1. Copyright 2005 Prentice Hall1 Bus 411 Day 8

2. Copyright 2005 Prentice Hall Ch 3 -2 Agenda Assignment #2 Not corrected  Still missing two submissions  Will be graded tomorrow Assignment 3 Posted  Due Feb 20 No lecture on March 3  Possible alternatives (check BlackBoard) Disney SWOT posted with class slides Finish Discussion on Internal Assessment Begin Discussion on Strategies in Action

3. Copyright 2005 Prentice Hall Ch 3 -3

4. Copyright 2005 Prentice Hall Ch 3 -4 Research & Development Research & Development Functions  Development of new products before competitors  Improving product quality  Improving manufacturing processes to reduce costs

5. Copyright 2005 Prentice Hall Ch 3 -5 Financing as many projects as possible Use percent-of-sales method Budgeting relative to competitors How many successful new products are needed Research & Development R&D Budgets

6. Copyright 2005 Prentice Hall Ch 3 -6 Research & Development Audit Are the R&D facilities adequate? If R&D is outsourced, is it cost effective? Are the R&D personnel well qualified? Are R&D resources allocated effectively? Are the R&D facilities adequate? If R&D is outsourced, is it cost effective? Are the R&D personnel well qualified? Are R&D resources allocated effectively?

7. Copyright 2005 Prentice Hall Ch 3 -7 Research & Development Audit Are MIS and computer systems adequate? Is communication between R&D & other organizational units effective? Are present products technologically competitive? Are MIS and computer systems adequate? Is communication between R&D & other organizational units effective? Are present products technologically competitive?

8. Copyright 2005 Prentice Hall Ch 3 -8 Management Information Systems Purpose  Improve performance of an enterprise by improving the quality of managerial decisions.

9. Copyright 2005 Prentice Hall Ch 3 -9 Management Information Systems Information Systems CIO/CTO Security User-friendly E-commerce

10. Copyright 2005 Prentice Hall Ch 3 -10 Management Information Systems Audit Do managers use the information system to make decisions? Is there a CIO or Director of Information Systems position in the firm? Is data updated regularly? Do managers use the information system to make decisions? Is there a CIO or Director of Information Systems position in the firm? Is data updated regularly?

11. Copyright 2005 Prentice Hall Ch 3 -11 Management Information Systems Audit Do managers from all functional areas contribute input to the information system? Are there effective passwords for entry into the firm’s information system? Are strategists of the firm familiar with the information systems of rival firms? Do managers from all functional areas contribute input to the information system? Are there effective passwords for entry into the firm’s information system? Are strategists of the firm familiar with the information systems of rival firms?

12. Copyright 2005 Prentice Hall Ch 3 -12 Management Information Systems Audit Is the information system user-friendly? Do all users understand the competitive advantages that information can provide? Are computer training workshops provided for users? Is the firm’s system being improved? Is the information system user-friendly? Do all users understand the competitive advantages that information can provide? Are computer training workshops provided for users? Is the firm’s system being improved?

13. Copyright 2005 Prentice Hall Ch 3 -13 The IFE Matrix A summary step in conducting an internal strategic- management audit is to construct an IFE Matrix. This strategy-formulation tool summarizes and evaluates the major strengths and weaknesses in the functional areas of a business, and it also provides a basis for identifying and evaluating relationships among these areas. Intuitive judgments are required in developing an IFE Matrix, so the appearance of a scientific approach should not be interpreted to mean this is an all-powerful technique.

14. Copyright 2005 Prentice Hall Ch 3 -14 5 Steps to an IFE 1.List key internal factors as identified in the internal-audit process. Use a total from ten to twenty internal factors including both strengths and weaknesses. 2.Assign a weight ranging from 0 (not important) to 1.0 (very important). The weight indicates the relative importance of the factor to being successful in the firm’s industry. The sum of all the weights must equal 1.0. 3.Assign a 1-4 rating to each factor to indicate whether that factor represents a major weakness (1), minor weakness (2), minor strength (3), or major strength (4). 4.Multiply each factor’s weight by its rating to determine a weighted score for each variable. 5.Sum the weighted scores for each variable to determine the total weighted score for the organization. Total weighted scores of below 2.5 indicate an internally weak organization.

15. Copyright 2005 Prentice Hall Ch 3 -15 IFE– Gateway Computers (2003) Key Internal Factors WeightRating Wtd Score Strengths 1. Several new senior executive with world- class skills and leadership experience 0.0540.40 2. Continuous decline in operating costs and cost of goods sold 0.0530.15 3. Well-known brand name0.0530.15 4. Consumer Reports (Sept 2002) recommended Gateway 500X as #1 0.1040.40 5. As a direct seller, Gateway holds high brand recognition 0.0530.15

16. Copyright 2005 Prentice Hall Ch 3 -16 IFE– Gateway Computers (2003) Key Internal Factors WeightRating Wtd Score Strengths (cont’d) 6. Gateway is diversifying into non-PC products 0.1030.30 7. Good relationship with its suppliers.0.0540.20 8. Economies of scale, the 6 th largest PC maker I the world 0.0540.20 9. Gateway retails stores excellent0.0530.15

17. Copyright 2005 Prentice Hall Ch 3 -17 IFE– Gateway Computers (2003) Key Internal Factors WeightRating Wtd Score Weaknesses 1. High operating expense (22% of revenue vs. 10% for Dell) 0.0520.10 2. Almost no budget for R&D vs. Dell’s 18% of revenue 0.1010.05 3. Low return on assets ratio0.02510.10 4. No niche market0.02520.05

18. Copyright 2005 Prentice Hall Ch 3 -18 IFE– Gateway Computers (2003) Key Internal Factors WeightRating Wtd Score Weaknesses (cont’d) 5. Shortage of cash due to successive losses 0.1020.20 6. Limited number Gateway stores0.0520.10 7. Weak performance in overseas market0.1020.20 TOTAL1.002.80

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20. Copyright 2005 Prentice Hall Ch 3 -20

21. Copyright 2005 Prentice Hall Ch 3 -21 Chapter 5 Strategies in Action Strategic Management: Concepts & Cases 11 th Edition Fred David

22. Strategic Management Process Model Copyright 2005 Prentice Hall Ch 3 -22

23. Copyright 2005 Prentice Hall Ch 3 -23 Chapter Outline Long-Term Objectives Types of Strategies Integration Strategies

24. Copyright 2005 Prentice Hall Ch 3 -24 Chapter Outline ( cont’d ) Intensive Strategies Diversification Strategies Defensive Strategies

25. Copyright 2005 Prentice Hall Ch 3 -25 Chapter Outline ( cont’d ) Michael Porter’s Generic Strategies Means for Achieving Strategies First Mover Advantages

26. Copyright 2005 Prentice Hall Ch 3 -26 Chapter Outline ( cont’d ) Outsourcing Strategic Management in Nonprofit & Governmental Organizations Strategic Management in Small Firms

27. Copyright 2005 Prentice Hall Ch 3 -27 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

28. Copyright 2005 Prentice Hall Ch 3 -28 Strategies in Action -- Quest for higher revenues -- Quest for higher profits Companies Embrace Strategic Planning

29. Copyright 2005 Prentice Hall Ch 3 -29 Results expected from pursuing certain strategies Strategies represent actions to accomplish long-term objectives Long-Term Objectives

30. Copyright 2005 Prentice Hall Ch 3 -30 Long-Term Objectives Objectives --  Quantifiable  Measurable  Realistic  Understandable  Challenging

31. Copyright 2005 Prentice Hall Ch 3 -31 A SMART way to Look at Objectives 1.Specific – Objectives should specify what they want to achieve. 2.Measurable – You should be able to measure whether you are meeting the objectives or not. 3.Achievable - Are the objectives you set, achievable and attainable? 4.Realistic – Can you realistically achieve the objectives with the resources you have? 5.Time – When do you want to achieve the set objectives?

32. Copyright 2005 Prentice Hall Ch 3 -32 Long-Term Objectives Objectives --  Hierarchical  Obtainable  Congruent  Time-line

33. Copyright 2005 Prentice Hall Ch 3 -33 Varying Performance Measures by Organizational Level

34. Copyright 2005 Prentice Hall Ch 3 -34 Financial vs. Strategic Objectives Financial Objectives  Growth in revenues  Growth in earnings  Higher dividends  Higher profit margins  Higher earnings per share  Improved cash flow

35. Copyright 2005 Prentice Hall Ch 3 -35 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

36. Copyright 2005 Prentice Hall Ch 3 -36 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

37. Copyright 2005 Prentice Hall Ch 3 -37 Not Managing by Objectives Managing by extrapolation Managing by crisis Managing by subjectives Managing by hope

38. Copyright 2005 Prentice Hall Ch 3 -38 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 More on the balanced scorecard in Chapter 9

39. Copyright 2005 Prentice Hall Ch 3 -39 Types of Strategies Operational Level Functional Level Division Level Corp Level A Large Company CEO President Directors Managers

40. Copyright 2005 Prentice Hall Ch 3 -40 Types of Strategies Operational Level Functional Level Company Level A Small Company Owner/president Directors Managers

41. Copyright 2005 Prentice Hall Ch 3 -41 Types of Strategies Integration Strategies Forward Integration Backward Integration Horizontal Integration

42. Copyright 2005 Prentice Hall Ch 3 -42 Vertical Integration Strategies Gain Control Over --  Distributors  Suppliers  Competitors

43. Copyright 2005 Prentice Hall Ch 3 -43 Forward Integration Strategies Gain Control Over --  Distributors  Retailers

44. Copyright 2005 Prentice Hall Ch 3 -44 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

45. Copyright 2005 Prentice Hall Ch 3 -45 Backward Integration Strategies Ownership or Control --  Firm’s suppliers

46. Copyright 2005 Prentice Hall Ch 3 -46 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

47. Copyright 2005 Prentice Hall Ch 3 -47 Horizontal Integration Strategies Ownership or Control --  Firm’s competitors

48. Copyright 2005 Prentice Hall Ch 3 -48 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

49. Copyright 2005 Prentice Hall Ch 3 -49 Types of Strategies Intensive Strategies Market Penetration Market Development Product Development

50. Copyright 2005 Prentice Hall Ch 3 -50 Intensive Strategies Intensive Efforts --  Improve competitive position with existing products

51. Copyright 2005 Prentice Hall Ch 3 -51 Market Penetration Strategies Increased Market Share --  Present products/services  Present markets  Greater marketing efforts

52. Copyright 2005 Prentice Hall Ch 3 -52 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

53. Copyright 2005 Prentice Hall Ch 3 -53 Market Development Strategies New Markets --  Present products/services to new geographic areas

54. Copyright 2005 Prentice Hall Ch 3 -54 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

55. Copyright 2005 Prentice Hall Ch 3 -55 Product Development Strategies Increased Sales --  Improving present products/services  Developing new products/services

56. Copyright 2005 Prentice Hall Ch 3 -56 Product Development Strategies Guidelines --  Products in maturity stage of life cycle  Industry characterized by rapid technological development  Competitors offer better-quality products @ comparable prices  Compete in high-growth industry  Strong R&D capabilities

57. Copyright 2005 Prentice Hall Ch 3 -57 Types of Strategies Diversification Strategies Related Diversification Unrelated Diversification

58. Copyright 2005 Prentice Hall Ch 3 -58 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

59. Copyright 2005 Prentice Hall Ch 3 -59 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

60. Copyright 2005 Prentice Hall Ch 3 -60 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

61. Copyright 2005 Prentice Hall Ch 3 -61 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

62. Copyright 2005 Prentice Hall Ch 3 -62 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

63. Copyright 2005 Prentice Hall Ch 3 -63 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

64. Copyright 2005 Prentice Hall Ch 3 -64 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

65. Copyright 2005 Prentice Hall Ch 3 -65 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

66. Copyright 2005 Prentice Hall Ch 3 -66 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

67. Copyright 2005 Prentice Hall Ch 3 -67 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

68. Copyright 2005 Prentice Hall Ch 3 -68 Types of Strategies Defensive Strategies Retrenchment Divestiture Liquidation

69. Copyright 2005 Prentice Hall Ch 3 -69 Retrenchment Strategies Regrouping --  Cost & asset reduction to reverse declining sales & profit

70. Copyright 2005 Prentice Hall Ch 3 -70 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

71. Copyright 2005 Prentice Hall Ch 3 -71 Divestiture Strategies  Selling a division or part of an organization

72. Copyright 2005 Prentice Hall Ch 3 -72 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

73. Copyright 2005 Prentice Hall Ch 3 -73 Liquidation Strategies  Company’s assets, in parts, for their tangible worth Selling

74. Copyright 2005 Prentice Hall Ch 3 -74 Liquidation Strategies Guidelines --  Retrenchment & divestiture failed  Only alternative is bankruptcy  Minimize stockholder loss by selling firm’s assets

75. Copyright 2005 Prentice Hall Ch 3 -75 Bankruptcy Chapter 7 – Liquidation Chapter 9 – Municipalities Chapter 11 – Reorganization for Corporations Chapter 12 – Family Farmers Chapter 13 – Reorganization for Small Businesses and Individuals

76. Copyright 2005 Prentice Hall Ch 3 -76 Michael Porter’s Generic Strategies Cost Leadership Strategies Differentiation Strategies Focus Strategies

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78. Copyright 2005 Prentice Hall Ch 3 -78 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)

79. Copyright 2005 Prentice Hall Ch 3 -79 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

80. Copyright 2005 Prentice Hall Ch 3 -80 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

81. Copyright 2005 Prentice Hall Ch 3 -81 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

82. Copyright 2005 Prentice Hall Ch 3 -82 Generic Strategies  Greater product flexibility  Greater compatibility  Lower costs  Improved service  Greater convenience  More features Differentiation (Type 3)

83. Copyright 2005 Prentice Hall Ch 3 -83 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

84. Copyright 2005 Prentice Hall Ch 3 -84 Generic Strategies  Industry segment of sufficient size  Good growth potential  Not crucial to success of major competitors Focused Strategies (Type 4 & 5)

85. Copyright 2005 Prentice Hall Ch 3 -85 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

86. Copyright 2005 Prentice Hall Ch 3 -86

87. Copyright 2005 Prentice Hall Ch 3 -87 Means for Achieving Strategies  Two or more companies form a temporary partnership or consortium for purpose of capitalizing on some opportunity Joint Venture/Partnering -

88. Copyright 2005 Prentice Hall Ch 3 -88 Reasons why Mergers and Acquisitions Fail Integration difficulties Inadequate evaluation of target Large or extraordinary debt Inability to achieve synergy

89. Copyright 2005 Prentice Hall Ch 3 -89 Means for Achieving Strategies  R&D partnerships  Cross-distribution agreements  Cross-licensing agreements  Cross-manufacturing agreements  Joint-bidding consortia Cooperative Arrangements -

90. Copyright 2005 Prentice Hall Ch 3 -90 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 -

91. Copyright 2005 Prentice Hall Ch 3 -91 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

92. Copyright 2005 Prentice Hall Ch 3 -92 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

93. Copyright 2005 Prentice Hall Ch 3 -93 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

94. Copyright 2005 Prentice Hall Ch 3 -94 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.

95. Copyright 2005 Prentice Hall Ch 3 -95 First Mover Advantages  Benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms

96. Copyright 2005 Prentice Hall Ch 3 -96 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

97. Copyright 2005 Prentice Hall Ch 3 -97 Outsourcing  Companies taking over the functional operations of other firms Business-process outsourcing (BPO)

98. Copyright 2005 Prentice Hall Ch 3 -98 Outsourcing  Less expensive  Allows firm to focus on core business  Enables firm to provide better services Benefits