Strategies in Action

Chapter 5

Chapter Overview• The value of establishing long-term objectives

• Financial versus Strategic Objectives

• Integration Strategies

• Intensive Strategies

• Diversification Strategies

• Defensive Strategies

• Michael Porter’s Five Generic Strategies

• Means for achieving strategies

• Strategic Management in Non-profit and Governmental

Organizations

Long-Term Objectives

•Long-term objectives▫Results from pursuing certain strategies

•Strategies ▫Actions to accomplish long term objectives

•Time frame▫2-5 years

Nature of Long-term Objectives

Quantitative

Measurable

Realistic

Understandable

Challenging

Hierarchical

Obtainable

Congruent

time bound

Terms of Objectives

Growth in assets

Growth in sales

Profitability

Market share

Degree of diversity

Nature of diversity

Degree of vertical integration

Nature of vertical integration

Earnings per share

Social responsibility

Benefits of clearly established Objectives

Provide direction

Allow synergy

Aid in evaluation

Established priority

Reduce uncertainty

Minimize conflicts

Stimulate exertion

Aid in the allocation of resources

Aid in the design of job

Provide basis for consistent decision making

Types of objectives

Two types of objectives are common in organization• Financial objective• Strategic objective

Financial ObjectivesFinancial objectives include

Growth in revenue

Growth in earnings

Higher dividends

Larger profit margins

Greater returns on investment

Higher earnings per share

Rising stock price

Improve cash flow

Strategic Objectives

•Strategic objectives include▫Larger market share▫Quicker on-time delivery▫Shorter design to market time▫Lower cost▫Higher product quality▫Wider geographical coverage▫Achieving technological leadership▫Consistently getting new or improved products

to the market

Integration Strategies•What is an integration strategy?

▫Strategy that allow a firm to gain control over supplier, distributor and competitor.

•It falls in three category: Forward Integration Backward integration Horizontal integration

Forward Integration Strategy

•It is geared at gaining ownership or control over retailers or distributors.▫More and more firms are seeking to sell

directly to their clients

E.g. (Microsoft opening its own retail stores) This gives the firm the ability to know their

clients first hand.▫Identify customer needs and buying pattern

When is Forward Integration Effective?•When present distributor are expensive ,

unreliable and not meeting distribution needs.

•Limited quality distributor to offer limited competition

•When the firm has both the capital and human resource.

Backward Integration Strategies•A move to acquire or control your supplier

and manufacturer of your raw material.▫It gives the firm the ability to streamline its

operations.

▫Be more efficient and consistent in production and distributions.

Advantages of Backward Integration•Product identity•Protect trade secrets•Avoid outsourcing to external parties

When is backward Integration effective?•When it is cost effective•When supplier is small and competition is

great•When supplier is sloppy.•When the firm need to acquire resource

quickly .

Horizontal Integration Strategy

•Taking over, or controlling competitor. JMMB & CCFG, BNS & DBG

•This is of the most pursued strategy in the business environment today.

▫Control market share▫Maximize profits

Types of Horizontal Integration

•Merger The acquiring company survive and the

acquired company cease to exist

•Acquisitation The acquiring of 100% of a firms common stock

or the majority. The acquired firm’s asset is integrated into the

assets of the acquiring firm

•Takeover

Disadvantage of Horizontal Integration•Monopoly

•Unfair advantage

•Unequal market share

Effective Horizontal Integration

•When you do not become monopolistic and face challenge from Federal Gov.

•When you are competition in a growing industry

•When competitors are on the verge of failing .

Apple should take over Sony

Intensive Strategies

•Intensive strategy is the terminology used to describe the activities of:

▫Market Penetration

▫Market Development

▫Product Development

Market Penetration

•This strategy is geared towards increasing market share for present products or services in present markets in using superior marketing efforts.

Guidelines

Market Development

•Entails introducing present products or services into new geographic areas

When is Market Development most effective?

• When new channels of distribution are available that are reliable, inexpensive, and of good quality. b.

• When an organization is very successful at what it does

 • When new untapped or unsaturated

markets exist

• When an organization has the needed capital and human resources to manage expanded operations

• When an organization has excess production capacity

• When an organizations basic industry rapidly is becoming global in scope.

Product Development

•A strategy that seeks to increase sales by making improvments or modifications to present products or services

When is Product development effective

 When an organization has successful products that are in the maturity stage of the product life cycle. b.

When an organization competes in an industry that is characterized by rapid technological developments

When major competitors offer better-quality products at comparable prices.

When an organization competes in a high-growth industry

When an organization has especially strong research and development capabilities.

INTENSIVE STRATEGY

•Market Penetration - increase market share for present products or services in present market through greater marketing efforts.

•This can be done by increasing sales persons, increase advertising expenditure, sales promotions items and increase and publicity efforts

•Market development- it involves introducing new products and servicing to new geographic areas

•Product Development- seeks to increse sales by improving or modifying the product or service.

Diversification strategies

Related diversification- adding new but relating product to the market. Example: Digicel and Claro

•Unrelated diversification- adding new unrelated products or services to the market customers, adding new products and services to the market. Example : Lasco going into medicine

Defensive Strategies

• Retrenchment – regrouping through cost and asset reduction to reverse declining salaries and profit.

• Divestiture- selling as division or part of an organization.

• Liquidation- selling all of the company asset in part for their tangible growth.

GUIDELINES FOR PURSUING EFFECTIVE RETRENCHMENT STRATEGY

•When an organization has grown so large so quickly that major internal reorganization is needed.

DIVESTITURE

•Divestiture is selling a division or part of an organization.

• It is often used to raise capital for further strategic acquisitions or investments.

DIVESTITURE

•Divestiture can be a part of an overall retrenchment strategy to rid an organization of business that are unprofitable, that require too much capital, or that do not fit well with the firm’s other activities

GUIDELINES FOR PURSUING EFFECTIVE DIVESTITURE STRATEGY•When an organization has pursued a

retrenchment strategy and failed to accomplish needed improvements.

•When a division needs more resources to be competitive than the company can provide.

GUIDELINES FOR PURSUING EFFECTIVE RETRENCHMENT STRATEGY

•When a division is responsible for an organization’s overall performance.

•When a division is a misfit with the rest of an organization; this can result from radically different markets, customers, managers, employees, value of needs.

GUIDELINES FOR PURSUING EFFECTIVE RETRENCHMENT STRATEGY

•When a large amount of cash is needed quickly and cannot be obtained reasonably from other sources.

•When government antitrust action threatens an organization.

LIQUIDATION

•Liquidation is selling is selling all of a company’ assets, in parts, for their tangible worth. It is a recognition of defeat and consequently can be emotionally difficult strategy.

GUIDELINES FOR PURSUING EFFECTIVE LIQUIDATION STRATEGY•When an organization has pursue both a

retrenchment strategy and a divestitute strategy, and neither has been successful.

•When an organization’s only alternative is bankruptcy. Liquidation presents an orderly and planned means of obtaining the greatest possible cash for an organization’s assets.

GUIDELINES FOR PURSUING EFFECTIVE RETRENCHMENT STRATEGY

A company can legally declare bankruptcy first and then liquidate various divisions to raise needed capital.

•When the stakeholders of a firm cn minimize their losses by selling the organization’s assets.

Michael Porter’s Five Generic Strategies

StrategiesType 1 Cost Leadership – Low costType 2 Cost Leadership – Best valueType 3 DifferentiationType 4 Focus – Low costType 5 Focus – Best value

Cost leadership emphasizes producing standardized products at a very low per-unit cost for consumers who are price-sensitive.

Types of Cost leadership strategiesThere are two types of cost leadership

strategies.

Type 1: low-cost strategy offers products to a wide range of customers at the lowest price available on the market.

Type 2: A best-value strategy offers products to a wide range of customers at the best price-value available on the market.

DifferentiationDifferentiation is aimed at producing

products that are considered unique. This strategy is most powerful with the source of differentiation is especially relevant to the target market

Type 3- Differentiation Strategies

Many ways to differentiate and buyers perceive the differences as having value

Diverse buyer needs and uses

Few rival firms following similar differentiation approach

Fast paced technological change and evolving product features

Focus means producing products and services that fulfill the needs of small groups of consumers.

Types of Focus StrategiesThere are two types of focus strategies.

Type 1: A low-cost focus strategy offers products or services to a small range (niche) of customers at the lowest price available on the market.

Type 2: A best-value focus strategy offers products to a small range of customers at the best price-value available on the market. This is sometimes called focused differentiation.

Fred R. DavidPrentice Hall

Ch5-53

Means for Achieving Strategies

Joint Venture/Partnering –

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

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First Mover Advantages

Benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms

Ch 5 -55

Outsourcing

Companies taking over the functional operations of other firms

Business-Process Outsourcing (BPO)

Ch5-56

Means for Achieving Strategies

Cooperative Arrangements –

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

Ch5-57

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

Ch5-58

Means for Achieving StrategiesGuidelines 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 Mergers

Acquiring Firm Acquired FirmHewlett-Packard Compaq ComputerEbay Homes DirectPepsiCo Quaker OatsSara Lee Earthgrains CompanyPhillips Petroleum ConocoDevon Anderson ExplorationAMR TWATellabs Ocular Networks

Ch 5 -60

Global PerspectiveJoint Ventures Mandatory for All Foreign Firms in India• India’s experiencing fastest growth in over 18

years• Second fastest (behind China) growth rate at

10.7%• Also experiencing 6.6% inflation• Gap between rich and

poor widening• Joint venture mandatory• Vast majority of joint

ventures fail• Tourism also growing

Educational Institutions

Medical Organizations

Governmental Agencies and Departments

Strategic Management in Nonprofit and Governmental Organizations

Review Questions 1. List five characteristics of objectives2. What are five benefits of objectives3 . Differentiate between financial and

strategic objectives4. What are the four types of Strategies5. What are the components of Integration,

Intensive, Diversification and Defensive Strategy?

6. Name three of Porter’s five generic strategies.

Review Questions

7. What are three means of achieving strategies?

8. What is Outsourcing?9. Is it important for Small firms to have

Strategic Management and why?10. Name a company that use any of the