MODULE 5

STRATEGY IN ACTION

LEARNING OBJECTIVES

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

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

2. Define and give an example of eleven types of strategies.

3. Identify and discuss the three types of “Integration Strategies.”

4. Give specific guidelines when market penetration, market development, and product
development are especially effective strategies.

5. Explain when diversification is an effective business strategy.

6. List guidelines for when retrenchment, divestiture, and liquidation are especially
effective strategies.

7. Identify and discuss Porter’s five generic strategies.

8. Compare (a) cooperation among competitors, (b) joint venture and partnering, and

(c) merger/acquisition as key means for achieving strategies.

9. Discuss tactics to facilitate strategies, such as (a) being a first mover, (b) outsourcing,
and (c) reshoring.

10. Explain how strategic planning differs in for-profit, not-for-profit, and small firms.

SUGGESTED READINGS

 Strategic Management: A Competitive Advantage Approach, Concepts and Cases, 6 th Ed.,

Fred R. David/Forest R. David (Chapter 4)
 Professor’s PPT
 MODULE 5
STRATEGY IN ACTION

LONG-TERM OBJECTIVES

- Long-term objectives represent the results expected from pursuing certain strategies. Strategies
represent the actions to be taken to accomplish long-term objectives.
- The time frame for objectives and strategies should be consistent, usually from 2 to 5 years.
- Without long-term objectives, `an organization would drift aimlessly toward some unknown
end. It is hard to imagine an organization or an individual being successful without clear
objectives.

CHARACTERISTICS AND BENEFITS OF OBJECTIVES

- Objectives should be quantitative, measurable, realistic, understandable, challenging,

hierarchical, obtainable, and congruent among organizational units. Each objective should also
be associated with a timeline.
- Clearly established objectives offer many benefits. They provide direction, allow synergy, assist
in evaluation, establish priorities, reduce uncertainty, minimize conflicts, stimulate exertion, and
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.

AVOID NOT MANAGING BY OBJECTIVES

- 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.”

• Managing by Extrapolation —Adheres to the principle “If it ain’t broke, don’t fix it.” The idea is
to keep on doing the same things in the same ways because things are going well.

• Managing by Crisis —Based on the belief that the true measure of a really good strategist is
the ability to solve problems. Managing by crisis is actually a form of reacting, letting events
dictate the what and when of management decisions.

• Managing by Subjectives —Built on the idea that there is no general plan for which way to go
and what to do; just do the best you can to accomplish what you think should be done.

• Managing by Hope —Based on the fact that the future is laden with great uncertainty and that
if we try and do not succeed, then we hope our second (or third) attempt will succeed.
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.

LEVELS OF STRATEGIES

- 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. However,
in small firms, there are three levels of strategies: company, functional, and operational.
INTEGRATION STRATEGIES

- 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.
- Vertical and horizontal actions by firms are broadly referred to as 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 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 the advantages of stable production are particularly high.
- When present distributors or retailers have high profit margins.

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 an organization has both capital and human resources.
- When the advantages of stable prices are particularly important.
- 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.

INTENSIVE STRATEGIES

- 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 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 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

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
- 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 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

DIVERSIFICATION STRATEGIES

 The two general types of diversification strategies are related diversification and unrelated
diversification.
 Businesses are said to be related when their value chains possess competitively valuable cross-
business strategic fits.
 Businesses are said to be unrelated when their value chains are so dissimilar that no
competitively valuable cross-business relationships exist

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 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

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 the new products have countercyclical sales patterns compared to present products
 When an organization’s basic industry is experiencing declining annual sales and profits
 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 the new products have countercyclical sales patterns compared to present products
 When an organization’s basic industry is experiencing declining annual sales and profits

DEFENSIVE STRATEGIES

 In addition to integrative, intensive, and diversification strategies, organizations also could

pursue defensive strategies such as retrenchment, divestiture, or liquidation.

 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

 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
- can be an emotionally difficult strategy

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

DIVERSTITURE 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 government antitrust action threatens a firm

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

MICHAEL PORTER’S FIVE GENERIC STRATEGIES

- 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.

 Cost leadership - emphasizes producing standardized products at a very low per-unit cost for
consumers who are price-sensitive
 Differentiation - strategy aimed at producing products and services considered unique industry-
wide and directed at consumers who are relatively price-insensitive
 Focus - means producing products and services that fulfill the needs of small groups of
consumers
 TYPE 1 - is a low-cost strategy that offers products or services to a wide range of customers at
the lowest price available on the market.
 TYPE 2 - is a best-value strategy that offers products or services to a wide range of customers at
the best price-value available on the market.
 TYPE 3 - a strategy aimed at producing products and services considered unique to the industry
and directed at consumers who are relatively price insensitive.
 TYPE 4 - is a low-cost focus strategy that offers products or services to a small range (niche
group) of customers at the lowest price available on the market.
 TYPE 5 - is a best-value focus strategy that offers products or services to a small range of
customers at the best price-value available on the market.

COST LEADERSHIP STRATEGIES (TYPE 1 & TYPE 2)

- 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.
- There are two ways to accomplish this:

1. Perform value chain activities more efficiently than rivals and control the factors that drive the
costs of value chain activities.
2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities.
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
- When large buyers can bargain down prices.

DIFFERENTIATION STRATAEGIES (TYPE 3)

- 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.
- A Type 3 differentiation strategy can be especially effective under the following four
- conditions:
 1. There are many ways to differentiate the product or service and many buyers perceive these
differences as having value.
2. The buyer’s needs and uses are diverse.
3. Few rival firms are following a similar differentiation approach.
4. Technological change is fast paced and competition revolves around rapidly evolving product
features.

FOCOUS 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.

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 industry leaders consider it too costly or difficult to meet the specialized needs of the
niche
- When the industry has many different niches
- 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/Reshoring
SUMMARY

The main appeal of any managerial approach is the expectation that it will enhance
organizational performance. This is especially true of strategic management. Through involvement in
strategic-management activities, managers and employees achieve a better understanding of an
organization’s priorities and operations. Strategic management allows organizations to be efficient, but
more important, it allows them to be effective. Although strategic management does not guarantee
organizational success, the process allows proactive rather than reactive decision making. Strategic
management may represent a radical change in philosophy for some organizations, so strategists must
be trained to anticipate and constructively respond to questions and issues as they arise. The strategies
discussed in this chapter can represent a new beginning for many firms, especially if managers and
employees in the organization understand and support the plan for action.

REVIEW QUESTIONS
1. Identify five situations when forward integration is a particularly good strategy. Forward
integration involves gaining ownership or increased control over distributors or retailers.
Increasing numbers of manufacturers (suppliers) are pursuing a forward integration strategy by
establishing websites to sell their products directly to consumers.
2. What three strategies defined in the chapter do you feel are most widely used by small
businesses?
3. Give some guidelines of when divestiture is a particularly effective strategy. Selling a division or
part of an organization is called divestiture. It is often used to raise capital for further strategic
acquisitions or investments.
4. What are the major advantages and disadvantages of diversification?
5. Identify three companies that use outsourcing effectively. Explain how and why those firms
utilize this management approach.