THEME 8: GENERIC

 1. Introduction.  2. The Porter's approach: competitive strategies (cost advantage, differentiation advantage and specialization).  3. The Ansoff's approach: the Growth Matrix (market penetration, product development, market development, and diversification).  4. An integrating approach.

© Alfonso VARGAS SÁNCHEZ 1 Hope is not a , specially when internationalizing the company is the intention 2 Strategic Analysis: Compulsory Questions

 What business is the organisation in? manufacturing/retail, etc.  Who do they compete with, and how do they compete?  Who are the organisation’s stakeholders? Key stakeholders & their influence.  What are the external drivers for change? – PEST model, macro environment. – Five Forces model, micro/industry environment.  How does the organisation gain value? – Resource audit, tangible & intangible. – and Value System analysis.  Assess the balance in the corporate portfolio, BCG matrix.  How should I compete? Porter’s generic strategies: low cost, differentiation, specialization.  What are my strategic movements? Mergers/Acquisitions, etc. 3 Mission - Vision - Values PEST analysis

Competitive Forces P.C. Industry Attractiveness S C.C. B (threats & opportunities) S.P. Strategy formulation , Value Chain : Value System at three levels: activities & F.I. (linkages) : C – B – F linkages other SBUs Company’s T.D. (synergies) & suppliers - Competitive buyers’ value Position HH.RR. chains (Resource- based View): PR. cost advantage or uniqueness (strengths & weaknesses) I.L. OP. O.L. M&S A-S.S. STRATEGY

ELEMENTS BUSINESS RESOURCES & COMPETITIVE SYNERGIES SCOPE CAPABILITIES ADVANTAGES LEVELS

CORPORATE (1) (1) (1)

BUSINESS (2) (2) (2)

FUNCTION (3) (3)

5 STRATEGIC ADVANTAGE PORTER’S

Exclusivity APPROACH Position of perceived low costs by the customer

Broad COSTS (the whole DIFFERENTIATION LEADERSHIP sector) COMPETITIVE SITUATION Reduced FOCUS or (only one NARROW segment) SEGMENTATION

6 THE LOW COST PHENOMENON

Two basic ways: -Productivity. -Economies of scale & learning/experience. 7 8 9 COSTS LEADERSHIP RESOURCES AND ORGANISATIONAL RISKS OR APTITUDES REQUIREMENTS LIMITATIONS -Sustained -Strict control of costs. -Technological investment of capital change that cancels and favourable -Detailed and frequent control out the experience access to financial reports. gained or investment markets. made. -Clearly defined organisation -Special aptitudes for and responsibilities. -Competitors who process engineering. learn easily and -Incentives based on meeting rapidly. -Close supervision of quantitative objectives. work and operations. -Stagnation of the product or of the -Products designed . for ease of manufacturing. - of costs that annuls the -Low cost of previous price distribution. differential. 10 Reading: “Designers on quest to build $12 computer” 11 DIFFERENTIATION RESOURCES AND ORGANISATIONAL RISKS OR APTITUDES REQUIREMENTS LIMITATIONS -Significant aptitudes -Coordination between the -Competitive levels of in marketing and in functions of R&D, product product prices, in product engineering. development and accordance with a marketing. strategy of minimum -Strong investment global cost. in R&D. -Qualitative assessments and incentives. -The customers no longer -Prestige in quality value the product's factors and technology. -Capacity for of differentiation. understanding the market -Full cooperation of and how it changes. -As the industry matures, the distribution imitation reduces the channels. -Appropriate perceived differentiation. organisational structure for -Long tradition in the stimulating and rewarding sector, or a unique creativity. combination of aptitudes obtained in other business 12 activities. Mention some brands for which you are willing to pay a premium price

13 SPECIALISATION RESOURCES ORGANISATIONAL RISKS OR AND APTITUDES REQUIREMENTS LIMITATIONS -Resources and -Flexible and efficient -The differences in costs aptitudes of special organisation structure. compared with non- application and specialized companies are interest in the -Corporate culture relevant so wide that the company's area of and specific to its areas of advantages of operation. specialisation (products and specialisation are markets). eliminated. -Dominance of the relevant technology -Close coordination between -The market in which the and of the functions. company is specialized engineering of the reduces its differences product. -Rapid response to changes with respect to the global in the environment. market. -Marketing capacity. -Other competitors are -Ability in the use of specialized in part of the limited resources. market of the already specialized company. 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.

18 Segmentation matrix (1)

TYPE OF PURCHASER

VARIETIES OF Final customer Restaurants, etc. PRODUCTS (QUALITY) (bottled product) (bulk product) Olive Oil

Virgin Olive Oil

Extra Virgin Olive Oil

19 Segmentation matrix (2)

TYPE OF DISTRIBUTION CHANNEL

VARIETIES OF Generic Specific PRODUCTS (QUALITY)

Olive Oil

Virgin Olive Oil

Extra Virgin Olive Oil

20 Combining segmentation matrixes (1+2)

TYPE OF DISTRIBUTION CHANNEL

VARIETIES OF Generic Specific PRODUCTS (QUALITY)

Virgin Olive Oil for final customers (bottled product)

Extra Virgin Olive Oil for final customers (bottled prod.)

21 Segmentation matrix (3)

GEOGRAPHIC AREA

VARIETIES OF National International PRODUCTS (QUALITY) Market Market Virgin Olive Oil for final customers using a generic (a) (c) distribution channel Extra Virgin Olive Oil for final customers using a (b) (d) specific distribution channel

22 The choice of a segment/s

ATTRACTIVENESS: (1) Structural attractiveness (competitive within the same industry there forces). are segments with different (2) Size and growth. levels of attractiveness. (3) Position of the company. INTERRELATIONSHIPS: (4) Advantages in costs or in choose the most beneficial differentiation. combination of segments. (5) Costs of coordination, of commitment and of inflexibility. SUSTAINABILITY: Against: your business scope should (6) Competitors with broader objectives. lead to a strong (defensible) (7) Imitation. position. (8) Substitution. 23 Example: olive oil market

SEGMENTS ATTRACTIVENESS INTERRELATIONS SUSTAINABILITY / CRITERIA

(1) (2) (3) (4) (5) (6) (7) (8)

(a)

(b)

(c)

(d)

24 Criticisms of Porter’s 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 .  Arguably, the resource based strategy has superseded this generic strategy framework.

25  “A company must produce 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 achieve high levels of reliability and consistency, while also being flexible” (Grant, 2012).

26 OPTIONS FOR GROWTH

ANSOFF’S APPROACH CURRENT NEW MARKETS MARKETS CURRENT PRODUCTS Market Market Penetration Development NEW PRODUCTS Product Diversification Development ANSOFF’S APPROACH CURRENT NEW MARKETS MARKETS CURRENT PRODUCTS Expansion… …of Markets NEW PRODUCTS …of Products Diversification

CASE STUDY: 27 The Growth Matrix

Sub-strategies MARKETS Existing New Market Penetration: Market Development: -Intensification. -New territories- INTERNATIONALIZATION. Existing -Relaunching. -Imitation. -New segments of purchasers. -Reduction of costs/prices. -New distribution channels. PRODUCTS -Disaggregation. -New possibilities for utilization. Product Development: Diversification: New -New products (R&D, -Concentric (or related). ). -By conglomerates (or -New product lines. unrelated). -New services.

28 INTERNATIONALIZATION & GLOBALIZATION

29 INTERNATIONALIZATION & GLOBALIZATION

Reading: “China’s budding food industry faces scrutiny”

30 International Strategy Opportunities and Outcomes

Identify Explore Use Core Strategic International Resources and Competence Competitiveness Opportunities Capabilities Management Outcomes Problems International Modes of and Risks Strategies Entry Increased International Exporting Market Size Business-Level Higher Strategy (*) Return on Licensing Performance Investment Multidomestic Returns Strategic Strategy Economies of Alliances Scale and Global Acquisition Learning Strategy Innovation Location Transnational Establishment of Advantage Strategy New Subsidiary

(*) Low cost or Differentiation. Management Standardization vs Adaptation. Problems and Risks Multidomestic vs Global. Strength of Market Drivers

Aircraft Computers Automobiles Soft Drinks Toothpaste Retail Banking Book Publishing Baked Goods Low High Multidomestic Global Strength of Cost Drivers

Pharmaceuticals Aircraft Computers Automobiles Toothpaste Retail Banking Baked Goods Soft Drinks Low High Multidomestic Global Corporate-LevelCorporate-Level InternationalInternational StrategiesStrategies MultiMulti --DomesticDomestic StrategyStrategy

StrategyStrategy andand operatingoperating decisionsdecisions areare decentralizeddecentralized toto strategicstrategic businessbusiness unitsunits (SBU)(SBU) inin eacheach country.country. ProductsProducts andand servicesservices areare tailoredtailored toto locallocal marketsmarkets.. BusinessBusiness unitsunits inin eacheach countrycountry areare independentindependent ofof eeachach other.other. ItIt assumesassumes marketsmarkets differdiffer byby countrycountry oror regions.regions. FocusFocus onon competitioncompetition inin eacheach market.market. ProminentProminent strategystrategy amongamong EuropeanEuropean firmsfirms duedue toto broadbroad varietyvariety ofof culturescultures andand marketsmarkets inin Europe.Europe. Corporate-LevelCorporate-Level InternationalInternational StrategiesStrategies GlobalGlobal StrategyStrategy

ProductsProducts areare standardizedstandardized acrossacross nationalnational markets.markets. DecisionsDecisions regardingregarding businessbusiness --levellevel strategiesstrategies areare centralizedcentralized inin thethe homehome office.office. StrategicStrategic businessbusiness unitsunits (SBU)(SBU) areare assumedassumed toto bebe interdependent.interdependent. EmphasizesEmphasizes economieseconomies ofof scale.scale. OftenOften lackslacks responsivenessresponsiveness toto locallocal markets.markets. RequiresRequires resourceresource sharingsharing andand coordinationcoordination acrossacross bordersborders (which(which alsoalso makesmakes itit difficultdifficult toto manage).manage). Corporate-LevelCorporate-Level InternationalInternational StrategiesStrategies TransnationalTransnational StrategyStrategy

SeeksSeeks toto achieveachieve bothboth globalglobal efficiencyefficiency andand locallocal responsiveness.responsiveness.

DifficultDifficult toto achieveachieve becausebecause ofof simultaneoussimultaneous requirementsrequirements forfor strongstrong centralcentral controlcontrol andand coordinationcoordination toto achieveachieve efficiencyefficiency andand locallocal flexibilityflexibility andand decentralizationdecentralization toto achieveachieve locallocal marketmarket responsiveness.responsiveness.

MustMust pursuepursue organizationalorganizational learninglearning toto achieveachieve competitivecompetitive advantage.advantage. InternationalInternational CorporateCorporate StrategyStrategy When is each strategy appropriate?

High

Global Trans- Strategy national

Need for Global Integration

Multi- Domestic

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.  Sold in 130 countries.  National adaptations : – Physical features. – Costumes. – Activity sets.  Standardized physique: – Scaled to 6’2”, 110 lbs. – 38-18-28. Effective Adaptation

 McMutton Pie in Australia.  Wendy’s shrimp sandwich in Japan.  Campbell’s non- condensed soups in the UK.  Coca-Cola’s 175 ml Cadillac Seville containers in Japan.  1997 Asian edition:  Right-hand drive, shorter seats, closer pedals, 10” shorter & retractable mirrors . LimitsLimits toto InternationalInternational ExpansionExpansion (beyond(beyond politicalpolitical andand economiceconomic risks)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: Don‘t put all your eggs in one basket !!

42 DIVERSIFICATION  Three essential tests for judging diversification (Porter): -The attractiveness test: Is the target industry attractive? Use the 5- forces model to assess its attractiveness. -The cost-of-entry test: Is the cost of the diversification worth it? Will the diversified 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. Internal 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, many 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 violin- playing robot”

45 Diversification & Performance

The 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 profitability. -Timing is key. Does related diversification outperform unrelated diversification? -Diversification into related industries should be more profitable than diversification into unrelated industries. -Peters and Waterman’s golden rule: “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 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; 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 sense behind this strategic 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. Electrical 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

Maintenance Growth Restructuring

Internal External

Expansion Diversification

of Products of Markets Concentric e Conglomerat

Vertical Integration Horizontal50 Integration AN INTEGRATING APPROACH

Strategic Advantage GROWTH STRATEGIES Costs Differentiation of Products Expansion of Markets Internal Concentric Diversification Conglomerate of Products Expansion of Markets External Concentric Diversification Conglomerate

Readings from the textbook : Pascual & Lagasa -internal growth based on diversification -; Fontaneda & La Casera -external growth based on the expansion of products and markets -. 51 ““ProgressProgress isis whenwhen thingsthings getget simpler,simpler, notnot moremore complicatedcomplicated””

Bruno Munari, Italian artist.

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