SM Week 5

1. Fred R. David
Prentice Hall
Ch5-1
Chapter 5
Strategies in Action
Strategic Management:
Concepts and Cases. 9th edition
Fred R. David
PowerPoint Slides by
Anthony F. Chelte
Western New England College

2. Copyright © 2011 Pearson
Education, Inc.
Publishing as Prentice Hall
Ch 4 -2
Strategic Management Process

3. Fred R. David
Prentice Hall
Ch5-3
Chapter Outline
• Long-Term Objectives
• Types of Strategies
• Integration Strategies

4. Fred R. David
Prentice Hall
Ch5-4
Chapter Outline
• Intensive Strategies
• Diversification Strategies
• Defensive Strategies
• Means for Achieving Strategies

5. Fred R. David
Prentice Hall
Ch5-5
Chapter Outline
• Michael Porter’s Generic Strategies
• Strategic Management in Nonprofit
and Governmental Organizations
• Strategic Management in Small
Firms

6. Fred R. David
Prentice Hall
Ch5-6
Long-Term Objectives
• The results expected from pursuing
certain strategies

7. Fred R. David
Prentice Hall
Ch5-7
Long-Term Objectives
Objectives –
– Quantifiable
– Measurable
– Realistic
– Understandable
– Challenging
– Hierarchical
– Obtainable
– Congruent
– Time-line

8. Fred R. David
Prentice Hall
Ch5-8
Long-Term Objectives
Long-term objectives are necessary –
– Corporate
– Divisional
– Functional levels

9. Fred R. David
Prentice Hall
Ch5-9
Integration Strategies
Vertical
Integration
Strategies
Forward Integration
Backward Integration
Horizontal Integration

10. Fred R. David
Prentice Hall
Ch5-10
Integration Strategies
Vertical Integration strategies –
–Allow a firm to gain control over:
• Distributors
• Suppliers
• competitors

11. Fred R. David
Prentice Hall
Ch5-11
Integration Strategies
Forward Integration –
–Gaining ownership or increased control
over distributors or retailers

12. Fred R. David
Prentice Hall
Ch5-12
Integration Strategies
Guidelines for Forward Integration –
 Present distributors are expensive, unreliable, or
incapable of meeting firm’s needs
 Availability of quality distributors is limited
 When firm competes in an industry that is expected
to grow markedly
 Organization has both capital and human resources
needed to manage new business of distribution
 Advantages of stable production are high
 Present distributors have high profit margins

13. Fred R. David
Prentice Hall
Ch5-13
Integration Strategies
Backward Integration –
–Seeking ownership or increased
control of a firm’s suppliers

14. Fred R. David
Prentice Hall
Ch5-14
Integration Strategies
Guidelines for Backward Integration –
 When present suppliers are expensive, unreliable,
or incapable of meeting needs
 Number of suppliers is small and number of
competitors large
 High growth in industry sector
 Firm has both capital and human resources to
manage new business
 Advantages of stable prices are important
 Present supplies have high profit margins

15. Fred R. David
Prentice Hall
Ch5-15
Integration Strategies
Horizontal Integration –
–Seeking ownership or increased
control over competitors

16. Fred R. David
Prentice Hall
Ch5-16
Integration Strategies
Guidelines for Horizontal Integration –
 Firm can gain monopolistic characteristics without
being challenged by federal government
 Competes in growing industry
 Increased economies of scale provide major
competitive advantages
 Faltering due to lack of managerial expertise or
need for particular resources

17. Fred R. David
Prentice Hall
Ch5-17
Michael Porter’s Generic Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies

18. Fred R. David
Prentice Hall
Ch5-18
Generic Strategies
Cost Leadership Strategies –
 Pursued in conjunction with differentiation
 Economies or diseconomies of scale
 Capacity utilization achieved
 Linkages with suppliers and distributors

19. Fred R. David
Prentice Hall
Ch5-19
Generic Strategies
Low Cost Producer Advantages –
 Market of many price-sensitive buyers
 Few ways of achieving product
differentiation
 Buyers not sensitive to brand differences
 Large number of buyers with bargaining
power

20. Fred R. David
Prentice Hall
Ch5-20
Generic Strategies
Differentiation Strategies –
 Greater product flexibility
 Greater compatibility
 Lower costs
 Improved service
 Greater convenience
 More features

21. Fred R. David
Prentice Hall
Ch5-21
Generic Strategies
Differentiation Strategies –
 Allow firm to charge higher price
 Gain customer loyalty

22. Fred R. David
Prentice Hall
Ch5-22
Generic Strategies
Focus Strategies –
 Industry segment of sufficient size
 Good growth potential
 Not crucial to success of major competitors

23. Fred R. David
Prentice Hall
Ch5-23
Generic Strategies
Focus Strategies –
 Consumers have distinctive preferences
 Rival firms not attempting to specialize in the
same target segment

24. Fred R. David
Prentice Hall
Ch5-24
Intensive Strategies
Intensive
Strategies
Market Penetration
Market Development
Product Development

25. Fred R. David
Prentice Hall
Ch5-25
Intensive Strategies
Intensive strategies –
–Require intensive efforts to improve a
firm’s competitive position with existing
products

26. Fred R. David
Prentice Hall
Ch5-26
Intensive Strategies
Market Penetration –
–Seeking increased market share for
present products or services in present
markets through greater marketing
efforts

27. Fred R. David
Prentice Hall
Ch5-27
Intensive Strategies
Guidelines for Market Penetration –
 Current markets not saturated
 Usage rate of present customers can be increased
significantly
 Market shares of competitors declining while total
industry sales increasing
 Increased economies of scale provide major
competitive advantages

28. Fred R. David
Prentice Hall
Ch5-28
Intensive Strategies
Market Development –
–Introducing present products or
services into new geographic area

29. Fred R. David
Prentice Hall
Ch5-29
Intensive Strategies
Guidelines for Market Development –
 New channels of distribution that are reliable,
inexpensive, and good quality
 Firm is very successful at what it does
 Untapped or unsaturated markets
 Capital and human resources necessary to manage
expanded operations
 Excess production capacity
 Basic industry rapidly becoming global

30. Fred R. David
Prentice Hall
Ch5-30
Intensive Strategies
Product Development –
–Seeking increased sales by improving
present products or services or
developing new ones

31. Fred R. David
Prentice Hall
Ch5-31
Intensive Strategies
Guidelines for Product Development –
 Products in maturity stage of life cycle
 Competes in industry characterized by rapid
technological developments
 Major competitors offer better-quality products at
comparable prices
 Compete in high-growth industry
 Strong research and development capabilities

32. Fred R. David
Prentice Hall
Ch5-32
Diversification Strategies
Diversification
Strategies
Concentric
Diversification
Conglomerate
Diversification
Horizontal
Diversification

33. Fred R. David
Prentice Hall
Ch5-33
Diversification Strategies
Diversification strategies –
–Becoming less popular as
organizations are finding it more
difficult to manage diverse business
activities

34. Fred R. David
Prentice Hall
Ch5-34
Diversification Strategies
Concentric Diversification –
–Adding new, but related, products or
services

35. Fred R. David
Prentice Hall
Ch5-35
Diversification Strategies
Guidelines for Concentric Diversification –
 Competes in no- or slow-growth industry
 Adding new & related products increases sales of
current products
 New & related products offered at competitive prices
 Current products are in decline stage of the product
life cycle
 Strong management team

36. Fred R. David
Prentice Hall
Ch5-36
Diversification Strategies
Conglomerate Diversification –
–Adding new, unrelated products or
services

37. Fred R. David
Prentice Hall
Ch5-37
Diversification Strategies
Guidelines for Conglomerate Diversification –
 Declining annual sales and profits
 Capital and managerial talent to compete
successfully in a new industry
 Financial synergy between the acquired and
acquiring firms
 Exiting markets for present products are saturated

38. Fred R. David
Prentice Hall
Ch5-38
Diversification Strategies
Horizontal Diversification –
–Adding new, unrelated products or
services for present customers

39. Fred R. David
Prentice Hall
Ch5-39
Diversification Strategies
Guidelines for Horizontal Diversification –
 Revenues from current products/services would
increase significantly by adding the new unrelated
products
 Highly competitive and/or no-growth industry w/low
margins and returns
 Present distribution channels can be used to market
new products to current customers
 New products have counter cyclical sales patterns
compared to existing products

40. Fred R. David
Prentice Hall
Ch5-40
Defensive Strategies
Defensive
Strategies
Retrenchment
Divestiture
Liquidation

41. Fred R. David
Prentice Hall
Ch5-41
Defensive Strategies
Retrenchment –
–Regrouping through cost and asset
reduction to reverse declining sales
and profit

42. Fred R. David
Prentice Hall
Ch5-42
Defensive Strategies
Guidelines for Retrenchment –
 Firm has failed to meet its objectives and goals
consistently over time but has distinctive
competencies
 Firm is one of the weaker competitors
 Inefficiency, low profitability, poor employee morale,
and pressure from stockholders to improve
performance.
 When an organization’s strategic managers have
failed
 Very quick growth to large organization where a
major internal reorganization is needed

43. Fred R. David
Prentice Hall
Ch5-43
Defensive Strategies
Divestiture –
–Selling a division or part of an
organization

44. Fred R. David
Prentice Hall
Ch5-44
Defensive Strategies
Guidelines for Divestiture –
 When firm has pursued retrenchment but failed to
attain needed improvements
 When a division needs more resources than the firm
can provide
 When a division is responsible for the firm’s overall
poor performance
 When a division is a misfit with the organization
 When a large amount of cash is needed and cannot
be obtained from other sources.

45. Fred R. David
Prentice Hall
Ch5-45
Recent Divestitures
Dell Computer web-hosting division FON Group
Cititgroup Citi Capital GE Capital Fleet Services
Maytag Blodgett Middleby Corporation
Wescoast Energy British Columbia Gas BC Gas
Westcoast Energy Union Energy Epcor Utilities
Westcoast Energy Westcoast Capital Epcor Utilities
Credit Suisse CSFBdirect Bank of Montreal
emerson Electric Chromalox JPMorgan Partners
General Motors Hughes Electronics Echostar Communications
DuPont drug division Bristol-Myers Squibb
Parent Company Part Being Divested Acquiring Company
Recent Divestitures

46. Fred R. David
Prentice Hall
Ch5-46
Defensive Strategies
Liquidation–
–Selling all of a company’s assets, in
parts, for their tangible worth

47. Fred R. David
Prentice Hall
Ch5-47
Defensive Strategies
Guidelines for Liquidation –
 When both retrenchment and divestiture have been
pursued unsuccessfully
 If the only alternative is bankruptcy, liquidation is an
orderly alternative
 When stockholders can minimize their losses by
selling the firm’s assets

48. Fred R. David
Prentice Hall
Ch5-48
Means for Achieving Strategies
Joint Venture/Partnering –
 Two or more companies form a temporary
partnership or consortium for purpose of capitalizing
on some opportunity.

49. Fred R. David
Prentice Hall
Ch5-49
Means for Achieving Strategies
Cooperative Arrangements –
 Research and development partnerships
 Cross-distribution agreements
 Cross-licensing agreements
 Cross-manufacturing agreements
 Joint-bidding consortia

50. Fred R. David
Prentice Hall
Ch5-50
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

51. Fred R. David
Prentice Hall
Ch5-51
Means for Achieving Strategies
Guidelines 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

52. Fred R. David
Prentice Hall
Ch5-52
Recent Mergers
Acquiring Firm Acquired Firm
Hewlett-Packard Compaq Computer
Ebay Homes Direct
PepsiCo Quaker Oats
Sara Lee Earthgrains Company
Phillips Petroleum Conoco
Devon Anderson Exploration
AMR TWA
Tellabs Ocular Networks

53. Fred R. David
Prentice Hall
Ch5-53
Key Terms
• Acquisition
• Backward Integration
• Combination Strategy
• Concentric Diversification
• Conglomerate Diversification
• Cooperative Arrangements
• Cost Leadership

54. Fred R. David
Prentice Hall
Ch5-54
Key Terms
• Differentiation
• Diversification Strategies
• Divestiture
• Focus
• Forward Integration
• Franchising
• Generic Strategies

55. Fred R. David
Prentice Hall
Ch5-55
Key Terms
• Horizontal Diversification
• Horizontal Integration
• Integration Strategies
• Intensive Strategies
• Joint Venture
• Liquidation
• Long-Term Objectives

56. Fred R. David
Prentice Hall
Ch5-56
Key Terms
• Market Development
• Market Penetration
• Merger
• Outsourcing
• Product Development
• Retrenchment
• Takeover
• Vertical Integration