Strategies in Action

Ch 5 -1

Strategy importance as managers see:

Because were making bigger bets in investments in technology, we cant afford to spend a whole lot of money in one direction and then find out five years later it was the a wrong direction

Ch 5 -2

Long-Term Objectives
Strategies: represent the actions to be taken to accomplish long- term objectives.

Long term objective: represent the results expected from pursuing certain strategies.

Objective must be:

Quantifiable Realistic Challenging Obtainable Timeline
Ch 5 -3

Measurable Understandable Hierarchical Congruent

Varying Performance Measures by Organizational Level

Ch 5 -4

Importance of clear and well communicated objective:

1. Help stakeholders understand their role in an organization future 2. Provide a basis for consistent decision making by managers whose values and attitudes differ 3. Minimize potential conflicts 4. Set organizational priorities 5. Standards by which individuals, groups, departments, and entire organization can be evaluated. 6. Provide direction and allow organizational synergy.

Ch 5 -5

Financial vs. Strategic Objectives

Financial Objectives: include those associated with growth in:
Growth in revenues Higher dividends Higher earnings per share Growth in earnings Higher profit margins Improved cash flow

Ch 5 -6

 Strategic objectives includes things such as:

Larger Market Share Quicker on time delivery than rivals

Achieving technological leadership

Higher product quality than rivals

Lower cost than rivals

Wider geographic coverage than rivals

Ch 5 -7

Not Managing by Objective

Managing by Extrapolation If it isn't broke, dont fix it.
Managing by Crisis The true measure of a good strategist is the ability to fix problems Managing by Subjective Do your own thing, the best way you know how. Managing by Hope The future is full of uncertainty and if first you dont succeed, then you may on the second or third try.

Ch 5 -8

The Balanced Scorecard

Robert Kaplan & David Norton , 1993
Strategy evaluation & control technique Balance financial measures with nonfinancial measures Balance shareholder objectives with customer & operational objectives Contains a carefully chosen combination of strategic and financial objectives tailored to the org. .

It consistent with TQM and CIM

Ch 5 -9

Ch 5 -10

Ch 5 -11

Types of Strategies
A Large Company
Corp Level

Division Level

Functional Level

Operational Level

Ch 5 -12

 Strategy making is not a task for top executives,

middle and lower- level managers too must be involved in the strategic planning process to the extent possible.
Many if not most organizations simultaneously

pursue a combination of two or more strategies, but not combination strategy can be exceptionally risky is carried too far.

Ch 5 -13

Ch 5 -14

Types of Strategies
Forward Integration

Vertical Integration Strategies

Backward Integration

Horizontal Integration

Ch 5 -15

Forward Integration
Involve gaining ownership or increased control over

distributors or retailers. Increasing numbers of manufacturers. (Suppliers) are pursuing a forward integration strategy by establishing web sites to directly sell products to customers. An effective means of forward integration is Franchising, which is a form of business organization in which a firm already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor's trade name and usually with the franchisor's guidance, in Ch 5 -16 exchange for a fee.

When implementing forward integration may be effective?!

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 -17

Backward Integration
Refers to a strategy of seeking ownership or

increased control of a firms suppliers. This strategy can be especially appropriate when a firms current suppliers are unreliable, too costly, or cannot meet the firms need.

Ch 5 -18

When implementing backward integration may be effective?!

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 -19

Horizontal integration
Refers to a strategy of seeking ownership of or

increased control over a firms competitors. One of the most significant trends in strategic management today is the increased use of horizontal integration as a strategy. Mergers, acquisitions, and takeovers.

Ch 5 -20

When implementing horizontal integration may be effective?!

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 -21

Types of Strategies
Market Penetration

Intensive Strategies

Market Development

Product Development

It require intensive from the organization

Ch 5 -22

Ch 5 -23

Market Penetration
It seek to increase market share for present products

or services in present market through greater marketing effort. It includes increasing number of salespersons, increasing in advertising, offering sales promotions, and increasing publicity.

Ch 5 -24

When to use market penetration?!

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 -25

Market Development
Involves introducing present products or services

into new geographic areas When implementing market development? 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 -26

Product Development
It is the strategy that seeks increased sales by

improving or modifying present products or services. Its entails large R&D expenditures.

Ch 5 -27

When implementing market development?

Products in maturity stage of life cycle

Industry characterized by rapid technological

development Competitors offer better-quality products at comparable prices Compete in high-growth industry Strong R&D capabilities

Ch 5 -28

Types of Strategies
Related Diversification

Diversification Strategies

Unrelated Diversification

Ch 5 -29

Diversification Strategies:
A collection of businesses under one corporate umbrella
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 -30

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

Ch 5 -31

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 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 Ch 5 -32

Diversification Strategies Less Popular -More difficult to manage divers business activities However; the greatest risk of being in a single industry is having all your eggs in one basket When Diversification can be effective? 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 -33

Unrelated Diversification
Business tend to be unrelated when their value

chains are so dissimilar that no competitive valuable cross- business relationships exist.

Ch 5 -34

Types of Strategies
Retrenchment

Defensive Strategies

Divestiture

Liquidation

Ch 5 -35

Retrenchment
Occurs when an organizations regroups through cost

and asset reduction to reverse declining sales and profits.

Ch 5 -36

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 -37

Divestiture Strategies Selling a division or part of an organization Divestiture Strategies Guidelines - Retrenchment failed to attain improvements Division needs more resources than are available Division responsible for firms overall poor performance Division is a miss -fit with organization Large amount of cash is needed and cannot be raised through other sources
Ch 5 -38

Liquidation Strategies Companys assets, in parts, for their tangible worth Selling Liquidation Strategies Guidelines - Retrenchment & divestiture failed Only alternative is bankruptcy Minimize stockholder loss by selling firms assets

Ch 5 -39

Michael Porters Generic Strategies

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

Differentiation Strategies

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

Ch 5 -40

Generic Strategies
Cost Leadership Strategies: focuses on producing

standardized product or services at very low price per unit for consumer who are price sensitive.
2 alternative type:

Type (1): Low cost strategy: offer product/service at the lowest the price available on the market to a wide range of customer.

Type(2): Best value strategy: offer product/ service to a wide

Ch5-41

Cost leader ship must be Pursued in conjunction with differentiation. A number of cost elements affect the relative attractiveness of generic strategies: Economies or diseconomies of scale Capacity utilization achieved Linkages with suppliers Learning & experience curve effect

Ch 5 -42

Low Cost Producer Advantages:

Market of many price-sensitive buyers Few ways of achieving product differentiation Buyers not sensitive to brand name differences Large number of buyers with bargaining power
It must gain a competitive advantage which it should be difficult to imitate, rare, not easily substitutable
Ch5-43

Risk of pursuing cost leader ship:

1.may rivals imitate the strategy 2.technological breakthrough in the industry may

make the strategy ineffective.

3.buyer interest may swing to other

differentiating

features besides price.

Ch 5 -44

Generic Strategies
Differentiation Strategies type (3) : produce product
/service considered unique industry wide directed to consumer who are price insensitive .
It can mean:

Greater product flexibility Greater compatibility Lower costs Improved service Greater convenience More features
Ch5-45

Differentiation Strategies

It should be after a careful study of buyers needs and preferences.

Allow firm to charge higher price. Gain customer loyalty. It must be a strong coordination between the R&D and the marketing function.

The most effective differentiation bases is when it is

hard or expensive for rivals to imitate.

Ch5-46

Differentiation Strategies
Can be effective under these condition: 1) When there are many ways to differentiate the

product/service, and many buyers perceive these differences as having value. 2) When buyers need and uses are diverse. 3) When few rivals firm are following the similar differentiation . 4) When technological change is growing fast and the competion revolves around rapidly.
Ch 5 -47

Generic Strategies
Focus Strategies: producing product or services that
fulfill needs a small group of customer (niche)
depend on:

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

Ch5-48

Focus strategy
2 Alternative type:

1) type (4): Low cost focus. 2) type (5): Best value focus.

Ch 5 -49

Generic Strategies
Focus Strategies

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

Fred R. David Prentice Hall

Ch5-50

Focus strategy
Can be attractive under these condition:

1) When the target niche is large, profitable and

growing.
2) When rivals do not consider the niche to be

crucial to their successes. Or consider it too costly or difficult to specialized in to meet the need of niche
3) Many Different niche and segment.
Ch 5 -51

Ch 5 -52

Ch 5 -53

Means for achieving strategies:

Joint venture/partnering:
Occurs when two company or more form a

temporary partnership for the purpose of capitalizing on some oppurtunity.

Ch 5 -54

cooperative arrangement such as: 1.Shared equity ownership in the new entity 2.Cross distribution agreement 3.R&D partnership 4.Cross manufacturing agreement

 Joint venturing and partnering are being used

increasingly because they allow companies to improve communication and networking

reasons that cause joint venture to fail: 1) Managers are not involved in operating venture.

2) Venture may benefit the partnering companies but

may not benefit the customers. 3) May not be supported equally by both partner the problem will arise. 4) The venture may begin to compete more with one of the partner than the other.
Ch 5 -55

 Guidelines for joint venture:1.When a privately owned org. is forming a joint

venture with a publicly owned org. there are some adv. Of being held such as access to stock issuance as a resource of capital. 2.When two or more smaller firm have trouble competing with a large firm. 3.When there is a need to quickly introduce a new technology. 4.When the distinct competences of 2 or more firm complement each other. 5.When some project is potentially very profitable but require over whelming resource and risk.
Ch 5 -56

 Merger / acquisition:
merger

: when two org. of about equal size unite

to form one enterprise.

Acquisition : when a large org. purchases a

smaller firm.
When merger or acquisition are not desired by

both parties it is called hostile takeover

If the acquisition is desired it is called friendly
Ch 5 -57

merge

 Factors encouraging companies to merge:

Deregulation Technological change Excess capacity Inability to boost profit through increasing price Depressed stock market The need to gain economies of scale.

Ch 5 -58

 Factors encouraging companies to acquisition:

Increased market power

Reduce entry barriers

Reduced cost of new product development Increased spread of products to market Increased diversification Avoiding of excessive competition Opportunity to learn and develop new
Ch 5 -59

capabilities

 reasons that cause Merger &acquisition to

fail:
1. Integration difficulties

2. Inadequate evaluation of target

3. Large or extraordinary dept 4. Inability to achieve synergy

5. Too much diversification

6. Mangers overly focus on acquisition 7. Different to integrate different organizational

cultures 8. Reduced employee moral due to layoff and relocation

Ch 5 -60

 reasons for Merger &acquisition:

1. To provide improved capacity utilization

2. To make better use of the existing sales force

3. To reduce managerial staff 4. To gain economies of scale

5. To smooth out seasonal trend in sales

6. To gain access to new supplier, distributer,

customer , products, and creditors 7. To gain new technology 8. To reduce tax obligation
Ch 5 -61

First Mover Advantages

Benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms Some advantage of being first mover:

Securing access to rare resource gaining new knowledge of key factors and issues Carving out market share and position that is easily

to defend and costly for rivals.

Ch 5 -62

 When being first mover you must aware

about:
1.Build firm image and reputation with buyers
2.Produce cost adv. Over rivals 3.Create strongly loyal customer 4.Make imitation by rival unlikely

Ch 5 -63

Outsourcing
Business-Process Outsourcing (BPO)

is a rabidly growing new business Companies taking over the functional operations of other firms

Such as: HR, Information System, accounting, customer service, and marketing.

Ch 5 -64

 Companies choose to outsource their function for

Ch 5 -65

several reasons: 1. Less expensive 2. Allow the firm to focus on its core businesses 3. Enables firm to provide better services 4. The strategy allow firms to align it self with best in world suppliers who focus on performing special tasks 5. Provide firm flexibility should customer needs shift unexpectedly 6. Allow firm to focus on other internal value chain activities critical to sustaining competitive adv.

Strategic Management in Nonprofit and Governmental Organizations

Educational Institutions Medical Organizations

Governmental Agencies and Departments

Ch 5 -66