CHAPTER 5 - Strategies in Action

LONG-TERM OBJECTIVES: represent the results expected from pursuing certain strategies.
●​ 2-5 years

STRATEGIES: actions to be taken to accomplish long-term objectives.

Arthur D. Little: argues that bonuses or merit pay for managers today must be based to a greater extent on
long-term objectives and strategies.

Objectives - should be quantitative, measurable, realistic, understandable, challenging, hierarchical,

obtainable, and congruent among organizational units.

Each objective should also be associated with a timeline.

Long-term objectives - are NEEDED at the corporate, divisional, and functional levels of an organization.
-​ important measure of managerial performance.

Success - only rarely occurs by accident; rather, it is the result of hard work directed toward achieving certain
objectives.

DESIRED CHARACTERISTICS OF OBJECTIVES:

1.​ Quantitative
2.​ Measurable
3.​ Realistic
4.​ Understandable
5.​ Challenging
6.​ Hierarchical
7.​ Obtainable
8.​ Congruent across departments

Benefits of Having Clear Objectives

1.​ Provide direction by revealing expectations
2.​ Allow synergy
3.​ Aid in evaluation by serving as standards
4.​ Establish priorities
5.​ Reduce uncertainty
6.​ Minimize conflicts
7.​ Stimulate exertion
8.​ Aid in allocation of resources
9.​ Aid in design of jobs
10.​Provide basis for consistent decision making

Financial versus Strategic Objectives

Two types of objectives are especially common in organizations:
1.​ financial objectives
2.​ strategic objectives.
FINANCIAL OBJECTIVES: include those associated with growth in revenues, growth in earnings, higher
dividends, larger profit margins, greater return on investment, higher earnings per share, a rising stock price,
improved cash flow, and so on;

STRATEGIC OBJECTIVES: include things such as a larger market share, quicker on-time delivery than rivals,
shorter design-to-market times than rivals, lower costs than rivals, higher product quality than rivals, wider
geographic coverage than rivals, achieving technological leadership, consistently getting new or improved
products to market ahead of rivals, and so on.

best way to sustain competitive advantage over the long run is to relentlessly pursue strategic objectives
that strengthen a firm’s business position over rivals.

Not Managing by Objectives:

●​ Managing by Extrapolation—adheres to the principle “If it ain’t broke, don’t fix it.”
●​ Managing by Crisis—based on the belief that the true measure of a really good strategist is the ability
to solve problems.
●​ Managing by Subjectives—built on the idea that there is no general plan for which way to go and
what to do; just do the best you can to accomplish what you think should be done.
-​ In short, “Do your own thing, the best way you know how”
-​ mystery approach to decision making
●​ Managing by Hope—based on the fact that the future is laden with great uncertainty and that if we try
and do not succeed, then we hope our second (or third) attempt will succeed.

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.
-​ strategy evaluation and control technique.
-​ balance shareholders objectives
●​ Developed in 1993 by Harvard Business School professors ROBERT KAPLAN and DAVID NORTON

Balanced Scorecard concept: consistent with the notions of continuous improvement in management (CIM)
and total quality management (TQM).

TYPES OF STRATEGIES: refer to pdf

Many, if not most, organizations simultaneously pursue a combination of two or more strategies, but a
combination strategy can be exceptionally risky if carried too far.

LEVELS OF STRATEGIES:
HANSEN and SMITH: explain that strategic planning involves “choices that risk resources” and “trade-offs that
sacrifice opportunity.”

INTEGRATION STRATEGIES:
1.​ Forward integration
2.​ backward integration
3.​ horizontal integration
- sometimes collectively referred to as vertical integration strategies.

VERTICAL INTEGRATION STRATEGIES: allow a firm to gain control over distributors, suppliers, and/or
competitors.

1. FORWARD INTEGRATION: involves gaining ownership or increased control over distributors or retailers.

●​ effective means of implementing forward integration is – franchising

2. BACKWARD INTEGRATION: strategy of seeking ownership or increased control of a firm’s suppliers.

DE-INTEGRATION: makes sense in industries that have global sources of supply.

3. HORIZONTAL INTEGRATION: refers to a strategy of seeking ownership of or increased control over a

firm’s competitors.

INTENSIVE STRATEGIES: they require intensive efforts if a firm’s competitive position with existing products
is to improve.
1.​ Market penetration
2.​ Market development
 3.​ Product development

1. MARKET PENETRATION: strategy seeks to increase market share for present products or services in
present markets through greater marketing efforts.

2. MARKET DEVELOPMENT: involves introducing present products or services into new geographic areas.

3. PRODUCT DEVELOPMENT: strategy that seeks increased sales by improving or modifying present
products or services.

DIVERSIFICATION STRATEGIES:
two general types of diversification strategies:
1.​ RELATED DIVERSIFICATION
2.​ UNRELATED DIVERSIFICATION

RELATED: Businesses value chains possess competitively valuable cross-business strategic fits;

UNRELATED: businesses value chains are dissimilar that no competitively valuable cross-business
relationships exist.

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

Diversification is now on the retreat. Michael Porter, of the Harvard Business School, says, “Management
found it couldn’t manage the beast.”

DEFENSIVE STRATEGIES:
1.​ RETRENCHMENT
2.​ DIVESTITURE
3.​ LIQUIDATION

1. RETRENCHMENT: occurs when an organization regroups through cost and asset reduction to reverse
declining sales and profits.
●​ Sometimes called a turnaround or reorganizational strategy
●​ designed to fortify an organization’s basic distinctive competence

bankruptcy – can be an effective type of retrenchment strategy.

●​ allow a firm to avoid major debt obligations and to void union contracts

2. DIVESTITURE: Selling a division or part of an organization.

●​ often is used to raise capital for further strategic acquisitions or investments.

3. LIQUIDATION: Selling all of a company’s assets, in parts, for their tangible worth.
●​ recognition of defeat and consequently can be an emotionally difficult strategy.
●​ represents an orderly and planned means of obtaining the greatest possible cash for an organization’s
assets.

Michael Porter’s Five Generic Strategies

Michael Porter’s Competitive Strategy
●​ Competitive Advantage
●​ Competitive Advantage of Nations

According to Porter:
●​ strategies allow organizations to gain competitive advantage from

three different bases known as (GENERIC STRATEGIES):

1.​ cost leadership
2.​ differentiation
3.​ focus
●​ Porter calls these bases generic strategies.

COST LEADERSHIP - leadership emphasizes producing standardized products at a very low per-unit cost
for consumers who are price-sensitive.

Two alternative types of cost leadership strategies:

TYPE 1 - a low-cost strategy that offers products or services to a wide range of customers at the lowest
price available on the market.

TYPE 2 - a best-value strategy that offers products or services to a wide range of customers at the best
price-value available on the market;

best-value strategy – aims to offer customers a range of products or services at the lowest price available
compared to a rival’s products with similar attributes.

Both Type 1 and Type 2 strategies — target a large market.

DIFFERENTIATION STRATEGY:
TYPE 3 generic strategy – differentiation – a strategy aimed at producing products and services considered
unique industrywide and directed at consumers who are relatively price-insensitive.
●​ differentiation strategy (Type 3) can be pursued with either a small target market or a large
target market.

FOCUS - means producing products and services that fulfill the needs of small groups of consumers.

Two alternative types of focus strategies

●​ Type 4
●​ Type 5.

TYPE 4 - is a low-cost focus strategy that offers products or services to a small range (niche group) of
customers at the lowest price available on the market.

TYPE 5 - is a best-value focus strategy that offers products or services to a small range of customers at
the best price-value available on the market.
 ●​ Sometimes called “focused differentiation,” the best-value focus strategy aims to offer a niche
group of customers products or services that meet their tastes and requirements better than rivals’
products do.

Both Type 4 and Type 5 focus strategies — target a small market.

However, the difference is that Type 4 strategies offer products services to a niche group at the lowest price,

whereas Type 5 offers products/services to a niche group at higher prices but loaded with features so the
offerings are perceived as the best value.

Porter’s five strategies imply different organizational arrangements, control procedures, and incentive systems.

Cost Leadership Strategies (Type 1 and Type 2)

●​ A primary reason for pursuing forward, backward, and horizontal integration strategies is to gain
low-cost or best-value cost leadership benefits.

Companies employing a low-cost (Type 1) or best-value (Type 2) cost leadership strategy must achieve their
competitive advantage in ways that are difficult for competitors to copy or match.

If rivals find it relatively easy or inexpensive to imitate the leader’s cost leadership methods, the leaders’
advantage will not last long enough to yield a valuable edge in the marketplace

Some risks of pursuing cost leadership are that competitors may imitate the strategy, thus driving overall
industry profits down;

Differentiation Strategies (Type 3)

●​ Differentiation does not guarantee competitive advantage, especially if standard products sufficiently
meet customer needs or if rapid imitation by competitors is possible.

Durable products protected by barriers to quick copying by competitors are best.

Product development is an example of a strategy that offers the advantages of differentiation.

successful differentiation strategy – allows a firm to charge a higher price for its product and to gain
customer loyalty because consumers may become strongly attached to the differentiation features.

risk of pursuing a differentiation strategy is that the unique product may not be valued highly enough by
customers to justify the higher price.

Another risk of pursuing a differentiation strategy is that competitors may quickly develop ways to copy
the differentiating features.

most effective differentiation bases are those that are hard or expensive for rivals to duplicate.
 Focus Strategies (Type 4 and Type 5)

●​ 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.

●​ 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.

●​ Strategies such as market penetration and market development offer substantial focusing
advantages.

Strategies for Competing in Turbulent, High-Velocity Markets

●​ world is changing more and more rapidly, and consequently industries and firms themselves are
changing faster than ever.
●​ Some industries are changing so fast that researchers call them turbulent, high-velocity markets

Meeting the challenge of high-velocity change presents the firm with a choice of whether to react, anticipate,
or lead the market in terms of its own strategies.
●​ react-to-change strategy - would not be as effective
●​ anticipate-change strategy - entail devising and following through with plans for dealing with the
expected changes.
●​ lead-change strategy - best whenever the firm has the resources to pursue this approach

Means for Achieving Strategies

1. Cooperation Among Competitors
2. Joint Venture/Partnering
3. Merger/Acquisition
4. First Mover Advantages
5. Outsourcing

1. Cooperation Among Competitors

●​ For collaboration between competitors to succeed, both firms must contribute something distinctive,
such as technology, distribution, basic research, or manufacturing capacity.

2. Joint Venture/Partnering
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.

Joint ventures and cooperative arrangements - are being used increasingly because they allow companies
to improve communications and networking, to globalize operations, and to minimize risk.

Joint ventures and partnerships - are often used to pursue an opportunity that is too complex,
uneconomical, or risky for a single firm to pursue alone.

Kathryn Rudie Harrigan, professor of strategic management at Columbia University, summarizes the
trend toward increased joint venturing:
In today’s global business environment of scarce resources, rapid rates of technological change, and rising
capital requirements, the important question is no longer “Shall we form a joint venture?” Now the question is
“Which joint ventures and cooperative arrangements are most appropriate for our needs and expectations?”
followed by “How do we manage these ventures most effectively?”

Strategic partnering takes many forms, including outsourcing, information sharing, joint marketing, and
joint research and development.

major reason why firms are using partnering as a means to achieve strategies is globalization.

Technology also is a major reason behind the need to form strategic alliances, with the Internet linking
widely dispersed partners.

3. Merger/Acquisition

Merger and acquisition – are two commonly used ways to pursue strategies.

MERGER - occurs when two organizations of about equal size unite to form one enterprise.

ACQUISITION - occurs when a large organization purchases (acquires) a smaller firm, or vice versa.

TAKEOVER or HOSTILE TAKEOVER - When a merger or acquisition is not desired by both parties

FRIENDLY MERGER - if acquisition is desired by both firms

●​ Most mergers are friendly.

“Hard times often come hand in hand with opportunities,” said Teruo Asada, president and chief
executive of the 150-year-old Marubeni Corporation in Japan.

WHITE KNIGHT - is a term that refers to a firm that agrees to acquire another firm when that other firm is
facing a hostile takeover by some company.

Warren Buffett once said in a speech that “too-high purchase price for the stock of an excellent company can
undo the effects of a subsequent decade of favorable business developments.”

Result of Mergers and Acquisition:

20% – successful
60% – produce disappointing result
20% – clear failures.

LEVERAGED BUYOUT (LBO) - occurs when a corporation’s shareholders are bought (hence buyout) by
the company’s management and other private investors using borrowed funds (hence leverage).

4.​ First Mover Advantages

FIRST MOVER ADVANTAGES - refer to the benefits a firm may achieve by entering a new market or
developing a new product or service prior to rival firms.
●​ analogous to taking the high ground first, which puts one in an excellent strategic position to launch
aggressive campaigns and to defend territory.
slow mover (also called fast follower or late mover) - can be effective when a firm can easily copy or imitate
the lead firm’s products or services.

5.​ Outsourcing
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.
●​ means for achieving strategies that are similar to partnering and joint venturing.

Companies are choosing to outsource their functional operations more and more for several reasons:
(1) it is less expensive,
(2) it allows the firm to focus on its core businesses
(3) it enables the firm to provide better services.

Other advantages of outsourcing are that the strategy:

(1) allows the firm to align itself with “best-in-world” suppliers who focus on performing the special task
(2) provides the firm flexibility should customer needs shift unexpectedly
(3) allows the firm to concentrate on other internal value chain activities critical to sustaining competitive
advantage.

Strategic Management in Nonprofit and Governmental Organizations

1.​ EDUCATIONAL INSTITUTIONS - are more frequently using strategic-management techniques and
concepts.

Richard Cyert, former president of Carnegie Mellon University, said:

“I believe we do a far better job of strategic management than any company I know.”

“You can put the kids to bed and go to law school,” says Andrew Rosen, chief operating officer of Kaplan
Education Centers, a subsidiary of the Washington Post Company.

2.​ Medical Organizations

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

3.​ Governmental Agencies and Departments

Federal, state, county, and municipal agencies and departments – responsible for formulating,
implementing, and evaluating strategies that use taxpayers’ dollars in the most cost-effective way to provide
services and programs.

Strategic Management in Small Firms

●​ major conclusion of these articles is that a lack of strategic management knowledge is a serious
obstacle for many small business owners.

CHAPTER 6 - STRATEGY ANALYSIS AND CHOICE

The Nature of Strategy Analysis and Choice

 ●​ focuses on generating and evaluating alternative strategies, as well as selecting strategies to
pursue.

Strategy analysis and choice – seek to determine alternative courses of action that could best enable the
firm to achieve its mission and objectives.

The Process of Generating and Selecting Strategies

Identifying and evaluating alternative strategies should involve many of the managers and employees who
earlier assembled the organizational vision and mission statements, performed the external audit, and
conducted the internal audit.

Comprehensive Strategy-Formulation Framework

●​ tools presented in this framework are applicable to all sizes and types of organizations and can help
strategists identify, evaluate, and select strategies.

STAGE 1 (INPUT STAGE) - summarizes the basic input information needed to formulate strategies.
formulation framework consists of:
●​ EFE Matrix
●​ IFE Matrix
●​ Competitive Profile Matrix (CPM)

STAGE 2 (MATCHING STAGE) - focuses upon generating feasible alternative strategies by aligning key
external and internal factors.

TECHNIQUES include:
1.​ Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix,
2.​ Strategic Position and Action Evaluation (SPACE) Matrix,
3.​ Boston Consulting Group (BCG) Matrix,
4.​ Internal-External (IE) Matrix,
5.​ Grand Strategy Matrix.

STAGE 3 (DECISION STAGE) - involves a single technique, the Quantitative Strategic Planning Matrix
(QSPM).

QSPM - uses input information from Stage 1 to objectively evaluate feasible alternative strategies identified
in Stage 2.
 The Input Stage
●​ Procedures for developing an EFE Matrix, an IFE Matrix, and a CPM were presented in Chapters 3 and
4.
-​ information derived from these three matrices provides basic input information for the matching
and decision stage matrices described later in this chapter.
●​ Making small decisions in the input matrices regarding the relative importance of external and internal
factors allows strategists to more effectively generate and evaluate alternative strategies.

The Matching Stage

●​ Strategy is sometimes defined as the match an organization makes between its internal resources and
skills and the opportunities and risks created by its external factors.

matching stage of the strategy-formulation framework consists of five techniques that can be used in any
sequence:
1.​ SWOT Matrix
2.​ SPACE Matrix
3.​ BCG Matrix
4.​ IE Matrix
5.​ Grand Strategy Matrix.

Matching external and internal critical success factors is the key to effectively generating feasible
alternative strategies.

1.​ The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix

Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix – is an important matching tool that helps

managers develop four types of strategies:
1.​ SO (strengths-opportunities) Strategies
2.​ WO (weaknesses-opportunities) Strategies,
3.​ ST (strengths-threats) Strategies,
 4.​ WT (weaknesses-threats) Strategies.

1. SO Strategies - use a firm’s internal strengths to take advantage of external opportunities.

2. WO Strategies - aim at improving internal weaknesses by taking advantage of external opportunities.

3. ST Strategies - use a firm’s strengths to avoid or reduce the impact of external threats.

4. WT Strategies - are defensive tactics directed at reducing internal weakness and avoiding external threats.

2. The Strategic Position and Action Evaluation (SPACE) Matrix

●​ Its four-quadrant framework indicates whether aggressive, conservative, defensive, or
competitive strategies are most appropriate for a given organization.

●​ axes of SPACE Matrix represent two internal dimensions (financial position [FP] and competitive
position [CP]) and two external dimensions (stability position [SP] and industry position [IP]).

●​ These four factors are perhaps the most important determinants of an organization’s overall strategic
position.
3. The Boston Consulting Group (BCG) Matrix

Autonomous divisions (or profit centers) of an organization make up what is called a BUSINESS PORTFOLIO

When a firm’s divisions compete in different industries, a separate strategy often must be developed for each
business.

Boston Consulting Group (BCG) Matrix and Internal-External (IE) Matrix – are designed specifically to
enhance a multidivisional firm’s efforts to formulate strategies.

BCG – is a private management consulting firm based in Boston.

Form 10K or Annual Report – some companies do not disclose financial information by segment, so a BCG
portfolio analysis is not possible by external entities.

BCG Matrix graphically portrays differences among divisions in terms of:

●​ relative market share position
●​ industry growth rate.

BCG Matrix – allows a multidivisional organization to manage its portfolio of businesses by examining the
relative market share position and the industry growth rate of each division relative to all other divisions in the
organization.

Relative market share position – is defined as the ratio of a division’s own market share (or revenues) in a
particular industry to the market share (or revenues) held by the largest rival firm in that industry.

Relative market share position is given on the x-axis of the BCG Matrix.
midpoint on the x-axis usually is set at .50, corresponding to a division that has half the market share of the
leading firm in the industry.

y-axis represents the industry growth rate in sales, measured in percentage terms. The growth rate
percentages on the y-axis could range from -20 to +20 percent, with 0.0 being the midpoint.

Each circle represents a separate division.

The size of the circle corresponds to the proportion of corporate revenue generated by that business unit

pie slice indicates the proportion of corporate profits generated by that division.

Quadrant I - “Question Marks,”

Quadrant II - “Stars,”
Quadrant III - “Cash Cows,”
Quadrant IV - “Dogs.”

Question Marks—Divisions in Quadrant I have a low relative market share position,

yet they compete in a high-growth industry.

Stars—Quadrant II businesses (Stars) represent the organization’s best long-run opportunities for growth
and profitability.

Cash Cows—Divisions positioned in Quadrant III have a high relative market share position but compete
in a low-growth industry.

Dogs—Quadrant IV divisions of the organization have a low relative market share position and compete in
a slow- or no-market-growth industry; they are Dogs in the firm’s portfolio.
major benefit of the BCG Matrix – is that it draws attention to the cash flow, investment characteristics,
and needs of an organization’s various divisions.

Division 1 has the greatest sales volume, so the circle representing that division is the largest one in the
matrix.
The circle corresponding to Division 5 is the smallest because its sales volume ($5,000) is least among all
the divisions.

4. The Internal-External (IE) Matrix

Internal-External (IE) Matrix positions an organization’s various divisions in a nine cell display

similar to the BCG Matrix in that both tools involve plotting organization divisions in a schematic diagram; this
is why they are both called “PORTFOLIO MATRICES”

size of each circle - percentage sales contribution of each division

pie slices – percentage profit contribution of each division in both the BCG and IE Matrix.

IE Matrix requires more information about divisions than the BCG Matrix.
 5.​ The Grand Strategy Matrix

Grand Strategy Matrix has become a popular tool for formulating alternative strategies.
●​ based on two evaluative dimensions:
1.​ competitive position
2.​ market (industry) growth.

Any industry whose annual growth in sales exceeds 5 percent could be considered to have RAPID GROWTH.

Quadrant I of the Grand Strategy Matrix are in an EXCELLENT STRATEGIC POSITION.

●​ continued concentration on current markets (market penetration and market development) and
products (product development) is an appropriate strategy.

Quadrant II – need to evaluate their present approach to the marketplace seriously.

●​ firms are in rapid-market-growth industry, an intensive strategy – is usually the first option that
should be considered.

Quadrant III – organizations compete in slow-growth industries and have weak competitive positions.
●​ firms must make some drastic changes quickly to avoid further decline and possible liquidation.
●​ Extensive cost and asset reduction (retrenchment) should be pursued first.
●​ final options for Quadrant III businesses are divestiture or liquidation.

Quadrant IV – businesses have a strong competitive position but are in a slow-growth industry.
●​ firms have the strength to launch diversified programs into more promising growth areas
●​ characteristically high cash-flow levels and limited internal growth needs and often can pursue
related or unrelated diversification successfully.
●​ firms also may pursue joint ventures.
 The Decision Stage

Quantitative Strategic Planning Matrix (QSPM) – This technique objectively indicates which alternative
strategies are best.
●​ tool that allows strategists to evaluate alternative strategies objectively, based on previously
identified external and internal critical success factors.

all the components of the QSPM:

●​ Strategic Alternatives
●​ Key Factors
●​ Weights
●​ Attractiveness Scores (AS)
●​ Total Attractiveness Scores (TAS)
●​ Sum Total Attractiveness Score

Attractiveness Scores (AS) – numerical values that indicate the relative attractiveness of each strategy in a
given set of alternatives.

Total Attractiveness Scores (TAS) – product of multiplying the weights (Step 2) by the Attractiveness Scores
(Step 4) in each row.

Sum Total Attractiveness Scores (STAS) – reveal which strategy is most attractive in each set of
alternatives.

Positive Features and Limitations of the QSPM

Positive Features of QSPM:
●​ sets of strategies can be examined sequentially or simultaneously.
●​ requires strategists to integrate pertinent external and internal factors into the decision process.

Limitations of QSPM:
●​ always requires intuitive judgments and educated assumptions.
●​ can be only as good as the prerequisite information and matching analyses upon which it is based.

Cultural Aspects of Strategy Choice

CULTURE - includes the set of shared values, beliefs, attitudes, customs, norms, personalities, heroes, and
heroines that describe a firm.
●​ unique way an organization does business.

The Politics of Strategy Choice

Internal politics – affect the choice of strategies in all organizations.

Governance Issues
“DIRECTOR,” according to Webster’s Dictionary, is “one of a group of persons entrusted with the overall
direction of a corporate enterprise.”

BOARD OF DIRECTORS – group of individuals who are elected by the ownership of a corporation to have
oversight and guidance over management and who look out for shareholders’ interests.

GOVERNANCE - act of oversight and direction

National Association of Corporate Directors defines GOVERNANCE as

●​ “the characteristic of ensuring that long-term strategic objectives and plans are established and that
the proper management structure is in place to achieve those objectives, while at the same time
making sure that the structure functions to maintain the corporation’s integrity, reputation, and
responsibility to its various constituencies.”