Chapter 5

Strategies in Action
Strategic Management: Concepts & Cases

Course coordinator
Prof. Begum Khaleda Khanam
Ch 5 -1

Chapter Outline
Long-Term Objectives
Types of strategies
Integration Strategies
Intensive Strategies
Diversification Strategies
Defensive Strategies
Michael Porters Generic Strategies
Means for Achieving Strategies
First Mover Advantages
Outsourcing
Strategic Management in Small Firms
Ch 5 -2

Strategies in Action

Companies Embrace Strategic Planning

-- Quest for higher revenues

-- Quest for higher profits

Ch 5 -3

Long-Term Objectives

Results expected from pursuing certain

strategies
Strategies represent actions to accomplish
long-term objectives

Ch 5 -4

Long-Term Objectives
Objectives -Quantifiable
Measurable
Realistic
Understandable
Challenging

Ch 5 -5

Types of Strategies
A Large Company

Corp
Level

Division Level

Functional Level

Operational Level

Ch 5 -6

Types of Strategies
A Small Company
Company
Level

Functional Level

Operational Level

Ch 5 -7

Types of Strategies
Forward
Integration

Vertical
Integration
Strategies

Backward
Integration

Horizontal
Integration

Ch 5 -8

Vertical Integration Strategies

Gain Control Over --

Distributors
Suppliers
Competitors
Forward Integration Strategies
Gain Control Over --

Distributors
Retailers
Ch 5 -9

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
Ch 5 -10

Backward Integration Strategies

Ownership or Control --

Firms suppliers
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
Ch 5 -11

Horizontal Integration Strategies

Ownership or Control --

Firms competitors
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 -12

Types of Strategies
Market
Penetration

Intensive
Strategies

Market
Development

Product
Development

Ch 5 -13

Intensive Strategies
Intensive Efforts --

Improve competitive position with existing products

Market Penetration Strategies
Increased Market Share --

Present products/services
Present markets
Greater marketing efforts

Ch 5 -14

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 -15

Market Development Strategies

New Markets --

Present products/services to new geographic areas

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 -16

Product Development Strategies

Increased Sales --

Improving present products/services

Developing new products/services
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 -17

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 -18

Types of Strategies
Related
Diversification

Diversification
Strategies

Unrelated
Diversification

Ch 5 -19

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

Ch 5 -20

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

Ch 5 -21

Related Diversification May be Effective

When:

New, but related, products have seasonal

sales levels that counterbalance an
organizations existing peaks and valleys
An organizations products are currently in
the declining stage of the products life cycle
An organization has a strong management
team

Ch 5 -22

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 -23

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
Ch 5 -24

Unrelated Diversification May be Effective

When:

Revenues derived from an organizations

current products or services would increase
by adding new unrelated products
An organization competes in a highly
competitive or a no growth industry
An organizations current distribution
channels can be used to market new
products to existing customers
Ch 5 -25

Unrelated Diversification May be Effective

When:

New products have countercyclical sales

patterns
An organizations basic industry is
experiencing declining annual sales and
profits
An organization has the capital and
managerial talent to compete successfully in
a new industry
Ch 5 -26

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
Ch 5 -27

Types of Strategies
Retrenchment

Defensive
Strategies

Divestiture

Liquidation

Ch 5 -28

Retrenchment Strategies
Regrouping --

Cost & asset reduction to reverse declining

sales & profit
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 -29

Divestiture Strategies

Selling a division or part of an organization

Guidelines --

Retrenchment failed to attain improvements

Division needs more resources than are available
Division responsible for firms 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 -30

Liquidation Strategies
Selling

Companys assets, in parts, for their tangible worth

Guidelines --

Retrenchment & divestiture failed

Only alternative is bankruptcy
Minimize stockholder loss by selling firms assets

Ch 5 -31

Michael Porters Generic Strategies

Cost Leadership Strategies

Differentiation Strategies

Focus Strategies

Ch 5 -32

Porters Competitive Strategies

Differentiation Strategy

Offers products and services that are uniquely different from

the competition

Focused Differentiation Strategy

Cost Leadership Strategy

offers a unique product to a special market segment.

Seeks to operate at lower costs than competitors

Focused Cost Leadership Strategy

uses cost leadership and target needs of a special market.

Ch 5 -33

Generic Strategies
Cost Leadership

In conjunction with differentiation

Economies or diseconomies of scale
Capacity utilization achieved
Linkages w/ suppliers & distributors

Ch 5 -34

Cost Leadership
Can be especially effective when:

1.
2.

3.
4.
5.
6.
7.

Price competition among rivals is vigorous

Rivals 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
Ch 5 -35

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 -36

Generic Strategies
Differentiation
Greater product flexibility
Greater compatibility
Lower costs
Improved service
Greater convenience
More features
Ch 5 -37

Differentiation
Can be especially effective when:

1.

2.
3.

4.

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

Ch 5 -38

Generic Strategies
Focused Strategies
Industry segment of sufficient size
Good growth potential
Not crucial to success of major competitors

Ch 5 -39

Focused Strategy
Can be especially effective when:

1.

2.
3.

4.

5.

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
Ch 5 -40

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 -41

Reasons why Mergers and Acquisitions Fail

Integration difficulties
Inadequate evaluation of target
Large or extraordinary debt
Inability to achieve synergy

Ch 5 -42

Means for Achieving Strategies

Cooperative Arrangements

R&D partnerships
Cross-distribution agreements
Cross-licensing agreements
Cross-manufacturing agreements
Joint-bidding consortia
Ch 5 -43

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 -44

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 -45

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

Ch 5 -46

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 -47

Recent Mergers
Acquiring Firm
IBM
Philip Morris
U.S. Steel
Oracle
OSIM International Ltd
Adobe Systems
US Airways
United Parcel Service

Acquired Firm
Ascential Software
PT Hanjaya Mandala Samp
National Steel Corp
PeopleSoft
Brookstone
Macromedia
American West
Overnight Corp.
Ch 5 -48

First Mover Advantages

Benefits a firm may achieve by entering a new

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

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 -49

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 -50

Outsourcing
Business-process outsourcing (BPO)

Companies taking over the functional operations of

other firms

Benefits

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

Ch 5 -51