Alternative strategies

Summary of Strategies and its definition

Forward Integration – Gaining ownership or increased control over distributors or retailers

Backward Integration – Seeking ownership or increased control of a firm’s suppliers
Horizontal Integration – Seeking ownership or increased control over competitors
Market Penetration – Seeking increased market share for present products or services in
present
markets through greater marketing efforts
Market Development – Introducing present products or services into new geographic area
Product Development – Seeking increased sales by improving present products or services or
developing new ones
Related Diversification – Adding new but related products or services
Unrelated Diversification – Adding new, unrelated products or services
Retrenchment – Regrouping through cost and asset reduction to reverse declining sales and
profit
Divestiture – Selling a division or part of an organization
Liquidation – Selling all of a company’s assets, in parts, for their tangible worth

Here are some of the guidelines for which each alternative strategy may be considered
an effective strategy:

Forward integration:

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:

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.
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
supplying its own raw materials.
5. 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.
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:

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
acquiring firm is more likely to understand the business of the target.
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.

Market penetration:

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. Increased economies of scale provide major competitive advantages.

Market development

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.

Product development:
1. An organization’s basic industry is rapidly becoming global in scope.
2. 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.
3. An organization competes in an industry that is characterized by rapid technological
developments.
4. Major competitors offer better-quality products at comparable prices.
5. An organization competes in a high-growth industry.
6. An organization has especially strong research and development capabilities.

Diversification strategies:

1. Transferring competitively valuable expertise, technological know-how, or other capabili-

ties from one business to another
2. Combining the related activities of separate businesses into a single operation to achieve
lower costs
3. Exploiting common use of a well-known brand name
4. Cross-business collaboration to create competitively valuable resource strengths and
capabilities

Related diversification:

1. An organization competes in a no-growth or a slow-growth industry.

2. Adding new, but related, products would significantly enhance the sales of current products
3. New, but related, products could be offered at highly competitive prices.
4. New, but related, products have seasonal sales levels that counterbalance an organization’s
existing peaks and valleys.
5. An organization’s products are currently in the declining stage of the product’s life cycle.
6. An organization has a strong management team.

Unrelated diversification:

1. Revenues derived from an organization’s current products or services would increase

significantly by adding the new, unrelated products.
2. An organization competes in a highly competitive or a no-growth industry, as indicated by
low industry profit margins and returns.
3. An organization’s present channels of distribution can be used to market the new products to
current customers.
4. New products have countercyclical sales patterns compared to an organization’s present
products.
5. An organization’s basic industry is experiencing declining annual sales and profits.
6. An organization has the capital and managerial talent needed to compete successfully in a
new industry.
7. An organization has the opportunity to purchase an unrelated business that is an attractive
investment opportunity.
8. 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.)
9. Existing markets for an organization’s present products are saturated.
10. Antitrust action could be charged against an organization that historically has concentrated
on a single industry.

Retrenchment:

1. An organization has a clearly distinctive competence but has failed consistently to meet its
objectives and goals over time.
2. An organization is one of the weaker competitors in a given industry.
3. An organization is plagued by inefficiency, low profitability, poor employee morale, and
pressure from stockholders to improve performance.
4. 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).
5. An organization has grown so large so quickly that major internal reorganization is needed.

Divestiture:

1. An organization has pursued a retrenchment strategy and failed to accomplish needed

improvements.
2. To be competitive, a division needs more resources than the company can provide.
3. A division is responsible for an organization’s overall poor performance.
4. A division is a misfit with the rest of an organization; this can result from radically different
markets, customers, managers, employees, values, or needs.
5. A large amount of cash is needed quickly and cannot be obtained reasonably from other
sources.
6. Government antitrust action threatens an organization.

Liquidation:

1. An organization has pursued both a retrenchment strategy and a divestiture strategy, and
neither has been successful.
2. 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.
3. The stockholders of a firm can minimize their losses by selling the organization’s assets.