S_Ch7_Long Term Objectives and Strategies

8/3/2019 S_Ch7_Long Term Objectives and Strategies

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Long-Term Objectives and

Strategies

Chapter 7


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Long-Term Objectives

Strategic managers recognize that short-run profitmaximization is rarely the best approach to achievingsustained corporate growth and profitability

To achieve long-term prosperity, strategic planners

commonly establish long-term objectives in sevenareas:

Profitability Productivity

Competitive Position EmployeeDevelopment

Employee Relations Productivity

Tech Leadership Public Responsibility

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Qualities of Long-Term Objectives

There are five criteria that should be used

in preparing long-term objectives:

Flexible

Measurable

Motivating

Suitable

Understandable

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The Balanced Scorecard

The balanced scorecard is a set of measures that aredirectly linked to the companys strategy

Developed by Robert S. Kaplan and David P. Norton, itdirects a company to link its own long-term strategy

with tangible goals and actions. The scorecard allows managers to evaluate the

company from four perspectives:

financial performance

customer knowledge

internal business processes

learning and growth

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The Balance Scorecard

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Generic Strategies

A long-term or grand strategy must be based on acore idea about how the firm can best compete inthe marketplace. The popular term for this coreidea is generic strategy.

3Generic Strategies:1. Striving for overall low-cost leadership in the industry.

2. Striving to create and market unique products for variedcustomer groups through differentiation.

3. Striving to have special appeal to one or more groups ofconsumers or industrial buyers,focusing on their cost or

differentiation concerns.

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Low-Cost Leadership

Low-cost producers usually excel at cost reductionsand efficiencies

They maximize economies of scale, implement cost-cutting technologies, stress reductions in overhead

and in administrative expenses, and use volumesales techniques to propel themselves up theearning curve

A low-cost leader is able to use its cost advantage to

charge lower prices or to enjoy higher profit margins

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Differentiation

Strategies dependent on differentiation are designed toappeal to customers with a special sensitivity for aparticular product attribute

By stressing the attribute above other product qualities,

the firm attempts to build customer loyalty Often such loyalty translates into a firms ability to

charge a premium price for its product

The product attribute also can be the marketingchannels through which it is delivered, its image forexcellence, the features it includes, and its servicenetwork

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Focus

A focus strategy, whether anchored in a low-cost base ora differentiation base, attempts to attend to the needs ofa particular market segment

A firm pursuing a focus strategy is willing to service

isolated geographic areas; to satisfy the needs ofcustomers with special financing, inventory, or servicingproblems; or to tailor the product to the somewhatunique demands of the small- to medium-sized customer

The focusing firms profit from their willingness to serve

otherwise ignored or underappreciated customersegments

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Risks of the Generic Strategies

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The Value Disciplines

Operational Excellence

This strategy attempts tolead the industry in priceand convenience by pursuinga focus on lean and efficient

operations Customer Intimacy

Customer intimacy meanscontinually tailoring andshaping products and

services to fit an increasinglyrefined definition of thecustomer

Product Leadership

Companies that pursuethe discipline of productleadership strive toproduce a continuous

state of state-of-the-artproducts and services

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Grand Strategies

Grand strategies, often called master or businessstrategies, provide basic direction for strategicactions

Indicate the time period over which long-rang

objectives are to be achieved Any one of these strategies could serve as the basis

for achieving the major long-term objectives of asingle firm

Firms involved with multiple industries, businesses,product lines, or customer groups usually combineseveral grand strategies

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Concentrated Growth

Concentrated growth is the strategy of the

firm that directs its resources to the profitable

growth of a dominant product, in a dominant

market, with a dominant technology Concentrated growth strategies lead to

enhanced performance

Specific conditions favor concentrated growth The risks and rewards vary

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Market Development

Market development commonly ranks second onlyto concentration as the least costly and least risky ofthe 15 grand strategies

It consists of marketing present products, often with

only cosmetic modifications, to customers in relatedmarket areas by adding channels of distribution orby changing the content of advertising or promotion

Frequently, changes in media selection, promotional

appeals, and distribution are used to initiate thisapproach

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Product Development

Product development involves the

substantial modification of existing

products or the creation of new butrelated products that can be marketed

to current customers through

established channels

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Innovation

These companies seek to reap the initially highprofits associated with customer acceptance of anew or greatly improved product

Then, rather than face stiffening competition as the

basis of profitability shifts from innovation toproduction or marketing competence, they searchfor other original or novel ideas

The underlying rationale of the grand strategy of

innovation is to create a new product life cycle andthereby make similar existing products obsolete

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Horizontal Integration

When a firms long-term strategy is basedon growth through the acquisition of oneor more similar firms operating at thesame stage of the production-marketingchain, its grand strategy is calledhorizontal integration

Such acquisitions eliminate competitors

and provide the acquiring firm with accessto new markets

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Vertical Integration

When a firms grand strategy is to acquirefirms that supply it with inputs (such asraw materials) or are customers for itsoutputs (such as warehouses for finishedproducts), vertical integration is involved

The main reason for backward integrationis the desire to increase the dependability

of the supply or quality of the rawmaterials used as production inputs

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Vertical and Horizontal Integration

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Concentric Diversification

Concentric diversification involves the acquisitionof businesses that are related to the acquiring firmin terms of technology, markets, or products

With this grand strategy, the selected new

businesses possess a high degree of compatibilitywith the firms current businesses

The ideal concentric diversification occurs whenthe combined company profits increase the

strengths and opportunities and decrease theweaknesses and exposure to risk

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Conglomerate Diversification

Occasionally a firm, particularly a very large one,plans acquire a business because it represents themost promising investment opportunity available.This grand strategy is commonly known as

conglomerate diversification. The principal concern of the acquiring firm is the

profit pattern of the venture

Unlike concentric diversification, conglomerate

diversification gives little concern to creatingproduct-market synergy with existing businesses

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Turnaround

The firm finds itself with declining profits Among the reasons are economic recessions,

production inefficiencies, and innovativebreakthroughs by competitors

Strategic managers often believe the firm cansurvive and eventually recover if a concerted effortis made over a period of a few years to fortify itsdistinctive competences. This is turnaround.

Two forms of retrenchment:

Cost reduction Asset reduction

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Elements of Turnaround

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 is

known as situation severity Turnaround responses among successful firms typically

include two stages of strategic activities: retrenchment and

the recovery response

The primary causes of the turnaround situation have beenassociated with the second phase of the turnaround process,

the recovery response

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Divestiture

A divestiture strategy involves the sale of a

firm or a major component of a firm

When retrenchment fails to accomplish the

desired turnaround, or when anonintegrated business activity achieves an

unusually high market value, strategic

managers often decide to sell the firm

Reasons for divestiture vary

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Liquidation

When liquidation is the grand strategy, the

firm typically is sold in parts, only

occasionally as a wholebut for its

tangible asset value and not as a goingconcern

Planned liquidation can be worthwhile

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Bankruptcy

Liquidation bankruptcyagreeing to acomplete distribution of firm assets tocreditors, most of whom receive a smallfraction of the amount they are owed

Reorganization bankruptcythe managersbelieve the firm can remain viable throughreorganization

Two notable types of bankruptcy

Chapter 7

Chapter 11

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Joint Ventures

Occasionally two or more capable firms lack anecessary component for success in aparticular competitive environment

The solution is a set ofjoint ventures, which

are commercial companies (children) createdand operated for the benefit of the co-owners(parents)

The joint venture extends the supplier-consumer relationship and has strategicadvantages for both partners

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Strategic Alliances

Strategic alliances are distinguished from

joint ventures because the companies

involved do not take an equity position in

one another In some instances, strategic alliances are

synonymous with licensing agreements

Outsourcing arrangements vary

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Consortia, Keiretsus, and Chaebols

Consortia are defined as large interlocking

relationships between businesses of an

industry

In Japan such consortia are known askeiretsus, in South Korea as chaebols

Their cooperative nature is growing in

evidence as is their market success

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Selection ofLong-Term Objectives and Grand StrategySets

When strategic planners study theiropportunities, they try to determine which aremost likely to result in achieving various long-range objectives

Almost simultaneously, they try to forecastwhether an available grand strategy can takeadvantage of preferred opportunities so thetentative objectives can be met

In essence, then, three distinct but highlyinterdependent choices are being made at onetime

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Sequence ofSelection

and Strategy Objectives

The selection of long-range objectives and grandstrategies involves simultaneous, rather than

sequential, decisions

While it is true that objectives are needed to

prevent the firms direction and progress from

being determined by random forces, it is equally

true that objectives can be achieved only if

strategies are implemented

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S_Ch7_Long Term Objectives and Strategies