Visit UMT online at © 2005 UMT Version MGT195 Visit UMT online at BUSINESS POLICY AND STRATEGY University of Management and Technology 1901 N. Fort Myer Drive Arlington, VA USA Phone: (703) Fax: (703) Website:

Visit UMT online at © 2005 UMT Version MGT195 Visit UMT online at Chapter 5: Strategies in Action David, Fred R. Strategic Management: Concepts (9th ed.) © 2003 Prentice Hall.

5-3 Visit UMT online at © 2005 UMT Version MGT195 Chapter Outline Long-Term Objectives Types of Strategies Integration Strategies

5-4 Visit UMT online at © 2005 UMT Version MGT195 Chapter Outline Intensive Strategies Diversification Strategies Defensive Strategies Means for Achieving Strategies

5-5 Visit UMT online at © 2005 UMT Version MGT195 Chapter Outline Michael Porter’s Generic Strategies Strategic Management in Nonprofit and Governmental Organizations Strategic Management in Small Firms

5-6 Visit UMT online at © 2005 UMT Version MGT195 Strategies in Action Even if you’re on the right track, you’ll get run over if you just sit there. -- Will Rogers

5-7 Visit UMT online at © 2005 UMT Version MGT195 Strategies in Action Hundreds of companies today – Embrace strategic planning Quest for higher revenues Quest for higher profits

5-8 Visit UMT online at © 2005 UMT Version MGT195 Long-Term Objectives The results expected from pursuing certain strategies

5-9 Visit UMT online at © 2005 UMT Version MGT195 Long-Term Objectives Objectives – Quantifiable Measurable Realistic Understandable Challenging Hierarchical Obtainable Congruent Time-line

5-10 Visit UMT online at © 2005 UMT Version MGT195 Long-Term Objectives Long-term objectives are necessary – Corporate Divisional Functional levels

5-11 Visit UMT online at © 2005 UMT Version MGT195 Long-Term Objectives Strategists should avoid – Managing by Extrapolation Managing by Crisis Managing by Subjectives Managing by Hope

5-12 Visit UMT online at © 2005 UMT Version MGT195 Vertical Integration Strategies Forward Integration Backward Integration Horizontal Integration Integration Strategies

5-13 Visit UMT online at © 2005 UMT Version MGT195 Integration Strategies Vertical Integration strategies – Allow a firm to gain control over: Distributors Suppliers competitors

5-14 Visit UMT online at © 2005 UMT Version MGT195 Integration Strategies Forward Integration – Gaining ownership or increased control over distributors or retailers

5-15 Visit UMT online at © 2005 UMT Version MGT195 Integration Strategies 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 Organization has both capital and human resources needed to manage new business of distribution Advantages of stable production are high Present distributors have high profit margins

5-16 Visit UMT online at © 2005 UMT Version MGT195 Integration Strategies Backward Integration – Seeking ownership or increased control of a firm’s suppliers

5-17 Visit UMT online at © 2005 UMT Version MGT195 Integration Strategies 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

5-18 Visit UMT online at © 2005 UMT Version MGT195 Integration Strategies Horizontal Integration – Seeking ownership or increased control over competitors

5-19 Visit UMT online at © 2005 UMT Version MGT195 Integration Strategies 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

5-20 Visit UMT online at © 2005 UMT Version MGT195 Michael Porter’s Generic Strategies Cost Leadership Strategies Differentiation Strategies Focus Strategies

5-21 Visit UMT online at © 2005 UMT Version MGT195 Generic Strategies Cost Leadership Strategies – Pursued in conjunction with differentiation Economies or diseconomies of scale Capacity utilization achieved Linkages with suppliers and distributors

5-22 Visit UMT online at © 2005 UMT Version MGT195 Generic Strategies Low Cost Producer Advantages – Market of many price-sensitive buyers Few ways of achieving product differentiation Buyers not sensitive to brand differences Large number of buyers with bargaining power

5-23 Visit UMT online at © 2005 UMT Version MGT195 Generic Strategies Differentiation Strategies – Greater product flexibility Greater compatibility Lower costs Improved service Greater convenience More features

5-24 Visit UMT online at © 2005 UMT Version MGT195 Generic Strategies Differentiation Strategies – Allow firm to charge higher price Gain customer loyalty

5-25 Visit UMT online at © 2005 UMT Version MGT195 Generic Strategies Focus Strategies – Industry segment of sufficient size Good growth potential Not crucial to success of major competitors

5-26 Visit UMT online at © 2005 UMT Version MGT195 Generic Strategies Focus Strategies – Consumers have distinctive preferences Rival firms not attempting to specialize in the same target segment

5-27 Visit UMT online at © 2005 UMT Version MGT195 Intensive Strategies Market Penetration Market Development Product Development Intensive Strategies

5-28 Visit UMT online at © 2005 UMT Version MGT195 Intensive Strategies Intensive strategies – Require intensive efforts to improve a firm’s competitive position with existing products

5-29 Visit UMT online at © 2005 UMT Version MGT195 Intensive Strategies Market Penetration – Seeking increased market share for present products or services in present markets through greater marketing efforts

5-30 Visit UMT online at © 2005 UMT Version MGT195 Intensive Strategies 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

5-31 Visit UMT online at © 2005 UMT Version MGT195 Intensive Strategies Market Development – Introducing present products or services into new geographic area

5-32 Visit UMT online at © 2005 UMT Version MGT195 Intensive Strategies 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

5-33 Visit UMT online at © 2005 UMT Version MGT195 Intensive Strategies Product Development – Seeking increased sales by improving present products or services or developing new ones

5-34 Visit UMT online at © 2005 UMT Version MGT195 Intensive Strategies 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

5-35 Visit UMT online at © 2005 UMT Version MGT195 Diversification Strategies Concentric Diversification Conglomerate Diversification Horizontal Diversification Diversification Strategies

5-36 Visit UMT online at © 2005 UMT Version MGT195 Diversification Strategies Diversification strategies – Becoming less popular as organizations are finding it more difficult to manage diverse business activities

5-37 Visit UMT online at © 2005 UMT Version MGT195 Diversification Strategies Concentric Diversification – Adding new, but related, products or services

5-38 Visit UMT online at © 2005 UMT Version MGT195 Diversification Strategies 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

5-39 Visit UMT online at © 2005 UMT Version MGT195 Diversification Strategies Conglomerate Diversification – Adding new, unrelated products or services

5-40 Visit UMT online at © 2005 UMT Version MGT195 Diversification Strategies 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

5-41 Visit UMT online at © 2005 UMT Version MGT195 Diversification Strategies Horizontal Diversification – Adding new, unrelated products or services for present customers

5-42 Visit UMT online at © 2005 UMT Version MGT195 Diversification Strategies 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

5-43 Visit UMT online at © 2005 UMT Version MGT195 Defensive Strategies Retrenchment Divestiture Liquidation Defensive Strategies

5-44 Visit UMT online at © 2005 UMT Version MGT195 Defensive Strategies Retrenchment – Regrouping through cost and asset reduction to reverse declining sales and profit

5-45 Visit UMT online at © 2005 UMT Version MGT195 Defensive Strategies 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

5-46 Visit UMT online at © 2005 UMT Version MGT195 Defensive Strategies Divestiture – Selling a division or part of an organization

5-47 Visit UMT online at © 2005 UMT Version MGT195 Defensive Strategies 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.

5-48 Visit UMT online at © 2005 UMT Version MGT195 Recent Divestitures

5-49 Visit UMT online at © 2005 UMT Version MGT195 Defensive Strategies Liquidation– Selling all of a company’s assets, in parts, for their tangible worth

5-50 Visit UMT online at © 2005 UMT Version MGT195 Defensive Strategies 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

5-51 Visit UMT online at © 2005 UMT Version MGT195 Means for Achieving Strategies Joint Venture/Partnering – Two or more companies form a temporary partnership or consortium for purpose of capitalizing on some opportunity.

5-52 Visit UMT online at © 2005 UMT Version MGT195 Means for Achieving Strategies Cooperative Arrangements – Research and development partnerships Cross-distribution agreements Cross-licensing agreements Cross-manufacturing agreements Joint-bidding consortia

5-53 Visit UMT online at © 2005 UMT Version MGT195 Means for Achieving Strategies Problems Causing Joint Ventures to Fail – Managers who must collaborate daily not involved in forming or shaping the venture Venture may benefit the companies but not the customers Venture not supported equally by both partners Venture may begin to compete with one of the partners more so than the other

5-54 Visit UMT online at © 2005 UMT Version MGT195 Means for Achieving Strategies Guidelines for Joint Ventures – 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

5-55 Visit UMT online at © 2005 UMT Version MGT195 Recent Mergers Acquiring FirmAcquired Firm Hewlett-PackardCompaq Comuter EbayHomesDirect PepsiCoQuaker Oats Sara LeeEarthgrains Company Phillips PetroleumConoco DevonAnderson Exploration AMRTWA TellabsOcular Networks

5-56 Visit UMT online at © 2005 UMT Version MGT195 Key Terms Acquisition Backward Integration Combination Strategy Concentric Diversification Conglomerate Diversification Cooperative Arrangements Cost Leadership

5-57 Visit UMT online at © 2005 UMT Version MGT195 Key Terms Differentiation Diversification Strategies Divestiture Focus Forward Integration Franchising Generic Strategies

5-58 Visit UMT online at © 2005 UMT Version MGT195 Key Terms Horizontal Diversification Horizontal Integration Integration Strategies Intensive Strategies Joint Venture Liquidation Long-Term Objectives

5-59 Visit UMT online at © 2005 UMT Version MGT195 Key Terms Market Development Market Penetration Merger Outsourcing Product Development Retrenchment Takeover Vertical Integration