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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 youre on the right track, youll 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:

. .
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Managing by Extrapolation

Managing by Crisis

. .

Managing by Subjective

Managing by Hope

Strategists should avoid the following alternative ways to "not managing by objectives." Managing by Extrapolationadheres 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 Crisisbased 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 whats and whens of management decisions. Managing by Subjectivebuilt 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 Hopebased 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 actionsforward integration, backward integration, horizontal integration, market penetration, market development, product development, concentric diversification, conglomerate diversification, horizontal diversification, joint venture, retrenchment, divestiture, and liquidationand 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. 81 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 firms 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 firms 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 83 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