chapter 05

Fred R. DavidPrentice Hall

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Chapter 5Chapter 5Strategies in ActionStrategies in Action

Strategic Management:

Concepts and Cases. 9th edition

Fred R. David

PowerPoint Slides by

Anthony F. Chelte

Western New England College


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Chapter OutlineChapter Outline

• Long-Term Objectives

• Types of Strategies

• Integration Strategies


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• Intensive Strategies

• Diversification Strategies

• Defensive Strategies

• Means for Achieving Strategies


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• Michael Porter’s Generic Strategies

• Strategic Management in Nonprofit and Governmental Organizations

• Strategic Management in Small Firms


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Strategies in ActionStrategies in Action

Even if you’re on the right track, you’ll get run over if you just sit there.

-- Will Rogers


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Strategies in ActionStrategies in Action

Hundreds of companies today –Hundreds of companies today –

• Embrace strategic planning• Quest for higher revenues• Quest for higher profits


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Long-Term ObjectivesLong-Term Objectives

• The results expected from pursuing The results expected from pursuing certain strategiescertain strategies


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Objectives –Objectives –

– QuantifiableQuantifiable– MeasurableMeasurable– RealisticRealistic– UnderstandableUnderstandable– ChallengingChallenging– HierarchicalHierarchical– Obtainable Obtainable – CongruentCongruent– Time-lineTime-line


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Long-term objectives are necessary –Long-term objectives are necessary –

– CorporateCorporate– DivisionalDivisional– Functional levelsFunctional levels


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Strategists should avoid –Strategists should avoid –

– Managing by ExtrapolationManaging by Extrapolation– Managing by CrisisManaging by Crisis– Managing by SubjectivesManaging by Subjectives– Managing by HopeManaging by Hope


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Integration StrategiesIntegration Strategies

Vertical Integration Strategies

Forward Integration

Backward Integration

Horizontal Integration


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Vertical Integration strategies –Vertical Integration strategies –

– Allow a firm to gain control over:Allow a firm to gain control over:• DistributorsDistributors• SuppliersSuppliers• competitorscompetitors


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Forward Integration –Forward Integration –

– Gaining ownership or increased control Gaining ownership or increased control over distributors or retailersover distributors or retailers


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Guidelines for Forward Integration –Guidelines for Forward Integration –

Present distributors are expensive, unreliable, or incapable of meeting firm’s needs

Availability of quality distributors is limited When firm competes in an industry that is expected

to grow markedly Organization has both capital and human resources

needed to manage new business of distribution Advantages of stable production are high Present distributors have high profit margins


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Backward Integration –Backward Integration –

– Seeking ownership or increased Seeking ownership or increased control of a firm’s supplierscontrol of a firm’s suppliers


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Guidelines for Backward Integration –Guidelines for Backward Integration –

When present suppliers are expensive, unreliable, or incapable of meeting needs

Number of suppliers is small and number of competitors large

High growth in industry sector Firm has both capital and human resources to

manage new business Advantages of stable prices are important Present supplies have high profit margins


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Horizontal Integration –Horizontal Integration –

– Seeking ownership or increased Seeking ownership or increased control over competitorscontrol over competitors


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Guidelines for Horizontal Integration –Guidelines for Horizontal Integration –

Firm can gain monopolistic characteristics without being challenged by federal government

Competes in growing industry Increased economies of scale provide major

competitive advantages Faltering due to lack of managerial expertise or

need for particular resources


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Michael Porter’s Generic StrategiesMichael Porter’s Generic Strategies

Cost Leadership Strategies

Differentiation Strategies

Focus Strategies


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Generic StrategiesGeneric Strategies

Cost Leadership Strategies –Cost Leadership Strategies –

Pursued in conjunction with differentiation Economies or diseconomies of scale Capacity utilization achieved Linkages with suppliers and distributors


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Low Cost Producer Advantages –Low Cost Producer Advantages –

Market of many price-sensitive buyers Few ways of achieving product

differentiation Buyers not sensitive to brand differences Large number of buyers with bargaining

power


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Differentiation Strategies –Differentiation Strategies –

Greater product flexibility Greater compatibility Lower costs Improved service Greater convenience More features


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Differentiation Strategies –Differentiation Strategies –

Allow firm to charge higher price Gain customer loyalty


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Focus Strategies –Focus Strategies –

Industry segment of sufficient size Good growth potential Not crucial to success of major competitors


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Focus Strategies –Focus Strategies –

Consumers have distinctive preferences Rival firms not attempting to specialize in the

same target segment


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Intensive StrategiesIntensive Strategies

Intensive Strategies

Market Penetration

Market Development

Product Development


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Intensive strategies –Intensive strategies –

– Require intensive efforts to improve a Require intensive efforts to improve a firm’s competitive position with existing firm’s competitive position with existing productsproducts


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Market Penetration –Market Penetration –

– Seeking increased market share for Seeking increased market share for present products or services in present present products or services in present markets through greater marketing markets through greater marketing effortsefforts


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Guidelines for Market Penetration –Guidelines for Market Penetration –

Current markets not saturated Usage rate of present customers can be increased

significantly Market shares of competitors declining while total

industry sales increasing Increased economies of scale provide major

competitive advantages


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Market Development –Market Development –

– Introducing present products or Introducing present products or services into new geographic areaservices into new geographic area


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Guidelines for Market Development –Guidelines for Market Development –

New channels of distribution that are reliable, inexpensive, and good quality

Firm is very successful at what it does Untapped or unsaturated markets Capital and human resources necessary to manage

expanded operations Excess production capacity Basic industry rapidly becoming global


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Product Development –Product Development –

– Seeking increased sales by improving Seeking increased sales by improving present products or services or present products or services or developing new onesdeveloping new ones


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Guidelines for Product Development –Guidelines for Product Development –

Products in maturity stage of life cycle Competes in industry characterized by rapid

technological developments Major competitors offer better-quality products at

comparable prices Compete in high-growth industry Strong research and development capabilities


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Diversification StrategiesDiversification Strategies

Diversification Strategies

Concentric Diversification

Conglomerate Diversification

Horizontal Diversification


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Diversification strategies –Diversification strategies –

– Becoming less popular as Becoming less popular as organizations are finding it more organizations are finding it more difficult to manage diverse business difficult to manage diverse business activitiesactivities


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Concentric Diversification –Concentric Diversification –

– Adding new, but related, products or Adding new, but related, products or servicesservices


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Guidelines for Concentric Diversification –Guidelines for Concentric Diversification –

Competes in no- or slow-growth industry Adding new & related products increases sales of

current products New & related products offered at competitive prices Current products are in decline stage of the product

life cycle Strong management team


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Conglomerate Diversification –Conglomerate Diversification –

– Adding new, unrelated products or Adding new, unrelated products or servicesservices


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Guidelines for Conglomerate Diversification –Guidelines for Conglomerate Diversification –

Declining annual sales and profits Capital and managerial talent to compete

successfully in a new industry Financial synergy between the acquired and

acquiring firms Exiting markets for present products are saturated


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Horizontal Diversification –Horizontal Diversification –

– Adding new, unrelated products or Adding new, unrelated products or services for present customersservices for present customers


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Guidelines for Horizontal Diversification –Guidelines for Horizontal Diversification –

Revenues from current products/services would increase significantly by adding the new unrelated products

Highly competitive and/or no-growth industry w/low margins and returns

Present distribution channels can be used to market new products to current customers

New products have counter cyclical sales patterns compared to existing products


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Defensive StrategiesDefensive Strategies

Defensive Strategies

Retrenchment

Divestiture

Liquidation


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Retrenchment –Retrenchment –

– Regrouping through cost and asset Regrouping through cost and asset reduction to reverse declining sales reduction to reverse declining sales and profitand profit


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Guidelines for RetrenchmentGuidelines for Retrenchment – –

Firm has failed to meet its objectives and goals consistently over time but has distinctive competencies

Firm is one of the weaker competitors Inefficiency, low profitability, poor employee morale,

and pressure from stockholders to improve performance.

When an organization’s strategic managers have failed

Very quick growth to large organization where a major internal reorganization is needed


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Divestiture –Divestiture –

– Selling a division or part of an Selling a division or part of an organizationorganization


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Guidelines for Divestiture –Guidelines for Divestiture –

When firm has pursued retrenchment but failed to attain needed improvements

When a division needs more resources than the firm can provide

When a division is responsible for the firm’s overall poor performance

When a division is a misfit with the organization When a large amount of cash is needed and cannot

be obtained from other sources.


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Recent DivestituresRecent Divestitures

Dell Computer web-hosting division FON GroupCititgroup Citi Capital GE Capital Fleet ServicesMaytag Blodgett Middleby Corporation

Wescoast Energy British Columbia Gas BC GasWestcoast Energy Union Energy Epcor UtilitiesWestcoast Energy Westcoast Capital Epcor Utilities

Credit Suisse CSFBdirect Bank of Montrealemerson Electric Chromalox JPMorgan PartnersGeneral Motors Hughes Electronics Echostar Communications

DuPont drug division Bristol-Myers Squibb

Parent Company Part Being Divested Acquiring Company

Recent Divestitures


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Liquidation–Liquidation–

– Selling all of a company’s assets, in Selling all of a company’s assets, in parts, for their tangible worthparts, for their tangible worth


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Guidelines for LiquidationGuidelines for Liquidation – –

When both retrenchment and divestiture have been pursued unsuccessfully

If the only alternative is bankruptcy, liquidation is an orderly alternative

When stockholders can minimize their losses by selling the firm’s assets


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Means for Achieving StrategiesMeans for Achieving Strategies

Joint Venture/PartneringJoint Venture/Partnering – –

Two or more companies form a temporary partnership or consortium for purpose of capitalizing on some opportunity.


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Cooperative ArrangementsCooperative Arrangements – –

Research and development partnerships Cross-distribution agreements Cross-licensing agreements Cross-manufacturing agreements Joint-bidding consortia


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Problems Causing Joint Ventures to FailProblems Causing Joint Ventures to Fail – –

Managers who must collaborate daily not involved in forming or shaping the venture

Venture may benefit the companies but not the customers

Venture not supported equally by both partners Venture may begin to compete with one of the

partners more so than the other


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Guidelines for Joint VenturesGuidelines for Joint Ventures – –

Combination of privately held and publicly held can be synergistically combined

Domestic forms joint venture with foreign firm, can obtain local management to reduce certain risks

Distinctive competencies of two or more firms are complementary

Overwhelming resources and risks where project is potentially very profitable (e.g., Alaska pipeline)

Two or more smaller firms have trouble competing with larger firm

A need exists to introduce a new technology quickly


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Recent MergersRecent Mergers

Acquiring Firm Acquired Firm

Hewlett-Packard Compaq Computer

Ebay Homes Direct

PepsiCo Quaker Oats

Sara Lee Earthgrains Company

Phillips Petroleum Conoco

Devon Anderson Exploration

AMR TWA

Tellabs Ocular Networks


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Key TermsKey Terms

• Acquisition• Backward Integration• Combination Strategy• Concentric Diversification• Conglomerate Diversification• Cooperative Arrangements• Cost Leadership


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Key TermsKey Terms

• Differentiation• Diversification Strategies• Divestiture• Focus• Forward Integration• Franchising• Generic Strategies


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Key TermsKey Terms

• Horizontal Diversification• Horizontal Integration• Integration Strategies• Intensive Strategies• Joint Venture• Liquidation• Long-Term Objectives


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Key TermsKey Terms

• Market Development• Market Penetration• Merger• Outsourcing• Product Development• Retrenchment• Takeover• Vertical Integration

chapter 05

Documents

david prentice

generic strategiesdifferentiation

generic strategiesfocus

high profit

human resources

defensive

defensive

diversification