Formulating Long-Term Objectives and Grand Strategies

Formulating Long-Term Objectives and Grand

Strategies

Types of Long-Term Objectives

• Profitability• Productivity• Competitive position• Employee development• Employee relations• Technological leadership• Public responsibility

Qualities of Long-Term Objectives• Acceptable• Achievable• Flexible• Measurable• Motivating• Suitable• Understandable

The Balanced ScorecardThe Balanced Scorecard is a set of measures that are directly linked to the company’s strategy. It directs a company to link its own long-term strategy with tangible goals and actions.

The Balanced Scorecard

5 Generic Competitive Strategies

Menu of Strategy Optionsfor Winning in the

Marketplace

GENERIC STRATEGIES• Low-Cost Leadership

A strategy aimed at producing standardized products at low per-unit cost for consumers who are price-sensitive .Examples:H.J Heinz – because beans and canned vegetables do not permit much of a mark-up, the profit comes from the large volume of cans sold. Thus, Heinz goes to extraordinary lengths to reduce costs – by even one-twentieth of a cent per can.

•  Wal-Mart is famous for squeezing its suppliers to ensure low prices for its goods especially that they are famous for their Every Day Low Pricing strategy (EDLP)

• Dell Computer initially achieved market share by keeping inventories low and only building computers to order.

GENERIC STRATEGIES• Differentiation

A strategy aimed at producing products and services considered unique industry-wide and directed at consumers who are relatively price-insensitive .

Differentiation Themes• unique taste – Dr. Pepper• multiple features – Microsoft Office• wide selection and one-stop shopping –

Home Depot, Wal-Mart• engineering design and performance –

BMW, Ferrari• rapid product innovation• prestige and distinctiveness – Rolex,

Chanel, Mercedes Benz• top-of-the-line image and reputation –

Starbucks, Tiffany

GENERIC STRATEGIES• Focus

A strategy aimed at producing products and services that fulfill the needs of small groups of customers .Example:

RTW stores selling plus-size clothes

Risks of Generic StrategiesRisks of Cost Leadership

Risks of Differentiation

Risks of Focus

Cost leadership is not sustained•Competitors imitate•Technology changes•Other bases for cost leadership erode•Proximity in differentiation is lost•Cost focusers achieve even lower cost in segments

Differentiation is not sustained•Competitors imitate•Bases for differentiation become less important to buyers•Cost proximity is lost•Differentiation focusers achieve greater differentiation in segments

Focus strategy is imitated•Target segment becomes unattractive•Structure erodes•Demand disappears•Broadly target competitors overwhelm segments•Segment’s differences from others narrow•Advantages of broad line increase

The Value Disciplines• Operational Excellence

A specific strategic approach to the production and delivery of products and services. A company that follows this strategy attempts to lead its industry in price and convenience by pursuing a focus on lean and efficient operations.

The Value Disciplines• Customer Intimacy

Companies excelling in customer intimacy combine detailed customer knowledge with operational flexibility. They are willing to spend money now to build customer loyalty for the long-term, considering each customer’s lifetime value to the company, not the profit of any single transaction.

The Value Disciplines• Product Leadership

Companies that pursue the discipline of product leadership strive to produce a continuous stream of state-of-the-art products and services. The 3 challenges that must be met are:

CreativityCommercialize ideas quicklyRelease their own improvements

GRAND STRATEGIESTypes of Grand Strategies

• Concentrated growth

• Market development

• Product development

• Innovation• Horizontal

integration• Vertical integration• Concentric

diversification

• Conglomerate diversification

• Turnaround• Divestiture• Liquidation• Bankruptcy• Joint ventures• Strategic alliances• Consortia

Characteristics of a Concentrated Growth Strategy• Involves focusing resources on the

profitable growth of a single product, in a single market, with a single dominant technology

• Rationale – Firm develops and exploits its expertise in a delimited competitive arena

• Determinants of competitive market success– Ability to assess market needs– Knowledge of buyer behavior– Customer price sensitivity– Effectiveness of promotion

Strategies of Market & Product Development• Market development

– Consists of marketing present products, often with only cosmetic modifications to customers in related market areas by•Adding channels of distribution or•Changing content of advertising or

promotion

Strategies of Market & Product Development• Product development

• Involves substantial modification of existing products or creation of new but related products

• Based on penetrating existing market by- Incorporating product modifications

into existing items or- Developing new products connected to

existing products

Innovation Strategy

Involves creating a new product life cycle,

thereby making similar existing products

obsolete.

Horizontal and Vertical Integration StrategiesHorizontal Integration• Based on growth via acquisition of

one or more similar firms operating at the same stage of the production-marketing chain

Horizontal and Vertical Integration StrategiesVertical Integration• Involves acquiring firms

• That supply acquiring firm with inputs (backward integration) or

• Are customers for firm’s outputs (forward integration)

Vertical and Horizontal Integrations

Textile producer Textile producer

Shirt manufacturer Shirt manufacturer

Clothing store Clothing store

Motivations for Diversification Increase firm’s stock value Increase growth rate of firm Investment is better use of funds than

using them for internal growth Improves stability of earnings and sales Balance or fill out product line Diversify product line Acquire a needed resource quickly Achieve tax savings Increase efficiency and profitability

Diversification Strategies

Concentric Diversification• Involves acquisition of businesses

related to acquiring firm in terms of technology, markets, or products

Diversification Strategies

Conglomerate Diversification• Involves acquisition of a business

because it represents a promising investment opportunity• Primary motivation is profit pattern of

venture

Turnaround Strategy• A turnaround situation represents absolute

and relative-to-industry declining performance of a sufficient magnitude to warrant explicit turnaround actions

• The immediacy of the resulting threat to company survival posed by the turnaround situation is known as situation severity

• Turnaround responses typically include two stages of strategic activities– Retrenchment– Recovery response

Divestiture and Liquidation StrategiesDivestiture Strategy

• Involves selling a firm or a major component of a firm

• Reasons for divestiture• Partial mismatches between acquired

firm and parent firm• Corporate financial needs• Government antitrust action

Divestiture and Liquidation StrategiesLiquidation Strategy

• Involves selling parts of a firm, usually for its tangible asset value and not as a going concern

The Strategy of Bankruptcy• Two approaches

• Liquidation – Involves complete distribution of a firm’s assets to creditors, most of whom receive a small fraction of amount owed

• Reorganization – Involves creditors temporarily freezing their claims while a firm reorganizes and rebuilds its operations more profitably

• Advantage of a reorganization bankruptcy• Proactive option offering maximum repayment

of a firm’s debt in the future if a recovery strategy is successful

Corporate Combination StrategiesJoint Ventures• Involves establishing a third company (child),

operated for the benefit of the co-owners (parents)

Strategic Alliance• Involves creating a partnership between two or

more companies that contribute skills and expertise to a cooperative project• Exists for a defined period• Does not involve the exchange of equity

Corporate Combination Strategies• Consortia are defined as large interlocking

relationships between businesses of an industry. In Japan such consortia are known as keiretsus, in South Korea as chaebols

• A Japanese keiretsu is an undertaking involving up to 50 different firms that are joined around a large trading company or bank and are coordinated through interlocking directories and stock exchanges

• Chaebols are typically financed through government banking groups and largely are run by professional managers trained by participating firms expressly for the job