Business Policy & Strategy: Chapter Four

1. Business Policy & Strategy: Chapter Four Strategic Management Murdick, Moor, Babson & Tomlinson, Sixth Edition, 2000

2. Strategic Management • Formulation – generating ideas done by top managers • Implementation – putting them into action, involves all levels of the firm • Evaluation – monitoring to see if the chosen strategy and its implementation are effective in the short and medium run (control)

3. Senior Managers Responsibility • Formulate vision, mission, goals, and objectives • Environmental analysis and forecast of opportunities and threats • Internal analysis of strengths and weaknesses

4. Strategy Formulation • Establish the corporate vision – where firm wants to be in 3-5 years • Review the corporate mission – why the firm exists, its purpose • Evaluate resources and capabilities • Creatively match your internal strengths with external opportunities

5. Strategy Formulation • Consider the scope (product and market), dynamics, competitive edge, risk, financial objectives, deployment of resources, • Consider potential acquisitions, divestments, joint ventures, mergers

6. Product Life Cycle • Stages: • Introductory – almost monopoly, low buyer awareness, high production and marketing costs, low profits, selective distributions • Growth – rapid increase in demand, entry of competitors, increased customer awareness and acceptance, repeat sales, increasing productive efficiency

7. Product Life Cycle • Maturity – rates of sales growth declines, profit margins decline, fewer new customers and more reorders, shakeout of weak competitors, LONGEST stage • Decline – sales drop, # of competing products declines, new types of replacement products appear, small group of loyal customers

8. Product Life Cycle • Rejuvenation or death – in the decline stage, firms must increase demand for their product (like ARM & HAMMER baking soda) or go into new markets (internationalization) to begin the product life cycle over; otherwise, organizational death results

9. Generic Strategies • Competitive Edge arises from: • Overall cost leadership • Product differentiation • Focus (serving market niches)

10. Risk • From management’s perspective, risk is the average size of investments in new capital projects, the probability of success, and the equity of the firm • Outsider’s view risk as the expected return on investment less the risk-free rate of return, measured by beta. > beta, > risk

11. Portfolio Matrix Management • PLOT these two dimensions to form a 3x3 matrix • Business Strength • Low, Medium or High • Industry Attractiveness • Low, Medium or High

12. Business Strengths • Size, growth, market share, position • Profitability, margins, • Image or reputation • Pollution, people, reputation • Strengths, weaknesses • Technology position (See Figure 4.3 page 53)

13. Industry Attractiveness • Size • Market growth, diversity, pricing • Competitive structure • Industry profitability • Social, Environmental • Legal, Human • Technical role

15. Integration • Forward Vertical is towards your customer and/or distribution channels (buying trucks to deliver your product to outlets/customers) • Backward Vertical is towards your suppliers, i.e. when Sears buys a lawnmower producer • Horizontal when a firm buys a firm in the same industry (hotels)

16. Outsourcing • Firms have to decide whether to make or buy their products/raw material • Outsourcing is fairly common now where firms outsource NON-CORE processes to those firms that specialize in that process. This allows the original firm to focus on what it does best.

17. Planning Strategy • Review - Merger – is when two firms of about equal size come together to form one firm with a hyphenated name; • Acquisitions – when one firm, generally the larger of the two, buys another firm which gets absorbed into the buying firm

18. Why undertake M/A? • Obtain skilled management, broader markets, new technology, new production capacity, raw materials, etc. • Tax advantages • Put idle cash to work for higher profits • Opportunities for better management or synergies

19. Valuation of Firms • Book value x 300% • Average earnings over the past 3 years capitalized at 10-20% • Five-year payback • Present value of estimated earnings over the next 10 years • Market value of stock x 2

20. Valuation of Firms • P/E ratio x average earnings of past three years • Upper limit = 8x earnings before interest and depreciation; • Lower limit = 3 x earnings before interest and depreciation

21. Going Public • Entrepreneurs want to sell and retire • They would like to provide for their families or no members are capable of managing the firm • Firm has been expanding rapidly, but lacks capital to expand further • Firm has been very successful but entrepreneur hasn’t kept current and earnings are declining