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Strategies in Action

Chapter Five

Chapter Objectives

Various types of business strategies.

Porter’s five generic strategies (Porter’s Model).

First mover advantage/disadvantage.

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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.

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Alternative Strategies Defined and Exemplified

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Alternative Strategies Defined and Exemplified

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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

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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 present distributors or retailers have high profit margins

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• When an organization’s present distributors are especially expensive, or unreliable, or incapable

of meeting the firm’s distribution needs.

• When the availability of quality distributors is so limited as to offer a competitive advantage

to those firms that integrate forward.

• When an organization competes in an industry that is growing and is expected to continue

to grow markedly; this is a factor because forward integration reduces an organization’s

ability to diversify if its basic industry falters.

• When an organization has both the capital and human resources needed to manage the new

business of distributing its own products.

• When the advantages of stable production are particularly high; this is a consideration because

an organization can increase the predictability of the demand for its output through

forward integration.

• When present distributors or retailers have high profit margins; this situation suggests that

a company could profitably distribute its own products and price them more competitively

by integrating forward.

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 advantages of stable prices are particularly important
When an organization needs to quickly acquire a needed resource

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• When an organization’s present suppliers are especially expensive, or unreliable, or incapable

of meeting the firm’s needs for parts, components, assemblies, or raw materials.

• When the number of suppliers is small and the number of competitors is large.

• When an organization competes in an industry that is growing rapidly; this is a factor

because integrative-type strategies (forward, backward, and horizontal) reduce an organization’s

ability to diversify in a declining industry.

• When an organization has both capital and human resources to manage the new business of

supplying its own raw materials.

• When the advantages of stable prices are particularly important; this is a factor because

an organization can stabilize the cost of its raw materials and the associated price of its

product(s) through backward integration.

• When present supplies have high profit margins, which suggests that the business of supplying

products or services in the given industry is a worthwhile venture.

• When an organization needs to quickly acquire a needed resource.

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 competitors are faltering due to a lack of managerial expertise

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• When an organization can gain monopolistic characteristics in a particular area or region

without being challenged by the federal government for “tending substantially” to reduce

competition.

• 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 to successfully manage

an expanded organization.

• When competitors are faltering due to a lack of managerial expertise or a need for particular

resources that an organization possesses; note that horizontal integration would not be

appropriate if competitors are doing poorly, because in that case overall industry sales are

declining.

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

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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 increased economies of scale provide major competitive advantages

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• 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 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 excess production capacity

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• 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.

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 that is characterized by rapid technological developments
When major competitors offer better-quality products at comparable prices
When an organization competes in a high-growth industry

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• When 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.

• 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 high-growth industry.

• When an organization has especially strong research and development capabilities.

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

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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 well-known brand name

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• 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 well-known brand name.

• Cross-business collaboration to create competitively valuable resource strengths and capabilities.

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 an organization has a strong management team

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• 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.

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Unrelated Diversification Guidelines

When revenues derived from an organization’s current products would increase significantly by adding the new, unrelated products
When an organization’s present channels of distribution can be used to market the new products to current customers
When an organization’s basic industry is experiencing declining annual sales and profits

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• When revenues derived from an organization’s current products or services would increase

significantly by adding the new, unrelated products.

• When an organization competes in a highly competitive and/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 an organization’s

present products.

• When an organization’s basic industry is experiencing declining annual sales and

profits.

Unrelated Diversification Guidelines (cont.)

When an organization has the opportunity to purchase an unrelated business that is an attractive investment opportunity
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

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• 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 between the acquired and acquiring firm. (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.)

• 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

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

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Retrenchment Guidelines

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 has grown so large so quickly that major internal reorganization is needed

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• When an organization has a clearly distinctive competence but has failed consistently to

meet its objectives and goals over time.

• When an organization is one of the weaker competitors in a given industry.

• When an organization is plagued by inefficiency, low profitability, poor employee morale,

and pressure from stockholders to improve performance.

• When an organization has failed to capitalize on external opportunities, minimize external

threats, take advantage of internal strengths, and overcome internal weaknesses over time;

that is, when the organization’s strategic managers have failed (and possibly will be replaced

by more competent individuals).

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

needed.

Defensive Strategies

Divestiture

Selling a division or part of an organization

often used to raise capital for further strategic acquisitions or investments

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Divestiture Guidelines

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
When a division is responsible for an organization’s overall poor performance
When a division is a misfit with the rest of an organization

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• 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.

• When a division is responsible for an organization’s overall poor performance.

• When a division is a misfit with the rest of an organization; this can result from radically

different markets, customers, managers, employees, values, or needs.

• When a large amount of cash is needed quickly and cannot be obtained reasonably from

other sources.

• When government antitrust action threatens an organization.

Defensive Strategies

Liquidation

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

can be an emotionally difficult strategy

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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

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• When an organization has pursued both a retrenchment strategy and a divestitute strategy,

and neither has been successful.

• When an organization’s only alternative is bankruptcy. Liquidation represents an orderly

and planned means of obtaining the greatest possible cash for an organization’s assets.

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

needed capital.

• When the stockholders of a firm can minimize their losses by selling the organization’s assets.

Porter’s Five Generic Strategies

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Michael Porter’s Five
Generic Strategies

Cost leadership

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

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Michael Porter’s Five
Generic Strategies

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

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Michael Porter’s Five
Generic Strategies

Differentiation

strategy aimed at producing products and services considered unique industry-wide and directed at consumers who are relatively price-insensitive

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Michael Porter’s Five
Generic Strategies

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

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Cost Leadership Strategies

To employ a cost leadership strategy successfully, a firm must ensure that its total costs across its overall value chain are lower than competitors’ total costs

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Cost Leadership Strategies

Two ways:

Perform value chain activities more efficiently than rivals and control the factors that drive the costs of value chain activities

Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities

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Cost Leadership Guidelines

When price competition among rival sellers is especially vigorous
When there are few ways to achieve product differentiation that have value to buyers
When most buyers use the product in the same ways
When buyers incur low costs in switching their purchases from one seller to another

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1. When price competition among rival sellers is especially vigorous.

2. When the products of rival sellers are essentially identical and supplies are readily available

from any of several eager sellers.

3. When there are few ways to achieve product differentiation that have value to buyers.

4. When most buyers use the product in the same ways.

5. When buyers incur low costs in switching their purchases from one seller to another.

6. When buyers are large and have significant power to bargain down prices.

7. When industry newcomers use introductory low prices to attract buyers and build a customer

base.

Differentiation Strategies

Differentiation strategy should be pursued only after a careful study of buyers’ needs and preferences to determine the feasibility of incorporating one or more differentiating features into a unique product that features the desired attributes

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Differentiation

When there are many ways to differentiate the product
When buyer needs and uses are diverse
When few rival firms are following a similar differentiation approach
When technological change is fast paced

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1. When there are many ways to differentiate the product or service and many buyers perceive

these differences as having value.

2. When buyer needs and uses are diverse.

3. When few rival firms are following a similar differentiation approach.

4. When technological change is fast paced and competition revolves around rapidly evolving

product features.

Focus Strategies

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
Most effective when consumers have distinctive preferences

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Focus Strategy Guidelines

When the target market niche is large, profitable, and growing
When industry leaders do not consider the niche to be crucial to their own success
When the industry has many different niches and segments
When few, if any, other rivals are attempting to specialize in the same target segment

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1. When the target market niche is large, profitable, and growing.

2. When industry leaders do not consider the niche to be crucial to their own success.

3. When industry leaders consider it too costly or difficult to meet the specialized needs of the

target market niche while taking care of their mainstream customers.

4. When the industry has many different niches and segments, thereby allowing a focuser to

pick a competitively attractive niche suited to its own resources.

5. When few, if any, other rivals are attempting to specialize in the same target segment.

Means for Achieving Strategies

Cooperation Among Competitors
Joint Venture/Partnering
Merger/Acquisition
Private-Equity Acquisitions
First Mover Advantages
Outsourcing

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Key Reasons Why Many Mergers and Acquisitions Fail

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Potential Benefits of Merging With or Acquiring Another Firm

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Benefits of a Firm Being
the First Mover

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