Chapter 5 Strategies in Action Strategic Management Concepts

Chapter 5 Strategies in Action Strategic Management: Concepts and Cases. 9 th edition Fred R. David Power. Point Slides by Anthony F. Chelte Western New England College Fred R. David Prentice Hall Ch 5 -1

Chapter Outline • Long-Term Objectives • Types of Strategies • Integration Strategies Fred R. David Prentice Hall Ch 5 -2

Chapter Outline • Intensive Strategies • Diversification Strategies • Defensive Strategies • Means for Achieving Strategies Fred R. David Prentice Hall Ch 5 -3

Chapter Outline • Michael Porter’s Generic Strategies • Strategic Management in Nonprofit and Governmental Organizations • Strategic Management in Small Firms Fred R. David Prentice Hall Ch 5 -4

Strategies in Action Even if you’re on the right track, you’ll get run over if you just sit there. -- Will Rogers Fred R. David Prentice Hall Ch 5 -5

Strategies in Action Hundreds of companies today – • Embrace strategic planning Quest for higher revenues • Quest for higher profits • Fred R. David Prentice Hall Ch 5 -6

Long-Term Objectives • The results expected from pursuing certain strategies Fred R. David Prentice Hall Ch 5 -7

Long-Term Objectives – – – – – Quantifiable Measurable Realistic Understandable Challenging Hierarchical Obtainable Congruent Time-line Fred R. David Prentice Hall Ch 5 -8

Long-Term Objectives Long-term objectives are necessary – – Corporate – Divisional – Functional levels Fred R. David Prentice Hall Ch 5 -9

Long-Term Objectives Strategists should avoid – – Managing by Extrapolation – Managing by Crisis – Managing by Subjectives – Managing by Hope Fred R. David Prentice Hall Ch 5 -10

Integration Strategies Forward Integration Vertical Integration Strategies Backward Integration Fred R. David Prentice Hall Ch 5 -11

Integration Strategies Vertical Integration strategies – – Allow a firm to gain control over: • Distributors • Suppliers • competitors Fred R. David Prentice Hall Ch 5 -12

Integration Strategies Forward Integration – – Gaining ownership or increased control over distributors or retailers Fred R. David Prentice Hall Ch 5 -13

Integration Strategies 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. David Prentice Hall Ch 5 -14

Integration Strategies Backward Integration – – Seeking ownership or increased control of a firm’s suppliers Fred R. David Prentice Hall Ch 5 -15

Integration Strategies 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. David Prentice Hall Ch 5 -16

Integration Strategies Horizontal Integration – – Seeking ownership or increased control over competitors Fred R. David Prentice Hall Ch 5 -17

Integration Strategies 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. David Prentice Hall Ch 5 -18

Michael Porter’s Generic Strategies Cost Leadership Strategies Differentiation Strategies Focus Strategies Fred R. David Prentice Hall Ch 5 -19

Generic Strategies Cost Leadership Strategies – Pursued in conjunction with differentiation § Economies or diseconomies of scale § Capacity utilization achieved § Linkages with suppliers and distributors § Fred R. David Prentice Hall Ch 5 -20

Generic Strategies 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. David Prentice Hall Ch 5 -21

Generic Strategies Differentiation Strategies – § § § Greater product flexibility Greater compatibility Lower costs Improved service Greater convenience More features Fred R. David Prentice Hall Ch 5 -22

Generic Strategies Differentiation Strategies – Allow firm to charge higher price § Gain customer loyalty § Fred R. David Prentice Hall Ch 5 -23

Generic Strategies Focus Strategies – Industry segment of sufficient size § Good growth potential § Not crucial to success of major competitors § Fred R. David Prentice Hall Ch 5 -24

Generic Strategies Focus Strategies – Consumers have distinctive preferences § Rival firms not attempting to specialize in the same target segment § Fred R. David Prentice Hall Ch 5 -25

Intensive Strategies Market Penetration Intensive Strategies Market Development Product Development Fred R. David Prentice Hall Ch 5 -26

Intensive Strategies Intensive strategies – – Require intensive efforts to improve a firm’s competitive position with existing products Fred R. David Prentice Hall Ch 5 -27

Intensive Strategies Market Penetration – – Seeking increased market share for present products or services in present markets through greater marketing efforts Fred R. David Prentice Hall Ch 5 -28

Intensive Strategies 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. David Prentice Hall Ch 5 -29

Intensive Strategies Market Development – – Introducing present products or services into new geographic area Fred R. David Prentice Hall Ch 5 -30

Intensive Strategies 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. David Prentice Hall Ch 5 -31

Intensive Strategies Product Development – – Seeking increased sales by improving present products or services or developing new ones Fred R. David Prentice Hall Ch 5 -32

Intensive Strategies 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. David Prentice Hall Ch 5 -33

Diversification Strategies Concentric Diversification Strategies Conglomerate Diversification Horizontal Diversification Fred R. David Prentice Hall Ch 5 -34

Diversification Strategies Diversification strategies – – Becoming less popular as organizations are finding it more difficult to manage diverse business activities Fred R. David Prentice Hall Ch 5 -35

Diversification Strategies Concentric Diversification – – Adding new, but related, products or services Fred R. David Prentice Hall Ch 5 -36

Diversification Strategies 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. David Prentice Hall Ch 5 -37

Diversification Strategies Conglomerate Diversification – – Adding new, unrelated products or services Fred R. David Prentice Hall Ch 5 -38

Diversification Strategies 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. David Prentice Hall Ch 5 -39

Diversification Strategies Horizontal Diversification – – Adding new, unrelated products or services for present customers Fred R. David Prentice Hall Ch 5 -40

Diversification Strategies 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. David Prentice Hall Ch 5 -41

Defensive Strategies Retrenchment Defensive Strategies Divestiture Liquidation Fred R. David Prentice Hall Ch 5 -42

Defensive Strategies Retrenchment – – Regrouping through cost and asset reduction to reverse declining sales and profit Fred R. David Prentice Hall Ch 5 -43

Defensive Strategies Guidelines 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. David Prentice Hall Ch 5 -44

Defensive Strategies Divestiture – – Selling a division or part of an organization Fred R. David Prentice Hall Ch 5 -45

Defensive Strategies 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. David Prentice Hall Ch 5 -46

Recent Divestitures Fred R. David Prentice Hall Ch 5 -47

Defensive Strategies Liquidation– – Selling all of a company’s assets, in parts, for their tangible worth Fred R. David Prentice Hall Ch 5 -48

Defensive Strategies Guidelines 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. David Prentice Hall Ch 5 -49

Means for Achieving Strategies Joint Venture/Partnering – § Two or more companies form a temporary partnership or consortium for purpose of capitalizing on some opportunity. Fred R. David Prentice Hall Ch 5 -50

Means for Achieving Strategies Cooperative Arrangements – § § § Research and development partnerships Cross-distribution agreements Cross-licensing agreements Cross-manufacturing agreements Joint-bidding consortia Fred R. David Prentice Hall Ch 5 -51

Means for Achieving Strategies Problems 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. David Prentice Hall Ch 5 -52

Means for Achieving Strategies Guidelines 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. David Prentice Hall Ch 5 -53

Recent Mergers Acquiring Firm Hewlett-Packard Ebay Pepsi. Co Sara Lee Phillips Petroleum Devon AMR Tellabs Acquired Firm Compaq Computer Homes Direct Quaker Oats Earthgrains Company Conoco Anderson Exploration TWA Ocular Networks Fred R. David Prentice Hall Ch 5 -54

Key Terms • • Acquisition Backward Integration Combination Strategy Concentric Diversification Conglomerate Diversification Cooperative Arrangements Cost Leadership Fred R. David Prentice Hall Ch 5 -55

Key Terms • • Differentiation Diversification Strategies Divestiture Focus Forward Integration Franchising Generic Strategies Fred R. David Prentice Hall Ch 5 -56

Key Terms • • Horizontal Diversification Horizontal Integration Strategies Intensive Strategies Joint Venture Liquidation Long-Term Objectives Fred R. David Prentice Hall Ch 5 -57

Key Terms • • Market Development Market Penetration Merger Outsourcing Product Development Retrenchment Takeover Vertical Integration Fred R. David Prentice Hall Ch 5 -58