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Copyright 2007 Prentice HallCh 5 -1
Chapter 5
Strategies in Action
Strategic Management:
Concepts & Cases11thEdition
Fred David
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Copyright 2007 Prentice HallCh 5 -2
Chapter Outline
Long-Term Objectives
Types of Strategies
Integration Strategies
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Copyright 2007 Prentice HallCh 5 -3
Chapter Outline (contd!
Intensive Strategies
Diversification Strategies
Defensive Strategies
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Copyright 2007 Prentice HallCh 5 -4
Chapter Outline (contd!
Michael Porters Generic Strategies
Means for chieving Strategies
!irst Mover "vantages
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Copyright 2007 Prentice HallCh 5 -5
Chapter Outline (contd!
O#tso#rcing
Strategic Management in $onprofit %Governmental Organi&ations
Strategic Management in Small !irms
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Copyright 2007 Prentice HallCh 5 -6
Strategies in Action
-- '#est for higher reven#es
-- '#est for higher profits
(ompanies )mbrace Strategic Planning
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Copyright 2007 Prentice HallCh 5 -7
*es#lts e+pecte" from p#rs#ing certain
strategies Strategies represent actions to accomplish
long-term objectives
"ong#$erm O%ectives
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Copyright 2007 Prentice HallCh 5 -8
"ong#$erm O%ectives
O%ectives ##
'#antifiable
Meas#rable
*ealistic
,n"erstan"able
(hallenging
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Copyright 2007 Prentice HallCh 5 -9
"ong#$erm O%ectives
O%ectives ##
ierarchicalObtainable
(ongr#ent
Time-line
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Copyright 2007 Prentice HallCh 5 -10
"ong#$erm O%ectives
Strategists Should Avoid ##
Managing by )+trapolationManaging by (risis
Managing by S#bjectives
Managing by ope
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Copyright 2007 Prentice HallCh 5 -11
.arying Performance Meas#res by
Organi&ational Level
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Copyright 2007 Prentice HallCh 5 -12
Financial vs' Strategic
O%ectives
Financial O%ectives
Gro/th in reven#es
Gro/th in earnings
igher "ivi"en"s
igher profit margins
igher earnings per share
Improve" cash flo/
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Copyright 2007 Prentice HallCh 5 -13
Financial vs' Strategic
O%ectives
Strategic O%ectives
Larger mar0et share
'#ic0er on-time "elivery than rivals
'#ic0er "esign-to-mar0et times than rivals
Lo/er costs than rivals
igher pro"#ct 1#ality than rivals
2i"er geographic coverage than rivals
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Copyright 2007 Prentice HallCh 5 -14
$pes o) Strategies
Operational "evel
Functional "evel
Division "evel
Corp"evelA "arge Compan
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Copyright 2007 Prentice HallCh 5 -15
$pes o) Strategies
Operational "evel
Functional "evel
Compan
"evel
A Small Compan
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Copyright 2007 Prentice HallCh 5 -16
$pes o) Strategies
*ertical+ntegration
Strategies
For,ard
+ntegration
-ac.,ard+ntegration
/ori0ontal
+ntegration
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Copyright 2007 Prentice HallCh 5 -17
*ertical +ntegration Strategies
ain Control Over ##
Distrib#torsS#ppliers
(ompetitors
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Copyright 2007 Prentice HallCh 5 -18
For,ard +ntegration Strategies
ain Control Over ##
Distrib#tors*etailers
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Copyright 2007 Prentice HallCh 5 -19
For,ard +ntegration Strategies
uidelines ##
(#rrent "istrib#tors 3 e+pensive or #nreliable
vailability of 1#ality "istrib#tors 3 limite"!irm competing in in"#stry e+pecte" to gro/
mar0e"ly
!irm has both capital % * to manage ne/
b#siness of "istrib#tion
(#rrent "istrib#tors have high profit margins
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Copyright 2007 Prentice HallCh 5 -20
-ac.,ard +ntegration
Strategies
O,nership or Control ##
!irms s#ppliers
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Copyright 2007 Prentice HallCh 5 -21
-ac.,ard +ntegration
Strategies
uidelines ##
(#rrent s#ppliers 3 e+pensive or #nreliable
4 of s#ppliers is small5 4 of competitors is largeigh gro/th in in"#stry sector
!irm has both capital % * to manage ne/
b#siness
Stable prices are important
(#rrent s#ppliers have high profit margins
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Copyright 2007 Prentice HallCh 5 -22
/ori0ontal +ntegration
Strategies
O,nership or Control ##
!irms competitors
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Copyright 2007 Prentice HallCh 5 -23
/ori0ontal +ntegration
Strategies
uidelines ##
Gain monopolistic characteristics /6o fe"eral
government challenge
(ompetes in gro/ing in"#stry
Increase" economies of scale 3 major competitive
a"vantages
!altering "#e to lac0 of managerial e+pertise ornee" for partic#lar reso#rce
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Copyright 2007 Prentice HallCh 5 -24
$pes o) Strategies
+ntensiveStrategies
Mar.et
2enetration
Mar.etDevelopment
2roduct
Development
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Copyright 2007 Prentice HallCh 5 -25
+ntensive Strategies
+ntensive E))orts ##
Improve competitive position /ithe+isting pro"#cts
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Copyright 2007 Prentice HallCh 5 -26
Mar.et 2enetration Strategies
+ncreased Mar.et Share ##
Present pro"#cts6services
Present mar0ets
Greater mar0eting efforts
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Copyright 2007 Prentice HallCh 5 -27
Mar.et 2enetration Strategies
uidelines ##
(#rrent mar0ets not sat#rate"
,sage rate of present c#stomers can be increase"
significantly
Shares of competitors "eclining5 in"#stry sales
increasing
Increase" economies of scale provi"e majorcompetitive a"vantage
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Copyright 2007 Prentice HallCh 5 -28
Mar.et Development
Strategies
3e, Mar.ets ##
Present pro"#cts6services to ne/
geographic areas
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Copyright 2007 Prentice HallCh 5 -29
Mar.et Development
Strategies
uidelines ##
$e/ channels of "istrib#tion 3 reliable7 ine+pensive7
goo" 1#ality
!irm is s#ccessf#l at /hat it "oes
,ntappe"6#nsat#rate" mar0ets
)+cess pro"#ction capacity
8asic in"#stry rapi"ly becoming global
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Copyright 2007 Prentice HallCh 5 -30
2roduct Development
Strategies
+ncreased Sales ##
Improving present pro"#cts6services
Developing ne/ pro"#cts6services
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Copyright 2007 Prentice HallCh 5 -31
2roduct Development
Strategies
uidelines ##
Pro"#cts in mat#rity stage of life cycle
In"#stry characteri&e" by rapi" technological
"evelopment
(ompetitors offer better-1#ality pro"#cts 9
comparable prices
(ompete in high-gro/th in"#stry
Strong *%D capabilities
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Copyright 2007 Prentice HallCh 5 -32
$pes o) Strategies
Diversi)icationStrategies
4elated
Diversi)ication
nrelated
Diversi)ication
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Copyright 2007 Prentice HallCh 5 -33
Diversification
*elate" 3 2hen their val#e chains posses
competitively val#able cross-b#siness
strategic fits
,nrelate" 3 2hen their val#e chains are so"issimilar that no competitively val#able
cross-b#siness relationships e+ist
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Copyright 2007 Prentice HallCh 5 -34
*elate" Diversification Preferre"
To (apitali&e on:
Transferring competitively val#able e+pertise
(ombining the relate" activities of separate
b#sinesses into a single operation to lo/er
costs )+ploiting common #se of a /ell-0no/n
bran" name
(ross-b#siness collaboration to createcompetitively val#able reso#rce strengths
an" capabilities
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Copyright 2007 Prentice HallCh 5 -35
Diversi)ication Strategies
"ess 2opular ##
More "iffic#lt to manage "iverse
b#siness activities
/o,ever ##
The greatest ris0 of being in a singlein"#stry is having all yo#r eggs in one
bas0et
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Copyright 2007 Prentice HallCh 5 -36
*elate" Diversification May be )ffective
2hen:
n organi&ation competes in a no-gro/th or a
slo/ gro/th in"#stry
""ing ne/7 b#t relate"7 pro"#cts /o#l"
significantly enhance the sales of c#rrentpro"#cts
$e/7 b#t relate" pro"#cts co#l" be offere" at
highly competitive prices
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Copyright 2007 Prentice HallCh 5 -37
*elate" Diversification May be )ffective
2hen:
$e/7 b#t relate"7 pro"#cts have seasonal
sales levels that co#nterbalance an
organi&ations e+isting pea0s an" valleys
n organi&ations pro"#cts are c#rrently inthe "eclining stage of the pro"#cts life cycle
n organi&ation has a strong management
team
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Copyright 2007 Prentice HallCh 5 -38
Conglomerate Diversi)ication
Strategies
uidelines ##
Declining ann#al sales % profits
(apital % managerial ability to compete in ne/in"#stry
!inancial synergy bet/een ac1#ire" an" ac1#iring
firms
(#rrent mar0ets for present pro"#cts - sat#rate"
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Copyright 2007 Prentice HallCh 5 -39
,nrelate" Diversification
!avors capitali&ing on a portfolio of
b#sinesses that are capable of "elivering
e+cellent financial performance
)ntails h#nting to ac1#ire companies: 2hose assets are #n"erval#e"
That are financially "istresse"
2ith high gro/th potential b#t are short oninvestment capital
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Copyright 2007 Prentice HallCh 5 -40
,nrelate" Diversification May be )ffective
2hen:
*even#es "erive" from an organi&ations
c#rrent pro"#cts or services /o#l" increase
by a""ing ne/ #nrelate" pro"#cts
n organi&ation competes in a highlycompetitive or a no gro/th in"#stry
n organi&ations c#rrent "istrib#tion
channels can be #se" to mar0et ne/pro"#cts to e+isting c#stomers
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Copyright 2007 Prentice HallCh 5 -41
,nrelate" Diversification May be )ffective
2hen:
$e/ pro"#cts have co#ntercyclical sales
patterns
n organi&ations basic in"#stry is
e+periencing "eclining ann#al sales an"profits
n organi&ation has the capital an"
managerial talent to compete s#ccessf#lly ina ne/ in"#stry
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Copyright 2007 Prentice Hall
Ch 5 -42
,nrelate" Diversification May be )ffective
2hen:
n organi&ation has the opport#nity to
p#rchase an #nrelate" b#siness as an
attractive investment opport#nity
There e+ists financial synergy bet/een theac1#ire" an" ac1#iring firm
)+isting mar0ets for the present pro"#cts are
sat#rate" ntitr#st action co#l" be charge" against a
company
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Copyright 2007 Prentice Hall
Ch 5 -43
$pes o) Strategies
De)ensiveStrategies
4etrenchment
Divestiture
"i6uidation
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Copyright 2007 Prentice Hall
Ch 5 -44
4etrenchment Strategies
4egrouping ##
(ost % asset re"#ction to reverse
"eclining sales % profit
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Copyright 2007 Prentice Hall
Ch 5 -45
4etrenchment Strategies
uidelines ##!aile" to meet objectives % goals consistency5 has
"istinctive competencies
!irm is one of /ea0er competitorsInefficiency7 lo/ profitability7 poor employee morale7
press#re for stoc0hol"ers
Strategic managers have faile"
*api" gro/th in si&e5 major internal reorgani&ation
necessary
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Copyright 2007 Prentice Hall
Ch 5 -46
Divestiture Strategies
Selling a "ivision or part of an
organi&ation
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Copyright 2007 Prentice Hall
Ch 5 -47
Divestiture Strategies
uidelines ##*etrenchment faile" to attain improvements
Division nee"s more reso#rces than are available
Division responsible for firms overall poor
performance
Division is a mis-fit /ith organi&ation
Large amo#nt of cash is nee"e" an" cannot beraise" thro#gh other so#rces
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Copyright 2007 Prentice Hall
Ch 5 -48
"i6uidation Strategies
(ompanys assets7 in parts7 for
their tangible /orth
Selling
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Copyright 2007 Prentice Hall
Ch 5 -49
"i6uidation Strategies
uidelines ##
*etrenchment % "ivestit#re faile"
Only alternative is ban0r#ptcy
Minimi&e stoc0hol"er loss by selling firms assets
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Copyright 2007 Prentice Hall
Ch 5 -50
Michael Porters Generic Strategies
Cost "eadership Strategies
Di))erentiationStrategies
Focus Strategies
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Copyright 2007 Prentice Hall
Ch 5 -51
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Copyright 2007 Prentice Hall
Ch 5 -52
eneric Strategies
In conj#nction /ith "ifferentiation
)conomies or "iseconomies of
scale
(apacity #tili&ation achieve"
Lin0ages /6 s#ppliers % "istrib#tors
(ost Lea"ership;Type < an" Type =>
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Copyright 2007 Prentice Hall
Ch 5 -53
(ost Lea"ership
2ays of ens#ring total costs across val#e
chain are lo/er than competitors total costs
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Copyright 2007 Prentice Hall
Ch 5 -54
(ost Lea"ership
(an be especially effective /hen:
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Copyright 2007 Prentice Hall
Ch 5 -55
eneric Strategies
Many price-sensitive b#yers
!e/ /ays of achieving "ifferentiation
8#yers not sensitive to bran"
"ifferences
Large 4 of b#yers /6bargaining po/er
Lo/ (ost Pro"#cer "vantage
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Copyright 2007 Prentice Hall
Ch 5 -56
eneric Strategies
Greater pro"#ct fle+ibility
Greater compatibility
Lo/er costs
Improve" service
Greater convenience
More feat#res
Differentiation ;Type @>
Diff ti ti
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Copyright 2007 Prentice Hall
Ch 5 -57
Differentiation
(an be especially effective /hen:
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Copyright 2007 Prentice Hall
Ch 5 -58
eneric Strategies
In"#stry segment of s#fficient si&e
Goo" gro/th potential
$ot cr#cial to s#ccess of major competitors
!oc#se" Strategies ;Type A % B>
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Ch 5 -59
!oc#se" Strategy
(an be especially effective /hen:
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Copyright 2007 Prentice Hall
Ch 5 -60
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Copyright 2007 Prentice Hall
Ch 5 -61
Means )or Achieving Strategies
T/o or more companies form a temporary
partnership or consorti#m for p#rpose of
capitali&ing on some opport#nity
7oint *enture82artnering #
* h M " i iti ! il
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Copyright 2007 Prentice Hall
Ch 5 -62
*easons /hy Mergers an" c1#isitions !ail
Integration "iffic#lties
Ina"e1#ate eval#ation of target
Large or e+traor"inary "ebt
Inability to achieve synergy
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Copyright 2007 Prentice Hall
Ch 5 -63
Means )or Achieving Strategies
*%D partnerships
(ross-"istrib#tion agreements
(ross-licensing agreements
(ross-man#fact#ring agreements
Eoint-bi""ing consortia
Cooperative Arrangements #
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Copyright 2007 Prentice Hall
Ch 5 -64
Means )or Achieving Strategies
Managers /ho m#st collaborate "aily5 not
involve" in "eveloping the vent#re
8enefits the company not the c#stomers
$ot s#pporte" e1#ally by both partners
May begin to compete /ith one of thepartners
9h 7oint *entures Fail #
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Copyright 2007 Prentice Hall Ch 5 -65
7oint *entures
uidelines ##Synergies bet/een private an" p#blicly hel"
Domestic /ith foreign firm7 local management can
re"#ce ris0
(omplementary "istinctive competencies
*eso#rces % ris0s /here project is highly profitable
;e?g? las0a Pipeline>
T/o or more smaller firms competing /6larger firm
$ee" to intro"#ce ne/ technology 1#ic0ly
*easons /hy Mergers an" c1#isitions !ail
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Copyright 2007 Prentice Hall Ch 5 -66
*easons /hy Mergers an" c1#isitions !ail
Too m#ch "iversification
Managers overly foc#se" on ac1#isition
Too large an ac1#isition
Diffic#lt to integrate "ifferent organi&ational
c#lt#res
*e"#ce" employee moral "#e to layoffs an"
relocations
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Copyright 2007 Prentice Hall Ch 5 -67
Means )or Achieving Strategies
Provi"e improve" capacity #tili&ation
8etter #se of e+isting sales force
*e"#ce managerial staff
Gain economies of scale
Smooth o#t seasonal tren"s in sales
Gain ne/ technology ccess to ne/ s#ppliers7 "istrib#tors7 c#stomers7
pro"#cts7 cre"itors
Mergers & Ac6uisitions
*ecent Mergers
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Copyright 2007 Prentice Hall Ch 5 -68
*ecent Mergers
Ac6uiring Firm Ac6uired Firm
I8M scential Soft/are
Philip Morris PT anjaya Man"ala Samp
,?S? Steel $ational Steel (orp
Oracle PeopleSoft
OSIM International Lt" 8roo0stone
"obe Systems Macrome"ia
,S ir/ays merican 2est,nite" Parcel Service Overnight (orp?
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Copyright 2007 Prentice Hall Ch 5 -69
First Mover Advantages
8enefits a firm may achieve by entering a
ne/ mar0et or "eveloping a ne/ pro"#ct orservice prior to rival firms
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Copyright 2007 Prentice Hall Ch 5 -70
First Mover Advantages
Sec#ring access to rare reso#rces
Gaining ne/ 0no/le"ge of 0ey factors %iss#es
(arving o#t mar0et share
)asy to "efen" position % costly for rivalfirms to overta0e
2otential Advantages
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Copyright 2007 Prentice Hall Ch 5 -71
Outsourcing
(ompanies ta0ing over the f#nctionaloperations of other firms
8#siness-process o#tso#rcing;8PO>
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Copyright 2007 Prentice Hall Ch 5 -72
Outsourcing
Less e+pensive llo/s firm to foc#s on core b#siness
)nables firm to provi"e better services
8enefits
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Copyright 2007 Prentice Hall Ch 5 -73
Fey Terms % (oncepts
For 4evie, (Chapter 5!
Ac6uisitionConcentric
Diversi)ication
-ac.,ard
+ntegration
Conglomerate
Diversi)ication
-an.ruptcCooperative
Arrangements
Com%ination
StrategCost "eadership
(C !
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Copyright 2007 Prentice Hall Ch 5 -74
Fey Terms % (oncepts
For 4evie, (Chapter 5!
Di))erentiation Focus
Diversi)ication
StrategiesFor,ard +ntegration
Divestiture Franchising
First Mover
Advantageseneric Strategies
F 4 i (Ch 5!
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Copyright 2007 Prentice Hall Ch 5 -75
Fey Terms % (oncepts
For 4evie, (Chapter 5!
/ori0ontal
Diversi)ication+ntensive Strategies
/ori0ontal
+ntegration7oint *enture
/ostile $a.eover "everaged -uout
+ntegration
Strategies"i6uidation
F 4 i (Ch t 5!
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Fey Terms % (oncepts
For 4evie, (Chapter 5!
"ong#$erm
O%ectivesOutsourcing
Mar.et Development 2roduct Development
Mar.et 2enetration 4etrenchment
Merger *ertical +ntegration