Chapter 5 Strategies in Action Strategic Management: Concepts & Cases 12th Edition Fred David

Strategies Strategies are the actions taken to achieve long term objectives. The time frame for long term objectives usually from 2 – 5 years.

Nature of Long Term Objectives – Quantifiable Measurable Realistic Understandable Challenging Hierarchical Obtainable Congruent Timeline

Long Term Objectives are commonly stated in terms of:– Asset Growth Sales growth Profit Market share Earning per share Social responsibility Degree of diversification

Benefits of Clear Objectives:- Long-Term Objectives Benefits of Clear Objectives:- Clear about role Provide direction Allow synergy Aid in evaluation Establish priorities Reduce uncertainty Minimize conflict Aid in resource allocation Job design

Varying Performance Measures by Organizational Level

Financial vs. Strategic Objectives Financial Objectives Strategic Objectives Growth in revenues Growth in earnings Higher dividends Higher profit margins Higher earnings per share Improved cash flow Larger Market share Speed of delivery Shorter market design Lower costs than rival ISO certification Leader in technology

MBO vs Not Managing by Objective Managing by Objectives – doing strategy through objectives (proactive action). Managing by Extrapolation – “If it ain’t broke, don’t fix it.” – clinging to old ways of doing things (reactive action). Managing by Crisis – The true measure of a good strategist is the ability to fix problems. Managing by Subjectives – “Do your own thing, the best way you know how.” – mystery approach to decision making. Managing by Hope – The future is full of uncertainty and if first you don’t succeed, then you may on the second or third try.

The Balanced Scorecard (1993) Robert Kaplan & David Norton – Definition: Strategy evaluation & control technique. Purpose: Balance financial measures (financial & process) with nonfinancial measures (customer satisfaction & quality product). Aim: Balance shareholder objectives with customer & operational objectives. Combination of financial objectives and strategic objectives.

Level of Strategies A Large Company Corp Level Division Level Functional Level Operational Level

Level of Strategies A Small Company Corp Level Functional Level Operational Level

Types of Strategies There are 16 strategies that can be grouped into several types of strategies. 1. Integration strategies 2. Intensive strategies 3. Diversification strategies 4. Defensive strategies Porter’s Generic strategies In doing strategy, priority must be established because of limited resources. Due to that, strategists must develop alternative strategies and choose the best amongst these strategies.

Horizontal Integration Types of Strategies Forward Integration Integration Strategies Backward Integration Horizontal Integration

Integration Strategies Forward Integration Definition: Involves gaining ownership or increased control over distributors or retailers. eg: franchising 6 guidelines to implement forward integration: When distributors are expensive, unreliable or incapable When availability of quality distributors is so limited When industry is growing When organization has enough capital and HR When production is stable When distributors or retailers have high profit margins (more profit if the company distribute its own products)

Integration Strategies Backward Integration Definition: Seeking ownership or increased control of a firms suppliers. eg: buy or take over supplier 7 guidelines to implement backward integration: When suppliers are expensive, unreliable or incapable. When number of suppliers is small and number of competitors is large. When industry is growing rapidly. When organization has enough capital and HR to supply it own materials. When prices are stable. When supplies have high profit margins (more profit if the company supply its own products). When organization needs to quickly acquire the needed resources.

Integration Strategies Horizontal Integration Definition: Seeking ownership or increased control of a firms competitors. eg: M&A, takeover 5 guidelines to implement horizontal integration: When organization gain monopolistic business. When organization competes in a growing industry. When increased in economies of scale provide major competitive advantage. When organization has enough capital and HR to expand. When competitors are faltering due to various reasons.

Types of Strategies Market Penetration Market Development Intensive Strategies Market Development Product Development

Intensive Strategies Market Penetration Definition: Seek to increase market share for present products or services through greater marketing efforts. eg: aggressive advertisement campaign 5 guidelines to implement market penetration: When current market are not saturated. When the usage rate of present customer can be increased. When total industry sales is increasing while market shares of major competitors is declining. When correlation between sales and marketing is high. When increased economies of scale provide competitive advantage.

Intensive Strategies Market Development Definition: Introducing present products or services into new geographic areas. eg: market expansion to new continents 6 guidelines to implement market development: When new distribution channels are reliable, inexpensive and good quality. When organization very successful in what it does. When new untapped or unsaturated market exist. When organization has enough capital and HR to expand. When organization has excess production capacity. When the industry becoming rapidly global.

Intensive Strategies Product Development Definition: seeks to increase sales by improving or modifying present products/services or developing new product. eg: more features to the existing product/services. 5 guidelines to implement product development: When the products has reached maturity stage of the product life-cycle. When organization competes in the industry that facing rapid technological development. When rival firms offer better quality product at fair price. When organization competes in high grow industry. When organization has strong R&D capabilities.

Diversification Strategies Types of Strategies Related Diversification Diversification Strategies Unrelated Diversification

Diversification Strategies Related Diversification Definition: Adding new but related products or services. Business are said to be related when their value chain posses competitively valuable cross-business strategic fits. 6 guidelines to implement related diversification: When organization competes in a no-growth or slow growth industry. When adding new but related product enables increase of sales of current products. When new but related products can be offered at a highly competitive prices. When new but related products have seasonal sales level. When existing products are in declining stage of product life cycle. When organization has strong management teams.

Diversification Strategies Reasons for Related Diversification Can transfer the valuable expertise, technological know-how and other capabilities. Can combine the related activities of separate business into single operation to achieve lower costs. Can exploit the common use of well-known brand name. Cross business collaboration to create competitively valuable resource strength and capabilities.

Diversification Strategies Unrelated Diversification Definition: Adding new, unrelated products or services. Business are said to be unrelated when their value chain are so dissimilar that no competitively valuable cross-business relationship exist. 10 guidelines to implement unrelated diversification: When new but unrelated product could increase revenue. When organization competes in highly competitive or no growth industry. When new products have counter cyclical sales pattern. When industry experiencing declining in sales and profits. When organization has enough capital and managerial to compete in new industry.

Diversification Strategies Unrelated Diversification When organization has the opportunity to purchase an unrelated business that has good investment opportunity. When there is financial synergy between the acquired and acquiring firm. When existing markets for current products are saturated. When existing distribution channel can be used to market new products.

Types of Strategies Retrenchment Divestiture Liquidation Defensive Strategies Divestiture Liquidation

Defensive Strategies Retrenchment Definition: organization regroups through cost and asset reduction to reverse declining sales and profits. Eg: reducing number of employees, closing factories, selling off fixed asset etc.. 5 guidelines to implement retrenchment: When organization failed consistently to meets its objectives and goals. When organization is the weaker competitors in the industry. When organization become inefficiency, low profitability, poor employee morale. When organization failed to tap external opportunities, minimize threats, take advantage of strength and overcome weaknesses. When organization needed major internal reorganization.

Defensive Strategies Divestiture Definition: selling a division or part of an organization. Eg. To rid off the non-profit units in the organization. 6 guidelines to implement divestiture: When organization failed to accomplish needed improvement through retrenchment. When division need more resources to be competitive than the company can provide. When one division is responsible towards overall poor performance. When one unit misfits with the rest of an organization. When large cash needed quickly but cannot be obtained internally.

Defensive Strategies Liquidation Definition: selling all of company asset for their tangible worth. Eg. To cease operation rather than continue losing large amount of money, declare bankruptcy. 3 guidelines to implement liquidation: When all organization efforts have failed. When the only alternative left is bankruptcy. When losses of shareholders can be minimize by selling the organization assets.

2007 Examples Forward Integration Southwest Airlines selling tickets through Galileo Backward Integration Hilton Hotels could acquire a large furniture manufacturer Horizontal Integration Huntington Bancshares and Sky Financial Group merged Market Penetration McDonald’s selling millions of “Shrek the Third” items to a healthier image Market Development Burger King opened its first restaurant in Japan Product Development Google introduced “Google Presents” to compete with PowerPoint

2007 Examples MGM Mirage is opening its first non-casino luxury hotel Related Diversification MGM Mirage is opening its first non-casino luxury hotel Unrelated Diversification Ford Motor Company entered the industrial bank business Retrenchment Discovery Channel closed 103 mall-based and stand-alone stores Divestiture Whirlpool sold its struggling Hoover floor-care business to Techtronic Industries Liquidation Follow Me Charters sold all of its assets and ceased doing business

Michael Porter’s Generic Strategies Cost Leadership Strategies (CLS) (Low-Cost & Best-Value) Differentiation Strategies (DS) Focus Strategies (FS) (Low-Cost Focus & Best-Value Focus)

Michael Porter’s Generic Strategies Cost Leadership Strategies (CLS) (Low-Cost & Best-Value) Producing standardized products/services at a very low cost for price sensitive consumers. Differentiation Strategies (DS) Producing unique products/services for price insensitive consumers. Focus Strategies (FS) (Low-Cost Focus & Best-Value Focus) Producing products/services that fulfill the needs of small groups of consumers.

Cost Leadership Strategies Type 1 and Type 2 Type 1: low cost strategy (offers product at very low price available in the market). Type 2: best value strategy (offers product at the best price value available on the market compared to rival product that have similar attributes). – low price + value added features. Both strategies target a large market. Effective strategy to be used especially the market is composed of many price-sensitive buyers. To gain low cost or best value cost leadership benefits, company need to use integration strategies (forward, backward and horizontal strategies). Useful to drive competitors out of the market.

Differentiation Strategies Type 3 Type 3 (differentiation) can be done by studying buyer needs and preferences to determine the feasibility of incorporating one or more differentiating features into unique product that features the desired attributes. Type 3 strategies target can be used at small or large market. Useful to make customers more attach to the unique features. Special features can differentiate one product with other products. Examples of differentiations are superior service, superior quality, user friendly, durability, robust, attractive packaging etc. The most effective way of differentiation is the product is hard or expensive for rivals to duplicate. Buyers will pay for higher price if their perceived value exceeds the price they are paying.

Focus Strategies Type 4 and Type 5 All firms generally follow a differentiation strategy but to compete successfully, firms need to be more focus either low cost or best value. Type 4: low cost focus (offer products/services to a small market (niche group) at the lowest price. Type 5: best value focus (offer products/services to a small market (niche group) at higher price but with value added features perceived as the best value by consumers. Type 4 (low cost focus) and Type 5 (best-value focus) can be done effectively when consumers have distinctive preferences or requirements and the rival firms are not attempting to specialize in the same target segment. Both strategies target a small market. To gain focus strategy, organization need to implement intensive strategies such as market penetration and market development. Organization that using focus strategy may do so by concentrating on a particular customer group of customers or particular product and produce it with low cost and provide best value to the buyers. Allow companies to focus on niche area that makes their product different with others at a low cost and give best value to the customer.

Summary of Porter’s Generis Strategies Type 1: low cost strategy that offers products or services to a wide range of customers at the lowest price available in the market. Type 2: best value strategy that offers products and services to a wide range of customers at the lowest price available in the market compared to a rival’s products/services with similar attributes. Type 3: differentiation strategy that aimed at producing products and services considered unique industry-wide and directed at consumers who are relatively price – insensitive. Type 4: low cost focus strategy that offers products or services to a small range (niche group) of customers at the lowest price available in the market. Type 5: best-value focus strategy that offers products or services to a small range of customers at the best-price value available on the market that meet their tastes and requirements better than rival’s product/services do.

Strategies for Competing in Turbulent, High Velocity Markets How? React, anticipate or lead the market. Must be able to handle turbulent change. Continually being proactive rather than being reactive. Formula: Reactive Proactive Market Leader

Means for Achieving Strategies – 1. Joint Ventures / Partnership Occurs when 2 or more companies form a temporary partnership or consortium for the purpose of capitalizing on some opportunity. Also known cooperative arrangements in the form of R&D, cross distribution agreement, cross licensing agreement etc. Benefits: Allow companies to improve communication and networking. To globalize the operations To minimize risks (less risky) Know-how sharing

Means for Achieving Strategies – 2. Mergers / Acquisitions Merger :- Occurs when 2 organizations of about equal size unite to form one enterprise. Acquisition:- large organization purchase a smaller firm or vice versa. Most M&A exercises are friendly mergers. Reasons: Deregulations To gain economies of scale Inability to boost profits Benefits: Reduces entry barriers Increased diversification Increased market power

Means for Achieving Strategies – 3. Cooperation among competitors Occurs when firms contributes their distinctive resources to overcome their major rivals. Require formal agreements. Forming alliances and competes as one groups with major rivals to remain survive.

Means for Achieving Strategies - 4. First Mover Advantages Benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms. Be a pioneer or market leader not a market follower. Benefits:- Able to secure access to rare resources Gaining new knowledge of key factors and issues Can obstruct new rival from entering the market Build image and reputation with buyers Enjoy cost advantages over new rival Create strong loyal customer base Difficult to imitate or duplicate by rival

Means for Achieving Strategies - 5. Outsourcing Business-Process Outsourcing (BPO) Companies taking over the functional operations of other firms. Transferring some job function to a 3rd party. Eg: IT, payroll, accounting, telemarketing etc.

Outsourcing The Reasons:- Less expensive Able to focus on core business Able to provide better services Provides firm with flexibility Allow firms to focus on internal value chain activities that critical to sustain competitive advantage.

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