5-15-1 Visit UMT online at 2005 UMT Version 02-18-05 MGT195 Visit UMT online at BUSINESS POLICY...

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BUSINESS POLICY AND BUSINESS POLICY AND STRATEGYSTRATEGY

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Chapter 5:Chapter 5:Strategies in ActionStrategies in Action

David, Fred R. David, Fred R. Strategic Strategic Management: Concepts (9th ed.)Management: Concepts (9th ed.) © ©

2003 Prentice Hall. 2003 Prentice Hall.




Chapter OutlineChapter Outline

Long-Term ObjectivesTypes of StrategiesIntegration Strategies




Intensive StrategiesDiversification StrategiesDefensive StrategiesMeans for Achieving Strategies




Michael Porter’s Generic StrategiesStrategic Management in Nonprofit and Governmental OrganizationsStrategic Management in Small Firms



Strategies in ActionStrategies in Action

Even if you’re on the right track, you’ll get run over if you just sit there.-- Will Rogers



Strategies in ActionStrategies in Action

Hundreds of companies today –Embrace strategic planning

Quest for higher revenuesQuest for higher profits



Long-Term ObjectivesLong-Term Objectives

The results expected from pursuing certain strategies




Objectives –QuantifiableMeasurableRealisticUnderstandableChallengingHierarchicalObtainable CongruentTime-line




Long-term objectives are necessary –CorporateDivisionalFunctional levels




Strategists should avoid –Managing by ExtrapolationManaging by CrisisManaging by SubjectivesManaging by Hope



Vertical Integration Strategies

Forward Integration

Backward Integration

Horizontal Integration

Integration StrategiesIntegration Strategies




Vertical Integration strategies –Allow a firm to gain control over:

DistributorsSupplierscompetitors




Forward Integration –Gaining ownership or increased control over distributors or retailers




Guidelines for Forward Integration –Present distributors are expensive, unreliable, or incapable of meeting firm’s needsAvailability of quality distributors is limitedWhen firm competes in an industry that is expected to grow markedlyOrganization has both capital and human resources needed to manage new business of distributionAdvantages of stable production are highPresent distributors have high profit margins




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




Guidelines for Backward Integration –When present suppliers are expensive, unreliable, or incapable of meeting needsNumber of suppliers is small and number of competitors largeHigh growth in industry sectorFirm has both capital and human resources to manage new businessAdvantages of stable prices are importantPresent supplies have high profit margins




Horizontal Integration –Seeking ownership or increased control over competitors




Guidelines for Horizontal Integration –Firm can gain monopolistic characteristics without being challenged by federal governmentCompetes in growing industryIncreased economies of scale provide major competitive advantagesFaltering due to lack of managerial expertise or need for particular resources



Michael Porter’s Generic Michael Porter’s Generic StrategiesStrategies

Cost Leadership Strategies

Differentiation Strategies

Focus Strategies



Generic StrategiesGeneric Strategies

Cost Leadership Strategies –Pursued in conjunction with differentiationEconomies or diseconomies of scaleCapacity utilization achievedLinkages with suppliers and distributors




Low Cost Producer Advantages –Market of many price-sensitive buyersFew ways of achieving product differentiationBuyers not sensitive to brand differencesLarge number of buyers with bargaining power




Differentiation Strategies –Greater product flexibilityGreater compatibilityLower costsImproved serviceGreater convenienceMore features




Differentiation Strategies –Allow firm to charge higher priceGain customer loyalty




Focus Strategies –Industry segment of sufficient sizeGood growth potentialNot crucial to success of major competitors




Focus Strategies –Consumers have distinctive preferencesRival firms not attempting to specialize in the same target segment



Intensive Strategies

Market Penetration

Market Development

Product Development

Intensive StrategiesIntensive Strategies




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




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




Guidelines for Market Penetration –Current markets not saturatedUsage rate of present customers can be increased significantlyMarket shares of competitors declining while total industry sales increasingIncreased economies of scale provide major competitive advantages




Market Development –Introducing present products or services into new geographic area




Guidelines for Market Development –New channels of distribution that are reliable, inexpensive, and good qualityFirm is very successful at what it doesUntapped or unsaturated marketsCapital and human resources necessary to manage expanded operationsExcess production capacityBasic industry rapidly becoming global




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




Guidelines for Product Development –Products in maturity stage of life cycleCompetes in industry characterized by rapid technological developmentsMajor competitors offer better-quality products at comparable pricesCompete in high-growth industryStrong research and development capabilities



Diversification Strategies

Concentric Diversification

Conglomerate Diversification

Horizontal Diversification

Diversification StrategiesDiversification Strategies




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




Concentric Diversification –Adding new, but related, products or services




Guidelines for Concentric Diversification –Competes in no- or slow-growth industryAdding new & related products increases sales of current productsNew & related products offered at competitive pricesCurrent products are in decline stage of the product life cycleStrong management team




Conglomerate Diversification –Adding new, unrelated products or services




Guidelines for Conglomerate Diversification –Declining annual sales and profitsCapital and managerial talent to compete successfully in a new industryFinancial synergy between the acquired and acquiring firmsExiting markets for present products are saturated




Horizontal Diversification –Adding new, unrelated products or services for present customers




Guidelines for Horizontal Diversification –Revenues from current products/services would increase significantly by adding the new unrelated productsHighly competitive and/or no-growth industry w/low margins and returnsPresent distribution channels can be used to market new products to current customersNew products have counter cyclical sales patterns compared to existing products



Defensive Strategies

Retrenchment

Divestiture

Liquidation

Defensive StrategiesDefensive Strategies




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




Guidelines for Retrenchment –Firm has failed to meet its objectives and goals consistently over time but has distinctive competenciesFirm is one of the weaker competitorsInefficiency, low profitability, poor employee morale, and pressure from stockholders to improve performance.When an organization’s strategic managers have failedVery quick growth to large organization where a major internal reorganization is needed




Divestiture –Selling a division or part of an organization




Guidelines for Divestiture –When firm has pursued retrenchment but failed to attain needed improvementsWhen a division needs more resources than the firm can provideWhen a division is responsible for the firm’s overall poor performanceWhen a division is a misfit with the organizationWhen a large amount of cash is needed and cannot be obtained from other sources.



Recent DivestituresRecent 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




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




Guidelines for Liquidation –When both retrenchment and divestiture have been pursued unsuccessfullyIf the only alternative is bankruptcy, liquidation is an orderly alternativeWhen stockholders can minimize their losses by selling the firm’s assets



Means for Achieving StrategiesMeans for Achieving Strategies

Joint Venture/Partnering –Two or more companies form a temporary partnership or consortium for purpose of capitalizing on some opportunity.




Cooperative Arrangements –Research and development partnershipsCross-distribution agreementsCross-licensing agreementsCross-manufacturing agreementsJoint-bidding consortia




Problems Causing Joint Ventures to Fail –Managers who must collaborate daily not involved in forming or shaping the ventureVenture may benefit the companies but not the customersVenture not supported equally by both partnersVenture may begin to compete with one of the partners more so than the other




Guidelines for Joint Ventures –Combination of privately held and publicly held can be synergistically combinedDomestic forms joint venture with foreign firm, can obtain local management to reduce certain risksDistinctive competencies of two or more firms are complementaryOverwhelming resources and risks where project is potentially very profitable (e.g., Alaska pipeline)Two or more smaller firms have trouble competing with larger firmA need exists to introduce a new technology quickly



Recent MergersRecent Mergers

Acquiring Firm Acquired FirmHewlett-Packard Compaq ComuterEbay HomesDirectPepsiCo Quaker OatsSara Lee Earthgrains CompanyPhillips Petroleum ConocoDevon Anderson ExplorationAMR TWATellabs Ocular Networks



Key TermsKey Terms

AcquisitionBackward IntegrationCombination StrategyConcentric DiversificationConglomerate DiversificationCooperative ArrangementsCost Leadership



Key TermsKey Terms

DifferentiationDiversification StrategiesDivestitureFocusForward IntegrationFranchisingGeneric Strategies



Key TermsKey Terms

Horizontal DiversificationHorizontal IntegrationIntegration StrategiesIntensive StrategiesJoint VentureLiquidationLong-Term Objectives



Key TermsKey Terms

Market DevelopmentMarket PenetrationMergerOutsourcingProduct DevelopmentRetrenchmentTakeoverVertical Integration


5-15-1 Visit UMT online at 2005 UMT Version 02-18-05 MGT195 Visit UMT online at BUSINESS POLICY...

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