Strategy Types

What are generic strategies and what are they good for?

Andy Weeger

Neu-Ulm University of Applied Sciences

September 3, 2024

Learning outcomes

After this session, you should have a solid understanding of

• different generic strategies as proposed by Ansoff, Porter and Mintzberg;
• the competitive characteristics that define the strategy types and their applicability;
• the significance of locating (and focusing on) the core business;
• the concepts of vertical and horizontal integration, internal and external growth; and
• the importance of trade-offs in strategic management;

You are able to apply the knowledge gained to real-life scenarios to describe and provide explanations for strategic decisions made by firms, particularly to develop initial guidance regarding the selection of an appropriate strategy.

Reflection

Before we start: Any questions or comments regarding the different types of corporate strategies outlined by Galbraith, Craig, and Schendel (1983) and my questions?

Galbraith and Schendel

Overview

Consumer goods:

Harvest, builder, continuity, climber, niche & cashout

Industrial products:

Low commitment, maintenance, growth & niche

Galbraith, Craig, and Schendel (1983) developed a typology of strategy encompassing six generic strategies for consumer goods and four for industrial products based on empirical data. The typology reaffirms that distinct, consistent, and recurring patterns of strategic behavior exist.

Exercise

Take five minutes to chat with your neighbor and think about how the strategy types identified by Galbraith, Craig, and Schendel (1983) relate to configurational thinking.

The configurational school of strategy, as described by Henry Mintzberg and others, views strategy formation as a process of transformation, where organizations move through different configurations or states over time. For instance:

• Low Commitment: This strategy type aligns with the configurational school’s emphasis on flexibility and adaptability. Organizations using a low commitment strategy can quickly shift configurations in response to changing environmental conditions, maintaining minimal investment in any single area to stay agile.
• Maintenance: This strategy type fits well with the idea of maintaining a stable configuration. Organizations focusing on maintenance aim to preserve their current state, ensuring consistent performance and reliability without seeking significant transformation.
• Growth: The growth strategy type is about transitioning to a more advanced configuration. Organizations pursuing growth are actively transforming their structures and processes to achieve higher performance levels and expand their market presence.
• Niche: This strategy type involves creating a specialized configuration tailored to a specific market segment. Organizations adopting a niche strategy develop unique capabilities and structures that cater to the particular needs of their target market, differentiating themselves from broader competitors.

Ansoff

Overview

The Ansoff-matrix (Ansoff 1965)

 

 

 

 

 

Figure 1: The Ansoff-matrix (Ansoff 1965)

The Ansoff-matrix (Ansoff 1965) is a strategic planning framework that helps businesses figure out how to grow by looking at their current and potential markets and products. The matrix groups growth strategies based on two main factors: products (what they offer) and markets (who they serve), leading to four growth strategies, each with its own focus.

Discussion

What school of strategy does the Ansoff-matrix reflect?

The Ansoff-matrix reflects the design school of strategy. This school emphasizes a systematic, analytical approach to strategy formulation, focusing on aligning internal capabilities with external opportunities and threats. By systematically evaluating the growth options, the Ansoff-matrix helps organizations make informed decisions about their growth strategies, aligning with the design school’s emphasis on deliberate, planned strategy formulation

Porter

Overview

Porter’s three generic strategies (Porter 1980)

 

 

 

 

Figure 2: Porter’s three generic strategies (Porter 1980)

Porter (1980) proposed three generic strategies that organizations can pursue to gain a competitive advantage in their respective industries. These strategies are based on the scope of the target market and the competitive advantage sought.

Discussion

What school of strategy does Porter and its three generic strategies reflect?

Porter’s three generic strategies—cost leadership, differentiation, and focus—reflect the competitive positioning school of strategy. This school emphasizes the importance of positioning a company within its industry to achieve a competitive advantage.

Stuck in the middle

Inability to pursue one of the three generic strategies effectively.

When a company is stuck in the middle, it does not offer unique enough features to justify a higher price (differentiation), nor does it have the cost structure to compete on price (cost leadership). As a result, it struggles to attract customers and achieve a competitive advantage

Being stuck in the middle refers to a situation where a company attempts to pursue multiple generic strategies simultaneously without excelling in any one of them. This term is often used to describe a lack of clear strategic focus or a failure to achieve a competitive advantage through cost leadership, differentiation, or focus.

Effective strategic management often involves making deliberate choices about which generic strategy to pursue and aligning the organization’s resources and activities accordingly. When a company tries to pursue multiple strategies without excelling in any of them, it may struggle to compete effectively in its industry.

Trade-offs

Trade-offs are necessary in order to secure a strategic position against activities that are incompatible. The essence of strategy is as much about choosing what not to do as choosing what to do (Mintzberg 2014).

Trade-offs arise for three reasons:

1. To avoid inconsistencies in image or reputation.
2. Different positions require different product configurations, equipment, skills, management systems, etc.
3. Due to limits on internal coordination and control.

Positioning trade-offs are essential to strategy – they create the need for choice, and purposefully limit what a company offers. They deter ‘straddling’ and ‘repositioning’ by competitors.

Exercise

Forward, backward and horizontal integration can be used as a way of putting Porter’s three generic strategies into practice.

Split into small groups and spend 15 minutes looking up the three strategic attempts, writing down the definitions and finding examples for each combination.

Prepare to present your findings.

Mintzberg

Overview

According to Mintzberg (1988) families of strategies can be divided into five broad groups:

Locating, distinguishing, elaborating, extending & reconceiving the core business

Locating the core business

Strategies that focus on identifying and concentrating on the core activities which define the organization’s essential business.

A clear focus on upstream business, midstream business or downstream business.

This strategy type involves a clear understanding of the core competencies and core products or services that the organization excels in. Resources are directed toward strengthening and emphasizing these core areas while potentially divesting from non-core activities.

To figure out what the company’s core competencies and products or services are, you can look at the industry network it’s in (Mintzberg 1988):

• In the upstream business the product flows in a number of different directions, from the basic material to a variety of uses. Upstream businesses tend to be tech and capital-intensive, rather than people-intensive. They’re more likely to look for advantage through low-cost than high margins, favoring sales push over market pull (e.g., Wieland producing copper semi-finished products). Essential elements are resource acquisition, technology and innovation, and cost management.
• Midstream businesses are at the heart of the process. The hourglass is a great metaphor for this. It shows how a variety of inputs are drawn into a single production process, which then flows out to a variety of users (e.g., Apple producing iPhones). Essential elements are supply chain coordination.
• In the downstream business lots of different inputs come together in a narrow space (e.g., Mediamarkt selling lots of different electronic products). Essential elements are marketing and distribution.

This framework can help companies better understand where they should focus their efforts and resources to strengthen their core business and achieve competitive advantage.

Distinguishing the core business

Strategies that focus on highlighting and differentiating the core business from competitors.

Creating a unique selling position for core products or services.

Organizations pursuing this strategy type work on creating unique selling propositions (USPs) for their core products or services. They aim to stand out in the market by emphasizing what makes their core offerings distinct and valuable to customers.

• Distinguishing the core business involves creating a clear distinction between what the organization does exceptionally well (its core) and what may be less critical or peripheral to its overall mission. Thus, companies need to identify what its core activities or competencies are. These are the fundamental processes, products, or services that define the essence of the organization and contribute significantly to its success.
• Once the core activities are identified, the organization needs to allocates a significant portion of its resources to support and strengthen these core elements, such as talent, capital, and time. This focus ensures that the company excels in the areas that truly set it apart from competitors.
• By emphasizing and differentiating the core business, the organization strategically positions itself as a leader or specialist in those core activities. This can help it compete more effectively, command premium prices, and build a strong brand reputation.

Generic strategies for distinguishing the core

Porter’s framework of generic strategies constitute strategies to distinguish the core business. Cost leadership and differentiation align with the idea of distinguishing the core business by focusing on specific strengths, whether in cost efficiency or unique features. Focus strategy aligns with both concepts as it involves concentrating resources and efforts on a specific market segment or niche, which essentially becomes the organization’s core customer base.

Elaborating the core business

Strategies that focus on expanding and deepening the core business to explore related opportunities.

New offerings or new channels but closely aligned with existing core competencies and customer base.

An organization can elaborate a business in a number of ways. It can develop its product offerings within that business, it can develop its market via new segments, new channels or new geographic areas, or it can simply push the same products more vigorously through the same markets. New offerings and channels are well aligned with their existing core competencies and customer base.

Generic strategies for elaborating the core

The strategy types proposed by Ansoff (1965) indicate how to elaborate the core:

• Market penetration
• Market development (e.g., geographic extension)
• Product development
• Diversification

Extending the core business

Strategies that focus on broadening the core business by exploring new markets or customer segments.

Organic or inorganic growth.

Organizations using this strategy type look for opportunities to leverage their existing core capabilities and enter new markets or customer groups, e.g., by extending operating chains vertically or horizontally:

• Vertical integration means backward or forward integration in the operating chain (downstream or upstream; i.e., chain integration strategies)
  • Forward integration: gaining ownership or increased control over distributors or retailers
  • Backward integration: seeking ownership or increased control of a firm’s suppliers
• Horizontal integration means seeking ownership or increased control over competitors in the saim value chain

The business can be extended either by internal development or acquisition.

Organic and inorganic growth

Organic growth refers to the expansion of a business through internal processes, relying on its own resources. This includes increasing sales, improving productivity, and developing new products or services. Inorganic growth involves expanding a business through external means, such as mergers, acquisitions, or strategic alliances. This approach allows for rapid expansion by leveraging the strengths and resources of other entities.

Reconceiving the core business

Strategies that focus on rethinking and transforming the core business to adapt to changing conditions.

Radical change and innovation.

Organizations reassess their core business in response to significant shifts in the industry, technology, or market demands. It may involve redefining the core competencies and adopting a more disruptive approach.

Mintzberg (1988) identifies three basic reconception strategies:

1. Business redefinition strategy involves fundamentally redefining the organization’s purpose, identity, and core activities in response to changing market conditions or disruptive forces.
2. Business recombination strategy involves reconfiguring existing resources, capabilities, or business units in new and innovative ways to create value.
3. Core relocation strategy refers to shifting the primary focus and resources of the organization from one area or aspect of the business to another.

Exercise

Extending the core business by means of integration strategies usually involve merging with or acquiring another firm (i.e., inorganic growth).

Take eight minutes to chat with your neighbour about the pros and cons of inorganic growth.

Benefits:

• To provide improved capacity utilization
• To make better use of the existing sales force
• To reduce managerial staff
• To gain economies of scale
• To smooth out seasonal trends in sales
• To gain access to new suppliers, distributors, customers, products, and creditors
• To gain new technology
• To gain market share
• To enter global markets
• To gain pricing power
• To reduce tax obligations
• To eliminate competitors

Risks:

• Integration difficulties up and down the two value chains
• Taking on too much new debt the target firm owes or to buy the target
• Inability to achieve synergy
• Too much diversification
• Difficult to integrate different organizational cultures
• Reduced employee morale due to layoffs and relocations

Blue Ocean Strategy

Overview

Create and capture value without intense competition by means of

identifying and converting noncustomers, leveraging four actions on six paths

Blue ocean strategy is a business strategy framework that encourages organizations to seek new and uncontested market spaces, where they can create and capture value without intense competition. The “blue ocean” represents uncharted waters, free from the competition seen in the “red ocean,” which symbolizes saturated and highly competitive markets (Kim and Mauborgne 2005).

By applying the principles of blue ocean strategy, organizations can break away from head-to-head competition in overcrowded markets and discover new growth opportunities by creating innovative value propositions and appealing to new customer segments.

Exercise

The strategy “Flywheel” is a powerful concept that describes how companies can create self-reinforcing cycles of growth.

Research on the concept, provide an illustrative example and analyse the impact of the flywheel on the value-stick.

Review and consolidation

The following questions are designed to review and consolidate what you have learned and are a good starting point for preparing for the exam.

1. Define and discuss vertical integration (or another generic strategy)
2. Give some guidelines when vertical integration (or another generic strategy) is an excellent strategy to pursue.
3. What are advantages and disadvantages of vertical integration (or another generic strategy)?
4. Define and give an example of a “blue ocean strategy.”
5. Define and explain “first mover advantages.” To which generic strategies does it relate?
6. Discuss whether it is best for a small firm to grow internally (organically) or to grow externally using means such as partnerships, joint ventures or mergers and acquisitions.
7. Give reasons why so many companies are divesting (spinning off) key segments/divisions of the firm.
8. Explain the following statement: Unlike with cost leadership where a firm examines how to reduce costs along its value chain, with differentiation one looks to maximize value along each level of the value chain.
9. Called de-integration, there appears to be a growing trend for firms to become less forward integrated. Discuss why.
10. What conditions, externally and internally, would be desired/necessary for a firm to diversify?
11. What are major benefits of acquiring another firm?
12. Why is it not advisable to pursue too many strategies at once?
13. There are cooperative and competitive strategies. What is the difference? What are advantages and disadvantages?

Homework

Read Hallegatte (2009) and make notes on following questions:

• Why should climate change be a strategic topic for contemporary firms?
• How does the article describe the uncertainty associated with climate change and its impacts?
• What are the implications of this uncertainty for businesses and organizations?
• What is robust decision-making in light of the climate change as proposed in the article?
• What are insights offered into how individuals, communities, and organizations can efficiently adapt to climate change? How can these insights inform and enhance the strategic management process?
• While only briefly mentioned in the article, economic evaluation is crucial in both climate adaptation and strategic management. How can organizations assess the cost-effectiveness of their strategies and make informed decisions about resource allocation in light of the many uncertainties of climate change?
• What are the five examples of practical strategies discussed in the article? Why are they particularly suited to coping with the high level of uncertainty that climate change is creating?

Q&A

Literature

Ansoff, H. I. 1965. Corporate Strategy: An Analytic Approach to Business Policy for Growth and Expansion. McGraw-Hill.

David, F. R., and F. R. David. 2016. Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Global Edition. Psychology Express. Pearson Education.

Galbraith, Jay R., Cynthia A. Craig, and Dan Schendel. 1983. “An Empirical Analysis of Strategy Types.” Strategic Management Journal 4 (2): 153–73.

Hallegatte, Stéphane. 2009. “Strategies to Adapt to an Uncertain Climate Change.” Global Environmental Change 19 (2): 240–47.

Kim, W. C., and R. Mauborgne. 2005. Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant. BusinessPro Collection. Harvard Business School Press.

Mintzberg, Henry. 1988. “Generic Strategies: Toward a Comprehensive Framework.” Advances in Strategic Management 5 (1): 1–67.

———. 2014. The Strategy Process: Concepts, Contexts, Cases. Pearson education.

Porter, M. E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press.