Copyright 2007 Prentice Hall Ch 5 -1 Chapter 5 Strategies in Action Strategic Management: Concepts & Cases 11 th Edition Fred David

Copyright 2007 Prentice Hall Ch 5 -2 Chapter Outline Long-Term Objectives Types of Strategies Integration Strategies

Copyright 2007 Prentice Hall Ch 5 -3 Chapter Outline ( cont’d ) Intensive Strategies Diversification Strategies Defensive Strategies

Copyright 2007 Prentice Hall Ch 5 -4 Chapter Outline ( cont’d ) Michael Porter’s Generic Strategies Means for Achieving Strategies First Mover Advantages

Copyright 2007 Prentice Hall Ch 5 -5 Chapter Outline ( cont’d ) Outsourcing Strategic Management in Nonprofit & Governmental Organizations Strategic Management in Small Firms

Copyright 2007 Prentice Hall Ch 5 -6 Strategies for taking the hill won’t necessarily hold it. – Amar Bhide Strategies in Action The early bird may get the worm, but the second mouse gets the cheese. – Unknown

Copyright 2007 Prentice Hall Ch 5 -7 Strategies in Action -- Quest for higher revenues -- Quest for higher profits Companies Embrace Strategic Planning

Copyright 2007 Prentice Hall Ch 5 -8 Results expected from pursuing certain strategies Strategies represent actions to accomplish long-term objectives Long-Term Objectives

Copyright 2007 Prentice Hall Ch 5 -9 Long-Term Objectives Objectives --  Quantifiable  Measurable  Realistic  Understandable  Challenging

Copyright 2007 Prentice Hall Ch Long-Term Objectives Objectives --  Hierarchical  Obtainable  Congruent  Time-line

Copyright 2007 Prentice Hall Ch Long-Term Objectives Strategists Should Avoid --  Managing by Extrapolation  Managing by Crisis  Managing by Subjectives  Managing by Hope

Copyright 2007 Prentice Hall Ch Varying Performance Measures by Organizational Level

Copyright 2007 Prentice Hall Ch Financial vs. Strategic Objectives Financial Objectives  Growth in revenues  Growth in earnings  Higher dividends  Higher profit margins  Higher earnings per share  Improved cash flow

Copyright 2007 Prentice Hall Ch Financial vs. Strategic 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

Copyright 2007 Prentice Hall Ch Financial vs. Strategic 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

Copyright 2007 Prentice Hall Ch Not Managing by Objectives Managing by extrapolation Managing by crisis Managing by subjectives Managing by hope

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch Types of Strategies Operational Level Functional Level Division Level Corp Level A Large Company

Copyright 2007 Prentice Hall Ch Types of Strategies Operational Level Functional Level Company Level A Small Company

Copyright 2007 Prentice Hall Ch Types of Strategies Vertical Integration Strategies Forward Integration Backward Integration Horizontal Integration

Copyright 2007 Prentice Hall Ch Vertical Integration Strategies Gain Control Over --  Distributors  Suppliers  Competitors

Copyright 2007 Prentice Hall Ch Forward Integration Strategies Gain Control Over --  Distributors  Retailers

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch Backward Integration Strategies Ownership or Control --  Firm’s suppliers

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch Horizontal Integration Strategies Ownership or Control --  Firm’s competitors

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch Types of Strategies Intensive Strategies Market Penetration Market Development Product Development

Copyright 2007 Prentice Hall Ch Intensive Strategies Intensive Efforts --  Improve competitive position with existing products

Copyright 2007 Prentice Hall Ch Market Penetration Strategies Increased Market Share --  Present products/services  Present markets  Greater marketing efforts

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch Market Development Strategies New Markets --  Present products/services to new geographic areas

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch Product Development Strategies Increased Sales --  Improving present products/services  Developing new products/services

Copyright 2007 Prentice Hall Ch Product Development Strategies Guidelines --  Products in maturity stage of life cycle  Industry characterized by rapid technological development  Competitors offer better-quality comparable prices  Compete in high-growth industry  Strong R&D capabilities

Copyright 2007 Prentice Hall Ch Types of Strategies Diversification Strategies Related Diversification Unrelated Diversification

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch Unrelated Diversification May be Effective 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

Copyright 2007 Prentice Hall Ch Unrelated Diversification May be Effective When: An organization has the opportunity to purchase an unrelated business as an attractive investment opportunity There exists financial synergy between the acquired and acquiring firm Existing markets for the present products are saturated Antitrust action could be charged against a company

Copyright 2007 Prentice Hall Ch Types of Strategies Defensive Strategies Retrenchment Divestiture Liquidation

Copyright 2007 Prentice Hall Ch Retrenchment Strategies Regrouping --  Cost & asset reduction to reverse declining sales & profit

Copyright 2007 Prentice Hall Ch Bankruptcy Chapter 7 – Liquidation Chapter 9 – Municipalities Chapter 11 – Reorganization for Corporations Chapter 12 – Family Farmers Cheaper 13 – Reorganization for Small Businesses and Individuals

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch Divestiture Strategies  Selling a division or part of an organization

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch Liquidation Strategies  Company’s assets, in parts, for their tangible worth Selling

Copyright 2007 Prentice Hall Ch Liquidation Strategies Guidelines --  Retrenchment & divestiture failed  Only alternative is bankruptcy  Minimize stockholder loss by selling firm’s assets

Copyright 2007 Prentice Hall Ch Michael Porter’s Generic Strategies Cost Leadership Strategies Differentiation Strategies Focus Strategies

Copyright 2007 Prentice Hall Ch 5 -56

Copyright 2007 Prentice Hall Ch Generic Strategies  In conjunction with differentiation  Economies or diseconomies of scale  Capacity utilization achieved  Linkages w/ suppliers & distributors Cost Leadership (Type 1 and Type 2)

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch Generic Strategies  Many price-sensitive buyers  Few ways of achieving differentiation  Buyers not sensitive to brand differences  Large # of buyers w/bargaining power Low Cost Producer Advantage

Copyright 2007 Prentice Hall Ch Generic Strategies  Greater product flexibility  Greater compatibility  Lower costs  Improved service  Greater convenience  More features Differentiation (Type 3)

Copyright 2007 Prentice Hall Ch Differentiation Can be especially effective when: 1. There are many ways to differentiate and many buyers perceive the value of the differences 2. Buyer needs and uses are diverse 3. Few rival firms are following a similar differentiation approach 4. Technology change is fast paced and competition revolves around evolving product features

Copyright 2007 Prentice Hall Ch Generic Strategies  Industry segment of sufficient size  Good growth potential  Not crucial to success of major competitors Focused Strategies (Type 4 & 5)

Copyright 2007 Prentice Hall Ch Focused Strategy Can be especially effective when: 1. The target market niche is large, profitable, and growing 2. Industry leaders do not consider the niche crucial 3. Industry leaders consider the niche too costly or difficult to meet 4. The industry has many different niches and segments 5. Few, if any, other rivals are attempting to specialize in the same target segment

Copyright 2007 Prentice Hall Ch 5 -65

Copyright 2007 Prentice Hall Ch Means for Achieving Strategies  Two or more companies form a temporary partnership or consortium for purpose of capitalizing on some opportunity Joint Venture/Partnering -

Copyright 2007 Prentice Hall Ch Reasons why Mergers and Acquisitions Fail Integration difficulties Inadequate evaluation of target Large or extraordinary debt Inability to achieve synergy

Copyright 2007 Prentice Hall Ch Means for Achieving Strategies  R&D partnerships  Cross-distribution agreements  Cross-licensing agreements  Cross-manufacturing agreements  Joint-bidding consortia Cooperative Arrangements -

Copyright 2007 Prentice Hall Ch Means for Achieving Strategies  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 Why Joint Ventures Fail -

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch Means for Achieving Strategies  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 Mergers & Acquisitions

Copyright 2007 Prentice Hall Ch Recent Mergers Acquiring FirmAcquired Firm IBMAscential Software Philip MorrisPT Hanjaya Mandala Samp U.S. SteelNational Steel Corp OraclePeopleSoft OSIM International LtdBrookstone Adobe SystemsMacromedia US AirwaysAmerican West United Parcel ServiceOvernight Corp.

Copyright 2007 Prentice Hall Ch First Mover Advantages  Benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms

Copyright 2007 Prentice Hall Ch First Mover 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 Potential Advantages

Copyright 2007 Prentice Hall Ch Outsourcing  Companies taking over the functional operations of other firms Business-process outsourcing (BPO)

Copyright 2007 Prentice Hall Ch Outsourcing  Less expensive  Allows firm to focus on core business  Enables firm to provide better services Benefits

Copyright 2007 Prentice Hall Ch Key Terms & Concepts For Review (Chapter 5) Acquisition Concentric Diversification Backward Integration Conglomerate Diversification Bankruptcy Cooperative Arrangements Combination Strategy Cost Leadership

Copyright 2007 Prentice Hall Ch Key Terms & Concepts For Review (Chapter 5) DifferentiationFocus Diversification Strategies Forward Integration DivestitureFranchising First Mover Advantages Generic Strategies

Copyright 2007 Prentice Hall Ch Key Terms & Concepts For Review (Chapter 5) Horizontal Diversification Intensive Strategies Horizontal Integration Joint Venture Hostile TakeoverLeveraged Buyout Integration Strategies Liquidation

Copyright 2007 Prentice Hall Ch Key Terms & Concepts For Review (Chapter 5) Long-Term Objectives Outsourcing Market DevelopmentProduct Development Market PenetrationRetrenchment MergerVertical Integration