Chapter 5:

Strategies in Action
2
Strategies in Action

Strategies for taking the hill won’t necessarily

hold it. –
Amar Bhide

The early bird may get the worm, but the

second mouse gets the cheese. –
Unknown

Ch 5 -3
Strategies in Action

Companies Embrace Strategic Planning

- Quest for higher revenues

- Quest for higher profits

Ch 5 -4
Long-Term Objectives

Strategists Should Avoid:

Managing by Extrapolation
Managing by Crisis
Managing by Subjectives
Managing by Hope:

Ch
5 -5
Long-Term Objectives
• Strategies represent actions to accomplish long-term
objectives
 Objectives must be:
1. Quantifiable
2. Measurable
3. Realistic
4. Understandable
5. Challenging
6. Hierarchical
7. Obtainable
8. Congruent
9. Time-line

Ch
5 -6
Varying Performance Measures by Organizational
Level

Ch 5 -7
Financial vs. Strategic Objectives

Strategic Objectives:
Financial Objectives: Larger market share
Growth in revenues Quicker on-time delivery than
Growth in earnings rivals

Higher dividends Quicker design-to-market

times than rivals
Higher profit margins
Lower costs than rivals
Higher earnings per share
Higher product quality than
Improved cash flow rivals
Wider geographic coverage
than rivals

Ch
5 -8
Financial vs. Strategic Objectives

Maximize short
term financial
Harm long-term
objectives
strategic objectives
Increase market Sacrifice short-term
share profitability
Increase cost
Concerns for
ethics

Trade-Off

Ch
5 -9
Types of Strategies
Corp
A Large Company Level

Division Level

Functional Level

Operational Level

Ch
5-
10
Types of Strategies

A Small Company
Company
Level

Functional Level

Operational Level

Ch
5-
11
Types of Strategies

Forward
Integration

Vertical Backward
Integration Integration
Strategies

Horizontal
Integration

Gaining control of retailers, distributors and competitors

Ch
5-
12
Forward Integration Strategies
Current distributors
– expensive or
unreliable

Availability of
quality distributors
– limited

Firm competing in
Suitable if: industry expected Gaining control over retailers
to grow markedly

Firm has both

capital & HR to
manage new
business of
distribution

Current distributors
have high profit
margins

Ch
5-
13
Backward Integration Strategies

Number of suppliers,
Current suppliers are
number of competitors
expensive or unreliable
is large

Suitable if:

Firm has both capital

High industry growth and HR to manage new Taking control of suppliers
business

Stable prices are Current suppliers have

important high profit margin

Ch
5-
14
Horizontal Integration Strategies

Gain monopolistic
characteristics w/o federal
government challenge

Compete in growing industry

Increase economies of scale –

major competitive advantages

Firms take control over competitors to:

Ch
5-
15
Types of Strategies

Market
Penetration

Intensive Market
Strategies Development

Product
Development

Increase competitiveness by intensifying efforts on existing products

Ch
5-
16
Market Penetration Strategies
Increase market share using:
• Present products/services
• Present markets
• Greater marketing efforts

Guideline:
 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-
17
Market Development Strategies

Increase market share by introducing present

products/services in new geographic areas
Guideline:
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-
18
Product Development Strategies

Increase sales by:

Improving present products/services
Developing new products/services

Guideline:
Products in maturity stage of life cycle
Industry characterized by rapid technological
development
Competitors offer better-quality products at
comparable prices
Compete in high-growth industry
Strong R&D capabilities
Ch
5-
19
 Types of Strategies

Related
Diversification

Diversification
Strategies

Unrelated
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-
20
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 -21
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-
22
 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 -23
 Related Diversification May be Effective
When:
• New, but related, products have seasonal sales levels that
counterbalance an organization’s existing peaks and valleys
• An organization’s products are currently in the declining stage of
the product’s life cycle
• An organization has a strong management team

Ch 5 -24
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-
25
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 -26
Unrelated Diversification May be
Effective When:
• Revenues derived from an organization’s current
products or services would increase by adding new
unrelated products
• An organization competes in a highly competitive or a no
growth industry
• An organization’s current distribution channels can be
used to market new products to existing customers
• New products have countercyclical sales patterns
• An organization’s 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 -27
 Unrelated Diversification May be
Effective 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 -28
Types of Strategies

Retrenchment

Defensive Divestiture
Strategies

Liquidation

Ch
5-
29
Retrenchment Strategies

Regrouping is called for when cost & asset

reduction can reverse declining sales & profit
Guideline:
oFailed to meet objectives & goals consistency; has
distinctive competencies
oFirm is one of weaker competitors
oInefficiency, low profitability, poor employee morale,
pressure for stockholders
oStrategic managers have failed
oRapid growth in size; major internal reorganization
necessary

Ch
5-
30
Divestiture Strategies
Selling a division or part of an organization
Guideline:
Retrenchment failed to attain improvements
Division needs more resources than are available
Division responsible for firm’s 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-
31
Liquidation Strategies

Selling company’s assets, in parts, for

their tangible worth
Guideline:
Retrenchment & divestiture failed
Only alternative is bankruptcy
Minimize stockholder loss by selling firm’s assets

Ch
5-
32
Michael Porter’s Generic Strategies

Cost Leadership Strategies

Differentiation Strategies

Focus Strategies

Ch 5 -33
Ch 5 -34
Generic Strategies
Cost Leadership
(Type 1 and Type 2)
In conjunction with differentiation
Economies or diseconomies of
scale
Capacity utilization achieved
Linkages with suppliers &
distributors
Ch
5-
35
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 firm’s overall value chain to eliminate or bypass some cost-
producing activities

Ch 5 -36
Cost Leadership
• Can be especially effective when:
1. Price competition among rivals is vigorous
2. Rival’s 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 -37
Generic Strategies

Low Cost Producer Advantage

Many price-sensitive buyers

Few ways of achieving differentiation
Buyers not sensitive to brand
differences
Large # of buyers with bargaining
power
Ch
5-
38
Generic Strategies
Differentiation (Type 3)

Greater product flexibility

Greater compatibility
Lower costs
Improved service
Greater convenience
More features

Ch
5-
39
Differentiation
• Can be especially effective when:
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 -40
Generic Strategies

Focused Strategies (Type 4 & 5)

Industry segment of sufficient size

Good growth potential
Not crucial to success of major competitors

Ch
5-
41
Focused Strategy
• Can be especially effective when:
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 -42
Ch 5 -43
Means for Achieving Strategies

Joint Venture/Partnering -

 Two or more companies form a temporary

partnership or consortium for purpose of
capitalizing on some opportunity

Ch 5 -44
Reasons why Mergers and Acquisitions Fail

• Integration difficulties
• Inadequate evaluation of target
• Large or extraordinary debt
• Inability to achieve synergy

Ch 5 -45
Means for Achieving Strategies

Cooperative Arrangements -

 R&D partnerships
 Cross-distribution agreements
 Cross-licensing agreements
 Cross-manufacturing agreements
 Joint-bidding consortia

Ch 5 -46
Means for Achieving Strategies

Why Joint Ventures Fail -

 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

Ch 5 -47
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-
48
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 -49
Means for Achieving Strategies

Mergers & Acquisitions

 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

Ch 5 -50
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-
51
First Mover Advantages

 Benefits a firm may achieve by entering a

new market or developing a new product or
service prior to rival firms

Ch 5 -52
First Mover Advantages

Potential Advantages

 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

Ch 5 -53
Outsourcing

Benefits
 Less expensive
 Allows firm to focus on
core business
 Enables firm to provide
better services

Ch 5 -54
Outsourcing
Business-process outsourcing
(BPO)

 Companies taking over the functional

operations of other firms

Ch 5 -55