MODULE 6

Formulating Long Term Objectives and Grand Strategies

Long Term Objectives

The results an organization seeks over a multi year period are its long term objectives.

• There are seven areas in which long term objectives have to be established
1. Profitability
2. Productivity
3. Competitive position
4. Employee Development
5. Employee relations
6. Technological leadership
7. Public responsibility
 QUALITIES OF LTO
• Acceptable
• Flexible
• Measurable
• Suitable
• Motivating
 Grand Strategies

• Grand strategies provide basic direction for strategic

actions.
• They are the basis for coordinated and sustained
efforts directed towards achieving long-term business
objectives.
• They indicate a time period over which long-term
objectives are to be achieved.
• Firms involved with multiple industries, businesses,
product lines or customer groups usually combine
several grand strategies.
 The twelve grand principles are:
1. Concentrated growth
2. Market development
3. Product development
4. Innovation
5. Horizontal integration
6. Vertical integration
7. Concentric diversification
8. Conglomerate diversification
9. Turnaround
10.Divestiture
11.Liquidation
12.Joint ventures
 Innovation
• Innovation is needed since both consumer and industrial markets
expect periodic changes and improvements in the products offered.
• Firms seeking to making innovation as their grand strategy seek to
reap the initially high profits associated with customer acceptance of
a new or greatly improved product.
• As the products enters the maturity stage these companies start
looking for a new innovation.
• The underlining rationale is to create a new product life cycle and
thereby make similar existing products obsolete.
• This strategy is different from the product development strategy in
which the product life cycle of an existing product is extended.
 Horizontal integration
• It is a strategy in which a firms long term strategy is based on
growth through acquisition of one or more similar firms operating at
the same stage of the production-marketing chain.
• Such acquisitions eliminate competitors and provide the acquiring
firm with access to new markets.
• The acquiring firm is able to greatly expand its operations, thereby
achieving greater market share, improving economics of scale, and
increasing the efficiency of capital use.
• The risk associated with horizontal integration is the increased
commitment to one type of business.
 Vertical integration

• It is a process in which a firm's grand strategy is to acquire firms

that supply it with inputs (such as raw materials) or are customers
for its outputs (such as warehouses for finished products).
• The acquiring of suppliers is called backward integration.
• The main reason for backward integration is the desire to increase
the dependability of the supply or quality of the raw materials used
in the production inputs.
• This need is particularly great when the number of suppliers are
less and the number of competitors is large.
• In these conditions a vertically integrated firm can better control its
costs and, thereby, improve the profit margin.
– e.g. acquiring of textile producer by a shirt manufacturer
• The acquiring of customers is called forward integration.
– e.g. acquiring of clothing store by a shirt manufacturer
• Forward integration is preferred if great advantages accrue to
stable production.
• It also helps in greater predictability of demand for its outputs.

• Vertical integration has a risk which results from the firm's

expansion into areas requiring strategic manager to broaden
the base of their competences and to assume additional
responsibilities.
 Concentric diversification
• It involves the acquisition of businesses that are related to the
acquiring firm in terms of technology, markets, or products.
• The selected new business must possess a very high degree of
compatibility with the firm's existing business.
• The ideal concentric diversification occurs when the combined
company profits increase the strengths and opportunities and
decreases the weaknesses and exposure to risk.
• Thus, the acquiring firm searches for new businesses whose
products, markets, distribution channels, technologies and resource
requirements are similar to but not identical with its own, whose
acquisition results in synergies but not complete interdependence.
– e.g. acquiring of Spice Telecom by Idea
 Conglomerate Diversification
• It is a grand strategy in which a very large firm plans to acquire a
business because it represents the most promising investment
opportunity available.
• The principal concern, and often the sole concern, of the acquiring
firm is the profit pattern of the venture.
• It gives little concern to creating product-market synergy with
existing business.
• They may seek a balance in their portfolio between current businesses
with cyclical sales and acquired businesses with countercyclical sales,
between high-cash/low-opportunity and low-cash/high-opportunity
businesses or between debt-free and high leveraged businesses.
– e.g. acquisition of Adlabs by Anil Dirubhai Ambani Group
 Turnaround
• Sometimes the profit of a company decline due to
various reasons like economic recession,
production inefficiencies and innovative
breakthrough by competitors.
• In many cases the management believes that such
a firm can survive and eventually recover if a
intensive effort is made over a period of a few
years to fortify its distinctive competences.
• This is known as turnaround strategy.
Turnaround typically is begun with one or both of the following forms
of retrenchment being employed either singly or in combination.
1. Cost reduction
– It is done by decreasing the workforce through employee attrition,
leasing rather than purchasing equipment, extending the life of
machinery, eliminating promotional activities, laying off employees,
dropping items from a production line and discontinuing low-margin
customers.
2. Asset reduction
– This includes sale of land, buildings and equipment not essential to the
basic activity of the firm.
• Research have showed that turnaround almost always was associated
with changes in top management.
• New managers are believed to introduce new perspectives, raise
employee morale and facilitate drastic actions like deep budgetary cuts
in established programs.
Turnaround situation
• The model begins with the depiction of external and internal
factors as causes of a firm's performance downturn.
• When these factors continue to detrimentally impact the firm, its
financial health is threatened.
• Unchecked decline places the firm in a turnaround situation.
• Turnaround situations may be a result of years of gradual
slowdown or months of sharp decline.
• For a declining firm, stabilizing operations and restoring
profitability almost always entail strict cost reduction followed by
shrinking back to those segments of the business that have been
the best prospects of attractive profit margins.
Situation severity
• The urgency of the resulting threat to company survival posed by
the turnaround situation is known as situation severity.
• Severity is the governing factor in estimating the speed with
which the retrenchment response will be formulated and
activated.
• When severity is low stability can be achieved through cost
reduction alone.
• When severity is high cost reduction must be supplemented with
more drastic asset reduction measures.
• More productive resources are protected and will become the
core business in the future plan of the company.
Turnaround response
• Turnaround response among successful firms typically include
two strategic activities:
– Retrenchment phase
– Recovery phase
Retrenchment phase
• It consists of cost-cutting and asset-reducing activities.
• The primary objective of this process is to stabilize the firm's
financial condition.
• Firms in danger of bankruptcy or failure attempt to halt decline
through cost and asset reductions.
• It is very important to control the retrenchment process in a effective
and efficient manner for any turnaround to be successful.
• After the stability has been attained through retrenchment, the next
step of recovery phase begins.
Recovery phase
• The primary causes of the turnaround situation will be
associated with the recovery phase.
• For firms that declined as a result of external problems,
turnaround most often has been achieved through creative
new entrepreneurial strategies.
• For firms that declined as a result of internal problem,
turnaround has been mostly achieved through efficiency
strategies.
• Recovery is achieved when economic measures indicate
that the firm has regained its pre downturn levels of
performance.
 Tailoring strategy to fit specific industry and company
situations
Strategies based on industry situation
• Strategies for emerging industries
• Strategies for competing in turbulent, high-velocity markets
• Strategies for competing in maturing industries
• Strategies for firms in stagnant or declining industries
• Strategies for competing in fragmented industries

Strategies based on company situation

• Strategies for sustaining rapid company growth
• Strategy for industry leaders
• Strategies for runner-up firms
• Strategies for weak and crisis-ridden businesses
Strategies for emerging industries
• An emerging industry is one which is in its formative stage.
• The two critical strategic issues confronting firms in an
emerging industry are:
• How to finance initial operations until sales and revenues
take off
• What market segments and competitive advantages to go
after in trying to secure a front-runner position.
Challenges when competing in emerging industries
 Because the market is new and unproven, there is speculation
about how it will function, how fast it will grow and how big it will
get.
 It is difficult to make sales and profit projections.
 There will be guess work about how rapidly customers would be
attracted and how much they would be willing to pay.
 Much of the technological know-how for the products of emerging
industries is proprietary and closely guarded.
 Patents and unique technical expertise are key factors in securing
competitive advantage.
 Often, there is no consensus regarding which of the several
competing technologies will win or which product attributes will
prove decisive in winning buyer favor.
 Strong learning and experience curve effects may be present,
allowing significant price reductions as volume builds and costs fall.
 Entry barriers tend to be low, even for entrepreneurial start-up
companies.
 Large companies with ample resources will enter the market if
they find the promise for explosive
 The marketing task is to induce initial purchases and to overcome
customer concerns about product features, performance reliability
and conflicting claims of rival firms.
 Potential buyers expect first-generation products to be rapidly
improved, so they delay purchase till second or third generation
products are released.
 It will take time for companies to secure ample raw materials and
components. Till suppliers gear up to meet the industry's needs.
 A lot of mergers and acquisitions happen as many small companies
not able to fund R&D will be willing to be acquired.
Strategic avenues for competing in an emerging market

 Try and win early race for industry leadership with risk-taking
entrepreneurship and a bold creative strategy. Broad or focused
differentiation strategies with emphasis on technology or product
superiority offers the best chance for early competitive advantage.

 Push to perfect the technology, improve product quality and develop

additional attractive performance features.

 As technological uncertainty clears and a dominant technology

emerges, adopt it quickly.

 Form strategic alliances with key suppliers to gain access to specialized

skills, technological capabilities and critical materials or components.
 Acquire of form alliances with companies that have related or complementary
technological expertise as a means of helping outcompete rivals on the basis of
technological superiority.
 Try to capture any first-mover advantage associated with early commitments to
promising technologies.
 Pursue new customer groups, new user applications and entry into new
geographical areas.
 Make it easy and cheap for first-time buyers to try the industry's first generation
product. Then, as the product becomes familiar to a large section of the market,
shift advertisement emphasis to increasing frequency of use and building brand
loyalty.
 Use price cuts to attract the next layer of price-sensitive buyers into the market.
Strategies for competing in turbulent, high-velocity markets
• The characteristics of the turbulent, high-velocity markets is
the occurrence of all the following things at once:
• rapid technological change

• short product life cycles

• entry of new rivals into the marketplace

• frequent launches of new competitive moves by rivals

• fast evolving customer requirements

Strategies for coping with rapid changes
• The central strategy-making challenge in a turbulent market
environment is managing change.

• Ideally a company's approach should incorporate all three postures,

in different proportions.

• The best-performing companies in high-velocity markets

consistently seek to lead change with proactive strategies, at the
same time anticipating and preparing for the future and reacting
quickly to unpredictable and uncontrollable new developments.
1. It can react to change
 The company can respond to a rival's new product with a
better product.
 It can counter unexpected shift in buyer tastes and buyer
demand by redesigning or repacking its product.

Disadvantages
 Reacting is a defensive strategy.
 It is unlikely to create fresh opportunity.
2. It can anticipate change, make plans for dealing with the expected change and
follow its plans as changes occur
• It entails looking ahead to analyze what is likely to occur and then preparing and
positioning for that future.
• It entails studying buyer behavior, buyer needs, and buyer expectations to get
insight into how the market will evolve, then preparing for the necessary
production and distribution capabilities ahead of time.

Advantages
• It can open new opportunities and thus is a better way to manage change than
just pure reaction.

Disadvantages
• Anticipating change is fundamentally a defensive strategy.
3. It can lead change
• It entails initiating the market and competitive forces that others must
respond to.

• It means being the first to market with an important new product or

service.

• It means being technological leader.

• It means having products whose features and attributes shape customer

preferences and expectations

• It means proactively seeking to shape the rules of the game.

Advantage

• It is a offensive strategy aimed at putting a company in the driver's seat.

Strategic moves for fast-changing markets
• The strategic moves depends on the company's ability to
 Improvise
 Experiment
 Adapt
 Reinvent
 regenerate
• It has to constantly reshape its strategy and its basis for competitive advantage.
• Cutting-edge know-how and first-to-market capabilities are very valuable competitive
assets.
• A company has to have quick reaction time and should have flexible and adaptable
resources.
• Organizational agility would be a competitive asset.
• When a company's strategy are not doing well, it has to quickly regroup probing,
experimenting, improvising and trying again and again, until it finds something that is
acceptable by customers.
The following five strategic moves provide the best payoff
between altering offensive and defensive strategies and fast-
obsolescing strategy.
1.Invest aggressively in R&D to stay on the leading edge of
technological know-how
• If technology is the primary driver of change, it is important to
translate technological advances into innovative new products and
remaining close to whatever advancements and features are
pioneered by rivals.
• It is desirable to focus the R&D effort on a few critical areas to:
- deepen the firm's expertise
- master the technology
- fully capture learning curve effects
- become a dominant player in a particular technology area or product
category.
2.Develop quick-response capability
• Since it will not be possible to anticipate all the changes that
can happen, having an organizational capability to react
quickly becomes very crucial.
• This means:
- shifting resources internally
- adapting existing competencies and capabilities
- creating new competencies and capabilities
- not falling far behind rivals
3.Rely on strategic partnerships with outside suppliers and with
companies making tie-in products
• specialization and focus are desirable, even though technology in high-
velocity market creates new paths and product categories continuously.
• It helps to Partner with suppliers making state-of-the-art parts and
components and collaborating closely with developers of related
technologies and makers of tie-in products.
• The managerial challenge is to strike a good balance between building a
rich internal resource base that keeps the firm from being at the mercy of
the suppliers and allies and at the same time maintain organizational
agility by relying on resources and expertise of outsiders.
4.Initiate fresh actions every few months, not just when a
competitive response is needed
• A company can be proactive by making proactive time-paced
moves - introducing a new or improved product every few
months rather than when the market declines or when rivals
introduce new models.
• It can enter a new market every few months rather wait for
opportunity to present itself.
• It can refresh existing brands often rather wait for its popularity
to wane.
• The key to successfully using time pacing strategy is the right
interval.
5.Keep the company's products and services fresh and exiting
enough to stand out in the midst of all the change that is taking
place.
• The marketing challenges for companies in fast changing
markets is to keep the firm's products and services in limelight.
• The products should be innovative and well matched to the
changes that are occurring in the marketplace.
Strategies for competing in maturing industries
What are the characters of an maturing industry?
• It is moving from a rapid growth to a significantly slower
growth.
• Nearly all its potential buyers are already users of the
industry's products.
• Consumer goods industries that are mature typically have a
growth rate roughly equal to the growth of the consumer base
or economy as a whole.
What are the changes we can see in an industry as it enters the
mature stage?
• Slowing growth in buyer demand generates more competition
for market share
 Firms looking for higher growth will try to take customers away from competitors.
 Price cutting, increased advertising and other aggressive tactics are seen as
markets mature.
• Buyers become more sophisticated, often driving a harder
bargain on repeat purchases
 Since buyers have already experienced the product and are familiar with competing
brands, they evaluate different brands and can negotiate for a better deal with
seller
• Competition often produces a greater emphasis on cost and
service
 As sellers add all features in a product, the sellers focus shifts to combination of
price and service.
• Firms are not ready to add new facilities
• Product innovation and new end-use applications are harder to
come by
• International competition increases
 Firms start looking for foreign markets for growth. E.g. Vodafone
 Production activity will be shifted to countries where products can be
produced at best cost.
 Product standardization and diffusion of technical know-how lowers
barrier and encourages foreign companies to enter the market.
 The focus for most global players will be to capture the large geographic
markets.
• Industry profitability falls temporarily or permanently
• Stiffening competition induces a number of mergers and
acquisitions among competitors, weaker firms are driven out
and consolidation is seen.
What strategic moves can be adopted for maturing industries?

1. Pruning marginal products and models

• A wide variety of products is suitable for growth stage, when consumer
tastes are still evolving.
• A variety of products in a mature industry means additional costs in
terms of maintaining more inventory, not able to reach economics of
scale, and distribution costs.
• Pruning marginal products helps the firms to cut cost, concentrate on a
few items with highest margins and where firms have competitive
advantage.
2. More emphasis on value chain
• Value chain innovation can lead to:
 lower costs
 better product and service quality
 greater ability to produce customized products
 shorter design-to-market time

• Innovation in production technology by using better technology, labor

efficiency, flexible manufacturing, redesign of assembly lines can lead to saving
and customization.
• Better collaboration with suppliers and distributors can increase quality of
service.
• 3. Trimming costs e.g. reduction in employees through automation
4.Increasing sales to present customers
 This is a more easier option as compared to converting customers loyal
to rival companies.
 This may include finding new applications for the products and sales
promotions. E.g. Johnson making soaps for mothers also
5. Acquiring rival firms at bargain
• Rival firms which are not doing well can be targets for acquisition at
bargain prices.
• Acquisitions helps in:
 increasing the customer base by adding acquired customers
 reaching economics of scale, if possible
 using new technologies from acquired firms
• The acquisition must be done carefully to ensure the overall competitive
strength of the firm increases.
6.Expanding internationally
• Firms should look for markets which have attractive growth potential
and competitive pressures are less.
• It is more suitable when the firm's skills, reputation and products can
be readily transferable to foreign markets.

7. Building new or more flexible capabilities

• Firms need to strengthen their competitive capabilities making them
harder to imitate.
• New competencies and capabilities can be added.
• Existing competencies can be made more adaptable to changing
customer requirements.
What can be the strategic pitfalls in an maturing industry?
• A company should not choose a middle path between low cost,
differentiation and focusing.
• Slow to mounting a defense against stiffening competitive
pressures. E.g. HTM watches against Titan
• Concentrating more on short-term profitability rather than building
long-term competitive position
• Waiting for too long to respond to price cutting by rivals.
• Over expanding in the face of slowing growth.
• Over spending on advertising and sales promotion efforts in a losing
effort to combat the growth slowdown.
• Failing to pursue cost reduction at the earliest and aggressively
 GE nine cell planning grid
• General Electric with the assistance of McKinsey and Company developed this matrix.
• This matrix includes 9 cells based on long-term industry attractiveness(on Y-axis) and
business strength/competitive position (on X-axis).
• The industry attractiveness includes Market size, Market growth rate, Market
profitability, Pricing trends, Competitive intensity / rivalry, Overall risk of returns in
the industry, Entry barriers, Opportunity to differentiate products and services,
Demand variability, Segmentation, Distribution structure, Technology development
• Business strength and competitive position includes Strength of assets and
competencies, Relative brand strength (marketing), Market share, Market share
growth, Customer loyalty, Relative cost position (cost structure compared with
competitors), Relative profit margins (compared to competitors), Distribution strength
and production capacity, Record of technological or other innovation, Quality, Access
to financial and other investment resources, Management strength
Plotting the Information:
1. Select factors to rate the industry for each product line or
business unit. Determine the value of each factor on a scale of 1
(very unattractive) to 5 (very attractive), and multiplying that
value by a weighting factor.
Industry attractiveness = factor value1 x factor weighting1
+ factor value2 x factor weighting2
.
.
.
+ factor value N x factor weighting N
2. Select the key factors needed for success in each of the product line or
business unit. Determine the value of each key factor in the criteria on a
scale of 1 (very unattractive) to 5 (very attractive), and multiplying that
value by a weighting factor.
Business strengths/competitive position = key factor value1 x factor
weighting1
+ key factor value2 x factor weighting2
.
.
.
+ key factor valueN x factor weightingN
3. Plot each product line's or business unit's current position on
a matrix.
4. The individual product lines or business units is identified by
a letter and plotted as circles on the GE Business Screen.
5. The area of each circle is in proportion to the size of the
industry in terms of sales. The pie slice within the circles
depict the market share of each product line or business unit.
6. Plot the firm's future portfolio assuming that present
corporate and business strategies remain unchanged. This is
shown as an arrow which starts from the circle representing
the current position and the tip of the arrow will be the
tentative center of the future circle.
 Strategic Implications

• Resource allocation recommendations can be made to grow, hold, or harvest a strategic

business unit based on its position on the matrix as follows:
1. Grow strong business units in:
– attractive industries
– average business units in attractive industries
– strong business units in average industries.

2. Hold average business units in:

– average industries
– strong businesses in weak industries
– weak business in attractive industies.

3. Harvest weak business units in:

– unattractive industries
– average business units in unattractive industries
– weak business units in average industries.
• There are strategy variations within these three groups. For example, within
the harvest group the firm would be inclined to quickly divest itself of a
weak business in an unattractive industry, whereas it might perform a phased
harvest of an average business unit in the same industry.

• GE business screen represents an improvement over the more simple BCG

growth-share matrix.

Limitations
– It presents a somewhat limited view by not considering interactions
among the business units
– It neglects to address the core competencies leading to value creation
– Rather than serving as the primary tool for resource allocation, portfolio
matrices are better suited to displaying a quick synopsis of the strategic
business units.