Chapter 5

Strategies in Action

Strategic Management:
Concepts & Cases
13th Edition
Fred David

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Long Term Objectives

 Quantitative  Challenging

 Measurable  Hierarchical

 Realistic  Obtainable

 Understandable  Congruent
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Long term objectives
 Commonly stated in terms:
E.g. growth in assets
profitability
market share

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Financial vs. Strategic Objectives
Financial Objectives
Growth in revenues
Growth in earnings
Higher dividends
Larger profit margins
Greater ROI
Higher earnings per share
Rising stock price
Improved cash flow
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Financial vs. Strategic Objectives
Strategic Objectives
 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
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 Financial objectives can best be met by
focusing on achieving on strategic objectives
that improve a firm’s competitiveness and
market strength.
 Trade-off between financial objective and
strategic objectives.
 Another trade off depend on business ethics,
natural environment preservation, social
responsibility.
“Managing by objectives”

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Not Managing by Objectives
Managing by Extrapolation – “If it ain’t
broke, don’t fix it”
Managing by Crisis – The true measure of a
good strategist is the ability to fix problems
Managing by Subjectives – “Do your own
thing, the best way you know how”
Managing by Hope – The future is full of
uncertainty and if at first you don’t succeed,
then you may on the second or third try
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The Balanced Scorecard
Robert Kaplan & David Norton –
Strategy evaluation & control technique
Balance financial measures with
nonfinancial measures (financial
objectives Vs strategic objectives)
Balance shareholder objectives with
customer & operational objectives

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Levels of Strategies –
Large Company

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Levels of Strategies –
Small Company

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Types of strategies
 Vertical Integration Strategies
 Intensive Strategies
 Diversification Strategies
 Defensive Strategies

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Types of Strategies
To gain control over distributors,
suppliers or competitors
Forward
Integration

Vertical Backward
Integration Integration
Strategies

Horizontal
Integration

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Vertical Integration Strategies
Gaining ownership or increased
Forward
control over distributors or retailers
Integration e.g franchising, smart partnership

Seeking ownership or increased

control of a firm’s suppliers
Backward e.g. Switzerland’s Nestle gives training &
new coffee trees to the next 10 yrs farmers
Integration (r/ship building).
e.g. de-integration for industry with global
sources of supply.

Seeking ownership or increased

Horizontal
control over competitors
Integration e.g. mergers, acquisition, takeovers
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Types of Strategies

Market
Penetration

Intensive Market
Strategies Development

Product
Development

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Intensive Strategies
Seeking increased market share for the
present products or services in present
markets through greater marketing
Market efforts.
Penetration e.g. increase advertising expenditure,
increase salespersons , sales promotion
items.
* Guidelines
Introducing present products or services into
Market new geographic areas
Development * Guidelines
Seeking increased sales by improving the
Product present products or services or developing
Development new ones
* Guidelines
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Types of Strategies

Related
Diversification

Diversification
Strategies

Unrelated
Diversification

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Diversification Strategies

Related Adding new but related products or

Diversification services

Unrelated
Adding new, unrelated products or
Diversification services

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 Diversify or not to diversify?
 Diversify was to spread risk – not putting all
eggs in one basket – protect shareholders.
 Now, diversification should do more than
what shareholder can act individually – add
value – yield higher return – more synergy
than what the business can achieve alone.
 Conglomerate company prove that focus and
diversity are not always mutually exclusive.

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 Concentric diversification.
Appropriate when:
- Organization competes in a slow-growth industry

- The related products significantly can enhance the

sales of current product.

- The related product could be offered at highly
Related
competitive.
Diversification
-The related product have seasonal sales that

counterbalance organization’s peaks and valleys.

-- The current product is in declining stage of the

product’s life cycle.

-- organization has a strong management team.

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Unrelated diversification
Adding new, unrelated products or services for present customers is
called horizontal diversification. This strategy is not as risky as
conglomerate diversification because a firm should already be
familiar with its present customers.
guidelines for when to use unrelated diversification:
 When revenues derived from an organization’s current products or

services would increase significantly by adding the new, unrelated

products.
 When an organization competes in a highly competitive and/or no-

growth industry (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 an organization’s present products.

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 When an organization’s basic industry is experiencing
declining annual sales and profits.
 When an organization has the capital and managerial
talent needed to compete.
 When an organization has the opportunity to purchase
an unrelated business that is an attractive investment.
 When financial synergy exists between the acquired and
acquiring firms.
 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.

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Types of Strategies

Retrenchment

Defensive Divestiture
Strategies

Liquidation

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Retrenchment
 Occurs when an organization regroups through cost and asset
reduction to reverse declining sales and profits
 Sometimes called a turnaround or reorganizational strategy

 Fortify an organizations basic distinctive competence

 Appropriate when:

1) When an organization has clearly distinctive competence but has

failed consistently to meet its objectives and goals over time
2) When an organization is one of the weaker competitors in a given
industry
3) When an organization is plagued by inefficiency, low profitability,
poor employee morale and pressure from stockholders to improve
performance

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Retrenchment
4) When an organization has failed to capitalize on external
opportunities, minimize external threats, take advantage of internal
strengths, and overcome internal weaknesses over time; that is,
when the organization’s strategic managers have failed (and
possibly will be replaced by more competent individuals)
5) When an organization has grown so large so quickly that major
internal reorganization is needed.

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Divestiture
 Used to raise capital for further investment or acquisition
 Release unprofitable business diversity – become less diversified –

focus on core business

 Appropriate when:

1) When an organization has pursued a retrenchment strategy and it

failed to accomplish needed improvement.
2) When a division needs more resources to be competitive than the
company can provide.
3) When a division is responsible for an organization’s overall poor
performance.

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Divestiture
4) When a division is a misfit with the rest of an organization.
5) When a large amount of cash is needed quickly and cannot be
obtained.
6) When government antitrust action threatens an organization.

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Liquidation
 Selling all of a company’s assets, for their tangible worth
is called liquidation.
 recognition of defeat - emotionally difficult strategy.
 Appropriate when:
1) When an organization has pursued both a retrenchment and a
divestiture strategy and neither has been successful.
2) When an organization’s only alternative is bankruptcy.
3) When the stockholders of a firm can minimize their losses by selling
assets.

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Porter’s Five Generic Strategies

Strategies achieve CA through the following

bases:

 Cost Leadership – Low cost

 Differentiation Generic
strategies
 Focus

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Cost Leadership
 Lies in the strategies which emphasize producing
standardized products at a very low per-unit cost for a
wide range of price-sensitive consumers.
 Basic idea: under price rival & increase market share
 Type 1 : low-cost strategy that offers product or services
to a wide range of customers at the lowest price
available on the market.
 Type 2 : a best value-strategy that offers products or
services to a wide range of customers at the lowest price
available compared to a rival’s products with similar
attributes.
 E.g. of strategy: vertical and horizontal integration
 ***Audit value chain and permeates cost the entire firm.
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Cost Leadership
 Ensure the total cost of value chain are lower
than competitors by:
 Perform value chain activities more efficiently (could
involve altering the plant layout, use new technologies)
 Revamp the overall value chain to eliminate or bypass
some activities on value chain. e.g. outsourcing some
value chain

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Differentiation (Type 3)
 Strategy which aims at producing products and services
considered unique industrywide
 Directed at consumers who are price – INsensitive.
 Target large and small markets.
 A successful differentiation allows a firm to charge higher
price
 Customers are attached to the unique features – build
loyalty
 E.g. superior service, spare parts availability,
engineering design, product performance, useful life,
ease of use.
 Strategy: product development.
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Differentiation (Type 3)
 Risk – unique feature may not be valued
highly enough by customers to justify the
higher price – solutions: add attractive
packaging, quality of sales presentations,
website quality, professionalism, size of the
firm, firm size (these influence perceived
value)
 Risk – quick imitation by rivals – solutions:
hard & expensive differentiation.

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Focus
 Emphasizes production of products and services that
fulfill the needs of small groups of consumers.
 Type 4: low-cost focus strategy that offers products or
services to a small range (niche group) of customers at
the lowest price available on the market.
 Type 5: best-value strategy that offers products and
services to a small range of customers with better
quality than rival’s products do (focused
differentiation).
 Strategies: Market penetration & market development

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Summary

 Type 1 Cost Leadership – Low cost

 Type 2 Cost Leadership – Best value

 Type 3 Differentiation

 Type 4 Focus – Low cost

 Type 5 Focus – Best value

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Type 1 or 2 Cost Leadership Strategy
Conditions
 Vigorous price competition
 Plentiful supply of identical products
 Few ways to differentiate product
 Products used in same ways
 Low cost to switch to other brand - consumers
 Large buyers with power
 Industry newcomers use low prices to attract
buyers

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Type 3 Differentiation Strategy
Conditions
 Many ways to differentiate and buyers perceive
the differences as having value
 Buyer needs and uses are diverse
 Few rival firms following a similar differentiation
approach
 Fast paced technological change and evolving
product features

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Type 4 or 5 Focus Strategy
Conditions
 Large, profitable, and growing target market
niche
 Industry leaders do not consider the niche
crucial to their success
 Industry leaders consider it costly or difficult
to meet the needs of this niche
 Industry has many niches and segments
 Few rivals are specializing on this target
segment
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Strategy for turbulent & high-velocity markets
 The industry which is changing so fast
 E.g. telecommunications, medical, biotechnology,
computer hardware, internet-based industries.
 company chooses whether to react, anticipate or lead
the market.
 To react to changes is a defensive strategy.
 Anticipate-change strategy is better than to react.
 The most ideal is to lead the changes. Pioneer new and
better technologies.
 Strategy: acquire rivals, improve efficiencies and
increase economies of scale.

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Means for Achieving Strategies
 Cooperation among competitors
- Both firms contribute something distinctive (e.g.
technology, R&D)
 Joint venture / partnering

- Two or more companies form a temporary

partnership or consortium to capitalize some

opportunity e.g. nokia and microsoft
- Could be in the form of outsourcing, information

sharing.
- Less risky than merger, but not all JV are

successful – *see the reasons

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Means for Achieving Strategies
 Merger / acquisition
- Merger : 2 organizations of about equal size
unite to form one enterprise.
- Acquisition: large organization purchases a
smaller firm, or vice versa.
- Takeover/ hostile takeover: when acquisition is
not desired by the acquired firms
- Friendly merger: the acquisition is desired by
both firms.
- * See the benefits and inhibitors of merger &
acquisition
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 Leveraged buyout (LBO)
- corporation’s shareholders are bought (buyout) by the
company’s management / private investors using
borrowed funds (leverage).
- Avoid hostile takeover.

 Private-Equity Acquisition
-Acquisition done by a private-equity firm.
- Private-equity firms: collection of partnerships that have
come together to pool their capital and invest in a
particular opportunity.
e.g: Ernst & Young

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Means for Achieving Strategies
 First mover advantages
- Benefits a firm may achieve by entering a new
market or developing a new product or service
prior to rival firms.
- *See the benefits
- Risk: unexpected problems and costs. Being a
slow-mover is effective when the leading firm’s
products or services are imitable.

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Means for Achieving Strategies
Outsourcing
Business-process outsourcing (BPO) occurs
when external company fully manages /
operates one or more of our functional
operation.

* See the benefits of outsourcing.

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Strategic Management in Nonprofit and
Governmental Organizations

Religious facilities
Educational Institutions
Medical Organizations
Governmental Agencies and
Departments

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