Strategic Management Process: Strategy formulation 2. · PDF fileStrategic Management Process: Strategy formulation 2. ... term objectives ŁTypes of ... ŁDetermining internal strenghts

© Dr. Nábrádi AndrásDE-AVK

By: By: Prof. Dr. AndrProf. Dr. Andráás Ns NáábrbráádidiPhD, MBAPhD, MBA

Strategic Management Process:

Strategy formulation 2.Strategy formulation 2.

University of DebrecenFacultyFaculty of Ag. Economics and of Ag. Economics and RuralRural DevelopmentDevelopment

DeptDept.: Business Management and Marketing.: Business Management and MarketingHUNGARYHUNGARY


Tasks of strategic management

Strategy formulation

Strategy Implementation

Strategy Evaluation

Outline

� Establish long term objectives

�Types of strategies

�Integration

�Intensive

�Defensive

�Generic

�Achieving strategies


First stage of the strategic management

DevelopVision and MissionStatements

Establishlong termobjectives

Generate, evaluate, and selectstrategies


(Strategic planning)

Outline



�Integration

�Intensive

�Defensive

�Generic




�Developing vision and mission�Indetifying external opportunities and threats�Determining internal strenghts and weaknesses

�Establishing long term objectives

�Generating alternative strategies�Choosing particular strategies to pursue�Deciding what new business to enter

�How to allocate resources�Expand or diversify operations�Entering or not international market�Merge or form joint venture�How to avoid a hostile takeover

Outline



�Integration

�Intensive

�Defensive

�Generic




PERFORMANCE OBJECTIVESPERFORMANCE OBJECTIVES

Organization�s target for achievement; both shortand long range objectives are needed.

FINANCIAL OBJECTIVESFINANCIAL OBJECTIVESFinancial performance targets a company wants to

achieve.

STRATEGIC OBJECTIVESSTRATEGIC OBJECTIVESTargets relating to strenghtening a company�s

overall market position and competetive viability.

Outline



�Integration

�Intensive

�Defensive

�Generic




Outline



�Integration

�Intensive

�Defensive

�Generic


LONGLONG--RANGE OBJECTIVESRANGE OBJECTIVES

Achiement levels to be reached within the next threeto five years.

SHORTSHORT--RANGE OBJECTIVESRANGE OBJECTIVES

Near-term performance target; they establish the pace for achieving the long-range objectives.


Establishing long term objectives

�Establishing long term objectives

Should be:�quantitative ( data, %, )�measurable ( what is now, what will be)�realistic (no politicians promise )�understandable ( clear in different levels of a company � corporate � division � functional � operational CDFO)�challenging (emotional risk)�hierarchical (CDFO)�associated with timeline ( within 3 year, end of the next year)

Outline



�Integration

�Intensive

�Defensive

�Generic



Varying performance Measures by organizational level

Outline



�Integration

�Intensive

�Defensive

�Generic


50 % based on long term objectives50 % based on annual objectives

FunctionalFinance, marketing, manufacturing, MIS, HRM


OperationalPlant managers, sales managers, production and department managers


Division division president, executive vice president


Corporate (president)

Basis foe annual bonus or merit payBasis foe annual bonus or merit payOrganizational levelOrganizational level


Establishing long term objectives

�Types of long term objectivesOutline



�Integration

�Intensive

�Defensive

�Generic


�Larger market share�Quicker on-time delivery than rivals�Shorter design-to-market times than rivals�Lower costs than rivals�Higher product quality than rivals�Achieving technological leadership�Consistently getting new products to market ahead of rivals

�Growth in revenues�Growth in earnings�Higher dividends�Larger profit margins�Greater return on investment�Higher earnings per share�Rising stock price�Improved cash flow

StrategicStrategicFinancialFinancial


Types of strategies

DefensiveDefensive� Retrenchment� Divestiture� Liquidation

Do nothingDo nothingOffensiveOffensive

� Integration� Forward� Backward� Horizontal

� Intensive� Market penetration� Market development� Product Development� Diversification

Outline



�Integration

�Intensive

�Defensive

�Generic



Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


One department store acquired another department store

Seeking ownership or increased control over competitors

Horizontal integration

Hotels Inc. purchased a furniture producer

Seeking ownership or increased control of a firm�s suppliers

Backward integration

An agricultural company purchased a regional bakery-chain

Gaining ownership or increased control overdistributors or retailers

Forward integration

ExampleExampleDescriptionDescriptionStrategyStrategy

I. Integration


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


Forward integration effective when:

� present distributors are especially expensive or unreliable� availability of quality distributors is limited� competes in an industry growing and expected to continueto grow � an organization has both capital and HR needed to manage ofdistributing its own products� present distributors or retailers have high profit margin

distributors


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


Backward integration effective when:

� present suppliers are especially expensive or unreliable� number of suppliers is small and the number of competitors is large � competes in an industry growing and expected to continue to grow � an organization has both capital and HR to manage new business of supplying its own raw materials� the advantages of a stable raw material price particularly important� present suppliers have high profit margin

suppliers


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


Horizontal integration effective when:

� increase economic of scale provide major competitive advantages � competes in an industry growing and expected to continue to grow � an organization has both capital and HR needed to manage an expanded organization

competitors


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


MOL purchased a 10 % stake in Slovakoil

Introducing present products or services into new geographic area

Market development

Glaxo Smith Kline (UK) introduced the new ADAPTOR toothbrush

Adding new but related products or services

Related diversification

A kitchenware company entered into a growing skin and beauty business

Adding new unrelated products and services

Unrelated diversification

Glaxo Smith Kline (UK) introduced the new Aquafresh 3 total care toothpaste

Increased sales by improving present products or developing new ones

Product development

Coca cola is spending millions to advertise its drinks

Increased market share for present products in present marketthrough greater marketing efforts

Market penetration


II. Intensive


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


Market penetration effective when:

� Current markets are not saturated with a particular product or service� usage rate of present customers could be increasedsignificantly � market share of major competitors have been decliningwhile total industry sales have been increasing�increased economies of scale provide major competitive advantages

present products in present market�Sony co. is spending over $141 million in a new advertising and promotion drive to market its high-definition television named BRAVIA sets in the USA�. 2006


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


� new channels of distribution are available, inexpensive� an organization is very successful at what it does� new untapped or unsaturated markets exists� an organization has both capital and HR needed to manage an expanded organization�an organization has excess production capacity� an organization�s basic industry is becoming rapidly global is scope

present products in new geographic area

Market development effective when:

Adidas in May 2005 had 1500 stores in China and stated that it wouldopen another 40 stores every month for the next 40 months


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


� an organization has successful products that are in maturity stage of the product life cycle.�an industry represented by rapid technological developments� major competitors offer better-quality products in comparable prices� an organization competes in a high-growth industry� an organization has especially strong R& D capabilities

improving present products or developing new ones

Product development effective when:

In 2005 Heineken developed and introduced low-calorie low carbohydrate beer � Heineken Light into US. Brad Pitt and John Travolta are promotes its product.


Product Life Cycle

Outline



�Integration

�Intensive

�Defensive

�Generic


0 1 2 3 4 5 6

Time

0

2

4

6

8

10

-2

Mon

ey /

Tim

e

Birth Growing Maturity Declining

Cash-flow


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


MOL purchased a 10 % stake in Slovakoil

Introducing present products or services into new geographic area

Market development

Glaxo Smith Kline (UK) introduced the new ADAPTOR toothbrush

Adding new but related products or services

Related diversification

A kitchenware company entered into a growing skin and beauty business

Adding new unrelated products and services

Unrelated diversification

Glaxo Smith Kline (UK) introduced the new Aquafresh 3 total care toothpaste

Increased sales by improving present products or developing new ones

Product development

Coca cola is spending millions to advertise its drinks

Increased market share for present products in present marketthrough greater marketing efforts

Market penetration


II. Intensive


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


� an organization competes in a no-growth or slow-growth industry� related products would enhance the sales of current products� related products could be offered at highly competitive prices�related products have no seasonal sales level that can balance existing trade problems (grain � flour � bakery)� existing products are in a declining stage of the product�s life cycle

Adding new but related products

Related diversification effective when:

Dell computer Inc. turned to produce flat-panel televisions and MP3 players, and opened an online music-downloading store.


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


� an organization competes in a highly competitive industry as indicated by low profit margins and returns� present marketing channels can be used to new products to current customers� an organization�s basic industry is experiencing declining sales and profits�an organization has both capital and HR to compete in a new industry� purchase an unrelated business is an attractive investment opportunity

Adding new unrelated products

Unrelated diversification effective when:

Hospitals are creating small malls by offering banks, bookstores, coffeeshops, restaurants, drugstores and other retail stores within their buildings


Summary of the intensive strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


Name Currentmarkets

New markets

Currentproducts

Market penetration

New products

Marketdevelopment

Marketdevelopment

Unrelateddiversification

Market penetration

Relateddiversification


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


Goodyear Co. sold its North American farm-tire business to Titan Inc.

Selling a division or part of an organization

Divestiture

Britain�s last major car manufacturer, MG Rover Group Ltd., liquidated in 2005 and laid off its 5000 employees.

Selling all of a company�s assets, in parts, for their tangible worth

Liquidation

Sanyo Electric is cutting its global workforce by 15% in 2006 for reducing its dept.

Regrouping through costs and assets reduction to serve declining sales and profit.

RetrenchmentReorganizationalstrategy


III. Defensive


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


� an organization has failed consistently to meet its objectives and goals over time� an organization is one of the weaker competitors in a given industry� an organization occurs inefficiency, low profitability, poor employee moral, and pressure from stockholders to improve performance � an organization has grown so large so quickly that major internal reorganization is needed

Retrenchment effective when:

Tools: reorganizationbankruptcyregroupingasset reductioncost reduction


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


� a division is responsible for an organization�s poor performance� a division needs more resources to be competitive than company can provide� a large amount of cash needed quickly and cannot be obtained from other sources�a division is a misfit with the rest of an organization

Divestiture effective when:

Selling a division or part of an organization


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


� both a reorganization and a divestiture has not been successful�an organization�s only alternative is bankruptcy� the stockholders can minimize their losses by selling the organization�s assets

Liquidation effective when:

Selling an organization


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


Michael Porter�s Five Generic strategies

Best value

Low costDiff.-Small

Best value

-Diff.Low cost

Large

FocusDifferenti-ation

Cost leadership

Size of market


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


Generic strategies

To gain competitive advantage from 3 different bases:� Cost leadership: producing standardized products at very low per-unit cost for consumers who are price-sensitive. Two alternatives:

� low cost strategy: concentrate on a low cost � best value: concentrate on best-price-value compared to rival�s

� Differentiation�Considered unique or industrywide products and services

� Focus: fulfill the needs of small groups of consumers Two alternatives

�low cost focus: �best value focus


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


� price competition among rivals vigorous� products of rival sellers are identical� most buyers use the product in same ways� buyers are large and have significant power to bargain down prices

Cost leadership effective when:

Tools: integrationR&DCapacity utilizationOutsourcing


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


� there are many ways to differentiate the products� few rival firm are following a similar approaches� buyers needs and users are diverse� technological change is fast

Differentiation effective when:

Tools: Market penetrationMarket developmentRelated diversificationR&D


Types of strategies

Outline



�Integration

�Intensive

�Defensive

�Generic


� Industry leaders consider it too costly or difficult to meet the specialized needs� few other rivals are attempting to specialize in the same segment

Focus effective when:

Tools: Market penetrationMarket developmentRelated diversificationR&DOutsourcing

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Strategic Management Process: Strategy formulation 2. · PDF fileStrategic Management Process: Strategy formulation 2. ... term objectives ŁTypes of ... ŁDetermining internal strenghts