2david - sm16 - ppt05

Strategic Management Concepts: A
Competitive Advantage Approach

Sixteenth Edition
Chapter 2
Strategies in Action
Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved
Learning Objectives (1 of 2)
5.1 Identify and discuss eight characteristics of objectives and
ten benefits of having clear objectives.
5.2 Define and give an example of eleven types of strategies.
5.3 Identify and discuss the three types of “Integration
Strategies.”
5.4 Give specific guidelines when market penetration, market
development, and product development are especially
effective strategies.
5.6 Explain when diversification is an effective business
strategy.
Learning Objectives (2 of 2)
5.6 List guidelines for when retrenchment, divestiture, and
liquidation are especially effective strategies.
5.7 Identify and discuss Porter’s five generic strategies.
5.8 Compare (a) cooperation among competitors, (b) joint
venture and partnering, and (c) merger/acquisition as key
means for achieving strategies.
5.9 Discuss tactics to facilitate strategies, such as (a) being
a first mover, (b) outsourcing, and (c) reshoring.
5.10 Explain how strategic planning differs in for-profit, not-
for-profit, and small firms.
Long-Term Objectives
• The results expected from pursuing certain strategies
• 2-to-5 year timeframe
Three levels of strategy in organizations
Corporate strategies
Corporate strategies
• Top level management formulate for overall organization

• The question at the corporate level we should answer
when design strategies: In what industry should we be
operating?
• It depends on the outcome of SWOT analysis.
7
Formulating Corporate-level Strategy
– Grand strategy or corporate level strategy is
a master strategy which provides the basic
strategic direction at corporate level.
– In grand strategies, there are three basic
directions:
 Growth
 Stability
 Defensive
Growth Strategies
Growth Strategies
Growth strategy: is a grand strategy involving organizational expansion.
 Merger
 Acquisition (Takeover)
 Concentric Diversification
 Conglomerate Diversification
 Joint Venture
 Strategic Alliance
 Horizontal integration:
 Vertical Integration (Forward and Backward)
 Market development:
 Product development:
 Market Penetration
10
Types of Strategies
Vertical Integration Joint Ventures
Horizontal Integration Strategic Alliance
Product Development Conglomerate Diversification
Market Penetration Concentric Diversification
Merger
Market Development
Acquisition (Takeover)
11
MERGER
• A Merger is a combination of two or more

businesses in which one acquires the asset and
liabilities of the other in exchange for stock or
cash or both.
PROS OF MERGER
• The firm enjoys economies of scale

• To utilize the fund in maximizing way
• The firm will be in a position to diversify the
activities
• The more effective and efficient utilization
of resources
• Revival of sick unit
CONS OF MERGER
• The psychological problem of the top management

of merging the firm
• Negative attitude of the senior partner towards the
junior partner
• The merger leads to the concentration of economic
power, monopolistic conditions and thereby
political power, higher prices, restricted supply etc.
ACQUISITIONS OR
TAKEOVER
Acquisition is the attempt of one firm to

acquire ownership or control over another
firm against the wishes of latter’s
management (takeover)
WHY TO TAKE PLACE THE TAKE
OVER?
• To reduce the competition by purchasing

a competitor
• To acquire the needed resources quickly
• For tax reasons it may be desirable to
purchase a firm with tax losses which will
offset the current or future earning
• To increase efficiency and profitability
Joint Ventures
• Two or more sponsoring firms forming a separate

organization for cooperative purposes.
• Company A + Company B = New Company C
17
Joint Ventures Examples
• Sony- Ericson
• Daimler-Chrysler
• Cadbury-Schweppes
• Siemens-Nokia
18
Strategic Alliances
• Strategic alliances are distinguished from

joint ventures because the companies
involved do not take an equity position in
one another but they share resources,
products, services, etc…...
19
Examples of Alliance Starbucks
Starbucks partnered with Barnes and

Nobles bookstores in 1993 to provide in-
house coffee shops, benefiting both
retailers.
In 1996, Starbucks partnered with Pepsico to

bottle, distribute and sell the popular coffee-
based drink, Frappacino.
A Starbucks-United Airlines alliance has resulted

in their coffee being offered on flights with the
Starbucks logo on the cups.
20
Examples of Alliances
•Star Alliance – Airlines alliances.
•Philips and Sony jointly launched the mini-CD.
•McDonald’s with Disney, Coca-Cola & Walmart
•Motorola-Toshiba: In 1987- Toshiba to produce

microprocessors & contribute access to the distribution
network.
21
Vertical and Horizontal Integration
22
Horizontal Integration
Horizontal Integration
A grand strategy based on growth through

the acquisition of similar firms operating at
the same stage of the production-marketing
chain.
Example 1
US Airways merging with

Piedmont Airlines
24
Example 2
Exxon Acquiring Mobil in

2000 for $85.1 Billion
Vertical Integration
A grand strategy based on the acquisition of firms

that supply the acquiring firm with inputs or new
customers for its outputs.
Backward VI is the desire to increase the
dependability of the supply or quality of the raw
materials used as production inputs
Forward VI is the desire to gain greater control of
the distribution/marketing/selling/service of products
or services
26
Example 1
AT&T has ownership over companies that

transmit equipments, including stations, cable
lines, telephones, etc. which tremendously
helped AT&T in providing one stop services and
products. Without paying AT&T for its entitled
infrastructure, other companies would never be
able to use or provide similar services or
products which AT&T is said to be a “dominating
winning mix”.
Example 2
• Starbucks originally started as a roaster

and retailer of coffee-beans, when its
founder, Howard Schultz joined the
company as a young salesman. The
company is immensely vertically integrated
for one purpose alone, maintaining perfect
quality throughout the value-chain.
Example 3
• Apple figured out how to link the content, the

hardware, the software, and the pricing and
distribution mechanisms, all more or less
under one company's control. However, Apple
is controlling the parts of the operation that
touch customer experience. Apple has dug
even deeper into vertical integration by
announcing that it now intends to design the
microchips that go into some of its products.
Concentric (related) Diversification
• Concentric diversification involves the

acquisition of businesses that are related
to the acquiring firm in terms of
technology, markets, or products
• With this grand strategy, the selected new
businesses possess a high degree of
compatibility with the firm’s current
businesses
30
Example 1
• The recent entry of Bell Atlantic Corporation, a

telephone company, into the video programming
business.
Example 2
Dell Computers is pursing concentric

diversification by manufacturing and marketing
consumer electronic products (Flat Panel TVs,
MP3 players, online music-downloading store.)
This is an example of Personal computer business
becoming more aligned with the entertainment
business because both are becoming more and
more digital.
Conglomerate (unrelated)
Diversification
• Occasionally a firm, particularly a very large

one, plans acquire a business because it
represents the most promising investment
opportunity available. This grand strategy is
commonly known as conglomerate
diversification.
• The principal concern of the acquiring firm is
the profit pattern of the venture
33
Example 1
• General Electric is an example of a firm that

is highly diversified. GE makes
locomotives, light bulbs, and refrigerators.
GE manages more credit cards than
American Express. GE owns more aircraft
that American Airlines.
Example 2
• ITC, a primarily cigarette company, is

pursing conglomerate diversification by
entering into hotel industry.
Synergies of Related Diversification
• Transferring competitively valuable expertise,
technological know-how, or other capabilities from one
business to another
• Combining the related activities of separate businesses
into a single operation to achieve lower costs
• Exploiting common use of a known brand name
• Using cross-business collaboration to create strengths
Related Diversification Guidelines
• When an organization competes in a no-growth or a slow-
growth industry
• When adding new, but related, products would significantly
enhance the sales of current products
• When new, but related, products could be offered at highly
competitive prices
• When new, but related, products have seasonal sales levels that
counterbalance an organization’s existing peaks and valleys
• When an organization’s products are currently in the declining
stage of the product’s life cycle
• When an organization has a strong management team
Unrelated Diversification Guidelines (1 of 2)
• When revenues derived from an organization’s current products
would increase significantly by adding the new, unrelated
products
• When an organization competes in a highly competitive or a no-
growth industry, as indicated by low industry profit margins and
returns
• When an organization’s present channels of distribution can be
used to market the new products to current customers
• When the new products have countercyclical sales patterns
compared to present products
• When an organization’s basic industry is experiencing declining
annual sales and profits
Unrelated Diversification Guidelines (2 of 2)
• When an organization has the capital and managerial
talent needed to compete successfully in a new industry
• When an organization has the opportunity to purchase an
unrelated business that is an attractive investment
opportunity
• When there exists financial synergy
• When existing markets for an organization’s present
products are saturated
• When antitrust action could be charged against an
organization that historically has concentrated on a single
industry
Market Penetration
• Is the growth strategy in which the company

sells more of the existing products to
customers in existing markets or segments
(increasing Market share).
• It is especially viable for companies that can
build on established customer relationships
and positive value perceptions.
Example 1
• In 2011, McDonald’s uses promotional

campaign “Monopoly” to increase the rate of
use of their current customers. If you make a
game out of it, people will purchase your
products to play.
41
Example 2
• Paypal revolutionized financial services through

its on-line person-to-person (P2P) money
transfer service. Paypal’s growth strategy is to
increase its customer base and sales through
focusing on its online payment market.
42
Market Development
Market development involves identifying and

reaching new segments or markets for existing
products.
43
Example 1
• Pacific Andes achieved considerable growth in

seafood and vegetable business within a short
span expanding into other countries. It also
increased its global market share and gained a
sustainable competitive advantage through
synergy.
Example 2
Toyota expanded its presence in the

European car market. Toyota succeeded in
localizing its strategies in tune with the needs
of the European car market. Toyota also
analyzed its strategy in Europe in the wake of
currency fluctuations and the new needs of
the market.
Product Development
A grand strategy that involves the substantial

modification of existing products that can be
marketed to current customers.
46
Example 1
The entire Nikon group is implementing the
“Nikon Product Assessment” to create new
products which offer enhanced power
consumption efficiency, are smaller and lighter,
use less harmful substances, and utilize Eco-
glass.
Example 2
The Nissan Leaf: With environmental concerns

growing among consumers, rising gasoline prices
and a desire for a reliable vehicle, Nissan embarked
on becoming the first to develop an electric vehicle.
The Nissan Leaf was rolled out for public purchase in
2008. Nissan has remained a leader in the electric
vehicle market.
48
Stability Strategies
Stability strategies: strategies involving maintaining

the status quo or growing in a methodical but slow
manner. Three types of stability strategies.
• PAUSE/PROCEED WITH CAUTION

STARATEGY
• NO CHANGE STRATEGY
• PROFIT STARATEGY
50
• PAUSE/PROCEED WITH CAUTION STARATEGY

• The Pause/Proceed with Caution Strategy is well
understood by the name itself, is a stability strategy
followed when an organization wait and look at the market
conditions before launching the full-fledged grand
strategy.
• NO CHANGE STRATEGY
• The No-Change Strategy, as the name itself suggests, is
the stability strategy followed when an organization aims
at maintaining the present business definition.
51
• PROFIT STRATEGY
• A profit strategy is one that capitalizes on a situation in
which old and obsolete product or technology is being
replaced by a new one. This type of strategy does not
require new investment, but it requires more focus on
operational efficiency. Firms adopting this strategy decide
to follow the same technology, at least partially, while
transiting into new technological domains.
• Sylvania, RCA, and GE are among the firms that followed
this strategy. They decided to stay in the vacuum tube
market till end of the game.
52
Types of Strategies
• 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 and priorities must be
established.
Defensive Strategies
Defensive strategy: strategies focusing on the desire

or need to reduce organizational operations,
usually through costs or asset reduction.
 Retrenchment (Turnaround):
 Divestiture:
 Liquidation:
 Bankruptcy
55
• Retrenchment (Turn Around)

– occurs when an organization regroups
through cost and asset reduction to reverse
declining sales and profits
– also called a turnaround or reorganizational
strategy
– designed to fortify an organization’s basic
distinctive competence
– Example Xerox company
56
• Divestiture
– Selling a division or part of an organization
– often used to raise capital for further
strategic acquisitions or investments
– Examples: Harcourt General, the large US
publisher, is selling its Neiman Marcus
division.
– Marriot group sold the time-share division
57
• Liquidation
– selling all of a company’s assets, in
parts, for their tangible worth
– can be an emotionally difficult strategy
– Example: El-Ameer Block factory in

Jordan sold all its assets and ceased
business.
58
• Bankruptcy
– Filing for bankruptcy
– Bankruptcy is a legal process under
which a borrower protects and/or
liquidates assets in order to repay debts
– Examples: Toys "R" Us, Goody's, Castle
Megastore, S&K Menswear, Dunkin'
Donuts, …..
59
Retrenchment Guidelines
• When an organization has a distinctive competence but
has failed consistently to meet its goals
• When an organization is one of the weaker competitors in
a given industry
• When an organization is plagued by inefficiency, low
profitability, and poor employee morale
• When an organization fails to capitalize on external
opportunities and minimize external threats
• When an organization has grown so large so quickly that
major internal reorganization is needed
Divestiture Guidelines
• When an organization has pursued a retrenchment
strategy and failed to accomplish improvements
• When a division needs more resources to be competitive
than the company can provide
• When a division is responsible for an organization's overall
poor performance
• When a division is a misfit with the rest of an organization
• When a large amount of cash is needed quickly
• When government antitrust action threatens a firm
Liquidation Guidelines
• When an organization has pursued both a retrenchment
strategy and a divestiture strategy, and neither has been
successful
• When an organization’s only alternative is bankruptcy
• When the stockholders of a firm can minimize their losses
by selling the organization’s assets
Means for Achieving Strategies
• Cooperation Among Competitors
• Joint Venture/Partnering
• Merger/Acquisition
• Private-Equity Acquisitions
• First Mover Advantages
• Outsourcing/Reshoring
Table 5-5 Nine Reasons Why Many Mergers
and Acquisitions Fail
1. Integration difficulties
2. Inadequate evaluation of target
3. Large or extraordinary debt
4. Inability to achieve synergy
5. Too much diversification
6. Managers overly focused on acquisitions
7. Too large an acquisition
8. Difficult to integrate different organizational cultures
9. Reduced employee morale due to layoffs and relocations
Table 5-6 Eleven Potential Benefits of
Merging With or Acquiring Another Firm
1. To provide improved capacity utilization
2. To make better use of the existing sales force
3. To reduce managerial staff
4. To gain economies of scale
5. To smooth out seasonal trends in sales
6. To gain access to new suppliers, distributors,
customers, products, and creditors
7. To gain new technology
8. To gain market share
9. To enter global markets
10. To gain pricing power
11. To reduce tax obligations
Table 5-7 Five Benefits of a Firm Being the
First Mover
Secure access and commitments to rare resources.

Gain new knowledge of critical success factors and issues.
Gain market share and position in the best locations.
Establish and secure long-term relationships with customers, suppliers,
distributors, and investors.
Gain customer loyalty and commitments.
REVIEW QUESTIONS
7-67
Review Questions
1) Long-term objectives are needed at which level(s) in an organization?
A) Corporate
B) Divisional
C) Functional
D) All of the above
E) None of the above
2) Which level of strategy is most likely not present in small firms?
A) Company
B) Functional
C) Divisional
D) Operational
E) All of the above are present in small firms.

Review Questions
3) Starbucks reaching a deal with Green Mountain Coffee Roasters for that firm to sell packs of
Starbucks Tazo-branded coffee and tea in their brewers is an example of which type of strategy?
A) Forward integration
B) Backward integration
C) Horizontal integration
D) Related diversification
E) Unrelated diversification
4) Marriott selling its timeshare business is an example of which type of strategy?
A) Related diversification
B) Unrelated diversification
C) Retrenchment
D) Divestiture
E) Liquidation
Review Questions
5) Which of the following is most likely NOT included in the functional level of a small
company?
A) Finance
B) Marketing
C) R&D
D) Department managers
E) Human resource managers
6) Integration strategies are sometimes collectively referred to as which of the following

categories of strategies?
A) Horizontal integration
B) Diversification
C) Vertical integration
D) Stuck-in-the-middle
70
E) Hierarchical integration
Review Questions
7) Which of these strategies is effective when the number of suppliers is small and the number
of competitors is large?
A) Conglomerate diversification
B) Forward integration
C) Concentric diversification
D) Backward integration
E) Horizontal diversification
8) What refers to a strategy of seeking ownership of, or increased control over a firm's
competitors?
A) Forward integration
B) Conglomerate diversification
C) Backward integration
D) Horizontal integration
E) Concentric diversification
71
Review Questions
9) Which strategy seeks to increase market share for present products or services in
present markets through greater marketing efforts?
A) Market penetration
B) Forward integration
C) Market development
D) Backward integration
E) Product development
10) When a domestic company first begins to export to India, it is an example of
A) horizontal integration.
B) backward integration.
C) forward integration.
D) concentric diversification.
E) market development.
72
Review Questions
11) Which strategy generally entails large research and development expenditures?
A) Market penetration
B) Retrenchment
C) Forward integration
D) Product development
E) Divestiture
12) Which strategy is appropriate when an organization competes in an industry characterized

by rapid technological developments?
A) Retrenchment
B) Product development
D) Liquidation
E) Market
73
penetration
Review Questions
13) Which strategy should an organization use if it competes in a no-growth or a
slow-growth industry?
A) Divestiture
B) Related diversification
D) Unrelated diversification
E) Retrenchment
14) Tyson Foods opening a manufacturing plan that makes diesel and jet fuel from
chicken fat, beef tallow, and leftover food grease from the firm's meat-processing
plants is an example of
A) backward integration.
B) divestiture.
C) retrenchment.
D) unrelated diversification.
E) forward integration.
74
Review Questions
15) Under which strategy would you offer products or services to a wide range of
customers at the lowest price available on the market?
A) Cost Leadership
B) Product Development
C) Focus – Cost Leadership
D) Focus – Differentiation
E) Differentiation
16) Under which condition would a cost leadership strategy be especially effective?
A) when there are many ways to differentiate the product or service and many buyers perceive these
differences as having value
B) when buyer needs and uses are diverse
C) when few rival firms are following a similar approach
D) when technological change is fast paced and competition revolves around rapidly evolving product
features
E) when the products of rival sellers are essentially identical and supplies are readily available from any
of several
75 eager sellers
Review Questions
17) Under which condition would a differentiation strategy be
especially effective?
A) when the target market niche is large, profitable and growing
B) when technological change is fast paced and competition revolves

around rapidly evolving product features
C) when industry leaders do not consider the niche to be crucial to their

own success
D) when the industry has many different niches and segments, thereby
allowing a company to pick a competitively attractive niche suited to its own
resources
E) when few, if any, other rivals are attempting to specialize in the same
target segment
76
Review Questions
18) Which strategy would be most appropriate when the distinctive competencies of two or
more firms complement each other especially well?
A) Conglomerate diversification
B) Divestiture
C) Joint venture
D) Retrenchment
E) Integration
19) When companies take over functional operations of other firms, such as human resources,
information systems, payroll, accounting, or customer service, this is called
A) marketing.
B) outsourcing.
C) licensing.
D) franchising.
E) divestiture.
77
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Strategic Management Concepts: A

Competitive Advantage Approach

• Top level management formulate for overall organization

Vertical Integration Joint Ventures

Horizontal Integration Strategic Alliance

Product Development Conglomerate Diversification

Market Penetration Concentric Diversification

• A Merger is a combination of two or more

• The firm enjoys economies of scale

• The psychological problem of the top management

Acquisition is the attempt of one firm to

• To reduce the competition by purchasing

• Two or more sponsoring firms forming a separate

• Company A + Company B = New Company C

• Strategic alliances are distinguished from

Starbucks partnered with Barnes and

In 1996, Starbucks partnered with Pepsico to

A Starbucks-United Airlines alliance has resulted

•Star Alliance – Airlines alliances.

•Philips and Sony jointly launched the mini-CD.

•McDonald’s with Disney, Coca-Cola & Walmart

•Motorola-Toshiba: In 1987- Toshiba to produce

A grand strategy based on growth through

US Airways merging with

Exxon Acquiring Mobil in

A grand strategy based on the acquisition of firms

AT&T has ownership over companies that

• Starbucks originally started as a roaster

• Apple figured out how to link the content, the

• Concentric diversification involves the

• The recent entry of Bell Atlantic Corporation, a

Dell Computers is pursing concentric

• Occasionally a firm, particularly a very large

• General Electric is an example of a firm that

• ITC, a primarily cigarette company, is

• Is the growth strategy in which the company

• In 2011, McDonald’s uses promotional

• Paypal revolutionized financial services through

Market development involves identifying and

• Pacific Andes achieved considerable growth in

Toyota expanded its presence in the

A grand strategy that involves the substantial

The Nissan Leaf: With environmental concerns

Stability strategies: strategies involving maintaining

• PAUSE/PROCEED WITH CAUTION

• PAUSE/PROCEED WITH CAUTION STARATEGY

Defensive strategy: strategies focusing on the desire

• Retrenchment (Turn Around)

– Example: El-Ameer Block factory in

Secure access and commitments to rare resources.

D) All of the above

E) None of the above

2) Which level of strategy is most likely not present in small firms?

E) All of the above are present in small firms.

4) Marriott selling its timeshare business is an example of which type of strategy?

E) Human resource managers

6) Integration strategies are sometimes collectively referred to as which of the following

10) When a domestic company first begins to export to India, it is an example of

12) Which strategy is appropriate when an organization competes in an industry characterized

B) when buyer needs and uses are diverse

C) when few rival firms are following a similar approach

A) when the target market niche is large, profitable and growing

B) when technological change is fast paced and competition revolves