CH 05

Copyright 2007 Prentice Hall
Ch 5 -1
Chapter 5
Strategies in Action

Strategic Management:
Concepts & Cases
11
th
Edition
Fred David

Ch 5 -2
Chapter Outline
Long-Term Objectives
Types of Strategies
Integration Strategies
Ch 5 -3
Chapter Outline (contd)
Intensive Strategies
Diversification Strategies
Defensive Strategies
Ch 5 -4
Michael Porters Generic Strategies
Means for Achieving Strategies
First Mover Advantages
Ch 5 -5
Outsourcing
Strategic Management in Nonprofit &
Governmental Organizations
Strategic Management in Small Firms
Ch 5 -6

Strategies for taking the hill wont
necessarily hold it.
Amar Bhide

The early bird may get the worm, but the
second mouse gets the cheese.
Unknown
Ch 5 -7

-- Quest for higher revenues

-- Quest for higher profits
Companies Embrace Strategic Planning
Ch 5 -8
Results expected from pursuing certain
strategies
Strategies represent actions to accomplish
long-term objectives
Ch 5 -9
Objectives --
Quantifiable
Measurable
Realistic
Understandable
Challenging
Ch 5 -10
Objectives --
Hierarchical
Obtainable
Congruent
Time-line
Ch 5 -11
Strategists Should Avoid --
Managing by Extrapolation
Managing by Crisis
Managing by Subjectives
Managing by Hope
Ch 5 -12
Varying Performance Measures by
Organizational Level
Ch 5 -13
Financial vs. Strategic
Objectives
Financial Objectives
Growth in revenues
Growth in earnings
Higher dividends
Higher profit margins
Higher earnings per share
Improved cash flow
Ch 5 -14
Objectives
Strategic Objectives
Larger market share
Quicker on-time delivery than rivals
Quicker design-to-market times than rivals
Lower costs than rivals
Higher product quality than rivals
Wider geographic coverage than rivals
Ch 5 -15
Objectives
Trade-Off
Maximize short-term financial objectives harm
long-term strategic objectives
Pursue increased market share at the expense
of short-term profitability
Tradeoffs related to risk of actions; concern for
business ethics; need to preserve natural
environment; social responsibility issues
Ch 5 -16
Not Managing by Objectives
Managing by extrapolation
Managing by crisis
Managing by subjectives
Managing by hope
Ch 5 -17
The Balanced Scorecard
Robert Kaplan & David Norton --
Strategy evaluation & control technique
Balance financial measures with non-financial
measures
Balance shareholder objectives with customer
& operational objectives
Ch 5 -18
Types of Strategies
Operational Level
Functional Level
Division Level
Corp
Level
A Large Company
Ch 5 -19
Types of Strategies
Operational Level
Functional Level
Company
Level
A Small Company
Ch 5 -20
Types of Strategies

Vertical
Integration
Strategies

Forward
Integration
Backward
Integration
Horizontal
Integration
Ch 5 -21
Vertical Integration Strategies
Gain Control Over --
Distributors
Suppliers
Competitors
Ch 5 -22
Forward Integration Strategies
Gain Control Over --
Distributors
Retailers
Ch 5 -23
Forward Integration Strategies
Guidelines --
Current distributors expensive or unreliable
Availability of quality distributors limited
Firm competing in industry expected to grow
markedly
Firm has both capital & HR to manage new
business of distribution
Current distributors have high profit margins
Ch 5 -24
Backward Integration
Strategies
Ownership or Control --
Firms suppliers
Ch 5 -25
Backward Integration
Strategies
Guidelines --
Current suppliers expensive or unreliable
# of suppliers is small; # of competitors is large
High growth in industry sector
Firm has both capital & HR to manage new
business
Stable prices are important
Current suppliers have high profit margins
Ch 5 -26
Horizontal Integration
Strategies
Ownership or Control --
Firms competitors
Ch 5 -27
Horizontal Integration
Strategies
Guidelines --
Gain monopolistic characteristics w/o federal
government challenge
Competes in growing industry
Increased economies of scale major competitive
advantages
Faltering due to lack of managerial expertise or
need for particular resource
Ch 5 -28
Types of Strategies

Intensive
Strategies

Market
Penetration
Market
Development
Product
Development
Ch 5 -29
Intensive Efforts --
Improve competitive position with
existing products
Ch 5 -30
Market Penetration Strategies
Increased Market Share --
Present products/services
Present markets
Greater marketing efforts
Ch 5 -31
Market Penetration Strategies
Guidelines --
Current markets not saturated
Usage rate of present customers can be increased
significantly
Shares of competitors declining; industry sales
increasing
Increased economies of scale provide major
competitive advantage
Ch 5 -32
Market Development
Strategies
New Markets --
Present products/services to new
geographic areas
Ch 5 -33
Market Development
Strategies
Guidelines --
New channels of distribution reliable, inexpensive,
good quality
Firm is successful at what it does
Untapped/unsaturated markets
Excess production capacity
Basic industry rapidly becoming global
Ch 5 -34
Product Development
Strategies
Increased Sales --
Improving present products/services
Developing new products/services
Ch 5 -35
Product Development
Strategies
Guidelines --
Products in maturity stage of life cycle
Industry characterized by rapid technological
development
Competitors offer better-quality products @
comparable prices
Compete in high-growth industry
Strong R&D capabilities
Ch 5 -36
Types of Strategies

Diversification
Strategies

Related
Diversification
Unrelated
Diversification
Ch 5 -37
Diversification
Related When their value chains posses
competitively valuable cross-business
strategic fits
Unrelated When their value chains are so
dissimilar that no competitively valuable
cross-business relationships exist
Ch 5 -38
Related Diversification Preferred
To Capitalize on:
Transferring competitively valuable expertise
Combining the related activities of separate
businesses into a single operation to lower
costs
Exploiting common use of a well-known
brand name
Cross-business collaboration to create
competitively valuable resource strengths
and capabilities
Ch 5 -39
Diversification Strategies
Less Popular --
More difficult to manage diverse
business activities
However --
The greatest risk of being in a single
industry is having all your eggs in one
basket
Ch 5 -40
Related Diversification May be Effective
When:
An organization competes in a no-growth or a
slow growth industry
Adding new, but related, products would
significantly enhance the sales of current
products
New, but related products could be offered at
highly competitive prices

Ch 5 -41
Related Diversification May be Effective
When:
New, but related, products have seasonal
sales levels that counterbalance an
organizations existing peaks and valleys
An organizations products are currently in
the declining stage of the products life cycle
An organization has a strong management
team
Ch 5 -42
Conglomerate Diversification
Strategies
Guidelines --
Declining annual sales & profits
Capital & managerial ability to compete in new
industry
Financial synergy between acquired and acquiring
firms
Current markets for present products - saturated
Ch 5 -43
Unrelated Diversification
Favors capitalizing on a portfolio of
businesses that are capable of delivering
excellent financial performance
Entails hunting to acquire companies:
Whose assets are undervalued
That are financially distressed
With high growth potential but are short on
investment capital

Ch 5 -44
Unrelated Diversification May be Effective
When:
Revenues derived from an organizations
current products or services would increase
by adding new unrelated products
An organization competes in a highly
competitive or a no growth industry
An organizations current distribution
channels can be used to market new
products to existing customers
Ch 5 -45
When:
New products have countercyclical sales
patterns
An organizations basic industry is
experiencing declining annual sales and
profits
An organization has the capital and
managerial talent to compete successfully in
a new industry
Ch 5 -46
When:
An organization has the opportunity to
purchase an unrelated business as an
attractive investment opportunity
There exists financial synergy between the
acquired and acquiring firm
Existing markets for the present products are
saturated
Antitrust action could be charged against a
company
Ch 5 -47
Types of Strategies

Defensive
Strategies

Retrenchment
Divestiture
Liquidation
Ch 5 -48
Retrenchment Strategies
Regrouping --
Cost & asset reduction to reverse
declining sales & profit
Ch 5 -49
Bankruptcy
Chapter 7 Liquidation
Chapter 9 Municipalities
Chapter 11 Reorganization for Corporations
Chapter 12 Family Farmers
Cheaper 13 Reorganization for Small
Businesses and Individuals
Ch 5 -50
Retrenchment Strategies
Guidelines --
Failed to meet objectives & goals consistency; has
distinctive competencies
Firm is one of weaker competitors
Inefficiency, low profitability, poor employee morale,
pressure for stockholders
Strategic managers have failed
Rapid growth in size; major internal reorganization
necessary
Ch 5 -51
Divestiture Strategies
Selling a division or part of an
organization
Ch 5 -52
Divestiture Strategies
Guidelines --
Retrenchment failed to attain improvements
Division needs more resources than are available
Division responsible for firms overall poor
performance
Division is a mis-fit with organization
Large amount of cash is needed and cannot be
raised through other sources
Ch 5 -53
Liquidation Strategies
Companys assets, in parts, for
their tangible worth
Selling
Ch 5 -54
Liquidation Strategies
Guidelines --
Retrenchment & divestiture failed
Only alternative is bankruptcy
Minimize stockholder loss by selling firms assets
Ch 5 -55
Michael Porters Generic Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
Ch 5 -56
Ch 5 -57
Generic Strategies
In conjunction with differentiation
Economies or diseconomies of
scale
Capacity utilization achieved
Linkages w/ suppliers & distributors
Cost Leadership
(Type 1 and Type 2)
Ch 5 -58
Cost Leadership
Ways of ensuring total costs across value
chain are lower than competitors total costs
1. Perform value chain activities more efficiently
than rivals and control factors that drive costs
2. Revamp the firms overall value chain to
eliminate or bypass some cost-producing
activities
Ch 5 -59
Cost Leadership
Can be especially effective when:
1. Price competition among rivals is vigorous
2. Rivals products are identical and supplies are
readily available
3. There are few ways to achieve differentiation
4. Most buyers use the product in the same way
5. Buyers have low switching costs
6. Buyers are large and have significant power
7. Industry newcomers use low prices to attract
buyers
Ch 5 -60
Generic Strategies
Many price-sensitive buyers
Few ways of achieving differentiation
Buyers not sensitive to brand
differences
Large # of buyers w/bargaining power
Low Cost Producer Advantage
Ch 5 -61
Generic Strategies
Greater product flexibility
Greater compatibility
Lower costs
Improved service
Greater convenience
More features
Differentiation (Type 3)
Ch 5 -62
Differentiation
1. There are many ways to differentiate and many
buyers perceive the value of the differences
2. Buyer needs and uses are diverse
3. Few rival firms are following a similar
differentiation approach
4. Technology change is fast paced and
competition revolves around evolving product
features
Ch 5 -63
Generic Strategies
Industry segment of sufficient size
Good growth potential
Not crucial to success of major competitors
Focused Strategies (Type 4 & 5)
Ch 5 -64
Focused Strategy
1. The target market niche is large, profitable, and
growing
2. Industry leaders do not consider the niche crucial
3. Industry leaders consider the niche too costly or
difficult to meet
4. The industry has many different niches and
segments
5. Few, if any, other rivals are attempting to
specialize in the same target segment
Ch 5 -65
Ch 5 -66
Two or more companies form a temporary
partnership or consortium for purpose of
capitalizing on some opportunity
Joint Venture/Partnering -
Ch 5 -67
Reasons why Mergers and Acquisitions Fail
Integration difficulties
Inadequate evaluation of target
Large or extraordinary debt
Inability to achieve synergy
Ch 5 -68
R&D partnerships
Cross-distribution agreements
Cross-licensing agreements
Cross-manufacturing agreements
Joint-bidding consortia
Cooperative Arrangements -
Ch 5 -69
Managers who must collaborate daily; not
involved in developing the venture
Benefits the company not the customers
Not supported equally by both partners
May begin to compete with one of the
partners
Why Joint Ventures Fail -
Ch 5 -70
Joint Ventures
Guidelines --
Synergies between private and publicly held
Domestic with foreign firm, local management can
reduce risk
Complementary distinctive competencies
Resources & risks where project is highly profitable
(e.g. Alaska Pipeline)
Two or more smaller firms competing w/larger firm
Need to introduce new technology quickly
Ch 5 -71
Reasons why Mergers and Acquisitions Fail
Too much diversification
Managers overly focused on acquisition
Too large an acquisition
Difficult to integrate different organizational
cultures
Reduced employee moral due to layoffs and
relocations
Ch 5 -72
Provide improved capacity utilization
Better use of existing sales force
Reduce managerial staff
Gain economies of scale
Smooth out seasonal trends in sales
Gain new technology
Access to new suppliers, distributors, customers,
products, creditors
Mergers & Acquisitions
Ch 5 -73
Recent Mergers
Acquiring Firm Acquired Firm
IBM Ascential Software
Philip Morris PT Hanjaya Mandala Samp
U.S. Steel National Steel Corp
Oracle PeopleSoft
OSIM International Ltd Brookstone
Adobe Systems Macromedia
US Airways American West
United Parcel Service Overnight Corp.
Ch 5 -74
Benefits a firm may achieve by entering a
new market or developing a new product or
service prior to rival firms
Ch 5 -75
Securing access to rare resources
Gaining new knowledge of key factors &
issues
Carving out market share
Easy to defend position & costly for rival
firms to overtake
Potential Advantages
Ch 5 -76
Outsourcing
Companies taking over the functional
operations of other firms
Business-process outsourcing
(BPO)
Ch 5 -77
Outsourcing
Less expensive
Allows firm to focus on core business
Enables firm to provide better services
Benefits
Ch 5 -78

Key Terms & Concepts
For Review (Chapter 5)
Acquisition
Concentric
Diversification
Backward
Integration
Conglomerate
Diversification
Bankruptcy
Cooperative
Arrangements
Combination
Strategy
Cost Leadership
Ch 5 -79

Differentiation Focus
Diversification
Strategies
Forward Integration
Divestiture Franchising
First Mover
Advantages
Generic Strategies
Ch 5 -80

Horizontal
Diversification
Horizontal
Integration
Joint Venture
Hostile Takeover Leveraged Buyout
Integration
Strategies
Liquidation
Ch 5 -81

Long-Term
Objectives
Outsourcing
Market Development Product Development
Market Penetration Retrenchment
Merger Vertical Integration

CH 05

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Copyright 2007 Prentice Hall

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