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.
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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)
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