Strategic ManagementStrategies in ActionTomorrow always arrives. It isAlways different. And even the mightiest Company is in trouble if it hasnt worked on the future. PETER DRUCKERChapter 5

Financial Versus Strategic Objective

Financial Versus Strategic ObjectivesFinancial Objectives: Any objective that can be derived from financial statements is financial objective.Strategic Objectives: Any objective that is market based and is aimed to make the organization more competitive is called strategic objective.

Financial ObjectiveStrategic Objectivegrowth in revenueslarge market sharegrowth in earningsquicker on time delivery than rivalshigher dividendsshorter design-to-market time than rivalslarger profit marginlower costs than rivalsgreater return on investmenthigher product quality than rivalshigher earning per sharewider geographic coverage than rivalsa rising stock priceachieving ISO certificationimproved cash flowincreasing customer satisfaction

Managing by ObjectivesNot

Not Managing by Objective1. Managing by Extrapolation: If it isnt broken, then dont fix it. The idea is to keep on doing the same thing if its going well.

2. Managing by Crisis: A crisis should set the strategist in motion and; a crisis dictates the whats and whens of management decision.

3. Managing by Subjective: Do your own thing, the best way you know.

4. Managing by Hope: Decisions are predicted on the hope that they will work and good times are just around the corner especially if luck is on our side.

The Balanced Scorecard

The Balanced ScorecardDeveloped in 1993 by Robert Kaplan and David NortonBalance scorecard is a strategy evaluation and control technique and its overall aim is to balance shareholder objectives (financial objectives) with customer and operational objectives (non-financial objectives). An effective Balanced Scorecard contains a carefully chosen combination of strategic and financial objectives tailored to the companys business.Such objectives interrelate and may even conflict with each other.

The Balanced Scorecard

Levels of Strategies

Levels of StrategiesA Large CompanyOperational LevelFunctional LevelDivision LevelCorp Level

Levels of StrategiesA Small CompanyOperational LevelFunctional LevelCompany Level

Types of Strategies

Integration Strategies

Integration StrategiesIt is a strategy of expansion under which growth is achieved mostly by Mergers & Acquisitions.

It consists of the following two major strategies;

Horizontal IntegrationVertical Integration

Integration StrategiesHorizontal IntegrationWhen a firms long-term strategy is based on growth through the merger or acquisition of a firms competitor.Such acquisitions eliminate competitors and provide the acquiring firm with access to new markets. Horizontal Integration is effectiveWhen an organization can gain monopolistic characteristics without being challenged by the government.When an organization competes in a growing industry.When increased economies of scale provides major competitive advantage.When an organization has both the capital and the human talent needed to handle an expanded organization.When competitors are faltering due to lack of managerial expertise.

Integration StrategiesVertical Integration: Vertical integration is the process in which several steps in the supply, production and distribution of a product or service are controlled by a single company or entity, in order to increase that companys or entitys power in the marketplace.Vertical Integration consists of two types of strategies.

Forward IntegrationBackward Integration

Integration StrategiesForward IntegrationWhen a firms strategy is to merge or acquire other firms that are customers for its outputs such as warehouses for finished products or retailers, the firm is said to follow a Forward Integration Strategy.Forward Integration is effective whenPresent distributors are expensive, unreliable, or incapable of meeting firms needs.Have the capital and Human ResourceDistributors are few in number with higher bargaining powerWhen distributors margins are very high.Company can gain a competitive advantageWhen the industry is rapidly growing

Integration StrategiesBackward Integration StrategyWhen a firms strategy is to merge or acquire other firms that supply it with inputs (such as raw materials), the firm is said to follow a Forward Integration Strategy.Backward Integration is effective whenA firms suppliers are expensive or unreliable.Number of suppliers is small and number of competitors is largeCompany can gain a competitive advantageWhen the organization has both the capital and the human resourceWhen the advantages of stable prices are particularly importantWhen supplier margins are high

Integration Strategies

Intensive Strategies

Intensive StrategiesIt is a strategy of expansion under which growth is achieved by expanding the scale of operations.

It involves the following three strategies;Market PenetrationMarket DevelopmentProduct Development

Intensive Strategies1. Market PenetrationThis strategy aims to seek increased sales of the present products in the present markets through more aggressive promotion and distribution. The firms tries to penetrate deeper into the market to increase its market share. More money is spent on advertising and sale promotion to increase sale volume.

Market Penetration involves decreasing price, improving quality, increasing the number of salespersons, increasing advertising, offering extensive sales promotion items, or increasing publicity efforts.

Intensive StrategiesMarket penetration is effective when..The current market is not saturated with existing products.The usage rate of consumers can be increased.The market shares of the major competitors is declining while the total share is increasingWhen increased economies of scale leads to a strong competitive advantage.Historical relationship between dollar marketing expenditure and dollar sales has been positive

Intensive Strategies2. Market DevelopmentThis strategy aims to increase sales volume by selling the present products into new markets. For example, Pepsi & Cola has achieved growth by capturing foreign markets in the past. Market development requires major changes intoDistribution channelsPricing policyPromotional strategy

Intensive StrategiesMarket Development is effective whenNew channels of distribution are available that are reliable, inexpensive and of good quality.When an organization is very good at what it doesWhen new untapped and unsaturated markets exists.When a firm has excess production capacity.When an organizations industry is rapidly becoming global in scope.

Intensive Strategies3. Product DevelopmentUnder this strategy, a business seeks to grow by developing improved or modified products for the present markets. The current product may be replaced or the new products may be introduced in addition to the existing products. The introduction of "Colgate-gel" by Colgate-Palmolive (India) Ltd. is an example in this regard.

Intensive StrategiesProduct development is effective whenWhen an organization has successful products in the maturity stage. The idea is to attract satisfied customers to try new (improved) products as a result of their positive experience with the organizations present products.When major competitors offer better quality products at comparable prices.When an organization competes in a high growth industry.When an organization has a strong R&D department.

Diversification Strategies

Diversification StrategiesDiversification strategies are used to expand firms' operations by adding markets, products, or services, to the existing business. The purpose of diversification is to allow the company to enter lines of business that are different from current operations.

Firms usually follow this strategy either to spread risk across different industries or avoid unattractive industries.

Diversification StrategiesThere are two general types of diversification strategies

Related Diversification (when two businesses value/supply chains posses competitively valuable cross-business strategic fit)

Unrelated Diversification (when the value/supply chains of two or more businesses are so dissimilar that no competitively valuable cross-business relationship exists)

Diversification Strategies1. Related Diversification Case

Engro FoodsEngro Fertilizer LimitedSuppliersCustomersIncludes large scale farmers who have diversified into dairy productionThe customers for one of their supply chain is used as a supplier for another venture Engro Foods

Diversification StrategiesRelated Diversification is effective whenAn organization competes in a no-growth or slow growth industry.When the organization has a strong management team.When an organizations current products are in the declining stage of the product life cycle.When existing products are seasonal and new, but related, products can provide with more stable streams of sales throughout the year or at least counterbalance the organizations existing peaks and valleys.When new, but related products, may be sold at highly competitive prices.

2. Unrelated Diversification Case (Nishat Group)2. Unrelated Diversification Case Nishat GroupNishat Mills

Diversification StrategiesUnrelated Diversification is effective whenWhen an organization has the capital and managerial talent to compete successfully in a new industry.When an organization has the opportunity to purchase an unrelated business that is an attractive investment opportunity. When an organization is competing in a highly competitive and/or no-growth industry with declining annual sales and profits.When an organization can violate anti-trust laws by diversifying in a related industry.

Defensive Strategies

Defensive StrategiesDefensive strategies are used when firms try to reduce the risk of loss.

There are three defensive strategies used in Strategic Management.

RetrenchmentDivestitureLiquidation

Defensive Strategies1. RetrenchmentRetrenchment is a corporate-level strategy that seeks to reduce the size or diversity of an organization's operations. Retrenchment is also a reduction of expenditures in order to become financially stable.Retrenchment is a pullback or a withdrawal from offering some current products or serving some markets in order to fortify some distinctive competencies.During retrenchment, strategists work with limited resources, and face pressures from stakeholders. It entails selling off lands, buildings, pruning product line, closing marginal businesses or obsolete factories, reducing number of employees, and instituting expense control systems.

Defensive StrategiesWhat drives retrenchment?

Uncompetitive cost structuresInadequate ROIPoor competitive positionFinancial distressMarket declineEconomic downturnChange of OwnershipToo rapid expansion

Defensive Strategies2. DivestitureSale of a division or part of an organization. A company will often divest an asset which is not performing well, which is not vital to the company's core business, or which is worth more to a potential buyer or as a separate entity than as part of the company.

Can be used in combination with Retrenchment strategy

Often used to make businesses more focused on their core businesses and less diversified..

Defensive StrategiesDivestiture if effective whenWhen retrenchment has failed to deliver needed improvements.When core businesses are faltering and require more capital that the firm can provide.When a division is responsible for an organizations overall poor performance

Defensive Strategies3. LiquidationWhen a business or firm is terminated or bankrupt its assets are sold and the proceeds are paid to creditors. Any leftovers are distributed to shareholders.

In liquidation, a liquidator is appointed by the court or by the creditors of the organization, or by a greater majority (at least 75%) of shareholders through an extraordinary resolution.

Defensive StrategiesLiquidation is effective whenBoth retrenchment and divestiture strategies have been failed.When the only option available to an organization is bankruptcyWhen the stock holders can minimize their losses by selling the organizations assets.

Michael Porters Five Generic Strategies

Michael Porters Five Generic StrategiesMichael Porter emphasized that strategists have three bases to achieve competitive advantage for an organization.

Base I: Cost Leadership

Base II: Differentiation

Base III: Focus

Michael Porters Five Generic StrategiesBase I: Cost LeadershipCost leadership emphasizes producing standardized products at a very low per unit cost for consumers who are price sensitive.There are two alternative types of cost leadership strategies:

1.Low-Cost Strategy (Type 1)Products offered to a wide range of customers at the lowest possible price.2.Best-Value Strategy (Type 2)It offers products to a wide range of customers at the best price-value available on the market.

Michael Porters Five Generic StrategiesCost leadership Strategies (Type 1 and Type 2)Horizontal and Vertical Integration strategies are often used to cut costs, stabilize prices and achieve economies of scale to gain low cost or best value cost leadership benefit.Major cost elements that effect the attractiveness of these strategies are economies of scale, learning and experience curve effects, percentage of capacity utilization achieved, and linkages with suppliers and distributors.Companies must consider the VRINE criteria while pursuing the type 1 and type 2 strategies. To employ cost leadership strategy, a company should either perform value chain activities efficiently or revamp the firms overall value chain to eliminate certain cost-producing (excess) activities.Price-cuts that eliminate company profits should be avoided.Strategists must be mindful of cost saving technologies or value chain advancements that may erode the firms competitive advantage.

Michael Porters Five Generic StrategiesType 1 and Type 2 are effective when

When price competition is vigorous.Few ways to achieve product differentiation.When buyers switching cost is low.When buyers are large in number and have a significant bargaining power.

Michael Porters Five Generic StrategiesBase II: Differentiation (Type 3)This strategy is aimed at producing products that are considered unique industry wide and directed at consumers who are relatively price-insensitive.Differentiation mean greater product flexibility, greater compatibility, improved services, less maintenance, greater convenience, or more features.In making unique products, companies should carefully select those means that are hard, expensive, and time consuming to imitate by competitors The product must also be unique in consumer perception. Consumers will not pay higher prices unless their perceived value of the product exceeds the price that they pay for it.

Michael Porters Five Generic StrategiesProduct development is the strategy that offers differentiation.For sustained differentiation, a strong R&D must be integrated with Marketing Function of the organization.Differentiation can be based on taste, wide selection, superior service, performance, convenience etc.

Michael Porters Five Generic StrategiesBase III: FocusFocus means products that meet the needs and wants of small groups of consumers. Two alternate focus strategies are Type 4 and Type 5.

1. Low Cost Focus (Type 4)A strategy that offers products to small range of customers (niche group) at the lowest price available on the market.

2.Best Value Focus (Type 5)A strategy that offers products to small range of customers at the best price value available on the market.

Michael Porters Five Generic StrategiesFocus Strategies (Type 4 and Type 5)Market Development offers good focus opportunities Focus strategy is successful when the segment size is sufficient, has good growth potential, and is not crucial to the success of major competitors.