Central Luzon State University
Science City of Muñoz 3120
Nueva Ecija, Philippines
Instructional Module for the Course
Strategic Management
Types of Strategies
In this module, we will discuss on the different types of
strategies used by business to gain competitive advantage and follow
the necessary guidelines to sustain it.
Objectives:
Upon completion of this module, you are expected to:
1. Describe the levels of strategies
2. Discuss the types of strategies
3. Understand the means to achieve strategies
A. Levels of Strategies
Strategy making is not just a task for top executives. Middle-and lower-level
managers also must be involved in the strategic-planning process to the extent
possible. In large firms, there are actually four levels of strategies: corporate,
divisional, functional, and operational. However, in small firms, there are actually
three levels of strategies: company, functional, and operational. in large firms,
the persons primarily responsible for having effective strategies at the various
levels include the CEO at the corporate level; the president or executive vice
president at the divisional level; the respective chief finance officer (CFO), chief
information officer (CIO), human resource manager (HRM), chief marketing
officer (CMO), and so on at the functional level; and the plant manager, regional
sales manager, and so on at the operational level.
In small firms, the persons primarily responsible for having effective
strategies at the various levels include the business owner or president at the
company level and then the same range of persons at the lower two levels, as
with a large firm.
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It is important that all managers at all levels participate and understand
the firm’s strategic plan to help ensure coordination, facilitation, and commitment
while avoiding inconsistency, inefficiency, and miscommunication. Plant
managers, for example, need to understand and be supportive of the overall
strategic plan (game plan), whereas the president and the CEO need to be
knowledgeable of strategies being employed in various sales territories and
manufacturing plants.
B. Types of Strategies
1. Integration Strategies
Forward integration and backward integration are sometimes collectively
referred to as vertical integration. Vertical integration strategies allow a firm
to gain control over distributors and suppliers, whereas horizontal integration
refers to gaining ownership and/or control over competitors. Vertical and
horizontal actions by firms are broadly referred to as integration strategies.
a. Forward Integration
Forward integration involves gaining ownership or increased control
over distributors or retailers. Increasing numbers of manufacturers
(suppliers) are pursuing a forward integration strategy by establishing
websites to sell their products directly to consumers.
The following six guidelines indicate when forward integration may
be an especially effective strategy:
i. An organization’s present distributors are especially expensive,
unreliable, or incapable of meeting the firm’s distribution needs.
ii. The availability of quality distributors is so limited as to offer a
competitive advantage to those firms that promote forward
integration.
iii. An organization competes in an industry that is growing and is
expected to continue to grow markedly; this is a factor because
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forward integration reduces an organization’s ability to diversify if
its basic industry falters.
iv. An organization has both the capital and human resources needed
to manage the new business of distributing its own products.
v. 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.
vi. Present distributors or retailers have high profit margins; this
situation suggests that a company could profitably distribute its
own products and price them more competitively by integrating
forward.
b. Backward Integration
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.
Seven guidelines when backward integration may be an especially
effective strategy are:
i. An organization’s present suppliers are especially expensive,
unreliable, or incapable of meeting the firm’s needs for parts,
components, assemblies, or raw materials.
ii. The number of suppliers is small and the number of competitors is
large.
iii. 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.
iv. An organization has both capital and human resources to manage
the new business of supplying its own raw materials.
v. 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(s) through
backward integration.
vi. Present suppliers have high profit margins, which suggest that the
business of supplying products or services in a given industry is a
worthwhile venture.
vii. An organization needs to quickly acquire a needed resource.
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c. Horizontal Integration
Seeking ownership of or control over a firm’s competitors, horizontal
integration is arguably the most common growth strategy.
The following five guidelines indicate when horizontal integration
may be an especially effective strategy:
i. 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.
ii. An organization competes in a growing industry.
iii. Increased economies of scale provide major competitive
advantages.
iv. An organization has both the capital and human talent needed to
successfully manage an expanded organization.
v. Competitors are faltering as a result of 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 in that case
overall industry sales are declining.
2. Intensive Strategies
Market penetration, market development, and product development are
sometimes referred to as intensive strategies because they require intensive
efforts if a firm’s competitive position with existing products is to improve.
a. Market Penetration
A market penetration strategy seeks to increase market share for
present products or services in present markets through greater
marketing efforts. This strategy is widely used alone and in combination
with other strategies. Market penetration includes increasing the number
of salespersons, increasing advertising expenditures, offering extensive
sales promotion items, or increasing publicity efforts.
The following five guidelines indicate when market penetration may
be an especially effective strategy:
i. Current markets are not saturated with a particular product or
service.
ii. The usage rate of present customers could be increased
significantly.
iii. The market shares of major competitors have been declining while
total industry sales have been increasing.
iv. The correlation between dollar sales and dollar marketing
expenditures historically has been high.
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v. Increased economies of scale provide major competitive
advantages.
b. Market Development
Market development involves introducing present products or services into
new geographic areas.
These six guidelines indicate when market development may be an
especially effective strategy:
i. New channels of distribution are available that are reliable,
inexpensive, and of good quality.
ii. An organization is successful at what it does.
iii. New untapped or unsaturated markets exist.
iv. An organization has the needed capital and human resources to
manage expanded operations.
v. An organization has excess production capacity.
vi. An organization’s basic industry is rapidly becoming global in scope.
c. Product Development
Product development is a strategy that seeks increased sales by
improving or modifying present products or services. Product development
usually entails large research and development expenditures.
These following five guidelines indicate when product development
may be an especially effective strategy to pursue:
i. An organization has successful products that are in the maturity
stage of the product life cycle; the idea here is to attract satisfied
customers to try new (improved) products as a result of their
positive experience with the organization’s present products or
services.
ii. An organization competes in an industry that is characterized by
rapid technological developments.
iii. Major competitors offer better-quality products at comparable
prices.
iv. An organization competes in a high-growth industry.
v. An organization has especially strong research and development
capabilities.
3. Diversification Strategies
The two general types of diversification strategies are related
diversification and unrelated diversification. Diversification must do more
than simply spread business risks across different industries; after all,
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shareholders could accomplish this by simply purchasing equity in
different firms across different industries or by investing in mutual funds.
Diversification makes sense only to the extent that the strategy adds more
to shareholder value than what shareholders could accomplish acting
individually. Any industry chosen for diversification must be attractive
enough to yield consistently high returns on investment and offer
potential across the operating divisions for synergies greater than those
entities could achieve alone.
Most companies favor related diversification strategies to capitalize
on synergies as follows:
i. Transferring competitively valuable expertise, technological know-
how, or other capabilities from one business to another
ii. Combining the related activities of separate businesses into a single
operation to achieve lower costs
iii. Exploiting common use of a well-known brand name
iv. Cross-business collaboration to create competitively valuable
resource strengths and capabilities
a. Concentric Diversification
Businesses are said to be related when their value chains possess
competitively valuable cross-business strategic fits;
The guidelines for when related diversification may be an effective
strategy are as follows.
i. An organization competes in a no-growth or a slow-growth
industry.
ii. Adding new, but related, products would significantly enhance the
sales of current products.
iii. New, but related, products could be offered at highly competitive
prices.
iv. New, but related, products have seasonal sales levels that
counterbalance an organization’s existing peaks and valleys.
v. An organization’s products are currently in the declining stage of
the product’s life cycle.
vi. An organization has a strong management team.
b. Conglomerate Diversification
Businesses are said to be unrelated when their value chains are so
dissimilar that no competitively valuable cross-business relationships exist.
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Given below are 10 guidelines when unrelated diversification may
be an especially effective strategy.
i. Revenues derived from an organization’s current products or
services would increase significantly by adding the new, unrelated
products.
ii. An organization competes in a highly competitive or a no-growth
industry, as indicated by low industry profit margins and returns.
iii. An organization’s present channels of distribution can be used to
market the new products to current customers.
iv. New products have countercyclical sales patterns compared to an
organization’s present products.
v. An organization’s basic industry is experiencing declining annual
sale and profits.
vi. An organization has the capital and managerial talent needed to
compete successfully in a new industry.
vii. An organization has the opportunity to purchase an unrelated
business that is an attractive investment opportunity.
viii.Financial synergy exists between the acquired and acquiring firm.
(Note that a key difference between related and unrelated
diversification is that the former should be based on some
commonality in markets, products, or technology, whereas the
latter is based more on profit considerations.)
ix. Existing markets for an organization’s present products are
saturated.
x. Antitrust action could be charged against an organization that
historically has concentrated on a single industry
4. Defensive Strategies
In addition to integrative, intensive, and diversification strategies,
organizations also could pursue defensive strategies such as retrenchment,
divestiture, or liquidation.
a. Retrenchment
Retrenchment occurs when an organization regroups through cost
and asset reduction to reverse declining sales and profits. Sometimes
called a turnaround or reorganizational 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 involve
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.
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Five guidelines for when retrenchment may be an especially
effective strategy to pursue are as follows:
i. An organization has a clearly distinctive competence but has failed
consistently to meet its objectives and goals over time.
ii. An organization is one of the weaker competitors in a given
industry.
iii. An organization is plagued by inefficiency, low profitability, poor
employee morale, and pressure from stockholders to improve
performance.
iv. An organization has failed to capitalize on external opportunities,
minimize external threats, take advantage of internal strengths,
and overcome internal weaknesses over time; that is, when the
organization’s strategic managers have failed (and possibly will be
replaced by more competent individuals).
v. An organization has grown so large so quickly that major internal
reorganization is needed.
b. Divestiture
Selling a division or part of an organization is called divestiture. It is
often used to raise capital for further strategic acquisitions or investments.
Divestiture can be part of an overall retrenchment strategy to rid an
organization of businesses that are unprofitable, that require too much
capital, or that do not fit well with the firm’s other activities. Divestiture
has also become a popular strategy for firms to focus on their core
businesses and become less diversified.
Here are some guidelines for when divestiture may be an especially
effective strategy to pursue:
i. An organization has pursued a retrenchment strategy and failed to
accomplish needed improvements.
ii. To be competitive, a division needs more resources than the
company can provide.
iii. A division is responsible for an organization’s overall poor
performance.
iv. A division is a misfit with the rest of an organization; this can result
from radically different markets, customers, managers, employees,
values, or needs.
v. A large amount of cash is needed quickly and cannot be obtained
reasonably from other sources.
vi. Government antitrust action threatens an organization.
c. Liquidation
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Selling all of a company’s assets, in parts, for their tangible worth is
called liquidation; it is associated with Chapter 10 bankruptcy. Liquidation
is a recognition of defeat and consequently can be an emotionally difficult
strategy. However, it may be better to cease operating than to continue
losing large sums of money.
These three guidelines indicate when liquidation may be an
especially effective strategy to pursue:
i. An organization has pursued both a retrenchment strategy and a
divestiture strategy, and neither has been successful.
ii. An organization’s only alternative is bankruptcy. Liquidation
represents an orderly and planned means of obtaining the greatest
possible amount of cash for an organization’s assets. A company
can legally declare bankruptcy first and then liquidate various
divisions to raise needed capital.
iii. The stockholders of a firm can minimize their losses by selling the
organization’s assets.
5. Generic (Michael Porter’s Five 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 a low per-
unit cost for consumers who are price sensitive. Two alternative types of cost
leadership strategies can be defined. Type 1 is a low-cost strategy that offers
products or services to a wide range of customers at the lowest price
available on the market. Type 2 is a best-value strategy that offers products
or services to a wide range of customers at the best price-value available on
the market. The best-value strategy aims to offer customers a range of
products or services at the lowest price available compared to a rival’s
products with similar attributes. Both Type 1 and Type 2 strategies target a
large market.
Moreover, Porter’s Type 3 generic strategy is differentiation, a strategy
aimed at producing products and services considered unique to the industry
and directed at consumers who are relatively price insensitive. Focus means
producing products and services that fulfill the needs of small groups of
consumers. Two alternative types of focus strategies are Type 4 and Type 5.
Type 4 is a low-cost focus strategy that offers products or services to a small
range (niche group) of customers at the lowest price available on the market.
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a. Cost Leadership Strategies (Type 1 and Type 2)
A primary reason for pursuing forward, backward, and horizontal
integration strategies is to gain low-cost or best-value cost leadership
benefits. But cost leadership generally must be pursued in conjunction with
differentiation. A number of cost elements affect the relative attractiveness of
generic strategies, including economies or diseconomies of scale achieved,
learning and experience curve effects, the percentage of capacity utilization
achieved, and linkages with suppliers and distributors. Other cost elements to
consider in choosing among alternative strategies include the potential for
sharing costs and knowledge within the organization, research and
development (R&D) costs associated with new product development or
modification of existing products, labor costs, tax rates, energy costs, and
shipping costs.
Companies employing a low-cost (Type 1) or best-value (Type 2) cost
leadership strategy must achieve their competitive advantage in ways that
are difficult for competitors to copy or match. If rivals find it relatively easy or
inexpensive to imitate the leader’s cost leadership methods, the leaders’
advantage will not last long enough to yield a valuable edge in the
marketplace. Recall that for a resource to be valuable, it must be either rare,
hard to imitate, or not easily substitutable. To employ a cost leadership
strategy successfully, a firm must ensure that its total costs across its overall
value chain are lower than competitors’ total costs.
When employing a cost leadership strategy, a firm must be careful not to
use such aggressive price cuts that its own profits are low or nonexistent.
Constantly be mindful of cost-saving technological breakthroughs or any
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other value chain advancements that could erode or destroy the firm’s
competitive advantage.
A Type 1 or Type 2 cost leadership strategy can be especially effective
under the following conditions:
i. Price competition among rival sellers is especially vigorous.
ii. Products of rival sellers are essentially identical and supplies are
readily available from any of several eager sellers.
iii. There are few ways to achieve product differentiation that have value
to buyers.
iv. Most buyers use the product in the same ways.
v. Buyers incur low costs in switching their purchases from one seller to
another.
vi. Buyers are large and have significant power to bargain down prices.
vii. Industry newcomers use introductory low prices to attract buyers and
build a customer base.
b. Differentiation Strategies (Type 3)
Different strategies offer different degrees of differentiation.
Differentiation does not guarantee competitive advantage, especially if
standard products sufficiently meet customer needs or if rapid imitation by
competitors is possible. Durable products protected by barriers to quick
copying by competitors are best. Successful differentiation can mean greater
product flexibility, greater compatibility, lower costs, improved service, less
maintenance, greater convenience, or more features. Product development is
an example of a strategy that offers the advantages of differentiation.
A Type 3 differentiation strategy can be especially effective under the
following four conditions:
i. There are many ways to differentiate the product or service and many
buyers perceive these differences as having value.
ii. The buyer’s needs and uses are diverse.
iii. Few rival firms are following a similar differentiation approach.
iv. Technological change is fast paced and competition revolves around
rapidly evolving product features.
c. Focus Strategies (Type 4 and Type 5)
A successful focus strategy depends on an industry segment that is of
sufficient size, has good growth potential, and is not crucial to the success of
other major competitors. Strategies such as market penetration and market
development offer substantial focusing advantages. Midsize and large firms
can effectively pursue focus-based strategies only in conjunction with
differentiation or cost leadership–based strategies. All firms essentially follow
a differentiated strategy. Because only one firm can differentiate itself with
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the lowest cost, the remaining firms in the industry must find other ways to
differentiate their products.
A low-cost (Type 4) or best-value (Type 5) focus strategy can be
especially attractive under these conditions:
i. The target market niche is large, profitable, and growing.
ii. Industry leaders do not consider the niche to be crucial to their own
success.
iii. Industry leaders consider it too costly or difficult to meet the
specialized needs of the target market niche while taking care of their
mainstream customers.
iv. The industry has many different niches and segments, thereby
allowing a focuser to pick a competitively attractive niche suited to its
own resources.
v. Few, if any, other rivals are attempting to specialize in the same target
segment.
C. Means for Achieving Strategies
1. Cooperation among Competitors
Strategies that stress cooperation among competitors are being used
more. For collaboration between competitors to succeed, both firms must
contribute something distinctive, such as technology, distribution, basic
research, or manufacturing capacity. But a major risk is that unintended
transfers of important skills or technology may occur at organizational levels
below where the deal was signed.23 Information not covered in the formal
agreement often gets traded in the day-to-day interactions and dealings of
engineers, marketers, and product developers. Firms often give away too
much information to rival firms when operating under cooperative
agreements! Tighter formal agreements are needed.
2. Joint Venture and Partnering
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. Often, the two or more sponsoring firms
form a separate organization and have shared equity ownership in the new
entity.
3. Merger/Acquisition
Merger and acquisition are two commonly used ways to pursue strategies.
A merger occurs when two organizations of about equal size unite to form
one enterprise. An acquisition occurs when a large organization purchases
(acquires) a smaller firm or vice versa. If a merger or acquisition is not
desired by both parties, it is called a hostile takeover, as opposed to a
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friendly merger. Most mergers are friendly, but the number of hostile
takeovers is on the rise.
4. Private-Equity Acquisitions
The intent of virtually all PE acquisitions is to buy firms at a low price and
sell them later at a high price, arguably just good business. Private equity
firms also are buying companies from other PE firms, such as Clayton,
Dubilier & Rice’s recent purchase of David’s Bridal from Leonard Green &
Partners LP for $1.05 billion. Such PE-to-PE acquisitions are called secondary
buyouts. In addition, PE firms especially, but other firms too, sometimes
borrow money simply to fund dividend payouts to themselves, a controversial
practice known as dividend recapitalizations. Critics say dividend
recapitalization saddles a company with debt, thus burdening its operations.
5. First Mover Advantages
First mover advantages refer to the benefits a firm may achieve by
entering a new market or developing a new product or service prior to rival
firms. Some advantages of being a first mover include securing access to rare
resources, gaining new knowledge of key factors and issues, and carving out
market share and a position that is easy to defend and costly for rival firms to
overtake.
First mover advantages are analogous to taking the high ground first,
which puts one in an excellent strategic position to launch aggressive
campaigns and to defend territory.
6. Outsourcing and Reshoring
Outsourcing involves companies hiring other companies to take over
various parts of their functional operations, such as human resources,
information systems, payroll, accounting, customer service, and even
marketing. While, reshoring is the new term that refers to companies
planning to move some of their manufacturing back to the Mainland.
References
David, F.R., & David, F.R. (2015). Strategic Management: A Competitive
Advantage Approach, Concepts & Cases (15th ed.). Pearson Education
Limited.
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