Chapter 5 Fred David - Strategic Management_ A Competitive Advantage Approach, Concepts and Cases [Team-IRA]-Pearson (2023)-155-190

5
Chapter 10: Business Ethics, Environmental Sustainability, and Social Responsibility
Feedback Loop
The External
Assessment
Chapter 3
Implementing Implementing
Strategy
Business Strategies Strategy Strategies: Strategies:
Evaluation
Vision and Analysis and Management Finance and
in Action and
Mission Choice and Marketing Accounting
Chapter 5 Governance
Chapter 2 Chapter 6 Issues Issues
Chapter 9
Chapter 7 Chapter 8
The
Internal
Assessment
Chapter 4
Chapter 11: Global and International Issues
Strategy Strategy Strategy

Formulation Implementation Evaluation
FIGURE 5-1
The Comprehensive, Integrative Strategic-Management Model
Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22,
no. 1 (February 1989): 91. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and
Putu Artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for National
Construction Contractor of Indonesia,” Journal of Mathematics and Technology, no. 4 (October 2010): 20.
154
Strategies in Action
LEARNING OBJECTIVES
After studying this chapter, you should be able to do the following:
5-1. Identify and discuss 5 characteristics and 10 benefits of clear objectives.

5-2. Define and give an example of 11 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.
5-5. Explain when diversification is an effective business strategy.
5-6. List guidelines for when retrenchment, divestiture, and liquidation are especially effec-
tive strategies.
5-7. Explain value chain analysis and benchmarking in strategic management.
5-8. Identify and discuss Porter’s two generic strategies: cost leadership and differentiation.
5-9. Compare and contrast when companies should “build, borrow, or buy” as key means
for achieving strategies.
5-10. Discuss first-mover advantages and disadvantages.
5-11. Explain how strategic planning differs in for-profit, not-for-profit, and small firms.
ASSURANCE-OF-LEARNING EXERCISES
The following exercises are found at the end of this chapter:
SET 1: Strategic Planning for Coca-Cola

EXERCISE 5A: Develop Hypothetical Coca-Cola Company Strategies
EXERCISE 5B: Should Coca-Cola Build, Borrow, or Buy in 2020–2021?
SET 2: Strategic Planning for My University

EXERCISE 5C: Develop Alternative Strategies for Your University
SET 3: Strategic Planning for Myself

EXERCISE 5D: The Key to Personal Strategic Planning: Simultaneously Build and Borrow
SET 4: Individual versus Group Strategic Planning

EXERCISE 5E: What Is the Best Mix of Strategies for Coca-Cola Company?
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156 PART 2 • STRATEGY FORMuLATION
H
undreds of companies today have embraced strategic planning in their quest for higher
revenues and profits. Kent Nelson, former chair and CEO of UPS, explains why his com-
pany created a new strategic-planning department: “Because we’re making bigger bets
on investments in technology, we can’t afford to spend a whole lot of money in one direction and
then find out five years later it was the wrong direction.”1 As illustrated in Figure 5-1, long-term
objectives are needed before strategies can be generated, evaluated, and selected.
This chapter brings strategic management to life with many contemporary examples.
Different types of strategies are defined and exemplified, including Michael Porter’s generic
strategies: cost leadership and differentiation. Guidelines are presented for determining when
each strategy is most appropriate to pursue. The integral importance of value chain analysis and
benchmarking in strategic planning is revealed. An overview of strategic management in non-
profit organizations, governmental agencies, and small firms is provided. As showcased next,
Tim Cook is arguably the best strategist on the planet; he has led Apple to be the most admired
company in the world. Read to see why Cook and Apple are “insanely great.”
LO 5.1 Long-Term Objectives

Long-term objectives represent the results expected from pursuing certain strategies. Strategies
represent the actions to be taken to accomplish long-term objectives. The time frame for objec-
tives and strategies should be consistent, usually from 2 to 5 years. Without long-term objectives,
an organization would drift aimlessly toward some unknown end or become too focused on
short-term fads and stray away from the firm’s mission.
It is hard to imagine an organization or an individual being successful without clear objec-
tives. You probably have worked hard the last few years striving to achieve an objective to gradu-
ate with a business degree. Success rarely occurs by accident; rather, it is the result of hard work
directed toward achieving certain objectives.
Characteristics and Benefits of Objectives

Objectives should be quantitative, understandable, challenging, compatible (consistent vertically
and horizontally in a chain of command), and obtainable. Each objective should also be associ-
ated with a timeline. Objectives are commonly stated in terms such as growth in assets, growth
EXEMPLARY STRATEGIST SHOWCASED
Tim Cook, CEO of Apple, Inc.

The editor of Businessweek, Megan Murphy, recently asked the CEO of
Apple, Tim Cook, what he thought his legacy at Apple would be. Tim re-
sponded: “To be honest I don’t think about it; I think about doing stuff.” Ildogesto/Shutterstock
Cook went on to explain how and why Apple’s founder, Steve Jobs,
rather than himself, should be the person revered forever as Apple’s
supreme strategist extraordinaire. Cook told Megan that Apple in the
past, present, and future is all about its founder Jobs. Tim explained that
Job’s “DNA” or “ethos” is and always will be Apple’s “Constitution” or
guiding set of principles. According to Cook, Jobs’s ethos ingrained into
Apple forever include the following items (paraphrased):
1. Pay acute attention to detail. 7. Walk away and be honest with yourself when you do something
2. Keep it simple and genuinely care. wrong.
3. Focus on the user and user experience. 8. Never get married to your position or pride.
4. Focus on building the best. 9. Invest for the long-term rather than striving to be the first to
5. Follow the motto “good isn’t good enough”; every product and market with a product.
process must be, as Jobs’s often said, “insanely great.”
6. Apple should own the proprietary technology it uses to control Source: Based on Megan Murphy, “Tim Cook,” Bloomberg Businessweek, June
its own quality of product and user experience. 19, 2017, pp. 52–56.
CHAPTER 5 • STRATEGIES IN ACTION 157
in sales, profitability, market share, degree and nature of diversification, degree and nature of
vertical integration, earnings per share, and social responsibility. (Note: Do not emulate many
Annual Reports that print really vague objectives for the firm, such as Macy’s Annual Report that
states as objectives “to grow sales profitably” and “to improve return on invested capital.” Such
statements are useless in strategic planning.
Clearly established objectives offer many benefits. They provide direction, allow synergy, assist
in evaluation, establish priorities, reduce uncertainty, minimize conflicts, stimulate exertion, and aid
in both the allocation of resources and the design of jobs. Objectives provide a basis for consistent
decision making by managers whose values and attitudes differ. Objectives serve as standards by
which individuals, groups, departments, divisions, and entire organizations can be evaluated.
Table 5-1 and Table 5-2 summarize the desired characteristics and benefits, respectively, of
having clear objectives.
TABLE 5-1 Five Characteristics of Objectives
1. Quantitative: measurable
2. Understandable: clear
3. Challenging: achievable
4. Compatible: consistent vertically and horizontally in a chain of command
5. Obtainable: realistic
TABLE 5-2 10 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. Aid in allocation of resources.
9. Aid in design of jobs.
10. Provide basis for consistent decision making.
Financial versus Strategic Objectives

Two types of objectives are especially common in organizations: financial and strategic objec-
tives. Financial objectives include those associated with growth in revenues, growth in earn-
ings, higher dividends, larger profit margins, greater return on investment, higher earnings per
share, a rising stock price, improved cash flow, and all other objectives relating to the financial
position of the firm, whereas strategic objectives focus on goals for obtaining a competitive
advantage, including factors such as a larger market share, quicker on-time delivery than rivals,
lower costs than rivals, higher product quality than rivals, wider geographic coverage than rivals,
achieving technological leadership, and consistently getting new or improved products to mar-
ket ahead of rivals.
Often there is a trade-off between financial and strategic objectives such that crucial deci-
sions have to be made. For example, a firm can do certain activities to maximize short-term
financial objectives that would harm long-term strategic objectives. To improve financial posi-
tion in the short run through higher 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 profitability. Amazon, for example, operated for decades without
concern for profits, instead concentrating on gaining market share. There are other trade-offs
between financial and strategic objectives, related to riskiness of actions, concern for business
ethics, the need to preserve the natural environment, and social responsibility issues. Both fi-
nancial and strategic objectives should include annual and long-term performance targets.
Ultimately, the best way to sustain competitive advantage is to relentlessly pursue strategic ob-
jectives that strengthen a firm’s business position over rivals.
Avoid Managing by Crisis, Hope, Extrapolation, and Mystery (CHEM)

Derek Bok, former President of Harvard University, once said, “If you think education is expen-
sive, try ignorance.” The idea behind this saying also applies to establishing objectives because
strategists should avoid managing by CHEM.
• Managing By Crisis—Based on the belief that the true measure of a really good strate-
gist is 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 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 corner, especially if luck and good fortune are on our side.
• Managing By Extrapolation—Adheres to the principle “If it ain’t broke, don’t fix it.” The
idea is to keep on doing the same things in the same ways because things are going well.
• Managing By Mystery—Built on the idea that there is no general plan for which way to go and
what to do; 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 left to figure out what is happening and why).2
LO 5.2 Types of Strategies

Defined and exemplified in Table 5-3, alternative strategies that an enterprise could pursue can
be categorized into 11 actions: forward integration, backward integration, horizontal integration,
market penetration, market development, product development, related diversification, unrelated
diversification, retrenchment, divestiture, and liquidation. Each alternative strategy has countless
variations. For example, market penetration can include adding salespersons, increasing adver-
tising expenditures, couponing, and using similar actions to increase market share in a given
geographic area. Note for a particular company the strategy is very specific; be specific to the
extent possible in all aspects of strategic planning.
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; priorities must be established. Difficult deci-
sions must be made. Organizations, like individuals, have limited resources. Both organizations
and individuals must choose among alternative strategies and avoid excessive indebtedness.
TABLE 5-3 Alternative Strategies Defined and Recent Examples Given

Strategy Definition Example
Forward Integration Gaining ownership or increased con- Nike opening 100 outlet stores and sell-
trol over distributors or retailers ing 30% more products on its website
Backward Integration Seeking ownership or increased con- Boeing building 80% of its wing flap
trol over suppliers motors in-house
Horizontal Integration Seeking ownership or increased con- Nestlé purchasing Sweet Earth Foods
trol over competitors
Market Penetration Seeking increased market share for Cristiano Ronaldo and LeBron James
present products in present markets sign lifetime endorsement deal with
through greater marketing Nike
Market Development Introducing present products into Publix building 20 new supermarkets
new geographic area in North and South Carolina
Product Development Seeking increased sales by improv- Ford shifting one-third of its sched-
ing present products or developing uled R&D budget on gas/diesel en-
new ones gines to electric engines
Related Diversification Adding new but related products Walmart acquired Jet.com for
$3.3 billion
Unrelated Diversification Adding new, unrelated products CVS pharmacy acquiring Aetna
insurance
Retrenchment Regrouping through cost and asset Eli Lilly laying off 3,500 employees
reduction to reverse declining sales
and profit
Divestiture Selling a division or part of an Toshiba aims to sell its memory-chip
organization unit to Bain Capital
Liquidation Selling all of a company’s assets, in Ringling Bros. and Barnum & Bailey
parts, for their tangible worth Circus liquidated (last performance
was on May 21, 2017)
Strategic planning thus involves “choices that risk resources, and trade-offs that sacrifice
opportunity.” In other words, if you have a strategy to go north, then you must 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.” Strategy is all about “what to do” and “what not to do.”
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; it is an educated wager based on predictions and hypotheses that are continually tested and
refined by knowledge, research, experience, and learning. Survival of the firm often hinges on an
excellent strategic plan.3
Organizations cannot excel in multiple different strategic pursuits because resources and
talents get spread thin and competitors gain advantage. In large, diversified companies, a com-
bination strategy is commonly employed when different divisions pursue different strategies.
Organizations struggling to survive may simultaneously employ a combination of several defen-
sive strategies, such as divestiture and retrenchment.
Levels of Strategies
Strategy making is not just a task for top executives. Middle- and lower-level managers also must be
involved in the strategic-planning process to the extent possible. In large firms, there are actually four
levels of strategies: corporate, divisional, functional, and operational—as illustrated in Figure 5-2.
However, in small firms, there are three levels of strategies: company, functional, and operational.
Corporate
Level—chief
executive officer
Company
Divisional Level—division Level—owner
president or executive or president
vice president Functional Level—
finance, marketing, R&D,
Functional Level—finance, marketing, manufacturing, information
R&D, manufacturing, information systems, systems, and human
and human resource managers resource managers
Operational Level—plant managers, sales managers, Operational Level—plant managers, sales
production and department managers managers, production and department managers
Large Company Small Company
FIGURE 5-2
Levels of Strategies with Persons Most Responsible
The persons primarily responsible for having effective strategies at the various levels
include the CEO at the corporate level; the president of segments at the divisional level;
the chief finance officer (CFO), chief information officer (CIO), human resource manager
(HRM), chief marketing officer (CMO), other executives at the functional level, and the
plant manager, regional sales manager, and so on at the operational level. It is important that
all managers at all levels participate and understand the firm’s strategic plan to help ensure
coordination, facilitation, and commitment, while avoiding inconsistency, inefficiency, and
miscommunication.
Long-term objectives are needed at the corporate, divisional, functional, and opera-
tional levels of an organization. They are an important measure of managerial performance.
Bonuses or merit pay for managers today should be based to a greater extent on long-term
objectives and strategies. An example framework for relating objectives to performance
evaluation is provided in Table 5-4. A particular organization could tailor these guidelines
to meet their own needs, but incentives should be attached to both long-term and annual
objectives.
TABLE 5-4 Varying Performance Measures By Organizational Level

Organizational-Level Basis for Annual Bonus or Merit Pay
Corporate: overall firm 75% based on long-term objectives

25% based on annual objectives
Divisional such as by product or region 50% based on long-term objectives
Functional such as marketing and finance 25% based on long-term objectives
Operational such as manufacturing plants or stores 25% based on long-term objectives
LO 5.3 Integration Strategies

Forward integration and backward integration are sometimes collectively referred to as verti-
cal integration. Vertical integration strategies allow a firm to gain control over distributors
and suppliers, whereas horizontal integration refers to gaining ownership or control over
competitors. Vertical and horizontal actions by firms are broadly referred to as integration
strategies.
Historically, vertical integration strategies have been difficult to implement because of
the firm operating in businesses out of its core competency, and because large fixed costs are
generally associated with such strategies. For example, if Coke wished to vertically integrate,
it could acquire sugar farms to gain control over its suppliers and open its own brick-and-
mortar stores to gain control of distributors. Both would be excessively costly and divert
Coke from what it does best: producing beverage products. Although the risk of depending
on suppliers and distributors may be high, owning these businesses is often associated with
even greater risks. Viable options to vertical integration are joint ventures and strategic alli-
ances discussed later in the chapter. Opportunity costs associated with the resources used for
vertical integration usually could be more effectively deployed to other endeavors.
Forward Integration
Forward integration involves gaining ownership or increased control over distributors or retail-
ers as a means of moving closer to the end customer and cutting out the middleman. Increasing
numbers of manufacturers (suppliers) are pursuing forward integration to market the products
they produce. For example, Nike sells millions of shoes and shirts in a variety of retail stores rang-
ing from Foot Locker to J. C. Penney, but the company is rapidly boosting its direct-to-consumer
business, bypassing, and in some cases infuriating, retail stores. Nike’s forward-integration
strategy has hundreds of retail stores upset; sales on the Nike.com website recently rose 50 per-
cent. By 2020, Nike projects that its direct sales to consumers will exceed $16 billion annually
and account for one-third of the company’s revenue. At the three largest publicly traded U.S.
athletic retailers, Finish Line, Foot Locker, and Dick’s Sporting Goods, the percentage of their
merchandise that comes from Nike is 73, 73, and 19 percent, respectively, so these firms must
adapt or face disaster.
Forward integration is an increasingly popular strategy among U.S.-based restaurants.
Scores of mainstream restaurant chains now use or are developing online-ordering apps that often
entail delivery of food to customers. For example, Panera Bread has installed online-ordering
and delivery in about 50 percent of its restaurants. Panera employs more than 10,000 of its own
delivery drivers. Similarly, Dunkin’ Brands is now delivering doughnuts and coffee in Dallas,
Atlanta, Chicago, Los Angeles, and numerous other cities. Chipotle Mexican Grill has instituted
a second food assembly line in its restaurants to accommodate delivery and online orders. Taco
Bell now takes online orders and delivers in more than 50 markets through nearly 1,000 Taco
Bell restaurants. Online ordering and delivery of restaurant food in general is expected to soon
surpass pizzas.
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-
ute their products or services. Businesses can expand rapidly by franchising because costs and
opportunities are spread among many individuals. Total sales by franchises in the United States
exceed $1 trillion annually. There are about 800,000 franchise businesses in the U.S. Subway
is today in turmoil as the 100 percent franchised firm has mostly franchisees that disagree with
top executives on the overall vision and mission of the firm. Year 2017 was the fourth consecu-
tive year of declining sales at Subway. Top executives want to continue adding stores to the over
25,000 in the U.S., but franchisees cannot take further cannibalization caused by new Subways
opening nearby. Instead, franchisees want more control over their supplier choices, more ad-
vertising from corporate, more flexibility on what promotions to participate in, more R&D to
enhance a menu that has not changed much in a decade, and permission to add drive-through
services.
The following six guidelines indicate when forward integration may be an especially effec-
tive strategy:4
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 a rival could potentially sign an exclu-
sive contract, thus locking down a competitive advantage.
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 abil-
ity 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 is a strategy of seeking ownership or increased control of a firm’s sup-
pliers. 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 property in Costa Rica. This backward integration strategy was used primarily to de-
velop new coffee varieties and to test methods to combat a fungal disease known as coffee rust
that plagues the industry. Manufacturers, as well as retailers, purchase needed materials from
suppliers.
Consolidation in the aircraft parts industry has resulted in increased prices of these parts,
which has prompted Boeing and Airbus to begin producing many aircraft parts internally. Boeing
is constructing a plant in England that will produce motors that aid in the movement of wing
flaps. Airbus CEO Fabrice Bregier commented on how the firm continually reviews “make-or-
buy” decisions on most of its components used in aircraft construction.
Some industries, such as automotive and aluminum producers, are reducing their histori-
cal pursuit of backward integration; this practice is called de-integration. Instead of owning
their suppliers, companies negotiate with outside suppliers. Ford and Chrysler buy more than
half of their component parts from outside suppliers such as TRW, Eaton, General Electric
(GE), and Johnson Controls. This makes sense in industries that have global sources of sup-
ply. 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.
Four major U.S. hospital systems recently launched a nonprofit company to produce ge-
neric drugs in order to offset skyrocketing prices of drugs. The four firms are Intermountain
Healthcare, Ascension, SSM Health, and Trinity Health; these four organizations own hundreds
of hospitals.
Seven guidelines when backward integration may be an especially effective strategy are:5
1. An organization’s present suppliers are especially expensive, unreliable, or incapable of
meeting the firm’s needs for parts, components, assemblies, or raw materials.
2. The number of suppliers is small and the number of competitors is large.
3. An organization competes in an industry that is growing rapidly; this is a 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 of raw materials are of upmost importance.
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. Whenever various resources may be needed quickly.
Horizontal Integration
Horizontal integration is a strategy aimed at gaining control over a firm’s competitors; this is
arguably the most common growth strategy. Thousands of mergers, acquisitions, and takeovers
among competitors are consummated annually and most aim for increased economies of scale,
enhanced transfer of resources and competencies, reduced competition, and fewer price wars.
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 of the target.6
Walgreens Boot Alliance recently purchased two thousand Rite Aid stores; the remaining
two thousand Rite Aid stores are being acquired by Albertsons Companies LLC. Horizontal inte-
gration is often met with legal antitrust challenges as the one displayed with Walgreens and Rite
Aid, which took the Federal Trade Commission 18 months before giving final approval of the
deal.
The largest merger of homebuilders in 10 years occurred in 2018 when Lennar Corp. ac-
quired CalAtlantic Group to create a combined company with revenues more than $17 billion
annually. The next largest homebuilders in the United States in rank order are D. R. Horton,
PulteGroup, NVR, Toll Brothers, and KB Home.
Britain’s Cineworld Group PLC in 2018 acquired its U.S. counterpart Regal Entertainment
Group for $3.6 billion, creating the world’s second-largest movie cinema operator. The com-
bined company now has more than 9,000 movie screens. The largest firm in the industry is AMC
Entertainment Holdings that is part of China’s Dalian Wanda Group. Cinemark Holdings is the
third-largest cinema chain in the United States.
The following six guidelines indicate when horizontal integration may be an especially ef-
fective strategy:7
1. An organization can gain monopolistic characteristics in a particular area or region with-
out being challenged by the federal government for “tending substantially” to reduce
competition.
2. An organization competes in a growing industry.
3. 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.
5. When competitors are faltering and can be acquired at a discount.
6. When a firm desires to enter a new geographic market quickly.
Intensive Strategies LO 5.4

Market penetration, market development, and product development are sometimes referred to as
intensive strategies because they require intensive efforts if a firm’s competitive position with
existing products is to improve. Intensive strategies are normally good options because they
involve a firm sticking to what it does best with the only variation being (1) redoubling your
effort (market penetration), (2) taking what it does best on the “road” (market development), or
(3) improving on what it does best (product development). In contrast, forward and backward
integration and diversification strategies take firms away from their core products, services, or
competencies.
Market Penetration
A market penetration strategy seeks to increase market share for present products or ser-
vices 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 promotions, or
increasing publicity efforts. For example, Verizon is spending millions of dollars on a new
advertising theme named “Humanability” that tells stories about how Verizon’s technology
products are easing traffic flow, keeping fish fresh in transit, and supporting advancements in
virtual surgery and health care; this new theme replaces Verizon’s “Can You Hear Me Now?”
theme.
The following five guidelines indicate when market penetration may be an especially effec-
tive strategy:8
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, whereas total industry sales
have been increasing.
4. The correlation between dollar sales and dollar marketing expenditures historically has
been high.
5. Increased economies of scale provide major competitive advantages.
Market Development
Market development involves introducing present products or services into new geographic
areas. Tesla will soon manufacture (and sell) cars in China based on the Chinese government’s
plans to relax restrictions on automakers needing a local partner. For thousands of firms, market
development means adding facilities and operations globally. The Global Capsule 5 reveals a key
variable used to determine where we should concentrate new business.
GLOBAL CAPSULE 5
How Can a Firm Determine Where to Initiate New Business? Use Gross
Domestic Product (GDP) as a Guide.
Thousands of companies and organizations
desire to grow globally, but they are not sure GDP Percent
Country
where among the two-hundred-plus countries 2017 2018
Madrugada Verde/
in the world. A key barometer for examining
United States 2.1 2.5
how to determine where to begin or expand
Shutterstock
United Kingdom 1.5 1.4
company operations is gross domestic product
(GDP) of various countries. GDP is a quanti- Mexico 2.3 2.3
tative measure of a nation’s total economic Japan 1.5 0.9
output, growth, or activity over a specified Germany 2.1 1.6
period of time. According to a recent issue of Canada 3.0 1.9
Bloomberg Businessweek, the 2018 GDP will
China 6.8 6.4
be a bit less than 2017 for most countries, and the magical 4 per-
cent number is expected only in India and China for the sample India 7.1 7.0
countries.
Caveat: GPD is important, but consumption habits are more im- Also, brand recognition can likely transfer to a new market more eas-
portant. Does the foreign market value your product? If not, who ily when consumption habits are similar.
cares about GDP? Market development allows for good risk/reward
compared to other strategy types if consumption habits are similar Source: Based on Peter Coy, “The World Economy Should Grow Nicely
in the targeted markets because the firm continues to focus on its Again in 2018. (Unless Someone Does Something Dumb.)” Bloomberg
core competency rather than entering businesses it knows less about. Businessweek (November 6, 2017 to January 8, 2018):17.
Millions of small businesses annually add a second, third, or fourth store, office, or restau-
rant in new locations; that is market development. Dollar General is adding 1,000 new stores
every 12 months across the United States, primarily in poor, rural communities. There are pres-
ently more than 14,000 one-story plain yellow-and-black Dollar Generals in the United States,
more than Starbucks’ two-tailed green mermaid stores.
These following seven guidelines indicate when market development may be an especially
effective strategy:9
1. New channels of distribution are available that are reliable, inexpensive, and of good quality.
2. An organization is successful at what it does.
3. New untapped or unsaturated markets exist.
4. An organization has the needed capital and human resources to manage expanded
operations.
5. An organization has excess production capacity.
6. An organization’s basic industry is rapidly becoming global in scope.
7. Consumption habits of the firm’s products are similar in other geographic areas.
Product Development
Product development is a strategy that seeks increased sales by improving or modifying
present products or services. Product development usually entails large research-and-devel-
opment (R&D) expenditures. For example, Ford recently announced that up to one-third of its
R&D budget scheduled for research on combustible engines would be shifted to battery and
electric car research. Ford also shifted $7 billion in investment away from smaller cars into
trucks and SUVs.
Kellogg recently purchased RXBAR in a move to shift its product mix away from traditional
sugary breakfast foods such as Frosted Flakes and Pop-Tarts, which have experienced declining
sales in recent years as customers turn to more healthy options. RXBARs get their sweeteners
solely from dates rather than added sugar. In a similar product development move, Campbell
Soup recently acquired Pacific Foods, a firm that specializes in organic soups.
Automobile companies use product development extensively. Some old truck brands are
making a comeback as Americans buy more pickups and SUVs. For example, the follow-
ing brands are being reintroduced in the respective years given: Jeep Scrambler (2019), Jeep
Wagoneer (2019), Chevy Blazer (2019), Ford Bronco (2020), Ford Ranger (2019), and Land
Rover Defender (2019). The bulk of profits earned at Ford, GM, and Fiat Chrysler today come
from pickups and SUVs.
Product development overall is an excellent option because a firm does not stray far from
what it does best. The following five guidelines indicate when product development may be an
especially effective strategy to pursue:10
1. An organization has successful products that are in the maturity stage of the product life
cycle; the idea here is to attract satisfied customers to try new (improved) products as a re-
sult of their positive experience with the organization’s present products or services.
2. An organization competes in an industry that is characterized by rapid technological
developments.
3. Major competitors offer better-quality products at comparable prices.
4. An organization competes in a high-growth industry.
5. An organization has especially strong research and development capabilities.
Diversification Strategies LO 5.5

The two general types of diversification strategies are 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 to be unrelated when their value chains
are so dissimilar that few competitively valuable cross-business relationships exist.11 Most com-
panies favor related diversification strategies to capitalize on synergies such as follows:
• Transferring competitively valuable expertise, technological know-how, or other capabili-
ties from one business to another
• Combining related activities of separate businesses into a single operation to achieve lower costs
• Exploiting common use of a well-known brand name
• Cross-business collaboration to create competitively valuable resource strengths and
capabilities12
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 do a 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. Another highly diversified company, General
Electric, is selling off many of its diversified parts.
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 ex-
tent that the strategy adds more to shareholder value than what shareholders could accomplish
acting individually. Any industry chosen for diversification must be attractive enough to yield
consistently high returns on investment and offer potential synergies across the operating divi-
sions that are 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 few 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, 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
In a related diversification move, Walt Disney recently acquired 21st Century Fox’s film and TV stu-
dios in a deal worth over $52 million. The deal included Fox-owned cable networks, including FX
and National Geographic, and Fox’s stakes in international networks like Star TV, Sky, and Hulu.
Five guidelines reveal when related diversification may be an effective strategy to follow:13
1. An organization competes in a no-growth or a slow-growth industry.
2. Adding new, but related, products would significantly enhance the sale of current products.
3. New, but related, products could be offered at highly competitive prices.
4. New, but related, products have seasonal sales levels that counterbalance an organization’s
existing peaks and valleys.
5. An organization has a strong management team.
Unrelated Diversification
An unrelated diversification strategy favors capitalizing on a portfolio of businesses that are capa-
ble of delivering excellent financial performance in their respective industries, rather than striving
to capitalize on strategic fit among the businesses. Firms that employ unrelated diversification
continually search across different industries for companies that can be acquired for a deal and yet
have potential to provide a high return on investment. Pursuing unrelated diversification entails
being on the hunt to acquire companies whose assets are undervalued, companies that are finan-
cially distressed, or companies that have high-growth prospects but are short on investment capital.
In an unrelated diversification move, Amazon.com is planning to enter the $412 billion phar-
macy business. Today, 9 out of 10 patients pick up their prescriptions at a retail pharmacy, but
Amazon is betting that home delivery of pharmaceuticals are soon to be the rule rather than the
exception. Partly because of this external threat, CVS recently acquired the huge insurance firm,
Aetna, Inc., in an unrelated diversification move targeted to offset their reliance on the drugstore
industry, which as a whole has been experiencing faltering revenues and profits.
Five guidelines reveal when unrelated diversification may be an especially effective strategy
follow:14
1. Existing markets for an organization’s present products are saturated.
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 new products to
current customers.
4. New products have countercyclical sales patterns compared to an organization’s present
products.
5. An organization has the capital and managerial talent needed to compete successfully in a
new industry.
LO 5.6 Defensive Strategies

In addition to integrative, intensive, and diversification strategies, organizations also could pur-
sue defensive strategies such as retrenchment, divestiture, or liquidation. Retrenchment is a broad
term that can include divestiture and liquidation.
Retrenchment
Retrenchment occurs when an organization regroups through cost and asset reduction to re-
verse declining sales and profits. Sometimes called a turnaround strategy, retrenchment is de-
signed 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, pruning product
lines, closing marginal businesses, closing obsolete factories, automating processes, reducing the
number of employees, and instituting expense control systems.
Eli Lilly is cutting 8 percent of its global workforce mostly centered on the production and mar-
keting of existing drugs that are nearing patent expiration because competition from lower-priced
generics is forecasted to be fierce. Eli Lilly is deploying much of the salary savings into R&D of new
drugs.
The world’s largest seller of generic drugs, Teva Pharmaceutical Industries is laying off
25 percent of its workforce, or about 14,000 employees around the world, and closing facto-
ries and research centers, and suspending its dividend to cut costs. Headquartered in Tel Aviv,
Israel, Teva expects its retrenchment strategy to save $3 billion in costs in 2018–2019.
The action-camera company, GoPro Inc. in 2018 laid off one-fifth of its workforce and ex-
ited the drone market as part of the firm’s retrenchment strategy. As smartphone cameras and
videos have improved, GoPro’s camera business has suffered.
In some cases, declaring bankruptcy can be an effective retrenchment strategy. Bankruptcy
can allow a firm to avoid major debt obligations and to void union contracts. Chapter 7
bankruptcy is a 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 companies declare
Chapter 7 bankruptcy annually with most of the firms being small.
Chapter 11 bankruptcy allows organizations to retrench, reorganize, and come back after
filing a petition for protection. About 40 large U.S. retail companies declared bankruptcy in both
2017 and 2018, up from 18 in 2016. Firms declaring bankruptcy in 2017 included RadioShack,
Payless Shoes, The Limited, HHGregg, Rue 21, Gander Mountain, and Toys R Us. Other retail com-
panies closing stores rapidly and possibly heading for bankruptcy include Gymboree, Bebe, Crocs,
Gamestop, Sears/Kmart, J. C. Penney, Michael Kors, Staples, Macy’s, and Chico’s. A key problem
for retail firms is shoppers’ discount addiction spurred by Amazon’s prowess and also smartphone-
shopping tools and apps prompting never-ending price-cutting, price matching, and price wars. The
dramatic shift to online purchasing has also severely curtailed the need for brick-and-mortar stores
of all kinds.
Three guidelines reveal when retrenchment may be an especially effective strategy to pursue
follow:15
1. An organization is plagued by inefficiency, low profitability, poor employee morale, and
pressure from stockholders to improve performance.
2. 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 re-
placed by more competent individuals).
3. 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. It is often used to raise
capital for further strategic acquisitions or investments. Divestiture can be part of an overall
retrenchment strategy to rid an organization of businesses that are unprofitable, that require
too much capital, or that do not fit well with the firm’s other activities. Divestiture has also
become a popular strategy for firms to refocus on their core businesses and become less
diversified.
Volkswagen AG recently divested upward of 20 percent of the company’s assets that are
not part of the firm’s core business including the potential sale of Ducati, the motorcycle brand.
Commonwealth Bank of Australia recently divested all of its life insurance businesses in Australia
and New Zealand totaling more than $3 billion, partly in response to pressure from regulators in
the countries. Nestlé SA recently divested its U.S. chocolate segment to the Italian firm Ferrero
International SA for $2.8 billion, making the family-owned Ferrero company the third-largest
chocolate seller in the United States.
A form of divestiture occurs when a corporation splits into two or more parts. Most
often, divested segments become separate, publicly traded companies. Many large conglom-
erate firms are employing this strategy. Sometimes this strategy is a prelude to the firm
selling the separated part(s) to a rival firm. Corporations annually 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 to potential buyers. Most times, the acquiring firms
desire to promote homogeneity to complement their own operations, rather than heteroge-
neity, and are willing to pay for homogeneity. For example, Nacco Industries is divesting
its Hamilton Beach Brands appliances and a kitchen-accessory store chain in an effort to
refocus on its core coal and mining businesses. Nacco’s revenues are about $900 million
annually with Hamilton Beach bringing in about $605 million and Kitchen Collection about
$144 million. Similarly, Britain’s GKN PLC in 2018 split into two companies, separating its
aerospace and automotive businesses. Based in Redditch, England, GKN is one of Britain’s
oldest companies (250 years) and today has about 58,000 employees.
Another example is the German company Daimler AG in 2018 consolidating its five busi-
ness divisions into three separately registered, wholly-owned subsidiary companies. Analysts
expect the Daimler restructuring is a prelude for Daimler divesting (spinning off) the three seg-
ments into separate publicly listed companies: (1) Mercedes-Benz cars and vans, (2) Daimler
trucks and buses, and (3) Daimler Financial Services. Pfizer Inc. and Honeywell International
Inc. recently divested several of their major business units, spinning them off into separate pub-
licly listed companies.
Here are some guidelines for when divestiture may be an especially effective strategy to pursue:16
1. An organization has pursued a retrenchment strategy and failed to accomplish needed
improvements.
2. A division is responsible for an organization’s overall poor performance.
3. A division is a misfit with the rest of an organization; this can result from radically differ-
ent markets, customers, managers, employees, values, or needs.
4. A large amount of cash is needed quickly and cannot be obtained reasonably from other
sources.
5. Government antitrust action threatens an organization.
Liquidation
Selling all of a company’s assets, in parts, for their tangible worth is called liquidation.
Liquidation is a recognition of defeat and consequently can be an emotionally difficult strat-
egy. However, it may be better to cease operating than to continue losing large sums of money
Chapter 7 bankruptcy is a 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 organi-
zation’s assets are sold in parts for their tangible worth. Several hundred thousand companies
declare Chapter 7 bankruptcy annually with most of the firms being small.
The legendary, world famous, Ringling Bros. and Barnum & Bailey circus liquidated in
2017 after 146 years in business because of “declining tickets sales and high operating costs.”
The final circus performances were in Providence, Rhode Island, on May 7 and Uniondale,
New York, on May 21, 2017. In May 2016, the circus had previously retired its elephant act,
years after a suit by activists. The animal rights group PETA says “we herald the end of what
has been the saddest show on earth for wild animals, and ask all other animal circuses to follow
suit, as this is a sign of changing times.” PETA President Ingrid Newkirk says “our protests
have awoken the world to the plight of animals in captivity.” The Ringling Bros. and Barnum &
Bailey circus went by the slogan: “The greatest show on earth,” a catchphrase so famous it was
employed for the title of the 1952 Cecil B. DeMille best picture Oscar-winning film starring
Charlton Heston and Betty Hutton. For more than 100 years, schools would close in towns and
cities when Ringling Bros. and Barnum & Bailey came to town; those days are long gone.
The American iconic toy store chain Toys “R” Us Inc. in 2018 liquidated, selling or clos-
ing all its 885 U.S. stores deleting about 33,000 jobs. The company is likely to liquidate also in
France, Spain, Poland, and Australia. The company hopes to sell its operation in Canada, Central
Europe, and Asia.
Two guidelines reveal when liquidation may be an especially effective strategy to pursue:17
1. An organization has pursued both a retrenchment strategy and a divestiture strategy, and
neither has been successful.
2. The stockholders of a firm can minimize their losses by selling the organization’s assets.
Value Chain Analysis and Benchmarking LO 5.7

Whenever a customer buys a product it is because that consumer feels the “value” to be derived
from that product in terms of price paid versus benefits received is worthwhile. However, the
ultimate price paid by a consumer for a product is determined from scores of activities that went
into producing that product, from raw materials to suppliers, to production processes, to distribu-
tors, etc. This collection of activities that leads to the ultimate price of a product is commonly
referred to as a firm’s value chain.18 Firm’s seek competitive advantages anywhere they can up
and down their value chain, to ultimately provide some product at some price and some level of
quality that consumers will perceive to be of sufficient value to warrant the purchase. The value
chain concept, as illustrated in Figure 5-3, is important in strategic management.
Value chain analysis (VCA) can be defined as the process whereby a firm determines the
value (price minus cost) of each and all activities that went into producing and marketing a prod-
uct, from purchasing raw materials to manufacturing, distributing, and marketing those products.
VCA is an excellent way to identify both external opportunities/threats and internal strengths/
weaknesses of a firm. Companies strive to gain competitive advantages wherever possible up and
down their value chain, because such “value activities” are not easily duplicated or imitable by
rival firms. In contrast, just lowering the price of an end product or hiring a celebrity to promote
an end product is easily imitable; such actions do not represent a sustainable competitive advan-
tage. In other words, at every step along a firm’s value chain, the firm strives to create value (price
Company
VALUE
Customer Supplier
CHAIN
Distribution
FIGURE 5-3
A Value Chain Illustrated
minus cost) that can ultimately be transferred to the end user (customers), so customers
will buy the product at some price to obtain the perceived value.
Substantial judgment may be required in performing a VCA because different items
along the value chain may impact other items positively or negatively, at times creat-
Supplier Costs
ing complex interrelationships. For example, exceptional customer service may be es-
Raw materials
pecially expensive yet may reduce the costs of returns and increase revenues. Cost and
Fuel
Energy
price differences among rival firms can have their origins in activities performed by sup-
Transportation pliers, distributors, creditors, or even shareholders.
Truck drivers The initial step in implementing VCA is to divide a firm’s operations into specific
Truck maintenance activities or business processes. Then the analyst attempts to attach a cost of each discrete
Component parts activity versus the price to be paid; the costs could be in terms of both time and money.
Inspection Finally, the analyst converts the “value data” into information by looking for competitive
Storing oppotunities/threats and/or strengths/weaknesses that may yield competitive advantage
Warehouse or disadvantage. Conducting a VCA is supportive of the research-based view’s examina-
Production Costs tion of a firm’s assets and capabilities as sources of distinctive competence.
Inventory system When a major competitor or new market entrant offers products or services at low
Receiving prices, this may be because that firm has substantially lower value chain costs or perhaps
Plant layout
the rival firm is just waging a desperate attempt to gain sales or market share. VCA en-
Maintenance
ables a firm to examine and monitor the extent that its prices and costs are competitive
Plant location
throughout the value chain; those value segments lead cumulatively to the customers’
Computer
R&D
perceived value received by paying some price for some end product.
Cost accounting A value chain is illustrated in Figure 5-4. There can be more than a hundred particu-
Distribution Costs lar value-creating activities associated with the business of producing and marketing a
Loading product or service, and each one of the activities can represent a sustainable competitive
Shipping advantage or disadvantage for the firm. The combined costs of all the various activities
Budgeting in a company’s value chain define the firm’s cost of doing business. Firms should deter-
Personnel mine where cost advantages and disadvantages in their value chain occur relative to the
Internet value chain of rival firms.
Trucking Value chains differ immensely across industries and firms. Whereas a paper prod-
Railroads ucts company, such as Stone Container, would include on its value chain timber farm-
Fuel ing, logging, pulp mills, and papermaking, a company such as Hewlett-Packard would
Maintenance
include programming, peripherals, mining of metals, licensing, software, hardware, and
Sales and Marketing Costs
laptops. A motel would include food, housekeeping, check-in and check-out operations,
Salespersons
website, reservations system where they order supplies and so on.
Website
Internet
All firms should use VCA to develop and nurture a core competence and convert
Publicity
this competence into a distinctive competence. A core competence is any element of a
Promotion firm's value chain that performs especially well (yields high value). When a core compe-
Advertising tence evolves into a major competitive advantage, then it is called a distinctive compe-
Transportation tence. Figure 5-5 illustrates this process.
Food and lodging More and more companies are using VCA to gain and sustain competitive advantage
Customer Service Costs by becoming especially efficient and effective along various parts of the value chain. For
Postage example, Walmart has built powerful value advantages by focusing on exceptionally tight
Phone inventory control and volume purchasing of products. In contrast, computer companies
Internet compete aggressively along the distribution end of the value chain. Price competitive-
Warranty ness is a key component of competitiveness for both mass retailers and computer firms.
Management Costs To gain and sustain competitive advantage, a firm must create value for a product or
Human resources
service that exceeds the value offered by rivals.19 This is commonly done in one of two
Administration
ways: (1) operating at the lowest cost, or (2) commanding a premium price. A few firms
Employee benefits
try to do both simultaneously. The bottom line, however, is that a business needs to be
Labor relations
Managers
better than rivals on many points along its value chain because these points likely cannot
Employees be easily copied, thus they are sustainable. Rival firms ask, “How do they do it?” The
Finance and legal answer for many successful firms is “through effective value chain analysis.”
VCA focuses on the quality differences in activities among rival firms. Not all firms
in a given industry will place equal weights on various value chain items. For exam-
FIGURE 5-4 ple, Rolex and Timex both produce watches, yet each value chain will differ substan-
An Example Value Chain for a tially on key areas. Rolex creates value for the customer through prestige and elegance,
Typical Manufacturing Company whereas Timex creates value through price and utility. Each firm creates value so long
Value Chain Core Competencies Some Core Some Distinctive

Activities Are Arise in Competencies Competencies Yield
Identified and Some Evolve into Sustained
Assessed Activities Distinctive Competitive
Competencies Advantages
FIGURE 5-5
Transforming Value Chain Activities into Sustained Competitive Advantages
as consumers feel they are getting value for the price paid for the product or service and each
firm can have its own competitive advantage in the watch industry. Even though the weights on
various value chain items can differ within the same industry, firms should strive to understand
not only their own value chain operations, but also those of the industry, competitors, suppliers,
and distributors.
VCA is a tool used to examine each step along the path of creating value from upstream
operations such as suppliers all the way to downstream operations of delivering the product to
customers. One of the main benefits of VCA is that each activity from start to finish has a value
element that can be improved upon. Pay careful attention to areas along the value chain that are
likely to lead to higher quality or lower cost. Also, be mindful it is generally more advantageous
to choose a path of being different than a rival on select value chain activities than simply trying
to compete with them on every item. The jewelry firms Tiffany and Blue Nile are great examples
of firms that have chosen to be different in the way they create value for customers.
Benchmarking
Benchmarking is another analytical tool used to determine whether a firm’s value chain is
competitive compared to those of rivals and thus conducive to winning in the marketplace.
Benchmarking entails examination of value chain activities across an industry to determine
“best practices” among competing firms; firms engage in benchmarking for the purpose of du-
plicating or improving on those best practices. Similar to VCA, benchmarking is an analyti-
cal tool used to identify key external opportunities/threats and internal strengths/weaknesses.
Benchmarking enables a firm to take action to improve its competitiveness by identifying (and
improving on) value chain activities where rival firms have comparative advantages in cost, ser-
vice, reputation, or operation.
A challenging part of benchmarking can be gaining access to other firms’ VCAs with asso-
ciated costs. Typical sources of benchmarking information, however, include published reports,
trade publications, suppliers, distributors, customers, partners, creditors, shareholders, lobbyists,
and willing rival firms. Some rival firms share benchmarking data. However, the International
Benchmarking Clearinghouse provides guidelines to help ensure that restraint of trade, price fixing,
bid rigging, bribery, and other improper business conduct do not arise between participating firms.
Although benchmarking is useful, strategists should be mindful of their firm’s unique po-
sition and how their firm differs from rivals when selecting which factors along a value chain
to benchmark. Never benchmark variable after variable without discretion. For example, Five
Guys who specialize in burgers made to order with quality ingredients should not benchmark
McDonald’s “service time” component, just as McDonald’s should not benchmark Five Guys
“quality” component. Five Guys benchmarking and attempting to compete with McDonald’s
on service time would be dysfunctional to Five Guys unique strategy and position of offering
higher quality burgers; erroneous benchmarking could lead a firm away from what made the firm
successful. This is not to say “improving on service time” is not important; it is just that Five
Guys should not sacrifice “made to order burgers” for “premade burgers” simply to benchmark
McDonald’s service-time component. Recall that uniqueness is important in strategic manage-
ment, so use benchmarking wisely.
LO 5.8 Michael Porter’s Two Generic Strategies

According to Michael Porter, strategies allow organizations to gain competitive advantage
from two different bases: cost leadership and differentiation. Porter calls these bases generic
strategies because generally firms should be mindful it is often best to develop product lines
that compete on cost or compete on unique value; it is difficult to compete on both simulta-
neously. Cost leadership emphasizes producing standardized products or services at a low
per-unit cost for consumers who are price sensitive. Differentiation is a strategy aimed at
producing products and services considered unique to the industry and directed at consumers
who are relatively price insensitive. Unlike with cost leadership where a firm examines how to
reduce costs all along its value chain, with differentiation the firm looks to maximize value all
along its value chain.
Cost Leadership
As indicated in Table 5-5, there are two types of cost leadership strategies. Type 1 is a broad low-
cost strategy that offers products or services to a wide range of customers at one of the lowest
prices available on the market. Type 2 is a narrow or focused low-cost strategy that offers prod-
ucts or services to a small range of customers at one of the lowest prices on the market. A cost
leadership 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.
Walmart could serve as an example firm pursuing a Type 1 cost leadership strategy because the
company serves a broad range of market segments with varied socioeconomic backgrounds. Dollar
General would serve as an example of Type 2 focusing mostly on rural areas, limited product lines,
less décor devoted to the stores, and less service. Both Type 1 and Type 2 strategies target a large
market. This is an important distinction of any cost leadership market; in order to achieve economies
of scale, there must be large market potential. Both Walmart and Dollar General met the large mar-
ket potential criteria, even though Dollar General has a significantly more focused target customer
base. Amazon is potentially another example of Type 1 cost leadership; Jiffy Lube, Little Caesars
Pizza, and Spirit Airlines are all examples of successful Type 2 cost-leadership strategies, as well
as examples of firms “saying no and accepting trade-offs” as a part of their cost leadership strategy.
Striving to be the low-cost producer in an industry can be especially effective when the
market is composed of many price-sensitive buyers, when there are few ways to achieve prod-
uct differentiation, when buyers do not care much about differences from brand to brand, or
when there are a large number of buyers with significant bargaining power. The basic idea
is to underprice competitors and thereby gain market share and sales, entirely driving some
competitors out of the market. Companies employing a cost-leadership strategy must achieve
their competitive advantage in ways that are difficult for competitors to copy or match. If ri-
vals find it relatively easy or inexpensive to imitate the leader’s cost-leadership methods, the
leaders’ advantage will not last long enough to yield a valuable edge in the marketplace. In
other words, firms try to gain competitive advantages all along their value chain, so the firm
can ultimately provide some product at some price low enough to yield compelling value to
customers.
For a resource to be valuable, it must be either rare, hard to imitate, or not easily substitutable.
To employ a cost-leadership strategy successfully, a firm must ensure that its total costs across
its overall value chain are lower than competitors’ total costs. A key way to first ensure the firm
is maintaining its cost-leadership competitive advantage is to routinely examine every level of its
value chain relative to rival firms for areas of possible cost savings. A successful cost-leadership
TABLE 5-5 The Four Types of Generic Strategies

Generic Strategies
Cost Leadership Differentiation
Market Segments
Broad Type 1 Type 3
Narrow Type 2 Type 4
strategy usually permeates the entire firm, as evidenced by high efficiency, low overhead, limited
perks, intolerance of waste, intensive screening of budget requests, wide spans of control, rewards
linked to cost containment, and broad employee participation in cost control efforts.
Some risks of pursuing cost leadership are that competitors may imitate the strategy, thus driv-
ing overall industry profits down; technological breakthroughs in the industry may make the strategy
ineffective; or buyer interest may swing to other differentiating features besides price; simply cutting
retail prices will not yield a cost leadership position since such actions are easily copied and will
erode margins.
Differentiation
There are two levels of a successful differentiation strategy, Type 3 having a wide target market
and Type 4 having a narrow target market, as revealed in Table 5-5. Under differentiation strat-
egies, firms are not as reliant on economies of scale, so targeting a small group of customers
can be advantageous if they are willing to pay a premium for the products or services offered.
A differentiation strategy should be pursued only after a careful study of buyers’ needs and
preferences has determined the feasibility of incorporating one or more differentiating features
into a unique product that showcases the desired attributes. A successful differentiation strategy
allows a firm to charge a higher price for its product and to gain customer loyalty because con-
sumers may become strongly attached to the differentiating features, such as superior service,
spare parts availability, engineering design, product performance, useful life, gas mileage, or
ease of use.
Examples of firms employing Type 3-wide differentiation strategies would include Monster
Beverage, Apple, and BMW; these firms employ a strategy that adds perceived value over Coca-
Cola, an LG smartphone, or a Ford Escort at significantly higher prices than their counterparts.
All three also target a wider audience than brands like Louis Vuitton, Rolex, or Maserati which
operate under a Type 4 strategy. A firm does not have to offer extremely expensive products to
use a Type 4 strategy, but generally this is the case because creating value at every step of the
value chain is expensive and with limited buyers reducing economies of scale prices tend to be
expensive.
Generally, environments favorable to differentiation are those where buyers have many dif-
ferent tastes or application needs. For example, the quality and type of food desired by consum-
ers varies greatly, leading to many different types of restaurants. When technology is changing
rapidly, firms can release new products and often have customers “trained” to purchase the lat-
est and greatest. Apple enjoys being differentiated through its own IOS software. All the other
leading phone manufacturers use Android, Windows, or some other operating system created by
different firms. Whenever customers view products as commodities, there is a need for differen-
tiation; even “commodities” such as milk or eggs can often be differentiated through marketing,
attractive packaging, and other tactics leading to prices often twice as high as competitors.
Differentiation does not guarantee competitive advantage, especially if standard products
sufficiently meet customer needs or if rapid imitation by competitors is possible. Products pro-
tected by barriers which prevent quick copying by competitors are best. Successful differentia-
tion can mean greater product flexibility, greater compatibility, lower costs, improved service,
less maintenance, greater convenience, or more features. Product development is an example of
a strategy that offers the advantages of differentiation.
A risk of pursuing a differentiation strategy is that the unique product may not be valued
highly enough by customers to justify the higher price. When this happens, a cost-leadership strat-
egy will easily defeat a differentiation strategy. Another risk of pursuing a differentiation strategy
is that competitors may quickly develop ways to copy the differentiating features. Thus, firms must
find durable sources of uniqueness that cannot be imitated quickly or inexpensively by rival firms.
Common organizational requirements for a successful differentiation strategy include strong
coordination among the R&D and marketing functions and substantial amenities to attract sci-
entists and creative people. Firms can pursue a differentiation strategy based on many different
competitive aspects. Differentiation opportunities exist or can potentially be developed anywhere
along the firm’s value chain, including supply chain activities, product R&D activities, produc-
tion and technological activities, manufacturing activities, human resource management activi-
ties, distribution activities, or marketing activities.
The most effective differentiation bases are those that are difficult or expensive for rivals to
duplicate. Competitors are continually trying to imitate, duplicate, and outperform rivals along
any differentiation variable that yields competitive advantage. Firms must be careful when em-
ploying a differentiation strategy because buyers will not pay a higher price unless their per-
ceived value of the differentiated offering exceeds its price.20
LO 5.9 Means for Achieving Strategies

Companies are under continual pressure from stockholders to maintain top line (revenues) and
bottom line (net income) growth (usually 4+ percent) and pay higher dividends. To accomplish
this end, firms are often faced with a BUILD, BORROW, or BUY decision. Building is growing
internally (organically), borrowing is growing externally using means such as partnerships, joint
ventures, and alliances; finally, buying includes mergers and acquisitions. Let’s look at build,
borrow, or buy options a bit closer.
BUILD from Within to Grow

When firms build from within, sometimes called organic growth, as a means for achieving strat-
egies, strategists must consider how well current internal resources match the capabilities needed
to grow (4+ percent). Building from within can include new training programs, hiring new em-
ployees, building (instead of buying rival’s) stores, or developing a “blue ocean strategy.” A blue
ocean strategy aims to target a new market where competition is not yet present, thus creating
a “blue ocean” as opposed to a red ocean where many firms are competing often on price, and
the gains of one firm are often at the expense of another. Blue ocean strategy is similar to being
a first mover seeking market space not yet occupied by rivals.
Kim and Mauborgne’s research on blue oceans revealed that existing line extensions ac-
count for 86 percent of new products created; only 14 percent of new ventures are targeted at
new markets or industries.21 Blue ocean thinking in developing news markets and products
can provide benefits far greater than competing in traditional markets. Apple’s development
of the PC and smartphone were blue ocean examples where customers did not even know
they desired the products before they were brought to market by Apple. However, the blue
ocean environment did not last long for Apple on either product because competitors en-
tered quickly, forcing Apple to operate under what Porter would classify as a differentiation
strategy.
Netflix, Southwest, eBay, and Amazon, like Apple, were all derived partly from blue
ocean thinking. These examples are of blue oceans where there was no defined industry or
market for the products previously, but according to Kim and Mauborgne, blue oceans can
arise from already established industries as well. It is likely blue oceans within current indus-
tries will not be as sustainable and may even erode a firm’s mission, moving it away from its
core competencies. Extra care should be taken when considering blue ocean thinking while
operating within an already established industry. However, a firm does not have to have a blue
ocean to build.
BORROW from Others to Grow

Firms tend to “borrow” capabilities through joint ventures or strategic alliances when the (1)
firm does not believe it can develop the necessary resources internally, or (2) the costs and risks
of merging are too high. Joint venture occurs when two or more companies form a temporary
partnership or consortium for the purpose of capitalizing on some opportunity and have shared
equity ownership in the new entity. Joint ventures are being used increasingly because they allow
companies to improve communications and networking, to globalize operations, and to minimize
risk. They are formed when a given opportunity is too complex, uneconomical, or risky for a
single firm to pursue alone, or when an endeavor requires a broader range of competencies and
know-how than any one firm possesses. Joint ventures are less common than alliances but more
common than mergers or acquisitions.
Qualcomm formed a joint venture with China’s Guizhou province to produce server
chips in China. The new company is owned 55 percent by the Chinese province and 45 per-
cent by Qualcomm. Coca-Cola and Nestlé recently agreed to dissolve their tea joint venture
named Beverage Partners Worldwide. Kathryn Rudie Harrigan summarizes the trend toward
increased joint venturing: “In today’s global business environment of scarce resources, rapid
rates of technological change, and rising capital requirements, the important question is no
longer ‘Shall we form a joint venture?’ Now the question is ‘Which joint ventures and co-
operative arrangements are most appropriate for our needs and expectations?’ followed by
‘How do we manage these ventures most effectively?’ ”22 Four common reasons joint ventures
struggle are:
1. Managers who must collaborate daily in operating the venture are not involved in forming
or shaping the venture.
2. The venture may benefit the partnering companies but may not benefit customers, who
then complain about poorer service or criticize the companies in other ways.
3. The venture may not be supported equally by both partners. If supported unequally, prob-
lems arise.
4. The venture may begin to compete more with one of the partners than the other.23
Six guidelines for when a joint venture may be an especially effective means for pursuing
strategies are:24
1. A privately owned firm forms a joint venture with a publicly owned organization. The
advantages to being privately held, such as closed ownership, and the advantages of being
publicly held, such as access to stock issuances as a source of capital, can sometimes be
synergistically combined in a joint venture.
2. A domestic firm forms a joint venture with a foreign company. A joint venture can provide
a domestic firm with the opportunity for obtaining local management in a foreign country,
thereby reducing risks such as expropriation and harassment by host country officials.
3. The distinct competencies of two or more firms complement each other especially well.
4. A particular project is potentially profitable but requires overwhelming resources and risks.
5. Two or more smaller firms have trouble competing with a large firm.
6. There is a need to quickly introduce a new technology.
Cooperation among competitors is a popular borrow strategy. Microsoft and business-
software vendor SAP SE recently formed an alliance to challenge Amazon.com’s dominance
in the $23 billion annual market for web-based, on-demand computing resources. As part of the
deal, SAP is now using Microsoft’s Azure cloud-computing services. The Microsoft-SAP deal
follows a similar deal whereby Microsoft and Adobe Systems agreed to cross promote each
other’s products.
Cooperation among competitors is becoming more common. For collaboration to suc-
ceed, both firms must contribute something distinctive, such as technology, distribution, basic
research, or manufacturing capacity. But a major risk is that unintended transfers of important
skills or technology may occur at organizational levels below where the deal was signed.25
Information not covered in the formal agreement often gets traded in the day-to-day interactions
and dealings of engineers, marketers, and product developers. Firms often give away too much
information to rival firms when operating under cooperative agreements! Tighter formal agree-
ments are needed.
Perhaps the best example of rival firms in an industry forming alliances to compete
against each other is the airline industry. Today, there are three major alliances: Star,
SkyTeam, and Oneworld. Joint ventures and cooperative arrangements among competitors
demand a certain amount of trust if companies are to combat paranoia about whether one
firm will injure the other. Increasing numbers of domestic firms are joining forces with
competitive foreign firms to reap mutual benefits. Kathryn Harrigan at Columbia University
contends, “Within a decade, most companies will be members of teams that compete against
each other.”
Often, U.S. companies enter alliances primarily to reduce costs and risks of entering new
businesses or markets. In contrast, learning from the partner is a major reason why Asian
and European firms enter into cooperative agreements. U.S. firms, too, should place learn-
ing high on the list of reasons to be cooperative with competitors. Companies in the United
States often form alliances with firms in Asia to gain an understanding of their manufacturing
excellence, but manufacturing competence is not easily transferable. Manufacturing excel-

lence is a complex system that includes employee training and involvement, integration with
suppliers, statistical process controls, value engineering, and design. In contrast, U.S. know-
how in technology and related areas can be imitated more easily. Therefore, U.S. firms need
to be careful not to give away more intelligence than they receive in cooperative agreements
with rival Asian firms.
BUY Others to Grow

Merger and acquisition refers to firms buying others to grow. A merger occurs when two orga-
nizations of about equal size unite to form one enterprise. An acquisition occurs when a large
organization purchases (acquires) a smaller firm or vice versa. If a merger or acquisition is not
desired by both parties, it is called a hostile takeover, as opposed to a friendly merger. Most
mergers are friendly, but the number of hostile takeovers is on the rise. A hostile takeover is
not unethical as long as it is conducted in a civil and legal manner. Sometimes shareholders are
skeptical, though, given that current research reveals CEOs to be less ethical today, as indicated
in Ethics Capsule 5.
Not all mergers are effective and successful. For example, soon after Halliburton acquired
Baker Hughes, Halliburton’s stock price declined 11 percent. So, a merger between two firms
can yield great benefits, but the price and reasoning must be right. More than 10,000 mergers
transpire annually in the United States, with same-industry combinations predominating. A gen-
eral market consolidation is occurring in most industries.
Six reasons why many mergers and acquisitions fail are provided in Table 5-6. Table 5-7
presents the potential benefits of merging with or acquiring another firm.
A leveraged buyout (LBO) occurs when a firm’s shareholders are bought (hence buyout)
by the company’s management and other private investors using borrowed funds (hence lever-
age). Besides trying to avoid a hostile takeover, other reasons for initiating an LBO include
instances when a particular division(s) lacks fit with an overall corporate strategy, as well as
when selling a division could raise needed cash. An LBO converts a public firm into a private
company.
Another popular way for firms to grow occurs whenever a private-equity (PE) firm acquires
and takes private some target firm. For example, Ruby Tuesday was taken private in late 2017
when the private-equity firm NRD Capital Management bought the casual-dining restaurant
ETHICS CAPSULE 5
Are CEOs Less Ethical Today Than in the Past?
and CEOs in particular, has declined for decades. Ethical miscon-
duct was a key reason for passage of the Dodd-Frank Act of 2010
that imposed new regulations and standards on top executives and
Wavebreakmedia/
board members, including further measures to detect, discourage,

and punish corporate wrongdoing. Also to combat wrongdoing, ac-
Shutterstock
cording to the Spencer Stuart Board Index, 85 percent of all board

members of S&P 500 companies are independent (not employees
of the firm), and 27 percent of these boards have an independent
chairperson, up from 9 percent in 2005. Thus, the days of an all-
The New Policy Is Legal, But Is powerful CEO presiding over a board composed of friends and in-
It Ethical?
siders are essentially gone. The share of incoming CEOs who also
A recent article suggests that the answer to the question posed is serve as chair of the board has steadily declined at the world’s 2,500
YES. CEO dismissals for ethical misconduct rose in North America largest companies from 48 percent in 2002 to less than 10 percent
and Western Europe from 4.6 percent in 2007–2011 to 7.8 per- today.
cent in 2012–2016, a 68 percent increase. According to the 2017
Edelman Trust Barometer, only 37 percent of people consider CEOs Source: Based on Per-Ola Karlsson, DeAnne Aguirre, and Kristin Rivera,
credible/ethical today, an all-time low for the survey, and down from “Are CEOs Less Ethical Than in the Past?” Strategy & Leadership (Summer
59 percent the prior year. Confidence and trust in large corporations, 2017): 57–65.
TABLE 5-6 Six Reasons Why Many Mergers and Acquisitions Fail
1. Integration difficulties up and down the two value chains
2. Taking on too much new debt the target firm owes or to buy the target
3. Inability to achieve synergy
4. Too much diversification
5. Difficult to integrate different organizational cultures
6. Reduced employee morale due to layoffs and relocations
TABLE 5-7 Twelve 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
12. To eliminate competitors
chain for a 21 percent premium amount of about $146 million. At the time, there were 599 Ruby
Tuesday restaurants in 41 states and 14 foreign countries.
The intent of virtually all PE acquisitions is to buy firms at a low price and sell them later at
a high price, which is arguably just good business. Buffalo Wild Wings (BWW) recently received
a $2.3-billion takeover bid from the PE firm Roark Capital Group. Roark’s offer of $151 per
share was a premium of at least 28 percent over BWW’s stock price at the time. Roark eventually
bought BWW for $157 per share, representing a premium of 7.2 percent (low because BWW
stock price had increased).
PE firms are rapidly acquiring opioid-addiction clinics and treatment centers, such as
Kohlberg & Co.’s recent $180 million acquisition of the Meadows in Wickenburg, Arizona. U.S.
drug- and alcohol-addiction clinics generate over $10 billion in revenue annually through more
than 3,000 facilities that are quickly growing.
First-Mover Advantages LO 5.10

First-mover advantages refer to the benefits a firm may achieve by entering a new market
or developing a new product or service prior to rival firms. As indicated in Table 5-8, some
advantages of being a first mover include securing access to rare resources, gaining new
knowledge of key factors and issues, and carving out market share and a position that is easy
to defend and costly for rival firms to overtake. First-mover advantages are analogous to
taking the high ground first, which puts one in an excellent strategic position to launch ag-
gressive campaigns and to defend territory. Being the first mover can be an excellent strategy
when such actions (1) build a firm’s image and reputation with buyers; (2) produce cost ad-
vantages over rivals in terms of new technologies, new components, new distribution chan-
nels; (3) create strongly loyal customers; and (4) make imitation or duplication by a rival
difficult or unlikely.
TABLE 5-8 Six Benefits of a Firm Being the First Mover
1. Secure access and commitments to rare resources.

2. Gain new knowledge of critical success factors and issues.
3. Gain market share and position in the best locations.
4. Establish and secure long-term relationships with customers, suppliers, distributors, and
investors.
5. Gain customer loyalty and commitments.
6. Gain patent protection early.
One of the keys in deciding to be a first mover is how quickly will a new technology, prod-
uct, or service catch-on with a target market. Quicker adoption by the bulk of the customer base
enhances the incentive to be a first mover. Quick adoption may especially be likely in industries
such as pharmaceuticals where patent protection can virtually lock out anyone other than the first
mover.
To sustain the competitive advantage gained by being the first mover, a firm needs to be a
fast learner. There are, however, risks associated with being the first mover, such as unantici-
pated problems and costs that occur from being the first firm doing business in the new market.
Therefore, being a slow mover (also called fast follower or late mover) can be effective when a
firm can easily copy or imitate the lead firm’s products or services, especially when initial costs
are high. If technology is advancing rapidly, slow movers can often leapfrog a first-mover’s prod-
ucts with improved second-generation products, so being a late mover has potential advantages.
In some industries, being a fast follower may be the better strategy, such as in the elec-
tric car business where most customers have not quickly adopted the new technology, due to
high switching costs, lack of infrastructure of charging stations, and uneasiness. Apple was a
first mover in the PC market, but initially struggled as the market was not ready to adopt PCs
widespread. However, in iPods and iPhones, Apple was a first mover and continues to enjoy
many benefits of entering the market first and profiting from high-switching costs that customers
would incur by switching from Apple’s unique operating system.
LO 5.11 Strategic Management in Nonprofit and Small Firms

Nonprofit organizations are similar to for-profit companies in virtually evey respect except for two
major differences: (1) Nonprofits do not pay taxes, and (2) nonprofits do not have shareholders to
provide capital. Nonprofits have employees, customers, creditors, suppliers, and distributors as well
as financial budgets, income statements, balance sheets, cash flow statements, and so on. Nonprofit
organizations embrace strategic planning as much as for-profit firms, and perhaps even more. Both
nonprofit and for-profit organizations have competitors that want to put them out of business.
The strategic-management process is being used effectively by countless nonprofit and govern-
mental organizations, such as the Girl Scouts, Boy Scouts, the Red Cross, chambers of commerce,
educational institutions, medical institutions, public utilities, libraries, government agencies, zoos,
cities, and churches. Many nonprofit and governmental organizations outperform private firms
and corporations on innovativeness, motivation, productivity, and strategic management.
Compared to for-profit firms, nonprofit and governmental organizations may be totally
dependent on outside financing. Especially for these organizations, strategic management pro-
vides an excellent vehicle for developing and justifying requests for needed financial support.
Nonprofits and governmental organizations owe it to their constituencies to garner and use mon-
ies wisely; that requires excellent strategy formulation, implementation, and evaluation.
Educational Institutions
Accrediting bodies that audit colleges and universities (such as SACS and AACSB) require con-
tinuous strategic planning. The Institute of International Education reported in late 2017 that
the number of international new students attending U.S. universities declined by 7 percent in
the fall of 2017, the largest drop in a few years. Some MBA programs across the United States
are closing because of falling enrollments, including at the University of Iowa, Wake Forest
University, Virginia Tech, Simmons College, and possibly even at the University of Wisconsin.
College enrollments in general are declining. State and federal support/monies given to institu-
tions of higher learning in the United States is dropping more than 5 percent annually. All these
factors make strategic planning essential for institutions of higher learning.
Population shifts nationally from the Northeast and Midwest to the Southeast and West are an-
other threat. To cope with severe external threats, educational institutions are more frequently using
strategic-management concepts, tools, and techniques. Richard Cyert, former president of Carnegie
Mellon University, said, “I believe we do a far better job of strategic management than any company
I know.” Because MBA programs are struggling, universities are selling MBA courses piecemeal and
offering various types of business certifications comprised of one to three online courses. For exam-
ple, Wharton offers a professional certificate in digital marketing comprised of several $600 courses,
as compared to their 900 MBA students who pay about $250,000 for their degrees.26 Harvard
Business School charges up to $1,500 for online 8-week classes like “Becoming a Better Manager.”
Ivy League schools in the Northeast are recruiting more heavily in the Southeast and West.
This trend represents a significant change in the competitive climate for attracting the best high
school graduates each year. Online degrees are a threat to traditional colleges and universities. “You
can put the kids to bed and go to law school,” says Andrew Rosen, chief operating officer of Kaplan
Education Centers, a subsidiary of the Washington Post Company. Reduced state and federal fund-
ing for higher education has resulted in more aggressive fundraising by colleges and universities.
Governmental Agencies and Departments

Federal, state, county, and municipal agencies and departments, such as police departments, cham-
bers of commerce, forestry associations, and health departments, are responsible for formulating,
implementing, and evaluating strategies that use taxpayers’ dollars in the most cost-effective way
to provide services and programs. Strategic-management concepts are generally required and thus
widely used to enable governmental organizations to be more effective and efficient.
Strategists in governmental organizations operate with less strategic autonomy than their
counterparts in private firms. Public enterprises generally cannot diversify into unrelated busi-
nesses or merge with other firms. Governmental strategists usually enjoy little freedom in alter-
ing the organization’s mission or redirecting objectives. Legislators and politicians often have
direct or indirect control over major decisions and resources. Strategic issues get discussed and
debated in the media and legislatures. Issues become politicized, resulting in fewer strategic
choice alternatives. However, government agencies and departments are finding that their em-
ployees get excited about the opportunity to participate in the strategic-management process and
thereby have an effect on the organization’s core value, vision, mission, objectives, strategies,
and policies. In addition, government agencies are using a strategic-management approach to
develop and substantiate formal requests for additional funding.
Small Firms
“Becoming your own boss” is a dream for millions of people and a reality for millions more.
Almost everyone wants to own a business—from teens and college students, who are signing
up for entrepreneurial courses in record numbers, to those older than age 65, who are forming
more companies every year. However, the percentage of people younger than age 30 who own
private businesses has reached a 24-year low in the United States, to about 3.6 percent, down
from 10.6 percent in 1989. The stereotype that 20-somethings are entrepreneurial risk-takers
is simply false, as millions of young adults struggle in underpaid jobs to maintain their own
household, rather than living with their parents. Reasons for the decline vary, but reduced bank
lending for small business startups, more indebtedness among young people, and increasing
numbers of competitors because of the Internet, all contribute to a more risk-averse, younger-
than-30 age group.
The strategic-management process is just as vital for small companies as it is for large firms.
From their inception, all organizations have a strategy, even if the strategy just evolves from day-
to-day operations. Even if conducted informally or by a single owner or entrepreneur, the strategic-
management process can significantly enhance small firms’ growth and prosperity. However, a lack
of strategic-management knowledge is a serious obstacle for many small business owners, as is a lack
of sufficient capital to exploit external opportunities and a day-to-day cognitive frame of reference.
Research indicates that strategic management in small firms is more informal than in large firms, but
small firms that engage in strategic management generally outperform those that do not.
IMPLICATIONS FOR STRATEGISTS

Figure 5-6 reveals that to gain and sustain competitive advantages, exists among teams such as Auburn, Alabama, Ohio State, Florida
firms must collect, analyze, and prioritize large amounts of informa- State, Kansas State, Oregon, Arizona State, Michigan State, and
tion to make excellent decisions. A “strategic plan” is very much Michigan, so the game plan can make the difference between win-
akin to an athletic team’s “game plan” in the sense that both a ning and losing.
strategic plan and a game plan are developed after carefully study- Most of the strategies described in this chapter would separately
ing rival firms (teams); success of the firm (or team) depends greatly yield substantial benefits for firms, but no firm has sufficient re-
on that plan being a better plan than the rival’s plan. Any strategist, sources to pursue more than a few basic strategies. Thus, strategists
much like any coach, puts his or her firm in great jeopardy of failure must select from a number of excellent alternatives, eliminate other
if the opposing strategist (coach) has a better strategic plan. excellent options, and consider risks, tradeoffs, costs, and other key
Value chain analysis and benchmarking are required to create, factors. Any strategist, or coach, that gets “outstrategized” by his
identify, nurture, and exploit sustained competitive advantages that or her opposing strategist (or coach) puts his or her firm (or team) at
can lead to success. Parity (and commoditization) is becoming com- a major disadvantage. Being outcoached can doom even a superior
monplace in both business and athletics; as parity increases, the team (or firm). Therefore, in Chapter 6 we examine six additional
intrinsic value of the overarching strategic plan, or game plan, in- analytical tools being widely used by strategists to help develop a
creases exponentially. For example, in college football, great parity winning strategic plan.
Establish A Clear
Vision & Mission
Evaluate & Monitor Formulate Strategies:

Gain & Sustain
Results: Collect, Analyze, &
Take Corrective Competitive Prioritize Data Using
Actions; Adapt Advantages Matrices; Establish A
To Change Clear Strategic Plan
Implement Strategies:
Establish Structure;
Allocate Resources;
Motivate & Reward;
Attract Customers;
Manage Finances
FIGURE 5-6
How to Gain and Sustain Competitive Advantages
IMPLICATIONS FOR STUDENTS

Numerous alternative strategies and means to achieve those strat- page. Your recommendations page(s) itself should, therefore, be
egies, as described in this chapter, could benefit any firm, but your a summary of suggestions mentioned throughout your paper or
strategic-management case analysis should result in specific rec- presentation, rather than being a surprise shock to your reader
ommendations whereby you decide what actions will best pro- or audience. You may even want to include with your recommen-
vide the firm with competitive advantages. Ultimately you will be dations insight as to why certain other strategies and means to
transforming some of the general strategies and actions defined in achieve those actions were not chosen for implementation. That
this chapter into specific recommendations with projected costs. information, too, should be anchored in the notion of competitive
Because your recommendations with costs comprise the most im- advantage and disadvantage with respect to perceived costs and
portant pages or slides in your case project, Chapter 6 will go into benefits. You may ask: “What is the difference between recom-
further detail on this topic. However, in giving an oral written pre- mendations and strategies?” The answer is: “Recommendations
sentation or paper, introduce bits of your recommendations early are strategies generated and selected for implementation.”
to “pave the way” for costs shown later on your recommendations
Chapter Summary
The main appeal of any managerial approach is the expectation that it will enhance organiza-
tional performance. This is especially true of strategic management. Through involvement in
strategic-management activities, managers and employees achieve a better understanding of an
organization’s priorities and operations. Strategic management allows organizations to be effi-
cient, but more importantly, it allows them to be effective. Although strategic management does
not guarantee organizational success, the process allows proactive rather than reactive decision
making. Strategic management may represent a radical change in philosophy for some organi-
zations, so strategists must be trained to anticipate and constructively respond to questions and
issues as they arise. The strategies discussed in this chapter can represent a new beginning for
many firms, especially if managers and employees in the organization understand and support
the plan for action.
This chapter reveals that firms can “grow” internally (organically) or by acquiring or coop-
erating with other firms. Guidelines are given in this chapter for when firms have been most suc-
cessful historically pursuing which strategies by what means. Companies and industries change,
but the material presented in this chapter should be relevant and useful for decades to come as
companies strive to gain and sustain competitive advantage. In a nutshell, this chapter empha-
sizes that companies need to continuously manage and improve their value chain activities rang-
ing from raw material securement to end product marketing to be successful.
Key Terms and Concepts

acquisition (p. 176) integration strategies (p. 160)
backward integration (p. 161) intensive strategies (p. 163)
bankruptcy (p. 167) joint venture (p. 174)
benchmarking (p. 171) leveraged buyout (LBO) (p. 176)
blue ocean strategy (p. 174) liquidation (p. 168)
combination strategy (p. 158) long-term objectives (p. 156)
core competence (p. 170) market development (p. 163)
cost leadership (p. 172) market penetration (p. 163)
de-integration (p. 162) merger (p. 176)
differentiation (p. 172) organic growth (p. 174)
diversification strategies (p. 165) product development (p. 164)
divestiture (p. 167) related diversification (p. 165)
financial objectives (p. 157) retrenchment (p. 166)
first-mover advantages (p. 177) strategic objectives (p. 157)
forward integration (p. 160) turnaround strategy (p. 166)
franchising (p. 161) unrelated diversification (p. 165)
friendly merger (p. 176) value chain (p. 169)
generic strategies (p. 172) value chain analysis (VCA) (p. 169)
horizontal integration (p. 160) vertical integration (p. 160)
hostile takeover (p. 176)
Issues for Review and Discussion

5-1. Define and discuss vertical integration. 5-13. The number and dollar value of hostile takeovers are on
5-2. Identify the advantages and disadvantages of vertical the rise. Give two reasons for this trend.
integration. 5-14. How are for-profit firms different from nonprofit firms
5-3. Define and give an example of a “blue ocean strategy.” in terms of business? What are the implications for stra-
5-4. Identify and discuss three common ways to build capa- tegic planning?
bilities internally. 5-15. If the CEO of a beverage company such as Dr Pepper
5-5. What are the advantages of being a first mover in a par- Snapple asked you whether backward or forward in-
ticular industry? tegration would be better for the firm, how would you
5-6. What are the two key differences between for-profit and respond?
not-for-profit organizations, besides one type seeks to 5-16. In order of importance, list the characteristics of objectives.
make a profit and the other does not. 5-17. In order of importance, list the benefits of objectives.
5-7. Define and discuss whether it is best for a small firm to 5-18. Called de-integration, there appears to be a growing
BUILD, BORROW, or BUY to grow. trend for firms to become less forward integrated.
5-8. Give reasons why so many companies are divesting Discuss why.
(spinning off) key segments or divisions of the firm. 5-19. Called de-integration, there appears to be a growing
5-9. When is a leveraged buyout an appropriate strategy to trend for firms to become less backward integrated.
pursue? Discuss why.
5-10. Give actual examples of how Amazon is forward inte- 5-20. What conditions, externally and internally, would be
grating and diversifying at the same time. desired or necessary for a firm to diversify?
5-11. Explain the following statement: Unlike with cost lead- 5-21. There is a growing trend of increased collaboration
ership where a firm examines how to reduce costs along among competitors. List the benefits and drawbacks of
its value chain, with differentiation one looks to maxi- this practice.
mize value along each level of the value chain. 5-22. List major benefits of forming a joint venture to achieve
5-12. Define and explain benchmarking. desired objectives.
5-23. List major benefits of acquiring another firm to achieve 5-39. List 11 types of strategies. Give a hypothetical example
desired objectives. of each strategy listed.
5-24. List reasons why many mergers or acquisitions histori- 5-40. Define and explain first-mover advantages.
cally have failed. 5-41. Give some advantages and disadvantages of cooperative
5-25. Can you think of any reasons why not-for-profit firms versus competitive strategies.
would benefit less from doing strategic planning than 5-42. What are the two major differences between for-profit
for-profit companies? and not-for-profit organizations?
5-26. Discuss how important it is for a college football or bas- 5-43. Give some guidelines when forward integration is an
ketball team to have a good game plan for the big rival excellent strategy to pursue.
game this coming weekend. How much time and effort 5-44. Give some guidelines when backward integration is an
do you feel the coaching staff puts into developing that excellent strategy to pursue.
game plan? Why is such time and effort essential? 5-45. Give some guidelines when horizontal integration is an
5-27. How does strategy formulation differ for a small versus excellent strategy to pursue.
a large organization? How does it differ for a for-profit 5-46. Give some guidelines when market penetration is an
versus a nonprofit organization? excellent strategy to pursue.
5-28. Give hypothetical examples of market penetration, mar- 5-47. Give some guidelines when market development is an
ket development, and product development. excellent strategy to pursue.
5-29. Give hypothetical examples of forward integration, 5-48. Give some guidelines when product development is an
backward integration, and horizontal integration. excellent strategy to pursue.
5-30. Give hypothetical examples of related and unrelated 5-49. Give some guidelines when divestiture is an excellent
diversification. strategy to pursue.
5-31. Give hypothetical examples of joint venture, retrench- 5-50. Give some guidelines when retrenchment is an excellent
ment, divestiture, and liquidation. strategy to pursue.
5-32. Are hostile takeovers unethical? Why or why not? 5-51. Give some guidelines when liquidation is an excellent
5-33. What are the major advantages and disadvantages of strategy to pursue.
diversification? 5-52. Give some guidelines when unrelated diversification is
5-34. What are the major advantages and disadvantages of an an excellent strategy to pursue.
integrative strategy? 5-53. Give some guidelines when related diversification is an
5-35. How does strategic management differ in for-profit and excellent strategy to pursue.
nonprofit organizations? 5-54. What is the difference between recommendations and
5-36. Why is it not advisable to pursue too many strategies at once? strategies?
5-37. Compare and contrast financial objectives with strategic 5-55. Why do Annual Reports often state objectives in re-
objectives. Which type is more important in your opin- ally vague terms, such as to “hire good people” or to
ion? Why? “stay ahead of trends”; why should strategists avoid
5-38. How do the levels of strategy differ in a large firm ver- including such vagueness in preparing a strategic
sus a small firm? plan?
ASSURANCE-OF-LEARNING EXERCISES
SET 1: STRATEGIC PLANNING FOR COCA-COLA
EXERCISE 5A
Develop Hypothetical Coca-Cola Company

Strategies
Purpose
Chapter 5 identifies, defines, and exemplifies 11 key types of strategies available to firms. This exer-
cise will give you practice formulating possible strategies within each broad category.
Instructions
Step 1 Review the Cohesion Case and your answers to the prior end-of-chapter assurance-of-learn-
ing exercises.
Step 2 For the 11 strategies given in Table 5-3, identify a feasible alternative strategy that could
reasonably benefit the Coca-Cola Company.
EXERCISE 5B
Should Coca-Cola Build, Borrow, or Buy

in 2020–2021?
Purpose
Comparing what is planned versus what you recommend is an important part of case analysis. Do not
recommend what the firm actually plans, unless in-depth analysis of the situation reveals those strate-
gies to be best among all feasible alternatives. This exercise gives you experience conducting research
to determine what a firm is doing in 2018–2019 and should do in 2020–2021.
Instructions
Step 1 Go to the Coca-Cola corporate website and click on Press Center. Read through the most
recent ten press releases.
Step 2 Determine two strategies that Coca-Cola is actually pursuing. Give some pros and cons of
those two strategies in light of the guidelines presented in this chapter.
Step 3 Determine two strategies that Coca-Cola is not pursuing. Give some pros and cons of those
two strategies in light of the guidelines presented in this chapter.
SET 2: STRATEGIC PLANNING FOR MY UNIVERSITY
EXERCISE 5C
Develop Alternative Strategies for Your University

Purpose
It is important for representatives from all areas of a college or university to identify and discuss al-
ternative strategies that could benefit faculty, students, alumni, staff, and other constituencies. As you
complete this exercise, notice the learning and understanding that occurs as people express differences
of opinion. Recall that the process of planning is more important than the document.
Instructions
Step 1 Recall or locate the external opportunity and threat and internal strength and weakness fac-
tors that you identified as part of Exercise 1A (p. 65). If you did not do that exercise, discuss
now as a class important external and internal factors facing your college or university.
Step 2 Identify and put on the screen 10 alternative strategies that you feel could benefit your col-
lege or university. Your proposed actions should allow the institution to capitalize on par-
ticular strengths, improve on certain weaknesses, avoid external threats, or take advantage
of particular external opportunities. Number the strategies as they are written on the screen
from 1 to 10. State each strategy in specific terms, such as “Build two new dormitories,”
rather than in vague terms, such as “Do market penetration.”
Step 3 On a separate sheet of paper, number from 1 to 10. Everyone in class individually should
rate the strategies identified, using a 1 to 3 scale, where 1 = I do not support implementation,
2 = I am neutral about implementation, and 3 = I strongly support implementation. In rating
the strategies, recognize that no institution has sufficient funds to do everything desired or
potentially beneficial.
Step 4 Your professor will now pick up the rating sheets and have a student add up the scores for each
strategy. That is, sum the ratings for each strategy, so that a prioritized list of recommended
strategies is obtained. The higher the sum, the more attractive the strategy. This prioritized list
reflects the collective wisdom of your class. Strategies with the highest score are deemed best.
Step 5 Discuss how this process could enable organizations to achieve understanding and commit-
ment from individuals.
SET 3: STRATEGIC PLANNING FOR MYSELF
EXERCISE 5D
The Key to Personal Strategic Planning: Simultaneously

Build and Borrow
Purpose
As a means to achieve various strategies, companies usually choose between “build, borrow, and buy”
to grow. However, individuals must build and borrow. This exercise gives you insight on how to build
and borrow to launch a successful career.
Instructions
Step 1 List four ways you can BUILD (i.e., grow internally) to advance your career opportunities.
Step 2 List four ways you can BORROW (i.e., grow using others) to advance your career
opportunities.
Step 3 Compare and contrast your lists with those of other students. Collectively decide on the four
best BUILD and four best BORROW means to achieve your objectives.
SET 4: INDIVIDUAL VERSUS GROUP STRATEGIC PLANNING
EXERCISE 5E
What Is the Best Mix of Strategies for Coca-Cola

Company?
Purpose
Strategic-management classes are usually composed of team of students who perform case analysis.
The purpose of this exercise is to examine whether individual decision making is better than group de-
cision making. Academic research suggests that groups make better decisions than individuals about
80 percent of the time. No company has sufficient resources to implement all strategies that would
benefit the firm. Thus, tough choices have to be made. Ranking strategies as to their relative attrac-
tiveness (1 = most attractive, 2 = next most attractive, etc.) is a commonly used procedure to help
determine which actions to actually fund. Often, a group of managers will jointly rank strategies and
compare their ranking to other groups. This ranking process may be used to determine the relative at-
tractiveness of feasible alternative strategies.
The purpose of this exercise is to examine how well students understand the advantages and dis-
advantages of a firm pursuing the strategic options described in Chapter 5. This is a fun exercise that
also gives you experience selecting among feasible alternative strategies for a company.
Situation
Coca-Cola is doing really well, but wants to do better. Coca-Cola is trying to decide what strategies
would be best for the company going forward. Seven strategies discussed in Chapter 5 are being seri-
ously considered, as listed.
Strategies
Production operations
1. Forward integration: Build 100 Coca-Cola stores.
2. Backward integration: Purchase a 10,000-acre sugarcane farm to gain better control over sup-
plies needed for Coca-Cola retail stores globally.
3. Horizontal integration: Acquire four beverage brands from Dr Pepper Snapple.
4. Market development: Build a manufacturing plant in Africa to better serve that continent.
5. Market penetration: Launch an advertising, promotion, and publicity campaign globally to shift
public perception of Coca-Cola from unhealthy to healthy.
6. Product development: Develop, produce, and launch a full line of organic juices.
7. Unrelated diversification: Acquire a construction company to handle building new stores and
manufacturing plants and distribution centers globally.
Task
Rank the seven strategies listed in terms of their relative attractiveness for Coca-Cola, where 1 = the most
attractive strategy to pursue, 2 = the next most attractive strategy, etc. to 7 = the least attractive strategy
to pursue. Rank the strategies first as an individual, and then as part a group. Then, listen to the EXPERT
ranking and rationale. In this manner, this exercise enables you to determine what individual(s) and what
group(s) in class make the best strategic decisions (i.e., that come closest to the expert ranking).
Steps
1. Fill in Column 1 in Table 5-9 to reveal your individual ranking of the relative attractiveness of
the proposed strategies. For example, if you feel backward integration is the seventh-best op-
tion, then in Table 5-9, enter a 7 in Column 1 beside Backward Integration.
2. Fill in Column 2 in Table 5-9 to reveal your group’s ranking of the relative attractiveness of the
proposed strategies. For example, if your group feels backward integration is the third-best op-
tion, then enter 3 into Column 2 beside backward integration.
3. Fill in Column 3 in Table 5-9 to reveal the expert’s ranking of the relative attractiveness of the
proposed strategies.
4. Fill in Column 4 in Table 5-9 to reveal the absolute difference between Column 1 and Column
3 to reveal how well you performed as an individual in this exercise. (Note: Absolute difference
disregards negative numbers.)
5. Fill in Column 5 in Table 5-9 to reveal the absolute difference between Column 2 and Column 3
to reveal how well your group performed in this exercise.
6. Sum Column 4. Sum Column 5.
7. Compare the Column 4 sum with the Column 5 sum. If your Column 4 sum is less than your
Column 5 sum, then you performed better as an individual than as a group. If you did better
than your group, you did excellent.
8. The Individual Winner(s): The individual(s) with the lowest Column 4 sum is the WINNER.
9. The Group Winners(s): The group(s) with the lowest Column 5 score is the WINNER.
TABLE 5-9 Strategic Planning for Coca-Cola: Individual versus Group

Decision Making
Column Number
(1) My (2) Group (3) ExPERT (4) Absolute (5) Absolute
The Strategies Rank Rank Rank Value 1-3 Value 2-3
1. Backward integration
Purchase sugarcane farm
2. Forward integration
Build 100 stores
3. Horizontal integration
Acquire four Dr Pepper brands
4. Market development
Build manufacturing plant
in Africa
5. Market penetration
Launch marketing campaign
6. Product development
Launch a full line of organic
candy juices
7. Unrelated diversification
Acquire a construction company
MINI-CASE ON FACEBOOK (FB)
SHOULD FACEBOOK ACQUIRE, COOPERATE,

OR JUST STAY FIERCE RIVALS WITH
LINKEDIN?
This chapter discussed rival firms merging, cooperating, or staying rivals. Headquartered in Menlo
Park, California, Facebook is by far the largest online social-networking company in the world.
Headquartered in Mountain View, California, LinkedIn is the largest online professional network de-
signed to help members find jobs, connect with other professionals, and locate business opportunities.
The two companies are becoming more and more rivals as their business model becomes more and
more similar. Both websites are free for members to join and both earn money through advertis-
ing spots. LinkedIn also earns revenue through its job-listing service. Companies post job openings
on LinkedIn and search for candidates on LinkedIn—particularly advantageous for students nearing
graduation. Facebook wants some of this action. Members of LinkedIn tend to be white collar and
highly educated; 45 percent of LinkedIn visitors earn more than $75,000 per year. Facebook has
nearly 3 billion members across the whole economic spectrum of income.
As evidence of the two firms gravitating toward each other in products and services, LinkedIn re-
cently rolled out its video uploading feature, trying to become more like Facebook. Facebook is testing
new professional (rather than social) features trying to take market share from LinkedIn. Both com-
panies’ primary strategy is product development. Both Facebook and LinkedIn continually develop
new and improved, visible and invisible, business analytics models to gather and assimilate data, and
then sell the data. LinkedIn has developed a big-data framework dubbed Gobblin that helps the social
network collect tons of data from a variety of sources so that it can be analyzed in its Hadoop-based
data warehouses. The company also houses a variety of internal data (information pertaining to mem-
ber profiles, user actions such as comments and clicking, and so on) in databases such as Espresso
and event-logging systems such as Kafka. Also, LinkedIn takes in data from outside sources—for
instance, Salesforce and Twitter. Facebook is testing a mentorship feature to help Facebook members
identify and spend time with professionals based on common interests. Facebook is also testing a
LinkedIn-like resume feature. Many people prefer to keep their social activities (Facebook) separate
from their professional activities (LinkedIn), but as these two firms become more and more similar,
separation becomes cloudier.
Questions
1. Should Facebook develop features to allow people to efficiently hunt for jobs on their website,
including posting their professional vita?
2. Should Facebook develop features to allow businesses to hunt for employees on their website,
including posting job descriptions and job vacancies?
3. Should LinkedIn develop features to allow people to post personal pictures and videos on their
website?
4. Should LinkedIn and Facebook merge? What are the pros and cons of merger for the two firms?
5. Should LinkedIn and Facebook cooperate rather than merge? Identify and describe three ways
the two rival firms could cooperate in mutually beneficial ways.
Source: Company documents and a variety of sources.
Web Resources
1. The author website provides continuous updates to this chap-
ter from both an academic journal and newspaper/magazine
perspective.
www.strategyclub.com
Current Readings
Arkadiy, V. Sakhartov. “Economies of Scope, Resource Lyons, Elizabeth, and Laurina Zhang. “Who Does (Not)
Relatedness, and the Dynamics of Corporate Benefit from Entrepreneurship Programs?” Strategic
Diversification.” Strategic Management Journal 38, no. 11 Management Journal 39, no. 1 (January 2018): 85–112.
(November 2017): 2168–2188. Mackey, Tyson B., Jay B. Barney, and Jeffrey P. Dotson.
Greve, Henrich R., and Cyndi Man Zhang. “Institutional “Corporate Diversification and the Value of Individual
Logics and Power Sources: Merger and Acquisition Firms: A Bayesian Approach.” Strategic Management
Decisions.” Academy of Management Journal 60, no. 2 Journal 38, no. 2 (February 2017): 322–341.
(April 2017): 671–694. Marks, Mitchell Lee, Philip Mirvis, and Ron Ashkenas.
Huang, Zhi, Hong (Susan) Zhu, and Daniel J. Brass. “Cross- “Surviving M&A.” Harvard Business Review 95, Issue 2
Border Acquisitions and the Asymmetric Effect of Power (March–April 2017): 145–149.
Distance Value Difference on Long-Term Post-Acquisition McCann, Brian T., and Mona Bahl. “The Influence of
Performance.” Strategic Management Journal 38, no. 4 Competition from Informal Firms on New Product
(April 2017): 972–991. Development.” Strategic Management Journal 38, no. 7
Jap, Sandy, A. Noel Gould, and Annie H. Liu. “Managing (July 2017): 1518–1535.
Mergers: Why People First Can Improve Brand and IT Mellewigt, Thomas, Adeline Thomas, Ingo Weller, and Edward
Consolidations.” Business Horizons 60, no. 1 (January Zajac. “Alliance or Acquisition? A Mechanisms-Based,
2017): 123–134. Policy-Capturing Analysis.” Strategic Management
Jiang, Han, Jun Xia, Albert Cannella, and Ting Xiao. “Do Journal 38, no. 12 (December 2017): 235–2369.
Ongoing Networks Block Out New Friends? Reconciling Moeen, Mahka. “Entry into Nascent Industries: Disentangling
the Embeddedness Constraint Dilemma on New Alliance a Firm’s Capability Portfolio at the Time of Investment
Partner Addition.” Strategic Management Journal 39, Versus Market Entry.” Strategic Management Journal 38,
Issue 1 (January 2018): 217–241. no. 10 (October 2017): 1986–2004.
Kistruck, Geoffrey M., Robert B. Lount Jr., Brett R Smith, Panico, Claudio. “Strategic Interaction in Alliances.” Strategic
Brian J. Bergman Jr., and Todd W. Moss. “Cooperation vs. Management Journal 38, Issue 8 (August 2017):
Competition: Alternative Goal Structures for Motivating 1646–1667.
Groups in a Resource Scarce Environment.” Academy Rabier, Maryiane. “Acquisition Motives and the Distribution of
of Management Journal 59, no. 4 (August 2016): Acquisition Performance.” Strategic Management Journal
1174–1198. 38, no. 13 (December 2017): 2666–2681.
Kuusela, Pasi, Thomas Keil, and Markku Maula. “Driven Vidal, Elena, and Will Mitchell. “Virtuous or Vicious Cycles?
by Aspirations, But in What Direction? Performance The Role of Divestitures as a Complementary Penrose
Shortfalls, Slack Resources, and Resource-Consuming Effect within Resource-Based Theory.” Strategic
vs. Resource-Freeing Organizational Change.” Strategic Management Journal 39, no. 1 (January 2018): 131–154.
Management Journal 38, no. 5 (May 2017): 1101–1120. Wassmer, Ulrich, Sali Li, and Anoop Madhok. “Resource
Li, Jing, Jun Xia, and Zhouyu Lin. “Cross-Border Ambidexterity Through Alliance Portfolios and Firm
Acquisitions by State-Owned Firms: How do Legitimacy Performance.” Strategic Management Journal 38, no. 2
Concerns Affect the Completion and Duration of Their (February 2017): 384–394.
Acquisitions?” Strategic Management Journal 38, no. 9 Zhou, Yue M., and Xiang Wan. “Product Variety, Sourcing
(September 2017): 1915–1934. Complexity, and the Bottleneck of Coordination.” Strategic
Lieberman, Marvine B., Roberto Garcia-Castro, and Natarajan Management Journal 38, no. 8 (August 2017): 1569–1587.
Balasubramanian. “Measuring Value Creation and Zhou, Yue Maggie, and Xiang Wan. “Product Variety and
Appropriation in Firms: The VCA Model.” Strategic Vertical Integration.” Strategic Management Journal 38,
Management Journal 38, no. 6 (June 2017): 1193–1211. no. 5 (May 2017): 1134–1150.
Endnotes
1. John Byrne, “Strategic Planning—It’s Back,” 6. Kenneth Davidson, “Do Megamergers Make Sense?”
BusinessWeek (August 26, 1996): 46. Journal of Business Strategy 7, no. 3 (Winter 1987): 45.
2. Steven C. Brandt, Strategic Planning in Emerging 7. David, “How Do We Choose.”
Companies (Reading, MA: Addison-Wesley, 1981). 8. Ibid.
Reprinted with permission of the publisher. 9. Ibid.
3. F. Hansen and M. Smith, “Crisis in Corporate America: 10. Ibid.
The Role of Strategy,” Business Horizons (January– 11. Arthur Thompson Jr., A. J. Strickland III, and John
February 2003): 9. Gamble, Crafting and Executing Strategy: Text and
4. Based on F. R. David, “How Do We Choose among Readings (New York: McGraw-Hill/Irwin, 2005), 241.
Alternative Growth Strategies?” Managerial Planning 33, 12. Michael E. Porter, Competitive Strategy: Techniques for
no. 4 (January–February 1985): 14–17, 22. Analyzing Industries and Competitors (New York: Free
5. Ibid. Press, 1980), 53–57, 318–319.
13. David, “How Do We Choose.” &mkwid=DSATitle_dc&pmt=b&cvosrc=ppc+dynamic+

14. Ibid. search.google.97175169&cvo_crid=158258695641&
15. Ibid. pkw=&source_code=GO1GB907OSH060513
16. Ibid. 22. Kathryn Rudie Harrigan, “Joint Ventures: Linking for a
17. Ibid Leap Forward,” Planning Review 14, no. 4 (July–August
18. Porter, Competitive Advantage, 34-44. 1986): 10.
19. Porter, Competitive Advantage, 160–162. 23. Matthew Schifrin, “Partner or Perish,” Forbes (May 21,
20. Porter, Competitive Advantage, 160–162. 2001): 32.
21. https://www.audible.com/pd/Business/ 24. David, “How Do We Choose.”
Summary-of-Blue-Ocean-Strategy-by-W-Chan- 25. Gary Hamel, Yves Doz, and C. K. Prahalad, “Collaborate
Kim-and-Renee-A-Mauborgne-Audiobook/ with Your Competitors—and Win,” Harvard Business
B01L06M29Y?gclid=Cj0KCQiA_5_QBRC9ARI Review 67, no. 1 (January–February 1989): 133.
sADVww15mWwiWvtZ5ci2wnBjmZlXczGUkKktkDj 26. Kelsey Gee, “Do Free Business Courses Pay Off?” Wall
WHt9wQ7pzwDYIi_R3UxSkaAt7QEALw_wcB& Street Journal, September 7, 2017, B6.
pcrid=158258695641&cvo_pid=5075902449

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5

Chapter 10: Business Ethics, Environmental Sustainability, and Social Responsibility

Chapter 11: Global and International Issues

Strategy Strategy Strategy

5-1. Identify and discuss 5 characteristics and 10 benefits of clear objectives.

SET 1: Strategic Planning for Coca-Cola

SET 2: Strategic Planning for My University

SET 3: Strategic Planning for Myself

SET 4: Individual versus Group Strategic Planning

LO 5.1 Long-Term Objectives

Characteristics and Benefits of Objectives

EXEMPLARY STRATEGIST SHOWCASED

Tim Cook, CEO of Apple, Inc.

TABLE 5-1 Five Characteristics of Objectives

TABLE 5-2 10 Benefits of Having Clear Objectives

1. Provide direction by revealing expectations.

Financial versus Strategic Objectives

Avoid Managing by Crisis, Hope, Extrapolation, and Mystery (CHEM)

LO 5.2 Types of Strategies

TABLE 5-3 Alternative Strategies Defined and Recent Examples Given

Large Company Small Company

TABLE 5-4 Varying Performance Measures By Organizational Level

Corporate: overall firm 75% based on long-term objectives

LO 5.3 Integration Strategies

Intensive Strategies LO 5.4

Diversification Strategies LO 5.5

LO 5.6 Defensive Strategies

Value Chain Analysis and Benchmarking LO 5.7

Value Chain Core Competencies Some Core Some Distinctive

LO 5.8 Michael Porter’s Two Generic Strategies

TABLE 5-5 The Four Types of Generic Strategies

Cost Leadership Differentiation

LO 5.9 Means for Achieving Strategies

BUILD from Within to Grow

BORROW from Others to Grow

excellence, but manufacturing competence is not easily transferable. Manufacturing excel-

BUY Others to Grow

board members, including further measures to detect, discourage,

cording to the Spencer Stuart Board Index, 85 percent of all board

First-Mover Advantages LO 5.10

TABLE 5-8 Six Benefits of a Firm Being the First Mover

1. Secure access and commitments to rare resources.

LO 5.11 Strategic Management in Nonprofit and Small Firms

Governmental Agencies and Departments

IMPLICATIONS FOR STRATEGISTS

Evaluate & Monitor Formulate Strategies:

IMPLICATIONS FOR STUDENTS

Key Terms and Concepts

Issues for Review and Discussion

Develop Hypothetical Coca-Cola Company

Should Coca-Cola Build, Borrow, or Buy

SET 2: STRATEGIC PLANNING FOR MY UNIVERSITY

Develop Alternative Strategies for Your University

SET 3: STRATEGIC PLANNING FOR MYSELF

The Key to Personal Strategic Planning: Simultaneously

SET 4: INDIVIDUAL VERSUS GROUP STRATEGIC PLANNING

What Is the Best Mix of Strategies for Coca-Cola

TABLE 5-9 Strategic Planning for Coca-Cola: Individual versus Group

MINI-CASE ON FACEBOOK (FB)

SHOULD FACEBOOK ACQUIRE, COOPERATE,

13. David, “How Do We Choose.” &mkwid=DSATitle_dc&pmt=b&cvosrc=ppc+dynamic+

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