Chapter 5

Strategies in Action

Strategic Management:
Concepts & Cases
12th Edition
Fred David

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Ch 5 -1

Chapter Objectives

Discuss the value of establishing long-term objectives.

Identify types of business strategies.
Identify numerous examples of organizations pursuing different types of
strategies.
Discuss guidelines when particular strategies are most appropriate to pursue.
Discuss Porters five generic strategies.
Describe strategic management in nonprofit, governmental, and small
organizations.
Discuss joint ventures as a way to enter the Russian market.
Discuss the Balanced Scorecard.
Compare and contrast financial with strategic objectives.
Discuss the levels of strategies in large versus small firms.
Explain the First Mover Advantages concept.
Discuss recent trends in outsourcing.
Discuss strategies for competing in turbulent, high velocity markets.
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Ch 5 -2

The Nature of Long-Term Objectives

Quantifiable (quantitative)
Measurable

Realistic
Understandable
Challenging
Hierarchical
Obtainable

Congruent
Timeline
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Ch 5 -3

Varying Performance Measures

by Organizational Level

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Ch 5 -4

Financial vs. Strategic Objectives

Financial Objectives
Growth in revenues
Growth in earnings

Higher dividends
Higher profit margins
Higher earnings per share
Improved cash flow
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Ch 5 -5

Not Managing by Objective

Managing by Extrapolation keep on doing about
the same things in the same ways because things
are going well - (If it aint broke, dont fix it.)
Managing by Crisis The true measure of a good
strategist is the ability to fix problems
Managing by Subjectives No general ways of how
to do things. Just do what you think best. (Do your
own thing, the best way you know how.)
Managing by Hope The future is full of uncertainty
and if first you dont succeed, then you may on the
second or third try.
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Ch 5 -6

The Balanced Scorecard Robert Kaplan & David Norton, 1993

Characteristics:
Strategy evaluation and control technique
Balance financial measures with nonfinancial
measures
Balance shareholder objectives with customer
& operational objectives

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Ch 5 -7

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Ch 5 -8

Types of Strategies
Corp
Level

A Large Company

Division Level

Functional Level

Operational Level

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Ch 5 -9

Types of Strategies
A Small Company
Corp
Level

Functional Level

Operational Level

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Ch 5 -10

Types of Strategies
Forward Integration

Forward integration involves gaining ownership or

increased control over distributors or retailers.

Franchising is an effective means of implementing

forward integration.

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Ch 5 -11

Forward Integration
Six guidelines when forward integration may be an especially effective
strategy:
When an organizations present distributors are especially
expensive or unreliable, or incapable of meeting firms distribution
needs.
When the availability of quality distributors is so limited as to offer a
competitive advantage to those firms that integrate forward.
When an organization competes in an industry that is growing and
expected to continue to grow markedly.
When an organization has both the capital and human resources
needed to manage the new business.
When the advantages of stable production are particularly high.
When present distributors have high profit margins

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Ch 5 -12

Types of Strategies
Backward Integration
Backward integration is a strategy of seeking ownership or
increased control of a firms suppliers. This strategy can be
especially appropriate when a firms current suppliers are
unreliable, too costly, or cannot meet the firms needs.
Some industries in the United States (such as automotive and
aluminum industries) are reducing their historic pursuit of
backward integration. Instead of owning their suppliers,
companies negotiate with several outside suppliers.
Outsourcing, whereby companies use outside suppliers, shop
around, play one seller against another, and go with the best
deal is becoming widely practiced.

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Ch 5 -13

Backward Integration
Seven guidelines for when backward integration may be especially
effective:

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 an organization competes in an industry that is growing
rapidly;
When an organization has both capital and human resources to
manage the new business of supplying its own raw materials;
When the advantages of stable prices are particularly important;
When present supplies have high profit margins; and
When an organization needs to quickly acquire needed resources.
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Ch 5 -14

Types of Strategies
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.

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Ch 5 -15

Backward Integration
Five guidelines for when horizontal integration may be an
especially effective strategy:
When an organization can gain monopolistic
characteristics.
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 lack of managerial
expertise or a need for particular resources that an
organization possesses.
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Ch 5 -16

Intensive Strategies
Market Penetration - seeks to increase market share for present
products or services in present markets through greater marketing
efforts.

Market penetration includes increasing the number of salespersons,

advertising expenditures, and publicity efforts or offering extensive
sales promotion items.
Five guidelines for when market penetration is especially effective:

When current markets are not saturated.

When usage rate of current customers could be increased.
When 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 advantages.
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Ch 5 -17

Intensive Strategies
Market Development - involves introducing present products or
services into new geographic areas.
The climate for international market development is becoming more
favorable. In many industries, such as airlines, it is going to be hard
to maintain a competitive edge by staying close to home.
Six guidelines for when this is may be effective:

When new channels of distribution are available that are reliable,

inexpensive, and of good quality.
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.
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Ch 5 -18

Intensive Strategies
Product Development - seeking increased sales by improving or
modifying present products or services. Product development
usually entails large research and development expenditures.
Five guidelines for when to use product development:

When an organization has successful products that are 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 has especially strong research and
development capabilities.
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Ch 5 -19

Diversification Strategies
Related Diversification

Businesses are said be related when their value chains

possess competitively valuable cross-business strategic
fits.
Related diversification strategies enable businesses to
capitalize on synergies such as:
transferring competitively valuable expertise,
combining the related activities of separate businesses
into a single operation to achieve lower costs,
exploiting common use of a well-known brand name, and
collaborating across businesses to create valuable
resource strengths and capacities.

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Ch 5 -20

Diversification Strategies
Unrelated Diversification

Businesses are said to be unrelated when their value

chains are so dissimilar that no competitively valuable
cross-business relationships exist.

An unrelated diversification strategy favors capitalizing

upon a portfolio of businesses that are capable of
delivering excellent financial performance in their
respective industries.

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Ch 5 -21

Defensive Strategies
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
designed to fortify an organizations basic
distinctive competence.
Bankruptcy can be an effective retrenchment
strategy.

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Ch 5 -22

Defensive Strategies
Retrenchment - Retrenchment occurs when an
organization regroups through cost and asset
reduction to reverse declining sales and profits.
Divestiture - Selling a division or part of an
organization is called divestiture. Divestiture
often is used to raise capital for further strategic
acquisitions or investments.
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.
Ch 5 -23
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Types of Strategies
Forward
Integration

Vertical
Integration
Strategies

Backward
Integration

Horizontal
Integration

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Ch 5 -24

Types of Strategies
Market
Penetration

Intensive
Strategies

Market
Development

Product
Development

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Ch 5 -25

Types of Strategies
Related
Diversification

Diversification
Strategies

Unrelated
Diversification

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Ch 5 -26

Types of Strategies
Retrenchment

Defensive
Strategies

Divestiture

Liquidation

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Ch 5 -27

Short Scenario Discussion 1

Syarikat Eko Sdn Bhd terlibat di dalam industri pengeluaran baja organik
yang sedang bertumbuh dengan pesat. Kedudukan kewangan syarikat ini
adalah kukuh dan meningkat dari tahun ke tahun kerana jualan dan
permintaan yang tinggi terhadap baja organik daripada industri pertanian.
Namun begitu, syarikat menghadapi masalah dengan pengedar yang
mengenakan caj perkhidmatan yang mahal dan perkhidmatan yang
diberikan kadangkala kurang memuaskan. Ini disebabkan bilangan
pengedar di pasaran adalah terhad dan dimonopoli sebilangan pemilik.
Disebabkan itu juga, pengedar mendapat untung margin yang tinggi.
Berdasarkan situasi persekitaran, matlamat dan kedudukan syarikat,
nyatakan satu strategi yang paling sesuai untuk dilaksanakan oleh syarikat
tersebut bagi setiap kes. Berikan alasan kenapa strategi tersebut paling
sesuai untuk dijalankan dan apakah pulangan yang dijangka dengan
pelaksanaan strategi tersebut.

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Ch 5 -28

Short Scenario Discussion 2

Syarikat Zam terlibat di dalam industri pengeluaran air mineral. Syarikat
menghadapi tekanan persaingan kerana industri ini terlalu kompetitif
disebabkan oleh produk yang standard, kos penggantian yang rendah, dan
kemasukan pesaing baru ke dalam industri adalah tinggi dan mudah. Oleh
itu, kebanyakan syarikat dalam industri ini menggunakan kepimpinan kos
sebagai strategi persaingan. Namun begitu, pengurusan atasan Syarikat
EmbunSuci percaya kesedaran orang Islam terhadap isu halal dan
kesucian bahan makanan dan minuman menawarkan peluang yang
menarik. Dengan jenama yang sesuai dan kemampuan teknologi yang
dimiliki oleh syarikat, syarikat percaya niche pengguna Muslim masih
terbuka luas untuk diterokai.
Berdasarkan situasi persekitaran, matlamat dan kedudukan syarikat,
nyatakan satu strategi yang paling sesuai untuk dilaksanakan oleh syarikat
tersebut bagi setiap kes. Berikan alasan kenapa strategi tersebut paling
sesuai untuk dijalankan dan apakah pulangan yang dijangka dengan
pelaksanaan strategi tersebut.
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Ch 5 -29

Natural Environment Perspective

Songbirds and Coral Reefs in Trouble

Songbirds 76 songbird species have

dramatically declined in numbers
Coral Reefs Trawl fishing destroys
coral reefs

Total area of fully protected

marine habitats in the US is only
50 square miles (93 million acres
of national wildlife refuges and
national parks)

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Ch 5 -30

2007 Examples
Forward
Integration

Backward
Integration
Horizontal
Integration

Southwest Airlines selling tickets

through Galileo
Hilton Hotels could acquire a large
furniture manufacturer

Huntington Bancshares and Sky

Financial Group merged
MAS dan Air Asia

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Ch 5 -31

2007 Examples
Market
Penetration

McDonalds selling millions of

Shrek the Third items to a
healthier image

Market
Development

Burger King opened its first

restaurant in Japan
Felda ventures into plantations in
Myanmar

Product
Development

Google introduced Google

Presents to compete with
PowerPoint

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Ch 5 -32

2007 Examples
Related
Diversification

MGM Mirage is opening its first noncasino luxury hotel

Proton dan DRB-Hicom

Unrelated
Diversification

Ford Motor Company entered the

industrial bank business

Retrenchment

Discovery Channel closed 103 mallbased and stand-alone stores

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Ch 5 -33

2007 Examples
Divestiture

Liquidation

Whirlpool sold its struggling Hoover

floor-care business to Techtronic
Industries
Follow Me Charters sold all of its
assets and ceased doing business

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Ch 5 -34

Michael Porters Generic Strategies

Cost Leadership Strategies
(Low-Cost & Best-Value)

Differentiation Strategies

Focus Strategies
(Low-Cost Focus &
Best-Value Focus)

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Ch 5 -35

Michael Porters Generic Strategies

Five generic strategies:
1. Cost leadership-low cost - producing
standardized products at a very low per-unit
cost for consumers who are price-sensitive;

A low-cost strategy offers products to a wide

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

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Ch 5 -36

Michael Porters Generic Strategies

2. Cost leadership-best value 3. Differentiation - producing products that are
considered unique.
4. Focus-low cost - A low-cost focus strategy
offers products or services to a small range
(niche) of customers at the lowest price available
on the market.
5. Focus-best value - 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.
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Ch 5 -37

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Ch 5 -38

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Ch 5 -39

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Ch 5 -40

Means for Achieving Strategies

Joint Venture/Partnering
Merger/Acquisition
Private-Equity Acquisition
First Mover Advantages
Outsourcing

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Ch 5 -41

First Mover Advantages

Benefits a firm may achieve by entering a

new market or developing a new product or
service prior to rival firms

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Ch 5 -42

Outsourcing
Business-Process Outsourcing
(BPO)

Companies taking over the functional

operations of other firms

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Ch 5 -43

Global Perspective
Joint Ventures Mandatory for All Foreign Firms in India

Indias 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

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Ch 5 -44

Strategic Management in Nonprofit and

Governmental Organizations
Educational Institutions
Medical Organizations

Governmental Agencies and Departments

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Ch 5 -45