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Strategic Management

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Lesson#18

TYPES OF STRATEGIES-1

Objectives:
This lecture brings strategic management to life with many contemporary examples. Sixteen types of
strategies are defined and exemplified, including Michael Porter's generic strategies: cost leadership,
differentiation, and focus. Guidelines are presented for determining when different types of strategies
are most appropriate to pursue. An overview of strategic management in nonprofit organizations,
governmental agencies, and small firms is provided. After reading this lecture you will be able to know
about:
. Long term objectives:
. Types of Strategies
. Integration strategies

Strategies in Action:

Even if you’re on the right track, you’ll get run over if you just sit there.
-- Will Rogers

Hundreds of companies today embrace strategic planning because:
Quest for higher revenues
Quest for higher profits
Many firms have to use strategic planning in order to earn revenues and more profits.

Long term objectives
Long-term objectives
represent the results expected from pursuing certain strategies. Strategies
represent the actions to be taken to accomplish long-term objectives. The time frame for objectives and
strategies should be consistent, usually from two to five years.

The Nature of Long-Term Objectives
Objectives should be quantitative, measurable, realistic, understandable, challenging, hierarchical,
obtainable, and congruent among organizational units. Each objective should also be associated with a
time line. Objectives are commonly stated in terms such as growth in assets, growth in sales,
profitability, market share, degree and nature of diversification, degree and nature of vertical integration,
earnings per share, and social responsibility. Clearly established objectives offer many benefits. They
provide direction, allow synergy, aid in evaluation, establish priorities, reduce uncertainty, minimize
conflicts, stimulate exertion, and aid in both the allocation of resources and the design of jobs.
Long-term objectives are needed at the corporate, divisional, and functional levels in an organization.
They are an important measure of managerial performance.
Clearly stated and communicated objectives are vital to success for many reasons. First, objectives help
stakeholders understand their role in an organization's future. They also provide a basis for consistent
decision making by managers whose values and attitudes differ. By reaching a consensus on objectives
during strategy-formulation activities, an organization can minimize potential conflicts later during
implementation. Objectives set forth organizational priorities and stimulate exertion and
accomplishment. They serve as standards by which individuals, groups, departments, divisions, and
entire organizations can be evaluated. Objectives provide the basis for designing jobs and organizing
activities to be performed in an organization. They also provide direction and allow for organizational
synergy.
Without long-term objectives, an organization would drift aimlessly toward some unknown end! It is
hard to imagine an organization or individual being successful without clear objectives. Success only
rarely occurs by accident; rather, it is the result of hard work directed toward achieving certain
objectives.

Not Managing by Objectives

Strategists should avoid:
. Managing by Extrapolation
. Managing by Crisis

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. Managing by Subjective
. Managing by Hope
Strategists should avoid the following alternative ways to "not managing by objectives."
Managing by Extrapolation—adheres to the principle "If it ain't broke, don't fix it." The idea is to
keep on doing about 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 strategist is the
ability to solve problems. Because there are plenty of crises and problems to go around for every
person and every organization, strategists ought to bring their time and creative energy to bear on
solving the most pressing problems of the day. Managing by crisis is actually a form of reacting
rather than acting and of letting events dictate what’s and when’s of management decisions.
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. In short, "Do
your own thing, the best way you know how" (sometimes referred to as the mystery approach to decision
making
because subordinates are left to figure out what is happening and why).
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. Decisions are
predicted on the hope that they will work and the good times are just around the corner, especially
if luck and good fortune are on our side!

Types of Strategies

Defined and exemplified in Table, alternative strategies that an enterprise could pursue can be
categorized into thirteen 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. Each alternative strategy has countless variations. For
example, market penetration can include adding salespersons, increasing advertising expenditures,
coopering, and using similar actions to increase market share in a given geographic area.

A Comprehensive Strategic-Management Model

Alternative Strategies Defined and Exemplified
Strategy Definition Example

Forward
Integration
Gaining ownership or
increased control over
distributors or retailers
General Motors is acquiring 10
percent of its dealers.
Backward
Integration
Seeking ownership or
increased control of a
firm's suppliers
Motel-8 acquired a furniture
manufacturer.
Horizontal
Integration
Seeking ownership or
increased control over
competitors
Hilton recently acquired
Promos.
Market
Penetration
Seeking increased market
share for present products
or services in present
markets through greater
marketing efforts
Ameritrade, the online broker,
tripled its annual advertising
expenditures to $200 million to
convince people they can make
their own investment decisions.
Market
Development
Introducing present
products or services into
new geographic area
Britain's leading supplier of
buses, Henlys PLC, acquires
Blue Bird Corp., North
America's leading school bus
maker.
Product
Development
Seeking increased sales by
improving present
products or services or
developing new ones
Apple developed the G4 chip
that runs at 500 megahertz.
Concentric
Diversification
Adding new, but related,
products or services
National Westminister Bank
PLC in Britain buys the leading
British insurance company,
Legal & General Group PLC.
Conglomerate
Diversification
Adding new, unrelated
products or services
H&R Block, the top tax
preparation agency, said it will
buy discount stock brokerage
Olde Financial for $850 million
in cash.
Horizontal
Diversification
Adding new, unrelated
products or services for
present customers
The New York Yankees baseball
team is merging with the New
Jersey Nets basketball team.
Joint Venture Two or more sponsoring
firms forming a separate
organization for
cooperative purposes
Lucent Technologies and Philips
Electronics NV formed Philips
Consumer Communications to
make and sell telephones.
Retrenchment Regrouping through cost
and asset reduction to
reverse declining sales and
profit
Singer, the sewing machine
maker, declared bankruptcy.

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Divestiture Selling a division or part
of an organization
Harcourt General, the large U.S.
publisher, selling its Neiman
Marcus division.
Liquidation Selling all of a company's
assets, in parts, for their
tangible worth
Ribol sold all its assets and
ceases business.

Integration 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.

Forward integration strategy refers to the transactions
between the customers and firm. Similarly, the function for the particular supply which the firm is being
intended to involve itself will be called backward integration. When the firm looks that other firm
which may be taken over within the area of its own activity is called horizontal integration.

Benefits of vertical integration strategy:

Allow a firm to gain control over:
. Distributors (forward integration)
. Suppliers (backward integration)
. Competitors (horizontal integration)

Forward integration:
Gaining ownership or increased control over distributors or retailers
Forward integration
involves gaining ownership or increased control over distributors or retailers.
You can gain ownership or control over the distributors, suppliers and
Competitors using forward integration.

Guidelines for the use of integration strategies:

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

. Present distributors are expensive, unreliable, or incapable of meeting firm’s needs
. Availability of quality distributors is limited
. When firm competes in an industry that is expected to grow markedly
. Organization has both capital and human resources needed to manage new business of distribution
. Advantages of stable production are high
. Present distributors have high profit margins
When your present distributors are expensive and you think that without affecting the quality of the
goods you have to carry own the operations, forward integration is advisable.
Similarly, if distributors are unreliable, they can not deliver with a sustained degree of timeliness or they
are not in a proper way to meet the needs of the firm, forward integration is advisable.
Availability of quality distributors is limited or it is difficult to get the quality of goods, then this need
for a quality distributor, forward integration is best alternative.
Suppose you have two industries, computers and mobile telephone which are progressing
tremendously, it is advisable to think of forward integration due to the changing environment of the
business.
Organization has both capital and human resources needed to manage new business of distribution. A
firm has all the basic elements to run the business safely in that case forward integration is best
alternate.
For stable production, stable supply is necessary. If you think that present distributors are charging high
mark up, you may do that operation your self in order to avoid the mark up charges. It is advisable that
firm itself involve in the operations. By gaining control, stability will be more and profitability will be
enhanced.
When an organization's present distributors are especially expensive, or unreliable, or incapable of
meeting the firm's distribution needs

When the availability of quality distributors is so limited as to offer a competitive advantage to
those firms that integrate forward
When an organization competes in an industry that is growing and is expected to continue to grow
markedly; this is a factor because forward integration reduces an organization's ability to diversify if
its basic industry falters
When an organization has both the capital and human resources needed to manage the new
business of distributing its own products
When the advantages of stable production are particularly high; this is a consideration because an
organization can increase the predictability of the demand for its output through forward
integration
When present distributors or retailers have high profit margins; this situation suggests that a
company profitably could distribute its own products and price them more competitively by
integrating forward

Backward Integration –

Seeking ownership or increased control of a firm’s suppliers
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, too costly, or cannot meet the firm's needs.

Guidelines for Backward Integration:

Six guidelines when backward integration may be an especially effective strategy are:
. When present suppliers are expensive, unreliable, or incapable of meeting needs
. Number of suppliers is small and number of competitors large
. High growth in industry sector
. Firm has both capital and human resources to manage new business
. Advantages of stable prices are important
. Present supplies have high profit margins
When an organization's present suppliers are especially expensive, or unreliable, or incapable of
meeting the firm's needs for parts, components, assemblies, or raw materials

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When the number of suppliers is small and the number of competitors is large
When an organization competes in an industry that is growing rapidly; this is a factor because
integrative-type strategies (forward, backward, and horizontal) reduce an organization's ability to
diversify in a declining industry
When an organization has both capital and human resources to manage the new business of
supplying its own raw materials
When the advantages of stable prices are particularly important; this is a factor because an
organization can stabilize the cost of its raw materials and the associated price of its product
through backward integration
When present supplies have high profit margins, which suggests that the business of supplying
products or services in the given industry is a worthwhile venture
When an organization needs to acquire a needed resource quickly

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