1. Strategic Management Concepts: A Competitive Advantage Approach
Sixteenth Edition
Chapter 5
Strategies in Action
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2. Agenda Assignment 3 Due Assignment 4 posted Covers chap 5 & 6
Assignment 2 Corrected
results are disappointing
Assignment 3 Due
Assignment 4 posted
Covers chap 5 & 6
Due Feb 26 prior to class
Lecture on Strategies in Action

3. Strategies in Action Amar Bhide
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

4. A Comprehensive Strategic-Management Model

5. Stages of Strategic Management
Strategy formulation
Strategy implementation
Strategy evaluation
The strategic-management process consists of three stages: strategy formulation, strategy implementation,
and strategy evaluation.

6. Learning Objectives (1 of 2)
5.1 Identify and discuss eight characteristics of objectives and ten benefits of having clear objectives. 5.2 Define and give an example of eleven types of strategies. 5.3 Identify and discuss the three types of “Integration Strategies.” 5.4 Give specific guidelines when market penetration, market development, and product development are especially effective strategies. 5.6 Explain when diversification is an effective business strategy.
After studying this chapter, you should be able to do the following:
5-1. Identify and discuss eight characteristics of objectives and ten benefits of having
clear objectives.
5-2. Define and give an example of eleven types of strategies.
5-3. Identify and discuss the three types of “Integration Strategies.”
5-4. Give specific guidelines when market penetration, market development, and product
development are especially effective strategies.
5-5. Explain when diversification is an effective business strategy.
5-6. List guidelines for when retrenchment, divestiture, and liquidation are especially effective
strategies.
5-7. Identify and discuss Porter’s five generic strategies.
5-8. Compare (a) cooperation among competitors, (b) joint venture and partnering, and
(c) merger/acquisition as key means for achieving strategies.
5-9. Discuss tactics to facilitate strategies, such as (a) being a first mover, (b) outsourcing,
and (c) reshoring.
5-10. Explain how strategic planning differs in for-profit, not-for-profit, and small firms.

7. Learning Objectives (2 of 2)
5.6 List guidelines for when retrenchment, divestiture, and liquidation are especially effective strategies. 5.7 Identify and discuss Porter’s five generic strategies. 5.8 Compare (a) cooperation among competitors, (b) joint venture and partnering, and (c) merger/acquisition as key means for achieving strategies. 5.9 Discuss tactics to facilitate strategies, such as (a) being a first mover, (b) outsourcing, and (c) reshoring Explain how strategic planning differs in for-profit, not- for-profit, and small firms.

8. Long-Term Objectives
The results expected from pursuing certain strategies
2-to-5 year timeframe
Without long-term objectives, an organization would drift aimlessly toward some unknown end.

9. Table 5-1 Varying Performance Measures by Organizational Level
Basis for Annual Bonus or Merit Pay
Corporate
75% based on long-term objectives
25% based on annual objectives
Division
50% based on long-term objectives
50% based on annual objectives
Function
25% based on long-term objectives
75% based on annual objectives
Long-term objectives are needed at the corporate, divisional, and functional levels of an organization.

10. Table 5-2 The Desired Characteristics of Objectives
Quantitative
Measurable
Realistic
Understandable
Challenging
Hierarchical
Obtainable
Congruent across departments

11. The Nature of Long-Term Objectives
provide direction
allow synergy
assist in evaluation
establish priorities
reduce uncertainty
minimize conflicts
stimulate exertion
aid in both the allocation of resources and the design of jobs
Objectives provide a basis for consistent decision making by managers whose values and attitudes differ. Objectives serve as standards by which individuals, groups, departments, divisions, and entire organizations can be evaluated.

12. A SMART way to Look at Objectives
Specific – Objectives should specify what they want to achieve.
Measurable – You should be able to measure whether you are meeting the objectives or not.
Achievable - Are the objectives you set, achievable and attainable?
Realistic – Can you realistically achieve the objectives with the resources you have?
Time – When do you want to achieve the set objectives?

13. Financial Versus Strategic Objectives
Financial objectives include growth in revenues, growth in earnings, higher dividends, larger profit margins, greater return on investment, higher earnings per share, a rising stock price, improved cash flow, and so on.
Strategic objectives include a larger market share, quicker on-time delivery than rivals, shorter design-to- market times than rivals, lower costs than rivals, higher product quality than rivals, wider geographic coverage than rivals, achieving technological leadership, consistently getting new or improved products to market ahead of rivals, and so on.
Two types of objectives are especially common in organizations: financial and strategic objectives.

14. Management by objective works - if you know the objectives
Management by objective works - if you know the objectives. Ninety percent of the time you don't.
Peter Drucker

15. Not Managing by Objectives
Managing by Extrapolation
Managing by Crisis
Managing by Subjectives
Managing by Hope

16. Types of Strategies
Most organizations simultaneously pursue a combination of two or more strategies, but a combination strategy can be exceptionally risky if carried too far.
No organization can afford to pursue all the strategies that might benefit the firm.
Difficult decisions must be made and priorities must be established.
Hansen and Smith explain that strategic planning involves “choices that risk resources and trade-offs that sacrifice opportunity.”

17. Table 5-4 Alternative Strategies Defined and Exemplified (1 of 2)
Strategy
Definition
Example
Forward Integration
Gaining ownership or increased control over distributors or retailers
Amazon began rapid delivery services in some U.S. cities.
Backward Integration
Seeking ownership or increased control of a firm’s suppliers
Starbucks purchased a coffee farm.
Horizontal Integration
Seeking ownership or increased control over competitors
BB&T acquired Susquehanna Bancshares.
Market Penetration
Seeking increased market share for present products or services in present markets through greater marketing efforts
Under Armour signed tennis champion Andy Murray to a 4-year, $23 million marketing deal.
Market Development
Introducing present products or services into new geographic area
Gap opened its first five stores in China.
Product Development
Seeking increased sales by improving present products or
services or developing new ones
Amazon just began offering its own line of baby diapers and wipes.
Defined and exemplified in Table 5-4, alternative strategies that an enterprise could pursue can be categorized into 11 actions.
Alternative Strategies Defined and Recent Examples Given

18. Table 5-4 Alternative Strategies Defined and Exemplified (2 of 2)
Strategy
Definition
Example
Related Diversification
Adding new but related products or services
Facebook acquired the text-messaging firm WhatsApp for $19 billion.
Unrelated Diversification
Adding new, unrelated products or services
Kroger and Whole Foods Market are cooking meals, becoming restaurants.
Retrenchment
Regrouping through cost and asset reduction to reverse declining sales and profit
Staples closed 250 stores and reduced by 50% the size of other stores.
Divestiture
Selling a division or part of an organization
Sears Holdings divested its Land’s End division to Sears’ shareholders.
Liquidation
Selling all of a company’s assets, in parts, for their
tangible worth
The Trump Taj Mahal in Atlantic City, New Jersey, faces liquidation.

19. Figure 5-2 Levels of Strategies with Persons Most Responsible
Strategy making is not just a task for top executives. Middle- and lower-level managers also must be involved in the strategic-planning process to the extent possible. In large firms, there are actually four levels of strategies: corporate, divisional, functional, and operational.

20. Integration Strategies
Forward Integration
involves gaining ownership or increased control over distributors or retailers
Backward Integration
strategy of seeking ownership or increased control of a firm's suppliers
Horizontal Integration
a strategy of seeking ownership of or increased control over a firm's competitors
Forward integration and backward integration are sometimes collectively referred to as vertical integration. Vertical integration strategies allow a firm to gain control over distributors and suppliers, whereas horizontal integration refers to gaining ownership and/or control over competitors.

21. Forward Integration Guidelines
When an organization’s present distributors are especially expensive
When the availability of quality distributors is so limited as to offer a competitive advantage
When an organization competes in an industry that is growing
When an organization has both capital and human resources to manage distributing their own products
When the advantages of stable production are particularly high
When present distributors or retailers have high profit margins
Forward integration involves gaining ownership or increased control over distributors or retailers.

22. Backward Integration Guidelines
When an organization’s present suppliers are especially expensive or unreliable
When the number of suppliers is small and the number of competitors is large
When the organization competes in a growing industry
When an organization has both capital and human resources
When the advantages of stable prices are particularly important
When present suppliers have high profit margins
When an organization needs to quickly acquire a needed resource
Backward integration is a strategy of seeking ownership or increased control of a firm’s suppliers.

23. Horizontal Integration Guidelines
When an organization can gain monopolistic characteristics in a particular area or region without being challenged by the federal government
When an organization competes in a growing industry
When increased economies of scale provide major competitive advantages
When an organization has both the capital and human talent needed
When competitors are faltering due to a lack of managerial expertise
Seeking ownership of or control over a firm’s competitors, horizontal integration is arguably the most common growth strategy.

24. Intensive Strategies Market Penetration Strategy
seeks to increase market share for present products or services in present markets through greater marketing efforts
Market Development
involves introducing present products or services into new geographic areas
Product Development Strategy
seeks increased sales by improving or modifying present products or services
Market penetration, market development, and product development are sometimes referred to as intensive strategies because they require intensive efforts if a firm’s competitive position with existing products is to improve.

25. Market Penetration Guidelines
When current markets are not saturated with a particular product or service
When the usage rate of present customers could be increased significantly
When the market shares of major competitors have been declining while total industry sales have been increasing
When the correlation between dollar sales and dollar marketing expenditures historically has been high
When increased economies of scale provide major competitive advantages
Market penetration strategy seeks to increase market share for present products or services in present markets through greater marketing efforts when current markets are not saturated with a particular product or service.

26. Market Development Guidelines
When new channels of distribution are available that are reliable, inexpensive, and of good quality
When an organization is very successful at what it does
When new untapped or unsaturated markets exist
When an organization has the needed capital and human resources to manage expanded operations
When an organization has excess production capacity
When an organization’s basic industry is rapidly becoming global in scope
Market development involves introducing present products or services into new geographic areas.

27. Product Development Guidelines
When an organization has successful products that are in the maturity stage of the product life cycle
When an organization competes in an industry characterized by rapid technological developments
When major competitors offer better-quality products at comparable prices
When an organization competes in a high-growth industry
When an organization has strong research and development capabilities
Product development strategy seeks increased sales by improving or modifying present products or services.

29. Diversification Strategies
Related Diversification
value chains possess competitively valuable cross- business strategic fits
Unrelated Diversification
value chains are so dissimilar that no competitively valuable cross-business relationships exist
The two general types of diversification strategies are related diversification and unrelated diversification.

30. Synergies of Related Diversification
Transferring competitively valuable expertise, technological know-how, or other capabilities from one business to another
Combining the related activities of separate businesses into a single operation to achieve lower costs
Exploiting common use of a known brand name
Using cross-business collaboration to create strengths
Related diversification value chains possess competitively valuable cross-business strategic fits.

31. Related Diversification Guidelines
When an organization competes in a no-growth or a slow- growth industry
When adding new, but related, products would significantly enhance the sales of current products
When new, but related, products could be offered at highly competitive prices
When new, but related, products have seasonal sales levels that counterbalance an organization’s existing peaks and valleys
When an organization’s products are currently in the declining stage of the product’s life cycle
When an organization has a strong management team
Related diversification should be considered when these circumstances exist.

32. Unrelated Diversification Guidelines (1 of 2)
When revenues derived from an organization’s current products would increase significantly by adding the new, unrelated products
When an organization competes in a highly competitive or a no- growth industry, as indicated by low industry profit margins and returns
When an organization’s present channels of distribution can be used to market the new products to current customers
When the new products have countercyclical sales patterns compared to present products
When an organization’s basic industry is experiencing declining annual sales and profits
Unrelated diversification is when value chains are so dissimilar that no competitively valuable cross-business relationships exist.

33. Unrelated Diversification Guidelines (2 of 2)
When an organization has the capital and managerial talent needed to compete successfully in a new industry
When an organization has the opportunity to purchase an unrelated business that is an attractive investment opportunity
When there exists financial synergy
When existing markets for an organization’s present products are saturated
When antitrust action could be charged against an organization that historically has concentrated on a single industry
Note that a key difference between related and unrelated diversification is that the former should be based on some commonality in markets, products, or technology, whereas the latter is based more on profit considerations.

34. Defensive Strategies (1 of 3)
Retrenchment
Regroups through cost and asset reduction to reverse declining sales and profits
Divestiture
Selling a division or part of an organization
Often used to raise capital for further strategic acquisitions or investments
Liquidation
Selling all of a company’s assets, in parts, for their tangible worth
In addition to integrative, intensive, and diversification strategies, organizations also could pursue defensive strategies such as retrenchment, divestiture, or liquidation.

35. Defensive Strategies (2 of 3)
Retrenchment
occurs when an organization regroups through cost and asset reduction to reverse declining sales and profits
also called a turnaround or reorganizational strategy
designed to fortify an organization’s basic distinctive competence
Right–sizing or down-sizing
Retrenchment occurs when an organization regroups through cost and asset reduction to reverse declining sales and profits.

36. Retrenchment Guidelines
When an organization has a distinctive competence but has failed consistently to meet its goals
When an organization is one of the weaker competitors in a given industry
When an organization is plagued by inefficiency, low profitability, and poor employee morale
When an organization fails to capitalize on external opportunities and minimize external threats
When an organization has grown so large so quickly that major internal reorganization is needed
Sometimes called a turnaround or reorganizational strategy, retrenchment is designed to fortify an organization’s basic distinctive competence.

37. Divestiture Guidelines
When an organization has pursued a retrenchment strategy and failed to accomplish improvements
When a division needs more resources to be competitive than the company can provide
When a division is responsible for an organization's overall poor performance
When a division is a misfit with the rest of an organization
When a large amount of cash is needed quickly
When government antitrust action threatens a firm
Divestiture is selling a division or part of an organization and is often used to raise capital for further strategic acquisitions or investments.

38. Defensive Strategies (3 of 3)
Liquidation
selling all of a company’s assets, in parts, for their tangible worth
can be an emotionally difficult strategy
Selling all of a company’s assets, in parts, for their tangible worth is called liquidation; it is associated with Chapter 7 bankruptcy. Liquidation is a recognition of defeat and consequently can be an emotionally difficult strategy.

39. Liquidation Guidelines
When an organization has pursued both a retrenchment strategy and a divestiture strategy, and neither has been successful
When an organization’s only alternative is bankruptcy
When the stockholders of a firm can minimize their losses by selling the organization’s assets
Liquidation is pursued when bankruptcy is the only option available.

40. Bankruptcy Chapter 7 – Liquidation Chapter 9 – Municipalities
Chapter 11 – Reorganization for Corporations
Chapter 12 – Family Farmers
Chapter 13 – Reorganization for Small Businesses and Individuals

41. Figure 5-3 Porter’s Five Generic Strategies
Probably the three most widely read books on competitive analysis in the 1980s were Michael Porter’s Competitive Strategy (1980), Competitive Advantage (1985), and Competitive Advantage of Nations (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.
Source: Based on Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980),

42. Michael Porter's Five Generic Strategies (1 of 3)
Cost Leadership emphasizes producing standardized products at a very low per-unit cost for consumers who are price-sensitive
Type 1
low-cost strategy that offers products or services to a wide range of customers at the lowest price available on the market
Type 2
best-value strategy that offers products or services to a wide range of customers at the best price-value available on the market
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.
Companies employing a low-cost (Type 1) or best-value (Type 2) cost leadership strategy must achieve their competitive advantage in ways that are difficult for competitors to copy or match.

43. Michael Porter's Five Generic Strategies (2 of 3)
Type 3
Differentiation is a strategy aimed at producing products and services considered unique industry-wide and directed at consumers who are relatively price- insensitive
Different strategies offer different degrees of differentiation. Differentiation does not guarantee competitive advantage, especially if standard products sufficiently meet customer needs or if rapid imitation by competitors is possible.

44. Michael Porter's Five Generic Strategies (3 of 3)
Type 4
low-cost focus strategy that offers products or services to a niche group of customers at the lowest price available on 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
A successful focus strategy depends on an industry segment that is of sufficient size, has good growth potential, and is not crucial to the success of other major competitors.

45. Means for Achieving Strategies
Cooperation Among Competitors
Joint Venture/Partnering
Merger/Acquisition
Private-Equity Acquisitions
First Mover Advantages
Outsourcing/Reshoring
For collaboration between competitors to succeed, both firms must contribute something distinctive, such as technology, distribution, basic research, or manufacturing capacity.
Joint venture is a popular strategy that occurs when two or more companies form a temporary partnership or consortium for the purpose of capitalizing on some opportunity.
A merger occurs when two organizations of about equal size unite to form one enterprise. An acquisition occurs when a large organization purchases (acquires) a smaller firm or vice versa.
Private equity (PE) firms are acquiring and taking private a wide variety of companies almost daily in the business world.
First mover advantages refer to the benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms.
Outsourcing involves companies hiring other companies to take over various parts of their functional operations, such as human resources, information systems, payroll, accounting, customer service, and even marketing.

46. Table 5-5 Nine Reasons Why Many Mergers and Acquisitions Fail
Integration difficulties
Inadequate evaluation of target
Large or extraordinary debt
Inability to achieve synergy
Too much diversification
Managers overly focused on acquisitions
Too large an acquisition
Difficult to integrate different organizational cultures
Reduced employee morale due to layoffs and relocations

47. Table 5-6 Eleven Potential Benefits of Merging With or Acquiring Another Firm
To provide improved capacity utilization
To make better use of the existing sales force
To reduce managerial staff
To gain economies of scale
To smooth out seasonal trends in sales
To gain access to new suppliers, distributors, customers, products, and creditors
To gain new technology
To gain market share
To enter global markets
To gain pricing power
To reduce tax obligations

48. Table 5-7 Five Benefits of a Firm Being the First Mover
Secure access and commitments to rare resources.
Gain new knowledge of critical success factors and issues.
Gain market share and position in the best locations.
Establish and secure long-term relationships with customers, suppliers, distributors, and investors.
Gain customer loyalty and commitments.
First mover advantages are analogous to taking the high ground first, which puts one in an excellent strategic position to launch aggressive campaigns and to defend territory.

49. Copyright