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Strategic Management Concepts: A Competitive Advantage Approach

Sixteenth Edition

Chapter 5

Strategies in Action

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Learning Objectives (1 of 2)

5.1 Identify and discuss eight characteristics of objectives and ten benefits of having 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.

5.6 Explain when diversification is an effective business strategy.

After studying this chapter, you should be able to do the following:

5-1. Identify and discuss eight characteristics of objectives and ten benefits of having

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

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.

Learning Objectives (2 of 2)

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.

Long-Term Objectives

The results expected from pursuing certain strategies

2-to-5 year timeframe

Without long-term objectives, an organization would drift aimlessly toward some unknown end.

Table 5-1 Varying Performance Measures by Organizational Level

Organizational Level	Basis for Annual Bonus or Merit Pay
Corporate	75% based on long-term objectives 25% based on annual objectives
Division	50% based on long-term objectives 50% based on annual objectives
Function	25% based on long-term objectives 75% based on annual objectives

Long-term objectives are needed at the corporate, divisional, and functional levels of an organization.

Table 5-2 The Desired Characteristics of Objectives

Quantitative

Measurable

Realistic

Understandable

Challenging

Hierarchical

Obtainable

Congruent across departments

The Nature of Long-Term Objectives

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

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.

Financial Versus Strategic Objectives

Financial objectives include growth in revenues, growth in earnings, higher dividends, larger profit margins, greater return on investment, higher earnings per share, a rising stock price, improved cash flow, and so on.

Strategic objectives include a larger market share, quicker on-time delivery than rivals, shorter design-to-market times than rivals, lower costs than rivals, higher product quality than rivals, wider geographic coverage than rivals, achieving technological leadership, consistently getting new or improved products to market ahead of rivals, and so on.

Two types of objectives are especially common in organizations: financial and strategic objectives.

Not Managing by Objectives

Managing by Extrapolation

Managing by Crisis

Managing by Subjectives

Managing by Hope

Mr. Derek Bok, former President of Harvard University, once said, “If you think education is expensive, try ignorance.” The idea behind this saying also applies to establishing objectives, because strategists should avoid the following ways of “not managing by objectives.”

Figure 5-1 A Comprehensive Strategic-Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics and Technology, no. 4 (October 2010): 20.

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.

Hansen and Smith explain that strategic planning involves “choices that risk resources and trade-offs that sacrifice opportunity.”

Table 5-4 Alternative Strategies Defined and Exemplified (1 of 2)

Strategy	Definition	Example
Forward Integration	Gaining ownership or increased control over distributors or retailers	Amazon began rapid delivery services in some U.S. cities.
Backward Integration	Seeking ownership or increased control of a firm’s suppliers	Starbucks purchased a coffee farm.
Horizontal Integration	Seeking ownership or increased control over competitors	BB&T acquired Susquehanna Bancshares.
Market Penetration	Seeking increased market share for present products or services in present markets through greater marketing efforts	Under Armour signed tennis champion Andy Murray to a 4-year, $23 million marketing deal.
Market Development	Introducing present products or services into new geographic area	Gap opened its first five stores in China.
Product Development	Seeking increased sales by improving present products or services or developing new ones	Amazon just began offering its own line of baby diapers and wipes.

Alternative Strategies Defined and Recent Examples Given

Defined and exemplified in Table 5-4, alternative strategies that an enterprise could pursue can be categorized into 11 actions.

Table 5-4 Alternative Strategies Defined and Exemplified (2 of 2)

Strategy	Definition	Example
Related Diversification	Adding new but related products or services	Facebook acquired the text-messaging firm WhatsApp for $19 billion.
Unrelated Diversification	Adding new, unrelated products or services	Kroger and Whole Foods Market are cooking meals, becoming restaurants.
Retrenchment	Regrouping through cost and asset reduction to reverse declining sales and profit	Staples closed 250 stores and reduced by 50% the size of other stores.
Divestiture	Selling a division or part of an organization	Sears Holdings divested its Land’s End division to Sears’ shareholders.
Liquidation	Selling all of a company’s assets, in parts, for their tangible worth	The Trump Taj Mahal in Atlantic City, New Jersey, faces liquidation.

Figure 5-2 Levels of Strategies with Persons Most Responsible

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.

Integration Strategies

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

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 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

Forward integration involves gaining ownership or increased control over distributors or retailers.

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

Backward integration is a strategy of seeking ownership or increased control of a firm’s suppliers.

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

Seeking ownership of or control over a firm’s competitors, horizontal integration is arguably the most common growth strategy.

Intensive Strategies

Market Penetration Strategy

seeks to increase market share for present products or services in present markets through greater marketing efforts

Market Development

involves introducing present products or services into new geographic areas

Product Development Strategy

seeks increased sales by improving or modifying present products or services

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 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

Market penetration strategy seeks to increase market share for present products or services in present markets through greater marketing efforts when current markets are not saturated with a particular product or service.

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

Market development involves introducing present products or services into new geographic areas.

Product Development Guidelines

When an organization has successful products that are in the maturity stage of the product life cycle

When an organization competes in an industry characterized by rapid technological developments

When major competitors offer better-quality products at comparable prices

When an organization competes in a high-growth industry

When an organization has strong research and development capabilities

Product development strategy seeks increased sales by improving or modifying present products or services.

Diversification Strategies

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

The two general types of diversification strategies are related diversification and unrelated diversification.

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

Related diversification value chains possess competitively valuable cross-business strategic fits.

Related Diversification Guidelines

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

Related diversification should be considered when these circumstances exist.

Unrelated Diversification Guidelines (1 of 2)

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

Unrelated diversification is when value chains are so dissimilar that no competitively valuable cross-business relationships exist.

Unrelated Diversification Guidelines (2 of 2)

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

Note that a key difference between related and unrelated diversification is that the former should be based on some commonality in markets, products, or technology, whereas the latter is based more on profit considerations.

Defensive Strategies (1 of 3)

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

In addition to integrative, intensive, and diversification strategies, organizations also could pursue defensive strategies such as retrenchment, divestiture, or liquidation.

Defensive Strategies (2 of 3)

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

Retrenchment occurs when an organization regroups through cost and asset reduction to reverse declining sales and profits.

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

Sometimes called a turnaround or reorganizational strategy, retrenchment is designed to fortify an organization’s basic distinctive competence.

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

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

Defensive Strategies (3 of 3)

Liquidation

selling all of a company’s assets, in parts, for their tangible worth

can be an emotionally difficult strategy

Selling all of a company’s assets, in parts, for their tangible worth is called liquidation; it is associated with Chapter 7 bankruptcy. Liquidation is a recognition of defeat and consequently can be an emotionally difficult strategy.

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

Liquidation is pursued when bankruptcy is the only option available.

Figure 5-3 Porter’s Five Generic Strategies

Source: Based on Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980), 35-40.

Probably the three most widely read books on competitive analysis in the 1980s were Michael Porter’s Competitive Strategy (1980), Competitive Advantage (1985), and Competitive Advantage of Nations (1989). According to Porter, strategies allow organizations to gain competitive advantage from three different bases: cost leadership, differentiation, and focus. Porter calls these bases generic strategies.

Michael Porter's Five Generic Strategies (1 of 3)

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

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

best-value strategy that offers products or services to a wide range of customers at the best price-value available on the market

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.

Companies employing a low-cost (Type 1) or best-value (Type 2) cost leadership strategy must achieve their competitive advantage in ways that are difficult for competitors to copy or match.

Michael Porter's Five Generic Strategies (2 of 3)

Type 3

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.

Michael Porter's Five Generic Strategies (3 of 3)

Type 4

low-cost focus strategy that offers products or services to a niche group of customers at the lowest price available on the market

Type 5

best-value focus strategy that offers products or services to a small range of customers at the best price-value available on the market

A successful focus strategy depends on an industry segment that is of sufficient size, has good growth potential, and is not crucial to the success of other major competitors.

Means for Achieving Strategies

Cooperation Among Competitors

Joint Venture/Partnering

Merger/Acquisition

Private-Equity Acquisitions

First Mover Advantages

Outsourcing/Reshoring

For collaboration between competitors to succeed, both firms must contribute something distinctive, such as technology, distribution, basic research, or manufacturing capacity.

Joint venture is a popular strategy that occurs when two or more companies form a temporary partnership or consortium for the purpose of capitalizing on some opportunity.

A merger occurs when two organizations of about equal size unite to form one enterprise. An acquisition occurs when a large organization purchases (acquires) a smaller firm or vice versa.

Private equity (PE) firms are acquiring and taking private a wide variety of companies almost daily in the business world.

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.

Outsourcing involves companies hiring other companies to take over various parts of their functional operations, such as human resources, information systems, payroll, accounting, customer service, and even marketing.

Table 5-5 Nine Reasons Why Many Mergers and Acquisitions Fail

Integration difficulties

Inadequate evaluation of target

Large or extraordinary debt

Inability to achieve synergy

Too much diversification

Managers overly focused on acquisitions

Too large an acquisition

Difficult to integrate different organizational cultures

Reduced employee morale due to layoffs and relocations

Table 5-6 Eleven Potential Benefits of Merging With or Acquiring Another Firm

To provide improved capacity utilization

To make better use of the existing sales force

To reduce managerial staff

To gain economies of scale

To smooth out seasonal trends in sales

To gain access to new suppliers, distributors, customers, products, and creditors

To gain new technology

To gain market share

To enter global markets

To gain pricing power

To reduce tax obligations

Table 5-7 Five Benefits of a Firm Being the First Mover

Secure access and commitments to rare resources.

Gain new knowledge of critical success factors and issues.

Gain market share and position in the best locations.

Establish and secure long-term relationships with customers, suppliers, distributors, and investors.

Gain customer loyalty and commitments.

First mover advantages are analogous to taking the high ground first, which puts one in an excellent strategic position to launch aggressive campaigns and to defend territory.