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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

• Profitability• Productivity• Competitive position• Employee development• Employee relations• Technological leadership• Public responsibility

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Qualities of Long-Term Objectives

Criteria used in preparing objectives

AchievableAcceptable

MotivatingSuitable

Understandable Flexible

Measurable

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What is the Balanced Scorecard?

The Balanced Scorecard is a set of measures that are directly linked to the company’s 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 performanceCustomer knowledgeInternal business processesLearning and growth

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Exhibit 6-2: The Balanced Scorecard

Vision and

Strategy

Financial‘To succeed financially, how should we appear to our shareholders?”

Internal Business Process

“To satisfy our shareholders and customers, what business processes must we excel at?”

Customer“To achieve our vision, how should we appear to our customers?” Learning and Growth

‘To achieve our vision, how will we sustain our ability to change and improve?”

Learning and Growth‘To achieve our vision, how will we sustain our ability to change and improve?”

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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 Commonly Required Skills and resources

Common Organizational Requirements

Differentiation •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

•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

Focus Combination of above policies directed at the particular strategic target

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 Risks of Differentiation Risks of Focus

Cost leadership is not sustained•Competitors imitate•Technology changes•Other bases for cost leadership erodeProximity in differentiation is lostCost focusers achieve even lower cost in segments

Differentiation is not sustained•Competitors imitate•Bases for differentiation become less important to buyersCost proximity is lostDifferentiation focusers achieve greater differentiation in segments

Focus strategy is imitatedTarget segment becomes unattractive•Structure erodes•Demand disappearsBroadly target competitors overwhelm segments•Segment’s 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• 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

Firm’s industry is resistant to major technological advancementsFirm’s target markets are not product saturatedFirm’s markets are sufficiently distinctive to dissuade competitors in adjacent markets from entering firm’s segmentFirm’s inputs are stable in price and quantity and available in the amounts and at the times neededFirm’s industry is stableFirm’s competitive advantages are based on efficient production or distribution channelsSuccess 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 6-5: Specific Options for Selected Grand Strategies

Concentration (Increasing use of present products in present markets)1. Increasing present customers’ rate of use

a. Increasing size of purchaseb. Increasing the rate of product obsolescencec. Advertising other usesd. Giving price incentives for increased use

2. Attracting competitors’ customersa. Establishing sharper brand recognitionb. Increasing promotional effortc. Initiating price cuts

3. Attracting nonusers to buy the producta. Introducing trial use thru’ sampling, price incentives, etc.b. Pricing up or downc. Advertising new uses

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Ex. 6-5 (contd.)

Market Development (Selling present products in new markets.)

1. Opening additional geographic marketsa. Regional expansionb. National expansionc. International expansion

2. Attracting other market segmentsa. Developing product versions to appeal to other segmentsb. Entering other channels of distributionc. Advertising in other media

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Ex. 6-5 (contd.)

Product Development (Developing new products for present markets)

1. Developing new product featuresa. Adapt (to other ideas, developments)b. Modify (change color, motion, sound, odor, form, shape)c. Magnify (stronger, longer, thicker, extra value)d. Minify (smaller, shorter, lighter)e. Substitute (other ingredients, process, power)f. Rearrange (other patterns, layout, sequence, components)g. Reverse (inside out)h. Combine (blend, alloy, assortment, ensemble, combine units, etc.)

2. Developing quality variations3. 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 chainVertical Integration

• Involves acquiring firms• That supply acquiring firm with inputs (backward

integration) or• Are customers for firm’s outputs (forward integration)

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Ex. 6-8: Vertical and Horizontal Integrations

Textile producer Textile producer

Shirt manufacturer Shirt manufacturer

Clothing storeClothing 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 firm’s stock valueIncrease growth rate of firmInvestment is better use of funds than using them for internal growthImproves stability of earnings and salesBalance or fill out product lineDiversify product lineAcquire a needed resource quicklyAchieve tax savingsIncrease 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 productsConglomerate 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 firm’s

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 firm’s 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 moreprofitably

• Advantage of a reorganization bankruptcy• Proactive option offering maximum repayment of a firm’s 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

• 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. 6-12: The Top Five Strategic Reasons for Outsourcing

1. Improve business focus2. Access to world-class capabilities3. Accelerated reengineering benefits4. Shared risks5. Free resources for other purposes