STRATEGIES

5.3 Strategies

In the previous section you have learnt the objectives for an organization and its key elements.
However for an organization to achieve its objectives, the organization must craft or formulate
strategies. The strategies are crafted for the purpose of achieving the objectives. In this way the
organization will be able to achieve its mission and move closer to its vision.

As you have learnt in the first module there are three levels of strategy. In this module we will
further discuss the three levels of strategy.

5.3.1 Corporate strategy

The following corporate strategy is discussed based on David (2007). For an overview of the
different types of corporate strategy you can refer to Table 5.2.

Table 5.2: Overview on Different Types of Corporate Strategy

Strategy
• Forward integration
• Backward integration
• Horizontal integration
• Market penetration
• Market development
• Product development
• Related diversification
• Unrelated diversification
• Retrenchment
• Divestiture
• Liquidation
Definition
• Gaining ownership or increased control over distributors or retailers
• Seeking ownership or increased control of a firm’s suppliers
• Seeking ownership or increased control over competitors
• Seeking increased market share for present products or services in present markets
through greater marketing efforts
• Introducing present products or services into new geographic area
• Seeking increased sales by improving present products or services or developing
new ones
• Adding new but related products or services
• Adding new, unrelated products or services
• Regrouping through cost and asset reduction to reverse declining sales and profit
• Selling a division or part on an organization
• Selling all of a company’s assets, in parts, for their tangible worth
Source: Adapted from David (2007). Strategic management: concepts and cases (11th ed.).
Singapore: Pearson Prentice Hall

Integration Strategy

Integration strategy consists of forward, backward, and horizontal integration. The main idea of
integration strategy is to gain control over distributors (forward integration), suppliers (backward
integration), and competitors (horizontal integration).

Forward Integration

Forward integration which takes place when an organization attempts to increase control over
distributors and retailers is best taken when:

1. An organization faces problem with its distributors or retailers such as unreliable, slow
delivery, etc.
2. There is limited number of quality distributors.
3. There enough resources such as financial and human resources for a company to carry
out integration.
4. There is high demand for its products.
5. Distributors or retailers enjoy high profit.

Backward integration
A company pursues backward integration when it tries to seek ownership or control over its
suppliers. Backward integration is best carried out under the following conditions:

1. Suppliers are unreliable.

2. There exist a small number of suppliers.
3. The industry in which the company is a part of is experiencing growth.
4. There are sufficient resources including financial and human resources.
5. There is a need to maintain stable prices for its inputs.
6. High profit margins enjoyed by the present suppliers.
7. When a particular input is of strategic concern.
Horizontal integration

Horizontal integration is a corporate strategy in which a firm seeks to control over its
competitors. This strategy is best carried out under the following conditions:

1. There is enough resources to carry out the strategy.

2. The increases in market share provide competitive advantages.
3. The organization is involved in a growing industry
4. When competitors are facing internal problems such as poor management control.

Intensive strategies
Intensive strategies call for active efforts from an organization to improve its competitive
position in a product-market. Intensive strategies comprise market penetration, market
development, and product development.

Market penetration

Market penetration strategy refers to marketing efforts to improve its market share in a firm
present product-market scope.

Market penetration strategy is best carried out under the following conditions:

1. When the present market is not saturated with a certain product or service.
2. When there is room to increase the utilization rate of a product.
3. When a competitor’s share of the market decline while the industry is growing.
4. When increase in market share lead to competitive advantages
5. When an increase in marketing effort can lead to increase in sales.

Market development

The market development strategy refers to the introduction of present product or service in a new
geographical area. The market development strategy can be carried out under the following
conditions:

1. When a firm can identify a new channel of distribution which is reliable and inexpensive.
2. When the potential market is not saturated.
3. The firm has the necessary resources to carry out the strategy.
4. The production capacity of he firm is under utilized.
5. The firm has no choice except to compete globally.

Product development

Product development strategy refers to a firm improving or modifying its products or services in
order to increase sales. In order to carry out this strategy a firm has to expend large amount of
fund for research and development to improve its present products or services.

Guidelines to carry out product development strategy include:

1. The present product has reached the maturity stage.
2. There is a rapid technological change in the industry.
3. The firm’s competitors introduce quality products at comparable prices.
4. The industry in which the firm competes grows rapidly.
5. The firm has a distinctive competency in research and development.
Diversification Strategies

As an industry enters its maturity stage firms that compete in the industry can also reach its
growth limit. The limit to growth has been reached such as in the cases when a firm had already
carried out integration strategies. In other words there is no much room for the firm to grow. A
firm will have to consider diversify into different industries. There are two types of
diversification strategies, related (concentric) diversification and unrelated (conglomerate)
diversification.

Related Diversification Strategy

In related diversification strategy a firm diversifies into other industry which has commonality
with its present industry such as in terms of similar distribution channel, managerial skills,
technology, and customer usage. The firm tries to take advantage of its distinctive competence in
the new industry that it is trying to diversify into. The rationale behind related diversification is
to seek for synergy which means that two different business together can generate more profits
than when two business operate separately.

Guidelines for related diversification include:

1. The present industry has matured.

2. Addition of new related product can increase the sales of the present product as well.
3. Addition of new products can complement the present slowdown or seasonal sales of the
present product.
4. Sufficient resources to carry out the diversification strategy.

Unrelated Diversification Strategy

In unrelated diversification strategy the main idea is to search for portfolio of business which can
deliver excellent financial performance instead of synergy as in the case of related diversification
strategy. A firm that attempts for unrelated diversification will search for firms that can provide a
good return on investment. Normally a firm can realize good return on investment when there are
target firms with undervalued assets, financial hardships, or target firm can also transfer its
management system into the required firm.

The guidelines to undertake unrelated diversification include:

1. The present industry has reached its maturity stage.

2. Target firm can offer a high financial return.
3. The organization can transfer its management skill to the newly acquired firm.
 4. Addition of new product can complement the present slowdown or seasonal sales of the
present product.

Defensive strategies

A firm will carry out defensive strategies when it is experiencing weak competitive position
which results in poor performance. When a company faces low productivity, inefficiency,
declining sales, the firm will resort to defensive strategies to overcome the weaknesses.
Defensive strategies can be in the form of retrenchment, divestiture, and liquidation.

Retrenchment
Retrenchment is also known as turnaround strategy or reorganizational strategy. In a
retrenchment strategy the main idea is to focus on the firm’s cost and asset reduction to
overcome declining sales and profit. During the retrenchment strategy the firm’s distinctive
competence will be strengthen. In doing so a number of actions will be taken such as selling of
firm’s assets for cash, closing of unprofitable business, reducing the number of employees, and
introducing a better control system to monitor expenses of the firm. However take note that when
implementing this strategy it is assumed that the firm still has its distinctive competence.

Among the guidelines to implement this strategy are:

1. Firm fails to achieve its objectives but it still has distinctive competence.
2. Firm faces problems such as low profitability, inefficiency, and low employee morale.
3. Managers of the firm fail to set direction, and use the wrong strategies to manage the
firm. At times managers may have different priorities from the firm.
4. Manager of the firm are not able to exert control due to rapid expansion of the firm.
5. Firm can still compete in the industry even tough it may be one of the weaker
competitors.
Divestiture

Divestiture takes place when a firm sells a subsidiary, division or part of the firm itself. The firm
will sell the unit as mentioned above which does not contribute to the firm’s profitability or does
not fit in with the firm overall activities.

Among the guidelines to carry out divestiture strategy are:

1. Retrenchment strategy does not improve a firm’s competitive position.

2. When the performance of particular unit negatively affect the overall performance.
3. When a particular unit does not match with the overall activities of the firm.
4. When a particular unit needs to be injected with cash and other resources at the expense
of other subsidiaries or divisions.

Liquidation

Liquidation refers to the termination of a firm. Liquidation is carried out when a firm has no
other attractive option to carry out business. The only choice is terminate the business. The
management will sell the saleable assets of the firm, use the proceed to pay off obligation and
return the balance to shareholders. (Student needs to differentiate liquidation with bankruptcy.
Bankruptcy is the case when the court takes over the management of the firm in order to settle
obligations of the firm).
Some guidelines for carrying out liquidation are:

1. There is no other viable option for the firm. Both retrenchment and divestiture do not
result in improved performance.
2. Liquidation can minimize shareholders losses from the sale of assets.
3. When bankruptcy is the only option. Liquidation can provide the mean to obtain cash for
the shareholders from the sale of assets.

5.3.2 Business Strategies

Business strategies refer to the ways in which a firm competes in an industry. Business strategy
strengthens a firm’s competitive position in the product-market or industry that it served.
Business strategy can be in the form of or competitive strategy or cooperative strategy.
Competitive strategy refers to competing with other competitors for advantage while cooperative
strategy is when a firm cooperates with other firms to seek advantage against other competitors.

Competitive strategy

In this module we will refer to Porter’s competitive strategies as they are well known and have
been further researched.

Porter (1980) suggested that there are two ways to achieve competitive advantage over
competitors. First is by having the lowest cost in the industry. Second is when a firm posses
significant differences from competitors. Another important factor that will determine a firm’s
ability to develop competitive strategy is the product market scope which can be broad,
encompassing the overall market or narrow which focuses on one or a few of the market
segments. Table 5.3 depicts the four competitive strategies.

Table 5.3: Porter’s Generic Competitive Strategies

Competitive advantage
Low costs Product-Service Differences
Broad Cost Leadership Differentiation
Competitive scope Narrow Cost Focus Differentiation Focus

Source: Porter (1980). Competitive strategy: Techniques for analyzing industries and
competitors, The Free Press: New York.

Cost leadership strategy

The main thrust of the cost leadership strategy is for a firm to achieve the lowest cost in the
industry by producing services and products for a broad customer base. As the firm has the
lowest unit cost in the industry it is able to charge lowest process and gain profits. The firm
which uses this strategy competes in terms of having the lowest rate.
In order to achieve the lowest costs the firm will have to be efficient in every department. It will
also capitalize on opportunity that is able to achieve lowest cost such as new technology.

However some of the weaknesses of the low cost strategy is when competitor is able to further
reduce their costs. Another weakness is that the firm might overlook customer’s requirement in
pursuit for low costs.

A firm can also experience stuck in the middle, which means that its costs is not the lowest in the
industry when pursuing a low cost strategy, and not able to differentiate enough when pursuing
differentiation strategy. Stuck in the middle position is to be avoided.

Differentiation strategy

The main thrust of the differentiation strategy is for a firm to compete on the basis of offering
unique products or services. As it is able to offer different or unique products the firm is able to
charge premium price.

In order to achieve differentiation a firm needs to differentiate its products or services in several
ways such as different models, features, price ranges, etc. What is important is that customers
perceive the products or services as unique. The drawback of this strategy is that competitors
may be able to offer the same products or services. Another drawback is that customers can be
sensitive to the premium price and unique product is no longer priority.

Focus strategy

A firm pursues a focus strategy when it emphasizes low cost or differentiation competitive
advantage in a particular customer segment or segments. The segment can be based on
geographical area, demographic, type of product, and so forth. In order to pursue with the low
cost focus strategy the firm has to compete at a lower cost than the overall cost leader for the
particular segment. Likewise for a firm that pursues differentiation focus it has use to the various
means to differentiate its products or services in the particular segment.

Some drawbacks of the focus strategy is that it can be difficult for the firm to enjoy economies
scale. Another drawback is that it is difficult for the firm to change market segment when there
exist a change in customer preferences. A profitable segment may invite overall market leader to
participate in the market segment.

A firm can also experience stuck in the middle position. Stuck in the middle means that a firm is
not able to lower its costs when pursuing a low cost strategy and unable to differentiate enough
when pursuing a differentiation strategy. A firm should avoid being stuck in the middle.

Cooperative strategy

Cooperative strategy is when a firm attempts to cooperate with other firms to gain competitive
advantage within an industry. Some of the cooperative strategies are given as follows:

1. Collusion
Collusion is when a number of firms cooperate to reduce output and increase the price
of the products or services. Collusion can be carried out either openly or indirectly. In
explicit collusion, firms communicate directly to effect the collusion while in indirect
or tacit collusion cooperation among firms is carried out based on earlier
understanding.

2. Strategic Alliance
Strategic alliance is when a number of firms form partnership to achieve common
objectives. The tenor of the strategic alliance can vary from a short period such as
when the strategic alliance is used as a mean to be in a market or it can last for long
period until a complete merger among the firms.

3. Mutual Service Consortia

Mutual service consortia is when a number of firms in similar industries form a
partnership in order to share resources to achieve common objectives which is
expensive to carry out by a single firm.

4. Joint Ventures
Joint venture is a strategy when several firms form a partnership by setting up a
separate entity, which is the joint venture company. The firms will divide ownership,
responsibilities, and financial matters in the joint venture company accordingly.

5. Licensing Arrangements
Licensing arrangement is when a licensor (licensing firm) grant the right to the
licensee (a firm which is granted the right) to sell or produce a product usually in a
different market or country. The licensor will be paid compensation for the technical
know how.

6. Value-Chain Partnership
Value-chain partnership is a cooperative strategy pursued by a firm to form a close
partnership with a supplier or distributor for mutual benefits. For instance a car
manufacturing company can seek involvement from engine supplier to design new
engine for the manufacturer.