Strategic management to life

CHAPTER 6

STRATEGIES IN ACTION

CHAPTER OVERVIEW

 

This chapter brings strategic management to life with many contemporary examples. Sixteen types of strategies are defined and exemplified, including Michael Porter’s generic strategies: cost leadership, differentiation, and focus.

EXTENDED CHAPTER OUTLINE WITH TEACHING TIPS

 

1. LONG-TERM OBJECTIVES

 

1. Long-term objectives represent the results expected from pursuing certain strategies. The time frame for objectives and strategies should be consistent, usually from two to five years.

 

1. The Nature of Long-term Objectives

 

1. Objectives should be quantifiable, measurable, realistic, understandable, challenging, hierarchical, obtainable, and congruent among organizational units.

 

2. Each objective should also be associated with a timeline.

 

1. When not Not Managing By Objectives

 

1. Managing by extrapolation: Maintaining the status quo

 

2. Managing by crisis: The true measure of a really good strategist is the ability to solve problems.

 

3. Managing by subjectives: This is built on doing the best you can to accomplish what you think should be done.

 

4. Managing by hope: The future is uncertain and if we do not succeed, then we hope our second (or third) attempt will succeed.

 

 

 

1. THE BALANCED SCORECARD

 

1. Developed in 1993 by Harvard Business School professors Robert Kaplan and David Norton, and refined continually, the Balanced Scorecard is a strategy evaluation and control technique.

 

1. Balanced Scorecard derives its name from the perceived need of firms to “balance” financial measures that are oftentimes used exclusively in strategy evaluation and control with nonfinancial measures such as product quality and customer service.

 

III.      TYPES OF STRATEGIES

 

1. Depending on their capabilities and potential, companies may display three attitudes: growth (offensive), retrenchment (defensive), and stability.

 

1. The growth strategy always involves increasing investment and this implies that the company is aggressively trying to change its industry and competition.

 

2. Retrenchment strategy is a defensive one where the company seeks to protect its position and hopefully minimize exposure to risk.

 

3. The stability strategy or maintaining the status quo manifests a satisfaction with the current market position and involvement.

 

1. Alternative strategies that an enterprise could pursue can be categorized into 11 actions:

 

1. Vertical integration (forward and backward integration), horizontal integration, market penetration, market development, product development, innovation, related diversification, unrelated diversification or conglomeration, retrenchment, divestiture, and liquidation
2. A combination of these strategies can be risky, and a company should choose from among alternative strategies .

 

1. Strategic planning is based on predictions and assumptions that are continually tested and refined by knowledge, research, experience, and learning.

 

1. Levels of Strategies

 

1. In large firms there are actually four levels of strategy: corporate, divisional, functional, and operational. CEO, FO, CIO, HRM, and CMO serve at the functional levels; the plant manager, regional sales manager, etc. at the operational level

 

2. In small firms there are three levels of strategy: company, functional, and operational. The business owner or president serves at the top level, and various functionaries at lower levels.

 

 

1. INTEGRATION STRATEGIES

 

1. Strategies that allow a firm to gain control over distributors, suppliers, and/or competitors are called integration strategies, and comprise: forward, backward, and horizontal integration.

 

1. Forward Integration: A company gaining ownership or increased control over distributors or retailers. Guidelines to seek effective forward integration are:

 

1. When an organization’s distributors are expensive or unreliable or incapable of meeting the firm’s distribution needs;
2. When the availability of quality distributors is so limited

 

1. When an organization competes in an industry that is growing and is expected to continue to grow markedly;

 

1. When an organization has both the capital and human resources needed to manage the new business of distributing its own products;

 

1. When present distributors or retailers have high profit margins.

 

2. Backward Integraton: A firm seeking ownership or increased control of a firm’s suppliers. Guidelines for when backward integration may be an especially effective strategy are:

 

1. When an organization’s present suppliers are expensive, or unreliable, or incapable of meeting the firm’s needs;

 

1. When the number of suppliers is small and the number of competitors is large;

 

1. When an organization competes in an industry that is growing rapidly;

 

1. When an organization has both capital and human resources to manage the new business of supplying its own raw materials;

 

1. When the advantages of stable prices are particularly important;

 

1. When present supplies have high profit margins;

 

1. When an organization needs to quickly acquire a needed resource.

 

3. Horizontal Integration: A company seeking ownership or increased control over competitors. Guidelines for when horizontal integration may be an especially effective strategy are:

 

1. When an organization can gain monopolistic characteristics in a particular area or region;

 

1. When an organization competes in a growing industry;

 

1. When increased economies of scale provide major competitive advantages;

 

1. When an organization has both the capital and human talent needed to successfully manage an expanded organization;

 

1. When competitors are hesitating due to a lack of managerial expertise.

 

1. INTENSIVE STRATEGIES

 

1. Market penetration, market development, product development, and innovation are sometimes referred to as intensive strategies because they require intensive efforts if a firm’s competitive position with existing products is to improve.

 

1. Market Penetration

 

1. A market penetration strategy seeks to increase market share for present products or services in present markets through greater marketing efforts. Guidelines for when market penetration may be an especially effective strategy are:

 

1. When current markets are not saturated with a particular product or service;

 

1. When the usage rate of present customers could be increased significantly;

 

1. When the market shares of major competitors have been declining while total industry sales have been increasing;

 

1. When the correlation between dollar sales and dollar marketing expenditures historically has been high;

 

1. When increased economies of scale provide major competitive advantages.

 

1. Market Development

 

1. Market development involves introducing present products or services into new geographic areas. Guidelines for when market development may be an especially effective strategy are:

 

1. When new channels of distribution are available that are reliable, inexpensive, and of good quality;

 

1. When an organization is very successful at what it does;

 

1. When new untapped or unsaturated markets exist;

 

1. When an organization has the needed capital and human resources to manage expanded operations;

 

1. When an organization has excess production capacity;

 

1. When an organization’s basic industry is becoming rapidly global in scope.

 

1. Product Development

 

1. Product development is a strategy that seeks increased sales by improving or modifying present products or services. Guidelines for when product development may be an especially effective strategy to pursue are:

 

1. When an organization has successful products that are in the maturity stage of the product life cycle;
2. When an organization competes in an industry that is characterized by rapid technological developments;

 

1. When major competitors offer better-quality products at comparable prices;

 

1. When an organization competes in a high-growth industry;

 

1. When an organization has especially strong R&D capabilities.

 

1. Innovation

 

1. Innovation implies the creation of a completely new product, instead of extending the life cycle of existing products through modification and improvement. An innovative strategy requires investing large capital in R&D and changing company culture to one that supports creativity and talent. Guidelines for when innovation may be an especially effective  strategy to pursue are:

 

1. When an organization is facing pressure to stay ahead of its competition and has to shorten the life cycle of existing products;

 

1. When an organization competes in an industry that is characterized by rapid change and fierce competition;

 

1. When major competitors come up with a new product with multiple functions at competitive prices;

 

1. When the economy is experiencing high growth and there is a strong customer demand for quality;

 

1. When an organization has well-established R&D capabilities;

 

1. When an organization seeks to be a global player and change the competition game.

 

 

1. DIVERSIFICATION STRATEGIES

 

1. There are two general types of diversification strategies: related and unrelated. Businesses are said to be related when their value chains possess competitive strategic fits; otherwise they are said to be unrelated. Most businesses choose (mostly related) diversification.

 

1. Related Diversification:

Guidelines for when related diversification may be an effective strategy are as follows:

 

1. When an organization competes in a no-growth or a slow growth industry;

 

1. When adding new, but related, products would significantly enhance the sales of current products;

 

1. When new, but related, products could be offered at highly competitive prices;

 

1. When new, but related, products have seasonal sales levels that counterbalance an organization’s existing peaks and valleys;
2. When an organization’s products are currently in the declining stage of the product life cycle;

 

1. When an organization has a strong management team.

 

VII.     DEFENSIVE STRATEGIES

 

1. Retrenchment

 

1. Retrenchment occurs when an organization regroups through cost and asset reduction to reverse declining sales and profits. Retrenchment can entail selling off land and buildings to raise needed cash, pruning product lines, closing marginal businesses, closing. There are five major types of bankruptcy.

 

Guidelines for when retrenchment may be an especially effective strategy to pursue are as follows:

 

1. When an organization has a clearly distinctive competence but has failed consistently to meet its objectives and goals over time;

 

1. When an organization is one of the weaker competitors in a given industry;

 

 

1. When an organization is overwhelmed by inefficiency, low profitability, poor employee morale, and pressure from stockholders to improve performance;

 

1. When an organization has failed to capitalize on external opportunities, minimize external threats, take advantage of internal strengths, and overcome internal weaknesses;

 

1. When an organization has grown so large so quickly that major internal reorganization.

 

 

 

 

 

1. Divestiture

 

1. Selling a division or part of an organization is called divestiture. Guidlines to follow for when divestiture may be an especially effective strategy:

 

1. When an organization has pursued a retrenchment strategy and failed to accomplish needed improvements;

 

1. When a division needs more resources to be competitive than the company can provide;

 

1. When a division is responsible for an organization’s overall poor performance;

 

1. When a division is a misfit with the rest of an organization; this can result from radically different markets, customers, managers, employees, values, or needs;

 

1. When a large amount of cash is needed quickly and cannot be obtained reasonably from other sources;

 

1. When government antitrust action threatens an organization.

 

1. Liquidation

 

1. Selling all of a company’s assets, in parts, for their tangible worth is called liquidation. Guidelines for when liquidation may be an especially effective strategy to pursue are:

 

1. When an organization has pursued both a retrenchment strategy and a divestiture strategy, and neither has been successful;

 

1. When an organization’s only alternative is bankruptcy;

 

1. When the stockholders of a firm can minimize their losses by selling the organization’s assets.

 

VIII.               PORTER’S FIVE GENERIC STRATEGIES

 

3. Porter’s five generic strategies are illustrated in Table 6-3. The five strategies are:

 

1. Cost Leadership (Lowest Price)

 

2. Cost Leadership (Best Value)

 

3. Differentiation

 

4. Focus (Lowest Price)

 

5. Focus (Best value)

 

 

1. Cost Leadership Strategies (Type 1 and Type 2):

 

1. A primary reason for pursuing forward, backward, and horizontal integration strategies is to gain low-cost or best-value cost leadership benefits. (Lowest Price)

 

2. Striving to be the low-cost producer in an industry can be especially effective when:

 

1. The market is composed of many price-sensitive buyers;

 

1. There are few ways to achieve product differentiation;

 

1. Buyers do not care much about differences from brand to brand;
2. When there are a large number of buyers with significant bargaining power.

 

3. There are two ways to accomplish Cost Leadership by ensuring that total costs across the value chain are lower than corresponding competitors’ costs:

 

1. Perform value-chain activities more efficiently than rivals and control the factors that drive the costs of value-chain activities;

 

1. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities.

 

1. Differentiation Strategies (Type 3)

 

1. Different strategies offer different degrees of differentiation. Differentiation does not guarantee competitive advantage, especially if standard products sufficiently meet customer needs or if rapid imitation by competitors is possible.

 

2. A 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.

 

3. 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, and also that competitors may quickly develop ways to copy the differentiating features.

 

4. The most effective differentiation bases are those that are hard or expensive for rivals to duplicate because competitors are continually trying to imitate, duplicate, and outperform rivals along any differentiation variable that has yielded competitive advantage.

 

5. A differentiation strategy can be especially effective under the following conditions:

 

1. When there are many ways to differentiate the product or service and many buyers perceive these differences as having value;

 

1. When buyer needs and uses are diverse;

 

1. When few rival firms are following a similar differentiation approach;

 

1. When technological change is fast-paced and competition revolves around rapidly evolving product features.

 

1. Focus Strategies (Type 4 and Type 5)

 

1. A 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.

 

2. Focus strategies are most effective when consumers have distinctive preferences or requirements and when rival firms are not attempting to specialize in the same target segment.

 

3. Risks of pursuing a focus strategy include the possibility that numerous competitors will recognize the successful focus strategy and copy it or that consumer preferences will drift toward the product attributes desired by the market as a whole.

 

4. A low-cost (Type 4) or best-value (Type 5) focus strategy can be especially attractive under the following conditions:

 

1. When the target market niche is large, profitable, and growing;

 

1. When industry leaders do not consider the niche to be crucial to their own success;

 

1. When industry leaders consider it too costly or difficult to meet the specialized needs of the target market niche while taking care of their mainstream customers;

 

1. When the industry has many different niches and segments, thereby allowing a focuser to pick a competitively attractive niche suited to its own resources;
2. When few, if any, other rivals are attempting to specialize in the same target segment.

 

 

1. MEANS FOR ACHIEVING STRATEGIES

 

1. Joint Venture/Partnering

 

1. Joint venture is a popular strategy that occurs when two or more companies form a temporary partnership or consortium for the purpose of capitalizing on some opportunity. Often, the two or more sponsoring firms form a separate organization and have shared equity ownership in the new entity.

 

2. There are countless examples of failed joint ventures, and a few common problems that cause joint ventures to fail are as follows:

 

1. Managers who must collaborate daily in operating the venture are not involved in forming or shaping the venture;

 

1. The venture may benefit the partnering companies but may not benefit customers, who then complain about poorer service or criticize the companies in other ways;

 

1. The venture may not be supported equally by both partners. If supported unequally, problems arise;

 

1. The venture may begin to compete more with one of the partners than the other.

 

 

3. Guidelines for when a joint venture may be an especially effective strategy to pursue are:

 

1. When a privately owned organization is forming a joint venture with a publicly owned organization; there are some advantages to being privately held, such as closed ownership; there are some advantages of being publicly held, such as access to stock issuances as a source of capital;

 

1. When a domestic organization is forming a joint venture with a foreign company, a joint venture can provide the domestic company with the opportunity for obtaining local management in a foreign country, thereby reducing risks such as expropriation and harassment by host-country officials;

 

1. When the distinct competencies of two or more firms complement each other especially well;

 

1. When some project is potentially very profitable but requires overwhelming resources and risks (the Alaskan pipeline is an example);

 

1. When two or more smaller firms have trouble competing with a large firm;

 

1. When there exists a need to quickly introduce a new technology.

 

 

1. Mergers and Acquisitions

 

Mergers and acquisitions (M&As) are two commonly used ways to pursue strategies. A merger occurs when two organizations of about equal size unite to form one enterprise. An acquisition occurs when a large organization purchases (acquires) a smaller firm, or vice versa.

 

1. There are numerous and powerful forces driving once fierce rivals to merge around the world:

 

1. Deregulation

 

1. Technological change

 

1. Excess capacity

 

1. Inability to boost profits through price increases

 

1. A depressed stock market

 

1. The need to gain economies of scale

 

1. Increased market power

 

1. Reduced entry barriers

 

1. Reduced cost of new product development

 

1. Increased speed of products to market

 

1. Lowered risk compared to developing new products

 

1. Increased diversification

 

1. Avoidance of excessive competition

 

1. The opportunity to learn and develop new capabilities.

 

 

 

2. There are many reasons for M&As, including the following:

 

1. To provide improved capacity utilization

 

1. To make better use of the existing sales force

 

1. To reduce managerial staff

 

1. To gain economies of scale

 

1. To smooth out seasonal trends in sales

 

1. To gain access to new suppliers, distributors, customers, products, and creditors

 

1. To gain new technology

 

1. To reduce tax obligations.

 

 

4. Some key reasons why many mergers and acquisitions fail are:

 

1. Organizational integration difficulties

 

1. Inadequate evaluation of target

 

1. Large or extraordinary debt

 

1. Inability to achieve synergy

 

1. Too much diversification

 

1. Managers overly focused on acquisitions

 

1. Too large an acquisition

 

1. Difficult to integrate different organizational cultures

 

1. Reduced employee morale due to layoffs and relocations.

 

1. Outsourcing

 

1. Business-process outsourcing (BPO) is a rapidly growing new business that involves companies taking over the functional operations, such as human resources, information systems, payroll, accounting, customer service, and even marketing of other firms.

 

2. Companies are choosing to outsource their functional operations more and more for several reasons:

 

1. It is less expensive

 

1. It allows the firm to focus on its core businesses

 

1. It enables the firm to provide better services

 

1. It allows the firm to align itself with “best-in-world” suppliers who focus on performing the special task

 

1. It provides the firm flexibility, should customer needs shift unexpectedly

 

1. Allows the firm to concentrate on other internal value chain activities critical to sustaining competitive advantage.

 

1. STRATEGIC MANAGEMENT IN NONPROFIT AND GOVERNMENTAL ORGANIZATIONS

 

1. The strategic-management process is being used effectively by countless nonprofit and governmental organizations.

 

1. Compared to for-profit firms, nonprofit and governmental organizations may be totally dependent on outside financing; strategic management provides an excellent vehicle for developing and justifying requests for needed financial support.

 

1. Educational Institutions

 

1. Educational institutions are more frequently using strategic-management techniques and concepts.

 

2. Online college degrees are becoming common and represent a threat to traditional colleges and universities.

 

3. Faced with conflicting priorities and increasing demands for quality higher education, universities across the region have adopted strategic planning to manage their resources and develop realistic plans for the future.

 

1. Medical Organizations

 

1. Like universities, hospitals in the region are experiencing huge demands for health services and adequate facilities.

 

2. Hospitals are creating new strategies today with advances in the diagnosis and treatment of chronic diseases.

 

3. Current strategies being pursued by many hospitals include creating home health services, establishing nursing homes, and forming rehabilitation centers.

 

1. Governmental Agencies and Departments

 

1. Central, regional, and local agencies and departments, such as police departments, chambers of commerce, forestry associations, and health departments, are responsible for formulating, implementing, and evaluating strategies that use resources in the most cost-effective way to provide services and programs.

 

2. Many Arab government agencies and departments utilize strategic planning techniques.

 

3. Strategists in governmental organizations operate with less strategic autonomy than their counterparts in private firms.

 

 

1. STRATEGIC MANAGEMENT IN SMALL FIRMS

 

 

1. Research indicates that strategic management in small firms is more informal than in large firms, but small firms that engage in strategic management outperform those that do not.