Chapter 5: Stratgies in Action (SUMMARY)

Long-Term Objectives

Long-term objectives represent the results expected from pursuing certain strategies.

Strategies represent the actions to be taken to accomplish long-term objectives.

The time frame for objectives and strategies should be consistent, usually from two to five years.

The Desired Characteristics of Objectives

1. Quantitative

2. Measurable

3. Realistic

4. Understandable

5. Challenging

6. Hierarchical

7. Obtainable

8. Congruent across departments

The Benefits of Having Clear Objectives

1. Provide direction by revealing expectations

2. Allow synergy

3. Aid in evaluation by serving as standards

4. Establish priorities

5. Reduce uncertainty

6. Minimize conflicts

7. Stimulate exertion

8. Aid in allocation of resources

9. Aid in design of jobs

10. Provide basis for consistent decision making

Financial vs. Strategic Objectives

Financial Objectives

 Include those associated with growth in revenues, growth in earnings, higher dividends etc. (In
short, PROFIT AND MONEY)

Strategic Objectives

 Include things such as a larger market share, quicker on-time delivery than rivals, shorter design-
to-market times than rivals etc. (In short, PLANS)
-There is a TRADE OFF if there is a crucial decision to be made. A firm can do certain things to maximize
short-term financial objectives that would harm long-term strategic objectives
Bottom Line: Financial objectives can best be met by focusing first and foremost on achievement of
strategic objectives that improve a firm’s competitiveness and market strength.

Not Managing by Objectives

 Managing by Extrapolation – “If it ain’t broke, don’t fix it”

 Managing by crisis – Based on the belief that the true measure of a really good strategist is the
ability to solve problems
 Managing by Subjective – “Do your own thing, the best way you know how”
 Managing by hope – Based on the fact that the future is laden with great uncertainty and that if
we try and do not succeed, then we hope our second (or third) attempt will succeed.

The Balanced Scorecard

Robert Kaplan & David Norton – Harvard Business School professors who developed the Balance
Scorecard in 1993

 The balance scorecard is a strategy evaluation & control technique

 Balance financial measures with non-financial measures
 Balance shareholder objectives with customer & operational objectives

-It’s overall aim is to balance shareholder objectives with customer and operational objectives

-consistent with CIM and TQM

-A balance scorecard for a firm is simply a listing of all key objectives to work toward, along with an
associated time dimension of when each objective is to be accomplished as well as a primary
responsibility or contact person, department or division for each objective.

Levels of Strategies

Large Company

 Corporate Level – Chief Executive officer ( CEO )

 Division Level – Division president or executive vice president
 Functional Level – Chief finance officer (CFO), Chief information Officer (CIO), marketing, R&D,
human resource manager (HRM) Chief marketing officer (CMO) and so on.
  Operational Level – Plant manager, sales manager, production and department manager and so
on.

Small Company

 Company Level – Owner or president

 Functional Level - Chief finance officer (CFO), Chief information Officer (CIO), marketing, R&D,
human resource manager (HRM) Chief marketing officer (CMO) and so on.
 Operational Level – Plant manager, sales manager, production and department manager and so
on.

Types of Strategies

Integration Strategies
Forward Integration
Backward Integration sometimes referred to as Vertical Integration strategies
Horizontal Integration
 Forward Integration– Involves gaining ownership or increased control over distributors or
retailers

-Franchising – an effective means of implementing forward integration.

However, a growing trend of is for franchisees, who for example may operate 10 franchised
restaurants, stores, or whatever, to buy out their part of the business from their franchiser
(corporate owner). There is a growing rift between franchisees and franchiser as the segment
often outperforms the parent.
 Backward Integration- Seeking ownership or increased control of a firm’s supplier’s
--effective when current suppliers are unreliable, too costly or cannot meet the firm's need
Benefits: Stable input, Lower cost, High quality
 Horizontal Integration- Seeking ownership or increased control over competitors

Intensive Strategies

Market Penetration - seeking increased market share for present products or services in preset markets
through greater marketing efforts.

Guidelines when market penetration is an effective strategy:

 When current markets are not saturated with a particular product or service.
 When the usage rate of present customers could be increased significantly.
 When the market shares of major competitors have been declining while total industry sales
have been increasing.
 When the correlation between dollar sales and dollar marketing expenditures historically has
been high.
 When increased economies of scale provide major competitive advantages.

Market Development
Market Development involves introducing present products or services into new geographic areas.

Guidelines when market development is an effective strategy:

 When new channels of distribution are available that are reliable, inexpensive, and of good
quality.
 When an organization is very successful at what it does.
 When new untapped or unsaturated market exist.
 When an organization has the needed capital and human resources to manage expanded
operations.
 When an organization has excess production capacity.
 When an organization’s basic industry is rapidly becoming global in scope.

Product Development

Product development is a strategy that seeks increased sales by improving or modifying present
products or services.

Guidelines when product development is an effective strategy:

 When an organization has successful products that are in maturity stage

 When an organization competes in an industry that is characterized by rapid technological
developments.
 When competitors offer better-quality products at comparable prices.
 When an organization competes in a high-growth industry.
 When an organization has strong research and development capabilities.

Diversification Strategies

-There are two general types of diversification strategies: related and unrelated. Businesses are said to
be related when their value chains possess competitively valuable cross-business strategic fits;
businesses are said to be unrelated when their value chains are so dissimilar that no competitively
valuable cross-business relationships exist. Most companies favor related diversification strategies.

 Related Diversification- Adding new but related products or services

 Unrelated Diversification- Adding new, unrelated products or services

-It is more difficult to manage than the related diversification because it manage many industries.

-It favors favors capitalizing that are capable of delivering excellent financial performance.

Defensive Strategies

 Retrenchment- Regrouping through cost and asset reduction to reverse declining sales and
profit
 Divestiture- Selling a division or part of an organization
 Liquidation- Selling all of a company’s assets, in pars for their tangible worth

Liquidation
-is a recognition of defeat and consequently can be an emotionally difficult strategy. It is a selling of all
company’s assets, in parts, for their tangible worth.

- Some reasons why companies/ businesses go into Liquidation:

 Weak financing/ financial skills

 Poor marketing
 failure of clients to pay money owing
 Lack of good planning Competition
 Inadequate resources to cover the costs of making the business viable

3 Guidelines indicate when liquidation may be an especially effective strategy to pursue:

• When an organization has pursued both a retrenchment strategy and a divestitute strategy, and
neither has been successful.

• When an organization’s only alternative is bankruptcy. Liquidation represents an orderly and planned
means of obtaining the greatest possible cash for an organization’s assets. A company can legally
declare bankruptcy first and then liquidate various divisions to raise needed capital.

• When the stockholders of a firm can minimize their losses by selling the organization’s assets.

Michael Porter’s Five Generic Strategies

-Three different bases: cost leadership, differentiation, focus (Porte’s calls these bases generic
strategies)

Type 1 Cost leadership- Low cost

-It is a low cost strategy that offers products or services to a wide range of customers at the lowest price
available on the market.

Type 2 Cost leadership- Best value

-Best value strategy that offers products or services to a wide range of customers at a best price value
available in the market

Type 3 Differentiation

-A strategy aimed at producing products and services considered unique industrywide and directed at
customers who were relatively price insensitive.

Type 4 Focus- Low Cost

-Is a low cost focus that offers products or services to a small range (niche group) of customers at the
lowest price available on the market.
Type 5 Focus- Best Value

-Is a best value focus strategy that offers products or services to a small range of customers at the best
price value available on the market. Sometimes called “Focused differentiation” it also aims to offer a
niche group of customers products or services that meet their taste and requirements better than rivals’
products do.

Strategies for competing in a turbulent, high-velocity markets

-Some industries are changing so fast that researchers call them turbulent.

-High-Velocity market such as telecommunications, medical, biotechnology, pharmaceuticals, computer

hardware, software and virtually all Internet-based industries.

-High velocity change is clearly becoming more and more the rule rather than the exception, even in
such industries as toys, phones, banking, defense, publishing and communication.

-To primarily react to changes in the industry would be a defensive strategy used to counter.

-Although a lead-change strategy is best whenever the firm has the resources to pursue this approach.,
on occasion even the strongest firms is turbulent industries have to employ the react-to-the-market
strategy and the anticipate-the-market strategy.

Means for Achieving Strategies

Cooperation among competitors

Strategies that stress cooperation among competitors are being used more, for collaboration between
competitors to succeed both firms must contribute something distinctive such as:

 Technology
 Distribution
 Basic Research
 Manufacturing capacity

--But a major risk is that unintended transfers of important skills or technology may occur at
organizational levels below where the deal was signed. Best example of rival firms in an industry
forming alliances to compete against each other is the airline industry.

Joint Venture/ Partnering

-Joint venture is a popular strategy that occurs when two or more companies form a temporary
partnership or consortium for the purpose of capitalizing on some opportunity. Often, two or more
sponsoring firms form a separate organization and have shared equity ownership in the new entity.

-Joint venture and partnerships are often used to pursue an opportunity that is too complex.

-A major reason why firms are using partnering as a means to achieve strategies is globalization.
-The good news is that joint ventures and partnerships are less risky for companies than mergers, but
the bad news is that many alliances fail.

Private-Equity Acquisitions

 Private-Equity Acquisitions intention is to buy firms at a low price and sell them later at high

prices, arguably just a good business.

o For example, 3G Capital Management acquired Burger King Holdings for 3.3 billion.

 Apollo Global Management- a large private equity firm that owns many companies.

 Most acquisitions in 2010 to 2012 were large investment firms .

Merger/Acquisition

Merger occurs when two organizations of about equal size unite to form one enterprise.

Acquisition occurs when a large organization purchases a smaller firm, or vice versa.

Hostile Takeover: Unfriendly takeover that is unexpected and undesired by the target firm

Friendly Merger: If the acquisition is desired by both firms, it is termed a friendly merger

White Knight: is a term that refers to a firm that agrees to acquire another firm when that other firm is
facing hostile takeover by some company

Leveraged buyout (LBO) occurs when a corporation’s shareholders are brought (hence buyout) by the
company’s management and other private investors using borrowed funds (hence leverage). An LBO
takes a corporation private.

Key Reasons Why Many Mergers and Acquisitions Fail

1. Integration difficulties
Although critical to acquisition success, firms should recognize that integrating two companies
following an acquisition can be quite difficult. Melding two corporate cultures, linking different
financial and control systems, building effective working relationships (particularly when
management styles differ), and resolving problems regarding the status of the newly acquired
firm’s executives are examples of integration challenges firms often face.
2. Inadequate evaluation of target
 The failure to complete an effective due-diligence process may easily result in the acquiring firm
paying an excessive premium for the target company. In addition, firms sometimes allow
themselves to enter a “bidding war”.
3. Large or extraordinary debt
To finance a number of acquisitions, some companies significantly increased their levels of debt.
A financial innovation called Junk Bonds helped make this possible. Junk bonds: financing option
whereby risky acquisitions are financed with money (debt) that provides a large potential return
to lenders (bondholders). High debt can have several negative effects on the firms such as
increasing the likelihood of bankruptcy and lower down the credit rating.
4. Inability to achieve synergy
Synergy exists when value created by units exceeds value of units working independently. It can
be achieved when the two firms' assets are complementary in unique ways. And also yields a
difficult-to-understand or imitate competitive advantage.
A firm develops a CA through an acquisition strategy only when a transaction generates private
synergy. Private synergy occurs when the combination and integration of acquiring and acquired
firms' assets yields capabilities and core competencies that could not be developed by
combining and integrating the assets with any other company. Because of its uniqueness, PS is
difficult for competitors to understand and imitate but also difficult to create for company.
5. Too much diversification
Diversified firms must process more information of greater diversity. Scope created by
diversification may cause managers to rely too much on financial rather than strategic controls
to evaluate performance of business units. Acquisitions may become substitutes for innovation.
6. Managers overly focused on acquisitions
A considerable amount of managerial time and energy is required for AS to be used successfully.
Necessary activities with an acquisition strategy involving Search for viable acquisition
candidates; complete effective due-diligence processes; prepare for negotiations and Managing
the integration process after the acquisition. Diverts attention from matters necessary for long-
term competitive success (I.e., identifying other activities, interacting with important external
stakeholders, or fixing fundamental internal problems). A short-term perspective and greater
risk aversion can result for target firm's managers. All shows that managers can become overly
involved in the process of making acquisitions.
7. Too large
Additional costs may exceed the benefits of the economies of scale and additional market
power. Larger size may lead to more bureaucratic controls. Formalized controls often lead to
relatively rigid and standardized managerial behavior. Firm may produce less innovation.

Potential Benefits of Merging or Acquiring another Firm

1. To provide improved capacity utilization

2. To make better use of the existing workforce

3. To reduce managerial staff

4. To gain economies of scale

5. To smooth out seasonal trends in sales

6. To gain access to new supplier, distributors, customers, products, and creditors.

7. To gain new technology

8. To reduce tax obligations

First Mover Advantages

-refer to the benefits a firm may achieve by entering a new market or developing a new product or
service prior to rival firms.

Benefits of a Firm Being the First Mover

1. Secure access and commitments to rare resources

2. Gain new knowledge of critical success factors and issues

3. Gain market share and position in the best locations

4. Establish and secure long term relationships with customers, suppliers, distributors and investors.

5. Gain customer loyalty and commitment

Outsourcing – to be done by people outside the company

Business-process outsourcing (BPO) – is a rapidly growing new business that involves companies taking
over the functional operations, such as human resources, information systems, payroll, accounting,
customer service, and even marketing of other firms.

3 Reasons Why Companies are Choosing to Outsource

1. It is less expensive;
2. It allows the firm to focus on its core businesses; and
3. It enables the firm to provide better services

Other Advantages of Outsourcing

1. Allows the firm to align itself with “best-in-world” suppliers

2. Provides the firm flexibility should customer needs shift unexpectedly
3. Allows the firm to concentrate on other internal value chain activities

Strategic Management in Nonprofit and Governmental Organizations

Many nonprofit and governmental organizations outperform private firms and corporations on
innovativeness, motivation, productivity, and strategic management. Compared to for-profit firms,
nonprofit and governmental organizations may be totally dependent on outside financing. Strategic
management provides an excellent vehicle for developing and justifying requests for needed
financial report.

Educational Institutions

-educational institutions are more frequently using strategic management techniques and concepts.

-online college degrees are becoming common and represent a threat to traditional colleges and
unversities.

Medical Organizations - declining occupancy rates, deregulation, and accelerating growth of health
maintenance organizations, preferred provider organizations, urgent care centers, outpatient
surgery centers, specialized clinics, and group practices are other majot threats facing hospitals
today.

Hospitals are beginning to bring services to the patient as much as bringing the patient to the
hospital.

Governmental Agencies and Department

-government agencies and department are responsible for formulating, implementing and
evaluating strategies that use taxpayer's dollars in the most cost-effective way to provide services
and programs.

-public enterprises generally cannot divesify into inrelated businesses or merge with other firms.

-Legislators and politicians often have direct or indirect control over major decisions and resources.

Small Firms

-the strategic management is just a vital for small companies.

-strategic management process can significantly enhance small firms growth and prosperity. -other
problem often encountered in applying strategic management concepts to small businesses are a
lack of both sufficient capital to exploit external opportunities and a day to day cognitive frame of
reference.

-strategic management is more informal in small firms.