Chapter 2 - Strategies in Action

2.1 Types of Strategies

For Brain Storming “Without a strategy the organization is like a ship without a rudder.” Joel
Ross and Michael Kami With your own words please explain the above proverb?

Alternative strategies that an enterprise could pursue can be categorized in to thirteen actions:
forward integration, backward integration, horizontal integration, market penetration, market
development, product development, concentric diversification, conglomerate diversification,
horizontal diversification, joint venture, retrenchment, divesture, liquidation, and a combination
strategy.
2.1.1 Integration Strategies or integrative-type strategies

Forward integration, backward integration, and horizontal integration are sometimes collectively
referred to as vertical integration strategies. Vertical integration strategies allow a firm to gain
control over distributors, suppliers, and/or competitors.

a) Forward Integration - Forward integration involves gaining ownership or increased

control over distributors or retailers. Increasing numbers of manufacturers (suppliers) today
are pursuing a forward integration strategy by establishing Web sites to sell products
directly to consumers. This strategy is causing turmoil or disorder in some industries. For
example, Dell Computer began pursuing forward integration in 2003 by establishing its own
stores - within-a-store in Sears, Roebuck. This strategy supplements Dell’s mall-based
kiosks, which enable customers to see and try Dell computers before they purchase one.
Neither the Dell kiosks nor the Dell stores-within a-store will stock computers. Customers
still will order Dells exclusively by phone or over the Internet which historically
differentiated Dell from other computer firms.

An effective means of implementing forward integration is franchising. Businesses can expand

rapidly by franchising because costs and opportunities are spread across many individuals.
However, a growing trend is for franchisees, who for example may operate ten franchised
restaurants, stores, or whatever, to buy out their part of the business from their franchiser
(corporate owner). There is a growing rift between franchisees and franchisers as the segment

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often outperforms the parent. For example, often to increase growth, a franchiser will allow new
owners to locate near existing franchise operations, or will cut back on services and training to
reduce costs.
b) Backward Integration - Both manufacturers and retailers purchase needed materials from
suppliers. 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 or defective, too costly, or cannot meet the firm’s needs. Reintegration makes sense in
industries that have global sources of supply. Companies today shop around, play one seller
against another, and go with the best deal. Global competition is also firms to reduce their
number of suppliers and to demand higher levels of service and quality from those they keep.
Although traditionally relying on many suppliers to ensure uninterrupted supplies and low prices,
American firms now are following the lead of Japanese firms, which have far fewer suppliers
and closer, long-term relationships with those few.
c) Horizontal Integration - Horizontal integration refers to a strategy of seeking ownership of
or increased control over a firm’s competitors. 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.
Scholars on Strategic Management make the following observation about horizontal integration:
The trend towards horizontal integration seems to reflect strategists’ misgivings about their
ability to operate many unrelated businesses. Mergers between direct competitors are more likely
to create efficiencies than mergers between unrelated businesses, both because there is a greater
potential for eliminating duplicate facilities and because the management of the acquiring firm is
more likely to understand the business of the target.
2.1.2 Intensive Strategies

Market penetration, market development, and product development are sometimes referred to as
intensive strategies because they require intensive efforts if a firm’s competitive position with
existing products is to improve.
a) Market Penetration - A market-penetration strategy seeks to increase market share for
present products or services in present markets through greater marketing efforts. This strategy is
widely used alone and in combination with other strategies. Market penetration includes

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increasing the number of salespersons, increasing advertising expenditures, offering extensive
sales promotion items, or increasing publicity efforts.

b) Market Development - Market development involves introducing present products or

services into new geographic areas. For example: - McDonald’s plans to open 100 new stores in
China in 2004 and another 100 in China in 2005. By mid-2003, McDonald’s had 566 restaurants
in 94 cities in China, representing the company’s seventh-largest market. McDonald’s serves
about 2 million customers in China every day and plans to aggressively boost that number.
Banks are expanding geographically by adding branches aggressively. For example: -
Commercial Bank of Ethiopia is opening various new branches throughout Ethiopia by
integrating innovative financial services.

c) Product Development - 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. 1.3 Diversification Strategies

There are three general types of diversification strategies: concentric, horizontal, and
conglomerate. Overall, diversification strategies are becoming less popular as organizations are
finding it more difficult to manage diverse business activities. In the 1960s and 1970s, the trend
was to diversify so as not to be dependent on any single industry, but the 1980s saw a general
reversal of that thinking. Diversification is now on the retreat. There are, however, a few
companies today that pride themselves on being conglomerates. For example:- Samsung now has
global market share leadership in many diverse areas, including cell-phones (10%), big-screen
televisions (32%), MP3 players (13%), DVD players (11%), and microwave ovens (25%).’
Similarly, Conglomerates prove that focus and diversity are not always mutually exclusive.
However, diversification is still an appropriate strategy sometimes, especially when the company
is competing in an unattractive industry.

a) Concentric Diversification - Adding new, but related, products or services is widely called
concentric diversification. For example: -Dell Computer is pursuing concentric diversification by
manufacturing and marketing consumer electronics products such as flat-panel televisions and
MP3 players. Also, Dell has recently opened an online music-downloading store. These are

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examples of concentric diversification strategies for Dell, as the company sees the personal
computer business becoming more aligned with the entertainment business because both are
becoming more and more digital. Simply put, computing and consumer electronics are
converging into one industry. Dell as well as Hewlett-Packard and Gateway are among the
computer firms that now compete with Sony and Samsung in consumer electronics.

b) Horizontal Diversification - Adding new but 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.

For example, consider the increasing number of hospitals that are creating mini malls or
shopping centers by offering banks, bookstores, coffee shops, restaurants, drugstores, and other
retail stores within their buildings. Many hospitals previously had only cafeterias, gift shops, and
maybe a pharmacy, but the movement into malls and retail stores is aimed at improving the
environment for patients and their visitors.

c) Conglomerate Diversification - Adding new, unrelated products or services is called

conglomerate diversification or company or multinational diversification. For example, in 2003,
the huge battery company Energizer Holdings, acquired the Schick Wilkinson Sword razor
business from Pfizer for $930 million. Schick was the nation’s second largest shaving products
company, with 18 percent global market share in the wet-shaving business. This conglomerate
diversification strategy puts Energizer in direct competition with industry leader Gillette, which,
interestingly, owns the Duracell battery brand and has 70 percent global market share in the wet-
shaving business. So Gillette and Energizer are examples of highly diversified firms competing
aggressively against each other in both batteries and razors.

2.1.4 Defensive Strategies

In addition to integrative, intensive, and diversification strategies, organizations also could

pursue retrenchment, divestiture, or liquidation.

a) Retrenchment - Retrenchment occurs when an organization regroups through cost and asset
reduction to reverse declining sales and profits. Sometimes called a turnaround or
reorganizational strategy, retrenchment is designed to fortify or strengthen an organization’s

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basic distinctive competence. During retrenchment, strategists work with limited resources and
face pressure from shareholders, employees, and the media. Retrenchment can entail selling off
land and buildings to raise needed cash, pruning product lines, closing marginal businesses,
closing obsolete factories, automating processes, reducing the number of employees, and
instituting expense control systems.

b) Divestiture - Selling a division or part of an organization is called divestiture. Divestiture

often is used to raise capital for further strategic acquisitions or investments. Divestiture can be
part of an overall retrenchment strategy to rid or liberate an organization of businesses that are
unprofitable, that require too much capital, or that do not fit well with the firm’s other activities.
For example, Walt Disney Company recently divested its Anaheim Angels baseball team, which
ended Disney’s financially disappointing ownership of the team that won the World Series in
2002. Disney is also trying to divest its only other sports team, the Mighty Ducks of Anaheim of
the National Hockey League, which is unprofitable. Disney has had trouble merging professional
sports teams into its entertainment empire.

c) Liquidation - Selling all 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. However, it may be better to cease operating than to continue losing large sums of
money. For example, National Century Financial Enterprises, Inc., based in Dublin, Ohio,
liquidated in 2003 after operating under bankruptcy for less than a year. National Century
specialized in providing financing for healthcare companies, several of which declared
bankruptcy themselves soon after National Century ceased operations. Thousands of small
businesses in our country Ethiopia also liquidate annually without ever making the news. It is
tough to start and successfully operate a small business.

2.2 Guidelines for pursuing strategies

The guideline for pursuing strategies reveals situations, conditions, and guideline for when
various alternative strategies are appropriate to pursue. For example, a market development
strategy is generally most appropriate when new channels of distribution are available that are
reliable, inexpensive, and of good quality.

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2.3 Michael Porter’s Generic Strategies
Michael Porter has described a category scheme consisting of three general types of strategies
that are commonly used by businesses to achieve and maintain competitive advantage. These
three generic strategies are defined along two dimensions: strategic scope and strategic strength.
Strategic scope is a demand-side dimension (Porter was originally an engineer, then an
economist before he specialized in strategy) and looks at the size and composition of the market
you intend to target. Strategic strength is a supply-side dimension and looks at the strength or
core competency of the firm. In particular he identified two competencies that he felt were most
important: product differentiation and product cost (efficiency). The figure below defines the
choices of "generic strategy" a firm can follow. A firm's relative position within an industry is
given by its choice of competitive advantage (cost leadership vs. differentiation) and its choice of
competitive scope. Competitive scope distinguishes between firms targeting broad industry
segments and firms focusing on a narrow segment.
Generic strategies are useful because they characterize strategic positions at the simplest and
broadest level. Porter maintains that achieving competitive advantage requires a firm to make a
choice about the type and scope of its competitive advantage

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A/Cost Leadership: In cost leadership, a firm sets out to become the low cost producer in its
industry. The firm sells its products either at average industry prices to earn a profit higher than
that of rivals, or below the average industry prices to gain market share. The cost leadership
strategy usually targets a broad market. Some of the ways that firms acquire cost advantages are
by improving process efficiencies, gaining unique access to a large source of lower cost
materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs
altogether. If competing firms are unable to lower their costs by a similar amount, the firm may
be able to sustain a competitive advantage based on cost leadership. There are two types of cost
leadership strategies:
i. A low cost strategy offers products to a wide range of customers at the lowest price available
on the market.
ii. A best value strategy offers products to a wide range of customers at the best value available
on the market.
B. Differentiation Strategy - In this strategy the firm seeks to be unique in its industry along
some dimensions that are widely valued by the buyers. It selects one or more attributes that are
perceived as important by the buyers, and uniquely position it to meet those needs. A successful
differentiation strategy allows a firm to charge higher prices for its products to gain customer
loyalty because consumers may become strongly attached to the differentiation strategy. A
differentiation strategy calls for the development of a product or service that offers unique
attributes that are valued by customers and that customers perceive to be better than or different
from the products of the competition.
C. Focus Strategy - The focus strategy concentrates on a narrow segment and within that
segment attempts to achieve either a cost advantage or differentiation. The premise is that the
needs of the group can be better serviced by focusing entirely on it. A low cost focus strategy
offers products or services to a small range (Niche) of customers at the lowest price available on
the market. A best value focus strategy offers products to a small range of customers at the best
price-value available in the market called as focused differentiation
2.3.1 Offensives and Defensive Strategy
2.3.1.1 Offensive strategy
An offensive strategy consists of a company’s actions directed against the market leaders to
secure competitive advantage. Offensive business strategies involve taking proactive, often

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aggressive action in the market. This action can be focused directly at competitors or aimed at
securing market share regardless of the existing competition. Offensive strategies include a
dramatic reduction of price, a highly creative and imaginative advertising campaign, or a
uniquely designed new product that suddenly attracts customers substantially.
Companies that go on the offensive generally invest heavily in research and development (R&D)
and technology in an effort to stay ahead of the competition. They will also challenge
competitors by cutting off new or underserved markets, or by going head-to-head with them.
Types of offensive strategies
a. Frontal attack: A frontal attack is attacking a competitor ahead on by producing similar
products with similar quality and price; it is highly risky unless the attacker has a clear
advantage. In the frontal attack, firms concentrate on competitor’s strengths rather than
weaknesses.
b. Flank attack: Flank attack is less risky when compared to that of frontal attack in which firms
attacking at the competitor’s weak point or blind spot. In this strategy firms follow the path of
least resistance where the competitor is incapable of defending.
c. Hold attack: It is the combination of both frontal and flank attacks. Here the challenging firm
attacks the competitor firm on its entire major fronts i.e. strengths and weaknesses. There are two
strategies that can be used under the hold attack.
1. Product Hold: In this strategy, the challenger firm introduces different types of products with
varied features, quality and price.
2. Market Hold: In market encirclement strategy the challenger firm introduces the products
into the new market segments which are left untapped by the competitor’s firms.

2.3.1.2 Defensive strategy

Defensive strategy is defined as a marketing tool that helps companies to retain valuable
customers that can be taken away by competitors. When rivalry exists, each company must
protect its brand, growth expectations, and profitability to maintain a competitive advantage and
adequate reputation among other brands. To reduce the risk of financial loss, firms strive to take
their competition away from the industry. This includes position defense, mobile defense,
retrenchment, divestiture, and liquidation.

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Position Defense - The position defense is the simplest defensive strategy. It simply involves
trying to hold the current position in the market. To do this, business simply continues to invest
in current markets and attempt to build their brand name and customer loyalty.
Mobile Defense - The mobile defense involves making constant changes to business so that it is
difficult for competitors to compete. This can involve introducing new products, entering new
markets or simply making changes to existing products. This constant moving between strategies
requires a flexible business that can adjust to change.

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