s_ch7_long term objectives and strategies
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Long-Term Objectives and
Strategies
Chapter 7
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Long-Term Objectives
Strategic managers recognize that short-run profitmaximization is rarely the best approach to achievingsustained corporate growth and profitability
To achieve long-term prosperity, strategic planners
commonly establish long-term objectives in sevenareas:
Profitability Productivity
Competitive Position EmployeeDevelopment
Employee Relations Productivity
Tech Leadership Public Responsibility
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Qualities of Long-Term Objectives
There are five criteria that should be used
in preparing long-term objectives:
Flexible
Measurable
Motivating
Suitable
Understandable
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The Balanced Scorecard
The balanced scorecard is a set of measures that aredirectly linked to the companys strategy
Developed by Robert S. Kaplan and David P. Norton, itdirects 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
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The Balance Scorecard
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Generic Strategies
A long-term or grand strategy must be based on acore idea about how the firm can best compete inthe marketplace. The popular term for this coreidea is generic strategy.
3Generic Strategies:1. Striving for overall low-cost leadership in the industry.
2. Striving to create and market unique products for variedcustomer groups through differentiation.
3. Striving to have special appeal to one or more groups ofconsumers or industrial buyers,focusing on their cost or
differentiation concerns.
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Low-Cost Leadership
Low-cost producers usually excel at cost reductionsand efficiencies
They maximize economies of scale, implement cost-cutting technologies, stress reductions in overhead
and in administrative expenses, and use volumesales techniques to propel themselves up theearning curve
A low-cost leader is able to use its cost advantage to
charge lower prices or to enjoy higher profit margins
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Differentiation
Strategies dependent on differentiation are designed toappeal to customers with a special sensitivity for aparticular product attribute
By stressing the attribute above other product qualities,
the firm attempts to build customer loyalty Often such loyalty translates into a firms ability to
charge a premium price for its product
The product attribute also can be the marketingchannels through which it is delivered, its image forexcellence, the features it includes, and its servicenetwork
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Focus
A focus strategy, whether anchored in a low-cost base ora differentiation base, attempts to attend to the needs ofa particular market segment
A firm pursuing a focus strategy is willing to service
isolated geographic areas; to satisfy the needs ofcustomers with special financing, inventory, or servicingproblems; or to tailor the product to the somewhatunique demands of the small- to medium-sized customer
The focusing firms profit from their willingness to serve
otherwise ignored or underappreciated customersegments
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Risks of the Generic Strategies
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The Value Disciplines
Operational Excellence
This strategy attempts tolead the industry in priceand convenience by pursuinga focus on lean and efficient
operations Customer Intimacy
Customer intimacy meanscontinually tailoring andshaping products and
services to fit an increasinglyrefined definition of thecustomer
Product Leadership
Companies that pursuethe discipline of productleadership strive toproduce a continuous
state of state-of-the-artproducts and services
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Grand Strategies
Grand strategies, often called master or businessstrategies, provide basic direction for strategicactions
Indicate the time period over which long-rang
objectives are to be achieved Any one of these strategies could serve as the basis
for achieving the major long-term objectives of asingle firm
Firms involved with multiple industries, businesses,product lines, or customer groups usually combineseveral grand strategies
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Concentrated Growth
Concentrated growth is the strategy of the
firm that directs its resources to the profitable
growth of a dominant product, in a dominant
market, with a dominant technology Concentrated growth strategies lead to
enhanced performance
Specific conditions favor concentrated growth The risks and rewards vary
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Market Development
Market development commonly ranks second onlyto concentration as the least costly and least risky ofthe 15 grand strategies
It consists of marketing present products, often with
only cosmetic modifications, to customers in relatedmarket areas by adding channels of distribution orby changing the content of advertising or promotion
Frequently, changes in media selection, promotional
appeals, and distribution are used to initiate thisapproach
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Product Development
Product development involves the
substantial modification of existing
products or the creation of new butrelated products that can be marketed
to current customers through
established channels
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Innovation
These companies seek to reap the initially highprofits associated with customer acceptance of anew or greatly improved product
Then, rather than face stiffening competition as the
basis of profitability shifts from innovation toproduction or marketing competence, they searchfor other original or novel ideas
The underlying rationale of the grand strategy of
innovation is to create a new product life cycle andthereby make similar existing products obsolete
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Horizontal Integration
When a firms long-term strategy is basedon growth through the acquisition of oneor more similar firms operating at thesame stage of the production-marketingchain, its grand strategy is calledhorizontal integration
Such acquisitions eliminate competitors
and provide the acquiring firm with accessto new markets
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Vertical Integration
When a firms grand strategy is to acquirefirms that supply it with inputs (such asraw materials) or are customers for itsoutputs (such as warehouses for finishedproducts), vertical integration is involved
The main reason for backward integrationis the desire to increase the dependability
of the supply or quality of the rawmaterials used as production inputs
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Vertical and Horizontal Integration
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Concentric Diversification
Concentric diversification involves the acquisitionof businesses that are related to the acquiring firmin terms of technology, markets, or products
With this grand strategy, the selected new
businesses possess a high degree of compatibilitywith the firms current businesses
The ideal concentric diversification occurs whenthe combined company profits increase the
strengths and opportunities and decrease theweaknesses and exposure to risk
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Conglomerate Diversification
Occasionally a firm, particularly a very large one,plans acquire a business because it represents themost 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 creatingproduct-market synergy with existing businesses
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Turnaround
The firm finds itself with declining profits Among the reasons are economic recessions,
production inefficiencies, and innovativebreakthroughs by competitors
Strategic managers often believe the firm cansurvive and eventually recover if a concerted effortis made over a period of a few years to fortify itsdistinctive competences. This is turnaround.
Two forms of retrenchment:
Cost reduction Asset reduction
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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 beenassociated with the second phase of the turnaround process,
the recovery response
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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 anonintegrated business activity achieves an
unusually high market value, strategic
managers often decide to sell the firm
Reasons for divestiture vary
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Liquidation
When liquidation is the grand strategy, the
firm typically is sold in parts, only
occasionally as a wholebut for its
tangible asset value and not as a goingconcern
Planned liquidation can be worthwhile
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Bankruptcy
Liquidation bankruptcyagreeing to acomplete distribution of firm assets tocreditors, most of whom receive a smallfraction of the amount they are owed
Reorganization bankruptcythe managersbelieve the firm can remain viable throughreorganization
Two notable types of bankruptcy
Chapter 7
Chapter 11
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Joint Ventures
Occasionally two or more capable firms lack anecessary component for success in aparticular competitive environment
The solution is a set ofjoint ventures, which
are commercial companies (children) createdand operated for the benefit of the co-owners(parents)
The joint venture extends the supplier-consumer relationship and has strategicadvantages for both partners
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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
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Consortia, Keiretsus, and Chaebols
Consortia are defined as large interlocking
relationships between businesses of an
industry
In Japan such consortia are known askeiretsus, in South Korea as chaebols
Their cooperative nature is growing in
evidence as is their market success
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Selection ofLong-Term Objectives and Grand StrategySets
When strategic planners study theiropportunities, they try to determine which aremost likely to result in achieving various long-range objectives
Almost simultaneously, they try to forecastwhether an available grand strategy can takeadvantage of preferred opportunities so thetentative objectives can be met
In essence, then, three distinct but highlyinterdependent choices are being made at onetime
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Sequence ofSelection
and Strategy Objectives
The selection of long-range objectives and grandstrategies involves simultaneous, rather than
sequential, decisions
While it is true that objectives are needed to
prevent the firms direction and progress from
being determined by random forces, it is equally
true that objectives can be achieved only if
strategies are implemented
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