Leading strategies - PowerPoint Presentation by Levone

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									                       Strategic Options
Add value either through
   •Operating activities (marketing or production).
   •Aggressive financial activities.
      •Either way might contribute to an organization’s
      improved performance.
      •Both have risks that may place the company at a
      competitive disadvantage or make it vulnerable to
      takeovers.
   •Extremes in either strategy may dominate management
   decisions.
•Operating strategies
•Research and development (R & D) is a third
activity for achieving competitive advantage, but
it is included with marketing or production,
depending on its focus.
•Management seeks to achieve competitive
advantage through reliance on marketing or
production or some balance between these two
functions.
                Defining A Leading Strategy
Resource allocation between operating & financial activities
   •Capital and operating expenditures
   •Changes in historical patterns that define
   management’s priorities.
   •A company concentrates its resources in one functional
   area or the other to build value.
   •Staffing patterns
   •View of primary stakeholders
   •Management’s focus in managing the value chain
 Staffing in top management
– Operating strategy: In traditional
  manufacturing organizations, employees
  move up through engineering or production.
– In high-technology organizations, they
  progress through the R&D group.
– In a financial emphasis, they progress
  through the legal, accounting, or finance side
  of operations
•Those viewed as primary stakeholders partially define
the leading strategy
   •Many groups have interests in and are affected by
   the company’s decisions.
   •Typically, interests of one group of stakeholders can
   be satisfied only at the expense of another’s.
   •E.g. Employees seek higher wages & benefits, which
   drive higher prices to consumers & lower returns to
   investors.
   •External agents (stockholders & creditors), internal
   agents (management & employees), those in the value
   chain (customers & suppliers), or external groups
   (community) may be defined as primary stakeholders
                                            Marketing strategy

                        Standardization Partial         Differentiation
         Strategic Leadership            in Operating
                                     MapDifferentiation Strategies

Low Fixed Costs         11-- Reactive       12                  13 Market Leader
(High AC with cost      Strategy - Low                           High investment in
flexibility during      investment                              R & D product
downturns )             strategy;                               innovation, e.g.,
                        capitalize on                           entrepreneurial
                        increase                                focus.
                        demand; cut
                        back on
                        declining
                        demand.
Moderate cost           21                  Follower Strategy   23
control with                                - partial
                                            implementation
moderate AC
                                            of fixed cost
.                                           control & low AC
                                            costs with some
                                            differentiation.

Low Cost                31 Production       31                  33 Value Leader
Leadership. (Low        Leader Strategy                         Strategy
AC but low              - high investment                       Market
flexibility to adjust   in infrastructure                       differentiation and
costs with dropping     & production                            cost leadership, high
demand)                 personnel                               investment
          Strategic Leadership Map of Operating Strategies



Marketing
Strategy


                  Standardization       Mixed      Differentiation
Production                              case
Strategy
Cost Control      Niche strategy                   Market leader
(high average     Low investment                   strategy
cost with cost    strategy;                        High investment in
flexibility       unfocused                        R&D product
during            strategy in terms                innovation,
downturns)        of achieving                     advertising &
                  competitive                      promotion (e.g.,
                  advantage (e.g.,                 custom designers
                  U.S. Steel)                      such as fashion
                                                   leaders in clothing;
Low-Cost                (Standarization)   (Differentiation)
Leadership              Production         Value leader
•High investment        leader strategy    strategy
strategy--Low AC at      Price leader      •Image and/or
capacity, but low       (e.g.              functional product
flexibility to adjust   Southwestern       differentiation &
costs with dropping     Airlines,          price leader, (e.g.,
demand)                 Lincoln            Intel, Toyota)
•Low investment         Electric, mini-    •Value leader—
strategy—retain core    steel mills,       differentiation by
& contract out the      Korean             mass
rest; low AC & high     integrated steel   customization &
flexibility             plants)            price leader (e.g.
                                           Dell, Amazon
                                           Dot.com)
    Differences in Perspective--production
•Production emphasis. If management believes
that low costs will enable the firm to dominate the
market, it protects the production core from multiple
demands.
   •Standardizes the product or service.
   •Limits responsiveness to special demands.
           Production as Leading Strategy
•Low-cost leadership usually requires that production
assume dominant strategy in operating activities.
   •High investment strategy: Lower its costs through
   the experience curve and optimum plant size which
   require large market share.
   •Low investment strategy: Lower costs through
   contracting out all but core functions.
•Marketing is subordinated to the requirements of the
production system.
•Insulate production’s technological core since this is
where efficiency improvements most often occur.
                Production Strategy
A firm may seek advantage through production
leadership.
   •E.g. Korean integrated steel mills, Goodyear,
   Lincoln Electric, & Southwest Airlines.
   •Sustain improvements in production economies by
   standardizing products or services & investing in
   modern plants and equipment.
   •Low average costs enable their products and
   services to be sold aggressively.
   •Drive out less efficient companies from the industry
   •Discourage new entrants.
Differences in Perspective--marketing

– Marketing emphasis. Differentiating products
  or services is the best way to achieve
  competitive advantage.
  • Marketing drives the decisions and activities to
    achieve product image or functional differentiation
    such as product variety, product innovation,
    product complements & quality standards,.
        Marketing as the Leading Strategy
•A company emphasizes adding value through
marketing activities.
   •Marketing assumes priority claim over total
   resources and management’s time.
   •Emphasis is on the skilled selling and efficient
   distribution of product or service.
   •Differentiate functionally &/or image the product
   or service
      •E.g.. Achieve rapid and reliable delivery.
      •E.g. Provide   superior quality & value.
      •E.g. Research   is market-oriented.
     Value as leading strategy
• Combine production (cost leadership) &
  marketing (differentiation) to create high
  value leadership:
  – Differentiate standard products by quality
  – Add complements that provide high value
    but low costs.
  – Mass customization of products or service
  – Improve responsiveness—speed, . . .
                     Value Leader Strategy
•Combination of differentiation in marketing and cost leadership in
production. Potential for dominant competitive advantage.
    •Achieve differentiation & cost leadership by standardizing
    products & services in functional terms but differentiating by an
    image of superiority.
    •E.g. IBM typically lags in product innovation in its markets but
    emphasizes image of excellence & economies of production,
    distribution.
    •IBM differentiates standard products with its emphasis on high
    quality & reliability of its products & with service follow-up.
    •The Japanese have been able to pursue value leader strategy by
    low cost of standard products, but superior quality to achieve a
    value leader strategy.
                  Trade-Offs in Operating Strategy
   Leading Operating            Production            Marketing Leadership
       Strategies               Leadership

High investment strategy
•Marketing strategies      Standardization           Differentiation
•Production strategies     Low cost leadership       Support marketing w/
                           (low AC, high FC, low     production flexibility &
                           MC @ capacity)            quality (accept high AC)
                           Value leadership          Value leadership
Low investment strategy
                           Mass customization        Mass customization
•Marketing strategies
                           Low cost leadership via   Low cost leadership via
•Production strategies
                           contracting out           contracting out
                  Financial Activities
•Conducted defensively, aggressively, or in some
combination of the two styles.
•The trade-offs in financial strategy are:
   •Defensive: Low leverage & limited speculation
   •Aggressive or high leverage and speculative
   activities
•Financial Strategy (usually discussed under
corporate diversification or vertical integration
strategies)
•Management seeks to achieve superior
performance through financial leveraging &
speculative activities.
• Aggressive operating & aggressive financial
strategies tend to move a firm in divergent
directions & generally involve trade-offs.
•Finance as a leading strategy concentrates its resources
on financial activities to add value to the firm
   •Takes actions to increase the value placed on the
   existing assets and earnings stream by investors.
   •Financial activities designed to increase a company’s
   value include:
   Purchase of assets (e.g., inventory, land, buildings,
   securities) that are expected to rise in value
   Purchase of companies judged as undervalued.
   Leverage of return on assets by debt.
   Speculation in futures markets
•Increase the value of its existing assets and earnings
stream by actions to influence the price of its stock.
   •Increasing percentage of dividend payout.
   •Buying back stock.
   •Adopting accounting procedures that stabilizes
   reported earnings or value of assets
   •Accounting charges & revenues timed to sustain or
   increase earnings per share over time.
•Initiate or sustain speculative & leveraging activities
   •Use debt to finance dividends or stock buybacks.
              Diversification Decisions
•Purchases of plant, equipment, & goodwill of a related
or unrelated business are often driven by aggressive
financial strategies.
•Speculation is that existing earnings stream will be
capitalized at a higher value because of greater investor
confidence in the new management.
•Speculation is that the new management will be more
competent than existing management (rather than
worse)
•Speculation is that an increase in the earnings stream
will be realized through synergies.
      Strategic Leadership Map of Operating & Financial
                          Strategies
                       Passive or niche     Follow-the-leader   Value leadership
Operating              response             (moderate           (high investment in
            Strategy   (low investment)     investment)         marketing &
Financial                                                       production to
Strategy                                                        achieve low AC &
                                                                differentiation)
Defensive (low         “Minimax” strategy                       Competitive
leverage, low          (e.g., Montgomery                        dominance
speculation)           Ward, 1946-1956; )                        (e.g. John Deere)


Financial straddle                          Incrementalist
(some leverage and                          strategy
speculation)


Aggressive (high       Liquidation                              Grand-slam
leverage, extensive    strategy (e.g.,                          strategy (e.g., Dot
speculation)           Firestone, raiders                       com firms in 90’s;
                       such as Carl Icahn                       Enron, GE)
                       and T. Boone
                       Pickens)
                 Minimax Strategy
•The most conservative and is least likely to be
competitive.
   •A standard product or service at high average cost.
   •High flexibility to respond to customer demand
   may provide a market niche in permissive settings.
   •The ability to cut costs enables survival on
   temporary downturns.
                   Functional Emphasis: Leading Strategy



Organizational     Marketing             Production           Financial
Activities         Activities            Activities           Activities

Dominant areas     Marketing-            Production-          Financial-
(where value is    advertising,          purchasing,          speculation in
added to the firm) distribution (e.g.,   manufacturing,       futures markets,
                   aspirins, vitamins,   assemble,            or assets; leverage
                   cosmetics, beer,      shipping, (e.g.,     through use of
                   soft drinks)          automobile firms,    debt, acquisitions
                                         steel companies)

                                         Processing (for      Financial
                                         service firms,       activities such as
                                         such as hospitals,   accounting
                                         universities,        policies, liberal
                                         consulting           dividend policies,
                                         operations,          stock buybacks
                                         accounting firms)
Competitive   Differentiation   Cost leadership Aggressive
focus                                           financial
                                                activities
R&D focus     Incremental       Innovation &    Collection of
              improvements      incremental     data on future
              & innovation in   improvements    interest rates,
              products &        in production   commodity
              services          process to      prices, value of
                                increase        currencies,
                                efficiency      inflationary
                                                trends
Trade-off     Emphasis on      Emphasis on   Emphasis on
stakeholders’ customers’       production    stockholders’
interests     interests as     personnel,    & creditors’
              first priority   unions, and   interests over
                               suppliers     those of other
                               over other    groups
                               groups
Investment      Distribution   Production    Commodities,
priorities in   & market       facilities:   stock
capital         facilities     buildings &   buybacks,
expenditures                   equipment     purchase of
                                             other firms
Operating      R&D for        R&D in mfg. Dividend &
expenditures   products &     process;     interest
and research   services;      preventive   payouts
allocations    advertising,   maintenance,
               promotion,     recruitment,
               recruitment,   upgrading of
               training, &    production
               upgrading of   personnel &
               marketing      supportive
               personnel      groups

								
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