Business Policy & Strategy: Chapter Four Strategic Management Murdick, Moor, Babson & Tomlinson, Sixth Edition, 2000

Strategic Management Formulation – generating ideas done by top managers Implementation – putting them into action, involves all levels of the firm Evaluation – monitoring to see if the chosen strategy and its implementation are effective in the short and medium run (control)

Senior Managers Responsibility Formulate vision, mission, goals, and objectives Environmental analysis and forecast of opportunities and threats Internal analysis of strengths and weaknesses

Strategy Formulation Establish the corporate vision – where firm wants to be in 3-5 years Review the corporate mission – why the firm exists, its purpose Evaluate resources and capabilities Creatively match your internal strengths with external opportunities

Strategy Formulation Consider the scope (product and market), dynamics, competitive edge, risk, financial objectives, deployment of resources, Consider potential acquisitions, divestments, joint ventures, mergers

Product Life Cycle Stages: Introductory – almost monopoly, low buyer awareness, high production and marketing costs, low profits, selective distributions Growth – rapid increase in demand, entry of competitors, increased customer awareness and acceptance, repeat sales, increasing productive efficiency

Product Life Cycle Maturity – rates of sales growth declines, profit margins decline, fewer new customers and more reorders, shakeout of weak competitors, LONGEST stage Decline – sales drop, # of competing products declines, new types of replacement products appear, small group of loyal customers

Product Life Cycle Rejuvenation or death – in the decline stage, firms must increase demand for their product (like ARM & HAMMER baking soda) or go into new markets (internationalization) to begin the product life cycle over; otherwise, organizational death results

Generic Strategies Competitive Edge arises from: Overall cost leadership Product differentiation Focus (serving market niches)

Risk From management’s perspective, risk is the average size of investments in new capital projects, the probability of success, and the equity of the firm Outsider’s view risk as the expected return on investment less the risk- free rate of return, measured by beta. > beta, > risk

Portfolio Matrix Management PLOT these two dimensions to form a 3x3 matrix Business Strength Low, Medium or High Industry Attractiveness Low, Medium or High

Business Strengths Size, growth, market share, position Profitability, margins, Image or reputation Pollution, people, reputation Strengths, weaknesses Technology position (See Figure 4.3 page 53)

Industry Attractiveness Size Market growth, diversity, pricing Competitive structure Industry profitability Social, Environmental Legal, Human Technical role

INDUSTRY ATTRACTIVE- NESS ______________ BUSINESS STRENGTH LOWMEDIUMHIGH Maintain Select for Investment, Grow Invest And Grow MEDIUMHarvest Select for Growth, or Divest Select for investment, Grow LOW Harvest Or Divest Harvest Select for Growth, or Divest

Integration Forward Vertical is towards your customer and/or distribution channels (buying trucks to deliver your product to outlets/customers) Backward Vertical is towards your suppliers, i.e. when Sears buys a lawnmower producer Horizontal when a firm buys a firm in the same industry (hotels)

Outsourcing Firms have to decide whether to make or buy their products/raw material Outsourcing is fairly common now where firms outsource NON-CORE processes to those firms that specialize in that process. This allows the original firm to focus on what it does best.

Planning Strategy Review - Merger – is when two firms of about equal size come together to form one firm with a hyphenated name; Acquisitions – when one firm, generally the larger of the two, buys another firm which gets absorbed into the buying firm

Why undertake M/A? Obtain skilled management, broader markets, new technology, new production capacity, raw materials, etc. Tax advantages Put idle cash to work for higher profits Opportunities for better management or synergies

Valuation of Firms Book value x 300% Average earnings over the past 3 years capitalized at 10-20% Five-year payback Present value of estimated earnings over the next 10 years Market value of stock x 2

Valuation of Firms P/E ratio x average earnings of past three years Upper limit = 8x earnings before interest and depreciation; Lower limit = 3 x earnings before interest and depreciation

Going Public Entrepreneurs want to sell and retire They would like to provide for their families or no members are capable of managing the firm Firm has been expanding rapidly, but lacks capital to expand further Firm has been very successful but entrepreneur hasn’t kept current and earnings are declining