Strategies in Action

STRATEGIC MANAGEMENT

Chapter 5

Strategies in Action

The Value of Establishing 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 to five years.

          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 rarely occurs by accident, rather, it is the result of hard work directed toward achieving certain objectives.

Financial versus Strategic Objectives

          Two types of objectives especially common to organizations:

· 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.

· Strategic Objectives- include things such as large market share, quicker on-time delivery than rivals, shorter design-to-market times than rival, lower costs than rivals, higher product quality than rivals, wider geographic coverage than rivals, achieving ISO certification, and so on.

      Although financial objectives are especially important in firms, oftentimes there is a trade-off between financial and strategic objectives such that crucial decisions have to be made.

Not Managing by Objectives

          The idea behind the saying “if you think education is expensive, try ignorance” also applies to establishing objectives.

           Strategists should avoid the following alternative ways to “not managing by objectives”.

· Managing by Extrapolation – adheres to the principle “if it ain’t broke, don’t fix it”. The idea is to keep doing about the same things in the same ways because they 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. Managing by crisis is actually a form of reacting rather than acting and of letting events dictate the what and the when of management decision.

· 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 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 predicted 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.  
      

Levels of Strategies

           Strategy making is not just a task for top executives, middle and lower-level managers to must be involved in the strategic planning process to the extent possible.

In Large Companies

In Small Companies

Types of Strategies

          Strategic planning involves “choices that risk resources and trade-offs that sacrifice opportunity”. 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.

The Balanced Scorecard

          Balanced Scorecard Concept derived its name from the perceived need of firms to “balance” financial measures which are oftentimes used exclusively in strategy evaluation and control with nonfinancial measures such as product and customer service.

         A Balanced Scorecard for a firm is simply a listing of all key objectives to work toward, along with 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.

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.

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 sell their products directly to consumers.

          An effective means of implementing forward integration is franchising.  Many companies use franchising to distribute their products and services. Businesses can expand rapidly by franchising because costs and opportunities are spread across many individuals.

Six Guidelines for Forward Integration may be an Effective Strategy:

· When the 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 remarkably;  this is a factor because forward integration reduces and organization’s ability to diversify if its basic industry falters

· When an organization has both capital and human resources needed to manage the new business of distributing its new 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 suggest that a company profitably could distribute its own products and price them more competitively by integrating forward.

Backward Integration

          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.

Seven Guidelines for Backward Integration may be a Effective Strategy:

· 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 new business of supplying its raw materials.

· When the advantages of stable prices are particularly important; this is a factor because an organization cab stabilize the cost of raw materials and the associated price of its products(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 acquire a needed resource quickly.

Horizontal Integration

          Horizontal integration refers to a strategy of seeking ownership of or increased control over a firm’s competitors. Mergers, acquisitions, and takeovers among the competitors allow for increased economies of scale and enhanced transfer of resources and competencies.

Intensive Strategies

Market Penetration

          A market-penetration strategy seeks to increase market share for present products or services in present markets through greater marketing efforts.

Market Development

          Market development involves introducing present products or services into new geographic areas.

Product Development

          Product development is a strategy that seeks increased sales by improving or modifying present products and services.

Diversification Strategies

          Three general types of diversification strategies: concentric, horizontal, & conglomerate.

1. Concentric Diversification - adding new, but related products or services.

2. Horizontal diversification – adding new, unrelated products or services for present customers.

3. Conglomerate diversification – adding new, unrelated products or services

Defensive Strategies

1. Retrenchment – occurs when an organization regroups through cost and asset reduction to reverse declining sales and profits. Sometimes called turnaround or reorganizational strategy.

It is designed to fortify an organization’s basic distinctive competence.

During retrenchment:

· strategists work with limited resources

· strategists face pressures from stockholders, employees, and the media

· it entails 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

· instituting expense control

2. Divestiture – selling a division or part of an organization. It is used to raise capital for further strategic acquisitions or investments. Divestiture can be part of an overall strategy to rid an organization of business that are unprofitable, that require too much capital, or that do not fit well with the firm’s other activities.

3. Liquidation – selling all of a company’s assets, in parts, for their tangible worth. Liquidation is a recognition of defeat and consequently can be emotionally difficult strategy. However, it may be better to cease operating than to continue losing large sums of money.

Michael Porter’s Generic Strategies

          According to Michael Porter, strategies allow organizations to gain competitive advantage from three different bases he called generic strategies. 

          Depending on factors such as type of industry, size of the firm, and nature of competition, various strategies could yield advantages in:

1. Cost Leadership – emphasizes producing standardized products at a very low per-unit cost for consumers who are price sensitive. The basic idea is to under price competitors and thereby gain market share and sales, driving some competitors out of the market entirely.

The low-cost producer in an industry can be effective when:

- the market is composed of price sensitive consumers

- there are few ways to achieve product differentiation

- buyers do not care much differences from brand to brand

- there are large number of buyers with significant bargaining power

2. Differentiation Strategies - aimed at producing products considered unique industry wide and directed at consumers who are relatively price-sensitive. A successful differentiation strategy allows a firm to charge a higher price for its product and to gain customer loyalty because consumers may become strongly attached to the differentiation features.

3. Focus Strategies – mans producing products and services that fulfill the needs of small group of consumers. It is most effective when consumers have distinctive preferences or requirements and when rival firms are not attempting to specialize in the same target market.

Means for Achieving Strategies

Joint Venture/Partnering

          Joint Venture occurs when two or more companies form a temporary partnership or consortium for the purpose of capitalizing on some opportunity.

           Other types of cooperative arrangements include research and development, cross-distribution agreements, cross-licensing agreements, cross-manufacturing agreements, and joint-bidding consortia.

          A major reason why firms are using partnering as a means to achieve strategies is globalization. 

Merger/Acquisition

          A merger occurs when two organizations of about equal size unite to form one enterprise.

         An acquisition occurs when a large organization purchases (acquires) a smaller firm, or vice versa.

When a merger or acquisition is not desired by both parties, it can be called a takeover or hostile

takeover. A friendly merger is when the acquisition is desired by both firms.

          A leverage buyout (LBO) occur when a corporation’s are bought (buyout) by the company’s management and other private investors using borrowed funds (leverage). Beside trying to avoid a hostile takeover, other reasons for LBO are senior management decisions that particular divisions do not fit into an overall corporate strategy or must be sold to raise cash, or receipt of an attractive offering price.

First Mover Advantages

          First Mover Advantages refers to the benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms. Strategic management research indicates that first mover advantages end to be greatest when competitors are roughly the same size and possess similar resources. If competitors are not similar in size, then large competitors can wait while others make initial investments and mistakes, and then respond with greater effectiveness and resources.

Outsourcing

         Business-process outsourcing (BPO) involves companies taking over the functional operations, such as human resources, information systems, payroll, accounting, customer service, and even marketing of other firms.

          Companies are choosing to outsource for the following reasons:

1. Less expensive

2. Allows the firm to focus on its core businesses

3. Enables the firm to provide better services

Strategic Management In Nonprofit and Government Organizations

          Contrary to for-profit firms, non-profit and governmental organizations may be totally dependent on outside financing. Strategic management provides an excellent vehicle for developing and justifying requests for needed financial support.

          Educational institutions are using strategic-management techniques and concepts more frequently.

          Medical institutions are creating new strategies to day as advances in the diagnosis and treatment of chronic diseases. Hospitals are bringing services to the patients. Healthcare is more concentrated in the homes.