Business Policy

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 managements perspective, risk is the
  average size of investments in new capital
  projects, the probability of success, and the
  equity of the firm
• Outsiders view risk as the expected return on
  investment less the risk-free rate of return,
  measured by beta. gt beta, gt 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

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INDUSTRY ATTRACTIVE-NESS ______________ BUSINESS STRENGTH LOW MEDIUM HIGH
HIGH Maintain Select for Investment, Grow Invest And Grow
MEDIUM Harvest Select for Growth, or Divest Select for investment, Grow
LOW Harvest Or Divest Harvest Select for Growth, or Divest
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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

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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
  hasnt kept current and earnings are declining