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Strategic Management

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Strategic Management ­ MGT603
VU
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
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Strategic Management ­ MGT603
VU
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
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Strategic Management ­ MGT603
VU
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
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Strategic Management ­ MGT603
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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:
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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
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Strategic Management ­ MGT603
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 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
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Strategic Management ­ MGT603
VU
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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Table of Contents:
  1. NATURE OF STRATEGIC MANAGEMENT:Interpretation, Strategy evaluation
  2. KEY TERMS IN STRATEGIC MANAGEMENT:Adapting to change, Mission Statements
  3. INTERNAL FACTORS & LONG TERM GOALS:Strategies, Annual Objectives
  4. BENEFITS OF STRATEGIC MANAGEMENT:Non- financial Benefits, Nature of global competition
  5. COMPREHENSIVE STRATEGIC MODEL:Mission statement, Narrow Mission:
  6. CHARACTERISTICS OF A MISSION STATEMENT:A Declaration of Attitude
  7. EXTERNAL ASSESSMENT:The Nature of an External Audit, Economic Forces
  8. KEY EXTERNAL FACTORS:Economic Forces, Trends for the 2000ís USA
  9. EXTERNAL ASSESSMENT (KEY EXTERNAL FACTORS):Political, Governmental, and Legal Forces
  10. TECHNOLOGICAL FORCES:Technology-based issues
  11. INDUSTRY ANALYSIS:Global challenge, The Competitive Profile Matrix (CPM)
  12. IFE MATRIX:The Internal Factor Evaluation (IFE) Matrix, Internal Audit
  13. FUNCTIONS OF MANAGEMENT:Planning, Organizing, Motivating, Staffing
  14. FUNCTIONS OF MANAGEMENT:Customer Analysis, Product and Service Planning, Pricing
  15. INTERNAL ASSESSMENT (FINANCE/ACCOUNTING):Basic Types of Financial Ratios
  16. ANALYTICAL TOOLS:Research and Development, The functional support role
  17. THE INTERNAL FACTOR EVALUATION (IFE) MATRIX:Explanation
  18. TYPES OF STRATEGIES:The Nature of Long-Term Objectives, Integration Strategies
  19. TYPES OF STRATEGIES:Horizontal Integration, Michael Porterís Generic Strategies
  20. TYPES OF STRATEGIES:Intensive Strategies, Market Development, Product Development
  21. TYPES OF STRATEGIES:Diversification Strategies, Conglomerate Diversification
  22. TYPES OF STRATEGIES:Guidelines for Divestiture, Guidelines for Liquidation
  23. STRATEGY-FORMULATION FRAMEWORK:A Comprehensive Strategy-Formulation Framework
  24. THREATS-OPPORTUNITIES-WEAKNESSES-STRENGTHS (TOWS) MATRIX:WT Strategies
  25. THE STRATEGIC POSITION AND ACTION EVALUATION (SPACE) MATRIX
  26. THE STRATEGIC POSITION AND ACTION EVALUATION (SPACE) MATRIX
  27. BOSTON CONSULTING GROUP (BCG) MATRIX:Cash cows, Question marks
  28. BOSTON CONSULTING GROUP (BCG) MATRIX:Steps for the development of IE matrix
  29. GRAND STRATEGY MATRIX:RAPID MARKET GROWTH, SLOW MARKET GROWTH
  30. GRAND STRATEGY MATRIX:Preparation of matrix, Key External Factors
  31. THE NATURE OF STRATEGY IMPLEMENTATION:Management Perspectives, The SMART criteria
  32. RESOURCE ALLOCATION
  33. ORGANIZATIONAL STRUCTURE:Divisional Structure, The Matrix Structure
  34. RESTRUCTURING:Characteristics, Results, Reengineering
  35. PRODUCTION/OPERATIONS CONCERNS WHEN IMPLEMENTING STRATEGIES:Philosophy
  36. MARKET SEGMENTATION:Demographic Segmentation, Behavioralistic Segmentation
  37. MARKET SEGMENTATION:Product Decisions, Distribution (Place) Decisions, Product Positioning
  38. FINANCE/ACCOUNTING ISSUES:DEBIT, USES OF PRO FORMA STATEMENTS
  39. RESEARCH AND DEVELOPMENT ISSUES
  40. STRATEGY REVIEW, EVALUATION AND CONTROL:Evaluation, The threat of new entrants
  41. PORTER SUPPLY CHAIN MODEL:The activities of the Value Chain, Support activities
  42. STRATEGY EVALUATION:Consistency, The process of evaluating Strategies
  43. REVIEWING BASES OF STRATEGY:Measuring Organizational Performance
  44. MEASURING ORGANIZATIONAL PERFORMANCE
  45. CHARACTERISTICS OF AN EFFECTIVE EVALUATION SYSTEM:Contingency Planning