Chapter 5

Strategies in Action
Strategic Management:
Concepts and Cases. 9th edition
Fred R. David
PowerPoint Slides by
Anthony F. Chelte
Western New England College
Fred R. David

Ch5-1

Chapter Outline
Long-Term Objectives
Types of Strategies
Integration Strategies
Fred R. David

Ch5-2

Chapter Outline
Intensive Strategies
Diversification Strategies
Defensive Strategies
Means for Achieving Strategies
Fred R. David

Ch5-3

Chapter Outline
Michael Porters Generic Strategies
Strategic Management in Nonprofit
and Governmental Organizations
Strategic Management in Small
Firms
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Ch5-4

Strategies in Action

Even if youre on the right track, youll get

run over if you just sit there.
-- Will Rogers

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Ch5-5

Strategies in Action
Hundreds of companies today

Embrace strategic planning

Quest for higher revenues

Quest for higher profits

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Ch5-6

Long-Term Objectives

The results expected from pursuing

certain strategies

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Ch5-7

Long-Term Objectives
Objectives

Quantifiable
Measurable
Realistic
Understandable
Challenging
Hierarchical
Obtainable
Congruent
Time-line
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Ch5-8

Long-Term Objectives
Long-term objectives are necessary
Corporate
Divisional
Functional levels

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Ch5-9

Long-Term Objectives
Strategists should avoid
Managing by Extrapolation
Managing by Crisis
Managing by Subjectives
Managing by Hope

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Ch5-10

Integration Strategies

Forward Integration
Vertical
Integration
Strategies

Backward Integration
Horizontal Integration

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Ch5-11

Integration Strategies
Vertical Integration strategies
Allow a firm to gain control over:
Distributors
Suppliers
competitors

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Ch5-12

Integration Strategies
Forward Integration
Gaining ownership or increased control
over distributors or retailers

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Ch5-13

Integration Strategies
Guidelines for Forward Integration

Present distributors are expensive, unreliable, or

incapable of meeting firms needs
Availability of quality distributors is limited
When firm competes in an industry that is expected
to grow markedly
Organization has both capital and human resources
needed to manage new business of distribution
Advantages of stable production are high
Present distributors have high profit margins
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Ch5-14

Integration Strategies
Backward Integration
Seeking ownership or increased
control of a firms suppliers

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Ch5-15

Integration Strategies
Guidelines for Backward Integration

When present suppliers are expensive, unreliable, or

incapable of meeting needs
Number of suppliers is small and number of
competitors large
High growth in industry sector
Firm has both capital and human resources to
manage new business
Advantages of stable prices are important
Present supplies have high profit margins
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Ch5-16

Integration Strategies
Horizontal Integration
Seeking ownership or increased
control over competitors

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Ch5-17

Integration Strategies
Guidelines for Horizontal Integration

Firm can gain monopolistic characteristics without

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

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Ch5-18

Michael Porters Generic Strategies

Cost Leadership Strategies

Differentiation Strategies

Focus Strategies

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Ch5-19

Generic Strategies
Cost Leadership Strategies

Pursued in conjunction with differentiation

Economies or diseconomies of scale
Capacity utilization achieved
Linkages with suppliers and distributors

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Ch5-20

Generic Strategies
Low Cost Producer Advantages

Market of many price-sensitive buyers

Few ways of achieving product
differentiation
Buyers not sensitive to brand differences
Large number of buyers with bargaining
power
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Ch5-21

Generic Strategies
Differentiation Strategies

Greater product flexibility

Greater compatibility
Lower costs
Improved service
Greater convenience
More features
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Ch5-22

Generic Strategies
Differentiation Strategies

Allow firm to charge higher price

Gain customer loyalty

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Ch5-23

Generic Strategies
Focus Strategies

Industry segment of sufficient size

Good growth potential
Not crucial to success of major competitors

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Ch5-24

Generic Strategies
Focus Strategies

Consumers have distinctive preferences

Rival firms not attempting to specialize in the
same target segment

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Ch5-25

Intensive Strategies

Market Penetration
Intensive
Strategies

Market Development
Product Development

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Ch5-26

Intensive Strategies
Intensive strategies
Require intensive efforts to improve a
firms competitive position with existing
products

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Ch5-27

Intensive Strategies
Market Penetration
Seeking increased market share for
present products or services in present
markets through greater marketing
efforts

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Ch5-28

Intensive Strategies
Guidelines for Market Penetration

Current markets not saturated

Usage rate of present customers can be increased
significantly
Market shares of competitors declining while total
industry sales increasing
Increased economies of scale provide major
competitive advantages
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Ch5-29

Intensive Strategies
Market Development
Introducing present products or
services into new geographic area

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Ch5-30

Intensive Strategies
Guidelines for Market Development

New channels of distribution that are reliable,

inexpensive, and good quality
Firm is very successful at what it does
Untapped or unsaturated markets
Capital and human resources necessary to manage
expanded operations
Excess production capacity
Basic industry rapidly becoming global
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Ch5-31

Intensive Strategies
Product Development
Seeking increased sales by improving
present products or services or
developing new ones

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Ch5-32

Intensive Strategies
Guidelines for Product Development

Products in maturity stage of life cycle

Competes in industry characterized by rapid
technological developments
Major competitors offer better-quality products at
comparable prices
Compete in high-growth industry
Strong research and development capabilities
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Ch5-33

Diversification Strategies

Concentric
Diversification
Diversification
Strategies

Conglomerate
Diversification
Horizontal
Diversification

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Ch5-34

Diversification Strategies
Diversification strategies
Becoming less popular as
organizations are finding it more
difficult to manage diverse business
activities

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Ch5-35

Diversification Strategies
Concentric Diversification
Adding new, but related, products or
services

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Ch5-36

Diversification Strategies
Guidelines for Concentric Diversification

Competes in no- or slow-growth industry

Adding new & related products increases sales of
current products
New & related products offered at competitive prices
Current products are in decline stage of the product
life cycle
Strong management team
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Ch5-37

Diversification Strategies
Conglomerate Diversification
Adding new, unrelated products or
services

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Ch5-38

Diversification Strategies
Guidelines for Conglomerate Diversification

Declining annual sales and profits

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

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Ch5-39

Diversification Strategies
Horizontal Diversification
Adding new, unrelated products or
services for present customers

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Ch5-40

Diversification Strategies
Guidelines for Horizontal Diversification

Revenues from current products/services would

increase significantly by adding the new unrelated
products
Highly competitive and/or no-growth industry w/low
margins and returns
Present distribution channels can be used to market
new products to current customers
New products have counter cyclical sales patterns
compared to existing products
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Ch5-41

Defensive Strategies

Retrenchment
Defensive
Strategies

Divestiture
Liquidation

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Ch5-42

Defensive Strategies
Retrenchment
Regrouping through cost and asset
reduction to reverse declining sales
and profit

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Ch5-43

Defensive Strategies
Guidelines for Retrenchment

Firm has failed to meet its objectives and goals

consistently over time but has distinctive
competencies
Firm is one of the weaker competitors
Inefficiency, low profitability, poor employee morale,
and pressure from stockholders to improve
performance.
When an organizations strategic managers have
failed
Very quick growth to large organization where a
major internal reorganization is needed
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Ch5-44

Defensive Strategies
Divestiture
Selling a division or part of an
organization

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Ch5-45

Defensive Strategies
Guidelines for Divestiture

When firm has pursued retrenchment but failed to

attain needed improvements
When a division needs more resources than the firm
can provide
When a division is responsible for the firms overall
poor performance
When a division is a misfit with the organization
When a large amount of cash is needed and cannot
be obtained from other sources.
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Ch5-46

Recent Divestitures

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Ch5-47

Defensive Strategies
Liquidation
Selling all of a companys assets, in
parts, for their tangible worth

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Ch5-48

Defensive Strategies
Guidelines for Liquidation

When both retrenchment and divestiture have been

pursued unsuccessfully
If the only alternative is bankruptcy, liquidation is an
orderly alternative
When stockholders can minimize their losses by
selling the firms assets

Fred R. David

Ch5-49

Means for Achieving Strategies

Joint Venture/Partnering

Two or more companies form a temporary

partnership or consortium for purpose of capitalizing
on some opportunity.

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Ch5-50

Means for Achieving Strategies

Cooperative Arrangements

Research and development partnerships

Cross-distribution agreements
Cross-licensing agreements
Cross-manufacturing agreements
Joint-bidding consortia

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Ch5-51

Means for Achieving Strategies

Problems Causing Joint Ventures to Fail

Managers who must collaborate daily not involved in

forming or shaping the venture
Venture may benefit the companies but not the
customers
Venture not supported equally by both partners
Venture may begin to compete with one of the
partners more so than the other
Fred R. David

Ch5-52

Means for Achieving Strategies

Guidelines for Joint Ventures

Combination of privately held and publicly held can be

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

Ch5-53

Recent Mergers
Acquiring Firm
Hewlett-Packard
Ebay
PepsiCo
Sara Lee
Phillips Petroleum
Devon
AMR
Tellabs

Acquired Firm
Compaq Computer
Homes Direct
Quaker Oats
Earthgrains Company
Conoco
Anderson Exploration
TWA
Ocular Networks
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Ch5-54

Key Terms

Acquisition
Backward Integration
Combination Strategy
Concentric Diversification
Conglomerate Diversification
Cooperative Arrangements
Cost Leadership
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Ch5-55

Key Terms

Differentiation
Diversification Strategies
Divestiture
Focus
Forward Integration
Franchising
Generic Strategies
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Ch5-56

Key Terms

Horizontal Diversification
Horizontal Integration
Integration Strategies
Intensive Strategies
Joint Venture
Liquidation
Long-Term Objectives
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Ch5-57

Key Terms

Market Development
Market Penetration
Merger
Outsourcing
Product Development
Retrenchment
Takeover
Vertical Integration
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Ch5-58