04. strategy formulation. action plan choice (09-11e)

8/3/2019 04. Strategy Formulation. Action Plan Choice (09-11E)

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Strategy Formulation:

Action Plan Choice

ReferencesReferences

Strategic Management Concepts & CasesStrategic Management Concepts & Cases 1010thth editionedition Fred R. DavidFred R. DavidWikipedia.comWikipedia.com

InternetInternet

Resource Person:Furqan-ul-haq Siddiqui

Chapter # 4


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Comprehensive Strategic Management ModelComprehensive Strategic Management Model

External

Audit

Chapter3

Internal

Audit

Chapter

3

Long-Term

Objectives

Chapter4

Generate,

Evaluate,Select

Strategies

ImplementStrategies:

Mgmt Issues

ImplementStrategies:Marketing,Fin/Acct,R&D, CIS

Measure &

EvaluatePerformance

Vision

&Mission

Chapter2


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LongLong--Term Objectives:Term Objectives:

Results that an organization seek over a

Results that an organization seek over a

multiyear period through certain strategiesmultiyear period through certain strategies

Time frame 2 to 5 years

include specific improvements in theorganization's competitive position,

technology leadership, profitability, return on

investment, employee relations andproductivity, and corporate image.

The objectives should beSMART


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Varying Performance Measures

by Organizational Level

OrganizationalLevel Basis for Annual Bonus/Merit Pay

Corporate75% on long-term objectives

25% on annual objectives

Division 50% on long-term objectives50% on annual objectives

Function25% on long-term objectives

75% on annual objectives

Long-Term Objectives


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Operational Level

Functional Level

Division Level

CorporateLevel


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Objectives are the basis for:

Designing jobs

Organizing activities

Providing direction

Organizational synergy

Standards for evaluationStrategists should avoidStrategists should avoid

Managing by ExtrapolationManaging by Extrapolation-- keep on doing the same thingskeep on doing the same thingsin same ways because things are going well.in same ways because things are going well.

Managing by CrisisManaging by Crisis-- (proactive vs. reactive)(proactive vs. reactive) Managing byManaging by SubjectivesSubjectives-- Mystery approach of decision

making. No general plan for which to go & what to do; justdo best to accomplish.

Managing by HopeManaging by Hope--


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Types of Strategies

1. Integration Strategies

i. Vertical

ii. Horizontal

2. Intensive Strategies

i. Market Penetration

ii. Market Development

iii. Product Development

3. DiversificationStrategies

i. Concentric Diversificationii. Horizontal Diversification

iii. ConglomerateDiversification

4. Defensive Strategies

i. Retrenchment

ii. Divestiture

iii. Liquidation


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1. Integration Strategies

i.V

ertical integration The degree to which a firm owns its

upstream suppliers and its downstreambuyers.

Vertically integrated companies in a supplychain are united through a common owner.Usually each member of the supply chain

produces a different product or(market-specific) service, and the products combineto satisfy a common need.


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Types ofVertical integration

a. Backward vertical integration when itcontrols/owns firms that produce some of the

inputs used in the production of its products. For

example, an automobile company may own a tirecompany, a glass company, and a metal company.

b. Forward vertical integration is when it controls

distribution centers and retailers where its products

are sold.

c. Balanced vertical integration means a firm

controls all of these components, from raw

materials to final delivery.


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Example

Oil companies often adopt a vertically integrated

structure.This means that they are active along theentire supply chain from locating crude oil deposits,

drilling and extracting crude, transporting it around the

world, refining it into petroleum products such as

petrol/gasoline, to distributing the fuel to company-owned retail stations, for sale to consumers.


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ii. Horizontal Integration

The acquisition of additional business activities atthe same level of the value chain is referred to as

horizontal integration.When a company expands

its business into different products that are similar tocurrent lines. Horizontal integration occurs when a firm is being taken

over by, or merged with, another firm which is in the same

industry and in the same stage of production as the mergedfirm.("buy out" or"take-over).

A car manufacturer merging with another car manufacturer.

In this case both the companies are in the same stage of

production and also in the same industry.


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British candycompany Cadburyagreed to afattened $19.5billion takeover

offer from U.S.food group Kraft(KFT) in a deal thatwould create theworld's biggest

chocolate maker.


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Intensive strategiesIntensive strategies

Require intensive efforts to improve a firms competitiveRequire intensive efforts to improve a firms competitiveposition with existing productsposition with existing products

i. Market penetration

ii.

Market developmentiii. Product development


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DefinedDefined

Seeking increased

market share forpresent products or

services in present

markets throughgreater marketing

efforts

ExampleExample

Toyota is rapidlyincreasing its market share

in north America.

Market PenetrationMarket Penetration


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Why to go for Market PenetrationWhy to go for Market Penetration

Current markets not saturated

Usage rate of present customers can be increased significantly Market shares of competitors declining while total industry sales

increasing

Increased economies of scale provide major competitive

advantages


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Market DevelopmentMarket Development

Introducing present products or services intonew geographic areas.

TITAN watches are now

available in Pakistan.


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Guidelines for Market DevelopmentGuidelines for Market Development

New channels of distribution that are reliable,inexpensive, and good quality

Firm is very successful at what it does

Untapped or unsaturated markets

Capital and human resources necessary to

manage expanded operationsExcess production capacity

Basic industry rapidly becoming global


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Product DevelopmentProduct Development

DefinedDefined

Developing new products ormodifying existing products so they

appear new.


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Guidelines for Product DevelopmentGuidelines for Product Development

Products in maturity stage of life cycle

Competes in industry characterized by rapid

technological developments Major competitors offer better-quality products at

comparable prices

Compete in high-growth industry

Strong research and development capabilities


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2.2. Diversification StrategiesDiversification Strategies

Movement by a manufacturer or trader into aMovement by a manufacturer or trader into awider field of Productswider field of Products

i. Concentric diversification

ii. Conglomerate diversificationiii.Horizontal diversification


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Concentric DiversificationConcentric DiversificationDefinedDefined

Adding new, but

related, products or

services

where a firm acquiresor develops new

products or services

(closely related to its

core business ortechnology) to enter

one or more new

markets.

ExampleExample

Meezan Bank startedprovision of IslamicLife Insurance.

Dell Computer hasstarted production ofTelevisions & MP3players.


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Guidelines for Concentric DiversificationGuidelines for Concentric Diversification

Competes in no- or slow-growth industry

Adding new & related products increases sales of

current products New & related products offered at competitive prices

Current products are in decline stage of the productlife cycle

Strong management team


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Conglomerate DiversificationConglomerate Diversification

DefinedDefined

Adding new,

unrelated

products or

services


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Guidelines for Conglomerate DiversificationGuidelines for Conglomerate Diversification

Declining annual sales and profits

Capital and managerial talent to compete

successfully in a new industry Financial synergy between the acquired and

acquiring firms

Exiting markets for present products are saturated

Availing oppertunity


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Horizontal DiversificationHorizontal Diversification

DefinedDefined

Adding new, unrelated

products or services for

present customers.

this form of diversification is

desirable if the present

customers are loyal to the

current products and if thenew products have a good

quality and are well promoted

and priced

ExampleExample

company was making note

books earlier now they arealso entering into pen market

through its new product.


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Guidelines forHorizontal DiversificationGuidelines forHorizontal Diversification

Revenues from current products/serviceswould increase significantly by adding thenew unrelated products

Highly competitive and/or no-growth industryw/low margins and returns

Present distribution channels can be used to

market new products to current customersNew products have counter cyclical sales

patterns compared to existing products


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Defensive StrategiesDefensive Strategies

i. Joint venture

ii.Retrenchment

iii.Divestiture

iv.Liquidation


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Joint VentureJoint Venture

An entity formed between two or more

parties to undertake economic activity

together.The parties agree to create a

new entity by both contributing equity,

and they then share in the revenues,

expenses, and control of the enterprise.

The venture can be for one specific

project only, or a continuing business

relationship

Some countries, such as the of China

and to some extent India, require

foreign companies to form joint

ventures with domestic firms in order to

enter a market.

Fuji Xerox Co., Ltd. is a joint

venture partnership between the

Japanese photographic firm Fuji

Photo Film Co.(75%) and the

American document management

company Xerox (25%) to develop,

produce and sell xerographic and

document-related products and

services in theAsia-Pacific region. Nokia Siemens Networks is one of

the largest telecommunications

solutions suppliers in the world

http://www.pakboi.gov.pk/joinventure_opp.htm


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The company Unitech Wireless was until 2009 a

subsidiary of Unitech Group, holding a wireless

services licence for all 22 Indian telecom circles

since 2008.In early 2009, Unitech Group and Telenoragreed on

a majority take-over by Telenor of Unitech's

wireless business, including Unitech Wireless'national-wide mobile licence.

Uninor is now 67.25% owned byNorwegian

telecom giant Telenor, and 32.75% by UNITECH.

Uninor is India's eighth nation-wide mobile

operator, in a competitive landscape of 13

nation-wide or regional mobile operators.


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Guidelines forJoint VentureGuidelines forJoint Venture

Combination of privately held and publicly held can besynergistically combined

Domestic forms joint venture with foreign firm, can obtainlocal management to reduce certain risks

Distinctive competencies of two or more firms arecomplementary

Huge resources and risks where project is potentially

very profitable (e.g., Iran-Pak-India Pipeline)

Two or more smaller firms have trouble competing withlarger firm

A need exists to introduce a new technology quickly


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RetrenchmentRetrenchment

DefinedDefined

Regroupingthrough cost andasset reduction toreverse decliningsales and profit

ExampleExample

PTCLs operating profit

decreased by 32 per cent in

2007 as compared to 2006

which became the reasonof retrenchment of

employees.


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Guidelines for RetrenchmentGuidelines for Retrenchment

Firm has failed to meet its objectives and goalsconsistently over time but has distinctive competencies

Firm is one of the weaker competitors

Inefficiency, low profitability, poor employee morale,and pressure from stockholders to improveperformance.

When an organizations strategic managers have failed

Very quick growth to large organization where a majorinternal reorganization is needed.


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DivestitureDivestiture

DefinedDefined Selling a division or

part of an

organization.alsoknown as divestment

ExampleExample

A bank may sell branch offices,

or even an entire operating

division, to cut operating

expenses or carry out its business

plan for long-term growth.

The next edition of the Oxford

English Dictionary, the wordreference bible of the Englishlanguage, may never appear inprint and instead be accessibleonly online (August, 2010)


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Guidelines for DivestitureGuidelines for Divestiture

When firm has pursued retrenchment but failed toattain needed improvements

When a division needs more resources than the firmcan provide

When a division is responsible for the firms overallpoor performance

When a division is a misfit with the organization

When a large amount of cash is needed and cannotbe obtained from other sources.


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LiquidationLiquidation

DefinedDefined

Selling all of a

companys assets, inparts.

Most common inpartnershipenterprises

ExampleExample

Ribol sold all its assets

and ceased business.


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Circuit City Stores, Inc. was an American retailerin brand-name consumer electronics, personalcomputers, entertainment software, and (until 2000)large appliances.The company opened its first store

in 1949 and liquidated its final American retailstores in 2009 following a bankruptcy filing andsubsequent failure to find a buyer.As part of itsbankruptcy, the company sold its Canadiansubsidiary, InterTAN to Bell Canada.

The "Circuit City" brand is now owned bySystemax, which uses the brand to sell electronics

as an online retailer.On May 11, 2009, Systemaxbought the brand, trademark and e-commercebusiness at an auction from Circuit City Stores, Inc.Systemax had earlier acquired CompUSA andTigerDirect which now operate as online retailers.Systemax in April 2009 signed a stalking horseagreement for $6.5 million which is an initial offer

for a bankrupt company's assets. At the time of liquidation, Circuit City was the

second largest U.S. electronics retailer, after BestBuy.There were 567 Circuit City Superstoresnationwide, ranging in size from 15,000 to 45,000square feet (1400 to 4000 m), when the companyannounced total liquidation.


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Guidelines for LiquidationGuidelines for Liquidation

When both retrenchment and divestiture have beenpursued unsuccessfully

If the only alternative is bankruptcy, liquidation is anorderly alternative

When stockholders can minimize their losses byselling the firms assets


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Porter Generic Strategies Michael Porter has described three general types of strategies to

achieve and maintain competitive advantage.These three generic

strategies1. Cost Leadership Strategy- Being lowest cost producer within a

industry.The organization aims to drive cost down through all theelements of the Business.The cost leader usually aims at a broadmarket, so sufficient sales can cover costs.

2. Differentiation Strategy- Development of a product or service thatoffers unique attributes that are valued by customers and thatcustomers perceive to be better than or different from the productsof the competition at premium prices.

3. Focus Strategy- Concentration on a arrow segment/niche andwithin that segment attempts to achieve either a cost advantage ordifferentiation.The premise is that the needs of the group can be

better serviced by focusing entirely on it, resulting high degree ofcustomer loyalty which discourages other firms from competing

directly.


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Stuck in the Middle? if a firm differentiates itself by supplying veryhigh quality products then it cant become a cost leader. Michael Porterargued that to be successful over the long-term, a firm must select

only one of these three generic strategies.Otherwise, with more thanone single generic strategy the firm will be "stuck in the middle" andwill not achieve a competitive advantage.

Suzuki Jimny JLX

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Some other terms/means of achieving goals

1. Acquisition (takeover/buyout)- the buying of one company

by another.

i. Friendly buyout- the companies cooperate in negotiations; in the

latter case,

ii. Hostile takeover- the takeover target is unwilling to be bought or

the target's board has no prior knowledge of the offer.

If a smaller firm acquires management control of a larger company

and keep its name for the combined entity.This is known as a

reverse takeover.

2. First Mover Advantage-

3. Business Process Outsourcing (BPO)

4. Merger-


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First-mover advantage orFMA is the

advantage gained by the initial occupant of a

market segment.This advantage may stem

from the fact that the first entrant can gain

control of resources that followers may not beable to match.

Sometimes the first mover is not able to

capitalize on its advantage, leaving the

opportunity for another firm to gain second-

mover advantage.


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Is it better to move 1st or 2nd


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24 June 2010 September 2010

499300

N P d Ad G


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New Product Adopters Groups

1. Innovators- Venturesome, they try new ideas at some risks

2. Early adopters- they adopt new ideas early but carefully

3. Early majority-Adopt new ideas before average person

4. Late majority-Adopt new idea after a majority of people tried it.

5. Laggards-people suspicious to changes and adopt new product

when it becomes some thing of a tradition itself(essential part of

life)

04. strategy formulation. action plan choice (09-11e)

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