Masters program
Strategic management
Lecture 5
Establishing Long-Term Objectives
Year 2023
After this lecture you should be able to:
Discuss the Characteristics and Benefits of long term
Objectives
Identify the types of business strategies and
organizations pursuing different types of strategies.
Discuss Porter’s five generic strategies.
Be familiar with the Means for Achieving Strategies
Notable Quotes
"Planning. Doing things today to make us better
tomorrow. Because the future belongs to those who
make the hard decisions today."
—Eaton Corporation
"Even if you’re on the right track, you’ll get run over if
you just sit there."
—Will Rogers
Long-Term Objectives
Long-term objectives represent the results expected
from pursuing certain strategies. Strategies represent the
actions to be taken to accomplish long-term objectives.
Without long-term objectives, an organization would
drift aimlessly toward some unknown end. It is hard to
imagine an organization or individual being successful
without clear objectives.
Success only rarely occurs by accident; rather, it is the
result of hard work directed toward achieving certain
objectives.
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Characteristics of Objectives
1. Quantitative: Sales, market share, rate of production
etc. are the examples of quantitative objectives.
2. Measurable: Unless the objectives are set the
organization will not be able to compare the actual
performance with the planned target.
3. Realistic/Obtainable: Able to obtain the level of
change reflected in the objective
4. Understandable/Clear: Once the objectives are set, it
must be understandable. This helps in communicating
your objectives to your investors, staffs, partners etc.
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Cont.
5. Challenging/Attainable: Something that stretches
your boundaries and makes you achieve what you
previously thought was impossible. It also will
motivate you to get out of your comfort zone.
6. Hierarchical: All the objectives are not equally
important. For example: In a hierarchy survival of a
business firm comes first following growth and then
the prestige and goodwill.
7. Congruent across departments: the consistency or
agreement of individual goals with company goals
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The Benefits of Having Clear Objectives
1. Provide direction by revealing expectations
2. Allow synergy
3. Aid in evaluation by serving as standards
4. Establish priorities
5. Reduce uncertainty
6. Minimize conflicts
7. Stimulate action
8. Aid in allocation of resources
9. Aid in design of jobs
10. Provide basis for consistent decision making
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Not Managing by Objectives
Managing by Extrapolation – “If it isn't broke, don’t
fix it”
Managing by Crisis – The true measure of a good
strategist is the ability to fix problems
Managing by Subjective – “Do your own thing, the
best way you know how”
Managing by Hope – The future is full of uncertainty
and if at first you don’t succeed, then you may on the
second or third try
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Types of Strategies
1. Integration Strategies: Forward integration,
backward integration, and horizontal integration are
sometimes collectively referred to as vertical integration
strategies. Vertical integration strategies allow a firm to
gain control over distributors, suppliers, and/or
competitors.
A.Forward Integration: Gaining ownership or
increased control over distributors or retailers E.g.
PepsiCo launched a hostile takeover of Pepsi Bottling
Group after its $4.2 billion offer was rejected.
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Cont.
B. Backward Integration: Seeking ownership or
increased control of a firm’s suppliers. E.g. Chinese
carmaker Geely Automobile Holdings Ltd. purchased
Australian car-parts maker Drivetrain Systems
International Pty. Ltd.
C. Horizontal Integration: Refers to a strategy of
Seeking ownership or increased control over
competitors. E.g. Pfizer acquires Wyeth; both are
huge drug companies
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Cont.
2. Intensive Strategies: Market penetration, market
development, and product development are sometimes
referred to as intensive strategies because they require
intensive efforts if a firm’s competitive position with
existing products is to improve.
A.Market Penetration: Seeking increased market share
for present products or services in present markets through
greater marketing efforts. E.g. Coke spending millions on
its new slogan “Open Happiness”
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Cont.
B. Market Development: Introducing present products or
services into new geographic area. E.g. Time Warner
purchased 31 percent of Central European Media
Enterprises Ltd. in order to expand into Romania,
Czech Republic, Ukraine, and Bulgaria
C. Product Development: Seeking increased sales by
improving present products/services or developing new
ones. E.g. News Corp.’s book publisher HarperCollins
began producing audio books for download, such as
Jeff Jarvis’s “What Would Google Do?”
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Cont.
3. Diversification Strategies: There are two general types of
diversification strategies: related and unrelated.
A.Related Diversification: Adding new but related products
or services. E.g. Sprint Nextel Corp. diversified from the cell
phone business by partnering with Garmin Ltd. To deliver
wireless Internet services into GPS machines
B.Unrelated Diversification: Adding new, unrelated
products or services. E.g. Cisco Systems Inc. entered the
camcorder business by acquiring Pure Digital Technology.
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Cont.
4. Defensive Strategies: In addition to integrative,
intensive, and diversification strategies, organizations
also could pursue retrenchment, divestiture, or
liquidation.
A.Retrenchment: Regrouping through cost and asset
reduction to reverse declining sales and profit. E.g.
Arcelor-Mittal, shut down half of its plants and laid off
thousands of employees even amid worker protests
worldwide
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Cont.
B. Divestiture: Selling a division or part of an
organization. Divestiture often is used to raise capital
for further strategic acquisitions or investments. E.g.
The British airport firm BAA Ltd. divested three UK
airports.
C. Liquidation: Selling all of a company’s assets, in
parts, for their tangible worth. E.g. Michigan
newspapers such as the Ann Arbor News, Detroit Free
Press, and Detroit News liquidated hard-copy
operations
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Review question 1
1. Which of these strategies is effective when the number
of suppliers is small and the number of competitors is
large?
A.Conglomerate diversification
B.Backward integration
C.Forward integration
D.Concentric diversification
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Cont.
These three guidelines indicate when liquidation may be
an especially effective strategy to pursue:
nWhen an organization has pursued both a retrenchment
strategy and a divestiture strategy, and neither has been
successful.
nWhen an organization’s only alternative is bankruptcy.
A company can legally declare bankruptcy first and then
liquidate various divisions to raise needed capital.
nWhen the stockholders of a firm can minimize their
losses by selling the organization’s assets.
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Porter’s Five Generic Strategies
According to Porter, strategies allow organizations to
gain competitive advantage from three different bases:
cost leadership, differentiation, and focus.
Type 1: Cost Leadership—Low Cost
Type 2: Cost Leadership—Best Value
Type 3: Differentiation
Type 4: Focus—Low Cost
Type 5: Focus—Best Value
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Cont.
A Type 1 or Type 2 cost leadership strategy can be
especially effective under the following conditions:
Vigorous price competition
Plentiful supply of identical products
Little product differentiation
Products used in same ways
Low cost to switch
Large buyers with power
Industry newcomers use low prices to attract buyers
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Cont.
A Type 3 differentiation strategy can be especially
effective under the following conditions:
When there are many ways to differentiate the product or
service and many buyers perceive these differences as
having value.
When buyer needs and uses are diverse.
When few rival firms are following a similar
differentiation approach.
When technological change is fast paced & competition
revolves around rapidly evolving product features.
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Cont.
A low-cost (Type 4) or best-value (Type 5) focus
strategy can be especially attractive under the
following conditions:
Large, profitable, and growing target market niche
Industry leaders do not consider the niche crucial to
their success
Industry leaders consider it costly or difficult to meet
the needs of this niche
Industry has many niches and segments
Few rivals are specializing on this target segment
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Means for Achieving Strategies
Cooperation Among Competitors
For collaboration between competitors to succeed, both
firms must contribute something distinctive, such as
technology, distribution, basic research, or manufacturing
capacity. But a major risk is that unintended transfers of
important skills or technology may occur at
organizational levels below where the deal was signed.
Firms often give away too much info to rival firms when
operating under cooperative agreements! Tighter formal
agreements are needed. E.g. the Star Alliance
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Cont.
Joint Venture/Partnering: Two or more firms form a
temporary partnership or consortium for the purpose of
capitalizing on some opportunity. Often, the two or more
sponsoring firms form a separate organization & have
shared equity ownership in the new entity. Once bitter
rivals, Nokia & Qualcomm recently formed a cooperative
agreement to develop next-generation cell phones for
North America to hit the market in mid-2010. Based in
Finland, Nokia has roughly 40% of the global cell phone
market but has lagged behind in North America.
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Cont.
Merger/Acquisition: Merger and acquisition are two
commonly used ways to pursue strategies. A merger
occurs when two organizations of about equal size unite
to form one enterprise. An acquisition occurs when a
large organization purchases (acquires) a smaller firm, or
vice versa. When a merger or acquisition is not desired
by both parties, it can be called a takeover or hostile
takeover. In contrast, if the acquisition is desired by both
firms, it is termed a friendly merger. Most mergers are
friendly.
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Cont.
Potential Benefits of Merging with or Acquiring
Another Firm
• To provide improved capacity utilization
• To make better use of the existing sales force
• To reduce managerial staff
• To gain economies of scale
• To gain access to new suppliers, distributors, customers,
products, and creditors
• To gain new technology
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Cont.
First Mover Advantages
First mover advantages refer to the benefits a firm may
achieve by entering a new market or developing a new
product or service prior to rival firms.
Some advantages of being a first mover include
securing access to rare resources, gaining new knowledge
of key factors and issues, and carving out market share
and a position that is easy to defend and costly for rival
firms to overtake.
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Cont.
Outsourcing: Business-process outsourcing (BPO) is a
rapidly growing new business that involves companies
taking over the functional operations, such as human
resources, information systems, payroll, accounting,
customer service, and even marketing of other firms.
Companies are choosing to outsource their functional
operations more and more for several reasons:
1.It is less expensive,
2.It allows the firm to focus on its core businesses,
3.It enables the firm to provide better services.
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Cont.
Other advantages of outsourcing are that the strategy
1.Allows the firm to align itself with “best-in-world”
suppliers who focus on performing the special task,
2.Provides the firm flexibility should customer
3.needs shift unexpectedly, and
4.Allows the firm to concentrate on other internal value
chain activities critical to sustaining competitive
advantage.
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End of Lecture 5
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