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Copyright 2009 Pearson Education, Inc.Publishing as Prentice Hall
Ch 5 -1
Chapter 5
Strategies in Action
Strategic Management:
Concepts & Cases
12thEdition
Fred David
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Ch 5 -2
Long-Term !"ectives
!"ectives
Quantifiable
Measurable
Realistic
Understandable
Challenging
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Ch 5 -3
Long-Term !"ectives
!"ectives #
HierarchicalObtainable
Congruent/go well together
Timeline
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Ch 5 -4
Objectives
Objectives are commonly stated in terms
such as growth in assets growth in sales
!rofitability mar"et share degree and nature
of diversification and so on#
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Ch 5 -5
$ar%ing er'ormance Meas(res
!% rgani)ationa* Leve*
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Ch 5 -6
Financia* vs+ Strategic
!"ectives
Financia* !"ectives
$rowth in revenues
$rowth in earnings
Higher dividends
Higher !rofit margins
Higher earnings !er share
%m!roved cash flow
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Ch 5 -7
Strategic objectives
such as&
'# larger mar"et share
(# )uic"er on*time delivery than rivals
+# )uic"er design*to*mar"et times than rivals
,# lower costs than rivals
-# higher !roduct )uality than rivals
.# wider geogra!hic coverage than rivals etc# +# There is fre)uently a tradeoff/echange
between financial and strategic objectives#
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Ch 5 -8
,ot Managing !% !"ective
0trategists should avoid the following alternative
ways of 1not managing by objectives#2
Managing by 3tra!olation 4 1%f it ain5t bro"e 6if you
don not have !roblem7 don5t fi it#2Managing by Crisis 4 The true measure of a good
strategist is the ability to fi !roblems
Managing by 0ubjectives 4 Do your on thing, the
best ay you !no ho."
Managing by Ho!e 4 The future is full of uncertainty
and if first you don5t succeed then you #ayon the
second or third try#
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Ch 5 -9
The a*anced Scorecard
.o!ert /ap*an & David ,orton #
The balanced scorecard is a strategy
evaluation and control techni)ue that
derives its name from the !erceived need
of firms to 1balance2 financial measures
which are oftentimes used eclusively in
strategy evaluation and control with non*
financial measures such as !roduct )ualityand customer service#
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Ch 5 -10
The Balanced Scorecard
8 balanced scorecard for a firm is sim!ly a
listing of all "ey objectives to wor" towards
along with an associated time dimension of
when each objective is to be accom!lishedas well as a !rimary res!onsibility or contact
!erson de!artment or division for each
objective#
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Ch 5 -11
BSC performance evaluationdepends on four consequential
stages '* 0!ecifying institutional objectives# (* Translating the institutional objectives to
analytical !erformance !lans#
+* 0!ecifying the res!onsibility centers#
,* 9evelo!ing the !erformance measurement
indicators which include& indicators of
effectiveness efficiency !roductivity and)uality
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Ch 5 -12
BSC analysis method constitutesfour perspectives as follows :inancial ;ers!ective# This is related to meet
the e!ectations of the shareholders#
Customer ;ers!ective# This is related to
achieve customer satisfaction#
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Ch 5 -13
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Ch 5 -14
T%pes o' Strategies
perationa* Leve*
F(nctiona* Leve*
Division Leve*
CorpLeve*A Large Compan%
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Ch 5 -15
T%pes o' Strategies
F(nctiona*
Leve*
perationa* Leve*
compan%A sma** Compan%
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Ch 5 -16
Strategies in ActionStrategies in Action
Vertical Integration StrategiesVertical Integration Strategies
Forward integration Backward integration
Horizontal integration
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Ch 5 -17
Strategies in ActionStrategies in Action
DefnedDefned
Gainingownership or
increasedcontrol overdistributors orretailers
!a"ple!a"ple
General #otors isac$uiring %&' o(its dealers)
ForwardForward
IntegrationIntegration
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Ch 5 -18
Strategies in Action
$uidelines for :orward %ntegration$uidelines for :orward %ntegration
;resent distributors are e!ensive unreliable or
inca!able of meeting firm5s needs
8vailability of )uality distributors is limited
=hen firm com!etes in an industry that is e!ected to
grow mar"edly
8dvantages of stable !roduction are high
;resent distributor have high !rofit margins
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Ch 5 -19
Strategies in ActionStrategies in Action
DefnedDefned
Seekingownership or
increasedcontrol o( afr"*ssuppliers
!a"ple!a"ple
#otel + ac$uired a(urniture"anu(acturer)
BackwardBackwardIntegrationIntegration
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Ch 5 -20
Strategies in Action
$uidelines for >ac"ward %ntegration$uidelines for >ac"ward %ntegration
=hen !resent su!!liers are e!ensive unreliable or
inca!able of meeting needs
?umber of su!!liers is small and number of com!etitorslarge
High growth in industry sector
:irm has both ca!ital and human resources to manage
new business8dvantages of stable !rices are im!ortant
;resent su!!lies have high !rofit margins
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Ch 5 -21
Strategies in ActionStrategies in Action
DefnedDefned
Seeking
ownership orincreasedcontrol overco"petitors
!a"ple!a"ple
Hilton recentl,ac$uired -ro"us)
HorizontalHorizontalIntegrationIntegration
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Ch 5 -22
Strategies in Action
$uidelines for Hori@ontal %ntegration$uidelines for Hori@ontal %ntegration
:irm can gain mono!olistic characteristics without being
challenged by federal government
Com!etes in growing industry
%ncreased economies of scale !rovide major com!etitive
advantages
:altering/losing due to lac" of managerial e!ertise or
need for !articular resources
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Ch 5 -23
Strategies in ActionStrategies in Action
Intensive StrategiesIntensive Strategies
#arket penetration #arket develop"ent -roduct develop"ent
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Ch 5 -24
Strategies in ActionStrategies in Action
DefnedDefned
Seekingincreased
"arket share (orpresentproducts orservices inpresent "arkets
through greater
!a"ple!a"ple
/"eritrade0 the on1line broker0 tripledits annualadvertisinge!penditures to23&& "illion toconvince peoplethe, can "ake their
own invest"ent
#arket#arket-enetration-enetration
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Ch 5 -25
Strategies in Action
$uidelines for Mar"et ;enetration$uidelines for Mar"et ;enetration
Current mar"ets not saturated
Usage rate of !resent customers can be increased
significantly
Mar"et shares of com!etitors declining while total
industry sales increasing
%ncreased economies of scale !rovide major com!etitive
advantages
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Ch 5 -26
Strategies in ActionStrategies in Action
DefnedDefned
Introducingpresent
products orservices intonew geographicarea
!a"ple!a"ple
4huzendar 5iles"aker introduce hisproduct to Gul(
"arkets)
#arket#arket
Develop"enDevelop"entt
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Ch 5 -27
Strategies in Action
$uidelines for Mar"et 9evelo!ment$uidelines for Mar"et 9evelo!ment
?ew channels of distribution that are reliable
ine!ensive and good )uality
:irm is very successful at what it does
Unta!!ed or unsaturated mar"ets
Ca!ital and human resources necessary to manage
e!anded o!erations
3cess !roduction ca!acity >asic industry ra!idly becoming global
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Ch 5 -28
Strategies in ActionStrategies in Action
DefnedDefned
Seekingincreased salesb, i"proving
presentproducts orservices ordeveloping newones
!a"ple!a"ple
/pple developedthe G6 chip thatruns at 7&&"egahertz)
4huzendar 5iles"aker introduce8era"ic as a newproduct)
-roduct-roduct
Develop"enDevelop"entt
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Ch 5 -29
Strategies in Action
$uidelines for ;roduct 9evelo!ment$uidelines for ;roduct 9evelo!ment
;roducts in maturity stage of life cycle
Com!etes in industry characteri@ed by ra!id
technological develo!ments
Major com!etitors offer better*)uality !roducts at
com!arable !rices
Com!ete in high*growth industry
0trong research and develo!ment ca!abilities
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Ch 5 -30
Strategies in ActionStrategies in Action
Diversifcation StrategiesDiversifcation Strategies
8oncentric diversifcation 8onglo"erate diversifcation Horizontal diversifcation
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Ch 5 -31
Strategies in ActionStrategies in Action
DefnedDefned
/dding new0 but
related0products orservices
!a"ple!a"ple
9ational:est"inister Bank-;8 in Britain
bought the leadingBritish insuranceco"pan,0 ;egal oth organi@ations and individuals
must choose among alternative strategies and
avoid ecess indebtedness#
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Ch 5 -42
Joint ventures may fail when
Managers who must collaborate regularly
are not involved in the venture#
The venture may benefit !artnering
com!anies but not the customers# >oth !artners may not su!!ort the venture
e)ually#
The venture com!etes with one of the!artners
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Ch 5 -43
Joint ventures are especiallye!ective when 8 !rivately owned organi@ation forms one with a
!ublic organi@ation# 8 domestic organi@ation wor"s with a foeign
com!any#
The distinct com!etencies of the firms com!lementeach other es!ecially well#
0ome !roject is !otentially !rofitable but re)uiresmuch ris"#
Two or more smaller firms wish to com!ete againsta larger firm# There is a need to introduce a new technology
)uic"ly#
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Ch 5 -44
Strategies in Action
$uidelines for Boint enture$uidelines for Boint enture
Combination of !rivately held and !ublicly held can besynergistically combined
9omestic forms joint venture with foreign firm can obtainlocal management to reduce certain ris"s
9istinctive com!etencies of two or more firms arecom!lementary
Overwhelming resources and ris"s where !roject is
!otentially very !rofitable 6e#g# 8las"a !i!eline7 Two or more smaller firms have trouble com!eting withlarger firm
8 need eists to introduce a new technology )uic"ly
i i iSt t i i A ti
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Ch 5 -45
Strategies in ActionStrategies in Action
DefnedDefned
>egrouping throughcost and assetreduction toreverse decliningsales and proft)So"eti"es it iscalled turnaroundor reorganizationalstrateg,)
!a"ple!a"ple
l1/wda sold o. aland and 6apart"ents to raise
cash needed) Itintroduce e!pensee.ective controls,ste")
>etrench"ent>etrench"ent?turnaround@?turnaround@
S i i A i
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Ch 5 -46
Strategies in Action
$uidelines for Retrenchment$uidelines for Retrenchment
:irm has failed to meet its objectives and goals consistently
over time but has distinctive com!etencies
:irm is one of the wea"er com!etitors
%nefficiency low !rofitability !oor em!loyee morale and
!ressure from stoc"holders to im!rove !erformance#
=hen an organi@ation5s strategic managers have failed
ery )uic" growth to large organi@ation where a majorinternal reorgani@ation is needed#
S i i A iSt t i i A ti
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Ch 5 -47
Strategies in ActionStrategies in Action
DefnedDefned
Selling a
division or parto( an
organization
!a"ple!a"ple
Harcourt General0the large AS
publisher0 is sellingits 9ei"an #arcusdivision)
DivestitureDivestiture
St t i i A ti
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Ch 5 -48
Strategies in Action
$uidelines for 9ivestiture$uidelines for 9ivestiture
=hen firm has !ursued retrenchment but failed to attain
needed im!rovements
=hen a division needs more resources than the firm can!rovide
=hen a division is res!onsible for the firm5s overall !oor
!erformance
=hen a division is a misfit with the organi@ation
=hen a large amount of cash is needed and cannot be
obtained from other sources#
St t i i A tiSt t i i A ti
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Ch 5 -49
Strategies in ActionStrategies in Action
DefnedDefned
Selling all o( aco"pan,*s
assets0 in parts0(or their
tangible worth
!a"ple!a"ple
l1/"eer Block(actor, sold all its
assets and ceasedbusiness)
;i$uidation;i$uidation
St t i i A ti
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Ch 5 -50
Strategies in Action
$uidelines for
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Ch 5 -51
"ergers and acquisitions
Mergers and ac)uisitions are two commonly
used ways to !ursue strategies#
8 merger occurs when two organi@ations of
about e)ual si@e unite to form one enter!rise# 8n ac)uisition occurs when a large
organi@ation !urchases 6ac)uires7 a smaller
firm or vice versa#
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Ch 5 -52
#easons for mergers andacquisitions'# a# To !rovide im!roved ca!acity utili@ation
(# b# To ma"e better use of an eisting sales force#
+# c# To reduce managerial staff#
,# d# To gain economies of scale#-# e# To smooth out seasonal trends in sales#
.# f# To gain access to new su!!liers distributors
customers !roducts and creditors#
D# g# To gain new technology#
E# h# To reduce ta obligations#
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Ch 5 -53
"ergers and acquisitionsmay fail due to the following reasons&
'# a# %ntegration difficulties
(# b# %nade)uate evaluation of target
+# c#
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Ch 5 -54
$everaged Buyouts %$BOs&
'# 8n O occurs when a cor!oration5s
shareholders are bought out 6hence buyout7 by the
com!any5s management and other !rivate investors
using borrowed funds 6hence le$eraged7#
(# >esides trying to avoid a hostile ta"eover other
reasons for the initiation of an O by senior
management are that !articular divisions do not fit
into an overall cor!orate strategy must be sold to
raise cash or receive an attractive offering !rice# 8
O ta"es a cor!oration !rivate
d
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Ch 5 -55
'irst "over Advantages
'# :irst mover advantages refers to thebenefits a firm may achieve by entering anew mar"et or develo!ing a new !roduct or
service !rior to rival firms# (# The advantages of being a first mover
include securing access to rare resourcesgaining new "nowledge of "ey factors and
issues and carving out mar"et share and a!osition that is easy to defend and costly forrival firms overta"e#
O
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Ch 5 -56
Outsourcing
>usiness*;rocess Outsourcing 6>;O7&
Com!anies ta"e over functional o!erations such
as human resources information systems and
mar"eting for other firms#
Outsourcing can be less e!ensive can allow
firms to focus on core businesses and enables
firms to !rovide better services#
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Ch 5 -57
Michael ;orter5s $eneric 0trategies
Cost Leadership Strategies
0Low-Cost & Best-Value)
Di''erentiationStrategies
Foc(s Strategies
(Low-Cost Focus &Best-Value Focus)
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Ch 5 -58
Mi h l ; t 5 $ i 0t t i
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Ch 5 -59
Michael ;orter5s $eneric 0trategies
Cost leadershi! em!hasi@es !roducing standardi@ed
!roducts at a very low !er*unit cost for consumers
who are !rice*sensitive#
There are two ty!es of cost leadershi! strategies#
a# 8 low*cost strategy offers !roducts to a wide
range of customers at the lowest !rice available on
the mar"et#
b# 8 best*value strategy offers !roducts to a widerange of customers at the best !rice*value available
on the mar"et#
C t l d hi
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Ch 5 -60
Cost leadership
0triving to be the low*cost !roducer in an
industry can be es!ecially effective when the
mar"et is com!osed of many !rice*sensitive
buyers when there are few ways to achieve!roduct differentiation when buyers do not
care much about differences from brand to
brand or when there are a large number of
buyers with significant bargaining !ower#
C t l d hi
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Ch 5 -61
Cost leadership
The basic idea behind a cost leadershi! strategy isto under!rice com!etitors or offer a better value andthereby gain mar"et share and sales driving somecom!etitors out of the mar"et entirely#
-# To successfully em!loy a cost leadershi!strategy firms must ensure that total costs acrossthe value chain are lower than that of thecom!etition# This can be accom!lished by&
a# !erforming value chain activities more
efficiently than com!etition and b# eliminating some cost*!roducing activities in
the value chain#
(i! ti ti
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Ch 5 -62
(i!erentiation
9ifferentiation is aimed at !roducing
!roducts that are considered uni)ue# This
strategy is most !owerful with the source of
differentiation is es!ecially relevant to thetarget mar"et
(i! ti ti
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Ch 5 -63
(i!erentiation
8 successful differentiation strategy allows
a firm to charge higher !rices for its !roducts
to gain customer loyalty because consumers
may become strongly attached to thedifferentiation features#
+# 8 ris" of !ursuing a differentiation strategy
is that the uni)ue !roduct may not be valuedhighly enough by customers to justify the
higher !rice#
(i! ti ti
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Ch 5 -64
(i!erentiation
Common organi@ational re)uirements for
a successful differentiation strategy include
strong coordination among the RA9 and
mar"eting functions and substantialamenities to attract scientists and creative
!eo!le#
'
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Ch 5 -65
'ocus
'# :ocus means !roducing !roducts and servicesthat fulfill the needs of small grou!s of consumers#
(# There are two ty!es of focus strategies# a# 8 low*cost focus strategy offers !roducts or
services to a small range 6niche7 of customers at thelowest !rice available on the mar"et#
b# 8 best*value focus strategy offers !roducts to asmall range of customers at the best !rice*valueavailable on the mar"et# This is sometimes calledfocused differentiation#
'
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Ch 5 -66
'ocus
:ocus strategies are most effective when the
niche is !rofitable and growing when industry
leaders are uninterested in the niche whenindustry leaders feel !ursuing the niche is too
costly or difficult when the industry offers
several niches and when there is littlecom!etition in the niche segment#
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Ch 5 -67
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Ch 5 -68
#e ie
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Ch 5 -69
#eview
o does strateg% 'orm(*ation di''er 'or a
sma** vers(s *arge organi)ation3 For a 'or-
pro'it vers(s a nonpro'it organi)ation3
0trategy formulation is conce!tually the same for
both small and large organi@ations# However for
large firms there are more variables to include in
both the eternal and internal audits# The !rocess
is usually more formal in a large firm#
#eview
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Ch 5 -70
#eview
4ive recent eamp*es o' 'orard integration6!ac7ard integration6 and hori)onta*integration+
:orward integration means !urchasing or
develo!ing a distributor for a !roduct# :or instance?i"e now has its own retail stores in variouslocations# >ac"ward integration means owning asu!!ly source for !roduction# :or instancerecently garment !roducers in 0ri
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Ch 5 -71
#eview
Do %o( thin7 hosti*e ta7eovers are (nethica*38h% or h% not3
%t can best be argued that hostile ta"eovers areethical# Usually only wea" com!anies face hostile
ta"eovers and ty!ically shareholders andcustomers of the com!any benefit from the neworgani@ation# Most em!loyees and managersbenefit too but some em!loyees and to!
managers usually lose their jobs when theta"eover is consummated# :rom this angle somestudents may argue that hostile ta"eovers areunethical#
#eview
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Ch 5 -72
#eview
8h% is it not advisa!*e to p(rs(e too man%strategies at once3
Organi@ational resources are s!read too thinwhen more than a few strategies are !ursued at
the same time# 8ll organi@ations have limitedresources# ?o organi@ation can !ursue all thestrategies that may benefit the firm# 0imilarly noindividual can ta"e on an unlimited amount of debtto obtain goods and services# ?o more than a few
strategies can be financed mar"eted andmanaged effectively at the same time# 0ome!ractitioners say only a single strategy should be!ursued at a given time by a single organi@ation#
#eview
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#eview
8hat strategies are !est 'or t(r!(*ent6 high-ve*ocit%mar7ets3
:irms in this ty!e of mar"et have a choice of whether to reactantici!ate or lead the mar"et in terms of its own strategies#These choices are reflected in :igure -*,# %f a firm !rimarily
res!onds to the turbulent mar"et by res!onding to changes inthe industry defensively# The react*to*change strategy wouldnot be as effective as the antici!ate change strategy whichentails devising and following through with !lans for dealingwith the e!ected changes# %deally a firm will strive to lead themar"et by !ioneering new and better technologies and!roducts#