126

Figure 4.2 - Key Stakeholders at Different Organizational Levels within Large Organizations
Figure 4.3 - Key Stakeholders at Different Organizational Levels within Small Organizations

18