Chapter 5: Strategies in Action
.1. Identify and discuss five characteristics of effective long-term objectives. Explain how
these characteristics contribute to the overall success of an organization.
Answer:
Effective long-term objectives are crucial for providing direction and focus to an organization.
The PowerPoint outlines five key characteristics:
1. Quantitative: Objectives should be measurable and specific. This allows for clear
evaluation of progress and success. Without a quantitative measure, it's difficult to
determine whether an objective has been met.
o Example: Instead of "Increase sales," a quantitative objective would be "Increase
sales by 15% in the next two years."
2. Understandable: Objectives must be clear and easily understood by everyone in the
organization. Ambiguous objectives lead to confusion and inconsistent efforts.
o Example: Instead of "Improve customer satisfaction," a more understandable
objective is "Increase the customer satisfaction score from 4.2 to 4.5 out of 5
within one year, based on quarterly surveys."
3. Challenging: Objectives should be ambitious yet achievable, pushing the organization to
improve and innovate. Overly easy objectives don't motivate, while unrealistic objectives
lead to discouragement.
o Example: A company with a consistent 5% annual growth might set a
challenging objective of 8% growth, requiring them to explore new markets or
improve efficiency.
4. Compatible: Objectives must be consistent vertically (aligned with the organization's
mission and vision) and horizontally (consistent across different departments and
functions). Conflicting objectives create internal friction and inefficiency.
o Example: If the marketing department aims to increase market share through
aggressive pricing, the finance department's objective must be compatible,
allowing for reduced profit margins in the short term.
5. Obtainable: Objectives should be realistic and achievable given the organization's
resources and capabilities. Setting unattainable objectives can lead to wasted effort and
demoralization.
o Example: A small startup cannot realistically aim to capture 50% of the market in
its first year. A more obtainable objective might be to secure 5% market share in a
specific geographic region.
How these characteristics contribute to success:
Clear Direction: Provides a clear roadmap for the organization, ensuring everyone is
working towards the same goals.
Motivation: Challenging yet obtainable objectives motivate employees to strive for
excellence.
Efficient Resource Allocation: Quantitative objectives enable effective resource
allocation by prioritizing activities that directly contribute to achieving the goals.
Performance Evaluation: Measurable objectives provide a basis for evaluating
performance and making necessary adjustments.
Strategic Alignment: Compatible objectives ensure that different parts of the
organization are working together harmoniously.
2. Describe the differences between financial and strategic objectives. Provide examples of
each and explain why both types of objectives are important for organizational success.
Answer:
The PowerPoint highlights two main types of objectives: financial and strategic.
Financial Objectives: These objectives focus on improving the organization's financial
performance. They are typically short-term in nature and relate to profitability, growth,
and shareholder value.
o Examples:
Increase revenues by 10% annually.
Improve profit margins from 12% to 15% within three years.
Increase earnings per share by 8% per year.
Achieve a return on investment (ROI) of 15%.
Strategic Objectives: These objectives focus on improving the organization's
competitive position and long-term prospects. They are often qualitative and relate to
market share, customer satisfaction, and innovation.
o Examples:
Increase market share from 20% to 25% within five years.
Achieve a customer satisfaction rating of 90% or higher.
Become the industry leader in product innovation.
Expand into three new geographic markets within two years.
Reduce time-to-market for new products by 20%.
Importance of Both Types of Objectives:
Both financial and strategic objectives are essential for organizational success.
Financial objectives provide the resources needed to invest in strategic initiatives and
reward shareholders. They ensure the organization's short-term viability and
attractiveness to investors.
Strategic objectives drive long-term growth and competitive advantage. They ensure the
organization's sustainability and ability to thrive in the face of competition and changing
market conditions.
Example:
A company like Amazon needs to achieve both financial and strategic objectives. While
increasing revenue and profit margins are essential (financial objectives), it also needs to focus
on strategic objectives like expanding its cloud computing business (AWS), developing new
products (e.g., Echo devices), and enhancing customer satisfaction. Without a balance of both,
the company risks short-term gains at the expense of long-term growth or vice versa.
3. Define and provide examples of forward integration, backward integration, and
horizontal integration strategies. Discuss the guidelines for when each strategy is most
effective.
Answer:
The PowerPoint outlines three types of integration strategies:
Forward Integration: Gaining ownership or increased control over distributors or
retailers.
o Definition: A strategy where a company expands its control over the distribution
channel by acquiring or establishing its own distribution network.
o Example: A manufacturing company opening its own retail stores to sell its
products directly to consumers. Tesla is a good example, as they primarily sell
their cars directly to consumers through company-owned stores and online
channels.
o Guidelines for Effectiveness:
When present distributors are expensive or unreliable.
When the availability of quality distributors is limited.
When the organization competes in a growing industry.
When the organization has the capital and resources to manage
distribution.
When stable production is important.
When distributors have high profit margins.
Backward Integration: Seeking ownership or increased control of a firm's suppliers.
o Definition: A strategy where a company expands its control over its supply chain
by acquiring or establishing its own supply sources.
o Example: A coffee company purchasing a coffee farm to ensure a stable supply
of high-quality beans. Starbucks, as noted in the slides, has purchased coffee
farms.
o Guidelines for Effectiveness:
When present suppliers are expensive or unreliable.
When the number of suppliers is small and the number of competitors is
large.
When the organization competes in a growing industry.
When the organization has the capital and resources to manage supply
operations.
When stable prices are important.
When suppliers have high profit margins.
When the organization needs to quickly acquire a needed resource.
Horizontal Integration: Seeking ownership of or increased control over a firm's
competitors.
o Definition: A strategy where a company expands its market share by acquiring or
merging with competitors in the same industry.
o Example: A large bank acquiring a smaller regional bank to expand its
geographic footprint and customer base. AT&T's acquisition of Susquehanna
Bancshares, as mentioned in the slides, is a good example.
o Guidelines for Effectiveness:
When an organization can gain monopolistic characteristics without
government challenge.
When the organization competes in a growing industry.
When increased economies of scale provide major competitive
advantages.
When the organization has the capital and talent needed.
When competitors are faltering due to a lack of expertise.
4. Define and provide examples of market penetration, market development, and product
development strategies. Discuss the guidelines for when each strategy is most effective.
Answer:
The PowerPoint outlines three types of intensive strategies:
Market Penetration: Seeking increased market share for present products or services in
present markets through greater marketing efforts.
o Definition: A strategy focused on increasing sales of existing products in existing
markets.
o Example: A soft drink company increasing its advertising spend in its current
markets to attract more customers. The Under Armour example in the slides
(signing Andy Murray) is a good illustration.
o Guidelines for Effectiveness:
When current markets are not saturated.
When the usage rate of present customers could be increased.
When competitors' market shares are declining while industry sales are
increasing.
When there is a high correlation between marketing expenditures and
sales.
When increased economies of scale provide advantages.
Market Development: Involves introducing present products or services into new
geographic areas.
o Definition: A strategy focused on expanding into new geographic markets with
existing products.
o Example: A restaurant chain opening new locations in different cities or
countries. Gap opening stores in China, as noted in the slides, exemplifies this.
o Guidelines for Effectiveness:
When new distribution channels are available.
When the organization is very successful.
When new, untapped markets exist.
When the organization has the resources to manage expansion.
When the organization has excess production capacity.
When the industry is rapidly becoming global.
Product Development: Seeks increased sales by improving or modifying present
products or services.
o Definition: A strategy focused on creating new products or improving existing
products to attract more customers.
o Example: A technology company launching a new version of its software with
enhanced features. Amazon offering its own line of baby diapers and wipes, as
shown in the slides, is an example.
o Guidelines for Effectiveness:
When the organization has successful products in the maturity stage of
their life cycle.
When the industry is characterized by rapid technological developments.
When competitors offer better-quality products at comparable prices.
When the organization competes in a high-growth industry.
When the organization has strong R&D capabilities.
5. Differentiate between related diversification and unrelated diversification strategies.
Provide guidelines for when each strategy is most appropriate, and discuss the potential
synergies of related diversification.
Answer:
Related Diversification: Adding new but related products or services to an
organization's existing portfolio.
o Definition: A strategy focused on expanding into businesses that are similar to
the existing business in terms of technology, markets, or resources.
o Example: A computer manufacturer expanding into the smartphone market
(similar technology and customer base). Facebook's acquisition of WhatsApp, as
listed in the slides, is a prime example, adding a related service to their social
media platform.
o Guidelines for Effectiveness:
When the organization competes in a no-growth or slow-growth industry.
When adding new, related products would enhance sales of current
products.
When new, related products could be offered at competitive prices.
When new products have seasonal sales that counterbalance existing peaks
and valleys.
When current products are in the declining stage of their life cycle.
When the organization has a strong management team.
o Potential Synergies:
Transferring expertise and know-how between businesses.
Combining related activities to lower costs.
Exploiting a common brand name across different businesses.
Using cross-business collaboration to create strengths.
Unrelated Diversification: Adding new, unrelated products or services to an
organization's existing portfolio.
o Definition: A strategy focused on expanding into businesses that are unrelated to
the existing business.
o Example: A manufacturing company acquiring a financial services firm. Kroger
and Whole Foods Market becoming restaurants, as listed in the slides, is a good
example.
o Guidelines for Effectiveness:
When revenues would increase significantly by adding the new, unrelated
products.
When the organization competes in a highly competitive or no-growth
industry.
When the organization's present distribution channels can be used to
market the new products.
When the organization has the capital and managerial talent needed.
When the existing business is declining in sales.
6. Define and provide examples of retrenchment, divestiture, and liquidation strategies.
Discuss the guidelines for when each strategy is most effective.
Answer:
Retrenchment: Regrouping through cost and asset reduction to reverse declining sales
and profit.
o Definition: A strategy focused on cutting costs and reducing assets to improve
financial performance during a downturn.
o Example: A company closing unprofitable stores, laying off employees, and
selling off non-core assets. Staples closing stores and downsizing, as noted in the
slides, is a good example.
o Guidelines for Effectiveness:
When the organization has failed to meet its objectives consistently.
When the organization is facing significant financial difficulties.
When the organization needs to refocus its efforts on core competencies.
When the organization is under pressure from stakeholders to improve
performance.
Divestiture: Selling a division or part of an organization.
o Definition: A strategy focused on selling off a business unit or subsidiary to raise
capital or improve focus.
o Example: A conglomerate selling its entertainment division to focus on its core
industrial business. Sears divesting its Lands' End division, as mentioned in the
slides, illustrates this strategy.
o Guidelines for Effectiveness:
When a division is consistently underperforming.
When a division does not fit with the organization's overall strategy.
When the organization needs to raise capital to fund other investments.
When a division is more valuable to another company.
Liquidation: Selling all of a company’s assets, in parts, for their tangible worth.
o Definition: A strategy focused on selling off all of a company's assets and ceasing
operations.
o Example: A failing retail chain closing all of its stores and selling off its
inventory and real estate. The example provided, The Trump Taj Mahal,
demonstrates this strategy in action.
o Guidelines for Effectiveness:
When the organization has failed to achieve its objectives despite repeated
attempts.
When the organization has no viable alternatives.
When the organization's assets are worth more when sold separately than
as a going concern.
