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Strategies in action
Learning objectives
After studying this chapter, you should be able to do the following:
5-1. Identify and discuss eight characteristics of goals and ten benefits of having clear goals.
5-2. Define and give an example of eleven types of strategies.
5-3. Identify and analyze the three types of “Integration Strategies”.
5-4. Give specific guidelines when market penetration, market and product development.
Development are especially effective strategies.
5-5. Explain when diversification is an effective business strategy.
5-6. List guidelines for when retrenchment, divestiture, and liquidation are especially effective.
active strategies.
5-7. Identify and discuss Porter's five generic strategies.
5-8. Compare (a) cooperation between competitors, (b) joint ventures and partnerships, and (c) mergers/
acquisitions as key means to achieve strategies.
5-9. Discuss tactics to facilitate strategies, such as (a) being the first to act, (b) outsourcing, and (c) offshoring.
5-10. Explain how strategic planning is different in small, for-profit, and nonprofit businesses.
Learning Assurance Exercises
The following exercises are found at the end of
this chapter: Exercise 5A Develop Hershey's Hypothetical Strategies
Company Exercise 5B Horizontal integration in the
practice Exercise 5c What strategies should Hershey follow in
2017? 5D exercise Browse articles about
strategy exercise 5e Classify some strategies
recent exercise 5f How risky are various strategies
alternatives? 5g exercise Develop alternative strategies for your university
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130 Part 2 • Strategy formulation
income and profits. Kent Nelson, former president of UPS, explains why his company created a
Today, hundreds
of companies
adopted“As
strategic
their bets
questonfortechnology
greater investments,
new strategic
planninghave
department:
we areplanning
making in
bigger
we can't afford to spend a lot of money in one direction and then I discovered five years later that it was
going in the wrong direction.”1
This chapter brings strategic management to life with many contemporary examples.
Sixteen types of strategies are defined and exemplified, including Michael Porter's generic strategies:
cost leadership, differentiation, and focus. Guidelines are presented to determine when it is most appropriate
to follow each strategy. An overview of strategic management in nonprofit organizations, government
agencies, and small businesses is provided. As shown below, Signet Jewelers is an exemplary company
that has for many years exemplified excellent strategic management, especially recently in the use of a
horizontal integration strategy (defined in Table 5-4).
Long-term goals
Long-term objectives represent the expected results when applying certain strategies. Strategies
represent the actions that must be taken to achieve long-term objectives. The timeframe for
goals and strategies should be consistent, typically 2 to 5 years. Without long-term goals, an
organization would drift aimlessly toward some unknown end. It is difficult to imagine an organization
or an individual being successful without clear objectives. You've probably worked hard the past few
years striving toward the goal of graduating with a business degree. Success rarely happens by
accident; rather, it is the result of hard work aimed at achieving certain goals.
Long-term objectives are needed at the corporate, divisional and functional levels of an organization.
organization. They are an important measure of managerial performance. Many professionals and academics
attribute a significant part of the competitive decline of American industry to the short-term, rather than longterm, strategic orientation of American managers. Arthur D. Little argues that bonuses or merit pay for
current managers should be based more on long-term goals and strategies. An example framework for
relating objectives to performance
EXEMPLARY COMPANY PRESENTED
Signet Jewelers Limited (SIG)
Signet Jewelers, parent company of Kay Jewelers, based in malls, Jared the Galleria
The sales of the
of Jewelry and Zale Corporation, is the largest specialty jewelry retailer in the United States,
company increased
United Kingdom and Canada. Signet's Sterling Jewelers division operates more than 1,500 stores in all 50
3.6 percent overall.
states, primarily under the brands Kay Jewelers and Jared The Galleria of Jewelry. The division of
For the first quarter
Signet in the UK operates around 500 stores, mainly under the brands H. Samuel and
(first quarter) of
Ernest Jones. Signet's Zale division operates nearly 1,600 locations in the United States and
fiscal year 2016, Signet
Canada, mainly under the brands Zales, Peoples and Piercing Pagoda.
reported growth
general sales
in the same stores of 3.6 percent, led by a 6.2 percent increase in the division of the
Signet recently removed 10 percent of its inventory from Zale stores, considered
company in the United Kingdom and a same-store sales increase of 5.6 percent in
slow-turning inventory, and replaced it with faster-turning inventory, such as Vera Wang and Unstoppable
the Zale division. During the first quarter of 2016, Signet repurchased $21.9 million of its
Love Collections.
Headquartered in Hamilton, Bermuda, Signet does excellent work in strategic planning,
own shares, hoping that the share price would rise further. Signet Sales
in the first quarter of 2016 they were 1,530.6 million dollars, 44.9 percent more than in the
primarily using a horizontal integration strategy to grow globally. sales
first fiscal quarter of the previous year. Signet is on a roll, led by excellent strategists and
in the same Signet stores for the company's fiscal 2015 holiday season
strategies.
increased 2.5, 3.5 and 9.7 percent, respectively, for the Sterling Jewelers, Zale and
Company UK.
Source: Various sources.
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Chapter 5 • Strategies in action
Table 5-1 Different performance measures by organizational level
organizational level
Basis for annual bonus or merit pay
Corporate
75% based on long-term goals
25% based on annual goals
Division
50% based on long-term goals
50% based on annual goals
Function
25% based on long-term goals
75% based on annual goals
The evaluation is provided in Table 5-1. A particular organization could adapt these guidelines to
meet their own needs, but incentives should be attached to annual and long-term objectives.
Features and benefits of lenses
Objectives should be quantitative, measurable, realistic, understandable, challenging, hierarchical, obtainable, and
consistent across organizational units. Each objective must also be associated with a schedule.
Objectives are commonly expressed in terms such as asset growth, sales growth, profitability, market share,
degree and nature of diversification, degree and nature of vertical integration, earnings per share, and social
responsibility. Clearly stated goals offer many benefits. They provide direction, enable synergy, assist in
evaluation, establish priorities, reduce uncertainty, minimize conflict, stimulate effort, and assist in both resource
allocation and job design. Objectives provide a basis for consistent decision making by managers whose values
and attitudes differ. Objectives serve as standards by which individuals, groups, departments, divisions, and
entire organizations can be evaluated.
Table 5-2 reveals the desired characteristics of the objectives and Table 5-3 summarizes the benefits of having
clear objectives.
Financial versus strategic objectives
Two types of objectives are especially common in organizations: financial and strategic objectives.
Financial objectives include those associated with revenue growth, profit growth, higher dividends, higher profit
margins, higher return on investment, higher earnings per share, a rising stock price, improved cash flow, box etc.
Whereas strategic objectives include things like greater market share, faster and more on-time delivery than
rivals, shorter design times than rivals, lower costs than rivals, higher product quality than rivals, greater geographic
coverage broader than rivals, achieve technological leadership, constantly bring new or improved products to market
before rivals, etc.
Although financial objectives are especially important in business, there is often a balance between
financial and strategic objectives, so crucial decisions need to be made.
For example, a company may do certain things to maximize short-term financial objectives that would harm longterm strategic objectives. Improve the financial position in the short term through greater
Table 5-2 Eight Desired Objective Characteristics
1. Quantitative
2. Measurable
3. Realistic
4. Understandable
5. Challenging
6. Hierarchical
7. Obtainable
8. Congruent between departments
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132 Part 2 • Strategy formulation
Table 5-3 Ten benefits of having clear objectives
1. Provide direction by revealing expectations.
2. Allow synergy
3. Help in evaluation by serving as standards.
4. Set priorities
5. Reduce uncertainty
6. Minimize conflicts
7. Stimulate effort
8. Helps in resource allocation
9. Help in job design
10. Provide a basis for consistent decision making
prices can, for example, jeopardize long-term market share. The dangers associated with trading long-term strategic
goals for short-term bottom lines are especially acute if competitors relentlessly pursue greater market share at the
expense of short-term profitability. Amazon, for example, spent many years operating without profits but gaining market
share.
And there are other trade-offs between financial and strategic objectives, related to the risk of actions, concerns
about business ethics, the need to preserve the natural environment and issues of social responsibility. Both financial and
strategic objectives should include both annual and long-term performance goals. Ultimately, the best way to maintain
long-term competitive advantage is to relentlessly pursue strategic objectives that strengthen a company's business
position over its rivals. The best way to achieve financial objectives is to focus first and foremost on achieving
strategic objectives that improve a company's competitiveness and market strength.
Avoid not managing by objectives
Derek Bok, former president of Harvard University, once said, “If you think education is expensive, try ignorance.” The
idea behind this saying also applies to goal setting, because strategists should avoid the following forms of “not
managing by goals.”
• Management by Extrapolation – Adheres to the principle “If it ain’t broke, don’t fix it.” The idea is to continue doing
the same things in the same way because things are going well.
• Crisis management: based on the belief that the true measure of a truly good strategy is
What is essential is the ability to solve problems. Because there are many crises and problems for every person
and organization, strategists must dedicate their time and creative energy to solving the most pressing problems
of the moment. Crisis management is actually a way of reacting, letting events dictate the what and
when of management decisions.
• Subjective management : is based on the idea that there is no general plan about which path to take and what
to do; just do your best to accomplish what you think needs to be done. In short, “Do your thing, the best
way you know how” (sometimes called the mystery approach to decision making because subordinates must
figure out what is happening and why).
• Manage through hope: based on the fact that the future is fraught with great uncertainty
and that if we try and fail, then we hope that our second (or third) attempt will be successful. Decisions are
based on the hope that they will work out and that good times are just around the corner, especially if luck and
good fortune are on our side!2
Types of strategies
The model illustrated in Figure 5-1 provides a conceptual basis for applying strategic management. Defined and
exemplified in Table 5-4, the alternative strategies that a company could pursue can be classified into 11 actions: forward
integration, backward integration, horizontal integration, market penetration, market development, product
development, related diversification ,
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Chapter 5 • Strategies in action 133
Chapter 10: Business Ethics/Social Responsibility/Environmental Sustainability Issues
Carry out
External audit
Chapter 3
Implement
Trigger,
Establish
Develop the vision
and mission
Assess,
and select
Long-term
Goals
Chapter 5
Statements
Episode 2
Implement
Strategies-
Extent
Strategies-
Marketing,
Finance,
and evaluate
Management
Issues
Strategies
Chapter 6
Accounting, R&D,
and MIS problems
Chapter 7
Performance
Chapter 9
Chapter 8
Carry out
Internal audit
Chapter 4
Chapter 11: Global/International Issues
Strategy
Formulation
Strategy
Implementation
Strategy
Assessment
Figure 5-1
A comprehensive strategic management model
Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40. See also Anik
Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David's Strategic Modeling at Industrial
Business for National Construction Contractor of Indonesia,” Journal of Mathematics and Technology, no. 4 (October 2010): 20.
unrelated diversification, reduction, divestiture and liquidation. Each alternative strategy has countless variations. For
example, market penetration may include adding sellers, increasing advertising spending, generating coupons, and using similar
actions to increase market share in a given geographic area.
Most organizations simultaneously pursue a combination of two or more strategies, but
A combination strategy can be exceptionally risky if taken too far. No organization
can afford to apply all the strategies that could benefit the company. Decisions must be made
difficult. You have to establish priorities. Organizations, like individuals, have limited resources.
Both organizations and individuals must choose between alternative strategies and avoid excessive debt.
Hansen and Smith explain that strategic planning involves “choices that put resources at risk and trade-offs that
sacrifice opportunities.” In other words, if you have a strategy to go north, then you should buy snowshoes and warm jackets
(spend resources) and give up the opportunity for “faster population growth in the southern states.” You can't have a
strategy to go north and then take a step east, south, or west “just to be safe.” Companies expend resources and focus on a
finite number of opportunities to pursue strategies to achieve an uncertain outcome in the future. Strategic planning is much
more than a roll of the dice; It's an educated bet based
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134 Part 2 • Strategy formulation
Table 5-4 Alternative strategies defined and recent examples given
Strategy
Forward integration
Backward integration
Definition
example
Gain ownership or increase control over distributors or retailers
Amazon started express delivery services in some cities in
USA.
Seek ownership or greater control of a company's suppliers
Starbucks bought a coffee farm.
company.
Horizontal integration
Market penetration
Market development
Seeking ownership or greater control over competitors, BB&T acquired Susquehanna Bancshares.
Seek greater market share for products or services
Under Armor signed tennis champion Andy Murray with
current markets through increased marketing efforts.
a 4-year, $23 million marketing contract.
Introduce current products or services into a new area
Gap opened its first five stores in China.
geographical.
Product development
Related diversification
Seek greater sales by improving current products or services or
Amazon just started offering its own line of diapers and
developing new ones.
baby wet wipes
Add new but related products or services
Facebook acquired the text messaging company
WhatsApp for 19 billion dollars.
Unrelated diversification
Add new, unrelated products or services
Kroger and Whole Foods Market are cooking and
becoming restaurants.
Reduction
Regrouping by reducing costs and assets to reverse the
drop in sales and profits.
Dispossession
Sell a division or part of an organization.
Staples closed 250 stores and reduced the size of its stores by 50%.
Other stores.
Sears Holdings sold its Land's End division to shareholders
from Sears.
Settlement
Sell all of a company's assets, in parts, for their value
The Trump Taj Mahal in Atlantic City, New Jersey, is
tangible.
faces liquidation.
about predictions and hypotheses that are continually tested and refined by knowledge, research, experience and learning. The survival of
the company often depends on an excellent strategic plan.3
Organizations cannot excel at too many things because resources and talents are dispersed and competitors
they get an advantage. In large, diversified companies, a combined strategy is commonly employed when different divisions pursue
different strategies. Furthermore, organizations struggling to survive may simultaneously employ a combination of several defensive
strategies, such as divestiture, liquidation, and downsizing.
Strategy levels
Strategy formulation is not just a task for senior executives. Middle and lower level managers must also
participate in the strategic planning process to the extent possible. In large companies, there are actually four
levels of strategies: corporate, divisional, functional and operational, as illustrated in Figure 5-2. However, in companies
small there are three levels of strategies: business, functional and operational.
The people primarily responsible for having effective strategies at different levels include the CEO or
business owner at the corporate level; the president or executive vice president at the divisional level; the chief financial officer (CFO), the
chief information officer (CIO), chief human resources officer (HRM), chief marketing officer (CMO), etc., at the functional level; and the
plant director, regional sales director, etc. at the operational level. It is important that all managers at all levels
participate and understand the company's strategic plan to help ensure coordination, facilitation and commitment,
while avoiding inconsistency, inefficiency and lack of communication.
Integration strategies
Forward integration and backward integration are sometimes collectively called vertical integration. The strategies
Vertical integration allows a company to gain control over distributors and suppliers, while vertical integration
horizontal refers to obtaining ownership and/or control over competitors.
The vertical and horizontal actions of companies are generally called integration strategies.
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Chapter 5 • Strategies in action 135
Corporate
Level—boss
executive officer
Company
Level: owner
Division level: division
or president
president or executive vice
Functional level-
president
Finance, marketing, R&D,
Functional level: finance, marketing,
manufacturing, information
R&D, manufacturing, information systems,
systems and human resources.
and human resources managers
resource managers
Operational level: plant managers, sales managers,
production and department heads
Operational level: plant managers, sales.
managers, production and department heads
Big company
Small company
Figure 5-2
Levels of strategies with the most responsible people
Forward integration
Forward integration involves gaining ownership or greater control over distributors or retailers. A number
An increasing number of manufacturers (suppliers) are following an advanced integration strategy through
Establishing websites to sell your products directly to consumers.
In a forward integration move, Coca-Cola recently signed a 10-year partnership with
Green Mountain Coffee Roasters, maker of the Keurig single-serve coffee maker, to offer a drink for the first time
Coca-Cola through a K-Cup. Therefore, Coca-Cola plans to sell Coca-Cola through the beverage system to
the Keurig K-Cup home. With the partnership, Coca-Cola also acquired 10 percent of the Green Mountain company for
approximately 1.25 billion dollars. Green Mountain now has a similar partnership with Campbell Soup to
Prepare a cup of chicken broth in a K-Cup.
Headquartered in Cincinnati with more than 2,600 grocery stores, Kroger recently acquired Viatcost.com to
expand its push into online groceries, in part to not give up the same-day food delivery market
to Amazon.com. FedEx and UPS are using direct integration and paying to the United States Post Office
(USPS) to ship your packages. Today, USPS delivers about 2.5 million packages daily for FedEx,
or about a third of FedEx express mail shipments destined for the United States.
Amazon is getting into the “installation business.” When you buy, for example, a ceiling fan or a
car stereo on Amazon, the company now wants to install it for a fee, in at least three cities (Los Angeles,
New York and Seattle). Amazon's new program is called Amazon Local Services and is another step by the company to
erode the 90 percent market share of brick-and-mortar retail sales in the United States.
Additionally, Amazon is developing a new mobile app that recruits and pays ordinary people to
Let them be package carriers while they travel, eliminating the need for FedEx, UPS and even the Postal Service
from United States. This new direct integration strategy from Amazon is known as “On My Way” and is still
is testing to resolve potential issues, such as what happens if the package is damaged or even stolen by the carrier.
Taco Bell also wants to ring your bell and deliver your merchandise. Fast food delivery is already a strategy
at some rival companies, such as sandwich shop Jimmy John's; Burger King offers home delivery in
select markets for a couple of years; Starbucks is testing delivery.
An effective means of implementing progressive integration is franchising. Approximately 2,000 companies
In approximately 50 different industries in the United States they use franchises to distribute their products or
services. Companies can expand quickly through franchising because the costs and opportunities are
distributed among many people. Total sales of franchises in the United States annually amount to
around 1 billion dollars. There are about 800,000 franchise companies in the United States.
However, there is a growing trend towards franchisees, who, for example, may operate 10 franchisees.
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136 Part 2 • Strategy formulation
restaurants, stores or whatever, to buy their share of the business from their franchisor (corporate owner). One gap at a time
The gap between franchisees and franchisors is intensifying as children often outnumber parents.
Restaurant chains are increasingly pressured to own fewer locations. For example, TGI Fridays sold
recently transferred its 250 company-owned restaurants in the United States to franchisees, as well as its 63
owned by the company in the United Kingdom. Applebee's is also increasingly becoming a business owned by
franchisees. Burger King is converting virtually all of its company-owned locations into retail operations.
franchise, and franchisee revenue will go from 30 percent of sales in 2011 to 90 percent in 2015. This change
results in a drop in Burger King's revenue as franchisees show income on their own income statements
personal. By contrast, rival Yum Brands owns virtually all of its restaurants outside the United States and says the policy
grants greater control and benefits if things go well (or badly).
The following six guidelines indicate when progressive integration can be a particularly effective strategy:4
1. An organization's current distributors are especially expensive, unreliable, or unable to
meet the company's distribution needs.
2. The availability of quality distributors is so limited that it offers a competitive advantage to
those companies that promote forward integration.
3. An organization competes in an industry that is growing and is expected to continue growing significantly; This is a factor
because forward integration reduces an organization's ability to diversify if its core industry fails.
4. An organization has both the capital and human resources necessary to manage the new business.
ability to distribute their own products.
5. The advantages of stable production are particularly high; This is a consideration because
An organization can increase the predictability of demand for its output through forward integration.
6. Current distributors or retailers have high profit margins; This situation suggests that a
The company could profitably distribute its own products and set more competitive prices if it integrated into
forward.
Backward integration
Backward integration is a strategy that seeks ownership or greater control of a company's suppliers.
This strategy may be especially appropriate when a company's current suppliers are unreliable, too
expensive or cannot meet the needs of the company. Starbucks recently purchased its first coffee farm, a
600 acre property in Costa Rica. This backward integration strategy was mainly used to develop new varieties
of coffee and test methods to combat a fungal disease known as coffee rust that affects the industry. Both the
Manufacturers and retailers purchase necessary materials from suppliers.
Large wine and beer producer Constellation Brands recently purchased several glass bottle factories after
have problems with several suppliers of their bottles. Constellation acquired a majority stake in a Mexican manufacturing factory
Anheuser-Busch glass bottles, giving it now ownership of more than 50 percent of the glass bottles it uses.
Some industries, such as automobile and aluminum producers, are reducing their historical quest for integration
regressive. Instead of owning their suppliers, companies negotiate with several third-party suppliers. Ford and Chrysler buy
more than half of its components to external suppliers such as TRW, Eaton, General Electric (GE) and Johnson Controls. Disintegration
It makes sense in industries that have global sources of supply. Nowadays, companies compare prices, confront a salesperson
against another and opt for the best offer. Global competition is also driving companies to reduce their number of suppliers.
and to demand higher levels of service and quality from those who maintain them. Although they traditionally depended on many suppliers
To ensure uninterrupted supplies and low prices, many American companies are now following the lead of the
Japanese companies, which have far fewer suppliers and closer, long-term relationships with those few. "Make a
Tracking so many suppliers is onerous," said Mark Shimelonis, a former Xerox employee.
Seven patterns where backward integration can be an especially effective strategy are:5
1. An organization's current suppliers are especially expensive, unreliable, or unable to meet needs.
company's needs for parts, components, assemblies or raw materials.
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Chapter 5 • Strategies in action 137
2. The number of suppliers is small and the number of competitors is large.
3. An organization competes in an industry that is growing rapidly; This is a factor because the
Integrative type strategies (forward, backward and horizontal) reduce the capacity of a
organization to diversify in a declining industry.
4. An organization has capital and human resources to manage the new business of supplying its own
raw Materials.
5. The advantages of stable prices are particularly important; This is a factor because an organization
you can stabilize the cost of your raw materials and the associated price of your product(s) by integrating
backward.
6. Current suppliers have high profit margins, suggesting that the business of supplying
products or services in a given industry is a worthwhile venture.
7. An organization needs to quickly acquire a necessary resource.
Horizontal integration
When seeking ownership or control over a company's competitors, horizontal integration is arguably the
most common growth strategy. Thousands of mergers, acquisitions and acquisitions are carried out annually between
competitors. Almost all of these transactions point to greater economies of scale and better transfer of
resources and competencies. Kenneth Davidson makes the following observation about horizontal integration:
The trend toward horizontal integration seems to reflect strategists' doubts about their ability to
operate many unrelated businesses. Mergers between direct competitors are more likely to generate
efficiencies than mergers between unrelated companies, because there is greater potential to eliminate
duplicate facilities and because the management of the acquiring company is more likely to understand the
target business6.
In the tobacco industry, Reynolds American recently acquired Lorillard for $25 billion. The
Merger combined Reynolds' Pall Mall and Camel brands (with 8.1 percent market share each
in the United States) with Lorillard's Newport brand (with a 12.2 market share) to combat the
Marlboro brand from industry leader Altria, which has a 40.2 percent market share in the United States.
As part of the transaction, to combat antitrust concerns, Reynolds CEO Susan
Cameron said his company will sell Lorillard's Blu electronic cigarette to Imperial Tobacco (another rival company),
while maintaining and growing Reynolds' Vuse e-cigarette. Reynolds also sold its Kool brands,
Winston, Salem and Maverick to Imperial.
Both Dollar General and Dollar Tree recently competed for months to acquire Family Dollar.
The winner, Dollar Tree, is reducing prices and turning Family Dollar stores into bright, clean places
and friendly. Dollar Tree still sells more items for a dollar or less, while Family Dollar sells more
branded. About 5,000 Dollar Tree stores and 8,300 Family Dollar stores now compete with the 11,500
stores from industry leader Dollar General.
Charter Communications (CHTR) recently acquired (1) Time Warner Cable (TWC) for $55.33 billion
dollars and (2) Bright House Networks for $10.4 billion, creating a giant television and Internet company
in United States. The new Charter has almost 24 million clients, below the 27.2 million clients of the
leader Comcast (CMCSK). Comcast owns NBCUniversal. Charter also trails AT&T (T), whose
Recent merger with DirecTV (DTV) gave AT&T 26.4 million television customers and 16.1 million Internet customers
landline, as well as tens of millions of wireless customers. Several important factors are stimulating integration
horizontal in the television and Internet business, including the fact that cable providers are losing
fast TV subscribers and pressure from online video services like Netflix (NFLX), Hulu and Amazon
is increasing dramatically.
The following five guidelines indicate when horizontal integration can be a particularly useful strategy.
effective:7
1. An organization can acquire monopolistic characteristics in a particular area or region without
being questioned by the federal government for “substantially tending” to reduce competition.
2. An organization competes in a growing industry.
3. Increased economies of scale provide important competitive advantages.
4. An organization has both the capital and human talent necessary to successfully manage a
expanded organization.
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138 Part 2 • Strategy formulation
5. Competitors are faltering as a result of lack of management experience or need for resources
individuals owned by an organization; Note that horizontal integration would not be appropriate if
Competitors are doing poorly because in that case overall industry sales are declining.
Intensive strategies
Market penetration, market development, and product development are sometimes called strategies
intensive because they require intensive efforts to improve the competitive position of a company with the products
existing.
Market penetration
A market penetration strategy seeks to increase the market share of current products or services in current markets through increased marketing efforts. This
strategy is widely used alone and in combination with other strategies. Market penetration includes increasing the number of sellers, increasing
advertising expenditures, offering extensive sales promotion items, or increasing advertising efforts. For example, Anheuser annually purchases several
30-second advertising spots worth more than $4.5 million during the Super Bowl.
Tiffany & Co. recently began using same-sex couples in advertising, preceded by J. Crew choosing
one of her designers and her boyfriend in a catalogue. Gap uses a beautiful couple on a billboard, and Jeremiah Brent and Nate Berkus appear in a Banana
Republic ad campaign.
The following five guidelines indicate when market penetration may be a particularly useful strategy.
effective:8
1. Today's markets are not saturated with a particular product or service.
2. The usage rate of current customers could increase significantly.
3. Market shares of major competitors have been declining, while total industry sales have declined.
been increasing.
4. Historically, the correlation between dollar sales and dollar marketing expenses has been
been high.
5. Increased economies of scale provide important competitive advantages.
Market development
Market development involves the introduction of current products or services into new geographic areas. By
For example, Whirlpool recently acquired Indesit, an Italian company that sells home appliances, in order to double
the size of Whirlpool in Europe, where the company has had difficulty competing against Electrolux AB of Sweden,
LG Electronics Inc. of South Korea and Haier Group of China. Indesit had 13 percent of the market share of the
major appliances in Eastern Europe and Whirlpool had 5 percent, so now 18 percent of the
main appliances sold in Eastern Europe are Whirlpool. In Western Europe, the acquisition of Indesit
gave Whirlpool a 17 percent market share, behind the 20 percent of the leader, BSH Bosch & Siemens Hausgerate
GmbH.
The largest online video streaming company, Netflix, recently launched its services in France, Germany,
Belgium and Switzerland, as well as in Eastern and Southern Europe, and hopes to be a global service provider by 2018.
Netflix's main rival in Europe is Vivendi. Canal Plus, SA's pay TV unit, which offers services similar to
Netflix through its Canal Play services.
These six guidelines indicate when market development can be a particularly effective strategy:9
1. New distribution channels are available that are reliable, economical and of good quality.
quality.
2. An organization is successful at what it does.
3. There are new untapped or unsaturated markets.
4. An organization has the capital and human resources necessary to manage expansion.
operations.
5. An organization has excess production capacity.
6. An organization's core industry is rapidly gaining global reach.
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Chapter 5 • Strategies in action 139
Product development
Product development is a strategy that seeks to increase sales by improving or modifying current products or services.
Product development typically involves large expenditures on research and development. The Walt Disney Company
recently developed a line of Disney Baby products and services that hopes to become a powerful baby brand for customers
ages 0-2. Bob Chapek, president of Disney Consumer Products, said: “This gives Disney the opportunity to reach moms
when the magical moments begin; “There is no occasion more special than the birth of a baby.”
Action camera company GoPro recently introduced new high-end and low-end cameras.
GoPro is the leading producer of portable, durable high-definition video cameras used by outdoor enthusiasts such as divers
and surfers. Headquartered in San Mateo, California, GoPro's rival companies
They include Sony, Canon, Garmin and Polaroid, but GoPro is doing very well selling products in more than 100
countries and through more than 25,000 points of sale.
The new Apple Watch is actually a wrist computer and now competes with several devices with
Android from Motorola and Samsung Electronics. “Laptops” are good for people to monitor their health, among many other
things. The Sensoria firm is manufacturing smart clothing, including smart socks, which are washable. The
opportunities for product development strategies are endless, given the rapid technological changes that occur daily.
The following five guidelines indicate when product development can be a particularly difficult task.
effective strategy to follow:10
1. An organization has successful products that are in the maturity stage of the product life cycle.
product; The idea here is to attract satisfied customers to try new (improved) products as a result of their
positive experience with the organization's current products or services.
2. An organization competes in an industry that is characterized by rapid technological advances.
developments.
3. Major competitors offer better quality products at comparable prices.
4. An organization competes in a high-growth industry.
5. An organization has especially strong research and development capabilities.
Diversification strategies
The two general types of diversification strategies are related diversification and unrelated diversification.
related. Companies are said to be related when their value chains have strategic coincidences.
between competitively valuable businesses; Companies are said to be unrelated when their value chains
are so different that there are no competitively valuable relationships between businesses.11 Most companies
favor related diversification strategies to capitalize on synergies as follows:
• Transfer experience, technological knowledge or other competitively valuable capabilities.
links from one company to another
• Combine the related activities of separate businesses into a single operation to achieve
lower costs
• Exploit the common use of a well-known brand
• Collaboration between companies to create competitively valuable resource strengths and
capabilities12
Diversification strategies are becoming less popular because organizations find it more
difficult to manage various business activities. In the 1960s and 1970s, the trend was to diversify to
avoid relying on a single industry, but in the 1980s there was a general shift in that way of thinking.
Diversification is still declining. Michael Porter of Harvard Business School commented: "Management
discovered that he couldn't handle the beast." Companies are still selling, closing or spinning off divisions
less profitable or “different” to focus on their core businesses. For example, ITT was recently split into
three independent specialized companies. There was a time when ITT owned everything from hotels
Sheraton and Hartford Insurance to the maker of Wonder Bread and Hostess Twinkies. About the breakup of ITT, the
Analyst Barry Knap said: “Companies in general are not very efficient diversifiers; Investors usually
“They can do better by buying shares in a variety of companies.” The new technologies that appear
quickly, new products and rapidly changing buyer preferences make it difficult to
diversification.
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140 Part 2 • Strategy formulation
Diversification must do more than simply spread business risks across different industries; after
All in all, shareholders could achieve this by simply purchasing shares in different companies in different industries or
investing in mutual funds. Diversification only makes sense to the extent that the strategy adds more value for the
shareholders than what the shareholders could achieve acting individually. Any industry chosen for diversification
must be attractive enough to generate consistently high returns on investment and offer potential among
operating divisions for greater synergies than those entities could achieve alone. Many strategists maintain
that companies should “stick to the fabric” and not stray too far from their core areas of competence.
However, today some companies pride themselves on being conglomerates, from small companies like Pentair
Inc. and Blount International to large companies such as Textron, Berkshire Hathaway, Allied Signal, Emerson Electric, GE, Viacom,
Amazon, Google, Disney, and Samsung. Clusters Show That Focus and Diversity Are Not Always Mutual
exclusive. In an unattractive industry, for example, diversification makes sense, as in the case of Philip Morris, because the
Cigarette consumption is declining, product liability lawsuits are a risk and some investors
They reject tobacco stocks on principle.
Related diversification
Recently, Alcoa further diversified into the jet engine parts industry by acquiring Firth Rixson Ltd. for
almost 3 billion dollars. The move away from total dependence on aluminum positions Alcoa to become a
major player in the aerospace jet engine market. Jet engines use a lot of aluminum, but still
This strategy is better classified as related diversification than forward integration due to the new
high-tech skills required.
With its new Apply Pay product linked with iBeacon so that stores can detect and locate users of
iPhone through a Bluetooth wireless signal when they enter the premises, Apple recently entered the payment business in
online, competing directly with PayPal. Using their iPhone and/or Apple Watch, consumers can now make purchases
retailers by tapping their device on participating cash registers. Apple is basically diversifying into the business
banking with these new products, but the threat to PayPal in particular is prompting eBay and Google to cooperate on this
ambit.
Guidelines for determining when related diversification may be an effective strategy are as follows13.
1. An organization competes in a slow-growth or no-growth industry.
2. Adding new, but related products would significantly improve sales of current ones.
products.
3. New, but related, products could be offered at highly competitive prices.
4. New but related products have seasonal sales levels that offset existing peaks and valleys
of an organization.
5. An organization's products are currently in the decline stage of the product life cycle.
6. An organization has a strong management team.
Unrelated diversification
Privately held Mars Inc., best known for its M&M chocolates and Mars and Snickers chocolate bars, became
recently into the world's largest pet food company, purchasing 80 percent of pet food brands.
Procter & Gamble pet food for $2.9 billion, plus its own brand. Pet brands
Whiskas, Pedigree and Royal Canin. Mars has more than 25 percent market share in the global food industry
for pets, slightly ahead of Nestlé SA, owner of Purina and Friskies.
Google now offers a driverless electric car that has no steering wheel, brake, or accelerator; rather, the car is
Equipped with go and stop buttons, and travels at a maximum speed of 25 mph. To diversify further, Google
recently acquired Skybox Imaging to collect and provide sky data using satellites that collect photographs and
daily videos of Earth. With the acquisition, Google also intends to cover the world with fast Internet access from the sky,
using balloons, drones and satellites.
Honda Motor Company diversified in 2015 by developing, producing and marketing its first business aircraft,
called HondaJet HA-420, which has a range of 1,180 miles and a maximum speed of 420 knots, and can carry seven
passengers. This new product competes directly with the Cessna Citation M2 and Embraer Phenom 100E business jets. These
Business jets sell for about $4.5 million each.
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An unrelated diversification strategy favors the capitalization of a portfolio of businesses that are capable of
deliver excellent financial performance in their respective industries, rather than striving to capitalize on reserve requirements
strategic aspects of the value chain between businesses. Companies that employ unrelated diversification seek
continuously in different industries companies that can be acquired through a deal and yet have potential
to provide a high return on investment. Seeking unrelated diversification implies being on the hunt to acquire
companies whose assets are undervalued, companies that are in financial difficulties or companies that have prospects
high growth but have little investment capital.
Below are ten guidelines where unrelated diversification can be a particularly useful strategy.
effective.14
1. Revenue derived from an organization's current products or services would increase.
significantly by adding new and unrelated products.
2. An organization competes in a highly competitive or non-growth industry, as indicated by low profit margins.
industry profit and returns.
3. An organization's current distribution channels can be used to market the new products.
to current customers.
4. New products have countercyclical sales patterns compared to an organization's current sales patterns.
products.
5. An organization's core industry is experiencing declining annual sales and profits.
6. An organization has the capital and management talent necessary to compete successfully in a
new industry.
7. An organization has the opportunity to purchase an unrelated business that is attractive.
investment opportunity.
8. There is financial synergy between the acquired company and the acquiring company. (Note that a key difference between the
related and unrelated diversification is that the first must be based on some common points in the
markets, products or technology, while the second is based more on profit considerations).
9. Existing markets for an organization's current products are saturated.
10. Antitrust actions could be filed against an organization that has historically focused on a single
industry.
Defensive strategies
In addition to integrative, intensive and diversification strategies, organizations could also apply strategies
defensive measures such as reduction, divestment or liquidation.
Reduction
Downsizing occurs when an organization regroups by reducing costs and assets to reverse declining profits.
sales and profits. Sometimes called a turnaround or turnaround strategy , downsizing is designed to strengthen the
basic distinctive competence of an organization. During cost reduction, strategists work with limited resources
and face pressure from shareholders, employees and the media. Reducing expenses may involve
sell land and buildings to raise necessary cash, cut product lines, close marginal businesses, close
obsolete factories, automate processes, reduce the number of employees and institute cost control systems.
Levi Strauss & Co. recently cut 20 percent of its non-retail, non-manufacturing workforce as part
of a reduction strategy aimed at streamlining the company's operations and generating cost savings of almost 200
million dollars per year. The 160-year-old San Francisco-based company is having trouble competing in the
intensely competitive clothing retail industry, marked by fleeting fads and "sales-only" shoppers.
Cisco Systems recently cut 6,000 employees from its payroll, representing 8 percent of the force
total labor force of the company. The routing and switching systems company is experiencing a decline in its
income and benefits. Time Warner's Turner Broadcasting division recently cut 1,475 jobs, or 10 percent.
percent of its workforce. The Turner division generates about half of Time Warner's operating profits and
It has more than 5,000 full-time employees in its hometown of Atlanta.
Staples closed 170 stores in North America in 2014 and closed another 55 stores in 2015.
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142 Part 2 • Strategy formulation
In some cases, filing for bankruptcy can be an effective reduction strategy. Bankruptcy can allow a
company avoid significant debt obligations and void union contracts. There are five main types of bankruptcy: Chapter 7,
Chapter 9, Chapter 11, Chapter 12 and Chapter 13. The first type, Chapter 7 bankruptcy, is a liquidation procedure that
It is used only when a corporation sees no hope of being able to operate successfully. or to obtain creditor agreement
necessary. All assets of the organization are sold in parts for their tangible value. Several hundred thousand companies
They file bankruptcy annually under Chapter 7.
Chapter 9 bankruptcy applies to municipalities. Detroit, Michigan, is the largest city in the USA.
file for bankruptcy, but others include Stockton, California and Birmingham, Alabama.
Chapter 11 bankruptcy allows organizations to reorganize and return after filing a bankruptcy petition.
protection. Quiznos recently filed for Chapter 11 bankruptcy because its 2,100 stores simply cannot
They can compete with rival Subway's 41,000 stores. Quiznos charges a 7 percent royalty fee and another 4 percent
of advertising from disgruntled franchisees, compared to the industry average rate of 6 percent royalties and the
2 percent marketing fee. The average Quiznos store has about $300,000 in annual revenue, versus
the $425,000 a few years ago.
Additionally, Sbarro recently filed for Chapter 11 bankruptcy for the second time in less than three years.
The pizza chain attributed its recent financial problems to “an unprecedented decline in traffic in the centers
commercial". Headquartered in Melville, New York, Sbarro is a privately held company with approximately 800 stores in more than 40 countries.
An artificial sapphire producer for Apple, GT Advanced Technologies, recently filed for bankruptcy, shortly after
that Apple decided to opt for glass screens instead of sapphire. GT's share price fell 93 percent on
same day that the news of the bankruptcy was published. By using sapphire, Apple expected a more scratch-resistant cover since
breaks for their smartphones, but decided to use toughened glass.
Chapter 12 bankruptcy was created by the Family Farmer Bankruptcy Act of 1986. This law
Provides special relief to family farmers with debts equal to or less than $1.5 million.
Chapter 13 bankruptcy is a reorganization plan similar to Chapter 11, but is available only to small
businesses owned by individuals with unsecured debts of less than $100,000 and secured debts of less than
$350,000. The Chapter 13 debtor is allowed to operate the business while a plan is developed to ensure operation
successful business in the future.
Below are five guidelines for determining when downsizing may be an especially effective strategy:15
1. An organization has a clearly distinctive competency but has not consistently met its
objectives and goals over time.
2. An organization is one of the weakest competitors in a given industry.
3. An organization is plagued by inefficiency, low profitability, low employee morale, and
pressure from shareholders to improve performance.
4. An organization has failed to capitalize on external opportunities, minimize external threats, take advantage
internal strengths and overcoming internal weaknesses over time; that is, when strategic managers
of the organization have failed (and will likely be replaced by more competent people).
5. An organization has grown so much and so quickly that a major internal reorganization is needed.
Dispossession
Selling a division or part of an organization is called divestiture. Often used to raise capital for future
acquisitions or strategic investments. Divestment may be part of an overall downsizing strategy to free a
organization of businesses that are unprofitable, require too much capital, or do not fit well with the other activities of
the company. Divestment has also become a popular strategy for companies to focus on their
core businesses and become less diversified.
The world's largest consumer products company, Procter & Gamble (P&G), is in the process of divesting (selling)
more than half of its brands (almost 100) to focus on its core brands (about 80). With brands like Pampers, Tide,
Era, Cheer, Metamucil, Clairol, Wella, Oral-B, Duracell, Fixodent, Ivory and Clearblue (pregnancy tests), P&G has 23 brands
which have more than a billion dollars in annual sales each. The ivory could be sold, since the Americans have
increasingly opting for body washes and liquid hand soaps instead of simple bar soaps.
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Airbus Group NV is in the process of selling its defense assets to focus solely on its defense business.
commercial airplanes. Airbus is selling its secure communications business, Fairchild Controls, as well as Rostock
System-Technik, AvDef, ESG and its naval technology joint venture Atlas Elektronik with ThyseenKrupp AG. Airbus
is also selling its 46 percent non-voting stake in Dassault Aviation SA, which makes the planes
French Rafale fighter jets and Falcon commercial aircraft.
A version of divestiture occurs when a corporation is divided into two or more parts. For example, Hewlett
Packard (HP) recently separated its personal computer and printer businesses from its corporate operations
hardware and services. Very often, divested segments become separate companies listed on
bag. Many large conglomerate companies are employing this strategy.
Sometimes this strategy is a prelude to the company selling the separate parts to a rival company, such as
example the merger of HP's corporate hardware and services business with EMC Corporation.
PepsiCo is under pressure to separate its soft drink division from its snack operations. Even General Electric
faces pressure from investors to spin off some of its various operations, which range from power plants
electric to locomotives and MRI machines. Dupont is spinning off a segment that generates 20
percent of your income. Gannet Company, owner of USA Today and Wall Street Journal, recently spun off its
print publishing business from the television movie business.
In 2014 alone, corporations globally spun off subsidiaries worth around $2 trillion.
Dollars. Part of the reason for breaking up diversified companies is that the homogeneous parts are generally much larger.
attractive to potential buyers. Most of the time, acquiring companies want to promote the
homogeneity to complement their own operations, rather than heterogeneity, and are willing to pay for
homogeneity. For example, Fiat Chrysler Automobiles NV recently “spinned off” its Ferrari segment in an IPO
separately, possibly raising up to $10 billion for Fiat. In the United States, sports cars
Ferraris are priced between $190,000 and $400,000, with limited edition models exceeding $3 million each.
Germany's huge power company, E.ON SE, recently split into two companies: one focuses on
company's green energy initiatives, while the other is made up of power generation operations
conventional of the company. Germany is in the midst of an aggressive policy to phase out all
its nuclear power plants by 2025.
Here are some guidelines for when divestment can be a particularly effective strategy
to follow:16
1. An organization has followed a cost reduction strategy and has failed to achieve what is necessary.
improvements.
2. To be competitive, a division needs more resources than the company can provide.
3. A division is responsible for the overall poor performance of an organization.
4. A division does not fit with the rest of an organization; This can result from radical differences.
markets, customers, managers, employees, values or needs.
5. A large amount of cash is needed quickly and cannot be reasonably obtained from others
sources.
6. Government antitrust action threatens an organization.
Settlement
Selling all of a company's assets, in parts, for their tangible value is called liquidation; is associated with the
Chapter 7 bankruptcy. Liquidation is a recognition of defeat and, consequently, can be a strategy
emotionally difficult. However, it may be better to stop trading than to continue losing large sums of money. By
For example, New York City-based Crumbs Bake Shop, the country's largest cupcake company, took advantage of
into Chapter 7 bankruptcy liquidation of its 65 stores in 12 states and Washington, DC. Crumbs Bake Shop was
famous for selling giant cupcakes in flavors like Red Velvet, Cookie Dough, and Girl Scouts Thin Mints. The company
notified its 165 full-time employees and 655 part-time hourly employees that the business was closing.
Crumbs' last day on the Nasdaq was June 30, 2014, at a share price of 11 cents.
Midwest retailer Alco Stores liquidated (closed) all of its stores in early 2015 after operating
previously under Chapter 11 bankruptcy. Founded in 1901 as a general merchandise store in Abilene,
Kansas, Alco had major offices in both Abilene and Coppell, Texas. More than 3,000 employees lost their
employment when Alco liquidated its assets.
Headquartered in Bonita Springs, Florida, one of the largest magazine distributors in the United States, Source Interlink
Distribution, recently liquidated, laying off its 6,000 employees and
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144 Part 2 • Strategy formulation
giving up its $750 million a year in revenue. Source Interlink had played an important role in
organizing the distribution of printed magazines to retailers, large and small.
These three guidelines indicate when liquidation can be a particularly effective strategy to follow:17
1. An organization has pursued both a downsizing strategy and a divestment strategy, and neither
They have been successful.
2. The only alternative for an organization is bankruptcy. Liquidation represents an orderly and planned means
of obtaining the greatest possible amount of cash for an organization's assets. A company can
legally declare bankruptcy first and then liquidate several divisions to obtain the necessary capital.
3. Shareholders of a company can minimize their losses by selling the organization's assets.
Michael Porter's five generic strategies
Probably the three most read books on competitive analysis in the 1980s were Competitive Strategy (1980),
Competitive Advantage (1985) and Competitive Advantage of Nations (1989) by Michael Porter. According to Porter, the strategies
They allow organizations to obtain competitive advantages from three different bases: cost leadership,
differentiation and focus. Porter calls these bases generic strategies.
Cost leadership emphasizes the production of standardized products at a low unit cost to consumers.
price sensitive. Two alternative types of cost leadership strategies can be defined.
Type 1 is a low-cost strategy that offers products or services to a wide range of customers at the lowest price
available on the market. Type 2 is a best value strategy that offers products or services to a wide range of
customers at the best price-value available on the market. The best value strategy aims to offer customers
a range of products or services at the lowest price available compared to a rival's products with attributes
Similar. Both Type 1 and Type 2 strategies target a large market.
Porter's Type 3 generic strategy is differentiation, a strategy aimed at producing products and services
considered unique to the industry and aimed at consumers who are relatively price insensitive.
Focus means producing products and services that meet the needs of small groups of consumers.
Two alternative types of focusing strategies are Type 4 and Type 5. Type 4 is a low-cost focusing strategy.
cost that offers products or services to a small range (niche group) of customers at the lowest price available in the market
market. Examples of companies that use the Type 4 strategy include Jiffy Lube International and Pizza Hut, as well as
local used car dealerships and hot dog restaurants. Type 5 is a focus strategy
best value that offers products or services to a small range of customers at the best price-value available in the market.
Sometimes called “focused differentiation,” the best value strategy aims to offer a group
niche customers products or services that satisfy their tastes and requirements better than rivals' products.
Both Type 4 and Type 5 targeting strategies target a small market. However, the difference
is that Type 4 strategies offer products or services to a niche group at the lowest price, while those of
Type 5 offer products and services to a niche group at higher prices but loaded with features so that
offers are perceived as the best value. Bed and Breakfast inns and local retail boutiques are
examples of Type 5 companies.
Porter's five strategies involve different organizational arrangements, control procedures, and control systems.
incentives. Larger companies with greater access to resources often compete based on leadership in
costs or differentiation, while smaller companies often compete based on focus. Five o'clock
Porter's generic strategies are illustrated in Figure 5-3. Note that a strategy can be applied
differentiation (Type 3) either with a small target market or with a large target market. However, it is not effective
pursue a cost leadership strategy in a small market because profit margins are generally
too small. Likewise, it is not effective to follow a focus strategy in a large market because
Economies of scale would generally favor a low-cost or best-value cost leadership strategy
to obtain or maintain a competitive advantage.
Porter emphasizes the need for strategists to conduct cost-benefit analyzes to evaluate “opportunities.”
shared” between existing and potential business units of a company. Share activities and
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Chapter 5 • Strategies in action 145
Type 1: Cost leadership: low cost
Type 2: Cost Leadership – Best Value
Type 3: Differentiation
Type 4: Focus: low cost
Type 5: Focus: best value
GENERIC STRATEGIES
Cost leadership
Big
Type 1
Type 3
Focus
—
TEKE
R
EZ
A
F
HIM
O
S
T
Type 2
Differentiation
Little
—
Type 3
Type 4
Type 5
Figure 5-3
Porter's five generic strategies
Source: Based on Michael E. Porter, Competitive Strategy: Techniques for Analyzing
Industries and Competitors (New York: Free Press, 1980), 35–40.
resources improves competitive advantage by reducing costs or increasing differentiation. In addition to encouraging sharing,
Porter emphasizes the need for companies to effectively “transfer” skills and experience between autonomous business
units to gain competitive advantage. Depending on factors such as the type of industry, the size of the company, and
the nature of the competition, various strategies could generate advantages in cost leadership, differentiation, and focus.
Cost leadership strategies (type 1 and type 2)
A primary reason to pursue forward, backward, and horizontal integration strategies is to gain low-cost or better-value
cost leadership benefits. But cost leadership should generally be pursued alongside differentiation. Several cost elements
affect the relative attractiveness of generic strategies, including the economies or diseconomies of scale achieved, the effects
of learning and experience curves, the percentage of capacity utilization achieved, and linkages with suppliers and distributors.
Other cost elements to consider when choosing between alternative strategies include the potential for cost and knowledge
sharing within the organization, research and development (R&D) costs associated with developing new products or
modifying existing products, labor costs , tax rates, energy costs and shipping costs.
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 the
differences between an brand and another. or when there are a large number of buyers with significant bargaining power.
The basic idea is to undercut competitors' prices and thus gain market share and sales, completely driving some
competitors out of the market. Companies that employ a low-cost (Type 1) or best-value (Type 2) cost leadership strategy
must achieve their competitive advantage in ways that are difficult for competitors to copy or match. If it is relatively easy
or cheap for rivals to imitate the leader's cost leadership methods, the leaders' advantage will not last long enough to
generate a valuable advantage in the market. Remember that for a resource to be valuable, it must be rare, difficult to
imitate, or difficult to substitute. To successfully employ a cost leadership strategy, a company must ensure
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146 Part 2 • Strategy formulation
that its total costs throughout its value chain are lower than the total costs of its competitors. There are two ways to achieve
this:18
1. Perform value chain activities more efficiently than rivals and control factors that drive production costs
value chain activities. Such activities could include altering plant layout, mastering technologies
recently introduced, use common parts or components in different products, simplify product design,
find ways to operate near full capacity year-round, etc.
2. Renew the company's general value chain to eliminate or avoid some activities that generate costs.
Such activities could include sourcing new suppliers or distributors, selling products online, relocating facilities
manufacturing, avoid the use of unionized labor, etc.
When employing a cost leadership strategy, a company must be careful not to use price cuts so aggressive that
their own profits are low or non-existent. Be constantly on the lookout for technological advances that save costs or any other
advancement in the value chain that could erode or destroy the company's competitive advantage. A cost leadership strategy
Type 1 or Type 2 may be especially effective under the following conditions:19
1. Price competition between rival sellers is especially vigorous.
2. Products from rival sellers are essentially identical and supplies are readily available anywhere
from several eager sellers.
3. There are few ways to achieve product differentiation that have value for buyers.
4. Most buyers use the product in the same way.
5. Buyers incur low costs by switching their purchases from one seller to another.
6. Buyers are large and have significant power to negotiate prices down.
7. Newcomers to the industry use low introductory prices to attract buyers and build a customer base.
A successful cost leadership strategy typically permeates the entire company, as evidenced by high efficiency,
low overheads, limited profits, intolerance of waste, intensive evaluation of budget requests,
wide spans of control, rewards linked to cost containment and broad employee participation. in the
cost control efforts. Some risks of pursuing cost leadership are that competitors may imitate the strategy,
thereby reducing overall industry profits; technological advances in the industry may render the strategy ineffective; either
The buyer's interest may turn towards other differentiating characteristics in addition to price. Dollar stores are well known
for their low-cost leadership strategies.
Differentiation strategies (Type 3)
Different strategies offer different degrees of differentiation. Differentiation does not guarantee a competitive advantage, especially if
standard products sufficiently satisfy customer needs or if rapid imitation by customers is possible
competitors. The best are durable products protected by barriers to rapid copying by competitors. A
Successful differentiation can mean greater product flexibility, greater compatibility, lower costs, better service, less
maintenance, greater convenience or more functions. Product development is an example of a strategy that offers the advantages of
differentiation.
A differentiation strategy should only be applied after careful study of customer needs and preferences.
buyers to determine the feasibility of incorporating one or more differentiating features into a unique product that displays the
desired attributes. A successful differentiation strategy allows a company to charge a higher price for its product and earn
customer loyalty because consumers can become strongly attached to differentiating factors. The special features
that differentiate a product may include superior service, spare parts availability, engineering design, product performance,
useful life, fuel consumption or ease of use.
One risk of pursuing a differentiation strategy is that customers may not value the unique product enough to justify the
highest price. When this happens, a cost leadership strategy will easily defeat a differentiation strategy. Other
The risk of pursuing a differentiation strategy is that competitors may quickly develop ways to copy the features.
differentiators. Therefore, companies must find durable sources of uniqueness that cannot be imitated by rival companies.
fast or cheap way.
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Common organizational requirements for a successful differentiation strategy include strong coordination
between R&D and marketing functions and substantial services to attract scientists and creative people. Companies can
follow a differentiation strategy (Type 3) based on many different competitive aspects. The opportunities of
Differentiation exists or can potentially develop in any part of the company's value chain, including
supply chain activities, product R&D activities, technological and production activities,
manufacturing activities, human resource management activities, distribution activities or activities
of marketing.
The most effective bases of differentiation are those that rivals find difficult or costly to duplicate. The
Competitors continually try to imitate, duplicate and surpass their rivals in any differentiation variable that exists.
generated a competitive advantage. For example, when US Airways reduced its prices, Delta quickly followed suit.
When Caterpillar instituted its policy of rapid delivery of parts, John Deere soon followed suit. Insofar
Differentiating attributes are difficult for rivals to copy, a differentiation strategy will be especially
effective, but uniqueness sources must be time-consuming, cost-prohibitive, and simply too
onerous for rivals to match. Therefore, a company must be careful when employing a strategy of
differentiation (Type 3). Buyers will not pay the highest differentiation price unless its perceived value
exceed the price they are currently paying.20 Based on issues such as attractive packaging, extensive advertising,
quality of sales presentations, quality of website, client list, professionalism, company size, or the
profitability, perceived value may be more important to customers than actual value.
A Type 3 differentiation strategy can be especially effective under the following four conditions:21
1. There are many ways to differentiate the product or service and many buyers perceive that these differences have
worth.
2. The needs and uses of the buyer are diverse.
3. Few rival companies are following a similar differentiation approach.
4. Technological change is accelerated and competition revolves around rapid evolution.
Product characteristics.
Focus Strategies (Type 4 and Type 5)
A successful targeting strategy depends on an industry segment that is of sufficient size, has good potential
of growth and is not crucial to the success of other major competitors. Strategies such as penetration and development
of the market offer important concentration advantages. Medium and large companies can effectively apply
strategies based on focus only along with strategies based on differentiation or cost leadership. All
Companies essentially follow a differentiated strategy. Since only a company can differentiate itself with the most cost
low, the remaining companies in the industry must find other ways to differentiate their products.
Targeting strategies are most effective when consumers have distinctive preferences or requirements and
when rival companies do not attempt to specialize in the same target segment. For example, Clorox Company, which
derives 80 percent of its revenue from the United States, is focusing on brands considered environmentally friendly
environment. Marriott continues to focus on its hotel business by announcing plans to double its hotels in Asia to
275 by 2017, especially growing its China-based hotels from 60 to 125 and covering almost 75 percent
of the Chinese provinces.
The reasoning behind Marriott's strategy is that Chinese tourists travel in and out of the country in large numbers.
dramatically higher, 21 percent on average year over year.
The risks of pursuing a focus strategy include the possibility that numerous competitors will recognize the
successful focus strategy and copy it or consumer preferences shift toward the attributes of the
product desired by the market as a whole. An organization that uses a focus strategy can concentrate
on a particular customer group, geographic markets, or particular product line segments to serve a
well-defined but limited market better than competitors who serve a broader market.
A low-cost (Type 4) or best-value (Type 5) approach strategy may be especially attractive in
these conditions:22
1. The target market niche is large, profitable and growing.
2. Industry leaders do not consider the niche to be crucial to their own success.
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148 Part 2 • Strategy formulation
3. Industry leaders consider it too expensive or difficult to meet the target's specialized needs.
niche market and at the same time serve its main clients.
4. The industry has many different niches and segments, allowing the focusser to choose a niche.
competitively attractive and adequate to its own resources.
5. Few, if any, rivals are trying to specialize in the same target segment.
Means to achieve strategies
Cooperation between competitors
Apple and IBM, fierce competitors for decades, recently formed an alliance to cooperate on the development of
applications and the sale of iPhones and iPads. For Apple, the alliance allows the company to expand the reach of its products
in the business world, while for IBM the alliance allows it to move more of its business software
to mobile devices. In a joint interview with IBM CEO Virginia Rometty, CEO
Apple's Tim Cook observed: "In 1984 we were competitors, but today I don't think you can find two companies
more complementary." Apple and IBM are today developing more than 100 applications together.
Apple and Google, also fierce competitors for decades, recently agreed to share the rights to
digital content with any consumer who purchases a Disney movie using the Disney Movies app
Anywhere. Previously, both Apple and Google had restricted movies, TV shows and other content
to your own family of devices running iOS or Android, respectively. Now, both Apple and Google pay Walt Disney
Company a wholesale fee for each copy of a Disney movie they sell, regardless of the type of
device that people use.
Strategies that emphasize cooperation between competitors are increasingly being used. So that the
Collaboration between competitors is successful, both companies must contribute something distinctive, such as technology, distribution,
basic research or manufacturing capacity. But an important risk is that unauthorized transfers may occur.
intentional transfers of important skills or technology at organizational levels below where the agreement was signed.23
Information that is not covered in the formal agreement is often traded in the daily interactions and dealings of
engineers, marketers and product developers.
Companies often give too much information to rival companies when operating under cooperative agreements! HE
They need stricter formal agreements.
Perhaps the best example of rival firms in an industry forming alliances to compete with each other is the industry
aerial. Today there are three main alliances: Star, SkyTeam and Oneworld. Joint ventures and agreements
Cooperatives between competitors require a certain degree of trust if companies are to combat paranoia about themselves.
one company will harm the other.
An increasing number of domestic companies are joining forces with competitive foreign companies to
obtain mutual benefits. Kathryn Harrigan of Columbia University argues: “Within a decade, most
of the companies will be members of teams that will compete with each other.”
Often, American companies enter into alliances primarily to avoid investments, since they are
more interested in reducing the costs and risks of entering new businesses or markets than in acquiring new
skills. On the contrary, learning from the partner is one of the main reasons why Asian and Asian companies
European companies enter into cooperation agreements. American companies should also place learning in a
high on the list of reasons to cooperate with competitors. American companies often form
alliances with Asian firms to understand their manufacturing excellence, but Asian competition in this area does not
It is easily transferable. Manufacturing excellence is a complex system that includes training and participation of
employees, integration with suppliers, statistical process controls, value engineering and design. On the other hand the
American know-how in technology and related areas can be more easily imitated. Therefore, companies
Americans should be careful not to reveal more information than they receive in cooperation agreements with
rival Asian companies.
Academic Research Capsule 5-1 examines whether international alliances are more effective
tive with competitors or non-competitors.
Joint venture and partnership
Joint venture is a popular strategy that occurs when two or more companies form a partnership or consortium.
temporary in order to capitalize on an opportunity. Often, the two or more sponsoring companies form a
separate organization and share ownership of the new entity.
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Chapter 5 • Strategies in action 149
ACADEMIC RESEARCH CAPSULE 5-1
Are international alliances more effective with competitors or noncompetitors?
Recent research reveals that small and medium-sized companies that are
globally and need alliances to grow, research shows that
expand to other countries should form alliances with non-competitive companies in
alliances with non-competitors are positively associated with performance
rather than with rival companies. Alliances with competitors are more expensive,
international, while alliances with competitors are negatively related.
directly and indirectly, and provide redundant knowledge and resources, which
These findings are based on a recent study involving 162 small
leading researchers to conclude that small and medium-sized businesses should
and medium-sized private British and American companies.
strive to form alliances with non-competitors rather than competitors
whenever possible. Researchers report that the benefits of allying
Source: Based on K. Brouthers & P. Dimitratos, “International Alliances with
with competitors are offset by higher monitoring and control costs.
Competitors and Non-Competitors: The Disparate Impact on SME International
Performance,” Strategic Entrepreneurship Journal, 8, no. 2 (June 2014): 167–
182.
In addition, competing companies often share less knowledge
than they could or should. Although small and medium-sized companies usually have
resource limitations as they expand
Other types of cooperative agreements include research and development partnerships, distribution agreements
cross-licensing agreements, cross-manufacturing agreements and joint bidding consortia. Although
Joint ventures and partnerships are increasingly preferred over mergers as a means to achieve strategies,
They are not always successful, for four main reasons:
1. The managers who must collaborate daily in the operation of the venture do not participate in the training
or give shape to the enterprise.
2. The company may benefit the associated companies, but not the customers, who then complain about the
worse service or criticize companies in other ways.
3. The venture cannot be supported equally by both partners. If support is unequal,
problems arise.
4. The venture may begin to compete more with one of the partners than with the other.24
Joint ventures are increasingly used because they allow companies to improve communications and
networking, globalizing operations and minimizing risk. They are formed when a given opportunity
is too complex, uneconomical or risky for any one company to exploit alone, or when a
effort requires a broader range of skills and technical knowledge than any company
can gather. Kathryn Rudie Harrigan summarizes the trend toward increased joint ventures:
In today's global business environment of scarce resources, rapid rates of technological change and increasing
capital needs, the important question is no longer "Will we form a joint venture?" Now the
question is: “Which joint ventures and cooperative agreements are most appropriate for our
needs and expectations?” followed by “How do we manage these ventures more
effective?”25
In a global market linked by the Internet, joint ventures, partnerships and alliances are
proving to be a more effective way to improve corporate growth than mergers and acquisitions.26
Strategic partnerships take many forms, including outsourcing, information sharing,
joint marketing and research and development. Today more than 10,000 joint ventures are formed annually,
more than all mergers and acquisitions. Walmart's successful joint venture with Mexico's Cifra is indicative
how a domestic company can benefit immensely by partnering with a foreign company to
obtain a substantial presence in that new country. Technology is also an important reason behind the
need to form strategic alliances, since the Internet unites widely dispersed partners. For example, IBM signed
recently partnered with Twitter and Facebook, allowing it to extract information from the 302 million
monthly active users of Twitter and the 1.4 billion Facebook users. With the data of those
partnerships, IBM is using its data analytics and cloud analytics services to help companies
create applications based on social data.
The leading company in data analysis or business analysis is Tableau Software, followed by Qlik Technologies.
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150 Part 2 • Strategy formulation
Although there is growing evidence that companies should use partnership as a means to achieve strategies,
most U.S. companies in many industries (such as financial services, forest products,
metals and retail) are still operating in merger or acquisition mode for growth. The associations have not yet
They are taught in most business schools and are often considered an issue within companies.
financial rather than a strategic issue. However, partnership has become a core competency, a matter
strategically important.
Six Guidelines for Determining When a Joint Venture Can Be a Particularly Effective Way to Implement Strategies
are:27
1. A privately owned organization is forming a joint venture with a publicly owned organization.
Being a private company has some advantages, such as close ownership. There are also some advantages of listing
on the stock market, such as access to share issues as a source of capital. Sometimes the unique advantages of being a
Public and private company can be combined synergistically in a joint venture.
2. A domestic organization is forming a joint venture with a foreign company. A joint venture can
provide a domestic company the opportunity to obtain local management in a foreign country, thereby reducing
risks such as expropriation and harassment by host country officials.
3. The different competencies of two or more companies complement each other particularly well.
4. Some projects are potentially profitable but require overwhelming resources and risks.
5. Two or more smaller companies have trouble competing with one large company.
6. New technology needs to be introduced quickly.
Merger/Acquisition
Merger and acquisition are two commonly used ways to pursue strategies. A merger occurs when two organizations
of approximately the same size join together to form a single company. An acquisition occurs when an organization
large company buys (acquires) a smaller company or vice versa. If both parties do not want a merger or acquisition,
called a hostile takeover, as opposed to a friendly merger. Most mergers are friendly, but the number of
Hostile takeovers are on the rise. Not all mergers are effective and successful. For example, shortly after
Halliburton acquired Baker Hughes, Halliburton's stock price fell 11 percent. Therefore, a merger between two
Businesses can generate huge profits, but the price and reasoning must be right. Table 5-5 shows
Some key reasons why many mergers and acquisitions fail.
There were many more global mergers and acquisitions in 2014 than in any year since 2007, exceeding $3.5 billion
of dollars. Three reasons contributing to this trend are (1) the desire of diversified companies to “spin off” segments
into separate companies that are later acquired by other companies, (2) the desire of companies to acquire companies
similar in countries with low corporate tax rates and shifting corporate profits from the United States.
United across those countries, and (3) shareholders' desire for companies to continually increase their earnings. TO
Growth is often most effective through acquisitions, as opposed to internal (organic) growth.
In the United States, mergers and acquisitions totaled $1.52 trillion in 2014, representing 45 percent
percent of global deals, up from $998 billion, or 43 percent, a year earlier. The data signature
Dealogic reported in mid-2015 that global mergers and acquisitions in 2015 will likely reach a record
historic of 4.58 trillion dollars.
Table 5-5 Nine reasons why many mergers and acquisitions fail
1. Integration difficulties
2. Inadequate target assessment
3. Large or extraordinary debt
4. Inability to achieve synergy
5. Too much diversification
6. Managers too focused on acquisitions
7. Too big an acquisition
8. Difficult to integrate different organizational cultures
9. Reduced employee morale due to layoffs and relocations
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Chapter 5 • Strategies in action
However, new US Treasury Department rules cracking down on
tax investments, in which a company acquires a foreign company to avoid paying taxes
federal funds, will probably reduce the number of mergers and acquisitions to some extent in the future. More than 10,000
Mergers occur annually in the United States, with combinations of the same industry predominating. It is being
producing general market consolidation in many industries, especially energy, banking,
insurance, defense and healthcare, but also in pharmaceuticals, food, airlines,
accounting, publishing, computers, retail, financial services and biotechnology. He
Table 5-6 presents the potential benefits of merging with or acquiring another company.
A leveraged buyout (LBO) occurs when the shareholders of a corporation are bought out (therefore,
purchase) by the company's management and other private investors using borrowed funds (therefore,
leverage). In addition to trying to avoid a hostile takeover, other reasons for initiating an LBO include when
a particular division does not fit into an overall corporate strategy, or when selling a division could generate
the necessary cash. An LBO converts a public company into a private company.
Private equity acquisitions
Private equity (PE) firms are acquiring and privatizing a wide variety of companies almost daily in
the business world. For example, one of the world's largest private equity firms, Apollo Global
Management LLC, recently acquired 577 Chuck E. Cheese stores, pizza parlors and lounges.
games, in 47 states and 10 foreign countries or territories. Apollo paid around $950 million for the
parent company, CEC Entertainment, or a 12 percent premium to the company's share price. The
Chuck E. Cheese's profits and revenue have been declining lately and the number of birthday parties
organized has decreased. Another large physical education company, Carlyle Group LP, recently acquired the business
of Johnson & Johnson blood tests for $4.15 billion.
Private equity firms are an integral part of the business world, especially in the United States, but
also in Europe, Asia and, more recently, Latin America. Private equity firms such as Kohlberg Kravis
Roberts (KKR) are aggressively back in the business of acquiring and selling companies and launching new public offerings
initials (IPO). A large private equity firm, Cerberus Capital Management, recently bought the second
largest supermarket chain in the United States, Safeway Inc., based in Pleasanton, California, for 9,400
millions of dollars. Cerberus already owns Albertsons, the fifth largest supermarket chain in
USA. Cerberus plans to merge the distribution and purchasing operations of the two companies to save
money and better compete with its main rivals, Wal-Mart Stores and Kroger.
Headquartered in Phoenix, Arizona, PetSmart was acquired in December 2014 by private equity firm BC
London-based Partners for $8.8 billion, the largest U.S. private equity deal of the year.
PetSmart had reportedly received a joint offer from KKR and Clayton Dubilier & Rice, and an offer from Apollo,
all PE companies. PetSmart operates 1,387 pet retail stores in the United States, Canada and Port
Rich. BC Partners paid $83 per PetSmart share, a 6.86 percent premium over the stock's closing price.
PetSmart stock.
Table 5-6 Eleven potential benefits of merging or acquiring another company
1. Provide better capacity utilization
2. Make better use of the existing sales force
3. Reduce management staff
4. Gain economies of scale
5. To smooth out seasonal trends in sales.
6. Access new suppliers, distributors, customers, products and creditors.
7. To acquire new technology
8. To gain market share
9. To enter global markets
10. To gain pricing power
11. To reduce tax obligations
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152 Part 2 • Strategy formulation
The intent of virtually all private equity acquisitions is to buy companies at a low price and
sell them later at a high price, which is arguably just good business. Private equity firms
They are also buying companies from other private equity firms, such as the recent purchase by Clayton, Dubilier
& Rice from David's Bridal to Leonard Green & Partners LP for $1.05 billion. These PE-to-PE acquisitions
called secondary purchases. Furthermore, private equity firms in particular, but also other companies, sometimes
They borrow money simply to finance the payment of dividends to themselves, a controversial practice known as dividending.
recapitalizations. Critics say dividend recapitalization burdens companies with debt, overloading
its operations.
Tactics to facilitate strategies
Strategists use numerous tactics to achieve strategies, including “first-mover,” outsourcing, and
relocation. There are advantages and disadvantages to such tactics, as discussed
next.
Advantages of the first movement
First-mover advantages refer to the benefits that a company can achieve by entering a new
market or develop a new product or service before rival companies. As indicated in Table 5-7, some
The advantages of being a pioneer include securing access to rare resources, acquiring new knowledge about factors and
key issues, and gain market share and a position that is easy to defend and costly for the rival.
companies to advance. The advantages of being the first to move are analogous to taking the high ground first, which
puts one in an excellent strategic position to launch aggressive campaigns and defend territory. Be the first
taking action can be an excellent strategy when such actions (1) build the image and reputation of a company
before buyers; (2) produce cost advantages over rivals in terms of new technologies, new components,
new distribution channels, etc.; (3) create strongly loyal customers, and (4) make imitation or duplication by
of an opponent is difficult or unlikely.
To maintain the competitive advantage gained by being the first to act, a company must learn quickly. Without
However, there are risks associated with being the first company to act, such as unexpected and unforeseen problems and costs.
that arise from being the first company to do business in the new market. Therefore, being a slow company (also
called fast or late follower) can be effective when a company can easily copy or imitate the products or
services from the leading company. If technology advances rapidly, slow growers can often outperform
products of the first with improved products of the second generation. Samsung is an example in the phone business
intelligent. Apple has always been a good example of a pioneering company.
First-mover advantages tend to be greatest when competitors are approximately the same size and
They have similar resources. If competitors are not similar in size, then larger competitors may
wait while others make initial investments and mistakes, and then respond with greater efficiency and resources. Lenovo has
done lately, just like Volkswagen.
Outsourcing and relocation
The second largest US airline by traffic, United Continental Holdings, recently outsourced its
check-in, baggage handling and customer service to suppliers who perform the tasks at a lower cost. Outsourcing
involves companies hiring other companies to take care of various parts of
Table 5-7 Five benefits of a company being the first to act
1. Secure access and commitments to rare resources.
2. Acquire new knowledge about critical success factors and problems.
3. Gain market share and position yourself in the best locations.
4. Establish and ensure long-term relationships with customers, suppliers, distributors and
investors.
5. Achieve customer loyalty and commitment.
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Chapter 5 • Strategies in action 153
your functional operations, such as human resources, information systems, payroll, accounting, customer service,
and even marketing.
For more than a decade, American and European companies have outsourced their manufacturing,
technical support and administrative work, but most insisted on keeping research and development activities inhouse. However, today an increasing number of companies outsource the design of their products to Asian
developers. China and India are becoming increasingly important suppliers of intellectual property. The details of what
work to outsource, to whom, where and for how much can challenge even the largest, most sophisticated
companies. And some outsourcing deals don't work, like JP Morgan Chase's deal with IBM and Dow
Chemical's deal with Electronic Data Systems. Both subcontracting agreements were abandoned after several
years.
India has become a booming location for outsourcing.
Exhibit 5-8 reveals some of the potential benefits that companies strive to achieve through outsourcing.
Keep in mind that the number one benefit is that outsourcing is often used to access lower salaries in foreign countries.
Reshoring is the new term that refers to American companies that plan to move part
of its production to the United States. Many US companies plan to relocate in 2016-2017 for the following reasons:
desire to get products to market faster and respond quickly to customer orders, savings from reduced transportation
and storage, better quality, and intellectual property protection , pressure to increase jobs in the US .28 “Made in
the USA” is making a comeback. Walmart, for example, will spend an additional $250 billion over the next 10
years on American-made products. As a result, numerous Walmart suppliers, such as Eden Prairie, Minnesota-based
Element Electronics, are bringing their manufacturing and assembly operations to the United States. Element now
assembles flat screen TVs in Winnsboro, South Carolina.
Whirlpool and General Electric have also moved some of their manufacturing operations to the United States.
However, the management consulting firm AT Kearney reports that reshoring has stalled and that American companies
are increasingly producing more goods in lower-cost countries.29
The strength of the dollar has also led American companies to increasingly look outside the United States to
produce goods. The high value of the dollar makes American products more expensive abroad and
Table 5-8 Thirteen potential benefits of outsourcing
1. Cost savings: Access lower salaries in foreign countries.
2. Focus on the core business: focus resources on developing the core business instead of being distracted by other
functions.
3. Cost restructuring: Outsourcing changes the balance from fixed costs to variable costs by shifting the
company more at variable costs. Outsourcing also makes variable costs more predictable.
4. Improve quality: Improve quality by outsourcing various business functions to specialists.
5. Knowledge: Gain access to intellectual property and broader experience and knowledge.
6. Contract: Obtain access to services within a legally binding contract with financial penalties and
legal reparation. This is not the case for services performed in-house.
7. Operational Expertise: Gain access to operational best practices that would be too difficult or time-consuming.
consume to develop internally.
8. Access to talent: Gain access to a larger talent pool and a sustainable source of skills, especially
science and engineering.
9. Catalyst for Change: Use an outsourcing agreement as a catalyst for a major change that cannot be achieved.
achieved alone.
10. Improve innovation capacity: use external knowledge to complement limited internal capacity.
ity for product innovation.
11. Reduce time to market: Accelerate the development or production of a product by
capacity provided by the supplier.
12. Risk Management – Manage risk by partnering with an outside company.
13. Tax benefit: Take advantage of tax incentives to locate manufacturing plants and avoid high taxes in
several countries.
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154 Part 2 • Strategy formulation
makes imports to the United States cheaper. However, seven benefits of repatriating to the United States are as follows:
1. Stable salaries
2. Reduced gas and electricity costs.
3. Excellent security to protect designs from foreign imitators
4. Enable closer monitoring of quality control and supply chains
5. Excellent economy with consumers buying more
6. Lower shipping costs with consumers nearby
7. Excellent human rights, educational, legal and political systems that promote freedom and
opportunity for citizens
Strategic management in non-profit, government and
Small companies
Nonprofit organizations are basically the same as for-profit companies, except for two differences.
main ones: (1) nonprofit organizations do not pay taxes and (2) nonprofit organizations do not have
shareholders who provide them with capital. In virtually all other respects, these two types of organizations are similar
each other. Nonprofit organizations have employees, customers, creditors, suppliers, and distributors, as well as
financial budgets, income statements, balance sheets, cash flow statements, etc. Non-profit organizations
They embrace strategic planning as much as for-profit companies, and perhaps even more, because social capital is not
an alternative source of financing. Nonprofits also have competitors who want to push them out of business.
business.
The strategic management process is being used effectively by countless government organizations and without
for-profit organizations, such as Girl Scouts, Boy Scouts, Red Cross, chambers of commerce, educational institutions,
medical institutions, public services, libraries, government agencies and zoos. , cities and churches.
Surprisingly, the nonprofit sector is by far the largest employer in the United States. Many organizations
Government and nonprofit organizations outperform private businesses and corporations in innovation, motivation, productivity and
strategic management.
Compared to for-profit businesses, government and nonprofit organizations may depend on
entirely from external financing. Especially for these organizations, strategic management provides a vehicle
excellent at developing and justifying requests for necessary financial support. Government and non-governmental organizations
For-profit organizations owe it to their constituents to get and use money wisely; That requires an excellent formulation,
implementation and evaluation of strategies.
educational institutions
The world of higher education is rapidly moving towards online courses and degrees. The American Council on Education, an
association for higher education presidents, is considering allowing free online courses to be eligible for degree credit and eligible for
transfer credit.
Educational institutions more frequently use strategic management techniques and concepts. Richard Cyert, former president of
Carnegie Mellon University, said: "I think we do a much better job of strategic management than any company I know." Nationwide
population shifts from the Northeast and Midwest to the Southeast and West are just one factor causing trauma for educational
institutions that have not planned to shift enrollment. Ivy League schools in the Northeast are recruiting more in the Southeast and West.
This trend represents a significant change in the competitive climate
to attract the best high school graduates each year.
Online degrees are a threat to traditional colleges and universities. “You can put the kids to bed and go to law school,” says Andrew
Rosen, chief operating officer of Kaplan Education Centers, a subsidiary of the Washington Post Company.
Reduced state and federal funding for higher education has resulted in more aggressive fundraising by colleges and universities.
President Obama's call for a free community college education for all could also erode attendance in 100- and 200-level courses at
four-year universities. All higher education institutions need an excellent strategic plan to survive and thrive.
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Chapter 5 • Strategies in action 155
Medical organizations
Declining occupancy rates, deregulation and accelerated growth of health maintenance organizations,
preferred provider organizations, urgent care centers, ambulatory surgery centers,
Diagnostics, specialty clinics, and group practices are other major threats facing hospitals today.
Many private and state-supported medical institutions are in financial trouble as a result of having
traditionally adopted a reactive rather than proactive approach when dealing with their industry. Originally intended as warehouses
for people dying of tuberculosis, smallpox, cancer, pneumonia and infectious diseases, hospitals today are creating new
strategies as advances in the diagnosis and treatment of chronic diseases are undermining that previous mission. The
Hospitals are beginning to provide services to the patient as well as taking them to the hospital; Health care is increasingly concentrated
more at home and in the residential community, rather than on the hospital campus. The current strategies followed by many hospitals
include the creation of home health care services, the establishment of nursing homes and the formation of centers
of rehabilitation. The backward integration strategies that some hospitals are pursuing include the acquisition of
ambulance, waste disposal services and diagnostic services. Millions of people research ailments annually
online doctors, causing a dramatic shift in the balance of power between doctor, patient and hospitals.
Government agencies and departments
Federal, state, county, and municipal agencies and departments, such as police departments, security cameras,
trade, forestry associations and health departments, are responsible for formulating, implementing and evaluating strategies that
use taxpayers' money as profitably as possible. effective way to provide services and programs. The concepts
Strategic management strategies are generally necessary and therefore widely used to enable organizations
governments are more effective and efficient.
Strategists in government organizations operate with less strategic autonomy than their business counterparts.
private. Public companies generally cannot diversify into unrelated businesses or merge with other companies.
Government strategists often enjoy little freedom to alter organizations' missions or reorient objectives.
Legislators and politicians often have direct or indirect control over major decisions and resources. The strategic issues
They are discussed and debated in the media and legislatures. Issues become politicized, resulting in fewer choice options
strategic. There is now more predictability in the management of public sector companies.
Government agencies and departments are finding that their employees are excited by the opportunity to
participate in the strategic management process and therefore have an effect on the mission, objectives, strategies and policies of the
organization. Additionally, government agencies are using a strategic management approach to develop and inform
formal requests for additional funding.
Small companies
“Becoming your own boss” is a dream for millions of people and a reality for millions more.
Almost everyone wants to own a business, from teenagers and college students, who sign up in droves.
record in business courses, up to those over 65 years of age, who create more companies every year. However, the January 3 edition
The Wall Street Journal's 2015 report (page A1) reported that the percentage of people under 30 who own private companies has
reached its lowest level in 24 years in the United States, at around 3.6 percent, down from 3.6 percent. 10.6 percent
in 1989. The stereotype that twenty-somethings take entrepreneurial risks is simply false, as millions of young adults
They struggle in low-paying jobs to support their own household, rather than living with their parents. The reasons for the decline vary,
but the reduction in bank loans for the creation of small businesses, the greater indebtedness among young people and the
increasing number of competitors due to the Internet contribute to a group of people under 30 years of age being more risk averse to
become business strategists.
The strategic management process is as vital for small businesses as it is for large ones.
From its inception, all organizations have a strategy, even if the strategy simply evolves from operations
from day to day. Even if carried out informally or by a single owner or entrepreneur, the strategic management process can
significantly improve the growth and prosperity of small businesses.
However, the lack of knowledge about strategic management is a serious obstacle for many small business owners,
as well as the lack of sufficient capital to exploit external opportunities and day-to-day life.
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156 Part 2 • Strategy formulation
cognitive frame of reference. Research indicates that strategic management in small businesses is more informal
than in large ones, but small businesses that engage in strategic management generally outperform those that do not.
Academic Research Capsule 5-2 reveals the key attributes of great entrepreneurs, many of whom never went
to college and were never experts in their craft.
ACADEMIC RESEARCH CAPSULE 5-2
What attributes do great entrepreneurs possess?
Many people dream of becoming a professional soccer player, musician,
matter or business idea.” Deliberate practice goes far beyond hard work or routine
doctor or businessman, but many of us don't believe we have the
practice, to the point that even the most successful entrepreneurs cannot
special skills needed to achieve great success. most of
engage in deliberate practice for more than a few hours a day. This
Aspiring entrepreneurs mistakenly believe that those special skills are
characteristic includes examining yourself as a person, your competence,
mandatory compared to other skills that we devalue. Baron and
and a wide range of factors related to the entrepreneurial endeavor at hand.
Henry carefully examined what attributes most humans possess.
Various antecedents of deliberate practice include strong motivation, self-efficacy,
great entrepreneurs and discovered that many great strategists started
self-discipline, delay of gratification, and self-control. Other factors are
out as great entrepreneurs, including Michael Dell, Steve Jobs, Milton Hershey,
determination, a strong work ethic, goal orientation, dedication, time management
Walt Disney, Henry Ford, and Bill Gates. Baron and Henry report that neither
and "being on a mission."
“years of experience” nor “natural, God-given ability” are primary attributes
explaining the success of most entrepreneurs.
Deliberate practice involves working “hard and smart”
Indeed, there does need to be some level of natural “special” competence, but the
simultaneously; It's about developing and using a strategic mental approach to
most important thing is that most of us are competent enough to be surprisingly
the endeavor at hand, rather than having a special innate talent or acquiring
successful in any endeavor we choose.
20 years of experience. Disney, Ford, Dell, Gates, Hershey and Jobs used
Baron and Henry found that most aspiring entrepreneurs
They may obtain or already have the necessary experience in a particular area,
deliberate practice from the beginning, instead of waiting to obtain
innate talent or work experience.
and additional experience only produces incremental improvements; They
These great entrepreneurs (strategists) generally did not have innate talent
argue that experience can, in fact, become an inhibiting factor. This finding is
or years of work experience. Baron and Henry claim that anyone can become
Surprising because experience is highly valued in most professions,
great through deliberate practice. So, don't be discouraged by having a minimum
especially by those who make hiring decisions. Many students, for example,
of innate talent or work experience.
when applying for jobs are told: “You don't have enough work experience.” So if
Rather, use the deliberate practice process to succeed in the endeavor.
innate talent (special skills) and experience aren't primary keys to business
chosen one.
success, what is? Baron and Henry provide the answer, reporting that the dominant
factor
and primary factor that explains the success of most great entrepreneurs is
who have a high level of deliberate practice. Deliberate practice is best
described as “an intense focus on all aspects related to a topic.”
Source: Based on RA Baron & R. Henry, “How Entrepreneurs Acquire the
Capacity to Excel: Insights from Research on Expert Performance,” Strategic
Entrepreneurship Journal, 4 (2019): 49–65. (Note: this is the most
downloaded article from this magazine in the last five years).
Implications for strategists
Figure 5-4 reveals that to obtain and maintain competitive advantages,
For example, in college football there is great parity between teams like
Companies must collect, analyze and prioritize large amounts of information
Auburn, Alabama, Ohio State, Florida State, Kansas State, Oregon, Arizona
to be able to make excellent decisions. A “strategic plan” is very similar.
State, Michigan State and Michigan, so the game plan can dictate the
to the “game plan” of a sports team in the sense that both the plan
difference between winning and losing. .
strategy and game plan are developed after studying
carefully rival companies (teams); The success of the company (or team)
It depends largely on whether that plan is better than the rival's plan.
Most of the strategies described in this chapter would produce
separate substantial benefits for companies, but none have resources
Any strategist, like any coach, puts his company in
enough to apply more than a few basic strategies. Therefore,
great danger of failure if the opposing strategist (coach) has a better
Strategists must select among several excellent alternatives, eliminate
Strategic plan.
Substantial deliberate practice is required, as discussed in the
other excellent options and consider risks, trade-offs, costs and other
key factors. Any strategist or coach who is “outmatched”
Academic Research Capsule 5-2, to create, identify, encourage and
strategy” by your opposing strategist (or coach) puts your company (or
exploit competitive advantages that can lead to success. Parity (and
team) at a huge disadvantage. Being outtrained can be dooming
commoditization) is becoming commonplace in both business and
even to a superior team (or company). Therefore, in Chapter 6
athleticism; As parity increases, the intrinsic value of the plan
We examine six additional analytical tools that strategists use
overall strategic, or game plan, increases exponentially.
extensively to help develop a winning strategic plan.
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Chapter 5 • Strategies in action 157
Establish a clear
Mission vision
Evaluate and monitor
Results:
Win and hold
Formulate strategies:
take corrective
Competitive
Collect, analyze and
Prioritize data usage
Behavior; Fit
Advantages
arrays; To establish a
Change
Clear strategic plan
Implement strategies:
Establish Structure;
Assign resources;
Motivate and reward;
Attract customers;
Manage finances
Figure 5-4
How to gain and maintain competitive advantages
Implications for students
Numerous alternative strategies could benefit any company, but the analysis
rather than being a surprise to the reader or audience. You may even
of your strategic management case should lead to specific
want to include in your recommendations information about why other
recommendations that you decide will provide the company with
feasible strategies were not chosen for implementation. This information should
also be anchored in the notion of advantage and disadvantage
competitive advantages. Because company recommendations with costs
comprise the most important pages or slides competitive with respect to perceived costs and benefits. If someone from your case project, introduce fragments
of that information at the beginning ask, "What is the difference between recommendations and strategies?", of the presentation as relevant supporting
material is presented to justify your expenses.
answer: "Recommendations are really alternative strategies. Therefore,
your recommendations page(s) should be a summary of selected for implementation."
the suggestions mentioned throughout your article or presentation.
Chapter summary
The main attraction of any management approach is the expectation that it will improve organizational
performance. This is especially true in the case of strategic management. Through participation
in strategic management activities, managers and employees gain a better understanding of an
organization's priorities and operations. Strategic management allows organizations to be efficient, but
more importantly, it allows them to be effective. Although strategic management does not guarantee
organizational success, the process allows for proactive rather than reactive decisions.
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158 Part 2 • Strategy formulation
doing. Strategic management can represent a radical change in the philosophy of some organizations, so
Strategists must be trained to anticipate and respond constructively to questions and problems as they arise.
The strategies discussed in this chapter can represent a new beginning for many companies, especially if the
managers and employees of the organization understand and support the action plan.
MyManagementLab®
To complete the problems with the
, go to EOC Discussion Questions in MyLab.
Key terms and concepts
acquisition (p. 150) backward
Hostile takeover (p. 150)
integration (p. 136) bankruptcy (p. 142)
Integration strategies (p. 134) Intensive
combination strategy
strategies (p. 138) Joint venture (p.
(p. 133) cost leadership (p. 144)
148) Leveraged buyout (LBO) (p.
disintegration (p. 136) deliberate
151) Liquidation (p. 143) Long-term
practice (p. 156) differentiation
objectives ( p. 130) market
(p. 144) diversification strategies
development (p. 138) market
(p. 139) divestment (p. 142)
penetration (p. 138) merger (p. 150)
dividend recapitalizations (p. 152) financial
outsourcing (p. 152) product development
objectives (p. 131)
(p. 139) related
diversification (p. 139) relocation
(p. 139) . 153) downsizing (p. 141)
Advantages of being the first to act (p. 152)
secondary purchases (p. 152) strategic
focus (p. 144) forward
objectives (p. 131) unrelated
integration (p. 135) franchising (p. 135)
diversification (p. 139)
friendly merger (p. 150)
vertical integration (p. 134)
generic strategies (p. 144)
horizontal integration (p. 134)
Topics for review and discussion
5-1. According to the article by Baron and Henry analyzed in the Research Capsule
5-6. Define and give an example of relocation. That
Academic 5-2, what is “deliberate practice” and why is it important
What are the three reasons why relocation is happening?
in strategic management?
becoming more popular? What are the three reasons why
many companies hope they will “never” relocate (like Steve Jobs
5-2. True or false? The strength of the dollar has led companies
Americans to increasingly outsource, rather than relocate.
Explain.
5-3. Give three reasons why so many companies
divest (spun off) key segments/divisions of the company.
once told President Obama)?
5-7. Define and give a hypothetical example of a secondary school.
buys.
5-8. The number and dollar value of hostile takeovers are
increasing. Give two reasons for this trend.
5-9. What do you think are the eight most important?
5-4. Are international alliances more effective with
Competitors or non-competitors? Because?
5-5. Give real examples of how Amazon is integrating and
diversifying at the same time.
Benefits of outsourcing?
5-10. Define and give an example of dividend recapitulation.
talization. List some pros and cons of doing this in a
company.
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Chapter 5 • Strategies in action 159
5-11. How are for-profit businesses different from non-profit businesses?
profit in business terms? What are the implications
for strategic planning?
5-12. If the CEO of a beverage company like Dr. Pepper Snapple asked you
asked if backward or forward integration would be better
For the company, how would you respond?
developing that game plan? Why is that time essential?
effort?
5-24. How is formulating strategies for an organization different?
small versus large? How is an organization different from
For-profit versus non-profit?
5-25. Give hypothetical examples of market penetration, market development
and product development.
5-13. In order of importance, list six characteristics of goals.
5-26. Give hypothetical examples of forward integration, backward integration
5-14. In order of importance, list six benefits of goals.
5-27. Give hypothetical examples of related and unrelated diversification.
back and horizontal integration.
5-15. What is called disintegration, there seems to be a growing trend
among companies to become less forward integrated.
Discuss why.
5-16. What is called disintegration, there seems to be a growing trend
among companies to become less backward integrated.
5-28. Give hypothetical examples of joint ventures, layoffs, divestitures, and
liquidations.
5-29. Are hostile takeovers unethical? Why or why not?
5-30. What are the main advantages and disadvantages of diversification?
Discuss why.
5-17. What conditions, external and internal, would be desirable or necessary for
5-31. What are the main advantages and disadvantages of an integrative strategy?
for a company to diversify?
5-18. There is a growing trend towards greater collaboration.
among competitors. List the benefits and disadvantages of this practice.
5-32. How does strategic management differ in organizations with and without purposes?
profit?
5-33. Why is it not advisable to follow too many strategies at once?
5-19. List four main benefits of forming a joint venture for
achieve the desired objectives.
5-20. List six main benefits of acquiring another company to achieve
the desired objectives.
5-21. List five reasons why historically many mergers or
acquisitions have failed.
5-22. Can you think of any reason why nonprofit businesses are
would benefit less from strategic planning than
for-profit companies?
5-23. Discuss how important it is to a college football team or
basketball have a good game plan for the next big rival game
weekend. How much time and effort do you think the body spends
technical?
once?
5-34. Compare and contrast financial goals with
strategic objectives. Which type is more important in your opinion? By
that?
5-35. How are the levels of strategy different in a large company?
versus a small business?
5-36. List 11 types of strategies. Give a hypothetical example
of each strategy listed.
5-37. Define and explain the advantages of being the first to act.
5-38. Define and explain subcontracting.
5-39. Give some advantages and disadvantages of cooperative strategies.
versus competitive.
5-40. What are the two main differences between purpose-driven and non-purpose organizations?
profit?
MyManagementLab®
Go to the Assignments section of your MyLab to complete these writing exercises.
5-41. If a company has $1 million to spend on a new strategy and is
considering market development versus product development,
5-42. Discuss five reasons why historically many mergers or acquisitions
they have failed.
What determining factors would be the most important to consider?
Learning Assurance Exercises
exercise 5A
Develop hypothetical Hershey company strategies
Aim
Exhibit 5-4 identifies, defines, and exemplifies 11 key types of strategies available to businesses. This
exercise will allow you to practice formulating possible strategies within each broad category.
Instructions
Step 1
Develop an 11 × 2 matrix where Hershey's (1) North American and (2) International segments are at the top and the 11 strategies
listed in Table 5-4 are on the left.
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160 Part 2 • Strategy formulation
Step 2
Step 3
Review the Hershey divisional information provided in the Cohesion Case (pages 28 and 29).
In each of the 22 cells within your 11 × 2 matrix, write a hypothetical strategy for the respective business segment indicated. Be
.
specific with numbers
exercise 5B
Horizontal integration in practice
Aim
As shown at the beginning of this chapter, Signet Jewelers Limited (SIG) is successfully pursuing horizontal
integration. This exercise will allow you to practice analyzing whether a company should or could acquire a rival
company.
Instructions
Step 1
Review the material on Signet at the beginning of this chapter and on the website www.signetjewel-ers.com.
Review current news articles about Signet posted on www.finance.
yahoo.com website.
Step 2
Review information about a major Signet rival, Tiffany & Co. (stock symbol TIF).
Determine whether you think Signet could or should try to acquire Tiffany. Explain the pros and cons
of said horizontal integration strategy. Recall that Signet recently acquired its rival
Zale Corporation.
exercise 5c
What strategies should Hershey follow in 2017?
Aim
By performing a strategic management case analysis, you can find information about the actual and planned
strategies of the respective company. Comparing what is planned with what you recommend is an important part of
case analysis. Do not recommend what the company actually plans, unless a thorough analysis of the situation
reveals that those strategies are the best among all feasible alternatives. This exercise gives you experience
conducting library and Internet research to determine what Hershey is doing in 2015-16 and what it should do in 2017.
Instructions
Step 1
Go to the website www.hersheycompany.com and click on Newsroom. Read the 10 statements
latest press releases.
Step 2
Determine two strategies that Hershey is actually following. Give some pros and cons of those.
two new strategies from Hershey.
5D exercise
Browse strategy articles
Aim
Strategy articles can be found weekly in magazines, journals and newspapers. By reading and studying strategy
articles, you can gain a better understanding of the strategic management process. Several of the best journals
to find corporate strategy articles are Advanced Management Journal, Business Horizons, Long Range Planning,
Journal of Business Strategy, and Strategic Management Journal. These journals are dedicated to reporting the
results of empirical research in management.
They apply strategic management concepts to specific organizations and industries, introduce new strategic
management techniques, and provide brief case studies on selected companies. Other good journals in which to find
articles on strategic management are Harvard Business Review, Sloan Management Review, California Management
Review, Academy of Management Review, Academy of Management Journal, Academy of Management Executive,
Journal of Management, and Journal of Small Business Management.
Unlike magazines, several of the best magazines for finding applied strategy articles are Dun's Business
Month, Fortune, Forbes, BusinessWeek, Inc., and Industry Week. Newspapers such as USA Today, Wall Street
Journal, New York Times, and Barron's cover strategic events as they occur; for example, a joint venture
announcement, a bankruptcy filing, the start of a new advertising campaign, the acquisition of a company, the sale
of a company. a split, the hiring or firing of a CEO, or a hostile takeover attempt.
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Chapter 5 • Strategies in action
Combining articles from newspapers, magazines and newspapers can make the strategic management course more
interesting. They allow you to identify and study the current strategies of for-profit and non-profit organizations.
Instructions
Step 1
Use your university's online databases to find a recent journal article that
focus on a strategic management topic. Select your article from one of the magazines we just
mention (not from a magazine). Copy the article and bring it to class.
Step 2
Deliver a 3-minute oral report that summarizes the most important information from your journal article. Include
comments that give your personal reaction to the article. Pass your article in class.
exercise 5e
Rank some recent strategies
Aim
This exercise can improve your understanding of various strategies by giving you experience in classifying strategies. This
This skill will help you use the strategy formulation tools presented in Chapter 6.
Consider the following recent strategies from several companies:
1. Amazon began producing and selling its own line of diapers.
2. MillerCoors offers free delivery of Miller Lite in four US cities for customers who place an order.
through its online store.
3. Sears closes about 235 stores a year.
4. America's largest toy maker, Mattel, is struggling; Therefore, it is being introduced
more striking and educational toys.
5. The German electricity company E.ON SE sold its Spanish assets to the Australian group Macquarie and
Kuwait sovereign fund for $3.1 billion.
6. Target Corporation will close its 133 stores in Canada and China.
7. Coca-Cola recently cut 1,600 white-collar jobs worldwide as part of a cost-cutting measure.
8. Nissan has totally revamped its Titan full-size pickup truck with new features and options and
style.
9. General Motors has just presented a sports version of its electric car, the Chevrolet Volt, and in 2017 it will present
an all-electric vehicle called the Chevrolet Bolt, capable of driving 200 miles without recharging.
10. SolarWinds acquired Pingdom, Confio and N-Able Technologies to obtain different products and services, since the business
solar has slowed due to falling oil prices.
11. Amazon Studios is expanding from TV series to movies, with plans to begin producing and acquiring
original films for theatrical release and streaming video.
12. ZF Friedrichshafen AG of Germany recently acquired TRW Automotive Holdings in the United States to create the second
largest auto parts supplier in the world behind the German Robert Bosch GmbH and ahead of the Japanese Denso
Corp.
13. Southwest Airlines recently began flying outside the United States, with flights to several
Destinations Caribbean, Central America and Mexico.
14. Amazon is aggressively pushing same-day grocery delivery service with its business
AmazonFresh along the West Coast of the United States.
15. USPS has started delivering groceries for Amazon.com within the grocery delivery service
AmazonFresh, especially in San Francisco and other markets.
16. USPS also recently launched Access Point, a strategy that allows customers to pick up their
packages at dry cleaners, convenience stores and pharmacies.
17. Food giant General Mills recently acquired Annies's Inc. for $820 million, paying a
premium of 37 percent by the company, in order to expand its presence in the organic food category and
fast growing natural.
18. Google recently entered the hotel booking industry by acquiring a company called Room 77.
and expand its ties with large hotel firms such as Hilton Worldwide Holdings and Radisson Hotels that now offer
virtual tours on Google. Google now allows hotels to list their rooms on their site, effectively avoiding
travel search sites such as Priceline Group, Expedia and TripAdvisor.
161
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162 Part 2 • Strategy formulation
19. Google recently partnered with medical company Novartis to develop high-tech contact lenses.
that control glucose levels and other bodily functions.
20. Amazon recently entered the mobile payments business and is now competing with PayPal.
ApplePay and all credit cards.
21. The world's largest furniture retailer, IKEA, recently diversified into the insurance business.
offering child, pregnancy and home insurance products in its stores.
22. Office Depot closed almost 500 stores in the last three years.
23. Drug manufacturer Dendreon Corporation recently filed for Chapter 11 bankruptcy. His
lead drug, Provenge, which treats prostate cancer, never gained traction in the market.
24. Symantec Corporation, known for its antivirus software, recently split its $4.2 billion cybersecurity
security business from their $2.5 billion management information business, making them two
listed companies.
25. eBay recently split into two companies, one being PayPal and the eBay Marketplace segment the other.
Instructions
Step 1
On a separate sheet of paper, number 1 to 25. These numbers correspond to the strategies described.
Step 2
What type of strategy best describes the 25 stocks mentioned?
Step 3
Exchange work with a classmate and grade each other's work as your instructor gives you the
correct answers.
exercise 5f
How risky are the various alternative strategies?
Aim
This exercise focuses on the risk to organizations of pursuing various alternative strategies.
Different degrees of risk are largely based on varying degrees of externality, defined as removal from the business
current towards new markets and products. In general, the greater the degree of externality, the greater the probability of loss
resulting from unexpected events. High risk strategies are generally less attractive than low risk strategies.
Instructions
Step 1
On a separate sheet of paper, number vertically from 1 to 10. Think of 1 as "riskiest," 2 as
"next at risk," and so on up to 10, "least risky."
Step 2
Write the following strategies next to the appropriate number to indicate how risky you think the strategy to follow is: horizontal
integration, related diversification, liquidation, forward integration, backward integration, product development, market development,
market penetration, reduction and unrelated diversification.
Step 3
Grade your work as your instructor provides you with correct answers and supporting rationales.
Each correct answer is worth 10 points.
5g exercise
Develop alternative strategies for your university
Aim
It is important that representatives from all areas of a college or university identify and discuss alternative strategies that
could benefit faculty, students, alumni, staff, and other stakeholders. As you complete this exercise, notice the
learning and understanding that occur when people express differences of opinion. Remember that the process of
Planning is more important than the document.
Instructions
Step 1
Recall or locate the external opportunities and threats and internal factors of strength and weakness that you identified as
part of Exercise 1D (p. 36). If you did not do that exercise, now discuss as a class the important external and internal factors facing
your college or university.
Step 2
Identify and display 10 alternative strategies that you think could benefit your college or university. The proposed actions should allow
the institution to capitalize
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Chapter 5 • Strategies in action 163
particular strengths, improve certain weaknesses, avoid external threats or take advantage of opportunities
particular externals. Number the strategies as they are written on the screen from 1 to 10. State each strategy in specific terms, such as
"Build two new dormitories," rather than vague terms, such as
as "Market Penetration".
Step 3
On a separate sheet of paper, number 1 to 10. Everyone in the class should individually rate the identified strategies, using a scale
of 1 to 3, where 1 = I do not support the implementation, 2 = I am neutral regarding the implementation, and 3 = I strongly support the
implementation. When rating strategies, recognize that no institution has sufficient funds to do everything desired or potentially
beneficial.
Stage 4
Your teacher will now collect the scoring sheets and ask a student to add up the scores for each strategy. That is, add the ratings of each
strategy, so that a prioritized list of recommended strategies is obtained. The larger the sum, the more attractive the strategy. This list
of priorities reflects the collective wisdom of your class. The strategies with the highest score are considered the best.
Step 5
Step 6
Discuss how this process could enable organizations to gain understanding and commitment from individuals.
Share your class results with a university administrator and ask for feedback on the
process and the main recommended strategies.
(Note to teachers: see Chapter IM for a great additional exercise for this chapter)
mini-case about the Linkedin corporation (LnkD)
SHOULD LINKEDIN COOPERATE WITH
FACEBOOK?
This chapter analyzes cooperation between rival companies. LinkedIn, headquartered in Mountain View, California, is a network
online professional designed to help members find work, connect with other professionals and locate
business opportunities. There are currently more than 160 million LinkedIn members in 200 countries. LinkedIn, launched in
2003, it is free to join, but the company offers a paid premium membership with additional features. LinkedIn sells
advertising and earns income through its job search service. Companies post job offers on LinkedIn
and search for candidates on LinkedIn.
particularly advantageous for students approaching graduation. LinkedIn members tend to be hardworking
white collar and highly educated; More than 40 percent of LinkedIn visitors earn more than $100,000 a year.
LinkedIn's main rival, Facebook, recently launched "professional" rather than personal features to its business,
thus trying to take market share away from LinkedIn, whose main strategy is product development. LinkedIn
continually develops new and improved business analytics models, visible and invisible, to collect and assimilate data.
LinkedIn has developed a big data framework called Gobblin that helps the social network collect tons of data from one
variety of sources, so they can be analyzed in your Hadoop-based data warehouses. The company also houses a
variety of internal data (information related to member profiles, user actions such as comments and
clicks, etc.) in databases like Espresso and event logging systems like Kafka. Additionally, LinkedIn takes data from sources
external, for example, Salesforce and Twitter. Advertisers are increasingly using LinkedIn to promote more effectively
various products and services among entrepreneurs from all over the world.
Questions
1. Examine Facebook's new professional features and access that company's potential to impact business
from LinkedIn.
2. Rival companies are increasingly forming partnerships and cooperative agreements. Maybe LinkedIn and Facebook
They should cooperate. Identify and describe three ways in which the two rival firms could perhaps cooperate
mutually beneficial.
3. In addition to product development, identify and describe four other strategies that LinkedIn should or could
follow, from most attractive (#1) to least attractive (#4).
Source: Company documents and various sources.
Source: alphaspirit/Fotolia.
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164 Part 2 • Strategy formulation
Current readings
Cabral, Sandro, Bertrand Quelin and Walmir Maia.
Nadkarni, Sucheta and Jianhong Chen. "Bridge
"Outsourcing failure and reintegration: the influence of factors
Yesterday, today and tomorrow: CEO's temporal focus, dynamism
contractual and external". Long-term planning
environmental and rate of introduction of new products”. Academy of
47, no. 6 (December 2014): 365–378.
Management Journal 57 (December 2014): 1,810–1,833.
Dobni, C. Brooke, Mark Klassen, and W. Thomas Nelson.
"Innovation strategy in the United States: senior executives
They offer their points of view." Business Strategy Magazine 36, no. 1
(2015): 3-13.
Roloff, Julia, Michael S. Ablander, and Dilek Z. Nayir. "The supplier's perspective:
forge strong partnerships with buyers.” Strategy Magazine
Business 36, no. 1 (2015): 25–32.
Fogarty, David and Peter C. Bell. "Should I outsource analysis?" Revision
of MIT Sloan Management 55, no. 2 (2014): 41–45.
Rubera, Gaia and Gerard J. Tetlis. "Spun-offs versus acquisitions: profitability
of alternative routes to commercialize innovations". Magazine of
MacCormack, Alan, Fiona Murray and Erika Wagner.
Strategic Management, 35, no. 13 (December 2014): 2043–2052.
"Stimulate innovation through competition." (Article from
front page). MIT Sloan Management Review 55, no. 1 (2013): 25–32.
Smith, Wendy K. "Dynamic Decision Making: A Model of Leaders
seniors who manage strategic paradoxes".
Martínez-Jerez, F. Asís. “Rewriting the playbook for
Academy of Management Journal 57 (December 2014): 1,592–1,623.
Corporate associations. MIT Loan Management Review
55, no. 2 (2014): 63–70.
Mckinley, William, Scott Latham and Michael Braun.
"Innovation and organizational decline: changes and downward spirals."
Academy of Management Journal 39, no. 1 (2014): 88-110.
Trahms, Cheryl A., Hermann Achidi Ndofor, and David G.
Sirmon. "Decline and organizational change: a review and
agenda for future research." Management Magazine 39, no. 5
(2013): 1,277–1,307.
Final notes
1. John Byrne, "Strategic Planning: It's Back,"
BusinessWeek (August 26, 1996): 46.
12. Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries
and Competitors (New York: Free Press, 1980), 53–57, 318–319.
2. Steven C. Brandt, Strategic Planning in Emerging Businesses
(Reading, MA: Addison-Wesley, 1981).
Reprinted with permission of the publisher.
3. F. Hansen and M. Smith, “Crisis in Corporate America: The Role of Strategy,”
Business Horizons (JanuaryFebruary 2003): 9.
4. Based on FR David, “How do we choose between
Alternative growth strategies? Management Planning 33, no. 4 (January-February
1985): 14-17, 22.
5. Ibid.
6. Kenneth Davidson, “Do Megamergers Make Sense?”
Business Strategy Magazine 7, no. 3 (Winter 1987): 45.
13. David, "How do we choose?"
14. Ibid.
15. Ibid.
16. Ibid.
17. Ibid.
18. Michael Porter, Competitive Advantage (New York: Free Press, 1985), 97.
See also Arthur Thompson Jr., A.J.
Strickland III and John Gamble, Strategy Making and Execution: Text and
Readings (New York: McGraw-Hill/
Irwin, 2005), 117.
19. Arthur Thompson Jr., AJ Strickland III, and John Gamble, Strategy
7. David, "How do we choose?"
Making and Execution: Text and Readings (New York: McGraw-Hill/
8. Ibid.
Irwin, 2005), 125–126.
9. Ibid.
10. Ibid.
11. Arthur Thompson Jr., AJ Strickland III, and John Gamble, Strategy
Making and Execution: Text and Readings (New York: McGraw-Hill/
Irwin, 2005), 241.
20. Porter, Competitive Advantage, 160–162.
21. Thompson, Strickland, and Gamble, Strategy Development and
Execution, 129-130.
22. Ibid., 134.
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Chapter 5 • Strategies in action 165
23. Gary Hamel, Yves Doz and CK Prahalad, “Collaborate with your
26. Schifrin, “Partner or Perish,” p. 26.
Competitors and Win,” Harvard Business Review 67, no. 1
27. David, “How Do We Choose?”
(January-February 1989): 133.
28. James Hagerty, “Some Companies Choose to Bring Manufacturing Back to
24. Matthew Schifrin, “Partner or Perish,” Forbes (May 21,
2001): 32.
25. Kathryn Rudie Harrigan, “Joint Ventures: Linking Up for a Leap
Forward,” Planning Review 14, no. 4 (July-August 1986): 10.
the U.S.,” Wall Street Journal, July 18, 2012, B8.
29. James Hagerty, “Offshoring trumps reshoring,” Wall
Street Journal, December 15, 2014, B3.