TYPES OF STRATEGIES:Diversification Strategies, Conglomerate Diversification

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TYPES OF STRATEGIES:Guidelines for Divestiture, Guidelines for Liquidation >>

Strategic Management MGT603

Lesson 21

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

Diversification strategies

Diversification Strategies

Diversification Strategies

Concentric

Diversification

Conglomerate

Diversification

Strategies

Horizontal

Diversification

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

Strategic Management MGT603

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.

Strategic Management MGT603

Defensive Strategies

Retrenchment

Divestiture

Defensive

Strategies

Liquidation

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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