STRATEGIES

IN ACTION

Even if you’re on the right track, you’ll get

run over if you just sit there.

-- Will Rogers

Ch5-5
Fred R. David
Prentice Hall
 Strategies in Action

Hundreds of companies today –

• Embrace strategic planning

• Quest for higher revenues
• Quest for higher profits

Ch5-6
Fred R. David
Prentice Hall
 Long-Term Objectives

• The results expected from pursuing

certain strategies

Ch5-7
Fred R. David
Prentice Hall
 Long-Term Objectives
Objectives –

– Quantifiable
– Measurable
– Realistic
– Understandable
– Challenging
– Hierarchical
– Obtainable
– Congruent
– Time-line

Ch5-8
Fred R. David
Prentice Hall
 Long-Term Objectives

Long-term objectives are necessary –

– Corporate
– Divisional
– Functional levels

Ch5-9
Fred R. David
Prentice Hall
 Long-Term Objectives

Strategists should avoid –

– Managing by Extrapolation
– Managing by Crisis
– Managing by Subjectives
– Managing by Hope

Ch5-10
Fred R. David
Prentice Hall
 Integration Strategies

Forward Integration
Vertical
Integration Backward Integration
Strategies
Horizontal Integration

Ch5-11
Fred R. David
Prentice Hall
 Integration Strategies

Vertical Integration strategies –

– Allow a firm to gain control over:

• Distributors
• Suppliers
• competitors

Ch5-12
Fred R. David
Prentice Hall
 Integration Strategies

Forward Integration –

– Gaining ownership or increased control

over distributors or retailers

Ch5-13
Fred R. David
Prentice Hall
 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
Ch5-14
Fred R. David
Prentice Hall
 Integration Strategies

Backward Integration –

– Seeking ownership or increased

control of a firm’s suppliers

Ch5-15
Fred R. David
Prentice Hall
 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
Ch5-16
Fred R. David
Prentice Hall
 Integration Strategies

Horizontal Integration –

– Seeking ownership or increased

control over competitors

Ch5-17
Fred R. David
Prentice Hall
 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

Ch5-18
Fred R. David
Prentice Hall
Michael Porter’s Generic Strategies

Cost Leadership Strategies

Differentiation Strategies

Focus Strategies

Ch5-19
Fred R. David
Prentice Hall
 Generic Strategies
Cost Leadership Strategies –

▪ Pursued in conjunction with differentiation

▪ Economies or diseconomies of scale
▪ Capacity utilization achieved
▪ Linkages with suppliers and distributors

Ch5-20
Fred R. David
Prentice Hall
 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
Ch5-21
Fred R. David
Prentice Hall
 Generic Strategies
Differentiation Strategies –

▪ Greater product flexibility

▪ Greater compatibility
▪ Lower costs
▪ Improved service
▪ Greater convenience
▪ More features
Ch5-22
Fred R. David
Prentice Hall
 Generic Strategies

Differentiation Strategies –

▪ Allow firm to charge higher price

▪ Gain customer loyalty

Ch5-23
Fred R. David
Prentice Hall
 Generic Strategies

Focus Strategies –

▪ Industry segment of sufficient size

▪ Good growth potential
▪ Not crucial to success of major competitors

Ch5-24
Fred R. David
Prentice Hall
 Generic Strategies

Focus Strategies –

▪ Consumers have distinctive preferences

▪ Rival firms not attempting to specialize in the
same target segment

Ch5-25
Fred R. David
Prentice Hall
 Intensive Strategies

Market Penetration
Intensive
Market Development
Strategies
Product Development

Ch5-26
Fred R. David
Prentice Hall
 Intensive Strategies

Intensive strategies –

– Require intensive efforts to improve a

firm’s competitive position with existing
products

Ch5-27
Fred R. David
Prentice Hall
 Intensive Strategies

Market Penetration –

– Seeking increased market share for

present products or services in present
markets through greater marketing
efforts

Ch5-28
Fred R. David
Prentice Hall
 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

Ch5-29
Fred R. David
Prentice Hall
 Intensive Strategies

Market Development –

– Introducing present products or

services into new geographic area

Ch5-30
Fred R. David
Prentice Hall
 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

Ch5-31
Fred R. David
Prentice Hall
 Intensive Strategies

Product Development –

– Seeking increased sales by improving

present products or services or
developing new ones

Ch5-32
Fred R. David
Prentice Hall
 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

Ch5-33
Fred R. David
Prentice Hall
 Diversification Strategies

Concentric
Diversification

Diversification Conglomerate
Strategies Diversification

Horizontal
Diversification

Ch5-34
Fred R. David
Prentice Hall
 Diversification Strategies

Diversification strategies –

– Becoming less popular as

organizations are finding it more
difficult to manage diverse business
activities

Ch5-35
Fred R. David
Prentice Hall
 Diversification Strategies

Concentric Diversification –

– Adding new, but related, products or

services

Ch5-36
Fred R. David
Prentice Hall
 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

Ch5-37
Fred R. David
Prentice Hall
 Diversification Strategies

Conglomerate Diversification –

– Adding new, unrelated products or

services

Ch5-38
Fred R. David
Prentice Hall
 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

Ch5-39
Fred R. David
Prentice Hall
 Diversification Strategies

Horizontal Diversification –

– Adding new, unrelated products or

services for present customers

Ch5-40
Fred R. David
Prentice Hall
 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
Ch5-41
Fred R. David
Prentice Hall
 Defensive Strategies

Retrenchment
Defensive
Divestiture
Strategies
Liquidation

Ch5-42
Fred R. David
Prentice Hall
 Defensive Strategies

Retrenchment –

– Regrouping through cost and asset

reduction to reverse declining sales
and profit

Ch5-43
Fred R. David
Prentice Hall
 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
Ch5-44
Fred R. David
Prentice Hall
 Defensive Strategies

Divestiture –

– Selling a division or part of an

organization

Ch5-45
Fred R. David
Prentice Hall
 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.
Ch5-46
Fred R. David
Prentice Hall
 Recent Divestitures
Recent Divestitures

Parent Company Part Being Divested Acquiring Company

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

Ch5-47
Fred R. David
Prentice Hall
 Defensive Strategies

Liquidation–

– Selling all of a company’s assets, in

parts, for their tangible worth

Ch5-48
Fred R. David
Prentice Hall
 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

Ch5-49
Fred R. David
Prentice Hall
 Means for Achieving Strategies

Joint Venture/Partnering –

▪ Two or more companies form a temporary

partnership or consortium for purpose of capitalizing
on some opportunity.

Ch5-50
Fred R. David
Prentice Hall
 Means for Achieving Strategies

Cooperative Arrangements –

▪ Research and development partnerships

▪ Cross-distribution agreements
▪ Cross-licensing agreements
▪ Cross-manufacturing agreements
▪ Joint-bidding consortia

Ch5-51
Fred R. David
Prentice Hall
 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

Ch5-52
Fred R. David
Prentice Hall
 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

Ch5-53
Fred R. David
Prentice Hall
 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
Ch5-54
Fred R. David
Prentice Hall