Chapter 5: Strategies in Action

Long-term Objectives results expected from pursuing certain strategies

Strategies actions to be taken to accomplish LTO
Time frame consistent for objectives and strategies (2 5 years)
The Nature of Long-term Objectives
Quantitative, measurable, realistic, understandable, challenging, hierarchical, obtainable and congruent among organizational
units
Time frame and timeline
Could be stated as growth (sales, assets), profitability, market share, degree and nature of diversification, EPS, social
responsibility and degree and nature of vertical integration
Provide direction, allow synergy, aid in evaluation, establish priorities, reduce uncertainties, minimize conflicts, stimulate
exertion, allocation of resources and job design, consistent decision-making, standards and evaluation
Needed at the corporate, divisional and functional levels, measure of managerial performance
o Financial versus Strategic Objectives
Two Types of Objectives:
Financial growth in revenues, growth in earnings, higher dividends, larger profit margins, greater return on
investment, improved cash flow, rising stock price
Strategic larger market share, quicker on-time deliveries, shorter design-to-market times, lower costs, higher product
quality, wider geographic coverage, achieving technological leadership
Trade-off exists; improve financial position in the short run through higher prices may jeopardize long-term market
share, riskiness of actions, concern for business ethics, social responsibility issues
Both should include annual and long-term performance targets, pursue strategies to strengthen business position to
sustain competitive advantage
Financial objectives can be met by focusing first on achieving strategic objectives that improve a firms
competitiveness and market strength
o Not Managing by Objectives
Managing by Extrapolation If it aint broke, dont fix it. ,doing the same things in the same ways because things are going
well
Managing by crisis ability to solve problems, time and resources to solve the most pressing problems, reacting rather than
acting and letting events dictate what and when of management decisions
Managing by Subjectives no general plan on the way to go and what to do, do the best you can, Do your own thing, the
best way you know how
Managing by Hope we try and do not succeed, hope that the next attempt would succeed, luck and good fortune are on our
side
The Balanced Scorecard
o Harvard Business School in 1993, Robert Kaplan and David Norton, strategy evaluation and control technique
o

balance financial measures, strategy evaluation and control with nonfinancial measures such as product quality and customer
service
o Chosen combination of financial and strategic objectives tailored to the companys business
o balance shareholder objectives with customer and operational objectives, consistent with the notions of continuous improvement in
management and total quality management
o Financial measures, softer factors comprise an important part of both the objective-setting process and strategy evaluation process
o Listing of all key objectives, associated time dimension of each objective and primary responsibility or contact person, department or
division for each objective
Types of Strategies
o Combination strategy two or more strategies, exceptionally risky if carried too far
o Priority must be established.
o choices that risk resources and trade-offs that sacrifice opportunity, spend resources and focus on a finite number of opportunities
o Strategic planning wager based on predictions and hypothesis that are continually tested and refined by knowledge, research
experience and learning
o Large diversified companies different divisions pursue different strategies
o Struggling to survive defensive strategies such as divestiture, liquidation and retrenchment
o Levels of Strategies:
Four levels of strategies (large firms):
Corporate
Divisional
Functional
Operational
Three levels of strategies (small firms):
Company
Functional
Operational
See Figure 5-2, page 170
Integration Strategies
o Forward Integration
Gaining ownership or increased control over distributors or retailers
Establishing Web sites to directly sell to customers
Microsoft: what the customers want and how they buy, shareholders agree but existing retail partners would not
Franchising distribute products and services, expand rapidly because costs and opportunities are spread; growing rift
between franchisees and franchisers
Six Guidelines:
Distributors are expensive, unreliable or incapable of meeting the firms distribution needs
Availability of quality distributors is so limited
Competes in a growing industry and would continue to grow; forward integration reduces an organizations ability to
diversify if its basic industry falters
o

Possesses capital and human resources needed to manage the new business of distributing its own products
High advantages of stable production; increase predictability of the demand for its output through forward integration
Present distributors have high profit margins; price products competitively
o Backward Integration
Strategy of seeking ownership or increased control of a firms suppliers
De-integration
Seven Guidelines:
Present suppliers are expensive, unreliable or incapable of meeting the firms needs
Number of suppliers is small and the number of competitors is large
Growing industry; integrative-type strategies (forward, backward and horizontal) reduce an organizations ability to
diversify in a declining industry
Capital and human resources to manage the new business of supplying its own raw materials
Advantages of stable prices are important, stabilize cost of raw materials and products
Present supplies have high profit margins
Organization needs to quickly acquire a needed resource
o Horizontal Integration
Strategy of seeking ownership of or increased control over a firms competitors
Growth strategy
Mergers (direct competitors) create efficiencies than mergers (unrelated) because duplicate facilities could be
minimized/eliminated and more business industry knowledge
Five Guidelines:
Gain monopolistic characteristics without being challenged by the government to reduce competition
Competes in a growing industry
Increased economies of scale provide major competitive advantages
Has capital and human talent needed to manage an expanded organization
Competitors are faltering due to a lack of managerial expertise or a need for particular resources that an organization
possesses
Intensive Strategies require intensive efforts if a firms competitive position with existing products is to improve
o Market Penetration seeks to increase market share for present products or services in present markets through greater marketing
efforts (increasing number of salespersons, increasing advertising expenditures, offering extensive sales promotion items or
increasing publicity efforts)
Five Guidelines:
Current markets are not saturated with a particular product or service
Usage rate of present customers could increase significantly
Market shares of competitors declining, industry sales increasing
Correlation between dollar sales and dollar marketing expenditures has been high
Increased economies of scale provide major competitive advantages
o Market Development introducing present products or services into new geographic areas; unprofitable domestic routes to
international ones

Six guidelines:
New channels of distribution are reliable, inexpensive and of good quality
Successful organization
New untapped or unsaturated markets exist
Has the needed capital and human resources to manage expanded operations
Excess production capacity
Increasingly global industry
o Product Development seeks increased sales by improving or modifying present products and services; entails large research and
development expenditures
Five guidelines:
Successful products at the maturity stage, attract satisfied customers
Rapid technological advances (industry)
Competitors offer better quality products at comparable prices
High-growth industry
Strong R & D capabilities
Diversification Strategies
o General types: related ( value chain possess competitively valuable cross-business strategic fits) and unrelated (value chains are so
dissimilar that no competitively cross-business relationships exist)
Favor related diversification:
Transferring competitively valuable expertise, technological know-how or other capabilities from one business to
another
Combining the related activities to a single operation to lower costs
Exploiting common use of a well-known brand name
Cross-business collaboration to create competitively valuable resource strengths and capabilities
Selling, closing, less profitable divisions to focus on core businesses
Risky single industry, all eggs in one basket; presence of new technologies, new products and customer preferences can
decimate a business
Add shareholder value, attractive to yield consistently high returns on investment, offer potential across the operating
divisions for greater synergies
stick to the knitting unattractive industry
o Related Diversification
Google Web search engine that sells advertising
Merck & Co. acquired rival Schering-Plough Corp., biotech, consumer health and animal health
Six guidelines:
No-growth or a slow-growth industry
Adding new related products could enhance sales of current products
New but related products could be offered at competitive prices
Products have seasonal sales levels
Current products are in the declining stage of their life cycle

Strong management team (plans, organizes, motivates, delegates and controls)

o Unrelated Diversification
Capitalizing on a portfolio of businesses that are capable of delivering excellent financial performance than striving to
capitalize on value chain strategic fits
On the hunt to acquire companies whose assets are undervalued, financially-distressed or have high-growth prospects but
lack investment capital
Ten guidelines:
Revenues from current products would increase upon the introduction of the new, unrelated products
Highly-competitive and no-growth industry (low industry profit margins and returns)
Present channels of distribution could be used to market new products
New products have countercyclical sales patterns
Declining annual sales and profits (industry)
Capital and managerial talent
Opportunity to purchase an unrelated business that is an attractive investment opportunity
Exists financial synergy between the acquired and acquiring firm (commonality in markets, products, or technology for
related and profit considerations for unrelated)
Existing markets for an organizations present products are saturated
Antitrust action could be charged against an organization has concentrated on a single industry
Defensive Strategies
o Retrenchment organization regroups through cost and asset reduction to reverse declining sales and profits
Designed to fortify an organizations basic distinctive competence, work with limited resources and face pressure from
shareholders, employees and the media
Bankruptcy avoid major debt obligations and to void union contracts
No hope of being able to operate successfully
Applies to municipalities
Allows organizations to reorganize and come back after filing a petition for protection
Five Guidelines:
Distinctive competence but has failed to consistently meet its objectives and goals over time
One of the weaker competitors
Inefficiency, low profitability, poor employee morale, and pressure from stockholders
Failed to capitalize on external opportunities, minimize threats, take advantage of strengths and overcome
weaknesses
Grown so large quickly that major internal reorganization is needed
o Divestiture
Selling a division or part of an organization; raise capital for acquisitions or investments, focus on core businesses
Unprofitable, require too much capital or do not fit well with the firms other activities
Six Guidelines:
Pursued a retrenchment activity but still failed
Needs more resources to be competitive

 Responsible for the companys poor performance

Misfit with the rest of the organization
Large amount of cash is needed quickly and cannot be obtained
o

Liquidation
Selling of a companys assets, in parts, for their tangible worth
Cease operating than to continue losing large sums of money
Bad planning and highly leveraged
Intense price competition, falling customer demand and economic distress
Three Guidelines:
Retrenchment, divestiture and still failed
Only alternative is bankruptcy, orderly and planned means of obtaining the greatest possible cash for the assets
Can minimize their losses by selling assets

Michael Porters Five Generic Strategies