business policy & strategy: chapter four strategic management murdick, moor, babson &...

Business Policy & Strategy: Chapter Four

Strategic Management

Murdick, Moor, Babson & Tomlinson, Sixth Edition, 2000

Strategic Management

Formulation – generating ideas done by top managersImplementation – putting them into action, involves all levels of the firmEvaluation – monitoring to see if the chosen strategy and its implementation are effective in the short and medium run (control)

Senior Managers Responsibility

Formulate vision, mission, goals, and objectivesEnvironmental analysis and forecast of opportunities and threatsInternal analysis of strengths and weaknesses

Strategy Formulation

Establish the corporate vision – where firm wants to be in 3-5 yearsReview the corporate mission – why the firm exists, its purposeEvaluate resources and capabilitiesCreatively match your internal strengths with external opportunities

Strategy Formulation

Consider the scope (product and market), dynamics, competitive edge, risk, financial objectives, deployment of resources, Consider potential acquisitions, divestments, joint ventures, mergers

Product Life Cycle

Stages:Introductory – almost monopoly, low buyer awareness, high production and marketing costs, low profits, selective distributionsGrowth – rapid increase in demand, entry of competitors, increased customer awareness and acceptance, repeat sales, increasing productive efficiency

Product Life Cycle

Maturity – rates of sales growth declines, profit margins decline, fewer new customers and more reorders, shakeout of weak competitors, LONGEST stageDecline – sales drop, # of competing products declines, new types of replacement products appear, small group of loyal customers

Product Life Cycle

Rejuvenation or death – in the decline stage, firms must increase demand for their product (like ARM & HAMMER baking soda) or go into new markets (internationalization) to begin the product life cycle over; otherwise, organizational death results

Generic Strategies

Competitive Edge arises from:Overall cost leadershipProduct differentiationFocus (serving market niches)

Risk

From management’s perspective, risk is the average size of investments in new capital projects, the probability of success, and the equity of the firmOutsider’s view risk as the expected return on investment less the risk-free rate of return, measured by beta. > beta, > risk

Portfolio Matrix Management

PLOT these two dimensions to form a 3x3 matrixBusiness Strength

Low, Medium or High

Industry AttractivenessLow, Medium or High

Business Strengths

Size, growth, market share, positionProfitability, margins, Image or reputationPollution, people, reputationStrengths, weaknessesTechnology position

(See Figure 4.3 page 53)

Industry Attractiveness

SizeMarket growth, diversity, pricingCompetitive structureIndustry profitabilitySocial, EnvironmentalLegal, HumanTechnical role

INDUSTRYATTRACTIVE-NESS______________BUSINESS STRENGTH

LOW MEDIUM HIGH

HIGH MaintainSelect for

Investment, Grow

InvestAnd

Grow

MEDIUM HarvestSelect for Growth, or

Divest

Select for investment,

Grow

LOW Harvest

Or Divest

HarvestSelect for Growth, or

Divest

Integration

Forward Vertical is towards your customer and/or distribution channels (buying trucks to deliver your product to outlets/customers)Backward Vertical is towards your suppliers, i.e. when Sears buys a lawnmower producerHorizontal when a firm buys a firm in the same industry (hotels)

Outsourcing

Firms have to decide whether to make or buy their products/raw materialOutsourcing is fairly common now where firms outsource NON-CORE processes to those firms that specialize in that process. This allows the original firm to focus on what it does best.

Planning Strategy

Review - Merger – is when two firms of about equal size come together to form one firm with a hyphenated name; Acquisitions – when one firm, generally the larger of the two, buys another firm which gets absorbed into the buying firm

Why undertake M/A?

Obtain skilled management, broader markets, new technology, new production capacity, raw materials, etc.Tax advantagesPut idle cash to work for higher profitsOpportunities for better management or synergies

Valuation of Firms

Book value x 300%Average earnings over the past 3 years capitalized at 10-20%Five-year paybackPresent value of estimated earnings over the next 10 yearsMarket value of stock x 2

Valuation of Firms

P/E ratio x average earnings of past three yearsUpper limit = 8x earnings before interest and depreciation;Lower limit = 3 x earnings before interest and depreciation

Going Public

Entrepreneurs want to sell and retireThey would like to provide for their families or no members are capable of managing the firmFirm has been expanding rapidly, but lacks capital to expand furtherFirm has been very successful but entrepreneur hasn’t kept current and earnings are declining