Chapter 5: Strategies in action

Chapter Objectives

• Discuss the value of establishing long-term objectives.

• Identify 16 types of business strategies.
• Identify numerous examples of organizations pursuing different types of strategies.
• Discuss guidelines when particular strategies are most appropriate to pursue.
• Discuss Porter’s five generic strategies.
• Describe strategic management in nonprofit, governmental, and small organizations.
• Discuss joint ventures as a way to enter the Russian market.
• Discuss the Balanced Scorecard.
• Compare and contrast financial with strategic objectives.
• Discuss the levels of strategies in large versus small firms.
• Explain the First Mover Advantages concept.
• Discuss recent trends in outsourcing.
• Discuss strategies for competing in turbulent, high-velocity markets.

I. VOLKSWAGEN
1.1 About
Volkswagen Group is also called Volkswagen AG. It is a major
German automobile manufacturer founded by the German government in 1937 to mass-
produce a low-priced “people’s car.” Headquarters are in Wolfsburg, Germany
(Britannica.com).

1.2 Strategic Analysis summary

Strategic Plan analysis of Volkswagen headquartered in Germany, a leading global car

manufacturer. The analysis clearly reveals key factors that have gone on to determine the
success of the company. From a small start-up to a multinational giant of today unfolds the
saga of visionary leadership that brought transformation in the company profile. The strategy
has ensured profitability for the company as well as consistently satisfied investors year after
year. However, the company needs to focus on a strategy against competitors that are equally
getting stronger due to consolidation in the industry. They might slice away the company’s
market share and reduce profitability. Several other issues have been analyzed in this
strategic plan analysis and conclude that the company is poised for greater growth and
expansion (Grant, R. M. 1991).
II. LONG-TERM OBJECTIVES
2.1 Definition
Long-term objectives represent the results expected from pursuing certain strategies.

2.2 The desired characteristics of objectives

Whatever objectives you set up, they must satisfy these characteristics.
2.3 Varying Performance measures by organizational level

Whether short or long-term objectives, they vary with respect to these organizational levels.

2.4 The benefits of having clear objectives

III. FINANCIAL VS. STRATEGIC OBJECTIVES
3.1 Comparison

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.

3.2 Not managing by objectives

✓ Managing by extrapolation
✓ Managing by crisis
✓ Managing by Subjectives
✓ Managing by hope
IV. THE BALANCED SCORECARD
4.1 Definition
• Developed in 1993 by Harvard Business School professors Robert Kaplan and David
Norton, and refined continually through today.

• The Balanced Scorecard is a strategy evaluation and control technique.

• It 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.

4.2 Importance
1. The Balanced Scorecard can tie your long-term strategy into a short-term set of goals.
2. The Balanced Scorecard is a “framework of frameworks.”
3. The Balanced Scorecard can help manage diverse company units.
4. You can use the Balanced Scorecard to manage numerous data sources.
(clearpointstrategy.com)

4.3 Example
Other sources:

Britannica (2021). Volkswagen Group. Retrieved September 24, 2022 from

https://www.britannica.com/topic/Volkswagen-Group

Grant, R. M. (1991). Contemporary Strategy Analysis: Concepts, Techniques, Application.

Cambridge, MA: Basil Blackwell. Retrieved September 24, 2022 from
https://www.blackwellpublishing.com/content/GrantContemporaryStrategyAnalysis/FIFTH_
IM.pdf

Jackson, T. (2021). The Importance Of The Balanced Scorecard For Large Organizations. Clear
Point Strategy. Retrieved September 26, 2022 from
https://www.clearpointstrategy.com/importance-of-balanced-scorecard-large-
organizations/

Panda, I. (2021). Volkswagen: Strategic Plan Analysis Report. Free Essays. Retrieved September
28, 2022 from https://ivypanda.com/essays/volkswagen-strategic-plan-analysis/

V. WHAT IS A STRATEGY?

▪ integrated and coordinated set of actions to achieve goals and objectives.

▪ It is not a plan.

Corporate Level
- It describes a company’s overall direction towards growth by managing business and product
lines.
 Division Level
- It emphasizes the improvement of competitive position of a firm’s products or services in an
industry or market segment.

Functional Level
- It is concerned with developing and nurturing a distinctive competence to provide the firm with
a competitive advantage.

Operational Level
- It is concerned with how the component parts of an organization deliver effectively the

corporate, division and functional -level strategies in terms of resources, processes, and people.

VI. TYPES OF STRATEGIES

Integration Strategies
- It allows a firm to gain control over distributors, suppliers and competitors.

• Forward Integration - Gaining ownership or increased control over distributors or retailers.

Example:
PepsiCo launched a hostile takeover of Pepsi Bottling Group after its 54.2 billion
offer was rejected.
GUIDELINES WHEN FORWARD INTEGRATION MAY BE AN ESPECIALLY EFFECTIVE
STRATEGY:

❑ Present distributors are expensive, unreliable, or incapable of meeting firm’s needs.

❑ Availability of quality distributors is limited.
❑ When firm competes in an industry that is expected to grow markedly.
❑ Organization has both capital and human resources needed to manage new business of
distribution.
❑ Advantages of stable production are high.
❑ Present distributors have high profit margins

• Backward Integration - Seeking ownership or increased control of a firm’s suppliers.

Example:
Chinese carmaker Geely Automobile Holdings Ltd. Purchased Australian car-
parts maker Drivetrain Systems International

GUIDELINES WHEN BACKWARD INTEGRATION MAY BE AN ESPECIALLY EFFECTIVE

STRATEGY:

❑ When present suppliers are expensive, unreliable, or incapable of meeting needs.

❑ Number of suppliers is small and number of competitors large.
❑ High growth in industry sector.
❑ Firm has both capital and human resources to manage new business.
❑ Advantages of stable prices are important.
❑ Present supplies have high profit margins.
❑ Need to quickly acquire a needed resource.

• Horizontal Integration - Seeking ownership or increased control over competitors.

Example:
Pfizer acquires Wyeth; both are huge drug companies.
GUIDELINES WHEN HORIZONTAL INTEGRATION MAY BE AN ESPECIALLY
EFFECTIVE STRATEGY:

❑ Firm can gain monopolistic characteristics without being challenged by federal government.
❑ Competes in growing industry.
❑ Increased economies of scale provide major competitive advantages.
❑ Firm has both capital and human resources to manage new business.
❑ Faltering due to lack of managerial expertise or need for particular resources.
Intensive Strategies
- They require intensive efforts if a firm’s competitive position with existing products is
to improve.

• Market Penetration - Seeking increased market share for present products or services in present
markets through greater marketing efforts.

Example:
Coke spending millions on its new slogan
“Open Happiness”

GUIDELINES WHEN MARKET PENETRATION MAY BE AN ESPECIALLY EFFECTIVE

STRATEGY:

❑ Current markets not saturated.

❑ Usage rate of present customers can be increased significantly.
❑ Market shares of competitors declining while total industry sales increasing.
❑ Correlation between dollar sales and dollar marketing expenditures historically has been high.
❑ Increased economies of scale provide major competitive advantages.

• Market Development - Introducing present products or services into new geographic area.

Example:
Time Warner purchased 31 percent of Central European Media Enterprises in
order to expand into Romania, Czech Republic, Ukraine, and Bulgaria.

GUIDELINES WHEN MARKET DEVELOPMENT MAY BE AN ESPECIALLY EFFECTIVE

STRATEGY:

❑ New channels of distribution that are reliable, inexpensive, and good quality.
❑ Firm is very successful at what it does.
 ❑ Untapped or unsaturated markets.
❑ Capital and human resources necessary to manage expanded operations.
❑ Excess production capacity.
❑ Basic industry rapidly becoming global.

• Product Development - Seeking increased sales by improving present products or services or

developing new ones.

Example:
News Corp’s book publisher HarperCollins began producing audio books for
download, such as Jeff Jarvis’s “What Would Google Do?”

GUIDELINES WHEN PRODUCT DEVELOPMENT MAY BE AN ESPECIALLY EFFECTIVE

STRATEGY:

❑ Products in maturity stage of lifecycle.

❑ Competes in industry characterizes by rapid technological developments.
❑ Major competitors offer better-quality products at comparable prices.
❑ Compete in high-growth industry.
❑ Strong research and development capabilities

VI. DIVERSIFICATION STRATEGIES

• Are becoming less popular organization are finding it more difficult to manage diverse business
activities.

• Must do more than simply spread business risk across different industries, however, because
shareholders could accomplish this by simply purchasing equity in different firms across different
industries or investing in mutual funds.

• It makes sense only to the extent the strategy adds more to shareholder value than what
shareholders could accomplish acting individually.

Two Types of Diversification

✓ Related Diversification
✓ Unrelated Diversification

Related Diversification
 • Business is said to be related when their value chains possess competitively valuable cross
business strategic fit.

• Googles stated strategy is to organize all the worlds information into searchable form,
diversifying the firm beyond its roots as a web search engine that sells advertising.

Unrelated Diversification

- Business are said to be unrelated when their value chains are so dissimilar that no competitively
valuable cross business relationship exist.
- Strategy favors capitalizing on a portfolio of businesses that can deliver excellent financial
performance in their respective industries, rather than striving to capitalize on value chain strategies
fits among the businesses.

VII. DEFENSIVE STRATEGIES

In addition, in integrative, intensive and diversification strategies, organizations also could pursue
retrenchment, divestiture, or liquidation.

Retrenchment

➢ Occurs when an organization regroups through cost and asset reduction to reverse declining sales
and profits.

➢ Sometimes called a turnaround or reorganizational strategy.

In some cases, Bankruptcy can be a Effective Type of Retrenchment

Bankruptcy can allow a firm to avoid major debt obligations and to void union contracts.

There are five major types of bankruptcy:

Chapter 7

Chapter 9

Chapter 11

Chapter 12

Chapter 13
1. Chapter 7 Bankruptcy is liquidation procedure used only when a corporation sees no hope of
being able to operate successfully or to obtain the necessary creditor agreement

2. Chapter 9 Bankruptcy applies to municipalities. A municipality that successfully declared

bankruptcy is Camden, New Jersey, the state’s poorest city and the fifth-poorest city in the United
States.

3. Chapter 11 Bankruptcy allows organizations to reorganize and come back after filing a petition
for protection.

4. Chapter 12 Bankruptcy was created at the Family Farmer Bankruptcy Act of 1986.

5. Chapter 13 Bankruptcy is a reorganization plan like Chapter 11 but is available only to small
businesses while a plan is being developed to provide for the successful operation of the business
in the future.

Companies That Recently Declared Chapter 11 bankruptcy

• Tribune Company this media conglomerate that owns the Chicago Tribune, the Los Angeles
Times, the Chicago cubs, and Wrigley Field recently declared bankruptcy.

• Advantage this car rental company filed for bankruptcy in December 2008 as cash strapped
consumers do less travelling during a slumping economy.

• Bally Total Fitness for the second time in two years, this gym operator field for bankruptcy
protection in December 2008.

• Pilgrim Pride U.S meat makers profits have shrunk in the wake of high feed prices and excessive
debt. In December 2008,

• Pilgrim Pride, the largest chicken producer, filed for chapter 11 bankruptcy protection.

• Hawaiian Telcom Communications Inc. the largest telephone company on the Hawaiian Islands.
This firm field for chapter 11 bankruptcy protection in December 2008.

Divestiture

➢ Selling a division or part of an organization is called Divestiture.

➢ It is often used to raise capital for further strategic acquisition or investments.

➢ It can be part of an overall Retrenchment Strategy to rid an organization of businesses that are
unprofitable.

➢ It also become popular strategy for firms to focus on their core businesses and become less
diversified.
 Liquidation

➢ Selling all a company’s assets, in parts, for their tangible worth is called liquidation.

➢ It is a recognition of defeat and consequently can be emotionally difficult strategy. However, it

may be better to cease operating than to continue losing large sums of money.

➢ Companies That Recently Liquidated, Declaring Chapter 7 Bankruptcy

• Aloha Airlines after more than 60 years of service to and within Hawaii, the firm made its last
passenger flight on March 31,2008. The company liquidated after bankruptcy protection did not
work for it.

• Sharper Image Corporation the company recently liquidated, citing declining sales, three straight
years of losses, and litigation involving its Ionic Breeze air purifiers.

• Tweeter the home electronics retailer field for chapter 7 liquidation and is selling all merchandise
in all its store.

VIII. MICHAEL PORTER’S FIVE GENERIC STRATEGIES

Porter’s five strategies imply different organizational arrangements, control procedures, and incentive
systems. Larger firms with greater access to resources typically compete on a cost leadership and/or
differentiation basis, whereas smaller firms often compete on a focus basis.

Porter’s Five Generic Strategies

Type 1: Cost leadership – Low Cost

Type 2: Cost Leadership – Best Value

Type 3: Differentiation

Type 4: Focus – Low Cost

Type 5: Focus – Best Value

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.

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.
 • A differentiation Strategy should be pursued only after a careful study of buyers need and
preferences to determine the feasibility of incorporating one or more differentiating features into
a unique product that features the desired attributes.

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.

• 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 for Competing in Turbulent, High-Velocity markets

• The 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,
such as telecommunications, medical, biotechnology, pharmaceuticals, computer hardware,
software, and virtually all internet base industries.

IX. MEANS OF ACHIEVING STRATEGIES

A. Cooperation Among Competitors
 For collaboration between competitors to succeed, both firms must contribute something
distinctive, such as technology, distribution, basic research, or manufacturing capacity. But a
major risk is that unintended transfers of important skills or technology may occur at
organizational levels below where the deal was signed.
B. 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.
o Other types of cooperative arrangements include
- research and development partnerships,
- cross-distribution agreements,
- cross-licensing agreements,
- cross-manufacturing agreements, and
- joint-bidding consortia.
 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.
 A 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.
o Common problems that cause joint ventures to fail are as follows:
1. Managers who must collaborate daily in operating the venture are not
involved in forming or shaping the venture.
2. The venture may benefit the partnering companies but may not benefit
customers, who then complain about poorer service or criticize the
companies in other ways.
 3. The venture may not be supported equally by both partners. If supported
unequally, problems arise.
4. The venture may begin to compete more with one of the partners than the
other.

o Six guidelines for when a joint venture may be an especially effective means for pursuing
strategies are:
a. 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.
b. When a domestic organization is forming a joint venture with a foreign company; a
joint venture can provide a domestic company with the opportunity for obtaining
local management in a foreign country, thereby reducing risks such as expropriation
and harassment by host country officials.
c. When the distinct competencies of two or more firms complement each other
especially well.
d. When some project is potentially very profitable but requires overwhelming
resources and risks.
e. When two or more smaller firms have trouble competing with a large firm.
f. When there exists a need to quickly introduce a new technology.

C. 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.
 If the acquisition is desired by both firms, it is termed a friendly merger.

Key Reasons Why Many Mergers and Acquisitions Fail

• Integration difficulties
• Inadequate evaluation of target
• Large or extraordinary debt
• Inability to achieve synergy
• Too much diversification
• Managers overly focused on acquisitions
• Too large an acquisition
 • Difficult to integrate different organizational cultures
• Reduced employee morale due to layoffs and relocations
Potential Benefits of Merging with or Acquiring Another firm

• To provide improved capacity utilization

• To make better use of the existing sales force
• To reduce managerial staff
• To gain economies of scale
• To smooth out seasonal trends in sales
• To gain access to new suppliers, distributors, customers, products, and creditors
• To gain new technology
• To reduce tax obligations

D. 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.
 First mover advantages are analogous to taking the high ground first, which puts one in an
excellent strategic position to launch aggressive campaigns and to defend territory.

Being the first mover can be especially wise when such actions

(1) build a firm’s image and reputation with buyers,

(2) produce cost advantages over rivals in terms of new technologies, new components, new
distribution channels, and so on,

(3) create strongly loyal customers, and

(4) make imitation or duplication by a rival hard or unlikely

 Being a 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.

E. 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.

Benefits of a firm being the first mover

1. Secure access and commitments to rare resources

2. Gain new knowledge of critical success factors and issues
3. Gain market share and position in the best locations
 4. Establish and secure long-term relationships with customers, suppliers, distributors, and investors
5. Gain customer loyalty and commitments
X.
XI.
X. STRATEGIC MANAGEMENT IN NONPROFIT AND GOVERNMENTAL
ORGANIZATIONS
 The strategic-management process is being used effectively by countless nonprofit and
governmental organizations.
 Many nonprofit and governmental organizations outperform private firms and corporations on
innovativeness, motivation, productivity, and strategic management.

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

B. Medical Organizations
Hospitals are beginning to bring services to the patient as much as bringing the patient to
the hospital; health care is more and more being concentrated in the home and in the residential
community, not on the hospital campus.

A successful hospital strategy for the future will require renewed and deepened
collaboration with physicians, who are central to hospitals’ well-being, and a reallocation of
resources from acute to chronic care in home and community settings.

C. Governmental Agencies and Departments

Strategists in governmental organizations operate with less strategic autonomy than their
counterparts in private firms. Public enterprises generally cannot diversify into unrelated
businesses or merge with other firms. Governmental strategists usually enjoy little freedom in
altering the organizations’ missions or redirecting objectives.

Government agencies and departments are finding that their employees get excited about
the opportunity to participate in the strategic-management process and thereby have an effect on
the organization’s mission, objectives, strategies, and policies.

XI. STRATEGIC MANAGEMENT IN SMALL FIRMS

Strategic management is vital for large firms’ success and is just as vital for small companies.

All organizations have a strategy, even if the strategy just evolves from day-to-day operations.
Even if conducted informally or by a single owner/entrepreneur, the strategic-management process can
significantly enhance small firms’ growth and prosperity.
 Lack of strategic-management knowledge is a serious obstacle for many small business owners.
Other problems often encountered in applying strategic-management concepts to small businesses are a
lack of both sufficient capital to exploit external opportunities and a day-day cognitive frame of reference.

Conclusion

The main appeal of any managerial approach is the expectation that it will enhance
organizational performance. This is especially true of strategic management. Through involvement in
strategic-management activities, managers and employees achieve a better understanding of an
organization’s priorities and operations. Strategic management allows organizations to be efficient, but
more important, it allows them to be effective. Although strategic management does not guarantee
organizational success, the process allows proactive rather than reactive decision making. Strategic
management may represent a radical change in philosophy for some organizations, so strategists must be
trained to anticipate and constructively respond to questions and issues as they arise. The 16 strategies
discussed in this chapter can represent a new beginning for many firms, especially if managers and
employees in the organization understand and support the plan for action.

Prepared by:
Aliponto, Hannah Alyssa D.
Ambaco, Omaima D.
Baraontong, Raivah
Calandada, Hania M.
MGT108 Yy