Chapter 5

Strategies in Action

Strategic Management:
Concepts & Cases
10th Edition
Fred David

PowerPoint Slides by
Anthony F. Chelte
Western New England College

Ch 5 -1
Copyright 2005 Prentice Hall
 Chapter Outline

Long-Term Objectives

Types of Strategies

Integration Strategies

Ch 5 -2
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 Chapter Outline (cont’d)

Intensive Strategies

Diversification Strategies

Defensive Strategies

Ch 5 -3
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 Chapter Outline (cont’d)

Michael Porter’s Generic Strategies

Means for Achieving Strategies

First Mover Advantages

Ch 5 -4
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 Chapter Outline (cont’d)

Outsourcing

Strategic Management in Nonprofit &

Governmental Organizations

Strategic Management in Small Firms

Ch 5 -5
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 Strategies in Action

Strategies fro 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

Ch 5 -6
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 Strategies in Action

Companies Embrace Strategic Planning

-- Quest for higher revenues

-- Quest for higher profits

Ch 5 -7
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 Long-Term Objectives

 Results expected from pursuing certain

strategies.
 Strategies represent actions to accomplish
long-term objectives.

Ch 5 -8
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 Long-Term Objectives

Objectives --

Quantifiable
Measurable
Realistic
Understandable
Challenging

Ch 5 -9
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 Long-Term Objectives

Objectives --

Hierarchical
Obtainable
Congruent
Time-line

Ch 5 -10
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 Long-Term Objectives

Objectives Necessary --

Corporate Level
Divisional Level
Functional Level

Ch 5 -11
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 Long-Term Objectives

Strategists Should Avoid --

Managing by Extrapolation
Managing by Crisis
Managing by Subjectives
Managing by Hope

Ch 5 -12
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 Long-Term Objectives

Varying Performance Measures

by Organizational Level
Organizational
Basis for Annual Bonus/Merit Pay
Level
75% on long-term objectives
Corporate
25% on annual objectives
50% on long-term objectives
Division
50% on annual objectives
25% on long-term objectives
Function
75% on annual objectives

Ch 5 -13
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 Financial vs. Strategic
Objectives
Financial Objectives
Growth in revenues
Growth in earnings
Higher dividends
Higher profit margins
Higher Earnings per share
Improved cash flow

Ch 5 -14
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 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

Ch 5 -15
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 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

Ch 5 -16
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 Types of Strategies
Corp
A Large Company Level

Division Level

Functional Level

Operational Level

Ch 5 -17
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 Types of Strategies

A Small Company Company

Level

Functional Level

Operational Level

Ch 5 -18
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 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

Ch 5 -19
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 Types of Strategies

Forward
Integration

Vertical Backward
Integration Integration
Strategies

Horizontal
Integration

Ch 5 -20
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 Vertical Integration Strategies

Gain Control Over --

Distributors
Suppliers
Competitors

Ch 5 -21
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 Forward Integration Strategies

Gain Control Over --

Distributors
Retailers

Ch 5 -22
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 Forward Integration Strategies

Guidelines --
Current distributors – expensive or unreliable
Availability of quality distributors – limited
Firm competes in industry expected to grow
markedly
Firm has both capital & HR to manage new
business of distribution
Current distributors have high profit margins

Ch 5 -23
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 Backward Integration
Strategies

Ownership or Control --

Firm’s suppliers

Ch 5 -24
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 Backward Integration
Strategies
Guidelines --
Current suppliers – expensive or unreliable
# of suppliers is small; # 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
Ch 5 -25
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 Horizontal Integration
Strategies

Ownership or Control --

Firm’s competitors

Ch 5 -26
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 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

Ch 5 -27
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 Types of Strategies

Market
Penetration

Intensive Market
Strategies Development

Product
Development

Ch 5 -28
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 Intensive Strategies

Intensive Efforts --

Improve competitive position with

existing products

Ch 5 -29
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 Market Penetration Strategies

Increased Market Share --

Present products/services
Present markets
Greater marketing efforts

Ch 5 -30
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 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

Ch 5 -31
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 Market Development
Strategies

New Markets --

Present products/services to new

geographic areas

Ch 5 -32
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 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

Ch 5 -33
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 Product Development
Strategies

Increased Sales --

Improving present products/services

Developing new products/services

Ch 5 -34
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 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

Ch 5 -35
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 Types of Strategies

Concentric
Diversification

Diversification Conglomerate
Strategies Diversification

Horizontal
Diversification

Ch 5 -36
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 Diversification Strategies

Less Popular --

More difficult to manage diverse

business activities

Ch 5 -37
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 Concentric Diversification
Strategies

Addition --

New & related products/services

Ch 5 -38
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 Concentric Diversification
Strategies
Guidelines --
Compete in no/slow growth industry
New & related products increases sales of current
products
New & related products offered at competitive prices
Current products—decline stage of product life cycle
Strong management team

Ch 5 -39
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 Conglomerate Diversification
Strategies

Addition --

New & unrelated products/services

Ch 5 -40
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 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

Ch 5 -41
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 Horizontal Diversification
Strategies

Addition --

New & unrelated products/services for

current customers

Ch 5 -42
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 Horizontal Diversification
Strategies
Guidelines --
Adding new products/services would significantly
increase revenues
Highly competitive and/or no-growth industry; low
margins & returns
Current distribution channels can be used
New products have counter cyclical sales patterns

Ch 5 -43
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 Types of Strategies

Retrenchment

Defensive Divestiture
Strategies

Liquidation

Ch 5 -44
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 Retrenchment Strategies

Regrouping --

Cost & asset reduction to reverse

declining sales & profit

Ch 5 -45
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 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

Ch 5 -46
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 Divestiture Strategies

Selling a division or part of an

organization.

Ch 5 -47
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 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

Ch 5 -48
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2003 Examples

Doll maker & mail order firm,

Forward
Pleasant Co., opened a retail store
Integration in Manhattan

Backward McDonalds recently acquired a

Integration paper cup producer

Horizontal Callaway Golf recently acquired

Integration Top-Flite Golf Company

Ch 5 -49
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2003 Examples

SABMiller Plc spent $500 million in

Market
2003 on marketing its Miller
Penetration brands of beer

Market JetBlue is adding dozens of new

Development routes

GM developing hydrogen powered

Product
automobiles or Pfizer developing a
Development new antismoking pill

Ch 5 -50
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2003 Examples

Microsoft launched its first

Concentric
personal computers that double as
Diversification entertainment centers

The video-rental firm Blockbuster

Conglomerate
may acquire the DVD and music
Diversification
direct-marketing firm Columbia
House

Horizontal Viacom acquired Comedy Central,

Diversification from AOL

Ch 5 -51
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2003 Examples

America West Airlines closing its

Retrenchment hub at Columbus, Ohio and laying
off 390 employees

ConocoPhillips recently sold its

Divestiture Circle K convenience store chain
to Alimentation Couche-Tard, a
Canadian firm

Sprint liquidated its Web-hosting

Liquidation
division

Ch 5 -52
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 Liquidation Strategies

Selling

Company’s assets, in parts, for

their tangible worth

Ch 5 -53
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 Liquidation Strategies

Guidelines --

Retrenchment & divestiture failed

Only alternative is bankruptcy
Minimize stockholder loss by selling firm’s assets

Ch 5 -54
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Michael Porter’s Generic Strategies

Cost Leadership Strategies

Differentiation Strategies

Focus Strategies

Ch 5 -55
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 Generic Strategies

Cost Leadership
In conjunction with differentiation
Economies or diseconomies of
scale
Capacity utilization achieved
Linkages w/ suppliers & distributors

Ch 5 -56
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 Generic Strategies

Low Cost Producer Advantage

Many price-sensitive buyers

Few ways of achieving differentiation
Buyers not sensitive to brand
differences
Large # of buyers w/bargaining power

Ch 5 -57
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 Generic Strategies
Differentiation

Greater product flexibility

Greater compatibility
Lower costs
Improved service
Greater convenience
More features
Ch 5 -58
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 Generic Strategies

Focus

Industry segment of sufficient size

Good growth potential
Not crucial to success of major competitors

Ch 5 -59
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 Means for Achieving Strategies
Joint Venture/Partnering -

 Two or more companies form a temporary

partnership or consortium for purpose of
capitalizing on some opportunity.

Ch 5 -60
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 Means for Achieving Strategies
Cooperative Arrangements -

 R&D partnerships
 Cross-distribution agreements
 Cross-licensing agreements
 Cross-manufacturing agreements
 Joint-bidding consortia

Ch 5 -61
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 Means for Achieving Strategies
Why Joint Ventures Fail -

 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

Ch 5 -62
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 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
Ch 5 -63
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 Means for Achieving Strategies
Mergers & Acquisitions
 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

Ch 5 -64
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Recent Mergers

Acquiring Firm Acquired Firm

IBM Rational Software Corp
Yahoo Inktomi Corp
U.S. Steel National Steel Corp
Pfizer Pharmacia
Krispy Kreme Doughnuts Montana Mills
Oracle People Soft
Palm Handspring
Nike Converse

Ch 5 -65
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 First Mover Advantages

 Benefits a firm may achieve by entering a

new market or developing a new product or
service prior to rival firms.

Ch 5 -66
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 First Mover Advantages
Potential 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

Ch 5 -67
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 Outsourcing
Business-process outsourcing
(BPO)

 Companies taking over the functional

operations of other firms

Ch 5 -68
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 Outsourcing

Benefits

 Less expensive
 Allows firm to focus on core business
 Enables firm to provide better services

Ch 5 -69
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 For Review (Chapter 5)

Key Terms & Concepts

Concentric
Acquisition
Diversification

Backward Conglomerate
Integration Diversification

Cooperative
Bankruptcy
Arrangements

Combination
Cost Leadership
Strategy

Ch 5 -70
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 For Review (Chapter 5)

Key Terms & Concepts

Differentiation Focus

Diversification
Forward Integration
Strategies

Divestiture Franchising

First Mover
Generic Strategies
Advantages

Ch 5 -71
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 For Review (Chapter 5)

Key Terms & Concepts

Horizontal
Intensive Strategies
Diversification

Horizontal
Joint Venture
Integration

Hostile Takeover Leveraged Buyout

Integration
Liquidation
Strategies

Ch 5 -72
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 For Review (Chapter 5)

Key Terms & Concepts

Long-Term
Outsourcing
Objectives

Market Development Product Development

Market Penetration Retrenchment

Merger Vertical Integration

Ch 5 -73
Copyright 2005 Prentice Hall