Types of Strategies

leArnin g obJeCtiveS
After studying this chapter, you should be able to do the following:

4-1. Identify and discuss eight characteristics of objectives and ten benefits of having
clear objectives.
4-2. Define and give an example of eleven types of strategies.
4-3. Identify and discuss the three types of “Integration Strategies.”
4-4. Give specific guidelines when market penetration, market development, and product
development are especially effective strategies.
4-5. Explain when diversification is an effective business strategy.
4-6. List guidelines for when retrenchment, divestiture, and liquidation are especially
effec- tive strategies.
4-7. Identify and discuss Porter’s five generic strategies.
4-8. Compare (a) cooperation among competitors, (b) joint venture and partnering, and
(c) merger/acquisition as key means for achieving strategies.
4-9. Discuss tactics to facilitate strategies, such as (a) being a first mover, (b) outsourcing,
and (c) reshoring.
4-10. Explain how strategic planning differs in for-profit, not-for-profit, and small firms.

ASSUrAnCe o F l e A r ni n g exerCiSeS
The following exercises are found at the end of this chapter:

exerCiSe 4A Market Development for Petronas

exerCiSe 4b Alternative Strategies for Petronas
exerCiSe 4C Private-Equity Acquisitions
exerCiSe 4d The Strategies of Nestlé S.A.: 2015–2017
exerCiSe 4e Lessons in Doing Business Globally
exerCiSe 4F What Are Petronas’ Strategies in 2015–2017?
exerCiSe 4g What Strategies Are Most Risky?
exerCiSe 4h Explore Bankruptcy
exerCiSe 4i Examine Strategy Articles
exerCiSe 4J Classify Some Strategies

119

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 12 Strategic CHAPTER 4 • TyPEs of sTRATEgiEs

H
undreds of companies today have embraced strategic planning in their quest for higher
revenues and profits. Kent Nelson, former chair of UPS, explains why his company
created a new strategic-planning department: “Because we’re making bigger bets on
investments in technology, we can’t afford to spend a whole lot of money in one direction and
then find out five years later it was the wrong direction.”1
This chapter 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 each strategy is most appropriate to pursue. An overview of strategic management in
nonprofit organizations, governmental agencies, and small firms is provided. As showcased
next, Petronas is an example company that for many years has exemplified excellent strategic
management, especially through its Upstream and Downstream business focus.

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 objec-
tives and strategies should be consistent, usually from 2 to 5 years. Without long-term
objectives, an organization would drift aimlessly toward some unknown end. It is hard to
imagine an organi- zation or an individual being successful without clear objectives. You
probably have worked hard the last few years striving to achieve an objective to graduate with a
business degree. Success only rarely occurs by accident; rather, it is the result of hard work
directed toward achieving certain objectives.
Long-term objectives are needed at the corporate, divisional, and functional levels of an
organization. They are an important measure of managerial performance. Many practitioners
and academicians attribute a significant part of U.S. industry’s competitive decline to the short-
term, rather than long-term, strategy orientation of managers in the United States. Arthur D.
Little argues that bonuses or merit pay for managers today must be based to a greater extent on
long- term objectives and strategies. An example framework for relating objectives to
performance

exempLAry compAny sHowcAseD

PETRONAS (PGAS.KL)
Established in 1974, Petroliam Nasional Berhad (PETRONAS), head- Ta k i n g
quartered in Kuala Lumpur, Malaysia, is an integrated oil and gas mul- advantage of
tinational company. Responsible for the national oil and gas resources, being an inte-
PETRONAS explores, develops, and produces these resources and deliv- grated chain
ers energy to meet the country’s growing demands. The only Malaysian and its strate-
company to feature in the Fortune Global 500 list, it operates in over gic location in
35 countries and is engaged in a wide spectrum of petroleum activi- South East Asia,
ties. Its Upstream business explores, produces, and monetizes oil and a region with
gas resources, and its Downstream business focuses on marketing and fast growing chemical consumers, it is focusing on three long-term
distribution strategies to enhance the value of resources. Its success- objec- tives— operational excellence, marketing and sales excellence, and
ful management of legal and maintenance activities in 2014 enabled innova- tion excellence. As part of its strategies, PETRONAS is pursuing
PETRONAS to shift its focus to raising utilization rate by 5 percent in backward integration by purchasing its ships to transport its oil and
2015. In 2014, while profit decreased by 27 percent, the group saw gas, especially its LNG. This will provide low cost, direct access to LNG
a 4 percent growth in revenue, which was driven by higher produc- shipping capacity. PETRONAS, operating the world’s first floating LNG
tion, higher liquefied natural gas (LNG) sales volume, and favorable U.S. facility, is also in the process of constructing one of the largest LNG
Dollar exchange rate movement. Revenue derived from PETRONAS pro- facilities in British Columbia.
vides roughly 45 percent of the Malaysian government’s annual budget.
Source: Based on company documents.
12 Strategic CHAPTER 4 • TyPEs of sTRATEgiEs

Table 4-1 Varying Performance Measures by Organizational Level

organizational Level Basis for Annual Bonus or Merit Pay

Corporate 75% based on long-term objectives

25% based on annual objectives
Division 50% based on long-term objectives
50% based on annual objectives
Function 25% based on long-term objectives
75% based on annual objectives

evaluation is provided in Table 4-1. A particular organization could tailor these guidelines to
meet its own needs, but incentives should be attached to both long-term and annual objectives.

Characteristics and Benefits of Objectives

Objectives should be quantitative, measurable, realistic, understandable, challenging, hierarchi-
cal, obtainable, and congruent among organizational units. Each objective should also be
associ- ated with a timeline. 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, assist in evaluation,
establish priori- ties, reduce uncertainty, minimize conf licts, stimulate exertion, and aid in both
the allocation of resources and the design of jobs. Objectives provide a basis for consistent
decision making by managers whose values and attitudes differ. Objectives serve as standards
by which individuals, groups, departments, divisions, and entire organizations can be evaluated.
Table 4-2 reveals the desired characteristics of objectives, and Table 4-3 summarizes the
benefits of having clear objectives.

Financial versus Strategic Objectives

Two types of objectives are especially common in organizations: financial and strategic objec-
tives. Financial objectives include those associated with growth in revenues, growth in
earnings, higher dividends, larger profit margins, greater return on investment, higher earnings
per share, a rising stock price, improved cash f low, and so on; whereas strategic objectives
include things such as a larger market share, quicker on-time delivery than rivals, shorter
design-to-market times than rivals, lower costs than rivals, higher product quality than rivals,
wider geographic coverage than rivals, achieving technological leadership, consistently getting
new or improved products to market ahead of rivals, and so on.
Although financial objectives are especially important in firms, oftentimes there is a trade-
off between financial and strategic objectives such that crucial decisions have to be made. For
example, a firm can do certain things to maximize short-term financial objectives that would
harm long-term strategic objectives. To improve financial position in the short run through
higher

Table 4-2 Eight Desired Characteristics of Objectives

1. Quantitative
2. Measurable
3. Realistic
4. Understandable
5. Challenging
6. Hierarchical
7. Obtainable
8. Congruent across departments

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12 Strategic CHAPTER 4 • TyPEs of sTRATEgiEs

Table 4-3 Ten Benefits of Having Clear Objectives

1. Provide direction by revealing expectations
2. Allow synergy
3. Assist in evaluation by serving as standards
4. Establish priorities
5. Reduce uncertainty
6. Minimize conf licts
7. Stimulate exertion
8. Aid in allocation of resources
9. Aid in design of jobs
10. Provide basis for consistent decision making

prices may, for example, jeopardize long-term market share. The dangers associated with
trading off long-term strategic objectives with near-term bottom-line performance are especially
severe if competitors relentlessly pursue increased market share at the expense of short-term
profitabil- ity. Amazon, for example, went many years operating without profits but gaining
market share. And there are other trade-offs between financial and strategic objectives, related
to riskiness of actions, concern for business ethics, the need to preserve the natural environment,
and social responsibility issues. Both financial and strategic objectives should include both
annual and long-term performance targets. Ultimately, the best way to sustain competitive
advantage over the long run is to relentlessly pursue strategic objectives that strengthen a firm’s
business posi- tion over rivals. Financial objectives can best be met by focusing first and
foremost on achieving strategic objectives that improve a firm’s competitiveness and market
strength.

Avoid Not Managing by Objectives

Mr. Derek Bok, former President of Harvard University, once said, “If you think education is
expensive, try ignorance.” The idea behind this saying also applies to establishing objectives,
because strategists should avoid the following ways of “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 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 strate-
gist is the ability to solve problems. Because there are plenty of crises and problems to go
around for every person and 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, letting events dictate the what and when of management
decisions.
• Managing by Subjectives —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 suc-
ceed. Decisions are predicated on the hope that they will work and that good times are just
around the corner, especially if luck and good fortune are on our side!2

Types of Strategies
The model illustrated in Figure 4-1 provides a conceptual basis for applying strategic manage-
ment. Defined and exemplified in Table 4-4, alternative strategies that an enterprise could
pursue can be categorized into 11 actions: forward integration, backward integration, horizontal
12 Strategic CHAPTER 4 • TyPEs of sTRATEgiEs
inte- gration, market penetration, market development, product development, related
diversification,
12 Strategic CHAPTER 4 • TyPEs of sTRATEgiEs

Chapter 2: Outside-USA Strategic Planning

The Internal
Audit
Chapter 6

Vision and Strategy

Types of Strategy Strategy 5VTCVGI[
Mission Generation
Strategies Implementation Execution /QPKVQTKPI
Analysis and Selection
Chapter 4 Chapter 9 Chapter 10 %JCRVGT
Chapter 5 Chapter 8

The External
Audit
Chapter 7

Chapter 3: Ethics, Social Responsibility, and Sustainability

Strategy Strategy Strategy

Formulation Implementation Evaluation
Figure 4-1
A Comprehensive Strategic-Management Model
Source: Fred R. David, adapted from “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40,
© Fred R. David.

unrelated diversification, retrenchment, divestiture, and liquidation. Each alternative strategy

has countless variations. For example, market penetration can include adding salespersons,
increas- ing advertising expenditures, couponing, and using similar actions to increase market
share in a given geographic area.
Most organizations simultaneously pursue a combination of two or more strategies, but a
combination strategy can be exceptionally risky if carried too far. No organization can afford
to pursue all the strategies that might benefit the firm. Difficult decisions must be made.
Priorities must be established. Organizations, like individuals, have limited resources. Both
organizations and individuals must choose among alternative strategies and avoid excessive
indebtedness.
Hansen and Smith explain that strategic planning involves “choices that risk resources and
trade-offs that sacrifice opportunity.” In other words, if you have a strategy to go north, then
you must buy snowshoes and warm jackets (spend resources) and forgo the opportunity of
“faster population growth in southern states.” You cannot have a strategy to go north and
then take a step east, south, or west “just to be on the safe side.” Firms spend resources
and focus on a finite number of opportunities in pursuing strategies to achieve an uncertain
outcome in the future. Strategic planning is much more than a roll of the dice; it is an
educated wager based

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12 Strategic CHAPTER 4 • TyPEs of sTRATEgiEs

Table 4-4 Alternative Strategies Defined and Recent Examples Given

strategy Definition example

Forward Integration Gaining ownership or increased control over distributors Amazon began rapid delivery services in some
or retailers U.S. cities.
Backward Integration Seeking ownership or increased control of a firm’s Starbucks purchased a coffee farm.
suppliers
Horizontal Integration Seeking ownership or increased control over competitors BB&T acquired Susquehanna Bancshares.
Market Penetration Seeking increased market share for present products or Under Armour signed tennis champion Andy
services in present markets through greater marketing Murray to a 4-year, $23 million marketing deal.
efforts
Market Development Introducing present products or services into new Gap opened its first five stores in China.
geographic area
Product Development Seeking increased sales by improving present products or Amazon just began offering its own line of baby
services or developing new ones diapers and wipes.
Related Diversification Adding new but related products or services Facebook acquired the text-messaging firm
WhatsApp for $19 billion.
Unrelated Diversification Adding new, unrelated products or services Kroger and Whole Foods Market are cooking
meals, becoming restaurants.
Retrenchment Regrouping through cost and asset reduction to reverse Staples closed 250 stores and reduced by 50%
declining sales and profit the size of other stores.
Divestiture Selling a division or part of an organization Sears Holdings divested its Land’s End division
to Sears’ shareholders.
Liquidation Selling all of a company’s assets, in parts, for their The Trump Taj Mahal in Atlantic City, New
tangible worth Jersey, faces liquidation.

on predictions and hypotheses that are continually tested and refined by knowledge, research,
experience, and learning. Survival of the firm oftentimes hinges on an excellent strategic plan.3
Organizations cannot excel in too many things because resources and talents get spread thin
and competitors gain advantage. In large, diversified companies, a combination strategy is com-
monly employed when different divisions pursue different strategies. Also, organizations strug-
gling to survive may simultaneously employ a combination of several defensive strategies, such
as divestiture, liquidation, and retrenchment.

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 actu- ally four levels of strategies: corporate, divisional, functional, and operational—as
illustrated in Figure 4-2. However, in small firms, there are three levels of strategies: company,
functional, and operational.
The persons primarily responsible for having effective strategies at the various levels
include the CEO or business owner at the corporate level; the president or executive vice
president at the divisional level; the 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. It is
important that all manag- ers at all levels participate and understand the firm’s strategic plan to
help ensure coordination, facilitation, and commitment, while avoiding inconsistency,
inefficiency, and miscommunication.

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
suppli- ers, 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.
12 Strategic CHAPTER 4 • TyPEs of sTRATEgiEs

Corporate Level
—chief
executive officer
Company
Division Level—division Level—owner
president or executive or president
vice president Functional Level— finance,
marketing, R&D,
Functional Level—finance, marketing,
manufacturing, information
R&D, manufacturing, information systems,
systems, and human
and human resource managers
resource managers
Operational Level—plant managers, sales managers, Operational Level—plant managers, sales
production and department managers managers, production and department managers

Large Company Small Company

Figure 4-2
Levels of Strategies with Persons Most Responsible

Forward Integration
Forward integration involves gaining ownership or increased control over distributors or
retail- ers. Increasing numbers of manufacturers (suppliers) are pursuing a forward integration
strategy by establishing websites to sell their products directly to consumers.
In a forward integration move, Coca-Cola recently signed a 10-year partnership with Green
Mountain Coffee Roasters, maker of the Keurig single-serve coffeemaker, to offer for the first
time a Coca-Cola drink through a K-Cup. Coca-Cola thus plans to sell Coke through the at-
home beverage system Keurig K-Cup. With the partnership, Coca-Cola also acquired 10 percent
of the Green Mountain company for about $1.25 billion. Green Mountain now has a similar
partnership with Campbell Soup to brew a cup of chicken broth in a K-Cup.
Based in Cincinnati and having more than 2,600 grocery stores, Kroger recently acquired
Viatcost.com to expand its push into online groceries, partly so as not to concede the same-day
food delivery market to Amazon.com. FedEx and UPS are both using forward integration, pay-
ing the United States Post Office (USPS) to ship their packages. Today, USPS delivers
about
2.5 million packages daily for FedEx, or about one third of FedEx’s express-mail U.S.-bound
mailings.
Amazon is forward integrating into the “installation business.” When you buy, for
example, a ceiling fan or car stereo from Amazon, the company now wants to install it for
you for a fee—at least in three cities (Los Angeles, New York, and Seattle). Amazon’s new
program is called Amazon Local Services and is another step by the company to erode brick-
and-mortar’s
90 percent market share of retail sales in the United States. In addition, Amazon is developing a
new mobile application that recruits and pays ordinary people to be carriers of packages as they
travel, doing away with the need for FedEx, UPS, and even the United States Postal Service.
This new Amazon forward integration strategy is known as “On My Way” and is still being
tested to resolve potential issues such as what happens if the package is damaged, or even
stolen, by the transporter.
Taco Bell also wants to ring your doorbell and deliver you the goods. Fast food delivery is
already a strategy at some rival firms, such as Jimmy John’s sandwich shop; Burger King has
been offering delivery in select markets for a couple of years now; Starbucks is testing delivery.
An effective means of implementing forward integration is franchising. Approximately
2,000 companies in about 50 different industries in the United States use franchising to distrib-
ute their products or services. Businesses can expand rapidly by franchising because costs and
opportunities are spread among many individuals. Total sales by franchises in the United States
are annually about $1 trillion. There are about 800,000 franchise businesses in the United
States. However, a growing trend is for franchisees, who, for example, may operate 10
franchised
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12 Strategic CHAPTER 4 • TyPEs of sTRATEgiEs

restaurants, stores, or whatever, to buy out their part of the business from their franchiser (cor-
porate owner). A growing rift between franchisees and franchisers is escalating as the offspring
often outperforms the parent.
Restaurant chains are increasingly being pressured to own fewer of their locations. For
example, TGI Fridays recently sold its 250 company-owned restaurants in the United States to
franchisees as well as its 63 company-owned restaurants in the United Kingdom. Applebee’s
also is becoming much more a franchisee-owned business. Burger King is converting virtually
all of its company-owned outlets to franchised operations, with revenue from franchisees
going from
30 percent of sales in 2011 to 90 percent in 2015. This change results in a drop in Burger King
revenues, since franchisees show revenues on their own personal income statements. In
contrast, rival Yum Brands owns virtually all of its outside-U.S. restaurants and says that
policy gives greater control and benefits if things go well (or bad).
The following six guidelines indicate when forward integration may be an especially
effective strategy:4
1. An organization’s present distributors are especially expensive, unreliable, or incapable
of meeting the firm’s distribution needs.
2. The availability of quality distributors is so limited as to offer a competitive advantage
to those firms that promote forward integration.
3. 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.
4. An organization has both the capital and human resources needed to manage the new busi-
ness of distributing its own products.
5. 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.
6. 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.

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. Starbucks recently purchased its first
coffee farm—a 600-acre prop- erty in Costa Rica. This backward integration strategy was utilized
primarily to develop new coffee varieties and to test methods to combat a fungal disease known
as coffee rust that plagues the indus- try. Manufacturers as well as retailers purchase needed
materials from suppliers.
The huge wine and beer producer, Constellation Brands, recently purchased several glass-
bottle factories after experiencing problems with several suppliers of their bottles. Constellation
acquired a controlling interest in a Mexican Anheuser-Busch glass-bottle factory, giving
Constellation ownership now of more than 50 percent of the glass bottles it uses.
Some industries, such as automotive and aluminum producers, are reducing their historical
pursuit of backward integration. Instead of owning their suppliers, companies negotiate with
sev- eral outside suppliers. Ford and Chrysler buy more than half of their component parts from
out- side suppliers such as TRW, Eaton, General Electric (GE), and Johnson Controls. De-
integration makes sense in industries that have global sources of supply. Companies today shop
around, play one seller against another, and go with the best deal. Global competition is also
spurring firms to reduce their number of suppliers and to demand higher levels of service and
quality from those they keep. Although traditionally relying on many suppliers to ensure
uninterrupted supplies and low prices, many U.S. firms now are following the lead of Japanese
firms, which have far fewer suppliers and closer, long-term relationships with those few.
“Keeping track of so many suppliers is onerous,” said Mark Shimelonis, formerly of Xerox.
Seven guidelines when backward integration may be an especially effective strategy are:5
1. An organization’s present suppliers are especially expensive, unreliable, or incapable
of meeting the firm’s needs for parts, components, assemblies, or raw materials.
12 Strategic CHAPTER 4 • TyPEs of sTRATEgiEs

2. The number of suppliers is small and the number of competitors is large.

3. 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.
4. An organization has both capital and human resources to manage the new business of sup-
plying its own raw materials.
5. The advantages of stable prices are particularly important; this is a factor because an orga-
nization can stabilize the cost of its raw materials and the associated price of its product(s)
through backward integration.
6. Present suppliers have high profit margins, which suggest that the business of supplying
products or services in a given industry is a worthwhile venture.
7. An organization needs to quickly acquire a needed resource.

Horizontal Integration
Seeking ownership of or control over a firm’s competitors, horizontal integration is arguably the
most common growth strategy. Thousands of mergers, acquisitions, and takeovers among com-
petitors are consummated annually. Nearly all these transactions aim for increased economies
of scale and enhanced transfer of resources and competencies. Kenneth Davidson makes the
following observation about horizontal integration:

The trend towards horizontal integration seems to ref lect strategists’ misgivings about
their ability to operate many unrelated businesses. Mergers between direct competitors are
more likely to create efficiencies than mergers between unrelated businesses, both
because there is a greater potential for eliminating duplicate facilities and because the
management of the acquiring firm is more likely to understand the business of the target.6

In the cigarette industry, Reynolds American recently acquired Lorillard for $25 billion.
The merger combined Reynolds’ Pall Mall and Camel brands (with 8.1 percent market share
each in the United States) with Lorillard’s Newport brand (with 12.2 market share) to combat
industry leader Altria’s Marlboro brand that commands 40.2 percent market share in the
United States. As part of the transaction, to combat antitrust concerns, Reynolds CEO Susan
Cameron said her company will divest Lorillard’s Blu e-cigarette to Imperial Tobacco (another
rival firm), while keeping and growing Reynolds’ Vuse e-cigarette. Reynolds also divested
its Kool, Winston, Salem, and Maverick brands to Imperial.
Both Dollar General and Dollar Tree recently competed for months to acquire Family
Dollar. The winner, Dollar Tree, is reducing prices and converting Family Dollar stores into
bright, clean, friendly places. Dollar Tree still sells more items for a dollar or less, whereas
Family Dollar sells more branded merchandise. About 5,000 Dollar Tree stores and 8,300
Family Dollar stores now compete with industry leader Dollar General’s 11,500 stores.
Charter Communications (CHTR) recently acquired (1) Time Warner Cable (TWC) for
$55.33 billion and (2) Bright House Networks for $10.4 billion, creating a giant U.S. TV and
Internet firm. The new Charter has nearly 24 million customers, below the leader Comcast’s
(CMCSK) 27.2 million customers. Comcast owns NBCUniversal. Charter also lags
AT&T (T), whose recent merger with DirecTV (DTV) gave AT&T 26.4 million TV
customers and
16.1 million fixed Internet customers, as well as tens of millions of wireless customers. Several
major factors are spurring horizontal integration in the TV and Internet business, including that
cable providers are rapidly losing TV subscribers, and pressure from online video services such
as Netf lix (NFLX), Hulu, and Amazon is increasing dramatically.
The following five guidelines indicate when horizontal integration may be an especially
effective strategy:7
1. 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.
2. An organization competes in a growing industry.
3. Increased economies of scale provide major competitive advantages.
4. An organization has both the capital and human talent needed to successfully manage an
expanded organization.
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12 Strategic CHAPTER 4 • TyPEs of sTRATEgiEs

5. 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.

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.

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. For example, Anheuser annually purchases several $4.5+ million,
30-second advertising slots during the Super Bowl.
Tiffany & Co. recently began using same-sex couples in advertising, preceded by J. Crew
casting one of its designers and his boyfriend in a catalogue. Gap uses a handsome couple in a
bill- board, and Jeremiah Brent and Nate Berkus appear in a Banana Republic advertising
campaign.
The following five guidelines indicate when market penetration may be an especially effec-
tive strategy:8
1. Current markets are not saturated with a particular product or service.
2. The usage rate of present customers could be increased significantly.
3. The market shares of major competitors have been declining while total industry sales have
been increasing.
4. The correlation between dollar sales and dollar marketing expenditures historically has
been high.
5. Increased economies of scale provide major competitive advantages.

Market Development
Market development involves introducing present products or services into new geographic
areas. For example, Whirlpool recently acquired Indesit, an Italian company that sells appli-
ances, in order to double Whirlpool’s size in Europe, where the company has struggled to com-
pete against Electrolux AB of Sweden, LG Electronics Inc. of South Korea, and Haier Group
of China. Indesit had 13 percent of the major appliance market share in eastern Europe and
Whirlpool had 5 percent, so now 18 percent of the major appliances sold in eastern Europe are
Whirlpool. In western Europe, the Indesit acquisition gave Whirlpool a 17 percent market share
behind the leader, BSH Bosch & Siemens Hausgerate GmbH’s 20 percent.
The largest online video-streaming company, Netf lix, recently launched it services
into France, Germany, Belgium, and Switzerland, as well as eastern and southern Europe, and
expects to be a global service provider by 2018. Netf lix’s major rival in Europe is Vivendi
SA’s pay-TV unit Canal Plus that offers Netf lix-like services through its Canal Play services.
These six guidelines indicate when market development may be an especially effective
strategy:9
1. New channels of distribution are available that are reliable, inexpensive, and of
good quality.
2. An organization is successful at what it does.
3. New untapped or unsaturated markets exist.
4. An organization has the needed capital and human resources to manage expanded
operations.
5. An organization has excess production capacity.
6. An organization’s basic industry is rapidly becoming global in scope.
 CHAPTER 4 • TyPEs of sTRATEgiEs

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 develop-
ment expenditures. Walt Disney Company recently developed a Disney Baby line of products
and services that it expects to become a powerful baby brand for customers ages 0 to 2. Bob
Chapek, president of Disney Consumer Products, stated, “This gives Disney the opportunity to
reach out to moms when magical moments begin; there is no more special occasion than the
birth of a baby.”
The action camera company, GoPro, recently unveiled new high- and low-end cameras.
GoPro is the leading producer of wearable and durable high-definition video cameras used by
outdoor enthusiasts such as scuba divers and surfers. Based in San Mateo, California, GoPro’s
rival firms include Sony, Canon, Garmin, and Polaroid, but GoPro is doing great by selling
prod- ucts in more than 100 countries and through more than 25,000 retail outlets.
The new Apple Watch is actually a wrist-top computer, and now competes with various
Android-powered devices from Motorola and Samsung Electronics. “Wearable computers” are
good for the people to monitor their healthiness among countless other things. The firm
Sensoria is making smart garments, including smart socks, which yes, are washable.
Opportunities for product development strategies are endless, given rapid technological changes
occurring daily.
These following five guidelines indicate when product development may be an especially
effective strategy to pursue:10
1. 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.
2. An organization competes in an industry that is characterized by rapid technological
developments.
3. Major competitors offer better-quality products at comparable prices.
4. An organization competes in a high-growth industry.
5. An organization has especially strong research and development capabilities.

Diversification Strategies
The two general types of diversification strategies are related diversification and unrelated
diversification. Businesses are said to be related when their value chains possess competitively
valuable cross-business strategic fits; businesses are said to be unrelated when their value
chains are so dissimilar that no competitively valuable cross-business relationships exist.11 Most
com- panies favor related diversification strategies to capitalize on synergies as follows:
• Transferring competitively valuable expertise, technological know-how, or other
capabili- ties from one business to another
• Combining the related activities of separate businesses into a single operation to achieve
lower costs
• Exploiting common use of a well-known brand name
• Cross-business collaboration to create competitively valuable resource strengths and
capabilities12
Diversification strategies are becoming less popular because organizations are finding it
more difficult to manage diverse business activities. In the 1960s and 1970s, the trend was to
diversify to avoid being dependent on any single industry, but the 1980s saw a general reversal
of that thinking. Diversification is still on the retreat. Michael Porter, of the Harvard Business
School, commented, “Management found it couldn’t manage the beast.” Businesses are still
selling, clos- ing, or spinning off less profitable or “different” divisions to focus on their core
businesses. For example, ITT recently divided itself into three separate, specialized companies.
At one time, ITT owned everything from Sheraton hotels and Hartford Insurance to the maker
of Wonder Bread and Hostess Twinkies. About the ITT breakup, analyst Barry Knap said,
“Companies generally are not very efficient diversifiers; investors usually can do a better job of
that by purchasing stock in a variety of companies.” Rapidly appearing new technologies, new
products, and fast-shifting buyer preferences make diversification difficult.

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