Business Policy


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Business Policy

  1. 1. Business Policy & Strategy: Chapter Four Strategic Management Murdick, Moor, Babson & Tomlinson, Sixth Edition, 2000
  2. 2. Strategic Management <ul><li>Formulation – generating ideas done by top managers </li></ul><ul><li>Implementation – putting them into action, involves all levels of the firm </li></ul><ul><li>Evaluation – monitoring to see if the chosen strategy and its implementation are effective in the short and medium run (control) </li></ul>
  3. 3. Senior Managers Responsibility <ul><li>Formulate vision, mission, goals, and objectives </li></ul><ul><li>Environmental analysis and forecast of opportunities and threats </li></ul><ul><li>Internal analysis of strengths and weaknesses </li></ul>
  4. 4. Strategy Formulation <ul><li>Establish the corporate vision – where firm wants to be in 3-5 years </li></ul><ul><li>Review the corporate mission – why the firm exists, its purpose </li></ul><ul><li>Evaluate resources and capabilities </li></ul><ul><li>Creatively match your internal strengths with external opportunities </li></ul>
  5. 5. Strategy Formulation <ul><li>Consider the scope (product and market), dynamics, competitive edge, risk, financial objectives, deployment of resources, </li></ul><ul><li>Consider potential acquisitions, divestments, joint ventures, mergers </li></ul>
  6. 6. Product Life Cycle <ul><li>Stages: </li></ul><ul><ul><li>Introductory – almost monopoly, low buyer awareness, high production and marketing costs, low profits, selective distributions </li></ul></ul><ul><ul><li>Growth – rapid increase in demand, entry of competitors, increased customer awareness and acceptance, repeat sales, increasing productive efficiency </li></ul></ul>
  7. 7. Product Life Cycle <ul><ul><li>Maturity – rates of sales growth declines, profit margins decline, fewer new customers and more reorders, shakeout of weak competitors, LONGEST stage </li></ul></ul><ul><ul><li>Decline – sales drop, # of competing products declines, new types of replacement products appear, small group of loyal customers </li></ul></ul>
  8. 8. Product Life Cycle <ul><li>Rejuvenation or death – in the decline stage, firms must increase demand for their product (like ARM & HAMMER baking soda) or go into new markets (internationalization) to begin the product life cycle over; otherwise, organizational death results </li></ul>
  9. 9. Generic Strategies <ul><li>Competitive Edge arises from: </li></ul><ul><ul><li>Overall cost leadership </li></ul></ul><ul><ul><li>Product differentiation </li></ul></ul><ul><ul><li>Focus (serving market niches) </li></ul></ul>
  10. 10. Risk <ul><li>From management’s perspective, risk is the average size of investments in new capital projects, the probability of success, and the equity of the firm </li></ul><ul><li>Outsider’s view risk as the expected return on investment less the risk-free rate of return, measured by beta. > beta, > risk </li></ul>
  11. 11. Portfolio Matrix Management <ul><li>PLOT these two dimensions to form a 3x3 matrix </li></ul><ul><li>Business Strength </li></ul><ul><ul><li>Low, Medium or High </li></ul></ul><ul><li>Industry Attractiveness </li></ul><ul><ul><li>Low, Medium or High </li></ul></ul>
  12. 12. Business Strengths <ul><li>Size, growth, market share, position </li></ul><ul><li>Profitability, margins, </li></ul><ul><li>Image or reputation </li></ul><ul><li>Pollution, people, reputation </li></ul><ul><li>Strengths, weaknesses </li></ul><ul><li>Technology position </li></ul><ul><li>(See Figure 4.3 page 53) </li></ul>
  13. 13. Industry Attractiveness <ul><li>Size </li></ul><ul><li>Market growth, diversity, pricing </li></ul><ul><li>Competitive structure </li></ul><ul><li>Industry profitability </li></ul><ul><li>Social, Environmental </li></ul><ul><li>Legal, Human </li></ul><ul><li>Technical role </li></ul>
  14. 14. Select for Growth, or Divest Harvest Harvest Or Divest LOW Select for investment, Grow Select for Growth, or Divest Harvest MEDIUM Invest And Grow Select for Investment, Grow Maintain HIGH HIGH MEDIUM LOW INDUSTRY ATTRACTIVE-NESS ______________ BUSINESS STRENGTH
  15. 15. Integration <ul><li>Forward Vertical is towards your customer and/or distribution channels (buying trucks to deliver your product to outlets/customers) </li></ul><ul><li>Backward Vertical is towards your suppliers, i.e. when Sears buys a lawnmower producer </li></ul><ul><li>Horizontal when a firm buys a firm in the same industry (hotels) </li></ul>
  16. 16. Outsourcing <ul><li>Firms have to decide whether to make or buy their products/raw material </li></ul><ul><li>Outsourcing is fairly common now where firms outsource NON-CORE processes to those firms that specialize in that process. This allows the original firm to focus on what it does best. </li></ul>
  17. 17. Planning Strategy <ul><li>Review - Merger – is when two firms of about equal size come together to form one firm with a hyphenated name; </li></ul><ul><li>Acquisitions – when one firm, generally the larger of the two, buys another firm which gets absorbed into the buying firm </li></ul>
  18. 18. Why undertake M/A? <ul><li>Obtain skilled management, broader markets, new technology, new production capacity, raw materials, etc. </li></ul><ul><li>Tax advantages </li></ul><ul><li>Put idle cash to work for higher profits </li></ul><ul><li>Opportunities for better management or synergies </li></ul>
  19. 19. Valuation of Firms <ul><li>Book value x 300% </li></ul><ul><li>Average earnings over the past 3 years capitalized at 10-20% </li></ul><ul><li>Five-year payback </li></ul><ul><li>Present value of estimated earnings over the next 10 years </li></ul><ul><li>Market value of stock x 2 </li></ul>
  20. 20. Valuation of Firms <ul><li>P/E ratio x average earnings of past three years </li></ul><ul><li>Upper limit = 8x earnings before interest and depreciation; </li></ul><ul><li>Lower limit = 3 x earnings before interest and depreciation </li></ul>
  21. 21. Going Public <ul><li>Entrepreneurs want to sell and retire </li></ul><ul><li>They would like to provide for their families or no members are capable of managing the firm </li></ul><ul><li>Firm has been expanding rapidly, but lacks capital to expand further </li></ul><ul><li>Firm has been very successful but entrepreneur hasn’t kept current and earnings are declining </li></ul>