Strategies in Action

Types of Strategies
Forward Integration

Vertical Integration Strategies

Backward Integration

Horizontal Integration

Forward Integration Strategies

Why ? -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 of distribution Current distributors have high profit margins

Backward Integration Strategies Why ? -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

Horizontal Integration Strategies Why ? -Gain monopolistic characteristics w/o federal government challenge Competes in growing industry Increased economies of scale major competitive advantages Faltering due to lack of managerial expertise or need for particular resource

Types of Strategies
Market Penetration

Intensive Strategies

Market Development

Product Development

Market Penetration Strategies

Why ? -Current markets not saturated Usage rate of present customers can be increased significantly Shares of competitors declining; industry sales increasing Increased economies of scale provide major competitive advantage

Market Development Strategies Why ? -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

Product Development Strategies Why ? -Products in maturity stage of life cycle Industry characterized by rapid technological development Competitors offer better-quality products @ comparable prices Compete in high-growth industry Strong R&D capabilities

Types of Strategies
Related Diversification

Diversification Strategies

Unrelated Diversification

Diversification

Related When their value chains posses competitively valuable cross-business strategic fits Unrelated When their value chains are so dissimilar that no competitively valuable cross-business relationships exist

Related Diversification Preferred To Capitalize on:

Transferring competitively valuable expertise Combining the related activities of separate businesses 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

Diversification Strategies
Less Popular -More difficult to manage diverse business activities

However -The greatest risk of being in a single industry is having all your eggs in one basket

Related Diversification May be Effective When:

An organization competes in a no-growth or a slow growth industry Adding new, but related, products would significantly enhance the sales of current products New, but related products could be offered at highly competitive prices

Related Diversification May be Effective When:

New, but related, products have seasonal sales levels that counterbalance an organizations existing peaks and valleys An organizations products are currently in the declining stage of the products life cycle An organization has a strong management team

Conglomerate Diversification Strategies Why ? -Declining annual sales & profits Capital & managerial ability to compete in new industry Financial synergy between acquired and acquiring firms

Current markets for present products - saturated

Unrelated Diversification

Favors capitalizing on a portfolio of businesses that are capable of delivering excellent financial performance Entails hunting to acquire companies:

Whose assets are undervalued That are financially distressed With high growth potential but are short on investment capital

Unrelated Diversification May be Effective When:

Revenues derived from an organizations current products or services would increase by adding new unrelated products An organization competes in a highly competitive or a no growth industry An organizations current distribution channels can be used to market new products to existing customers

Unrelated Diversification May be Effective When:

New products have countercyclical sales patterns An organizations basic industry is experiencing declining annual sales and profits An organization has the capital and managerial talent to compete successfully in a new industry

Unrelated Diversification May be Effective When:

An organization has the opportunity to purchase an unrelated business as an attractive investment opportunity There exists financial synergy between the acquired and acquiring firm Existing markets for the present products are saturated Antitrust action could be charged against a company

Types of Strategies
Retrenchment

Defensive Strategies

Divestiture

Liquidation

Retrenchment Strategies

Regrouping -Cost & asset reduction to reverse declining sales & profit

Retrenchment Strategies
Why ? -Failed to meet objectives & goals consistency; has distinctive 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 reorganization necessary

Divestiture Strategies

Selling a division or part of an organization

Divestiture Strategies
Why ? -Retrenchment failed to attain improvements
Division needs more resources than are available Division responsible for firms overall poor performance Division is a mis-fit with organization Large amount of cash is needed and cannot be raised through other sources

Liquidation Strategies
Selling

Companys assets, in parts, for their tangible worth

Liquidation Strategies
Why ? -Retrenchment & divestiture failed Only alternative is bankruptcy Minimize stockholder loss by selling firms assets

Michael Porters Generic Strategies

Cost Leadership Strategies

Differentiation Strategies

Focus Strategies

Generic Strategies
Cost Leadership
(Type 1 and Type 2)

In conjunction with differentiation Economies or diseconomies of scale Capacity utilization achieved Linkages w/ suppliers & distributors

Cost Leadership

Ways of ensuring total costs across value chain are lower than competitors total costs
1.

2.

Perform value chain activities more efficiently than rivals and control factors that drive costs Revamp the firms overall value chain to eliminate or bypass some cost-producing activities

Cost Leadership

1. 2.

Can be especially effective when:

Price competition among rivals is vigorous Rivals products are identical and supplies are readily available There are few ways to achieve differentiation Most buyers use the product in the same way Buyers have low switching costs Buyers are large and have significant power Industry newcomers use low prices to attract buyers

3. 4. 5. 6. 7.

Generic Strategies
Low Cost Producer Advantage

Many price-sensitive buyers Few ways of achieving differentiation Buyers not sensitive to brand differences

Large # of buyers w/bargaining power

Generic Strategies
Differentiation (Type 3)
Greater product flexibility
Greater compatibility Lower costs Improved service Greater convenience More features

Differentiation

1.

Can be especially effective when:

There are many ways to differentiate and many buyers perceive the value of the differences Buyer needs and uses are diverse Few rival firms are following a similar differentiation approach Technology change is fast paced and competition revolves around evolving product features

2. 3.

4.

Generic Strategies
Focused Strategies (Type 4 & 5)
Industry segment of sufficient size Good growth potential Not crucial to success of major competitors

Focused Strategy

1.

Can be especially effective when:

The target market niche is large, profitable, and growing Industry leaders do not consider the niche crucial Industry leaders consider the niche too costly or difficult to meet The industry has many different niches and segments Few, if any, other rivals are attempting to specialize in the same target segment

2. 3.

4.

5.

Means for Achieving Strategies

Joint Venture/Partnering

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

Reasons why Mergers and Acquisitions Fail

Integration difficulties Inadequate evaluation of target Large or extraordinary debt Inability to achieve synergy

Means for Achieving Strategies

Cooperative Arrangements

R&D partnerships Cross-distribution agreements Cross-licensing agreements Cross-manufacturing agreements Joint-bidding consortia

Means for Achieving Strategies

Why Joint Ventures Fail

Managers who must collaborate daily; not involved in developing the venture Benefits the company not the customers Not supported equally by both partners May begin to compete with one of the partners

Joint Ventures
Why ? -Synergies between private and publicly held
Domestic with foreign firm, local management can reduce risk Complementary distinctive competencies Resources & risks where project is highly profitable (e.g. Alaska Pipeline) Two or more smaller firms competing w/larger firm Need to introduce new technology quickly

Reasons why Mergers and Acquisitions Fail

Too much diversification Managers overly focused on acquisition Too large an acquisition Difficult to integrate different organizational cultures Reduced employee moral due to layoffs and relocations

Means for Achieving Strategies

Mergers & Acquisitions

Provide improved capacity utilization Better use of existing sales force Reduce managerial staff Gain economies of scale Smooth out seasonal trends in sales Gain new technology Access to new suppliers, distributors, customers, products, creditors

Recent Mergers
Acquiring Firm Acquired Firm Ascential Software PT Hanjaya Mandala Samp National Steel Corp PeopleSoft Brookstone Macromedia American West Overnight Corp.

IBM Philip Morris U.S. Steel Oracle OSIM International Ltd Adobe Systems US Airways United Parcel Service

First Mover Advantages

Benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms

First Mover Advantages

Potential Advantages

Securing access to rare resources Gaining new knowledge of key factors & issues Carving out market share Easy to defend position & costly for rival firms to overtake

Outsourcing
Business-process outsourcing (BPO)

Companies taking over the functional operations of other firms

Outsourcing
Benefits

Less expensive Allows firm to focus on core business Enables firm to provide better services

For Review
Key Terms & Concepts
Acquisition Backward Integration Bankruptcy Combination Strategy Concentric Diversification Conglomerate Diversification Cooperative Arrangements Cost Leadership

For Review
Key Terms & Concepts
Differentiation Diversification Strategies Divestiture First Mover Advantages Focus

Forward Integration

Franchising

Generic Strategies

For Review
Key Terms & Concepts
Horizontal Diversification Horizontal Integration Hostile Takeover Integration Strategies Intensive Strategies

Joint Venture

Leveraged Buyout

Liquidation

For Review
Key Terms & Concepts
Long-Term Objectives Outsourcing

Market Development

Product Development

Market Penetration

Retrenchment

Merger

Vertical Integration