Business Strategy LO1

Business strategy
LO1
Importance of Business Environment
Importance of Business Environment
How can companies compete in the Business
Environment
Environment
Environment
What is Mission Statement?
Components of Mission Statement
What is Vision Statement?
What is the difference?
Mission Statements Vision Statements
 Communicates the  A future-oriented

organization’s reason for declaration of the
being, and how it aims to organization’s purpose and
serve its key stakeholders aspirations.
 Often integrates a  Addresses what a firm
summation of the firm’s wants to become
values  Vision statements tend to
 Mission statements tend to be relatively brief
be longer than vision
statements
What is strategic Plan
What is strategic Planning?
Strategic Planning
Strategic Management
Strategy Execution
Strategy Execution
What are Core Competencies
What are Core competencies
Business Goal & Objectives
Business Goal & Objectives
Objectives
Business Goals & objectives
Business Goals & Objectives
Difference between Goals & Objectives
The strategy and tactics by Clausewitz
The tactics: using the army to win the

battle.
The strategy: using the battles to win the

war.
A Definition of Strategy
Strategy is:
• the direction and scope of an organisation,
• over the long term,
• which achieves advantage for the
organisation,
• through configuration of its resources,
• within a changing environment,
• to meet the needs of markets, and
• to fulfill stakeholder expectations.
The Strategic Planning Process
• In today's highly competitive business environment, budget-oriented planning or forecast-based
planning methods are insufficient for a large corporation to survive and prosper. The firm must
engage in strategic planning that clearly defines objectives and assesses both the internal and
external situation to formulate strategy, implement the strategy, evaluate the progress, and make
adjustments as necessary to stay on track.
• A simplified view of the strategic planning process is shown by the following diagram:
Mission and objectives
Environmental
Scanning
Strategy
Formulation
Strategy
Implementation
Mission and objectives
Management Information System

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Mission and Objectives
• The mission statement describes the company's
business vision, including the unchanging values
and purpose of the firm and forward-looking
visionary goals that guide the pursuit of future
opportunities.
• Guided by the business vision, the firm's leaders
can define measurable financial and strategic
objectives. Financial objectives involve
measures such as sales targets and earnings
growth. Strategic objectives are related to the
firm's business position, and may include
measures such as market share and reputation.
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Environmental Scan
The environmental scan includes the following components:
– Internal analysis of the firm
– Analysis of the firm's industry (task environment)
– External macro environment (PEST analysis)
The internal analysis can identify the firm's strengths and weaknesses
and the external analysis reveals opportunities and threats. A profile
of the strengths, weaknesses, opportunities, and threats is
generated by means of a SWOT analysis
An industry analysis can be performed using a framework developed
by Michael Porter known as Porter's five forces. This framework
evaluates entry barriers, suppliers, customers, substitute products,
and industry rivalry.

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Strategy Formulation
• Given the information from the environmental
scan, the firm should match its strengths to the
opportunities that it has identified, while
addressing its weaknesses and external threats.
• To attain superior profitability, the firm seeks to
develop a competitive advantage over its rivals.
A competitive advantage can be based on cost
or differentiation. Michael Porter identified
three industry-independent generic strategies
from which the firm can choose.
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Strategy Implementation
• The selected strategy is implemented by means of
programs, budgets, and procedures. Implementation
involves organization of the firm's resources and
motivation of the staff to achieve objectives.
• The way in which the strategy is implemented can have
a significant impact on whether it will be successful. In a
large company, those who implement the strategy likely
will be different people from those who formulated it. For
this reason, care must be taken to communicate the
strategy and the reasoning behind it. Otherwise, the
implementation might not succeed if the strategy is
misunderstood or if lower-level managers resist its
implementation because they do not understand why the
particular strategy was selected.

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Evaluation & Control
The implementation of the strategy must be
monitored and adjustments made as needed.
Evaluation and control consists of the following
steps:
1. Define parameters to be measured
2. Define target values for those parameters
3. Perform measurements
4. Compare measured results to the pre-defined
standard
5. Make necessary changes
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Hierarchical Levels of Strategy
Strategy can be formulated on three different levels:
1. corporate level
2. business unit level
3. functional or departmental level.
While strategy may be about competing and surviving as a

firm, one can argue that products, not corporations
compete, and products are developed by business
units. The role of the corporation then is to manage its
business units and products so that each is competitive
and so that each contributes to corporate purposes.

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Corporate Level Strategy
Corporate level strategy fundamentally is concerned with the selection of businesses in
which the company should compete and with the development and coordination of
that portfolio of businesses.
Corporate level strategy is concerned with:
• Reach - defining the issues that are corporate responsibilities; these might include
identifying the overall goals of the corporation, the types of businesses in which the
corporation should be involved, and the way in which businesses will be integrated
and managed.
• Competitive Contact - defining where in the corporation competition is to be
localized. Take the case of insurance: In the mid-1990's, Aetna as a corporation was
clearly identified with its commercial and property casualty insurance products. The
conglomerate Textron was not. For Textron, competition in the insurance markets
took place specifically at the business unit level, through its subsidiary, Paul Revere.
(Textron divested itself of The Paul Revere Corporation in 1997.)
• Managing Activities and Business Interrelationships - Corporate strategy seeks to
develop synergies by sharing and coordinating staff and other resources across
business units, investing financial resources across business units, and using
business units to complement other corporate business activities. Igor Ansoff
introduced the concept of synergy to corporate strategy.
• Management Practices - Corporations decide how business units are to be
governed: through direct corporate intervention (centralization) or through more or
less autonomous government (decentralization) that relies on persuasion and
rewards.
• Corporations are responsible for creating value through their businesses. They do
so by managing their portfolio of businesses, ensuring that the businesses are
successful over the long-term, developing business units, and sometimes ensuring
that each business is compatible with others in the portfolio
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Corporate strategies
• Top level management formulate for overall
organization
• The question at the corporate level we
should answer when design strategies: In
what industry should we be operating?
• It depends on the outcome of SWOT analysis.
40 Prof. Dr. Majed El-Farra 2009

Growth strategies
Growth strategies:
They result increase in sales, market share and profit: the
types:
• Internal growth: Increase internal capacity of organization
without acquiring other firms.
• Conglomerate Diversification: Acquiring unrelated business.
• Merger: Two roughly similar size firms combine into one. To
benefit of synergy.
• Strategic alliance: Temporary partnerships

Corporate Restructuring
The change in a broad set of actions and decisions, e.g., changing

relationships and organization of work.
• The aim of restructuring is to improve effectiveness.
• Restructuring could be growth, stability or retrenchment. This
depends on why we use it.

Retrenchment strategies
• Types:
1- Turnaround:
Eliminating unprofitable outputs, pruning/cutting
assets, reducing size of work force, rethinking
firm’s products lines and customer groups.
2- Divestment: sell one of business units
3- Liquidation: last resort strategy

Strategies in Action
Vertical Integration Strategies
• Forward integration
• Backward integration
• Horizontal integration

Forward
Integration Example
Defined • General Motors is

acquiring 10% of its
• Gaining dealers.
ownership or
increased control
over distributors
or retailers
• Guidelines for Forward Integration
 Present distributors are expensive, unreliable, or incapable of

meeting firm’s needs
 Availability of quality distributors is limited
 When firm competes in an industry that is expected to grow
markedly
 Advantages of stable production are high
 Present distributor have high profit margins

Backward
Integration Example
• Motel 8 acquired a
Defined furniture
manufacturer.
• Seeking
ownership or
increased control
of a firm’s
suppliers
• Guidelines for Backward Integration
 When present suppliers are expensive, unreliable, or incapable

of meeting needs
 Number of suppliers is small and number of competitors large
 High growth in industry sector
 Firm has both capital and human resources to manage new
business
 Advantages of stable prices are important
 Present supplies have high profit margins

Horizontal
Integration Example
• Palestinian Islamic
Defined Bank acquired Cairo-
Amman Bank Islamic
• Seeking transaction branch.
ownership or
increased control
over competitors

• Guidelines for Horizontal Integration
 Firm can gain monopolistic characteristics without being

challenged by federal government
 Competes in growing industry
 Increased economies of scale provide major competitive
advantages
 Faltering/losing due to lack of managerial expertise or need for
particular resources

Intensive Strategies
• Market penetration
• Market development
• Product development

Market
Penetration
Example
Defined • Ameritrade, the on-
line broker, tripled its
• Seeking increased annual advertising
market share for expenditures to $200
present products million to convince
or services in people they can make
present markets their own investment
through greater decisions.
marketing efforts
• Guidelines for Market Penetration
 Current markets not saturated

 Usage rate of present customers can be increased significantly
 Market shares of competitors declining while total industry
sales increasing
 Increased economies of scale provide major competitive
advantages

Market
Development
Example
Defined
• Khuzendar Tiles maker
• Introducing introduce his product
present products to Gulf markets.
or services into
new geographic
area
• Guidelines for Market Development
 New channels of distribution that are reliable, inexpensive, and

good quality
 Firm is very successful at what it does
 Untapped or unsaturated markets
 Capital and human resources necessary to manage expanded
operations
 Excess production capacity
 Basic industry rapidly becoming global

Product
Development
Example
Defined • Apple developed the
G4 chip that runs at
• Seeking increased 500 megahertz.
sales by improving • Khuzendar Tiles maker
present products introduce Ceramic as a
or services or new product.
developing new
ones
• Guidelines for Product Development
 Products in maturity stage of life cycle

 Competes in industry characterized by rapid technological
developments
 Major competitors offer better-quality products at comparable
prices
 Compete in high-growth industry
 Strong research and development capabilities

Diversification Strategies
• Concentric diversification
• Conglomerate diversification
• Horizontal diversification

Concentric
Diversification
Example
Defined • National Westminister

Bank PLC in Britain
• Adding new, but bought the leading
related, products British insurance
or services company, Legal &
General Group PLC.

• Guidelines for Concentric Diversification
 Competes in no- or slow-growth industry

 Adding new & related products increases sales of current
products
 New & related products offered at competitive prices
 Current products are in decline stage of the product life cycle
 Strong management team

Conglomerate
Diversification
Example
Defined • Consultant
Construction
• Adding new, Engineering acquired
unrelated products Bisects factory.
or services

• Guidelines for Conglomerate Diversification
 Declining annual sales and profits

 Capital and managerial talent to compete successfully in a new
industry
 Financial synergy between the acquired and acquiring firms
 Exiting markets for present products are saturated

Horizontal
Diversification
Example
Defined
• The El-Awda Co.
• Adding new, provide ice-cream
unrelated products product to present
or services for customer
present customers

• Guidelines for Horizontal Diversification
 Revenues from current products/services would increase

significantly by adding the new unrelated products
 Highly competitive and/or no-growth industry w/low margins
and returns
 Present distribution channels can be used to market new
products to current customers
 New products have counter cyclical sales patterns compared to
existing products

Defensive Strategies
• Joint venture
• Retrenchment
• Divestiture
• Liquidation

Joint Venture
Example
Defined
• Lucent Technologies
• Two or more and Philips Electronic
sponsoring firms NV formed Philips
forming a separate Consumer
organization for Communications to
cooperative make and sell
purposes telephones.
• Guidelines for Joint Venture
 Combination of privately held and publicly held can be

synergistically combined
 Domestic forms joint venture with foreign firm, can obtain local
management to reduce certain risks
 Distinctive competencies of two or more firms are
complementary
 Overwhelming resources and risks where project is potentially
very profitable (e.g., Alaska pipeline)
 Two or more smaller firms have trouble competing with larger
firm
 A need exists to introduce a new technology quickly

Retrenchment
(turnaround)
Example
Defined
• • A company sold off a
Regrouping through
cost and asset land and 4 apartments
reduction to reverse to raise cash needed.
declining sales and It introduce expense
profit. Sometimes it is
called turnaround or
effective control
reorganizational system.
strategy.
• Guidelines for Retrenchment
 Firm has failed to meet its objectives and goals consistently over
time but has distinctive competencies
 Firm is one of the weaker competitors
 Inefficiency, low profitability, poor employee morale, and
pressure from stockholders to improve performance.
 When an organization’s strategic managers have failed
 Very quick growth to large organization where a major internal
reorganization is needed.

Divestiture
Example
Defined
• Harcourt General, the
• Selling a division large US publisher, is
or part of an selling its Neiman
organization Marcus division.

• Guidelines for Divestiture
 When firm has pursued retrenchment but failed to attain

needed improvements
 When a division needs more resources than the firm can
provide
 When a division is responsible for the firm’s overall poor
performance
 When a division is a misfit with the organization
 When a large amount of cash is needed and cannot be
obtained from other sources.

Liquidation
Defined Example
• Selling all of a • El-Ameer Block factory

company’s assets, sold all its assets and
in parts, for their ceased business.
tangible worth

• Guidelines for Liquidation
 When both retrenchment and divestiture have been pursued

unsuccessfully
 If the only alternative is bankruptcy, liquidation is an orderly
alternative
 When stockholders can minimize their losses by selling the
firm’s assets

Business Unit Level Strategy
A strategic business unit may be a division, product line, or other profit
center that can be planned independently from the other business
units of the firm.
At the business unit level, the strategic issues are less about the
coordination of operating units and more about developing and
sustaining a competitive advantage for the goods and services that
are produced. At the business level, the strategy formulation
phase deals with:
• positioning the business against rivals
• anticipating changes in demand and technologies and adjusting the
strategy to accommodate them
• Influencing the nature of competition through strategic actions such
as vertical integration and through political actions such as
lobbying.
• Michael Porter identified three generic strategies (cost leadership,
differentiation, and focus) that can be implemented at the business
unit level to create a competitive advantage and defend against the
adverse effects of the five forces.
Management Information System 74

Functional Level Strategy
• The functional level of the organization is the level of the
operating divisions and departments. The strategic
issues at the functional level are related to business
processes and the value chain. Functional level
strategies in marketing, finance, operations, human
resources, and R&D involve the development and
coordination of resources through which business unit
level strategies can be executed efficiently and
effectively.
• Functional units of an organization are involved in higher
level strategies by providing input into the business unit
level and corporate level strategy, such as providing
information on resources and capabilities on which the
higher level strategies can be based. Once the higher-
level strategy is developed, the functional units translate
it into discrete action-plans that each department or
division must accomplish for the strategy to succeed.
Analytical frameworks of the macro
environment
Stakeholder Analysis
• Stakeholder matrix
• Stakeholder mapping
Stakeholder Analysis
• Stakeholder analysis is the systematic
identification, evaluation, and prioritization
of everyone who can influence, or has an
interest in, a project, program or business. It
assists with the development of an effective
stakeholder communication and engagement
strategy and is a fundamental element of an
organization’s stakeholder management plan.
Why perform stakeholder analysis?
Understanding who your stakeholders are and the impact they may
have on your business or project is crucial to success. Not engaging
key players in the right way at an early stage can have disastrous
results for a project.. The development of a stakeholder map:
• Creates a shared understanding of the key people who can impact
on your success.
• Provides a foundation for your communications and engagement
strategy.
• Identifies potential risks from negative stakeholders or those who
feel they are not being heard.
• Prioritizes stakeholders so the appropriate amount of resources can
be assigned and the right engagement strategy is applied.
Stakeholder Mapping
• A stakeholder map is a business tool that allows you to see a visual
representation of your company’s various stakeholders (individual
and groups), their level of interest in the company and their
• Different stakeholders or groups of stakeholders are categorized
and listed on a chart according to their level of interest and the
power they exert over a company. importance to the company.
• Level of Interest – How much a stakeholder cares about the
outcomes. Are they beneficiaries or will there be negative effects?
• Level of Influence – The degree in which a stakeholder can make or
break the project. For example through funding, legislation,
protests, etc.
Environmental Analysis
• PESTLE
• Porter’s Five forces model
PEST Analysis
A scan of the external macro-environment in which
the firm operates can be expressed in terms of
the following factors:
Political
Economic
Social
Technological
The acronym PEST (or sometimes rearranged as
"STEP") is used to describe a framework for the
analysis of these macro environmental factors
Political Factors
Political factors include government regulations

and legal issues and define both formal and
informal rules under which the firm must
operate. Some examples include:
– tax policy
– employment laws
– environmental regulations
– trade restrictions and tariffs
– political stability

Economic Factors
Economic factors affect the purchasing

power of potential customers and the
firm's cost of capital. The following are
examples of factors in the macro
economy:
– economic growth
– interest rates
– exchange rates
– inflation rate

Social Factors
Social factors include the demographic and
cultural aspects of the external macro
environment. These factors affect customer
needs and the size of potential markets. Some
social factors include:
– health consciousness
– population growth rate
– age distribution
– career attitudes
– emphasis on safety
Technological Factors
Technological factors can lower barriers to
entry, reduce minimum efficient production
levels, and influence outsourcing
decisions. Some technological factors
include:
– R&D activity
– automation
– technology incentives
– rate of technological change

Porter's Five Forces
• The model of pure competition implies that risk-adjusted
rates of return should be constant across firms and
industries. However, numerous economic studies have
affirmed that different industries can sustain different
levels of profitability; part of this difference is explained
by industry structure.
• Michael Porter provided a framework that models an
industry as being influenced by five forces. The strategic
business manager seeking to develop an edge over
rival firms can use this model to better understand the
industry context in which the firm operates.

Introduction
The Five Forces Model was developed by Michael E. Porter to help companies
assess the nature of an industry’s competitiveness and develop corporate
strategies accordingly.
• The strength of the five forces will determine the level of profit within an
industry
that a competitor can expect to make
• Through his model, Porter classifies five main competitive forces that affect
any market and all industries. It is these forces that determine how much
competition will exist in a market and consequently the profitability and
attractiveness of this market for a company. Through sound corporate
strategies, a company will aim to shape these forces to its advantage to
strengthen the organizations position in the industry.
• Cont…
Introduction
• This model aimed to provide a new way to use effective strategy to identify,
analyze and manage external factors in an organization’s environment.
• Porter’s five forces model is an analysis tool that uses five industry
forces to
determine the intensity of competition in an industry and its profitability
level.
• An attractive market place does not mean that all companies will enjoy similar
success levels. Rather, the unique selling propositions, strategies and
processes will put one company over the other.
• The Five Forces were Porter’s conclusions on the reasons for differing levels of
competition, and hence profitability, in differing industries. They are
empirically derived, i.e. by observation of real companies in real markets,
rather than the result of economic analysis.
Threat of New Entry Competitive Rivalry
- Time and cost of - Number of
entry
Threat competitors
- Quality difference
- Specialist knowledge of New - Other difference
- Economics of Scale
- Cost advantage
Entrants - Switching costs
- Technology - Customer loyalty
protection
- Barriers to entry
Bargainin Competitiv Bargainin

g Power e Rivalry g Power
of within an of
Suppliers Industry Custome
Supplier Power rs
- Number of suppliers
- Size of suppliers
- Uniqueness of service Buyer Power
- Your ability to - Number of
substitute customers
- Cost of changingj -- Differences
Size of each orders
Threat of between
Threat of Substitute competitors
- Substitute - Price sensitivity
Substitut - Ability to
performance
- Cost of change es substitute
- Cost of changing
Competitive Rivalry within an
Industry
• This force is the major determinant on how competitive and
profitable an industry is. In competitive industry, firms have to
compete aggressively for a market share, which results in low
profits. Rivalry among competitors is intense when:
- There are many competitors

- Exit barriers are high
- Industry growth is slow or negative
- Products are not differentiated and can be easily substituted
- Competitors are of equal size
- Low customer loyalty
Competitive Rivalry within an Industry - Example
•McDonald’s faces tough competition because the fast food restaurant market is already saturated.
•This element of the Five Forces analysis tackles the effect of competing firms in the industry
•environment. In McDonald’s case, the strong force of competitive rivalry is based on the following
external factors:
•High number of firms (strong force)

•High aggressiveness of firms (strong
force) Low switching costs (strong
force)
•The fast food restaurant industry has

many firms of various sizes, such as
global chains like
•McDonald’s, KFC and local fast food restaurants and road side stops (vada pav) . Also, most medium and
large firms aggressively market their products. In addition, McDonald’s customers experience low
switching costs, which means that they can easily transfer to other restaurants. Thus, this
•element of the Five Forces analysis of McDonald’s shows that competition is among the most
significant external forces on the business.
Bargaining Power of Suppliers
• Strong bargaining power allows suppliers to sell higher priced or
low quality raw materials to their buyers. This directly affects the
buying firms’ profits because it has to pay more for materials.
Suppliers have strong bargaining power when:
- There are few suppliers but many buyers

- Suppliers are large and threaten to forward integrate
- Few substitute raw materials exist
- Suppliers hold scarce resources
- Cost of switching raw materials is especially high.
Example of Suppliers also influence the competiveness of an industry
• The bargaining power of Toyota’s supplier is Weak
• Toyota has many suppliers in its automotive manufacturing sector. Resources

like metal, raw materials, leather, plastic, computers, cooling system,
electrical system, breaking system and fuel supply system are all bought from
hundreds of different suppliers and different bargaining prices distributed
across the globe.
• One of the competitive advantages of Toyota is its strong relationship with

the suppliers and its efficient manner of monitoring supply chain places low
bargaining power on the suppliers.
• In addition most vehicle manufactures own many interchangeable suppliers,

and also have the ability to produce the components by their own in the
short time. Thus, the suppliers do not own the power to change the price.
Bargaining Power of Buyer
• Customers have the power to demand lower price or higher
product quality from industry producers when their bargaining
power is strong. Lower price means lower revenues for the
producer, while higher quality products usually raise production
costs. Both scenarios result in lower profits for producers.
Customers exert strong bargaining power when:
- Buying in large quantities or acces point to the fina

control many s s l
customer
- Only few customers exist
- Switching costs to other supplier are
low
- They threaten to backward integrate
- There are many substitutes
- Customers are price sensitive
Example of Bargaining power of Buyer
Depends on the marketing channel used for Coca-Cola
1. Super Markets
2. Convenience Stores
3. Soda Shop
4. Vending Machine
5. Restaurant and Food stores
Bargaining power of buyer is high for fountain supermarkets and

mass merchandising because of the low profitability and strong
negotiation power of retail channels but for vending machine
bargaining power is non-existing caused by high profitability.
Threat of New Entrants
• This force determines how easy (or not) it is to enter a particular
industry. If an industry is profitable and there are few barriers to
enter, rivalry soon intensifies. When more organizations compete
for the same market share, profits start to fall. It is essential for
existing organizations to create high barriers to enter to deter new
entrants. Threat of new entrants is high when:
- Low amount of capital is required to enter a market
- Existing companies can do little to retaliate
- Existing firms do not possesspatents, trademarks or do
not have established brand reputation
- There is no government regulation
- There is low customer loyalty
- Products are nearly identical
- Economies of scale can be easily achieved
Example of Threat of New Entrant – Entry of Reliance JIO
Telecommunications
1. Jio has grown at a scorching pace:-the network, which has been
adding 1-
1.2 million subscribers a day, will likely have 25 million 4G customers.
2. Jio has set off a fierce mobile tariff war in the country:
3. Jio is hurting the balance sheets of other telecom companies: Airtel
saw a
4.9% decline in its Q2 profit following the operator slashing data
tariffs.
4. Jio is forcing the other players to join forces:-Vodafone and Idea
Merger
5. Jio could impact the online content market in India:-The Jio suite
offers more than 300 live streaming TV channels and hundreds of
music albums and movies. This forces other incumbents to up their
game in the online video streaming space.
Threat of Substitutes
• This force is especially threatening when buyers can easily find substitute
products with attractive prices or better quality and when buyers can switch
from one product or service to another with little cost. For example, to
switch from coffee to tea doesn’t cost anything, unlike switching from car
to bicycle.
• Determining Factors :-
 First, if the consumer’s switching costs are low
 Second, if the substitute product is cheaper than the industry’s product
 Third, if the substitute product is of equal or superior quality compared to
the industry’s product, the threat of substitutes is high
 Fourth, if the functions, attributes, or performance of the substitute product
are
equal or superior to the industry’s product
Example of Threat of substitutes
• EXAMPLE – THE AIRLINE INDUSTRY
• From the point of view of airlines themselves, the flying business is very
competitive. There are hundreds of airlines all trying to get a bigger piece of the
pie. Global recessions have also meant cost cutting exercises for most airlines in
the industry and often less travel in the part of consumers.
• Depending on the nature of the airline’s business, the threat of substitutes can
range from lower on the scale to mid-range.
• For domestic or regional airlines or routes, there is always the option of taking a
car, bus or train. It may take longer but often this consideration is outweighed
by the cost advantages of substitute methods
• There is also no switching cost to deal with.
• In the case of international airlines, the threat of substitutes is almost non-
existent
• On longer routes, a traveler needs to take a flight with no possible alternates
• Threat here is from competitors who may offer better rewards, better prices or a
better
flying experience
• There is also somewhat of a switching cost
Porter's Five Forces
Threat
Of Auto Industry
of New
Entrants
(Low)
Bargaini Bargaini
ng Power Competiti ng Power
of ve Rivalry of
Suppliers (High) Custome
(Low) rs (High
Substitu
te
Products
(Low)
Structure- conduct- performance model
• Economists have developed a branch of

economic analysis called Industrial
Organization to trace the relationship
between the structure of a market and the
performance of the firms in that market.
• Markets have three elements that may be the
focus of public policy: structure, conduct, and
performance
Structure
The structure of a market is the set of
conditions and characteristics that describe
and define the market type. To describe
market structure, economists consider
• the number and size distribution of firms;
• the extent of product differentiation;
• the effectiveness of barriers to entry; and
• the degree to which the industry is vertically
integrated.
Market Structures
Perfect Monopolistic Oligopoly Pure
Competition Competition Monopoly
No. and Many Many A Few One

Size of
Firm
Extent of Identical Different Identical or No Close
Product Different Substitute
Differentiation
Barriers to None None Moderate to Blocked

Entry Difficult
Conduct
Conduct refers to the behavior, policies, and

strategies used by the firms in the industry. To
describe firms’ conduct, economists consider
the strategies used by firms as they affect
• pricing;
• production;
• promotion; and
• distribution
Performance
Performance refers to the economic outcomes

that result from the market structure and the
firms’ conduct. To evaluate an industry’s
performance, economists consider
• allocation efficiency;
• production efficiency;
• equity; and
• technological advancement.
Strategic Positioning
• Ansoff’s Growth vector matrix
Ansoff’s Matrix
• Ansoff’s Growth Vector matrix helps a
business to understand the business
development and/or marketing strategy that it
should use to enable growth. It may consider
existing markets, or new markets in which to
sell its products or services , or existing
products or services, or new products or
services to sell to customers.
In terms of the product, the two
options are:
– selling existing products
– developing new ones
Ansoff’s matrix and risk
• The greater the degree of newness the greater
the risk
• Hence:
• Market penetration - little risk involved
• Market development - moderate risk
• Product development - moderate risk
• Diversification - high risk because both
product and market are new and unknown
MARKET PENETRATION
• This is the objective of higher
market share in existing markets
– E.g. in 2000, Mitsubishi announced a 10%

reduction in prices in the UK in order to
encourage purchases
Market Penetration
• Aim of the strategy:
– To maintain or increase share of the current market with current
products
– To secure dominance of a growth market or restructure a mature market
by driving out competition
• Market penetration involves an increase in sales of existing
products to existing markets - selling more of the same to the
same people
• But it is difficult to achieve growth through increased market
penetration if the market is saturated
• In a stagnating market increase in sales is only possible by
grabbing market share from rivals. Hence competition will be
intense in such markets
• Risks are low but the prospects of success are low unless there
is strong growth in the market
Market penetration strategies
• How is increased market penetration
achieved?
– Increase usage by existing customers
– Attract customers away from rivals
– Gain market. share at the expense of rivals
– Encourage increase in frequency of use
– Devise and encourage new applications
– Encourage non buyers to buy
Use market penetration when...
• The market is not saturated
• There is growth in the market
• Competitors’ share of the market is falling
• Increased volumes lead to economies of scale
• There is scope for selling more to existing
customers
Market development
• This involves
– Selling the same product to different people
– Entering new markets or segments with existing products
– Gaining new customers,new segments,new markets
– Entering overseas markets
• Market development will require changes to
marketing strategy e.g. new distribution channels,
different pricing policy, now promotional strategy to
attract different types of customers
Market development
• Market development is used when…
– Untapped markets are beckoning
– The firm has excess capacity
– There are attractive channels to access new
market
• Market development involves moderate risk -
there is a lack of familiarity with customers
but at least the product is familiar
Product development
• This is the development of new products for
the existing market
• New products come in the form of:
– New products to replace current products
– New innovative products
– Product improvements
– Product line extensions
– New products to complement existing products
– Products at a different quality level to existing
products
Product development
• Product development is used when:
– The Firm has strong R&D capabilities
– The market is growing
– There is rapid change
– The firm can build on existing brands
– Competitors have better products
• But new product development is costly and
there are moderate risks associated with this
strategy
Diversification
• Diversification in the Ansoff Matrix means:
– New products sold to new markets
– New products for new customers
• It is a risky strategy because it involves two unknowns
• Therefore new products and new markets should be selected
which offer the prospect for growth which the exiting product
market mix does not
• One problem is to identify real life examples of firms
developing new products for genuinely new groups of
customers
• Diversification can be sub-divided into related and unrelated
Related diversification
• This is development beyond present product market but still
within the broad confines of the industry
• Markets and products share some commonality with existing
products
• Therefore it builds on assets or activities which the firm has
developed
• Related diversification can also be seen as synergistic
diversification since it involves harnessing exiting product
market knowledge
• This closeness can reduce the risks associated with
diversification
• Example: banks developing insurance products
Related diversification
• Horizontal diversification: when new products are
introduced to current markets
• Vertical diversification: when an organisation
decides to move into its suppliers or customer’s
business to secure supply or to firm up the use of
products in end products
• Concentric diversification: when new products
closely related to current products are introduced
into new markets
• The product might be new but is it genuinely
diversification into new markets?
Unrelated diversification
• Features of unrelated diversification
– Growth in products and markets that are completely new
– Development beyond the present industry into products
and markets which bear little relation to the present
product market mix
– No commonality with existing products and markets
• It is also known as conglomerate diversification:
When completely new, technologically unrelated
products are introduced into new markets
• As it represents a departure from existing products
and markets it does represent considerable risk
Examples of unrelated diversification
• In each case consider whether it is genuinely unrelated or
whether there is some link be with existing products or
markets
• Water supply companies acquiring or developing hotel
businesses
• Granada TV group developed motorway service areas (now
sold off since the merger of ITV)
• The involvement of Pearson Group (a publisher) in television
production companies and running an exam board (Edexcel)
• British Gas offers home emergency services covering
plumbing and electrical problems
• Hollywood film studios own hotels, casinos and cruise liners
MARKET EXTENSION
• This is the strategy of selling an existing
product to new markets. This could
involve selling to an overseas market, or a
new market segment
– Nintendo are making hand held games consoles

(e.g. DS) appeal to the adult/grey market by
introducing games such as Brain Train
PRODUCT
DEVELOPMENT
• Least risky of all four strategies
• This involves taking an existing
product and developing it in existing
markets
– E.g. Coca-Cola. This has been
developed to have vanilla, lime, cherry
and diet varieties (amongst others) in
the SOFT DRINKS market
DIVERSIFICATION
• This is the process of selling
different, unrelated goods or
services in unrelated
markets
• This is the most risky of all four
strategies
– E.g. the Virgin group

Uses of the Ansoff Matrix
• The matrix is a framework to explore directions for
strategic growth
• It is the most commonly used model for analysing the
possible strategic direction that a business should
take
• It not only identifies and analyses different growth
opportunities it also encourages planners to consider
both expected returns and risks
• But, as we have seen, real world examples do not fit
neatly into the four cells of the Ansoff’s Matrix
Organizational Audit
• Benchmarking indicators
Benchmarking indicators
Benchmarking is a method of improving performance in a systematic and
logical way by measuring and comparing your performance against
others, and then using lessons learned from the best to make targeted
improvements. It involves answering the questions:
• “Who performs better?”
• “Why are they better?”
• “What actions do we need to take in order to improve our
performance?”
Whilst benchmarking has been used occasionally in the construction
industry for many years, the recent surge of interest has been
encouraged by the publication of sets of national Key Performance
Indicators that allow companies to measure their performance simply
and to set targets based on national performance data.
Types of Benchmarking
• Internal – a comparison of internal operations such as one site (or project
team) against another within the same company. Large companies will often
have plenty of scope for this sort of benchmarking, and should aim to bring the
level of performance of the whole company to the current ‘best in company.’
• Competitive – a comparison against a specific competitor for the product,
service or function of interest. This will provide data and information about
what competitors are achieving. It is more difficult and complex to carry out. A
number of benchmarking clubs have been established to allow collection and
comparison of data from organisations which compete with each other.
• Generic – a comparison of business functions or processes that are the same,
regardless of industry or country. In a well-documented case in USA, a ready-
mix concrete company compared its delivery performance against a pizza
delivery company. Both were in the business of delivering products which had
to arrive at the point of use promptly!
Benefits of Benchmarking
• Benchmarking focuses improvement efforts on issues
critical to success
• It ensures that improvement targets are based on what
has been achieved in practice, which removes the
temptation to say ‘it can’t be done’.
• Benchmarking provides confidence that your
organisation’s performance compares favourably with
best practice.
• For organisations in the public sector, benchmarking
provides an assurance that ‘Best Value’ is being achieved.
Key Performance Indicators
• While a benchmark has a company comparing its processes,
products and operations with other entities, a key performance
indicator (KPI) measures how well an individual, business unit,
project and company performs against their strategic goals.
• Company executives and managers use KPIs to understand
where they are in relation to their goals and to help them
adjust if it looks like they are off course to meeting their
objectives.
• KPIs are used primarily to measure and improve performance
and to provide incentives for performance improvement and to
drive and implement strategy.

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Business strategy

 Communicates the  A future-oriented

The tactics: using the army to win the

The strategy: using the battles to win the

Mission and objectives

Mission and objectives

Management Information System

Management Information System

Management Information System

While strategy may be about competing and surviving as a

Management Information System

40 Prof. Dr. Majed El-Farra 2009

41 Prof. Dr. Majed El-Farra 2009

The change in a broad set of actions and decisions, e.g., changing

42 Prof. Dr. Majed El-Farra 2009

43 Prof. Dr. Majed El-Farra 2009

Vertical Integration Strategies

44 Prof. Dr. Majed El-Farra 2009

Defined • General Motors is

• Guidelines for Forward Integration

 Present distributors are expensive, unreliable, or incapable of

46 Prof. Dr. Majed El-Farra 2009

 When present suppliers are expensive, unreliable, or incapable

48 Prof. Dr. Majed El-Farra 2009

49 Prof. Dr. Majed El-Farra 2009

• Guidelines for Horizontal Integration

 Firm can gain monopolistic characteristics without being

50 Prof. Dr. Majed El-Farra 2009

51 Prof. Dr. Majed El-Farra 2009

• Guidelines for Market Penetration

 Current markets not saturated

53 Prof. Dr. Majed El-Farra 2009

• Guidelines for Market Development

 New channels of distribution that are reliable, inexpensive, and

55 Prof. Dr. Majed El-Farra 2009

• Guidelines for Product Development

 Products in maturity stage of life cycle

57 Prof. Dr. Majed El-Farra 2009

58 Prof. Dr. Majed El-Farra 2009

Defined • National Westminister

59 Prof. Dr. Majed El-Farra 2009

• Guidelines for Concentric Diversification

 Competes in no- or slow-growth industry

60 Prof. Dr. Majed El-Farra 2009

61 Prof. Dr. Majed El-Farra 2009

• Guidelines for Conglomerate Diversification

 Declining annual sales and profits

62 Prof. Dr. Majed El-Farra 2009

63 Prof. Dr. Majed El-Farra 2009

 Revenues from current products/services would increase

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65 Prof. Dr. Majed El-Farra 2009

 Combination of privately held and publicly held can be

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 When firm has pursued retrenchment but failed to attain

71 Prof. Dr. Majed El-Farra 2009

• Selling all of a • El-Ameer Block factory

72 Prof. Dr. Majed El-Farra 2009