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Strategic

Management
Strategies in Action
Tomorrow always arrives. It is
Always different. And even the mightiest
Company is in trouble if it hasnt
worked on the future.
PETER DRUCKER
Chapter 5
Financial Versus Strategic Objective
Financial Versus Strategic Objectives
Financial Objectives: Any objective that can be derived from
financial statements is financial objective.
Strategic Objectives: Any objective that is market based and is
aimed to make the organization more competitive is called
strategic objective.

Financial Objective Strategic Objective
growth in revenues large market share
growth in earnings quicker on time delivery than rivals
higher dividends shorter design-to-market time than rivals
larger profit margin lower costs than rivals
greater return on investment higher product quality than rivals
higher earning per share wider geographic coverage than rivals
a rising stock price achieving ISO certification
improved cash flow increasing customer satisfaction
Managing by Objectives
Not Managing by Objective
1. Managing by Extrapolation: If it isnt broken, then dont fix it.
The idea is to keep on doing the same thing if its going well.

2. Managing by Crisis: A crisis should set the strategist in motion
and; a crisis dictates the whats and whens of management
decision.

3. Managing by Subjective: Do your own thing, the best way
you know.

4. Managing by Hope: Decisions are predicted on the hope that
they will work and good times are just around the corner
especially if luck is on our side.
The Balanced Scorecard
The Balanced Scorecard
Developed in 1993 by Robert Kaplan and David Norton
Balance scorecard is a strategy evaluation and control
technique and its overall aim is to balance shareholder
objectives (financial objectives) with customer and
operational objectives (non-financial objectives).
An effective Balanced Scorecard contains a carefully chosen
combination of strategic and financial objectives tailored to
the companys business.
Such objectives interrelate and may even conflict with each
other.

The Balanced Scorecard
Levels of Strategies
Levels of Strategies
A Large Company
Operational Level
Functional Level
Division Level
Corp
Level
Levels of Strategies
A Small Company
Operational Level
Functional Level
Company
Level
Types of Strategies
Integration Strategies
Integration Strategies
It is a strategy of expansion under which growth is achieved
mostly by Mergers & Acquisitions.

It consists of the following two major strategies;

1. Horizontal Integration
2. Vertical Integration

Integration Strategies
Horizontal Integration
When a firms long-term strategy is based on growth through the
merger or acquisition of a firms competitor.
Such acquisitions eliminate competitors and provide the acquiring
firm with access to new markets.
Horizontal Integration is effective
When an organization can gain monopolistic characteristics without
being challenged by the government.
When an organization competes in a growing industry.
When increased economies of scale provides major competitive
advantage.
When an organization has both the capital and the human talent
needed to handle an expanded organization.
When competitors are faltering due to lack of managerial expertise.
Integration Strategies
Vertical Integration:
Vertical integration is the process in which several steps in the
supply, production and distribution of a product or service
are controlled by a single company or entity, in order to
increase that companys or entitys power in the
marketplace.
Vertical Integration consists of two types of strategies.

1. Forward Integration
2. Backward Integration
Integration Strategies
Forward Integration
When a firms strategy is to merge or acquire other firms that
are customers for its outputs such as warehouses for finished
products or retailers, the firm is said to follow a Forward
Integration Strategy.
Forward Integration is effective when
Present distributors are expensive, unreliable, or incapable of
meeting firms needs.
Have the capital and Human Resource
Distributors are few in number with higher bargaining power
When distributors margins are very high.
Company can gain a competitive advantage
When the industry is rapidly growing
Integration Strategies
Backward Integration Strategy
When a firms strategy is to merge or acquire other firms that
supply it with inputs (such as raw materials), the firm is said to
follow a Forward Integration Strategy.
Backward Integration is effective when
A firms suppliers are expensive or unreliable.
Number of suppliers is small and number of competitors is
large
Company can gain a competitive advantage
When the organization has both the capital and the human
resource
When the advantages of stable prices are particularly
important
When supplier margins are high
Integration Strategies
Intensive Strategies
Intensive Strategies
It is a strategy of expansion under which growth is achieved by
expanding the scale of operations.

It involves the following three strategies;
1. Market Penetration
2. Market Development
3. Product Development
Intensive Strategies
1. Market Penetration
This strategy aims to seek increased sales of the present
products in the present markets through more aggressive
promotion and distribution. The firms tries to penetrate
deeper into the market to increase its market share. More
money is spent on advertising and sale promotion to increase
sale volume.

Market Penetration involves decreasing price, improving quality,
increasing the number of salespersons, increasing advertising,
offering extensive sales promotion items, or increasing
publicity efforts.
Intensive Strategies
Market penetration is effective when..
The current market is not saturated with existing products.
The usage rate of consumers can be increased.
The market shares of the major competitors is declining while the total
share is increasing
When increased economies of scale leads to a strong competitive
advantage.
Historical relationship between dollar marketing expenditure and dollar
sales has been positive


Intensive Strategies
2. Market Development
This strategy aims to increase sales volume by selling the
present products into new markets. For example, Pepsi & Cola
has achieved growth by capturing foreign markets in the past.
Market development requires major changes into
Distribution channels
Pricing policy
Promotional strategy
Intensive Strategies
Market Development is effective when
New channels of distribution are available that are reliable,
inexpensive and of good quality.
When an organization is very good at what it does
When new untapped and unsaturated markets exists.
When a firm has excess production capacity.
When an organizations industry is rapidly becoming global in
scope.

Intensive Strategies
3. Product Development
Under this strategy, a business seeks to grow by developing
improved or modified products for the present markets. The
current product may be replaced or the new products may be
introduced in addition to the existing products. The
introduction of "Colgate-gel" by Colgate-Palmolive (India) Ltd.
is an example in this regard.
Intensive Strategies
Product development is effective when
1. When an organization has successful products in the
maturity stage. The idea is to attract satisfied customers to
try new (improved) products as a result of their positive
experience with the organizations present products.
2. When major competitors offer better quality products at
comparable prices.
3. When an organization competes in a high growth industry.
4. When an organization has a strong R&D department.

Diversification Strategies
Diversification Strategies
Diversification strategies are used to expand firms'
operations by adding markets, products, or services, to the
existing business. The purpose of diversification is to allow
the company to enter lines of business that are different
from current operations.

Firms usually follow this strategy either to spread risk across
different industries or avoid unattractive industries.


Diversification Strategies
There are two general types of diversification strategies

1. Related Diversification (when two businesses value/supply
chains posses competitively valuable cross-business strategic
fit)

2. Unrelated Diversification (when the value/supply chains of
two or more businesses are so dissimilar that no
competitively valuable cross-business relationship exists)

Diversification Strategies
1. Related Diversification Case


Engro Foods
Engro
Fertilizer
Limited
Suppliers
Customers
Includes large
scale farmers
who have
diversified into
dairy production
The customers for one of
their supply chain is used
as a supplier for another
venture Engro Foods
Diversification Strategies
Related Diversification is effective when
An organization competes in a no-growth or slow growth
industry.
When the organization has a strong management team.
When an organizations current products are in the declining
stage of the product life cycle.
When existing products are seasonal and new, but related,
products can provide with more stable streams of sales
throughout the year or at least counterbalance the
organizations existing peaks and valleys.
When new, but related products, may be sold at highly
competitive prices.

2. Unrelated Diversification Case (Nishat Group)
2. Unrelated Diversification Case Nishat Group
Nishat
Mills
Diversification Strategies
Unrelated Diversification is effective when
When an organization has the capital and managerial talent to
compete successfully in a new industry.
When an organization has the opportunity to purchase an
unrelated business that is an attractive investment
opportunity.
When an organization is competing in a highly competitive
and/or no-growth industry with declining annual sales and
profits.
When an organization can violate anti-trust laws by
diversifying in a related industry.
Defensive Strategies
Defensive Strategies
Defensive strategies are used when firms try to reduce the risk
of loss.

There are three defensive strategies used in Strategic
Management.

1. Retrenchment
2. Divestiture
3. Liquidation
Defensive Strategies
1. Retrenchment
Retrenchment is a corporate-level strategy that seeks to
reduce the size or diversity of an organization's operations.
Retrenchment is also a reduction of expenditures in order to
become financially stable.
Retrenchment is a pullback or a withdrawal from offering
some current products or serving some markets in order to
fortify some distinctive competencies.
During retrenchment, strategists work with limited resources,
and face pressures from stakeholders.
It entails selling off lands, buildings, pruning product line,
closing marginal businesses or obsolete factories, reducing
number of employees, and instituting expense control
systems.
Defensive Strategies
What drives retrenchment?

Uncompetitive cost structures
Inadequate ROI
Poor competitive position
Financial distress
Market decline
Economic downturn
Change of Ownership
Too rapid expansion


All of
which
indicate a
need for
strategic
change
Defensive Strategies
2. Divestiture
Sale of a division or part of an organization. A company will
often divest an asset which is not performing well, which is
not vital to the company's core business, or which is worth
more to a potential buyer or as a separate entity than as part
of the company.

Can be used in combination with Retrenchment strategy

Often used to make businesses more focused on their core
businesses and less diversified..

Defensive Strategies
Divestiture if effective when
When retrenchment has failed to deliver needed
improvements.
When core businesses are faltering and require more capital
that the firm can provide.
When a division is responsible for an organizations overall
poor performance

Defensive Strategies
3. Liquidation
When a business or firm is terminated or bankrupt its assets are
sold and the proceeds are paid to creditors. Any leftovers are
distributed to shareholders.

In liquidation, a liquidator is appointed by the court or by the
creditors of the organization, or by a greater majority (at least
75%) of shareholders through an extraordinary resolution.


Defensive Strategies
Liquidation is effective when
Both retrenchment and divestiture strategies have been failed.
When the only option available to an organization is
bankruptcy
When the stock holders can minimize their losses by selling
the organizations assets.
Michael Porters Five Generic
Strategies
Michael Porters Five Generic Strategies
Michael Porter emphasized that strategists have three bases to
achieve competitive advantage for an organization.

Base I: Cost Leadership


Base II: Differentiation


Base III: Focus
Michael Porters Five Generic Strategies
Base I: Cost Leadership
Cost leadership emphasizes producing standardized products
at a very low per unit cost for consumers who are price
sensitive.
There are two alternative types of cost leadership strategies:

1. Low-Cost Strategy (Type 1)
Products offered to a wide range of customers at the lowest
possible price.
2. Best-Value Strategy (Type 2)
It offers products to a wide range of customers at the best price-
value available on the market.
Michael Porters Five Generic Strategies
Cost leadership Strategies (Type 1 and Type 2)
Horizontal and Vertical Integration strategies are often used to cut costs,
stabilize prices and achieve economies of scale to gain low cost or best
value cost leadership benefit.
Major cost elements that effect the attractiveness of these strategies are
economies of scale, learning and experience curve effects, percentage of
capacity utilization achieved, and linkages with suppliers and distributors.
Companies must consider the VRINE criteria while pursuing the type 1 and
type 2 strategies.
To employ cost leadership strategy, a company should either perform value
chain activities efficiently or revamp the firms overall value chain to
eliminate certain cost-producing (excess) activities.
Price-cuts that eliminate company profits should be avoided.
Strategists must be mindful of cost saving technologies or value chain
advancements that may erode the firms competitive advantage.
Michael Porters Five Generic Strategies
Type 1 and Type 2 are effective when

When price competition is vigorous.
Few ways to achieve product differentiation.
When buyers switching cost is low.
When buyers are large in number and have a significant
bargaining power.
Michael Porters Five Generic Strategies
Base II: Differentiation (Type 3)
This strategy is aimed at producing products that are
considered unique industry wide and directed at consumers
who are relatively price-insensitive.
Differentiation mean greater product flexibility, greater
compatibility, improved services, less maintenance, greater
convenience, or more features.
In making unique products, companies should carefully select
those means that are hard, expensive, and time consuming to
imitate by competitors
The product must also be unique in consumer perception.
Consumers will not pay higher prices unless their perceived
value of the product exceeds the price that they pay for it.



Michael Porters Five Generic Strategies
Product development is the strategy that offers
differentiation.
For sustained differentiation, a strong R&D must be integrated
with Marketing Function of the organization.
Differentiation can be based on taste, wide selection, superior
service, performance, convenience etc.



Michael Porters Five Generic Strategies
Base III: Focus
Focus means products that meet the needs and wants of small
groups of consumers. Two alternate focus strategies are
Type 4 and Type 5.

1. Low Cost Focus (Type 4)
A strategy that offers products to small range of customers
(niche group) at the lowest price available on the market.

2. Best Value Focus (Type 5)
A strategy that offers products to small range of customers at
the best price value available on the market.
Michael Porters Five Generic Strategies
Focus Strategies (Type 4 and Type 5)
Market Development offers good focus opportunities
Focus strategy is successful when
the segment size is sufficient,
has good growth potential, and
is not crucial to the success of major competitors.