Topic 4 Long-Term Objectives and Grand Strategies

Topics Long-Term Objectives Generic Strategies Grand Strategies

Long-Term Objectives … Examples Statements of the results that a firm seeks to achieve over a specified period Profitability Productivity Competitive position Employee development Employee relations Technological leadership Public responsibility

Qualities of Long-Term Objectives Achievable Acceptable Criteria used in preparing objectives Understandable Flexible Suitable Measurable Motivating

Porter’s Generic Strategies core ideas about how the firm can best compete in the marketplace … based on either … Low-cost Leadership Focus (Niche) Differentiation

Porter’s - Requirements for Generic Competitive Strategies Generic Strategy Commonly Required Skills and Resources Common Organizational Requirements Overall Cost Leadership Sustained capital investment and 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

Foundation Strategy Broad Cost Leader … will attempt to be the low-cost producer in both segments of the market. It will have good profit margins on all sales while keeping prices low for price-sensitive customers. Firm Profile: More likely to reposition products than introduce new ones to the market Capacity improvements are unlikely to be undertaken (may run overtime instead) … Automation may be pursued to increase margins Investments will be financed with debt and/or stock issues Tends to spend less on promotion and sales Focus on Market Share, Profits, and Stock Price

Foundation Strategy Cost Leader with Product Life Cycle Focus … minimize costs through efficiency and expertise. Products will be allowed to age and change in appeal from High Tech to Low Tech buyers. Low R&D spending (very little repositioning & new product every 2-3 years) Invests in automation early in the product’s life-cycle Moderate spending on promotion and sales Focus on ROE, ROS, and Profits

Porter’s - Requirements for Generic Competitive Strategies (contd.) Generic Strategy Commonly Required Skills and resources Common Organizational Requirements Differentiation Product engineering Creative flair 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

Foundation Strategy Broad Differentiation … will seek to create maximum awareness and brand equity. It wants to be well known as a maker of high quality/highly desirable products. Firm Profile: High R&D spending to keep products fresh Maintains a presence in both market segments Spends heavily on advertising and sales to create maximum awareness and accessibility Prices tend to be higher Focus on Market Share, Profits, and Stock Price

Foundation Strategy Differentiation Strategy with a Product Life Cycle Focus … seeks to be well-known as a top producer of good performing products in both segments. Firm Profile: Multiple product lines in both segments High promotion and sales investments to create maximum awareness and accessibility High R&D expenditures to continually reposition product lines and keep products fresh Unlikely to invest in increased automation or production capacity Focus on ROA, Stock Price, and Asset Turnover

Porter’s - Requirements for Generic Competitive Strategies (contd.) Generic Strategy Commonly Required Skills and resources Common Organizational Requirements Focus Combination of above policies directed at the particular strategic target

Foundation Strategy Niche Cost Leader … seeks to dominate the price sensitive Low Tech market segment. Its aim is to set prices below all competitors — and still be profitable. Firm Profile: Multiple product lines in the Low Tech segment Invests heavily in automation Spends moderately on advertising to cost sensitive customers (sales people have more than one product to pitch to prospects) Investments financed with debt and/or stock issues Focus on ROS, ROE, and Profits

Foundation Strategy Niche Differentiation … company seeks to be known far and wide as the top producer of the best performing state-of-the-art products. Firm Profile: Multiple product lines in the High Tech Segment Minimum focus in the other segment High promotion and sales investments to create maximum awareness and accessibility High R&D expenditures to continually introduce new product lines and keep existing products fresh Unlikely to invest in increased automation or production capacity Focus on ROA, Asset Turnover, and ROE

Grand Strategies Comprehensive general approaches that guide a firm’s major actions Conglomerate diversification Turnaround Divestiture Liquidation Bankruptcy Joint ventures Strategic alliances Concentrated growth Market development Product development Innovation Horizontal integration Vertical integration Concentric diversification

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 limited competitive arena

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 Based on penetrating existing market by Incorporating product modifications into existing items or Developing new products connected to existing products

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 production-marketing chain Vertical Integration Involves acquiring firms that supply acquiring firm with inputs (backward integration) or are customers for firm’s outputs (forward integration)

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 firm’s distinctive competencies, returning it to profitability done through : Cost reduction Asset reduction

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 firm’s assets to creditors, most of whom receive a small fraction of amount owed (7) Reorganization – Involves creditors temporarily freezing their claims while a firm reorganizes and rebuilds its operations more profitably (11, 13)

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