TYPES OF STRATEGIES:The Nature of Long-Term Objectives, Integration Strategies

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Strategic Management MGT603

Lesson 18

TYPES OF STRATEGIES

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

Strategic Management MGT603

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

Strategic Management MGT603

Alternative Strategies Defined and Exemplified

Strategy

Definition

Example

Forward

Gaining ownership or

General Motors is acquiring 10

Integration

increased control over

percent of its dealers.

distributors or retailers

Backward

Seeking ownership or

Motel-8 acquired a furniture

Integration

increased control of a

manufacturer.

firm's suppliers

Horizontal

Seeking ownership or

Hilton

recently

acquired

Integration

increased control over

Promos.

competitors

Market

Seeking increased market

Ameritrade, the online broker,

Penetration

share for present products

tripled its annual advertising

or services in present

expenditures to $200 million to

markets through greater

convince people they can make

their own investment decisions.

marketing efforts

Market

Introducing

present

Britain's leading supplier of

Development

products or services into

buses, Henlys PLC, acquires

new geographic area

Blue Bird

Corp.,

North

America's leading school bus

maker.

Product

Seeking increased sales by

Apple developed the G4 chip

Development

improving

present

that runs at 500 megahertz.

products or services or

developing new ones

Concentric

Adding new, but related,

National Westminister Bank

Diversification

products or services

PLC in Britain buys the leading

British insurance company,

Legal & General Group PLC.

Conglomerate

Adding new, unrelated

H&R Block, the top tax

Diversification

products or services

preparation agency, said it will

buy discount stock brokerage

Olde Financial for $850 million

in cash.

Horizontal

Adding new, unrelated

The New York Yankees baseball

Diversification

products or services for

team is merging with the New

present customers

Jersey Nets basketball team.

Joint Venture

Two or more sponsoring

Lucent Technologies and Philips

firms forming a separate

Electronics NV formed Philips

organization

for

Consumer Communications to

cooperative purposes

make and sell telephones.

Retrenchment

Regrouping through cost

Singer, the sewing machine

and asset reduction to

maker, declared bankruptcy.

reverse declining sales and

profit

Strategic Management MGT603

Divestiture

Selling a division or part

Harcourt General, the large U.S.

of an organization

publisher, selling its Neiman

Marcus division.

Liquidation

Selling all of a company's

Ribol sold all its assets and

assets, in parts, for their

ceases business.

tangible worth

Integration Strategies:

Integration Strategies

Forward Integration

Vertical

Integration

Backward Integration

Strategies

Horizontal Integration

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:

Strategic Management MGT603

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

Strategic Management MGT603

· 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

Strategic Management MGT603

Lesson 19

TYPES OF STRATEGIES

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

Integration strategies

Horizontal Integration:

Seeking ownership or increased control over competitors

Horizontal integration refers to a strategy of seeking ownership of or increased control over a firm's

competitors. One of the most significant trends in strategic management today is the increased use of

horizontal integration as a growth strategy. Mergers, acquisitions, and takeovers among competitors

allow for increased economies of scale and enhanced transfer of resources and competencies.

Increased control over competitors means that you have to look for new opportunities either by the

purchase of the new firm or hostile take over the other firm. One organization gains control of other

which functioning within the same industry.

It should be done that every firm wants to increase its area of influence, market share and business.

Guidelines for Horizontal Integration:

Four guidelines when horizontal integration may be an especially effective strategy are:

Firm can gain monopolistic characteristics without being challenged by federal government

Competes in growing industry

Increased economies of scale provide major competitive advantages

Faltering due to lack of managerial expertise or need for particular resources

When an organization can gain monopolistic characteristics in a particular area or region without being

challenged by the federal government for "tending substantially" to reduce competition

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 needed to successfully manage an

expanded organization

When competitors are faltering due to a lack of managerial expertise or a need for particular resources

that an organization possesses; note that horizontal integration would not be appropriate if competitors

are doing poorly because overall industry sales are declining

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