Strategic Mgt- 2023

Chapter four: Types of Strategies

1. Long-Term Objectives
• The results expected from pursuing certain strategies.
• 2-to-5-year timeframe
• Varying Performance Measures by Organizational Level
• provide a basis for consistent decision making by managers whose values and attitudes differ.
• serve as standards by which individuals, groups, departments, divisions, and entire organizations
can be evaluated.
• establish priorities, reduce uncertainty, minimize conflicts, aid in both the allocation of resources
and the design of jobs.

1.1. The Desired Characteristics of Objectives

1.2. Financial versus Strategic Objectives

Two types of objectives are especially common in organizations: financial and strategic
objectives.
Financial objectives include 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, and so on.
Strategic objectives include 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.
1.3. Not Managing by Objectives
Strategists should avoid the following ways of “not managing by objectives.”

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2. Types of Strategies
• 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, and priorities must be established.

2.1. Alternative Strategies Defined and Exemplified

Integration
st
Intensive st

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Defensive st

2.2. Levels of Strategies with Persons Most Responsible

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.

3. 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.
3.1. Forward Integration
involves gaining ownership or increased control over distributors or retailers.
Forward Integration Guidelines
• When an organization's present distributors are especially expensive
• When the availability of quality distributors is so limited as to offer a competitive advantage
• When an organization competes in an industry that is growing

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• When an organization has both capital and human resources to manage distributing their own
products
• When the advantages of stable production are particularly high
• When present distributors or retailers have high profit margins

3.2. Backward Integration

strategy of seeking ownership or increased control of a firm's suppliers.
Backward Integration Guidelines
• When an organization's present suppliers are especially expensive or unreliable
• When the number of suppliers is small, and the number of competitors is large
• When the organization competes in a growing industry
• When an organization has both capital and human resources
• 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(s)
• through backward integration.
• When present suppliers have high profit margins
• When an organization needs to quickly acquire a needed resource

3.3. Horizontal Integration

a strategy of seeking ownership of or increased control over a firm's competitors
Horizontal Integration Guidelines
• When an organization can gain monopolistic characteristics in a particular area or region without
being challenged by the federal government
• When an organization competes in a growing industry
• When increased economies of scale provide major competitive advantages.
• When an organization has both the capital and human talent/ resources needed
• When competitors are faltering due to a lack of managerial expertise

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4. 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.
4.1. Market Penetration Strategy
Market penetration strategy seeks to increase market share for present products or services in
present markets through greater marketing efforts when current markets are not saturated with a
particular product or service.
Market Penetration Guidelines
• When current markets are not saturated with a particular product or service
• When the usage rate of present customers could be increased significantly
• When the market shares of major competitors have been declining while total industry sales have
been increasing
• When the correlation between dollar sales and dollar marketing expenditures historically has
been high
• When increased economies of scale provide major competitive advantages.

4.2. Market Development

involves introducing present products or services into new geographic areas.
Market Development Guidelines
• When new channels of distribution are available that are reliable, inexpensive, and of good
quality.
• When an organization is very successful at what it does.
• When new untapped or unsaturated markets exist.
• When an organization has the needed capital and human resources to manage expanded
operations.
• When an organization has excess production capacity.
• When an organization's basic industry is rapidly becoming global in scope.

4.3. Product Development Strategy

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seeks increased sales by improving or modifying present products or services.

Product Development Guidelines
• When an organization has successful products that are in the maturity stage of the product life
cycle.
• When an organization competes in an industry characterized by rapid technological
developments.
• When major competitors offer better-quality products at comparable prices.
• When an organization competes in a high-growth industry.
• When an organization has strong research and development capabilities.

5. Diversification Strategies
The two general types of diversification strategies are related diversification and unrelated
diversification.
Related Diversification
value chains possess competitively valuable cross-business strategic fits.
Unrelated Diversification
value chains are so dissimilar that no competitively valuable cross-business relationships exist.
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Synergies of Related Diversification
• Transferring competitively valuable expertise, technological know-how, or other capabilities
from one business to another.
• Combining the related activities of separate businesses into a single operation to achieve lower
costs.
• Exploiting common use of a known brand name.
• Using cross-business collaboration to create strengths.
Related Diversification Guidelines
• When an organization competes in a no-growth or a slow-growth industry.
• When adding new, but related, products would significantly enhance the sales of current
products.
• When new, but related, products could be offered at highly competitive prices.

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• When new, but related, products have seasonal sales levels that counterbalance an organization’s
existing peaks and valleys.
• When an organization’s products are currently in the declining stage of the product’s life cycle.
• When an organization has a strong management team.

Unrelated Diversification Guidelines

• When revenues derived from an organization's current products would increase significantly by
adding the new, unrelated products.
• When an organization competes in a highly competitive or a no-growth industry, as indicated by
low industry profit margins and returns.
• When an organization's present channels of distribution can be used to market the new products
to current customers.
• When the new products have countercyclical sales patterns compared to present products.
• When an organization's basic industry is experiencing declining annual sales and profits.
• When an organization has the capital and managerial talent needed to compete successfully in a
new industry.
• When an organization has the opportunity to purchase an unrelated business that is an attractive
investment opportunity.
• When there exists financial synergy.
• When existing markets for an organization's present products are saturated.
• When antitrust action could be charged against an organization that historically has concentrated
on a single industry.
Note that a key difference between related and unrelated diversification is that the former should
be based on some commonality in markets, products, or technology, whereas the latter is based
more on profit considerations.

6. Defensive Strategies
In addition to integrative, intensive, and diversification strategies, organizations also could
pursue defensive strategies such as retrenchment, divestiture, or liquidation.
6.1. Retrenchment

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• occurs when an organization regroups through cost and asset reduction to reverse declining sales
and profits.
• also called a turnaround or reorganizational strategy.
• designed to fortify (protect/ strengthen) an organization’s basic distinctive competence.
Retrenchment Guidelines
• When an organization has a distinctive competence but has failed consistently to meet its goals.
• When an organization is one of the weaker competitors in a given industry.
• When an organization is plagued by inefficiency, low profitability, and poor employee morale.
• When an organization fails to capitalize on external opportunities and minimize external threats.
• When an organization has grown so large so quickly that major internal reorganization is needed.

6.2. Divestiture
Selling a division or part of an organization.
Often used to raise capital for further strategic acquisitions or investments.
Divestiture Guidelines
• When an organization has pursued a retrenchment strategy and failed to accomplish
improvements.
• When a division needs more resources to be competitive than the company can provide.
• When a division is responsible for an organization's overall poor performance.
• When a division is a misfit with the rest of an organization.
• When a large amount of cash is needed quickly.
• When government antitrust action threatens a firm.

6.3. Liquidation
Selling all of a company’s assets for their tangible worth.
Liquidation is a recognition of defeat and consequently can be an emotionally difficult strategy.
Liquidation is pursued when bankruptcy is the only option available.
Liquidation Guidelines

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• When an organization has pursued both a retrenchment strategy and a divestiture strategy, and
neither has been successful.
• When an organization's only alternative is bankruptcy.
• When the stockholders of a firm can minimize their losses by selling the organization's assets.

7. Michael Porter's Five Generic Strategies

According to Porter, strategies allow organizations to gain competitive advantage from three
different bases: cost leadership, differentiation, and focus. Porter calls these bases generic
strategies.

1. Cost Leadership
• emphasizes producing standardized products at a very low per-unit cost for consumers who are
price-sensitive.
• Cost leadership generally must be pursued in conjunction with differentiation.
• Companies employing a low-cost (Type 1) or best-value (Type 2) cost leadership strategy must
achieve their competitive advantage in ways that are difficult for competitors to copy or match.
Type 1
Low-cost strategy that offers products or services to a wide range of customers at the lowest price
available on the market.
Type 2
Best-value strategy that offers products or services to a wide range of customers at the best
price-value available on the market.
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Type 1 or Type 2 cost leadership strategy can be especially effective under the following
conditions:
1. Price competition among rival sellers is especially vigorous (strong).
2. Products of rival sellers are essentially identical, and supplies are readily available from any
of several eager sellers.
3. There are few ways to achieve product differentiation that have value to buyers.
4. Most buyers use the product in the same ways.
5. Buyers incur low costs in switching their purchases from one seller to another.
6. Buyers are large and have significant power to bargain down prices.
7. Industry newcomers use introductory low prices to attract buyers and build a customer base.
2. Differentiation strategies
Type 3
Differentiation is a strategy aimed at producing products and services considered unique
industry-wide and directed at consumers who are relatively price-insensitive.
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.
Used when:
• A firm can charge a higher price for its product and to gain customer loyalty because consumers
may become strongly attached to the differentiation factors.
• Special features that differentiate one’s product can include superior service, spare parts
availability, engineering design, product performance, useful life, gas mileage, or ease of use.
Risks of using this generic strategy:
• the unique product may not be valued highly enough by customers to justify the higher price.
When this happens, a cost-leadership strategy easily will defeat a differentiation strategy.
• Competitors may quickly develop ways to copy the differentiating features.
3. Focus strategies
Type 4
low-cost focus strategy that offers products or services to a niche group of customers at the
lowest price available on the market.

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Type 5
best-value focus strategy that offers products or services to a small range of customers at the best
price-value available on the market.
A successful focus strategy depends on an industry segment that is of sufficient size, has good
growth potential, and is not crucial to the success of other major competitors.
Discuss each of Michael Porter's five generic strategies.
Answer: According to Porter, strategies allow organizations to gain competitive advantage from
three different bases: cost leadership, differentiation, and focus. Porter calls these bases generic
strategies. Cost leadership emphasizes producing standardized products at a very low per-unit
cost for consumers who are price-sensitive. Two alternative types of cost leadership strategies
can be defined. Type 1 is a low-cost strategy that offers products or services to a wide range of
customers at the lowest price available on the market. Type 2 is a best-value strategy that offers
products or services to a wide range of customers at the best price-value available on the market.
The best value strategy aims to offer customers a range of products or services at the lowest price
available compared to a rival's products with similar attributes. Both Type 1 and Type 2
strategies target a large market. Differentiation, Type 3, is a strategy aimed at producing products
and services considered unique industry-wide and directed at consumers who are relatively
price-insensitive. Focus means producing products and services that fulfill the needs of small
groups of consumers. Type 4, a low-cost focus strategy, offers products or services to a small
range of customers at the lowest price available on the market. Type 5 is a best-value focus
strategy that offers products or services to a small range of customers at the best price-value
available on the market.

8. Means for Achieving Strategies

• Cooperation Among Competitors. For collaboration between competitors to succeed,
both firms must contribute something distinctive, such as technology, distribution, basic
research, or manufacturing capacity.
• Joint venture/ partnering 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.
• 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.
• Private equity (PE) firms are acquiring and taking private a wide variety of companies
almost daily in the business world.
Tactics to facilitate strategies:

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• First mover advantages refer to the benefits a firm may achieve by entering a new
market or developing a new product or service prior to rival firms.
• Outsourcing/ Reshoring 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.

Questions on Chapter 4: Types of Strategies

1) Long-term objectives are needed at which level(s) in an organization?

A) Corporate
B) Divisional
C) Functional
D) All of the above
E) Corporate & divisional levels, but not functional level

Answer: D

2) Financial objectives involve all of the following EXCEPT

A) growth in revenues.
B) larger market share.
C) higher dividends.
D) greater return on investment.
E) a rising stock price.

Answer: B

3) What principle is based on the belief that the true measure of a really good strategist is the
ability to solve problems?
A) Managing by crisis
B) Managing by objectives
C) Managing by extrapolation
D) Managing by exception
E) Managing by hope

Answer: A

4) What principle is built on the idea that there is no general plan for which way to go and what
to do?
A) Managing by crisis
B) Managing by extrapolation
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C) Managing by objectives
D) Managing by hope
E) Managing by subjectives

Answer: E

5) Which level of strategy is most likely NOT present in small firms?

A) Company
B) Functional
C) Divisional
D) Operational
E) All of the above are present in small firms.

Answer: C

6) Which strategy is effective when new, but related, products could be offered at highly
competitive prices?
A) Forward integration
B) Related diversification
C) Related integration
D) Conglomerate diversification
E) Unrelated diversification

Answer: B

7) Which strategy should an organization use when its products are currently in the declining
stage of the product's life cycle?
A) Divestiture
B) Related diversification
C) Backward integration
D) Unrelated diversification
E) Retrenchment

Answer: B

8) Forward integration and backward integration are sometimes collectively referred to as

A) horizontal integration.
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B) diversification.
C) vertical integration.
D) stuck-in-the-middle.
E) hierarchical integration.

Answer: C

9) Websites that sell products directly to consumers are examples of which type of strategy?
A) Backward integration
B) Product development
C) Forward integration
D) Horizontal integration
E) Conglomerate diversification

Answer: C

10) Which of these strategies is effective when the number of suppliers is small and the number
of competitors is large?
A) Conglomerate diversification
B) Forward integration
C) Concentric diversification
D) Backward integration
E) Horizontal diversification

Answer: D

11) Backward integration is effective in all of these cases EXCEPT

A) when an organization competes in an industry that is growing rapidly.
B) when an organization has both capital and human resources to manage the new business of
supplying its own raw materials.
C) when an organization needs to acquire a needed resource quickly.
D) when the advantages of stable prices are not particularly important.
E) when present suppliers have high profit margins.

Answer: D

12) What refers to a strategy of seeking ownership of, or increased control over a firm's
competitors?
A) Forward integration
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B) Conglomerate diversification
C) Backward integration
D) Horizontal integration
E) Concentric diversification

Answer: D

13) Which strategy seeks to increase market share for present products or services in present
markets through greater marketing efforts?
A) Market penetration
B) Forward integration
C) Market development
D) Backward integration
E) Product development

Answer: A

14) When a domestic company first begins to export to India, it is an example of

A) horizontal integration.
B) backward integration.
C) forward integration.
D) concentric diversification.
E) market development.

Answer: E

15) Which strategy generally entails large research and development expenditures?
A) Market penetration
B) Retrenchment
C) Forward integration
D) Product development
E) Divestiture

Answer: D

16) All of the following situations are conducive to market development EXCEPT
A) when new channels of distribution are expensive and unreliable.
B) when an organization is successful at what it does.
C) when new untapped or unsaturated markets exist.
D) when an organization has excess production capacity.
E) when an organization's basic industry is rapidly becoming global in scope.
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Answer: A

17) Which strategy is appropriate when an organization competes in an industry characterized by

rapid technological developments?
A) Retrenchment
B) Product development
C) Backward integration
D) Liquidation
E) Market penetration

Answer: B

18) Gap's opening of its first five stores in China is an example of which type of strategy?
A) Forward integration
B) Backward integration
C) Horizontal integration
D) Market development
E) Product development

Answer: D

19) A pasta manufacturer's purchase of some pet food brands is an example of

A) backward integration.
B) divestiture.
C) retrenchment.
D) unrelated diversification.
E) forward integration.

Answer: D

20) Procter & Gamble's (P&G) sale of many of its brands in order to focus on its core brands is
an example of which type of strategy?
A) Related diversification
B) Unrelated diversification
C) Retrenchment
D) Divestiture
E) Liquidation

Answer: D
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21) What kind of strategy is retrenchment?

A) A turnaround strategy
B) An expansion strategy
C) A diagonal strategy
D) An intensive strategy
E) An offensive strategy

Answer: A

22) Which strategy should be implemented when a division is responsible for an organization's
overall poor performance?
A) Backward integration
B) Divestiture
C) Forward integration
D) Cost leadership
E) Related diversification

Answer: B

23) Selling all of a company's assets, in parts, for their tangible worth is called
A) joint venture.
B) divestiture.
C) concentric diversification.
D) liquidation.
E) unrelated integration.

Answer: D

24) Under which strategy would you offer products or services to a wide range of customers at
the lowest price available on the market?
A) Cost Leadership - Low Cost
B) Cost Leadership - Best Value
C) Focus - Low Cost
D) Focus - Best Value
E) Differentiation

Answer: A

25) According to Porter, which strategy offers products or services to a niche group of
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customers at the lowest price available on the market?

A) Cost Leadership - Low Cost
B) Cost Leadership - Best Value
C) Focus - Low Cost
D) Focus - Best Value
E) Differentiation

Answer: C

26) What occurs when two or more companies form a temporary partnership or consortium for
the purpose of capitalizing on some opportunity?
A) Retrenchment
B) A joint venture
C) Liquidation
D) Forward integration
E) Divestiture

Answer: B

27) All of the following are cooperative arrangements EXCEPT

A) Research and Development (R&D) partnerships.
B) joint-bidding consortia.
C) cross-licensing agreements.
D) cross-manufacturing agreements.
E) marketing plans.

Answer: E

28) Which strategy would be most appropriate when the distinctive competencies of two or more
firms complement each other especially well?
A) Conglomerate diversification
B) Divestiture
C) Joint venture
D) Retrenchment
E) Integration

Answer: C

29) When two organizations of about equal size unite to form one enterprise, which of these
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occurs?
A) Hostile takeover
B) Merger
C) Acquisition
D) Leveraged buyout
E) Friendly takeover

Answer: B

30) When companies are hired by other companies to take over functional operations such as
human resources, information systems, payroll, accounting, or customer service, this is called
A) marketing.
B) outsourcing.
C) licensing.
D) franchising.
E) divestiture.

Answer: B

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