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Direction Setting and

Strategy Formulation
Part 3

Long-Term Objectives
Must link to the situational analysis
Represent the results expected from
pursuing certain strategies
Should be quantitative, measurable,
realistic, understandable,
challenging, achievable and
congruent among organizational
units.
Provide direction and also allocation
of resources

Long-Term Objectives
Needed at corporate, divisional and
functional levels of an organization.
Clearly stated and communicated
objectives are vital to succeed.
Also provide a basis for consistent
decision making by managers whose
values and attitudes differ.

Financial V Strategic
Objectives
Financial revenue growth, larger profit ,
better ROI and etc
Strategic Larger market share, quicker ontim delivery, higher product quality and etc
Financial shorter term
Strategic Longer term
Danger trade off
Best way to sustain competitive advantages
over the long run, pursue strategic objective

Types of strategies
Corporate level strategies is an
action taken to gain a competitive
advantage through the selection and
management of a mix of business
competing in several industries or
product markets.
Two key questions What businesses
the firm should be in and how the
corporate office should manage its
group of businesses.

Types of strategies
Business- level strategy an
integrated and coordinated set of
commitments and actions the firm
uses to gain a competitive advantage
by exploiting core competencies in
specific product market.
Indicates the choices the firm has
made about how it intends to
compete in individual product
markets.

Business-level Strategy -The Five


Generic Competitive strategies

Business-Level Strategy
Porters Generic Competitive
Strategies :
A low-cost provider strategy
A broad differentiation strategy
A focused low-cost strategy
A focused differentiation strategy
A best-cost provider strategy

Low-cost provider strategy


Striving to achieve lower overall costs
than rivals
Low-cost leadership when it become the
industrys lowest cost provider.
How?
Through cost-efficient management of
value chain activities.
Revamping the Value Chain system to
lower costs

Cost-efficient management of value


chain activities.
Capturing all available economies of
scale
Take advantage of experience &
Learning curve
Operating facilities at full capacity
Improving supply chain efficiency
Substituting lower-cost inputs
wherever there is little or no
sacrifice in product quality or
performance

When a low-cost Provider strategy


work best
Price competition among rival sellers is
vigorous
The product of rival sellers are essentially
identical and readily available from many
eager sellers
It is difficult to achieve product differentiation
in ways that have value to buyers
Most buyers use the product in the same ways
Buyers incur low costs in switching their
purchase from one seller to another.

Cost-efficient management of value


chain activities.
Using companys bargaining power
Using sophisticated software to
achieve operating efficiencies
Employing advanced production
technology
Outsourcing or vertical integration
Motivating employees through
incentives and company culture

Revamping the Value Chain System


to lower costs
Selling direct to consumers and
bypassing intermediaries.
Streamlining operations by
eliminating low-value or unnecessary
work steps and activites
Reducing materials handling and
shipping costs by having suppliers
locate their plants or waehouse close
to the companys own facilities.

Broad Differentiation
Strategies
To offer unique product attributes
that a wide range of buyers find
appealing and worth paying for
How?
Managing the Value Chain to Create
the Differentiating attributes
Revamping the Value Chain System
to increase Dirrerentiation

Managing the Value Chain to Create the Differentiating


attributes

Create product features and


performance attributes that appeal
to a wide range of buyers
Improve customer service or add
extra services
Invest in production-related R&D
Strive for innovation and
technological advances

Managing the Value Chain to Create


the Differentiating attributes
Strive for innovation and technological
advances
Pursue continuous quality improvement
Increase marketing and brand building
activities
Seek out high-quality inputs
Emphasize human resource management
activities that improve the skills, expertise
and knowledge of company personnel

Revamping the value chain system


to increase differentiation
Coordinating with channel allies to
enhance customer value
Coordinating with suppliers to better
address customer needs

When a differentiation strategy


work best
Buyer needs and uses of the product are
diverse
There are many ways to differentiate the
product or service that have value to
buyers
Few rival firms are following a similar
differentiation approach
Technological change is fast-paced and
competition revolves around rapidly
evolving product features

Focused (Market Niche)


Strategies
Focused low-cost Strategy aims at
securing a competitive advantage by
serving buyers in the target market
niche at a lower cost and lower price
than those of rival competitors
Focused differentiation strategy
offering superior products or services
designed to appeal to the unique
preferences and needs of a narrow,
well-defined group of buyers.

When a focused low-cost or focused


differentiation strategy is attractive
The target market niche is bigh enough to be
profitable and good growth potential
Industry leaders have chosen not to compete
in the niche
It is costly or difficult for multi-segment
competitors to meet the specialized needs
The industry has many differen niches and
segements
Few if any rivals are attempting to specialize
in the same target segment

Best-Cost provider
strategies
A Hybrid of low-cost provider and
differentiation strategies that aim at
providing more desirable attributes
( quality, features, performance,
services) while beating rivals on
price.

When a best-cost provider strategy


works best
In markets where product
differentiation is the norm and an
attractively large number of valueconscious buyers can be induced to
purchase midrange products rather
than cheap, basic products or
expensive, top-of-the-range product.

Strengthening a companys
competitive Position
Strategic offensive is use when a
company spots opportunities to gain
profitable market share at its rivals
expense or to try to whittle away at a
strong rivals competitive advantage.
The best offensives use a companys
most powerful resources and
capabilities to attach rivals in the
areas where they are weakest.

Principal offensive strategy


options
Offering an equally good or better
product at a lower price
Leapfrogging competitors by being
first to market with next-generation
product
Pursuing continuous product
innovation to draw sales and market
share away from less innovative rival

Principal offensive strategy


options
Pursuing disruptive product innovations to
create new products
Adopting and improving on the good ideas
of other companies
Using hit-and-run or guerrilla warfare
tactics to grab market share from
complacent or distracted rivals
Launching a pre-emptive strike to secure
an industrys limited resources or capture a
rare opportunity

Which rivals to attack?


Market leaders that are vulnerable
( not serving the market well)
Runner up firms with weaknesses in
areas where the challenger is strong.
Struggling enterprise that are on the
verge of going uner
Small local and regional firms with
limited capabilities.

Other strategic options


First- Mover, Early and late Mover
Horizontal merger and acquisition
Vertical integration strategies ( Back
and Forward)
Outsourcing strategies involves
contracting out certain value chain
activities that are normally performed
in-house to outsider vendors

Other strategic options


Strategic Alliance a formal
agreement between two or more
separate companies in which they
agree to work cooperatively toward
some common objectives.
Joint-venture - a partnership
involving the establishment of an
independent corporate entity that
the partners own and control jointly
sharing in its revenues and expenses

Strategic options for entering


international markets
Exporting a conservative way of
testing the international market
Licensing when a firm with valuable
technical know-how, appealing
brand, or a unique patented product
has neither the internal
organizational capability nor the
resources to enter foreign market.

Strategic options for entering


international markets
Franchising owners of proprietary
technology and the international
expansion efforts of service and
retailing enterprise
Greenfield venture a subsidiary
business that is established by
setting up the entire operation from
the ground up
Cross-board alliance and Joint
Venture strategies

International strategy: Three main


approaches
A global strategy is one in which a
company employees the same basic
competitive approach in all countries
where it operates, sells standardized
products globally, strives to build
global brands, and coordinates its
actions worldwide with strong
headquarters control. It represents a
think-global, act global approach.

International strategy: Three main


approaches
Transnational strategy is a think-global, act
local approach that incorporates elements of
both multidomestic, and global strategies
Multidomestic stratragy is one which a
company varies its product offering an
competitive approach from country to country
in an effort to be responsive to differing buyer
conditions, It is think-local, act local type of
international strategy, facilitated by decision
making decentralized to the local level.

Three Approaches for Competing


Internationally

Advantages and Disadvantages of Multidomestic,


Global and Transnational Strategies

Corporate Level strategy


Diversification
Related Diversification
Unrelated Diversification

Reasons for Diversification

Justification for Diversification


Building Shareholder Value
For the above to happen, new
business must pass the 3 Tests of
Corporate Advantage
1) The industry attractiveness
2) The cost of entry test
3) The better-off test

Approaches to Diversifying
Acquisition of existing business
Through Internal Development
Joint-Venture

Diversification into Related


Businesses
There must be good strategic fit
across corresponding value chain
activities.
Transferring specialized expertise,
technological know-how or other
competitively valuable strategic
assets from one businesss value
chain to anothers.
Sharing costs between businesses by
combining their related value chain

Diversification into Related


Businesses
Exploiting the common use of a wellknow brand name
Sharing resources that support
corresponding value chain activities
across businesses
Engaging in cross-business
collaboration and knowledge sharing
to create new competitively valuable
resources and capabilities

Diversification into Related


Businesses
Related diversification involves
sharing or transferring specialized
resources and capabilities for specific
applications and are limited to a
restricted range of industry and
business types.
NOT sharing of general resources
and capabilities ( general
management capabilities)

Diversification into unrelated


businesses
Strategic fit is NOT a motivation
Opportunity for good financial results

Building Shareholder Value via


Unrelated Diversification
Corporate Parenting refers to the
role that a diversified corporation
plays a nurturing its component
businesses through the provision of
top management expertise,
disciplined control, financial
resources and other types of general
resources and capabilities such as
long term planning systems,
business development skills,

Corporate Parenting
Judicious Cross-Business Allocation of
Financial Resources ( acting as
internal capital market to other
businesses)
Acquiring and Restructuring
undervalued companies.

Drawbacks of unrelated
Diversification
Demanding Managerial Requirements
Limited Competitive Advantage
Potential
( relying solely on
leveraging general resources and the
expertise of corporate executives)

Building Shareholder Value via


Unrelated Diversification
An umbrella brand is a corporate
brand name that can be applied to a
wide assortment of business types.
As such, it is a type of general
resources that can be leveraged in
unrelated diversification.

References
Thompson/Peteraf/Gamble/Strickland,
Crafting & Executing strategy, 12th Edition,
Mc Graw-Hill
F.R. David, Strategic Management
concepts and cases, 11th Edition, Pearson
International edition.
D. Hanson, P. Dowling, M. Hitt, R.D. Ireland
and R.E. Hoskisson, Strategic
Management, competitiveness &
Globalization, Asia Pacific Third Edition