Business strategy for Trung Nguyen's tea product

- Specialization by customer type: A firm can cope with the intense competition of a fragmented industry by catering to those customers 1 who have the least bargaining leverage because t

VIETNAM NATIONAL UNIVERSITY, HANOI

HANOI SCHOOL OF BUSINESS

Doan Duc Toan

BUSINESS STRATEGY FOR TRUNG

NGUYEN’S TEA PRODUCT

Major: Business Administration

Abstract……….i

Acknowledgements……… ……….ii

List of figure……….……… ………iii

List of table……… ……… iv

INTRODUCTION 1 Necessity of the thesis 1

2 Purpose 2

3 Key research area 2

4 Methodology 3

5 Constructions of the thesis 5

6 Outline 5

Chapter 1: Literature review 1.1 Strategies 5

1.2 Matching strategy to a company’s situatition 7

1.2.1 Industry Development Stages 10 1.2.2 Firm Capability 26 1.3 Fuction strategies 39

Chapter 2: Case study of Trung Nguyen corporation on tea industry

2.1 Case study method 42

2.2 Data presentation 44

Table of contents

2.2.7 Capital Investment Requirements 63 3.2.8 Trung Nguyen Company's Competitive Position 64

Chapter 3: Recommendation and conclusion

3.1 Successions and the action plan 79

LIST OF FIGURES

Figure 2.1 Tea Area

Figure 2.2 Area Under Cultivation

Figure 2.3 Province Growing Tea

Figure 2.4 Tea Out Put

Figure 2.5 Tea Export

LIST OF TABLES

Table 2.1 Growth Of Tea Area

Table 2.2 Growth Of Tea Area In Province Table 2.3 Growth Of Tea Output

Table 2.4 Growth Of Tea Export

Table 2.5 Consumptione

Table 2.6 Comparing Price Of End Product Table 2.7 Comparing Price Of Meterial Table 2.8 Comparing Price Of Meterial Table 2.9 Comparing Price Of Meterial

The first chapter will provide readers with an insight to the research area It will begin by briefly necessity of the thesis that will be followed by the purpose of the study and research questions, key research area, methodology using for research and outline for overall thesis

1 NECESSITY OF THE THESIS

In recently years, The Vietnam’s economy has been changed comprehensively For few years ago, state owned company is considered as backbone of national economy, but now, we need to make an examination of it Appearing in strongly way private enterprise, specially, enterprises are descended from empty hands By miraculous steps, those enterprises have stepped up onto glorious dais, up to now, when search total process of development of it, people only feel extremely miraculous and admire that can not talk by word

Trung Nguyen is one of those enterprises making miraculousness To start by empty hand, up to now, Trung Nguyen has become a very famous company When looking back in the history of Trung Nguyen, one can see that Trung Nguyen had difficult initial steps, without property, traditional knowledge of business With this difficult start, many other companies would fell they began their businesses under a much better condition The history shows that successes only come with people who try one’s best by heart and brain By this element but is not other things, Trung Nguyen has made a success for itself

I have been lucky having internship in Trung Nguyen for few months, both acquiring sprit and learning experience With assignment that complete graduated thesis, I have chosen field tea, area that Trung Nguyen is newcomer

Business strategy is compared as a map that looking it, people can know which path is both reliable and shortest to succeed Base on that, I have chosen subject: Built business strategy for tea of Trung Nguyen With general approach, do not go deep into the details of each aspect of business action of Trung Nguyen, expected outcome will supply more information for Trung Nguyen about tea industry in what stage of development process with characteristics and strategies to succeed in that environment

The purpose of this thesis is to study external and internal environment of Trung Nguyen Company to define the optimal strategy for its tea products

Research Question:

 How to match strategy to a company's situation?

The scope of this thesis is limited to:

- The tea industry in Vietnam and Trung Nguyen Corporation together with its business strategies

- Strategic choice that such a firm could apply in its own environment

Methodology usually refers to the general approaches to research while method refers to techniques for gathering evidence Therefore, methodology is a theory and analysis of how a research does or should proceed Specific method for the case study will

be described and elaborated upon later in the chapter three of the thesis

4.1 Research Purpose

A research can classify into three basic purposes exploratory, descriptive and explanatory This study comes with descriptive and explanatory purpose more than exploratory purposes only

4.2 Research Approach

The research approach of this study is qualitative Qualitative research approaches have traditional been favored when the main research objective is to improve the understanding of a phenomenon is, especially when this phenomenon is complex and deeply embedded in its context Its many methodologies and techniques have helped researcher get a better grasp of a variety of management situations

4.3 Research Method

Research method were used in this thesis is case study According to theory, a case study approach should be used when how or why questions are being posed about a contemporary set of events over which the researcher has little of any control This study is based on research question of how character and focuses on contemporary sets of events

4.4 Data Collection Method

There are documentary sources, archival records, participant observation, and direct observation Each of these data sources has their strengths and weaknesses Since no

single source of data have a complete advantage over all the others and given that the data sources are highly complementary, and the recommendation by the researchers that a good case study may want to use as many sources as possible In this study data will be collected from source: document, archival records, and direct observation

Data reduction: The process of collecting, focusing, simplifying, abstracting, and transforming the data The purpose is to organize the data so that final conclusions can be drawn and verified

Data display: Taking the resumed data and displaying it in an organized, as table, diagram,

to conclusion can be more easily drawn

 Provision of an approach in building business strategy, which helps Trung Nguyen Corporation in guiding its business activities

 Findings of the characteristics of environment of the tea industry in Vietnam, and the

6 OUTLINE

The thesis is divided into four chapters:

The chapter one will provide readers with an insight to the research area It will begin by briefly necessity of the thesis that will be followed by the purpose of the study and research questions, key research area, methodology using for research and outline for overall thesis

The chapter two is a summary of relevant theories connected to the research questions Chapter three contains a case analysis to Trung Nguyen, including case study method, analysis and findings of matching strategy to the firm’s company's situation

Chapter four recommendations and conclusions will be presented

CHAPTER 1: LITTERATURE REVIEW

The chapter summaries theories connected to research questions The literature has been collected to address the research questions

1.1 STRATEGIES

 A strategy is a long term plan of action designed to achieve a particular goal Strategy applies to many disparate fields, such as: Military strategy, Marketing strategies, Strategic management, Football strategy, Game theoretical strategy, economic strategy, Neuro-linguistic programming strategy.1

 A strategy in game theory is a sequence of activities and reactions, that fully determine

an agent’s behavior in a game or a business situation The mathematically precise description of behavior is connected to computer programming and algorithms.2

 In general, the plan or policy for arbitrating between multiple, concurrent requests for the use of a device Specifically in disk device drivers, the policy for scheduling multiple, concurrent disk block-read and block-write requests.3

 A strategy is a long term plan for success, to achieve an advantage In force terms this

is the key milestones and targets for the coming year These are based upon the Governments PPAF requirement.4

 Describes the differentiating activities an organization pursues to gain competitive advantage Situated at the center of the Balanced Scorecard system, all performance

 Remains one of the most widely discussed and debated topics in the world of modern organizations.5

 While matching in a dictionary several methods for comparing words can be used These methods are named strategies and include exact match, regular expression match, and sounder match The available strategies depends on the server, but a special name can be used to denote a server-default strategy.6

 A plan for the conduct of a major phase, or campaign, within a grand strategy for the overall conflict A strategy is the basic idea of how the struggle of a specific campaign shall develop, and how its separate components shall be fitted together to contribute most advantageously to achieve its objectives Strategy operates within the scope of the grand strategy Tactics and specific methods of action are used in smaller scale operations to implement the strategy for a specific campaign.7

1.2 MATCHING STRATEGY TO A COMPANY’S SITUATION

According to Thompson & Strickland III (1997), the task of matching strategy to a company's situation is complicated because of the large external and internal factors managers have to weigh However, while the number and variety of considerations is

necessarily lengthy, the most important drivers shaping a company's strategic options fall into two broad categories:

 The nature of industry and competitive conditions

 The firm's own competitive capabilities, market position, and best opportunities

5 Taken from website: www.balancedscorecard.biz/Glossary.html

6 Taken from website: www.myrkr.in-berlin.de/dictionary/using.html

7 Taken from website: www.canvasopedia.org/content/canvasopedia/dictionary.htm

The dominant strategy-shaping industry and competitive conditions revolve around:

1) What stage in his life-cycle the industry is in (emerging, rapid growth, mature, declining)

2) The industry's structure (fragmented versus concentrated)

3) The nature and relative strength of the five competitive forces

4) The scope of competitive rivalry (particularly whether the company's market is globally competitive)

The pivotal company-specific considerations hinge on:

1) Whether the company is an industry leader, an up-and-coming challenger, a content runner-up, or an also-ran struggling to survive

2) The company's particular set of strengths, weaknesses, opportunities, and threats But even these few categories occur in too many combinations to cover here However, we can demonstrate what the task of matching strategy to the situation involves by considering five classic types of industry environments:

1) Competing in emerging and rapidly growing industries

2) Competing in maturing industries

3) Competing in stagnant or declining industries

4) Competing in fragmented industries

3) Firms that is competitively weak or crisis-ridden

According to Miller & Dess (1998), Industry life cycle, a conceptual model that suggests that a market evolves through the stages of introduction, growth, maturity, and decline The industry life cycle provide a useful framework for studying business-level strategy formulation because it provides" shorthand" for the numerous differences in strategic situations and the behavior appropriate to each

Product life cycles and technological life cycles are well-known, important concepts that

we have attempt to build into our consideration of an overall industry life cycle

However, there are two caveats to bear in mind when considering the industry life cycle First, the industry life cycle is not intended to be use as a short-run forecasting device Strategists find it more useful to consider the industry life cycle as a conceptual framework

for understanding what changes might occur over time rather than when they are likely to occur Second, industry life cycles are reversible and repeatable

1.2.1 Industry Development Stages

The following text will concentrate on characteristics and relevant strategies of four different stages for industry Four stages are: emerging, maturing, declining fragmented

a- Competing in Emerging Industries

An emerging industry is one in the early, formative state Most company in an emerging industry are in a start-up mode, adding people, acquiring or constructing facilities, gearing

up production, trying to broaden distribution and gain buyer acceptance (Thompson & Strickland III, 1997)

Characteristics

The market is new and unproven; there are many uncertainties about how it will function, how fast it will grow, and how big it will get

Much of the technological know-how tends to be proprietary and closely guarded, having been developed in-house by pioneering firms; some firms may file patents in an effort to secure competitive advantage

Often, there is no consensus regarding which of several competing production technologies will win out or which product attributes will gain the most buyer favor Until market forces sort these things out, wide differences in product quality and performance are typical and rivalry centers around each firm's efforts to get the market to ratify its own strategic approach to technology, product design, marketing, and distribution

Entry barriers tend to be relatively low, even for entrepreneurial start-up companies; financed, opportunity-seeking outsiders are likely to enter if the industry has promise for explosive growth

well-Firms have little hard information about competitors, how fast products are gaining buyer acceptance, and users' experiences with the product; there are no trade associations gathering and distributing information

Since all buyers are first-time users, the marketing task is to induce initial purchase and to overcome customer concerns about product features, performance reliability, and conflicting claims of rival firms

Many companies, finding themselves short of funds to support needed R&D and get through several lean years until the product catches on, end up merging with competitors

or being acquired by outsiders looking to invest in a growth market

Strategies

- Try to win the early race for industry leadership with risk-taking entrepreneurship and a bold, creative strategy Broad or focused differentiation strategies keyed to product superiority typically offer the best chance for early competitive advantage

- Push to perfect the technology, to improve product quality, and to develop attractive performance features

- Try to capture any first-mover advantages associated with more models, better styling, and early commitments to technologies and raw materials suppliers, experience curve effects, and new distribution channels

- Search out new customer groups, new geographical areas to enter, and new user applications Make it easier and cheaper for first-time buyers to try the industry's first-generation product

- Gradually shift the advertising emphasis from building product awareness to increasing frequency of use and creating brand loyalty

- As technological uncertainty clears and a dominant technology emerges, adopt it quickly While there's merit in trying to pioneer the "dominant design" approach, such a strategy carries high risk when there are many competing technologies, R&D is a costly, and rapidly moving technological development quickly make early investments obsolete

- Use price cuts to attract the next layer of price-sensitive buyers into the market

- Expect well-financed outsiders to move in with aggressive strategies as industry sales start to take off and the perceived risk of investing in the industry lessens Try to prepare for the entry of powerful competitors by forecasting (a) who the probable entrants will be (based on present and future entry barriers) and (b) the types of strategies they are likely to employ

b- Competing in Maturing Industries

The rapid-growth environment of a young industry cannot go on forever However, the transition to a slower-growth, maturing industry environment does not begin on an easily predicted schedule, and the transition can be forestalled by a steady stream of technological advances, product innovations, or other driving forces that keep rejuvenating market demand Nonetheless, when growth rates do slacken, the transition to market maturity usually produces fundamental changes in the industry's competitive environment

Characteristics

Slowing growth in buyer demand generates more head-to-head competition for market share Firms that want to continue on a rapid-growth track start looking for ways to take customers away from competitors Outbreaks of price-cutting, increased advertising, and other aggressive tactics are common

Buyers become more sophisticated, often driving a harder bargain on repeat purchases Since buyers have experience with the product and are familiar with competing brands,

Competition often produces a greater emphasis on cost and service As sellers all begin to offer the product attributes buyers prefer, buyer choices increasingly depend on which seller offers the best combination of price and service

Firms have a "topping out" problem in adding production capacity Slower rates of industry growth mean slowdowns in capacity expansion Each firm has to monitor rivals' expansion plans and time its own capacity additions to minimize oversupply conditions in the industry With slower industry growth, the mistake of adding too much capacity too soon can adversely affect company profits well into the future

Product innovation and new end-use applications are harder to come by Producers find it increasingly difficult to create new product features, find further uses for the product, and sustain buyer excitement

International competition increases Growth-minded domestic firms start to seek out sales opportunities in foreign markets Some companies, looking for ways to cut costs, relocate plants to countries with lower wage rates Greater product standardization and diffusion of technological know-how reduce entry barriers and make it possible for enterprising foreign companies to become serious market contenders in more countries Industry leadership passes to companies that succeed in building strong competitive positions in most of the world's major geographic markets and in winning the biggest global market shares

Industry profitability falls temporarily or permanently Slower growth, increased competition, more sophisticated buyers, and occasional periods of overcapacity put pressure on industry profit margins Weaker, less-efficient firms are usually the hardest hit Stiffening competition induces a number of mergers and acquisitions among former competitors, drives the weakest firms out of the industry, and, in general, produces

industry consolidation Inefficient firms and firms with weak competitive strategies can survive in a fast-growing industry with booming sales But the intensifying competition that accompanies industry maturity exposes competitive weakness and throws second- and third-tier competitors into a survival-of-the-fittest contest

Strategies

- Pruning the Product Line: A wide selection of models, features, and product options has

competitive value during the growth stage when buyers' needs are still evolving But such variety can become too costly as price competition stiffens and profit margins are squeezed Maintaining too many product versions prevents firms from achieving the economies of long production runs In addition, the prices of slow-selling versions may not cover their true costs Pruning marginal products from the line lowers costs and permits more concentration on items whose margins are highest and/or where the firm has a competitive advantage

- More Emphasis on Process Innovations: Efforts to "reinvent" the manufacturing process

can have a fourfold payoff: lower costs, better production quality, greater capability to turn out multiple product versions, and shorter design-to-market cycles Process innovation can involve mechanizing high-cost activities, revamping production lines to improve labor efficiency, creating self-directed work teams, reengineering the manufacturing portion of the value chain, and increasing use of advanced technology (robotics, computerized controls, and automatic guided vehicles) Japanese firms have become remarkably adept at

- A Stronger Focus on Cost Reduction: Stiffening price competition gives firms extra

incentive to reduce unit costs Such efforts can cover a broad front: companies can push suppliers for better prices, switch to lower-priced components, develop more economical product designs, cut low-value activities out of the value chain, streamline distribution channels, and reengineer internal processes

- Increasing Sales to Present Customers: In a mature market, growing by taking customers

away from rivals may not be as appealing as expanding sales to existing customers Strategies to increase purchases by existing customers can involve providing complementary items and ancillary services, and finding more ways for customers to use the product Convenience food stores, for example, have boosted average sales per customer by adding video rentals, automatic bank tellers, and deli counters

- Purchasing Rival Firms at Bargain Prices: Sometimes the facilities and assets of

distressed rivals can be acquired cheaply Bargain-priced acquisitions can help create a low-cost position if they also present opportunities for greater operating efficiency In addition, an acquired firm's customer base can provide expanded market coverage The most desirable acquisitions are those that will significantly enhance the acquiring firm's competitive strength

- Expanding Internationally: As its domestic market matures, a firm may seek to enter

foreign markets where attractive growth potential still exists and competitive pressures are not so strong Several manufacturers in highly industrialized nations found international expansion attractive because equipment no longer suitable for domestic operations could

be used in plants in less-developed foreign markets (a condition that lowered entry costs) Such possibilities arise when (1) foreign buyers have less sophisticated needs and have

simpler, old-fashioned, end-use applications, and (2) foreign competitors are smaller, less formidable, and do not employ the latest production technology Strategies to expand internationally also make sense when a domestic firm's skills, reputation, and product are readily transferable to foreign markets Even though the U.S market for soft drinks is mature, Coca-Cola has remained a growth company by upping its efforts to penetrate foreign markets where soft-drink sales are expanding rapidly

c- Competing in Stagnant or Declining Industries

Many firms operate in industries where demand is growing more slowly than the economy wide average or is even declining Although harvesting the business to obtain the greatest cash flow, selling out, or closing down are obvious end-game strategies for uncommitted competitors with dim long-term prospects, strong competitors may be able to achieve good performance in a stagnant market environment Stagnant demand by itself is not enough to make an industry unattractive Selling out may or may not be practical, and closing

operations is always a last resort

Characteristics

Businesses competing in slow-growth/declining industries have to accept the difficult realities of an environment of continuing stagnation, and they must resign themselves to performance targets consistent with available market opportunities Cash flow and return-on-investment criteria are more appropriate than growth-oriented performance measures, but sales and market share growth are by no means ruled out Strong competitors may be

- Pursue a focused strategy by identifying, creating, and exploiting the growth segments within the industry Stagnant or declining markets, like other markets, are composed of numerous segments or niches Frequently, one or more of these segments is growing rapidly, despite stagnation in the industry as a whole An astute competitor who is first to concentrate on the attractive growth segments can escape stagnating sales and profits and possibly achieve competitive advantage in the target segments

- Stress differentiation based on quality improvement and product innovation Either enhanced quality or innovation can rejuvenate demand by creating important new growth segments or inducing buyers to trade up Successful product innovation opens up an avenue for competing besides meeting or beating rivals' prices Differentiation based on successful innovation has the additional advantage of being difficult and expensive for rival firms to imitate

Work diligently and persistently to drive costs down When increases in sales cannot be counted on to generate increases in earnings, companies can improve profit margins and return on investment by continuous productivity improvement and cost reduction year after year Potential cost-saving actions include (a) outsourcing functions and activities that can

be performed more cheaply by outsiders, (b) completely redesigning internal business processes, (c) consolidating underutilized production facilities, (d) adding more distribution channels to ensure the unit volume needed for low-cost production, (e) closing low-volume, high-cost distribution outlets, and (f) cutting marginally beneficial activities out of the value chain

d- Competing in Fragmented Industries

A number of industries are populated by hundreds, even thousands, of small and sized companies, many privately held and none with a substantial share of total industry sales The standout competitive feature of a fragmented industry is the absence of market leaders with king-sized market shares or widespread buyer recognition Examples of fragmented industries include book publishing, landscaping and plant nurseries, kitchen cabinets, oil tanker shipping, auto repair, restaurants and fast-food, public accounting, women's dresses, metal foundries, meat packing, paperboard boxes, log homes, hotels and motels, and furniture

medium-Characteristics

Low entry barriers allow small firms to enter quickly and cheaply An absence of scale production economies permits small companies to compete on an equal cost footing with larger firms Buyers require relatively small quantities of customized products (as in business forms, interior design, and advertising); because demand for any particular product version is small, sales volumes are not adequate to support producing, distributing,

large-or marketing on a scale that yields advantages to a large firm

The market for the industry's product/service is local (dry cleaning, residential construction, medical services, automotive repair), giving competitive advantage to local businesses familiar with local buyers and local market conditions

Market demand is so large and so diverse that it takes very large numbers of firms to accommodate buyer requirements (restaurants, energy, and apparel)

The industry is so new that no firms have yet developed the skills and resources to command a significant market share

Strategies

- Constructing and operating "formula" facilities: This strategic approach is frequently

employed in restaurant and retailing businesses operating a multiple locations It involves constructing standardized outlets in favorable locations at minimum cost and then polishing to a science how to operate all outlets in a super efficient manner McDonald's, Home Depot, and 7-Eleven have pursued this strategy to perfection, earning excellent

profits in their respective industries

- Becoming a low-cost operator: When price competition is intense and profit margins are

under constant pressure, companies can stress no-frills operations featuring low overhead, high-productivity/low-cost labor, lean capital budgets, and dedicated pursuit of total operating efficiency Successful low-cost producers in a fragmented industry can play the price-cutting game and still earn profits above the industry average

- Increasing customer value through integration: Backward or forward integration may

contain opportunities to lower costs or enhance the value provided to customers Examples include assembling components before shipment to customers, providing technical advice,

or opening regional distribution centers

- Specializing by product type: When a fragmented industry's products include a range of

styles or services, a strategy to focus on one product/service category can be very effective Some firms in the furniture industry specialize in only one furniture type such as brass beds, rattan and wicker, lawn and garden, or early American In auto repair, companies specialize in transmission repair, body work, or speedy oil changes

- Specialization by customer type: A firm can cope with the intense competition of a

fragmented industry by catering to those customers (1) who have the least bargaining leverage (because they are small in size or purchase small amounts), (2) who are the least price sensitive, or (3) who are interested in unique product attributes, a customized product/service, or other "extras."

- Focusing on a limited geographic area: Even though a firm in a fragmented industry

can't win a big share of total industry wide sales, it can still try to dominate a local/regional geographic area Concentrating company efforts on a limited territory can produce greater operating efficiency, speed delivery and customer services, promote strong brand awareness, and permit saturation advertising, while avoiding the diseconomies of stretching operations out over a much wider area Supermarkets, banks, and sporting goods retailers successfully operate multiple locations within a limited geographic area

In fragmented industries, firms generally have the strategic freedom to pursue broad or narrow market targets and low-cost or differentiation-based competitive advantages Many different strategic approaches can exist side by side

Introduction Growth Maturity and Decline Fragmented Industry

Faster than GNP Equal or less than GNP -Absence of visible market

leaders -Low entry barriers and absence of scale economies -Market for product is local Small quantities of

customized products required

-Market is so large and diverse it takes numerous firms to accommodate buyer needs

-High transportation costs prevent serving large market area

-Local regulatory requirements make each geographic area unique -Newness of industry

Competition Slight competition; unprofitable

Few pioneers begin to explore the market

Competitors focus inward on product rather than competition Market exploration

Growth may mask success

of competitors

Competitive rivalry peaks

as competitors try to maintain shakeout

Technology High level of technological

change and product/service innovation

No established dominant design

or standard Technological development requires a high level of investment

Technology is not fully understood by the creators

Dominant design emerges, emphasis placed on product variety

As dominant design emerges, product process can become more

specialized

Small increment entail innovations, many base on cost saving and

performance improvements Emphasis on efficiency, most likely stage for automation

Capital

Investment

Significant investment to support venture start-up and creation of new products/services

Peak period, needed to fund growth

Reinvestment as needed to maintain viability

Table 1.1: Summary of Stages for an Industry and the Corresponding Characteristics and Strategies

Introduction Growth Maturity and Decline Fragmented Industry

Prices High and volatile

Market will pay high price for new industry’s products/services

Prices decline rapidly as cost fall and competition rises

Prices decline slowly as productivity allows costs to fall

Entry and exit A few pioneers begin to explore

the market

Many firms scramble to enter what appears to be a promising market

As market is saturated, growth slows and shakeout begins

Promotion

efforts

Target innovators and try to build awareness of product

Build brand awareness Tailor promotion to a

variety of market segments Sales Low but growing volume Sale volume soars Stabilizing sale volume

Profits Negative; revenue per share is

low but increasing as matures industry

Profitable but cash flow may still be negative

Profits declining

Cash Flow Negative cash flow due to heavy

expenses including debt service costs

Cash flow may still be negative

Larger investment level may mean cash flow is strong

Table 1.1: Summary of Stages for an Industry and the Corresponding Characteristics and Strategies

Introduction Growth Maturity and Decline Fragmented Industry

-Push to perfect the technology,

to improve product quality, and to develop attractive performance features

-Try to capture any first-mover advantages associated with more models, better styling, and early commitments to technologies and raw materials suppliers,

experience curve effects, and new distribution channels

-Search out new customer groups, new geographical areas to enter, and new user applications

-Gradually shift the advertising emphasis from building product awareness to increasing frequency

of use and creating brand loyalty

-Use price cuts to attract the next layer of price-sensitive buyers into the market

-Pruning the Product Line

-More Emphasis on Process Innovations

-A Stronger Focus on Cost Reduction

-Increasing Sales to Present Customers

-Purchasing Rival Firms at Bargain Prices

-Expanding Internationally

-Pursue a focused strategy

by identifying, creating, and exploiting the growth segments within the industry

-Stress differentiation based on quality improvement and product innovation

-Work diligently and persistently to drive costs down

-Construct and operate

―formula‖ facilities -Become a low-cost producer

-Increase customer value via vertical integration -Specialize by product type -Specialize by customer type

-Focus on limited geographic area Table 1.1: Summary of Stages for an Industry and the Corresponding Characteristics and Strategies

- Stay-on-the-offensive strategy: This strategy rests on the principle that the best

defense is a good offense Offensive-minded leaders stress being first-movers to sustain their competitive advantage (lower cost or differentiation) and to reinforce their reputation as the leader A low-cost provider aggressively pursues cost reduction, and a differentiator constantly tries new ways to set its product apart from rivals' brands The theme of a stay-on-the-offensive strategy is relentless pursuit of continuous improvement and innovation Striving to be first with new products, better performance features, quality enhancements, improved customer services, or

easier and less costly for potential customers to switch their purchases from

runner-up firms to its own products Unless a leader's market share is already so dominant that it presents a threat of antitrust action (a market share under 60 percent is usually

"safe"), a stay-on-the-offensive strategy means trying to grow faster than the industry

as a whole and wrest market share from rivals A leader whose growth does not equal

or outpace the industry average is losing ground to competitors

- Fortify-and-defend strategy: —The essence of "fortify and defend" is to make it

harder for new firms to enter and for challengers to gain ground The goals of a strong defense are to hold onto the present market share, strengthen current market position, and protect whatever competitive advantage the firm has

Specific defensive actions can include:

 Attempting to raise the competitive ante for challengers and new entrants via increased spending for advertising, higher levels of customer service, and bigger R&D outlays

 Introducing more of the company's own brands to match the product attributes that challenger brands have or could employ

 Adding personalized services and other "extras" that boost customer loyalty and make it harder or more costly for customers to switch to rival products

 Broadening the product line to close off possible vacant niches for competitors to slip into

 Keeping prices reasonable and quality attractive

 Building new capacity ahead of market demand to try to block the market expansion potential of smaller competitors

 Patenting the feasible alternative technologies

 Signing exclusive contracts with the best suppliers and dealer distributors

 A fortify-and-defend strategy best suits firms that have already achieved industry dominance and don't wish to risk antitrust action It is also well-suited to situations where a firm wishes to milk its present position for profits and cash flow because the industry's prospects for growth are low or because further gains

in market share do not appear profitable enough to go after But the defend strategy always entails trying to grow as fast as the market as a whole (to stave off market share slippage) and requires reinvesting enough capital in the business to protect the leader's ability to compete

fortify-and Followfortify-and thefortify-and leader strategy—Here the leader's strategic posture involves using its

competitive muscle (ethically and fairly!) to encourage runner-up firms to be content followers rather than aggressive challengers The leader plays competitive hardball when smaller rivals rock the boat with price cuts or mount new market offensives that directly threaten its position Specific responses can include quickly matching and perhaps exceeding challengers' price cuts, using large promotional campaigns to counter challengers' moves to gain market share, and offering better deals to the major customers of maverick firms Leaders can also court distributors assiduously

to dissuade them from carrying rivals' products, provide salespersons with documented information about the weaknesses of an aggressor's products, or try to

in hardball fashion when smaller rivals attack each other's customer base in ways that don't affect its own

b- Runner-up firms

Characteristics

Runner-up firms occupy weaker market positions than the industry leader(s) Some runner-up firms are up-and-coming market challengers, employing offensive strategies to gain market share and a stronger market position Others behave as content followers, willing to coast along in their current positions because profits are adequate Follower firms have no urgent strategic issue to confront beyond "What kinds of strategic changes are the leaders initiating and what do we need to do to follow along?"

A challenger firm interested in improving its market standing needs a strategy aimed at building a competitive advantage of its own Rarely can a runner-up firm improve its competitive position by imitating the strategies of leading firms A cardinal rule in offensive strategy is to avoid attacking a leader head-on with an imitative strategy, regardless of the resources and staying power an underdog may have Moreover, if a challenger has a 5 percent market share and needs a 20 percent share to earn attractive returns, it needs a more creative approach to competing than just "try harder."

Strategies

Strategic options for runner-up firm’s case # 1

Where large size yields significantly lower unit costs giving large-share firms a cost advantage, two options exist:

 Become a lower-cost producer

 Pursue a differentiation strategy

2) Withdraw from business

Strategic options for runner-up firm’s case # 2

Where large size does not yield a cost advantage, six options exist:

- Vacant-niche strategy—This version of a focused strategy involves concentrating

on customer or end-use applications that market leaders have bypassed or neglected

An ideal vacant niche is of sufficient size and scope to be profitable, has some growth potential, is well-suited to a firm's own capabilities and skills, and for one reason or another is not interesting to leading firms Two examples where vacant-niche strategies worked successfully are regional commuter airlines serving cities with too few passengers to attract the interest of major airlines and health foods producers (like Health Valley, Hein, and Tree of Life) that cater to local health food stores—a market segment traditionally ignored by Pillsbury, Kraft General Foods, Heinz, Nabisco, Campbell's Soup, and other leading food products firms

- Specialist strategy—A specialist firm trains its competitive effort on one market

segment: a single product, a particular end use, or buyers with special needs The aim

is to build competitive advantage through product uniqueness, expertise in purpose products, or specialized customer services Smaller companies that successfully use a specialist focused strategy include Formby's (a specialist in stains

special Oursspecial isspecial betterspecial thanspecial theirs strategy—The approach here is to use a differentiationspecial

differentiation-based focused strategy keyed to superior product quality or unique attributes Sales and marketing efforts are aimed directly at quality-conscious and performance-oriented buyers Fine craftsmanship, prestige quality, frequent product innovations, and/or close contact with customers to solicit their input in developing a better product usually under gird this "superior product" approach Some examples include Beefeater and Tanqueray in gin, Tiffany in diamonds and jewelry, Chicago Cutlery

in premium-quality kitchen knives, Baccarat in fine crystal, Cannonade in mountain bikes, bally in shoes, and Patagonia in apparel for outdoor recreation enthusiasts

- Content-follower strategy—Follower firms deliberately refrain from initiating

trendsetting strategic moves and from aggressive attempts to steal customers away from the leaders Followers prefer approaches that will not provoke competitive retaliation, often opting for focus and differentiation strategies that keep them out of the leaders' paths They react and respond rather than initiate and challenge They prefer defense to offense And they rarely get out of line with the leaders on price Union Camp (in paper products) has been a successful market follower by consciously concentrating on selected product uses and applications for specific customer groups, focused R&D, profits rather than market share, and cautious but efficient management

- Growth-via-acquisition strategy—one way to strengthen a company's position is to

merge with or acquire weaker rivals to form an enterprise that has more competitive strength and a larger share of the market Commercial airline companies such as Northwest, USAir, and Delta owe their market share growth during the past decade

to acquisition of smaller, regional airlines Likewise, the Big Six public accounting firms enhanced their national and international coverage by merging or forming

- Distinctive-image strategy—some runner-up companies build their strategies

around ways to make themselves stand out from competitors A variety of strategic approaches can be used: creating a reputation for charging the lowest prices, providing prestige quality at a good price, going all out to give superior customer service, designing unique product attributes, being a leader in new product introduction, or devising unusually creative advertising

c- Weak Businesses

A firm in an also-ran or declining competitive position has four basic strategic options If it has the financial resources, it can launch an offensive turnaround strategy keyed either to low-cost or "new" differentiation themes, pouring enough money and talent into the effort to move up a notch or two in the industry rankings and become a respectable market contender within five years or so It can employ a fortify-and-defend strategy, using variations of its present strategy and fighting hard

to keep sales, market share, profitability, and competitive position at current levels It can opt for an immediate abandonment strategy and get out of the business, either by selling out to another firm or by closing down operations if a buyer cannot be found

Or it can employ a harvest strategy, keeping reinvestment to a bare-bones minimum and taking actions to maximize short-term cash flows in preparation for an orderly market exit The gist of the first three options is self-explanatory The fourth merits

more discussion

The measures taken in a harvest strategy are fairly clear-cut The operating budget is chopped to a rock-bottom level; reinvestment in the business is held to a bare minimum Capital expenditures for new equipment are put on hold or given low financial priority (unless replacement needs are unusually urgent); instead, efforts are made to stretch the life of existing equipment and make do with present facilities as long as possible Price may be raised gradually, promotional expenses slowly cut, quality reduced in not-so-visible ways, nonessential customer services curtailed, and the like Although harvesting results in shrinking sales and market share, if cash expenses can be cut even faster, then after-tax cash flows may rise (at least temporarily) and the company's profits will erode slowly rather than rapidly

Harvesting is a reasonable strategic option for a weak business in the following circumstances:

1 When the industry's long-term prospects are unattractive

2 When rejuvenating the business would be too costly or at best marginally profitable

3 When the firm's market share is becoming increasingly costly to maintain or defend

4 When reduced levels of competitive effort will not trigger an immediate or rapid falloff in sales

5 When the enterprise can redeploy the freed resources in higher opportunity areas

6 When the business is not a crucial or core component of a diversified

Company’s portfolio of business interests (harvesting a no core business is

Strategically preferable to harvesting a core business)

7 When the business does not contribute other desired features (sales stability, prestige, a well-rounded product line) to a company's overall business portfolio The more of these seven conditions present, the more ideal the business is for harvesting

Harvesting strategies make the most sense for diversified companies that have sideline or no core business units in weak competitive positions or in unattractive industries Such companies can take the cash flows from harvesting unattractive, no core business units and reallocate them to business units with greater profit potential

or to the acquisition of new businesses

Turnaround Strategies for Businesses in Crisis

Turnaround strategies are needed when a business worth rescuing goes into crisis; the objective is to arrest and reverse the sources of competitive and financial weakness as quickly as possible Management's first task in formulating a suitable turnaround strategy is to diagnose what lies at the root of poor performance Is it an unexpected downturn in sales brought on by a weak economy? An ill-chosen competitive strategy? Poor execution of an otherwise workable strategy? An overload of debt? Can the business be saved, or is the situation hopeless? Understanding what is wrong with the business and how serious its strategic problems are is essential because different diagnoses lead to different turnaround strategies

come up with effective innovations, betting on technological long shots, being too optimistic about the ability to

penetrate new markets, making frequent changes in strategy (because the previous strategy didn't work out), and being overpowered by the competitive advantages enjoyed by more successful rivals Curing these kinds of problems and achieving a successful business turnaround can involve any of the following actions:

 Revising the existing strategy

 Launching efforts to boost revenues

 Pursuing cost reduction

 Selling off assets to raise cash to save the remaining part of the business

 Using a combination of these efforts

Strategy Revision When weak performance is caused by bad strategy, the task of strategy overhaul can proceed along any of several paths: (1) shifting to a new competitive approach to rebuild the firm's market position; (2) overhauling internal operations and functional area strategies to better support the same overall business strategy; (3) merging with another firm in the industry and forging a new strategy keyed to the newly merged firm's strengths; and (4) retrenching into a reduced core

of products and customers more closely matched to the firm's strengths The most appealing path depends on prevailing industry conditions, the firm's particular strengths and weaknesses, its competitive capabilities vis-a-vis rival firms, and the severity of the crisis Situation analysis of the industry, major competitors, and the firm's own competitive position and its skills and resources are prerequisites for action As a rule, successful strategy revision must be tied to the ailing firm's strengths and near-term competitive capabilities and directed at its best market

Boosting Revenues Revenue-increasing turnaround efforts aim at generating increased sales volume There are a number of revenue-building options: price cuts, increased promotion, a bigger sales force, added customer services, and quickly achieved product improvements Attempts to increase revenues and sales volumes are necessary (1) when there is little or no room in the operating budget to cut expenses and still break even and (2) when the key to restoring profitability is increased utilization of existing capacity If buyer demand is not especially price sensitive because of differentiating features, the quickest way to boost short-term revenues may be to raise prices rather than opt for volume-building price cuts

Cutting Costs Cost-reducing turnaround strategies work best when an ailing firm's value chain and cost structure are flexible enough to permit radical surgery, when operating inefficiencies are identifiable and readily correctable, when the firm's costs are obviously bloated and there are many places where savings can be quickly achieved, and when the firm is relatively close to its break-even point Accompanying a general belt-tightening can be an increased emphasis on paring administrative overheads, elimination of nonessential and low value-added activities

in the firm's value chain, modernization of existing plant and equipment to gain greater productivity, delay of nonessential capital expenditures, and debt restructuring to reduce interest costs and stretch out repayments

Selling Off Assets reduction/retrenchment strategies are essential when cash flow is a critical consideration and when the most practical ways to generate cash are (1)

losing operations and to stem cash drains as to raise funds to save and strengthen the remaining

Business activities In such cases, the choice is usually to dispose of no core business assets to support strategy renewal in the firm's core businesses

Combination Efforts Combination turnaround strategies are usually essential in grim situations that require fast action on a broad front Likewise, combination actions frequently come into play when new managers are brought in and given a free hand

to make whatever changes they see fit The tougher the problems, the more likely the solutions will involve multiple strategic initiatives

Turnaround efforts tend to be high-risk undertakings, and they often fail A landmark study of 64 companies found no successful turnarounds among the most troubled companies in eight basic industries Many of the troubled businesses waited too long

to begin a turnaround Others found themselves short of both the cash and entrepreneurial talent needed to compete in a slow-growth industry characterized by

a fierce battle for market share Better-positioned rivals simply proved too strong to defeat in a long, head-to-head contest Even when successful, many troubled companies go through a series of turnaround attempts and management changes before long-term competitive viability and profitability are finally restored

1.2.3 FUNCTION STRATEGIES

Short-term activities that each functional area within a firm must undertake in order

to implement the grand strategy

Translate grand strategy into action designed to accomplish specific annual objectives

Key areas of strategies development:

- Marketing

- Finance

- Human Resource Management

Functional Strategies in Production/Operations

Production/ operations management (POM) is the core function of organization That

function converts inputs (raw materials, supplies, machines, and people) in to value –

enhanced output The POM function is most easily associated with manufacturing

firms POM strategy must guide decisions regarding the basic nature of the firm

OPM system, seeking an optimum balance between investment input and production

out and location, facilities design, and process planning on a short term basic

POM facility and equipment strategy involve decisions regarding plant location, size,

equipment replacement, and facilities utilization that should be consistent with grand

strategy and other operating strategy

Functional Strategies in Marketing

The role of the marketing function is to achieve the firm’s objectives by bringing

about the profitable sale of the business’s product/ services in target markets

Marketing should guide sale and marketing managers in determining who will sale

what, where, to whom, in what quantity, and how Marketing at a minimum should

address four fundamental areas: products, price, place, and promotion