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Fred R. DavidPrentice Hall
Ch5-1
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
Fred R. DavidPrentice Hall
Ch5-2
Chapter OutlineChapter Outline
• Long-Term Objectives
• Types of Strategies
• Integration Strategies
Fred R. DavidPrentice Hall
Ch5-3
Chapter OutlineChapter Outline
• Intensive Strategies
• Diversification Strategies
• Defensive Strategies
• Means for Achieving Strategies
Fred R. DavidPrentice Hall
Ch5-4
Chapter OutlineChapter Outline
• Michael Porter’s Generic Strategies
• Strategic Management in Nonprofit and Governmental Organizations
• Strategic Management in Small Firms
Fred R. DavidPrentice Hall
Ch5-5
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
Fred R. DavidPrentice Hall
Ch5-6
Strategies in ActionStrategies in Action
Hundreds of companies today –Hundreds of companies today –
• Embrace strategic planning• Quest for higher revenues• Quest for higher profits
Fred R. DavidPrentice Hall
Ch5-7
Long-Term ObjectivesLong-Term Objectives
• The results expected from pursuing The results expected from pursuing certain strategiescertain strategies
Fred R. DavidPrentice Hall
Ch5-8
Long-Term ObjectivesLong-Term Objectives
Objectives –Objectives –
– QuantifiableQuantifiable– MeasurableMeasurable– RealisticRealistic– UnderstandableUnderstandable– ChallengingChallenging– HierarchicalHierarchical– Obtainable Obtainable – CongruentCongruent– Time-lineTime-line
Fred R. DavidPrentice Hall
Ch5-9
Long-Term ObjectivesLong-Term Objectives
Long-term objectives are necessary –Long-term objectives are necessary –
– CorporateCorporate– DivisionalDivisional– Functional levelsFunctional levels
Fred R. DavidPrentice Hall
Ch5-10
Long-Term ObjectivesLong-Term Objectives
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
Fred R. DavidPrentice Hall
Ch5-11
Integration StrategiesIntegration Strategies
Vertical Integration Strategies
Forward Integration
Backward Integration
Horizontal Integration
Fred R. DavidPrentice Hall
Ch5-12
Integration StrategiesIntegration Strategies
Vertical Integration strategies –Vertical Integration strategies –
– Allow a firm to gain control over:Allow a firm to gain control over:• DistributorsDistributors• SuppliersSuppliers• competitorscompetitors
Fred R. DavidPrentice Hall
Ch5-13
Integration StrategiesIntegration Strategies
Forward Integration –Forward Integration –
– Gaining ownership or increased control Gaining ownership or increased control over distributors or retailersover distributors or retailers
Fred R. DavidPrentice Hall
Ch5-14
Integration StrategiesIntegration Strategies
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
Fred R. DavidPrentice Hall
Ch5-15
Integration StrategiesIntegration Strategies
Backward Integration –Backward Integration –
– Seeking ownership or increased Seeking ownership or increased control of a firm’s supplierscontrol of a firm’s suppliers
Fred R. DavidPrentice Hall
Ch5-16
Integration StrategiesIntegration Strategies
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
Fred R. DavidPrentice Hall
Ch5-17
Integration StrategiesIntegration Strategies
Horizontal Integration –Horizontal Integration –
– Seeking ownership or increased Seeking ownership or increased control over competitorscontrol over competitors
Fred R. DavidPrentice Hall
Ch5-18
Integration StrategiesIntegration Strategies
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
Fred R. DavidPrentice Hall
Ch5-19
Michael Porter’s Generic StrategiesMichael Porter’s Generic Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
Fred R. DavidPrentice Hall
Ch5-20
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
Fred R. DavidPrentice Hall
Ch5-21
Generic StrategiesGeneric Strategies
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
Fred R. DavidPrentice Hall
Ch5-22
Generic StrategiesGeneric Strategies
Differentiation Strategies –Differentiation Strategies –
Greater product flexibility Greater compatibility Lower costs Improved service Greater convenience More features
Fred R. DavidPrentice Hall
Ch5-23
Generic StrategiesGeneric Strategies
Differentiation Strategies –Differentiation Strategies –
Allow firm to charge higher price Gain customer loyalty
Fred R. DavidPrentice Hall
Ch5-24
Generic StrategiesGeneric Strategies
Focus Strategies –Focus Strategies –
Industry segment of sufficient size Good growth potential Not crucial to success of major competitors
Fred R. DavidPrentice Hall
Ch5-25
Generic StrategiesGeneric Strategies
Focus Strategies –Focus Strategies –
Consumers have distinctive preferences Rival firms not attempting to specialize in the
same target segment
Fred R. DavidPrentice Hall
Ch5-26
Intensive StrategiesIntensive Strategies
Intensive Strategies
Market Penetration
Market Development
Product Development
Fred R. DavidPrentice Hall
Ch5-27
Intensive StrategiesIntensive Strategies
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
Fred R. DavidPrentice Hall
Ch5-28
Intensive StrategiesIntensive Strategies
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
Fred R. DavidPrentice Hall
Ch5-29
Intensive StrategiesIntensive Strategies
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
Fred R. DavidPrentice Hall
Ch5-30
Intensive StrategiesIntensive Strategies
Market Development –Market Development –
– Introducing present products or Introducing present products or services into new geographic areaservices into new geographic area
Fred R. DavidPrentice Hall
Ch5-31
Intensive StrategiesIntensive Strategies
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
Fred R. DavidPrentice Hall
Ch5-32
Intensive StrategiesIntensive Strategies
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
Fred R. DavidPrentice Hall
Ch5-33
Intensive StrategiesIntensive Strategies
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
Fred R. DavidPrentice Hall
Ch5-34
Diversification StrategiesDiversification Strategies
Diversification Strategies
Concentric Diversification
Conglomerate Diversification
Horizontal Diversification
Fred R. DavidPrentice Hall
Ch5-35
Diversification StrategiesDiversification Strategies
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
Fred R. DavidPrentice Hall
Ch5-36
Diversification StrategiesDiversification Strategies
Concentric Diversification –Concentric Diversification –
– Adding new, but related, products or Adding new, but related, products or servicesservices
Fred R. DavidPrentice Hall
Ch5-37
Diversification StrategiesDiversification Strategies
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
Fred R. DavidPrentice Hall
Ch5-38
Diversification StrategiesDiversification Strategies
Conglomerate Diversification –Conglomerate Diversification –
– Adding new, unrelated products or Adding new, unrelated products or servicesservices
Fred R. DavidPrentice Hall
Ch5-39
Diversification StrategiesDiversification Strategies
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
Fred R. DavidPrentice Hall
Ch5-40
Diversification StrategiesDiversification Strategies
Horizontal Diversification –Horizontal Diversification –
– Adding new, unrelated products or Adding new, unrelated products or services for present customersservices for present customers
Fred R. DavidPrentice Hall
Ch5-41
Diversification StrategiesDiversification Strategies
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
Fred R. DavidPrentice Hall
Ch5-42
Defensive StrategiesDefensive Strategies
Defensive Strategies
Retrenchment
Divestiture
Liquidation
Fred R. DavidPrentice Hall
Ch5-43
Defensive StrategiesDefensive Strategies
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
Fred R. DavidPrentice Hall
Ch5-44
Defensive StrategiesDefensive Strategies
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
Fred R. DavidPrentice Hall
Ch5-45
Defensive StrategiesDefensive Strategies
Divestiture –Divestiture –
– Selling a division or part of an Selling a division or part of an organizationorganization
Fred R. DavidPrentice Hall
Ch5-46
Defensive StrategiesDefensive Strategies
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.
Fred R. DavidPrentice Hall
Ch5-47
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
Fred R. DavidPrentice Hall
Ch5-48
Defensive StrategiesDefensive Strategies
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
Fred R. DavidPrentice Hall
Ch5-49
Defensive StrategiesDefensive Strategies
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
Fred R. DavidPrentice Hall
Ch5-50
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.
Fred R. DavidPrentice Hall
Ch5-51
Means for Achieving StrategiesMeans for Achieving Strategies
Cooperative ArrangementsCooperative Arrangements – –
Research and development partnerships Cross-distribution agreements Cross-licensing agreements Cross-manufacturing agreements Joint-bidding consortia
Fred R. DavidPrentice Hall
Ch5-52
Means for Achieving StrategiesMeans for Achieving Strategies
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
Fred R. DavidPrentice Hall
Ch5-53
Means for Achieving StrategiesMeans for Achieving Strategies
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
Fred R. DavidPrentice Hall
Ch5-54
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
Fred R. DavidPrentice Hall
Ch5-55
Key TermsKey Terms
• Acquisition• Backward Integration• Combination Strategy• Concentric Diversification• Conglomerate Diversification• Cooperative Arrangements• Cost Leadership
Fred R. DavidPrentice Hall
Ch5-56
Key TermsKey Terms
• Differentiation• Diversification Strategies• Divestiture• Focus• Forward Integration• Franchising• Generic Strategies
Fred R. DavidPrentice Hall
Ch5-57
Key TermsKey Terms
• Horizontal Diversification• Horizontal Integration• Integration Strategies• Intensive Strategies• Joint Venture• Liquidation• Long-Term Objectives
Fred R. DavidPrentice Hall
Ch5-58
Key TermsKey Terms
• Market Development• Market Penetration• Merger• Outsourcing• Product Development• Retrenchment• Takeover• Vertical Integration