Based on a careful analysis of the external and internal business environment and the company’s profile, various strategic options are available for a business. An analysis of the external environment of business might involve the use of industry analysis, PEST or an equivalent, and also Porter’s five force analysis, which would help to identify the opportunities and threats that may exist for the business. For the internal analysis a company would carry out a resource audit, examining physical, human, and financial resources together with intangibles such as brands, patents, etc and would then look at its value chain as a means of assessing the efficiency and effectiveness of all aspects of its operation. Any element of the value chain is capable of adding or destroying value. The aim of the internal analysis is to identify the company’s strengths and weaknesses and as a result the company should be able to identify what it is or is not capable of doing and what it needs to address before pursuing certain strategic options.
The company must choose one or more of these strategic options and commit resources accordingly. Most important strategic options in business are listed below:
It is a simple, first level type of expansion grand strategy. It involves converging resources in one or more of a firm’s businesses in terms of their respective customer needs, customer functions, or alternative technologies, either singly or jointly, in such a manner that it results in expansion. In business policy terminology concentration strategies are know variously as intensification, focus or specialization strategies. In practical terms, concentration strategies involve investment of resources in a product line for an identified market with the help of proven technology. This may be done by various means. A firm may attempt focusing intensely on existing markets with its present products by using a market penetration type of concentration. Or it may try attracting new users for existing products resulting in a market development type of concentration. Alternatively it may introduce newer products in existing markets by concentration on product development. For expansion, concentration is often the first preference strategy for a firm, for the simple reason that it would like to do more of what it is already doing. A firm that is familiar with an industry would naturally like to invest more in known businesses rather than unknown ones. Each industry is unique in the sense that there are established ways of doing things. Firms that have been operating in an industry for long are familiar with these ways. So they prefer to concentrate on these industries.
2. Market Development
Existing products can be modified slightly and sold to customers in related market areas. Alternatively, sales can be boosted by adding new distribution channels or by changing the promotion mix. The firm is seeking to capitalize on its brand name in new markets, as the Japanese automobile giant Toyota did in entering the luxury segment of the US car market.
3. Product Development
Existing products can be modified significantly and new related products created. They can then be sold to current customers through established channels. This strategy relies on extensive R&D and can be expensive. This often happens with the auto markets where existing models are updated or replaced and then marketed to existing customers. In some industries, preemptive signaling, or announcing a product development that is not yet ready for sale, is widely used.
Innovation is the process by which organizations use their skills and resources to create new technologies or goods and services so they can change and better respond to the needs of their customer. Process innovation occurs if there is anything new or novel about the way a company operates. Product innovation occurs if there is anything new or novel about the company’s products. Thus innovation includes advances in the kinds of products, production processes, management systems, organizational structures, and strategies developed by a company. Successful innovation gives a company something unique that its competitors lack (that is, until imitation occurs). This uniqueness allows a company to differentiate and charge a premium price. Successful innovation may also allow a company to reduce its unit costs. Speed is important because early mover advantages are often critical. Small organizations with an entrepreneurial style of management are often better at innovation than large bureaucracies.
5. Horizontal Integration
Horizontal integration is the process of acquiring or merging with industry competitors to achieve the competitive advantages that come with large scale and scope. Horizontal integration may be achieved by acquisition, as when a company purchases another company, or by a merger, meaning an agreement by which equals pool their operations and create a new entity. The net result of all the horizontal integration has been to increase the consolidation in many industries.
The popularity of this strategy is due to the benefits that horizontally integrated firms realize.
- It allows companies to grow, and therefore to realize economies of scale. This is especially important in industries with high fixed costs.
- Another benefit is the cost savings due to reducing duplication between the two companies, for example, eliminating duplicate headquarter offices.
- In addition, it can allow the company to offer a wider range of products that can be sold together for a single price, a strategy called product bundling. Customers value the convenience of bundled products, leading to differentiation.
- It facilitates another strategy, similar to bundling, called a “total solution.” This is an important strategy, for example, in the computer industry, where corporate customers prefer the ease and coordination of purchasing all their hardware and service from a single source.
- It aids in value creation by supporting cross selling, as occurs when a company tries to leverage its relationship with customers by acquiring additional product categories that can be sold to them. Again, customers’ preference for convenience leads to differentiation.
- It helps companies manage industry rivalry by reducing excess capacity in the industry.
- It reduces the number of players in an industry, thus making it easier to implement tacit price coordination.
6. Vertical Integration
Vertical integration means that a company is producing its own inputs (backward or upstream integration) or is disposing of its own outputs (forward or downstream integration). There are four main stages in a typical raw-material-to-consumer production chain: raw materials; component part manufacturing; final assembly; and retail. For a company based in the assembly stage, backward integration involves moving into intermediate manufacturing and raw-material production. Forward integration involves movement into distribution. By vertically integrating backward or forward, a company can build barriers to new entry, limiting competition and enabling the company to charge a higher price and make greater profits. An important aspect of vertical integration is the difference between full integration, which occurs when a company produces all of its own inputs or disposes of all of its own output, and taper integration, in which a company buys from independent suppliers in addition to company-owned suppliers or when it disposes of its output through independent outlets in addition to company-owned outlets.
7. Joint Ventures
A joint venture involves two or more parties coming together to undertake an economic activity. The parties typically agree to create a new entity together by jointly contributing equity capital and share the revenues and expenses. The venture can be for one specific project only, or for a continuing business relationship. Multinationals often enter emerging markets by forming joint ventures. In such cases, Joint ventures require a sharing of ownership, along with the sharing of all attendant costs and benefits, between a company in the home country and one in the host country. To maintain control, some multinational firms maintain a majority share of ownership.
- Joint ventures have the advantage that a multinational can benefit from a local partner’s knowledge of a host country’s competitive conditions, culture, language, political systems, and business systems.
- Another advantage is the sharing of costs and risk of setting up business with a local partner.
- A third advantage is that, in many countries, political considerations make joint ventures the only feasible entry mode.
- One drawback of joint ventures is the risk of losing control over technology. Some companies cope with this threat by not allowing foreign partners to own a majority stake in the venture. However, some foreign partners may not be willing to accept minority ownership.
- Another drawback exists because a joint venture does not give a company tight control over different subsidiaries that it needs to realize economies or engage in coordinated global attacks against global rivals.
8. Concentric Diversification
When an organization takes up an activity in such a manner that is related to the existing business definition of one or more of a firm’s businesses, either in terms of customer groups, customer functions or alternative technologies, it is called concentric diversification. Diversification into a related industry may be a very appropriate corporate strategy when a firm has a strong competitive position but industry attractiveness is low. By focusing on the characteristics that have given the company its distinctive competence, the company uses those very strengths as its means of diversification. The firm attempts to secure strategic fit in a new industry where the firm’s product knowledge, its manufacturing capabilities, and the marketing skills it used so effectively in the original industry can be put to good use.
9. Conglomerate Diversification
When an organization adopts a strategy which requires taking up of those activities which are unrelated to the existing business definitions of one or more of its businesses, either in terms of their respective customer groups, customer functions or alternative technologies, it is called conglomerate diversification. It takes place when management realizes that the current industry is unattractive and that the firms lacks outstanding abilities or skills that it could easily transfer to related products, or services in other industries, the most likely strategy is conglomerate diversification – diversifying into an industry unrelated to its current one. Rather than maintaining a common threat throughout their organization, strategic managers who adopt this strategy are primarily concerned with financials considerations of cash flow or risk reductions. For instance, businesses with sales patterns moving in opposite trends may balance each other.
By cutting costs, divesting assets and improving asset utilization, the firm tries to strengthen itself and restore profitability. Analogous to a weight reduction diet, the two basic phases of a turnaround strategy are contraction and consolidation. Contraction is the initial effort to quickly “stop the bleeding” with a general across the board cutback in size and costs. Consolidation, implements a program to stabilize the now-leaner corporation. To streamline the company, plans are developed to reduce unnecessary overhead and to make functional activities cost justified. This is a crucial time for the organization. If the consolidation phase is not conducted in a positive manner, many of the best people leave the organization.
Read More: Business Turnaround Strategies
A divestiture strategy involves the sale of a business or part of a business for various reasons. This is the last resort, often considered after the failure of a turnaround strategy. First reason of divestiture could be a lack of fit with the core business. A second reason could be that the business has entered the decline phase of its life cycle. The third might be an urgent need for cash. A fourth could be government antitrust action when a corporation is perceived to monopolize or unfairly dominate a particular market.
Read More: Divestiture Strategy
A liquidation strategy requires a company to cease operations in that business and sell its assets. A liquidation strategy is the least attractive of all to pursue because the company has to write off its investment in a business unit—often at a considerable cost. Because the industry is unattractive and the company too weak to be sold as a going concern, management may choose to convert as many saleable assets as possible to cash, which is then distributed to the shareholders after all obligations are paid.
The above strategic options need not be mutually exclusive. Based on the company mission and the SWOT analysis, one or more of the above options may be selected. Techniques which help in arriving at a desirable option include the BCG matrix and the GE 9 cell planning grid.
Read more about various tools that are used for identifying best strategic options in business: