Copyright 2007 Prentice Hall Ch 5 -1 Chapter
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Copyright 2007 Prentice Hall Ch 5 -1 Chapter 5 Strategies in Action Strategic Management: Concepts & Cases 11th Edition Fred David
Copyright 2007 Prentice Hall Ch 5 -2 Chapter Outline Long-Term Objectives Types of Strategies Integration Strategies
Copyright 2007 Prentice Hall Ch 5 -3 Chapter Outline (cont’d) Intensive Strategies Diversification Strategies Defensive Strategies
Copyright 2007 Prentice Hall Ch 5 -4 Chapter Outline (cont’d) Michael Porter’s Generic Strategies Means for Achieving Strategies First Mover Advantages
Copyright 2007 Prentice Hall Ch 5 -5 Chapter Outline (cont’d) Outsourcing Strategic Management in Nonprofit & Governmental Organizations Strategic Management in Small Firms
Copyright 2007 Prentice Hall Ch 5 -6 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
Copyright 2007 Prentice Hall Ch 5 -7 Strategies in Action -- Quest for higher revenues -- Quest for higher profits Companies Embrace Strategic Planning
Copyright 2007 Prentice Hall Ch 5 -8 Results expected from pursuing certain strategies Strategies represent actions to accomplish long-term objectives Long-Term Objectives
Copyright 2007 Prentice Hall Ch 5 -9 Long-Term Objectives Objectives -- Quantifiable Measurable Realistic Understandable Challenging
Copyright 2007 Prentice Hall Ch 5 -10 Long-Term Objectives Objectives -- Hierarchical Obtainable Congruent Time-line
Copyright 2007 Prentice Hall Ch 5 -11 Long-Term Objectives Strategists Should Avoid -- Managing by Extrapolation Managing by Crisis Managing by Subjectives Managing by Hope
Copyright 2007 Prentice Hall Ch 5 -12 Varying Performance Measures by Organizational Level
Copyright 2007 Prentice Hall Ch 5 -13 Financial vs. Strategic Objectives Financial Objectives Growth in revenues Growth in earnings Higher dividends Higher profit margins Higher earnings per share Improved cash flow
Copyright 2007 Prentice Hall Ch 5 -14 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
Copyright 2007 Prentice Hall Ch 5 -15 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
Copyright 2007 Prentice Hall Ch 5 -16 Not Managing by Objectives Managing by extrapolation Managing by crisis Managing by subjectives Managing by hope
Copyright 2007 Prentice Hall Ch 5 -17 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
Copyright 2007 Prentice Hall Ch 5 -18 Types of Strategies Operational Level Functional Level Division Level Corp Level A Large Company
Copyright 2007 Prentice Hall Ch 5 -19 Types of Strategies Operational Level Functional Level Company Level A Small Company
Copyright 2007 Prentice Hall Ch 5 -20 Types of Strategies Vertical Integration Strategies Forward Integration Backward Integration Horizontal Integration
Copyright 2007 Prentice Hall Ch 5 -21 Vertical Integration Strategies Gain Control Over -- Distributors Suppliers Competitors
Copyright 2007 Prentice Hall Ch 5 -22 Forward Integration Strategies Gain Control Over -- Distributors Retailers
Copyright 2007 Prentice Hall Ch 5 -23 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
Copyright 2007 Prentice Hall Ch 5 -24 Backward Integration Strategies Ownership or Control -- Firm’s suppliers
Copyright 2007 Prentice Hall Ch 5 -25 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
Copyright 2007 Prentice Hall Ch 5 -26 Horizontal Integration Strategies Ownership or Control -- Firm’s competitors
Copyright 2007 Prentice Hall Ch 5 -27 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
Copyright 2007 Prentice Hall Ch 5 -28 Types of Strategies Intensive Strategies Market Penetration Market Development Product Development
Copyright 2007 Prentice Hall Ch 5 -29 Intensive Strategies Intensive Efforts -- Improve competitive position with existing products
Copyright 2007 Prentice Hall Ch 5 -30 Market Penetration Strategies Increased Market Share -- Present products/services Present markets Greater marketing efforts
Copyright 2007 Prentice Hall Ch 5 -31 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
Copyright 2007 Prentice Hall Ch 5 -32 Market Development Strategies New Markets -- Present products/services to new geographic areas
Copyright 2007 Prentice Hall Ch 5 -33 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
Copyright 2007 Prentice Hall Ch 5 -34 Product Development Strategies Increased Sales -- Improving present products/services Developing new products/services
Copyright 2007 Prentice Hall Ch 5 -35 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
Copyright 2007 Prentice Hall Ch 5 -36 Types of Strategies Diversification Strategies Related Diversification Unrelated Diversification
Copyright 2007 Prentice Hall Ch 5 -37 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
Copyright 2007 Prentice Hall Ch 5 -38 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
Copyright 2007 Prentice Hall Ch 5 -39 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
Copyright 2007 Prentice Hall Ch 5 -40 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
Copyright 2007 Prentice Hall Ch 5 -41 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
Copyright 2007 Prentice Hall Ch 5 -42 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
Copyright 2007 Prentice Hall Ch 5 -43 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
Copyright 2007 Prentice Hall Ch 5 -44 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
Copyright 2007 Prentice Hall Ch 5 -45 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
Copyright 2007 Prentice Hall Ch 5 -46 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
Copyright 2007 Prentice Hall Ch 5 -47 Types of Strategies Defensive Strategies Retrenchment Divestiture Liquidation
Copyright 2007 Prentice Hall Ch 5 -48 Retrenchment Strategies Regrouping -- Cost & asset reduction to reverse declining sales & profit
Copyright 2007 Prentice Hall Ch 5 -49 Bankruptcy Chapter 7 – Liquidation Chapter 9 – Municipalities Chapter 11 – Reorganization for Corporations Chapter 12 – Family Farmers Cheaper 13 – Reorganization for Small Businesses and Individuals
Copyright 2007 Prentice Hall Ch 5 -50 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
Copyright 2007 Prentice Hall Ch 5 -51 Divestiture Strategies Selling a division or part of an organization
Copyright 2007 Prentice Hall Ch 5 -52 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
Copyright 2007 Prentice Hall Ch 5 -53 Liquidation Strategies Company’s assets, in parts, for their tangible worth Selling
Copyright 2007 Prentice Hall Ch 5 -54 Liquidation Strategies Guidelines -- Retrenchment & divestiture failed Only alternative is bankruptcy Minimize stockholder loss by selling firm’s assets
Copyright 2007 Prentice Hall Ch 5 -55 Michael Porter’s Generic Strategies Cost Leadership Strategies Differentiation Strategies Focus Strategies
Copyright 2007 Prentice Hall Ch 5 -56
Copyright 2007 Prentice Hall Ch 5 -57 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)
Copyright 2007 Prentice Hall Ch 5 -58 Cost Leadership Ways of ensuring total costs across value chain are lower than competitors’ total costs Perform value chain activities more efficiently than rivals and control factors that drive costs Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities
Copyright 2007 Prentice Hall Ch 5 -59 Cost Leadership Can be especially effective when: Price competition among rivals is vigorous Rival’s products are identical and supplies are readily available There are few ways to achieve differentiation Most buyers use the product in the same way Buyers have low switching costs Buyers are large and have significant power Industry newcomers use low prices to attract buyers
Copyright 2007 Prentice Hall Ch 5 -60 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
Copyright 2007 Prentice Hall Ch 5 -61 Generic Strategies Greater product flexibility Greater compatibility Lower costs Improved service Greater convenience More features Differentiation (Type 3)
Copyright 2007 Prentice Hall Ch 5 -62 Differentiation Can be especially effective when: There are many ways to differentiate and many buyers perceive the value of the differences Buyer needs and uses are diverse Few rival firms are following a similar differentiation approach Technology change is fast paced and competition revolves around evolving product features
Copyright 2007 Prentice Hall Ch 5 -63 Generic Strategies Industry segment of sufficient size Good growth potential Not crucial to success of major competitors Focused Strategies (Type 4 & 5)
Copyright 2007 Prentice Hall Ch 5 -64 Focused Strategy Can be especially effective when: The target market niche is large, profitable, and growing Industry leaders do not consider the niche crucial Industry leaders consider the niche too costly or difficult to meet The industry has many different niches and segments Few, if any, other rivals are attempting to specialize in the same target segment
Copyright 2007 Prentice Hall Ch 5 -65
Copyright 2007 Prentice Hall Ch 5 -66 Means for Achieving Strategies Two or more companies form a temporary partnership or consortium for purpose of capitalizing on some opportunity Joint Venture/Partnering -
Copyright 2007 Prentice Hall Ch 5 -67 Reasons why Mergers and Acquisitions Fail Integration difficulties Inadequate evaluation of target Large or extraordinary debt Inability to achieve synergy
Copyright 2007 Prentice Hall Ch 5 -68 Means for Achieving Strategies R&D partnerships Cross-distribution agreements Cross-licensing agreements Cross-manufacturing agreements Joint-bidding consortia Cooperative Arrangements -
Copyright 2007 Prentice Hall Ch 5 -69 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 -
Copyright 2007 Prentice Hall Ch 5 -70 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
Copyright 2007 Prentice Hall Ch 5 -71 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
Copyright 2007 Prentice Hall Ch 5 -72 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
Copyright 2007 Prentice Hall Ch 5 -73 Recent Mergers
Copyright 2007 Prentice Hall Ch 5 -74 First Mover Advantages Benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms
Copyright 2007 Prentice Hall Ch 5 -75 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
Copyright 2007 Prentice Hall Ch 5 -76 Outsourcing Companies taking over the functional operations of other firms Business-process outsourcing (BPO)
Copyright 2007 Prentice Hall Ch 5 -77 Outsourcing Less expensive Allows firm to focus on core business Enables firm to provide better services Benefits
Copyright 2007 Prentice Hall Ch 5 -78 Key Terms & Concepts For Review (Chapter 5) Acquisition Concentric Diversification Backward Integration Conglomerate Diversification Bankruptcy Cooperative Arrangements Combination Strategy Cost Leadership
Copyright 2007 Prentice Hall Ch 5 -79 Key Terms & Concepts For Review (Chapter 5) Differentiation Focus Diversification Strategies Forward Integration Divestiture Franchising First Mover Advantages Generic Strategies
Copyright 2007 Prentice Hall Ch 5 -80 Key Terms & Concepts For Review (Chapter 5) Horizontal Diversification Intensive Strategies Horizontal Integration Joint Venture Hostile Takeover Leveraged Buyout Integration Strategies Liquidation
Copyright 2007 Prentice Hall Ch 5 -81 Key Terms & Concepts For Review (Chapter 5) Long-Term Objectives Outsourcing Market Development Product Development Market Penetration Retrenchment Merger Vertical Integration