strategy in action
TRANSCRIPT
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Copyright 2007 Prentice Hall Ch 5 -1
Chapter 5Strategies in Action
Strategic Management: Concepts & Cases
11th EditionFred David
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Copyright 2007 Prentice Hall Ch 5 -2
Chapter Outline
Long-Term Objectives
Types of Strategies
Integration Strategies
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Copyright 2007 Prentice Hall Ch 5 -3
Chapter Outline (cont’d)
Intensive Strategies
Diversification Strategies
Defensive Strategies
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Copyright 2007 Prentice Hall Ch 5 -4
Chapter Outline (cont’d)
Michael Porter’s Generic Strategies
Means for Achieving Strategies
First Mover Advantages
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Copyright 2007 Prentice Hall Ch 5 -5
Chapter Outline (cont’d)
Outsourcing
Strategic Management in Nonprofit & Governmental Organizations
Strategic Management in Small Firms
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Copyright 2007 Prentice Hall Ch 5 -6
Strategies for taking the hill won’t necessarily hold it. –Amar Bhide
Strategies in Action
The early bird may get the worm, but the second mouse gets the cheese. – Unknown
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Copyright 2007 Prentice Hall Ch 5 -7
Strategies in Action
-- Quest for higher revenues
-- Quest for higher profits
Companies Embrace Strategic Planning
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Copyright 2007 Prentice Hall Ch 5 -8
Results expected from pursuing certain strategies
Strategies represent actions to accomplish long-term objectives
Long-Term Objectives
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Copyright 2007 Prentice Hall Ch 5 -9
Long-Term Objectives
Objectives --
Quantifiable
Measurable
Realistic
Understandable
Challenging
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Copyright 2007 Prentice Hall Ch 5 -10
Long-Term Objectives
Objectives --
Hierarchical
Obtainable
Congruent
Time-line
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Copyright 2007 Prentice Hall Ch 5 -11
Long-Term Objectives
Strategists Should Avoid --
Managing by Extrapolation
Managing by Crisis
Managing by Subjectives
Managing by Hope
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Copyright 2007 Prentice Hall Ch 5 -12
Varying Performance Measures by Organizational Level
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Copyright 2007 Prentice Hall Ch 5 -13
Financial vs. Strategic Objectives
Financial ObjectivesGrowth in revenues
Growth in earnings
Higher dividends
Higher profit margins
Higher earnings per share
Improved cash flow
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Copyright 2007 Prentice Hall Ch 5 -14
Financial vs. Strategic Objectives
Strategic ObjectivesLarger 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
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Copyright 2007 Prentice Hall Ch 5 -15
Financial vs. Strategic Objectives
Trade-OffMaximize short-term financial objectives – harm long-term strategic objectives
Pursue increased market share at the expense of short-term profitability
Tradeoffs related to risk of actions; concern for business ethics; need to preserve natural environment; social responsibility issues
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Copyright 2007 Prentice Hall Ch 5 -16
Not Managing by Objectives
Managing by extrapolation Managing by crisis Managing by subjectives Managing by hope
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Copyright 2007 Prentice Hall Ch 5 -17
The Balanced Scorecard
Robert Kaplan & David Norton --
Strategy evaluation & control technique
Balance financial measures with non-financial measures
Balance shareholder objectives with customer & operational objectives
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Copyright 2007 Prentice Hall Ch 5 -18
Types of Strategies
Operational Level
Functional Level
Division Level
Corp LevelA Large Company
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Copyright 2007 Prentice Hall Ch 5 -19
Types of Strategies
Operational Level
Functional Level
Company Level
A Small Company
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Copyright 2007 Prentice Hall Ch 5 -20
Types of Strategies
Vertical IntegrationStrategies
Forward Integration
BackwardIntegration
HorizontalIntegration
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Copyright 2007 Prentice Hall Ch 5 -21
Vertical Integration Strategies
Gain Control Over --
Distributors
Suppliers
Competitors
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Copyright 2007 Prentice Hall Ch 5 -22
Forward Integration Strategies
Gain Control Over --
Distributors
Retailers
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Copyright 2007 Prentice Hall Ch 5 -23
Forward Integration Strategies
Guidelines --Current distributors – expensive or unreliable
Availability of quality distributors – limited
Firm competing in industry expected to grow markedly
Firm has both capital & HR to manage new business of distribution
Current distributors have high profit margins
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Copyright 2007 Prentice Hall Ch 5 -24
Backward Integration Strategies
Ownership or Control --
Firm’s suppliers
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Backward Integration StrategiesGuidelines --Current suppliers – expensive or unreliable
# of suppliers is small; # of competitors is large
High growth in industry sector
Firm has both capital & HR to manage new business
Stable prices are important
Current suppliers have high profit margins
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Copyright 2007 Prentice Hall Ch 5 -26
Horizontal Integration Strategies
Ownership or Control --
Firm’s competitors
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Copyright 2007 Prentice Hall Ch 5 -27
Horizontal Integration StrategiesGuidelines --Gain monopolistic characteristics w/o federal government challenge
Competes in growing industry
Increased economies of scale – major competitive advantages
Faltering due to lack of managerial expertise or need for particular resource
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Copyright 2007 Prentice Hall Ch 5 -28
Types of Strategies
IntensiveStrategies
MarketPenetration
MarketDevelopment
ProductDevelopment
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Copyright 2007 Prentice Hall Ch 5 -29
Intensive Strategies
Intensive Efforts --
Improve competitive position with existing products
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Copyright 2007 Prentice Hall Ch 5 -30
Market Penetration Strategies
Increased Market Share --
Present products/services
Present markets
Greater marketing efforts
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Copyright 2007 Prentice Hall Ch 5 -31
Market Penetration Strategies
Guidelines --Current markets not saturated
Usage rate of present customers can be increased significantly
Shares of competitors declining; industry sales increasing
Increased economies of scale provide major competitive advantage
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Copyright 2007 Prentice Hall Ch 5 -32
Market Development Strategies
New Markets --
Present products/services to new geographic areas
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Copyright 2007 Prentice Hall Ch 5 -33
Market Development StrategiesGuidelines --New channels of distribution – reliable, inexpensive, good quality
Firm is successful at what it does
Untapped/unsaturated markets
Excess production capacity
Basic industry rapidly becoming global
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Copyright 2007 Prentice Hall Ch 5 -34
Product Development Strategies
Increased Sales --
Improving present products/services
Developing new products/services
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Copyright 2007 Prentice Hall Ch 5 -35
Product Development StrategiesGuidelines --Products in maturity stage of life cycle
Industry characterized by rapid technological development
Competitors offer better-quality products @ comparable prices
Compete in high-growth industry
Strong R&D capabilities
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Copyright 2007 Prentice Hall Ch 5 -36
Types of Strategies
DiversificationStrategies
Related Diversification
UnrelatedDiversification
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Copyright 2007 Prentice Hall Ch 5 -37
Diversification
Related – When their value chains posses competitively valuable cross-business strategic fits
Unrelated – When their value chains are so dissimilar that no competitively valuable cross-business relationships exist
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Copyright 2007 Prentice Hall Ch 5 -38
Related Diversification Preferred To Capitalize on:
Transferring competitively valuable expertise Combining the related activities of separate
businesses into a single operation to lower costs
Exploiting common use of a well-known brand name
Cross-business collaboration to create competitively valuable resource strengths and capabilities
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Copyright 2007 Prentice Hall Ch 5 -39
Diversification Strategies
Less Popular --
More difficult to manage diverse business activities
However --
The greatest risk of being in a single industry is having all your eggs in one basket
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Copyright 2007 Prentice Hall Ch 5 -40
Related Diversification May be Effective When:
An organization competes in a no-growth or a slow growth industry
Adding new, but related, products would significantly enhance the sales of current products
New, but related products could be offered at highly competitive prices
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Copyright 2007 Prentice Hall Ch 5 -41
Related Diversification May be Effective When:
New, but related, products have seasonal sales levels that counterbalance an organization’s existing peaks and valleys
An organization’s products are currently in the declining stage of the product’s life cycle
An organization has a strong management team
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Copyright 2007 Prentice Hall Ch 5 -42
Conglomerate Diversification Strategies
Guidelines --Declining annual sales & profits
Capital & managerial ability to compete in new industry
Financial synergy between acquired and acquiring firms
Current markets for present products - saturated
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Copyright 2007 Prentice Hall Ch 5 -43
Unrelated Diversification
Favors capitalizing on a portfolio of businesses that are capable of delivering excellent financial performance
Entails hunting to acquire companies: Whose assets are undervalued That are financially distressed With high growth potential but are short on
investment capital
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Copyright 2007 Prentice Hall Ch 5 -44
Unrelated Diversification May be Effective When:
Revenues derived from an organization’s current products or services would increase by adding new unrelated products
An organization competes in a highly competitive or a no growth industry
An organization’s current distribution channels can be used to market new products to existing customers
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Copyright 2007 Prentice Hall Ch 5 -45
Unrelated Diversification May be Effective When:
New products have countercyclical sales patterns
An organization’s basic industry is experiencing declining annual sales and profits
An organization has the capital and managerial talent to compete successfully in a new industry
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Copyright 2007 Prentice Hall Ch 5 -46
Unrelated Diversification May be Effective When:
An organization has the opportunity to purchase an unrelated business as an attractive investment opportunity
There exists financial synergy between the acquired and acquiring firm
Existing markets for the present products are saturated
Antitrust action could be charged against a company
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Copyright 2007 Prentice Hall Ch 5 -47
Types of Strategies
DefensiveStrategies
Retrenchment
Divestiture
Liquidation
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Copyright 2007 Prentice Hall Ch 5 -48
Retrenchment Strategies
Regrouping --
Cost & asset reduction to reverse declining sales & profit
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Copyright 2007 Prentice Hall Ch 5 -49
Bankruptcy
Chapter 7 – Liquidation Chapter 9 – Municipalities Chapter 11 – Reorganization for Corporations Chapter 12 – Family Farmers Cheaper 13 – Reorganization for Small
Businesses and Individuals
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Copyright 2007 Prentice Hall Ch 5 -50
Retrenchment Strategies
Guidelines --Failed to meet objectives & goals consistency; has distinctive competencies
Firm is one of weaker competitors
Inefficiency, low profitability, poor employee morale, pressure for stockholders
Strategic managers have failed
Rapid growth in size; major internal reorganization necessary
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Copyright 2007 Prentice Hall Ch 5 -51
Divestiture Strategies
Selling a division or part of an organization
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Copyright 2007 Prentice Hall Ch 5 -52
Divestiture Strategies
Guidelines --Retrenchment failed to attain improvements
Division needs more resources than are available
Division responsible for firm’s overall poor performance
Division is a mis-fit with organization
Large amount of cash is needed and cannot be raised through other sources
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Copyright 2007 Prentice Hall Ch 5 -53
Liquidation Strategies
Company’s assets, in parts, for their tangible worth
Selling
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Copyright 2007 Prentice Hall Ch 5 -54
Liquidation Strategies
Guidelines --
Retrenchment & divestiture failed
Only alternative is bankruptcy
Minimize stockholder loss by selling firm’s assets
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Copyright 2007 Prentice Hall Ch 5 -55
Michael Porter’s Generic Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
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Copyright 2007 Prentice Hall Ch 5 -56
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Copyright 2007 Prentice Hall Ch 5 -57
Generic Strategies
In conjunction with differentiation
Economies or diseconomies of scale
Capacity utilization achieved
Linkages w/ suppliers & distributors
Cost Leadership(Type 1 and Type 2)
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Copyright 2007 Prentice Hall Ch 5 -58
Cost Leadership
Ways of ensuring total costs across value chain are lower than competitors’ total costs
1. Perform value chain activities more efficiently than rivals and control factors that drive costs
2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities
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Copyright 2007 Prentice Hall Ch 5 -59
Cost Leadership
Can be especially effective when:1. Price competition among rivals is vigorous2. Rival’s products are identical and supplies are
readily available3. There are few ways to achieve differentiation4. Most buyers use the product in the same way5. Buyers have low switching costs6. Buyers are large and have significant power7. Industry newcomers use low prices to attract
buyers
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Copyright 2007 Prentice Hall Ch 5 -60
Generic Strategies
Many price-sensitive buyers
Few ways of achieving differentiation
Buyers not sensitive to brand differences
Large # of buyers w/bargaining power
Low Cost Producer Advantage
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Copyright 2007 Prentice Hall Ch 5 -61
Generic Strategies
Greater product flexibility
Greater compatibility
Lower costs
Improved service
Greater convenience
More features
Differentiation (Type 3)
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Copyright 2007 Prentice Hall Ch 5 -62
Differentiation
Can be especially effective when:1. There are many ways to differentiate and many
buyers perceive the value of the differences2. Buyer needs and uses are diverse3. Few rival firms are following a similar
differentiation approach4. Technology change is fast paced and
competition revolves around evolving product features
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Copyright 2007 Prentice Hall Ch 5 -63
Generic Strategies
Industry segment of sufficient size
Good growth potential
Not crucial to success of major competitors
Focused Strategies (Type 4 & 5)
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Copyright 2007 Prentice Hall Ch 5 -64
Focused Strategy Can be especially effective when:
1. The target market niche is large, profitable, and growing
2. Industry leaders do not consider the niche crucial3. Industry leaders consider the niche too costly or
difficult to meet4. The industry has many different niches and
segments5. Few, if any, other rivals are attempting to
specialize in the same target segment
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Copyright 2007 Prentice Hall Ch 5 -65
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Means for Achieving Strategies
Two or more companies form a temporary partnership or consortium for purpose of capitalizing on some opportunity
Joint Venture/Partnering -
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Reasons why Mergers and Acquisitions Fail
Integration difficulties Inadequate evaluation of target Large or extraordinary debt Inability to achieve synergy
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Copyright 2007 Prentice Hall Ch 5 -68
Means for Achieving Strategies
R&D partnerships Cross-distribution agreements Cross-licensing agreements Cross-manufacturing agreements Joint-bidding consortia
Cooperative Arrangements -
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Copyright 2007 Prentice Hall Ch 5 -69
Means for Achieving Strategies
Managers who must collaborate daily; not involved in developing the venture
Benefits the company not the customers Not supported equally by both partners May begin to compete with one of the
partners
Why Joint Ventures Fail -
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Copyright 2007 Prentice Hall Ch 5 -70
Joint Ventures
Guidelines --Synergies between private and publicly held
Domestic with foreign firm, local management can reduce risk
Complementary distinctive competencies
Resources & risks where project is highly profitable (e.g. Alaska Pipeline)
Two or more smaller firms competing w/larger firm
Need to introduce new technology quickly
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Copyright 2007 Prentice Hall Ch 5 -71
Reasons why Mergers and Acquisitions Fail
Too much diversification Managers overly focused on acquisition Too large an acquisition Difficult to integrate different organizational
cultures Reduced employee moral due to layoffs and
relocations
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Copyright 2007 Prentice Hall Ch 5 -72
Means for Achieving Strategies
Provide improved capacity utilization Better use of existing sales force Reduce managerial staff Gain economies of scale Smooth out seasonal trends in sales Gain new technology Access to new suppliers, distributors, customers,
products, creditors
Mergers & Acquisitions
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Copyright 2007 Prentice Hall Ch 5 -73
Recent Mergers
Acquiring Firm Acquired FirmIBM Ascential Software Philip Morris PT Hanjaya Mandala SampU.S. Steel National Steel CorpOracle PeopleSoftOSIM International Ltd BrookstoneAdobe Systems MacromediaUS Airways American WestUnited Parcel Service Overnight Corp.
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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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First Mover Advantages
Securing access to rare resources Gaining new knowledge of key factors &
issues Carving out market share Easy to defend position & costly for rival
firms to overtake
Potential Advantages
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Outsourcing
Companies taking over the functional operations of other firms
Business-process outsourcing (BPO)
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Outsourcing
Less expensive Allows firm to focus on core business Enables firm to provide better services
Benefits
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Key Terms & Concepts
For Review (Chapter 5)
Acquisition Concentric Diversification
Backward Integration
Conglomerate Diversification
Bankruptcy Cooperative Arrangements
Combination Strategy Cost Leadership
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Key Terms & Concepts
For Review (Chapter 5)
Differentiation Focus
DiversificationStrategies Forward Integration
Divestiture Franchising
First Mover Advantages Generic Strategies
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Key Terms & Concepts
For Review (Chapter 5)
HorizontalDiversification Intensive Strategies
HorizontalIntegration Joint Venture
Hostile Takeover Leveraged Buyout
IntegrationStrategies Liquidation
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Key Terms & Concepts
For Review (Chapter 5)
Long-TermObjectives Outsourcing
Market Development Product Development
Market Penetration Retrenchment
Merger Vertical Integration