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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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