Chapter 5

Strategies in Action

Strategic Management:
Concepts & Cases
13th Edition
Fred David

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Long Term Objectives

 Quantitative  Challenging

 Measurable  Hierarchical

 Realistic  Obtainable

 Understandable  Congruent
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Hierarchical Objective:
Congruency: The quality of agreeing; being suitable and appropriate

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Financial vs. Strategic Objectives
Financial Objectives
Growth in revenues
Growth in earnings
Higher dividends
Larger profit margins
Greater ROI
Higher earnings per share
Rising stock price
Improved cash flow
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The Balanced Scorecard

Robert Kaplan & David Norton –

Strategy evaluation & control technique

Balance financial measures with
nonfinancial measures
Balance shareholder objectives with
customer & operational objectives
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Levels of Strategies –
Large Company

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Levels of Strategies –
Small Company

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Types of Strategies

Forward
Integration

Vertical Backward
Integration Integration
Strategies

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Vertical Integration Strategies
Forward Gaining ownership or increased
Integration control over distributors or retailers

Backward Seeking ownership or increased

Integration control of a firm’s suppliers

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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

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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

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Types of Strategies

Market
Penetration

Intensive Market
Strategies Development

Product
Development

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Intensive Strategies
Seeking increased market share for
Market present products or services in
Penetration present markets through greater
marketing efforts

Market Introducing present products or

Development services into new geographic areas

Seeking increased sales by

Product
improving present products or
Development services or developing new ones

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Guideline 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

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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

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Guideline 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

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Types of Strategies

Related
Diversification

Diversification
Strategies

Unrelated
Diversification

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Diversification Strategies

Related Adding new but related products or

Diversification services

Unrelated
Adding new, unrelated products or
Diversification services

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Guideline for Related/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
Example of Related/Concentric Diversification
National Westminister Bank PLC in Britain bought the
leading British insurance company, Legal & General
Group PLC.

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Guideline for Unrelated/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

Example of Unrelated/Conglomerate Diversification

Consultant Construction Engineering acquired Bisects

factory

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Types of Strategies

Retrenchment

Defensive Divestiture
Strategies

Liquidation

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Defensive Strategies
Regrouping through cost and asset
Retrenchment reduction to reverse declining sales
and profit

Divestiture Selling a division or part of an

organization

Selling all of a company’s assets, in

Liquidation parts, for their tangible worth

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Guideline 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.

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Guideline 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.

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Guideline 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

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Porter’s Five Generic Strategies

 Type 1 Cost Leadership – Low cost

 Type 2 Cost Leadership – Best value

 Type 3 Differentiation

 Type 4 Focus – Low cost

 Type 5 Focus – Best value

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Porter’s Five Generic Strategies

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Michael Porter’s Generic Strategies
Type 1: Cost Leadership
 Cost leadership emphasizes producing standardized
products at a very low per-unit cost for consumers who
are price-sensitive.
 There are two types of cost leadership strategies.
 a. A low-cost strategy offers products to a wide range of
customers at the lowest price available on the market.
 b. A best-value strategy offers products to a wide range
of customers at the best price-value available on the
market

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Cost Leadership

 Striving to be the low-cost producer in an

industry can be especially effective when
the market is composed of many price-
sensitive buyers, when there are few ways
to achieve product differentiation, when
buyers do not care much about differences
from brand to brand, or when there are a
large number of buyers with significant
bargaining power.
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Cost Leadership (Continue)
 The basic idea behind a cost leadership strategy
is to underpriced competitors or offer a better
value and thereby gain market share and sales,
driving some competitors out of the market
entirely.
 5. To successfully employ a cost leadership
strategy, firms must ensure that total costs across
the value chain are lower than that of the
competition. This can be accomplished by:
 a. performing value chain activities more
efficiently than competition, and
 b. eliminating some cost-producing
activities in the value chain.
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 Differentiation –

– Broad mass market

– Unique product/service
– Premiums charged
– Less price sensitivity

 Differentiation is aimed at producing products that are

considered unique. This strategy is most powerful with
the source of differentiation is especially relevant to the
target market.
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Differentiation (Continue)

 A successful differentiation strategy allows

a firm to charge higher prices for its
products to gain customer loyalty because
consumers may become strongly attached
to the differentiation features.
 A risk of pursuing a differentiation strategy
is that the unique product may not be
valued highly enough by customers to
justify the higher price.
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Focus:

 Focus strategies are most effective when

the niche is profitable and growing, when
industry leaders are uninterested in the
niche, when industry leaders feel pursuing
the niche is too costly or difficult, when the
industry offers several niches, and when
there is little competition in the niche
segment.

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Focus
 Focus means producing products and services
that fulfill the needs of small groups of
consumers.
 There are two types of focus strategies.
 A low-cost focus strategy offers products or
services to a small range (niche) of customers at
the lowest price available on the market.
 b. A best-value focus strategy offers products to
a small range of customers at the best price-
value available on the market. This is some
times called focused differentiation.
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Cost Focus Continue
 Cost-Focus –

– Low-cost competitive strategy

– Focus on market segment
– Niche focused
– Cost advantage in market segment
 Stuck in the middle –

– No competitive advantage
– Below-average performance
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Differentiation Focus

Differentiation Focus –

–Specific group or geographic market

focus
–Differentiation in target market
–Special needs of narrow target market

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Risk of Generic Strategies

 Risks of Cost Leadership

 Cost leadership is not sustained:
 • Competitors imitate.
 • Technology changes.
 • Other bases for cost
leadership erode.
 Proximity in differentiation is lost.
 Cost focusers achieve even lower cost in
segments.
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Risk of Differentiation

 Differentiation is not sustained:

 • Competitors imitate.
 • Bases for differentiation
become less important to
buyers.
 Cost proximity is lost.
 Differentiation focusers achieve even greater
differentiation in segments.

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Risk of Focus
 Risks of Focus
 The focus strategy is imitated:
 The target segment becomes structurally unattractive:
 • Structure erodes.
 • Demand disappears.
 Broadly targeted competitors overwhelm the segment:
 • The segment’s
differences from other
segments narrow.
 • The advantages of a
broad line increase.
 New focusers sub-segment the industry.

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