Strategies in Action: Strategic Management: Concepts & Cases 11 Edition Fred David

Chapter 5
Strategies in Action
Strategic Management:
Concepts & Cases
11th Edition
Fred David
Ch 5 -1
Copyright 2007 Prentice Hall
Chapter Outline
Long-Term Objectives
Types of Strategies
Integration Strategies
Ch 5 -2
Chapter Outline (cont’d)
Intensive Strategies
Diversification Strategies
Defensive Strategies
Ch 5 -3
Michael Porter’s Generic Strategies
Means for Achieving Strategies
First Mover Advantages
Ch 5 -4
Outsourcing
Strategic Management in Nonprofit &

Governmental Organizations
Strategic Management in Small Firms
Ch 5 -5
Strategies for taking the hill won’t

necessarily hold it. –
Amar Bhide
The early bird may get the worm, but the

second mouse gets the cheese. –
Unknown
Ch 5 -6
Companies Embrace Strategic Planning
-- Quest for higher revenues
-- Quest for higher profits
Ch 5 -7
 Results expected from pursuing certain

strategies
 Strategies represent actions to accomplish
long-term objectives
Ch 5 -8
Objectives --
Quantifiable
Measurable
Realistic
Understandable
Challenging
Ch 5 -9
Objectives --
Hierarchical
Obtainable
Congruent
Time-line
Ch 5 -10
Strategists Should Avoid --
Managing by Extrapolation
Managing by Crisis
Managing by Subjectives
Managing by Hope
Ch 5 -11
Varying Performance Measures by
Organizational Level
Ch 5 -12
Financial vs. Strategic
Objectives
Financial Objectives
Growth in revenues
Growth in earnings
Higher dividends
Higher profit margins
Higher earnings per share
Improved cash flow
Ch 5 -13
Objectives
Strategic Objectives
Larger market share
Quicker on-time delivery than rivals
Quicker design-to-market times than rivals
Lower costs than rivals
Higher product quality than rivals
Wider geographic coverage than rivals
Ch 5 -14
Objectives
Trade-Off
Maximize short-term financial objectives – harm
long-term strategic objectives
Pursue increased market share at the expense
of short-term profitability
Tradeoffs related to risk of actions; concern for
business ethics; need to preserve natural
environment; social responsibility issues
Ch 5 -15
Not Managing by Objectives
 Managing by extrapolation
 Managing by crisis
 Managing by subjectives
 Managing by hope
Ch 5 -16
The Balanced Scorecard
Robert Kaplan & David Norton --
Strategy evaluation & control technique

Balance financial measures with non-financial
measures
Balance shareholder objectives with customer
& operational objectives
Ch 5 -17
Types of Strategies
Corp
A Large Company Level
Division Level
Functional Level
Operational Level
Ch 5 -18
Types of Strategies
A Small Company
Company
Level
Functional Level
Operational Level
Ch 5 -19
Types of Strategies
Forward
Integration
Vertical Backward
Integration Integration
Strategies
Horizontal
Integration
Ch 5 -20
Vertical Integration Strategies
Gain Control Over --
Distributors
Suppliers
Competitors
Ch 5 -21
Forward Integration Strategies
Gain Control Over --
Distributors
Retailers
Ch 5 -22
Forward Integration Strategies
Guidelines --
Current distributors – expensive or unreliable
Availability of quality distributors – limited
Firm competing in industry expected to grow
markedly
Firm has both capital & HR to manage new
business of distribution
Current distributors have high profit margins
Ch 5 -23
Backward Integration
Strategies
Ownership or Control --
Firm’s suppliers
Ch 5 -24
Backward Integration
Strategies
Guidelines --
Current suppliers – expensive or unreliable
# of suppliers is small; # of competitors is large
High growth in industry sector
Firm has both capital & HR to manage new
business
Stable prices are important
Current suppliers have high profit margins
Ch 5 -25
Horizontal Integration
Strategies
Ownership or Control --
Firm’s competitors
Ch 5 -26
Horizontal Integration
Strategies
Guidelines --
Gain monopolistic characteristics w/o federal
government challenge
Competes in growing industry
Increased economies of scale – major competitive
advantages
Faltering due to lack of managerial expertise or
need for particular resource
Ch 5 -27
Types of Strategies
Market
Penetration
Intensive Market
Strategies Development
Product
Development
Ch 5 -28
Intensive Efforts --
Improve competitive position with

existing products
Ch 5 -29
Market Penetration Strategies
Increased Market Share --
Present products/services
Present markets
Greater marketing efforts
Ch 5 -30
Market Penetration Strategies
Guidelines --
Current markets not saturated
Usage rate of present customers can be increased
significantly
Shares of competitors declining; industry sales
increasing
Increased economies of scale provide major
competitive advantage
Ch 5 -31
Market Development
Strategies
New Markets --
Present products/services to new

geographic areas
Ch 5 -32
Market Development
Strategies
Guidelines --
New channels of distribution – reliable, inexpensive,
good quality
Firm is successful at what it does
Untapped/unsaturated markets
Excess production capacity
Basic industry rapidly becoming global
Ch 5 -33
Product Development
Strategies
Increased Sales --
Improving present products/services

Developing new products/services
Ch 5 -34
Product Development
Strategies
Guidelines --
Products in maturity stage of life cycle
Industry characterized by rapid technological
development
Competitors offer better-quality products @
comparable prices
Compete in high-growth industry
Strong R&D capabilities
Ch 5 -35
Types of Strategies
Related
Diversification
Diversification
Strategies
Unrelated
Diversification
Ch 5 -36
Diversification
 Related – When their value chains posses

competitively valuable cross-business
strategic fits
 Unrelated – When their value chains are so
dissimilar that no competitively valuable
cross-business relationships exist
Ch 5 -37
Related Diversification Preferred
To Capitalize on:
 Transferring competitively valuable expertise
 Combining the related activities of separate
businesses into a single operation to lower
costs
 Exploiting common use of a well-known
brand name
 Cross-business collaboration to create
competitively valuable resource strengths
and capabilities
Ch 5 -38
Diversification Strategies
Less Popular --
More difficult to manage diverse

business activities
However --
The greatest risk of being in a single

industry is having all your eggs in one
basket
Ch 5 -39
Related Diversification May be Effective
When:
 An organization competes in a no-growth or a
slow growth industry
 Adding new, but related, products would
significantly enhance the sales of current
products
 New, but related products could be offered at
highly competitive prices
Ch 5 -40
Related Diversification May be Effective
When:
 New, but related, products have seasonal
sales levels that counterbalance an
organization’s existing peaks and valleys
 An organization’s products are currently in
the declining stage of the product’s life cycle
 An organization has a strong management
team
Ch 5 -41
Conglomerate Diversification
Strategies
Guidelines --
Declining annual sales & profits
Capital & managerial ability to compete in new
industry
Financial synergy between acquired and acquiring
firms
Current markets for present products - saturated
Ch 5 -42
Unrelated Diversification
 Favors capitalizing on a portfolio of

businesses that are capable of delivering
excellent financial performance
 Entails hunting to acquire companies:
 Whose assets are undervalued
 That are financially distressed
 With high growth potential but are short on
investment capital
Ch 5 -43
Unrelated Diversification May be Effective
When:
 Revenues derived from an organization’s
current products or services would increase
by adding new unrelated products
 An organization competes in a highly
competitive or a no growth industry
 An organization’s current distribution
channels can be used to market new
products to existing customers
Ch 5 -44
When:
 New products have countercyclical sales
patterns
 An organization’s basic industry is
experiencing declining annual sales and
profits
 An organization has the capital and
managerial talent to compete successfully in
a new industry
Ch 5 -45
When:
 An organization has the opportunity to
purchase an unrelated business as an
attractive investment opportunity
 There exists financial synergy between the
acquired and acquiring firm
 Existing markets for the present products are
saturated
 Antitrust action could be charged against a
company
Ch 5 -46
Types of Strategies
Retrenchment
Defensive Divestiture
Strategies
Liquidation
Ch 5 -47
Retrenchment Strategies
Regrouping --
Cost & asset reduction to reverse

declining sales & profit
Ch 5 -48
Bankruptcy
 Chapter 7 – Liquidation
 Chapter 9 – Municipalities
 Chapter 11 – Reorganization for Corporations
 Chapter 12 – Family Farmers
 Cheaper 13 – Reorganization for Small
Businesses and Individuals
Ch 5 -49
Retrenchment Strategies
Guidelines --
Failed to meet objectives & goals consistency; has
distinctive competencies
Firm is one of weaker competitors
Inefficiency, low profitability, poor employee morale,
pressure for stockholders
Strategic managers have failed
Rapid growth in size; major internal reorganization
necessary
Ch 5 -50
Divestiture Strategies
Selling a division or part of an

organization
Ch 5 -51
Divestiture Strategies
Guidelines --
Retrenchment failed to attain improvements
Division needs more resources than are available
Division responsible for firm’s overall poor
performance
Division is a mis-fit with organization
Large amount of cash is needed and cannot be
raised through other sources
Ch 5 -52
Liquidation Strategies
Selling
Company’s assets, in parts, for

their tangible worth
Ch 5 -53
Liquidation Strategies
Guidelines --
Retrenchment & divestiture failed

Only alternative is bankruptcy
Minimize stockholder loss by selling firm’s assets
Ch 5 -54
Michael Porter’s Generic Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
Ch 5 -55
Ch 5 -56
Generic Strategies
Cost Leadership
(Type 1 and Type 2)
In conjunction with differentiation
Economies or diseconomies of
scale
Capacity utilization achieved
Linkages w/ suppliers & distributors
Ch 5 -57
Cost Leadership
 Ways of ensuring total costs across value

chain are lower than competitors’ total costs
1. Perform value chain activities more efficiently
than rivals and control factors that drive costs
2. Revamp the firm’s overall value chain to
eliminate or bypass some cost-producing
activities
Ch 5 -58
Cost Leadership
 Can be especially effective when:

1. Price competition among rivals is vigorous
2. Rival’s products are identical and supplies are
readily available
3. There are few ways to achieve differentiation
4. Most buyers use the product in the same way
5. Buyers have low switching costs
6. Buyers are large and have significant power
7. Industry newcomers use low prices to attract
buyers
Ch 5 -59
Generic Strategies
Low Cost Producer Advantage
Many price-sensitive buyers

Few ways of achieving differentiation
Buyers not sensitive to brand
differences
Large # of buyers w/bargaining power
Ch 5 -60
Generic Strategies
Differentiation (Type 3)
Greater product flexibility

Greater compatibility
Lower costs
Improved service
Greater convenience
More features
Ch 5 -61
Differentiation

1. There are many ways to differentiate and many
buyers perceive the value of the differences
2. Buyer needs and uses are diverse
3. Few rival firms are following a similar
differentiation approach
4. Technology change is fast paced and
competition revolves around evolving product
features
Ch 5 -62
Generic Strategies
Focused Strategies (Type 4 & 5)
Industry segment of sufficient size

Good growth potential
Not crucial to success of major competitors
Ch 5 -63
Focused Strategy
1. The target market niche is large, profitable, and
growing
2. Industry leaders do not consider the niche crucial
3. Industry leaders consider the niche too costly or
difficult to meet
4. The industry has many different niches and
segments
5. Few, if any, other rivals are attempting to
specialize in the same target segment
Ch 5 -64
Ch 5 -65
Joint Venture/Partnering -
 Two or more companies form a temporary

partnership or consortium for purpose of
capitalizing on some opportunity
Ch 5 -66
Reasons why Mergers and Acquisitions Fail
 Integration difficulties
 Inadequate evaluation of target
 Large or extraordinary debt
 Inability to achieve synergy
Ch 5 -67
Cooperative Arrangements -
 R&D partnerships
 Cross-distribution agreements
 Cross-licensing agreements
 Cross-manufacturing agreements
 Joint-bidding consortia
Ch 5 -68
Why Joint Ventures Fail -
 Managers who must collaborate daily; not

involved in developing the venture
 Benefits the company not the customers
 Not supported equally by both partners
 May begin to compete with one of the
partners
Ch 5 -69
Joint Ventures
Guidelines --
Synergies between private and publicly held
Domestic with foreign firm, local management can
reduce risk
Complementary distinctive competencies
Resources & risks where project is highly profitable
(e.g. Alaska Pipeline)
Two or more smaller firms competing w/larger firm
Need to introduce new technology quickly
Ch 5 -70
Reasons why Mergers and Acquisitions Fail
 Too much diversification

 Managers overly focused on acquisition
 Too large an acquisition
 Difficult to integrate different organizational
cultures
 Reduced employee moral due to layoffs and
relocations
Ch 5 -71
Mergers & Acquisitions

 Provide improved capacity utilization
 Better use of existing sales force
 Reduce managerial staff
 Gain economies of scale
 Smooth out seasonal trends in sales
 Gain new technology
 Access to new suppliers, distributors, customers,
products, creditors
Ch 5 -72
Recent Mergers
Acquiring Firm Acquired Firm

IBM Ascential Software
Philip Morris PT Hanjaya Mandala Samp
U.S. Steel National Steel Corp
Oracle PeopleSoft
OSIM International Ltd Brookstone
Adobe Systems Macromedia
US Airways American West
United Parcel Service Overnight Corp.
Ch 5 -73
 Benefits a firm may achieve by entering a

new market or developing a new product or
service prior to rival firms
Ch 5 -74
Potential Advantages
 Securing access to rare resources

 Gaining new knowledge of key factors &
issues
 Carving out market share
 Easy to defend position & costly for rival
firms to overtake
Ch 5 -75
Outsourcing
Business-process outsourcing
(BPO)
 Companies taking over the functional

operations of other firms
Ch 5 -76
Outsourcing
Benefits
 Less expensive
 Allows firm to focus on core business
 Enables firm to provide better services
Ch 5 -77
For Review (Chapter 5)
Key Terms & Concepts
Concentric
Acquisition
Diversification
Backward Conglomerate
Integration Diversification
Cooperative
Bankruptcy
Arrangements
Combination
Cost Leadership
Strategy
Ch 5 -78
Differentiation Focus
Diversification
Forward Integration
Strategies
Divestiture Franchising
First Mover
Generic Strategies
Advantages
Ch 5 -79
Horizontal
Diversification
Horizontal
Joint Venture
Integration
Hostile Takeover Leveraged Buyout
Integration
Liquidation
Strategies
Ch 5 -80
Long-Term
Outsourcing
Objectives
Market Development Product Development
Market Penetration Retrenchment
Merger Vertical Integration
Ch 5 -81

Strategies in Action: Strategic Management: Concepts & Cases 11 Edition Fred David

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Strategies in Action: Strategic Management: Concepts & Cases 11 Edition Fred David

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Chapter 5

Michael Porter’s Generic Strategies

Means for Achieving Strategies

First Mover Advantages

Strategic Management in Nonprofit &

Strategic Management in Small Firms

Strategies for taking the hill won’t

The early bird may get the worm, but the

Companies Embrace Strategic Planning

-- Quest for higher revenues

-- Quest for higher profits

 Results expected from pursuing certain

Strategists Should Avoid --

Robert Kaplan & David Norton --

Strategy evaluation & control technique

Gain Control Over --

Gain Control Over --

Improve competitive position with

Increased Market Share --

Present products/services to new

Improving present products/services

 Related – When their value chains posses

More difficult to manage diverse

The greatest risk of being in a single

 Favors capitalizing on a portfolio of

Cost & asset reduction to reverse

Selling a division or part of an

Company’s assets, in parts, for

Retrenchment & divestiture failed

Cost Leadership Strategies

 Ways of ensuring total costs across value

 Can be especially effective when:

Low Cost Producer Advantage

Many price-sensitive buyers

Greater product flexibility

 Can be especially effective when:

Focused Strategies (Type 4 & 5)

Industry segment of sufficient size

 Two or more companies form a temporary

Why Joint Ventures Fail -

 Managers who must collaborate daily; not

 Too much diversification

Mergers & Acquisitions

Acquiring Firm Acquired Firm

 Benefits a firm may achieve by entering a

 Securing access to rare resources

 Companies taking over the functional

Key Terms & Concepts

Key Terms & Concepts

Key Terms & Concepts

Hostile Takeover Leveraged Buyout

Key Terms & Concepts

Market Development Product Development

Market Penetration Retrenchment

Merger Vertical Integration

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