PLACING STRATEGIES INTO ACTION

CHAPTER V

Placing Strategies into Action

OVERVIEW OF CLASS MODULE

In this module, we will bring strategic management to life with many contemporary examples. Sixteen
types of strategies are defined and exemplified, including Michael Porter’s generic strategies: cost
leadership, differentiation, and focus. Guidelines are presented for determining when it is most
appropriate to pursue different types of strategies. An overview of strategic management in nonprofit
organizations, governmental agencies, and small firms is provided.

LEARNING OBJECTIVES

By the end of this module, the students should be able to:

1. Discuss the value of establishing long-term objectives;
2. Identify 16 types of business strategies; and
3. Discuss Porter’s five generic strategies.

LEARNING CONTEXT
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 “Alice said, ‘Would you please tell me
which way to go from here?’ The cat
time frame for objectives and strategies should be consistent, said, ‘That depends on where you
usually from two to five years. want to get to.’”

-Lewis Carroll
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.
Clearly established objectives offer many benefits.

The desired Characteristics of Objectives are as follow:

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

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

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Financial versus 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.

There are other trade-offs between financial and strategic objectives, related to riskiness of
actions, concern for business ethics, need to preserve the natural environment, and social
responsibility issues. Both financial and strategic objectives should include both annual and long-term
performance targets. Ultimately, the 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. Financial
objectives can best be met by focusing first and foremost on achievement of strategic objectives that
improve a firm’s competitiveness and market strength.

Not Managing by Objectives

An unidentified educator once said, “If you think education is expensive, try ignorance.” The idea
behind this saying also applies to establishing objectives. Strategists should avoid the following
alternative ways to “not managing by objectives.”

1. Managing by Extrapolation

It adheres to the principle “If it ain’t broke, don’t fix it.” The idea is to keep on doing about the
same things in the same ways because things are going well.

2. Managing by Crisis

It is based on the belief that the true measure of a really good strategist is the ability to solve
problems.

3. Managing by Subjective

It is 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.

4. Managing by Hope

It is 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.

TYPES OF STRATEGIES

Defined and exemplified in Table 5.4, alternative strategies that an enterprise could pursue can
be categorized into 11: forward integration, backward integration, horizontal integration, market
penetration, market development, product development, related diversification, unrelated
diversification, retrenchment, divestiture, and liquidation. Each alternative strategy has countless
variations.

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. No organization can afford to
pursue all the strategies that might benefit the firm. Difficult decisions must be made. Priority must be
established. Organizations, like individuals, have limited resources. Both organizations and individuals
must choose among alternative strategies and avoid excessive indebtedness

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Table 5.1 Alternative Strategies Defined and

Exemplified
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 consumers who are price-sensitive. Two
alternative types of cost leadership strategies can be defined.

 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. A number of 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 among 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.

a. TYPE 1: Cost Leadership—Low Cost

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It offers products or services to a wide range of customers at the lowest price available on
the market.

b. TYPE 2: Cost Leadership—Best Value

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.

 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.

 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. Midsize and
large firms can effectively pursue focus-based strategies only in conjunction with differentiation or
cost leadership–based strategies. All firms in essence follow a differentiated strategy. Because only
one firm can differentiate itself with the lowest cost, the remaining firms in the industry must find
other ways to differentiate their products.

a. TYPE 4: Focus—Low Cost

It 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.

b. TYPE 5: Focus—Best Value

It 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.

Porter stresses the need for strategists to perform cost-benefit analyses to evaluate “sharing
opportunities” among a firm’s existing and potential business units. Sharing activities and
resources enhances competitive advantage by lowering costs or increasing differentiation. In
addition to prompting sharing, Porter stresses the need for firms to effectively “transfer” skills
and expertise among autonomous business units to gain competitive advantage. Depending on
factors such as type of industry, size of firm, and nature of competition, various strategies
could yield advantages in cost leadership, differentiation, and focus

SOURCE:

 David, Fred R. (2011). “Strategic Management: Concepts and Cases.” 13th Edition. Pearson
Education, Inc.

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