Strategies in Action


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Strategies in Action

  1. 1. Chapter 5 Strategies in Action <ul><li>Strategic Management: Concepts & Cases </li></ul><ul><li>10 th Edition </li></ul><ul><li>Fred David PowerPoint Slides by </li></ul><ul><li>Anthony F. Chelte </li></ul><ul><li>Western New England College </li></ul>
  2. 2. Chapter Outline Long-Term Objectives Types of Strategies Integration Strategies
  3. 3. Chapter Outline ( cont’d ) Intensive Strategies Diversification Strategies Defensive Strategies
  4. 4. Chapter Outline ( cont’d ) Michael Porter’s Generic Strategies Means for Achieving Strategies First Mover Advantages
  5. 5. Chapter Outline ( cont’d ) Outsourcing Strategic Management in Nonprofit & Governmental Organizations Strategic Management in Small Firms
  6. 6. <ul><li>Strategies fro taking the hill won’t necessarily hold it. – </li></ul><ul><li>Amar Bhide </li></ul>Strategies in Action The early bird may get the worm, but the second mouse gets the cheese. – Unknown
  7. 7. <ul><li>-- Quest for higher revenues </li></ul><ul><li>-- Quest for higher profits </li></ul>Strategies in Action Companies Embrace Strategic Planning
  8. 8. <ul><li>Results expected from pursuing certain strategies. </li></ul><ul><li>Strategies represent actions to accomplish long-term objectives. </li></ul>Long-Term Objectives
  9. 9. Long-Term Objectives Objectives -- <ul><li>Quantifiable </li></ul><ul><li>Measurable </li></ul><ul><li>Realistic </li></ul><ul><li>Understandable </li></ul><ul><li>Challenging </li></ul>
  10. 10. Long-Term Objectives Objectives -- <ul><li>Hierarchical </li></ul><ul><li>Obtainable </li></ul><ul><li>Congruent </li></ul><ul><li>Time-line </li></ul>
  11. 11. Long-Term Objectives Objectives Necessary -- <ul><li>Corporate Level </li></ul><ul><li>Divisional Level </li></ul><ul><li>Functional Level </li></ul>
  12. 12. Long-Term Objectives Strategists Should Avoid -- <ul><li>Managing by Extrapolation </li></ul><ul><li>Managing by Crisis </li></ul><ul><li>Managing by Subjectives </li></ul><ul><li>Managing by Hope </li></ul>
  13. 13. Long-Term Objectives 25% on long-term objectives 75% on annual objectives Function 50% on long-term objectives 50% on annual objectives Division 75% on long-term objectives 25% on annual objectives Corporate Basis for Annual Bonus/Merit Pay Organizational Level Varying Performance Measures by Organizational Level
  14. 14. Financial vs. Strategic Objectives Financial Objectives <ul><li>Growth in revenues </li></ul><ul><li>Growth in earnings </li></ul><ul><li>Higher dividends </li></ul><ul><li>Higher profit margins </li></ul><ul><li>Higher Earnings per share </li></ul><ul><li>Improved cash flow </li></ul>
  15. 15. Financial vs. Strategic Objectives Strategic Objectives <ul><li>Larger market share </li></ul><ul><li>Quicker on-time delivery than rivals </li></ul><ul><li>Quicker design-to-market times than rivals </li></ul><ul><li>Lower costs than rivals </li></ul><ul><li>Higher product quality than rivals </li></ul><ul><li>Wider geographic coverage than rivals </li></ul>
  16. 16. Financial vs. Strategic Objectives Trade-Off <ul><li>Maximize short-term financial objectives – harm long-term strategic objectives </li></ul><ul><li>Pursue increased market share at the expense of short-term profitability </li></ul><ul><li>Tradeoffs related to risk of actions; concern for business ethics; need to preserve natural environment; social responsibility issues </li></ul>
  17. 17. Types of Strategies Operational Level Functional Level Division Level Corp Level A Large Company
  18. 18. Types of Strategies Operational Level Functional Level Company Level A Small Company
  19. 19. The Balanced Scorecard Robert Kaplan & David Norton -- <ul><li>Strategy evaluation & control technique </li></ul><ul><li>Balance financial measures with non-financial measures </li></ul><ul><li>Balance shareholder objectives with customer & operational objectives </li></ul>
  20. 20. Types of Strategies Vertical Integration Strategies Forward Integration Backward Integration Horizontal Integration
  21. 21. Vertical Integration Strategies Gain Control Over -- <ul><li>Distributors </li></ul><ul><li>Suppliers </li></ul><ul><li>Competitors </li></ul>
  22. 22. Forward Integration Strategies Gain Control Over -- <ul><li>Distributors </li></ul><ul><li>Retailers </li></ul>
  23. 23. Forward Integration Strategies Guidelines -- <ul><li>Current distributors – expensive or unreliable </li></ul><ul><li>Availability of quality distributors – limited </li></ul><ul><li>Firm competes in industry expected to grow markedly </li></ul><ul><li>Firm has both capital & HR to manage new business of distribution </li></ul><ul><li>Current distributors have high profit margins </li></ul>
  24. 24. Backward Integration Strategies Ownership or Control -- <ul><li>Firm’s suppliers </li></ul>
  25. 25. Backward Integration Strategies Guidelines -- <ul><li>Current suppliers – expensive or unreliable </li></ul><ul><li># of suppliers is small; # competitors is large </li></ul><ul><li>High growth in industry sector </li></ul><ul><li>Firm has both capital & HR to manage new business </li></ul><ul><li>Stable prices are important </li></ul><ul><li>Current suppliers have high profit margins </li></ul>
  26. 26. Horizontal Integration Strategies Ownership or Control -- <ul><li>Firm’s competitors </li></ul>
  27. 27. Horizontal Integration Strategies Guidelines -- <ul><li>Gain monopolistic characteristics w/o federal government challenge </li></ul><ul><li>Competes in growing industry </li></ul><ul><li>Increased economies of scale – major competitive advantages </li></ul><ul><li>Faltering due to lack of managerial expertise or need for particular resource </li></ul>
  28. 28. Types of Strategies Intensive Strategies Market Penetration Market Development Product Development
  29. 29. Intensive Strategies Intensive Efforts -- <ul><li>Improve competitive position with existing products </li></ul>
  30. 30. Market Penetration Strategies Increased Market Share -- <ul><li>Present products/services </li></ul><ul><li>Present markets </li></ul><ul><li>Greater marketing efforts </li></ul>
  31. 31. Market Penetration Strategies Guidelines -- <ul><li>Current markets not saturated </li></ul><ul><li>Usage rate of present customers can be increased significantly </li></ul><ul><li>Shares of competitors declining; industry sales increasing </li></ul><ul><li>Increased economies of scale provide major competitive advantage </li></ul>
  32. 32. Market Development Strategies New Markets -- <ul><li>Present products/services to new geographic areas </li></ul>
  33. 33. Market Development Strategies Guidelines -- <ul><li>New channels of distribution – reliable, inexpensive, good quality </li></ul><ul><li>Firm is successful at what it does </li></ul><ul><li>Untapped/unsaturated markets </li></ul><ul><li>Excess production capacity </li></ul><ul><li>Basic industry rapidly becoming global </li></ul>
  34. 34. Product Development Strategies Increased Sales -- <ul><li>Improving present products/services </li></ul><ul><li>Developing new products/services </li></ul>
  35. 35. Product Development Strategies Guidelines -- <ul><li>Products in maturity stage of life cycle </li></ul><ul><li>Industry characterized by rapid technological development </li></ul><ul><li>Competitors offer better-quality products @ comparable prices </li></ul><ul><li>Compete in high-growth industry </li></ul><ul><li>Strong R&D capabilities </li></ul>
  36. 36. Types of Strategies Diversification Strategies Concentric Diversification Conglomerate Diversification Horizontal Diversification
  37. 37. Diversification Strategies Less Popular -- <ul><li>More difficult to manage diverse business activities </li></ul>
  38. 38. Concentric Diversification Strategies Addition -- <ul><li>New & related products/services </li></ul>
  39. 39. Concentric Diversification Strategies Guidelines -- <ul><li>Compete in no/slow growth industry </li></ul><ul><li>New & related products increases sales of current products </li></ul><ul><li>New & related products offered at competitive prices </li></ul><ul><li>Current products—decline stage of product life cycle </li></ul><ul><li>Strong management team </li></ul>
  40. 40. Conglomerate Diversification Strategies Addition -- <ul><li>New & unrelated products/services </li></ul>
  41. 41. Conglomerate Diversification Strategies Guidelines -- <ul><li>Declining annual sales & profits </li></ul><ul><li>Capital & managerial ability to compete in new industry </li></ul><ul><li>Financial synergy between acquired and acquiring firms </li></ul><ul><li>Current markets for present products - saturated </li></ul>
  42. 42. Horizontal Diversification Strategies Addition -- <ul><li>New & unrelated products/services for current customers </li></ul>
  43. 43. Horizontal Diversification Strategies Guidelines -- <ul><li>Adding new products/services would significantly increase revenues </li></ul><ul><li>Highly competitive and/or no-growth industry; low margins & returns </li></ul><ul><li>Current distribution channels can be used </li></ul><ul><li>New products have counter cyclical sales patterns </li></ul>
  44. 44. Types of Strategies Defensive Strategies Retrenchment Divestiture Liquidation
  45. 45. Retrenchment Strategies Regrouping -- <ul><li>Cost & asset reduction to reverse declining sales & profit </li></ul>
  46. 46. Retrenchment Strategies Guidelines -- <ul><li>Failed to meet objectives & goals consistency; has distinctive competencies </li></ul><ul><li>Firm is one of weaker competitors </li></ul><ul><li>Inefficiency, low profitability, poor employee morale, pressure for stockholders </li></ul><ul><li>Strategic managers have failed </li></ul><ul><li>Rapid growth in size; major internal reorganization necessary </li></ul>
  47. 47. Divestiture Strategies <ul><li>Selling a division or part of an organization. </li></ul>
  48. 48. Divestiture Strategies Guidelines -- <ul><li>Retrenchment failed to attain improvements </li></ul><ul><li>Division needs more resources than are available </li></ul><ul><li>Division responsible for firm’s overall poor performance </li></ul><ul><li>Division is a mis-fit with organization </li></ul><ul><li>Large amount of cash is needed and cannot be raised through other sources </li></ul>
  49. 49. 2003 Examples Callaway Golf recently acquired Top-Flite Golf Company Horizontal Integration McDonalds recently acquired a paper cup producer Backward Integration Doll maker & mail order firm, Pleasant Co., opened a retail store in Manhattan Forward Integration
  50. 50. 2003 Examples GM developing hydrogen powered automobiles or Pfizer developing a new antismoking pill Product Development JetBlue is adding dozens of new routes Market Development SABMiller Plc spent $500 million in 2003 on marketing its Miller brands of beer Market Penetration
  51. 51. 2003 Examples Viacom acquired Comedy Central, from AOL Horizontal Diversification The video-rental firm Blockbuster may acquire the DVD and music direct-marketing firm Columbia House Conglomerate Diversification Microsoft launched its first personal computers that double as entertainment centers Concentric Diversification
  52. 52. 2003 Examples Sprint liquidated its Web-hosting division Liquidation ConocoPhillips recently sold its Circle K convenience store chain to Alimentation Couche-Tard, a Canadian firm Divestiture America West Airlines closing its hub at Columbus, Ohio and laying off 390 employees Retrenchment
  53. 53. Liquidation Strategies <ul><li>Company’s assets, in parts, for their tangible worth </li></ul>Selling
  54. 54. Liquidation Strategies Guidelines -- <ul><li>Retrenchment & divestiture failed </li></ul><ul><li>Only alternative is bankruptcy </li></ul><ul><li>Minimize stockholder loss by selling firm’s assets </li></ul>
  55. 55. Michael Porter’s Generic Strategies Cost Leadership Strategies Differentiation Strategies Focus Strategies
  56. 56. Generic Strategies <ul><li>In conjunction with differentiation </li></ul><ul><li>Economies or diseconomies of scale </li></ul><ul><li>Capacity utilization achieved </li></ul><ul><li>Linkages w/ suppliers & distributors </li></ul>Cost Leadership
  57. 57. Generic Strategies <ul><li>Many price-sensitive buyers </li></ul><ul><li>Few ways of achieving differentiation </li></ul><ul><li>Buyers not sensitive to brand differences </li></ul><ul><li>Large # of buyers w/bargaining power </li></ul>Low Cost Producer Advantage
  58. 58. Generic Strategies <ul><li>Greater product flexibility </li></ul><ul><li>Greater compatibility </li></ul><ul><li>Lower costs </li></ul><ul><li>Improved service </li></ul><ul><li>Greater convenience </li></ul><ul><li>More features </li></ul>Differentiation
  59. 59. Generic Strategies <ul><li>Industry segment of sufficient size </li></ul><ul><li>Good growth potential </li></ul><ul><li>Not crucial to success of major competitors </li></ul>Focus
  60. 60. Means for Achieving Strategies <ul><ul><li>Two or more companies form a temporary partnership or consortium for purpose of capitalizing on some opportunity. </li></ul></ul>Joint Venture/Partnering -
  61. 61. Means for Achieving Strategies <ul><ul><li>R&D partnerships </li></ul></ul><ul><ul><li>Cross-distribution agreements </li></ul></ul><ul><ul><li>Cross-licensing agreements </li></ul></ul><ul><ul><li>Cross-manufacturing agreements </li></ul></ul><ul><ul><li>Joint-bidding consortia </li></ul></ul>Cooperative Arrangements -
  62. 62. Means for Achieving Strategies <ul><ul><li>Managers who must collaborate daily; not involved in developing the venture </li></ul></ul><ul><ul><li>Benefits the company not the customers </li></ul></ul><ul><ul><li>Not supported equally by both partners </li></ul></ul><ul><ul><li>May begin to compete with one of the partners </li></ul></ul>Why Joint Ventures Fail -
  63. 63. Joint Ventures Guidelines -- <ul><li>Synergies between private and publicly held </li></ul><ul><li>Domestic with foreign firm, local management can reduce risk </li></ul><ul><li>Complementary distinctive competencies </li></ul><ul><li>Resources & risks where project is highly profitable (e.g. Alaska Pipeline) </li></ul><ul><li>Two or more smaller firms competing w/larger firm </li></ul><ul><li>Need to introduce new technology quickly </li></ul>
  64. 64. Means for Achieving Strategies <ul><ul><li>Provide improved capacity utilization </li></ul></ul><ul><ul><li>Better use of existing sales force </li></ul></ul><ul><ul><li>Reduce managerial staff </li></ul></ul><ul><ul><li>Gain economies of scale </li></ul></ul><ul><ul><li>Smooth out seasonal trends in sales </li></ul></ul><ul><ul><li>Gain new technology </li></ul></ul><ul><ul><li>Access to new suppliers, distributors, customers, products, creditors </li></ul></ul>Mergers & Acquisitions
  65. 65. Recent Mergers Converse Nike Handspring Palm People Soft Oracle Montana Mills Krispy Kreme Doughnuts Pharmacia Pfizer National Steel Corp U.S. Steel Inktomi Corp Yahoo Rational Software Corp IBM Acquired Firm Acquiring Firm
  66. 66. First Mover Advantages <ul><ul><li>Benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms. </li></ul></ul>
  67. 67. First Mover Advantages <ul><ul><li>Securing access to rare resources </li></ul></ul><ul><ul><li>Gaining new knowledge of key factors & issues </li></ul></ul><ul><ul><li>Carving out market share </li></ul></ul><ul><ul><li>Easy to defend position & costly for rival firms to overtake </li></ul></ul>Potential Advantages
  68. 68. Outsourcing <ul><ul><li>Companies taking over the functional operations of other firms </li></ul></ul>Business-process outsourcing (BPO)
  69. 69. Outsourcing <ul><ul><li>Less expensive </li></ul></ul><ul><ul><li>Allows firm to focus on core business </li></ul></ul><ul><ul><li>Enables firm to provide better services </li></ul></ul>Benefits
  70. 70. <ul><li>Key Terms & Concepts </li></ul>For Review (Chapter 5) Acquisition Concentric Diversification Backward Integration Conglomerate Diversification Bankruptcy Cooperative Arrangements Combination Strategy Cost Leadership
  71. 71. <ul><li>Key Terms & Concepts </li></ul>For Review (Chapter 5) Differentiation Focus Diversification Strategies Forward Integration Divestiture Franchising First Mover Advantages Generic Strategies
  72. 72. <ul><li>Key Terms & Concepts </li></ul>For Review (Chapter 5) Horizontal Diversification Intensive Strategies Horizontal Integration Joint Venture Hostile Takeover Leveraged Buyout Integration Strategies Liquidation
  73. 73. <ul><li>Key Terms & Concepts </li></ul>For Review (Chapter 5) Long-Term Objectives Outsourcing Market Development Product Development Market Penetration Retrenchment Merger Vertical Integration