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mission of a company. Objectives act as reference points for strategic actions to be performed based on the vision and mission of company. Ansoff (1965) refers to objective as a criterion in which a firm’s success or failure is determined. As such objective is an important concept because a firm needs a ‘right’ objective in order to survive. A firm without objective has no particular direction and is rudderless. David (2007) refers to the long term objective as the specific results than an organization seeks to achieve in pursuing its mission. As mission answers the question “what business are we involved in?”, long term objectives which are derived from the mission aid to clarify the direction of the firm. Objectives can also be useful as standards for measuring performance, set priorities for making decision, and identify specific areas of importance for the firm. The long term objective normally covers a period of three to five years. The annual objectives are the specific results that a firm seeks to achieve over a short term period of normally within a year. Normally the short term objectives are derived from the long term objectives. Short term objectives represent the specific results to be achieved by the corporate, divisional, and functional levels in an organization over the short term of one year. Put it differently each level of the organization will have its own annual objectives to be achieved within the short term period.
5.2.1 Elements of objective As mentioned at the beginning of this module, objective is derived from the vision and mission of an organization. Objective consists of a number of elements which must be aligned with an organization’s vision and mission. Some of the important elements of objective are stated below: a. Objective should be based on a particular attribute that is selected. For an example organization can select sales or other key areas of concern as one particular attribute. b. Objective should be measurable. When an objective is measurable only then can a progress be measured. In our example given above sales can be measured say by percentage sales growth. c. Objective should carry a specific goal. Back to our example, a 10 percent sales growth would present as a goal for the objective. Given a specific goal, managers would know what they are supposed to achieve. d. Objective should have a time line. In order words there must be a specific time frame in which a particular goal should be achieved. The time frame depends on the planning requirement which can be two to five years for a long term objective, one year for annual objective and it can also be daily, weekly, monthly, quarterly, and semi-annually.
In doing so it will be much easier to obtain their commitment. ROI. In establishing objectives the involvement of people who are supposed to accomplish the objective would be preferable. etc.2 Strategic objectives versus financial objectives As shown in the preceding section there are various key areas which are important for organizational performance. minimum wastage. At the same time the firm also must achieve a certain level of strategic performance such as its . ROA) Reputation (being considered a “top” firm) Contributions to employees (wages. Different organizations in different industries will have different areas to focus on.e. such as providing jobs for relatives) 5. f. An objective which is too lofty would discourage employees knowing that it cannot be achieved. sales. etc) Growth (increase in total assets. Objective should be based on the results to be achieved and not on the means to achieve the objective. Strategic management scholars concur that most the areas of importance for a firm can be categorized as financial and strategic areas of performance. Objective should be challenging and at the same time achievable. Put differently objective must not be based on the works required to achieve the objective else the focus will be on the means rather than the end.2. A firm needs to accomplish financial performance such as paying off debt. dividend to shareholder. A number of key areas in which an organization will set its goals as pointed out by Wheelen and Huuger (2008) are such as: Profitability Efficiency (low cost. g. On the other hand an objective which is too easy to accomplish would not bring the best out of the employees. There a number of key areas of concern for an organization in which objective will be based on. employment security) Contributions to societies (taxes. charities) Market leadership (market share) Technological leadership (innovations and creativity) Survival (avoiding bankruptcy) Personal needs of top management (using the firm for personal purposes. etc) Shareholder wealth Utilization of resources (ROE. The areas of concern depend on the vision and mission of the organization.
USA. Table 5.3. Strategies In the previous section you have learnt the objectives for an organization and its key elements. Sometimes an organization would have to consider making a short term profit (financial objective) and forego its long term competitive position (strategic objectives). The strategies are crafted for the purpose of achieving the objectives. Strategic management: Concepts and cases 12 edition. 5. These are difficult situation in which a firm has to face.competitiveness and long term market position. In this module we will further discuss the three levels of strategy.1 Corporate strategy . As you have learnt in the first module there are three levels of strategy. However for an organization to achieve its objectives.1 Example of Financial and Strategic Objectives Financial objectives • Growth in revenue • Growth in earnings • Higher dividends • Bigger profit margins • Higher returns on invested capital • Attractive economic value added (EVA) performance • Strong bond and credit ratings • Bigger cash flows • A rising stock price • Attractive and sustainable increases in market • Recognition as a “blue-chip” company • A more diversified revenue base • Stable earnings during periods of recession Strategic objectives • A bigger market share • Quicker design-to-market times than rivals • Higher products\ quality than rival • Lower costs relative to key competitors • Broader or more attractive product line than rivals • Better e-commerce and internet sales capabilities than rivals • Superior on-time delivery • A stronger brand name than rivals • Superior customer service compare to rivals • Stronger global distribution and sales capabilities than rivals • Recognition as a leader in technology and/or product innovation • Wider geographic coverage than rival • Higher levels of customer satisfaction than rival Source: Thompson and Strickland (2001). In practice however an organization has to make trade off between financial objectives and strategic objectives. McGraw Hill Irwin: Boston.1 shows some of the financial objectives and strategic objectives for a firm. However to many strategic management scholars it is more beneficial for the firm to build a stronger long term competitive position than improving short term profitability. The following Table 5. An organization in general would prefer to accomplish both of its financial and strategic objectives. or at times it has to forego its short term profit and invest in the long term competitive position. the organization must craft or formulate strategies. In this way the organization will be able to achieve its mission and move closer to its vision.
Forward Integration Forward integration which takes place when an organization attempts to increase control over distributors and retailers is best taken when: 1. Table 5. 2. and competitors (horizontal integration). unrelated products or services Regrouping through cost and asset reduction to reverse declining sales and profit Selling a division or part on an organization Selling all of a company’s assets. for their tangible worth Source: Adapted from David (2007). An organization faces problem with its distributors or retailers such as unreliable.2. in parts. backward. For an overview of the different types of corporate strategy you can refer to Table 5. and horizontal integration. . There is limited number of quality distributors. Singapore: Pearson Prentice Hall Integration Strategy Integration strategy consists of forward. slow delivery. Strategic management: concepts and cases (11th ed. suppliers (backward integration). etc. The main idea of integration strategy is to gain control over distributors (forward integration).2: Overview on Different Types of Corporate Strategy Strategy • • • • • • • • • • • Forward integration Backward integration Horizontal integration Market penetration Market development Product development Related diversification Unrelated diversification Retrenchment Divestiture Liquidation Definition • • • • • • • • • • • 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 Seeking increased market share for present products or services in present markets through greater marketing efforts Introducing present products or services into new geographic area Seeking increased sales by improving present products or services or developing new ones Adding new but related products or services Adding new.The following corporate strategy is discussed based on David (2007).).
Backward integration A company pursues backward integration when it tries to seek ownership or control over its suppliers. Suppliers are unreliable. There is high demand for its products. 5. High profit margins enjoyed by the present suppliers. Intensive strategies comprise market penetration. 3. 4. 4. The organization is involved in a growing industry When competitors are facing internal problems such as poor management control. 2. 5.3. 3. There is enough resources to carry out the strategy. This strategy is best carried out under the following conditions: 1. When the present market is not saturated with a certain product or service. When a competitor’s share of the market decline while the industry is growing. There enough resources such as financial and human resources for a company to carry out integration. 2. 5. 2. When a particular input is of strategic concern. There is a need to maintain stable prices for its inputs. Distributors or retailers enjoy high profit. and product development. Market penetration Market penetration strategy refers to marketing efforts to improve its market share in a firm present product-market scope. Horizontal integration Horizontal integration is a corporate strategy in which a firm seeks to control over its competitors. 3. There exist a small number of suppliers. market development. Intensive strategies Intensive strategies call for active efforts from an organization to improve its competitive position in a product-market. 7. There are sufficient resources including financial and human resources. . When there is room to increase the utilization rate of a product. The industry in which the company is a part of is experiencing growth. The increases in market share provide competitive advantages. 4. Backward integration is best carried out under the following conditions: 1. 6. When increase in market share lead to competitive advantages When an increase in marketing effort can lead to increase in sales. 4. Market penetration strategy is best carried out under the following conditions: 1.
There is a rapid technological change in the industry. The firm’s competitors introduce quality products at comparable prices. Related Diversification Strategy In related diversification strategy a firm diversifies into other industry which has commonality with its present industry such as in terms of similar distribution channel. 5. In order to carry out this strategy a firm has to expend large amount of fund for research and development to improve its present products or services. The present product has reached the maturity stage. The firm has a distinctive competency in research and development. managerial skills. 3. 2. The limit to growth has been reached such as in the cases when a firm had already carried out integration strategies. 4. The market development strategy can be carried out under the following conditions: 1. The industry in which the firm competes grows rapidly. 3. The firm has no choice except to compete globally. related (concentric) diversification and unrelated (conglomerate) diversification. Guidelines for related diversification include: . When a firm can identify a new channel of distribution which is reliable and inexpensive. When the potential market is not saturated.Market development The market development strategy refers to the introduction of present product or service in a new geographical area. Diversification Strategies As an industry enters its maturity stage firms that compete in the industry can also reach its growth limit. The firm tries to take advantage of its distinctive competence in the new industry that it is trying to diversify into. 5. technology. A firm will have to consider diversify into different industries. There are two types of diversification strategies. In other words there is no much room for the firm to grow. Product development Product development strategy refers to a firm improving or modifying its products or services in order to increase sales. The firm has the necessary resources to carry out the strategy. 2. Guidelines to carry out product development strategy include: 1. The rationale behind related diversification is to seek for synergy which means that two different business together can generate more profits than when two business operate separately. The production capacity of he firm is under utilized. and customer usage. 4.
However take note that when implementing this strategy it is assumed that the firm still has its distinctive competence. The guidelines to undertake unrelated diversification include: 1. During the retrenchment strategy the firm’s distinctive competence will be strengthen. Target firm can offer a high financial return. The organization can transfer its management skill to the newly acquired firm. closing of unprofitable business. 3. The present industry has reached its maturity stage. Normally a firm can realize good return on investment when there are target firms with undervalued assets.1. In doing so a number of actions will be taken such as selling of firm’s assets for cash. the firm will resort to defensive strategies to overcome the weaknesses. and liquidation. financial hardships. Retrenchment Retrenchment is also known as turnaround strategy or reorganizational strategy. declining sales. divestiture. Sufficient resources to carry out the diversification strategy. The present industry has matured. or target firm can also transfer its management system into the required firm. reducing the number of employees. A firm that attempts for unrelated diversification will search for firms that can provide a good return on investment. 2. Addition of new products can complement the present slowdown or seasonal sales of the present product. In a retrenchment strategy the main idea is to focus on the firm’s cost and asset reduction to overcome declining sales and profit. Among the guidelines to implement this strategy are: . Defensive strategies A firm will carry out defensive strategies when it is experiencing weak competitive position which results in poor performance. and introducing a better control system to monitor expenses of the firm. 4. 2. 4. Unrelated Diversification Strategy In unrelated diversification strategy the main idea is to search for portfolio of business which can deliver excellent financial performance instead of synergy as in the case of related diversification strategy. Addition of new related product can increase the sales of the present product as well. 3. Addition of new product can complement the present slowdown or seasonal sales of the present product. inefficiency. Defensive strategies can be in the form of retrenchment. When a company faces low productivity.
3. Competitive strategy refers to competing with other competitors for advantage while cooperative strategy is when a firm cooperates with other firms to seek advantage against other competitors. 5. 2. Divestiture Divestiture takes place when a firm sells a subsidiary. When bankruptcy is the only option.3. inefficiency. The firm will sell the unit as mentioned above which does not contribute to the firm’s profitability or does not fit in with the firm overall activities. Among the guidelines to carry out divestiture strategy are: 1. 4. Both retrenchment and divestiture do not result in improved performance.2 Business Strategies Business strategies refer to the ways in which a firm competes in an industry. Competitive strategy . Some guidelines for carrying out liquidation are: 1. The management will sell the saleable assets of the firm. Firm fails to achieve its objectives but it still has distinctive competence. Retrenchment strategy does not improve a firm’s competitive position. 4. (Student needs to differentiate liquidation with bankruptcy. 3. Managers of the firm fail to set direction. When a particular unit needs to be injected with cash and other resources at the expense of other subsidiaries or divisions. Liquidation is carried out when a firm has no other attractive option to carry out business. and use the wrong strategies to manage the firm. Business strategy can be in the form of or competitive strategy or cooperative strategy. Manager of the firm are not able to exert control due to rapid expansion of the firm. use the proceed to pay off obligation and return the balance to shareholders. When a particular unit does not match with the overall activities of the firm. Bankruptcy is the case when the court takes over the management of the firm in order to settle obligations of the firm). 2. 2. and low employee morale.1. Business strategy strengthens a firm’s competitive position in the product-market or industry that it served. Liquidation can provide the mean to obtain cash for the shareholders from the sale of assets. Firm can still compete in the industry even tough it may be one of the weaker competitors. The only choice is terminate the business. Liquidation can minimize shareholders losses from the sale of assets. 3. division or part of the firm itself. Liquidation Liquidation refers to the termination of a firm. At times managers may have different priorities from the firm. There is no other viable option for the firm. 5. Firm faces problems such as low profitability. When the performance of particular unit negatively affect the overall performance.
Another important factor that will determine a firm’s ability to develop competitive strategy is the product market scope which can be broad. Another weakness is that the firm might overlook customer’s requirement in pursuit for low costs. The firm which uses this strategy competes in terms of having the lowest rate. Porter (1980) suggested that there are two ways to achieve competitive advantage over competitors. Cost leadership strategy The main thrust of the cost leadership strategy is for a firm to achieve the lowest cost in the industry by producing services and products for a broad customer base. Second is when a firm posses significant differences from competitors.3: Porter’s Generic Competitive Strategies Low costs Cost Leadership Cost Focus Competitive advantage Product-Service Differences Differentiation Differentiation Focus Competitive scope Broad Narrow Source: Porter (1980). Table 5. However some of the weaknesses of the low cost strategy is when competitor is able to further reduce their costs. It will also capitalize on opportunity that is able to achieve lowest cost such as new technology. As the firm has the lowest unit cost in the industry it is able to charge lowest process and gain profits. Competitive strategy: Techniques for analyzing industries and competitors. A firm can also experience stuck in the middle. Table 5. and not able to differentiate enough when pursuing differentiation strategy. encompassing the overall market or narrow which focuses on one or a few of the market segments. First is by having the lowest cost in the industry. In order to achieve the lowest costs the firm will have to be efficient in every department. which means that its costs is not the lowest in the industry when pursuing a low cost strategy. The Free Press: New York.In this module we will refer to Porter’s competitive strategies as they are well known and have been further researched. Stuck in the middle position is to be avoided.3 depicts the four competitive strategies. .
Focus strategy A firm pursues a focus strategy when it emphasizes low cost or differentiation competitive advantage in a particular customer segment or segments. A profitable segment may invite overall market leader to participate in the market segment. The drawback of this strategy is that competitors may be able to offer the same products or services. demographic. Some drawbacks of the focus strategy is that it can be difficult for the firm to enjoy economies scale. In order to pursue with the low cost focus strategy the firm has to compete at a lower cost than the overall cost leader for the particular segment. 2. A firm should avoid being stuck in the middle. Stuck in the middle means that a firm is not able to lower its costs when pursuing a low cost strategy and unable to differentiate enough when pursuing a differentiation strategy. Likewise for a firm that pursues differentiation focus it has use to the various means to differentiate its products or services in the particular segment. features. The tenor of the strategic alliance can vary from a short period such as when . type of product. Strategic Alliance Strategic alliance is when a number of firms form partnership to achieve common objectives. The segment can be based on geographical area. Cooperative strategy Cooperative strategy is when a firm attempts to cooperate with other firms to gain competitive advantage within an industry. price ranges. Some of the cooperative strategies are given as follows: 1. A firm can also experience stuck in the middle position. Collusion can be carried out either openly or indirectly.Differentiation strategy The main thrust of the differentiation strategy is for a firm to compete on the basis of offering unique products or services. In order to achieve differentiation a firm needs to differentiate its products or services in several ways such as different models. Collusion Collusion is when a number of firms cooperate to reduce output and increase the price of the products or services. Another drawback is that it is difficult for the firm to change market segment when there exist a change in customer preferences. Another drawback is that customers can be sensitive to the premium price and unique product is no longer priority. As it is able to offer different or unique products the firm is able to charge premium price. What is important is that customers perceive the products or services as unique. and so forth. In explicit collusion. etc. firms communicate directly to effect the collusion while in indirect or tacit collusion cooperation among firms is carried out based on earlier understanding.
and financial matters in the joint venture company accordingly. 3. 4. The firms will divide ownership. For instance a car manufacturing company can seek involvement from engine supplier to design new engine for the manufacturer. Licensing Arrangements Licensing arrangement is when a licensor (licensing firm) grant the right to the licensee (a firm which is granted the right) to sell or produce a product usually in a different market or country. Value-Chain Partnership Value-chain partnership is a cooperative strategy pursued by a firm to form a close partnership with a supplier or distributor for mutual benefits. Mutual Service Consortia Mutual service consortia is when a number of firms in similar industries form a partnership in order to share resources to achieve common objectives which is expensive to carry out by a single firm. responsibilities. 6. 5. Joint Ventures Joint venture is a strategy when several firms form a partnership by setting up a separate entity. .the strategic alliance is used as a mean to be in a market or it can last for long period until a complete merger among the firms. The licensor will be paid compensation for the technical know how. which is the joint venture company.