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Long-Term Objectives andStrategies
Chapter 7
McGraw-Hill/Irwin Copyright 2009 by the McGraw-Hill Companies, Inc. All rights reserved.
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Learning Objectives
1. Discuss seven differenttopics forlong-term corporateobjectives
2. Describethe five qualities of long-term corporateobjectives thatmakethem useful to strategic managers
3. Explainthegeneric strategies of low-cost leadership,differentiation,and focus
4. Discuss the importanceofthevalue disciplines
5. List, describe,evaluate,and giveexamples of 15grand strategies that decisionmakers use in formingtheircompanys competitiveplan
6. Understand the creationof sets of long-termobjectivesand grand strategies options
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Long-Term Objectives
Strategic managers recognizethat short-runprofitmaximization is rarelythebestapproachtoachievingsustained corporategrowthandprofitability
Toachieve long-termprosperity, strategicplanners
commonlyestablish long-termobjectives in sevenareas:
Profitability Productivity
Competitive Position EmployeeDevelopment
Employee Relations Productivity
Tech Leadership Public Responsibility
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Qualities of Long-Term Objectives
Thereare five criteriathat should be used
inpreparing long-termobjectives:
Flexible
Measurable
Motivating
Suitable
Understandable
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The Balanced Scorecard
Thebalanced scorecard is a setofmeasures thatare
directly linked tothe companys strategy
Developedby RobertS. Kaplanand David P.
Norton, it directs a companyto linkits own long-term strategywithtangiblegoals and actions.
The scorecard allows managers toevaluatethe
company from fourperspectives:
financialperformance customerknowledge
internalbusinessprocesses
learningand growth
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The Balance Scorecard
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Generic Strategies
A long-termorgrand strategymustbebased ona
core ideaabouthowthe firm canbest compete in
themarketplace. Thepopularterm forthis core idea
is generic strategy.
3 Generic Strategies:
1. Striving foroverall low-cost leadership inthe industry.
2. Strivingto createand market uniqueproducts forvaried
customergroups throughdifferentiation.
3. Strivingtohave special appeal tooneormoregroups of
consumers orindustrialbuyers,focusingontheircostor
differentiation concerns.
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Low-Cost Leadership
Low-costproducers usuallyexcel at costreductionsand efficiencies
Theymaximizeeconomies of scale, implement cost-cuttingtechnologies, stress reductions inoverhead
and inadministrativeexpenses,and usevolume salestechniques topropel themselves uptheearning curve
A low-cost leaderis ableto use its costadvantagetocharge lowerprices ortoenjoyhigherprofitmargins
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Differentiation
Strategies dependenton differentiationare designed
toappeal to customers witha special sensitivity fora
particularproductattribute
By stressingtheattributeaboveotherproductqualities,the firmattempts tobuild customerloyalty
Often such loyaltytranslates intoa firms abilityto
chargeapremiumprice forits product
Theproductattributealso canbethemarketingchannels throughwhich it is delivered, its image for
excellence,the features it includes,and its service
network
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Focus
A focus strategy,whetheranchored ina low-cost
baseora differentiationbase,attempts toattend to
theneeds ofaparticularmarket segment
Afirmpursuinga focus strategy is willingto serviceisolated geographic areas; to satisfytheneeds of
customers with special financing, inventory,or
servicingproblems; ortotailortheproducttothe
somewhat unique demands ofthe small- tomedium-sized customer
The focusing firms profit fromtheirwillingness to
serveotherwise ignored orunderappreciated
customersegments 7-11
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Risks of the Generic Strategies
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The Value Disciplines
Operational Excellence
This strategyattempts to
lead the industry inprice
and convenienceby
pursuinga focus on leanand efficientoperations
CustomerIntimacy
Customerintimacymeans
continuallytailoringandshapingproducts and
services to fitan
increasinglyrefined
definitionofthe customer
Product Leadership
Companies thatpursue
the disciplineofproduct
leadership striveto
producea continuousstateof state-of-the-art
products and services
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Grand Strategies
Grand strategies,often called masterorbusiness
strategies,providebasic direction forstrategic
actions
Indicatethetimeperiod overwhich long-rang
objectives aretobeachieved
Anyoneofthese strategies could serveas thebasis
forachievingthemajorlong-termobjectives ofa
single firm
Firms involved withmultiple industries,businesses,
product lines,orcustomergroups usually combine
several grand strategies
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Concentrated Growth
Concentrated growth is the strategyofthe
firmthat directs its resources totheprofitable
growthofa dominantproduct, ina dominant
market,witha dominanttechnology Concentrated growth strategies lead to
enhanced performance
Specific conditions favorconcentrated growth Therisks and rewards vary
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Market Development
Market development commonlyranks second onlyto concentrationas the least costlyand leastriskyofthe 15 grand strategies
It consists ofmarketingpresentproducts,oftenwith
only cosmetic modifications,to customers inrelatedmarketareasbyadding channels of distributionorbychangingthe contentofadvertisingorpromotion
Frequently, changes inmedia selection,promotional
appeals,and distributionare used to initiatethisapproach
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Product Development
Product development
involves the substantial
modificationofexistingproducts orthe creationof
newbutrelated products
that canbemarketed tocurrent customers through
established channels
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Innovation
These companies seektoreapthe initiallyhigh
profits associated with customeracceptanceofanew
orgreatly improvedproduct
Then,ratherthan face stiffening competitionas thebasis ofprofitability shifts from innovationto
productionormarketing competence,they search for
otheroriginal ornovel ideas
The underlyingrationaleofthegrand strategyofinnovation is to createanewproduct life cycleand
therebymake similarexistingproducts obsolete
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Horizontal Integration
Whena firms long-term strategy is based
ongrowththroughtheacquisitionofone
ormore similarfirms operatingatthe same
stageoftheproduction-marketing chain,its grand strategy is called horizontal
integration
Suchacquisitions eliminate competitorsand providetheacquiring firmwithaccess
tonewmarkets
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Vertical Integration
Whena firms grand strategy is toacquire
firms that supply itwith inputs (suchas
rawmaterials) orare customers forits
outputs (suchas warehouses forfinishedproducts),vertical integration is involved
Themainreason forbackward integration
is the desireto increasethe dependabilityofthe supplyorqualityoftheraw
materials used as production inputs
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Vertical and Horizontal Integration
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Concentric Diversification
Concentric diversification involves theacquisitionofbusinesses thatarerelated totheacquiring firm interms oftechnology,markets,or
products
Withthis grand strategy,the selected newbusinessespossess ahigh degreeof compatibilitywiththe firms currentbusinesses
The ideal concentric diversificationoccurs when
the combined companyprofits increasethestrengths and opportunities and decreasetheweaknesses and exposuretorisk
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Conglomerate Diversification
Occasionallya firm,particularlyavery largeone,
plans acquireabusinessbecause itrepresents the
mostpromising investmentopportunityavailable.
This grand strategy is commonlyknownas
conglomerate diversification.
Theprincipal concernoftheacquiring firm is the
profitpatternoftheventure
Unlike concentric diversification, conglomeratediversificationgives little concernto creating
product-market synergywithexistingbusinesses
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Turnaround
The firm finds itselfwith decliningprofits Amongthereasons areeconomic recessions,
production inefficiencies,and innovativebreakthroughsby competitors
Strategic managers oftenbelievethe firm cansurviveand eventuallyrecoverifa concerted effortis madeoveraperiod ofa fewyears to fortify itsdistinctive competences. This is turnaround.
Two forms ofretrenchment: Costreduction
Assetreduction
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Elements of Turnaround
Aturnaround situation represents absoluteand relative-to-industry decliningperformanceofa sufficientmagnitudeto
warrantexplicitturnaround actions
The immediacyoftheresultingthreatto company survival is
knownassituation severity Turnaround responses among successful firms typically
includetwo stages of strategic activities: retrenchmentand the
recoveryresponse
Theprimary causes oftheturnaround situationhavebeenassociated withthe secondphaseoftheturnaroundprocess,
therecovery response
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Divestiture
Adivestiture strategy involves the saleofa
firmoramajorcomponentofa firm
Whenretrenchment fails toaccomplishthe
desired turnaround,orwhenanonintegratedbusiness activityachieves an unusuallyhigh
marketvalue, strategic managers often
decideto sell the firm Reasons fordivestiturevary
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Liquidation
When liquidation is thegrand strategy,the
firmtypically is sold inparts,only
occasionallyas awholebut forits
tangibleassetvalueand notas agoingconcern
Planned liquidation canbeworthwhile
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Bankruptcy
Liquidation bankruptcyagreeingtoa
complete distributionof firmassets to
creditors,mostofwhomreceivea small
fractionoftheamounttheyareowed Reorganization bankruptcythemanagers
believethe firm canremainviablethrough
reorganization Twonotabletypes ofbankruptcy
Chapter 7
Chapter 117-28
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Joint Ventures
Occasionallytwoormore capable firms
lackanecessary component forsuccess ina
particularcompetitiveenvironment
The solution is a setofjoint ventures,whichare commercial companies (children)
created and operated forthebenefitofthe
co-owners (parents) Thejointventureextends the supplier-
consumerrelationshipand has strategic
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Strategic Alliances
Strategic alliances are distinguished from
jointventures becausethe companies
involved donottakeanequityposition in
oneanother In some instances, strategic alliances are
synonymous with licensingagreements
Outsourcingarrangements vary
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Consortia, Keiretsus, and Chaebols
Consortia are defined as large interlocking
relationships betweenbusinesses ofan
industry
In Japan such consortiaareknownaskeiretsus, inSouth Koreaas chaebols
Theircooperativenature is growing in
evidenceas is theirmarket success
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Selection of Long-Term Objectives and
Grand Strategy Sets
When strategicplanners studytheiropportunities,theytryto determinewhichare
most likelytoresult inachievingvarious long-
rangeobjectives
Almost simultaneously,theytryto forecast
whetheranavailablegrand strategy cantake
advantageofpreferred opportunities sothe
tentativeobjectives canbemet
Inessence,then,three distinctbuthighly
interdependent choices arebeingmadeatone
time
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Sequence of Selectionand Strategy Objectives
The selectionof long-rangeobjectives and grandstrategies involves simultaneous,ratherthan
sequential, decisions
While it is truethatobjectives areneeded to
preventthe firms directionandprogress from
being determinedbyrandom forces, it is equally
truethatobjectives canbeachieved only if
strategies are implemented
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