CHAPTER FOUR

STRATEGIES IN ACTION

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 Chapter Objectives

 Discuss the value of establishing long-term

objectives.
 Identify 16 types of business strategies.
 Identify numerous examples of organizations
pursuing different types of strategies.
 Discuss guidelines when particular strategies are
most appropriate to pursue.
 Discuss Porter’s five generic strategies.

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 Chapter Contents

4.1 The Nature of Long-Term Objectives

4.2 The Desired Characteristics of Objectives
4.3 Types of Corporate level Strategies

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 4.1 The Nature of 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.
 Objectives should be:
 quantitative, measurable, realistic, understandable,
challenging, hierarchical, obtainable, and
compatible among organizational units

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 Cont…

 Objectives
 provide direction
 Allow synergy
 aid in evaluation
 establish priorities
 reduce uncertainty
 minimize conflicts
 aid in both the allocation of resources and the
design of jobs
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 Cont….

 Long-term objectives are needed at the corporate,

divisional, and functional levels of an organization. They
are an important measure of managerial performance.
 Without long-term objectives, an organization would
drift aimlessly toward some unknown end. It is hard to
imagine an organization or individual being successful
without clear objectives.
 Success only rarely occurs by accident; rather, it is the
result of hard work directed toward achieving certain
objectives.
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4.2 The Desired Characteristics of Objectives

5-7
 4.3 Types of Corporate level 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.

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Alternative Strategies Defined and
Exemplified

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Alternative Strategies Defined and
Exemplified

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Levels of Strategies With Persons Most
Responsible

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 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
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 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 present distributors or retailers have high
profit margins

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 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 the advantages of stable prices are
particularly important
 When an organization needs to quickly acquire a
needed resource

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 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

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 Intensive Strategies
 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 in the present market.
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 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

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 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

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 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 that
is characterized by rapid technological
developments
 When major competitors offer better-quality
products at comparable prices
 When an organization competes in a high-growth
industry

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 Diversification Strategies

 Related  Unrelated
diversification diversification
 value chains possess  value chains are so
competitively dissimilar that no
valuable cross- competitively
business strategic valuable cross-
fits business
relationships exist

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 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 well-known brand
name.

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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

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 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 an organization’s basic industry is
experiencing declining annual sales and profits

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Unrelated Diversification Guidelines (cont.)

 When an organization has the opportunity to

purchase an unrelated business that is an attractive
investment opportunity
 When existing markets for an organization’s present
products are saturated
 When antitrust action could be charged against an
organization that historically has concentrated on a
single industry

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 Defensive Strategies

 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/strengthen an
organization’s basic distinctive competence

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 Retrenchment Guidelines

 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 has grown so large so
quickly that major internal reorganization is
needed

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 Defensive Strategies (cont’d…)_

 Divestiture
 Selling a division or part of an organization
 often used to raise capital for further strategic
acquisitions or investments

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 Divestiture Guidelines

 When an organization has pursued a retrenchment

strategy and failed to accomplish needed
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

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 Defensive Strategies …

 Liquidation
 selling all of a company’s assets for their
tangible worth
 can be an emotionally difficult strategy

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 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

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Porter’s Five Generic Strategies
(Business Level Strategy)

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 Michael Porter’s Five
Generic Strategies

 Cost leadership
 emphasizes producing standardized products
at a very low per-unit cost for consumers who
are price-sensitive

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 Michael Porter’s Five Generic Strategies

 Type 1  Type 2
 low-cost strategy  best-value
that offers strategy that offers
products or products or
services to a wide services to a wide
range of range of
customers at the customers at the
lowest price best price-value
available on the available on the
market market
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 Michael Porter’s Five
Generic Strategies
 Differentiation
 strategy aimed at producing products and
services considered unique industry-wide
and directed at consumers who are relatively
price-insensitive

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 Michael Porter’s Five
Generic Strategies
 Type 4  Type 5
 low-cost focus  best-value focus
strategy that offers strategy that offers
products or products or
services to a niche services to a small
group of range of
customers at the customers at the
lowest price best price-value
available on the available on the
market market
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 Cost Leadership Strategies

 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

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 Cost Leadership Strategies

Two ways:
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

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 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

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 Differentiation Strategies

 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

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 Differentiation

 When there are many ways to differentiate the

product
 When buyer needs and uses are diverse
 When few rival firms are following a similar
differentiation approach
 When technological change is fast paced

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 Focus 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

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 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 the industry has many different niches
and segments
 When few, if any, other rivals are attempting to
specialize in the same target segment

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 Means for Achieving Strategies

 Cooperation Among Competitors

 Joint Venture/Partnering
 Merger/Acquisition
 First Mover Advantages
 Outsourcing

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Key Reasons Why Many Mergers and
Acquisitions Fail

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Potential Benefits of Merging With or
Acquiring Another Firm

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Benefits of a Firm Being
the First Mover

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