CHAPTER 4

TYPES OF
STRATEGIES
TYPES OF OBJECTIVE
Long-term objectives
 represent the results expected from pursuing certain strategies. Strategies represent the actions to
be taken to accomplish long-term objectives.

Financial objectives
 include those associated with growth in revenues, growth in earnings, higher dividends, larger
profit margins, greater return on investment, higher earnings per share, a rising stock price,
improved cash flow.

Strategic objectives
 include things such as a larger market share, quicker on-time delivery than rivals, shorter design-to-market
times than rivals, lower costs than rivals, higher product quality than rivals, wider geographic coverage than
rivals, achieving technological leadership, consistently getting new or improved products to market ahead of
rivals, and so on.
Eight Desired Characteristics of Objectives
1. Quantitative
2. Measurable
3. Realistic
4. Understandable
5. Challenging
6. Hierarchical
7. Obtainable
8. Congruent across departments
Ten Benefits of Having Clear Objectives
1. Provide direction by revealing expectations
2. Allow synergy
3. Assist in evaluation by serving as standards
4. Establish priorities
5. Reduce uncertainty
6. Minimize conflicts
7. Stimulate exertion
8. Aid in allocation of resources
9. Aid in design of jobs
10. Provide basis for consistent decision making
 Avoid Not Managing by Objectives
 Mr. Derek Bok, former President of Harvard University, once said, “If you
think education is expensive, try ignorance.” The idea behind this saying
also applies to establishing objectives, because strategists should avoid the
following ways of “not managing by objectives.”
Managing by Extrapolation
 Adheres to the principle “If it isn’t broke, don’t fix it.” The idea is to keep on doing the same things
in the same ways because things are going well.
Managing by Crisis
 Based on the belief that the true measure of a really good strata-gist is the ability to solve problems.
Because there are plenty of crises and problems to go around for every person and organization,
strategists ought to bring their time and creative energy to bear on solving the most pressing
problems of the day.
Managing by Subjective
 Built on the idea that there is no general plan for which way to go and what to do; just do the best
you can to accomplish what you think should be done.
Managing by Hope
 Based on the fact that the future is laden with great uncertainty and that if we try and do not
succeed, then we hope our second (or third) attempt will succeed.
Combination Strategy
 Most organizations simultaneously pursue a combination of two or more
strategies, 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 individuals, have limited resources. Both
organizations and individuals must choose among alternative strategies and
avoid excessive indebtedness.
Combination Strategy
Most organizations simultaneously pursue a combination of two or
more strategies, 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
individuals, have limited resources. Both organizations and
individuals must choose among alternative strategies and avoid
excessive indebtedness.
Alternative Strategies Defined and Recent Examples Given
Levels of Strategies

 Strategy making is not just a task for top executives. Middle- and lower-level
managers also must be involved in the strategic-planning process to the extent
possible. In large firms, there are actually four levels of strategies: corporate,
divisional, functional, and operational.
 The persons primarily responsible for having effective strategies at the various levels
include:
 CEO or business owner at the corporate level
 The president or executive vice president at the divisional level The chief finance
officer (CFO)
 Chief information officer (CIO).
Integration Strategies

 Forward integration and backward integration are

sometimes collectively referred to as vertical integration.
 Vertical integration strategies allow a firm to gain control over
distributors and suppliers, whereas horizontal integration refers to
gaining ownership and/or control over competitors.
 Vertical and horizontal actions by firms are broadly referred to as
integration strategies.
Forward Integration
 Involves gaining ownership or increased control over distributors
or retailers. Increasing numbers of manufacturers (suppliers) are
pursuing a forward integration strategy by establishing websites
to sell their products directly to consumers.
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, or cannot meet
the firm’s needs.
Horizontal Integration
 is arguably the most common growth strategy. Thousands of
mergers, acquisitions, and takeovers among competitors are
consummated annually. Nearly all these transactions aim for
increased economies of scale and enhanced transfer of
resources and competencies.
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.
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 increasing the number of
salespersons, increasing advertising expenditures, offering
extensive sales promotion items, or increasing publicity efforts.
Market Development
 involves introducing present products or services into new
geographic areas.
Product development
 Is a strategy that seeks increased sales by improving or modifying
present products or services.
These following five guidelines indicate
when product development may be an
especially effective strategy to pursue:
1. An organization has successful products that are in the maturity stage of the
product life cycle; the idea here is to attract satisfied customers to try new
(improved) products as a result of their positive experience with the
organization’s present products or services.
2. An organization competes in an industry that is characterized by rapid
technological developments.
3. Major competitors offer better-quality products at comparable prices.
4. An organization competes in a high-growth industry.
5. An organization has especially strong research and development
capabilities.
Diversification Strategies
Two General Type of are:

1. Related diversification Businesses are said to be related when their value

chains possess competitively valuable cross-business strategic fits
2. Unrelated diversification businesses are said to be unrelated when their
value chains are so dissimilar that no competitively valuable cross-
business relationships exist.
Defensive Strategies
 In addition to integrative, intensive, and diversification strategies,
organizations also could pursue defensive strategies such as
retrenchment, divestiture, or liquidation.

Defensive strategy
1. Retrenchment occurs when an organization regroups through
cost and asset reduction to reverse declining sales and profits
2. Divestiture Selling a division or part of an organization is
called divestiture.
LIQUIDATION

 Selling all of a company’s assets, in parts, for their tangible worth is

called liquidation; it is with Chapter 10 bankruptcy. Liquidation is a
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.
These three guidelines indicate when
liquidation may be an especially
effective strategy to pursue:
1. An organization has pursued both a retrenchment strategy and a divestiture strategy, and
neither has been successful.
2. An organization’s only alternative is bankruptcy. Liquidation represents an orderly and
planned means of obtaining the greatest possible amount of cash for an organization’s
3. Assets. A company can legally declare bankruptcy first and then liquidate various
divisions
4. To raise needed capital.
5. The stockholders of a firm can minimize their losses by selling the organization’s assets
Cost Leadership
 emphasizes producing standardized products at a low per-unit cost for consumers
who are price sensitive.
Focus
 means producing products and services that fulfill the needs of small groups of consumers.
Two alternative types of focus strategies are Type 4 and Type 5. Type 4 is a low-cost focus
strategy that offers products or services to a small range (niche group) of customers at the
lowest price available on the market.
Porter’s Five Generic Strategies
 resources enhances competitive advantage by lowering costs or increasing
differentiation. In addition to prompting sharing, Porter stresses the need for
firms to effectively “transfer” skills and expertise among autonomous business
units to gain competitive advantage. Depending on factors such as type of
industry, size of firm, and nature of competition, various strategies could yield
advantages in cost leadership, differentiation, and focus.
Cost Leadership Strategies
(Type 1 and Type 2)
 A primary reason for pursuing forward, backward, and horizontal integration strategies is
to gain low-cost or best-value cost leadership benefits. But cost leadership generally must
be pursued in conjunction with differentiation. A number of cost elements affect the
relative attractiveness of generic strategies, including economies or diseconomies of scale
achieved, learning and experience curve effects, the percentage of capacity utilization
achieved, and linkages with suppliers and distributors. Other cost elements to consider in
choosing among alternative strategies include the potential for sharing costs and
knowledge within the organization, research and development (R&D) costs associated
with new product development or modification of existing products, labor costs, tax rates,
energy costs, and shipping costs.
There are
two ways to accomplish this:
1. Perform value chain activities more efficiently than rivals and control the factors that drive
the costs of value chain activities. Such activities could include altering the plant layout,
mastering newly introduced technologies, using common parts or components in different
products, simplifying product design, finding ways to operate close to full capacity year-
round, and so on.
2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing
activities. Such activities could include securing new suppliers or distributors, selling
products online, relocating manufacturing facilities, avoiding the use of union labor, and so
on a cost leadership strategy, a firm must be careful not to use such aggressive
Differentiation Strategies (Type 3)
 Different strategies offer different degrees of differentiation.
Differentiation does not guarantee competitive advantage, especially
if standard products sufficiently meet customer needs or if rapid
imitation by competitors is possible. Durable products protected by
barriers to quick copying by competitors are best. Successful
differentiation can mean greater product flexibility, greater
compatibility, lower costs, improved service, less maintenance,
greater convenience, ormore features.
 A Type 4 differentiation strategy can be
especially effective under the following
four conditions:
1. There are many ways to differentiate the product or service and many
buyers perceive these differences as having value.
2. The buyer’s needs and uses are diverse.
3. The buyer’s needs and uses are diverse.
4. Technological change is fast paced and competition revolves around
rapidly evolving product features.
A low-cost (Type 4) or best-value (Type 5)
focus strategy can be especially attractive
under these conditions
1. The target market niche is large, profitable, and growing.
2. Industry leaders do not consider the niche to be crucial to their own success.
3. Industry leaders consider it too costly or difficult to meet the specialized needs of the
target market niche while taking care of their mainstream customers.
4. The industry has many different niches and segments, thereby allowing a focuser to pick
a competitively attractive niche suited to its own resources.
5. Few, if any, other rivals are attempting to specialize in the same target segment.
JOINT VENTURE
 Is a popular strategy that occurs when two or more companies form a temporary
partnership or consortium for the purpose of capitalizing on some opportunity.
Often, the two or more sponsoring firms form a separate organization and have
shared equity ownership in the new entity.
Although joint ventures and partnerships are increasingly
preferred over mergers as a means for achieving
strategies, they are not always successful, for four
primary reasons:

1. Managers who must collaborate daily in operating the venture are not involved in forming
or shaping the venture.
2. The venture may benefit the partnering companies but may not benefit customers, who
then complain about poorer service or criticize the companies in other ways.
3. The venture may not be supported equally by both partners. If supported unequally,
problems arise.
4. The venture may begin to compete more with one of the partners than the other.
MERGER/ACQUISITION

 are two commonly used ways to pursue strategies. A Merger occurs when two
organizations of about equal size unite to form one enterprise. An
Acquisition occurs when a large organization purchases (acquires) a smaller
firm or vice versa. If a merger or acquisition is not desired by both parties, it is
called a hostile takeover, as opposed to a friendly merger
Nine Reasons Why Many Mergers
and Acquisitions Fail
1. Integration difficulties
2. Inadequate evaluation of target
3. Large or extraordinary debt
4. Inability to achieve synergy.
5. Too much diversification
6. Managers overly focused on acquisitions
7. Too large an acquisition
8. Difficult to integrate different organizational cultures
9. Reduced employee morale due to layoffs and relocations
Eleven Potential Benefits of Merging
with or Acquiring Another Firm
1. To provide improved capacity utilization
2. To make better use of the existing sales force
3. To reduce managerial staff
4. To gain economies of scale
5. To smooth out seasonal trends in sales
6. To gain access to new suppliers, distributors, customers, products, and creditors
7. To gain new technology
8. To gain market share
9. To enter global markets
10. To gain pricing power
11. To reduce tax obligations
TACTICS TO FACILITATE STRATEGIES
 Strategists use numerous tactics to accomplish strategies,
including being a first mover, outsourcing, and
reshoring.
FIRST MOVER
 refer to the benefits a firm may achieve by entering a new market or developing a new
product or service prior to rival firms. Some advantages of being a first mover include
securing access to rare resources, gaining new knowledge of key factors and issues, and
carving out market share and a position that is easy to defend and costly for rival firms to
overtake
Outsourcing and Reshoring
 Outsourcing involves companies hiring other companies to take over various parts of
their functional operations, such as human resources, information systems, payroll,
accounting, customer service, and even marketing. Reshoring companies plan to reshore
in 2016–2017 for the following reasons: a desire to get products to market faster and respond
rapidly to customer orders, savings from reduced transportation and warehousing, improved
quality and protection of intellectual property
Strategic Management in Nonprofit,
Governmental, and Small Firms
 Educational Institutions The world of higher education is rapidly moving to
online courses and degrees. The American Council on Education, an association for
higher education presidents, is considering allowing free, online courses to be eligible
for credit toward a degree and eligible for transfer credit.
 Medical Organizations Declining occupancy rates, deregulation, and accelerating
growth of health maintenance organizations, preferred provider organizations, urgent
care centers, outpatient surgery centers, diagnostic centers, specialized clinics, and group
practices are other major threats facing hospitals today.
 Governmental Agencies and Departments - Federal, state, county, and
municipal agencies and departments, such as police departments, chambers of
commerce, forestry associations, and health departments, are responsible for
formulating, implementing, and evaluating strategies that use taxpayers’ dollars in the
most cost-effective way to provide services and programs.
 Small Firms - “Becoming your own boss” is a dream for millions of people and a
reality for millions more. Almost everyone wants to own a business—from teens and
college students, who are signing up for entrepreneurial courses in record numbers, to
those older than age 65, who are forming more companies every year.
What Attributes Do Great
Entrepreneurs Possess?
 Many people dream of becoming a professional football player, musician,
doctor, or entrepreneur, but many of us do not think we have the perceived
special skills required to become greatly success- full. Most aspiring
entrepreneurs mistakenly believe those special skills are mandatory versus
other skill sets we devalue.