Strategic Management
Concepts & Cases
8th edition
Fred R. David
Chapter 5:
Strategies in Action
PowerPoint Slides By:
Anthony F. Chelte
Western New England College
Ch. 5-1
© 2001 Prentice Hall
Comprehensive Strategic Management Model
External
Audit
Chapter 3
Strategies Generate, Implement
Implement Measure &
In Evaluate, Strategies:
Strategies: Evaluate
Select Marketing,
Vision Action Strategies
Mgmt Issues
Fin/Acct,
Performance
&
R&D, CIS
Mission Chapter 7 Chapter 9
Statements
Chapter 5 Chapter 6 Chapter 8
Chapter 2
Internal
Audit
Chapter 4
Ch. 5-2
© 2001 Prentice Hall
Strategies in Action
“Planning. Doing things today to make us
better tomorrow. Because the future
belongs to those who make the hard
decisions today.”
—Eaton Corporation—
Ch. 5-3
© 2001 Prentice Hall
Strategies in Action
“If you don’t invest for the long term,
there is no short term.”
—George David—
Ch. 5-4
© 2001 Prentice Hall
Strategies in Action
“Innovate or evaporate. Particularly in
technology-driven businesses, nothing
quite recedes like success.”
—Bill Saporito—
Ch. 5-5
© 2001 Prentice Hall
Strategies in Action
Companies embrace strategic planning.
• Quest for higher revenues and profits
Ch. 5-6
© 2001 Prentice Hall
Strategies in Action
Long-Term Objectives:
• Results expected from pursuing
certain strategies
Tme frame —2 to 5 years
Ch. 5-7
© 2001 Prentice Hall
Strategies in Action
Nature of Long-Term Objectives
Quantitative
Measurable
Realistic
Understandable
Challenging
Hierarchical
Obtainable
Congruent among organizational units
Ch. 5-8
© 2001 Prentice Hall
Strategies in Action
Nature of Long-Term Objectives (Cont’d)
Objectives are associated with a time line and stated in terms:
• Growth in assets
• Growth in sales
• Profitability
• Market share
• Diversification
• Integration
• EPS
• Social responsibility
Ch. 5-9
© 2001 Prentice Hall
Strategies in Action
Nature of Long-Term Objectives (Cont’d)
Objectives are the basis for:
• Designing jobs
• Organizing activities
• Providing direction
• Organizational synergy
• Standards for evaluation
Ch. 5-10
© 2001 Prentice Hall
Strategies in Action
Nature of Long-Term Objectives (Cont’d)
Strategists should avoid:
• Managing by extrapolation
“If it ain’t broke, don’t fix it.”
Ch. 5-11
© 2001 Prentice Hall
Strategies in Action
Nature of Long-Term Objectives (Cont’d)
Strategists should avoid:
• Managing by crisis:
Reactive vs. proactive
Ch. 5-12
© 2001 Prentice Hall
Strategies in Action
Nature of Long-Term Objectives (Cont’d)
Strategists should avoid:
• Managing by subjectives:
Mystery approach to decision making
Subordinates are left to figure out what
is happening and why
Ch. 5-13
© 2001 Prentice Hall
Strategies in Action
Nature of Long-Term Objectives (Cont’d)
Strategists should avoid:
• Managing by hope:
Good times are just around the corner
Ch. 5-14
© 2001 Prentice Hall
Strategies in Action
Vertical Integration Strategies
• Forward integration
• Backward integration
• Horizontal integration
Ch. 5-15
© 2001 Prentice Hall
Strategies in Action
Forward
Integration Example
Defined • General Motors is
acquiring 10% of its
• Gaining dealers.
ownership or
increased control
over distributors
or retailers
Ch. 5-16
© 2001 Prentice Hall
Strategies in Action
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
Advantages of stable production are high
Present distributor have high profit margins
Ch. 5-17
© 2001 Prentice Hall
Strategies in Action
Backward
Integration Example
• Motel 8 acquired a
Defined furniture
manufacturer.
• Seeking
ownership or
increased control
of a firm’s
suppliers
Ch. 5-18
© 2001 Prentice Hall
Strategies in Action
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
Ch. 5-19
© 2001 Prentice Hall
Strategies in Action
Horizontal
Integration
Example
Defined • Hilton recently
acquired Promus.
• Seeking
ownership or
increased control
over competitors
Ch. 5-20
© 2001 Prentice Hall
Strategies in Action
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
Ch. 5-21
© 2001 Prentice Hall
Strategies in Action
Intensive Strategies
• Market penetration
• Market development
• Product development
Ch. 5-22
© 2001 Prentice Hall
Strategies in Action
Market
Penetration
Example
Defined • Ameritrade, the on-
line broker, tripled its
• Seeking increased annual advertising
market share for expenditures to $200
present products million to convince
or services in people they can make
present markets their own investment
through greater decisions.
marketing efforts
Ch. 5-23
© 2001 Prentice Hall
Strategies in Action
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
Ch. 5-24
© 2001 Prentice Hall
Strategies in Action
Market
Development
Example
Defined • Britain’s leading
supplier of buses,
Henlys PLC, acquires
• Introducing
Blue Bird Corp. North
present products
America’s leading
or services into
school bus maker.
new geographic
area
Ch. 5-25
© 2001 Prentice Hall
Strategies in Action
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
Ch. 5-26
© 2001 Prentice Hall
Strategies in Action
Product
Development
Defined Example
• Seeking increased • Apple developed the
sales by improving G4 chip that runs at
present products 500 megahertz.
or services or
developing new
ones
Ch. 5-27
© 2001 Prentice Hall
Strategies in Action
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
Ch. 5-28
© 2001 Prentice Hall
Strategies in Action
Diversification Strategies
• Concentric diversification
• Conglomerate diversification
• Horizontal diversification
Ch. 5-29
© 2001 Prentice Hall
Strategies in Action
Concentric
Diversification
Example
Defined • National Westminister
Bank PLC in Britain
• Adding new, but bought the leading
related, products British insurance
or services company, Legal &
General Group PLC.
Ch. 5-30
© 2001 Prentice Hall
Strategies in Action
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
Ch. 5-31
© 2001 Prentice Hall
Strategies in Action
Conglomerate
Diversification
Example
Defined • H&R Block, the top tax
preparation agency,
said it will buy
• Adding new, discount stock
unrelated products brokerage Olde
or services Financial for $850
million in cash.
Ch. 5-32
© 2001 Prentice Hall
Strategies in Action
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
Ch. 5-33
© 2001 Prentice Hall
Strategies in Action
Horizontal
Diversification
Example
Defined
• The New York Yankees
• Adding new, baseball team are
unrelated products merging with the New
or services for Jersey Nets basketball
present customers team.
Ch. 5-34
© 2001 Prentice Hall
Strategies in Action
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
Ch. 5-35
© 2001 Prentice Hall
Strategies in Action
Defensive Strategies
• Joint venture
• Retrenchment
• Divestiture
• Liquidation
Ch. 5-36
© 2001 Prentice Hall
Strategies in Action
Joint Venture
Example
Defined
• Lucent Technologies
• Two or more and Philips Electronic
sponsoring firms NV formed Philips
forming a separate Consumer
organization for Communications to
cooperative make and sell
purposes telephones.
Ch. 5-37
© 2001 Prentice Hall
Strategies in Action
Guidelines for Joint Venture
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
Ch. 5-38
© 2001 Prentice Hall
Strategies in Action
Retrenchment
Defined Example
• Regrouping • Singer, the sewing
through cost and machine company,
asset reduction to declared bankruptcy.
reverse declining
sales and profit
Ch. 5-39
© 2001 Prentice Hall
Strategies in Action
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.
Ch. 5-40
© 2001 Prentice Hall
Strategies in Action
Divestiture
Example
Defined
• Harcourt General, the
• Selling a division large US publisher, is
or part of an selling its Neiman
organization Marcus division.
Ch. 5-41
© 2001 Prentice Hall
Strategies in Action
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.
Ch. 5-42
© 2001 Prentice Hall
Strategies in Action
Liquidation
Defined Example
• Selling all of a • Ribol sold all its assets
company’s assets, and ceased business.
in parts, for their
tangible worth
Ch. 5-43
© 2001 Prentice Hall
Strategies in Action
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
Ch. 5-44
© 2001 Prentice Hall
Michael Porter’s Generic Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
Ch. 5-45
© 2001 Prentice Hall
Key Terms & Concepts
• Acquisition • Differentiation
• Backward integration • Diversification strategies
• Bankruptcy • Divestiture
• Focus
• Combination strategy
• Forward integration
• Concentric
• Franchising
diversification
• Generic strategies
• Conglomerate
• Horizontal
diversification
diversification
• Cooperative • Horizontal integration
arrangements
• Integration strategies
• Cost leadership
Ch. 5-46
© 2001 Prentice Hall
Key Terms & Concepts (Cont’d)
• Intensive strategies • Merger
• Joint venture • Outsourcing
• Leveraged buyout • Product development
• Liquidation • Retrenchment
• Merchant banking • Takeover
• Market development • Vertical integration
• Market penetration
Ch. 5-47
© 2001 Prentice Hall
Key Terms & Concepts (Cont’d)
• Product and service • Selling
planning • Social responsibility
• Production/operations • Staffing
functions • Synergy
• Profitability ratios
• Test marketing
• Research and
development
Ch. 5-48
© 2001 Prentice Hall
