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Strategies in Action
Ch 5 -1
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Strategy importance as managers see:
Because were making bigger bets in investments in
technology, we cant afford to spend a whole lot ofmoney in one direction and then find out five
years later it was the a wrong direction
Ch 5 -2
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Ch 5 -3
Long-Term Objectives
Strategies: represent the actions to be taken to accomplish long- term
objectives.
Long term objective: represent the results expected from
pursuing certain strategies.
Objective must be:
Quantifiable Measurable
Realistic Understandable
Challenging Hierarchical
Obtainable Congruent
Timeline
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Ch 5 -4
Varying Performance Measures byOrganizational Level
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Ch 5 -5
Importance of clear and well communicated objective:
1. Help stakeholders understand their role in an organization future
2. Provide a basis for consistent decision making by managers
whose values and attitudes differ
3. Minimize potential conflicts
4. Set organizational priorities
5. Standards by which individuals, groups, departments, and entire
organization can be evaluated.
6. Provide direction and allow organizational synergy.
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Ch 5 -6
Financial vs. Strategic Objectives
Financial Objectives: include those associated with growth
in:
Growth in revenues Growth in earnings
Higher dividends Higher profit margins
Higher earnings per share Improved cash flow
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Strategic objectives includes things such as:
Ch 5 -7
Larger Market Share Quicker on time delivery than rivals
Achieving technological leadership Lower cost than rivals
Higher product quality than rivals Wider geographic coverage than rivals
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Ch 5 -8
Not Managing by Objective
Managing by Extrapolation If it isn't broke, dont fix it.
Managing by Crisis The true measure of a good
strategist is the ability to fix problems
Managing by Subjective Do your own thing, the best
way you know how.
Managing by Hope The future is full of uncertainty and
if first you dont succeed, then you mayon the second or
third try.
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Ch 5 -9
The Balanced Scorecard
Robert Kaplan & David Norton , 1993
Strategy evaluation & control technique
Balance financial measures with nonfinancial measures
Balance shareholder objectives with customer &
operational objectives
Contains a carefully chosen combination of strategic and
financial objectives tailored to the org. .
It consistent with TQM and CIM
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Ch 5 -10
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Ch 5 -11
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Ch 5 -12
Types of Strategies
Operational Level
Functional Level
Division Level
CorpLevelA Large Company
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Ch 5 -13
Strategy making is not a task for top executives,middle and lower- level managers too must beinvolved in the strategic planning process to theextent possible.
Many if not most organizations simultaneouslypursue a combination of two or more strategies,but not combination strategy can be
exceptionally risky is carried too far.
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Ch 5 -14
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Ch 5 -15
Types of Strategies
VerticalIntegration
Strategies
Forward
Integration
BackwardIntegration
Horizontal
Integration
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Forward Integration
Involve gaining ownership or increased control overdistributors or retailers. Increasing numbers ofmanufacturers. (Suppliers) are pursuing a forwardintegration strategy by establishing web sites todirectly sell products to customers.
An effective means of forward integration isFranchising, which is a form of business organization
in which a firm already has a successful product orservice (the franchisor) enters into a continuingcontractual relationship with other businesses(franchisees) operating under the franchisor's trade
name and usually with the franchisor's guidance, inexchan e for a fee.Ch 5 -16
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When implementing forward integrationmay be effective?!
Current distributors expensive or unreliable
Availability of quality distributors limited
Firm competing in industry expected to grow markedly
Firm has both capital & HR to manage new business ofdistribution
Current distributors have high profit margins
Ch 5 -17
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Backward Integration
Refers to a strategy of seeking ownership orincreased control of a firms suppliers.
This strategy can be especially appropriate when a
firms current suppliers are unreliable, too costly, orcannot meet the firms need.
Ch 5 -18
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When implementing backward integrationmay be effective?!
Current suppliers expensive or unreliable
# of suppliers is small; # of competitors is large
High growth in industry sector Firm has both capital & HR to manage new business
Stable prices are important
Current suppliers have high profit margins
Ch 5 -19
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Horizontal integration
Refers to a strategy of seeking ownership of orincreased control over a firms competitors.
One of the most significant trends in strategic
management today is the increased use of horizontalintegration as a strategy.
Mergers, acquisitions, and takeovers.
Ch 5 -20
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When implementing horizontal integrationmay be effective?!
Gain monopolistic characteristics w/o federal governmentchallenge
Competes in growing industry Increased economies of scale major competitive
advantages
Faltering due to lack of managerial expertise or need for
particular resource
Ch 5 -21
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Ch 5 -22
Types of Strategies
IntensiveStrategies
Market
Penetration
MarketDevelopment
Product
Development
It require intensive from theorganization
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Ch 5 -23
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Market Penetration
It seek to increase market share for present productsor services in present market through greatermarketing effort.
It includes increasing number of salespersons,increasing in advertising, offering sales promotions,and increasing publicity.
Ch 5 -24
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When to use market penetration?!
Current markets not saturated
Usage rate of present customers can beincreased significantly
Shares of competitors declining; industry salesincreasing
Increased economies of scale providemajor competitive advantage
Ch 5 -25
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Market Development
Involves introducing present products or servicesinto new geographic areas
When implementing market development?
New channels of distribution reliable, inexpensive,good quality
Firm is successful at what it does
Untapped/unsaturated markets
Excess production capacity
Basic industry rapidly becoming global
Ch 5 -26
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Product Development
It is the strategy that seeks increased sales byimproving or modifying present products or services.Its entails large R&D expenditures.
Ch 5 -27
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When implementing market development?
Products in maturity stage of life cycle
Industry characterized by rapid technologicaldevelopment
Competitors offer better-quality products atcomparable prices
Compete in high-growth industry
Strong R&D capabilities
Ch 5 -28
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Ch 5 -29
Types of Strategies
DiversificationStrategies
RelatedDiversification
UnrelatedDiversification
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Diversification Strategies:
A collection of businesses under one corporateumbrella
Related When their value chains possescompetitively valuable cross-business strategic fits
Unrelated When their value chains are so dissimilarthat no competitively valuable cross-business
relationships exist
Ch 5 -30
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Related Diversification Preferred ToCapitalize on:
Transferring competitively valuable expertise
Combining the related activities of separatebusinesses into a single operation to lower costs
Exploiting common use of a well-known brand name Cross-business collaboration to create competitively
valuable resource strengths and capabilities
Ch 5 -31
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Related Diversification May be EffectiveWhen:
An organization competes in a no-growth or aslow growth industry
Adding new, but related, products would
significantly enhance the sales of currentproducts
New, but related products could be offered athighly competitive prices
New, but related, products have seasonal saleslevels that counterbalance an organizations
existing peaks and valleys
An organizations products are currently in the
declining stage of the products life cycle Ch 5 -32
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Diversification Strategies Less Popular --
More difficult to manage divers business activities
However; the greatest risk of being in a single industryis having all your eggs in one basket
When Diversification can be effective?
Declining annual sales & profits
Capital & managerial ability to compete in newindustry
Financial synergy between acquired and acquiringfirms
Current markets for present products - saturated
Ch 5 -33
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Unrelated Diversification
Business tend to be unrelated when their valuechains are so dissimilar that no competitive valuablecross- business relationships exist.
Ch 5 -34
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Ch 5 -35
Types of Strategies
DefensiveStrategies
Retrenchment
Divestiture
Liquidation
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Retrenchment
Occurs when an organizations regroups through costand asset reduction to reverse declining sales andprofits.
Ch 5 -36
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Retrenchment Strategies Guidelines --
Failed to meet objectives & goals consistency; hasdistinctive competencies
Firm is one of weaker competitors
Inefficiency, low profitability, poor employee morale
,pressure for stockholders Strategic managers have failed
Rapid growth in size; major internal reorganizationnecessary
Ch 5 -37
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Divestiture Strategies
Selling a division or part of an organization
Divestiture Strategies Guidelines --
Retrenchment failed to attain improvements
Division needs more resources than are
available Division responsible for firms overall
poor performance
Division is a miss -fit with organization
Large amount of cash is needed and cannotbe raised through other sources
Ch 5 -38
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Liquidation Strategies
Companys assets, in parts, fortheirtangible worth Selling
Liquidation Strategies Guidelines -- Retrenchment & divestiture failed
Only alternative is bankruptcy
Minimize stockholder loss by selling firms
assets
Ch 5 -39
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Ch 5 -40
Michael Porters Generic Strategies
Cost Leadership Strategies
(Low-Cost & Best-Value)
DifferentiationStrategies
Focus Strategies
(Low-Cost Focus &Best-Value Focus)
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Generic Strategies
Cost Leadership Strategies: focuses on producing
standardized product or services at very low price per unit for
consumer who are price sensitive.
2 alternative type:-
Type (1): Low cost strategy: offer product/service at the
lowest the price available on the market to a wide range of
customer.
Type(2): Best value strategy: offer product/ service to a wideCh5-41
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Cost leader ship must be Pursued inconjunction with differentiation.
A number of cost elements affect the
relative attractiveness of genericstrategies:
Economies or diseconomies of scale
Capacity utilization achieved
Linkages with suppliers
Learning & experience curve effect
Ch 5 -42
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Low Cost Producer Advantages:
Market of many price-sensitive buyers
Few ways of achieving product differentiation
Buyers not sensitive to brand name
differences Large number of buyers with bargaining
power
It must gain a competitive advantage which it should bedifficult to imitate, rare, not easily substitutable
Ch5-43
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Risk of pursuing cost leader ship:
1.may rivals imitate the strategy
2.technological breakthrough in the industry may
make the strategy ineffective.
3.buyer interest may swing to other
differentiating features besides price.
Ch 5 -44
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Differentiation Strategies type (3) : produce product/service considered unique industry wide directed toconsumer who are price insensitive .
It can mean:
Greater product flexibility
Greater compatibility
Lower costs
Improved service
Greater convenience
More featuresCh5-45
Generic Strategies
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Differentiation Strategies
It should be after a careful study of buyers needs and
preferences.
Allow firm to charge higher price.
Gain customer loyalty.
It must be a strong coordination between the R&D and
the marketing function.
The most effective differentiation bases is when it is
hard or expensive for rivals to imitate. Ch5-46
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Differentiation Strategies
Can be effective under these condition:
1) When there are many ways to differentiate the
product/service, and many buyers perceive thesedifferences as having value.
2) When buyers need and uses are diverse.
3) When few rivals firm are following the similar
differentiation .4) When technological change is growing fast and
the competion revolves around rapidly.
Ch 5 -47
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Generic Strategies
Focus Strategies: producing product or services thatfulfill needs a small group of customer (niche)
depend on: Industry segment of sufficient size
Good growth potential
Not crucial to success of major competitors
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Focus strategy
2 Alternative type:
1) type (4): Low cost focus.
2) type (5): Best value focus.
Ch 5 -49
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Generic Strategies
Focus Strategies
Consumers have distinctive preferences
Rival firms not attempting to specialize in the sametarget segment
Fred R. DavidPrentice Hall
Ch5-50
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Focus strategy Can be attractive under these condition:
1) When the target niche is large, profitable and
growing.
2) When rivals do not consider the niche to be
crucial to their successes. Or consider it too
costly or difficult to specialized in to meet the
need of niche
3) Many Different niche and segment.
Ch 5 -51
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Ch 5 -52
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Ch 5 -53
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Means for achieving strategies:
Joint venture/partnering: Occurs when two company or more form a
temporary partnership for the purpose ofcapitalizing on some oppurtunity.
cooperative arrangement such as:
1.Shared equity ownership in the new
entity2.Cross distribution agreement
3.R&D partnership
4.Cross manufacturing agreementCh 5 -54
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Joint venturing and partnering are being used
increasingly because they allow companies to improve
communication and networking
reasons that cause joint venture to fail:
1) Managers are not involved in operating venture.2) Venture may benefit the partnering companies but
may not benefit the customers.
3) May not be supported equally by both partner the
problem will arise.4) The venture may begin to compete more with one of
the partner than the other.
Ch 5 -55
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Guidelines for joint venture:-
1.When a privately owned org. is forming a joint
venture with a publicly owned org. there aresome adv. Of being held such as access tostock issuance as a resource of capital.
2.When two or more smaller firm have trouble
competing with a large firm.3.When there is a need to quickly introduce a new
technology.
4.When the distinct competences of 2 or more
firm complement each other.
5.When some project is potentially very profitablebut require over whelming resource and risk.
Ch 5 -56
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Merger / acquisition:
merger : when two org. of about equal size unite
to form one enterprise.
Acquisition : when a large org. purchases asmaller firm.
When merger or acquisition are not desired byboth parties it is called hostile takeover
If the acquisition is desired it is called friendly
mergeCh 5 -57
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Factors encouraging companies to merge:
Deregulation
Technological change
Excess capacity
Inability to boost profit through increasing price
Depressed stock market
The need to gain economies of scale.
Ch 5 -58
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Factors encouraging companies to acquisition:
Increased market power
Reduce entry barriers
Reduced cost of new product development
Increased spread of products to market
Increased diversification
Avoiding of excessive competition
Opportunity to learn and develop new
capabilitiesCh 5 -59
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reasons that cause Merger &acquisition tofail:
1. Integration difficulties
2. Inadequate evaluation of target
3. Large or extraordinary dept
4. Inability to achieve synergy5. Too much diversification
6. Mangers overly focus on acquisition
7. Different to integrate different organizationalcultures
8. Reduced employee moral due to layoff and
relocation
Ch 5 -60
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reasons for Merger &acquisition:
1. To provide improved capacity utilization
2. To make better use of the existing sales force
3. To reduce managerial staff
4. To gain economies of scale5. To smooth out seasonal trend in sales
6. To gain access to new supplier, distributer,customer , products, and creditors
7. To gain new technology
8. To reduce tax obligation
Ch 5 -61
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Ch 5 -62
First Mover Advantages
Benefits a firm may achieve by entering a newmarket or developing a new product or service priorto rival firms
Some advantage of being first mover:
Securing access to rare resource
gaining new knowledge of key factors and issues
Carving out market share and position that is easily
to defend and costly for rivals.
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When being first mover you must awareabout:
1.Build firm image and reputation with buyers
2.Produce cost adv. Over rivals
3.Create strongly loyal customer
4.Make imitation by rival unlikely
Ch 5 -63
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Ch 5 -64
Outsourcing
is a rabidly growing new business
Companies taking over the functional operations
of other firms
Such as: HR, Information System, accounting,customer service, and marketing.
Business-Process Outsourcing(BPO)
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Companies choose to outsource their function forseveral reasons:
1. Less expensive2. Allow the firm to focus on its corebusinesses
3. Enables firm to provide better services
4. The strategy allow firms to align it self withbest in world suppliers who focus on
performing special tasks
5. Provide firm flexibility should customerneeds shift unexpectedly
6. Allow firm to focus on other internal valuechain activities critical to sustaining competitive
adv.Ch 5 -65
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Strategic Management in Nonprofit andGovernmental Organizations
Educational Institutions
Medical OrganizationsGovernmental Agencies and Departments