Long-Term Objectives

• Strategic managers recognize that short-run profit maximization is rarely

the best approach to achieving sustained corporate growth and
profitability
• To achieve long-term prosperity, strategic planners commonly establish
long-term objectives in seven areas:
• Profitability – Productivity
• Competitive Position – Employee Development
• Employee Relations
• Tech Leadership – Public Responsibility

7-1
Qualities of Long-Term Objectives

• There are five criteria that should be used in preparing

long-term objectives:
• Flexible
• Measurable
• Motivating
• Suitable
• Understandable

7-2
The Balanced Scorecard

• The balanced scorecard is a set of measures that are directly linked to

the company’s strategy
• Developed by Robert S. Kaplan and David P. Norton, it directs a
company to link its own long-term strategy with tangible goals and
actions.
• The scorecard allows managers to evaluate the company from four
perspectives:
• financial performance
• customer knowledge
• internal business processes
• learning and growth

7-3
The Balance Scorecard

7-4
Generic Strategies
• A long-term or grand strategy must be based on a core idea
about how the firm can best compete in the marketplace.
The popular term for this core idea is generic strategy.
• 3 Generic Strategies:
1. Striving for overall low-cost leadership in the industry.
2. Striving to create and market unique products for varied customer
groups through differentiation.
3. Striving to have special appeal to one or more groups of consumers
or industrial buyers, focusing on their cost or differentiation
concerns.

7-5
Low-Cost Leadership

• Low-cost producers usually excel at cost reductions and

efficiencies
• They maximize economies of scale, implement cost-cutting
technologies, stress reductions in overhead and in
administrative expenses, and use volume sales techniques to
propel themselves up the earning curve
• A low-cost leader is able to use its cost advantage to charge
lower prices or to enjoy higher profit margins

7-6
Differentiation

• Strategies dependent on differentiation are designed to appeal to

customers with a special sensitivity for a particular product attribute
• By stressing the attribute above other product qualities, the firm
attempts to build customer loyalty
• Often such loyalty translates into a firm’s ability to charge a premium
price for its product
• The product attribute also can be the marketing channels through which
it is delivered, its image for excellence, the features it includes, and its
service network

7-7
Focus

• A focus strategy, whether anchored in a low-cost base or a differentiation

base, attempts to attend to the needs of a particular market segment
• A firm pursuing a focus strategy is willing to service isolated geographic
areas; to satisfy the needs of customers with special financing, inventory,
or servicing problems; or to tailor the product to the somewhat unique
demands of the small- to medium-sized customer
• The focusing firms profit from their willingness to serve otherwise ignored
or underappreciated customer segments

7-8
Risks of the Generic Strategies

7-9
Competitive Strategies
Competitive Advantage

Lower Cost Differentiation

Compe Broad Cost Differentiation

titive Target Leadership
Scope
Narrow Cost Focus Differentiation
Target Focus
The Value Disciplines

• Operational Excellence • Product Leadership

• This strategy attempts to lead • Companies that pursue the
the industry in price and discipline of product leadership
convenience by pursuing a strive to produce a continuous
focus on lean and efficient state of state-of-the-art products
and services
operations
• Customer Intimacy
• Customer intimacy means
continually tailoring and
shaping products and services
to fit an increasingly refined
definition of the customer
Selection of Long-Term Objectives and Grand
Strategy Sets

• When strategic planners study their opportunities, they

try to determine which are most likely to result in
achieving various long-range objectives
• Almost simultaneously, they try to forecast whether an
available grand strategy can take advantage of preferred
opportunities so the tentative objectives can be met
• In essence, then, three distinct but highly
interdependent choices are being made at one time
Sequence of Selection
and Strategy Objectives

• The selection of long-range objectives and grand

strategies involves simultaneous, rather than
sequential, decisions
• While it is true that objectives are needed to
prevent the firm’s direction and progress from
being determined by random forces, it is equally
true that objectives can be achieved only if
strategies are implemented

7-13
Strickland Grand Strategy
Selection Model
 Strategy Analysis & Choice
Grand Strategy Matrix

• Popular tool for formulating alternative strategies

• Based on two evaluative dimensions
 Competitive position
 Market growth
 Grand Strategy Matrix
RAPID MARKET GROWTH
Quadrant II
• Market development
• Market penetration
• Product development
• Horizontal integration
• Divestiture
• Liquidation
WEAK
COMPETITIVE
POSITION Quadrant III
• Retrenchment
• Concentric diversification
• Horizontal diversification
• Conglomerate
diversification
• Liquidation
Quadrant I
• Market development
• Market penetration
• Product development
• Forward integration
• Backward integration
• Horizontal integration
• Concentric diversification STRONG
COMPETITIVE
Quadrant IV POSITION
• Concentric diversification
• Horizontal diversification
• Conglomerate
diversification
• Joint ventures

SLOW MARKET GROWTH

 Strategy Analysis & Choice
Grand Strategy Matrix

• Quadrant I
 Excellent strategic position
 Concentration on current markets and products
 Take risks aggressively when necessary
 Strategy Analysis & Choice

Grand Strategy Matrix

• Quadrant II
 Evaluate present approach seriously
 How to change to improve competitiveness
 Rapid market growth requires intensive strategy
 Strategy Analysis & Choice

Grand Strategy Matrix

• Quadrant III
 Compete in slow-growth industries
 Weak competitive position
 Drastic changes quickly
 Cost and asset reduction indicated (retrenchment)
 Strategy Analysis & Choice
Grand Strategy Matrix

• Quadrant IV
 Strong competitive position
 Slow-growth industry
 Diversification indicated to more promising growth areas
Hofer’s Model
 Life Cycle – Market Evolution Matrix
Dimensions
STAGE OF INDUSTRY EVOLUTION
• Early Development
• Rapid Growth/Takeoff
• Shake-Out
• Maturity/Saturation
• Decline/Stagnation

COMPETITIVE POSITION
The Life-Cycle Portfolio Matrix The business unit competitive position
Strong Average Weak

Development

The Industry’s stage in the evolutionary life cycle

Growth

Competitive
shakeout

Maturity

Saturation

Decline
Advantages
• Used to identify developing winners
• Illustrates how businesses are distributed across the
stages of industry evolution
BCG Matrix
 Strategy Analysis & Choice
Boston Consulting Group Matrix
(BCG)

• Enhances multidivisional firms’ efforts to formulate

strategies
• Autonomous divisions (or profit centers) constitute the
business portfolio
• Firm’s divisions may compete in different industries
requiring separate strategy
 Strategy Analysis & Choice
Boston Consulting Group Matrix
(BCG)

• Graphically portrays differences among divisions

• Focuses on market share position and industry growth rate
• Manage business portfolio through relative market share
position and industry growth rate
 Strategy Analysis & Choice
Boston Consulting Group Matrix
(BCG)

• Relative market share position defined:

 Ratio of a division’s own market share in a particular industry to

the market share held by the largest rival firm in that industry.
 BCG Matrix
Relative Market Share Position
High Medium Low
1.0 .50 0.0
High
+20
Industry Sales Growth Rate

Stars Question Marks

II I
Medium
0

Cash Cows Dogs

III IV
Low
-20
 Strategy Analysis & Choice
BCG Matrix

• Question Marks
• Stars
• Cash Cows
• Dogs
 Strategy Analysis & Choice
BCG Matrix

• Question Marks
 Low relative market share position yet compete in
high-growth industry.
 Cash needs are high
 Case generation is low
 Decision to strengthen (intensive strategies) or divest
 Strategy Analysis & Choice
BCG Matrix
• Stars
 High relative market share and high industry growth
rate.
 Best long-run opportunities for growth and profitability
 Substantial investment to maintain or strengthen
dominant position
 Integration strategies, intensive strategies, joint ventures
 Strategy Analysis & Choice
BCG Matrix
• Cash Cows
 High relative market share position, but compete in
low-growth industry
 Generate cash in excess of their needs
 Milked for other purposes
 Maintain strong position as long as possible
 Product development, concentric diversification
 If becomes weak—retrenchment or divestiture
 Strategy Analysis & Choice
BCG Matrix

• Dogs
 Low relative market share position and compete in
slow or no market growth
 Weak internal and external position
 Decision to liquidate, divest, retrenchment
GE Nine Cell Matrix
 GE Nine-Cell Matrix
Industry
• Relative Costs
Attractiveness • Profit Margins
• Market Size • Fit with KSFs
• Growth Rate
• Profit Margin
• Intensity of Competition
10.0 Strong 6.7 Average 3.3 Weak 1.0

• Seasonality
• Cyclicality High
• Resource Requirements
• Social Impact 6.7

• Regulation
Medium
• Environment
• Opportunities & Threats 3.3
• Relative Market Share
• Reputation/ Image Low
• Bargaining Leverage
• Ability to Match Quality/Service 1.0
Rating Scale: 1 = Weak ; 10 = Strong
 Strategy Implications of
Attractiveness/Strength Matrix
• Businesses in upper left corner
• Accorded top investment priority
• Strategic prescription is grow and build
• Businesses in three diagonal cells
• Given medium investment priority
• Invest to maintain position
• Businesses in lower right corner
• Candidates for harvesting or divestiture
• May be candidates for an overhaul and reposition strategy
 The Attractiveness/Strength Matrix
• Allows for intermediate rankings between high and low and between
strong and weak
• Incorporates a wide variety of strategically relevant variables
• Stresses allocating corporate resources to businesses with greatest
potential for
• Competitive advantage and
• Superior performance
Business Level Strategies
Learning Objectives

1. Determine why a business would choose a low-cost, differentiation, or

speed-based strategy
2. Explain the nature and value of a market focus strategy
3. Illustrate how a firm can pursue both low-cost and differentiation
strategies
4. Identify requirements for business success at different stages of
industry evolution
5. Determine good business strategies in fragmented and global industries
6. Decide when a business should diversify
Levels of Planning at General Electric
Levels and Types of Planning
What Is Business-Level Strategy?

• Business-level strategy
• A plan of action to use the firm’s resources and distinctive
competencies to gain competitive advantage.
• Abell’s “Business Definition” process
• Customer needs – product differentiation (what)
• Customer groups – market segmentation (who)
• Distinctive competencies – competitive actions (how)
 Choosing a Generic Business-Level Strategy
• Product/Market/Distinctive-Competency Choices and Generic Competitive Strategies

Cost Leadership Differentiation Focus

Product Low High Low to high

Differentiation (principally (principally by (price or
by price) uniqueness) uniqueness)

Market Low High Low

Segmentation (mass market) (many market segments) (one or a few
segments)

Distinctive Manufacturing Research and Any kind of

Competency and materials development, sales and distinctive
management marketing competency
Choosing a Business-Level Strategy
• Cost-leadership strategy success is affected by:
• Competitors producing at equal or lower costs.
• The bargaining strength of suppliers.
• Powerful buyers demanding lower prices.
• Substitute products moving into the market.
• New entrants overcoming entry barriers.
Choosing a Business-Level Strategy
• Differentiation strategy success is achieved through:
• An emphasis on product or service quality.
• Innovation in providing new features for which customers will pay a
premium price.
• Responsiveness to customers after the sale.
• Appealing to the psychological desires of customers.
Choosing a Business-Level Strategy
• Differentiation strategy success is affected by:
• Competitors imitating features and services.
• Increases in supplier costs exceeding differentiator’s price premium.
• Buyers becoming less brand loyal.
• Substitute products adding similar features.
• New entrants overcoming entry barriers related to differentiator’s
competitive advantage.
Choosing a Business-Level Strategy
• Focus strategy success is affected by:
• Competitor entry into focuser’s market segment.
• Suppliers capable of increasing costs affecting only the focuser.
• Buyers defecting from market segment.
• Substitute products attracting customers away from focuser’s segment.
• New entrants overcoming entry barriers that are the source of the
focuser’s competitive advantage.
 Strategic Groups and Business-Level Strategy

• Implications for business-level strategy

• Immediate competitors are companies pursuing same strategy within
the same strategic group.
• Different strategic groups can have a different standing with respect to
the effects of the five competitive forces.
• First mover advantage
• Benefits are first choice of customers and suppliers, setting standards,
building entry barriers.
Choosing an Investment Strategy at the
Business Level
• Investment strategy
• The resources (human, functional, and financial) required to gain
sustainable competitive advantage.
• Competitive position
• Market share is an indicator of competitive strength.
• Distinctive competencies are competitive tools.
• Life Cycle Effects
• An industry’s life cycle stage affects its attractiveness to investment
prospects.
Choosing an Investment Strategy at the Business Level

•Stage of the Industry •Strong Competitive •Weak Competitive

Life Cycle Position Position

•Embryonic •Share building •Share building

•Growth •Growth •Market concentration

•Shakeout •Share increasing •Market concentration or

harvest/liquidation

•Maturity •Hold-and-maintain or profit •Harvest or

liquidation/divestiture

•Decline •Market concentration or harvest •Turnaround, liquidation,

(asset reduction) or divestiture
Evaluating and Choosing Business Strategies: Seeking Sustained
Competitive Advantage

• The two most prominent sources of competitive advantage

can be found in the business’s cost structure and its ability to
differentiate the business from competitors
• Businesses that have one or more sources/capabilities that let
them
operate at a lower cost will
consistently outperform their
rivals that don’t
Evaluating Cost Leadership Opportunities

• Business success built on cost leadership requires

the business to be able to provide its product or
service at a cost below what its competitors can
achieve
Sustainable Low-Cost Activities
1. Some low-cost advantages reduce the likelihood of
buyers’ pricing pressure
2. Truly sustained low-cost advantages may push rivals into
other areas
3. New entrants competing on price must face an
entrenched cost leader
4. Low-cost advantages should lessen the attractiveness of
substitute products
Sustainable Low-Cost Activities
1. Higher margins allow low-cost producers to withstand
supplier cost increases
2. Many cost-saving activities are easily duplicated
3. Exclusive cost leadership can be a trap
4. Obsessive cost cutting can shrink other competitive
advantages
5. Cost differences often decline over time
Evaluating Differentiation

• Differentiation requires that the business have sustainable

advantages that allow it to provide buyers with something
uniquely valuable to them
• Differentiation usually arises from one or more activities in
the value chain that create a unique value important to
buyers
• Strategists use benchmarking and consider the 5 forces in
considering differentiation
Evaluating Speed as a Competitive Advantage

• Speed-based strategies, or rapid response to

customer requests or market and technological
changes, have become a major source of
competitive advantage for numerous firms in
today’s intensely competitive global economy
Speed can be created by:

• Customer responsiveness
• Product development cycles
• Product or service improvements
• Speed in delivery or distribution
• Information Sharing and Technology
Risks of Speed-based Strategy

• Speeding up activities that haven’t been conducted in a fashion that

prioritizes rapid response should only be done after considerable
attention to training, reorganization, and/or reengineering
• Some industries may not offer much advantage to the firm that
introduces some forms of rapid response
• Customers in such settings may prefer the slower pace or the lower costs
currently available, or they may have long time frames in purchasing
Evaluating Market Focus as a Way to Competitive
Advantage

• Market focus: the extent to which a business concentrates on a

narrowly defined market
• Small companies, at least the better ones, usually thrive
because they serve narrow market niches
• Market focus allows some businesses to compete on the basis
of low cost, differentiation, and rapid response against much
larger businesses with greater resources
Risks of Market Focus
• The risk of focus is that you attract major
competitors who have waited for your business to
“prove” the market
• Managers evaluating opportunities to build
competitive advantage should link strategies to
• Resources
• Capabilities
• Value chain activities that exploit low cost,
differentiation, and rapid response
Stages of Industry Evolution and Business Strategy
Choices

• The requirements for success in industry segments change

over time
• Strategists can use these changing requirements, which are
associated with different stages of industry evolution, as a way
to isolate key competitive advantages and shape strategic
choices around them
Emerging Industries

• Emerging industries are newly formed or re-formed industries

that typically are created by technological innovation, newly
emerging customer needs, or other economic or sociological
changes
• There are no “rules of the game”
Business Strategies in
Emerging Industries

• Technologies that are most proprietary to the pioneering firms and

technological uncertainty will unfold
• Competitor uncertainty because of inadequate information about competitors,
buyers, and the timing of demand
• High initial costs but steep cost declines
• Few entry barriers
• First-time buyers requiring initial inducement to purchase
• Inability to obtain raw materials and components until suppliers gear up to
meet the industry’s needs
• Need for high-risk capital because of the industry’s uncertain prospects
Emerging Industries

• For success in this industry setting, business strategies require one or more of
these features:
• The ability to shape the industry’s structure
• The ability to rapidly improve product quality and performance features
• Advantageous relationships with key suppliers and promising distribution
channels
• The ability to establish the firm’s technology as the dominant one
• The early acquisition of a core group of loyal customers and then the expansion
of that customer base
• The ability to forecast future competitors
Competitive Advantages and Strategic Choices in
Growing Industries

• Rapid growth brings new competitors into the industry

• At this stage, growth industry strategies that emphasize brand
recognition, product differentiation, and the financial
resources to support both heavy marketing expenses and the
effect of price competition on cash flow can be key strengths
Growth Industries

• For success in this industry setting, business strategies require one or

more of the following features:
• The ability to establish strong brand recognition
• The ability and resources to scale up to meet increasing demand
• Strong product design skills to be able to adapt products and services
• The ability to differentiate the firm’s product[s] from competitors entering
the market
• R&D resources and skills to create product variations
• The ability to build repeat buying from established customers
• Strong capabilities in sales and marketing
Competitive Advantages and Strategic Choices in Mature
Industries

• As an industry evolves, its rate of growth eventually declines

• Firms working with the mature industry strategies sell increasingly to
experienced, repeat buyers who are now making choices among known
alternatives
• Competition becomes more
oriented to cost and service
as knowledgeable buyers
expect similar price and features
Mature Industries
• Strategy elements of successful firms in maturing industries often
include the following:
• Product line pricing
• Emphasis on process innovation that
permits low-cost product design,
manufacturing methods, and distribution
synergy
• Emphasis on cost reduction
• Careful buyer selection to focus on
buyers who are less aggressive, more
closely tied to the firm, and able to buy more from the firm
• Horizontal integration to acquire rival firms whose weaknesses can be used to
gain a bargain price
• International expansion to markets where attractive growth and limited
competition still exist
Competitive Advantages and Strategic Choices in Declining
Industries

• Declining industries are those that make products or services for which demand
is growing slower than demand in the economy as a whole or is actually
declining
• Focus on higher growth
or a higher return
• Emphasize product innovation
and quality improvement
• Emphasize production and
distribution efficiency
• Gradually harvest the business
Competitive Advantage in
Fragmented Industries

• A fragmented industry is one in which no firm has a significant market

share and can strongly influence industry outcomes
• Tightly managed decentralization
• “Formula” facilities
• Increased value added
• Specialization
• Bare bones/no frills
Competitive Advantage in
Global Industries

• A global industry is one that comprises firms whose

competitive positions in major geographic or national markets
are fundamentally affected by their overall global competitive
positions
• License foreign firms to produce and distribute the firm’s products
• Maintain a domestic production base and export products to foreign
countries
• Establish foreign-based plants and distribution to compete directly in the
markets of one or more foreign countries
Strategic Choices

• Four basic strategies to enter and compete in the international

environment:
• International strategy
• Multi domestic strategy
• Global strategy
• Transnational strategy

Hill, 2005
Four Potential Strategies
International strategy

• Create value by transferring valuable core competencies to foreign markets

that indigenous competitors lack
• Centralize product development functions at home
• Establish manufacturing and marketing functions in local country but head
office exercises tight control over it
• Limit customization of product offering and market strategy
Multi-domestic strategy

• Main aim is maximum local responsiveness

• Customize product offering, market strategy including
establishing production and R&D facilities according to national
conditions
• Generally unable to realize value from experience curve effects
and location economies
• Possess high cost structure
Global strategy

• Focus is on achieving a low cost strategy by reaping cost reductions that

come from experience curve effects and location economies
• Production, marketing, and R&D concentrated in a few favorable
functions
• Market standardized product to keep cost’s low
• Effective where strong pressures for cost reductions and low demand for
local responsiveness
• Semiconductor industry
Transnational strategy

• To meet competition firms aim to reduce costs, transfer core competencies

while paying attention to pressures for local responsiveness
• Global learning
• Valuable skills can develop in any of the firm’s world wide operations
• Transfer of knowledge from foreign subsidiary to home country, to
other foreign subsidiaries
• Transnational strategy difficult task due to contradictory demands placed
on the organization
• Example : Caterpillar
Cost pressures and pressures for local responsiveness facing
Caterpillar
Grand Strategy Selection Matrix
Model of Grand Strategy Clusters
Building Value as a Basis for Choosing
Diversification or Integration

• The grand strategy selection matrix and model of

grand strategy clusters are useful tools to help
dominant product company managers evaluate and
narrow their choices among alternative grand
strategies
• Dominant product company managers who choose
diversification or integration eventually create another
management challenge