Chapter 5

Strategies 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 two to five years.
• The Nature of Long-Term 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.
• Long-term objectives are needed at the corporate, divisional, and
functional levels of an organization. They are an important measure of
managerial performance.
• Two types of objectives are especially common in organizations:
Financial and strategic objectives. Financial objectives include those
associated with growth in revenues, growth in earnings, higher
dividends, larger profit margins, greater return on investment, higher
earnings per share, a rising stock price, improved cash flow.
• Strategic objectives include things such as a larger market share,
quicker on-time delivery than rivals, shorter design-to-market times
than rivals, lower costs than rivals, higher product quality than rivals,
wider geographic coverage than rivals, achieving technological
leadership, consistently getting new or improved products to market
ahead of rivals.
Not Managing by Objectives
• An unidentified educator once said, “If you think education is
expensive, try ignorance.” The idea behind this saying also applies to
establishing objectives. Strategists should avoid the following
alternative ways to “not managing by objectives.”
• Managing by Extrapolation
• Managing by Crisis
• Managing by Subjective
• Managing by Hope
The Balanced Scorecard
•Developed in 1993 by Harvard Business School
professors Robert Kaplan and David Norton, and
refined continually through today, the Balanced
Scorecard is a strategy evaluation and control
technique.
Levels of Strategies with Persons Most
Responsible
Types of Strategies
• Integration Strategies
Forward Integration
Backward Integration
Horizontal Integration
• Intensive Strategies
Market Penetration
Market Development
Product Development
• Diversification Strategies
Related Diversification
Unrelated diversification
• Defensive Strategies
Retrenchment
Divestiture
Liquidation
Michael Porter’s Five Generic Strategies
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
• Integration Strategies : Forward integration, backward integration,
and horizontal integration are sometimes collectively referred to as
vertical integration strategies. Vertical integration strategies allow a
firm to gain control over distributors, suppliers, and/or competitors.
• Forward Integration: Forward integration involves gaining ownership
or increased control over distributors or retailers. Increasing numbers
of manufacturers (suppliers) today are pursuing a forward integration
strategy by establishing Web sites to directly sell products to
consumers. This strategy is causing turmoil in some industries. For
example, Microsoft is opening its own retail stores, a forward
integration strategy similar to rival Apple Inc., which currently has
more than 200 stores around the world.
• These six guidelines indicate when forward integration may be an
especially effective strategy
• • When an organization’s present distributors are especially
expensive, or unreliable, or incapable of meeting the firm’s
distribution needs.
• • When the availability of quality distributors is so limited as to offer a
competitive advantage to those firms that integrate forward.
• • When an organization competes in an industry that is growing and
is expected to continue to grow markedly; this is a factor because
forward integration reduces an organization’s ability to diversify if its
basic industry falters
• When an organization has both the capital and human resources
needed to manage the new business of distributing its own products.
• When the advantages of stable production are particularly high; this
is a consideration because an organization can increase the
predictability of the demand for its output through forward
integration.
• When present distributors or retailers have high profit margins; this
situation suggests that a company profitably could distribute its own
products and price them more competitively by integrating forward
• Backward Integration : Both manufacturers and retailers purchase
needed materials from suppliers. Backward integration is a strategy of
seeking ownership or increased control of a firm’s suppliers. This
strategy can be especially appropriate when a firm’s current suppliers
are unreliable, too costly, or cannot meet the firm’s needs. When you
buy a box of Pampers diapers at Wal-Mart, a scanner at the store’s
checkout counter instantly zaps an order to Procter & Gamble
Company.
• Seven guidelines for when backward integration may be an especially
effective strategy are:
• When an organization’s present suppliers are especially expensive, or
unreliable, or incapable of meeting the firm’s needs for parts, components,
assemblies, or raw materials.
• When the number of suppliers is small and the number of competitors is
large. • When an organization competes in an industry that is growing
rapidly; this is a factor because integrative-type strategies (forward,
backward, and horizontal) reduce an organization’s ability to diversify in a
declining industry.
• When an organization has both capital and human resources to manage
the new business of supplying its own raw materials
• When the advantages of stable prices are particularly important; this
is a factor because an organization can stabilize the cost of its raw
materials and the associated price of its product(s) through backward
integration.
• When present supplies have high profit margins, which suggests that
the business of supplying products or services in the given industry is a
worthwhile venture.
• When an organization needs to quickly acquire a needed resource
• Horizontal Integration: Horizontal integration refers to a strategy of
seeking ownership of or increased control over a firm’s competitors.
One of the most significant trends in strategic management today is
the increased use of horizontal integration as a growth strategy.
Mergers, acquisitions, and takeovers among competitors allow for
increased economies of scale and enhanced transfer of resources and
competencies.
• 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
• A market penetration strategy seeks to increase market share for
present products or services in present markets through greater
marketing efforts. This strategy is widely used alone and in
combination with other strategies. Market penetration includes
increasing the number of salespersons, increasing advertising
expenditures, offering extensive sales pro motion items, or increasing
publicity efforts. Coke in 2009/2010 spent millions on its new
advertising slogan, “Open Happiness,” which replaced “The Coke Side
of Life.”
• These five guidelines indicate when market penetration may be an
especially effective strategy:
• 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 the correlation between dollar sales and dollar marketing
expenditures historically has been high.
• When increased economies of scale provide major competitive advantages
Market Development :
• Market development involves introducing present products or
services into new geographic areas. For example, Retailers such as
Wal-Mart Stores, Carrefour SA, and Tesco PLC are expanding further
into China in 2009/2010 even in a world of slumping sales. Tesco is
opening fewer stores in Britain to divert capital expenditures to China.
• These six guidelines indicate when market development may be an
especially effective strategy:
• 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 the needed capital and human resources to
manage expanded operations.
• When an organization has excess production capacity.
• When an organization’s basic industry is rapidly becoming global in scope
• Product Development :
• Product development is a strategy that seeks increased sales by
improving or modifying present products or services. Product
development usually entails large research and development
expenditures. Google’s new Chrome OS operating system illuminates
years of monies spent on product development. Google expects
Chrome OS to overtake Microsoft Windows by 2015.
• These five guidelines indicate when product development may be an
especially effective strategy to pursue:
• When an organization has successful products that are in the maturity
stage of the product life cycle; the idea here is to attract satisfied customers
to try new (improved) products as a result of their positive experience with
the organization’s present products or services.
• 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.
• When an organization has especially strong research and development
capabilities
Diversification Strategies
• There are two general types of diversification strategies: related and
unrelated. Businesses are said to be related when their value chains
posses 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.
Most companies favor related diversification strategies in order to
capitalize on synergies as follows:
• 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.
• Cross-business collaboration to create competitively valuable
resource strengths and capabilities
• Related Diversification Google’s stated strategy is to organize all the
world’s information into searchable form, diversifying the firm beyond
its roots as a Web search engine that sells advertising.
Six guidelines for when related diversification may
be an effective strategy are as follows.
• 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 new, but related, products have seasonal sales levels that
counterbalance an organization’s existing peaks and valleys.
• When an organization’s products are currently in the declining stage of the
product’s life cycle.
• When an organization has a strong management team
• Unrelated Diversification: An unrelated diversification strategy favors
capitalizing on a portfolio of businesses that are capable of delivering
excellent financial performance in their respective industries, rather
than striving to capitalize on value chain strategic fits among the
businesses.
Ten guidelines for when unrelated diversification
may be an especially effective strategy are:
• When revenues derived from an organization’s current products or services
would increase significantly by adding the new, unrelated products.
• When an organization competes in a highly competitive and/or a no-
growth industry, as indicated by low industry profit margins and returns.
• 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
an organization’s present products.
• When an organization’s basic industry is experiencing declining annual
sales and profits
• When an organization has the capital and managerial talent needed to
compete successfully in a new industry.
• When an organization has the opportunity to purchase an unrelated
business that is an attractive investment opportunity.
• When there exists financial synergy between the acquired and acquiring
firm. (Note that a key difference between related and unrelated
diversification is that the former should be based on some commonality in
markets, products, or technology, whereas the latter should be based more
on profit considerations.)
• 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