Chapter 5 strategies in action
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Long-term objectives and strategies provide direction for organizations over 2-5 years. Objectives should be measurable, realistic, and obtainable. They provide benefits like consistent decision making, performance evaluation, and resource allocation. Objectives exist at the corporate, divisional, functional, and operational levels. Financial objectives focus on growth and profits while strategic objectives compare performance to competitors. Effective strategies include market penetration, product development, and vertical integration through controlling suppliers or distributors.
Chapter 5 strategies in action
- 1. Strategies in Action ESTRAT M. ALDANA ‘16
- 3. Long-term Objectives • Long-term objectives represent the results expected from pursuing certain strategies. • Strategies represent the actions to be taken to accomplish long- term objectives. • The time frame for objectives and strategies should be consistent, usually from two to five years.
- 4. The Nature of Long-term Objectives • Objectives should be quantitative, measurable, realistic, understandable, challenging, hierarchical, obtainable, and congruent among organizational units. Each objective should also be associated with a timeline. • Objectives are commonly stated in terms such as growth in assets, growth in sales, profitability, market share, degree and nature of diversification, degree and nature of vertical integration, earnings per share, and social responsibility. • Clearly established objectives offer many benefits. They provide direction, allow synergy, aid in evaluation, establish priorities, reduce uncertainty, minimize conflicts, stimulate exertion, and aid in both the allocation of resources and the design of jobs.
- 5. The Nature of Long-term Objectives • Objectives provide a basis for consistent decision making by managers whose values and attitudes differ. • Objectives serve as standards by which individuals, groups, departments, divisions, and entire organizations can be evaluated. • Long-term objectives are needed at the corporate, divisional, and functional levels of an organization. They are an important measure of managerial performance.
- 6. The Nature of Long-term Objectives • Without long-term objectives, an organization would drift aimlessly toward some unknown end. It is hard to imagine an organization or individual being successful without clear objectives. • Success only rarely occurs by accident; rather, it is the result of hard work directed toward achieving certain objectives.
- 7. Financial vs. Strategic Objectives • Two types of objectives are especially common in organizations: financial and strategic objectives. • Financial objectives include those associated with growth in revenues, growth in earnings, higher dividends, larger profit margins, greater return on investment, higher earnings per share, a rising stock price, improved cash flow, and so on; while strategic objectives include things such as a larger market share, quicker on-time delivery than rivals, shorter design-to-market times than rivals, lower costs than rivals, higher product quality than rivals, wider geographic coverage than rivals, achieving technological leadership, consistently getting new or improved products to market ahead of rivals, and so on.
- 8. Not Management by Objectives • Managing by Extrapolation—adheres to the principle “If it ain’t broke, don’t fix it.” The idea is to keep on doing about the same things in the same ways because things are going well. • Managing by Crisis—based on the belief that the true measure of a really good strategist is the ability to solve problems. Because there are plenty of crises and problems to go around for every person and every organization, strategists ought to bring their time and creative energy to bear on solving the most pressing problems of the day. Managing by crisis is actually a form of reacting rather than acting and of letting events dictate the what and when of management decisions.
- 9. Not Management by Objectives • Managing by Subjectives—built on the idea that there is no general plan for which way to go and what to do; just do the best you can to accomplish what you think should be done. In short, “Do your own thing, the best way you know how” (sometimes referred to as the mystery approach to decision making because subordinates are left to figure out what is happening and why). • Managing by Hope—based on the fact that the future is laden with great uncertainty and that if we try and do not succeed, then we hope our second (or third) attempt will succeed. Decisions are predicated on the hope that they will work and the good times are just around the corner, especially if luck and good fortune are on our side!
- 11. Balanced Scorecard • Balanced Scorecard derives its name from the perceived need of firms to “balance” financial measures that are oftentimes used exclusively in strategy evaluation and control with nonfinancial measures such as product quality and customer service. • An effective Balanced Scorecard contains a carefully chosen combination of strategic and financial objectives tailored to the company’s business.
- 12. Balanced Scorecard • The overall aim of the Balanced Scorecard is to “balance” shareholder objectives with customer and operational objectives. • Obviously, these sets of objectives interrelate and many even conflict. For example, customers want low price and high service, which may conflict with shareholders’ desire for a high return on their investment. • The Balanced Scorecard concept is consistent with the notions of continuous improvement in management (CIM) and total quality management (TQM).
- 13. Balanced Scorecard • A Balanced Scorecard for a firm is simply a listing of all key objectives to work toward, along with an associated time dimension of when each objective is to be accomplished, as well as a primary responsibility or contact person, department, or division for each objective.
- 14. Types of Strategies • Alternative strategies that an enterprise could pursue can be categorized into 11 actions: forward integration, backward integration, horizontal integration, market penetration, market development, product development, related diversification, unrelated diversification, retrenchment, divestiture, and liquidation.
- 16. Types of Strategies • Many, if not most, organizations simultaneously pursue a combination of two or more strategies, but a combination strategy can be exceptionally risky if carried too far. No organization can afford to pursue all the strategies that might benefit the firm. Difficult decisions must be made. Priority must be established. Organizations, like individuals, have limited resources. Both organizations and individuals must choose among alternative strategies and avoid excessive indebtedness.
- 17. Levels of Strategies • Strategy making is not just a task for top executives. • Middle and lower-level managers too must be involved in the strategic-planning process to the extent possible. In large firms, there are actually four levels of strategies: corporate, divisional, functional, and operational. • However, in small firms, there are actually three levels of strategies: company, functional, and operational.
- 19. Strategies for Large Companies • In large firms, the persons primarily responsible for having effective strategies at the various levels include the CEO at the corporate level; the president or executive vice president at the divisional level; the respective chief finance officer (CFO), chief information officer (CIO), human resource manager (HRM), chief marketing officer (CMO), and so on, at the functional level; and the plant manager, regional sales manager, and so on, at the operational level.
- 20. Strategies for Small Companies • In small firms, the persons primarily responsible for having effective strategies at the various levels include the business owner or president at the company level and then the same range of persons at the lower two levels, as with a large firm.
- 21. Integration Strategies • Forward integration, backward integration, and horizontal integration are sometimes collectively referred to as vertical integration strategies. Vertical integration strategies allow a firm to gain control over distributors, suppliers, and/or competitors.
- 22. Forward Integration • Forward integration involves gaining ownership or increased control over distributors or retailers. Increasing numbers of manufacturers (suppliers) today are pursuing a forward integration strategy by establishing Web sites to directly sell products to consumers. • For example, Microsoft is opening its own retail stores, a forward integration strategy similar to rival Apple Inc. • An effective means of implementing forward integration is franchising.
- 23. Effective Forward Integration • When an organization’s present distributors are especially expensive, or unreliable, or incapable of meeting the firm’s distribution needs. • When the availability of quality distributors is so limited as to offer a competitive advantage to those firms that integrate forward. • When an organization competes in an industry that is growing and is expected to continue to grow markedly; this is a factor because forward integration reduces an organization’s ability to diversify if its basic industry falters.
- 24. Effective Forward Integration • When an organization has both the capital and human resources needed to manage the new business of distributing its own products. • When the advantages of stable production are particularly high; this is a consideration because an organization can increase the predictability of the demand for its output through forward integration. • When present distributors or retailers have high profit margins; this situation suggests that a company profitably could distribute its own products and price them more competitively by integrating forward.
- 25. Backward Integration • Both manufacturers and retailers purchase needed materials from suppliers. Backward integration is a strategy of seeking ownership or increased control of a firm’s suppliers. • This strategy can be especially appropriate when a firm’s current suppliers are unreliable, too costly, or cannot meet the firm’s needs. • In a major strategic shift to design its own computer chips, Apple Inc. in 2009 began a backward integration strategy to shield Apple technology from rival firms.
- 26. Effective Backward Integration • When an organization’s present suppliers are especially expensive, or unreliable, or incapable of meeting the firm’s needs for parts, components, assemblies, or raw materials. • When the number of suppliers is small and the number of competitors is large. • When an organization competes in an industry that is growing rapidly; this is a factor because integrative-type strategies (forward, backward, and horizontal) reduce an organization’s ability to diversify in a declining industry. • When an organization has both capital and human resources to manage the new business of supplying its own raw materials.
- 27. Effective Backward Integration • When the advantages of stable prices are particularly important; this is a factor because an organization can stabilize the cost of its raw materials and the associated price of its product(s) through backward integration. • When present supplies have high profit margins, which suggests that the business of supplying products or services in the given industry is a worthwhile venture. • When an organization needs to quickly acquire a needed resource.
- 28. Horizontal Integration • Horizontal integration refers to a strategy of seeking ownership of or increased control over a firm’s competitors. One of the most significant trends in strategic management today is the increased use of horizontal integration as a growth strategy. Mergers, acquisitions, and takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies.
- 29. Effective Horizontal Integration • When an organization can gain monopolistic characteristics in a particular area or region without being challenged by the federal government for “tending substantially” to reduce competition. • When an organization competes in a growing industry. • When increased economies of scale provide major competitive advantages. • When an organization has both the capital and human talent needed to successfully manage an expanded organization. • When competitors are faltering due to a lack of managerial expertise or a need for particular resources that an organization possesses; note that horizontal integration would not be appropriate if competitors are doing poorly, because in that case overall industry sales are declining.
- 30. Intensive Strategies • Market penetration, market development, and product development are sometimes referred to as intensive strategies because they require intensive efforts if a firm’s competitive position with existing products is to improve.
- 31. Market Penetration • A market penetration strategy seeks to increase market share for present products or services in present markets through greater marketing efforts. • This strategy is widely used alone and in combination with other strategies. • Market penetration includes increasing the number of salespersons, increasing advertising expenditures, offering extensive sales promotion items, or increasing publicity efforts.
- 32. Effective Market Penetration • When current markets are not saturated with a particular product or service. • When the usage rate of present customers could be increased significantly. • When the market shares of major competitors have been declining while total industry sales have been increasing. • When the correlation between dollar sales and dollar marketing expenditures historically has been high. • When increased economies of scale provide major competitive advantages.
- 33. Market Development • Market development involves introducing present products or services into new geographic areas.
- 34. Effective Market Development • When new channels of distribution are available that are reliable, inexpensive, and of good quality. • When an organization is very successful at what it does. • When new untapped or unsaturated markets exist. • When an organization has the needed capital and human resources to manage expanded operations. • When an organization has excess production capacity. • When an organization’s basic industry is rapidly becoming global in scope.
- 35. Product Development • Product development is a strategy that seeks increased sales by improving or modifying present products or services. Product development usually entails large research and development expenditures.
- 36. Effective Product Development • When an organization has successful products that are in the maturity stage of the product life cycle; the idea here is to attract satisfied customers to try new (improved) products as a result of their positive experience with the organization’s present products or services. • When an organization competes in an industry that is characterized by rapid technological developments. • When major competitors offer better-quality products at comparable prices. • When an organization competes in a high-growth industry. • When an organization has especially strong research and development capabilities.
- 37. Diversification Strategies • There are two general types of diversification strategies: related and unrelated. • Businesses are said to be related when their value chains posses competitively valuable cross-business strategic fits; businesses are said to be unrelated when their value chains are so dissimilar that no competitively valuable cross-business relationships exist.
- 38. Effective Related Diversification • When an organization competes in a no-growth or a slow-growth industry. • When adding new, but related, products would significantly enhance the sales of current products. • When new, but related, products could be offered at highly competitive prices. • When new, but related, products have seasonal sales levels that counterbalance an organization’s existing peaks and valleys. • When an organization’s products are currently in the declining stage of the product’s life cycle. • When an organization has a strong management team.
- 39. Unrelated Diversification • When revenues derived from an organization’s current products or services would increase significantly by adding the new, unrelated products. • When an organization competes in a highly competitive and/or a no- growth industry, as indicated by low industry profit margins and returns. • When an organization’s present channels of distribution can be used to market the new products to current customers. • When the new products have countercyclical sales patterns compared to an organization’s present products. • When an organization’s basic industry is experiencing declining annual sales and profits.
- 40. Unrelated Diversification • When an organization has the capital and managerial talent needed to compete successfully in a new industry. • When an organization has the opportunity to purchase an unrelated business that is an attractive investment opportunity. • When there exists financial synergy between the acquired and acquiring firm. (Note that a key difference between related and unrelated diversification is that the former should be based on some commonality in markets, products, or technology, whereas the latter should be based more on profit considerations.) • When existing markets for an organization’s present products are saturated. • When antitrust action could be charged against an organization that historically has concentrated on a single industry.
- 41. Defensive Strategies • In addition to integrative, intensive, and diversification strategies, organizations also could pursue retrenchment, divestiture, or liquidation.
- 42. Retrenchment • Retrenchment occurs when an organization regroups through cost and asset reduction to reverse declining sales and profits. • Sometimes called a turnaround or reorganizational strategy, retrenchment is designed to fortify an organization’s basic distinctive competence. • During retrenchment, strategists work with limited resources and face pressure from shareholders, employees, and the media. Retrenchment can entail selling off land and buildings to raise needed cash, pruning product lines, closing marginal businesses, closing obsolete factories, automating processes, reducing the number of employees, and instituting expense control systems.
- 43. Effective Retrenchment • When an organization has a clearly distinctive competence but has failed consistently to meet its objectives and goals over time. • When an organization is one of the weaker competitors in a given industry. • When an organization is plagued by inefficiency, low profitability, poor employee morale, and pressure from stockholders to improve performance. • When an organization has failed to capitalize on external opportunities, minimize external threats, take advantage of internal strengths, and overcome internal weaknesses over time; that is, when the organization’s strategic managers have failed (and possibly will be replaced by more competent individuals). • • When an organization has grown so large so quickly that major internal reorganization is needed.
- 44. Divestiture • Selling a division or part of an organization is called divestiture. • Divestiture often is used to raise capital for further strategic acquisitions or investments. • Divestiture can be part of an overall retrenchment strategy to rid an organization of businesses that are unprofitable, that require too much capital, or that do not fit well with the firm’s other activities.
- 45. Effective Divestiture • When an organization has pursued a retrenchment strategy and failed to accomplish needed improvements. • When a division needs more resources to be competitive than the company can provide. • When a division is responsible for an organization’s overall poor performance. • When a division is a misfit with the rest of an organization; this can result from radically different markets, customers, managers, employees, values, or needs. • When a large amount of cash is needed quickly and cannot be obtained reasonably from other sources. • When government antitrust action threatens an organization.
- 46. Liquidation • Selling all of a company’s assets, in parts, for their tangible worth is called liquidation. • Liquidation is a recognition of defeat and consequently can be an emotionally difficult strategy. However, it may be better to cease operating than to continue losing large sums of money.
- 47. Effective Liquidation • When an organization has pursued both a retrenchment strategy and a divestitute strategy, and neither has been successful. • When an organization’s only alternative is bankruptcy. Liquidation represents an orderly and planned means of obtaining the greatest possible cash for an organization’s assets. A company can legally declare bankruptcy first and then liquidate various divisions to raise needed capital. • When the stockholders of a firm can minimize their losses by selling the organization’s assets.