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TYPES OF STRATEGIES-4

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:
. Types of Strategies
. Diversification strategies

Diversification Strategies

There are three general types of diversification strategies: concentric, horizontal, and conglomerate. Over all,
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.

Concentric Diversification

Adding new, but related, products or services
Adding new, but related, products or services is widely called concentric diversification. An example of this
strategy is AT&T recently spending $120 billion acquiring cable television companies in order to wire
America with fast Internet service over cable rather than telephone lines.

AT&T's concentric diversification
strategy has led the firm into talks with America Online (AOL) about a possible joint venture or merger to
provide AOL customers cable access to the Internet.

Guidelines for Concentric Diversification

Five guidelines when concentric diversification may be an effective strategy are provided below:
. Competes in no- or slow-growth industry
. Adding new & related products increases sales of current products
Diversification Strategies


Diversification
Strategies
Concentric
Diversification
Conglomerate
Diversification
Horizontal
Diversification

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. New & related products offered at competitive prices
. Current products are in decline stage of the product life cycle
. Strong management team

Conglomerate Diversification

Adding new, unrelated products or services
Adding new, unrelated products or services is called conglomerate diversification. Some firms pursue
conglomerate diversification based in part on an expectation of profits from breaking up acquired firms and
selling divisions piecemeal.

Guidelines for Conglomerate Diversification

Four guidelines when conglomerate diversification may be an effective strategy are provided below:
. Declining annual sales and profits
. Capital and managerial talent to compete successfully in a new industry
. Financial synergy between the acquired and acquiring firms
. Exiting markets for present products are saturated

Horizontal Diversification

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.

Guidelines for Horizontal Diversification
Four guidelines when horizontal diversification may be an especially effective strategy are:
. Revenues from current products/services would increase significantly by adding the new unrelated
products
. Highly competitive and/or no-growth industry w/low margins and returns
. Present distribution channels can be used to market new products to current customers
. New products have counter cyclical sales patterns compared to existing products

Defensive Strategies

In addition to integrative, intensive, and diversification strategies, organizations also could pursue
retrenchment, divestiture, or liquidation.

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Retrenchment

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

Guidelines for Retrenchment

Five guidelines when retrenchment may be an especially effective strategy to pursue are as follows:
. Firm has failed to meet its objectives and goals consistently over time but has distinctive competencies
. Firm is one of the weaker competitors
. Inefficiency, low profitability, poor employee morale and pressure from stockholders to improve
performance.
. When an organization’s strategic managers have failed
. Very quick growth to large organization where a major internal reorganization is needed
When an organization has grown so large so quickly that major internal reorganization is needed

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