CHAPTER 5

STRATEGIES IN ACTION

LONG-TERM OBJECTIVES
The Nature of Long-Term Objectives

Objectives should be quantitative, measurable, realistic, understandable, challenging, hierarchical, obtainable, and congruent among organizational units. Each objective also should be associated with a time line. Objectives are commonly stated in terms such as growth in assets, growth in sales, profitability, market share, degree and nature of diversification, and so on. Long-term objectives are

needed

at

the

corporate,

divisional,

and

functional

levels

in

an

organization. They are an important measure of managerial performance.

FINANCIAL VERSUS STRATEGIC OBJECTIVES

Financial objectives include ones associated with growth in revenues, growth in earnings, higher dividends, larger profit margins, greater return on investment, higher earnings per share, a rising stock price, improved cash flow,

Strategic objectives include ones such as larger market share, quicker on-time delivery than rivals, quicker design-to-market times than rivals, lower costs than rivals, higher product quality than rivals, wider geographic coverage than rivals, etc.3. There is frequently a tradeoff between financial and strategic objectives

N O T M A N AG I N G B Y O B J E C T I V E S
Strategists should avoid the following alternative ways of not managing by objectives 1. Managing by extrapolation

2. Managing by crisis
3. Managing by subjective 4. Managing by hope

T H E BA L A N C E D S C O R E C A R D
The balanced scorecard is a strategy evaluation and control technique that derives its name from the perceived need of firms to balance financial measures, which are oftentimes used exclusively in strategy evaluation and control with non-

financial measures such as product quality and customer service.

A balanced scorecard for a firm is simply a listing of all key objectives to work towards along with an associated time dimension of when each objective is to be accomplished, as well as a primary responsibility or contact person, department, or division for each objective.

TYPES OF STRATEGIES

LEVELS OF STRATEGIES
Levels of Strategies with persons Most Responsible
Corporate Level chief officer executive

LARGE COMPANY

Division Level division president or executive vice president

Functional Level finance, marketing, R&D, manufacturing, information systems and human resource managers Operational Level plant managers, sales managers, production and department managers.

LEVELS OF STRATEGIES
Company Level president
SMALL COMPANY

- owner or

Functional Level finance, marketing, R&D, manufacturing, information systems and human resource managers
Operational Level plant managers, sales managers, production and department managers.

C L A S S I F I C AT I O N O F S T R AT E G I E S
INTEGRATION STRATEGIES INTENSIVE STRATEGIES DIVERSIFICATION STRATEGIES DEFENSIVE STRATEGIES

INTEGRATION STRATEGIES
FORWARD INTEGRATION Involves gaining ownership or increased control over distributors or retailers. These six guidelines indicate when forward integration may be an especially effective strategy: 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 to those firms that integrate forward. When an organization competes in an industry that is growing and is expected to continue to grow markedly; this is a factor because forward integration reduces an organizations ability to diversify if its basic industry falters.

INTEGRATION STRATEGIES
When an organization has both the capital and human resources needed to manage the new business of distributing its own products. When the advantages of stable production are particularly high; this is a consideration because an organization can increase the predictability of the demand for its output through forward integration. When present distributors or retailers have high profit margins; this situation suggests that a company profitably could distribute its own products and price them more competitively by integrating forward.

INTEGRATION STRATEGIES
BACKWARD INTEGRATION Is a strategy of seeking ownership or increased control of a firms suppliers. Seven guidelines for when backward integration may be an especially an 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 an organization competes in an industry that is growing rapidly; this is a factor because integrative-type strategies (forward, backward, and horizontal) reduce an organizations ability to diversify in a declining industry.

INTEGRATION STRATEGIES
When an organization has both capital and human resources to manage the new business of supplying its own raw When the advantages of stable prices are particularly important; this is a factor because an organization can stabilize the cost of its raw materials and the associated price of its product(s) through backward integration. When present supplies have high profit margins, which suggests that the business of supplying products or services in the given industry is a worthwhile venture. When an organization needs to quickly acquire a needed resource.

INTEGRATION STRATEGIES
HORIZONTAL STRATEGIES Refers to a strategy of seeking ownership of or increased control over a firms competitors. These five guidelines indicate when horizontal integration may be an effective strategy: When an organization can gain monopolistic characteristics in a particular area or region without being challenged by the federal government for tending substantially to reduce competition. When an organization competes in a growing industry. When increased economies of scale provide major competitive advantages. especially

INTEGRATION STRATEGIES
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; note that horizontal integration would not be appropriate if competitors are doing poorly, because in that case overall industry sales are declining.

INTENSIVE STRATEGIES
MARKET PENETRATION Strategy seeks to increase market share for present products or services in present markets through greater marketing efforts. Five guidelines indicate when market penetration may be an especially effective strategy: When current markets are not saturated with a particular product or service. When the usage rate of present customers could be increased significantly. When the market shares of major competitors have been declining while total industry sales have been increasing.

INTENSIVE STRATEGIES
When the correlation between dollar sales and dollar marketing expenditures historically has been high. When increased economies of scale provide major competitive advantages.

INTENSIVE STRATEGIES
MARKET DEVELOPMENT Involves introducing present products or services into new geographic areas. These six guidelines indicate when market development may be especially effective strategy: When new channels of distribution are available, inexpensive and of good quality. When an organization is very successful at what it does. When new untapped or unsaturated markets exist. an

INTENSIVE STRATEGIES
When an organization has the needed capital and human resources to manage expanded operations. When an organization ahs excess production capacity. When an organizations basic industry is rapidly becoming global in scope.

INTENSIVE STRATEGIES
PRODUCT DEVELOPMENT
A strategy that seeks increased sales by improving or modifying present products or services.

These five guidelines indicate when product development may be an especially

effective strategy to pursue: When an organization has successful products that are in the maturity stage of the product life cycle; the idea here is to attract satisfied customers to try new (improved) products as a result of their positive experience with the organizations present products or services. When an organization competes in an industry that is characterized by rapid technological developments.

INTENSIVE STRATEGIES
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.

D I V E R S I F I C AT I O N S T R AT E G I E S
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: a. Transferring competitively valuable expertise, b. combining the related activities of separate businesses into a single operation to achieve lower costs,

c. exploiting common use of a well-known brand name, and

d. collaborating across businesses to create valuable resource strengths and capacities

D I V E R S I F I C AT I O N S T R AT E G I E S
Six guidelines for when related diversification may be effective are identified below: When an organization competes in a no-growth or slow growth industry. When adding new, but related products would enhance sales of current products When new, but related products could be offered at competitive prices. When new, but related products have seasonal sales levels that counterbalance existing peaks and valleys. When an organizations products are in the decline stage of the life cycle. When an organization has a strong management team

D I V E R S I F I C AT I O N S T R AT E G I E S
UNRELATED DIVERSIFICATION Businesses are said to be unrelated when their value chains are so dissimilar that noncompetitively 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.

D I V E R S I F I C AT I O N S T R AT E G I E S
Ten guidelines for when unrelated diversification may be effective are identified below: 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 and/or no-growth industry. When an organizations present channels of distribution can be used to market the new products to current customers. When the new products have countercyclical 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 capital and managerial talent needed to compete. When an organization has the opportunity to purchase an unrelated business that is an attractive investment. When financial synergy exists between the acquired and acquiring firms.

When existing markets for an organizations present products are saturated.

When antitrust action could be charged against an organization that historically has concentrated on a single industry.

DEFENSIVE STRATEGIES
RETRENCHMENT
occurs when an organization regroups through cost an asset reduction to reverse declining sales and profits. Sometimes called a turnaround or reorganizational strategy. BANKRUPTCY Types: 1. Chapter 7 Bankruptcy 2. Chapter 9 Bankruptcy 3. Chapter 11 Bankruptcy 4. Chapter 12 Bankruptcy 5. Chapter 13 Bankruptcy

DEFENSIVE STRATEGIES
DIVESTITURE
Selling a division or part of an organization. Six guidelines for when divestiture may be an especially effective strategy to pursue follow: 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. When a division is responsible for an organizations overall poor performance.

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

DEFENSIVE STRATEGIES
LIQUIDATION
Selling all of a companys assets, in parts, for their tangible worth. These three guidelines indicate when liquidation may be an especially effective strategy to pursue:
When an organization has pursued both a retrenchment strategy and a divestiture strategy, and neither 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.

MICHAEL PORTERS FIVE GENERIC STRATEGIES

GENERIC STRATEGIES
COST LEADERSHIP DIFFERENTIATION FOCUS

S I Z E O F M A R K E T

LARGE

TYPE 1 TYPE 2

TYPE 3

SMALL

TYPE 3

TYPE 4 TYPE 5

GENERIC STRATEGIES
COST LEADERSHIP
Emphasizes producing standardized products at a very low per-unit cost for consumers who are price-sensitive. 2 alternative types:
Type 1 low-cost strategy Type 2 best-value strategy DIFFERENTIATION (Type 3) A strategy aimed at producing products and services considered unique industry wide and directed at consumers who are relatively price-insensitive.

GENERIC STRATEGIES
FOCUS
Means producing products and services that fulfill the needs of small groups of consumers. 2 alternative types:
Type 4 low-cost focus strategy Type 5 best-value focus strategy

GENERIC STRATEGIES
STRATEGIES FOR COMPETING IN TURBULENT, HGH VELOCITY MARKETS The world is changing more and more rapidly, and consequently industries and firms themselves are changing faster than ever. Some industries are changing so fast that researchers call them

turbulent, high-velocity markets.

MEANS FOR ACHIEVING STRATEGIES

J O I N T V E N T U R E / PA R T N E R I N G
Is the popular strategy that occurs when two or more companies form a temporary partnership or consortium for purpose of capitalizing on some opportunity There are countless examples of failed joint ventures:
Managers who must collaborate daily in operating the venture are not involved in forming or shaping the venture The venture may benefit the partnering companies but may not benefit customers, who then complain about poorer service or criticize the companies in other ways

J O I N T V E N T U R E / PA R T N E R I N G
The venture may not be supported equally by both partners. If supported unequally, problem arise The venture may begin to complete more with one of the partners than the other

6 guidelines for when a joint venture may be an especially effective means

for pursuing strategies are:
When a privately owned organization is forming a joint venture with a publicly owned organization When domestic organization is forming a joint venture with a foreign company

J O I N T V E N T U R E / PA R T N E R I N G
When the distinct competencies of the two or more firms complement each other especially well When some project is potentially very profitable but requires overwhelming resources and risks When two or more smaller firms have trouble competing with larger firm

When there exists a need to quickly introduce a new technology

MERGER/ACQUISITION
Merger /acquisition are two commonly used ways to purse strategies. Merger occurs two organizations of about equal size unite to form one enterprise An acquisition occurs when a large organization purchase

MERGER/ACQUISITION
Key reason why many mergers and acquisition fail: Integration difficulties Inadequate evaluation of target Large or extraordinary of target Inability to achieve synergy Too much diversification Managers overly focused on acquisition Potential Benefits of Merging With or Acquiring another Firm: To provide improved capacity utilization To make better use of the existing sales force To reduce managerial staff To gain economics of scale To smooth out seasonal trends in sales

FIRST MOVER ADVANTAGES

Refers to the benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms. Being the first mover can be especially wise when such actions Build a firms image and reputation with buyers Produce cost advantages over rivals in terms of new technologies Crete strong loyal customers Make imitation or duplication by a rival hard or unlikely

FIRST MOVER ADVANTAGES

Benefits of a firm being the first mover
Secure access and commitments to rare resources Gain new knowledge of critical success factors and issues Gain market share and position in the best locations Establish and secure long-term relationships with customers, supplier, distributors, and investors Gain customer loyalty and commitments

OUTSOURCING
Is rapidly growing new business the involves companies taking over the functional operations such as human resources information. Companies are choosing to outsource their functional operation 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.

OUTSOURCING
Other advantages of outsourcing are that the strategy:
Allows the firm to align itself with best-in-world supplier who focus on performing the special task, Provides the firm flexibility should customer needs shift unexpectedly Allows the firm to concentrate on other internal value chain activities

STRATEGIC MANAGEMENT IN NON PROFIT AND GOVERMENTAL ORGANIZATIONS

 the strategic-management process is being used effectively by countless nonprofit and governmental organizations, such as the girl scouts, boy scouts, red cross, chambers of commerce, educational institutions, public utilities, libraries government agencies, and churches. EDUCATIONAL INSTITUTIONS educational institutions are more frequently using strategicmanagement techniques and concepts. MEDICAL ORGANIZATIONS GOVERNMENT AGENCIES AND DEPARTMENT Strategic-management concepts are generally required and thus widely used to enable governmental organizations to be more effective and efficient for a list of government agency strategic plans .

STRATEGIC MANAGEMENT IN SMALL FIRMS

The strategic-management process is just as vital for small companies. From
their inception, all organizations have a strategy, even if the strategy just evolves from day-to-day operations. Even if conducted informally or by a single owner/entrepreneur, the strategic-management process can significantly

enhance small firms growth and prosperity.