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

5-1. Identify and discuss eight characteristics of objectives and ten benefits of having
clear objectives.
5-2. Define and give an example of eleven types of strategies.
5-3. Identify and discuss the three types of “Integration Strategies.”
5-4. Give specific guidelines when market penetration, market development, and
product
development are especially effective strategies.
5-5. Explain when diversification is an effective business strategy.
5-6. List guidelines for when retrenchment, divestiture, and liquidation are especially
effective
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Without long-term objectives, an organization would drift aimlessly toward some

unknown end.
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Long-term objectives are needed at the corporate, divisional, and functional levels of
an organization.
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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.
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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.
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Two types of objectives are especially common in organizations: financial and

strategic objectives.
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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.”
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Hansen and Smith explain that strategic planning involves “choices that risk
resources and trade-offs that sacrifice opportunity.”
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Defined and exemplified in Table 5-4, alternative strategies that an enterprise could
pursue can be categorized into 11 actions.
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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.
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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.
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Forward integration involves gaining ownership or increased control over

distributors or retailers.
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Backward integration is a strategy of seeking ownership or increased control of a

firm’s suppliers.
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Seeking ownership of or control over a firm’s competitors, horizontal integration is

arguably the most common growth strategy.
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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.
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Market penetration strategy

seeks to increase market share for
present products or services in
present markets through greater
marketing efforts when current markets are not saturated
with a particular product or service.
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Market development involves introducing present products or services into new

geographic areas.
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Product development strategy seeks increased sales by improving or modifying

present products or services.
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The two general types of diversification strategies are related diversification and
unrelated diversification.
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Related diversification value chains possess competitively valuable cross-business

strategic fits.
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Related diversification should be considered when these circumstances exist.

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Unrelated diversification is when value chains are so dissimilar that no

competitively valuable cross-business relationships exist.
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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.
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In addition to integrative, intensive, and diversification strategies, organizations also

could pursue defensive strategies such as retrenchment, divestiture, or liquidation.
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Retrenchment occurs when an organization regroups through cost and asset

reduction to reverse declining sales and profits.
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Sometimes called a turnaround or reorganizational strategy, retrenchment is

designed to fortify an organization’s basic distinctive competence.
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Divestiture is selling a division or part of an organization and is often used to

raise capital for further strategic acquisitions or investments.
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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 7 bankruptcy. Liquidation is a recognition of
defeat and consequently can be an emotionally difficult strategy.
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Liquidation is pursued when bankruptcy is the only option available.

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Probably the three most widely read books on competitive analysis in the 1980s
were Michael Porter’s Competitive Strategy (1980), Competitive Advantage (1985),
and Competitive Advantage of Nations (1989). 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.
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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.
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.
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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.
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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.
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For collaboration between competitors to succeed, both firms must contribute

something distinctive, such as technology, distribution, basic research, or
manufacturing capacity.
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.
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.
Private equity (PE) firms are acquiring and taking private a wide variety of companies
almost daily in the business world.
First mover advantages refer to the benefits a firm may achieve by entering a new
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Some key reasons why many mergers and acquisitions fail are provided in Table 5-5.
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Table 5-6 presents the potential benefits of merging with or acquiring another firm.
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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.