case study

Long-Term Objectives and

Strategies

LEARNING OBJECTIVES • Discuss seven different topics for long-term corporate

objectives

• Describe the five qualities of long-term corporate objectives that make them useful to strategic managers

• Explain Porter’s generic strategies of low-cost leadership, differentiation, and focus

• Discuss the importance of the value disciplines

• Understand the 15 grand strategies that decision makers use in forming their company’s competitive plan

• Understand the creation of sets of long-term objectives and grand strategies options

2

‘Create new customer and shareholder value’

3

PROFITABILITY

SURVIVAL

Three universal goals …

BUSINESS MODEL – the ‘how’ How the firm will generate profits and the strategic actions it must take to succeed over the long term.

4

Business model definition – the ‘magic triangle’

BUSINESS MODEL

Business model

examples

AIR BNB Business Model

6 See also University of St Gallen 55 Business Model patterns (Air BNB is a ‘Peer to Peer’ model)

Proposed Solution

Business model

LONG-TERM OBJECTIVES • Short-run profit maximization is rarely the best approach for

sustained corporate growth and profitability

• Long-term objective planning particularly in seven areas: o Profitability o Productivity o Competitive Position o Employee development o Employee Relations o Technological Leadership o Social Responsibility

• Five criteria in preparing long-term objectives: o Flexible o Measurable o Motivating o Suitable o Understandable

7

4 GENERIC STRATEGIES Proponent: Michael Porter (1985) • A long-term/ grand strategy is based on a core

idea (‘generic strategy’) of how to best compete.

• Companies generally cannot be low cost AND differentiation – they may have some differentiated products etc, but overall will typically be one or the other (subsidiaries may have different approaches)

• 4 Generic Strategies:

• Seeking overall low-cost leadership in the industry.

• Seeking to create and market unique products for varied customer groups through differentiation.

• Striving to have special appeal to one or more groups of consumers or industrial buyers, focusing on their cost or differentiation concerns.

• Note: this is how these companies present to the customer. It does not mean that a differentiated company does not seek to limit its costs – just that it will not be the lowest price point.

8

LOW-COST STRATEGIES • Firm can provide cheaper products or services than competitors by pursuing

strategies to perfect value chain activities (e.g. outsourcing, buying globally) – i.e. charging lower prices and/or enjoying higher profit margins

• Low-cost producers use several typical tactics o excel at cost reductions and (admin) efficiencies o maximize economies of scale, o use volume sales techniques o ‘EDLP’ – every day low price strategy

• Advantages: o Truly sustained low-cost advantages may push rivals into other areas o New entrants competing on price must face an entrenched cost leader o Typically lessens the attractiveness of substitute products o Higher margins allow low-cost producers to withstand supplier cost increases

• Risks: o Many cost-saving activities are easily duplicated o Obsessive cost cutting can shrink other competitive advantages / suppress innovation o Cost differences often decline over time

e.g. ALDI, Dollar Stores, Ikea, Southwest Airline, McDonalds

9

Differentiation ‘Stand out from the crowd’

• Seeks to build competitive advantage by making the product/service “different” from others based on features, performance, or other factors not directly related to price, and in a way that is hard to create and/or copy.

• Tries to build customer loyalty by offering added value (e.g., quality, service, convenience, fashion, added features?) – which often translates into the firm’s ability to charge a premium price.

• Differentiation requires that the business have sustainable advantages that allow it to provide buyers with something uniquely valuable to them

e.g. Apple, Tesla, Dollar Shave Club, Lush, Whole Foods

10

Focus • Targets a particular market segment, whether anchored in a low-cost or

differentiation base.

• Applies differentiation or low cost (or combination) solely in a narrow market niche. Profit lies in willingness to serve otherwise ignored or under- exploited customer segments, e.g.: o service isolated geographic areas; o satisfy needs of customers with special financing, inventory, or servicing problems; or o tailor the product to the unique demands of the small- to medium-sized customer

• Market focus allows some businesses to compete on the basis of low cost, differentiation and rapid response against much larger businesses

• Risks: o Can attract competitors who waited for your business to “prove” the market o Publicly traded companies built around focus strategies become takeover targets for

large firms seeking to fill out a product portfolio o Slipping into the illusion that it is focus itself, and not low cost, etc. that is creating

success.

e.g. Presidente (budget Hispanic chain), Quintessentially, AARP, Melissa and Doug 11

SPEED-BASED STRATEGY as a Competitive Advantage

• Rapid response has become a major source of competitive advantage as pace of change increases o Faster product development and

innovation cycles o Using tech for faster customer response o Delivery / distribution speed

(Amazon: 1 week -> 2 hours)

12

• Risks o Can be complex, costly to implement and sustain (are customers willing to carry

the cost?) – e.g. Amazon delivery speed vs profitability

• Is speed a strategy or an operational efficiency? o Opinion varies, sometimes seen as a component of differentiation

VALUE DISCIPLINES Proponents: Treacy and Wiersema

Alternative view to generic strategies.

• Operational Excellence • lead in price and convenience by

focusing on lean and efficient operations

• Customer Intimacy • continually tailoring products and

services to fit an increasingly refined definition of the customer

• Product Leadership • produce continuous state of state-

of-the-art products and services

13

15 GRAND STRATEGIES

Grand strategy: provides basic direction for major actions for achieving long-term business objectives

• Indicate the time period over which long-range objectives are to be achieved

• Any one of these strategies could serve as the basis for achieving major long-term objectives

• Larger firms often combine multiple grand strategies

14

1. Concentrated growth (market penetration)

2. Market development

3. Product development

4. Vertical integration (merger/acquisition)

5. Horizontal integration (merger/acquisition)

6. Concentric diversification

7. Conglomerate diversification

8. Strategic alliance

9. Joint venture

10. Consortia

11. Divestiture

12. Turnaround (retrenchment)

13. Bankruptcy

14. Liquidation

15 15. Innovation

15 Grand Strategies

16

ALTERNATIVE GRAND STRATEGIES MATRIX Note: all depends on the circumstances

YOUR TURN

1. CONCENTRATED GROWTH

• The firm directs resources to the profitable growth of a dominant product, in a dominant market, with a dominant technology (i.e. exploit your strength in a narrowly defined area, saturate a market)

• Concentrated growth strategies lead to enhanced performance

• Also called ‘market penetration strategy’ - do what you do, well

• Generally lower risk, but focus on a single product / segment can be risky in a changeable environment

18

e.g.s: John Deere abandoned plans to expand into construction to defend its agri-machinery sector from Caterpillar entry; Blackberry put its eggs in one basket

2. MARKET DEVELOPMENT • Second only to concentration as

the least costly / risky

• Introducing present products in new markets, often with only cosmetic modifications

• Frequently, changes in media selection, promotional appeals, and distribution (e.g., opening branch offices in new cities, ‘markets’, etc) are used to initiate this approach

19

e.g.s: Coca Cola in Thailand; Lego launches products targeting girls

3. PRODUCT DEVELOPMENT

• Substantial modification of existing products or creation of new but related products that can be marketed to current customers through established channels

20

4. INNOVATION • Seeking to reap the initially high profits

associated with customer acceptance of a new or greatly improved product

• Then, rather than face stiffening competition as the basis of profitability shifts from innovation to production or marketing competence, they search for other original or novel ideas

• The underlying rationale of this grand strategy is to create a new product life cycle and thereby make similar existing products obsolete

• May innovate (R&D) through partners

• Risks: only as good as your last great idea, R&D costs can be high and gambling that a rival product does not come out before yours

21

5. HORIZONTAL ACQUISITION/ INTEGRATION

• Long-term strategy is based on growth through the acquisition of one or more similar firms operating at the same stage of the production-marketing chain

• Such acquisitions eliminate competitors and provide the acquiring firm with access to new markets (e.g. international acquisitions)

• Risks in taking on additional liabilities / debts, and increased dependence on one type of business

22

6. VERTICAL ACQUISITION/INTEGRATION • Acquire firms that supply inputs (such

as raw materials) or who are customers for its outputs (such as warehouses for finished products) to generate efficiencies / control costs and supply

• Forward = towards customer, backward = towards raw materials

• The main reason for backward vertical acquisition is to secure source of supply or quality of the raw materials

• Method of cost control if you have enough volume

• Risk in needing to be more expert in a number of industries, integrations of different organizational cultures, reduces options for outsourcing

23

7. CONCENTRIC DIVERSIFICATION • Acquire related /

compatible businesses in terms of technology, markets, or products

• Ideal situation when combined company profits increase the strengths and opportunities and decrease weaknesses and risk exposure

• Acquiring firm likely to already possess some knowledge of new businesses, plus gains different perspectives

24

8. CONGLOMERATE DIVERSIFICATION • Acquire often-unrelated

businesses as the most promising investment opportunity available. Often very large firms.

• The principal concern of the acquiring firm is the profit pattern of the venture

• Unlike concentric diversification, there is little concern to creating product-market synergy with existing businesses

• ‘What business are we in again?’

25

9. TURNAROUND • Declining profits. Possible the firm can survive and

eventually recover if effort is made over a few years to fortify its distinctive competences. This is turnaround.

• Reasons include: recession, production inefficiencies, competitors’ innovative breakthroughs

• The resulting threat to company survival is known as situation severity

• Turnaround responses among successful firms typically include two stages of strategic activities: retrenchment and the recovery response.

• Retrenchment characteristics:  Cost reduction (layoffs, exiting businesses, etc)  Asset reduction  Executive leadership changes

• The primary causes of the turnaround situation are associated with the second phase of the turnaround process, the recovery response

26

e.g.s: Xerox succcessful turnaround 2001-2, JC Penney and Winn Dixie several efforts

10.DIVESTITURE • Sale of a firm/subsidiary or

major component

• Often when retrenchment fails to accomplish the desired turnaround, or a nonintegrated business activity achieves an unusually high market value, making it ripe for sale

• Can be streamlining a too-diverse conglomerate portfolio

27

e.g. Darden sold Red Lobster to Golden Gate Capital for US$2.1 BN in 2014.

11.BANKRUPTCY Two notable types:

• Chapter 11 - Reorganization bankruptcy—managers believe the firm can remain viable through reorganization (e.g., debt restructuring, sale of assets, layoffs etc)

• Chapter 7 - Liquidation bankruptcy—agreeing to a complete distribution of firm assets to creditors, most of whom receive a small fraction of the amount owed

28

e.g., Winn Dixie (2009, 2018); Delta (2005–7)

12.LIQUIDATION • Firm is typically sold in parts, only

occasionally as a whole—but for its tangible asset value and often to pay off debts, not as a going concern

• Can be solvent or insolvent

• Often the conclusion of a failed turnaround or bankruptcy strategy

• Planned liquidation can be worthwhile (e.g. solvent liquidation – dissolution of family business where no successor is apparent or the nature of the business is changing)

29

Sports Authority liquidated in 2016 after an unsuccessful Chapter 11

bankruptcy attempt

13.JOINT VENTURES (JVS) • Occasionally two or more

capable firms lack a necessary component in a particular competitive environment

• JVs are commercial companies (children) created and operated for the benefit of the co-owners (parents)

• The JV extends the supplier- consumer relationship and has strategic advantages for both partners

30

e.g. founded 2001 as JV between Sony and Ericsson, bought out by

Sony in 2012 (-> Sony Mobile).

e.g. Google + NASA “JV” announced 2005, more like a strategic alliance

e.g. airline industry mix of JVs and strategic alliances, particularly post-9-11

14.STRATEGIC ALLIANCES • Unlike JVs, the companies

do not take an equity position in one another/ the new entity

• In some instances, strategic alliances are synonymous with licensing agreements

• Outsourcing arrangements vary

31

e.g. various JVs and strategic alliances working on autonomous vehicles

15.CONSORTIA

• Large interlocking relationships between businesses of an industry

• In Japan such consortia are known as keiretsus, in South Korea as chaebols (from ‘rich’ and ‘clan’)

• Their cooperative nature is growing in evidence as is their market success

• Fairly common in e.g. defense, high-cost research industries.

32

Began as a pan-European consortium, now primarily owned by

the European Aeronautic Defence and Space Company (EADS)

Established in 1870, structure includes banking, industrial, cars, etc.

Made of around 40 autonomous companies, no parent company.

KEY TERMS • Bankruptcy

• Business model

• Concentrated growth

• Liquidation

• Market development

• Product development

• Strategic alliances

• Turnaround

• Vertical acquisition

• Concentric diversification

• Conglomerate diversification

• Consortia

• Divestiture strategy

• Generic strategy

• Grand strategy

• Horizontal acquisition

• Innovation

• Joint venture

33