Monday, May 15, 2023

Chapter # 4

Strategy Formulation:
Action Plan Choice
 References
 Strategic Management Concepts & Cases, Fred R. David

Resource Person: Furqan-ul-

 Comprehensive Strategic Management Model

Chapter 2
Environmental
Analysis
(External
Audit)

Chapter 3 Chapter 4
Vision Strategy Implement
Implement Measure &
& Strategies Strategies:
Analysis Strategies: Evaluate
Mission In Mgmt Issues
Marketing,
Performance
Statements & Fin/Acct,
Action
Choice R&D, CIS

Chapter 2
Environmental
Analysis
(Internal
Audit)

2
 Long-Term Objectives
Varying Performance Measures
by Organizational Level
Organizational Basis for Annual Bonus/Merit Pay
Level
75% on long-term objectives
Corporate
25% on annual objectives
50% on long-term objectives
Division
50% on annual objectives
25% on long-term objectives
Function
75% on annual objectives
 Long-Term Objectives:
 Results that an organization seek over a
multiyear period through certain strategies
 Time frame —3+
 include specific improvements in the
organization's competitive position,
technology leadership, profitability, return on
investment, employee relations and
productivity, and corporate image.
 The objectives should be SMART
Characteristics of Objectives
Selecting Strategy and Design to Achieve
Organizational Goals
1. Goals  Where you want to go
2. Strategy  How you are going to get there.
A plan for interacting with the competitive
environment to achieve organizational goals.
3. Structure  How you can do what you need
to do to implement strategy and achieve goals

Environment Goals Strategy Structure

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 Objectives are the basis for:
Designing jobs
Organizing activities
Providing direction
Organizational synergy
Standards for evaluation
Strategists should avoid –
 Managing by Extrapolation- keep on doing the same things
in same ways because things are going well.
 Managing by Crisis- (proactive vs. reactive)
 Managing by Subjectives- Mystery approach of decision
making. No general plan for which to go & what to do; just
do best to accomplish.
 Managing by Hope-
 Porter Generic Strategies
 Michael Porter has described three general types of strategies to
achieve and maintain competitive advantage. These three generic
strategies are;
1. Cost Leadership Strategy- Being lowest cost producer within a
industry. The organization aims to drive cost down through all the
elements of the Business. The cost leader usually aims at a broad
market, so sufficient sales can cover costs.
2. Differentiation Strategy- Development of a product or service that
offers unique attributes that are valued by customers and that
customers perceive to be better than or different from the products
of the competition at premium prices.
3. Focus Strategy- Concentration on a arrow segment/niche and
within that segment attempts to achieve either a cost advantage or
differentiation. The premise is that the needs of the group can be
better serviced by focusing entirely on it, resulting high degree of
customer loyalty which discourages other firms from competing
directly.
 Stuck in the Middle? if a firm differentiates itself by supplying very
high quality products then it cant become a cost leader. Michael
Porter argued that to be successful over the long-term, a firm must
select only one of these three generic strategies. Otherwise, with more
than one single generic strategy the firm will be "stuck in the middle"
and will not achieve a competitive advantage.
Blue Ocean/Red Ocean Strategies
Blue ocean strategy opens a new market. Red
ocean strategy competes in an existing space.
 Types of Strategies
1. Integration Strategies 3. Diversification
i. Vertical Strategies
ii. Horizontal i. Concentric Diversification
2. Intensive Strategies ii. Conglomerate
i. Market Penetration Diversification
ii. Market Development 4. Defensive Strategies
iii. Product Development i. Retrenchment
ii. Divestiture
iii. Liquidation
 1. Integration Strategies
i. Vertical integration
 The degree to which a firm owns its
upstream suppliers and its downstream
buyers.
 Vertically integrated companies in a supply
chain are united through a common owner.
Usually each member of the supply chain
produces a different product or (market-
specific) service, and the products combine
to satisfy a common need.
 Types of Vertical integration
a. Backward vertical integration when it
controls/owns firms that produce some of the
inputs used in the production of its products. For
example, an automobile company may own a tire
company, a glass company, and a metal company.
b. Forward vertical integration is when it controls
distribution centers and retailers where its products
are sold.
c. Balanced vertical integration means a firm
controls all of these components, from raw
materials to final delivery.
Example

 Oil companies often adopt a vertically integrated

structure. This means that they are active along the
entire supply chain from locating crude oil deposits,
drilling and extracting crude, transporting it around the
world, refining it into petroleum products such as
petrol/gasoline, to distributing the fuel to company-
owned retail stations, for sale to consumers.
 ii. Horizontal Integration
 The acquisition of additional business activities at
the same level of the value chain is referred to as
horizontal integration. When a company expands
its business into different products that are similar to
current lines.
• Horizontal integration occurs when a firm is being taken
over by, or merged with, another firm which is in the same
industry and in the same stage of production as the merged
firm. ("buy out" or "take-over).
 A car manufacturer merging with another car manufacturer.
In this case both the companies are in the same stage of
production and also in the same industry. 21
British candy
company Cadbury
agreed to a
fattened $19.5
billion takeover
offer from U.S.
food group Kraft
(KFT) in a deal that
would create the
world's biggest
chocolate maker.
 Intensive strategies
 Require intensive efforts to improve a firm’s competitive
position with existing products
i. Market penetration
ii. Market development
iii. Product development
 Market Penetration

Defined

• Seeking increased
market share for Example
present products or
• Toyota is rapidly
services in present
increasing its market
markets through share in north America.
greater marketing
efforts
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 Why to go for Market Penetration
 Current markets not saturated
 Usage rate of present customers
can be increased significantly
 Market shares of competitors
declining while total industry
sales increasing
 Increased economies of scale
provide major competitive
advantages

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Market Development
• Introducing present products or services into
new geographic areas.
• TITAN watches are now
available in Pakistan.

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Guidelines for Market Development

 New channels of distribution that are reliable,

inexpensive, and good quality
 Firm is very successful at what it does
 Untapped or unsaturated markets
 Capital and human resources necessary to manage
expanded operations
 Excess production capacity
 Basic industry rapidly becoming global

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 Product Development

Defined

• Developing new products or modifying

existing products so they appear new.

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Guidelines for Product Development

 Products in maturity stage of life cycle

 Competes in industry characterized by rapid technological
developments
 Major competitors offer better-quality products at
comparable prices
 Compete in high-growth industry
 Strong research and development capabilities

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 2. Diversification Strategies

 Movement by a manufacturer or trader into a

wider field of Products

i. Concentric diversification
ii. Conglomerate diversification
iii. Horizontal diversification

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 Concentric Diversification
Defined
Example
• Adding new, but
related, products or • Meezan Bank started
provision of Islamic Life
services
Insurance.
• where a firm acquires • Dell Computer has started
or develops new production of Televisions
products or services & MP3 players.
(closely related to its
core business or
technology) to enter
one or more new
markets.
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Guidelines for Concentric Diversification

 Competes in no- or slow-growth industry

 Adding new & related products increases sales of current
products
 New & related products offered at competitive prices
 Current products are in decline stage of the product life
cycle
 Strong management team

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 Conglomerate Diversification

Defined

• Adding new,
unrelated
products or
services

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Guidelines for Conglomerate Diversification

 Declining annual sales and

profits
 Capital and managerial talent to
compete successfully in a new
industry
 Financial synergy between the
acquired and acquiring firms
 Exiting markets for present
products are saturated
 Availing oppertunity

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Defensive Strategies

i. Joint venture
ii. Retrenchment
iii.Divestiture
iv. Liquidation

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 Joint Venture
• An entity formed between two or more
parties to undertake economic activity • Fuji Xerox Co., Ltd. is a joint
together. The parties agree to create a venture partnership between the
new entity by both contributing equity, Japanese photographic firm Fuji
Photo Film Co. (75%) and the
and they then share in the revenues, American document management
expenses, and control of the enterprise. company Xerox (25%) to develop,
The venture can be for one specific produce and sell xerographic and
project only, or a continuing business document-related products and
relationship services in the Asia-Pacific region.
• Nokia Siemens Networks is one of
• Some countries, such as the of China
the largest telecommunications
and to some extent India, require solutions suppliers in the world
foreign companies to form joint
ventures with domestic firms in order to
enter a market.
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http://www.pakboi.gov.pk/joinventure_opp.htm
 The company Unitech Wireless was until 2009 a subsidiary
of Unitech Group, holding a wireless services license for all
22 Indian telecom circles since 2008.
 In early 2009, Unitech Group and Telenor agreed on a
majority take-over by Telenor of Unitech's wireless
business, including Unitech Wireless' national-wide mobile
license.
 In October 2012, the two companies signed an agreement
under which Unitech transferred Uninor assets to Telenor
and exited the joint venture.
 Telenor’s exit from India with sale to Bharti Airtel (Feb 2017).
Reliance’s Jio mobile spurs competition and potential wave of defensive deals
 Guidelines for Joint Venture
 Combination of privately held and publicly held can be
synergistically combined
 Domestic forms joint venture with foreign firm, can obtain
local management to reduce certain risks
 Distinctive competencies of two or more firms are
complementary
 Huge resources and risks where project is potentially very
profitable (e.g., Iran-Pak-India Pipeline)
 Two or more smaller firms have trouble competing with larger
firm
 A need exists to introduce a new technology quickly

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 Retrenchment

Defined
Example
• Regrouping
through cost and • PTCL’s operating profit
asset reduction to decreased by 32 per cent in
reverse declining 2007 as compared to 2006
sales and profit which became the reason
of retrenchment of
employees.

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 Guidelines for Retrenchment

 Firm has failed to meet its objectives and goals consistently

over time but has distinctive competencies
 Firm is one of the weaker competitors
 Inefficiency, low profitability, poor employee morale, and
pressure from stockholders to improve performance.
 When an organization’s strategic managers have failed
 Very quick growth to large organization where a major
internal reorganization is needed.

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Divestiture The next edition of the
Oxford English
• Selling a division or part of an Dictionary, the word
organization. also known as reference bible of the
divestment English language, may
o A bank may sell branch offices, or never appear in print and
even an entire operating division, instead be accessible
to cut operating expenses or carry only online (August,
out its business plan for long-term 2010)
growth.
 Contraction Defense- When a large organisation
withdraws from a market or market segment in
which it is not strong in order to concentrate on
another market or other segments in which it has
greater strength; also referred to as Strategic
Withdrawal. 43
 Guidelines for Divestiture

 When firm has pursued retrenchment but failed to attain

needed improvements
 When a division needs more resources than the firm can
provide
 When a division is responsible for the firm’s overall poor
performance
 When a division is a misfit with the organization
 When a large amount of cash is needed and cannot be
obtained from other sources.

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 Liquidation

Defined
• Selling all of a
company’s assets, in
parts.
• Most common in Example
partnership
enterprises • Ribol sold all its assets
and ceased business.

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 Circuit City Stores, Inc. was an American retailer
in brand-name consumer electronics, personal
computers, entertainment software, and (until 2000)
large appliances. The company opened its first store
in 1949 and liquidated its final American retail
stores in 2009 following a bankruptcy filing and
subsequent failure to find a buyer. As part of its
bankruptcy, the company sold its Canadian
subsidiary, InterTAN to Bell Canada.
 The "Circuit City" brand is now owned by
Systemax, which uses the brand to sell electronics
as an online retailer. On May 11, 2009, Systemax
bought the brand, trademark and e-commerce
business at an auction from Circuit City Stores, Inc.
Systemax had earlier acquired CompUSA and
TigerDirect which now operate as online retailers.
Systemax in April 2009 signed a stalking horse
agreement for $6.5 million which is an initial offer
for a bankrupt company's assets.
 At the time of liquidation, Circuit City was the
second largest U.S. electronics retailer, after Best
Buy. There were 567 Circuit City Superstores
nationwide, ranging in size from 15,000 to 45,000
square feet (1400 to 4000 m²), when the company
announced total liquidation.
 Guidelines for Liquidation

 When both retrenchment and divestiture have been

pursued unsuccessfully
 If the only alternative is bankruptcy, liquidation is an
orderly alternative
 When stockholders can minimize their losses by selling
the firm’s assets

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 In Pipeline Strategy, firms
organize their internal labor and
resources to create value by
optimizing an entire chain of
product activities, from materials
sourcing to sales and service.
Platforms create value by
facilitating interactions between
external producers and
consumers. A platform strategy
is an approach to entering a
market that revolves around the
task of allowing platform
participants to benefit from the
presence of others.
 Blitzscaling is what you do when
you need to grow really, really
quickly. It's the science and art of
rapidly building out a company to
serve a large and usually global
market, with the goal of
becoming the first mover at scale.
This is high-impact
entrepreneurship.
 Amazon's incredible growth in the late 1990s (and
up through today) is a prime example of blitzscaling.
In 1996, a pre-IPO Amazon Books had 151
employees and generated revenues of US$5.1 million.
By 1999, the now-public Amazon.com had grown to
7,600 employees and generated revenues of $1.64
 First-mover advantage or FMA is the
advantage gained by the initial occupant of a
market segment. This advantage may stem
from the fact that the first entrant can gain
control of resources that followers may not be
able to match.

 Sometimes the first mover is not able to

capitalize on its advantage, leaving the
opportunity for another firm to gain second-
mover advantage.
 New Product Adopters Groups
1. Innovators- Venturesome, they try new ideas at some risks
2. Early adopters- they adopt new ideas early but carefully
3. Early majority- Adopt new ideas before average person
4. Late majority- Adopt new idea after a majority of people tried it.
5. Laggards- people suspicious to changes and adopt new product
when it becomes some thing of a tradition itself (essential part of
life)