Chapter 5 Strategy in Action

This chapter introduces strategies in action, covering five characteristics and ten benefits of a clear objective, defining 11 types of strategies, discussing three types of integration strategies, and providing guidelines for market penetration, development, product development, diversification, retrenchment, divestiture, and liquidation. It also identifies Porter's five generic strategies and explains strategic planning differences for profit and non-profit companies.

Long-term objectives typically span two to five years, though some can be longer. These objectives provide general direction, create synergy, assist evaluation, establish priorities, reduce uncertainty, minimize conflicts, stimulate exertion, and aid resource allocation and job design. Five key characteristics of objectives are being measurable, understandable, challenging, compatible, and realistic/achievable.

Financial objectives are focused on monetary gains like revenue growth, profit margins, increased return on investment, earnings per share, and cash flow. Strategic objectives, conversely, aim to improve market share, delivery times, design-to-market speed, lower costs relative to competitors, enhance product quality, expand geographic coverage, achieve technological leadership, and bring new products to market faster. Both are interconnected, with strategic successes driving financial performance.

The discussion warns against ineffective management styles: 'managing by reaction' (only addressing crises), 'managing by hope' (relying on luck), 'management by extrapolation' (failing to innovate), and 'managing by mystery' (lacking clear strategy). Companies should avoid these to ensure effective strategic execution.

Organizations pursue multiple strategies rather than just one. Integration strategies include 'forward integration' (gaining control over distributors/retailers, like Amazon or Apple Stores), 'backward integration' (gaining control over suppliers, like Starbucks buying a coffee farm), and 'horizontal integration' (acquiring competitors to increase market share, like PepsiCo originally acquiring fast-food chains).

Market penetration involves increasing market share for existing products in current markets (e.g., Coke/Pepsi's aggressive distribution). Market development introduces present products to new geographic areas or customer segments (e.g., Walmart in Mexico, but Target failed in Canada). Product development focuses on increasing sales by improving existing products or developing new ones (e.g., Hyundai's 10-year warranty, car manufacturers' annual model updates).

Related diversification involves adding new, but related, products or services, leveraging core strategic advantages (e.g., Facebook buying Instagram, Disney acquiring Marvel/Star Wars). Unrelated diversification involves entering significantly different, unrelated fields (e.g., AT&T buying Warner Brothers, or cigarette companies buying food companies). While unrelated diversification can offer growth in new sectors or financial synergy, it requires significant capital and management talent, and may face integration challenges.

Defensive strategies are employed during challenging times. 'Retrenchment' involves regrouping, reducing scope, costs, and assets to stabilize (e.g., Dunkin' Donuts restructuring). 'Divestiture' means selling a division or part of the company that doesn't fit or provide capital (e.g., McDonald's selling off non-core restaurant chains). 'Liquidation' is the final resort when a business fails, selling assets to pay liabilities and return remaining value to shareholders.

Value chain analysis evaluates a firm's value by examining all activities from material procurement to marketing and delivery, aiming to maximize value minus costs. Benchmarking involves comparing a firm's performance against industry averages or best practices to identify areas for improvement and competitive advantage. The goal is to transform activities into core competencies and distinctive competencies, leading to sustained competitive advantage.

Porter's generic strategies help companies distinguish themselves. 'Cost leadership' aims to be the low-cost provider (e.g., Walmart vitamins). 'Differentiation' focuses on offering unique products or services (e.g., Monster energy drinks, or unique high-end products). These can be applied to broad or narrow target markets.

Companies can grow by: 'building' from within, using internal resources and core competencies (e.g., Netflix producing its own content); 'borrowing' from others through joint ventures or strategic alliances (e.g., companies collaborating to increase market penetration); or 'buying' other companies through mergers and acquisitions (e.g., Microsoft, Oracle, Google acquiring smaller innovators).

Mergers and acquisitions often fail due to integration difficulties, conflicting company cultures, too much debt taken on by the acquiring company, inability to achieve expected synergy between merged entities, or over-diversification into areas where the acquiring company lacks expertise. These can lead to layoffs, reduced morale, and ultimately, failed ventures.

Despite risks, mergers and acquisitions offer benefits like improved capacity utilization, better use of existing salesforces, reduced managerial staff, economies of scale, smoothing out seasonal trends, access to new suppliers/customers/technologies, gaining market share, reducing tax obligations, and eliminating competitors.

Being a first mover in the market with a new product or service offers significant advantages. It allows a company to establish itself early, secure supplier and distributor contracts, gain new knowledge, acquire substantial market share, and obtain patent or trademark protections. Examples include Vitamin Water and Gatorade, which created new beverage categories and solidified their market positions before competitors.

Strategic management for non-profit and smaller firms differs from profit-oriented companies. Non-profits don't aim to satisfy shareholders or generate profits but rather to address societal needs (e.g., education, housing). Their strategies focus on stretching resources, gaining tax advantages, and fulfilling their mission in a sustainable way, often providing services that might be unprofitable for traditional corporations.