Chapter 5 Strategies in Action Strategic Management: Concepts and Cases. 9th edition

Chapter 5 Strategies in Action

• Strategic Management:

• Concepts and Cases. 9th edition

• Fred R. David

• PowerPoint Slides by

• Anthony F. Chelte

• Western New England College

Chapter Outline

• Long-Term Objectives

• Types of Strategies

• Integration Strategies

Chapter Outline

• Intensive Strategies

• Diversification Strategies

• Defensive Strategies

• Means for Achieving Strategies

Chapter Outline

• Michael Porter’s Generic Strategies

• Strategic Management in Nonprofit and Governmental Organizations

• Strategic Management in Small Firms

Strategies in Action

• Even if you’re on the right track, you’ll get run over if you just sit there.

• -- Will Rogers

Strategies in Action

• Hundreds of companies today –

• Embrace strategic planning
• Quest for higher revenues
• Quest for higher profits

Long-Term Objectives

• The results expected from pursuing certain strategies

Long-Term Objectives

• Objectives –

• Quantifiable
• Measurable
• Realistic
• Understandable
• Challenging
• Hierarchical
• Obtainable
• Congruent
• Time-line

Long-Term Objectives

• Long-term objectives are necessary –

• Corporate
• Divisional
• Functional levels

Long-Term Objectives

• Strategists should avoid –

• Managing by Extrapolation
• Managing by Crisis
• Managing by Subjectives
• Managing by Hope

Integration Strategies

• Vertical Integration strategies –

• Allow a firm to gain control over:
• Distributors
• Suppliers
• competitors

Integration Strategies

• Forward Integration –

• Gaining ownership or increased control over distributors or retailers

Integration Strategies

• Guidelines for Forward Integration –

• Present distributors are expensive, unreliable, or incapable of meeting firm’s needs
• Availability of quality distributors is limited
• When firm competes in an industry that is expected to grow markedly
• Organization has both capital and human resources needed to manage new business of distribution
• Advantages of stable production are high
• Present distributors have high profit margins

Integration Strategies

• Backward Integration –

• Seeking ownership or increased control of a firm’s suppliers

Integration Strategies

• Guidelines for Backward Integration –

• When present suppliers are expensive, unreliable, or incapable of meeting needs
• Number of suppliers is small and number of competitors large
• High growth in industry sector
• Firm has both capital and human resources to manage new business
• Advantages of stable prices are important
• Present supplies have high profit margins

Integration Strategies

• Horizontal Integration –

• Seeking ownership or increased control over competitors

Integration Strategies

• Guidelines for Horizontal Integration –

• Firm can gain monopolistic characteristics without being challenged by federal government
• Competes in growing industry
• Increased economies of scale provide major competitive advantages
• Faltering due to lack of managerial expertise or need for particular resources

Michael Porter’s Generic Strategies

Generic Strategies

• Cost Leadership Strategies –

• Pursued in conjunction with differentiation
• Economies or diseconomies of scale
• Capacity utilization achieved
• Linkages with suppliers and distributors

Generic Strategies

• Low Cost Producer Advantages –

• Market of many price-sensitive buyers
• Few ways of achieving product differentiation
• Buyers not sensitive to brand differences
• Large number of buyers with bargaining power

Generic Strategies

• Differentiation Strategies –

• Greater product flexibility
• Greater compatibility
• Lower costs
• Improved service
• Greater convenience
• More features

Generic Strategies

• Differentiation Strategies –

• Allow firm to charge higher price
• Gain customer loyalty

Generic Strategies

• Focus Strategies –

• Industry segment of sufficient size
• Good growth potential
• Not crucial to success of major competitors

Generic Strategies

• Focus Strategies –

• Consumers have distinctive preferences
• Rival firms not attempting to specialize in the same target segment

Intensive Strategies

• Intensive strategies –

• Require intensive efforts to improve a firm’s competitive position with existing products

Intensive Strategies

• Market Penetration –

• Seeking increased market share for present products or services in present markets through greater marketing efforts

Intensive Strategies

• Guidelines for Market Penetration –

• Current markets not saturated
• Usage rate of present customers can be increased significantly
• Market shares of competitors declining while total industry sales increasing
• Increased economies of scale provide major competitive advantages

Intensive Strategies

• Market Development –

• Introducing present products or services into new geographic area

Intensive Strategies

• Guidelines for Market Development –

• New channels of distribution that are reliable, inexpensive, and good quality
• Firm is very successful at what it does
• Untapped or unsaturated markets
• Capital and human resources necessary to manage expanded operations
• Excess production capacity
• Basic industry rapidly becoming global

Intensive Strategies

• Product Development –

• Seeking increased sales by improving present products or services or developing new ones

Intensive Strategies

• Guidelines for Product Development –

• Products in maturity stage of life cycle
• Competes in industry characterized by rapid technological developments
• Major competitors offer better-quality products at comparable prices
• Compete in high-growth industry
• Strong research and development capabilities

Diversification Strategies

• Diversification strategies –

• Becoming less popular as organizations are finding it more difficult to manage diverse business activities

Diversification Strategies

• Concentric Diversification –

• Adding new, but related, products or services

Diversification Strategies

• Guidelines for Concentric Diversification –

• Competes in no- or slow-growth industry
• Adding new & related products increases sales of current products
• New & related products offered at competitive prices
• Current products are in decline stage of the product life cycle
• Strong management team

Diversification Strategies

• Conglomerate Diversification –

• Adding new, unrelated products or services

Diversification Strategies

• Guidelines for Conglomerate Diversification –

• Declining annual sales and profits
• Capital and managerial talent to compete successfully in a new industry
• Financial synergy between the acquired and acquiring firms
• Exiting markets for present products are saturated

Diversification Strategies

• Horizontal Diversification –

• Adding new, unrelated products or services for present customers

Diversification Strategies

• Guidelines for Horizontal Diversification –

• Revenues from current products/services would increase significantly by adding the new unrelated products
• Highly competitive and/or no-growth industry w/low margins and returns
• Present distribution channels can be used to market new products to current customers
• New products have counter cyclical sales patterns compared to existing products

Defensive Strategies

• Retrenchment –

• Regrouping through cost and asset reduction to reverse declining sales and profit

Defensive Strategies

• Guidelines for Retrenchment –

• Firm has failed to meet its objectives and goals consistently over time but has distinctive competencies
• Firm is one of the weaker competitors
• Inefficiency, low profitability, poor employee morale, and pressure from stockholders to improve performance.
• When an organization’s strategic managers have failed
• Very quick growth to large organization where a major internal reorganization is needed

Defensive Strategies

• Divestiture –

• Selling a division or part of an organization

Defensive Strategies

• Guidelines for Divestiture –

• When firm has pursued retrenchment but failed to attain needed improvements
• When a division needs more resources than the firm can provide
• When a division is responsible for the firm’s overall poor performance
• When a division is a misfit with the organization
• When a large amount of cash is needed and cannot be obtained from other sources.

Recent Divestitures

Defensive Strategies

• Liquidation–

• Selling all of a company’s assets, in parts, for their tangible worth

Defensive Strategies

• Guidelines for Liquidation –

• When both retrenchment and divestiture have been pursued unsuccessfully
• If the only alternative is bankruptcy, liquidation is an orderly alternative
• When stockholders can minimize their losses by selling the firm’s assets

Means for Achieving Strategies

• Joint Venture/Partnering –

• Two or more companies form a temporary partnership or consortium for purpose of capitalizing on some opportunity.

Means for Achieving Strategies

• Cooperative Arrangements –

• Research and development partnerships
• Cross-distribution agreements
• Cross-licensing agreements
• Cross-manufacturing agreements
• Joint-bidding consortia

Means for Achieving Strategies

• Problems Causing Joint Ventures to Fail –

• Managers who must collaborate daily not involved in forming or shaping the venture
• Venture may benefit the companies but not the customers
• Venture not supported equally by both partners
• Venture may begin to compete with one of the partners more so than the other

Means for Achieving Strategies

• Guidelines for Joint Ventures –

• Combination of privately held and publicly held can be synergistically combined
• Domestic forms joint venture with foreign firm, can obtain local management to reduce certain risks
• Distinctive competencies of two or more firms are complementary
• Overwhelming resources and risks where project is potentially very profitable (e.g., Alaska pipeline)
• Two or more smaller firms have trouble competing with larger firm
• A need exists to introduce a new technology quickly

Recent Mergers

Key Terms

• Acquisition

• Backward Integration

• Combination Strategy

• Concentric Diversification

• Conglomerate Diversification

• Cooperative Arrangements

• Cost Leadership

Key Terms

• Differentiation

• Diversification Strategies

• Divestiture

• Focus

• Forward Integration

• Franchising

• Generic Strategies

Key Terms

• Horizontal Diversification

• Horizontal Integration

• Integration Strategies

• Intensive Strategies

• Joint Venture

• Liquidation

• Long-Term Objectives

Key Terms

• Market Development

• Market Penetration

• Merger

• Outsourcing

• Product Development

• Retrenchment

• Takeover

• Vertical Integration