BUS501: Strategic Management

4a. Explain commonly used corporate strategies 

• When might an organization use horizontal integration?
• What are the advantages of diversification for a company?
• In what situations do you think a company would use a retrenchment strategy?

A growth strategy aims to fuel growth in revenues and earnings. Growth strategies include horizontal integration, which is a merger or acquisition of a new business. They can engage in vertical integration, which occurs when a company integrates successive stages in the production and marketing process. For example, when a gas station acquires an oil refinery. Diversification is a strategy in which a company acquires or establishes a business other than what it currently does. A retrenchment strategy is when an organization shrinks one or more business units. Often this means to lay off employees and, in other words, get smaller. The McKinsey Matrix is a tool to help organizations determine market attractiveness and their own competitive strength. As you can see from the graph below, organizations look at each business unit and put that business unit in the correct place in the matrix, depending on how attractive the market and industry are.
 

To review, see Growth Strategy, Strategies for Getting Smaller, and The GE Approach.

 

4b. Analyze which strategy alternatives will create the most value 

• Why do companies analyze internal and external strengths/weaknesses before developing a strategy?
• Why do you think the concept of market share is important when determining your company's strategy?
• What strategy would you likely choose if you have a narrow market scope?

When considering which alternatives to use for strategy, it is important to do the external and internal analysis first, such as SWOT and PESTLE analysis as discussed in a previous unit. Once you determine where your organization stands, you are better positioned to determine which of Porter's Competitive strategies to use. Also, when you can understand your competitive advantage, you can choose the correct strategy. As you may remember, Porter's strategies consist of two main differences: the market scope, and the uniqueness of the product. If you find your organization can better compete on price, perhaps through TQM measures, you may want to use a cost leadership strategy. If you find the market scope is small for a particular product or service, you may want to use a segmentation strategy to find markets that larger firms don't tap. Market share is the percentage of a specific market held by a company. Porter also explains that, within these strategies, there is potential for a "hole in the middle," which refers to companies with moderate market share – in other words, they are stuck with neither a high market share nor successful differentiation strategies if the market share is lower. This isn't to say a company always needs to have a high market share to be profitable. Many companies can be profitable by having a low market share, as long as the segmentation/differentiation strategy is effective. In summary, it is necessary to:

1. Understand where your company is in terms of its competitive advantage.
2. Determine the type of market you are competing in
3. By applying Porter's strategies, decide how you can leverage your competitive advantages within that market.

To review, see The GE Approach.

 

4c. Relate strategy theory to specific applications 

• What is the difference between a stakeholder and a stockholder?
• How do organizations evaluate specific strategies before implementation?
• What factors of suitability, feasibility, and acceptability are important when analyzing a strategy?

Once your organization decides on a strategy, you should consider Johnson, Scholes, and Whittington's model for evaluating specific strategy options. Their model posits that options should be evaluated upon suitability, feasibility, and acceptability. Suitability refers to the overall rationale of the strategy. Sometimes a SWOT analysis is used to see if the proposed strategy fits with the organization's mission. Suitability analysis considers the best way to leverage the company's competitive advantages. Feasibility refers to the availability of resources for the company to implement the strategy. In other words, is there the capital, time, expertise, and human capital to make the strategy a reality? Acceptability refers to the idea that we need to meet stakeholders' expectations. A stakeholder has a vested interest in the success of a business (not to be confused with a stockholder – who actually owns part of the company). This may include suppliers, employees, and customers.

Another way organizations determine which strategy to choose, given all of the information they have, is through analysis using Mulcaster's Managing Forces Framework. This framework addresses forces that should be considered before moving forward with a specific strategy. Please note that some of these things you may have already analyzed in what will affect your business. These are focused more on looking at a specific strategic option and applying the framework to each strategy you are considering. These forces include time, opposing forces, politics, perception, holistic effects, adding value, incentives, learning capabilities, opportunity cost, risk, and style.

To review, see The GE Approach.

 

Unit 4 Vocabulary 

This vocabulary list includes terms you will need to know to successfully complete the final exam.

• diversification
• horizontal integration
• market share
• retrenchment strategy
• segmentation strategy
• stakeholder
• vertical integration