Long-Term Objectives and

Strategies

Chapter 6

McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.
Long-Term Objectives
 Strategic managers recognize that short-run profit
maximization is rarely the best approach to achieving
sustained corporate growth and profitability
 To achieve long-term prosperity, strategic planners
commonly establish long-term objectives in seven
areas:
 Profitability
 Competitive Position – Employee Development
 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 are
directly linked to the company’s strategy
 Developed by Robert S. Kaplan and David P. Norton, it
directs 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 a core
idea about how the firm can best compete in the
marketplace. The popular term for this core idea is
generic strategy.
 3 Generic Strategies:
1. Striving for overall low-cost leadership in the industry.
2. Striving to create and market unique products for varied
customer groups through differentiation.
3. Striving to have special appeal to one or more groups of
consumers or industrial buyers, focusing on their cost or
differentiation concerns.

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Low-Cost Leadership
 Low-cost producers usually excel at cost reductions
and efficiencies
 They maximize economies of scale, implement cost-
cutting technologies, stress reductions in overhead
and in administrative expenses, and use volume sales
techniques to propel themselves up the earning 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 to
appeal to customers with a special sensitivity for a
particular product attribute
 By stressing the attribute above other product qualities,
the firm attempts to build customer loyalty
 Often such loyalty translates into a firm’s ability to
charge a premium price for its product
 The product attribute also can be the marketing channels
through which it is delivered, its image for excellence,
the features it includes, and its service network

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Focus
 A focus strategy, whether anchored in a low-cost base or a
differentiation base, attempts to attend to the needs of a
particular market segment
 A firm pursuing a focus strategy is willing to service
isolated geographic areas; to satisfy the needs of
customers with special financing, inventory, or servicing
problems; or to tailor the product to the somewhat unique
demands of the small- to medium-sized customer
 The focusing firms profit from their willingness to serve
otherwise ignored or underappreciated customer segments

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Risks of the Generic Strategies

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Three Levels of Strategy
 Corporate level
 Business level
 Functional level
Corporate Level
 Composed principally of board of directors and
the chief executive and administrative officers.
-they set objectives and formulate strategies
-attempt to exploit their firm’s distinctive
competencies by adopting a portfolio approach.
-they are responsible for the firm’s financial
performance.
-in a multibusiness firm, corporate-level
executives determine the business in which the
business should be involved.
Business Level
 Composed principally of business and corporate
managers.
-they translate the statements of direction into
concrete objectives and strategies for individual
business divisions, or SBUs.
-they determine how the firm will compete in the
selected product-market arena.
Functional Level
 Composed principally of managers of product,
geographic, and functional areas.
-they develop annual objectives and short-term
strategies.
-principal responsibility is to implement the firms
strategic plans.
Whereas corporate and business level
managers center their attention on “doing the
right things” managers at the functional level
center their attention on “doing things right.”
Three Types of Strategy
 Corporate
 Business
 Functional
Corporate Strategy
 Describes a company overall direction in terms of
its general attitude toward growth and the
management of its various business and product
lines.
-typically fit within three main categories:
stability, growth, and retrenchment.
Example; Maytag Corp. acquisition of other
appliance companies in order to have full line of
major home appliances.
Business Strategy
Usually occurs at the business unit or product level,
and it emphasizes improvement of the competitive
position of a corporation’s products or services in the
specific industry or market segment served by that
business unit.
-may fit in two overall categories of competitive or
cooperative strategies.
Example; British Airways formed an alliance with
American Airlines in order to provide global service.
Functional Strategy
 Is the approach taken by a functional area to
achieve corporate and business unit objectives
and strategies by maximizing resources
productivity.
 It is concerned with developing and nurturing a
distinctive competencies.

-example of R&D functional strategies are technological

followership (imitate the products of other companies) &
technological leadership (pioneer and innovation) .
Strategy at the SBU Level
As corporate strategists jumped on the
diversification bandwagon, they soon found a
challenge in managing the resources needs of
diverse businesses and their respective strategic
missions, particularly in times of limited
resources.
Responding to this challenge, the Boston
Consulting Group pioneered an approach called
portfolio techniques.
Attempts to help managers “balance” the flow of
cash resources among their various businesses
while also identifying their strategic purpose
within the overall portfolio.
BCG Growth-Share Matrix

* ?
Star Question mark
high
GROWTH
$ X
RATE low Cash Cow Dog

high low
MARKET SHARE
Stars- rapidly growing markets with large market
share.
- represent the best long-run opportunities
(growth and opportunity).
- require substantial investment.
- investment requirement is often in excess of
the funds that they can generate internally.
Cash cows – has strong positions and minimal
reinvestment requirement.
- often generate cash in excess of their
needs.
- selectively “milked” as a source of
corporate resources for deployment elsewhere.
- are yesterday’s stars and the current
foundation of corporate portfolio.
Dogs- low market share and low market growth.
- face mature markets with intense
competition & low profit margins.
- managed for short-term cash flow
- they are divested or liquidated once this
short-term harvesting has been maximized.
Question marks- high growth rate gives
considerable appeal.
- low market share makes profit potential
uncertain.
- rapid growth results in high cash needs.
- small market share results in low cash
generation.
Grand Strategies
 Grand strategies, often called master or business
strategies, provide basic direction for strategic actions
 Indicate the time period over which long-range
objectives are to be achieved
 Any one of these strategies could serve as the basis for
achieving the major long-term objectives of a single
firm
 Firms involved with multiple industries, businesses,
product lines, or customer groups usually combine
several 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 only
to concentration as the least costly and least risky of
the 15 grand strategies
 It consists of marketing present products, often with
only cosmetic modifications, to customers in related
market areas by adding channels of distribution or by
changing the content of advertising or promotion
 Frequently, changes in media selection, promotional
appeals, and distribution are used to initiate this
approach

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Product Development
 Product development
involves the substantial
modification of existing
products or the creation of new
but related products that can be
marketed to current customers
through established channels

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Innovation
 These companies seek to reap the initially high
profits associated with customer acceptance of a new
or greatly improved product
 Then, rather than face stiffening competition as the
basis of profitability shifts from innovation to
production or marketing competence, they search for
other original or novel ideas
 The underlying rationale of the grand strategy of
innovation is to create a new product life cycle and
thereby make similar existing products obsolete

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Horizontal Integration
 When a firm’s long-term strategy is based
on growth through the acquisition of one or
more similar firms operating at the same
stage of the production-marketing chain, its
grand strategy is called horizontal
integration
 Such acquisitions eliminate competitors and
provide the acquiring firm with access to
new markets

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Vertical Integration
 When 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),
vertical integration is involved
 The main reason for backward integration is
the desire to increase the dependability of
the supply or quality of the raw materials
used as production inputs

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Vertical and Horizontal Integration

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Concentric Diversification
 Concentric diversification involves the
acquisition of businesses that are related to the
acquiring firm in terms of technology, markets, or
products
 With this grand strategy, the selected new
businesses possess a high degree of compatibility
with the firm’s current businesses
 The ideal concentric diversification occurs when
the combined company profits increase the
strengths and opportunities and decrease the
weaknesses 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 the
most 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 creating
product-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 innovative
breakthroughs by competitors
 Strategic managers often believe the firm can survive
and eventually recover if a concerted effort is made
over a period of a few years to fortify its distinctive
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 been
associated 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 a nonintegrated
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 whole—but for its
tangible asset value and not as a going
concern
 Planned liquidation can be worthwhile

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Bankruptcy
 Liquidation bankruptcy—agreeing to a complete
distribution of firm assets to creditors, most of
whom receive a small fraction of the amount they
are owed
 Reorganization bankruptcy—the managers believe
the firm can remain viable through reorganization
 Two notable types of bankruptcy
 Chapter 7
 Chapter 11

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Joint Ventures
 Occasionally two or more capable firms lack a
necessary component for success in a particular
competitive environment
 The solution is a set of joint ventures, which are
commercial companies (children) created and
operated for the benefit of the co-owners (parents)
 The joint venture extends the supplier-consumer
relationship and has strategic advantages 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 as
keiretsus, in South Korea as chaebols
 Their cooperative nature is growing in
evidence as is their market success

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Selection of Long-Term Objectives and
Grand Strategy Sets
 When strategic planners study their opportunities,
they try to determine which are most likely to result
in achieving various long-range objectives
 Almost simultaneously, they try to forecast whether
an available grand strategy can take advantage of
preferred opportunities so the tentative objectives
can be met
 In essence, then, three distinct but highly
interdependent choices are being made at one time

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 Sequence of Selection
and Strategy Objectives
 The selection of long-range objectives and grand
strategies involves simultaneous, rather than
sequential, decisions
 While it is true that objectives are needed to
prevent the firm’s 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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