BUS 411
Day 8
Copyright 2005 Prentice Hall
1
Agenda
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Assignment #2 Corrected
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1 A, 6 B’s, 1 C and 1 non-submit
Pretty good results considering this is new to most
students
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Assignment #3 due next class
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Templates available in WebCT
Discussion about Strategies
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Copyright 2005 Prentice Hall
Ch 5 -2
Chapter 5
Strategies in Action
Strategic Management:
Concepts & Cases
10th Edition
Fred David
PowerPoint Slides by
Anthony F. Chelte
Western New England College
Copyright 2005 Prentice Hall
Ch 5 -3
Chapter Outline
Long-Term Objectives
Types of Strategies
Integration Strategies
Copyright 2005 Prentice Hall
Ch 5 -4
Chapter Outline (cont’d)
Intensive Strategies
Diversification Strategies
Defensive Strategies
Copyright 2005 Prentice Hall
Ch 5 -5
Chapter Outline (cont’d)
Michael Porter’s Generic Strategies
Means for Achieving Strategies
First Mover Advantages
Copyright 2005 Prentice Hall
Ch 5 -6
Chapter Outline (cont’d)
Outsourcing
Strategic Management in Nonprofit &
Governmental Organizations
Strategic Management in Small Firms
Copyright 2005 Prentice Hall
Ch 5 -7
Strategies in Action
Strategies for taking the hill won’t
necessarily hold it. –
Amar Bhide
The early bird may get the worm, but the
second mouse gets the cheese. –
Unknown
Even if you are on the right track, you’ll get
run over if you just sit there –
Will Rogers
Copyright 2005 Prentice Hall
Ch 5 -8
Strategies in Action
Companies Embrace Strategic Planning
-- Quest for higher revenues
-- Quest for higher profits
Copyright 2005 Prentice Hall
Ch 5 -9
Long-Term Objectives


Results expected from pursuing certain
strategies.
Strategies represent actions to accomplish
long-term objectives.
Copyright 2005 Prentice Hall
Ch 5 -10
Long-Term Objectives
Objectives -Quantifiable
Measurable
Realistic
Understandable
Challenging
Copyright 2005 Prentice Hall
Ch 5 -11
Long-Term Objectives
Objectives Necessary -Corporate Level
Divisional Level
Functional Level
Copyright 2005 Prentice Hall
Ch 5 -12
Long-Term Objectives
Strategists Should Avoid -Managing by Extrapolation
If it ain’t broke don’t fix it
Managing by Crisis
It’s broke, FIX IT! White Knighters
Managing by Subjectives
Do your own thing, you know how to do it best
Managing by Hope
Do your best and just keep trying
Copyright 2005 Prentice Hall
Ch 5 -13
Long-Term Objectives
Varying Performance Measures
by Organizational Level
Organizational
Level
Corporate
Division
Function
Basis for Annual Bonus/Merit Pay
75% on long-term objectives
25% on annual objectives
50% on long-term objectives
50% on annual objectives
25% on long-term objectives
75% on annual objectives
Copyright 2005 Prentice Hall
Ch 5 -14
Financial vs. Strategic
Objectives
Financial Objectives
Growth in revenues
Growth in earnings
Higher dividends
Higher profit margins
Higher Earnings per share
Improved cash flow
Copyright 2005 Prentice Hall
Ch 5 -15
Financial vs. Strategic
Objectives
Strategic Objectives
Larger market share
Quicker on-time delivery than rivals
Quicker design-to-market times than rivals
Lower costs than rivals
Higher product quality than rivals
Wider geographic coverage than rivals
Copyright 2005 Prentice Hall
Ch 5 -16
Financial vs. Strategic
Objectives
Trade-Off
Maximize short-term financial objectives – harm
long-term strategic objectives
Pursue increased market share at the expense
of short-term profitability
Tradeoffs related to risk of actions; concern for
business ethics; need to preserve natural
environment; social responsibility issues
Copyright 2005 Prentice Hall
Ch 5 -17
Types of Strategies
A Large Company
Corp
Level
Division Level
Functional Level
Operational Level
Copyright 2005 Prentice Hall
Ch 5 -18
Types of Strategies
A Small Company
Company
Level
Functional Level
Operational Level
Copyright 2005 Prentice Hall
Ch 5 -19
The Balanced Scorecard
Robert Kaplan & David Norton -Strategy evaluation & control technique
Balance financial measures with non-financial
measures
Balance shareholder objectives with customer
& operational objectives
Copyright 2005 Prentice Hall
Ch 5 -20
The Balanced Scorecard
BEFORE to measure success, firms used:
- Financial performance,
- Market share,
- The bottom line (profits).
BUT these approaches are narrowly focused and place
more weight on short-term results rather than addressing
the firm's long-term sustainability.
Copyright 2005 Prentice Hall
Ch 5 -21
The Balanced Scorecard
NOW, they use: The Balanced Scorecard
= enterprise performance management systems that measure
many aspects of a firm’s achievements.
50% of organizations worldwide have adopted the Balanced
Scorecard with excellent results.
The scorecard approach links strategy to measurement by
asking firms to consider their vision, critical success factors
for accomplishing it, and subsequent performance metrics
in four areas: Customer, internal, innovation and learning,
and financial.
Copyright 2005 Prentice Hall
Ch 5 -22
Customer
Perspective
Internal Business
Perspective
Goals
Goals
Measures
Measures
Innovation and
Learning
Perspective
Goals
Measures
Financial
Perspective
Goals
Measures
Exhibit 2 - 1 The Balanced Scorecard Has Four Perspectives
Copyright 2005 Prentice Hall
Ch 5 -23
Types of Strategies
Forward
Integration
Integration
Strategies
Backward
Integration
Horizontal
Integration
Copyright 2005 Prentice Hall
Ch 5 -24
Vertical Integration Strategies
Gain Control Over -Distributors
Suppliers
Competitors
Copyright 2005 Prentice Hall
Ch 5 -25
Forward Integration Strategies
Gain Control Over -Distributors
Retailers
Copyright 2005 Prentice Hall
Ch 5 -26
Forward Integration Strategies
Guidelines -Current distributors – expensive or unreliable
Availability of quality distributors – limited
Firm competes in industry expected to grow
markedly
Firm has both capital & HR to manage new
business of distribution
Current distributors have high profit margins
Copyright 2005 Prentice Hall
Ch 5 -27
Backward Integration Strategies
Ownership or Control -Firm’s suppliers
Copyright 2005 Prentice Hall
Ch 5 -28
Backward Integration Strategies
Guidelines -Current suppliers – expensive or unreliable
# of suppliers is small; # competitors is large
High growth in industry sector
Firm has both capital & HR to manage new
business
Stable prices are important
Current suppliers have high profit margins
Copyright 2005 Prentice Hall
Ch 5 -29
Horizontal Integration
Strategies
Ownership or Control -Firm’s competitors
Copyright 2005 Prentice Hall
Ch 5 -30
Horizontal Integration
Strategies
Guidelines -Gain monopolistic characteristics w/o federal
government challenge
Competes in growing industry
Increased economies of scale – major competitive
advantages
Faltering due to lack of managerial expertise or
need for particular resource
Copyright 2005 Prentice Hall
Ch 5 -31
Types of Strategies
Market
Penetration
Intensive
Strategies
Market
Development
Product
Development
Copyright 2005 Prentice Hall
Ch 5 -32
Intensive Strategies
Intensive Efforts -Improve competitive position with
existing products
Copyright 2005 Prentice Hall
Ch 5 -33
Market Penetration Strategies
Increased Market Share -Present products/services
Present markets
Greater marketing efforts
Copyright 2005 Prentice Hall
Ch 5 -34
Market Penetration Strategies
Guidelines -Current markets not saturated
Usage rate of present customers can be increased
significantly
Shares of competitors declining; industry sales
increasing
Increased economies of scale provide major
competitive advantage
Copyright 2005 Prentice Hall
Ch 5 -35
Market Development
Strategies
New Markets -Present products/services to new
geographic areas
Copyright 2005 Prentice Hall
Ch 5 -36
Market Development
Strategies
Guidelines -New channels of distribution – reliable, inexpensive,
good quality
Firm is successful at what it does
Untapped/unsaturated markets
Excess production capacity
Basic industry rapidly becoming global
Copyright 2005 Prentice Hall
Ch 5 -37
Product Development
Strategies
Increased Sales -Improving present products/services
Developing new products/services
Copyright 2005 Prentice Hall
Ch 5 -38
Product Development
Strategies
Guidelines -Products in maturity stage of life cycle
Industry characterized by rapid technological
development
Competitors offer better-quality products @
comparable prices
Compete in high-growth industry
Strong R&D capabilities
Copyright 2005 Prentice Hall
Ch 5 -39
Types of Strategies
Concentric
Diversification
Diversification
Strategies
Conglomerate
Diversification
Horizontal
Diversification
Copyright 2005 Prentice Hall
Ch 5 -40
Diversification Strategies
Less Popular -More difficult to manage diverse
business activities
Copyright 2005 Prentice Hall
Ch 5 -41
Concentric Diversification
Strategies
Addition -New & related products/services
Copyright 2005 Prentice Hall
Ch 5 -42
Concentric Diversification
Strategies
Guidelines -Compete in no/slow growth industry
New & related products increases sales of current
products
New & related products offered at competitive
prices
Current products—decline stage of product life
cycle
Strong management team
Copyright 2005 Prentice Hall
Ch 5 -43
Conglomerate Diversification
Strategies
Addition -New & unrelated products/services
Copyright 2005 Prentice Hall
Ch 5 -44
Conglomerate Diversification
Strategies
Guidelines -Declining annual sales & profits
Capital & managerial ability to compete in new
industry
Financial synergy between acquired and acquiring
firms
Current markets for present products - saturated
Copyright 2005 Prentice Hall
Ch 5 -45
Horizontal Diversification
Strategies
Addition -New & unrelated products/services for
current customers
Copyright 2005 Prentice Hall
Ch 5 -46
Horizontal Diversification
Strategies
Guidelines -Adding new products/services would significantly
increase revenues
Highly competitive and/or no-growth industry; low
margins & returns
Current distribution channels can be used
New products have counter cyclical sales patterns
Copyright 2005 Prentice Hall
Ch 5 -47
Types of Strategies
Retrenchment
Defensive
Strategies
Divestiture
Liquidation
Copyright 2005 Prentice Hall
Ch 5 -48
Retrenchment Strategies
Regrouping -Cost & asset reduction to reverse
declining sales & profit
Copyright 2005 Prentice Hall
Ch 5 -49
Retrenchment Strategies
Guidelines -Failed to meet objectives & goals consistency; has
distinctive competencies
Firm is one of weaker competitors
Inefficiency, low profitability, poor employee morale,
pressure for stockholders
Strategic managers have failed
Rapid growth in size; major internal reorganization
necessary
Copyright 2005 Prentice Hall
Ch 5 -50
Divestiture Strategies
Selling a division or part of an
organization.
Copyright 2005 Prentice Hall
Ch 5 -51
Divestiture Strategies
Guidelines -Retrenchment failed to attain improvements
Division needs more resources than are available
Division responsible for firm’s overall poor
performance
Division is a mis-fit with organization
Large amount of cash is needed and cannot be
raised through other sources
Copyright 2005 Prentice Hall
Ch 5 -52
Liquidation Strategies
Selling
Company’s assets, in parts, for
their tangible worth
Copyright 2005 Prentice Hall
Ch 5 -53
Liquidation Strategies
Guidelines -Retrenchment & divestiture failed
Only alternative is bankruptcy
Minimize stockholder loss by selling firm’s assets
Copyright 2005 Prentice Hall
Ch 5 -54
2003 Examples
Forward
Integration
Doll maker & mail order firm,
Pleasant Co., opened a retail store
in Manhattan
Backward
Integration
McDonalds recently acquired a
paper cup producer
Horizontal
Integration
Callaway Golf recently acquired
Top-Flite Golf Company
Copyright 2005 Prentice Hall
Ch 5 -55
2003 Examples
Market
Penetration
SABMiller Plc spent $500 million in
2003 on marketing its Miller
brands of beer
Market
Development
JetBlue is adding dozens of new
routes
Product
Development
GM developing hydrogen powered
automobiles or Pfizer developing a
new antismoking pill
Copyright 2005 Prentice Hall
Ch 5 -56
2003 Examples
Concentric
Diversification
Microsoft launched its first
personal computers that double as
entertainment centers
Conglomerate
Diversification
The video-rental firm Blockbuster
may acquire the DVD and music
direct-marketing firm Columbia
House
Horizontal
Diversification
Viacom acquired Comedy Central,
from AOL
Copyright 2005 Prentice Hall
Ch 5 -57
2003 Examples
Retrenchment
Divestiture
Liquidation
Copyright 2005 Prentice Hall
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 Couche-Tard, a
Canadian firm
Sprint liquidated its Web-hosting
division
Ch 5 -58
Michael Porter’s Generic Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
Copyright 2005 Prentice Hall
Ch 5 -59
Generic Strategies
Cost Leadership
In conjunction with differentiation
Economies or diseconomies of
scale
Capacity utilization achieved
Linkages w/ suppliers & distributors
Copyright 2005 Prentice Hall
Ch 5 -60
Generic Strategies
Low Cost Producer Advantage
Many price-sensitive buyers
Few ways of achieving differentiation
Buyers not sensitive to brand
differences
Large # of buyers w/bargaining power
Copyright 2005 Prentice Hall
Ch 5 -61
Generic Strategies
Differentiation
Greater product flexibility
Greater compatibility
Improved service
Greater convenience
More features
Copyright 2005 Prentice Hall
Ch 5 -62
Generic Strategies
Focus
Industry segment of sufficient size
Good growth potential
Not crucial to success of major competitors
Copyright 2005 Prentice Hall
Ch 5 -63
Means for Achieving Strategies
Joint Venture/Partnering 
Two or more companies form a temporary
partnership or consortium for purpose of
capitalizing on some opportunity.
Copyright 2005 Prentice Hall
Ch 5 -64
Means for Achieving Strategies
Cooperative Arrangements 
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R&D partnerships
Cross-distribution agreements
Cross-licensing agreements
Cross-manufacturing agreements
Joint-bidding consortia
Copyright 2005 Prentice Hall
Ch 5 -65
Means for Achieving Strategies
Why Joint Ventures Fail 
Managers who must collaborate daily; not
involved in developing the venture
 Benefits the company not the customers
 Not supported equally by both partners
 May begin to compete with one of the
partners
Copyright 2005 Prentice Hall
Ch 5 -66
Joint Ventures
Guidelines -Synergies between private and publicly held
Domestic with foreign firm, local management can
reduce risk
Complementary distinctive competencies
Resources & risks where project is highly profitable
(e.g. Alaska Pipeline)
Two or more smaller firms competing w/larger firm
Need to introduce new technology quickly
Copyright 2005 Prentice Hall
Ch 5 -67
Means for Achieving Strategies
Mergers & Acquisitions

Provide improved capacity utilization
 Better use of existing sales force
 Reduce managerial staff
 Gain economies of scale
 Smooth out seasonal trends in sales
 Gain new technology
 Access to new suppliers, distributors, customers,
products, creditors
Copyright 2005 Prentice Hall
Ch 5 -68
Recent Mergers
Acquiring Firm
IBM
Yahoo
U.S. Steel
Pfizer
Krispy Kreme Doughnuts
Oracle
Palm
Nike
Copyright 2005 Prentice Hall
Acquired Firm
Rational Software Corp
Inktomi Corp
National Steel Corp
Pharmacia
Montana Mills
People Soft
Handspring
Converse
Ch 5 -69
First Mover Advantages

Benefits a firm may achieve by entering a
new market or developing a new product or
service prior to rival firms.
Copyright 2005 Prentice Hall
Ch 5 -70
First Mover Advantages
Potential Advantages

Securing access to rare resources
 Gaining new knowledge of key factors &
issues
 Carving out market share
 Easy to defend position & costly for rival
firms to overtake
Copyright 2005 Prentice Hall
Ch 5 -71
Outsourcing
Business-process outsourcing
(BPO)

Companies taking over the functional
operations of other firms
Copyright 2005 Prentice Hall
Ch 5 -72
Outsourcing
Benefits

Less expensive
 Allows firm to focus on core business
 Enables firm to provide better services
Copyright 2005 Prentice Hall
Ch 5 -73