5-1Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Visit UMT online at www.umtweb.edu
BUSINESS POLICY AND BUSINESS POLICY AND STRATEGYSTRATEGY
University of Management and Technology1901 N. Fort Myer Drive
Arlington, VA 22209 USAPhone: (703) 516-0035
Fax: (703) 516-0985Website: www.umtweb.edu
5-2Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Visit UMT online at www.umtweb.edu
Chapter 5:Chapter 5:Strategies in ActionStrategies in Action
David, Fred R. David, Fred R. Strategic Strategic Management: Concepts (9th ed.)Management: Concepts (9th ed.) © ©
2003 Prentice Hall. 2003 Prentice Hall.
5-3Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Chapter OutlineChapter Outline
Long-Term ObjectivesTypes of StrategiesIntegration Strategies
5-4Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Chapter OutlineChapter Outline
Intensive StrategiesDiversification StrategiesDefensive StrategiesMeans for Achieving Strategies
5-5Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Chapter OutlineChapter Outline
Michael Porter’s Generic StrategiesStrategic Management in Nonprofit and Governmental OrganizationsStrategic Management in Small Firms
5-6Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
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
5-7Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Strategies in ActionStrategies in Action
Hundreds of companies today –Embrace strategic planning
Quest for higher revenuesQuest for higher profits
5-8Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Long-Term ObjectivesLong-Term Objectives
The results expected from pursuing certain strategies
5-9Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Long-Term ObjectivesLong-Term Objectives
Objectives –QuantifiableMeasurableRealisticUnderstandableChallengingHierarchicalObtainable CongruentTime-line
5-10Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Long-Term ObjectivesLong-Term Objectives
Long-term objectives are necessary –CorporateDivisionalFunctional levels
5-11Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Long-Term ObjectivesLong-Term Objectives
Strategists should avoid –Managing by ExtrapolationManaging by CrisisManaging by SubjectivesManaging by Hope
5-12Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Vertical Integration Strategies
Forward Integration
Backward Integration
Horizontal Integration
Integration StrategiesIntegration Strategies
5-13Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Integration StrategiesIntegration Strategies
Vertical Integration strategies –Allow a firm to gain control over:
DistributorsSupplierscompetitors
5-14Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Integration StrategiesIntegration Strategies
Forward Integration –Gaining ownership or increased control over distributors or retailers
5-15Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Integration StrategiesIntegration Strategies
Guidelines for Forward Integration –Present distributors are expensive, unreliable, or incapable of meeting firm’s needsAvailability of quality distributors is limitedWhen firm competes in an industry that is expected to grow markedlyOrganization has both capital and human resources needed to manage new business of distributionAdvantages of stable production are highPresent distributors have high profit margins
5-16Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Integration StrategiesIntegration Strategies
Backward Integration –Seeking ownership or increased control of a firm’s suppliers
5-17Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Integration StrategiesIntegration Strategies
Guidelines for Backward Integration –When present suppliers are expensive, unreliable, or incapable of meeting needsNumber of suppliers is small and number of competitors largeHigh growth in industry sectorFirm has both capital and human resources to manage new businessAdvantages of stable prices are importantPresent supplies have high profit margins
5-18Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Integration StrategiesIntegration Strategies
Horizontal Integration –Seeking ownership or increased control over competitors
5-19Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Integration StrategiesIntegration Strategies
Guidelines for Horizontal Integration –Firm can gain monopolistic characteristics without being challenged by federal governmentCompetes in growing industryIncreased economies of scale provide major competitive advantagesFaltering due to lack of managerial expertise or need for particular resources
5-20Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Michael Porter’s Generic Michael Porter’s Generic StrategiesStrategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
5-21Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Generic StrategiesGeneric Strategies
Cost Leadership Strategies –Pursued in conjunction with differentiationEconomies or diseconomies of scaleCapacity utilization achievedLinkages with suppliers and distributors
5-22Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Generic StrategiesGeneric Strategies
Low Cost Producer Advantages –Market of many price-sensitive buyersFew ways of achieving product differentiationBuyers not sensitive to brand differencesLarge number of buyers with bargaining power
5-23Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Generic StrategiesGeneric Strategies
Differentiation Strategies –Greater product flexibilityGreater compatibilityLower costsImproved serviceGreater convenienceMore features
5-24Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Generic StrategiesGeneric Strategies
Differentiation Strategies –Allow firm to charge higher priceGain customer loyalty
5-25Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Generic StrategiesGeneric Strategies
Focus Strategies –Industry segment of sufficient sizeGood growth potentialNot crucial to success of major competitors
5-26Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Generic StrategiesGeneric Strategies
Focus Strategies –Consumers have distinctive preferencesRival firms not attempting to specialize in the same target segment
5-27Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Intensive Strategies
Market Penetration
Market Development
Product Development
Intensive StrategiesIntensive Strategies
5-28Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Intensive StrategiesIntensive Strategies
Intensive strategies –Require intensive efforts to improve a firm’s competitive position with existing products
5-29Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Intensive StrategiesIntensive Strategies
Market Penetration –Seeking increased market share for present products or services in present markets through greater marketing efforts
5-30Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Intensive StrategiesIntensive Strategies
Guidelines for Market Penetration –Current markets not saturatedUsage rate of present customers can be increased significantlyMarket shares of competitors declining while total industry sales increasingIncreased economies of scale provide major competitive advantages
5-31Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Intensive StrategiesIntensive Strategies
Market Development –Introducing present products or services into new geographic area
5-32Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Intensive StrategiesIntensive Strategies
Guidelines for Market Development –New channels of distribution that are reliable, inexpensive, and good qualityFirm is very successful at what it doesUntapped or unsaturated marketsCapital and human resources necessary to manage expanded operationsExcess production capacityBasic industry rapidly becoming global
5-33Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Intensive StrategiesIntensive Strategies
Product Development –Seeking increased sales by improving present products or services or developing new ones
5-34Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Intensive StrategiesIntensive Strategies
Guidelines for Product Development –Products in maturity stage of life cycleCompetes in industry characterized by rapid technological developmentsMajor competitors offer better-quality products at comparable pricesCompete in high-growth industryStrong research and development capabilities
5-35Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Diversification Strategies
Concentric Diversification
Conglomerate Diversification
Horizontal Diversification
Diversification StrategiesDiversification Strategies
5-36Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Diversification StrategiesDiversification Strategies
Diversification strategies –Becoming less popular as organizations are finding it more difficult to manage diverse business activities
5-37Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Diversification StrategiesDiversification Strategies
Concentric Diversification –Adding new, but related, products or services
5-38Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Diversification StrategiesDiversification Strategies
Guidelines for Concentric Diversification –Competes in no- or slow-growth industryAdding new & related products increases sales of current productsNew & related products offered at competitive pricesCurrent products are in decline stage of the product life cycleStrong management team
5-39Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Diversification StrategiesDiversification Strategies
Conglomerate Diversification –Adding new, unrelated products or services
5-40Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Diversification StrategiesDiversification Strategies
Guidelines for Conglomerate Diversification –Declining annual sales and profitsCapital and managerial talent to compete successfully in a new industryFinancial synergy between the acquired and acquiring firmsExiting markets for present products are saturated
5-41Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Diversification StrategiesDiversification Strategies
Horizontal Diversification –Adding new, unrelated products or services for present customers
5-42Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Diversification StrategiesDiversification Strategies
Guidelines for Horizontal Diversification –Revenues from current products/services would increase significantly by adding the new unrelated productsHighly competitive and/or no-growth industry w/low margins and returnsPresent distribution channels can be used to market new products to current customersNew products have counter cyclical sales patterns compared to existing products
5-43Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Defensive Strategies
Retrenchment
Divestiture
Liquidation
Defensive StrategiesDefensive Strategies
5-44Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Defensive StrategiesDefensive Strategies
Retrenchment –Regrouping through cost and asset reduction to reverse declining sales and profit
5-45Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Defensive StrategiesDefensive Strategies
Guidelines for Retrenchment –Firm has failed to meet its objectives and goals consistently over time but has distinctive competenciesFirm is one of the weaker competitorsInefficiency, low profitability, poor employee morale, and pressure from stockholders to improve performance.When an organization’s strategic managers have failedVery quick growth to large organization where a major internal reorganization is needed
5-46Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Defensive StrategiesDefensive Strategies
Divestiture –Selling a division or part of an organization
5-47Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Defensive StrategiesDefensive Strategies
Guidelines for Divestiture –When firm has pursued retrenchment but failed to attain needed improvementsWhen a division needs more resources than the firm can provideWhen a division is responsible for the firm’s overall poor performanceWhen a division is a misfit with the organizationWhen a large amount of cash is needed and cannot be obtained from other sources.
5-48Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
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
5-49Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Defensive StrategiesDefensive Strategies
Liquidation–Selling all of a company’s assets, in parts, for their tangible worth
5-50Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Defensive StrategiesDefensive Strategies
Guidelines for Liquidation –When both retrenchment and divestiture have been pursued unsuccessfullyIf the only alternative is bankruptcy, liquidation is an orderly alternativeWhen stockholders can minimize their losses by selling the firm’s assets
5-51Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Means for Achieving StrategiesMeans for Achieving Strategies
Joint Venture/Partnering –Two or more companies form a temporary partnership or consortium for purpose of capitalizing on some opportunity.
5-52Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Means for Achieving StrategiesMeans for Achieving Strategies
Cooperative Arrangements –Research and development partnershipsCross-distribution agreementsCross-licensing agreementsCross-manufacturing agreementsJoint-bidding consortia
5-53Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Means for Achieving StrategiesMeans for Achieving Strategies
Problems Causing Joint Ventures to Fail –Managers who must collaborate daily not involved in forming or shaping the ventureVenture may benefit the companies but not the customersVenture not supported equally by both partnersVenture may begin to compete with one of the partners more so than the other
5-54Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Means for Achieving StrategiesMeans for Achieving Strategies
Guidelines for Joint Ventures –Combination of privately held and publicly held can be synergistically combinedDomestic forms joint venture with foreign firm, can obtain local management to reduce certain risksDistinctive competencies of two or more firms are complementaryOverwhelming resources and risks where project is potentially very profitable (e.g., Alaska pipeline)Two or more smaller firms have trouble competing with larger firmA need exists to introduce a new technology quickly
5-55Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Recent MergersRecent Mergers
Acquiring Firm Acquired FirmHewlett-Packard Compaq ComuterEbay HomesDirectPepsiCo Quaker OatsSara Lee Earthgrains CompanyPhillips Petroleum ConocoDevon Anderson ExplorationAMR TWATellabs Ocular Networks
5-56Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Key TermsKey Terms
AcquisitionBackward IntegrationCombination StrategyConcentric DiversificationConglomerate DiversificationCooperative ArrangementsCost Leadership
5-57Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Key TermsKey Terms
DifferentiationDiversification StrategiesDivestitureFocusForward IntegrationFranchisingGeneric Strategies
5-58Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Key TermsKey Terms
Horizontal DiversificationHorizontal IntegrationIntegration StrategiesIntensive StrategiesJoint VentureLiquidationLong-Term Objectives
5-59Visit UMT online at www.umtweb.edu© 2005 UMTVersion 02-18-05 MGT195
Key TermsKey Terms
Market DevelopmentMarket PenetrationMergerOutsourcingProduct DevelopmentRetrenchmentTakeoverVertical Integration