CH 7 Pearce Robinson McGrawHill Corporate Strategy

1. 7-1
Chapter 7Chapter 7
Long-Term Objectives and
Strategies

2. 7-2
Long-Term Objectives
• Strategic managers recognize that short-run
profit maximization is rarely the best
approach to achieving sustained corporate
growth and profitability

3. 7-3
To achieve long-term prosperity, strategic planners
commonly establish long-term objectives in seven areas:

4. 7-4
Profitability
The ability of any firm to operate in he long run depends on
acceptable levels of profit. Strategically managed firms
characteristically have a profit objective, usually expressed in
EPS or Return on Equity.
Productivity
Firms that can improve the input-output relationship normally
increase profitability. Commonly used productivity objectives
are the number of items produced or the number of services
rendered per unit of input. They can also be stated in terms of
desired cost reduction. For example: Objective for reducing
defects, customer complaints leading to litigation, or overtime.
Such objectives increase profitability if unit output is
maintained

5. 7-5
Competitive Position
• One measure of corporate success is relative dominance
in the marketplace. Objective in terms of competitive
position is commonly stated by using total sales or
market share as measures of their competitive position.
In FY 2001, Hero Honda was targeting a sale of 1 million
motorcycles. To motivate its workforce, they raised the
slogan “OM (one million) Sweet OM”.
Majestic Wine, UK’s largest specialist retailer of wine,
recently slashed prices on 500 of its single-bottle wines
in an attempt to win market share.

6. 7-6
Employee Development
• Employees value education and training, in part
because they lead to increased compensation and
job
security.Providing such opportunities often increase
s productivity and decreases turnover.
• Bilt has a 4 week management trainee programme
to identify and groom leaders of tomorrow.
• JM family has a drive your own development
programme that sees several associates completing
departmental rotations, site visits, and process

7. 7-7
Technological Leadership
• Firms must decide whether to lead or follow in the
marketplace. Either approach can be successful, but
each requires a different strategic posture.
Therefore, many firms state an objective with regard
to technological leadership.
• Caterpillar Tractor Company established its
reputation and early dominance by being in the
forefront of technological innovation in the
manufacturer of large earthmovers.

8. 7-8
Public Responsibility
• Managers recognize their responsibilities to
their customers and to society at large. In fact,
many firms seek to exceed government
requirements. They work not only to develop
reputation for fairly priced products and services but
also to establish themselves as responsible corporate
citizens.
• Tata Group
• Eureka Forbes

9. 7-9
Employee Relations
• Whether or not they are bound by union contracts, firms
actively seek good employee relations. In fact, proactive
steps in anticipation of employee needs and
expectations are characteristic of strategic managers.
Strategic managers believe that productivity is
linked to employee loyalty and to appreciation of
mangers’ interest in employee welfare. They, therefore,
set objectives to improve employee relations. Among
the outgrowths of such objectives are safety programs,
worker representation of management committees, and
employee stock option plans.

10. 7-10
Qualities of Long-Term Objectives
• There are seven criteria that should be used in
preparing long-term objectives:

11. 7-11
The Balanced Scorecard
• The balanced scorecard is a set of measures that
are directly linked to the company’s strategy
– Developed by Robert S. Kaplan and David P. Norton, it
directs a company to link its own long-term strategy
with tangible goals and actions.
– The scorecard allows managers to evaluate the
company from four perspectives:
• financial performance
• customer knowledge
• internal business processes
• learning and growth

12. 7-12
The Balance Scorecard

13. 7-13
Generic Strategies
• A long-term or grand strategy must be based on a
core idea about how the firm can best compete in
the marketplace. The popular term for this core
idea is generic strategy.
• 3 Generic Strategies:
1. Striving for overall low-cost leadership in the industry.
2. Striving to create and market unique products for
varied customer groups through differentiation.
3. Striving to have special appeal to one or more groups
of consumers or industrial buyers, focusing on their
cost or differentiation concerns.

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Strategic Management, 10/eStrategic Management, 10/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

15. McGraw-Hill/IrwinMcGraw-Hill/Irwin
Strategic Management, 10/eStrategic Management, 10/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

16. 7-16
Low-Cost Leadership
• Low-cost producers usually excel at cost reductions and
efficiencies
• They maximize economies of scale, implement cost-
cutting technologies, stress reductions in overhead and in
administrative expenses, and use volume sales techniques
to propel themselves up the earning curve
• A low-cost leader is able to use its cost advantage to
charge lower prices or to enjoy higher profit margins
• It involves marketing your company as the cheapest
source for a good or service. This means that you need to
minimize your costs and pass the savings on to your
customers.

17. 7-17
Low-Cost Leadership

18. 7-18
Differentiation
• Strategies dependent on differentiation are designed to
appeal to customers with a special sensitivity for a
particular product attribute
• By stressing the attribute above other product
qualities, the firm attempts to build customer loyalty
• Often such loyalty translates into a firm’s ability to
charge a premium price for its product
• The product attribute also can be the marketing
channels through which it is delivered, its image for
excellence, the features it includes, and its service
network

19. 7-19
Differentiation

20. 7-20

21. 7-21
Focus
• A focus strategy, whether anchored in a low-cost base
or a differentiation base, attempts to attend to the needs
of a particular market segment
• A firm pursuing a focus strategy is willing to service
isolated geographic areas; to satisfy the needs of
customers with special financing, inventory, or
servicing problems; or to tailor the product to the
somewhat unique demands of the small- to medium-
sized customer
• The focusing firms profit from their willingness to serve
otherwise ignored or underappreciated customer
segments

22. 7-22
The Value Disciplines
• The Value-Discipline Model looks at 3 different areas or “value
disciplines” in which an enterprise can focus. Each area results in
customers valuing the enterprise in a different way. The three value-
disciplines are:
• Operating Excellence;
• Product Leadership; and
• Customer Intimacy
• Treacy-Wiersema proposed that an enterprise cannot excel in all
three disciplines because the basic enterprise culture, structures,
people, facilities, processes and business models that lead to
excellence in any one discipline are incompatible with achieving
excellence in the others.

23. 7-23
The Value Disciplines

24. 7-24
Operational Excellence
– This strategy attempts to lead the industry in price and
convenience by pursuing a focus on lean and efficient
operations
– Companies pursuing operational excellence relentlessly
seek ways to minimize overhead costs, to eliminate
intermediate production steps, to reduce transaction and
other costs, and to optimize business processes across
functional and organizational boundaries.
– They focus on delivering their products or services to
customers at competitive prices and with minimal
inconvenience.

25. 7-25
Operational Excellence

26. 7-26
Customer Intimacy
– Customer intimacy means continually tailoring and
shaping products and services to fit an increasingly
refined definition of the customer
– This can be expensive, but customer-intimate
companies are willing to spend now to build customer
loyalty for the long term. They typically look at the
customer’s lifetime value to the company, not the value
of any single transaction.
– Employees in these companies will do almost anything
—with little regard for initial cost—to make sure that
each customer gets exactly what he or she really wants.

27. 7-27
Customer Intimacy

28. 7-28
Product Leadership
• Companies that pursue the discipline of product leadership
strive to produce a continuous state of state-of-the-art
products and services.
• Product Leadership is characterized by products that are the
best in their market and highly valued by customers.
• Encouragement of innovation and a risk-oriented
management style are key principles of a product leadership
enterprise.
• It is important to maintain the level of capability to deliver
products or services and the continuous improvement of
those capabilities.

29. 7-29
Product Leadership

30. 7-30
Grand Strategies
• Grand strategies, often called master or business
strategies, provide basic direction for strategic
actions
• Indicate the time period over which long-term
objectives are to be achieved
• Any one of these strategies could serve as the basis
for achieving the major long-term objectives of a
single firm
• Firms involved with multiple industries,
businesses, product lines, or customer groups
usually combine several grand strategies

31. 7-31
Concentrated Growth
• Concentrated growth is the strategy of the firm
that directs its resources to the profitable growth of
a single product, in a single market, with a single
dominant technology
• Concentrated growth strategies lead to enhanced
performance
• Specific conditions favor concentrated growth
• The risks and rewards vary

32. 7-32
Market Development
• Market development commonly ranks second
only to concentration as the least costly and least
risky of the 15 grand strategies
• It consists of marketing present products, often
with only cosmetic modifications, to customers in
related market areas by adding channels of
distribution or by changing the content of
advertising or promotion
• Frequently, changes in media selection,
promotional appeals, and distribution are used to
initiate this approach

33. 7-33
Product Development
• Product development
involves the substantial
modification of existing
products or the creation of
new but related products
that can be marketed to
current customers through
established channels

34. 7-34
Innovation
• These companies seek to reap the initially high
profits associated with customer acceptance of a
new or greatly improved product
• Then, rather than face stiffening competition as the
basis of profitability shifts from innovation to
production or marketing competence, they search
for other original or novel ideas
• The underlying rationale of the grand strategy of
innovation is to create a new product life cycle and
thereby make similar existing products obsolete

35. 7-35
Horizontal Integration
• Horizontal integration is the process of a company
increasing production of goods or services at the same
part of the supply chain. A company may do this via
internal expansion, acquisition or merger.
• The process can lead to monopoly if a company captures
the vast majority of the market for that good or service.

36. 7-36

37. 7-37
Vertical Integration
• When a company expands its business into areas
that are at different points on the same production
path, such as when a manufacturer owns its supplier
and/or distributor.
• Here, a firm’s grand strategy is to acquire firms that
supply it with inputs (such as raw materials) or are
customers for its outputs (such as warehouses for
finished products).

38. 7-38
• There are three varieties: backward (upstream)
vertical integration, forward (downstream) vertical
integration, and balanced (both upstream and
downstream) vertical integration.
• The main reason for backward integration is the
desire to increase the dependability of the supply or
quality of the raw materials used as production
inputs

39. 7-39

40. 7-40
Vertical and Horizontal Integration

41. 7-41
Concentric Diversification
• Concentric diversification involves the
acquisition of businesses that are related to the
acquiring firm in terms of technology, markets, or
products
• With this grand strategy, the selected new
businesses possess a high degree of compatibility
with the firm’s current businesses
• The ideal concentric diversification occurs when
the combined company profits increase the
strengths and opportunities and decrease the
weaknesses and exposure to risk

42. 7-42
• Coke purchased several beverage manufacturers to
expand beyond the soft drink industry to the
beverage industry. Coke’s acquisitions of Vitamin
Water, Honest Tea, Fuze Beverage and Core Power
were concentric diversification moves, providing it
with brand recognition in new categories.

43. 7-43
Conglomerate Diversification
• Occasionally a firm, particularly a very large one,
plans acquire a business because it represents the
most promising investment opportunity available.
This grand strategy is commonly known as
conglomerate diversification.
• The principal concern of the acquiring firm is the
profit pattern of the venture
• Unlike concentric diversification, conglomerate
diversification gives little concern to creating
product-market synergy with existing businesses

44. 7-44

45. 7-45
Turnaround
The firm finds itself with declining profits
• Among the reasons are economic recessions,
production inefficiencies, and innovative
breakthroughs by competitors
• Strategic managers often believe the firm can
survive and eventually recover if a concerted effort
is made over a period of a few years to fortify its
distinctive competences. This is turnaround.
• Two forms of retrenchment:
– Cost reduction
– Asset reduction

46. 7-46
Elements of Turnaround
• 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
is known as situation severity
• Turnaround responses among successful firms typically
include two stages of strategic activities: retrenchment and
the recovery response
• The primary causes of the turnaround situation have been
associated with the second phase of the turnaround
process, the recovery response

47. 7-47
Divestiture
• A divestiture strategy involves the sale of a
firm or a major component of a firm
• When retrenchment fails to accomplish the
desired turnaround, or when a nonintegrated
business activity achieves an unusually high
market value, strategic managers often
decide to sell the firm
• Reasons for divestiture vary

48. 7-48
Liquidation
• When liquidation is the grand strategy, the firm
typically is sold in parts, only occasionally as a
whole—but for its tangible asset value and not as a
going concern
• Planned liquidation can be worthwhile

49. 7-49
Bankruptcy
• Liquidation bankruptcy—agreeing to a complete
distribution of firm assets to creditors, most of
whom receive a small fraction of the amount they
are owed
• Reorganization bankruptcy—the managers believe
the firm can remain viable through reorganization
• Two notable types of bankruptcy

50. 7-50
Joint Ventures
• Occasionally two or more capable firms lack a
necessary component for success in a particular
competitive environment
• The solution is a set of joint ventures, which are
commercial companies (children) created and
operated for the benefit of the co-owners (parents)
• The joint venture extends the supplier-consumer
relationship and has strategic advantages for both
partners

51. 7-51
Strategic Alliances
• Strategic alliances are distinguished from joint
ventures because the companies involved do not
take an equity position in one another
• In some instances, strategic alliances are
synonymous with licensing agreements
• Outsourcing arrangements vary

52. 7-52
Consortia, Keiretsus, and Chaebols
• 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
• Their cooperative nature is growing in evidence as
is their market success

53. 7-53
Selection of Long-Term Objectives and
Grand Strategy Sets
• When strategic planners study their opportunities,
they try to determine which are most likely to
result in achieving various long-range objectives
• Almost simultaneously, they try to forecast
whether an available grand strategy can take
advantage of preferred opportunities so the
tentative objectives can be met
• In essence, then, three distinct but highly
interdependent choices are being made at one time

54. 7-54
Sequence of Selection
and Strategy Objectives
• The selection of long-range objectives and
grand strategies involves simultaneous,
rather than sequential, decisions
• While it is true that objectives are needed to
prevent the firm’s direction and progress
from being determined by random forces, it
is equally true that objectives can be
achieved only if strategies are implemented