STRATEGIES IN ACTION

OUTLINE
CD
Long-Term Objectives
Types of Strategies
Integration Strategies
Intensive Strategies
Diversification Strategies
Defensive Strategies
Michael Porter's Generic Strategies
Means for Achieving Strategies
Merger/Acquisition

I. WNG-TERMOBJECTIVES

A. The Nature of Long-Term Objectives

1. Objectives should be quantitative, measurable, realistic, understandable, challenging,

hierarchical, obtainable, and congruent among organizational units. Each objective
also should be associated with a time line.

a. Objectives are commonly stated in terms such as growth in assets, growth in

sales, profitability, market share, degree and nature of diversification, and so on.

b. Long-term objectives are needed at the corporate, divisional, and :functional levels in an
organization. They are an important measure of managerial performance. ·,

B. Not Managing by Objectives

1. Strategists should avoid the following alternative ways of "not managmg by

objectives."

a Managing by extrapolation
b. Managing by crisis
c. Managing by subjectives
d. Managing by hope

II. TYPES OF S1RATEGIES

A. A Comprehensive Strategic Management Model

1. alternative strategies that an enterprise could pursue can be categoriz.ed into 13

actions-forward integration, backward integration, horizontal integration, market
penetration, market development, product development, concentric diversification,
conglomerate diversification, horizontal diversification, joint venture, retrenchment,
divestiture, and liquidation-and a combination strategy.

Strategies in Action Shai/esh Dudani

( 8
3. Each alternative strategy has countless variations. For example, market penetration
can include adding salespersons, increasing advertising expenditures, couponing, and
using similar actions to increase market share in a given geographic area

ill. INTEGRATION STRATEGIES

A. Forward Integration

1. Forward integration involves gaining ownership or increased control over distributors

or retailers.

2. Six guidelines when forward integration may be an especially effective strategy:

a When an organization's present ·distributors are especially expensive or
unreliable, or incapable of meeting firm's distribution needs.
b. When the availability of quality distributors is so limited as to offer a competitive
advantage to those firms that integrate forward.
c. When an organization competes in an industry that is growing and expected to
continue to grow markedly.
d. When an organization has both the capital and human resources needed to
manage the new business.
e. When ~e advantages of stable production are particularly high.
f. When present distributors have high profit margins.

B. Backward Integration

1. Backward integration is a strategy of seeking ownership or increased control of a

firm's suppliers. This strategy can be especially appropriate when a firm's current
suppliers are unreliable, too costly, ~r cannot meet the firm's needs.
'
2. Some industries (such as automotive and aluminum industries) are reducing their
historic pursuit of backward integration. Instead of owning their suppliers,.companies
negotiate with several outside suppliers.
'
3. Outsourcing, whereby companies use outside suppliers, shop around, play one seller
against another, and go with the best deal is becoming widely practiced.

C. Horizontal Integration

1. Horizontal integration refers to a strategy of seeking ownership of or increased control

over a firm's competjtors. One of the most significant trends in strategic management
today is the increased use of horizontal integration as a growth strategy. Mergers,
acquisitions, and takeovers among competitors allow for increased economies of scale
and enhanced transfer of resources and competencies.

2. Horizontal integration has become the most-favored growth strategy in many

industries. For example, explosive growth in e-commerce has telecommunications
firms worldwide frantically merging and pursuing horizontal integration to gain
competitiveness.

3. There are five guidelines for when horizontal integration may be an especially
effective strategy:
I a. When an organization can gain monopolistic characteristics.
b. When an organization competes in a growing industry.
c. When increased economies of scale provide major competitive advantages.
d. When an organization has both the capital and human talent needed to
successfully manage an expanded organization.

N. INTENSNE STRATEGIES

A. Market Penetration

1. A market-penetration strategy seeks to increase market share for present products or

services in present markets through greater marketing efforts.

2. Market penetration includes increasing the number of salespersons, advertising

expenditures, and publicity efforts or offering extensive sales promotion items.

3. Five guidelines for when market penetration is especially effective:

a. When current markets are not saturated.

b. When usage rate of current customers could be increased.
c. When market shares of major competitors have been declining while total
industry·sales have been increasing.
d. When the correlation between dollar sales and dollar marketing expenditures
historically has been high.
e. When increased economies of scale provide major advantages.

B. Market Development

1. Market development involves introducing present products or services into new

geographic areas.

2. The climate for international market development is becoming more favorable. In

many industries, such as airlines, it is going to be hard to maintain a competitive edge
by staying close to home.

3. Six guidelines for when this is may be effective:

a. When new channels of distribution are available that are reliable, inexpensive,
and of good quality.
b. When an organization is very successful atwhat it does.
c. When new untapped or unsaturated markets exist.
· d. When an organization has the needed capital and human resources to manage
expanded operations.
e. When an organization has excess production capacity.
f. When an organization's basic industry rapidly is becoming global in scope.

C. Product Development

1. Product development is a strategy that seeks increased sales by improving or

modifying present products or services. Product development usually entails large
research and development expenditures.

2. Five guidelines for when to use product development:

Strategies in Action Shai/esh Dudani

I a.
3
When an organization has successful products that are in the maturity stage
of the product life cycle.
b. When an organization competes in an indusny that is characterized by rapid
technological developments.
c. When major competitors offer better-quality products at comparable prices.
d. When an organization competes in a high-growth industry.
e. When an organization has especially strong research and development
capabilities. ·

V. DIVERSIFICATION STRATEGIES

A. Concentric Diversification

1. Adding new, but related, products or services is widely called concentric

diversification.

2. Six guidelines for when to use concentric diversification:

a. When an organization competes in a no-growth or slow growth industry.

b. When adding new, but related products would enhance sales of current products.
c. When new, bul related products could be offered at competitive prices.
d. When new, but related products have seasonal sales levels that counterbalance
existing peaks and valleys.
e. When an organization's products are in the decline stage of the life cycle.
f. When an organization has a strong management terun.

B. Horizontal Diversification

1. Adding new, unrelated products or services for present customers is called horizontal
diversification. This strategy is not as risky as conglomerate diversification because a
firm already should be familiar with its present customers.

2. Four guidelines for when to use.horizontal diversification:

a. When revenues derived from an organization's current products or services would

increase significantly by adding the pew, unrelated products.
b. When an organization competes· in a highly competitive and/or no-growth
industry.
c. When an organization'~ present channels of distribution can be used to market the
new products to current customers.
d. When the new products have countercyclical sales patterns compared to an
organization's present products.

C. Conglomerate Diversification

1. Adding new, unrelated products or services is called conglomerate diversification.

2. Some firms pursue conglomerate diversification based in part on an expectation of

profits from breaking up acquired firms and selling divisions piecemeal.

3. General Electric is a classic firm that is highly diversified. GE makes locomotives,

lightbulbs, power plants, and refrigerators; GE manages more credit cards than
American Express and owns more commercial aircraft than American Airlines.
Strategies in Action
Shai/esh Dudani
 4
@
· Six guidelines explain when it is effective to use conglomerate diversification:

a. When an organization's basic industry is experiencing declining annual sales

and profits.
b. When an organization has the capital and managerial talent needed to compete.
c. When an organization has the opportunity to purchase an µnrelated business that
is an attractive investment.
d. When there exists financial synergy between the acquired and acquiring firms.
e. When existing markets for an organization's present products are saturat~..
f. When antitrust _action could be charged against an organization that histoncally
has concentrated on a single industry.

VI. DEFENSNE STRATEGIES

A . Retrenchment

1. Retrenchment occurs when an organization regroups through cost and asset reduction
to reverse declining sales and profits.

2. Sometimes 'called a turnaround or reorganizational strategy, retrenchment is designed

to fortify an organization's basic distinctive competence.

3. Bankruptcy can be an effective retrenchment strategy. In US there are following types

of bankruptcy

a. Chapter 7 bankruptcy is a liquidation procedure used only when a

corporation sees no hope of being able to operate successfully or,to obtain
the necessary creditor agreements.
b. Chapter 9 bankruptcy applies to municipalities.
c. Chapter 11 bankruptcy allows organizations to reorganize and come back after
filing.
d. Chapter 12 bankruptcy provides special relief to family fanners with debt equal to
or less than $1.5 million.
e. Chapter 13 bankruptcy is similar to Chapter 11 but available only to small
businesses owned by individuals '1Vith·unsecured debts of less than $100,000 and
secured debts ofless than $350~000.

4. Five guidelines when retr~nchment may be an especially effective strategy to pursue:

a. When an organiz.ation has a clearly distinctive competence but has failed to

meet objectives consistently.
b. When an organization is one of the weaker competitors in a given industry.
c. When an organization is plagued by inefficiency, low profitability, poor
employee morale, and pressure from stockholders to improve perfonnance.
d. When an organization has failed to capitalize_on external opportunities, minimize
ex.temal threats, take advantage of internal strengths, and overcome internal
weaknesses over time.
e. When an organization has grown so large so quickly that major internal
reorganization is needed.

B. Divestiture
Strategies in Action
Shailesh Dudani
 G)
l. Selling a ?ivisio? or part of an organiz.ation is called divestiture. Divestiture often is
used to raise capital for further strategic acquisitions or investments.
2
· Divestiture has become a very popular strategy as firms tzy to focus on their core
strengths, lessening their level of diversification.
3. Six guidelines for when to use divestiture:

a. When an organization has pursued a retrenchment strategy and it failed to

accomplish needed improvement. .
b. When a division needs more resources to be competitive than the company
can provide.
c. When a division is responsible for an organization~$ overall poor
performance.
d. When a division is a misfit with the rest of an organization.
e. When a large amount of cash is needed quickly and cannot be obtained.
f. When government antitrust action threatens an organization.

C. Liquidation

1. Selling an ·of a company's assets, in parts, for their tangible worth is called liquidation.
Liquidation is recognition of defeat and consequently can be an emotionally difficult
strategy.

2. 1bree guidelines of when to use liquidation:

a. When an organization has pursued both a retrenchment and a divestiture

strategy and neither has been successful.
b. When an organiz.ation's only alternative is bankruptcy.
c. When the stockholders of a firm can minimize their losses by selling assets.

VU.MICHAEL PORTER'S GENERIC STRATEGIES

A. Cost Leadership Strategies

1. A primary reason for pursuing foiward, backward, and horizontal integration

strategies is to gain cost leadership benefits.
,
2. Striving to be the low-cost producer in an industzy can be especially effective when
the market is composed of many price-sensitive buyers, when there are few ways to
achieve product differentiation, when buyers do not care much about differences from
brand to brand, or when there are a large number of buyers with significant bargaining
power.

3. The basic idea behind a cost leadership strategy is to underprice competitors and
thereby gain market share and sales, driving some competitors out of the market
entirely.

B. Differentiation Strategies

Strategies in Action
Shailesh Dudani
 . G)
1. A successful ?ifferentiation strategy allows a firm to charge higher prices for its
products to gam customer loyalty because consumers may become strongly attached
to the differentiation features.

2. A risk o:
pursuing a differentiation strategy is that the unique product may not be
valued highly enough by customers to justify the higher price.

3· Common organizational requirements for a successful differentiation strategy inclu~e

strong coordination among the R&D and marketing functions and substantial
amenities to attract scientists and creative people.

C. Focus Strategies

1. A successful focus strategy depends on an industry segment that is of sufficient size,

has good growth potential, and is not crucial to the success of other major competitors.

2. Strategies such as market penetration and market development offer substantial

focusing advantages.

3. Focus strategies are most effective wheQ. consumers have distinctive preferences or
requirements and when rival firms are not attempting to specialize in the same target
segment. · Finns pursuing a focus strategy include Midas, Red Lobster, Federal
Express, and Schwinn.

D. The Value Chain

1. According to Porter, the business of a firm can be best described as a value chain in
which total revenues minus total· costs of all activities undertaken to develop and
market a product or service yields value.

2. Finns should strive to understand not only their own value chain operations, but also
their competitors', suppliers', and distributors' value chains.

VIII. JOINT VENTURF/PARlNERING

A. Joint Venture

1. Joint venture is a popular strategy· that occurs when two or more companies form a
temporaiy partnership or consortium for the purpose of capitalizing on some
opportunity.

2. Other types of cooperative arrangements include R&D partnerships, cross-distribution

agreements, cross-licensing agreements, cross-manufacturing agreements, and joint-
bidding consortia

3. Joint ventures and cooperative arrangements are being used increasingly because they
allow companies to improve communications and networl<lng, to globalize operations
and minimiz.e risk.

4. Many, if not most, organizations pursue a combination of two or more strategies

simultaneously, but a combination strategy can be exceptionally risky if carried too
far. No organization can afford to pursue all the strategies that might benefit the firm.
Difficult decisions must be made. Priorities must be established. Organizations, like
Strategies in Action
Shailesh Dudani
 . d"1v1"duals, ha~e .1wu1ted
m @
=-· resources. Both organizations and individuals must choose .
among alternative strategies and avoid excess indebtedness.

S. Joint ventures may fail when:

a. Managers who mustcollaborate regularly are not involved in the venture.

b. The venture may benefit partnering companies but not the customers.
c. Both partners may not support the venture equally.
d. The venture may begin to compete with one of the partners.

B. Joint Ventures into Russia

1. A joint venture strategy offers a possible way to enter the Russian market.

2. Joint ventures create a mechanism to generate hard currency, which is im~rtant

because of problems valuing the ruble. Russia's joint venture law has been re~ised to
allow foreigners to own up to 99 percent of the venture and to allow a foreigner to
serve as chief executive officer.

3. The following guidelines are appropriate:

a. First,.avoid regions with ethnic conflicts and violence.

b. Second, make sure .the potential partner has a proper charter that has been
amended to permit joint venture participation.
c. Third, be aware that businesspeople in these lands have little knowledge of
marketing, contract law, corporate law, fax machines, voice mail, and other
business practices that Westerners take for granted.

4. A number of organizations in Russia assist foreign companies interested µi initiating,

continuing, or expanding business operations there.

IX. MERGER/ACQUISITION

A. Mergers and acquisitions are two commonly used ways to pursue strategies.

1. A merger occurs when two organizations of about equal size unite to form one
enterprise.

2. An acquisition occurs when a large organization purchases (acquires) a smaller firm

or vice versa.

B. There are many reasons for mergers and acquisitions, including the following:

a. To provide improved capacity utilization.

b. To make better use of an existing sales force.
c. To reduce managerial staff.
d. To gain economies of scale.
e. To smooth out seasonal trends in sales.
f. To gain access to new suppliers, distributors, customers, products, and creditors.
g. To gain new technology.
h. To reduce tax obligations.

C. Leveraged Buyouts (LBOs)

Strategies in Action
Shailesh Dudani
 0)
1. An LBO occurs when a corporation's shareholders are bought out (hence buyout) by
the company's management and other private investors using borrowed funds (hence
leveraged).

3. Besides trying to avoid a hostile takeover, other reasons for the initiation of an LBO by
senior management are that particular divisions do not fit into an overall corporate
strategy, must be sold to raise cash, or receive an attractive offering price. A LBO takes a
·corporation private.