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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
CHAPTER 6
Formulating Long-Term Objectives and Grand
Strategies
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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
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Types of Long-Term Objectives
• Profitability• Productivity• Competitive position• Employee development• Employee relations• Technological leadership• Public responsibility
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Qualities of Long-Term Objectives
Criteria used in preparing objectives
Acceptable
Flexible
MeasurableMotivating
Suitable
Understandable
Achievable
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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.
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The Four Perspectives in a Balanced Scorecard
Financial performanceCustomer knowledge Internal business processesLearning and growth
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Exhibit 6-2: The Balanced Scorecard
Vision and
Strategy
Financial‘To succeed financially, how should we appear to our shareholders?”
Customer“To achieve our vision, how should we appear to our customers?”
Internal Business Process
“To satisfy our shareholders and customers, what business processes must we excel at?”
Learning and Growth‘To achieve our vision, how will we sustain our ability to change and improve?”
Learning and Growth‘To achieve our vision, how will we sustain our ability to change and improve?”
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The Value Disciplines
• Strategies must center on delivering superior customer value through one of three value disciplines: Operational excellence Customer intimacy Product leadership
• Companies that specialize in one of these disciplines, while simultaneously meeting industry standards in the other two, gain a sustainable lead in their markets.
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Generic Strategies
Low-cost Leadership
Differentiation Focus
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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
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Ex. 6-3 (contd.)
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
Combination of above policies directed at the particular strategic target
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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
•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
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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
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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
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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
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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
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Exhibit 6-4: Specific Options for Selected Grand Strategies
Concentration (Increasing use of present products in present markets)
1. Increasing present customers’ rate of usea. Increasing size of purchaseb. Increasing the rate of product obsolescencec. Advertising other usesd. Giving price incentives for increased use
2. Attracting competitors’ customersa. Establishing sharper brand recognitionb. Increasing promotional effortc. Initiating price cuts
3. Attracting nonusers to buy the producta. Introducing trial use thru’ sampling, price incentives, etc.b. Pricing up or downc. Advertising new uses
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Ex. 6-4 (contd.)
Market Development (Selling present products in new markets.)
1. Opening additional geographic marketsa. Regional expansion
b. National expansion
c. International expansion
2. Attracting other market segmentsa. Developing product versions to appeal to other
segments
b. Entering other channels of distribution
c. Advertising in other media
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Ex. 6-4 (contd.)
Product Development (Developing new products for present markets)
1. Developing new product featuresa. Adapt (to other ideas, developments)b. Modify (change color, motion, sound, odor, form, shape)c. Magnify (stronger, longer, thicker, extra value)d. Minify (smaller, shorter, lighter)e. Substitute (other ingredients, process, power)f. Rearrange (other patterns, layout, sequence, components)g. Reverse (inside out)h. Combine (blend, alloy, assortment, ensemble, combine
units, etc.)
2. Developing quality variations3. Developing additional models and sizes (product
proliferation)
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Innovation Strategy
Involves creating a new product life cycle, thereby making similar existing products obsolete
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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)
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Ex. 6-7: 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
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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
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Diversification StrategiesConcentric Diversification
• Involves acquisition of businesses related to acquiring firm in terms of technology, markets, or productsConglomerate 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
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Turnaround Strategy
Involves a concerted effort over a period of time to fortify a firm’s distinctive competencies, returning it to profitability
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Turnaround Strategy
A turnaround strategy is done through
Cost reduction Asset reduction
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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
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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
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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
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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
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Corporate Combination Strategies(contd.)
• 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
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Ex. 6-13: The Top Five Strategic Reasons for Outsourcing
1. Improve business focus
2. Access to world-class capabilities
3. Accelerated reengineering benefits
4. Shared risks
5. Free resources for other purposes