Chapter 5

Strategies in Action

Strategic Management: Concepts & Cases

Course coordinator
Prof. Begum Khaleda Khanam

Ch 5 -1
Chapter Outline
• Long-Term Objectives
•Types of strategies
• Integration Strategies
• Intensive Strategies
• Diversification Strategies
• Defensive Strategies
• Michael Porter’s Generic Strategies
• Means for Achieving Strategies
• First Mover Advantages
• Outsourcing
• Strategic Management in Small Firms
Ch 5 -2
Strategies in Action

Companies Embrace Strategic Planning

-- Quest for higher revenues

-- Quest for higher profits

Ch 5 -3
Long-Term Objectives

 Results expected from pursuing certain

strategies
 Strategies represent actions to accomplish
long-term objectives

Ch 5 -4
Long-Term Objectives

Objectives --

Quantifiable
Measurable
Realistic
Understandable
Challenging

Ch 5 -5
Types of Strategies
Corp
A Large Company Level

Division Level

Functional Level

Operational Level

Ch 5 -6
Types of Strategies

A Small Company
Company
Level

Functional Level

Operational Level

Ch 5 -7
Types of Strategies

Forward
Integration

Vertical Backward
Integration Integration
Strategies

Horizontal
Integration

Ch 5 -8
Vertical Integration Strategies

Gain Control Over --

Distributors
Suppliers
Competitors
Forward Integration Strategies
Gain Control Over --

Distributors
Retailers
Ch 5 -9
Forward Integration Strategies

Guidelines --
Current distributors – expensive or unreliable
Availability of quality distributors – limited
Firm competing in industry expected to grow
markedly
Firm has both capital & HR to manage new
business of distribution
Current distributors have high profit margins

Ch 5 -10
Backward Integration Strategies
Ownership or Control --

Firm’s suppliers

Guidelines --
Current suppliers – expensive or unreliable
# of suppliers is small; # of competitors is large
High growth in industry sector
Firm has both capital & HR to manage new business
Stable prices are important
Current suppliers have high profit margins

Ch 5 -11
Horizontal Integration Strategies
Ownership or Control --

Firm’s competitors

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
Ch 5 -12
Types of Strategies

Market
Penetration

Intensive Market
Strategies Development

Product
Development

Ch 5 -13
Intensive Strategies
Intensive Efforts --
Improve competitive position with existing products

Market Penetration Strategies

Increased Market Share --

Present products/services
Present markets
Greater marketing efforts

Ch 5 -14
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

Ch 5 -15
Market Development Strategies

New Markets --

Present products/services to new geographic areas

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
Ch 5 -16
Product Development Strategies
Increased Sales --

Improving present products/services

Developing new products/services

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
Ch 5 -17
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

Ch 5 -18
Types of Strategies

Related
Diversification

Diversification
Strategies

Unrelated
Diversification

Ch 5 -19
Diversification

 Related – When their value chains posses

competitively valuable cross-business
strategic fits

 Unrelated – When their value chains are so

dissimilar that no competitively valuable
cross-business relationships exist

Ch 5 -20
Related Diversification May be Effective
When:
 An organization competes in a no-growth or a
slow growth industry
 Adding new, but related, products would
significantly enhance the sales of current
products
 New, but related products could be offered at
highly competitive prices

Ch 5 -21
Related Diversification May be Effective
When:
 New, but related, products have seasonal
sales levels that counterbalance an
organization’s existing peaks and valleys
 An organization’s products are currently in
the declining stage of the product’s life cycle
 An organization has a strong management
team

Ch 5 -22
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

Ch 5 -23
Unrelated Diversification

 Favors capitalizing on a portfolio of

businesses that are capable of delivering
excellent financial performance
 Entails hunting to acquire companies:
 Whose assets are undervalued
 That are financially distressed
 With high growth potential but are short on
investment capital

Ch 5 -24
Unrelated Diversification May be Effective
When:
 Revenues derived from an organization’s
current products or services would increase
by adding new unrelated products
 An organization competes in a highly
competitive or a no growth industry
 An organization’s current distribution
channels can be used to market new
products to existing customers

Ch 5 -25
Unrelated Diversification May be Effective
When:
 New products have countercyclical sales
patterns
 An organization’s basic industry is
experiencing declining annual sales and
profits
 An organization has the capital and
managerial talent to compete successfully in
a new industry

Ch 5 -26
Unrelated Diversification May be Effective
When:
 An organization has the opportunity to
purchase an unrelated business as an
attractive investment opportunity
 There exists financial synergy between the
acquired and acquiring firm
 Existing markets for the present products are
saturated
 Antitrust action could be charged against a
company
Ch 5 -27
Types of Strategies

Retrenchment

Defensive Divestiture
Strategies

Liquidation

Ch 5 -28
Retrenchment Strategies

Regrouping --

Cost & asset reduction to reverse declining

sales & profit

Guidelines --

Failed to meet objectives & goals consistency; has distinctive

competencies
Firm is one of weaker competitors
Inefficiency, low profitability, poor employee morale, pressure
for stockholders
Strategic managers have failed
Rapid growth in size; major internal reorganization necessary
Ch 5 -29
Divestiture Strategies

Selling a division or part of an organization

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
Ch 5 -30
Liquidation Strategies
Selling

Company’s assets, in parts, for their tangible worth

Guidelines --

Retrenchment & divestiture failed

Only alternative is bankruptcy
Minimize stockholder loss by selling firm’s assets

Ch 5 -31
Michael Porter’s Generic Strategies

Cost Leadership Strategies

Differentiation Strategies

Focus Strategies

Ch 5 -32
 Porter’s Competitive Strategies

 Differentiation Strategy
 Offers products and services that are uniquely different from
the competition

 Focused Differentiation Strategy

 offers a unique product to a special market segment.

 Cost Leadership Strategy

 Seeks to operate at lower costs than competitors

 Focused Cost Leadership Strategy

 uses cost leadership and target needs of a special market.

Ch 5 -33
Generic Strategies

Cost Leadership

In conjunction with differentiation

Economies or diseconomies of scale
Capacity utilization achieved
Linkages w/ suppliers & distributors

Ch 5 -34
Cost Leadership

 Can be especially effective when:

1. Price competition among rivals is vigorous
2. Rival’s products are identical and supplies are
readily available
3. There are few ways to achieve differentiation
4. Most buyers use the product in the same way
5. Buyers have low switching costs
6. Buyers are large and have significant power
7. Industry newcomers use low prices to attract
buyers
Ch 5 -35
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

Ch 5 -36
Generic Strategies
Differentiation

Greater product flexibility

Greater compatibility
Lower costs
Improved service
Greater convenience
More features
Ch 5 -37
Differentiation

 Can be especially effective when:

1. There are many ways to differentiate and many
buyers perceive the value of the differences
2. Buyer needs and uses are diverse
3. Few rival firms are following a similar
differentiation approach
4. Technology change is fast paced and
competition revolves around evolving product
features

Ch 5 -38
Generic Strategies

Focused Strategies

Industry segment of sufficient size

Good growth potential
Not crucial to success of major competitors

Ch 5 -39
Focused Strategy

 Can be especially effective when:

1. The target market niche is large, profitable, and
growing
2. Industry leaders do not consider the niche crucial
3. Industry leaders consider the niche too costly or
difficult to meet
4. The industry has many different niches and
segments
5. Few, if any, other rivals are attempting to
specialize in the same target segment

Ch 5 -40
Means for Achieving Strategies

Joint Venture/Partnering -

 Two or more companies form a temporary

partnership or consortium for purpose of
capitalizing on some opportunity

Ch 5 -41
Reasons why Mergers and Acquisitions Fail

 Integration difficulties
 Inadequate evaluation of target
 Large or extraordinary debt
 Inability to achieve synergy

Ch 5 -42
Means for Achieving Strategies

Cooperative Arrangements -

 R&D partnerships
 Cross-distribution agreements
 Cross-licensing agreements
 Cross-manufacturing agreements
 Joint-bidding consortia

Ch 5 -43
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

Ch 5 -44
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

Ch 5 -45
Reasons why Mergers and Acquisitions Fail

 Too much diversification

 Managers overly focused on acquisition
 Too large an acquisition
 Difficult to integrate different organizational
cultures
 Reduced employee moral due to layoffs and
relocations

Ch 5 -46
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

Ch 5 -47
Recent Mergers

Acquiring Firm Acquired Firm

IBM Ascential Software
Philip Morris PT Hanjaya Mandala Samp
U.S. Steel National Steel Corp
Oracle PeopleSoft
OSIM International Ltd Brookstone
Adobe Systems Macromedia
US Airways American West
United Parcel Service Overnight Corp.

Ch 5 -48
 First Mover Advantages
 Benefits a firm may achieve by entering a new
market or developing a new product or service prior
to rival firms

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

Ch 5 -49
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

Ch 5 -50
 Outsourcing

Business-process outsourcing (BPO)

 Companies taking over the functional operations of

other firms

Benefits

 Less expensive
 Allows firm to focus on core business
 Enables firm to provide better services

Ch 5 -51