Mission apter 10: Business Ethics, Environmental Sustainablliy: Strategies in Action Chapter 5 atc EE m eet Perec Implementing Finenee and! Accounting Erte Ei Chapter3 oe B The Comprehensive, no. 1 (February 1989): Contractor of Putu Aram: Constructiv 154 Integrative Strategic-Management Model Indonesi jes Define Their Missi '9}. See also Anik Ratnaningsih, salance Scorecard of David's Strategie Modeling Journal of Mathemaaies and Te ji Anwa " Long Range Planning 22, Patdono Suwignjo, and at Industrial Business for National ehnology, no. 4 (October 2010); 20. I mula + Strategy 4 Strategy I Formulation’ t sat | suategy FIGURE 5-1Strategies in Action LEARNING OBJECTIVES After studying this chapter, you should be able to do the following 5-4. Identify and discuss 5 characteristics and 10 benefits of clear objectives. 5-2. Define and give an example of 11 types of strategies. 5-3. 5-4. Identify and discuss the three types of “Integration Strategies.” Give specific guidelines when market penetration, market development, and product development are especially effective strategies. 5-5. Explain when diversification is an effective business strategy. 5-6. List guidelines for when retrenchment, divestiture, and liquidation are especially effec- tive strategies. 5-7. Explain value chain analysis and benchmarking in strategic management. 5-8. Identify and discuss Porter’ two generic strategies: cost leadership and differentiation 5-9. Compare and contrast when companies should “build, borrow, or buy” as key means for achieving strategies. 5-10, Discuss first-mover advantages and disadvantages. 5-11. Explain how strategic planning differs in for-profit, not-for-profit, and small firms. ASSURANCE-OF-LEARNING EXERCISES ‘The following exercises are found at the end of this chapter: seT 4: Strategic Planning for Coca-Cola EXERCISE SA: Develop Hypothetical Coca-Cola Company Strategies EXERCISE 5! Should Coca-Cola Build, Borrow, or Buy in 2020-2021? SET 2: Strategic Planning for My University EXERCISE SC: Develop Alternative Strategies for Your University SET 3: Strategic Planning for Myself EXERCISE SD: The Key to Personal Strategic Planning; Simultaneously Build and Borrow SET 4: Individual versus Group Strategic Planning EXERCISE SE: What Is the Best Mix of Strategies for Coca-Cola Company? MyLab Management & improve Your Grade! if your instructor i using MyLab Management, vit [Link]/mylablmanagement os, simulations, and writing exercises. for vi156 PART 2 » STRATEGY FORMULATION strategi ben Objectives should be quant Tim Cook, CEO of Apple, Inc. ‘The editor of Businessweek, Megan Murphy, recently asked the CEO of ‘Apple, Tim Cook, what he thought hi legacy at Apple would be. Tim sponded: “To be honest dont think about! think about doing stuf" ‘Cook went on to explain how and why Apple’ founder, Steve Jobs, rather than himself, should be the person revered forever as Apple's supreme strategist extraordinai. Cook told Megan that Apple in the pest, present, ad future i all about is founder Jobs, Tim explained that Jobs “DNA of “ethos” és and always wil be Apple's “Constituton” or ‘uiding set of principles. According to Cook, Jobs’ ethos ingrained into ‘Apple forever include the folowing items (oaraphased) 1, Pay acute attention to deta 2. Keep it simple and genuinely care. 3. Focus on the user and user experience. 4, Focus on building the best. 5, Foliow the motto "good isn’t good enough"; every product and ‘process must be, as Jobs's often said, “insanely great” 6. Apple should ovin the proprietary technology it uses to contol, its own quality of product and user experience wm weds of companies today pray created a new strateg technology, we can’t afford to spend then find out five years later it was the wrong abjectves are needed before strategies can be general This chapter brings strategic us Ditfren types of strategies are defined and exemplified. MCIWONE Te rnining when cost leadership an es are resi cach strategy is most appropriate to pursue. The integral smarking in strategic planning is revealed. id differentiation. profit organizations, governmental agencies, an ‘Tim Cook is arguably the best strategist on the ‘company in the world. Read to see why Cook and Apple are Long-Term Objectives Long-term objectives represent the results expected from pursuing represent the actions to be taken to accomplish long-term object tives and strategies should be consistent, usually from 2 to 5 years. an organization would drift aimlessly toward some unknown ¢ short-term fads and stray away from the firm's mission. Its hard to imagine an organization or an i tives. You probably have worked hard the last few years striving to achieve an objective to gradu- ate with a business degree. Success rarely accurs directed toward achieving certain objectives. Jc planning in their quest fr higher ne cmbracd eet TUS. exis Wh hiscom. Ison former chai a ecause we're making bigger bey anning depart nole ft of MONEY sy ete and as illustrated in Figure 5-1, 1ong-erm Sieemed, evaluated, and selected. fife with many contemporary examples luding Michael Porter’s generic management (0 jidelines are Goulding monance of value chain analysis and i sment in non- ‘an overview of strategic manage! pencall firms is provided. As showeased ne ane; he has fed Apple toe the most admired ‘insanely great” certain strategies. Strategies “The time frame for objec- ind or become t00 focused on ‘dual being successful without clear objec- by accident; rather, itis the result of hard work Characteristics and Benefits of Objectives ive, understandable, challenging, comy ‘and horizontally ina chain of command), and obtainable. Each objective should also be associ- ated with a timeline, Objectives are commonly stated in terms such as growth in assets, growth ible (consistent vertically NdogestrShuerstock 7 ven we ‘and be honest with yourself when you do something 8, Never get marred to you position or pride 9. Invest forthe long-term rather than st mmakel with 9 produc nn etna tobe he frst to Sonne: Based on Megan Murphy icon Tim Cook: Bloomberg Businessweek neCHAPTERS + STRATEGIES INACTION — 157 in sales, profitability, market share, degree and nature of diversification, degree and nature of tertica integration, earnings per share, and social responsibility. (Note: Do not emulate many “Anna! Reports that print really vague objectives forthe firm, such as Macy's Annual Report that states as objectives “to grow sales profitably” and “to improve return on invested capital.” Such ‘Statements are useless in strategic planning, Clearly established objectives offer many benefits They provide direction, allow synergy, assist inevaluation, establish priorities, reduce uncertainty, minimize conflicts, stimulate exertion, and aid both the allocation of resources and the design of jobs. Objectives provide a bass for consistent decision making by managers whose values and altitudes differ. Objectives serve as standards by which individuals, groups, departments divisions, and entire organizations can be evaluated. Table 5-1 ancl Table 5-2 summarize the desired characteristics and benefits, respectively, of having clear objectives. TABLE 5-1 Five Characteristics of Objectives 1. Quantitative: measurable 2. Understandable: clear 3. Challenging: achievable 4, Compatible: consistent vertically and horizontally in chain of command ‘5. Obtainable: realistic —eeee TABLE 5-2 10 Benefits of Having Clear Objectives 1. Provide direction by revealing expectations. 2. Allow synergy. 3. Assist in evaluation by serving as standards, 4, Establish priorities. 5, Reduce uncertainty. 6, Minimize conflicts. 1 8. ‘Stimulate exertion. 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: financial and strategic objec- tives. Financial objectives include those associated with growth in revenues, growth in earn- ings, higher dividends, larger profit margins, greater return on investment, higher earings per share, a rising stock price, improved cash flow, and all other objectives relating to the financial foto of he ie, eran ati Fre on sk GR taal advantage, including factors such as a larger market share, quicker on-time delivery than lower costs than rivals, higher product quality than rivals, wider geographic coverage than rivals, achieving technological leadership, and consistently getting new or improved products to mar- ket ahead of rival. Often there is a trade-off between financial and strategic objectives such that crucial deci sions have to be made. For example, a firm can do certain activities to maximize short-term financial objectives that would harm long-term strategic objectives. To improve financial posi tion in the short run through higher prices may, for example, jeopardize long-term market share. “The dangers associated with trading off long-term strategic objectives with near-term bottom line performance are especially severe if competitors retentessly pursue increased market share a the expense of short-term profitability. Amazon, for example, operated for decades without concern for profits, instead concentrating on gaining market share. There are other trade-offs between financial and strategic objectives, related (0 riskiness of actions, concern for business ethics, the need to preserve the natural environment, and social responsibilty issues, Both fi- nancial and. strategi objectives should include annual and long-term performance targets.1S8_—-PART 2 + STRATEGY FORMULATION, lentlessly pursue strategic ob, ‘Ultimately, the best to sustain comp ye advantage is (0 rel jectives that strengthen a firm's business position over rivals. Mystery (CHEM) If you think education is expen. establishing objectives because Avoid Managing by Crisis, Hope, Extrapolation, and Derek Bok, former President of Harvard University. once si sive, try ignor ‘The idea behind this saying also applies (0 strategists should avoid managing by CH ‘* Managing By Crisis—Based on the belief that the tu an a gist isthe ability to solve problems. Because there are plenty of crs Sip oer ted found for every person and organization segs ought 1 rig thei fis an rate energy to beat on solving the most pressing problems of the day. Mapas TET actualy a form of reacting, letting events dictate the what and witen decisions. * Managing By Hope—Based on the fact that the future is laden Ww aren that if we ry and do ot sues, ten we Hope ur eco (or tid) temps wits ceed. Decisions are predicated on the hope that they will work and ame times are just around the comer, especially i luck and good fortune are on our Si ial BF + Managing By Exirapotation-Adheres othe principle “If it ain't broke, don't fx it ae idea is 10 keep on doing the same things in the same ways because things are going well. ‘© Managing By Mystery—Built on the idea that there is no general plan for which way t0 go and ‘what o do just do the best you can to accomplish what you think should be done. In shor, “Do ‘your own thing, the best way you know how’ (sometimes refered to as the mystery approach ‘o decision making because subordinates are left o figure out what is happening and why). re measure of a really good strate- laden with great uncertainty and Types of Strategies Defined and exemplified in Table 5-3, alternative strategies that an enterprise could pursue can bbe categorized into 11 actions: 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, For example, market penetration can include adding salespersons, increasing adver- tising expenditures, couponing, and using similar actions to increase market share in a given geographic area. Note for a particular company the strategy is very specific; be specific to the ‘extent possible in all aspects of strategie planning. ‘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 al the strategies that might benefit the frm: priorities must be established. Difficult deci- sions must be made. Organizations, like individuals, have limited resources. Both organizations and individuals must choose among alternative strategies and avoid excessive indebledness. TABLE 5-3 Alternative Strategies Defined and Recent Examples Given Strategy Definition Example Forward Integration Gaining ownership or increased con- Nike opening 100 outlet stores and sll- twol over distributors orreilers ing 30% more products on its website Backward Inegration Seeking ownership or increased eon- Boeing building 80% of its wing flap ‘rol over suppliers motors in-house Horizamal megan Seeking ownership rina con-Nesé purchasing Sweet arth Foals rol over competitors Market Penetration Sevking increased market share for present products in present markets ‘rough greater marketing Market Development Introducing present product into Publix building 20 new supermarkets ew geographic ares in North and South Carolina Produet Development. Seeking inereasc sales by improw- ord shifting one-thind of ts sched= ing presen prxiucs or developing ued R&D budget on gaviesel eneCHAPTER'S + STRATEGIES IN ACTION Related Diversification Adding new but related prexhicts Walmart acquited [Link] for $3. billion Unrelated Diversification “Adding new, unrelated products CVS pharmacy aequiring Aetna insurance Rotrenchment Regrouping through cost and asset Eli Lilly laying off 3,500 employees reduction to reverse declining sales and profit Divestiture Selling adivision or part of an Toshiba aims to sll its memory-chip ‘organization nit to Bain Capital Liquidation Selling all ofa company’s assets. in Ringling Bros. and Bamum & Bailey Pars for their tangible worth Circus liguidated (last performance ‘on May 21, 2017) ih MMO 2 Nn Strategic planning thus involves “choices that risk resources, and trade-offs that sacrifice opportunity.” In other words, if you have a strategy to go north, then you must buy snowshoes and warm jackets (spend resources) and forgo the opportunity of “faster population growth in southem states.” You cannot have a strategy to go north and then take a step east, south, oF west “just to be on the safe side.” Strategy is all about “what to do” and “what not to do.” Firms spend resources and focus on a finite number of opportunities in pursuing strategies ‘achieve an uncertain outcome in the future. Strategic planning is much more than a roll ofthe dice: itis an educated wager based on predictions and hypotheses that are continually tested and refined by knowledge, research, experience, and learning. Survival of the firm often hinges on an excellent strategic plan? Organizations cannot excel in multiple different strategic pursuits because resources and talents get spread thin and competitors gain advantage. In large, diversified companies, a com- bination strategy is commonly employed when different divisions pursue different strategies. Organizations struggling to survive may simultaneously employ a combination of several defen- sive strategies, such as divestiture and retrenchment. Levels of Strategies Strategy making is not justa task for top executives. Middle- and lower-level managers also must be involved in the strategic-planning process to the extent possible. In large firms, there arc actually four levels of strategies: corporat, divisional, functional, and operational—as illustrated in Figure 5-2. However, in small firms, there are three levels of strategies: company, functional, and operational. Large Company Small Company FIGURE 5-2 ; Levels of Strategies with Persons Most Responsible 1594160 PART 2 + STRATEGY FORMULATION roa gies at the various Jy ‘The persons primarily responsible for havin ete see os ‘he divislona Pi inctule the CO athe corporate Hvel the preside! Of FEO man resource manager eee ine (CEO) eet Informant Level, and te (HRM, chiet marketing oliver (CMO, oer eX se 1 important plant manager, region: rr, and 50 ON At AT firm's strategic plan 0 help ensure cand undersan donsisteney, inefficiency, ang all managers at all levels part coordination, facilitate sional, functional, and oper, objectives are needed at the corporates tnanagerial performay sion eehe at ae eek They ao niger Ess ee aaa tonal levels of an organization, They ar 8 te a gear extent On Ione Jonuses or mert pay for managers today should BE Pe Te ectves to performance id tailor these guidelines objectives and strategies. An example framewo term and annual evaluation is provided in Table 5-4. A particular to meet their own needs, but incentives should be objectives. i oul organization ct ‘attached to both long-t izational Level TABLE 5-4 Varying Performance Measures By 0/98") ih ‘Organizational-Level Basis for Annual Bonus or Merit Pay ‘Corporate: overall firm 75S based on long-term objectives 256 based on annual objectives : such as by product or region 50% based on long-term objectives Divisionat 50% based on anual objectives Functional such as marketing and finance 25% based on long-term objectives 175% based on annual objectives Operational soch as manufacturing plants or stores 25% based on long-term objectives 758 based on anual objectives Integration Strategies Forward integration and backward integration are sometimes collectively referred to as verti- cal integration. Vertical integration strategies allow a firm to gain control over distributors and suppliers, whereas horizontal integration refers to gaining ownership or control over ‘competitors. Vertical and horizontal actions by firms are broadly referred to as integration strategies. Historically, vertical integration strategies have been difficult to implement because of the firm operating in businesses out of its core competency, and because large fixed costs are generally associated with such strategies. For example, if Coke wished to vertically integrate, it could acquire sugar farms to gain control over its suppliers and open its own brick-and- mortar stores 0 gain control of distributors. Both would be excessively costly and divert Coke from what it does best: producing beverage products. Although the risk of depending ‘on suppliers and distributors may be high, owning these businesses is often associated with even greater risks. Viable options to vertical integration are joint ventures and strategic all ances discussed later inthe chapter. Opportunity costs associated with the resources used for vertical integration usually could be more effectively deployed to other endeavors Forward Integration Forward integration involves gaining ownership or increased i crea owing clos thc etx a eatig ot th oe. ana a imate Glee Ranag incre they prods Foretanple,Nilosesnillonsoshoesandshine oie ing from Foo Locker iJ ©. Penney, ut the company is apdly boosting is det oconsueCHAPTER S + STRATEGIES IN ACTION strategy has hundreds of retail stores upset; sales on the [Link] website recently rose 50 per- and account for one-third of the company’s revenue, At the three largest publicly traded U.S, athletic retailers, Finish Line, Foot Locker, and Dick's Sporting Goods, the percentage of their merchandise that comes from Nike is 73, 73, and 19 percent, respectively, so these firms must adaptor face disaster, Forward integration is an increasingly popular strategy among U.S.-based restaurants. ‘Scores of mainstream restaurant chains now use or are developing online-ordering apps that often entail delivery of food to customers. For example, Panera Bread has installed online-ordering. and delivery in about 50 percent ofits restaurants. Panera employs more than 10,000 of its own delivery drivers. Similarly, Dunkin’ Brands is now delivering doughnuts and coffee in Dallas, Allanta, Chicago, Los Angeles, and numerous other cities. Chipotle Mexican Grill as instituted 1 second food assembly Tine in its restaurants to accommodate delivery and online orders. Taco Bell now takes online orders and delivers in more than 50 markets through nearly 1,000 Taco Bell restaurants. Online ordering and delivery of restaurant food in general is expected to soon surpass pizzas An effective means of implementing forward integration is franchising. Approximately 2,000 companies in about 50 different industries in the United States use franchising to distrib- ute their products or services. Businesses can expand rapidly by franchising because costs and ‘opportunities are spread among many individuals. Total sales by franchises in the United States exceed $1 trillion annually, There are about 800,000 franchise businesses in the U.S. Subway is today in turmoil as the 100 percent franchised firm has mostly franchisees that disagree wit top executives on the overall vision and mission ofthe firm. Year 2017 was the fourth consect- tive year of declining sales at Subway. Top executives want to continue adding stores tothe over 25,000 in the U.S., but franchisees cannot take further cannibalization caused by new Subways: ‘opening nearby. Instead, franchisees want more control over their supplier choices, more ad- vertising from corporate, more flexibility on what promotions to participate in, more R&D to enhance a menu that has not changed much in a decade, and permission to add drive-through services. The following six guidelines indicate when forward integration may be an especially effec- tive strategy:* 1. An organization’s present distributors are especially expensive, unreliable, or incapable of ‘meeting the firm’s distribution needs. 2. The availability of quality distributors is so limited a rival could potentially sign an exclu- sive contract, thus locking down a competitive advantage. 3. An organization competes in an industry that is growing and is expected to continue to ‘grow markedly; this isa factor because forward integration reduces an organization’s abil- ity to diversify if its basic industry falters. 4. An organization has both the capital and human resources needed to manage the new busi- ness of distributing its own products, 5. The advantages of stable production are particularly high; this is a consideration because ‘an organization can increase the predictability ofthe demand for its output through forward integration. 6, Present distributors or retailers have high-profit margins; this situation suggests that a company could profitably distribute its own products and price them more competitively by integrating forward. a. ‘a strategy of seeking ownership or increased control of a firm’s sup- pliers. This strategy can be especially appropriate when a firm's current suppliers are unreliable, too costly, or cannot meet the firm’s needs. Starbucks recently purchased its frst coffee farm—a ‘O0-acre property in Costa Rica. This backward integration strategy was used primarily to de- velop new coffee varieties and to test methods to combat a fungal disease known as coffee rust that plagues the industry. Manufacturers, as well as rel se needed materials from suppliers. 161162 PART 2 « STRATEGY FORMULATION in increased prices of these pans, dustry has resulted i y areraft parts internally. Boeing Consolidation in the sera parti ; ‘ cua prompted Boeing and Airbus ea he NEED fing ng that wll prod mn continually view “make ce. ‘on how the Flap. Airs CEO Fabrice Bregir commented 0” HOw 1 Or eet bay de anes we in aia ere reducing thet his ‘Some industries, such Hed de-integration. Instead of ovning cal pursuit of backward integration: this prac Jed ord and Chrysler buy more than their suppliers, companies negotiate with outside supplier Fe : ‘as TRW, Eaton, General Electric half of their component parts from outside suppliers such @ “hat have global SOUTCES of sup. (GE), and Johnson Contos This makes sense in indUSLICS TN ih the best de ply. Companies toy shop around, pay one sll sin rs and to demand Got competion abo sparing firms to res tn a sionally eying on higher levels of service and quality rom those they KeePe AUTON sims now are many suppliers to ensure uninterrupted supplies and loW’ Pret following the lead of Japanese firms, which have far Fever ETT relationships with those few. “Keeping track of so many ‘Shimetonis, formerly of Xerox. t , ‘a nonprofit company t0 produce ge- Four major US. hospital systems receny launched 2 ono neric drugs in order to offset skyrocketing prices of dugs. seaticta ew idecke Healthcare, Ascension, SSM Health, and Trinity Health; these four organizatios of hospitals, ‘Seven guidelines when backward integral 1. An organization's present suppliers are especially expensive, unreliable, or incapable of ‘meeting the firm's needs for parts, components, assemblies, or raw materials. 2. The numberof suppliers is small and the number of competitors is large. '3. An organization competes in an industry that is growing rapidly; this isa factor because integrativetype strategies (forward, backward, and horizontal) reduce an organization's ability to diversify in a declining industry. 4. An organization has both capital and human resources to manage the new business of sup- plying its own raw materials. 5. The advantages of stable prices of raw materials are of upmost importance. 6. Present suppliers have high-profit margins, which suggest thatthe business of supplying products or services in a given industry is a worthwhile venture. 7. Whenever various esourees may be needed quickly ers and closer, 1ong-term onerous.” said Mark tion may be an especially effective strategy aimed at gaining control over a firm's competitors; ths is arguably the most common growth sraegy, Thousands of mergers, acyuisitone sav kee among competitors are consummated annually and most aim for increased economies of see enhanced transfer of resources and competencies, reduced competition, and fewer price wan Kenneth Davidson makes the following observation about horizontal integrations Tre tend tonards ional interton seems ore statist mas silly oop nny ued Mg bearer ae likely to create efficiencies than mergers between unrel: : Gea ue isa grr potal for lining dpa ces nd te et te acquiring ‘more likely o understand the business ofthe target nn eee OF HH acs Dek Ahiance recep two thousand Rite Aid stores are bei : : target Ieahited by Aloe nat Rite Aid stores the remsining ‘sons Companies LLC, Horizontal inte- ots one isp ‘ed with Walgreens and Ri months before giving final a or 2 1al approval of Aid, which took the Federal Tiade Commissi deal nest menger OF homebuilders in 10 y quired CalAtlantic Group « 9 create a combined i oe The oe acta Sant me ta 17 Bn PotteGroup, NVR, Toll Brothers and KB Home MS omler‘are D. Roce:l CHAPTERS « STRATEGIES IN ACTION Britain’s Cineworld Group PLC in 2018 aq Group for $3.6 billion, creating the world's second-largest movie bined company now has more than 9,000 movie sereens. The largest fi Entertainment Holdings that is part of China’s Dalian Wanda Group. third-largest cinema chain in the United States The following six guidelines indicate when horizontal integration may be an especially ef- fective strategy’ i its US. counter 1, An organization can gain monopolistic characteristics in a particular area or region with- ‘oat being challenged by the federal government for “tending substantially” to reduce ‘competition 2, An organization competes in a growing industry. 3, Increased economies of seale provide major competitive advantages. 4, An organization has both the capital and human talent needed to successfully manage an expanded organization, ‘5, When competitors are faltering and can be acquired ata discount. 66, When a firm desires to enter a new geographic market quickly. Intensive Strategies “Market penetration, market development, and product development are sometimes refered 10 a8 intensive strategies because they require intensive effos if a firm's competitive pesition with existing products is to improve. Intensive strategies are normally good options because they involve a firm sticking to what it does best with the ony varaton being (I) redoubling your effort (market penetration), (2) taking what it does best on the “road” (market development), or (3) improving on what it does best (product development). In contrast, forward and backward invegration and diversification strategies take firms away’ rom ther core products, services, oF competencies. Market Penetration ‘A market penetration strategy seeks to increase market share for present products or ser- viees 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 advenising expenditures, offering extensive sales promotions, ot increasing publicity efforts. For example, Verizon is spending millions of dollars on a new advertising theme named *Humanabilit” that tells stories about how Verizon’s technology products are easing taffi flow, keeping fish fresh in transit, and supporting advancements in virtual surgery and health care; this new theme replaces Verizon’s "Can You Hear Me Now?” theme. “The following five guidelines indicate when market penetration may be an especi tive strategy 1. Current markets are not saturated with a particular product or service. 2. The usage rate of present customers could be increased significantly. 33. The market shares of major competitors have been declining, whereas total industry sales have been increasing. 4. The correlation between dollar sales and dollar marketing expenditures historically has been high 5, Increased economies of sele provide major competitive advantages. ly effec Market Development “Market development involves introducing present products or services into new geographic areas, Tesla will soon manufacture (and sell) cars in China based on the Chinese government's plans to relax restrictions on automakers needing a local partner. For thousands of firms, market ‘development means adding facilities and operations globally. The Global Capsule $ reveals a key variable used to determine where we should concentrate new business, 163164 PART 2 + STRATEGY FORMULATION GLOBAL CAPSULE 5 How Can a Firm Determine Where to Initiate New Busi Domestic Product (GDP) as a Guide. pe ee SDP Perea ness? Use Gross Thousands of companies and organizations desire to grow globally, but they are not sue Country 30172018 where among the two-hundred-plus counties inthe word key batomete or examining United Stes tk how to determine where to begin or expand United Kingdom i company operations is gross domestic product Mexico: 23, 20, (GOP) of various counties. GOP is a quant: Japan 6 oe. tative measure of a nations total economic 24 16 ‘output, growth, or activity over a specified ane, 30 19 Period af time. According to a recent issue of Canada Bloomberg Businessweek, the 2018 GDP will China 6b ea bbe a bit less than 2017 for most counties, and the magical 4 per- 16 al 70 cent number is expected only in india ané China forthe sample soon ly ransfer to a new market more eas- Caveat: GPO is important, but consumption habits are more im- Aso, brand recognition can likely portant. Does the foreign market value your product? If nt, who ay when consumption habits ae similar ‘ares about GDP? Market development allows for good rstreward é compared to other strategy types if consumption habits are simlat source: Based on Peter Coy, “The World Economy Shook! Cros Nisiy im the targeted markets because the fm continues 0 focus on iis Again in 2018. (ness Someone Does Something, Dumb)” Bloomberg Core competency rather than entering businesses itknows less about. Busnesowee (November 62017 to Janvary 8, 2018)17, Millions of small businesses annually add a second, third, or fourth store, office, or restau- ‘ant in new locations; that is market development. Dollar General is adding 1,000 new stores every 12 months across the United States, primarily in poo, rural communities. There are pres- tently more than 14,000 one-siory plain yellow-and-black Dollar Generals in the United States, ‘more than Starbucks’ two-tailed green mermaid stores. “These following seven guidelines indicate when market development may be an especially effective strategy:? 1, New channels of distribution are available that are reliable, inexpensive, and of good quality 2, An organization is successful at what it does. 3. New untapped or unsaturated markets 4. An org ‘operations 5. An organization has excess production capacity. 6. An organization's basic industry is rapidly becoming global in scope. 7. Consumption habits of the firm's products are similar in other geographic areas. In resources to manage expanded Product Development Product development is a strategy that seeks increased sales by improving or modifi present product o series, Product development usally entail lage researeh-anddeteh pment (R&D) expenditures, For este Ford ecemly announced that po oe ide R&D budge ibustible engines ris hatte aly i xe Be see ill its product mix away from traditionalSEE CHAPTERS + STRATEGIES IN ACTION 165 Automobile companies use produet development extensively. Some ol truck brands are amaking a comeback as Americans buy more pickups and SUVs. For example, the follow. ing brands are being reintroduced in the respective years given: Jeep Serambler (2019), Jeep Wagoneer (2019), Chevy Blazer (2019), Ford Bronco (2020). Ford Ranger (2019), and Land Rover Defender (2019). The bulk of profits earned at Ford, GM, and Fiat Chrysler from pickups and SUVs, Product development overall is an excellent option because a firm does not stray far from ‘what it does best. The following five guidelines indicate when product development may be an especially effective strategy to pursue:! 1, An organization has successful products that are inthe maturity stage ofthe product life ceyele; the ‘idea here ‘is to attract satisfied customers to try new (improved) products as a re- sult of their positive experience with the organization's present products or services. 2. An organization competes in an industry that is characterized by rapid technological developments. 3. Major competitors offer better-quality procucts at comparable prices. 4, An organization competes in a high-growth industry. ‘5. An organization has especially strong research and development capabil Diversification Strategies ‘The two general types of diversification strategies are related diversification and unrelated diversification. Businesses are said to be related when their value chains possess competitively valuable cross-business strategic fits; businesses are said to be unrelated when theit value chains are so dissimilar that few competitively valuable eross-business relationships exit.!! Most com panies favor related diversification strategies to capitalize on synergies such as follows: ‘+ Transferring competitively valuable expertise, technol ties from one business to another * Combining related activites 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 ccapabilities'? i know-how, or other capabi I Diversification strategies are becoming less popular because organizations ae finding it more | difficult to manage diverse business activities. In the 1960s and 1970s, the trend was to diversify dependent on any single industry, but the 1980s saw a general reversal of that ,. Diversification is still on the retreat, Michael Porter, of the Harvard Business School, commented, “Management found it couldn't manage the beast.” Businesses are sil selling, clos- ing, or spinning off less profitable or “different” divisions to focus on their core businesses. For ‘example, ITT recently divided itself into three separate, specialized companies. Atone time, ITT ‘owned everything from Sheraton Hotels and Hartford Insurance to the maker of Wonder Bread and Hostess Twinkies. About the ITT breakup, analyst Barry Knap said, “Companies generally are not very efficient diversifirs; investors usually can do a better job ofthat by purchasing stock ina variety of companies.” Rapidly appearing new technologies, new products, and fast-shifting buyer preferences make diversification difficult. Another highly diversified company, General Electric, i selling off many ofits diversified parts - Diversification must do more than simply spread business risks across different industries; afterall, shareholders could accomplish this by simply purchasing equity in different firms across different industries or by investing in mutual funds. Diversification makes sense only to the ex- tent that the strategy adds more to shareholder value than what shareholders could accomplish acting individually. Any industry chosen for diversification must be atiractive enough to yield consistently high returns on investment and offer potential synergies across the operating divi- sions that are greater than those entities could achieve alone. Many strategists contend that Firms should “stick to the knitting” and not stray too far from the firms” basic areas of competence. ‘A few companies today, however, pride themselves on being conglomerates, from small firms such as Pentair Ine, and Blount Intemational to huge companies such as Testron, Berkshire fay, Allied Signal, Emerson F . Viacom, Amazon, Google, Disney, and Samsung. ee166 PART 2 » STRATEGY FORMULATION sutually exclusive. In a Unalracti not always T ecause cigarette CONSUMpLion j, + Philip Morris, Bec westors Conglom industry, di declining, product lability suits Related Diversification ‘ist Century Fox's film and TY sy, raat sare me, Wal isny occ ee nt works incling Fx Fox-owned dios in a deal worth over $52 milion, The deal rene x york like Star TV. SKY, and Hulu ‘and National Geographic, and Fox's stakes in internavio®® ne eg) flo? Fi lines reveal when related diversification May Foca acsne: ith industry. aie voc ta oe inated smpetitive prices. rere at highly £0 Sent Id be off - a ren ana eounterbalance an organization’ 1. An organization competes in 2. Adding new, but related, pro 3. New, but related, products cou 4. New, but related, products have seasonal existing peaks and valleys. 5. An organization has a strong management eam. Unrelated Diversification ‘i aanasetged aivetRenten satey favor aptalzing ona portfolio of businesses nat ar cipa- tie of delving excellent financial performance in het respective industri, HANS 0 erving fi 7 one that employ unrelated diversification to capitalize on strategic fit among the businesses. Ted Rea aaa ‘continually search across different industries for companies that can bbe acquired for a deal and yer fave potential to provide a high return on investment. Pursuing unrelated diversification et being onthe hunt to acquire companies whose assets are undervalued, companies that ave finan- cially distressed, or companies that have high-growth prospects but are short on investment capital ‘nan unrelated diversification move, [Link] is planning to enter the $412 billion phar tnaey business. Today, 9 out of 10 patients pick up their prescriptions at a retail pharmacy, but ‘Amazon is betting that home delivery of pharmaceuticals are soon to be the rule rather than the ‘exception, Partly because ofthis external threat, CVS recently acquired the huge insurance frm, ‘Aetna, nc, in an unrelated diversification move targeted to offset their reliance on the drugstore industry, which asa whole has been experiencing faltering revenues and profits. cane ein when ated versteten maybe an especially effective sraegy jollow:!* 1. Existing markets for an organization's present products are saturated. 2. An organization competes ina highly competitive or a no-growth industry, as indicated by low industry profit margins and returns. {3 An organization's present channels of distribution can be used to market new products to current customers. 4, New have countercycli asia Bey ds ntereyclical sales patterns compared to an organization's present ‘5. An organization has the capital and manageri ae aay pi iagerial talent needed to compete successfully in a Defensive Strategies In addition to integrative, imensive, and diversi so deofesragenshaecon ea aren ah ol tern that ean include vests andgudation "©" M¥AtOn. Retenchment isa bod Retrenchment Retrench reaniztion regroup les and roi. Sometines elds ten oS ined Fran organizations bask dene ; and asset reduction 10 F ‘urnaround stratexy, retrenchment is petence. During reirencl= CHAPTER S * STRATEGIES IN ACTION work with limited resources and face pressure from shareholders, employees, and the media Rewrenchme’ i off land and 35 to rise needed cash, pruning product Tines. closing marginal businesses, closing obsolete factories, automating processes, reducing the number of employees, and instituting expense control systems, i Lilly is cuting 8 percent ofits global workforce mostly centered onthe production and mat- Jating of existing drugs that are nearing patent expiration because competition from lower-priced generics is forecasted to be fierce. Ei Lilly is deploying much of the salary savings ilo R&D of new drugs. ‘The world’s largest seller of generic drugs, Teva Pharmaceutical Industries is laying off 25 pervent of its workforce, oF about 14,000 employees around the world, and closing facto- rics and research centers, and suspending its dividend to cut costs. Headquartered in Tel Aviv, Israel Teva expects its retrenchment strategy to save $3 billion in costs in 2018-2019, The action-camera company, GoPro Inc. in 2018 laid off one-fifth of its workforce and ex- ited the drone market as part of the firm’s retrenchment strategy. As smartphone cameras and videos have improved, GoPro's camera business has suffered. In some cases, declaring bankruptcy can be an effective retrenchment strategy. Bankruptcy can allow a firm to avoid major debt obligations and to void union contracts. Chapter 7 bankruptcy is a liquidation procedure used only when a corporation sees no hope of being able to operate successfully or to obtain the necessary creditor agreement All the organization's assets are sold in parts for their tangible worth. Several hundred thousand companies declare Chapter 7 bankrupicy annvally with most of the firms being small. Chapter 11 bankruptcy allows organizations to retrench, reorganize, and come back after fling a petition for protection, About 40 large U.S. retail companies declared bankruptey in both 2017 and 2018, up from 18 in 2016, Firms declaring bankruptcy in 2017 included RadioShack, Payless Shoes, The Limited, HHGregg, Rue 21, Gander Mountain, and Toys R Us. Other retail com- panies closing stores rapidly and possibly heading for bankruptey include Gymboree, Bebe, Crocs, ‘Gamestop, Sears/Kmart, J. C. Penney, Michael Kors, Staples, Macy’s, and Chico's. A key problem for retail firms is shoppers’ discount addition spurred by Amazon's prowess and also smartphone- shopping tools and apps prompting never-ending price-cutting, price matching, and price wars. The ‘dramatic shift to online purchasing has also severely curtailed the need for brick-and-mortar stores ofall kinds. Three gui follow:!8 ines reveal when retrenchment may be an especially effective strategy to pursue 1. An organization is plagued by inefficiency, low profitability, poor employee morale, and pressure from stockholders to improve performance. 2. 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 re- placed by more competent individuals). 3. An organization has grown so large so quickly that major internal reorganization is needed. Divestiture Selling a division or part of an organization is called divestiture. It is often used to raise ‘capital for further strategic acquisitions or investments. Divestiture can be part of an overall retrenchment strategy to rid an organization of businesses that are unprofitable, 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 refocus on their core businesses and become less diversified, ‘Volkswagen AG recently divested upward of 20 percent of the company’s assets that are not part of the firms core business ineluding the potential sale of Ducati, the motorcycle brand, Commonwealth Bank of Australia recently divested al of its life insurance businesses in Australia ‘nd New Zealand totaling more than $3 billion, partly in response 1 pressure from regulators in 167168 PART 2 » STRATEGY FORMULATION, segment to the Halian firm Ferrer is US, chocolate eo company the third ange the countries, Nestlé SA recently divested i ca ot Intemational SA for $2.8 billion, making the family chocolate seller in the United States. an splits into (WO OF MOFE PAS. Mog ire occurs when a corporat! ormalyuraded companies: Many IarBe COnglon, p often, divested segments become separate, is strategy is a prelude to the fir ies this strateg} rm erate firms are employing this strategy. Ss orporations ‘annually split off about $2 trillion selling the separated part(s) to a rival firm. fied firms is that the homogenous veri = worth of subsidiaries, Part ofthe reason for splitting diversi ie suing frm parts are generally much more attractive to potential buyers. own operations, rather than heteroge. desire to promote homogeneity to complement theit ero Indvares is diene, neity, and are willing to pay for homogeneity. For exa ressory store chain in an effort 9 its Hamilton Beach Brands appliances and a kitchen-access7Y 8077 goa refocus on its core coal and mining businesses. Naceo's eve cre Th annually with Hamilton Beach bringing in about $605 million omy $144 million, Similarly, Britain's GKN PLC in 2018 split into td, GKN is one of Britain’ ‘aerospace and automotive businesses. Based in Redditch, eee Ss a ‘oldest companies (250 years) and today hus about 58,000 emPIOYES. a a Sas 8 ee gay Dae AC i 208 consti 8 ei ness divisions imo three separately registred, wholly-owned subst ty. Ment TMs expect the Daimler restructuring isa prelude for Daimler divesting (spinning seg. ir ied companies: (1) Mercedes-Benz. cars and vans, (2) Daimler trucks and buses, and (3) Daimler Financial Services. Pizer Inc. and Honeywell International Inc. recently divested several of their major business units, spinning them off into separate pub- lic listed companies. : 7 Here are some guidelines for when divestiture may be an especially effective strategy to pursue: 1. An organization has pursued a retrenchment strategy and failed to accomplish needed improvements. 2. A division is responsible for an organization's overall poor performance. = 3. A division is a misfit with the rest of an organization; this can result from radically differ. ‘ent markets, customers, managers, employees, values, or needs. 4. A large amount of cash is needed quickly and cannot be obtained reasonably from other sources. 5. Government antitrust action threatens an organization. A form of dive 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 stat- egy. However, it may be better to cease operating than to continue losing large sums of money Chapter 7 bankruptcy isa liquidation procedure used only when a corporation sees no hope of being able to operate successfully or to obtain the necessary creditor agreement, All the orgai- zation’s assets are sold in parts for their tangible worth, Several hundred thousand compar declare Chapter 7 bankruptey annually with most ofthe firms being small. ‘The legendary, world famous, Ringling Bros. and jley circus Li srr tase ene ai Bley cs at ‘The final circus performances were in Providence, Rhode Island, on May T and Uniondale New York, on May 21,2017. In May 2016, the circus hid previously retised its elephant ac years after a suit by activists. ‘The animal rights group PETA says “we herald the end of whl has been the saddest show on earth for wild animals, and ask all other animal circuses to follo this is a sign of changing times.” PETA President Ingrid Newkirk says “our protests have awoken the work the plight of animal in capivity The Ringling Bros, and Barnum & ailey cireus went by the slogan: “The greatest show on earth: cere oe Bros, and Bar © town; those days are long gone. cities when Ri im & Bailey came