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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

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

Achievable Understandable
Criteria used in preparing objectives

Acceptable
Flexible Measurable Motivating

Suitable

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What is the Balanced Scorecard?

The Balanced Scorecard is a set of measures that are directly linked to the companys 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 performance Customer knowledge Internal business processes Learning and growth

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Exhibit 6-2: The Balanced Scorecard

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?

Vision and Strategy

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 Differentiation Commonly Required Skills and resources
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

Common Organizational Requirements

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 Combination of above policies directed at the particular strategic target

Focus

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 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 Risks of Differentiation 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 Risks of Focus Focus strategy is imitated Target segment becomes unattractive Structure erodes Demand disappears Broadly target competitors overwhelm segments Segments 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

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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

Firms industry is resistant to major technological advancements Firms target markets are not product saturated Firms markets are sufficiently distinctive to dissuade competitors in adjacent markets from entering firms segment Firms inputs are stable in price and quantity and available in the amounts and at the times needed Firms industry is stable Firms 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) Increasing present customers rate of use
a. b. c. d. Increasing size of purchase Increasing the rate of product obsolescence Advertising other uses Giving price incentives for increased use Establishing sharper brand recognition Increasing promotional effort Initiating price cuts Introducing trial use thru sampling, price incentives, etc. Pricing up or down Advertising new uses

1.

2.

Attracting competitors customers

a. b. c.

3.

Attracting nonusers to buy the product

a. b. c.

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Ex. 6-4 (contd.)

Market Development (Selling present products in new markets.) Opening additional geographic markets
a. b. c. Regional expansion National expansion International expansion Developing product versions to appeal to other segments Entering other channels of distribution Advertising in other media

1.

2.

Attracting other market segments

a. b. c.

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Ex. 6-4 (contd.)

1.
Product Development (Developing new products for present markets) Developing new product features
a. b. c. d. e. f. g. h. 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.)

2. 3.
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Developing quality variations 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 firms 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 firms 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 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
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Turnaround Strategy

Involves a concerted effort over a period of time to fortify a firms 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 firms 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 firms 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. 2. 3. 4. 5.

Improve business focus Access to world-class capabilities Accelerated reengineering benefits Shared risks Free resources for other purposes

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