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 Scorecard The 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 Options for 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 Strategies Risks 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 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: Creativity Commercialize ideas quickly Release their own improvements

GRAND STRATEGIES Types 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 I

Strategies of Market & 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 Strategies Horizontal 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 Strategies 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 Strategies Divestiture 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 Strategies Liquidation 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 Strategies Joint 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