Chapter 5 Strategies in

Action
Strategic Management Concepts: A Competitive
Advantage Approach, Concepts and Cases, 17th Global
Edition
 Learning Objectives
• 5.1 Identify and discuss five characteristics and ten benefits of clear objectives.
• 5.2 Define and give an example of eleven types of strategies.
• 5.3 Identify and discuss the three types of “Integration Strategies.”
• 5.4 Give specific guidelines when market penetration, market development, and
product development are especially effective strategies.
• 5.5 Explain when diversification is an effective business strategy.
• 5.6 List guidelines for when retrenchment, divestiture, and liquidation are
especially effective strategies.
• 5.7 Identify and discuss Porter’s five generic strategies.
• 5.8 Compare (a) cooperation among competitors, (b) joint venture and
partnering, and (c) merger/acquisition as key means for achieving strategies.
• 5.9 Discuss tactics to facilitate strategies, such as (a) being a first mover, (b)
outsourcing, and (c) reshoring.
• 5.10 Explain how strategic planning differs in for-profit, not-for-profit, and small
firms.
 Outline
• 5.1: Identify and discuss five characteristics and ten benefits
of clear objectives.
• Long-Term Objectives
• Characteristics and Benefits of Objectives
• Financial versus Strategic Objectives
• Avoid Managing by Crisis, Hope, Extrapolation, and Mystery (CHEM)
• 5.2: Define and give an example of eleven types of strategies.
• Types of Strategies
• Levels of Strategies
• 5.3: Identify and discuss the three types of "Integration
Strategies.“
• Integration Strategies: Forward Integration; Backward Integration;
Horizontal Integration
 Outline
• 5.4: Give specific guidelines when market penetration,
market development, and product development are
especially effective strategies.
• Intensive Strategies: Market Penetration; Market Development;
Product Development
• 5.5: Explain when diversification is an effective business
strategy.
• Related Diversification; Unrelated Diversification
• 5.6: List guidelines for when retrenchment, divestiture, and
liquidation are especially effective strategies.
• Retrenchment; Divestiture; Liquidation;
• 5.7: Explain value chain analysis and benchmarking in
strategic management.
• Value Chain Analysis and Benchmarking
 Outline
• 5.8: Identify and discuss Porter's two generic strategies: cost
leadership and differentiation.
• Michael Porter’s Two Generic Strategies: Cost Leadership;
Differentiation
• 5.9: Compare and contrast when companies should "build,
borrow, or buy" as key means for achieving strategies.
• Means for Achieving Strategies: BUILD from Within to Grow; BORROW
from Others to Grow; BUY Others to Grow
• 5.10: Discuss first mover advantages and disadvantages.
• First-Mover Advantages
• 5.11: Explain how strategic planning differs in for-profit, not-
for-profit, and small firms.
• Strategic Management in Nonprofit and Small Firms
 Long-Term Objectives
• Long-term objectives  represent the results expected
from pursuing certain strategies.
• Strategies  represent the actions to be taken to
accomplish long-term objectives.
• The time frame for objectives and strategies should be
consistent, usually from 2 to 5 years.
 Long-Term Objectives
• Objectives provide a basis for consistent decision making by
managers whose values and attitudes differ.
• Objectives serve as standards by which individuals, groups,
departments, divisions, and entire organizations can be
evaluated.
• Objectives
• provide direction
• allow synergy
• assist in evaluation
• establish priorities
• reduce uncertainty
• minimize conflicts
• stimulate exertion
• aid in both the allocation of resources and the design of jobs
 Long-Term Objectives:
Characteristics and Benefits of
Objectives
Five Characteristics of Objectives
•1. Quantitative: measurable
•2. Understandable: clear
•3. Challenging: achievable
•4. Compatible: consistent vertically and horizontally in a
chain of command
•5. Obtainable: realistic
 Long-Term Objectives:
Characteristics and Benefits of
Objectives
10 Benefits of Having Clear Objectives
•1. Provide direction by revealing expectations.
•2. Allow synergy.
•3. Assist in evaluation by serving as standards.
•4. Establish priorities.
•5. Reduce uncertainty.
•6. Minimize conflicts.
•7. Stimulate exertion.
•8. Aid in allocation of resources.
•9. Aid in design of jobs.
•10. Provide basis for consistent decision making
 Long-Term Objectives:
Financial versus Strategic
Objectives
Two types of objectives are especially common in
organizations: financial and strategic objectives.
•Financial objectives  include those associated with growth
in revenues, growth in earnings, higher dividends, larger
profit margins, greater return on investment, higher earnings
pershare, a rising stock price, improved cash flow, and all
other objectives relating to the financial position of the firm.
•Strategic objectives  focus on goals for obtaining a
competitive advantage, including factors such as a larger
market share, quicker on-time delivery than rivals, lower
costs than rivals, higher product quality than rivals, wider
geographic coverage than rivals, achieving technological
leadership, and consistently getting new or improved
products to market ahead of rivals.
 Long-Term Objectives:
Avoid Managing by Crisis, Hope, Extrapolation, and
Mystery (CHEM)
Not Managing by Objectives:
•Managing by Crisis
•Managing by Hope
•Managing by Extrapolation
•Managing by Mystery
 Types of Strategies
• Most organizations simultaneously pursue a
combination of two or more strategies, but a
combination strategy can be exceptionally risky if
carried too far.
• No organization can afford to pursue all the strategies
that might benefit the firm.
• Difficult decisions must be made and priorities must be
established.
 Types of Strategies:
Alternative Strategies Defined and
Exemplified
 Types of Strategies:
Alternative Strategies Defined and
Exemplified
 Levels of Strategies
• Strategy making is
not just a task for top
executives.
• Middle- and lower-
level managers also
must be involved in
the strategic-planning
process to the extent
possible.
• In large firms, there
are actually four
levels of strategies:
corporate, divisional,
functional, and
operational.
 Levels of Strategies
Long-term objectives are needed at the corporate,
divisional, functional, and operational levels of an
organization.
 Integration Strategies
• Forward integration and backward integration are sometimes
collectively referred to as vertical integration.
• Vertical integration strategies allow a firm to gain control over
distributors and suppliers, whereas horizontal integration refers
to gaining ownership and/or control over competitors.
• Forward Integration
• involves gaining ownership or increased control over distributors or
retailers
• Backward Integration
• strategy of seeking ownership or increased control of a firm's suppliers
• Horizontal Integration
• a strategy of seeking ownership of or increased control over a
firm's competitors
 Integration Strategies:
Forward Integration Guidelines
• When an organization’s present distributors are especially
expensive
• 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
• When an organization has both capital and human resources
to manage distributing their own products
• When the advantages of stable production are particularly
high
• When present distributors or retailers have high profit margins
 Integration Strategies:
Backward Integration Guidelines
• When an organization’s present suppliers are especially
expensive or unreliable
• When the number of suppliers is small and the number of
competitors is large
• When the organization competes in a growing industry
• When an organization has both capital and human resources
• When the advantages of stable prices are particularly
important
• When present suppliers have high profit margins
• When an organization needs to quickly acquire a needed
resource
 Integration Strategies:
Horizontal Integration Guidelines
• When an organization can gain monopolistic
characteristics in a particular area or region without
being challenged by the federal government
• 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
• When competitors are faltering due to a lack of
managerial expertise
 Intensive Strategies
• Market penetration, market development, and product
development are sometimes referred to as intensive strategies
because they require intensive efforts if a firm’s competitive
position with existing products is to improve.
• Market Penetration Strategy
• seeks to increase market share for present products or
services in present markets through greater marketing efforts
• Market Development Strategy
• involves introducing present products or services into new
geographic areas
• Product Development Strategy
• seeks increased sales by improving or modifying present
products or services
 Intensive Strategies:
Market Penetration Guidelines
• 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
• 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 Guidelines
• 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 organization’s basic industry is rapidly
becoming global in scope
 Intensive Strategies:
Product Development Guidelines
• Product development overall is an excellent option because a
firm does not stray far from what it does best. The following
five guidelines indicate when product development may be
an especially effective strategy to pursue:
• 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 organization’s present products or services.
• An organization competes in an industry that is characterized by
rapid technological developments.
• Major competitors offer better-quality products at comparable prices.
• An organization competes in a high-growth industry.
• An organization has especially strong research and development
capabilities.
 Diversification Strategies
• The two general types of diversification strategies are
related diversification and unrelated diversification.
• Related Diversification
• value chains possess competitively valuable cross-business
strategic fits
• Unrelated Diversification
• value chains are so dissimilar that no competitively valuable
cross-business relationships exist
 Diversification Strategies:
Synergies of Related Diversification
• Transferring competitively valuable expertise,
technological know-how, or other capabilities from one
business to another
• Combining the related activities of separate businesses
into a single operation to achieve lower costs
• Exploiting common use of a known brand name
• Using cross-business collaboration to create strengths
 Diversification Strategies:
Related Diversification Guidelines
• Related diversification should be considered when these
circumstances exist:
• When an organization competes in a no-growth or a slow-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 prices
• When new, but related, products have seasonal sales levels that
counterbalance an organization’s existing peaks and valleys
• When an organization’s products are currently in the declining
stage of the product’s life cycle
• When an organization has a strong management team
 Diversification Strategies:
Unrelated Diversification Guidelines
• When revenues derived from an organization’s current products
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 organization’s 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 present products
• When an organization’s basic industry is experiencing declining
annual sales and profits
 Diversification Strategies:
Unrelated Diversification Guidelines
• When an organization has the capital and managerial talent
needed to compete successfully in a new industry
• When an organization has the opportunity to purchase an
unrelated business that is an attractive investment
opportunity
• When there exists financial synergy
• When existing markets for an organization’s present
products are saturated
• 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 defensive
strategies such as retrenchment, divestiture, or liquidation.
• Retrenchment
• Regroups through cost and asset reduction to reverse declining
sales and profits
• Divestiture
• Selling a division or part of an organization
• Often used to raise capital for further strategic acquisitions or
investments
• Liquidation
• Selling all of a company’s assets, in parts, for their tangible worth
 Defensive Strategies:
Retrenchment
• Retrenchment
• occurs when an organization regroups through cost and asset
reduction to reverse declining sales and profits
• also called a turnaround or reorganizational strategy
• designed to fortify an organization’s basic distinctive
competence
 Defensive Strategies:
Retrenchment Guidelines
• When an organization has a distinctive competence but
has failed consistently to meet its goals
• When an organization is one of the weaker competitors
in a given industry
• When an organization is plagued by inefficiency, low
profitability, and poor employee morale
• When an organization fails to capitalize on external
opportunities and minimize external threats
• When an organization has grown so large so quickly
that major internal reorganization is needed
 Defensive Strategies:
Divestiture Guidelines
• When an organization has pursued a
retrenchment strategy and failed to
accomplish improvements
• When a division needs more
resources to be competitive than the
company can provide
• When a division is responsible for an
organization's overall poor
performance
• When a division is a misfit with the
rest of an organization
• When a large amount of cash is
needed quickly
• When government antitrust action
threatens a firm
 Defensive Strategies:
Liquidation
• Liquidation
• selling all of a
company’s assets, in
parts, for their
tangible worth
• can be an
emotionally difficult
strategy
 Defensive Strategies:
Liquidation Guidelines
• When an organization has pursued both a retrenchment
strategy and a divestiture strategy, and neither has
been successful
• When an organization’s only alternative is bankruptcy
• When the stockholders of a firm can minimize their
losses by selling the organization’s assets
 Value Chain Analysis and
Benchmarking
• Value chain analysis
• The process whereby a firm determines the value (price minus
cost) of each and all activities that went into producing and
marketing a product, from purchasing raw materials to
manufacturing, distributing, and marketing those products.
• Benchmarking
• Entails examination of value chain activities across an industry
to determine “best practices” among competing firms; firms
engage in benchmarking for the purpose of duplicating or
improving on those best practices.
Value Chain Analysis and
Benchmarking
 Value Chain Analysis and
Benchmarking
Figure 5.4 An
Example Value
Chain for a
Typical
Manufacturing
Company
Value Chain Analysis and
Benchmarking
 Michael Porter’s Two Generic
Strategies
• Cost Leadership
• emphasizes producing standardized products at a very low per-unit cost
for consumers who are price-sensitive.
• Differentiation
• is a strategy aimed at producing products and services considered unique
industry-wide and directed at consumers who are relatively price-
insensitive
• Different strategies offer different degrees of differentiation. Differentiation
does not guarantee competitive advantage, especially if standard products
sufficiently meet customer needs or if rapid imitation by competitors is
possible.
• Cost leadership generally must be pursued in conjunction with
differentiation.
• A number of cost elements affect the relative attractiveness of generic
strategies, including economies or diseconomies of scale achieved,
learning and experience curve effects, the percentage of capacity
utilization achieved, and linkages with suppliers and distributors.
 Michael Porter’s Two Generic
Strategies:
Cost Leadership
• Companies employing a low-cost (Type 1) or narrow or
focused (Type 2) cost leadership strategy must achieve
their competitive advantage in ways that are difficult for
competitors to copy or match.
• Type 1
• low-cost strategy that offers products or services to a wide
range of customers at the lowest price available on the market
• Type 2
• Narrow or focused low-cost strategy that offers products or
services to a small range of customers at one of the lowest
prices in the market
 Michael Porter’s Two Generic
Strategies:
Differentiation
• One type of
differentiation focuses
on a wide target market;
the other focuses on a
narrow target market.
Two types of differentiation
• Wide target market
• Narrow target market
Means For Achieving Strategies
Means For Achieving Strategies
 Means For Achieving Strategies
• BUILD from within to grow or organic growth
• Blue ocean strategy
• BORROW from others to grow
• joint ventures or strategic alliances
• BUY others to grow
• Merger, acquisition, leveraged buyout, private equity
 Means For Achieving Strategies:
BUILD from within to grow
• When firms build from within, sometimes called organic
growth, as a means for achieving strategies, strategists
must consider how well current internal resources match
the capabilities needed to grow (4+ percent).
• Building from within can include new training programs,
hiring new employees, building (instead of buying rival’s)
stores, or developing a “blue ocean strategy.”
• A blue ocean strategy aims to target a new market where
competition is not yet present, thus creating a “blue ocean”
as opposed to a red ocean.
• Red ocean strategy - where many firms are competing often on
price, and the gains of one firm are often at the expense of another.
• Blue ocean strategy is similar to being a first mover seeking market
space not yet occupied by rivals.
 Means For Achieving Strategies:
BORROW from others to grow
• Firms tend to “borrow” capabilities through joint ventures or
strategic alliances when the
• (1) firm does not believe it can develop the necessary resources internally,
or
• (2) the costs and risks of merging are too high.
• Joint venture - occurs when two or more companies form a
temporary partnership or consortium for the purpose of
capitalizing on some opportunity and have shared equity
ownership in the new entity.
• Strategic alliance - cooperation among competitors.
• are agreements between two or more independent companies to
cooperate in the manufacturing, development, or sale of products and
services, or other business objectives.
 Means For Achieving Strategies:
BUY others to grow
• Merger and acquisition refers to firms buying others to grow.
• Merger occurs when two organizations of about equal size unite to form one
enterprise.
• Acquisition occurs when a large organization purchases (acquires) a smaller
firm or vice versa.
• If a merger or acquisition is not desired by both parties, it is called a
hostile takeover, as opposed to a friendly merger.
• Most mergers are friendly, but the number of hostile takeovers is on the rise.
• A hostile takeover is not unethical as long as it is conducted in a civil and legal
manner.
• Leveraged buyout (LBO) occurs when a firm’s shareholders are
bought (hence buyout) by the company’s management and other
private investors using borrowed funds (hence leverage).
• Private Equity – a type of investment in which the investors
purchase shares in privately-held businesses.
Means For Achieving Strategies:
BUY others to grow
 Means For Achieving Strategies:
BUY others to grow
Table 5.7 12 Potential Benefits of Merging With or Acquiring
• Another• Firm
To provide improved capacity To gain new technology
utilization • To gain market share
• To make better use of the • To enter global markets
existing sales force
• • To gain pricing power
To reduce managerial staff
• • To reduce tax obligations
To gain economies of scale
• • To eliminate competitors
To smooth out seasonal trends
in sales
• To gain access to new
suppliers, distributors,
customers, products, and
creditors
 First-Mover Advantages
• First-mover advantages refer 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 an excellent strategy when
such actions
• (1) build a firm’s image and reputation with buyers;
• (2) produce cost advantages over rivals in terms of new
technologies, new components, new distribution channels;
• (3) create strongly loyal customers; and
• (4) make imitation or duplication by a rival difficult or unlikely.
First-Mover Advantages
 Strategic Management in Nonprofit
and Small Firms
• Nonprofit organizations are similar to for-profit companies in
virtually every respect except for two major differences:
• (1) Nonprofits do not pay taxes, and
• (2) nonprofits do not have shareholders to provide capital.
• Nonprofits organizations
• have employees, customers, creditors, suppliers, and distributors as
well as financial budgets, income statements, balance sheets, cash
flow statements, and so on.
• embrace strategic planning as much as for-profit firms, and perhaps
even more.
• Both nonprofit and for-profit organizations have competitors
that want to put them out of business.
 Strategic Management in Nonprofit
and Small Firms
• Educational Institutions
• Accrediting bodies that audit colleges and universities require
continuous strategic planning.
• Governmental Agencies and Departments
• are responsible for formulating, implementing, and evaluating
strategies that use taxpayers’ dollars in the most cost-effective way
to provide services and programs.
• Strategic-management concepts are generally required and thus
widely used to enable governmental organizations to be more
effective and efficient.
• Strategists in governmental organizations operate with less strategic
autonomy than their counterparts in private firms.
• Small Firms
• Research indicates that strategic management in small firms is more
informal than in large firms, but small firms that engage in strategic
management generally outperform those that do not.