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Ch 5 -1
Chapter 5Strategies in Action
Strategic Management: Concepts & Cases
12th Edition
Fred David
Ch 5 -2
Strategies
• Strategies are the actions taken to achieve long term objectives.
• The time frame for long term objectives usually from 2 – 5 years.
Ch 5 -3
Long-Term Objectives
Nature of Long Term Objectives –
Quantifiable
Measurable
Realistic
Understandable
Challenging
Hierarchical
Obtainable
Congruent
Timeline
Ch 5 -4
Long-Term Objectives
Long Term Objectives are commonly stated in terms of:–Asset Growth
Sales growth
Profit
Market share
Earning per share
Social responsibility
Degree of diversification
Ch 5 -5
Long-Term Objectives
Benefits of Clear Objectives:-
Clear about role
Provide direction
Allow synergy
Aid in evaluation
Establish priorities
Reduce uncertainty
Minimize conflict
Aid in resource allocation
Job design
Ch 5 -13
Types of Strategies
There are 16 strategies that can be grouped into several types of strategies.
1. Integration strategies
2. Intensive strategies
3. Diversification strategies
4. Defensive strategies
5.Porter’s Generic strategies
In doing strategy, priority must be established because of limited resources. Due to that, strategists must develop alternative strategies and choose the best amongst these strategies.
Ch 5 -14
Types of Strategies
IntegrationStrategies
Forward Integration
BackwardIntegration
HorizontalIntegration
Ch 5 -15
Integration Strategies
Forward IntegrationDefinition: Involves gaining ownership or increased control over distributors or retailers. eg: franchising
6 guidelines to implement forward integration:
When distributors are expensive, unreliable or incapable
When availability of quality distributors is so limited
When industry is growing
When organization has enough capital and HR
When production is stable
When distributors or retailers have high profit margins (more profit if the company distribute its own products)
Ch 5 -16
Integration Strategies
Backward IntegrationDefinition: Seeking ownership or increased control of a firms suppliers. eg: buy or take over supplier
7 guidelines to implement backward integration:
When suppliers are expensive, unreliable or incapable.
When number of suppliers is small and number of competitors is large.
When industry is growing rapidly.
When organization has enough capital and HR to supply it own materials.
When prices are stable.
When supplies have high profit margins (more profit if the company supply its own products).
When organization needs to quickly acquire the needed resources.
Ch 5 -17
Integration Strategies
Horizontal IntegrationDefinition: Seeking ownership or increased control of a firms competitors. eg: M&A, takeover
5 guidelines to implement horizontal integration:
When organization gain monopolistic business.
When organization competes in a growing industry.
When increased in economies of scale provide major competitive advantage.
When organization has enough capital and HR to expand.
When competitors are faltering due to various reasons.
Ch 5 -18
Types of Strategies
IntensiveStrategies
MarketPenetration
MarketDevelopment
ProductDevelopment
Ch 5 -19
Intensive Strategies
Market PenetrationDefinition: Seek to increase market share for present products or services through greater marketing efforts. eg: aggressive advertisement campaign
5 guidelines to implement market penetration:
When current market are not saturated.
When the usage rate of present customer can be increased.
When total industry sales is increasing while market shares of major competitors is declining.
When correlation between sales and marketing is high.
When increased economies of scale provide competitive advantage.
Ch 5 -20
Intensive Strategies
Market DevelopmentDefinition: Introducing present products or services into new geographic areas. eg: market expansion to new continents
6 guidelines to implement market development:
When new distribution channels are reliable, inexpensive and good quality.
When organization very successful in what it does.
When new untapped or unsaturated market exist.
When organization has enough capital and HR to expand.
When organization has excess production capacity.
When the industry becoming rapidly global.
Ch 5 -21
Intensive Strategies
Product DevelopmentDefinition: seeks to increase sales by improving or modifying present products/services or developing new product. eg: more features to the existing product/services.
5 guidelines to implement product development:
When the products has reached maturity stage of the product life-cycle.
When organization competes in the industry that facing rapid technological development.
When rival firms offer better quality product at fair price.
When organization competes in high grow industry.
When organization has strong R&D capabilities.
Ch 5 -22
Types of Strategies
DiversificationStrategies
Related Diversification
Unrelated Diversification
Ch 5 -23
Diversification Strategies
Related Diversification
Definition: Adding new but related products or services. Business are said to be related when their value chain posses competitively valuable cross-business strategic fits.
6 guidelines to implement related diversification:
When organization competes in a no-growth or slow growth industry.
When adding new but related product enables increase of sales of current products.
When new but related products can be offered at a highly competitive prices.
When new but related products have seasonal sales level.
When existing products are in declining stage of product life cycle.
When organization has strong management teams.
Ch 5 -24
Diversification Strategies
Reasons for Related Diversification
Can transfer the valuable expertise, technological know-how and other capabilities.
Can combine the related activities of separate business into single operation to achieve lower costs.
Can exploit the common use of well-known brand name.
Cross business collaboration to create competitively valuable resource strength and capabilities.
Ch 5 -25
Diversification Strategies
Unrelated Diversification
Definition: Adding new, unrelated products or services. Business are said to be unrelated when their value chain are so dissimilar that no competitively valuable cross-business relationship exist.
10 guidelines to implement unrelated diversification:
When new but unrelated product could increase revenue.
When organization competes in highly competitive or no growth industry.
When new products have counter cyclical sales pattern.
When industry experiencing declining in sales and profits.
When organization has enough capital and managerial to compete in new industry.
Ch 5 -26
Diversification Strategies
Unrelated Diversification
When organization has the opportunity to purchase an unrelated business that has good investment opportunity.
When there is financial synergy between the acquired and acquiring firm.
When existing markets for current products are saturated.
When existing distribution channel can be used to market new products.
Ch 5 -27
Types of Strategies
DefensiveStrategies
Retrenchment
Divestiture
Liquidation
Ch 5 -28
Defensive Strategies
Retrenchment
Definition: organization regroups through cost and asset reduction to reverse declining sales and profits. Eg: reducing number of employees, closing factories, selling off fixed asset etc..
5 guidelines to implement retrenchment:
When organization failed consistently to meets its objectives and goals.
When organization is the weaker competitors in the industry.
When organization become inefficiency, low profitability, poor employee morale.
When organization failed to tap external opportunities, minimize threats, take advantage of strength and overcome weaknesses.
When organization needed major internal reorganization.
Ch 5 -29
Defensive Strategies
Divestiture
Definition: selling a division or part of an organization. Eg. To rid off the non-profit units in the organization.
6 guidelines to implement divestiture:
When organization failed to accomplish needed improvement through retrenchment.
When division need more resources to be competitive than the company can provide.
When one division is responsible towards overall poor performance.
When one unit misfits with the rest of an organization.
When large cash needed quickly but cannot be obtained internally.
Ch 5 -30
Defensive Strategies
Liquidation
Definition: selling all of company asset for their tangible worth. Eg. To cease operation rather than continue losing large amount of money, declare bankruptcy.
3 guidelines to implement liquidation:
When all organization efforts have failed.
When the only alternative left is bankruptcy.
When losses of shareholders can be minimize by selling the organization assets.
Ch 5 -33
Michael Porter’s Generic Strategies
Cost Leadership Strategies (CLS)(Low-Cost & Best-Value)
Differentiation Strategies (DS)
Focus Strategies (FS)(Low-Cost Focus & Best-Value Focus)
Ch 5 -34
Michael Porter’s Generic StrategiesCost Leadership Strategies (CLS)
(Low-Cost & Best-Value)
• Producing standardized products/services at a very low cost for price sensitive consumers.
Differentiation Strategies (DS)
• Producing unique products/services for price insensitive consumers.
Focus Strategies (FS)(Low-Cost Focus & Best-Value Focus)
• Producing products/services that fulfill the needs of small groups of consumers.
Ch 5 -35
Cost Leadership Strategies
Type 1 and Type 2Type 1: low cost strategy (offers product at very low price available in the market).
Type 2: best value strategy (offers product at the best price value available on the market compared to rival product that have similar attributes). – low price + value added features.
Both strategies target a large market.
Effective strategy to be used especially the market is composed of many price-sensitive buyers.
To gain low cost or best value cost leadership benefits, company need to use integration strategies (forward, backward and horizontal strategies).
Useful to drive competitors out of the market.
Ch 5 -36
Differentiation StrategiesType 3
Type 3 (differentiation) can be done by studying buyer needs and preferences to determine the feasibility of incorporating one or more differentiating features into unique product that features the desired attributes.
Type 3 strategies target can be used at small or large market.
Useful to make customers more attach to the unique features.
Special features can differentiate one product with other products.
Examples of differentiations are superior service, superior quality, user friendly, durability, robust, attractive packaging etc.
The most effective way of differentiation is the product is hard or expensive for rivals to duplicate.
Buyers will pay for higher price if their perceived value exceeds the price they are paying.
Ch 5 -37
Focus StrategiesType 4 and Type 5
All firms generally follow a differentiation strategy but to compete successfully, firms need to be more focus either low cost or best value.
Type 4: low cost focus (offer products/services to a small market (niche group) at the lowest price.
Type 5: best value focus (offer products/services to a small market (niche group) at higher price but with value added features perceived as the best value by consumers.
Type 4 (low cost focus) and Type 5 (best-value focus) can be done effectively when consumers have distinctive preferences or requirements and the rival firms are not attempting to specialize in the same target segment.
Both strategies target a small market.
To gain focus strategy, organization need to implement intensive strategies such as market penetration and market development.
Organization that using focus strategy may do so by concentrating on a particular customer group of customers or particular product and produce it with low cost and provide best value to the buyers.
Allow companies to focus on niche area that makes their product different with others at a low cost and give best value to the customer.
Ch 5 -38
Ch 5 -39
Summary of Porter’s Generis Strategies
Type 1: low cost strategy that offers products or services to a wide range of customers at the lowest price available in the market.
Type 2: best value strategy that offers products and services to a wide range of customers at the lowest price available in the market compared to a rival’s products/services with similar attributes.
Type 3: differentiation strategy that aimed at producing products and services considered unique industry-wide and directed at consumers who are relatively price – insensitive.
Type 4: low cost focus strategy that offers products or services to a small range (niche group) of customers at the lowest price available in 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 that meet their tastes and requirements better than rival’s product/services do.
Ch 5 -42
Means for Achieving Strategies –1. Joint Ventures / Partnership
• Occurs when 2 or more companies form a temporary partnership or consortium for the purpose of capitalizing on some opportunity.
• Also known cooperative arrangements in the form of R&D, cross distribution agreement, cross licensing agreement etc.
• Benefits:
• Allow companies to improve communication and networking.
• To globalize the operations
• To minimize risks (less risky)
• Know-how sharing
Ch 5 -43
Means for Achieving Strategies –2. Mergers / Acquisitions
• Merger :- Occurs when 2 organizations of about equal size unite to form one enterprise.
• Acquisition:- large organization purchase a smaller firm or vice versa.
• Most M&A exercises are friendly mergers.• Reasons:
• Deregulations• To gain economies of scale• Inability to boost profits• Benefits:• Reduces entry barriers• Increased diversification• Increased market power
Ch 5 -44
Means for Achieving Strategies –3. Cooperation among competitors
• Occurs when firms contributes their distinctive resources to overcome their major rivals.
• Require formal agreements.
• Forming alliances and competes as one groups with major rivals to remain survive.
Ch 5 -46
Means for Achieving Strategies -4. First Mover Advantages
Benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms.
Be a pioneer or market leader not a market follower. Benefits:-
Able to secure access to rare resources Gaining new knowledge of key factors and issues Can obstruct new rival from entering the market Build image and reputation with buyers Enjoy cost advantages over new rival Create strong loyal customer base Difficult to imitate or duplicate by rival
Ch 5 -47
Means for Achieving Strategies -5. Outsourcing
Companies taking over the functional operations of other firms.
Transferring some job function to a 3rd party. Eg: IT, payroll, accounting, telemarketing etc.
Business-Process Outsourcing (BPO)
Ch 5 -48
Outsourcing
Less expensive Able to focus on core business Able to provide better services Provides firm with flexibility Allow firms to focus on internal
value chain activities that critical to sustain competitive advantage.
The Reasons:-
End of Presentation
