Strategies in Action

Chapter 5

Chapter Overview
The value of establishing long-term objectives Financial versus Strategic Objectives Integration Strategies Intensive Strategies Diversification Strategies Defensive Strategies Michael Porters Five Generic Strategies

Means for achieving strategies

Strategic Management in Non-profit and Governmental Organizations

Long-Term Objectives
Long-term objectives
Results from pursuing certain strategies

Strategies
Actions to accomplish long term objectives

Time frame
2-5 years

Nature of Long-term Objectives

Quantitative
Measurable Realistic

Understandable
Challenging Hierarchical

Obtainable
Congruent time bound

Terms of Objectives
Growth in assets Growth in sales Degree of vertical integration Nature of vertical integration

Profitability
Market share Degree of diversity Nature of diversity

Earnings per share

Social responsibility

Benefits of clearly established Objectives

Provide direction
Allow synergy

Aid in evaluation
Established priority Reduce uncertainty

Minimize conflicts

Stimulate exertion
Aid in the allocation of resources Aid in the design of job Provide basis for consistent decision making

Types of objectives
Two types of objectives are common in organization Financial objective Strategic objective

Financial Objectives
Financial objectives include
Growth in revenue Growth in earnings Higher dividends

Larger profit margins

 Greater returns on investment

Higher earnings per share

Rising stock price Improve cash flow

Strategic Objectives
Strategic objectives include
Larger market share Quicker on-time delivery Shorter design to market time Lower cost Higher product quality Wider geographical coverage Achieving technological leadership Consistently getting new or improved products to the market

Integration Strategies
What is an integration strategy?
Strategy that allow a firm to gain control over supplier, distributor and competitor.

It falls in three category:

Forward Integration Backward integration Horizontal integration

Forward Integration Strategy

It is geared at gaining ownership or control over retailers or distributors.
More and more firms are seeking to sell directly to their clients
E.g. (Microsoft opening its own retail stores)

This gives the firm the ability to know their clients first hand.
Identify customer needs and buying pattern

When is Forward Integration Effective?

When present distributor are expensive , unreliable and not meeting distribution needs. Limited quality distributor to offer limited competition

When the firm has both the capital and human resource.

Backward Integration Strategies

A move to acquire or control your supplier and manufacturer of your raw material.
It gives the firm the ability to streamline its operations. Be more efficient and consistent in production and distributions.

Advantages of Backward Integration

Product identity Protect trade secrets Avoid outsourcing to external parties

When is backward Integration effective?

When it is cost effective When supplier is small and competition is great When supplier is sloppy. When the firm need to acquire resource quickly .

Horizontal Integration Strategy

Taking over, or controlling competitor.
JMMB & CCFG, BNS & DBG

This is of the most pursued strategy in the business environment today.

Control market share Maximize profits

Types of Horizontal Integration

Merger
The acquiring company survive and the acquired company cease to exist

Acquisitation
The acquiring of 100% of a firms common stock or the majority. The acquired firms asset is integrated into the assets of the acquiring firm

Takeover

Disadvantage of Horizontal Integration

Monopoly Unfair advantage Unequal market share

Effective Horizontal Integration

When you do not become monopolistic and face challenge from Federal Gov. When you are competition in a growing industry When competitors are on the verge of failing .
Apple should take over Sony

Intensive Strategies
Intensive strategy is the terminology used to describe the activities of:
Market Penetration Market Development Product Development

Market Penetration
This strategy is geared towards increasing market share for present products or services in present markets in using superior marketing efforts.

Guidelines

Market Development
Entails introducing present products or services into new geographic areas

When is Market Development most effective?

When new channels of distribution are available that are reliable, inexpensive, and of good quality. b. 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 organizations basic industry rapidly is becoming global in scope.

Product Development
A strategy that seeks to increase sales by making improvments or modifications to present products or services

When is Product development effective

When an organization has successful products that are in the maturity stage of the product life cycle. b.
When an organization competes in an industry that is characterized by rapid technological developments When major competitors offer better-quality products at comparable prices.

 When an organization competes in a highgrowth industry When an organization has especially strong research and development capabilities.

INTENSIVE STRATEGY
Market Penetration - increase market share for present products or services in present market through greater marketing efforts. This can be done by increasing sales persons, increase advertising expenditure, sales promotions items and increase and publicity efforts

 Market development- it involves introducing new products and servicing to new geographic areas Product Development- seeks to increse sales by improving or modifying the product or service.

Diversification strategies
Related diversification- adding new but relating product to the market. Example: Digicel and Claro Unrelated diversification- adding new unrelated products or services to the market customers, adding new products and services to the market. Example : Lasco going into medicine

Defensive Strategies
Retrenchment regrouping through cost and asset reduction to reverse declining salaries and profit. Divestiture- selling as division or part of an organization. Liquidation- selling all of the company asset in part for their tangible growth.

GUIDELINES FOR PURSUING EFFECTIVE RETRENCHMENT STRATEGY

When an organization has grown so large so quickly that major internal reorganization is needed.

DIVESTITURE
Divestiture is selling a division or part of an organization. It is often used to raise capital for further strategic acquisitions or investments.

DIVESTITURE
Divestiture can be a part of an overall retrenchment strategy to rid an organization of business that are unprofitable, that require too much capital, or that do not fit well with the firms other activities

GUIDELINES FOR PURSUING EFFECTIVE DIVESTITURE STRATEGY

When an organization has pursued a retrenchment strategy and failed to accomplish needed improvements. When a division needs more resources to be competitive than the company can provide.

GUIDELINES FOR PURSUING EFFECTIVE RETRENCHMENT STRATEGY

When a division is responsible for an organizations overall performance. When a division is a misfit with the rest of an organization; this can result from radically different markets, customers, managers, employees, value of needs.

GUIDELINES FOR PURSUING EFFECTIVE RETRENCHMENT STRATEGY

When a large amount of cash is needed quickly and cannot be obtained reasonably from other sources. When government antitrust action threatens an organization.

LIQUIDATION
Liquidation is selling is selling all of a company assets, in parts, for their tangible worth. It is a recognition of defeat and consequently can be emotionally difficult strategy.

GUIDELINES FOR PURSUING EFFECTIVE LIQUIDATION STRATEGY

When an organization has pursue both a retrenchment strategy and a divestitute strategy, and neither has been successful. When an organizations only alternative is bankruptcy. Liquidation presents an orderly and planned means of obtaining the greatest possible cash for an organizations assets.

GUIDELINES FOR PURSUING EFFECTIVE RETRENCHMENT STRATEGY

A company can legally declare bankruptcy first and then liquidate various divisions to raise needed capital.

When the stakeholders of a firm cn minimize their losses by selling the organizations assets.

Michael Porters Five Generic Strategies

Strategies
Type 1 Cost Leadership Low cost Type 2 Cost Leadership Best value Type 3 Differentiation Type 4 Focus Low cost Type 5 Focus Best value

Cost leadership emphasizes producing standardized products at a very low per-unit cost for consumers who are price-sensitive.

Types of Cost leadership strategies

There are two types of cost leadership strategies. Type 1: low-cost strategy offers products to a wide range of customers at the lowest price available on the market. Type 2: A best-value strategy offers products to a wide range of customers at the best pricevalue available on the market.

Differentiation
Differentiation is aimed at producing products that are considered unique. This strategy is most powerful with the source of differentiation is especially relevant to the target market

Type 3- Differentiation Strategies

Many ways to differentiate and buyers perceive the differences as having value
Diverse buyer needs and uses Few rival firms following similar differentiation approach Fast paced technological change and evolving product features

Focus means producing products and services that fulfill the needs of small groups of consumers.

Types of Focus Strategies

There are two types of focus strategies.
Type 1: A low-cost focus strategy offers products or services to a small range (niche) of customers at the lowest price available on the market. Type 2: A best-value focus strategy offers products to a small range of customers at the best price-value available on the market. This is sometimes called focused differentiation.

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Means for Achieving Strategies

Fred R. David Prentice Hall

Joint Venture/Partnering

Two or more companies form a temporary partnership or consortium for purpose of capitalizing on some opportunity.

First Mover Advantages

Ch 5 -54

Benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms

Outsourcing
Business-Process Outsourcing (BPO)

Ch 5 -55

Companies taking over the functional operations of other firms

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Means for Achieving Strategies

Cooperative Arrangements
Research and development partnerships Cross-distribution agreements Cross-licensing agreements Cross-manufacturing agreements Joint-bidding consortia

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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

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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

Recent Mergers
Acquiring Firm Hewlett-Packard Ebay PepsiCo Sara Lee Phillips Petroleum Devon AMR Tellabs Acquired Firm Compaq Computer Homes Direct Quaker Oats Earthgrains Company Conoco Anderson Exploration TWA Ocular Networks
Ch5-59

Ch 5 -60

Global Perspective
Joint Ventures Mandatory for All Foreign Firms in India Indias experiencing fastest growth in over 18 years Second fastest (behind China) growth rate at 10.7% Also experiencing 6.6% inflation Gap between rich and poor widening Joint venture mandatory Vast majority of joint ventures fail Tourism also growing

Strategic Management in Nonprofit and Governmental Organizations

Educational Institutions Medical Organizations

Governmental Agencies and Departments

Review Questions
1. List five characteristics of objectives 2. What are five benefits of objectives 3 . Differentiate between financial and strategic objectives 4. What are the four types of Strategies 5. What are the components of Integration, Intensive, Diversification and Defensive Strategy? 6. Name three of Porters five generic strategies.

Review Questions
7. What are three means of achieving strategies? 8. What is Outsourcing? 9. Is it important for Small firms to have Strategic Management and why? 10. Name a company that use any of the