Chapter 5
Strategies in Action
Strategic Management:
Concepts & Cases
11th Edition
Fred David
Copyright 2007 Prentice Hall
Ch 5 -1
Chapter Outline
Long-Term Objectives
Types of Strategies
Integration Strategies
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Ch 5 -2
Chapter Outline (cont’d)
Intensive Strategies
Diversification Strategies
Defensive Strategies
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Ch 5 -3
Chapter Outline (cont’d)
Michael Porter’s Generic Strategies
Means for Achieving Strategies
First Mover Advantages
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Ch 5 -4
Chapter Outline (cont’d)
Outsourcing
Strategic Management in Nonprofit &
Governmental Organizations
Strategic Management in Small Firms
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Ch 5 -5
Strategies in Action
Strategies for taking the hill won’t
necessarily hold it. –
Amar Bhide
The early bird may get the worm, but the
second mouse gets the cheese. –
Unknown
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Ch 5 -6
Strategies in Action
Companies Embrace Strategic Planning
-- Quest for higher revenues
-- Quest for higher profits
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Ch 5 -7
Long-Term Objectives


Results expected from pursuing certain
strategies
Strategies represent actions to accomplish
long-term objectives
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Ch 5 -8
Long-Term Objectives
Objectives -Quantifiable
Measurable
Realistic
Understandable
Challenging
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Ch 5 -9
Long-Term Objectives
Objectives -Hierarchical
Obtainable
Congruent
Time-line
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Ch 5 -10
Long-Term Objectives
Strategists Should Avoid -Managing by Extrapolation
Managing by Crisis
Managing by Subjectives
Managing by Hope
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Ch 5 -11
Varying Performance Measures by
Organizational Level
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Ch 5 -12
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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Ch 5 -13
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 -14
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 -15
Not Managing by Objectives




Managing by extrapolation
Managing by crisis
Managing by subjectives
Managing by hope
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Ch 5 -16
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
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Ch 5 -17
Types of Strategies
A Large Company
Corp
Level
Division Level
Functional Level
Operational Level
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Ch 5 -18
Types of Strategies
A Small Company
Company
Level
Functional Level
Operational Level
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Ch 5 -19
Types of Strategies
Forward
Integration
Vertical
Integration
Strategies
Backward
Integration
Horizontal
Integration
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Ch 5 -20
Vertical Integration Strategies
Gain Control Over -Distributors
Suppliers
Competitors
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Ch 5 -21
Forward Integration Strategies
Gain Control Over -Distributors
Retailers
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Ch 5 -22
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
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Ch 5 -23
Backward Integration
Strategies
Ownership or Control -Firm’s suppliers
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Ch 5 -24
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
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Ch 5 -25
Horizontal Integration
Strategies
Ownership or Control -Firm’s competitors
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Ch 5 -26
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
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Ch 5 -27
Types of Strategies
Market
Penetration
Intensive
Strategies
Market
Development
Product
Development
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Ch 5 -28
Intensive Strategies
Intensive Efforts -Improve competitive position with
existing products
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Ch 5 -29
Market Penetration Strategies
Increased Market Share -Present products/services
Present markets
Greater marketing efforts
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Ch 5 -30
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
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Ch 5 -31
Market Development
Strategies
New Markets -Present products/services to new
geographic areas
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Ch 5 -32
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
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Ch 5 -33
Product Development
Strategies
Increased Sales -Improving present products/services
Developing new products/services
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Ch 5 -34
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
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Ch 5 -35
Types of Strategies
Related
Diversification
Diversification
Strategies
Unrelated
Diversification
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Ch 5 -36
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
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Ch 5 -37
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 -38
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 -39
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 -40
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
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Ch 5 -41
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
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Ch 5 -42
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 -43
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 -44
Unrelated Diversification May be Effective
When:
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

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 -45
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
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Ch 5 -46
Types of Strategies
Retrenchment
Defensive
Strategies
Divestiture
Liquidation
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Ch 5 -47
Retrenchment Strategies
Regrouping -Cost & asset reduction to reverse
declining sales & profit
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Ch 5 -48
Bankruptcy

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
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 -49
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
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Ch 5 -50
Divestiture Strategies
Selling a division or part of an
organization
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Ch 5 -51
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
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Ch 5 -52
Liquidation Strategies
Selling
Company’s assets, in parts, for
their tangible worth
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Ch 5 -53
Liquidation Strategies
Guidelines -Retrenchment & divestiture failed
Only alternative is bankruptcy
Minimize stockholder loss by selling firm’s assets
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Ch 5 -54
Michael Porter’s Generic Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
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Ch 5 -55
Copyright 2007 Prentice Hall
Ch 5 -56
Generic Strategies
Cost Leadership
(Type 1 and Type 2)
In conjunction with differentiation
Economies or diseconomies of
scale
Capacity utilization achieved
Linkages w/ suppliers & distributors
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Ch 5 -57
Cost Leadership
Ways of ensuring total costs across value
chain are lower than competitors’ total costs

1.
2.
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 -58
Cost Leadership
Can be especially effective when:

1.
2.
3.
4.
5.
6.
7.
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 -59
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
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Ch 5 -60
Generic Strategies
Differentiation (Type 3)
Greater product flexibility
Greater compatibility
Lower costs
Improved service
Greater convenience
More features
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Ch 5 -61
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
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Ch 5 -62
Generic Strategies
Focused Strategies (Type 4 & 5)
Industry segment of sufficient size
Good growth potential
Not crucial to success of major competitors
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Ch 5 -63
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
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Ch 5 -64
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Ch 5 -65
Means for Achieving Strategies
Joint Venture/Partnering 
Two or more companies form a temporary
partnership or consortium for purpose of
capitalizing on some opportunity
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Ch 5 -66
Reasons why Mergers and Acquisitions Fail




Integration difficulties
Inadequate evaluation of target
Large or extraordinary debt
Inability to achieve synergy
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Ch 5 -67
Means for Achieving Strategies
Cooperative Arrangements 




R&D partnerships
Cross-distribution agreements
Cross-licensing agreements
Cross-manufacturing agreements
Joint-bidding consortia
Copyright 2007 Prentice Hall
Ch 5 -68
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
Copyright 2007 Prentice Hall
Ch 5 -69
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 -70
Reasons why Mergers and Acquisitions Fail
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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 -71
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
Copyright 2007 Prentice Hall
Ch 5 -72
Recent Mergers
Acquiring Firm
IBM
Philip Morris
U.S. Steel
Oracle
OSIM International Ltd
Adobe Systems
US Airways
United Parcel Service
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Acquired Firm
Ascential Software
PT Hanjaya Mandala Samp
National Steel Corp
PeopleSoft
Brookstone
Macromedia
American West
Overnight Corp.
Ch 5 -73
First Mover Advantages

Benefits a firm may achieve by entering a
new market or developing a new product or
service prior to rival firms
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Ch 5 -74
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
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Ch 5 -75
Outsourcing
Business-process outsourcing
(BPO)

Companies taking over the functional
operations of other firms
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Ch 5 -76
Outsourcing
Benefits

Less expensive
 Allows firm to focus on core business
 Enables firm to provide better services
Copyright 2007 Prentice Hall
Ch 5 -77
For Review (Chapter 5)
Key Terms & Concepts
Acquisition
Concentric
Diversification
Backward
Integration
Conglomerate
Diversification
Bankruptcy
Cooperative
Arrangements
Combination
Strategy
Cost Leadership
Copyright 2007 Prentice Hall
Ch 5 -78
For Review (Chapter 5)
Key Terms & Concepts
Differentiation
Focus
Diversification
Strategies
Forward Integration
Divestiture
Franchising
First Mover
Advantages
Generic Strategies
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Ch 5 -79
For Review (Chapter 5)
Key Terms & Concepts
Horizontal
Diversification
Intensive Strategies
Horizontal
Integration
Joint Venture
Hostile Takeover
Leveraged Buyout
Integration
Strategies
Liquidation
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Ch 5 -80
For Review (Chapter 5)
Key Terms & Concepts
Long-Term
Objectives
Outsourcing
Market Development
Product Development
Market Penetration
Retrenchment
Merger
Vertical Integration
Copyright 2007 Prentice Hall
Ch 5 -81