Chapter 5

Strategies in Action

Strategic Management:
Concepts & Cases
12th Edition
Fred David

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Long-Term Objectives

Objectives –

Quantifiable
Measurable
Realistic
Understandable
Challenging

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Long-Term Objectives

Objectives –

Hierarchical
Obtainable
Congruent/go well together
Timeline

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Objectives

 Objectives are commonly stated in terms

such as growth in assets, growth in sales,
profitability, market share, degree and nature
of diversification, and so on.

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Varying Performance Measures
by Organizational Level

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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

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Strategic objectives

 such as:
1. larger market share,
2. quicker on-time delivery than rivals,
3. quicker design-to-market times than rivals,
4. lower costs than rivals,
5. higher product quality than rivals,
6. wider geographic coverage than rivals, etc.
 3. There is frequently a tradeoff/exchange
between financial and strategic objectives.

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Not Managing by Objective
Strategists should avoid the following alternative
ways of “not managing by objectives.”
Managing by Extrapolation – “If it ain’t broke (if you
don not have problem), 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 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 –

 The balanced scorecard is a strategy
evaluation and control technique that
derives its name from the perceived need
of firms to “balance” financial measures,
which are oftentimes used exclusively in
strategy evaluation and control with non-
financial measures such as product quality
and customer service.

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The Balanced Scorecard

 A balanced scorecard for a firm is simply a

listing of all key objectives to work towards
along with an associated time dimension of
when each objective is to be accomplished,
as well as a primary responsibility or contact
person, department, or division for each
objective.

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BSC performance evaluation depends on
four consequential stages
 1- Specifying institutional objectives.
 2- Translating the institutional objectives to
analytical performance plans.
 3- Specifying the responsibility centers.
 4- Developing the performance measurement
indicators, which include: indicators of
effectiveness, efficiency, productivity, and
quality

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BSC analysis method constitutes four
perspectives as follows
 Financial Perspective. This is related to meet
the expectations of the shareholders.
 Customer Perspective. This is related to
achieve customer satisfaction.
 Learning and Growth Perspective. This is
related to business ability to learn and grow
to be ready for future.
 Internal Process Perspective. The internal
process should be efficient and effective.
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Copyright © 2009 Pearson Education, Inc. Ch 5 -13
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Types of Strategies
Corp
A Large Company Level

Division Level

Functional Level

Operational Level

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Types of Strategies
company
A small Company
Functional
Level

Operational Level

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 Strategies in Action

Vertical Integration Strategies

• Forward integration
• Backward integration
• Horizontal integration

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 Strategies in Action

Forward
Integration Example

Defined • General Motors is

acquiring 10% of its
• Gaining dealers.
ownership or
increased control
over distributors
or retailers
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 Strategies in Action

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
 Advantages of stable production are high
 Present distributor have high profit margins

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 Strategies in Action
Backward
Integration Example

• Motel 8 acquired a
Defined furniture
manufacturer.
• Seeking
ownership or
increased control
of a firm’s
suppliers
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 Strategies in Action

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

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 Strategies in Action
Horizontal
Integration
Example

Defined • Hilton recently

acquired Promus.
• Seeking
ownership or
increased control
over competitors

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 Strategies in Action

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/losing due to lack of managerial expertise or
need for particular resources

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 Strategies in Action

Intensive Strategies

• Market penetration
• Market development
• Product development

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 Strategies in Action
Market
Penetration
Example
Defined • Ameritrade, the on-
line broker, tripled its
• Seeking increased annual advertising
market share for expenditures to $200
present products million to convince
or services in people they can make
present markets their own investment
through greater decisions.
marketing efforts
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 Strategies in Action

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

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 Strategies in Action
Market
Development

Example
Defined
• Khuzendar Tiles maker
• Introducing introduce his product
present products to Gulf markets.
or services into
new geographic
area
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 Strategies in Action

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

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 Strategies in Action
Product
Development
Example
Defined
• Apple developed the
G4 chip that runs at
• Seeking increased 500 megahertz.
sales by improving • Khuzendar Tiles maker
present products introduce Ceramic as a
or services or new product.
developing new
ones
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 Strategies in Action

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

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 Strategies in Action

Diversification Strategies

• Concentric diversification
• Conglomerate diversification
• Horizontal diversification

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 Strategies in Action
Concentric
Diversification
Example

Defined • National Westminister

Bank PLC in Britain
• Adding new, but bought the leading
related, products British insurance
or services company, Legal &
General Group PLC.

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 Strategies in Action

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

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 Strategies in Action
Conglomerate
Diversification
Example

Defined • Consultant
Construction
• Adding new, Engineering acquired
unrelated products El-Awda Bisects Co.
or services

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 Strategies in Action

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

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 Strategies in Action
Horizontal
Diversification

Example
Defined
• The El-Awda Co.
• Adding new, merging with
unrelated products Palestinian Islamic
or services for Bank.
present customers

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 Strategies in Action

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

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 Strategies in Action

Defensive Strategies

• Joint venture
• Retrenchment
• Divestiture
• Liquidation

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 Strategies in Action

Joint Venture

Example
Defined
• Lucent Technologies
• Two or more and Philips Electronic
sponsoring firms NV formed Philips
forming a separate Consumer
organization for Communications to
cooperative make and sell
purposes telephones.
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Joint Venture

 Joint venture is a popular strategy that

occurs when two or more companies form a
temporary partnership or consortium for the
purpose of capitalizing on some opportunity.
 Other types of cooperative arrangements
include R&D partnerships, cross-distribution
agreements, cross-licensing agreements,
cross-manufacturing agreements, and joint-
bidding consortia.
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Joint Venture

 Joint ventures and cooperative

arrangements are being used increasingly
because they allow companies to improve
communications and networking, to
globalize operations and minimize risk.

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Joint Venture

 Many, if not most, organizations pursue a

combination of two or more strategies
simultaneously, 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. Priorities must be established.
Organizations, like individuals, have limited
resources. Both organizations and individuals
must choose among alternative strategies and
avoid excess indebtedness.
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Joint ventures may fail when:

 Managers who must collaborate regularly

are not involved in the venture.
 The venture may benefit partnering
companies but not the customers.
 Both partners may not support the venture
equally.
 The venture competes with one of the
partners

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Joint ventures are especially effective
when:
 A privately owned organization forms one with a
public organization.
 A domestic organization works with a foeign
company.
 The distinct competencies of the firms complement
each other especially well.
 Some project is potentially profitable but requires
much risk.
 Two or more smaller firms wish to compete against
a larger firm.
 There is a need to introduce a new technology
quickly.

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 Strategies in Action

Guidelines for Joint Venture

 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

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 Strategies in Action
Retrenchment
(turnaround)

Example
Defined
• Regrouping through • El-Awda sold off a land
cost and asset and 4 apartments to
reduction to reverse raise cash needed. It
declining sales and introduce expense
profit. Sometimes it is
called turnaround or
effective control
reorganizational system.
strategy.
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 Strategies in Action

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.

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 Strategies in Action

Divestiture

Example
Defined
• Harcourt General, the
• Selling a division large US publisher, is
or part of an selling its Neiman
organization Marcus division.

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 Strategies in Action

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.

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 Strategies in Action

Liquidation

Defined Example

• Selling all of a • El-Ameer Block factory

company’s assets, sold all its assets and
in parts, for their ceased business.
tangible worth

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 Strategies in Action

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

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Mergers and acquisitions

 Mergers and acquisitions are two commonly

used ways to pursue strategies.
 A merger occurs when two organizations of
about equal size unite to form one enterprise.
 An acquisition occurs when a large
organization purchases (acquires) a smaller
firm or vice versa.

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Reasons for mergers and acquisitions

1. a. To provide improved capacity utilization

2. b. To make better use of an existing sales force.
3. c. To reduce managerial staff.
4. d. To gain economies of scale.
5. e. To smooth out seasonal trends in sales.
6. f. To gain access to new suppliers, distributors,
customers, products, and creditors.
7. g. To gain new technology.
8. h. To reduce tax obligations.

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Mergers and acquisitions may fail

 due to the following reasons:

1. a. Integration difficulties
2. b. Inadequate evaluation of target
3. c. Large debt
4. d. Inability to achieve synergy
5. e. Too much diversification
6. f. Managers overly focused on acquisitions
7. g. Too large of an acquisition
8. h. Difficulty integrating different cultures
9. i. Reduced employee morale due to layoffs and
relocations

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Leveraged Buyouts (LBOs)

 1. An LBO occurs when a corporation’s

shareholders are bought out (hence buyout) by the
company’s management and other private investors
using borrowed funds (hence leveraged).
 2. Besides trying to avoid a hostile takeover, other
reasons for the initiation of an LBO by senior
management are that particular divisions do not fit
into an overall corporate strategy, must be sold to
raise cash, or receive an attractive offering price. A
LBO takes a corporation private

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First Mover Advantages

 1. First mover advantages refers to the

benefits a firm may achieve by entering a
new market or developing a new product or
service prior to rival firms.
 2. The advantages of being a first mover
include securing access to rare resources,
gaining new knowledge of key factors and
issues, and carving out market share and a
position that is easy to defend and costly for
rival firms overtake.
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Outsourcing

 Business-Process Outsourcing (BPO):

Companies take over functional operations such
as human resources, information systems, and
marketing for other firms.
 Outsourcing can be less expensive, can allow
firms to focus on core businesses, and enables
firms to provide better services.

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Michael Porter’s Generic Strategies

Cost Leadership Strategies

(Low-Cost & Best-Value)

Differentiation Strategies

Focus Strategies
(Low-Cost Focus &
Best-Value Focus)

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Copyright © 2009 Pearson Education, Inc. Ch 5 -58
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Michael Porter’s Generic Strategies

 Cost leadership emphasizes producing standardized

products at a very low per-unit cost for consumers
who are price-sensitive.
 There are two types of cost leadership strategies.
 a. A low-cost strategy offers products to a wide
range of customers at the lowest price available on
the market.
 b. A best-value strategy offers products to a wide
range of customers at the best price-value available
on the market.

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Cost leadership

 Striving to be the low-cost producer in an

industry can be especially effective when the
market is composed of many price-sensitive
buyers, when there are few ways to achieve
product differentiation, when buyers do not
care much about differences from brand to
brand, or when there are a large number of
buyers with significant bargaining power.

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Cost leadership

 The basic idea behind a cost leadership strategy is

to underprice competitors or offer a better value and
thereby gain market share and sales, driving some
competitors out of the market entirely.
 5. To successfully employ a cost leadership
strategy, firms must ensure that total costs across
the value chain are lower than that of the
competition. This can be accomplished by:
 a. performing value chain activities more
efficiently than competition, and
 b. eliminating some cost-producing activities in
the value chain.

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Differentiation

 Differentiation is aimed at producing

products that are considered unique. This
strategy is most powerful with the source of
differentiation is especially relevant to the
target market

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Differentiation

 A successful differentiation strategy allows

a firm to charge higher prices for its products
to gain customer loyalty because consumers
may become strongly attached to the
differentiation features.
 3. A risk of pursuing a differentiation strategy
is that the unique product may not be valued
highly enough by customers to justify the
higher price.
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Differentiation

 Common organizational requirements for

a successful differentiation strategy include
strong coordination among the R&D and
marketing functions and substantial amenities
to attract scientists and creative people.

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Focus

 1. Focus means producing products and services

that fulfill the needs of small groups of consumers.
 2. There are two types of focus strategies.
 a. A low-cost focus strategy offers products or
services to a small range (niche) of customers at the
lowest price available on the market.
 b. A best-value focus strategy offers products to a
small range of customers at the best price-value
available on the market. This is sometimes called
focused differentiation.
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Focus

 Focus strategies are most effective when the

niche is profitable and growing, when industry
leaders are uninterested in the niche, when
industry leaders feel pursuing the niche is too
costly or difficult, when the industry offers
several niches, and when there is little
competition in the niche segment.

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Copyright © 2009 Pearson Education, Inc. Ch 5 -67
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Copyright © 2009 Pearson Education, Inc. Ch 5 -68
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Review

 How does strategy formulation differ for a

small versus large organization? For a for-
profit versus a nonprofit organization?
 Strategy formulation is conceptually the same for
both small and large organizations. However, for
large firms, there are more variables to include in
both the external and internal audits. The process
is usually more formal in a large firm.

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Review

 Give recent examples of forward integration,

backward integration, and horizontal
integration.
 Forward integration means purchasing or
developing a distributor for a product. For instance,
Nike now has its own retail stores in various
locations. Backward integration means owning a
supply source for production. For instance,
recently garment producers in Sri Lanka began
seeking to purchase textile mills in India.
Horizontal integration means acquiring like
operations. For instance, a hospital group may
purchase another hospital.

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Review

 Do you think hostile takeovers are unethical?

Why or why not?
 It can best be argued that hostile takeovers are
ethical. Usually, only weak companies face hostile
takeovers, and, typically, shareholders and
customers of the company benefit from the new
organization. Most employees and managers
benefit, too, but some employees and top
managers usually lose their jobs when the
takeover is consummated. From this angle, some
students may argue that hostile takeovers are
unethical.
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Review

 Why is it not advisable to pursue too many

strategies at once?
 Organizational resources are spread too thin
when more than a few strategies are pursued at
the same time. All organizations have limited
resources. No organization can pursue all the
strategies that may benefit the firm. Similarly, no
individual can take on an unlimited amount of debt
to obtain goods and services. No more than a few
strategies can be financed, marketed, and
managed effectively at the same time. Some
practitioners say only a single strategy should be
pursued at a given time by a single organization.

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Review
 What strategies are best for turbulent, high-velocity
markets?
 Firms in this type of market have a choice of whether to react,
anticipate, or lead the market in terms of its own strategies.
These choices are reflected in Figure 5-4. If a firm primarily
responds to the turbulent market by responding to changes in
the industry defensively. The react-to-change strategy would
not be as effective as the anticipate change strategy, which
entails devising and following through with plans for dealing
with the expected changes. Ideally, a firm will strive to lead the
market, by pioneering new and better technologies and
products.

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