Chapter 5
Strategies in Action
“One big problem with American business
is that when it gets into trouble, it
redoubles its effort. Its like digging for
gold. If you dig down twenty feet and
haven’t found it, one of the strategies
you could use is to dig twice as deep.
But if the gold is twenty feet to the side,
you could dig a long time and not find it”
Even if you’re on the right track, you’ll get
run over if you just sit there
Introduction …………………
Hundreds of company today, including IBM
& HP embraced Strategic Planning for high
revenues & profits
Contemporary examples complimented by
16 Strategies are defined including Michael
Porter’s Generic Strategies
When it is appropriate to pursue different
types of strategies….Guidelines presented
Managerial approach is the expectation
that it will enhance Org performance
Strategic Management allows ORG’s to be
efficient, but more important, it allows
them to be effective
SM doesn’t guarantee success, the
process allows proactive rather reactive
decision making
16 strategies- new beginning for firmsmanagers & employees in the ORG
understand & support the plan for action
Long-Term Objectives
 LTO represent the results expected from
pursing certain strategies
 Strategies represent the actions to be taken
to accomplish long-term objectives
Objectives --
 Quantifiable (increasing profits by 2%, decreasing scrap by 1%)
 Measurable (Not all goals can be expressed in numerical terms but
vague goals have little motivating power for employees)
Realistic (Goals should be challenging but not unreasonably difficult
When goals are unrealistic, they set employees up for failure and lead to
decreasing employee morale)
 Understandable (At the Top Org, goals often are qualitative as well
as quantitative)
 Challenging (Kmart: set a goal to have more revenues than Wal-Mart
next year)
Long-Term Objectives
Objectives - Hierarchical
?
 Obtainable (Managers should, however make
sure that goals are set within the existing resource
base, not beyond dept’s time, equipment & financial
resource)
 Congruent (Consistent)
 Time-line (Goals should specify the time period over
which the will be achieved)
Long term objectives
• Strategies represent the actions to be
taken to accomplish LTO
• Time Frame 2-5years
• Table 5.1 (Bonuses /merit pay for
managers must be based on LTO)
• LTO serve as standards by which
individuals, dept’s, division & entire ORG’s
can be evaluated
Financial vs. Strategic
Objectives
Financial Objectives
Growth in revenues
Growth in earnings
Higher dividends
Higher profit margins
Higher Earnings per share
Improved cash flow
Dell Computer corporate
objective to
Grow revenues by 15% annually
Through 2006 & to reach $60
billion
In total revenues by that year
Financial vs. Strategic
Objectives
Strategic Objectives
 Larger Market share
 quicker on-time delivery than rivals
 Shorter design to market times than rivals
 Lower costs than rivals
 Higher product quality
 Wider geographic coverage
 Achieving tech leadership
Often times there is a trade-off
between financial & strategic
objectives such that a crucial
decisions have to be made
YOU NEED TO FIND OUT?
Financial VS Strategic Objectives
1. If competitor pursue increased market share at
the expense of short-term profitability----Danger is associated with trading LTO
2. Other trade offs between F&S objectives
-Riskiness of actions
 Preserve the natural environment
 Social responsibility
Concern
for
over
business
ethics
 Conclusion---Sustain competitive adv
long run is to pursue ‘SO’..
 Financial objectives can be met by focusing
first on SO- to improve a firm’s
competitiveness & market strength
The Balanced Scorecard
Robert Kaplan & David Norton -Strategy evaluation & control technique
Balance financial measures with nonfinancial measures (product quality &
customer service)
BS contains strategic & financial Obj’s
tailored to the Companies
Balance shareholder objectives with
customer & operational objectives
Will be
discussed
later in
chapter 9
The Balanced Scoreboard
 Theme is the same to evaluate firms
strategy based upon quantitative &
qualitative measures
3M FO– annual growth earnings per share
10% or better
SO– at least 30% of shares from products
introduced in the past 4 years
Types of Strategies
Combination strategy can be exceptionally
risky if carried out too far
Strategic planning involves
“ Choices that risk resources”
“ trade-offs that sacrifice opportunity”
If you have a strategy to go north, then you must buy snowshoes & warm
jackets (spend resources) &forgo the opportunity of population increases you
would have by going south
You cannot have a strategy to go north & then take a step east, south, or
west “just to be on the safe side”
Levels of Strategies
A Large Company
Corp
Level
Division Level
Functional Level
Operational Level
Strategy making is not
just a task for top executive
All managers at all level
must be involved
Forward integration
Gaining ownership or increased control over
distributors or retailers
Manufacturers (suppliers) today are pursuing a FIS
by establishing Websites to directly sell products to
consumers
Dell establishing its own stores-within-astore….(Don’t stock computers-Customers will still
order Dells by phone or over the internet-which
differentiated Dell from other computer firms)
Franchising (to distribute their products or services)
Cost & opportunities are spread among many individuals
That’s what you need to Find out ?
Strategy of seeking ownership or increased
control of a firm’s supplier
Appropriate when a firm’s current suppliers are
unreliable, too costly or cannot meet the firm’s
needs
Example: buy a box of Pampers diapers at WalMart, a scanner at the store’s checkout counter
instantly zaps an order to P&G Co.
Contrast- Hospitals, reordering supplies is a
logistical nightmare…. Inefficiency of control of
suppliers in the healthcare industry—Giant
purchasers do more effective backward
integration
• Read Out………..
Strategy of seeking ownership of or
increased control over a firm’s competitors
Mergers, acquisitions & takeovers among
competitors allow for increased economies
of scale & enhanced transfer of resources
& competencies
• Read Out……………
Intensive Strategies
Market penetration, market development &
product development are sometimes
referred to as intensive strategies because
they require intensive efforts if a firm’s
competitive position with existing
products is to improve
Seeks to increase market share for present
products or services in present markets through
greater marketing efforts
 Used alone & in combination with other strategies
 Increasing number of salespersons, increasing
advertising expenditures, offering extensive sales
promotion items or increasing publicity efforts
 Sony is spending over $140M in a new advertising &
promotion drive to market HDTV sets in the U.S
(Bravia)
 Sony- setting up special tents to promote Bravia at
1000 stores in America
When the usage rate of present customers could
be increased significantly
When the market shares of major competitors
have been declining while total industry sales
have been increasing
When increased economies of scale provide
major competitive adv
When current markets are not saturated with a
particular product or service
when the correlation btw $sales & $ marketing
expenditure historically has been high
Market Development
Involves introducing present products or
services into new geographic areas
Adidas in 2005 had 1500 stores in China
& stated that it would open another 40
stores every month in china for the next 40
months
United Parcel Service (UPS) is building
new cargo hub in shanghai– UPS planning
to compete in China with FedEx & DHL
Guidelines for when market development may
be an especially effective strategy
• When an org is very successful at what it
does
• When an Org has the needed capital & HR
to manage expanded operations
• Excess production capacity
• Org basic industry is becoming rapidly
global in scope
Product Development
Strategy that seeks increased sales by improving
or modifying present products or services
Usually entails large research and development
expenditures
Coca-Cola introducing Zero which underscore the
growing popularity of diet soft drinks at the
expense of sugary drinks. Sales in sugary drinks
fell 3%. Diet drinks now have 29.1% market
share & that is growing. Many teenagers & young
adults ditched regular colas in favor of bottled
water & diet drinks
McDonald’s design your own deli sandwiches
(chicken salad blended with pecans, apples &
grapes)
Guidelines for when Product development
may be an especially effective strategy…..
 When an organization has successful products that are
in the maturity stage of the product life cycle; the idea
here is to attract satisfied customers to try new
(improved) products as a result of their positive
experience with the Org present products or services
 When major competitors offer better quality products at
comparable prices
 When an organization competes in a high growth
industry
 Org has strong R&D capabilities
Diversification Strategies
Business are said to be related when their
value chains posses competitively
valuable cross-business strategic fits;
businesses are said to be unrelated when
their value chain are so dissimilar that no
competitively valuable cross-business
relationship exist
Diversification
Continue……..
Becoming less popular as organizations are
finding it more difficult to manage diverse
business activities
1960’s-70’s trend was to diversify so as not to be
dependent on any single industry
But 1980’s saw a general reversal of that
thinking
M.Porter “Management found it couldn’t manage
the beast”– hence business selling or closing
less profitable divisions in order to focus on core
businesses
Diversification
Continue……..
• Being in single industry is having all of the
firm’s eggs in one basket
• New technologies, new products or fast
shifting buyer preferences can decimate
particular business
• Diversification must do more than simply
spread business risk across different
industries
• Strategy adds more to share holder value
……
Related Diversification
Entering a new business or industry to create a competitive advantage
in one or more of an organizations existing divisions or businesses
Synergy is obtained when value created by two divisions cooperating is
greater than the value that would be created if the two divisions operated
separately
• Amazon. COM recent move to sell Personal Computers
through its online store
• Dell manufacturing & marketing consumer electronics
products such as flat-panel TV & MP3 players- opened
online music-downloading store
• Dell sees the PC business more aligned with the
entertainment business because both are becoming
more & more digital
• Computing & consumer electronics are converging into
one industry
• Dell, HP, Gateway compete with Sony, Matsushita &
Samsung
•Joint sales force
•Same distribution system
Procter & Gamble’s
Paper Products
Paper towel
Shaving
Skin Care
Hair Care
Disposable diaper
 Businesses share one of the best examples of the successful production
of synergies
Share the costs of producing inputs such as paper & developing new
technology to reduce manufacturing costs
Guidelines …..
• When Org competes in no-growth or slow
growth industry
• When adding new, but related products
would significantly enhance the sales of
current products
• When an org products are currently in the
declining stage of the products life cycle
• When an org has a strong management
team
Unrelated Diversification
Strategy favors capitalizing upon a portfolio of
businesses that are capable of delivering
excellent financial performance in their respective
industries, rather than striving to capitalize on
value chain strategic fits among the businesses
Search different industries for Companies that
could be acquired for a deal & yet have potential
to provide a high return on investment
Hunt to acquire Co.’s hat have growth prospects
but are short on investment capital
GE owns NBC
Walt Disney owns ABC & CBS
Three major TV networks are all owned
by diversified firms
“Unless we diversify our revenue, we wont be
able to fulfill our mission of providing healthcare.
We want our hospital to be a place that people
want to go to”
Hospitals creating malls by offering Banks,
bookstores, coffee shops, restaurants & other
retail stores… improving ambiance for patients &
their visitors
Guidelines …………..
When revenues derived from an
organization’s current products or services
would increase significantly by adding new,
unrelated products
When an Org present channels of
distribution can be used to market the new
products to current customers
When an Org basic industry is experiencing
declining annual sales & profits
Occurs when an organization regroups
through cost and asset reduction to reverse
declining sales & profits
Sometimes called turnaround or reorganizational strategy
Entail selling off land & buildings to raise
needed cash, pruning products lines, closing
marginal businesses, closing obsolete
factories, automating processes, reducing the
number of employees & instituting expense
control systems
Retrenchment
Continue….
Winn-Dixie is pursing a retrenchment
strategy in 2005 to 2006 by closing one third
of its stores & eliminating 22,000 jobs,
representing 28% of its workforce
Trying to emerge from Chapter 11 bankruptcy
Bankruptcy can be effective type of
retrenchment strategy
Five major types of bankruptcy
Chapter 7, 9, 11, 12, 13 (You find out)
Divestiture
Selling a division or part of an Org
Used to raise capital for further strategy to
rid an Org of businesses that are
unprofitable- require too much capital- do
not fit well with the firm’s other activities
 Example: Unilever recently sold its
perfume business, including brands CK to
Coty Inc. for $800M
Adidas divested ski-equipment maker
Salomon-which was its least profitable
division
Guidelines
• When an Org has pursued a retrenchment
strategy & failed to accomplish needed
improvements
• Division needs more resources to be
competitive than the company can provide
• When a division is responsible for an Org’s
overall poor performance ……….
Liquidation
• Selling all of a company’s assets in parts
for their tangible worth
• Recognition of defeat & consequently can
be an emotionally difficult strategy
• Better to cease operating than to continue
losing large sums of money
• Example: AOL filed for bankruptcy
protection in mid 2005 & announced plans
to liquidate its business
Guidelines
When an Org has pursued both a Retrenchment
strategy & a divestitute strategy & neither has
been successful
When Org’s only alternative is banktruptcy
Liquidation represents an orderly & planned
means of obtaining the greatest possible cash
for an Org assets
A company can legally declare bankruptcy first &
then liquidate various divisions to raise needed
capital
Michael Porters Five Generic Strategies
Cost leadership –Low cost (Type 1)
Cost Leadership – Best Value (Type 2)
Differentiation (Type 3)
Focus-Low Cost (Type 4)
Focus-Best Value (Type 5)
Do it yourself
Joint Ventures / Partnering
Merger / Acquisition
First Mover Advantages
Outsourcing
Joint Venture / Partnering
• Two or more companies form a temporary
partnership or consortium for the purpose of
capitalizing on some opportunity
• Often used to pursue an opportunity that is
too complex, uneconomical, or risky for a
single firm to pursue alone
• JV & Partnerships, alliances are proving to
be more effective way to enhance corporate
growth than Mergers & Acquisitions
VA & Partnering ………….continue
• Take many forms including – outsourcing,
information sharing, joint marketing and R&D
• 10,000 JV’s formed annually, more than all
mergers & acquistions
– Starbucks’ JV with China’s president coffee to
open hundreds of SB coffee shops in China
(building Chinese taste for coffee)
– Microsoft Online service division JV with
Shanghai alliance investment to launch MSN
China throughout China
Concluding thoughts
JV are preferred over M&A as a means of
achieving strategies, certainly they are not
all successful- Good news is that JV are
less risky but bad news is that many
alliances fail
Statistics you have to find out 
Mergers & Acquisitions
Merger occurs when two organizations of
about equal size unite to form one
enterprise
Acquisition occurs when a large
organization purchases (acquires) a
smaller firm, or vice versa
M&A not desired by both parties – take over or
hostile takeover
In contrast, if the acquisitions is desired by both
firms, it is termed as friendly merger
There are number or reasons (forces) which drives
companies to merger around the world
( You to find out :Hint for exams  )
 Not all mergers are successful
 Some key reasons for their failures are ?
 Many reasons for companies to merge and acquire ?
First Mover Advantages

Benefits a firm may achieve by entering a
new market or developing a new product
or service prior to rival firms.
Outsourcing
Business-process outsourcing
(BPO)

Companies taking over the functional
operations of other firms
Types of Strategies
Forward
Integration
Vertical
Integration
Strategies
Backward
Integration
Horizontal
Integration
Types of Strategies
Market
Penetration
Intensive
Strategies
Market
Development
Product
Development
Types of Strategies
Related
Diversification
Diversification
Strategies
Unrelated
Diversification
Types of Strategies
Retrenchment
Defensive
Strategies
Divestiture
Liquidation
2003 Examples
Forward
Integration
Budget Rent-a-Car is opening
car rental shops in Wal-Mart
stores.
Backward
Integration
McDonalds recently acquired a
paper cup producer
Hotels, Inc. purchased a
furniture producer
Horizontal
Integration
Federated Dept stores, the parent of
Macy’s & Bloomingdale’s acquired
May dept stores
Callaway Golf recently acquired TopFlite Golf Company
2003 Examples
Market
Penetration
Market
Development
Product
Development
Coca-Cola Co. is spending
millions to advertise its new
zero calorie drink called CocaCola Zero
Bank of America recently
purchased a 9% stake in China
Construction Bank- 4th largest
lender. BOA first big move into
China
GM developing hydrogen
powered automobiles
 Pfizer developing a new
antismoking pill
2003 Examples
Related
Diversification
Unrelated
Diversification
Microsoft launched its first
personal computers that double
as entertainment centers
The video-rental firm
Blockbuster may acquire the
DVD and music directmarketing firm Columbia House
Tupperware Corp., the direct
seller of kitchenware, has
entered & is growing its skin &
beauty business through
BeautiControl
2003 Examples
Retrenchment
Divestiture
Liquidation
America West Airlines closing
its hub at Columbus, Ohio and
laying off 390 employees
ConocoPhillips recently sold its
Circle K convenience store
chain to Alimentation CoucheTard, a Canadian firm
Sprint liquidated its Webhosting division
Britain’s last major car
manufacturer, MG Rover
liquidated in 2005 & laid off its
5000 employee
Michael Porter’s Generic Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
Recent Mergers
Acquiring Firm
Acquired Firm
IBM
Rational Software Corp
Yahoo
Inktomi Corp
U.S. Steel
National Steel Corp
Pfizer
Pharmacia
Krispy Kreme Doughnuts
Oracle
Palm
Nike
Montana Mills
People Soft
Handspring
Converse