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Chapter Two Strategies in Action

The document discusses 13 different types of business strategies that can be categorized as integration strategies, intensive strategies, and diversification strategies. Integration strategies include forward, backward, and horizontal integration and aim to gain control over distributors, suppliers, or competitors. Intensive strategies like market penetration, market development, and product development focus on improving competitive position in existing markets and products. Diversification strategies such as concentric, horizontal, and conglomerate diversification add new related or unrelated products or services. The document also provides guidelines for when different strategies may be appropriate.

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0% found this document useful (0 votes)
33 views9 pages

Chapter Two Strategies in Action

The document discusses 13 different types of business strategies that can be categorized as integration strategies, intensive strategies, and diversification strategies. Integration strategies include forward, backward, and horizontal integration and aim to gain control over distributors, suppliers, or competitors. Intensive strategies like market penetration, market development, and product development focus on improving competitive position in existing markets and products. Diversification strategies such as concentric, horizontal, and conglomerate diversification add new related or unrelated products or services. The document also provides guidelines for when different strategies may be appropriate.

Uploaded by

medrek
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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CHAPTER TWO

STRATEGIES IN ACTION
2.1 Types of strategies

Alternative strategies that an enterprise could pursue can be categorized in to thirteen actions:
forward integration, backward integration, horizontal integration, market penetration, market
development, product development, concentric diversification, conglomerate diversification,
horizontal diversification, joint venture, retrenchment,, divesture, liquidation, and a combination
strategy.

I. INTEGRATION STRATEGIES

a) Forward Integration: involves gaining ownership or increased control over distributers or


retailers. An effective means of implementing forward integration is franchising. Business
can expand rapidly by franchising because costs and opportunities are spread among many
individuals. E.g. Coca-cola continues to purchase domestic and foreign bottlers.
b) Backward Integration: Both manufacturers and retailers purchase needed materials from
suppliers. Backward integration is a strategy of seeking ownership or increased control of a
firm’s supplier. This strategy is can be especially appropriate when a firm’s current suppliers
are unreliable, too costly, or cannot meet the firm’s standard.
c) Horizontal Integration: refers to a strategy of seeking ownership of or increased control
over a firm’s competitors. Mergers, acquisition, and takeovers among competitors allow for
increased economies of scale and enhanced transfer of resources and competencies.
Horizontal integration has become the most favored growth strategy in many industries

II. INTENSIVE STRATEGIES

These types of strategies require intensive efforts to improve a firm’s competitive position with
existing products.

a) Market Penetration: this strategy seeks to increase market share for present products or
service in present market through grater marketing efforts. It includes increasing the

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number of sales persons, increasing advertising expenditures, offering extensive sales
promotions, or increasing publicity efforts.
b) Market Development: involves introducing present products or services in to new
geographic areas. In many industries such as airlines, it is going to be hard to maintain a
competitive edge by staying close to home.
c) Product development: is a strategy that seeks increased sales by improving or modifying
present products or services. It usually entails large research and development
expenditures.

III. DIVERSIFICATION STRATEGIES

There are three general types of diversification strategies: concentric, horizontal, and
conglomerate. However diversification strategies are becoming less and less popular as
organizations are finding it more and more difficult to manage diverse business activities.

a) Concentric Diversification: adding new, but related, products or service is widely called
concentric diversification. E.g. entry of Bell Corporation, a telephone company, in to
video programming business.
b) Horizontal diversification: adding new, unrelated products or service for present
customers is called horizontal diversification. This strategy is not as risky as
conglomerate diversification, because a firm should already be familiar with its present
customers.
c) Conglomerate Diversification: Adding new, unrelated products or services is called
conglomerate diversification. Some firms pursue this strategy based on an expectation of
profits from breaking up acquired firms and selling divisions piecemeal. It is based on a
stand that there is some kind of anti-synergy, the whole being worth less that the parts.

IV. DEFENSIVE STRATEGIES


a) Joint Venture: 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.
This strategy can be considered defensive only because the firm is not undertaking the
project alone. Joint venture and cooperative arrangements are being used increasingly

Ashenafi A. (PhD Candidate) Page 2


because they allow companies to improve communications and networking, to globalize
operations and to minimize risk.
b) Retrenchment: occurs when an organization regroups through cost and asset reduction to
reverse declining sales and profits. It is sometimes called turnaround or reorganizational
strategy, retrenchment is designed to fortify an organization’s basic distinctive
competencies. This strategy entail selling off land and buildings to raise needed cash,
pruning product line, closing marginal business, closing obsolete factories, reducing
number of employees, and instituting expense control systems.
c) Divestiture: selling a division or part of an organization is called divestiture. It is used to
raise capital for further strategic acquisitions or investments. It can be part of an overall
retrenchment strategy to rid an organization of business that are unprofitable, that require
too much capital, or that do not fit well with the firm’s other activities.
d) Liquidation: selling all of a company’s assets, in parts, for their tangible worthies called
liquidation. Liquidation is recognition of defeat and consequently can be emotionally
difficult strategy.
e) Combination: many organizations pursue a combination of two or more strategies
simultaneously, but this strategy can be exceptionally risky if carried too far. No
organization can afford to pursue all the strategies that might benefit the firm.
Organizations cannot do too many things well because resources and talents get spread
thin and competitors gain advantage. In large diversified companies, a combination
strategy is commonly employed when different divisions pursue different strategies.

2.2 Guidelines for pursuing strategies

The guideline for pursuing strategies reveals situations, conditions, and guideline for when
various alternative strategies are appropriate to pursue. For example, a market development
strategy is generally most appropriate when new channels of distribution are available that are
reliable, inexpensive, and of good quality.

Ashenafi A. (PhD Candidate) Page 3


Forward Integration Backward integration
 When present distributors are expensive,  When present suppliers are especially
unreliable, or incapable expensive, or unreliable, or incapable of
 When quality distributors are limited in meeting firm’s need
number  When the organization competes in rapidly
 When the industry is growing and is growing industry
expected to grow rapidly  When the organization has both the capital
 When the organization has both the capital and human resources needed
and human resources needed  When advantage of stable prices are
 When the advantage of stable production particularly important
 When present distributors or retailers have  When present suppliers have high profit
high profit margins margins
 When an organization needs to acquire a
needed resource quickly
Horizontal integration Market Penetration
 When an organization can gain  When current markets are not saturated
monopolistic characteristics in particular  Usage rate of customers could significantly
area increase
 Growing industry  When the market share of competitors have
 When increased economies of scale been declining
provide major competitive advantage.  When increases economies of scale provide
 When an organization has both the capital major competitive advantage
and human talent
 When competitors lack managerial
expertise or a need for particular resources
that your organization possesses

Market Development Product development


 When new channels of distribution are  When an organization has successful
available products that are in maturity stage
 When new untapped or unsaturated market  When the industry is characterized by rapid
exist technological change
 When an organization has needed capital  When competitors offer better quality
and human resource products
 When an organization has excess  High growth industry
production capacity  When an organization has strong research
 When the industry is rapidly becoming and development capabilities
global in scope

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Concentric Diversification Conglomerate Diversification
 Slow/no growth industry  When the industry is experiencing declining
 When new, but related, product would annual sales
enhance the sales of current product  When the organization has capital and
 When new, but related, product could be managerial talent
offered at a competitive price  When there exists financial synergy b/n the
 When the organization’s products are in acquired and the acquiring firm
declining stage  When existing markets are saturated

Horizontal Diversification Joint Venture


 When revenue derived from current would  When two or more smaller firms have
increase by adding new unrelated products trouble competing with a large firm
 Highly competitive and/or a no-growth  when project require overwhelming
strategy resources and risks
 When present channels of distribution can  When there is a need to introduce a new
be used to market new product to current technology quickly
customers  When distinctive competencies of two or
more firms complement each other
 When the unique advantage of being
privately and publicly held can be
synergistically combined in a joint venture
Retrenchment Divestiture
 When an organization failed to meet its  When retrenchment strategy is pursued and
objectives and goals consistently overtime then failed
 When the organization is one of the weaker  When a division need more resources to be
competitors competitive
 When there is inefficiency, low  When gov’t antitrust action threatens an
profitability, poor employee morale etc. organization
 When an organization failed to capitalize  When large amount of cash is needed
opportunities, minimize threats, take quickly
advantage of strengths, and overcome  When a division is a misfit with the rest of
weaknesses. an organization
 When a division is responsible for an overall
organization performance

Liquidation
 When neither retrenchment nor divestiture 
strategy has been successful
 When an organization’s only strategy is
bankruptcy
 When stockholders can minimize their loss
by selling the organization’s asset.

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2.3 Michael Porter’s 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.

 Cost leadership emphasizes producing standardized products at very low per-unit cost for
consumers who are price sensitive.
 Differentiation 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.

Porter strategies imply different organizational arrangements, control procedures, and incentive
systems. Larger firms with greater access to resources typically compete on a cost leadership
and/or differentiation basis; whereas smaller firms often compete on a focus basis. Porter stresses
the need for strategists to perform cost-benefit analysis to evaluate “sharing opportunities”
among firm’s business units. He also stresses the need for firms to “transfer” skills and expertise
among autonomous business units effectively in order to gain competitive advantage.

COST LEADERSHIP STRATEGIES

The aim of this strategy is to operate the business in highly cost effective manner and open up a
sustainable cost advantage over rivals. Successful low-cost leaders are exceptionally good at
finding ways to drive costs out of their business. A primary reason for pursuing forward,
backward, and horizontal integration strategies is to gain cost leadership benefits. But cost
leadership generally must be pursued in conjunction with differentiation. It is appealing to a
broad spectrum of customers based on being the overall low cost provider of a product or
service. A number of cost elements affect the relative attractiveness of generic strategies includes
economies or diseconomies of scale achieved, learning and experience curve effects, the
percentage of capacity utilization achieved, linkage with suppliers and distributors, the potential
for sharing costs and knowledge, labor costs, tax rates, energy costs, and shipping costs.

Striving to be low cost leader is effective when the market is comprised of many price-sensitive
buyers, when there are few ways to achieve product differentiation, when buyers do not care

Ashenafi A. (PhD Candidate) Page 6


much about differences from brand to brand, or when there are a large number of buyers with
significant bargaining power. The basic idea is to under price competitors and thereby gains
market share and sales, driving some competitors out of the market.

A successful cost leadership strategy usually permeates the entire firm, as evidenced by high
efficiency, low overhead, limited perks, intolerance of waste, intensive screening of budget
requests, wide span of control, reward linked to cost containment, and broad employee
participation in cost control efforts. The Some risks of pursuing cost leadership are

 Competitors may imitate the strategy


 Technological breakthrough may make the strategy ineffective
 Buyer may swing to other differentiation feature besides price

DIFFERENTIATION STRATEGIES

The essence of a differentiation strategy is to be unique in ways that are valuable to customers
and that can be sustained. Successful differentiation can mean greater product flexibility, greater
compatibility, lower costs, improved service, less maintenance, greater convenience, or more
features. Differentiation does not guarantee competitive advantage, especially if standard
products sufficiently meet customer needs or if rapid imitation by competitors is possible. A
differentiation strategy should be pursued only after careful study of buyers’ needs and
preferences. A successful differentiation strategy allows a firm to charge a higher price for its
product and to gain customers loyalty since customers may become strongly attached to the
differentiation features. Features include superior service, spare parts availability, engineering
design, product performance, useful life, or ease of use. Common organizational requirements
for a successful differentiation strategy include strong coordination among the R&D (Research
and Development) and marketing functions and substantial amenities to attract scientists and
creative people. Some of the risks of this strategy are;

 Unique product may not valued by customer to justify the higher price
 Competitors may develop ways to quickly copy the differentiating feature

Ashenafi A. (PhD Candidate) Page 7


FOCUS STRATEGY

This strategy focuses on concentrating attention on a narrow piece of the total market. A
successful focus strategy depends upon an industry segment that is of sufficient size, has good
growth potential, and is not crucial to the success of other major competitors. Midsize and large
firms can effectively pursue focus based strategies only in conjunction with differentiation or
cost leadership-based strategies. All firms follow a differentiated strategy. This strategy is
effective when consumers have distinctive preferences or requirements and when rival firms are
not attempting to specialize in the same target segment. A focus strategy may concentrate on a
particular group of customers, geographic markets, or product line segments in order to serve a
well defined narrow market. A focuser’s basis for competitive advantage is either (1) lower costs
than competitors in serving the market niche or (2) an ability to offer niche members something
they perceive is better. This strategy is effective when;

 The target market niche is big enough to be profitable


 The niche has good growth potential
 The niche is not crucial to the success of competitors
 The focusing firm has the capabilities and resources to serve the niche
 The focuser can defend itself against challengers

The risk of this strategy includes;


 Numerous competitors recognize the successful focus strategy and copy the strategy
 Consumer preferences drift toward attributes desired by the market as a whole.

BEST COST PROVIDER STRATEGY

This strategy aims at giving customers more value for the money. It combines a strategic
emphasis on low cost with a strategic emphasis on more than minimally acceptable quality,
service, features, and performance. The idea is to create superior value by meeting or exceeding
buyers’ expectation on key quality-service-features-performance attributes and by beating their
expectation on price. The aim is to become the low cost provider of a product or service with
good excellent attributes, then use the cost advantage to underpriced brands with comparable
attributes. The most powerful competitive approach a company can pursue is to strive
relentlessly to become a lower-and-lower cost producer of a higher-and-higher-caliber product,

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aiming at eventually becoming the industry’s absolute low cost provider and, simultaneously, the
producer of the industry’s overall best product.

THE VALUE CHAIN

According to porter, the business of a firm can best be described as a value chain in which total
revenues minus total cost of all activities undertaken to develop and market a product or service
yields value. All firms in a given industry have a similar value chain, which includes activities
such as obtaining raw materials, designing products, building manufacturing facilities,
developing cooperative agreements, and providing customer service. Firms should strive to
understand not only their own value chain operations, but also their competitors’, suppliers’, and
distributors’ value chain.

Ashenafi A. (PhD Candidate) Page 9

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