1 Chapter 5 Strategies in Action. 2 Integration Strategies Vertical Integration Strategies Forward...

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Chapter 5Strategies in Action

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Integration StrategiesIntegration Strategies

Vertical Integration Strategies

Forward Integration

Backward Integration

Horizontal Integration

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Integration Strategies

Vertical Integration strategies –

– Allow a firm to gain control over:• Distributors• Suppliers• competitors

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Forward Integration –

– Gaining ownership or increased control over distributors or retailers

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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 Organization has both capital and human resources

needed to manage new business of distribution Advantages of stable production are high Present distributors have high profit margins

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Backward Integration –

– Seeking ownership or increased control of a firm’s suppliers

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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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Horizontal Integration –

– Seeking ownership or increased control over competitors

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Guidelines for Horizontal Integration –

Firm can gain monopolistic characteristics without being challenged by federal government

Competes in growing industry Increased economies of scale provide major

competitive advantages Faltering due to lack of managerial expertise or

need for particular resources

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Intensive StrategiesIntensive Strategies

Intensive Strategies

Market Penetration

Market Development

Product Development

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Intensive strategies –

– Require intensive efforts to improve a firm’s competitive position with existing products

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Market Penetration –

– Seeking increased market share for present products or services in present markets through greater marketing efforts

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Guidelines 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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Market Development –

– Introducing present products or services into new geographic area

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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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Product Development –

– Seeking increased sales by improving present products or services or developing new ones

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Guidelines 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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Diversification StrategiesDiversification Strategies

Diversification Strategies

Concentric Diversification

Conglomerate Diversification

Horizontal Diversification

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Diversification strategies –

– Becoming less popular as organizations are finding it more difficult to manage diverse business activities

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Concentric Diversification –

– Adding new, but related, products or services

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Guidelines for 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

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Conglomerate Diversification –

– Adding new, unrelated products or services

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Guidelines for 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

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Horizontal Diversification –

– Adding new, unrelated products or services for present customers

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Guidelines for Horizontal Diversification –

Revenues from current products/services would increase significantly by adding the new unrelated products

Highly competitive and/or no-growth industry w/low margins and returns

Present distribution channels can be used to market new products to current customers

New products have counter cyclical sales patterns compared to existing products

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Defensive StrategiesDefensive Strategies

Defensive Strategies

Retrenchment

Divestiture

Liquidation

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Retrenchment –

– Regrouping through cost and asset reduction to reverse declining sales and profit

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Guidelines 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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Divestiture –

– Selling a division or part of an organization

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Guidelines 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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Recent Divestitures

Dell Computer web-hosting division FON GroupCititgroup Citi Capital GE Capital Fleet ServicesMaytag Blodgett Middleby Corporation

Wescoast Energy British Columbia Gas BC GasWestcoast Energy Union Energy Epcor UtilitiesWestcoast Energy Westcoast Capital Epcor Utilities

Credit Suisse CSFBdirect Bank of Montrealemerson Electric Chromalox JPMorgan PartnersGeneral Motors Hughes Electronics Echostar Communications

DuPont drug division Bristol-Myers Squibb

Parent Company Part Being Divested Acquiring Company

Recent Divestitures

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Liquidation–

– Selling all of a company’s assets, in parts, for their tangible worth

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Guidelines 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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Means for Achieving Strategies

Joint Venture/Partnering –

Two or more companies form a temporary partnership or consortium for purpose of capitalizing on some opportunity.

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Cooperative Arrangements –

Research and development partnerships Cross-distribution agreements Cross-licensing agreements Cross-manufacturing agreements Joint-bidding consortia

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Mergers and Acquisitions -

Merger – two organizations of about equal size unit to form one enterprise.

Acquisition – one company purchases another company.

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Porter’s Generic Strategies DefinedPorter’s Generic Strategies Defined

Cost Leadership

A Strategy Aimed at Producing Standardized Products at Low Per-Unit Cost for Consumers Who are Price-Sensitive

DifferentiationA Strategy Aimed at Producing Products and Services Considered Unique Industrywide and Directed at Consumers Who are Relatively Price-Insensitive

©1999 Prentice Hall

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Porter’s Generic Strategies (continued)Porter’s Generic Strategies (continued)

Focus

A Strategy Aimed at Producing Products and Services That Fulfill the Needs of Small Groups of Customers

©1999 Prentice Hall

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Who Should Use Strategic Management

• All firms, from large to small, profit and nonprofit, and government organizations.

1 Chapter 5 Strategies in Action. 2 Integration Strategies Vertical Integration Strategies Forward...

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