Strategic Management Process: Strategy formulation 2.

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1 Strategic Management Process: Strategy formulation 2. By: Prof. Dr. András s NábrN brádi PhD, MBA University of Debrecen Faculty of Ag. Economics and Rural Development Dept.: Business Management and Marketing HUNGARY

2 Tasks of strategic management Strategy formulation Strategy Implementation Strategy Evaluation

3 First stage of the strategic management Develop Vision and Mission Statements Establish long term objectives Generate, evaluate, and select Strategy formulation (Strategic planning)

4 Strategy formulation Developing vision and mission Indetifying external opportunities and threats Determining internal strenghts and weaknesses Establishing long Generating alternative Choosing particular 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

5 Strategy formulation PERFORMANCE OBJECTIVES Organization s target for achievement; both short and long range objectives are needed. FINANCIAL OBJECTIVES Financial performance targets a company wants to achieve. STRATEGIC OBJECTIVES Targets relating to strenghtening a company s overall market position and competetive viability.

6 Strategy formulation LONG-RANGE OBJECTIVES Achiement levels to be reached within the next three to five years. SHORT-RANGE RANGE OBJECTIVES Near-term performance target; they establish the pace for achieving the long-range objectives.

7 Establishing long Establishing long 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)

8 Varying performance Measures by organizational level Organizational level Corporate (president) Division division president, executive vice president Functional Finance, marketing, manufacturing, MIS, HRM Operational Plant managers, sales managers, production and department managers Basis foe annual bonus or merit pay 85 % based on long 15 % based on annual objectives 75 % based on long 25 % based on annual objectives 50 % based on long 50 % based on annual objectives 25 % based on long 75 % based on annual objectives

9 Establishing long long Financial Strategic 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 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 technological leadership Consistently getting new products to market ahead of rivals

10 Defensive Retrenchment Divestiture Liquidation Do nothing Offensive Types of Integration Forward Backward Horizontal Intensive Market penetration Market development Product Development Diversification

11 Types of I. Integration Strategy Description Example Forward integration Backward integration Horizontal integration Gaining ownership or increased control over distributors or retailers Seeking ownership or increased control of a firm s suppliers Seeking ownership or increased control over competitors An agricultural company purchased a regional bakerychain Hotels Inc. purchased a furniture producer One department store acquired another department store

12 Types of 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 continue to grow an organization has both capital and HR needed to manage of distributing its own products present distributors or retailers have high profit margin distributors

13 Types of 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

14 Types of 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

15 Types of II. Intensive Strategy Market penetration Market development Product development Related diversification Unrelated diversification Description Increased market share for present products in present market through greater marketing efforts Introducing present products or services into new geographic area Increased sales by improving present products or developing new ones Adding new but related products or services Adding new unrelated products and services Example Coca cola is spending millions to advertise its drinks MOL purchased a 10 % stake in Slovakoil Glaxo Smith Kline (UK) introduced the new Aquafresh 3 total care toothpaste Glaxo Smith Kline (UK) introduced the new ADAPTOR toothbrush A kitchenware company entered into a growing skin and beauty business

16 Types of Market penetration effective when: Current markets are not saturated with a particular product or service usage rate of present customers could be increased significantly market share of major competitors have been declining while 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

17 Types of Market development effective when: 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 Adidas in May 2005 had 1500 stores in China and stated that it would open another 40 stores every month for the next 40 months

18 Types of Product development effective when: 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 In 2005 Heineken developed and introduced low-calorie low carbohydrate beer Heineken Light into US. Brad Pitt and John Travolta are promotes its product.

19 Product Life Cycle Money / Time Birth Growing Maturity Declining Cash-flow Time

20 Types of II. Intensive Strategy Market penetration Market development Product development Related diversification Unrelated diversification Description Increased market share for present products in present market through greater marketing efforts Introducing present products or services into new geographic area Increased sales by improving present products or developing new ones Adding new but related products or services Adding new unrelated products and services Example Coca cola is spending millions to advertise its drinks MOL purchased a 10 % stake in Slovakoil Glaxo Smith Kline (UK) introduced the new Aquafresh 3 total care toothpaste Glaxo Smith Kline (UK) introduced the new ADAPTOR toothbrush A kitchenware company entered into a growing skin and beauty business

21 Types of Related diversification effective when: 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 Dell computer Inc. turned to produce flat-panel televisions and MP3 players, and opened an online music-downloading store.

22 Types of Unrelated diversification effective when: 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 Hospitals are creating small malls by offering banks, bookstores, coffee shops, restaurants, drugstores and other retail stores within their buildings

23 Summary of the intensive Name Current markets New markets Current products Market penetration Market development New products Market development Market penetration Related diversification Unrelated diversification

24 Types of III. Defensive Strategy Description Example Retrenchment Reorganizational strategy Divestiture Regrouping through costs and assets reduction to serve declining sales and profit. Selling a division or part of an organization Sanyo Electric is cutting its global workforce by 15% in 2006 for reducing its dept. Goodyear Co. sold its North American farm-tire business to Titan Inc. Liquidation Selling all of a company s assets, in parts, for their tangible worth Britain s last major car manufacturer, MG Rover Group Ltd., liquidated in 2005 and laid off its 5000 employees.

25 Types of Retrenchment effective when: 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 Tools: reorganization bankruptcy regrouping asset reduction cost reduction

26 Types of Divestiture effective when: 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 Selling a division or part of an organization

27 Types of Liquidation effective when: 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 Selling an organization

28 Types of Size of market Michael Porter s Five Generic Large Small Cost leadership Low cost Best value - Differentiation Diff. Diff. Focus - Low cost Best value

29 Types of Generic To gain competitive advantage from 3 different bases: Cost leadership: producing standardized products at very low perunit 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

30 Types of Cost leadership effective when: 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 Tools: integration R&D Capacity utilization Outsourcing

31 Types of Differentiation effective when: 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 Tools: Market penetration Market development Related diversification R&D

32 Types of Focus effective when: Industry leaders consider it too costly or difficult to meet the specialized needs few other rivals are attempting to specialize in the same segment Tools: Market penetration Market development Related diversification R&D Outsourcing

Strategies in Action. Chapter Five

Strategies in Action. Chapter Five Strategies in Action Chapter Five Chapter Objectives 1. Discuss the value of establishing long-term objectives. 2. Identify 16 types of business strategies. 3. Identify numerous examples of organizations