STRATEGIC MANAGEMENT

– art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to
achieve its objectives. As this definition implies, strategic management focuses on integrating management, marketing,
finance/accounting, production/operations, research and development, and information systems to achieve organizational
success. The purpose of strategic management is to exploit and create new and different opportunities for tomorrow; long-
range planning, in contrast, tries to optimize for tomorrow the trends of today.

STAGES OF STRATEGIC MANAGEMENT

Strategy formulation
includes developing a vision and mission, identifying an organization’s external opportunities and threats, determining
internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies, and choosing
particular strategies to pursue. Strategy-formulation issues include deciding what new businesses to enter, what businesses
to abandon, how to allocate resources, whether to expand operations or diversify, whether to enter international markets,
whether to merge or form a joint venture, and how to avoid a hostile takeover.

Strategy implementation
requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that
formulated strategies can be executed. Strategy implementation includes developing a strategy-supportive culture,
creating an effective organizational structure, redirecting marketing efforts, preparing budgets, developing and utilizing
information systems, and linking employee compensation to organizational performance. Strategy implementation often is
called the “action stage” of strategic management. Often considered to be the most difficult stage in strategic
management, strategy implementation requires personal discipline, commitment, and sacrifice.

Strategy evaluation
is the final stage in strategic management. Managers desperately need to know when particular strategies are not working
well; strategy evaluation is the primary means for obtaining this information. All strategies are subject to future
modification because external and internal factors are constantly changing. Three fundamental strategy-evaluation
activities are (1) reviewing external and internal factors that are the bases for current strategies, (2) measuring
performance, and (3) taking corrective actions.

BENEFITS OF STRATGEIC MANAGEMENT

FINANCIAL:
Businesses using strategic-management concepts show significant improvement in sales, profitability, and productivity
compared to firms without systematic planning activities.

NON-FINANCIAL:
1. It allows for identification, prioritization, and exploitation of opportunities.
2. It provides an objective view of management problems.\
3. It represents a framework for improved coordination and control of activities.
4. It minimizes the effects of adverse conditions and changes.
5. It allows major decisions to better support established objectives.
6. It allows more effective allocation of time and resources to identified opportunities.
7. It allows fewer resources and less time to be devoted to correcting erroneous or ad hoc decisions.
8. It creates a framework for internal communication among personnel.
9. It helps integrate the behavior of individuals into a total effort.
10. It provides a basis for clarifying individual responsibilities.
11. It encourages forward thinking.
12. It provides a cooperative, integrated, and enthusiastic approach to tackling problems and opportunities.
13. It encourages a favorable attitude toward change.
14. It gives a degree of discipline and formality to the management of a business.

WHY SOME FIRMS DO NO STRATEGIC PLANNING

Lack of knowledge or experience in strategic planning—No training in strategic planning.
Poor reward structures—when an organization assumes success, it often fails to reward success. When failure occurs, then
the firm may punish.
Firefighting— an organization can be so deeply embroiled in resolving crises and that it reserves no time for planning.
Waste of time— some firms see planning as a waste of time because no marketable product is produced. Time spent on
planning is an investment.
Too expensive— some organizations see planning as too expensive in time and money.
Laziness—People may not want to put forth the effort needed to formulate a plan.
Content with success— particularly if a firm is successful, individuals may feel there is no need to plan because things are
fine as they stand. But success today does not guarantee success tomorrow.
Fear of failure— by not taking action, there is little risk of failure unless a problem is urgent and pressing. Whenever
something worthwhile is attempted, there is some risk of failure.
Overconfidence— as managers amass experience, they may rely less on formalized planning.
Prior bad experience—People may have had a previous bad experience with planning, that is, cases in which plans have
been long, cumbersome, impractical, or inflexible.
Self-interest— when someone has achieved status, privilege, or self-esteem through effectively using an old system, he or
she often sees a new plan as a threat.
Honest difference of opinion—People may sincerely believe the plan is wrong. They may view the situation from a
different viewpoint, or they may have aspirations for themselves or the organization that are different from the plan.
 STRATEGY FORMULATION
DEVELOPING VISION AND MISSION

Vision statement answers the

question “What do we want to
Vision Mission become?” Developing a vision
statement is often considered the
first step in strategic planning,
Purpose
preceding even development of a
mission statement. Many vision
Tells what an organization aims to achieve. States what a company is statements are a single sentence.
currently doing.

Answers the question

What do we want to become? What do we do?
Includes
 Objectives  Customers
 Values  Products/Services
 Markets
 Technology
 Concern for survival
 Philosophy
 Self-Concept
 Concern for public image
 Concern for employees
Future or present time?
Talks about the future Talks about the present
To whom it is developed?
Mission statements are “enduring
statements of purpose that
distinguish one business from
other similar firms. A mission
statement identifies the scope of
a firm’s operations in product
and market terms.” It addresses
the basic question that faces all
strategists: “What is our
business?” A clear mission
statement describes the values
and priorities of an organization.
A mission statement broadly
charts the future direction of an
organization. A mission
statement is a constant reminder
to its employees of why the
organization exists.

Employees of the company Employees, customers,

suppliers, distributors,
partners and communities

IMPORTANCE OF VISION AND MISSION

1. To ensure unanimity of purpose within the organization

2. To provide a basis, or standard, for allocating organizational resources
3. To establish a general tone or organizational climate
4. To serve as a focal point for individuals to identify with the organization’s purpose and direction, and to deter those
who cannot from participating further in the organization’s activities
5. To facilitate the translation of objectives into a work structure involving the assignment of tasks to responsible elements
within the organization
6. To specify organizational purposes and then to translate these purposes into objectives in such a way that cost, time,
and performance parameters can be assessed and controlled.
PERFORM EXTERNAL AND INTERNAL AUDIT

External opportunities and external threats refer to economic, social, cultural, demographic, environmental, political,
legal, governmental, technological, and competitive trends and events that could significantly benefit or harm an
organization in the future. Opportunities and threats are largely beyond the control of a single organization—thus the
word external.

Internal strengths and internal weaknesses are an organization’s controllable activities that are performed especially well
or poorly. They arise in the management, marketing, finance/accounting, production/operations, research and
development, and management information systems activities of a business.

PORTER’S FIVE FORCES MODEL

Threat of new entrants. This force determines how easy (or not) it is to enter a particular industry. If an industry is
profitable and there are few barriers to enter, rivalry soon intensifies. When more organizations compete for the same
market share, profits start to fall. It is essential for existing organizations to create high barriers to enter to deter new
entrants. Threat of new entrants is high when:

 Low amount of capital is required to enter a market;

 Existing companies can do little to retaliate;
 Existing firms do not possess patents, trademarks or do not have established brand reputation;
 There is no government regulation;
 Customer switching costs are low (it doesn’t cost a lot of money for a firm to switch to other industries);
 There is low customer loyalty;
 Products are nearly identical;
 Economies of scale can be easily achieved.
 Bargaining power of suppliers. Strong bargaining power allows suppliers to sell higher priced or low quality raw
materials to their buyers. This directly affects the buying firms’ profits because it has to pay more for materials. Suppliers
have strong bargaining power when:

 There are few suppliers but many buyers;

 Suppliers are large and threaten to forward integrate;
 Few substitute raw materials exist;
 Suppliers hold scarce resources;
 Cost of switching raw materials is especially high.

Bargaining power of buyers. Buyers have the power to demand lower price or higher product quality from industry
producers when their bargaining power is strong. Lower price means lower revenues for the producer, while higher
quality products usually raise production costs. Both scenarios result in lower profits for producers. Buyers exert strong
bargaining power when:

 Buying in large quantities or control many access points to the final customer;
 Only few buyers exist;
 Switching costs to other supplier are low;
 They threaten to backward integrate;
 There are many substitutes;
 Buyers are price sensitive.

Threat of substitutes. This force is especially threatening when buyers can easily find substitute products with attractive
prices or better quality and when buyers can switch from one product or service to another with little cost. For example, to
switch from coffee to tea doesn’t cost anything, unlike switching from car to bicycle.

Rivalry among existing competitors. This force is the major determinant on how competitive and profitable an industry
is. In competitive industry, firms have to compete aggressively for a market share, which results in low profits. Rivalry
among competitors is intense when:

 There are many competitors;

 Exit barriers are high;
 Industry of growth is slow or negative;
 Products are not differentiated and can be easily substituted;
 Competitors are of equal size;
 Low customer loyalty.

EXAMPLE:

Porter's Five Forces Evaluation

Threat of new entry (very weak)

 Large amount of capital required

 High retaliation possible from existing companies, if new entrants would bring innovative products and
ideas to the industry
 Few legal barriers protect existing companies from new entrants
 All automotive companies have established brand image and reputation
 Products are mainly differentiated by design and engineering quality
 New entrant could easily access suppliers and distributors
 A firm has to produce at least 5 million (by some estimations) vehicles to be cost competitive, therefore it is
very hard to achieve economies of scale
 Governments often protect their home markets by introducing high import taxes

Supplier power (weak)

 Large number of suppliers
 Some suppliers are large but the most of them are pretty small
 Companies use another type of material (use one metal instead of another) but only to some extent (plastic
instead of metal)
 Materials widely accessible
 Suppliers do not pose any threat of forward integration

Buyer power (strong)

 There are many buyers
 Most of the buyers are individuals that buy one car, but corporates or governments usually buy large fleets
and can bargain for lower prices
 It doesn’t cost much for buyers to switch to another brand of vehicle or to start using other type of
transportation
 Buyers can easily choose alternative car brand
 Buyers are price sensitive and their decision is often based on how much does a vehicle cost
 Buyers do not threaten backward integration

Threat of substitutes (weak)

 There are many alternative types of transportation, such as bicycles, motorcycles, trains, buses or planes
 Substitutes can rarely offer the same convenience
 Alternative types of transportation almost always cost less and sometimes are more environment friendly

Competitive rivalry (very strong)

 Moderate number of competitors
 If a firm would decide to leave an industry it would incur huge losses, so most of the time it either
bankrupts or stays in automotive industry for the lifetime
 Industry is very large but matured
 Size of competing firm’s vary but they usually compete for different consumer segments
 Customers are loyal to their brands
 There is moderate threat of being acquired by a competitor
INDUSTRY ANALYSIS: THE EXTERNAL FACTOR EVALUATION
(EFE) MATRIX

An External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluate economic, social, cultural,
demographic, environmental, political, governmental, legal, technological, and competitive information.
1. List key external factors as identified in the external-audit process. Include a total of 15 to 20 factors,
including both opportunities and threats, that affect the firm and its industry. List the opportunities first
and then the threats. Be as specific as possible, using percentages, ratios, and comparative numbers
whenever possible.
2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important). The weight
indicates the relative importance of that factor to being successful in the firm’s industry. Opportunities
often receive higher weights than threats, but threats can receive high weights if they are especially severe
or threatening. The sum of all weights assigned to the factors must equal 1.0.
3. Assign a rating between 1 and 4 to each key external factor to indicate how effectively the firm’s current
strategies respond to the factor, where 4 is the highest and 1 is the lowest. Ratings are based on
effectiveness of the firm’s strategies. It is important to note that both threats and opportunities can receive
a 1, 2, 3, or 4.
4. Multiply each factor’s weight by its rating to determine a weighted score.
5. Sum the weighted scores for each variable to determine the total weighted score for the organization.

Regardless of the number of key opportunities and threats included in an EFE Matrix, the highest possible
total weighted score for an organization is 4.0 and the lowest possible total weighted score is 1.0. The
average total weighted score is 2.5. A total weighted score higher than 2.5 indicates that an organization is
responding in an outstanding way to existing opportunities and threats in its industry. In other words, the
firm’s strategies effectively take advantage of existing opportunities and minimize the potential adverse
effects of external threats. A total score lower than 2.5 indicates that the firm’s strategies are not capitalizing
on opportunities or avoiding external threats.
THE INTERNAL FACTOR EVALUATION (IFE) MATRIX

This strategy-formulation tool summarizes and evaluates the major strengths and weaknesses in the functional areas of A
business, and it also provides a basis for identifying and evaluating relationships among those areas.

1. List key internal factors as identified in the internal-audit process. Use a total of from 10 to 20 internal
factors, including both strengths and weaknesses. List strengths first and then weaknesses. Be as specific
as possible, using percentages, ratios, and comparative numbers.
2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to each factor. The weight
assigned to a given factor indicates the relative importance of the factor to being successful in the firm’s
industry. Regardless of whether a key factor is an internal strength or weakness, factors considered to
have the greatest effect on organizational performance should be assigned the highest weights. The sum
of all weights must equal 1.0.
3. Assign a 1-to-4 rating to each factor to indicate whether that factor represents a major weakness (rating =
1), a minor weakness (rating = 2), a minor strength (rating = 3), or a major strength (rating = 4). Note that
strengths must receive a 3 or 4 rating and weaknesses must receive a 1 or 2 rating.
4. Multiply each factor’s weight by its rating to determine a weighted score for each variable.
5. Sum the weighted scores for each variable to determine the total weighted score for the organization.

Regardless of how many factors are included in an IFE Matrix, the total weighted score can range from a low
of 1.0 to a high of 4.0, with the average score being 2.5. Total weighted scores well below 2.5 characterize
organizations that are weak internally, whereas scores significantly above 2.5 indicate a strong internal position. Like
the EFE Matrix, an IFE Matrix should include from 10 to 20 key factors. The number of factors has no effect upon the
range of total weighted scores because the weights always sum to 1.0.

Both matrices have the following benefits:

 Easy to understand. The input factors have a clear meaning to everyone inside or outside the company. There’s no
confusion over the terms used or the implications of the matrices.
 Easy to use. The matrices do not require extensive expertise, many personnel or lots of time to build.
 Focuses on the key internal and external factors. Unlike some other analyses (e.g. value chain analysis, which
identifies all the activities in the company’s value chain, despite their importance), the IFE and EFE only
highlight the key factors that are affecting a company or its strategy.
 Multi-purpose. The tools can be used to build SWOT analysis, IE matrix, GE-McKinsey matrix or for
benchmarking
THE COMPETITIVE PROFILE MATRIX (CPM)

The Competitive Profile Matrix (CPM) identifies a firm’s major competitors and its particular strengths and weaknesses in
relation to a sample firm’s strategic position. The weights and total weighted scores in both a CPM and an EFE have the
same meaning. However, critical success factors in a CPM include both internal and external issues; therefore, the ratings
refer to strengths and weaknesses, where 4 = major strength, 3 = minor strength, 2 = minor weakness, and 1 = major
weakness. The critical success factors in a CPM are not grouped into opportunities and threats as they are in an EFE. In a
CPM, the ratings and total weighted scores for rival firms can be compared to the sample firm. This comparative analysis
provides important internal strategic information.
Benefits of the CPM:

 The same factors are used to compare the firms. This makes the comparison more accurate.
 The analysis displays the information on a matrix, which makes it easy to compare the companies visually.
 The results of the matrix facilitate decision-making. Companies can easily decide which areas they should
strengthen, protect or what strategies they should pursue.

Critical Success Factors

Critical success factors (CSF) are the key areas, which must be performed at the highest possible level of excellence if
organizations want succeed in the particular industry. They vary between different industries or even strategic groups and
include both internal and external factors.

Market Share Union relations Power over suppliers

Product Quality Skilled workforce Access to key suppliers

Clear strategic direction Location of facilities Efficient supply chain

Customer service Production capacity Supply chain integration

Customer loyalty Added product features On time delivery

Brand reputation Price competitiveness Strong online presence

Effective social media

Customer satisfaction Low cost structure
management

Experience and skills

Financial position Variety of products
in e-commerce

Management qualification
Cash reserves Complementary products
and experience

Innovation in products and

Profit margin Level of product integration
services

Inventory turnover Successful product promotions Innovative culture

Employee retention Superior marketing capabilities Efficient production

Income per employee Superior advertising capabilities Lean production system

Innovations per employee Superior IT capabilities Strong supplier network

Cost per employee Size of advertising budget Strong distribution network

R&D spending Effectiveness of sales distribution Product design

Strong patent portfolio Employee satisfaction Level of vertical integration

Effective corporate social

New patents per year Effective planning and budgeting
responsibility programs

Revenue per new product Variety of distribution channels Sales per outlet

Successful new introductions Power over distributors Parent company support

SWOT ANALYSIS

is a framework that allows managers to synthesize insights obtained from an internal analysis of the company’s strengths
and weaknesses with those from an analysis of external opportunities and threats

Strengths: factors that give an edge for the company over its competitors.
Weaknesses: factors that can be harmful if used against the firm by its competitors.
Opportunities: favorable situations which can bring a competitive advantage.
Threats: unfavorable situations which can negatively affect the business.

BENEFITS:

 Simple to do and practical to use;

 Clear to understand;
 Focuses on the key internal and external factors affecting the company;
 Helps to identify future goals;
 Initiates further analysis.
EXAMPLE
Strengths
1. Second most valuable brand in the world
valued at $76 billion
2. Diversified income (5 different brands
earning more than $4 billion each)
3. Strong patents portfolio (15,000 patents)
4. Investments in R&D reaching 4 billion a
year.
5. Competent in mergers & acquisitions
6. Have an access to cheap cash reserves
7. Effective corporate social responsibility
(CSR) projects
8. Localized products
9. Highly skilled workforce
10. Economies of scale or economies of scope
Opportunities
1. Market growth for the main firm's product
2. Growing demand for renewable energy
3. New technology, that would drive
production costs by 20% is in development
4. Our country accession to EU
5. Changing customer habits
6. Disposable income level will increase
7. Government's incentives for 'specific'
industry
8. Economy is expected to grow by 4% next
year
9. Growing number of people buying online
10. Interest rates falling to 1%
Weaknesses
1. Investments in R&D are below the industry
average
2. Very low or zero profit margins
3. Poor customer services
4. High employee turnover
5. High cost structure
6. Weak brand portfolio
7. Rigid (bureaucratic) organizational culture
impeding fast introduction of new products
8. High debt level ($3 billion)
9. Brand dilution (the firm has too many
brands)
10. Poor presence in the world's largest markets
Threats
1. Corporate tax may increase from 20% to
22% in 2013
2. Rising pay levels
3. Rising raw material prices
4. Intense competition
5. Market is expected to grow by only 1%
next year indicating market saturation
6. Increasing fuel prices
7. Aging population
8. Stricter laws regulating environment
pollution
9. Lawsuits against the company
10. Currency fluctuations
ESTABLISHMENT OF LONG-TERM OBJECTIVES

Long-term objectives represent the results expected from pursuing certain strategies.

The Desired Characteristics of Objectives

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

The 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

STRATEGIES

INTEGRATION

Forward Integration

Forward integration involves gaining ownership or increased control over distributors or retailers. Increasing
numbers of manufacturers (suppliers) today are pursuing a forward integration strategy by establishing Web sites
to directly sell products to consumers.

These six guidelines indicate when forward integration may be an especially effective strategy:
• When an organization’s present distributors are especially expensive, or unreliable, or incapable of
meeting the firm’s distribution needs.
• When the availability of quality distributors is so limited as to offer a competitive advantage to those
firms that integrate forward.
• When an organization competes in an industry that is growing and is expected to continue to grow
markedly; this is a factor because forward integration reduces an organization’s ability to diversify if its
basic industry falters.
• When an organization has both the capital and human resources needed to manage the new business of
distributing its own products.
• When the advantages of stable production are particularly high; this is a consideration because an
organization can increase the predictability of the demand for its output through forward integration.
• When present distributors or retailers have high profit margins; this situation suggests that a company
profitably could distribute its own products and price them more competitively by integrating forward.
 Backward Integration

Both manufacturers and retailers purchase needed materials from suppliers. Backward integration is a strategy of
seeking ownership or increased control of a firm’s suppliers.

Seven guidelines for when backward integration may be an especially effective strategy are:
• When an organization’s present suppliers are especially expensive, or unreliable, or incapable of
meeting the firm’s needs for parts, components, assemblies, or raw materials.
• When the number of suppliers is small and the number of competitors is large.
• When an organization competes in an industry that is growing rapidly; this is a factor because
integrative-type strategies (forward, backward, and horizontal) reduce an organization’s ability to
diversify in a declining industry.
• When an organization has both capital and human resources to manage the new business of supplying its
own raw materials.
• When the advantages of stable prices are particularly important; this is a factor because an organization
can stabilize the cost of its raw materials and the associated price of its product(s) through backward
integration.
• When present supplies have high profit margins, which suggests that the business of supplying products
or services in the given industry is a worthwhile venture.
• When an organization needs to quickly acquire a needed resource.

Horizontal Integration

Horizontal integration refers to a strategy of seeking ownership of or increased control over a firm’s competitors.

These five guidelines indicate when horizontal integration may be an especially effective strategy
• When an organization can gain monopolistic characteristics in a particular area or region without being
challenged by the federal government for “tending substantially” to reduce competition.
• When an organization competes in a growing industry.
• When increased economies of scale provide major competitive advantages.
• When an organization has both the capital and human talent needed to successfully manage an expanded
organization.
• When competitors are faltering due to a lack of managerial expertise or a need for particular resources
that an organization possesses; note that horizontal integration would not be appropriate if competitors are
doing poorly, because in that case overall industry sales are declining.

INTENSIVE

Market Penetration

A market penetration strategy seeks to increase market share for present products or services in present markets
through greater marketing efforts.
These five guidelines indicate when market penetration may be an especially effective strategy:
• When current markets are not saturated with a particular product or service.
• When the usage rate of present customers could be increased significantly.
• When the market shares of major competitors have been declining while total industry sales have been
increasing.
• When the correlation between dollar sales and dollar marketing expenditures historically has been high.
• When increased economies of scale provide major competitive advantages.
 Market Development

Market development involves introducing present products or services into new geographic areas.

These six guidelines indicate when market development may be an especially effective strategy:
• When new channels of distribution are available that are reliable, inexpensive, and of good quality.
• When an organization is very successful at what it does.
• When new untapped or unsaturated markets exist.
• When an organization has the needed capital and human resources to manage expanded operations.
• When an organization has excess production capacity.
• When an organization’s basic industry is rapidly becoming global in scope.

Product Development

Product development is a strategy that seeks increased sales by improving or modifying present products or
services. Product development usually entails large research and development expenditures.

These five guidelines indicate when product development may be an especially effective strategy to pursue:
• When an organization has successful products that are in the maturity stage of the product life cycle; the idea
here is to attract satisfied customers to try new (improved) products as a result of their positive experience with
the organization’s present products or services.
• When an organization competes in an industry that is characterized by rapid technological developments.
• When major competitors offer better-quality products at comparable prices.
• When an organization competes in a high-growth industry.
• When an organization has especially strong research and development capabilities.

DIVERSIFICATION

Related Diversification

Businesses are said to be related when their value chains possess competitively valuable cross-business strategic
fits

Six guidelines for when related diversification may be an effective strategy are as follows.
• When an organization competes in a no-growth or a slow-growth industry.
• When adding new, but related, products would significantly enhance the sales of current products.
• When new, but related, products could be offered at highly competitive prices.
• When new, but related, products have seasonal sales levels that counterbalance an organization’s existing peaks
and valleys.
• When an organization’s products are currently in the declining stage of the product’s life cycle.
• When an organization has a strong management team.

Unrelated Diversification

An unrelated diversification strategy favors capitalizing on a portfolio of businesses that are capable of delivering
excellent financial performance in their respective industries, rather than striving to capitalize on value chain
strategic fits among the businesses. Firms that employ unrelated diversification continually search across different
industries for companies that can be acquired for a deal and yet have potential to provide a high return on
investment
 Ten guidelines for when unrelated diversification may be an especially effective strategy are:
• When revenues derived from an organization’s current products or services would increase significantly by
adding the new, unrelated products.
• When an organization competes in a highly competitive and/or a no-growth industry, as indicated by low
industry profit margins and returns.
• When an organization’s present channels of distribution can be used to market the new products to current
customers.
• When the new products have countercyclical sales patterns compared to an organization’s present products.
• When an organization’s basic industry is experiencing declining annual sales and profits.
• When an organization has the capital and managerial talent needed to compete successfully in a new industry.
• When an organization has the opportunity to purchase an unrelated business that is an attractive investment
opportunity.
• When there exists financial synergy between the acquired and acquiring firm. (Note that a key difference
between related and unrelated diversification is that the former should be based on some commonality in markets,
products, or technology, whereas the latter should be based more on profit considerations.)
• When existing markets for an organization’s present products are saturated.
• When antitrust action could be charged against an organization that historically has concentrated on a single
industry.

DEFENSIVE

Retrenchment

Retrenchment occurs when an organization regroups through cost and asset reduction to reverse declining sales
and profits. Sometimes called a turnaround or reorganizational strategy, retrenchment is designed to fortify an
organization’s basic distinctive competence.

Five guidelines for when retrenchment may be an especially effective strategy to

pursue are as follows:
• When an organization has a clearly distinctive competence but has failed consistently to meet its objectives and
goals over time.
• When an organization is one of the weaker competitors in a given industry.
• When an organization is plagued by inefficiency, low profitability, poor employee morale, and pressure from
stockholders to improve performance.
• When 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
• When 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. Divestiture often is used to

raise capital for further strategic acquisitions or investments.

Six guidelines for when divestiture may be an especially effective strategy to pursue
follow:
• When an organization has pursued a retrenchment strategy and failed to accomplish needed improvements.
• When a division needs more resources to be competitive than the company can provide.
• When a division is responsible for an organization’s overall poor performance.
• When a division is a misfit with the rest of an organization; this can result from radically different markets,
customers, managers, employees, values, or needs.
• When a large amount of cash is needed quickly and cannot be obtained reasonably from other sources.
• When government antitrust action threatens an organization.

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 strategy. However, it may
be better to cease operating than to continue losing large sums of money.

These three guidelines indicate when liquidation may be an especially effective

strategy to pursue:
• When an organization has pursued both a retrenchment strategy and a divestitures strategy, and neither has been
successful.
• When an organization’s only alternative is bankruptcy. Liquidation represents an orderly and planned means of
obtaining the greatest possible cash for an organization’s assets. A company can legally declare bankruptcy first
and then liquidate various divisions to raise needed capital.
• When the stockholders of a firm can minimize their losses by selling the organization’s assets.