Strategic Management

Process:
Strategy formulation 2.
By: Prof. Dr. András Nábrádi
PhD, MBA

University of Debrecen
Faculty of Ag. Economics and Rural Development
Dept.: Business Management and Marketing
HUNGARY

© Dr. Nábrádi András

DE-AVK
 Tasks of strategic management

Outline
• Establish long
term objectives
Strategy formulation
•Types of
strategies
•Integration
•Intensive Strategy Implementation
•Defensive
•Generic
•Achieving
strategies
Strategy Evaluation

© Dr. Nábrádi András

DE-AVK
 First stage of the strategic management

Outline
• Establish long
term objectives Develop
•Types of
Vision and
strategies Mission
•Integration
Statements
•Intensive
Establish
•Defensive
long term Strategy formulation
•Generic objectives
•Achieving (Strategic planning)
strategies
Generate,
evaluate,
and select
strategies
© Dr. Nábrádi András
DE-AVK
 Strategy formulation
•Developing vision and mission
Outline
•Indetifying external opportunities and threats
• Establish long
term objectives
•Determining internal strenghts and weaknesses
•Types of
strategies •Establishing long term objectives
•Integration
•Intensive •Generating alternative strategies
•Defensive •Choosing particular strategies to pursue
•Generic •Deciding what new business to enter
•Achieving •How to allocate resources
strategies •Expand or diversify operations
•Entering or not international market
•Merge or form joint venture
•How to avoid a hostile takeover
© Dr. Nábrádi András
DE-AVK
 Strategy formulation

Outline
• Establish long
PERFORMANCE OBJECTIVES
term objectives
•Types of Organization’s target for achievement; both short
strategies and long range objectives are needed.
•Integration
•Intensive
FINANCIAL OBJECTIVES
•Defensive
•Generic Financial performance targets a company wants to
•Achieving achieve.
strategies
STRATEGIC OBJECTIVES
Targets relating to strenghtening a company’s
© Dr. Nábrádi András
overall market position and competetive viability.
DE-AVK
 Strategy formulation

Outline
• Establish long
LONG-RANGE OBJECTIVES
term objectives
•Types of Achiement levels to be reached within the next three
strategies to five years.
•Integration
•Intensive
•Defensive
•Generic SHORT-RANGE OBJECTIVES
•Achieving
strategies
Near-term performance target; they establish the
pace for achieving the long-range objectives.

© Dr. Nábrádi András

DE-AVK
 Establishing long term objectives

•Establishing long term objectives

Outline
• Establish long
term objectives Should be:
•Types of •quantitative ( data, %, )
strategies •measurable ( what is now, what will be)
•Integration •realistic (no politicians promise )
•Intensive •understandable ( clear in different levels of
•Defensive a company – corporate – division – functional
•Generic
– operational CDFO)
•Achieving
strategies
•challenging (emotional risk)
•hierarchical (CDFO)
•associated with timeline ( within 3 year,
end of the next year)
© Dr. Nábrádi András
DE-AVK
 Varying performance Measures by
organizational level
Outline Organizational level Basis foe annual bonus or merit pay
• Establish long
term objectives Corporate (president) 85 % based on long term objectives
•Types of 15 % based on annual objectives
strategies
•Integration Division 75 % based on long term objectives
•Intensive division president, 25 % based on annual objectives
executive vice president
•Defensive
Functional 50 % based on long term objectives
•Generic
Finance, marketing, 50 % based on annual objectives
•Achieving manufacturing, MIS, HRM
strategies
Operational 25 % based on long term objectives
Plant managers, sales 75 % based on annual objectives
managers, production and
department managers

© Dr. Nábrádi András

DE-AVK
 Establishing long term objectives

•Types of long term objectives

Outline
• Establish long Financial Strategic
term objectives
•Types of
strategies
•Growth in revenues •Larger market share
•Growth in earnings •Quicker on-time delivery than
•Integration
•Higher dividends rivals
•Intensive •Shorter design-to-market times
•Larger profit margins
•Defensive •Greater return on than rivals
•Generic investment •Lower costs than rivals
•Higher earnings per share •Higher product quality than rivals
•Achieving
strategies •Rising stock price •Achieving technological
•Improved cash flow leadership
•Consistently getting new
products to market ahead of rivals

© Dr. Nábrádi András

DE-AVK
 Types of strategies
Defensive
Outline
• Retrenchment
• Establish long
term objectives
• Divestiture
•Types of
• Liquidation
strategies Do nothing
•Integration Offensive
•Intensive • Integration
•Defensive • Forward
•Generic • Backward
•Achieving • Horizontal
strategies
• Intensive
• Market penetration
• Market development
• Product Development
© Dr. Nábrádi András
DE-AVK
• Diversification
 Types of strategies

Outline
I. Integration
• Establish long
term objectives Strategy Description Example
•Types of
Forward Gaining ownership An agricultural
strategies
integration or increased company
•Integration control over purchased a
distributors or regional bakery-
•Intensive
retailers chain
•Defensive Backward Seeking ownership Hotels Inc.
•Generic integration or increased purchased a
control of a firm’s furniture producer
•Achieving suppliers
strategies
Horizontal Seeking ownership One department
integration or increased store acquired
control over another department
competitors store

© Dr. Nábrádi András

DE-AVK
 Types of strategies

Outline
Forward integration effective when:
• Establish long
• present distributors are especially expensive or unreliable
term objectives
• availability of quality distributors is limited
•Types of
strategies
• competes in an industry growing and expected to continue
to grow
•Integration
• an organization has both capital and HR needed to manage of
•Intensive
distributing its own products
•Defensive • present distributors or retailers have high profit margin
•Generic
•Achieving
strategies

distributors
© Dr. Nábrádi András
DE-AVK
 Types of strategies

Outline
Backward integration effective when:
• Establish long
term objectives
• present suppliers are especially expensive or unreliable
•Types of • number of suppliers is small and the number of
strategies
competitors is large
•Integration
• competes in an industry growing and expected to continue
•Intensive
to grow
•Defensive
• an organization has both capital and HR to manage new
•Generic
business of supplying its own raw materials
•Achieving
strategies • the advantages of a stable raw material price particularly
important
• present suppliers have high profit margin

© Dr. Nábrádi András

suppliers
DE-AVK
 Types of strategies

Outline
Horizontal integration effective when:
• Establish long
term objectives
• increase economic of scale provide major competitive
•Types of advantages
strategies
• competes in an industry growing and expected to continue
•Integration
to grow
•Intensive
• an organization has both capital and HR needed to
•Defensive
manage an expanded organization
•Generic
•Achieving
strategies

competitors

© Dr. Nábrádi András

DE-AVK
 Types of strategies

Outline
II. Intensive
• Establish long
term objectives Strategy Description Example
•Types of Increased market share for present
Market Coca cola is spending
strategies products in present market millions to advertise its
penetration through greater marketing efforts
drinks
•Integration
•Intensive Market Introducing present MOL purchased a 10
development products or services into % stake in Slovakoil
•Defensive new geographic area

•Generic Product Increased sales by improving Glaxo Smith Kline (UK)

development present products or introduced the new
•Achieving developing new ones Aquafresh 3 total care
strategies toothpaste
Related Adding new but related Glaxo Smith Kline (UK)
diversification products or services introduced the new
ADAPTOR toothbrush
Unrelated Adding new unrelated A kitchenware company
diversification products and services entered into a growing
skin and beauty business
© Dr. Nábrádi András
DE-AVK
 Types of strategies

Outline
Market penetration effective when:
• Establish long
term objectives
• Current markets are not saturated with a particular product
•Types of or service
strategies
• usage rate of present customers could be increased
•Integration
significantly
•Intensive
• market share of major competitors have been declining
•Defensive
while total industry sales have been increasing
•Generic
•increased economies of scale provide major competitive
•Achieving
strategies advantages
present products in present market
‘Sony co. is spending over $141 million in a new advertising and
promotion drive to market its high-definition television named
© Dr. Nábrádi András BRAVIA sets in the USA’. 2006
DE-AVK
 Types of strategies

Outline Market development effective when:

• Establish long
term objectives
• new channels of distribution are available, inexpensive
•Types of • an organization is very successful at what it does
strategies
• new untapped or unsaturated markets exists
•Integration
• an organization has both capital and HR needed to
•Intensive
•Defensive
manage an expanded organization
•Generic
•an organization has excess production capacity
•Achieving
• an organization’s basic industry is becoming rapidly
strategies global is scope
present products in new geographic area
Adidas in May 2005 had 1500 stores in China and stated that it would
open another 40 stores every month for the next 40 months
© Dr. Nábrádi András
DE-AVK
 Types of strategies

Outline Product development effective when:

• Establish long
term objectives
• an organization has successful products that are in
•Types of maturity stage of the product life cycle.
strategies
•an industry represented by rapid technological
•Integration
developments
•Intensive
• major competitors offer better-quality products in
•Defensive
comparable prices
•Generic
• an organization competes in a high-growth industry
•Achieving
strategies • an organization has especially strong R& D capabilities
improving present products or developing new ones
In 2005 Heineken developed and introduced low-calorie
low carbohydrate beer – Heineken Light into US. Brad Pitt and John
© Dr. Nábrádi András Travolta are promotes its product.
DE-AVK
 Product Life Cycle

Outline
Birth Growing Maturity Declining
• Establish long
term objectives 10

•Types of 8
strategies Money / Time
•Integration 6
•Intensive 4
Cash-flow

•Defensive
2
•Generic
•Achieving 0
strategies
-2
0 1 2 3 4 5 6

Time

© Dr. Nábrádi András

DE-AVK
 Types of strategies

Outline
II. Intensive
• Establish long
term objectives Strategy Description Example
•Types of Increased market share for present
Market Coca cola is spending
strategies products in present market millions to advertise its
penetration through greater marketing efforts
drinks
•Integration
•Intensive Market Introducing present MOL purchased a 10
development products or services into % stake in Slovakoil
•Defensive new geographic area

•Generic Product Increased sales by improving Glaxo Smith Kline (UK)

development present products or introduced the new
•Achieving developing new ones Aquafresh 3 total care
strategies toothpaste
Related Adding new but related Glaxo Smith Kline (UK)
diversification products or services introduced the new
ADAPTOR toothbrush
Unrelated Adding new unrelated A kitchenware company
diversification products and services entered into a growing
skin and beauty business
© Dr. Nábrádi András
DE-AVK
 Types of strategies

Outline Related diversification effective when:

• Establish long
term objectives • an organization competes in a no-growth or slow-growth
•Types of industry
strategies • related products would enhance the sales of current products
•Integration • related products could be offered at highly competitive prices
•Intensive •related products have no seasonal sales level that can
•Defensive balance existing trade problems (grain – flour – bakery)
•Generic • existing products are in a declining stage of the product’s life
•Achieving cycle
strategies
Adding new but related products

Dell computer Inc. turned to produce flat-panel televisions and MP3

players, and opened an online music-downloading store.
© Dr. Nábrádi András
DE-AVK
 Types of strategies

Outline Unrelated diversification effective when:

• Establish long
term objectives • an organization competes in a highly competitive industry as indicated by
•Types of
low profit margins and returns
strategies • present marketing channels can be used to new products to current
•Integration
customers
• an organization’s basic industry is experiencing declining sales and
•Intensive
profits
•Defensive •an organization has both capital and HR to compete in a new industry
•Generic • purchase an unrelated business is an attractive investment opportunity
•Achieving
strategies
Adding new unrelated products

Hospitals are creating small malls by offering banks, bookstores, coffee

shops, restaurants, drugstores and other retail stores within their buildings
© Dr. Nábrádi András
DE-AVK
 Summary of the intensive strategies

Outline
Current New
• Establish long Name
term objectives markets markets
•Types of
strategies Market Market
•Integration Current penetration development
•Intensive products
•Defensive
Market
•Generic development
•Achieving Market Unrelated
strategies penetration
New products diversification
Related
diversification

© Dr. Nábrádi András

DE-AVK
 Types of strategies

Outline
III. Defensive
• Establish long
term objectives Strategy Description Example
•Types of
Retrenchment Regrouping through costs Sanyo Electric is cutting
strategies and assets reduction to its global workforce by
Reorganizational serve declining sales and 15% in 2006 for reducing
•Integration strategy profit. its dept.
•Intensive Divestiture Selling a division or part of Goodyear Co. sold its
an organization North American farm-tire
•Defensive business to Titan Inc.
•Generic Liquidation Selling all of a company’s Britain’s last major car
assets, in parts, for their manufacturer, MG Rover
•Achieving tangible worth Group Ltd., liquidated in
strategies 2005 and laid off its 5000
employees.

© Dr. Nábrádi András

DE-AVK
 Types of strategies

Outline Retrenchment effective when:

• Establish long
term objectives • an organization has failed consistently to meet its objectives and goals
•Types of
over time
strategies • an organization is one of the weaker competitors in a given industry
•Integration
• an organization occurs inefficiency, low profitability, poor employee
moral, and pressure from stockholders to improve performance
•Intensive
• an organization has grown so large so quickly that major internal
•Defensive reorganization is needed
•Generic
•Achieving Tools: reorganization
strategies
bankruptcy
regrouping
asset reduction
cost reduction
© Dr. Nábrádi András
DE-AVK
 Types of strategies

Outline Divestiture effective when:

• Establish long
term objectives • a division is responsible for an organization’s poor performance
•Types of
• a division needs more resources to be competitive than company can
strategies provide
•Integration
• a large amount of cash needed quickly and cannot be obtained from
other sources
•Intensive
•a division is a misfit with the rest of an organization
•Defensive
•Generic
•Achieving
strategies

Selling a division or part of an organization

© Dr. Nábrádi András

DE-AVK
 Types of strategies

Outline Liquidation effective when:

• Establish long
term objectives • both a reorganization and a divestiture has not been successful
•Types of
•an organization’s only alternative is bankruptcy
strategies • the stockholders can minimize their losses by selling the organization’s
•Integration
assets
•Intensive
•Defensive
•Generic
•Achieving
strategies Selling an organization

© Dr. Nábrádi András

DE-AVK
 Types of strategies

Outline Michael Porter’s Five Generic strategies

• Establish long
term objectives Cost Differenti- Focus
•Types of leadership ation
strategies
•Integration
Low cost
•Intensive Large Diff. -
•Defensive
Size of Best value
•Generic
market
•Achieving
strategies Low cost
Small - Diff.

Best value

© Dr. Nábrádi András

DE-AVK
 Types of strategies

Outline
Generic strategies
• Establish long
term objectives To gain competitive advantage from 3 different bases:
•Types of
• Cost leadership: producing standardized products at very low per-
strategies unit cost for consumers who are price-sensitive. Two alternatives:
•Integration
• low cost strategy: concentrate on a low cost
• best value: concentrate on best-price-value compared to rival’s
•Intensive
• Differentiation
•Defensive •Considered unique or industrywide products and services
•Generic • Focus: fulfill the needs of small groups of consumers Two
•Achieving alternatives
strategies •low cost focus:
•best value focus

© Dr. Nábrádi András

DE-AVK
 Types of strategies

Outline Cost leadership effective when:

• Establish long
term objectives • price competition among rivals vigorous
•Types of
• products of rival sellers are identical
strategies • most buyers use the product in same ways
•Integration
• buyers are large and have significant power to bargain down prices
•Intensive
•Defensive
•Generic
Tools: integration
•Achieving
strategies
R&D
Capacity utilization
Outsourcing

© Dr. Nábrádi András

DE-AVK
 Types of strategies

Outline Differentiation effective when:

• Establish long
term objectives • there are many ways to differentiate the products
•Types of
• few rival firm are following a similar approaches
strategies • buyers needs and users are diverse
•Integration
• technological change is fast
•Intensive
•Defensive
Tools:
•Generic
Market penetration
•Achieving
strategies Market development
Related diversification
R&D

© Dr. Nábrádi András

DE-AVK
 Types of strategies

Outline Focus effective when:

• Establish long
term objectives • Industry leaders consider it too costly or difficult to meet the specialized
•Types of
needs
strategies • few other rivals are attempting to specialize in the same segment
•Integration
•Intensive
•Defensive
Tools:
•Generic
Market penetration
•Achieving
strategies Market development
Related diversification
R&D
Outsourcing
© Dr. Nábrádi András
DE-AVK