Grand Stratergy

7/30/2019 Grand Stratergy

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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

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CHAPTER 6

Formulating Long-Term

Objectives and GrandStrategies




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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




3

Types of Long-Term Objectives

• Profitability

• Productivity• Competitive position

• Employee development

• Employee relations

• Technological leadership

• Public responsibility




4

Qualities of Long-Term Objectives

Criteria used

in preparing

objectives

Acceptable

Flexible

MeasurableMotivating

Suitable

Understandable

Achievable




5

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 andactions.




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The Four Perspectives in a Balanced

Scorecard

Financial performance

Customer knowledge Internal business processes

Learning 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?”

Customer“To achieve

our vision,

how should

we appear to

our

customers?”

Internal

BusinessProcess

“To satisfy our

shareholders

and customers,

what business

processes mustwe excel at?”

Learning and Growth

„To achieve our vision,

how will we sustain our

ability to change and

improve?”



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The Value Disciplines

• Strategies must center on delivering superior

customer value through one of three value

disciplines:

Operational excellence

Customer intimacy

Product leadership

• Companies that specialize in one of these

disciplines, while simultaneously meetingindustry standards in the other two, gain a

sustainable lead in their markets.



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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 CostLeadership

•Sustained capital investmentand 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 inR&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 erode

Proximity in differentiation

is lost

Cost focusers achieve even

lower cost in segments

Differentiation is not

sustained

•Competitors imitate

•Bases for differentiation

become less important to

buyers

Cost proximity is lost

Differentiation focusers

achieve greater differentiation in segments

Focus strategy is imitated

Target segment becomes

unattractive

•Structure erodes

•Demand disappears

Broadly 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

• Conglomeratediversification

• 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

advancements

Firm‟s target markets are not product saturated

Firm‟s markets are sufficiently distinctive to dissuadecompetitors in adjacent markets from entering firm‟s

segment

Firm‟s inputs are stable in price and quantity and

available in the amounts and at the times needed

Firm‟s industry is stable Firm‟s competitive advantages are based on efficient

production or distribution channels

Success of market generalists

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Strategies of Market and Product

Development

• Market development

• Consists of marketing present products, often withonly cosmetic modifications to customers inrelated 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 6-4: Specific Options for

Selected Grand Strategies

Concentration (I ncreasing use of present products in

present markets)

1. Increasing present customers‟ rate of use

a. Increasing size of purchase

b. Increasing the rate of product obsolescencec. Advertising other uses

d. Giving price incentives for increased use

2. Attracting competitors‟ customers

a. Establishing sharper brand recognition

b. Increasing promotional effort

c. Initiating price cuts3. Attracting nonusers to buy the product

a. Introducing trial use thru‟ sampling, price incentives, etc.

b. Pricing up or down

c. Advertising new uses

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Ex. 6-4 (contd.)

Market Development (Sell ing present

products in new markets.)

1. Opening additional geographic markets

a. Regional expansion b. National expansion

c. International expansion

2. Attracting other market segments

a. Developing product versions to appeal to other segments

b. Entering other channels of distribution

c. Advertising in other media

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Ex. 6-4 (contd.)

Product Development (Developing new products for present markets)

1. Developing new product features

a. 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, combineunits, etc.)

2. Developing quality variations

3. 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 I ntegration

• Based on growth via acquisition of one or

more similar firms operating at the same

stage of the production-marketing chainVertical I ntegration

• 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. 6-7: Vertical and Horizontal

Integrations

Textile producer Textile producer

Shirt manufacturer Shirt manufacturer

Clothing store Clothing 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 value

Increase growth rate of firm

Investment is better use of funds than using

them for internal growth Improves stability of earnings and sales

Balance or fill out product line

Diversify product line

Acquire a needed resource quickly

Achieve tax savings

Increase efficiency and profitability

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Diversification Strategies

Concentr ic Diversif ication

• Involves acquisition of businesses related toacquiring firm in terms of technology,markets, or products

Conglomerate Diversif ication • Involves acquisition of a business because it

represents a promising investmentopportunity

• Primary motivation is profit pattern of venture

• Difference between the approaches• Concentric diversification emphasizes

commonality whereas conglomeratediversification emphasizes profits for eachindividual unit

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Turnaround Strategy

Involves a concerted effort

over a period of time tofortify 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 sever ity

• Turnaround responses typically include two

stages of strategic activities

– Retrenchment

– Recovery response

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Divestiture and Liquidation Strategies

Divesti ture 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

L iquidation Strategy • Involves selling parts of a firm, usually for

its tangible asset value and not as a goingconcern

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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 more profitably

• 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 All iance

• 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(contd.)

• Consortia are defined as large interlockingrelationships between businesses of anindustry. In Japan such consortia are knownas keiretsus , in South Korea as chaebols

• A Japanese keiretsu is an undertakinginvolving up to 50 different firms that are

joined around a large trading company or bank and are coordinated throughinterlocking directories and stock exchanges

• Chaebols are typically financed throughgovernment banking groups and largely arerun by professional managers trained by

participating firms expressly for the job

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Ex. 6-13: The Top Five Strategic

Reasons for Outsourcing

1. Improve business focus

2. Access to world-class capabilities3. Accelerated reengineering benefits

4. Shared risks

5. Free resources for other purposes

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