I Types of Strategies CHAPTER OBJECTIVES After studying this chapter, you should be able to do the following ib 2. 3. 4. Define and discuss secondary buyouts and dividend recapitalizations. Identify the benefits and drawbacks of merging with another firm. Discuss the value of establishing long-term objectives. Identify 16 types of business strategies. Identify numerous examples of organizations pursuing different types of strategies, 6. Discuss guidelines when particular strategies are most appropriate to pursue. Discuss Porter’s five generic strategies. 8. Describe strategic management in nonprofit, governmental, and small 10. 11. 12. 13. organizations. Discuss the nature and role of joint ventures in strategic planning, Compare and contrast financial with strategic objectives. Discuss the levels of strategies in large versus small firms. Explain the first mover advantages concept. Discuss recent trends in outsourcing and reshoring ASSURANCE OF LEARNING EXERCISES The following exercises are found at the end of this chapter. EXERCISE 4A Market Development: Petronas, EXERCISE 48 Alternative Strategies for Petronas EXERCISE 4c Private-Equity Acquisitions EXERCISE 4D ‘The strategies of adidas AG: 2013-2015 EXERCISE 4E Lessons in Doing Business Globally EXERCISE 4F Petronas 2013-2015 EXERCISE 46 What Strategies Are Most Risky? EXERCISE 4H Exploring Bankruptcy EXERCISE 41 Examining Strategy Articles EXERCISE 4) Classifying Some Strategies132° CHAPTER 4 + TYPES OF STRATEGIES embraced strategic planning fully in their quest for higher revenues and profits. Kent Nelson, former chair of UPS, explains why his company has created a new strategic- planning department: “Because we're making bigger bets on investments in technology, we can’t afford to spend a whole lot of money in one direction and then find out five years later it ‘was the wrong direction.”! This chapter brings strategic management to life with many contemporary examples. Sixteen types of stralegies are defined and exemplified, including Michael Porter's generic strategies: cost leadership, differentiation, and focus. Guidelines are presented for determining when each strategy is most appropriate to pursue. An overview of strategic management in nonprofit organizations, governmental agencies, and small firms is provided. As showcased below, Petronas is an example company that for many years has exemplified excellent strategic management. H== of companies today, including IBM, Wells Fargo, and General Electric, have 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 objec- tives and strategies should be consistent, usually from two to five years, The Nature of Long-Term Objectives Objectives should be quantitative, measurable, realistic, understandable, challenging, hierarchi- cal, obtainable, and congruent among organizational units. Each objective should also be associ- ated 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 a rere) Petronas PETRONAS, short for Petroliam Nasional Berhad, is a Malaysian oll capacity at the and gas company, wholly owned by the Government of Malaysia. lowest —_pos- Headquartered in Kuala Lumpur, PETRONAS owns the entire oil and sible costs {gas resources in Malaysia and is responsible for developing and adding PETRONAS value to these resources. In 2013, Fortune ranked PETRONAS as the has engaged 75th largest company in the world, the 19th most profitable company MISC. Bhd to in the world, and the most profitable company in Asia. PETRONAS has provide Project business interests in 35 countries and is engaged in a wide spectrum of | Management petroleum activities, including upstream exploration and production of oil and gas as well as downstream oil refining, marketing, and distribu- tion. Revenue derived from PETRONAS provides roughly 45 percent of the Malaysian government's annual budget. PETRONAS was one of the main sponsors of the BMW Sauber Formula One team before sponsor- ing the Mercedes Grand Prix team. PETRONAS is the main sponsor for, the Malaysian Grand Prix and co-sponsors the Chinese Grand Prix, ‘Among other strategies, PETRONAS is pursuing backward inte- gration by purchasing its own ships to transport its own oil and gas, especialy its liquefied natural gas (LNG). PETRONAS is directly procur- ing new LNG ships to meet its LNG transportation requirements. The strategy will allow PETRONAS to have direct access to LNG shipping and Technical Consultancy services for the construction ofits new LNG ships; MISC’s has extensive experience and expertise in the LNG ship- ping sector and is familiar with PETRONAS’ business needs. PETRONAS since 1975 has awarded 20,600 Malaysian students scholarships, including a total of 400 deserving students in 2013 to pursue their education under its PETRONAS Education Sponsorship Programme (PESP). Scholarship recipients are chosen during rigor ‘ous selection days held across Malaysia, and are offered opportuni ties to take education at overseas institutions or at the Universit Teknologi PETRONAS in Perak. The aim of PESP is to develop the skills of @ pool of young people who meet PETRONAS’ business requirements.CHAPTER 4 + TYPES OF STRATEGIES TABLE 4-1 Varying Performance Measures by Organizational Level Organizational Level Basis for Annual Bonus or Merit Pay Conporate "75% based on long-term objectives 25% based on annual objectives Division 50% based on long-term objectives 50% based on annual objectives Function 25% based on long-term objectives 75% based on annual objectives offer many benefits. They provide direction, allow synergy, aid in evaluation, establish priori- ties, reduce uncertainty, minimize conflicts, stimulate exertion, and aid in both the allocation of resources and the design of jobs. 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, Many practitioners and academicians attribute a significant part of U.S. industry's competitive decline to the short- term, rather than long-term, strategy orientation of managers in the USA. Arthur D. Little argues that bonuses or merit pay for managers today must be based to a greater extent on long-term objectives and strategies. An example framework for relating objectives to performance evalua- tion is provided in Table 4-1. A particular organization could tailor these guidelines to meet its ‘own needs, but incentives should be attached to both long-term and annual 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. You probably have worked hard the last few years striving to achieve an objective to graduate with a business degree. Success only rarely occurs by accident; rather, itis the result of hard work directed toward achieving certain objectives. Table 4-2 reveals the desired characteristics of objectives, while Table 4-3 summarizes the benefits of having clear objectives ancial versus Strategic Objectives ‘Two types of objectives are especially common in organizations: financial and strategic objec- tives, Financial objectives include those associated with growth in revenues, growth in earn- ings, higher dividends, larger profit margins, greater return on investment, higher earnings per share, arising stock price, improved cash flow, and so on; whereas strategic objectives include things such as a larger market share, quicker on-time delivery than rivals, shorter design-to-mar- ket 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. 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. TABLE 4-2 The Desired Characteristics of Objectives 1. Quantitative Measurable Realistic ‘Understandable Challenging Hierarchical Obtainable Congruent across departments 133