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Chapter 7
Before we learn how strategic decisions are made, it is important to understand the two principal
components of any strategic choice; namely, long-term objectives and the grand strategy. The
purpose of this chapter is to convey that understanding.
Long-term objectives are defined as the result a firm seeks to achieve over a specified period,
typically five years. Seven common long-term objectives are discussed: profitability, productivity,
competitive position, employee development, employee relations, technological leadership, and
public responsibility. These, or any other long-term objectives, should be flexible, measurable
over time, motivating, suitable, and understandable.
Grand strategies are defined as comprehensive approaches guiding the major actions designed to
achieve long-term objectives. Fifteen grand strategy options are discussed: concentrated growth,
market development, product development, innovation, horizontal integration, vertical integration,
concentric diversification, conglomerate diversification, turnaround, divestiture, liquidation,
bankruptcy, joint ventures, strategic alliances, and consortia.
Learning Objectives
Lecture Outline
I. Long-Term Objectives
A. Strategic managers recognize that short-run profit maximization is rarely the best approach
to achieving sustained corporate growth and profitability.
1. An often repeated adage states that if impoverished people are given food, they will
eat it and remain impoverished, whereas if they are given seeds and tools and shown
how to grow crops, they will be able to improve their condition permanently. A
parallel choice confronts strategic decision makers:
a) Should they eat the seeds to improve the near-term profit picture and make
large dividend payments through cost-saving measures such as laying off
workers during periods of slack demand, selling off inventories, or cutting
back on research and development?
b) Or should they sow the seeds in the effort to reap long-term rewards by
reinvesting profits in growth opportunities, committing resources to
employee training, or increasing advertising expenditures?
2. For most strategic managers, the solution is clear—distribute a small amount of profit
now but sow most of it to increase the likelihood of a long-term supply. This is the
most frequently used rationale in selecting objectives.
a) Profitability
(1) The ability of any firm to operate in the long run depends on attaining
an acceptable level of profits.
(2) Strategically managed firms characteristically have a profit objective,
usually expressed in earnings per share or return on equity.
b) Productivity
c) Competitive Position
d) Employee Development
(1) Employees value education and training, in part because they lead to
increased compensation and job security.
(2) Providing such opportunities often increases productivity and decreases
turnover.
(3) Therefore, strategic decision makers frequently include an employee
development objective in their long-range plans.
e) Employee Relations
(1) Whether or not they are bound by union contracts, firms actively seek
good employee relations.
(2) In fact, proactive steps in anticipation of employee needs and
expectations are characteristic of strategic managers.
(3) Strategic managers believe that productivity is linked to employee
loyalty and to appreciation of mangers’ interest in employee welfare.
(4) They, therefore, set objectives to improve employee relations.
(5) Among the outgrowths of such objectives are safety programs, worker
representation of management committees, and employee stock option
plans.
f) Technological Leadership
g) Public Responsibility
1. There are five criteria that should be used in preparing long-term objectives: flexible,
measurable over time, motivating, suitable, and understandable.
a) Flexible
b) Measurable
(1) Objectives must clearly and concretely state what will be achieved and
when it will be achieved.
(2) Thus, objectives should be measurable over time.
c) Motivating
(1) People are most productive when objectives are set at a motivating
level—one high enough to challenge but not so high as to frustrate or so
low as to be easily attained.
(2) The problem is that individuals and groups differ in their perceptions of
what is high enough.
(3) A broad objective that challenges one group frustrates another and
minimally interests a third.
(4) One valuable recommendation is that objectives be tailored to specific
groups.
(5) Developing such objectives requires time and effort, but objectives of
this kind are more likely to motivate.
(6) Objectives must also be achievable
d) Suitable
(1) Objectives must be suited to the broad aims of the firm, which are
expressed in its mission statement.
(2) Each objective should be a step toward the attainment of overall goals.
(3) In fact, objectives that are inconsistent with the company mission can
subvert the firm’s aims.
e) Understandable
1. The balanced scorecard is a set of measures that are directly linked to the
company’s strategy.
a) Surrounding the vision and strategy are four additional boxes, each box
contains the objectives, measures, targets, and initiatives for one of the four
perspectives:
(1) The box at the top of Exhibit 7.1 represents the financial perspective, and
answers the question “To succeed financially, how should we appear to our
shareholders?”
(2) The box to the right represents the internal business process perspective
and addresses the question “To satisfy our shareholders and customers,
what business processes must we excel at?”
(3) The learning and growth box at the bottom of the exhibit answer the
question “To achieve our vision, how will we sustain our ability to
change and improve?”
(4) The box at the left reflects the customer perspective, and responds to the
question, “To achieve our vision, how should we appear to our
customers?”
b) All of the boxes are connected by arrows to illustrate that the objectives and
measures of the four perspectives are linked by cause-and-effect relationships
that lead to the successful implementation of the strategy.
4. The balanced scorecard is a management system that can be used at the central
organizing framework for key managerial processes.
D. Generic Strategies
1. Many planning experts believe that the general philosophy of doing business
declared by the firm in the mission statement must be translated into a holistic
statement of the firm’s strategic orientation before it can be further defined in
terms of a specific long-term strategy.
b) A low-cost leader is able to use its cost advantage to charge lower prices or
to enjoy higher profit margins.
(1) By doing so, the firm effectively can defend itself in price wars, attack
competitors on price to gain market share, or, if already dominant in the
industry, simply benefit from exceptional returns.
3. Differentiation
(1) By stressing the attribute above other product qualities, the firm
attempts to build customer loyalty.
(2) Often such loyalty translates into a firm’s ability to charge a premium
price for its product.
b) The product attribute also can be the marketing channels through which it is
delivered, its image for excellence, the features it includes, and the service
network that supports it.
4. Focus
a) This lead is derived from the firm’s focus on one discipline, aligning all
aspects of operations with it.
b) Having decided on the value that must be conveyed to customers, firms
understand more clearly what must be done to attain the desired results.
c) After transforming their organizations to focus on one discipline, companies
can concentrate on smaller adjustments to produce incremental value.
d) To match this advantage, less focused companies require larger changes than
the tweaking that discipline leaders need.
B. Operational Excellence
a) A company that follows this strategy attempts to lead its industry in price and
convenience by pursuing a focus on lean and efficient operations.
(1) Companies that employ operational excellence work to minimize costs
by reducing overhead, eliminating intermediate production steps,
reducing transaction costs, and optimizing business processes across
functional and organizational boundaries.
(2) The focus is on delivering products or services to customers at
competitive prices with minimal inconvenience.
2. Customer Intimacy
b) Like other product leaders, Johnson & Johnson creates and maintains an
environment that encourages employees to share ideas.
(1) Additionally, product leaders continually scan the environment for new-
product or service possibilities and rush to capitalize them.
(2) Product leaders also avoid bureaucracy because it slows down
commercialization of their ideas.
(3) In a product leadership company, a wrong decision is often less
damaging than one made late.
(4) As a result, managers make decisions quickly, their companies
encouraging them to decide today and implement tomorrow.
(5) Product leaders continually look for new methods to shorten their cycle
times.
(1) These firms continually make the products and services they have
created obsolete.
(2) Product leaders believe that if they do not develop a successor, a
competitor will.
A. A grand strategy is a master long-term plan that provides basic direction for major
actions directed toward achieving long-term business objectives. .
2. The purpose of this section is twofold: (1) to list, describe, and discuss 15 grand
strategies that strategic managers should consider and (2) to present approaches to
the selection of an optimal grand strategy from the available alternatives.
3. Grand strategies indicate the time period over which long-rang objectives are to be
achieved.
a) Any one of these strategies could serve as the basis for achieving the major
long-term objectives of a single firm.
b) But a firm involved with multiple industries, businesses, product lines, or
customer groups—as many firms are—usually combines several grand
strategies.
c) For clarity, each of the principal grand strategies is described independently
in this section, with examples to indicate some of its relative strengths and
weaknesses.
B. Concentrated Growth
1. Many of the firms that fell victim to merger mania were once mistakenly
convinced that the best way to achieve their objectives was to pursue unrelated
diversification in the search for financial opportunity and synergy.
a) Concentrated growth is the strategy of the firm that directs its resources to
the profitable growth of a dominant product, in a dominant market, with a
dominant technology.
b) The main rationale for this approach, sometimes called a market penetration
strategy, is that by thoroughly developing and exploiting its expertise in a
narrowly defined competitive arena, the company achieves superiority over
competitors that try to master a greater number of product and market
combinations.
(1) This is certainly not true for a firm that correctly utilizes the strategy.
(2) A firm employing concentrated growth grows by building on its
competences, and it achieves a competitive edge by concentrating in the
product-market segment it knows best.
(3) A firm employing this strategy is aiming for the growth and results from
increased productivity, better coverage of its actual product-market
segment, and more efficient use of its technology.
(1) The first is a condition in which the firm’s industry is resistant to major
technological advancements.
(2) This is usually the case in the late growth and maturity stages of the
product life cycle and in product markets where product demand is
stable and industry barriers, such as capitalization, are high.
(1) Markets with competitive gaps leave the firm with alternatives for
growth, other than taking market share away from competitors.
c) A third condition that favors concentrated growth exists when the firm’s
product markets are sufficiently distinctive to dissuade competitors in
adjacent product markets from trying to invade the firm’s segment.
d) A fourth favorable condition exists when the firm’s in puts are stable in price
and quantity and are available in the amounts and at the times needed.
e) The pursuit of concentrated growth is also favored by a stable market—a
market without the seasonal or cyclical swings that would encourage a firm
to diversify.
f) A firm also can grow while concentrating, if it enjoys competitive advantages
based on efficient production or distribution channels.
a) Under stable conditions, concentrated growth poses lower risk than any other
grand strategy; but, in a changing environment, a firm committed to
concentrated growth faces high risks.
(1) The greatest risk is that concentrating in a single product market makes
a firm particularly vulnerable to changes in that segment.
(2) Slowed growth in this segment would jeopardize the firm because its
investment, competitive edge, and technology are deeply entrenched in
a specific offering.
(3) It is difficult for the firm to attempt sudden changes if its product is
threatened by near-term obsolescence, a faltering market, new
substitutes, or changes in technology or customer needs.
(1) However, any failure of such a firm to properly forecast major changes
in its industry can result in extraordinary losses.
(1) Firms that remain within their chosen product market are able to extract
the most from their technology and market knowledge and, thus, are
able to minimize the risk associated with unrelated diversification.
(2) The success of a concentration strategy is founded on the firm’s use of
superior insights into its technology, product, and customer to obtain a
sustainable competitive advantage.
(3) Superior performance on these aspects of corporate strategy has been
shown to have a substantial positive effect on market success.
(1) Broadly speaking, the firm can attempt to capture a larger market share
by increasing the usage rates of present customers, by attracting
competitors’ customers, or by selling to nonusers.
(2) In turn, each of these options suggests more specific options, some of
which are listed in the top section of Exhibit 7.4, Specific Options
under the Grand Strategies of Concentration, Market Development,
and Product Development.
d) When strategic managers forecast that their current products and their
markets will not provide the basis for achieving the company mission, they
have two options that involve moderate costs and risk: market development
and product development.
C. Market Development
D. Product Development
a) The product development strategy often is adopted either to prolong the life
cycle of current products or to take advantage of a favorite reputation or
brand name.
b) The idea is to attract satisfied customers to new products as a result of their
positive experience with the firm’s initial offering.
c) The bottom section in Exhibit 7.4 lists some of the options available to firms
undertaking product development.
E. Innovation
2. While most growth-oriented firms appreciate the need to be innovative, few firms
use it as their fundamental way of relating to their markets.
3. Few innovative ideas prove profitable because the research, development, and pre -
marketing costs of converting a promising idea into a profitable product are
extremely high.
F. Horizontal Acquisition
2. Such acquisitions eliminate competitors and provide the acquiring firm with
access to new markets.
3. The attractions of a horizontal acquisition strategy are many and varied. However,
every benefit provides the parent firm with critical resources that it needs to
improve overall profitability.
G. Vertical Acquisition
1. When a firm’s grand strategy is to acquire firms that supply it with inputs (such as
raw materials) or are customers for its outputs (such as warehouses for finished
products), vertical acquisition is involved.
2. Exhibit 7.9, Vertical and Horizontal Acquisition, depicts both horizontal and
vertical integration.
3. The reasons for choosing a vertical acquisition grand strategy are more varied and
sometimes less obvious.
a) The main reason for backward integration is the desire to increase the
dependability of the supply or quality of the raw materials used as production
inputs.
b) That desire is particularly grate when the number of suppliers is small and
the number of competitors is large.
c) In this situation, the vertically integrating firm can better control its costs
and, thereby, improve the profit margin of the expanded production-
marketing system.
d) Forward integration is a preferred grand strategy if great advantages accrue
stable production.
e) A firm can increase the predictability of demand for its output though
forward integration, that is, through ownership of the next stage of its
production-marketing chain.
a) For horizontally integrated firms, the risks stem from increased commitment
to one type of business.
b) For vertically integrated firms, the risks result from the firm’s expansion into
areas requiring strategic managers to broaden the base of their competences
and to assume additional responsibilities.
H. Concentric Diversification
a) With this grand strategy, the selected new businesses possess a high degree
of compatibility with the firm’s current businesses.
b) The ideal concentric diversification occurs when the combined company
profits increase the strengths and opportunities and decrease the weaknesses
and exposure to risk.
c) Thus, the acquiring firm searches for new businesses whose products,
markets, distribution channels, technologies, and resource requirements are
similar to but not identical with its own, whose acquisition results in
synergies but not complete interdependence.
I. Conglomerate Diversification
(1) The principal concern, and often the sole concern, of the acquiring firm
is the profit pattern of the venture.
(2) Unlike concentric diversification, conglomerate diversification gives
little concern to creating product-market synergy with existing
businesses.
b) The principal difference between the two types of diversification is that
concentric diversification emphasizes some commonality in markets,
products, or technology, whereas conglomerate diversification is based
principally on profit considerations.
b) Regardless of the approach taken, the motivations of the acquiring firms are
the same:
(1) Increase the firm’s stock value. In the past, mergers often have led to
increases in the stock price or the price-earnings ratio.
(2) Increase the growth rate of the firm.
(3) Make an investment that represents better use of funds than plowing
them into internal growth.
(4) Improve the stability of earnings and sales by acquiring firms whose
earnings and sales complement the firm’s peaks and valleys.
(5) Balance or fill out the product line.
(6) Diversify the product line when the life cycle of current products has
peaked.
(7) Acquire needed resource quickly.
(8) Achieve tax savings by purchasing a firm whose tax losses will offset
current or future earnings.
(9) Increase efficiency and profitability, especially if there is synergy
between the acquiring firm and the acquired firm.
J. Turnaround
1. For any one of a large number of reasons, a firm can find itself with declining
profits.
a) In a study of 58 large firms, researches Shendel, Patton, and Riggs found that
turnaround almost always was associated with changes in top management.
b) Bringing in new managers was believed to introduce needed new
perspectives on the firm’s situation, to raise employee morale, and to
facilitate drastic actions, such as deep budget cuts in established programs.
3. Strategic management research provides evidence that the firms that have used a
turnaround strategy have successfully confronted decline.
a) The research findings have been assimilated and used as the building blocks
for a model of the turnaround process shown in Exhibit 7.10, Strategy in
Action, A Model of the Turnaround Process.
4. The model begins with a depiction of external and internal factors as causes of a
firm’s performance downturn.
a) When these factors continue to detrimentally impact the firm, its financial
health is threatened.
b) Unchecked decline places the firm in a turnaround situation.
8. The primary causes of the turnaround situation have been associated with the
second phase of the turnaround process, the recovery response.
K. Divestiture
a) They often arise because of partial mismatches between the acquired firm
and the parent corporation.
b) Some of the mismatched parts cannot be integrated into the corporation’s
mainstream activities and, thus, must be spun off.
c) A second reason is corporate financial needs.
d) Sometimes the cash flow of financial stability of the corporation as a whole
can be greatly improved if businesses with high market value can be
sacrificed.
e) The result can be a balancing of equity with long-term risks or of long-term
debt payments to optimize the cost of capital.
f) A third, less frequent reason for divestiture is government antitrust action
when a firm is believed to monopolize or unfairly dominate a particular
market.
L. Liquidation
1. When liquidation is the grand strategy, the firm typically is sold in parts, only
occasionally as a whole—but for its tangible asset value and not as a going
concern.
M. Bankruptcy
(1) More than 75 percent of these financially desperate firms file for a
liquidation bankruptcy—they agree to a complete distribution of their
assets to creditors, most of whom receive a small fraction of the amount
they are owed.
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— Estimez-vous bien heureux de recevoir du pain comestible et
de la viande froide ! si, un jour, il vous arrive d’être fait prisonnier, on
vous collera dans un camp de représailles et alors, vous verrez ça !
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Ainsi, Camille se faisait toujours moucher.
Il ne fut cependant point emmené prisonnier. Il fit toute la guerre
et revint avec les vainqueurs.
Son père, lui, avait profité du désordre pour amasser encore de
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beau jour, au moment où Camille revenait, il finit par mourir, laissant
à son fils une grande fortune.
Camille se frotta les mains, passa sa langue sur ses lèvres.
— Attends un peu ! murmura-t-il ; cette fois, on va pouvoir rigoler !
Sans perdre de temps, il essaya de goûter aux bonnes choses.
Mais voilà ! il ne savait pas du tout s’y prendre ; il manquait
d’habitude. D’autre part, il n’avait plus l’entrain endiablé de son jeune
âge. Certains plaisirs, autrefois violemment désirés, lui semblèrent
fastidieux. Il était un peu abasourdi et riait difficilement. Dès les
premiers moments, la bonne chère acheva de lui détraquer
l’estomac. Il tomba malade.
Très embêté, il alla trouver un médecin qui avait sa confiance.
— Guérissez-moi bien vite ! dit Camille ; car je voudrais prendre
du bon temps.
Le médecin le tripota consciencieusement, puis murmura :
— Ça sera long !
— Qu’est-ce donc qui sera long ? demanda Camille.
Le médecin le regarda dans les yeux.
— Vous êtes un homme, dit-il ; vous êtes même un héros ; on
peut vous dire la vérité… Eh bien !… mon pauvre garçon, vous avez
l’estomac fichu… Trop de soupers fins, trop de vins généreux… Que
voulez-vous ! on ne fait pas impunément la noce ; les excès se
paient un jour ou l’autre… Bref ! il n’y a pas trente-six façons d’y
voir ; pour vous en tirer sans trop de souffrances, il vous faudra
suivre pendant des années un régime sévère.
— Voyons ce régime ! balbutia Camille.
— C’est bien simple, répondit le médecin : Vie solitaire et
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bouillon aux herbes, rigoureusement maigre, eau de Vichy, purées
de pommes de terre et de haricots décortiqués.
Camille verdit, puis jaunit. Instantanément un flot de bile s’était
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Il n’en mourut point mais perdit le peu de gaieté qui lui restait
encore. Et, à partir de ce moment, la joie d’autrui commença aussi à
lui faire mal au cœur.
C’est ainsi que, né avec les meilleures dispositions pour rire,
s’amuser et réjouir la société, Camille est devenu un triste et
mauvais chien, comme feu son père.
EN SE DANDINANT
« Monsieur,