Topic 3 – Overview

Long-term Objectives and Strategies

Learning Objectives
Critically discuss the use and importance of generic strategies
Develop generic strategies for particular corporate examples
Critically examine the 15 Grand Strategies that decision makers use as building
blocks in forming the company’s competitive plan
Plan or criticize the long term direction of a company of your choice

Introduction

In the previous topics we described the mission of a company, as encompassing the broad
aims of the firm. At the same time, we highlighted that the mission is an abstract statement
that is quite too often brief, giving a general sense of the direction but not specific
benchmarks for evaluating the firm’s progress in achieving its aims. In other words, a mission
statement will not specify numbers, exact strategies and objectives, or strict timeframes.
Therefore, long-term objectives are necessary in supporting the mission statement, with
specific timeframes, typically three to five years. This topic is divided into two parts. The
first part of the Topic will focus on long-term objectives. These are statements of the results a
firm seeks to achieve over a specific period, typically three to five years. The second part will
focus on the formulation of Grand Strategies. Together, long term objectives and grand
strategies provide a comprehensive general approach in guiding the entire organisation
towards accomplishing its objectives.

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Main Body
Long- term objectives are more specific than a mission statement, and explain how, when,
and with which means we are up to chasing our mission. At the same time, long-term
objectives should be Flexible; Measurable; Motivating; Suitable and Understandable.
Flexible because objectives should be adaptable to unforeseen or
extraordinary changes in the firm’s competitive or environmental forecasts
Measurable because objectives must clearly and concretely state what will be
achieved and when it will be achieved
Motivating because people are productive when objectives are set at a
motivating level
Suitable because objectives must be suited to the broad aims of the firm,
which are expressed in the mission statement
Understandable because strategic managers at all levels must understand what
is to be achieved. If they don’t understand and subscribe to the objective, the company
may never achieve its mission.

Moreover, according to Pearce and Robinson (2007) 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. The popular term for this core idea is
generic strategy. From a scheme developed by Michael Porter, a firm can achieve
competitive advantage based on one of three generic strategies:

1. Striving for overall low-cost leadership in the industry. 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.

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 2. Striving to create and market unique products for varied customer groups through
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.

3. Striving to have special appeal to one or more groups of consumers or industrial

buyers, focusing on their cost or differentiation concerns. 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.

...think theory 1...

Read the corporate history of IKEA as it

appears in their corporate website:
http://www.ikea.com/ms/en_US/about_ikea/the
_ikea_way/history/index.html

Write 200 words explaining which one (or more) of the 3 generic
strategies they use

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Grand Strategies

As we said in previous topics, 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 need to have in place Grand
Strategies. Grand strategies, often called master or business strategies, provide basic
direction for strategic actions. In contrast to an abstract mission statement, Grand Strategies
indicate the time period over which long-rang objectives are to be achieved. Any one of these
strategies could serve as the basis for achieving the major long-term objectives of a single
firm. Firms involved with multiple industries, businesses, product lines, or customer groups
usually combine several grand strategies. Each of the 15 Grand Strategies is presented and
discussed independently below:

1. Concentrated Growth
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.
Concentrated growth strategies lead to enhanced performance. Specific conditions favor
concentrated growth and the risks and rewards vary.

Think for instance of KFC. The only do one product but they are doing good!! They have a
sound business strategy, in particular market, the chicken market! In other words, they are
enjoying special success through strategic emphasis on increasing market share through
concentrated growth in a particular industry, on a specific product.
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2. Market Development
Market development commonly ranks second only to concentration as the least costly and
least risky of the 15 grand strategies. It consists of marketing present products, often with
only cosmetic modifications, to customers in related market areas by adding channels of
distribution or by changing the content of advertising or promotion. Frequently, changes in
media selection, promotional appeals, and distribution are used to initiate this approach.

Think for instance of Nutella, the popular and successful chocolate spread. So far, people
knew Nutella as a breakfast chocolate spread. Of course, many of us used to consume Nutella
with a spoon directly from the jar. With an effortless strategy, nevertheless, and a short-term
series of advertising, Nutella managed to increase its market impressively. Simply, they
added a cake recipe at the back label of the jar with the question ‘did you know that Nutella is
used for perfect cakes?’. In other words, they promoted the idea that Nutella is not just a
chocolate spread, but it can be used for pastry purposes as well. Cookies, cakes, chocolate-
fingers and croissants are just a few among the wide range of delicacies that customers bake
using Nutella. And all these, with one simple Market Development strategy – by adding a
recipe at the back label of the jar.

3. Product Development
Product development involves the substantial modification of existing products or the
creation of new but related products that can be marketed to current customers through
established channels. The Product Development strategy often is adopted either to prolong
the life of current products or to take advantage of a favourite reputation or brand name. The
idea is to attract satisfied customers to new products as a result of their positive experience

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with the firm’s initial offering. A revised smaller and slimmer version of Playstation or Xbox
are examples of the product development strategy.

Similarly, PEPSI developed new flavours of the famous soft-drink, such as the PEPSI Twist
and PEPSI Blue, by adding lime, cherry, vanilla, and other flavours in the existing PEPSI
drinks. The product development strategy is based on the penetration of existing markets by
incorporating product modifications onto existing items or be developing new products with a
clear connection to the existing product line.

4. Innovation
These companies seek to reap the initially high profits associated with customer acceptance
of a new or greatly improved product. Then, rather than face stiffening competition as the
basis of profitability shifts from innovation to production or marketing competence, they
search for other original or novel ideas. The underlying rationale of the grand strategy of
innovation is to create a new product life cycle and thereby make similar existing products
obsolete.

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Think for instance of APPLE’s iPod Shuffle and iPad. Both products were innovative, high-
tech devices appearing in the market for the first time in history. Therefore, this strategy
differs from the product development strategy of extending an existing product’s life cycle.

5. Horizontal Integration
When a firm’s long-term strategy is based on growth through the acquisition of one or more
similar firms operating at the same stage of the production-marketing chain, its grand strategy
is called horizontal integration. Such acquisitions eliminate competitors and provide the
acquiring firm with access to new markets.

For example, Deutsche Telecom growth strategy of horizontal acquisition is a sound one.
Deutsche Telecom was a dominant player in the European wireless services market, but
without a presence in the fast-growing U.S market in 2000. To correct this limitation,
Deutsche Telekom Horizontally integrated by purchasing the American Firm Voice-Stream
Wireless, a company that was growing faster than most domestic rivals and that owned
spectrum licences providing access to 2220 million potential customers.

6. Vertical Integration
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 integration is involved. 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.

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For example, AMOCO emerged as North America’s leader in natural gas reserves and
products as a result of its acquisition of Dome Petroleum. This backward integration by
AMOCO was made in support of its downstream business in refining and in gas stations,
whose profits made the acquisition possible.

7. Concentric Diversification
Concentric diversification involves the acquisition of businesses that are related to the
acquiring firm in terms of technology, markets, or products. With this grand strategy, the
selected new businesses possess a high degree of compatibility with the firm’s current
businesses. The ideal concentric diversification occurs when the combined company profits
increase the strengths and opportunities and decrease the weaknesses and exposure to risk. A
sound example of this strategy is the popular American retailer Wal-Mart.

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Although traditionally a retailer, Wal-Mart decided to enter the financial services industry
because of strategic managers’ confidence that they could use their tremendous customer
volume to reduce prices on services as well as products. Over the past years, the giant has
steadily built alliances with financial service providers, such as MoneyGram International
and SunTrust Banks.

8. Conglomerate Diversification
Occasionally a firm, particularly a very large one, plans acquire a business because it
represents the most promising investment opportunity available. This grand strategy is
commonly known as conglomerate diversification. The principal concern of the acquiring
firm is the profit pattern of the venture. Unlike concentric diversification, conglomerate
diversification gives little concern to creating product-market synergy with existing
businesses. Some examples of companies that conglomerate diversify are ITT, Textron,
American Brands, Litton, U.S. Industries, Fuqua and I.C. Industries (Pearce and Robinson,
2007).

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9. Turnaround
Here we have a scenario where the firm finds itself with declining profits. Among the reasons
are economic recessions, production inefficiencies, and innovative breakthroughs by
competitors. Strategic managers often believe the firm can survive and eventually recover if a
concerted effort is made over a period of a few years to fortify its distinctive competences.
This is turnaround. There are two forms of retrenchment:
 Cost reduction: examples include the decrease of the workforce through
employee attrition, leasing rather than purchasing equipment, extending the
life of machinery, elimination elaborate promotional activities, laying off
employees, dropping items from a production line, and discontinuing low-
margin customers.
 Asset reduction: examples include the sale of land, buildings and equipment
not essential to the basic activity of the firm.

10. Divestitute
A divestiture strategy involves the sale of a firm or a major component of a firm. When
retrenchment fails to accomplish the desired turnaround, or when a nonintegrated business
activity achieves an unusually high market value, strategic managers often decide to sell the
firm. Reasons for divestiture vary. Sara Lee Corp. (SLE) for example is a good example of
Divestiture.

This company sells everything from Wonderbras and Kiwi shoe polish to Endust furniture
polish and Chock Full o’Nuts coffee. The company used a conglomerate diversification
strategy to build Sara Lee into a huge portfolio of disparate brands. A new president, C.
Steven McMillan, faced stagnant revenues and earnings. So he consolidated, streamlined, and
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focused the company on its core categories- food, underwear, and household products. He
divested 15 businesses, including Coach leather goods, which together equated more than 20
percent of the company’s revenue, and laid off 13,200 employees, nearly 10 percent of the
workforce (Pearce and Robinson, 2007:217).

11. Liquidation
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. In selecting liquidation,
the owners and strategic managers of a firm are admitting failure and recognize that this
action is likely to result in great hardships to themselves and their employees. Planned
liquidation can be worthwhile

For example, Columbia Corporation, a $130 million diversified firm, liquidated its assets for
more cash per share than the market value of its stock.

12. Bankruptcy
Business failures are part of corporate life. For instance, in the U.S., more than 300
companies fail on average on a weekly basis. More than 75% of these financially desperate
firms file for a liquidation bankruptcy. Liquidation bankruptcy is agreeing to a complete

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distribution of firm assets to creditors, most of whom receive a small fraction of the amount
they are owed. The 25% of these firms refuse to surrender until one final option is exhausted.
Choosing a strategy to recapture its viability, such a company asks the courts for a
reorganization bankruptcy. In other words, Reorganization bankruptcy is when the managers
believe the firm can remain viable through reorganization.

13. Joint Ventures

Occasionally two or more capable firms lack a necessary component for success in a
particular competitive environment. The solution is a set of joint ventures, which are
commercial companies (children), created and operated for the benefit of the co-owners
(parents). The joint venture extends the supplier-consumer relationship and has strategic
advantages for both partners. For example, Diamond-Star Motors is the result of a joint
venture between a U.S. company Chrysler Corporation, and Japan’s Mitsubishi Motors
Corporation.

Located in Normal, Illinois, Diamond Star was launched because it offered Chrysler and
Mitsubishi a chance to expand on their long-standing relationship in which subcompact cars
are imported to the United States and sold under the Dodge and Plymouth names.

14. Strategic Alliances

Strategic alliances are distinguished from joint ventures because the companies involved do
not take an equity position in one another. In some instances, strategic alliances are
synonymous with licensing agreements. Most tend to be patents, trademarks, or technical
know-how that are granted to the license for a specified time in return for a royalty and for
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 avoiding tariffs or import quotas. Outsourcing arrangements vary. For example, Bell South
and U.S. West, with various marketing and service competitive advantage valuable to
Europe, have extended a number of licenses to create personal computer networks in the
United Kingdom.

15. Consortia, Keiretsus and Chaebols

Consortia are defined as large interlocking relationships between businesses of an industry.
In Japan such consortia are known as keiretsus, and in South Korea as chaebols. Their
cooperative nature is growing in evidence as is their market success. Examples include the
Junior Engineers’ and Scientists’ Summer Institute, which underwrites cooperative learning
and research; and the European Strategic Program for Research and Development in
Information Technologies, which seeks to enhance European competitiveness in fields related
to computer electronics and component manufacturing.

...think theory 2...

Indentify firms in your business community

that appear to rely principally on 1 of the 15
grand strategies.

Write 200 words explaining what kind of information you use to

classify the firms.

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 Summary
As we discussed in Topic 3, 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 need to have in place Grand Strategies.
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. 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.

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