122. STRATEGIC MANAGEMENT TABLE 4-3. Ten Benefits of Having Clear Objectives 1, Provide direction by revealing expectations 2, Allow synergy 3. Assist in evaluation by serving as standards 4, Establish priorities 5, Reduce uncertainty 6, Minimize conflicts 7, Stimulate exertion 8. Alc in allocation of resources 9. Ai in design of jobs 10, Provide bass for consistent decision making prices may, for example, jeopardize long-term market share. The dangers associated with trading off long-term strategic objectives with near-term bottom-line performance are especially severe if competitors relentlessly pursue increased market share at the expense of short-term profitabil- ity, Amazon, for example, went many yeats operating without profits but gaining market share. And there are other trade-offs between financial and strategic objectives, related to riskiness of actions, concem for business ethics, the need to preserve the natural environment, and social responsiblity issues. Both financial and strategic objectives should include both annual and long-term performance targets. Ultimately, the best way to sustain competitive advantage over the long run is to relentlessly pursue strategic objectives that strengthen a firm's business posi- tion over rivals. Financial objectives can best be met by focusing frst and foremost on achieving strategic objectives that improve a firm's competitiveness and market strength, Avoid Not Managing by Objectives Mr, Derek Bok, former President of Harvard University, once sai, “Ifyou think education is expensive try ignorance.” The idea behind this saying also applies to establishing objectives, because strategists should avoid the following ways of “not managing by objectives.” + Managing by Extrapolation —Adheres tothe principle “If it ain't broke, don't fix it" The {dea isto keep on doing the same things inthe same ways because things are going well + Managing by Crisis —Based on the belief thatthe true measure of a really good strate ists the ability to solve problems. Because there are plenty of crises and problems to go around for every person and organization, strategists ought to bring their time and creative energy to bear on solving the most pressing problems of the day. Managing by crisis is actually a form of reacting, letting events dictate the what and when of management decisions. ‘© Managing by Subjectives —Built on the idea that there is no general plan for which way to go and what todo; just do the best you can to accomplish what you think should be done. In short, “Do your own thing, the best way you know how (sometimes referred to as the mystery approach to decision making because subordinates are lft to figure out ‘what is happening and why). + Managing by Hope —Based on the fact that the future is laden with great uncertainty ‘and that if we try and do not succeed, then we hope our second (or third) attempt will suc ceed. Decisions are predicated on the hope that they will work and that good times are just ‘around the comer, especially if luck and good fortune are on our side!” Types of Strategies Te model illustrated in Figure 4-1 provides a conceptual basis for applying strategic manage: rent. Defined and exemplified in Table 4-4, altemative strategies that an enterprise could pursue can be categorized into 11 actions: forward integration, backward integration, horizontal inte gration, market penetration, market development, product development, related diversification,CHAPTER 4 + TYPES OF STRATEGIES Cee ere L Strategy 1 Strategy r Formulation T ‘implementation’ FIGURE 4-1 ‘A Comprehensive Strategic-Management Model Strategy Evaluation Source: Fed R. David, adapted from “How Companies Define Their Mission,” Long Range Planning 22, no.3 lune 1988): 40, © Fred R. David, unrelated diversification, retrenchment, divestiture, and liquidation. Fach alternative strategy has countless variations. For example, market penetration can include adding salespersons, increas- ing advertising expenditures, couponing, and using similar actions to increase market share in @ given geographic area, ‘Most organizations simultaneously pursue a combination of two or more strategies, but a combination strategy can be exceptionally risky if carried too far. No organization can afford to pursue all the strategies that might benefit the firm. Difficult decisions must be made. Priorities ‘must be established. Organizations, like individuals, have limited resources. Both organizations and individuals must choose among alternative strategies and avoid excessive indebtedness. Hansen and Smith explain that strategic planning involves “choices that risk resources and trade-off that sacrifice opportunity.” In other words, if you have a strategy to go north, then you smust buy snowshoes and warm jackets (spend resources) and forgo the opportunity of “faster population growth in southern states.” You cannot have a strategy to go north and then take a step east, south, or west “just to be on the safe side.” Firms spend resources and focus on a finite number of opportunities in pursuing strategies to achieve an uncertain outcome in the future. Strategic planning is much more than a roll of the dice; itis an educated wager based www.ebook3000.com 123124 STRATEGIC MANAGEMENT TABLE 4-4 Alternative Strategies Defined and Recent Examples Given Strategy Definition Example Forward Integration Backward Integration Horizontal Integration Market Penetration Market Developmen Product Developmeat Related Diversification Unrelated Diversification Retenehment Divestinure Liquidation Gaining ownership oF increased contol over distributors retailers ‘Seeking ownership or increased control of «firm's suppliers ‘Seeking ownership or increased control aver competitors Seeking inereased marketshare for present products or services in present markets through greater marketing efforts Introducing present products or services into new geographic arca Seeking increased sales by improving services or developing new ones Adding new but related products or services ent products of Adding new, unrelated products or services Regrouping through cost and asset reduction to reverse declining sales and profit Selling a division or part ofan organization Selling all of company’s assets, in pars, for their tangible worth “Amazon began rapid delivery services in some US. cites, Starbucks purchased a coffee farm. BRAT acquired Susquchanna Bancshares, ‘Under Armour signed tennis champion Andy Murray to a 4-year, $23 million marketing dal Gap opened is st five stores in China Amazon just began offering its own line of baby liapers and wipes. Facebook acquired the text-messaging firm ‘Whats App for $19 billion. Kroger and Whole Foods Market are cooking ‘meals, becoming restaurants Staples closed 250 stores and reduced by 50% the sizeof other stores, Sears Holdings divested its Land’s End division to Sears’ shareholders. ‘The Trump Taj Mabal in Atlantic City, New Jersey, faces liquidation, on predictions and hypotheses that are continually tested and refined by knowledge, research, experience, and learning. Survival of the firm oftentimes hinges on an excellent strategic plan.* ‘Organizations cannot excel in too many things because resources and talents get sprcad thin and competitors gain advantage. In large, diversified companies, a combination strategy is com monly employed when different divisions pursue different strategies. Also, organizations strug- sling to survive may simultaneously employ a combination of several defensive strategies, such as divestiture, liquidation, and retrenchment, Levels of Strategies Strategy making is not justa task for top executives. Middle- and lower-level managers also must be involved in the strategic-planning process to the extent possible. In lage firms, there are actu- ally four levels of strategies: corporate, divisional, functional, and operational—as illustrated in Figure 4-2. However, in small firms, there are three levels of strategies: company, functional, and operational "The persons primarily responsible for having effective strategies atthe various levels include the EO or business owner at the corporate level; the president or executive vice president at the divisional level; the chief finance officer (CFO), chief information officer (CIO), human resource ‘manager (HRM), chief marketing officer (CMO), and so on atthe functional level; and the plant ‘manager, regional sales manager, and so on at the operational evel. Its important that all manag cs at all levels participate and understand the firm's strategie plan to help ensure coordination, facilitation, and commitment, while avoiding inconsistency, inefficiency, and miscommunication. Integration Strategies Forward integration and backward integration are sometimes collectively referred to as vertical integration. Vertical integration strategies allow a firm to gain control over distsibutors and suppli- ers, whereas horizontal integration refers to gaining ownership and/or control over competitors. Vertical and horizontal actions by firms are broadly referred to as integration strategies.CHAPTER * TYPES OF STRATEGIES 125 Large Company Small Company FIGURE 4-2 Levels of Strategies with Persons Most Responsil Forward Integration Forward integration involves gaining ownership or increased control over distributors or retail es. Increasing numbers of manufacturers (suppliers) are pursuing a forward integration strategy by establishing websites to sell their products directly to consumers. Ina forward integration move, Coca-Cola recently signed a 10-year partnership with Green Mountain Coffee Roasters, maker of the Keurig single-serve coffeemaker, o offer for the first time a Coca-Cola drink through a K-Cup. Coca-Cola thus plans to sell Coke through the at-home beverage system Keurig K-Cup. With the partnership, Coca-Cola also acquired 10 percent of the Green Mountain company for about $1.25 billion. Green Mountain now has a similar partnersbip with Campbell Soup to brew a cup of chicken broth in a K-Cup, Based in Cincinnati and having more than 2,600 grocery stores, Kroger recently acquired Viateost.com to expand its push into online groceries, partly so as not to concede the same-day food delivery market to Amazon.com. FedEx and UPS are both using forward integration, pay- ing the United States Post Office (USPS) to ship their packages. Today, USPS delivers about 25 million packages daly for FedEx, or about one third of Fedx’s express-mail U.S.-bound sailings. ‘Amazon is forward integrating into the “installation business.” When you buy, for example, a ceiling fan or car stereo from Amazon, the company now wants to install it for you for & fee—at least in three cities (Los Angeles, New York, and Seattle). Amazon's new program is called Amazon Local Services and is another step by the company to erode brick-and-mortar's 90 percent market share of retail sales in the United States. In addition, Amazon is developing a ‘new mobile application that recruits and pays ordinary people to be carriers of packages as they travel, doing away with the need for FedEx, UPS, and even the United States Postal Service. This new Amazon forward integration strategy is known as “On My Way” and is still being tested to resolve potential issues such as what happens ifthe package is damaged, or even stolen, by the transporter. ‘Taco Bell also wants to ring your doorbell and deliver you the goods. Fast food delivery is already a strategy at some rival firms, such as Jimmy John's sandwich shop; Burger King has been offering delivery in select markets for a couple of years now; Starbucks is testing delivery. ‘An effective means of implementing forward integration is franchising. Approximately 2,000 companies in about 50 different industries in the United States use franchising to distrib- lute their produets oF services. Businesses can expand rapidly by franchising because costs and opportunities are spread among many individuals. Total sales by franchises in the United States are annually about $1 till. There are about 800,000 franchise businesses in the United States. However, a growing trend is for franchisees, who, for example, may operate 10 franchised www.ebook3000.com126 STRATEGIC MANAGEMENT restaurants, stores, or whatever, to buy out their part of the business from their franchiser (cor- porate owner). A growing rift between franchisees and franchisers is escalating as the offspring often outperforms the parent. Restaurant chains are increasingly being pressured to own fewer of their locations. For example, TGI Fridays recently sold its 250 company-owned restaurants in the United States to franchisees as well as its 63 company-owned restaurants in the United Kingdom. Applebee's also is becoming much more a franchisee-owned business, Burger King is converting virtually all of its company-owned outlets to franchised operations, with revenue from franchisees going from 30 percent of sales in 2011 to 90 percent in 2015. This change results in a drop in Burger King revenues, since franchisees show revenues on their own personal income statements. In contrast, rival Yum Brands owns virtually all of its outside-U.S. restaurants and says that policy gives greater control and benefits if things go well (or bad), ‘The following six guidelines indicate when forward integration may be an especially effective strategy! 1, An organization's present distributors are especially expensive, unreliable, or incapable of ‘meeting the firm’s distribution needs. 2. The availability of quality distributors is so limited as to offer a competitive advantage to those firms that promote forward integration. 3. An organization competes in an industry that is growing and is expected to continue to ‘grow markedly; this is a factor because forward integration reduces an organization's, ability to diversify if its basic industry falters 4, An organization has both the capital and human resources needed to manage the new busi- ness of distributing its own products. 5. The advantages of stable production are particularly high; this is a consideration because ‘an organization can increase the predictability of the demand for its output through forward integration, 6, Present distributors or retailers have high profit margins; this situation suggests that a ‘company could profitably distribute its own products and price them more competitively by integrating forward. Backward Integration Backward integration isa strategy of seeking ownership or increased control of a firm's suppliers. This strategy can be especially appropriate when a firm’s current suppliers are unreliable, too costly, ‘or cannot meet the firm's needs. Starbucks recently purchased its first coffee farm—a 600-acre prop- erty in Costa Rica. This backward integration strategy was utilized primarily to develop new coffee varieties and to test methods to combat a fungal discase known as coffee rust that plagues the indus- tty, Manufacturers as well as retailers purchase needed materials from suppliers. ‘The huge wine and beer producer, Constellation Brands, recently purchased several glass- bottle factories after experiencing problems with several suppliers of their bottles. Constellation acquired a controlling interest in a Mexican Anhcuser-Busch glass-bottle factory, giving Constellation ownership now of more than 50 percent of the glass bottles it uses, Some industries, such as automotive and aluminum producers, are reducing their historical pursuit of backward integration. Instead of owning their supplicrs, companies negotiate with sev- eral outside suppliers. Ford and Chrysler buy more than half of their component parts from out- side suppliers such as TRW, Eaton, General Electric (GE), and Johnson Controls. De-integration _makes sense in industries that have global sources of supply. Companies today shop around, play ‘one seller against another, and go with the best deal. Global competition is also spurring firms to reduce their number of suppliers and to demand higher levels of service and quality from those they keep. Although traditionally relying on many suppliers to ensure uninterrupted supplies and low prices, many U.S. firms now are following the lead of Japanese firms, which have far fewer suppliers and closer, long-term relationships with those few. “Keeping track of so many suppliers is onerous,” said Mark Shimelonis, formerly of Xerox. Seven guidelines when backward integration may be an especially effective strategy are’ 1. An organization's present suppliers are especially expensive, unreliable, or incapable of meeting the firm's needs for parts, components, assemblies, or aw materials,CHAPTER 4 + TYPES OF STRATEGIES 2. The number of supplies is small and the number of competitors is large. 3. An organization competes in an industry that is growing rapidly; this isa factor because integrative-type strategies (forward, backward, and horizontal) reduce an organization's ability to diversify in a declining industry. 4, An organization has both capital and human resources to manage the new business of sup- plying its own raw materials, 5. The advantages of stable prices are particularly important; this isa factor because an orga- nization can stabilize the cost of its raw materials and the associated price of its product(s) through backward integration. 6, Present suppliers have high profit margins, which suggest that the business of supplying products or services in a given industry is a worthwhile venture. 7. An organization needs to quickly acquite a needed resource. Horizontal Integration Seeking ownership of or control over a firm's competitors, horizontal integration is arguably the ‘most common growth strategy. Thousands of mergers, acquisitions, and takeovers among com petitors are consummated annually. Nearly all these transactions aim for increased economies of scale and enhanced transfer of resources and competencies. Kenneth Davidson makes the following observation about horizontal integration: ‘The trend towards horizontal integration seems to reflect strategists’ misgivings about their ability to operate many unrelated businesses. Mergers between direct competitors are more likely to create efficiencies than mergers between unrelated businesses, both because there is a greater potential for eliminating duplicate facilities and because the management of the acquiring firm is more likely to understand the business ofthe target.® In the cigarette industry, Reynolds American recently acquired Lorillard for $25 billion. The ‘merger combined Reynolds’ Pall Mall and Camel brands (with 8.1 percent market share each in the United States) with Lorillard's Newport brand (with 12.2 market share) to combat industry leader Altria's Marlboro brand that commands 40.2 percent market share in the United States. As part of the transaction, to combat antitrust concerns, Reynolds CEO Susan Cameron said her company will divest Lorillard’s Blu e-cigarette to Imperial Tobacco (another rival firm), while keeping and growing Reynolds’ Vuse e-cigarette, Reynolds also divested its Kool, Winston, Salem, ancl Maverick brands to Imperial, Both Dollar General and Dollar Tree recently competed for months to acquire Family Dollar. ‘The winner, Dollar Tree, is reducing prices and converting Family Dollar stores into bright, clean, friendly places. Dollar Tree sill sells more items for a dollar or less, whereas Family Dollar sells more branded merchandise. About 5,000 Dollar Tree stores and 8,300 Family Dollar stores now compete with industry leader Dollar General's 11,500 stores, Charter Communications (CHTR) recently acquired (1) Time Warmer Cable (TWC) for {$55.33 billion and (2) Bright House Networks for $10.4 billion, creating a giant U.S. TV and Internet firm. The new Charter has nearly 24 million customers, below the leader Comcast's (CMCSK) 27.2 million customers. Comcast owns NBCUniversal. Charter also lags AT&T (1), whose recent merger with DirecTV (DTV) gave AT&T 26.4 million TV customers and 16.1 million fixed Internet customers, as well as tens of millions of wireless customers. Several ‘major factors are spurring horizontal integration in the TV and Internet business, including that cable providers are rapidly losing TV subscribers, and pressure from online video services such as Netflix (NFLX), Hulu, and Amazon is increasing dramatically ‘The following five guidelines indicate when horizontal integration may be an especially effective strategy: 1. An organization can gain monopolistic characteristics ina particular area or region without being challenged by the federal government for “tending substantially” to reduce competition, 2. An organization competes in a growing industry. . Increased economies of scale provide major competitive advantages. 4, An organization has both the capital and human talent needed to successfully manage an expanded organization www.ebook3000.com 27128 STRATEGIC MANAGEMENT 5. Competitors are faltering asa result ofa lack of managerial expertise or a need for particular resources that an organization possesses; note that horizontal integration would not be appropriate if competitors are doing poorly because in that case overall industry sales are declining, Intensive Strategies Market penetration, market development, and product development are sometimes referred to as intensive strategies because they require intensive efforts if firm's competitive position with existing products is to improve, Market Penetration ‘A market penetration strategy secks to increase market share for present products or services in present markets through greater marketing efforts. This strategy is widely used alone and in combination with other strategies. Market penetration includes increasing the number of salespersons, increasing advertising expenditures, offering extensive sales promotion items, or increasing publicity efforts. For example, Anheuser annually purchases several $4.5 million, 30-second advertising slots during the Super Bowl. Tiffany & Co. recently began using same-sex couples in advertising, preceded by J. Crew casting one of its designers and his boyfriend in a catalogue. Gap uses a handsome couple ina bill: board, and Jeremiah Brent and Nate Berkus appear in a Banana Republic advertising campaign. The following five guidelines indicate when market penetration may be an especially effec: tive strategy:* 1. Current markets are not saturated with a particular product or service, 2. The usage rate of present customers could be increased significantly 3. The market shares of major competitors have been declining while total industry sales have been increasing. 4, The correlation between dollar sales and dollar marketing expenditures historically has been high, 5, Increased economies of seale provide major competitive advantages. Market Development Market development involves introducing present products or services into new geographic arcas, For example, Whirlpool recently acquired Indesit, an Italian company that sells appli- ances, in order to double Whirlpool’s size in Europe, where the company has struggled to com- pete against Electrolux AB of Sweden, LG Electronics Inc. of South Korea, and Haier Group of China, Indesit had 13 percent of the major appliance market share in castern Europe and Whirlpool had 5 percent, so now 18 percent of the major appliances sold in eastem Europe are Whirlpool. In westem Europe, the Indesit acquisition gave Whirlpool a 17 percent market share bochind the leader, BSH Bosch & Siemens Hausgerate GmbH’s 20 percent. ‘The largest online video-streaming company, Netflix, recently launched it services into France, Germany, Belgium, and Switzerland, as well as eastern and southern Europe, and expects to be a global service provider by 2018. Netflix’s major rival in Europe is Vivendi SA’s pay-TV tunit Canal Plus that offers Netflix-like services through its Canal Play services. ‘These six guidelines indicate when market development may be an especially effective strategy.” 1, New channels of distribution are available that are reliable, inexpensive, and of good. quality, 2. An organization is successful at what it does. New untapped or unsaturated markets exis. 4. An organization has the needed capital and human resources to manage expanded ‘operations. 5. An organization has excess production capacity. 66. An organization's basic industry is rapidly becoming global in scope.CHAPTER 4 + TYPES OF STRATEGIES Product Development Product development is a strategy that secks increased sales by improving or modifying present products or services. Product development usually entails large research and develop- ‘ment expenditures, Walt Disney Company recently developed a Disney Baby line of products and services that il expects to become a powerful baby brand for customers ages 0 to 2, Bob CChapek, president of Disney Consumer Products, stated, “This gives Disney the opportunity to reach out to moms when magical moments begin; there is no more special occasion than the birth of a baby.” ‘The action camera company, GoPro, recently unveiled new high- and low-end cameras, GoPro is the leading producer of wearable and durable high-lefinition video cameras used by outdoor enthusiasts such as scuba divers and surfers. Based in San Mateo, California, GoPro’s rival firms include Sony, Canon, Garmin, and Polaroid, but GoPro is doing great by selling prod- tues in more than 100 countries and through more than 25,000 retail outlets ‘The new Apple Watch is actually a wrist-top computer, and now competes with various Android-powered devices from Motorola and Samsung Electronics. “Wearable computers” are {2004 for the people to monitor their healthiness among countless other things. The firm Sensoria is making smart garments, including smart socks, which yes, are washable. Opportunities for product development strategies are endless, given rapid technological changes occurring daily. ‘These following five guidelines indicate when product development may be an especially effective strategy to pursues!” 1. An organization has successful products that are inthe maturity stage of the product life cycle; the idea here is to attract satisfied customers to try new (improved) products as 2 result oftheir positive experience with the organization's present products or services. 2. An organization competes in an industry that is characterized by rapid technological developments . Major competitors offer better quality products at comparable prices. |. An organization competes in a high-growth industry. 5. An organization has especially strong research and development capabilities. Diversification Strategies The two general types of diversification strategies ae related diversification and unrelated diversification. Businesses are said to be related when their value chains possess competitively valuable cross-business strategic fits; businesses are said t0 be unrelated when their value chains are so dissimilar that no competitively valuable cross-business relationships exist." Most com- panies favor elated diversification strategies to capitalize on synergies as follows: © Transferring competitively valuable expertise, technological know-how, or other capabili- tics from one business to another = Combining the related activities of separate businesses into a single operation to achieve Tower costs * Exploiting common use of a well-known brand name * Cross-business collaboration to create competitively valuable resource strengths and capabilites! Diversification strategies are becoming less popular because organizations are finding it more difficult to manage diverse business activities. In the 1960s and 1970s, the trend was to diversify to avoid being dependent on any single industry, but the 1980s saw a general reversal of that thinking. Diversification is still on the retreat. Michael Porter, of the Harvard Business School, commented, “Management found it couldn't manage the beast.” Businesses are still selling, clos- ing, or spinning off less profitable or “different” divisions to focus on their core businesses. For example, ITT recently divided itself into three separate, specialized companies. At one time, ITT ‘owned everything from Sheraton hotels and Hartford Insurance to the maker of Wonder Bread and Hostess Twinkies. About the ITT breakup, analyst Barry Knap said, “Companies generally are not very efficient diversifiers investors usually can doa better job of that by purchasing stock in a variety of companies.” Rapidly appearing new technologies, new products, and fast-shifting buyer preferences make diversification difficult. www.ebook3000.com 29130 STRATEGIC MANAGEMENT Diversification must do more than simply spread business risks across different industries; after all, shareholders could accomplish this by simply purchasing equity in different firms across different industries or by investing in mutual funds. Diversification makes sense only to the extent that the strategy adds more to shareholder value than what shareholders could aecom- plish acting individually. Any industry chosen for diversification must be attractive enough to yield consistently high returns on investment and offer potential across the operating divisions for synergies greater than those entities could achieve alone. Many strategists contend that firms should “stick to the knitting” and not stray too far from the firms” basic areas of competence. ‘A fow companies today, however, pride themselves on being conglomerates, from small firms such as Pentair Inc. and Blount International to huge companies such as Textron, Berkshire Hathaway, Allied Signal, Emerson Electric, GE, Viacom, Amazon, Google, Disney, and ‘Samsung. Conglomerates prove that focus and diversity are not always mutually exclusive. In an unattractive industry, for example, diversification makes sense, such as for Philip Morris, because cigarette consumption is declining, product liability suits are a risk, and some investors reject tobacco stocks on principle Related Diversification Aleoa recently diversified further into the jet-engine parts industry by acquiring Firth Rixson Lid. for nearly $3 billion. The move away from total reliance on aluminum puts Alcoa in position to become a major player in the aerospace jet-engine market, Jet engines utilize alot of alumi- ‘num but still this strategy is best classified as related diversification rather than forward integra- tion due to the new high-tech competencies required. With its new Apply Pay product being linked with Beacon so stores can detect and locate iPhone users via a Bluetooth wireless signal as they enter the premises, Apple recently entered the online payments business, competing directly with PayPal. Using their iPhone and/or Apple ‘Watch, consumers can now make retail purchases by tapping their device at participating check- out registers. Apple is basically diversifying into the banking business with these new products, but the threat to PayPal in particular is spurring eBay and Google to cooperate in this arena, ‘The guidelines for when related diversification may be an effective strategy are as follows," 1. An organization competes in a no-growth or a slow-growth industry. 2. Adding new, but related, products would significantly enhance the sales of current products, but related, products could be offered at highly competitive prices. but related, products have seasonal sales levels that counterbalance an organization's ‘existing peaks and valleys. ‘5. An organization's products are currently in the declining stage of the product's life cycle. 66. An organization has a strong management team. Unrelated Diversification Privately held Mars Inc., best known for its M&M chocolates and its Mars and Snickers candy bas, ecently became the world’s largest pet-food company, purchasing 80 percent of Procter & Gamble’s pet-food brands for $2.9 billion, to go with its own Whiskas, Pedigree, and Royal Canin pet brands. Mars has over 25 percent market share inthe global pet-food industry, slightly ahead of Nestlé S.A., which owns Purina and Friskies. Google now offers an electric-powered driverless car that has no steering wheel, brake, or gas pedal; rather, the car is equipped with buttons for go and stop, and travels at a top speed of 25 mph. Further diversifying, Google recently acquired Skybox Imaging to collect and provide data from the sky using satellites that collect daly photos and video ofthe Earth. With the acquisition, Google is also trying to cover the globe with fast Internet access from the sky, using balloons, drones, and satellites Honda Motor Company diversified in 2015 by developing, producing, and marketing its first business jet, named the Hondalet HA-420 that has a range of 1,180 miles and a top speed ‘of 420 knots, and can carry seven passengers. This new product competes directly with the Cessna Citation M2 and Embraer Phenom 100E business jets. These business jets sell for about $4.5 million each.CHAPTER 4 + TYPES OF STRATEGIES ‘An unrelated diversification strategy favors capitalizing on a portfolio of businesses that are capable of delivering excellent financial performance in their respective industries, rather than striving to capitalize on value chain strategic fits among the businesses. Firms that employ unrelated diversification continually search across different industries for companies that can bbe acquired for a deal and yet have potential to provide a high retum on investment. Pursuing unrelated diversification eniails being on the hunt to acquire companies whose assets are under- valued, companies that are financially distressed, or companies that have high-growth prospects bout are short on investment capital Given below are 10 guidelines when unrelated diversification may be an especially effective strategy." 1, Revenues derived from an organization's current products or services would increase significantly by adding the new, unrelated products 2. An organization competes in a highly competitive or a no-growth industry, as indicated by low industry profit margins and returns. 3. An organization's present channels of distribution can be used to market the new products to current customers, 4, New products have countercyclical sales patterns compared to an organization's present products, 5. An organization's basic industry is experiencing declining annual sales and profits, 6, An organization has the capital and managerial talent needed to compete successfully in a new industry. 7. An organization has the opportunity to purchase an unrelated business that is an attractive investment opportunity 8. Financial synergy cxists between the acquired and acquiring firm, (Note that a key difference between related and unrelated diversification is that the former should be based on some ‘commonality in markets, products, ot technology, whereas the latter is based more on profit considerations.) 9. Existing markets for an organization's present products are saturated 410. Antitrust action could be charged against an organization that historically has concentrated ‘ona single industry. Defensive Strategies In addition to integrative intensive, and diversification strategics, organizations also could pursue defensive strategies such as retrenchment, divestiture, or liquidation, Retrenchment Retrenchment occurs when an organization regroups through cost and asset reduction to reverse declining sales and profits. Sometimes called a turnaround ot reorganizational strategy, retrench- ‘ment is designed to fortify an organization's basic distinctive competence. During retrenchment, strategists work with limited resources and face pressure from shareholders, employees, and the media. Retrenchment can involve selling off land and buildings to raise needed cash, prun- ing product lines, closing marginal businesses, closing obsolete factories, automating processes, reducing the number of employees, and instituting expense control systems, Levi Strauss & Co, recently cut 20 percent of its nontetail and nonmanufacturing work- force as part of a retrenchment strategy aimed at streamlining the firm's operations and generat- ing cost savings of nearly $200 million per year. The 160-year-old company headquartered in San Francisco is having trouble competing in the intensely competitive retail clothing industry, ‘marked by fleeting fashions and “sale only” shoppers. Cisco Systems recently removed 6,000 employees from its payrolls, comprising ® percent of the company’s total workforce. The routing and switching system company is experiencing declining revenue and profits. The Turner Broadcasting division of Time Warner recently deleted 1,415 jobs, or 10 percent of its workforce. The Turner division generates about half of Time ‘Warner's operating profit and has more than 5,000 full-time employees in its home city of Atlanta. Staples closed 170 stores in North America in 2014, and closed another 55 stores in 2015. www.ebook3000.com 131132 STRATEGIC MANAGEMENT In some cases, declaring bankruptey can be an effective retrenchment strategy. Bankruptcy can allow a firm to avoid major debt obligations and to void union contracts. There are five major types of bankruptcy: Chapter 10, Chapter 11, Chapter 2, Chapter 12, and Chapter 13. The first type, Chapter 10 bankruptcy, isa liquidation procedure used only when a corporation sees no hope of being able to operate successfully or to obtain the necessary creditor agreement. All the ‘organization's assets are sold in parts for their tangible worth. Several hundred thousand compa- nies declare Chapter 10 bankruptey annually. Chapter 11 bankruptcy applies to municipalities. Detroit, Michigan, isthe largest U.S. to declare bankruptcy, but others include Stockton, California, and Birmingham, Alabama. Chapter 2 bankruptcy allows organizations to reorganize and come back after filing a petition for protection. Quiznos recently filed Chapter 2 bankruptey as its 2,100 stores simply cannot compete with rival Subway's 41,000 stores. Quiznos collects a 7 percent royalty fee and another 4 percent advertising from is disgruntled franchisees, compated to the industry average 6 percent royalty fee and 2 percent marketing fee. The average Quiznos store has about $300,000 in annual revenue, down from $425,000 a few years ago. Also, Sbarro recently filed Chapter 2 bankruptcy for a second time in less than three years. The pizza chain blamed its recent financial troubles on “an unprecedented decline in mall taf- fic.” Based in Melville, New York, Sbarro isa privately held firm with about 800 stores in more than 40 countries, ‘An artficial-sapphire producer for Apple, GT Advanced Technologies, recently filed for bankruptcy, soon after Apple decided to go with glass screens rather than sapphire. GT’s stock price dropped 93 percent the same day the bankruptcy news released. By using sapphire, Apple was hoping for a more scratch- and shatter-esistant cover for its smartphones, but decided instead to use hardened glass. Chapter 12 bankruptcy was created by the Family Farmer Bankruptcy Act of 1986, This law provides special relief to family farmers with debt equal to or less than $1.5 million. Chapter 13 bankruptcy is a reorganization plan similar to Chapter 2, but it is available only to small businesses owned by individuals with unsecured debts of less than $100,000 and secured debts of less than $350,000. The Chapter 13 debtor is allowed to operate the business while a plan is being developed to provide for the successful operation of the business in the future. Five guidelines for when retrenchment may be an especially effective strategy to pursue are as follows:"* city 1, An organization has a clearly distinctive competence but has failed consistently to mect its objectives and goals overtime, An organization is one of the weaker competitors in a given industry, An organization is plagued by inefficiency, low profitability, poor employee morale, and pressure from stockholders to improve performance. 4, An organization has failed to capitalize on external opportunities, minimize external threats, take advantage of internal strengths, and overcome internal weaknesses over time; that is, when the organization's strategic managers have failed (and possibly will be replaced by more competent individuals), 55. An organization has grown so large so quickly that major internal reorganization is needed, Divestiture Selling a division or part of an organization is called divestiture. Its often used to raise capital for further strategic acquisitions or investments. Divestiture can be part of an overall retrench- ‘ment strategy to rid an organization of businesses that are unprofitable, that require too much capital, or that do not fit well withthe firm's other activities. Divestiture has also become a popu- lar strategy for fiems to focus on their core businesses and become less diversified, ‘The largest consumer-products company in the world, Procter & Gamble (P&G), is in the process of divesting (selling) more than half of its brands (nearly 100) in order to focus on its core brands (about 80). With brands such as Pampers, Tide, Era, Cheer, Metamucil, Clairol, Wella, Oral-B, Duracell, Fixodent, Ivory, and Clearblue (pregnancy tests), P&G has 23 brands that have more than $1 billion annual sales each. Ivory might be divested, as Americans have increasingly opted for body washes and liquid hand soap over plain bar soaps.CHAPTER 4 + TYPES OF STRATEGIES Airbus Group NV is in the process of divesting its defense assets in order to focus solely on its commercial-airplane business. Airbus is selling its secure-communications business, Fairchild Controls, as well as Rostock System-Technik, AvDef, ESG, and its Atlas Elektronik naval-tech- nology joint venture with ThyseenKrupp AG. Airbus is also divesting its 46 percent nonvoting interest in Dassault Aviation SA that makes France's Rafale combat jets and Falcon business jets. A version of divestiture occurs when a corporation splits into two or more parts. For exam- ple, Hewlett-Packard (HP) recently separated its personal computer and printer businesses from its corporate hardware and services operations. Most often, divested segments become sepa- rate, publically traded companies. Many large conglomerate firms are employing this strategy. Sometimes this strategy is a prelude to the firm selling the separated part(s) to a rival firm, such as HP's corporate hardware and services business perhaps merging with EMC Corporation. PepsiCo is under pressure to split its soft drinks division away from its snacks operations. Even General Electric is facing pressure from investors to spin off some of its diverse operations rang- ing from power plants to locomotives to MRI machines. Dupont is spliting off a segment that generates 20 percent of its revenue. Gannet Company, owner of USA Today and Wall Street Journal, recently split their print-publishing business from their television-film business. In 2014 alone, corporations globally split off about $2 trillion worth of subsidiaries. Part of the reason for splitting diversified firms is that the homogenous parts are generally much more attractive for potential buyers. Most times, the acquiring firms desire to promote homogeneity to complement their own operations, rather than heterogeneity, and are willing to pay for homo- geneity. For example, Fiat Chrysler Automobiles NV recently “spun off” its Ferrari segment into a separate IPO, possibly raising as much as $10 billion for Fiat In the United States, Ferrari sports cars are priced between $190,000 and $400,000, with limited edition models exceeding $3 million each. ‘Germany's huge power utility, E.ON SE, recently split into two companies, one focusing on the utility's green energy initiatives, while the other company is comprised of the firm's conven- tional power-generation operations. Germany isin the midst of an aggressive policy to phase out all of its nuclear energy power plants by 2025, Here are some guidelines for when divestiture may be an especially effective strategy to pursue:!® 1, An organization has pursued a retrenchment strategy and failed to accomplish needed, improvements. 2. To be competitive, a division needs more resources than the company can provide. 3. A division is responsible for an organization's overall poor performance. 4. A division isa misfit with the rest of an organization; this can result from radically differ- cent markets, customers, managers, employees, values, ot needs, 5. A large amount of cash is needed quickly and cannot be obtained reasonably from other 6. Government antitrust action threatens an organization, Liquidation Selling all of a company’s assets, in pars, for their tangible worth is called liquidation; it is associated with Chapter 10 bankruptcy. Liquidation is a recognition of defeat and consequently can be an emotionally difficult strategy. However, it may be beter to cease operating than to continue losing large sums of money. For exaniple, based in New York City, Crumbs Bake Shop, the nation’s largest eupeake company, filed for Chapter 10 bankruptcy liquidation of ts 65 stores in 12 states and Washington, DC. Crumbs Bake Shop was famous for selling giant cupcakes in flavors such as Red Velvet, Cookie Dough, and Gitl Scouts Thin Mints. The company notified all its 165 full-time employees and 655 parttime hourly employees that the business was closing. Crumbs’ ast day on the Nasdaq was June 30, 2014, ata stock price of 11 cents. “The midwestern retailer, Alco Stores, in early 2015 liquidated (closed) allt stores after ear- lier operating under Chapter 2 bankruptey. Founded in 1901 as a generl-merchandising store in Abilene, Kansas, Alco had major ofices both in Abilene and in Coppell, Texas, More than 3,000 employees lost their job as Alco liquidated its asses. Based in Bonita Springs, Florida, one of the largest distributors of magazines in the United States, Source Interlink Distibution, recently liquidated, laying off its 6,000 employees and www.ebook3000.com 1333a STRATEGIC MANAGEMENT forgoing its $750 million a year in revenue. Source Interlink had played a major role in arranging for printed magazines to be distributed to retailers, large and small "These three guidelines indicate when liquidation may be an especially effective strategy to pursue:!” 1, An organization has pursued both a retrenchment strategy and a divestiture strategy, and rcither has been successful. 2. An organization's only alternative is bankruptcy. Liquidation represents an orderly and planned means of obtaining the greatest possible amount of cash for an organization's assets. A company can legally declare bankruptcy first and then liquidate various divisions to raise needed capital 3. The stockholders ofa firm can minimize their losses by selling the organization's assets, Michael Porter’s Five Generic Strategies Probably the three most widely read books on competitive analysis in the 1980s were Michael Porter’s Competitive Strategy (1980), Competitive Advantage (1985), and Competitive Advantage of Nations (1989). According to Porter, strategies allow organizations to gain competitive advan- tage from three different bases: cost leadership, differentiation, and focus. Porter calls these bases generic strategies. Cost leadership emphasizes producing standardized products ata low per-unit cost for con- sumers who are price sensitive. TWwo alternative types of cost leadership strategies can be defined. Type 1 is a low-cost strategy that offers products or services to a wide range of customers at the lowest price available on the market. Type 2 is a best-value strategy that offers products or set- vices to a wide range of customers atthe best price-value available on the marker. The best-value strategy aims to offer customers a range of products or services at the lowest price available compared to a rival's products with similar attributes. Both Type I and Type 2 strategies target a large market, Porter's Type 3 genetic strategy is differentiation, a strategy aimed at producing products, and services considered unique to the industry and directed at consumers who are relatively price insensitive Focus means producing products and services that fulfill the needs of small groups of consumers. Two alternative types of focus strategies are Type 4 and Type 5. Type 4 is a low- cost focus strategy that offers products ot services to a small range (niche group) of customers at the lowest price available on the market. Examples of firms that use the Type 4 strategy include Jiffy Lube International and Pizza Hut, as well as local used car dealers and hot dog restaurants, Type 5 is a best-value focus strategy that offers products or services to a small range of customers at the best price-value available on the market. Sometimes called “Focused differentiation,” the best-value focus strategy aims to offer a niche group of customers the products or services that meet their tastes and requirements better than rivals’ products do. Both Type 4 and Type 5 focus strategies target a small market. However, the difference is that Type 4 strategies offer products or services to a niche group at the lowest price, whereas Type 5 offers products and services to a niche group at higher prices but loaded with features so the offerings are perceived as the best value. Bed-and-breakfast inns and local retail boutiques are examples of Type 5 firms. Porter's five strategies imply different organizational arrangements, control procedures, and incentive systems. Larger firms with greater access to resources typically compete on a cost lead- ership or differentiation basis, whereas smaller firms often compete on a focus basis. Porter's five genetic strategies are illustrated in Figure 4-3. Note that a differentiation strategy (Type 3) can be pursued with either a small target market or a large target market. However, itis not effective to pursue a cost leadership strategy in a small market because profits margins are generally too small Likewise, it is not effective to pursue a focus strategy ina large market because economies of scale would generally favor a low-cost or best-value cost leadership strategy to gain or sustain competitive advantage. Porter stresses the need for strategists to perform cost-benefit analyses to evaluate “shar- ing opportunities” among a firm’s existing and potential business units, Sharing activities and