1. Formulating Long-Term Objectives and Grand Strategies
CHAPTER 6
Formulating Long-Term Objectives and Grand Strategies

2. Chapter Topics Long-Term Objectives Generic Strategies
Grand Strategies
Corporate Combinations
Selection of Long-Term Objectives and Grand Strategy Sets
Sequence of Objectives and Strategy Selection

3. Types of Long-Term Objectives
Profitability
Productivity
Competitive position
Employee development
Employee relations
Technological leadership
Public responsibility

4. Qualities of Long-Term Objectives
Achievable
Acceptable
Criteria used in preparing objectives
Understandable
Flexible
Suitable
Measurable
Motivating

5. What is 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.

6. The Four Perspectives in a Balanced Scorecard
Financial performance
Customer knowledge
Internal business processes
Learning and growth

7. Exhibit 6-2: The Balanced Scorecard
Financial
‘To succeed financially, how should we appear to our shareholders?”
Internal Business Process
“To satisfy our shareholders and customers, what business processes must we excel at?”
Customer
“To achieve our vision, how should we appear to our customers?”
Vision and Strategy
Learning and Growth
‘To achieve our vision, how will we sustain our ability to change and improve?”

8. Generic Strategies
Low-cost Leadership
Differentiation
Focus

9. Ex. 6-3: Requirements for Generic Competitive Strategies
Generic Strategy
Commonly Required Skills and Resources
Common Organizational Requirements
Overall Cost Leadership
Sustained capital investment
and access to capital
Process engineering skills
Intense supervision of labor
Products designed for ease in
manufacture
Low-cost distribution system
Tight cost control
Frequent, detailed
control reports
Structured
organization and
responsibilities
Incentives based on
meeting strict
quantitative targets

10. Ex. 6-3 (contd.) Focus Generic Strategy
Commonly Required Skills and resources
Common Organizational Requirements
Differentiation
Product engineering
Creative flare
Strong capability in basic research
Corporate reputation for quality or
technological leadership
Unique combination of skills
Strong cooperation from channels
Strong marketing abilities
Strong coordination
among functions in
R&D, product
development, and
marketing
Subjective measurement and incentives instead of quantitative measures
Amenities to attract highly skilled labor, scientists, or creative people
Focus
Combination of above policies directed at the particular strategic target

11. Ex. 6-4: Risks of the 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

12. Types of Grand Strategies
Conglomerate diversification
Turnaround
Divestiture
Liquidation
Bankruptcy
Joint ventures
Strategic alliances
Consortia
Concentrated growth
Market development
Product development
Innovation
Horizontal integration
Vertical integration
Concentric diversification

13. 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

14. Conditions Favoring a Concentrated Growth Strategy
Firm’s industry is resistant to major technological advancements
Firm’s target markets are not product saturated
Firm’s markets are sufficiently distinctive to dissuade competitors in adjacent markets from entering firm’s segment
Firm’s inputs are stable in price and quantity and available in the amounts and at the times needed
Firm’s industry is stable
Firm’s competitive advantages are based on efficient production or distribution channels
Success of market generalists

15. Strategies of Market and 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
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

16. Exhibit 6-5: Specific Options for Selected Grand Strategies
Concentration (Increasing use of present products in present markets)
Increasing present customers’ rate of use
Increasing size of purchase
Increasing the rate of product obsolescence
Advertising other uses
Giving price incentives for increased use
Attracting competitors’ customers
Establishing sharper brand recognition
Increasing promotional effort
Initiating price cuts
Attracting nonusers to buy the product
Introducing trial use thru’ sampling, price incentives, etc.
Pricing up or down
Advertising new uses

17. Ex. 6-5 (contd.)
Market Development (Selling present products in new markets.)
Opening additional geographic markets
Regional expansion
National expansion
International expansion
Attracting other market segments
Developing product versions to appeal to other segments
Entering other channels of distribution
Advertising in other media

18. Ex. 6-5 (contd.)
Product Development (Developing new products for present markets)
Developing new product features
Adapt (to other ideas, developments)
Modify (change color, motion, sound, odor, form, shape)
Magnify (stronger, longer, thicker, extra value)
Minify (smaller, shorter, lighter)
Substitute (other ingredients, process, power)
Rearrange (other patterns, layout, sequence, components)
Reverse (inside out)
Combine (blend, alloy, assortment, ensemble, combine units, etc.)
Developing quality variations
Developing additional models and sizes (product proliferation)

19. Innovation Strategy
Involves creating a new product life cycle, thereby making similar existing products obsolete

20. 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
Vertical Integration
Involves acquiring firms
That supply acquiring firm with inputs (backward integration) or
Are customers for firm’s outputs (forward integration)

21. Ex. 6-8: Vertical and Horizontal Integrations
Textile producer
Textile producer
Shirt manufacturer
Shirt manufacturer
Clothing store
Clothing store
Acquisitions or mergers of suppliers or customer businesses are vertical integration
Acquisitions or mergers of competing businesses are horizontal integrations

22. 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

23. Diversification Strategies
Concentric Diversification
Involves acquisition of businesses related to acquiring firm in terms of technology, markets, or products
Conglomerate Diversification
Involves acquisition of a business because it represents a promising investment opportunity
Primary motivation is profit pattern of venture
Difference between the approaches
Concentric diversification emphasizes commonality whereas conglomerate diversification emphasizes profits for each individual unit

24. Turnaround Strategy
Involves a concerted effort over a period of time to fortify a firm’s distinctive competencies, returning it to profitability

25. A turnaround strategy is done through
Cost reduction
Asset reduction

26. Terms Used in 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

27. 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
Liquidation Strategy
Involves selling parts of a firm, usually for its tangible asset value and not as a going concern

28. 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

29. 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

30. 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

31. Ex. 6-12: The Top Five Strategic Reasons for Outsourcing
Improve business focus
Access to world-class capabilities
Accelerated reengineering benefits
Shared risks
Free resources for other purposes