Chapter 5

Strategies in Action

Long Term Objectives

• Long term objectives represent the results expected from pursuing certain strategies.

• Strategies represent the actions to be taken to accomplish long term objectives.

• The time frame for objectives and strategies should be consistent, usually from two to five years.

Nature of Long Term Objectives

• Objectives should be Quantitative, Measurable, Realistic, Understandable, Challenging, Hierarchical, Obtainable, and Congruent among organizational units.

• E.g growth in assets, growth in sales, profitability, market share,….

• Long term obj. are needed at the corporate, divisional, and functional levels

• They are an important measure of managerial performance

Financial vs. Strategic Objectives

• Two types of objective are especially common in organizations : financial and strategic objectives.

• Although financial objectives are especially important in firms, oftentimes there is a trade-off between financial and strategic objectives such that crucial decisions have to be made.

• For example : a firm can maximize short term financial objective that would harm long term strategic objectives

• Financial objectives can best be met by focusing first on achievement of strategic objective that improve a firm market strength

Financial Objectives include

• Growth in revenues• Growth in earnings• Higher dividends• Larger profit margins• Greater ROI• Higher earnings per share• Rising stock price• Improved cash flow

Strategic Objectives include

• Larger market share• Quicker on-time delivery than rivals• Shorter design-to-market times than rivals• Lower costs than rivals• Higher product quality than rivals• Wider geographic coverage than rivals• Achieving technological leadership• Consistently getting new or improved products to

market ahead of rivals

Not Managing by Objectives

• An unknown educator once said ‘ If you think the education is expensive, try ignorance.’ The idea behind this saying also applies to establishing objectives. Strategists should avoid the following alternatives ways to ‘ not managing by objectives.’

Not Managing by Objectives

• Managing by Extrapolation االستنباط– adheres to the principles “If it ain’t broke, don’t fix it”. The idea is to keep on doing about the same things in the same ways because things are going well.

• Managing by Crisis – based on the belief that the true measure of really good strategist is: the ability to solve problems.

• This is a form of reacting rather than acting

Not Managing by Objectives

• Managing by Subjective – built on the idea that there is no general plan for which way to go and what to do just “Do your own thing, the best way you know how”

• Managing by Hope – based on the fact that the future is full of uncertainty and that if we try and don’t succeed, then we hope our second or third try will succeed.

The Balanced Scorecard

-Robert Kaplan & David Norton –•Is a Strategy evaluation & control technique•Balance financial measures with non financial measures (customer service, employee morale, product quality,…)•Contain combination of strategic and financial objectives tailored to the company’s business•Balance shareholder objectives with customer & operational objectives

Levels of Strategies – Large Company

Levels of Strategies – Small Company

• It is important to note that all persons responsible for strategic planning at the various levels ideally participate and understand the strategies at the other organizational level to help ensure coordination , facilitation, and commitment while avoiding inconsistency , inefficiency , and miscommunication. Plant managers , for example , need to understand and be supportive of the overall corporate strategic plan (game plan) while the president and the CEO need to be knowledgeable of strategies being employed in various sales territories and manufacturing plan.

• Many if not most organizations purse a combination of two or more strategies

• But a combination can be risky if carried too far

• No organization can afford to pursue all the strategies that might benefit the firm

• Difficult decisions must be made, priority must be established

• Firms have limited resources

Types of Strategies

1-Vertical Integration Strategies• Forward Integration : Gaining ownership or

increased control over distributors or retailerse.g microsoft open its own retail stores to firsthand about what consumers want and

how they buy

• An effective means of implementing forward integration is franchising وكالة منح

• Firm can expand rapidly by franchising due to costs & opportunities are spread among many individuals. See guideline on page 139-40

• Backward Integration : Seeking ownership or increased control of a firm’s suppliers

e.G any product of Proctol&Gamble has been checkout by scanner in wal-mart give instantly reorder in P&G

Global competition is also force firms to reduce their number of supplier to demand higher level of service &quality .See guideline on page 140-141

• Horizontal Integration : Seeking ownership or increased control over competitors

• Mergers, acquisition &takeover among competitors allow for increased economies of scale and enhanced transfer of resources and competencies

• Mergers between direct competitors are more efficient than between unrelated businesses due to eliminating duplicate facilities and management is more likely to understand the business of the target.

• See guideline on page 141

Types of Strategies

• Intensive Strategies: because they require intensive efforts

• Market Penetration • Market Development• Product Development

Intensive Strategies

• Market Penetration :Seeking increased market share for present products or services in present markets through greater marketing efforts.

-Includes increasing the number of salespersons, increasing advertising expenditures, offering extensive sales promotion items, or increasing publicity efforts.

Example: McDonald’s is spending million on its ‘ Shrek the third’ promotion aimed at convincing consumers it offers healthy items (2007).

-Five guidelines for when market penetration may be an especially effective strategy are:• When current markets are not saturated with a particular

product or service.• When the usage rate of present customers could be increased

significantly.• When he market shares of major competitors have been

declining while total industry sales have been increasing.• When the correlation between euro sales and euro marketing

expenditures historically has been high.• When increased economies of sales provide major competitive

advantages.

Intensive Strategies

• Market Development: Introducing present products or services into new geographic areas.

• Example : burger king opened its first restaurant in japan in 2007.

-Six guidelines for when market development may be an especially effective strategy are:• When new channels of distribution are available that are reliable,

inexpensive, and of good quality.

• When an organization is very successful at what it does.

• When new unplanned or unsaturated markets exist.

• When an organization has the needed capital and human resources to manage expanded operations.

• When an organization has excess production capacity.

• When an organization’s basic industry is becoming rapidly global in scope

Intensive Strategies

•Product Development: Seeking increased sales by improving present products or services or developing new ones.

- Product development usually entails large research and development expenditures.

-Example: Google introduced ‘ Google presents’ to compete with Microsoft’s PowerPoint in 2007.

-Five guidelines for when product development may be an especially effective strategy are:• When an organization has successful products that are in the

maturity stage of the product life cycle.

• When an organization competes in an industry that is characterized by rapid technological development.

• When an organization competes in a high growth industry.

• When an organization has especially strong research and development capabilities.

• When major competitors offer better quality products at comparable price.

Diversification Strategies

•Related Diversification•Unrelated Diversification

Diversification Strategies

•Related Diversification: Adding new but related products or services. Most company favor related diversification in order to capitalize on synergies as follow:1-transfering competitive expertise, know how, or other capabilities from one business to another.2-combining related activities to lower costs3-exploting well known brand name4-cross business collaboration to create competitive advantages -Example : MGM Mirage is opening its first non casino luxury hotel in 2007.

-Six guidelines for when Related Diversification may be an especially effective strategy are:• When an organization competes in a no a growth or a slow

growth industry.• When adding new but related products that enhance the sales

of current products.• When new but related products could be offered at highly

competitive prices• When new but related products have seasonal sales levels that

counterbalance organization’s existing peaks and valleys.• When an organization’s products are currently in the declining

stage of the product’s life cycle.• When an organization has a strong team.

Diversification Strategies

•Unrelated Diversification: Adding new, unrelated products or services. An unrelated diversification strategy favor capitalizing upon portfolio of business that are capable of delivering excellent financial performance in their respective industries rather than striving to capitalize on value chain strategic fits among the business.

Parent firm must have excellent top management team, it is much difficult to

manage businesses in many industries

-Example: Ford Motor Company entered the industrial bank business in 2007.

- Guidelines for when Related Diversification may be an especially effective strategy are:

- When an organization compete in a highly competitive and / or a no growth industry as indicated by low industry profit margins and return.

- When an organization’s present channel of distribution can be used to market the new products to current customers.

- When an organization’s basic industry is experiencing declining annual sales and profits.

- When an organization has the opportunity to purchase an unrelated business that is an attractive investment opportunity.

- When an organization has the capital and managerial talent to compete successfully in a new industry. Other guidelines present on page145-146

Defensive Strategies

•Retrenchment•Divestiture

•Liquidation

Defensive Strategies

•Retrenchment: Regrouping through cost and asset reduction to reverse declining sales and profit.- Sometimes called turnaround or reorganizational strategy;

retrenchment is designed to fortify an organization’s basic distinctive competence.

- During retrenchment, strategies work with limited resources and face pressure from shareholders, employees, and the media

- Example: Discovery Channel closed its 103 mall based and stand alones stores to force on the internet and laid off 25% of its workforce in 2007

-Guidelines for when Related Diversification may be an especially effective strategy are:

•When an organization has a clearly distinctive competence but has failed consistently to meet its objectives and goals over time.•When firm is affected by inefficiency, low profit, low employee morale and pressure from stockholders to improve performance •When an organization is one the of the weaker competitors in a given industry.*when firm strategic management failed.•When an organization has grown so large so quickly that major internal reorganization is needed.

Defensive Strategies

•Divestiture: Selling a division or part of an organization.

-Divestiture often is used to raise capital for further strategic acquisition or investments.

-It can be part of retrenchment strategy to rid an organization of business that are unprofitable, that require too much capital.

- Example : Whirlpool sold its struggling Hoover floor care business to Techtronic Industries in 2007

-Guidelines for when Divestiture may be an especially effective strategy are:•When a division needs more resources to be competitive than the company can provide.•When firm try retrenchment strategy and failed.•When division is misfit with the rest of firm•When large amount of cash is needed quickly an can not obtained from other sources.•When a division is responsible for an organization’s overall poor performance.•When government antitrust action threatens an organization.

Defensive Strategies

•Liquidation: Selling all of a company’s assets, in parts, for their tangible worth.

- Liquidation is a recognition of defeat and consequently can be an emotionally difficult strategy.

- However, it can be better to cease operating than to continue losing large sums of money.

- Example Follow Me Charters sold all of its assets and ceased doing business.

-Three Guidelines for when Liquidation may be an especially effective strategy are:

• When an organization has pursued both a retrenchment strategy and a divestiture strategy, and neither has been successful.

• When the stockholders of a firm can minimize their loses by selling the organization’s assets.

• When an organization’s only alternative is bankruptcy.

Porter’s Five Generic Strategies

• Type 1 Cost Leadership – Low cost• Type 2 Cost Leadership – Best value• Type 3 Differentiation• Type 4 Focus – Low cost• Type 5 Focus – Best value• See page 151

Type 1 or 2 Cost Leadership

• See first paragraph on153• Strategy Conditions:• Vigorous price competition• Plentiful supply of identical products• Little product differentiation• Products used in same ways• Low cost to switch• Large buyers with power• Industry newcomers use low prices to attract buyersRisk: 1- competitor may imitate strategy2- buyers switch to differentiation features besides price

Type 3 Differentiation Strategy • Allows a firm to charge a higher price for its product and to

gain customer loyalty because consumers may become strongly attached to the differentiation features.

• Risk: 1- when unique product may not be valued highly enough to justify the higher price. When this happens , a cost leadership strategy easily will defeat a differentiation strategy.

• Risk :2-competitors may quickly develop ways o copy the differentiating features.

-thus firms must find durable sources of uniqueness that cannot be imitated quickly or cheaply by rival firm through strong coordination among the R&D and marketing functions.

Type 3 Differentiation Strategy Conditions

• Many ways to differentiate and buyers perceive the differences as having value

• Diverse buyer needs and uses• Few rival firms following similar

differentiation approach• Fast paced technological change and evolving

product features

Type 4 or 5 Focus Strategy Conditions

• Large, profitable, and growing target market niche• Industry leaders do not consider the niche crucial

to their success• Industry leaders consider it costly or difficult to

meet the needs of this niche• Industry has many niches and segments• Few rivals are specializing on this target segmentStrategies for competing in turbulent market: see on

page 155

Means for Achieving Strategies

• 1-Cooperation among competitors:

Both firms must contribute something distinctive ,such as technology , distribution , basic research , or manufacturing capacity. example: airline industry; firms are finding difficulty to survive alone in some industry.

2-Joint venture / partnering

• Joint venture is a popular strategy that occurs when two or more companies form a temporary partnership or consortium for the purpose the purpose of capitalizing on some opportunity.

• Often the two or more sponsoring firms form a separate organization and have shared equity ownership in the new entity.

• They allow companies to improve communications and networking , to globalize operations ,and to minimize risk. To pursue an opportunity that is too complex, uneconomical, or risky for a single firm to pursue alone

• A few common problems that cause joint ventures to fail are as follows:

1-managers who must collaborate daily in operating the venture are not involved in forming or shaping the venture.

2- the venture may benefit the partnering companies but may not benefit customers, who then complain about poorer service or criticize the companies in other ways.

3-the venture may not be supported equally by both partners. if supported unequally , problem arise.

4-the venture may begin to compete more with one of the partners than the other.

• Six guidelines for when a joint venture may be an especially effective means for pursuing strategies are:

1-when a privately owned organization is forming a joint venture with a publicly owned organization; there are some advantages to being privately held ,such as closed ownership; there are some advantages of being publicly held, such as access to stock issuances as a source of capital.sometimes,the unique advantages of being privately and publicly held can be synergistically combine in a joint venture.

2- when a domestic organization is forming a joint venture with a foreign company; a joint venture can provide a domestic company with the opportunity for obtaining local management in a foreign country.

3-when two or more firms complement each other especially well.4-when some project is very profitable but requires resources and risks.5-when two or more smaller firms have trouble competing with a large firm.6-when there exists a need to quickly introduce a new technology.

3-Merger / acquisition

• Merger and acquisition are two commonly used ways to pursue strategies.

• A merger occurs when two organization of about equal size unite to form one enterprise.

• An acquisition occurs when a large organization purchases a smaller firm or vise versa.

• When a merger or acquisition is not desired by both parties, it can be called a takeover or hostile takeover.

• In contrast, if acquisition is desired by both firm, it is called a friendly merger.

4- first mover advantages

first mover advantages refer to the benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms.

5-outsourcing• Companies are choosing to outsource their functional

operations more and more for several reason:1-it is less expensive.2-it allows the firm to focus on its core businesses.3-it enables the firm to provide better services.**other advantages of outsourcing are that the strategy:1-allows the firm to align itself with “best-in-world" suppliers

who focus on performing the special task2-provides the firm flexibility should customer needs shift

unexpectedly .3- allows the firm to concentrate on other internal value chain

activities critical to sustaining competitive advantage.

Strategic Management in Nonprofit and Governmental Organizations

Depend on outside financing• Educational Institutions• Medical Organizations

Backward integration with ambulance services• Governmental Agencies and Departments

Cannot diversify into unrelated business or merge with other firm