Strategies in Action

Strategies in Action
1
Comprehensive Strategic Management Model
External
Audit
Chapter 3
Strategies Generate, Implement

Implement Measure &
In Evaluate, Strategies:
Strategies: Evaluate
Select Marketing, Performance
Vision Action Strategies
Mgmt Issues
Fin/Acct,
&
R&D, CIS
Mission Chapter 7 Chapter 9
Statements
Chapter 5 Chapter 6 Chapter 8
Chapter 2
Internal
Audit
Chapter 4
2
“Planning. Doing things today to make us

better tomorrow. Because the future
belongs to those who make the hard
decisions today.”
—Eaton Corporation—
3
“If you don’t invest for the long term,

there is no short term.”
—George David—
4
“Innovate or evaporate. Particularly in

technology-driven businesses, nothing
quite recedes like success.”
—Bill Saporito—
5
Companies embrace strategic planning.
• Quest for higher revenues and profits
6
Long-Term Objectives:
►Results expected from pursuing

certain strategies
 Tme frame —2 to 5 years
7
Nature of Long-Term Objectives
 Quantitative
 Measurable
 Realistic
 Understandable
 Challenging
 Hierarchical
 Obtainable
 Congruent among organizational units
8
Nature of Long-Term Objectives (Cont’d)
Objectives are associated with a time line and stated in terms:

• Growth in assets
• Growth in sales
• Profitability
• Market share
• Diversification
• Integration
• Social responsibility
9
Objectives are the basis for:
• Designing jobs
• Organizing activities
• Providing direction
• Organizational synergy
• Standards for evaluation
10
Strategists should avoid:
• Managing by extrapolation
“If it ain’t broke, don’t fix it.”
11
• Managing by crisis:
Reactive vs. proactive
12

• Managing by subjectives:
Mystery approach to decision making
 Subordinates are left to figure out what
is happening and why
13
• Managing by hope:
Good times are just around the corner
14
Integration Strategies
• Forward integration
• Backward integration
• Horizontal integration
15
Forward
Integration Example
Defined • General Motors is

acquiring 10% of its
• Gaining dealers.
ownership or
increased control
over distributors
or retailers
16
► Germany, Adidas plans to add 2500 stores in
China between 2011 and 2015 as the company
widens its distribution in that country from 500
cities currently to 1400. As part of its new
forward integration strategy in china. Adidas
plans also to boost its presence in basketball,
a sport that Adidas emphasizes less than
competitors such as Nike and Li Ning
Company, China leading sports-apparel maker.
Adidas Sponsored the Beijing Marathon, the
company’s fist running competition in China
17
Guidelines for Forward Integration
 Present distributors are expensive, unreliable, or

incapable of meeting firm’s needs
 Availability of quality distributors is limited
 When firm competes in an industry that is expected
to grow markedly
 Advantages of stable production are high
 Present distributor have high profit margins
18
Backward
Integration Example
• Motel 8 acquired a
Defined furniture
manufacturer.
• Seeking
ownership or
increased control
of a firm’s
suppliers
19
► The largest coffee company in the world, based in
Switzerland, Nestle is training thousand of farmers
over the next 10 years and providing them with new
coffee trees. With this backward integration strategy,
Nestle does not own the plantations or bind farmers
into long term contracts, but CEO ‘Paul Bulcke’ says
the relationship the firm develops with farmers will
lead them to sell to Nestle. This may be a wise
strategy for Nestle because rival firms such as
Unilever and Kraft Foods struggle to obtain better
control of raw materials. Nestle coffee strategy comes
just after the firm’s backward integration strategy of
recently spending $106 million to replant cocoa trees
in Ivory Coast in West Africa.
20
Guidelines for Backward Integration
 When present suppliers are expensive, unreliable, or

incapable of meeting needs
 Number of suppliers is small and number of
competitors large
 High growth in industry sector
 Firm has both capital and human resources to
manage new business
 Advantages of stable prices are important
 Present supplies have high profit margins
21
Horizontal
Integration
Example
Defined • Hilton recently

acquired Promus.
• Seeking
ownership or
increased control
over competitors
22
► One of the most significant trends in
strategic planning and resource deployment
today is the increased used of horizontal
integration as growth strategy.
► Mergers, acquisitions and takeover among
the competitors allow for increase
economies of scale and enhanced transfer
of resources and competencies.
23
Guidelines for Horizontal Integration
 Firm can gain monopolistic characteristics without

being challenged by federal government
 Competes in growing industry
 Increased economies of scale provide major
competitive advantages
 Faltering due to lack of managerial expertise or need
for particular resources
24
Intensive Strategies
• Market penetration
• Market development
• Product development
25
Market
Penetration
Example
Defined • Ameritrade, the on-
line broker, tripled its
• Seeking increased annual advertising
market share for expenditures to $200
present products million to convince
or services in people they can make
present markets their own investment
through greater decisions.
marketing efforts
26
Market Penetratioin
► Market penetration is both a measure
and a strategy. A business will utilize a
market penetration strategy to attempt to
enter a new market. The goal is to get in
quickly with your product or service and
capture a large share of the market. Market
penetration is also a measure of the
percentage of the market that your product
or service is able to capture.
27
Market Penetration Tactics
► Aggressive pricing is a very common tactic. You can
use penetration pricing, which is setting the price of your
product or services lower than that of your competitors. This
strategy may work well in price-sensitive markets. You may be
able to maintain a decent level of profits due to the volume of
sales decreasing your costs per unit for the product. Additionally,
once you have obtained your market share goal and have
achieved a sufficient level of brand loyalty, you may be able to
increase prices.
► You can also achieve market penetration through aggressive
marketing campaigns and distribution strategies. For
example, you may saturate the market with an aggressive
advertising campaign consisting of TV, radio and direct mailing
ads. You may also penetrate the market by saturating your
product in the market. 28
Advantages of Market Penetration
► It may cause quick diffusion and adoption of your
product in the market. If your product is cheap enough
and of similar quality to competing products, it should
spread out into the market and be purchased by
customers quickly.
► It may create goodwill among the first customers that
purchase the product due to the aggressive pricing. This
may create customer referrals.
► Efficiency is encouraged because of thinner profit
margins due to the aggressive pricing. *Efficiency
will be needed to maintain profitability.
29
► It may discourage competitors from entering the
Guidelines for Market Penetration
 Current markets not saturated

 Usage rate of present customers can be increased
significantly
 Market shares of competitors declining while total
industry sales increasing
 Increased economies of scale provide major
competitive advantages
30
Market
Development
Example
Defined • Britain’s leading

supplier of buses,
Henlys PLC, acquires
• Introducing
Blue Bird Corp. North
present products
America’s leading
or services into
school bus maker.
new geographic
area
31
► Ford Motor introduced eight new vehicles in
India between 2011 and 2015 to capitalize
on increasing demand in the fast-expanding
car market. Ford also has begun exporting
its new Figo small car from India to 50 new
markets, including Mexico, North Africa and
the Middle east. Ford’s new market
development strategy is aimed at taking
advantage of fast-growing emerging
markets.
32
Guidelines for Market Development
 New channels of distribution that are reliable,

inexpensive, and good quality
 Firm is very successful at what it does
 Untapped or unsaturated markets
 Capital and human resources necessary to manage
expanded operations
 Excess production capacity
 Basic industry rapidly becoming global
33
Product
Development
Defined Example
• Market • Apple developed the
development G4 chip that runs at
involves 500 megahertz.
introducing new
products or
services into new
geographic areas.
34
► Product development usually entails large
research and development expenditures.
► Google’s new Chrome OS operating system
illuminates years of monies spent on
product development. Google expects
Chrome OS to overtake Microsoft Windows
by 2015.
► Product development is perhaps the most
important strategy for high-tech firms such
as Acer, SAMSUNG
35
Product Development
► To compete with Apple’s iPad and tablets,
the world second largest PC maker, Acer
released in 2011 a tablet running Microsoft
windows software with a 10.1 inch screen.
Acer also released two tablets using
Google’s Andriod Software. Acer expected to
sell about 50 million tablets worldwide in
2011.
36
Guidelines for Product Development
 Products in maturity stage of life cycle

 Competes in industry characterized by rapid
technological developments
 Major competitors offer better-quality products at
comparable prices
 Compete in high-growth industry
 Strong research and development capabilities
37
Diversification Strategies
• Concentric diversification
• Conglomerate diversification
• Horizontal diversification
38
Concentric
Diversification
Example
Defined • National Westminister

Bank PLC in Britain
• Adding new, but bought the leading
related, products British insurance
or services company, Legal &
General Group PLC.
39
Guidelines for Concentric Diversification
 Competes in no- or slow-growth industry

 Adding new & related products increases sales of
current products
 New & related products offered at competitive prices
 Current products are in decline stage of the product
life cycle
 Strong management team
40
Conglomerate
Diversification
Example
Defined • H&R Block, the top tax

preparation agency,
said it will buy
• Adding new, discount stock
unrelated products brokerage Olde
or services Financial for $850
million in cash.
41
Guidelines for Conglomerate Diversification
 Declining annual sales and profits

 Capital and managerial talent to compete
successfully in a new industry
 Financial synergy between the acquired and
acquiring firms
 Exiting markets for present products are saturated
42
Horizontal
Diversification
Example
Defined
• The New York Yankees
• Adding new, baseball team are
unrelated products merging with the New
or services for Jersey Nets basketball
present customers team.
43
Guidelines for Horizontal Diversification
 Revenues from current products/services would

increase significantly by adding the new unrelated
products
 Highly competitive and/or no-growth industry w/low
margins and returns
 Present distribution channels can be used to market
new products to current customers
 New products have counter cyclical sales patterns
compared to existing products
44
Defensive Strategies
• Joint venture
• Retrenchment
• Divestiture
• Liquidation
45
Joint Venture
Example
Defined
• Lucent Technologies
• Two or more and Philips Electronic
sponsoring firms NV formed Philips
forming a separate Consumer
organization for Communications to
cooperative make and sell
purposes telephones.
46
Guidelines for Joint Venture
 Combination of privately held and publicly held can

be synergistically combined
 Domestic forms joint venture with foreign firm, can
obtain local management to reduce certain risks
 Distinctive competencies of two or more firms are
complementary
 Overwhelming resources and risks where project is
potentially very profitable (e.g., Alaska pipeline)
 Two or more smaller firms have trouble competing
with larger firm
 A need exists to introduce a new technology quickly
47
Retrenchment
Defined Example
• Regrouping • Singer, the sewing
through cost and machine company,
asset reduction to declared bankruptcy.
reverse declining
sales and profit
48
Retrenchment
Retrenchment occurs when an organization regroups through cost
and asset reduction to reverse declining sales and profits.
Sometimes called a turnaround or reorganizational strategy,
retrenchment is designed to fortify an organization’s basic
distinctive competence. During retrenchment, strategists work with
limited resources and face pressure from shareholders, employees,
and the media. Retrenchment can entail selling off land and
buildings to raise needed cash, closing marginal businesses, closing
obsolete factories, reducing the number of employees, and
instituting expense control systems.
49
Cases
Starbucks has launched a massive retrenchment strategy in efforts to
save the company. CEO Howard Schultz says Starbucks will soon close
300 underperforming, company-operated stores worldwide, including
200 in the United States. These closing are on top of 600 recent
Starbucks closings in the United States and 61 closings in Australia.
However, the firm plans to open 140 stores in the United States in 2009
and open 170 stores outside the United States. Starbucks plans to cut
700 corporate and nonretail positions globally. In addition, as part of
Starbucks’s strategy to survive the global recession, the company will
enter the value-meal race to combat McDonald’s new McCafe coffee
bars, which are spreading nationally and likely soon globally.
Abbot Laboratories in 2011 cut about 3000 jobs or 3 % of its workforce
as part of Retrenchment strategy to streamline operations and
efficiencies.
50
Cases
Pursing a heavy retrenchment strategy to survive, Citigroup recently
announced that it is cutting 52,000 more jobs. This is the largest
corporate layoff announcement since 1993, when IBM cut 60,000
jobs. Citigroup had already cut 23,000 jobs in 2008 as its stock
price fell 70 percent in that year alone.
Tokyo-based Sony Corp. is cutting 8,000 jobs and closing 6 of its
57 factories by March 2010 as prices of televisions fall and
consumer spending in general declines. Sony has also been hurt by
falling demand for digital cameras and the sharp rise in the yen
against major currencies, which has cut into profits by reducing its
overseas revenue when converted back into the Japanese currency.
A total 157 banks in the USA ceased operations in 2010 due to
financial insolvency due global financial crisis.
51
Guidelines for Retrenchment
 Firm has failed to meet its objectives and goals

consistently over time but has distinctive competencies
 Firm is one of the weaker competitors
 Inefficiency, low profitability, poor employee morale,
and pressure from stockholders to improve
performance.
 When an organization’s strategic managers have failed
 Very quick growth to large organization where a major
internal reorganization is needed.
52
Divestiture
Example
Defined
• Harcourt General, the
• Selling a division large US publisher, is
or part of an selling its Neiman
organization Marcus division.
53
► Divestiture often is 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 focus on their core businesses and become less
diversified.
► Historically firms have divested their unwanted or
poorly performing divisions, but the global recession
has witnessed firms simply closing such operations
54
Guidelines for Divestiture
 When firm has pursued retrenchment but failed to

attain needed improvements
 When a division needs more resources than the firm
can provide
 When a division is responsible for the firm’s overall
poor performance
 When a division is a misfit with the organization
 When a large amount of cash is needed and cannot
be obtained from other sources.
55
Liquidation
Defined Example
• Selling all of a • Ribol sold all its assets
company’s assets, and ceased business.
in parts, for their
tangible worth
56
Guidelines for Liquidation
 When both retrenchment and divestiture have been

pursued unsuccessfully
 If the only alternative is bankruptcy, liquidation is an
orderly alternative
 When stockholders can minimize their losses by
selling the firm’s assets
57
Michael Porter’s Generic Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
58
► Probably the three most widely read books on competitive analysis in the
1980s were Michael Porter’s Competitive Strategy (Free Press, 1980),
Competitive Advantage (Free Press, 1985), and Competitive Advantage of
Nations (Free Press, 1989). According to
► Porter, strategies allow organizations to gain competitive advantage from
three different bases: cost leadership, differentiation, and focus.
► Porter calls these bases generic strategies. Cost leadership emphasizes
producing standardized products at a very low per-unit cost for consumers
who are price-sensitive. Two alternative types of cost leadership strategies can
be defined.
► Type 1 is a low-cost strategy that offers products or services to a wide range
of customers at the lowest price available on the market.
► Type 2 is a best-value strategy that offers products or services to a wide range
of customers at the best price-value available on the market; the best-value
strategy aims to offer customers a range of products or services at the lowest
price available compared to a rival’s products with similar attributes.
► Both Type 1 and Type 2 strategies target a large market.
59
► Porter’s Type 3 generic strategy is differentiation, a strategy aimed
at producing products and services considered unique industrywide
and directed at consumers who are relatively price-insensitive.
► Focus means producing products and services that fulfill the needs
of small groups of consumers. Two alternative types of focus
strategies are Type 4 and Type 5. Type 4 is a
► low-cost focus strategy that offers products or services to a small
range (niche group) of customers at the lowest price available on
the market.
► Type 5 is a best-value focus strategy that offers products or services
to a small range of customers at the best price-value available on
the market.
► Sometimes called “focused differentiation,” the best-value focus
strategy aims to offer a niche group of customers products or
services that meet their tastes and requirements better than rivals’
products do. 60
Ch 5 Copyright 2007 Prentice Hall
-61
Generic Strategies
Cost Leadership (Type 1 and Type 2)
►A primary reason for pursuing forward, backward, and
horizontal integration strategies is to gain low-cost or best-
value cost leadership benefits.
►But cost leadership generally must be pursued in
conjunction with differentiation.
►A number of cost elements affect the relative attractiveness
of generic strategies, including economies or diseconomies
of scale achieved, learning and experience curve effects, the
percentage of capacity utilization achieved, and linkages
with suppliers and distributors
Copyright 2007 Prentice Hall Ch 5 -62
► 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 product 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.
63
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

-64
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
-65
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

Generic Strategies
Differentiation (Type 3)
Greater product flexibility

Greater compatibility
Lower costs
Improved service
Greater convenience
More features
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
-68
Generic Strategies
Focused Strategies (Type 4 & 5)
Industry segment of sufficient size

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

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
-70
Ch 5
-71
Means for Achieving Strategies
Joint
Venture/Partnering -
 Two or more companies form a temporary
partnership or consortium for purpose of
capitalizing on some opportunity

-72
Reasons why Mergers and Acquisitions Fail
► Integration difficulties
► Inadequate evaluation of target
► Large or extraordinary debt
► Inability to achieve synergy

-73
Cooperative Arrangements -
 R&D partnerships
 Cross-distribution agreements
 Cross-licensing agreements
 Cross-manufacturing agreements
 Joint-bidding consortia

-74
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

-75
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

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

-77
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

-78
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.

First Mover Advantages
 Benefits a firm may achieve by entering a

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

-80
Potential Advantages
 Securing access to rare resources
 build a firm’s image and reputation with buyers.
 Gaining new knowledge of key factors & issues
 Produce cost advantages over rivals in terms of new
technologies, new components, new distribution
channels,
 Carving out market share
 Easy to defend position & costly for rival firms to
overtake

-81
Conti……
► To sustain the competitive advantage gained by being the
first mover, such a firm also needs to be a fast.

-82
Outsourcing
Business-process outsourcing (BPO)
 Companies taking over the functional

operations of other firms

-83
Outsourcing
Benefits
 Less expensive
 Allows firm to focus on core business
 Enables firm to provide better services
► An ever-growing number of firms today are outsourcing their product
design to Asian developers. China and India are becoming increasingly
important suppliers of intellectual property. For companies that include
Hewlett-Packard, PalmOne, Dell, Sony, Apple, Kodak, Motorola, Nokia,
Ericsson, Lucent, Cisco, and Nortel, the design of personal computers and
cameras is mostly outsourced to China and India.

-84
Key Terms & Concepts
► Acquisition ► Differentiation
► Backward integration ► Diversification strategies
► Bankruptcy ► Divestiture
► Combination strategy
► Focus
► Forward integration
► Concentric
diversification
► Franchising
► Generic strategies
► Conglomerate
diversification
► Horizontal diversification
► Horizontal integration
► Cooperative
arrangements
► Integration strategies
► Cost leadership
85
Key Terms & Concepts (Cont’d)
► Intensive strategies ► Merger

► Joint venture ► Outsourcing
► Leveraged buyout ► Product development
► Liquidation ► Retrenchment
► Merchant banking ► Takeover
► Market development ► Vertical integration
► Market penetration
86
Key Terms & Concepts (Cont’d)
► Product and service ► Selling
planning ► Social responsibility
► Production/operations ► Staffing
functions ► Synergy
► Profitability ratios ► Test marketing
► Research and
development
87

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Strategies in Action

Strategies Generate, Implement

“Planning. Doing things today to make us

“If you don’t invest for the long term,

“Innovate or evaporate. Particularly in

Companies embrace strategic planning.

• Quest for higher revenues and profits

►Results expected from pursuing

Nature of Long-Term Objectives (Cont’d)

Objectives are associated with a time line and stated in terms:

Nature of Long-Term Objectives (Cont’d)

Objectives are the basis for:

Nature of Long-Term Objectives (Cont’d)

Strategists should avoid:

Nature of Long-Term Objectives (Cont’d)

Strategists should avoid:

Nature of Long-Term Objectives (Cont’d)

Strategists should avoid:

Nature of Long-Term Objectives (Cont’d)

Strategists should avoid:

Defined • General Motors is

Guidelines for Forward Integration

 Present distributors are expensive, unreliable, or

 When present suppliers are expensive, unreliable, or

Defined • Hilton recently

Guidelines for Horizontal Integration

 Firm can gain monopolistic characteristics without

Guidelines for Market Penetration

 Current markets not saturated

Defined • Britain’s leading

Guidelines for Market Development

 New channels of distribution that are reliable,

Guidelines for Product Development

 Products in maturity stage of life cycle

Defined • National Westminister

Guidelines for Concentric Diversification

 Competes in no- or slow-growth industry

Defined • H&R Block, the top tax

Guidelines for Conglomerate Diversification

 Declining annual sales and profits

 Revenues from current products/services would

 Combination of privately held and publicly held can

 Firm has failed to meet its objectives and goals

 When firm has pursued retrenchment but failed to

Guidelines for Liquidation

 When both retrenchment and divestiture have been

Cost Leadership Strategies

► Ways of ensuring total costs across value

Ch 5 Copyright 2007 Prentice Hall

Low Cost Producer Advantage

Many price-sensitive buyers

Copyright 2007 Prentice Hall Ch 5 -66

Greater product flexibility

Focused Strategies (Type 4 & 5)

Industry segment of sufficient size

Copyright 2007 Prentice Hall Ch 5 -69

Ch 5 Copyright 2007 Prentice Hall

Ch 5 Copyright 2007 Prentice Hall

Ch 5 Copyright 2007 Prentice Hall

Why Joint Ventures Fail -

 Managers who must collaborate daily; not

Ch 5 Copyright 2007 Prentice Hall

Copyright 2007 Prentice Hall Ch 5 -76