Strategic Management: A Competitive
Advantage Approach, Concepts and
Cases
Eighteenth Edition Global Edition
Chapter 5
Strategies in Action
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Learning Objectives
5.1 Identify and discuss 5 characteristics and 10 benefits of
clear objectives.
5.2 Define and give an example of 11 types of strategies.
5.3 Identify and discuss the three types of integration
strategies.
5.4 Give specific guidelines for when market penetration,
market development, and product development are
especially effective strategies.
5.5 Explain when diversification is an effective business
strategy.
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Learning Objectives (continued)
5.6 List guidelines for when retrenchment, divestiture, and
liquidation are especially effective strategies.
5.7 Explain value chain analysis and benchmarking in
strategic management.
5.8 Identify and discuss Porter’s two generic strategies:
cost leadership and differentiation.
5.9 Compare and contrast when companies should build,
borrow, or buy as key means for achieving strategies.
5.10 Discuss first-mover advantages and disadvantages.
5.11 Explain how strategic planning differs in for-profit, not-
for-profit, and small firms.
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Figure 5.1
The Comprehensive, Integrative, Strategic Management Model
Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 1 (February 1989): 91.
See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s
Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics and
Technology no. 4 (October 2010): 20.
See also Meredith E. David, Fred R. David, and Forest R. David, “Closing the Gap Between Graduates’ Skills and
Employers’ Requirements: A Focus on the Strategic Management Capstone Business Course,” Administrative Sciences
11, no. 1 (2021): 10–26.
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Long-Term Objectives
• The results expected from pursuing certain strategies
• 2- to 5-year timeframe
• Without long-term objectives the firm would drift aimlessly
toward some unknown end or chase short-term fads
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Table 5.1
Five Characteristics of Objectives
1. Quantitative: measurable
2. Understandable: clear
3. Challenging: achievable
4. Compatible: consistent vertically and horizontally in a
chain of command
5. Obtainable: realistic
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Table 5.2
10 Benefits of Having Clear Objectives
1. Provide direction by revealing expectations.
2. Allow synergy.
3. Assist in evaluation by serving as standards.
4. Establish priorities.
5. Reduce uncertainty.
6. Minimize conflicts.
7. Stimulate exertion.
8. Aid in allocation of resources.
9. Aid in design of jobs.
10. Provide basis for consistent decision-making.
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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.
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Avoid Managing by Crisis, Hope,
Extrapolation, and Mystery (CHEM)
• Managing by Crisis – based on the belief that good
managers are problem solvers.
• Managing by Hope – based on the future uncertainty and
we may have to make multiple attempts and hope we
succeed at some point.
• Managing by Extrapolation – based on the adage “If it
ain’t broke, don’t fix it.” Maintain the status quo if things
appear to be going right.
• Managing by Mystery – based on the idea there is no
general plan. Just do what you think is best and what you
think should be done.
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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.
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Table 5.3
Alternative Strategies Defined and Recent Examples Given
Strategy Definition Example
Forward Integration Gaining ownership or increased Amazon is adding 500 new
control over distributors or retailers distribution centers globally to
speed up its deliveries.
Backward Integration Seeking ownership or increased Ford is joining with
control over suppliers GlobalFoundries, Inc. to
produce needed semiconductors.
Horizontal Integration Seeking ownership or increased Skillsoft Corp. acquired rival U.S.-
control over competitors based education technology firm
Codecademy.
Market Penetration Seeking increased market share for Cryptocurrency firm [Link] ran
present products in present markets its first Super Bowl commercial in
through greater marketing 2022.
Market Development Introducing present products into a Costco is adding 20 new stores
new geographic area annually; low-cost grocer Lidl is
building 50 new stores.
Product Development Seeking increased sales by improving Dollar Tree, owner of Family Dollar,
present products or developing new is expanding its offerings of fresh
ones produce.
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Table 5.3 (continued)
Alternative Strategies Defined and Recent Examples Given
Strategy Definition Example
Related Adding new but related products Fenway Sports Group that owns
Diversification the Boston Red Sox just acquired
the Pittsburgh Penguins hockey
team.
Unrelated Adding new, unrelated products The security firm AD T just acquired
Diversification Sunpro Solar for $825 million.
Retrenchment Regrouping through cost and asset General Mills laid off 1,400
reduction to reverse declining sales and employees in 2021.
profit
Divestiture Selling a division or part of an AT&T divested its online
organization advertising segment, Xandra, to
Microsoft.
Liquidation Selling all of a company’s assets, in Mom-and-pop restaurant D E F Inc.
parts, for their tangible worth sold all its assets and ceased doing
business.
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Figure 5.2
Levels of Strategies with Persons Most Responsible
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Table 5.4
Varying Performance Measures by Organizational Level
Organizational Level Basis for Annual Bonus or Merit Pay
Corporate: overall firm 75% based on long-term objectives
25% based on annual objectives
Divisional (such as by 50% based on long-term objectives
product or region) 50% based on annual objectives
Functional (such as 25% based on long-term objectives
marketing or finance) 75% based on annual objectives
Operational (such as 25% based on long-term objectives
manufacturing plants) 75% based on annual objectives
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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
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Six 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
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Seven 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
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Six 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
• When a firm desires to enter a new geographic market
quickly
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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
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Five 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
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Seven 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
• When consumption habits of the firm’s products are similar
in other geographic areas
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Five 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 especially strong research and
development capabilities
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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
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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
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Five 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
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Five Unrelated Diversification
Guidelines
• When existing markets for an organization’s present
products are saturated
• 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 has the capital and managerial
talent needed to compete successfully in a new industry
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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
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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
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Three Retrenchment Guidelines
• When an organization is plagued by inefficiency, low
profitability, poor employee morale, and pressure from
stockholders to improve performance
• When an organization fails to capitalize on external
opportunities, minimize external threats, take advantage of
internal strengths, and overcome internal weaknesses over
time; that is, the organization’s strategic managers have
failed (and possibly will be replaced by more competent
individuals)
• When an organization has grown so large so quickly that
major internal reorganization is needed
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Five Divestiture Guidelines
• When an organization has pursued a retrenchment
strategy and failed to accomplish improvements
• 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 and
cannot be obtained reasonably from other sources
• When government antitrust action threatens a firm
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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
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Two Liquidation Guidelines
• When an organization has pursued both a retrenchment
strategy and a divestiture strategy, and neither has been
successful
• When the stockholders of a firm can minimize their losses
by selling the organization’s assets
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Value Chain Analysis and
Benchmarking
• Value chain analysis
– The process whereby a firm determines the value
(price minus cost) of each and all activities that went
into producing and marketing a product, from
purchasing raw materials to manufacturing, distributing,
and marketing those products.
• Benchmarking
– Entails examination of value chain activities across an
industry to determine “best practices” among
competing firms; firms engage in benchmarking for the
purpose of duplicating or improving on those best
practices.
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Figure 5.3
A Value Chain Illustrated
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Figure 5.4
An Example Value Chain for a Typical Manufacturing Company
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Figure 5.4 (continued)
An Example Value Chain for a Typical Manufacturing Company
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Figure 5.5
Transforming Value Chain Activities into Sustained
Competitive Advantages
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Michael Porter’s Two Generic
Strategies
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
– Narrow or focused low-cost strategy that offers
products or services to a small range of customers at
one of the lowest prices in the market
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Michael Porter’s Two Generic
Strategies (continued)
Differentiation is a strategy aimed at producing products
and services considered unique industry-wide and directed
at consumers who are relatively price-insensitive
• Type 3
– Wide target market
• Type 4
– Narrow target market
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Means for Achieving Strategies
BUILD from within to grow
• A blue ocean strategy aims to create a target market
where there is no competition yet
BORROW from others to grow
• Firms tend to “borrow” capabilities through joint ventures or
strategic alliances
BUY others to grow
• Merger and acquisition refers to firms buying others to
grow
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Four Common Reasons Joint
Ventures Struggle
1. Managers who must collaborate daily in operating the
venture are not involved in forming or shaping the
venture.
2. The venture may benefit the partnering companies but
may not benefit customers, who then complain about
poorer service or criticize the companies in other ways.
3. The venture may not be supported equally by both
partners. If supported unequally, problems arise.
4. The venture may begin to compete more with one of the
partners than the other.
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Six Joint Venture Guidelines
1. When a privately-owned firm forms a joint venture with a
publicly-owned organization. Privately held firms and publicly
held can sometimes create synergies in a joint venture.
2. When a domestic firm forms a joint venture with a foreign
company.
3. When the distinct competencies of two or more firms
complement each other especially well.
4. When a particular project is potentially profitable but requires
overwhelming resources and risks.
5. When two or more smaller firms have trouble competing with a
large firm.
6. When there is a need to quickly introduce a new technology.
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Table 5.6
Six Reasons Why Many Mergers and Acquisitions Fail
1. Integration difficulties up and down the two value chains
2. Taking on too much new debt the target firm owes or to
buy the target
3. Inability to achieve synergy
4. Too much diversification
5. Difficult to integrate different organizational cultures
6. Reduced employee morale due to layoffs and relocations
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Table 5.7
12 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
• To eliminate competitors
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Table 5.8
Six Benefits of a Firm Being the First Mover
1. Secure access and commitments to rare resources.
2. Gain new knowledge of critical success factors and
issues.
3. Gain market share and position in the best locations.
4. Establish and secure long-term relationships with
customers, suppliers, distributors, and investors.
5. Gain customer loyalty and commitment.
6. Gain patent protection early.
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Strategic Management in Nonprofit
and Small Firms
Two differences between nonprofit and for-profit
organizations:
• Nonprofits do not pay taxes
• Nonprofits do not have shareholders to provide capital
Educational Institutions
Educational Institutions
• Accrediting bodies mandate strategic planning
Governmental agencies and departments
• Engage in strategic planning to show efficient use of
taxpayer dollars
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Strategic Management in Nonprofit
and Small Firms (continued)
Small firms
• Strategic management is just as vital for small firms as it is
for large firms
• All firms have a strategy from inception
• The strategic management process can enhance the firm’s
growth and prosperity
• However, a lack of strategic planning knowledge is a major
obstacle that prevents many small firm owners from
engaging in strategic planning
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Figure 5.6
How to Gain and Sustain Competitive Advantages
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