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Topic 5

Formulating Long-Term
Objectives and Grand
Strategies
Prof. Niki Lukviarman, SE, MBA, DBA, Akuntan

Topic Outline

Long-Term Objectives
Generic Strategies
Grand Strategies
Corporate Combinations
Selection of Long-Term Objectives & Grand
Strategy Sets
Sequence of Objectives & Strategy Selection

Types of Long-Term Objectives

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

Qualities of Long-Term Objectives


Achievable

Understandable

Acceptable
Criteria used
in preparing
objectives

Suitable

Flexible
Measurable

Motivating

What is the Balanced Scorecard?

The Balanced Scorecard is a set of measures that


are directly linked to the companys strategy.
It directs a company to link its own long-term
strategy with tangible goals and actions.

The Four Perspectives in a


Balanced Scorecard

Financial performance
Customer knowledge
Internal business processes
Learning and growth

The Balanced Scorecard


Financial
To succeed financially,
how should we appear to
our shareholders?
Customer
To achieve
our vision,
how should
we appear to
our
customers?

Vision
and
Strategy

Learning and Growth


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

Internal
Business
Process
To satisfy our
shareholders
and customers,
what business
processes must
we excel at?

Michael Porters Generic Strategies


Cost Leadership Strategies

Differentiation Strategies

Focus Strategies

Copyright 2007 Prentice Hall

Ch 5 -8

Copyright 2007 Prentice Hall

Ch 5 -9

Generic Strategies
Cost Leadership
(Type 1 and Type 2)

In conjunction with differentiation


Economies or diseconomies of scale
Capacity utilization achieved
Linkages w/ suppliers & distributors

Copyright 2007 Prentice Hall

Ch 5 -10

Cost Leadership
Ways of ensuring total costs across value
chain are lower than competitors total
costs

1.

2.

Perform value chain activities more efficiently


than rivals and control factors that drive costs
Revamp the firms overall value chain to
eliminate or bypass some cost-producing
activities

Copyright 2007 Prentice Hall

Ch 5 -11

Cost Leadership
Can be especially effective when:
1.
2.

3.
4.
5.
6.
7.

Price competition among rivals is vigorous


Rivals products are identical and supplies
are readily available
There are few ways to achieve differentiation
Most buyers use the product in the same way
Buyers have low switching costs
Buyers are large and have significant power
Industry newcomers use low prices to attract
buyers

Copyright 2007 Prentice Hall

Ch 5 -12

Generic Strategies
Low Cost Producer Advantage

Many price-sensitive buyers


Few ways of achieving differentiation
Buyers not sensitive to brand differences
Large # of buyers w/bargaining power

Copyright 2007 Prentice Hall

Ch 5 -13

Generic Strategies
Differentiation (Type 3)
Greater product flexibility
Greater compatibility
Lower costs
Improved service
Greater convenience
More features
Copyright 2007 Prentice Hall

Ch 5 -14

Differentiation
Can be especially effective when:

1.

2.
3.

4.

There are many ways to differentiate and


many buyers perceive the value of the
differences
Buyer needs and uses are diverse
Few rival firms are following a similar
differentiation approach
Technology change is fast paced and
competition revolves around evolving product
features

Copyright 2007 Prentice Hall

Ch 5 -15

Generic Strategies
Focused Strategies (Type 4 & 5)
Industry segment of sufficient size
Good growth potential
Not crucial to success of major competitors

Copyright 2007 Prentice Hall

Ch 5 -16

Focused Strategy
Can be especially effective when:

1.

2.

3.

4.

5.

The target market niche is large, profitable,


and growing
Industry leaders do not consider the niche
crucial
Industry leaders consider the niche too costly
or difficult to meet
The industry has many different niches and
segments
Few, if any, other rivals are attempting to
specialize in the same target segment

Copyright 2007 Prentice Hall

Ch 5 -17

Copyright 2007 Prentice Hall

Ch 5 -18

Requirements for Generic


Competitive Strategies
Generic
Strategy

Overall Cost
Leadership

Commonly Required Skills


and Resources

Sustained capital investment


and access to capital
Process engineering skills
Intense supervision of labor
Products designed for ease in
manufacture
Low-cost distribution system

Common
Organizational
Requirements

Tight cost control


Frequent, detailed
control reports
Structured
organization and
responsibilities
Incentives based on
meeting strict
quantitative targets

Requirements for Generic


Competitive Strategies
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

Risks of the Generic Strategies


Risks of Cost
Leadership
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

Risks of
Differentiation

Risks of Focus

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
Segments differences
from others narrow
Advantages of broad
line increase

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

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

Conditions Favoring a
Concentrated Growth Strategy

Firms industry is resistant to major technological


advancements
Firms target markets are not product saturated
Firms markets are sufficiently distinctive to dissuade
competitors in adjacent markets from entering firms segment
Firms inputs are stable in price and quantity and available in
the amounts and at the times needed
Firms industry is stable
Firms competitive advantages are based on efficient
production or distribution channels
Success of market generalists

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

Specific Options for Selected


Grand Strategies
Concentration
(Increasing use of present products in present markets)
1.

2.

3.

Increasing present customers rate of use


a.
Increasing size of purchase
b.
Increasing the rate of product obsolescence
c.
Advertising other uses
d.
Giving price incentives for increased use
Attracting competitors customers
a.
Establishing sharper brand recognition
b.
Increasing promotional effort
c.
Initiating price cuts
Attracting nonusers to buy the product
a.
Introducing trial use thru sampling, price incentives, etc.
b.
Pricing up or down
c.
Advertising new uses

Specific Options for Selected


Grand Strategies
Market Development
(Selling 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

Specific Options for Selected


Grand Strategies
Product Development
(Developing new products for present markets)
1.

2.
3.

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, combine units, etc.)
Developing quality variations
Developing additional models and sizes (product proliferation)

Innovation Strategy
Involves creating a new product life
cycle, thereby making similar existing
products obsolete

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 productionmarketing chain
Vertical Integration
Involves acquiring firms
That supply acquiring firm with inputs (backward
integration) or
Are customers for firms outputs (forward integration)

Example:
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

Motivations for Diversification

Increase firms 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

Diversification Strategies
Concentric Diversification

Involves acquisition of businesses related to acquiring


firm in terms of technology, markets, or products
Conglomerate 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

Turnaround Strategy
Involves a concerted effort over a period
of time to fortify a firms distinctive
competencies, returning it to profitability

Turnaround Strategy
A turnaround strategy is done
through

Cost reduction

Asset reduction

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

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

The Strategy of Bankruptcy

Two approaches

Liquidation Involves complete distribution of a firms 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 firms debt
in the future if a recovery strategy is successful

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

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

The Top Five


Strategic Reasons for Outsourcing
1.
2.
3.
4.
5.

Improve business focus


Access to world-class capabilities
Accelerated reengineering benefits
Shared risks
Free resources for other purposes