Lesson 5 Notes

LESSON 5
LONG-TERM OBJECTIVES
- results expected from pursuing certain strategies

Strategies – actions to be taken to accomplish long-term objectives.
Time frame for objectives and strategies should be consistent, usually from two to five years.
THE NATURE OF LONG-TERM OBJECTIVES
Objectives – should be quantitative, measurable, realistic, understandable, challenging,

hierarchical, obtainable, and congruent among organizational units.
 Each objective should also be associated with a timeline.
 OBJECTIVES are commonly stated in terms such as growth in assets, growth in sales,
profitability, market share…
 Without long-term objectives, an organization would drift aimlessly toward some
unknown end.
 Success only rarely occurs by accident; rather, it is the result of hard work directed
toward achieving certain objectives.
FINANCIAL VERSUS STRATEGIC OBJECTIVES

FINANCIAL OBJECTIVES – associated with growth in revenues, growth in earnings,
higher dividends, larger profit margins… (basta related sa earnings sa company)
Financial objectives can best be met by focusing first and foremost on achievement of strategic
objectives that improve a firm’s competitiveness and market strength.
STRATEGIC OBJECTIVES – include things such as a larger market share, quicker on-time
delivery than rivals, shorter design-to-market times than rivals, lower costs than rivals,
higher product quality than rivals… (murag siyag about sa entity’s competitive advantage)
 Ultimately, the best way to sustain competitive advantage over the long run is to
relentlessly pursue strategic objective that strengthen a firm’s business position over
rivals.
NOT MANAGING BY OBJECTIVES
 Managing by EXTRAPOLATION – “if it ain’t broke, don’t fix it” (keep on doing
about the same things in the same ways because things are going well)
 Managing by CRISIS – a form of reacting rather than acting and of letting events dictate
the what and when of management decisions (based on the belief that the true measure
of a really good strategist is the ability to solve problems)
 Managing by SUBJECTIVES (Mystery approach to decision making)– “Do your
own thing, the best way you know how.” (there is no general plan for which way to go
and what to do; just do the best you can to accomplish what you think should be done)
 Managing by HOPE – based on the fact that the future is laden with great uncertainty
and that if we try and do not succeed, then we hope our second (or third) attempt will
succeed.
THE BALANCED SCORECARD
- a strategy evaluation and control technique

 overall aim of the balanced scorecard is to “balance” shareholder objectives with
customer and operational objectives
 The Balanced Scorecard concept is consistent with the notions of continuous
improvement in management (CIM) and total quality management (TQM)
 Basic tenet of the balanced scorecard is that firms should establish objectives and
evaluate strategies on items other than financial measures
 A Balanced Scorecard for a firm is simply a listing of all key objectives to work
toward, along with an associated time dimension….
An effective balanced scorecard contains a carefully chosen combination of strategic and
financial objectives tailored to the company’s business
TYPES OF STRATEGIES
 FORWARD INTEGRATION – gaining ownership or increased control over

distributors or retailers
 BACKWARD INTEGRATION – seeking ownership or increased control of a firm’s
suppliers
 HORIZONTAL INTEGRATION – increased control over competitors
 MARKET PENETRATION – seeking increased market share for present products or
services in present markets through greater marketing efforts
 MARKET DEVELOPMENT – introducing present products or services into new
geographic area
 PRODUCT DEVELOPMENT – seeking increased sales by improving present
products or services or developing new ones
 RELATED DIVERSIFICATION – adding new but related products or services
 UNRELATED DIVERSIFICATION – adding new, unrelated products or services
 RETRENCHMENT – regrouping through cost and asset reduction to reverse
declining sales and profit
 DIVESTITURE- selling a division or part of an organization
 LIQUIDATION – selling all of a company’s assets, in parts, for their tangible worth
Many, if not most, organizations simultaneously pursue a combination of two or more strategies,
but a combination strategy can be exceptionally risky if carried too far.
No organizations can afford to pursue all strategies that might benefit the firm.
Strategic planning is much more than a roll of the dice; it is a wager based on predictions and
hypotheses that are continually tested and refined by knowledge, research, experience, and
learning.
LEVELS OF STRATEGIES
 Strategy making is not just a task for top executives.
INTEGRATION STRATEGIES
- Forward, backward, and horizontal integration are sometimes collectively referred as

VERTICAL INTEGRATION strategies.
 VERTICAL INTEGRATION – allow a firm to gain control over distributors,
suppliers, and/or competitors.
Forward Integration
- an effective means of implementing forward integration is franchising
Backward Integration
- this strategy can be especially appropriate when a firm’s current suppliers are
unreliable, too costly, or cannot meet the firm’s needs
Horizontal Integration
- one of the most significant trends in strategic management today is the increased use of
horizontal integration as a growth strategy
- the trend towards horizontal integration seems to reflect strategists’ misgivings about
their ability to operate many unrelated businesses
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
Market Penetration
- widely used alone and in combination with other strategies
- includes increasing the number of salespersons, increasing advertising expenditures,
offering extensive sales promotion items, or increasing publicity efforts
Market Development
- introducing present products or services into new geographic areas
Product Development
- usually entails large research and development expenditures
DIVERSIFICATION STRATEGIES
- two general types: related and unrelated

 RELATED – businesses’ value chains possess competitively valuable cross-business
strategic fits
 UNRELATED – businesses’ value chains are so dissimilar that no competitively
valuable cross-business relationships exist
Diversification strategies are becoming less popular as organizations are finding it more difficult
to manage diverse business activities.
DEFENSIVE STRATEGIES
Retrenchment
- Sometimes called a turnaround or reorganizational strategy
- Designed to fortify an organization’s basic distinctive competence
 During retrenchment, strategists work with limited resources and face pressure from
shareholders, employees, and the media
 Retrenchment can entail selling off land and buildings to raise needed cash, pruning
product lines…
 In some cases, bankruptcy can be an effective type of retrenchment strategy. It can allow
a firm to avoid major debt obligations and to void union contracts.
Divestiture
- Selling a division or part of an organization
- Often is used to raise capital for further strategic acquisitions or investments
Liquidation
- Selling all of a company’s assets, in parts, for their tangible worth
- A recognition of defeat and consequently can be an emotionally difficult strategy
MICHAEL PORTER’S FIVE GENERIC STRATEGIES
- According to Porter, strategies allow organizations to gain competitive advantage from

three different bases: cost leadership, differentiation, and focus. (These bases are called
GENERIC STRATEGIES)
Cost Leadership Strategies (Type 1 and Type 2)
- Emphasizes producing standardized products at a very low per-unit cost for
consumers who are price-sensitive.
 TYPE 1 LOW-COST STRATEGY – offers products or services to a wide range
of customers at the lowest price available on the market
 TYPE 2 BEST-VALUE STRATEGY – offers products or services to a wide
range of customers at the best price-value strategy available on the market
 A primary reason for pursuing forward, backward, and horizontal integration strategies is
to gain low-cost or best-value cost leadership benefits.
Differentiation Strategies (Type 3)
- A strategy aimed at producing products and services considered unique industry wide
and directed at consumers who are relatively price-insensitive
Focus Strategies (Type 4 and Type 5)
- Producing products and services that fulfill the needs of small groups of consumers
 TYPE 4 LOW-COST FOCUS – offers products or services to a small range
(niche group) of customers at the lowest price available on the market
 TYPE 5 BEST-VALUE FOCUS – offers products or services to a small range
of customers at the best price-value available on the market
STRATEGIES FOR COMPETING IN TURBULENT, HIGH-VELOCITY
MARKETS
- Some industries are changing so fast that researchers call them turbulent, high-velocity
markets
MEANS FOR ACHIEVING STRATEGIES
Cooperation Among Competitors

- Strategies that stress cooperation among competitors are being used more
- Firms often give away too much information to rival firms when operating under
cooperative agreements. Tighter formal agreements are needed.
Joint Venture/Partnering
- a popular strategy that occurs when two or more companies form a temporary
partnership or consortium for the purpose of capitalizing on some opportunity
 A major reason why firms are using partnering as a means to achieve strategies is
globalization.
 Forbes has reported that about 30% of all joint ventures and partnership alliances are
outright failures, while another 17% have limited success and then dissipate due to
problems.
Merger/Acquisition
- Two commonly used ways to pursue strategies
 MERGER – occurs when two organizations of about equal size unite to form
one enterprise
 Not all mergers are effective and successful
 BusinessWeek and the Wall Street Journal studied mergers and
concluded that about half produced negative returns to
shareholders.
 ACQUISITION – occurs when a large organization purchases (acquires) a
smaller firm, or vice versa.
 TAKEOVER/HOSTILE TAKEOVER – when a merger or acquisition is not
desired by both parties.
 FRIENDLY MERGER – if the acquisition is desired by both firms
 WHITE KNIGHT – refers to a firm that agrees to acquire another firm when
that other firm is facing a hostile takeover by some company
 LEVERAGED BUYOUT (LBO) – occurs when a corporation’s shareholders
are bought by the company’s management and other private investors using
borrowed funds
First Mover Advantages
- benefits a firm may achieve by entering a new market or developing a new product or
service prior to rival firms
 To sustain the competitive advantage gained by being the first mover, such a firm also
needs to be a fast learner.
 Strategic-management research indicated that first mover advantages tend to be
greatest when competitors are roughly the same size and possess similar resources.
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…
STRATEGIC MANAGEMENT IN NONPROFIT AND GOVERNMENTAL
ORGANIZATIONS
Educational Institutions
- are more frequently using strategic-management techniques and concepts
- Online college degrees are becoming common and represent a threat to traditional
colleges and universities
Medical Organizations
- Many private and state-supported medical institutions are in financial trouble as a result
of traditionally taking a reactive rather than a proactive approach in dealing with
their industry
- Backward integration strategies that some hospitals are pursuing include acquiring
ambulance services, waster disposal services, and diagnostic services.
Governmental Agencies and Departments
- Strategists in governmental organizations operate with less strategic autonomy than their
counterparts in private firms
STRATEGIC MANAGEMENT IN SMALL FIRMS
- The reason why “becoming your own boss” has become a national obsession is that
entrepreneurs are America’s role models.
- Strategic management is vital for large firms’ success, but what about small firms? The
strategic-management process is just as vital for small companies.
- From their inception, all organizations have a strategy, even if the strategy just evolves
from day-to-day operations.
- Widespread corporate layoffs have contributed to an explosion in small businesses and
new ideas.

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LESSON 5

- results expected from pursuing certain strategies

THE NATURE OF LONG-TERM OBJECTIVES

Objectives – should be quantitative, measurable, realistic, understandable, challenging,

FINANCIAL VERSUS STRATEGIC OBJECTIVES

NOT MANAGING BY OBJECTIVES

THE BALANCED SCORECARD

- a strategy evaluation and control technique

 FORWARD INTEGRATION – gaining ownership or increased control over

 Strategy making is not just a task for top executives.

- Forward, backward, and horizontal integration are sometimes collectively referred as

- market penetration, market development, and product development are sometimes

- two general types: related and unrelated

MICHAEL PORTER’S FIVE GENERIC STRATEGIES

- According to Porter, strategies allow organizations to gain competitive advantage from

MEANS FOR ACHIEVING STRATEGIES

Cooperation Among Competitors

STRATEGIC MANAGEMENT IN SMALL FIRMS

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