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CHAPTER 05 2 STRATEGIES IN ACTION rather than acting and of letting events dictate the what and when of management decisions. Managing by Subjectives--built on the idea that there is no general plan for which way to go and what to do in short; do your own thing, the best way you know how. Managing by Hope-- based on the fact that the future is laden with great uncertainty and that if we try and do not succeed, then we hope our second attempt will succeed.
TYPES OF STRATEGIES:
Strategist that an enterprise can pursue can be categorized in to 11 actions; forward integration, backward integration, horizontal integration, market penetration, market development, product development, related diversification, unrelated diversification, retrenchment, divestiture, and liquidation. Each strategy has countless variations. No organization can pursue all the strategies that might benefit the organization. Firms spend resource and focus on finite number of opportunities in pursuing strategies to achieve an uncertain outcome in the future. In large diversified companies, a combination strategy is commonly employed when different divisions pursue different strategies.
LEVEL OF STRATEGIES:
Strategy making is the task of upper, middle, and lower level managers. In large firms there are four levels of strategies: corporate, divisional, functional, and operational. However, in small firms there are 3 level of strategies; company, functional, and operational. In large organizations the person responsible for having effective strategies include CEO at corporate level president at the divisional level and the CFO, HRM, CIO at the functional level however in the small firms the responsible person is business owner or president at the company level and the same range of persons at the two levels.
INTEGRATION STRATEGIES:
Forward integration backward integration and horizontal integration are sometimes collectively referred to as vertical integration strategies. Vertical integration strategies allow a firm to gain control over distributors, suppliers and competitors.
FORWARD INTEGRATION:
Forward integration involves gaining ownership or increased control over distributors or retailers. Increasing numbers of manufacturers today are pursuing a forward integration strategy by establishing websites to directly sell products to consumers.
CHAPTER 05 3 STRATEGIES IN ACTION An effective means implementing forward integration is franchising. Business can expand by franchising because costs and opportunities are spread among many individuals. However a growing trend is for franchisees, who for example may operate 10 franchised restaurants, stores, or whatever, to buy out their part of the business from their franchiser. The segment often outperforms the parent. For example, often increase growth, a franchiser will allow new owners to locate near existing franchisee operations, or will cut back on services and training to reduce costs. Six guidelines for when forward integration may be especially effective strategy are: When an organizations present distributors are especially expensive, or unreliable, or incapable of meeting the firms distribution needs. When the availability of quality distributors is so limited as to offer a competitive advantage. When an organization competes in an industry that is growing and is expected to continue to grow markedly. When an organization has both the capital and human resources needed to mange distribution of its own products. When the advantages of stable production are particularly high. When present distributors or retailers have high profit margins.
BACKWARD INTEGRATION:
Backward integration is a strategy of seeking ownership or increased control of a firms suppliers. His strategy can be especially appropriate when a firms current suppliers are reliable, too costly, or cannot meet the firms needs. Of the estimated $83 billion spent annually on hospital supplies, industry reports indicate that $11 billion can be eliminated through more effective backward integration. De-integration makes sense in industries that have global sources of supply. Companies today shop around, play one seller against another, and go with the best deal. Global competition is also spurring firms to reduce heir number of suppliers and to demand higher levels of service and quality from those they keep. Seven guidelines for when backward integration may be an especially effective strategy are: When an organizations present suppliers are especially expensive, or unreliable, or incapable of meeting the firms needs for parts, components, assemblies, or raw materials. When the number of suppliers is small and the number of competitors is large. When organization competes in an industry that is growing rapidly; this is a factor because integrative-type strategies reduce an organizations ability to diversify in a declining industry. When an organization has both capital and human resources to manage. When an organization has both capital and human resources to manage. When the advantages of stable prices are particularly important. When present supplies have high profit margins, which suggests that he business of supplying products or services.
HORIZONTAL INTEGRATION:
Horizontal integration refers to a strategy of seeking ownership of or increased control over a firms competitors. One of the most significant trends in strategic management today is the increased use of horizontal integration as a growth strategy. Mergers, acquisitions, and takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies. Five guidelines for when horizontal integration may be an especially effective strategy are: When an organization can gain monopolistic characteristics in a particular area or region tending substantially to reduce competition. When an organization competes in a growing industry. When increased economies of scale provide major competitive advantages. When an organization has both the capital and human talent needed to successfully manage an expanded organization. When competitors are faltering due to a lack of managerial expertise or a need for particular resources that an organization possesses.
INTENSIVE STRATEGIES:
Market penetration, market development, and product development are sometimes referred to as intensive strategies.
MARKET PENETRATION:
A market penetration strategy seeks to increase market share for present products or services in present markets through greater marketing efforts. This strategy is widely used alone and in combination with other strategies. Market penetration includes increasing the number of sales persons, increasing advertising expenditures, offering extensive sales promotion items, or increasing publicity efforts. Five guidelines for when market penetration may be an especially effective strategy are: When current markets are not saturated with a particular product or service. When usage rate of present customer could be increased significantly. When the market shares of major competitors have been declining while total industry sales have been increasing. When the correlation between dollar sales and dollar marketing expenditures historically has been high. When increased economies of scale provide major competitive advantages.
MARKET DEVELOPMENT:
Market development involves introducing present products or services into new geographic areas. For example, Adidas in May 2005 had 1,500 stores in China and stated that it would open another 40stores every month in China for the next 40 months. Six guidelines for when market development may be an especially effective strategy are: When new channels of distribution are available that are reliable, inexpensive, and of good quality.
CHAPTER 05 5 STRATEGIES IN ACTION 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 is becoming rapidly global in scope.
PRODUCT DEVELOPMENT:
Product development is a strategy that seeks increased sales by improving or modifying present products or services. Product development usually entails large research and development expenditures. Coca-cola company, based in Atlanta, and PepsiCo, based in Purchase, New York, are introducing Coca-Cola Zero and Pepsi One, respectively, which underscore the growing popularity of diet soft drinks at the expense of sugary drinks. Five guidelines for when product development may be an especially effective strategy to pursue are: When an organization wants to attract satisfied customers to try a new or improved product which is in the maturity stage of the product life cycle. 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 ha especially strong research and development capabilities.
DIVERSIFICATION STRATEGIES:
There are two general types of diversification strategies: related and unrelated. Business are said to be related when their value chains posses competitively valuable cross business strategic fits, businesses are said to be unrelated when their value chains are so dissimilar that no competitively valuable cross business relationships exist. Most companies favor relater diversification strategies in order to capitalize on synergies as follows: Transferring competitively valuable expertise or other capabilities from one business to another. Combining related activities in to single operation to achieve lower costs. Exploiting common use of a well known brand name. Cross business collaboration to create competitively valuable resource strengths and capabilities.
Diversification is now on the retreat. Michael porter, of the Harvard business school says, Management found it couldnt manage the beast. The greatest risk of being in a single industry is having all the firms eggs in one basket. Diversification must do more than simply spread business risk across different industries because shareholders could accomplish by simply purchasing equity in different firm across different industries. Industry choose for diversification must be attractive enough to yield consistently
CHAPTER 05 6 STRATEGIES IN ACTION high returns on investment and offer potential across the operating divisions for synergies greater than those entities could achieve alone. However diversification is still sometimes an appropriate strategy especially when the company is competing in an unattractive strategy.
RELATED DIVERSIFICATION:
An example of related diversification is Amazon.com Incs recent move to sell personal computers through its online stores rather than keeping the computer in its warehouse. Dell computer is pursuing related diversification by manufacturing and marketing consumer electronics products. Six guidelines for when related diversification may be an effective strategy are as follows: When an organization compete in a low growth or no growth industry. When adding new but related products would significantly enhance the sales of current products. When new but related products could be offered at highly competitive price. When new but related products have seasonal sales levels that counterbalance an organizations existing peaks and valleys. When an organizations products are currently in the declining stage of the products life cycle. When an organization has a strong management team.
UNRELATED DIVERSIFICATION:
An unrelated diversification strategy favors capitalizing upon portfolio of businesses that are capable of delivering excellent financial performance in their respective industries rather than striving to capitalize on value chain strategic fits among the businesses. Unrelated diversifications entails being on the hunt to acquire companies whose assets are undervalued, financially distressed companies or have high growth prospects but are short on investment capital. Drawback of diversification is the parent firm must have an excellent top management that plan, organize and delegates effectively. Many more firms have failed at unrelated diversification than have succeeded due to immense management challenges. When unrelated diversification may be an especially effective strategy are: When revenues derived from an organizations current products or services would increase significantly by adding the new, unrelated products. When an organization competes in a highly competitive or a no growth industry as indicated by low industry profit margins and returns When an organizations present channel of distribution can be used to market the new products to current customers. When the new products have counter cyclical sales patterns compared to an organizations present products. When an organizations basic industry is experiencing declining annual sales and profits. When an organization has the opportunity to purchase an unrelated business that is an attractive investment opportunity. When there is financial synergy between the acquired and acquiring firm. When existing market for an organizations present products are saturated.
CHAPTER 05 7 STRATEGIES IN ACTION When antitrust action could be charged against an organization that historically has concentrated on a single industry.
DEFENSIVE STRATEGIES:
In addition to integrative, intensive, and diversification strategies, organizations also could pursue retrenchment, divestiture, or liquidation.
RETRENCHMENT:
Retrenchment occurs when an organization regroups through cost and asset reduction to reverse declining sales and profits. Sometimes called a turnaround or reorganizational strategy, retrenchment is design to fortify an organizations basic distinctive competence. In some cases, bankruptcy can be an attractive type of retrenchment strategy. Bankruptcy can allow a firm to avoid major debt obligations and to avoid union contracts. Retrenchment may be an effective strategy to pursue as follows: When an organization has a clearly distinctive competence but has failed consistently to meet its objectives and goals overtime. When an organization is one of the weaker competitors in a given industry. When an organization is plagued by inefficiency, low profitability, and pressure from stakeholders to improve performance. When an organization has failed to capitalize on external opportunities, minimize external threats, take advantages of internal strengths and overcome internal weakness overtime that is when an organizations strategic managers have failed. When an organization has grown so large so quickly that major internal reorganization is needed.
DIVESTITURE:
Selling a part or division of an organization is called divestiture. Divestiture often is used to raise capital for further strategic acquisitions. It can be part of an overall retrenchment strategy to rid an organization of businesses that are unprofitable, require too much capital, do not fit well with firms other activities. When divestiture may be effective strategy to pursue follows When an organization has pursued a retrenchment strategy and failed to accomplish needed improvements. When division needs more resources to be competitive than the company can provide. When a division is responsible for an organizations overall poor performance. When a division is a misfit with the rest of an organization this can result from radically different markets, customers, values, or needs. 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:
Selling all of a companys assets, in parts, for their tangible worth is called liquidation. Liquidation is recognition of defeat and consequently can be an emotionally difficult strategy. Liquidation may be effective strategy to pursue is: When an organization has pursued both a retrenchment strategy and a divestiture strategy and there has been successful. When an organizations only alternative is bankruptcy. Liquidation represents an orderly and planned means of obtaining the greatest possible cash for an organizations assets. A company can legally declare bankruptcy first and then liquidate various divisions to raise needed capital. When the stockholders of a firm can minimize their losses by selling the organizations assets.
CHAPTER 05 9 STRATEGIES IN ACTION Larger firms with greater access to resources typically compete on a cost leadership and/or differentiation basis, whereas smaller firms often compete on focus basis. Differentiation strategy (TYPE 3) can be pursued with either a small or a large target market. Porter stresses the need for strategists to perform cost-benefit analysis to evaluate sharing opportunities among a firms existing and potential business units; he also stresses the need for firms to effectively transfer skills and expertise among autonomous business units in order to gain competitive advantage.
CHAPTER 05 10 STRATEGIES IN ACTION A differentiation strategy should be pursued only after a careful study of buyers needs and preferences to determine the feasibility of incorporating one or more differentiating features into a unique product that features the desired attributes. A risk of pursuing a differentiation strategy is that the unique product may not be valued highly enough by customers to justify the higher price. When this happen cost leadership strategy easily beat the differentiation strategy. Common organizational requirements for a successful differentiation strategy include strong coordination among the R&D and marketing functions and substantial amenities to attract scientists and creative people. Differentiation opportunities exist or can potentially be developed anywhere along the firms value chain, including supply chain activities, product R&D activities etc. The most effective differentiation bases are those that are hard or expensive for rivals to duplicate. Buyers will not pay the higher differentiation price unless their perceived value exceeds the price they are paying. Perceived value may be more important to customers than actual value. A type 3 differentiation strategy can be especially effective under the following conditions: 1. When there are many ways to differentiate the product or service and many buyers perceive these differences having value. 2. When buyers needs and uses are diverse. 3. When few rival firms are following a similar differentiation approach. 4. When technological change is fast paced and competition revolves around rapidly evolving product features.
CHAPTER 05 11 STRATEGIES IN ACTION call them turbulent, high-velocity markets, such as telecommunications, medical etc. Meeting the challenge of high-velocity change presents the firm with the choice of whether to react, anticipate, or lead the market in terms of its own strategies. To primarily react to changes in the market is defensive strategy use to counter. The react-to-change strategy would not be as effective as the anticipate-change strategy, which would entail devising and following through with plans for dealing with the expected changes. Pioneer of change in high-velocity market is an aggressive, offensive strategy. A lead-change strategy is best whenever the firm has the resources to pursue this approach.
CHAPTER 05 12 STRATEGIES IN ACTION 4. Some project is potentially profitable but requires much risk. 5. Two or more smaller firms wish to compete against a larger firm. 6. There is a need to introduce a new technology quickly.
MERGER/ACQUISITION:
Mergers and acquisitions are two commonly used ways to pursue strategies. A Merger occurs when two organizations of about equal size unite to form one enterprise. An Acquisition occurs when a large organization purchases (acquires) a smaller firm or vice versa. When merger or acquisition is not desired by both parties, it can be called a takeover or hostile takeover. In contrast, if acquisition is desired by both firms, it is termed a friendly merger. Mergers and acquisitions may fail due to the following reasons: a. Integration difficulties b. Inadequate evaluation of target c. Large debt d. Inability to achieve synergy e. Too much diversification f. Managers overly focused on acquisitions g. Too large of an acquisition h. Difficulty integrating different cultures i. Reduced employee morale due to layoffs and relocations Among mergers, acquisitions and takeovers in recent years, same industry combinations have predominated. There are many reasons for mergers and acquisitions, including the following: a. To provide improved capacity utilization b. To make better use of an existing sales force c. To reduce managerial staff d. To gain economies of scale e. To smooth out seasonal trends in sales f. To gain access to new suppliers, distributors, customers, products, and creditors g. To gain new technology h. To reduce tax obligations An LBO occurs when a corporations shareholders are bought out (hence buyout) by the companys management and other private investors using borrowed funds (hence leveraged). Besides trying to avoid a hostile takeover, other reasons for the initiation of an LBO by senior management are that particular divisions do not fit into an overall corporate strategy, must be sold to raise cash, or receive an attractive offering price. A LBO takes a corporation private.
CHAPTER 05 13 STRATEGIES IN ACTION unexpected and unanticipated problems and costs that occur from being the first firm doing business in the new market. Therefore, being a slow mover often called fast follower or late mover, can be effective when a firm can easily copy or imitate the lead firms products or services.
OUTSOURCING:
Business process outsourcing (BPO) is a rapidly growing new business that involves companies taking over the functional operations, such as human resources, payroll, accounting etc. Companies are choosing to outsource their functional operations more and more for several reasons: It is less expensive. It allows the firm to focus on its core businesses and It enables the firm to provide better services Other advantages of outsourcing are that the strategy: Allows the firm to align itself with best-in-world suppliers who focus on performing the special task, Provides the firm flexibility should customers needs shift unexpectedly, and Allows the firm to concentrate on other internal value chain activities critical to sustaining competitive advantage. BPO is a means for achieving strategies that are similar to partnering and joint venturing. U.S and European companies for more than a decade have been outsourcing their manufacturing; tech support and back-office work, but most insisted on keeping research and development activities in-house. China and India are becoming increasingly important suppliers of intellectual property.
NONPROFIT
AND
The strategic management process is being used effectively by many nonprofit and governmental organizations. Many nonprofit and governmental organizations outperform private firms and corporations on innovativeness, motivation, productivity and strategic management.
EDUCATIONAL INSTITUITION:
Educational institutions are frequently using strategic management techniques and concepts. Richard Cyert, president of Carnegie Mellon University, says, I believe we do a far better job of strategic management than any company I know. The first all-internet law school, concord university school of law, boasts nearly 200 students who can access lectures anytime and chat at fixed times with professors. Online college degrees are becoming common and represent a threat to traditional colleges and universities.
MEDICAL ORGANIZATIONS:
Many private and state-supported medical institutions are in financial trouble as a result of traditionally taking a reactive rather than a proactive approach in dealing with their industry. Hospitals-originally intended to be warehouses for people dying of diseases-are creating new
CHAPTER 05 14 STRATEGIES IN ACTION strategies today as advances in the diagnosis and treatment of chronic diseases are undercutting that earlier mission. A successful hospital strategy for the future will require renewed and deepened collaborations with physicians, and a relocation of resources from acute to chronic care in home and community settings. Current strategies being pursued by many hospitals include creating home health services, establishing nursing homes etc. backward integration strategies that some hospitals are pursuing include acquiring ambulance services, waste disposal services and diagnostic services. Millions of people annually research medical ailments online, which is causing a dramatic shift in the balance of power between doctor, patient and hospitals.
CONCLUSION:
The main appeal of any managerial approach is the expectation that it will enhance organizational performance. Through Strategic management organizations become efficient and effective. Strategic management process allows proactive rather than reactive decision making. The 16 strategies discussed in this chapter can represent a new beginning for many firms, especially if managers and employees in the organization understand and support the plan for action.