LA PATRIA COLLEGE

Santiago City
College of Accountancy and Management
MODULE IN BMEC 103
Strategic Management

PLACING STRATEGIES INTO ACTION

LONG-TERM OBJECTIVES
Long-term objectives represent the results expected from pursuing certain strategies. Strategies represent the
actions to be taken to accomplish long-term objectives. The time frame for objectives and strategies should be
consistent, usually from two to five years.
The Nature of Long-Term Objectives
Objectives should be quantitative, measurable, realistic, understandable, challenging, hierarchical, obtainable,
and congruent among organizational units. Each objective should also be associated with a timeline. Objectives
are commonly stated in terms such as growth in assets, growth in sales, profitability, market share, degree and
nature of diversification, degree and nature of vertical integration, earnings per share, and social responsibility.
Established objectives offer many benefits. They provide direction, allow synergy, aid in evaluation, establish
priorities, reduce uncertainty, minimize conflicts, stimulate exertion, and aid in both the allocation of resources
and the design of jobs. Long-term objectives are needed at an organization's corporate, divisional, and functional
levels. They are an important measure of managerial performance.
Clearly stated and communicated objectives are vital to success for many reasons. First, objectives help
stakeholders understand their role in an organization's future. They also provide a basis for consistent decision-
making by managers whose values and attitudes differ. An organization can minimize potential conflicts later
during implementation by reaching a consensus on objectives during strategy-formulation activities. Objectives
set forth organizational priorities and stimulate exertion and accomplishment. They serve as standards by which
individuals, groups, departments, divisions, and entire organizations can be evaluated. Objectives provide the
basis for designing jobs and organizing activities in an organization.
FINANCIAL VERSUS STRATEGIC OBJECTIVES
Two types of objectives are especially common in organizations financial and 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; while 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.
LEVELS OF STRATEGIES
Strategy-making is not just a task for top executives. Middle and lower-level managers too must be involved in
the strategic planning process to the extent possible. In large firms, there are four levels of strategies: corporate,
divisional, functional, and operational. However, in small firms, there are three levels of strategies, company,
functional, and operational
In large firms, the persons primarily responsible for having effective strategies at the various levels include the
CEO at the corporate level, the president or executive vice president at the divisional level, the respective chief
finance officer (CFO), chief information officer (CIO), human resource manager (HRM), chief marketing officer
(CMO), and so on, at the functional level, and the plant manager, regional sales manager, and so on, at the
operational level. In small firms, the persons primarily responsible for having effective strategies at the various
levels include the business owner or at the company level and then the same range of persons at the lower two
levels, as with a large firm.
It is important to note that all persons responsible for strategic planning at the various levels ideally participate
and understand the strategies at the other organizational levels to help ensure coordination, facilitation, and
commitment while avoiding inconsistency, inefficiency, and miscommunication.
DIFFERENT ALTERNBATIVE STRATEGIES
Integration Strategies
Forward integration, backward integration, and horizontal integration are 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
Forward integration involves gaining ownership or increased control over distributors or retailers. Increasing
numbers of manufacturers (suppliers) today are pursuing a forward integration strategy by establishing Web
sites to directly sell products to consumers.
Six guidelines for when forward integration may be an especially effective strategy are:

 When an organization's present distributors are especially expensive, unreliable, or incapable of meeting
the firm's distribution needs.
 When the availability of quality distributors is so limited as to offer a competitive advantage to those firms
that integrate forward.
 When an organization competes in an industry that is growing and is expected to continue to grow
markedly; this is a factor because forward integration reduces an organization's ability to diversify if its
basic industry falters.
 When an organization has both the capital and human resources needed to manage the new business
of distributing its products.
 When the advantages of stable production are particularly high; this is a consideration because an
organization can increase the predictability of the demand for its output through forward integration.
 When present distributors or retailers have high profit margins; this situation suggests a company could
distribute its products and price them more competitively by integrating forward.

2. Backward Integration

Both manufacturers and retailers purchase needed materials from suppliers. Backward integration is a
strategy of seeking ownership or increased control of a firm's suppliers. This strategy can be especially
appropriate when a firm's current suppliers are unreliable, too costly, or cannot meet the firm's needs.

Seven guidelines for when backward integration may be an especially effective strategy are:

 When an organization's present suppliers are especially expensive, unreliable, or incapable of

meeting the firm's needs for parts, components, assemblies, or raw materials.
 When the number of suppliers is small, and the number of competitors is large.
 When an organization competes in an industry that is growing rapidly; this is a factor because
integrative-type strategies (forward, backward, and horizontal) reduce an organization's ability to
diversify in a declining industry.
 When an organization has both capital and human resources to manage the new business of
supplying its raw materials.
 When the advantages of stable prices are particularly important; this is a factor because an
organization can stabilize the cost of its raw materials and the associated price of its product(s)
through backward integration.
  When present supplies have high-profit margins, which suggests that the business of supplying
products or services in the given industry is a worthwhile venture. When an organization needs to
quickly acquire a needed resource.

3. Horizontal Integration

Horizontal integration refers to a strategy of seeking ownership of increased Control over a firm's competitors.
One of the most significant trends in strategic management today is the increased use of horizontal
integration as a growth strategy. Mergers, acquisitions, and takeovers among competitors allow for increased
economies of scale and enhanced transfer of resources and competencies.

The trend towards horizontal integration seems to reflect strategists' misgivings about their ability to operate
many unrelated businesses. Mergers between direct competitors are more likely to create efficiencies than
mergers between unrelated businesses, both because there is a greater potential for eliminating duplicate
facilities and because the management of the acquiring firm is more likely to understand the business of the
target

Five guidelines for when horizontal integration may be an especially effective strategy are:

 When an organization can gain monopolistic characteristics in a particular area or region without being
challenged by the federal government for "tending substantially" to reduce competition.
 When an organization competes in a growing industry.
 When increased economies of scale provide major competitive advantages.
 When an organization has both the capital and human talent needed to successfully manage an
expanded organization.
 When faltering due to a lack of managerial expertise or a need for particular resources that an
organization possesses, note that horizontal integration would not be appropriate if competitors are doing
poorly, because in that case, overall industry sales are declining.
Intensive Strategies

Market penetration, market development, and product development 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
A market penetration strategy seeks to increase market share for present products or services in present
markets through greater marketing efforts. This strategy is widely used alone and in combination with other
strategies. Market penetration includes increasing the number of salespersons, increasing advertising
expenditures, offering extensive sales promotion items, or increasing publicity efforts.
Five guidelines for when market penetration may be an especially effective strategy are:

 When current markets are not saturated with a particular product or service.
 When the usage rate of present customers could be increased significantly.
 When the market shares of major competitors have been declining while total industry sales have been
increasing.
 When the correlation between euro sales and euro marketing expenditures historically has been high.
 When increased economies of scale provide major competitive advantages.
2. Market Development
Market development involves introducing present products or services into new geographic areas.
Six guidelines for when market development may be an especially effective strategy are:

 When new channels of distribution are available that are reliable, inexpensive, and of good quality.
 When an organization is very successful at what it does.
 When new untapped or unsaturated markets exist.
 When an organization has the needed capital and human resources to manage expanded operations.
 When an organization has excess production capacity.
 When an organization's basic industry is becoming rapidly global in scope.

3. Product Development
Product development is a strategy that seeks increased sales by improving or modifying present products or
services. Product development usually entails large research and development expenditures.
Five guidelines for when product development may be an especially effective strategy to pursue are:

 When an organization has successful products that are in the maturity stage of the product life cycle; the
idea here is to attract satisfied customers to try new (improved) products as a result of their positive
experience with the organization's present products or services.
 When an organization competes in an industry that is characterized by rapid technological developments.
 When major competitors offer better-quality products at comparable prices.
 When an organization competes in a high-growth industry
 When an organization has especially strong research and development capabilities.
Diversification Strategies
There are two general types of diversification strategies: related and unrelated. Businesses are said to be related
when their value chains possess competitively valuable cross-business strategic fits; businesses are said to be
unrelated when their value chains are so dissimilar that not have competitively valuable cross-business
relationships. Most companies favor related diversification strategies to capitalize on synergies as follows:

 Transferring competitively valuable expertise, technological know-how, or other capabilities from one
business to another.
 Combining the related activities of separate businesses into a single operation to achieve lower costs.
 Exploiting common use of a well-known brand name.
 Cross-business collaboration to create competitively valuable resource strengths and capabilities.

1. Related Diversification
This type of strategy occurs when a firm moves into a new industry that has important similarities with the
firm’s existing industry or industries.
Six guidelines for when related diversification may be an effective strategy are as follows:

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

 When adding new, but related, products would significantly enhance the sales of current products.
 When new, but related, products could be offered at highly competitive prices.
 When new, but related, products have seasonal sales levels that counterbalance an organization's
existing peaks and valleys.
 When an organization's products are currently in the declining stage of the product's life cycle.
 When an organization has a strong management team.
2. Unrelated Diversification
An unrelated diversification strategy favors capitalizing upon a portfolio of businesses that are capable of
delivering excellent financial performance in their respective industries, rather than striving to capitalize on
value chain strategic fits among the businesses. Firms that employ unrelated diversification continually
search across different industries for companies that can be acquired for a deal and yet have the potential
to provide a high return on investment Pursuing unrelated diversification entails being on the hunt to acquire
companies whose assets are undervalued, or companies that are financially distressed, or companies that
have high growth prospects but are short on investment capital. An obvious drawback of unrelated
diversification is that the parent firm must have an excellent top management team that plans, organizes,
motivates, delegates, and controls effectively. It is much more difficult to manage businesses in many
industries than in a single industry.
Ten guidelines for when unrelated diversification may be an especially effective strategy.

 When revenues derived from an organization's current products or services would increase significantly
adding the new, unrelated products.
 When an organization competes in a highly competitive and/or a no-growth industry as indicated by low
industry profit margins and returns.
 When an organization's present channels of distribution can be used to market the new products to
current customers.
 When the new products have countercyclical sales patterns compared to an organization's present
products.
 When an organization's basic industry is experiencing declining annual sales and profits.
 When an organization has the capital and managerial talent needed to compete successfully in a new
industry.
 When an organization has the opportunity to purchase an unrelated business that is an attractive
investment opportunity
 When there exists a financial synergy between the acquired and acquiring firm. (Note that a key difference
between related and unrelated diversification is that the former should be based on some commonality
in markets, products, or technology, whereas the latter should be based more on profit considerations.)
 When existing markets for an organization's present products are saturated.
 When anti-trust could be charged against an organization that historically has concentrated on a single
industry.
Defensive Strategies
In addition to integrative, intensive, and diversification strategies, organizations also could pursue retrenchment,
divestiture, or liquidation.
1. Retrenchment
Retrenchment occurs when an organization regroups through cost and asset reduction to reverse declining
sales and profits. Sometimes called turnaround or reorganizational strange retrenchment is designed to
fortify an organization's basic distinctive competence. During retrenchment, strategists work with limited
resources and face pressure from shareholders, employers, and the media, Retrenchment can entail selling
off land and buildings to raise needed cash, pruning product lines, closing marginal businesses, closing
obsolete factories, automating processes, reducing the number of employees, and instituting expense control
systems.
Five guidelines for when retrenchment may be an especially effective strategy to pursue are as follows:

 When an organization has a distinctive competence but has failed consistently to meet its objectives and
goals over time. When an organization is one of the weaker competitors in a given industry.
  When an organization is plagued by inefficiency, low profitability, poor employee morale, and pressure
from stockholders to improve performance.
 When an organization has failed to capitalize on external opportunities, minimize external threats, take
advantage of internal strengths, and overcome internal weaknesses over time; that is when the
organization's strategic managers have failed (and possibly will be replaced by more competent
individuals).
 When an organization has grown so large so quickly that major internal reorganization is needed.

2. Divestiture
Selling a division or part of an organization is called divestiture. Divestiture often is used to raise capital for
further strategic acquisitions or investments. Divestiture can be part of an overall retrenchment strategy to
rid an organization of unprofitable businesses, that require too much capital, or that do not fit well with the
firm's other activities. Divestiture has also become a popular strategy for firms to focus on their core
businesses and become less diversified.
Six guidelines for when divestiture may be an especially effective strategy to pursue are as follows:

 When an organization has pursued a retrenchment strategy and failed to accomplish needed
improvements.
 When a division needs more resources to be competitive than the company can provide.
 When a division is responsible for an organization's overall poor performance.
 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.
 When a large amount of cash is needed quickly and cannot be obtained reasonably from other sources.
 When government antitrust action threatens an organization.

3. Liquidation

Selling all of a company's assets, in parts, for their tangible worth is called liquidation. Liquidation is a
recognition of defeat and consequently can be an emotionally difficult strategy.
Three guidelines for when liquidation may be an especially effective strategy to pursue are:

 When an organization has pursued both a retrenchment strategy and a divestiture strategy, and neither
has been successful.
 When an organization's only alternative is bankruptcy. Liquidation represents an orderly and planned
means of obtaining the greatest possible cash for organizations. A company can legally declare
bankruptcy first and then liquidate various divisions to raise needed capital.
 When the stockholders of a firm can minimize their losses by selling the organization's assets.
MICHAEL PORTER'S FIVE GENERIC STRATEGIES
Probably the three most widely read books on competitive analysis in the 1980s were Michael Porter's
Competitive Strategy (Free Press, 1980), Competitive Advantage (Free Press, 1985), and Competitive
Advantage of Nations (Free Press, 1989). According to Porter, strategies allow organizations to gain
competitive advantage from three different bases: cost leadership, differentiation, and focus Porter calls these
bases generic strategies. Cost leadership emphasizes producing standardized products at a very low per-
unit cost for price-sensitive consumers. Two alternative types of cost leadership strategies can be defined.
Type 1 is 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 is a best-value strategy that offers products or services to a wide range of
customers at the best price-value available on the market, the 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.
 Porter's Type 3 generic is differentiation. Differentiation is a strategy aimed at producing products and
services considered unique industrywide and directed at consumers who are relatively price-insensitive.
Focus means producing products and services that fulfill the needs of small groups of consumers. Two
alternative types of focus strategies are Type 4 and 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 a product/s or service/s that meets their tastes and
requirements better than rivals' products do. Both Type 4 and Type 5 strategies target a large market.
1. 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. But cost leadership generally must be pursued in conjunction with
differentiation. Some cost elements affect the relative attractiveness of generic strategies, including
economies or diseconomies of scale achieved, learning and experience curve effects, the percentage of
capacity utilization achieved, and linkages with suppliers and distributors. Other cost elements to consider in
choosing alternative strategies include the potential for sharing costs and knowledge within the organization,
R&D costs associated with new product development or modification of existing products, labor costs, tax
rates, energy costs, and shipping costs.
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.
To successfully employ a cost leadership strategy, a firm must ensure that its total costs across its overall
value chain are lower than competitors' total costs. There are two ways to accomplish this:
1. Perform value chain activities more efficiently than rivals and control the factors that drive the costs of
value chain activities. Such activities could include altering the plant layout, mastering newly introduced
technologies, using common parts or components in different products, simplifying product design,
finding ways to operate close to full capacity year-round, and so on.
2. Revamp the firm's overall value chain to eliminate or bypass some cost-producing activities. Such
activities could include securing new suppliers or distributors, selling products online, relocating
manufacturing facilities, avoiding the use of union labor, and so on.
A successful cost leadership strategy usually permeates the entire firm, as evidenced by high efficiency, low
overhead, limited rewards, intolerance of waste, intensive screening of budget requests, wide spans of
control, rewards linked to cost containment, and broad employee participation in cost control efforts.
2. Differentiation Strategies (Type 3)
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. Durable products protected by barriers to quick copying by competitors are best.
Successful differentiation can mean greater product flexibility, greater compatibility, lower costs, improved
service, less maintenance greater convenience, or more features Product development, is an example of a
strategy that offers the advantages of differentiation.
A differentiation strategy should be pursued only after a careful study of buyer’s needs and preferences to
determine the feasibility of incorporating one or more differentiating features into a unique product that
features the desired attributes. A 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. Special features that differentiate one's product can include superior service, spare
parts availability, engineering design, product performance, useful life, gas mileage, or ease of use.
A Type 3 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.
2. When a buyer's needs and uses are diverse.
3. When a few rival firms are following a similar differentiation approach.
4. When technological change is fast-paced, and competition revolves around rapidly evolving product
features.

3. Focus Strategies (Type 4 and Type 5)

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 Strategies such as market penetration
and market development offer substantial focusing advantages.
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
2. When industry leaders do not consider the niche to be crucial to their own success.
3. 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.
4. When the industry has many different niches and segments, thereby allowing a focuser to pick a
competitively attractive niche suited to its own resources.
5. When few, if any, other rivals are attempting to specialize in the same target segment.
MEANS FOR ACHIEVING STRATEGIES
1. Joint Venture/Partnering

A joint venture is a popular strategy that occurs when two or more companies form a temporary partnership
or consortium to capitalize on some opportunity. Often, two or more sponsoring firms form a separate
organization and have shared equity ownership in the new entity. Other types of cooperative arrangements
include research and development partnerships, cross-distribution agreements, cross-licensing
agreements, cross-manufacturing agreements, and joint-bidding consortia.
Six guidelines for when a joint venture may be an especially effective strategy to pursue are:

 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. Sometimes, the unique
advantages of being privately and publicly held can be synergistically combined in a joint venture.
 When a domestic organization is forming a joint venture with a foreign company, a joint venture can
provide a domestic company with the opportunity to obtain local management in a foreign country,
thereby reducing risks such as expropriation and harassment by host country officials.
 When the distinct competencies of two or more firms complement each other especially well.
 When some project is potentially very profitable but requires overwhelming resources and risks; the
Alaskan pipeline is an example. When two or more smaller firms have trouble competing with a large
firm.
 When there exists a need to quickly introduce a new technology.

2. Merger Acquisition
Merger and acquisition 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. When a merger or acquisition is not desired
by both parties, it can be called a takeover or hostile takeover In contrast, if the acquisition is desired by both
firms, it is termed a friendly merger. Most mergers are friendly.
3. 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 before rival firms. Some advantages of being a first mover include securing access
to rare resources, gaining new knowledge of key factors and issues, and carving out market share and a
position that is easy to defend and costly for rival firms to overtake. First-mover advantages are analogous
to taking the high ground first, which puts one in an excellent strategic position to launch aggressive
campaigns and defend territory. Being the first mover can be especially wise when such actions:
a) build a firm's image and reputation with buyers
b) Produce cost advantages over rivals in terms of new technologies, new components, new distribution
channels, and so on.
c) create strongly loyal customers, and
d) Make imitation or duplication by a rival hard or unlikely.
To sustain the competitive advantage gained by being the first mover, such a firm also needs to be a fast
learner. There would, however, be risks associated with being the first mover, such as unexpected and
unanticipated problems and costs that occur from being the first firm doing business in the new market.
Therefore, being a slow mover (also called a fast follower or late mover) can be effective when a firm can
easily copy or imitate the lead firm's products or services.
4. Outsourcing
Business process outsourcing (BPO) is a rapidly growing new business that involves companies taking over
functional operations, such as human resources, information systems, payroll, accounting, customer service,
and even marketing of other firms.
Companies are choosing to outsource their functional operations more for several reasons:

 it is less expensive
 it allows the firm to focus on its core businesses, and
 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, and (3) allows the firm to concentrate on other internal value chain activities critical to
sustaining competitive advantage. BPO is a means for achieving strategies that are similar to partnering and
joint venturing.