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STRATEGIC MANAGEMENT DEEPIKA C
S4 MBA
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Types of strategy Integration strategy
Diversification strategy
Intensive strategy
Defensive strategy |
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Integration strategy Vertical integration
Forward integration
Backward integration
Horizontal integration |
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Vertical integration When the grand strategy of a firm involves the acquisition of business that either supply the firm with inputs or serve as a customer for the firm’s outputs, vertical integration is involved. |
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Vertical Integration strategies
Allow a firm to gain control over:
Distributors, Suppliers, Competitors
Forward Integration –
Gaining ownership or increased control over distributors or retailers
Eg : General Motors is acquiring 10% of its dealers
Microsoft is opening its own retail stores.
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Guidelines for Forward Integration –
Present distributors are expensive, unreliable, or incapable of meeting firm’s needs
Availability of quality distributors is limited
When firm competes in an industry that is expected to grow markedly
Organization has both capital and human resources needed to manage new business of distribution
Advantages of stable production are high
Present distributors have high profit margins
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Backward Integration –
Seeking ownership or increased control of a firm’s suppliers
Eg: Apple is working to produce its own internally developed chips for its iPhone and iPod Touch devices.
Guidelines for Backward Integration –
When present suppliers are expensive, unreliable, or incapable of meeting needs
Number of suppliers is small and number of competitors large
High growth in industry sector
Firm has both capital and human resources to manage new business
Present suppliers have high profit margins
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Example for vertical integration If a shirt manufacturer acquires a textile producer by purchasing its common stock, buying its assets or through an exchange of ownership interests, the strategy is a vertical integration. In this case it is a backward vertical integration since the business acquired operates at an earlier stage of the production/marketing process.
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If the shirt manufacturer had merged with a clothing store, it would have been an example of forward integration-the acquisition of a business nearer to the ultimate consumer.
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Horizontal integration When the long term strategy of a firm based on growth through the acquisition of one or more similar business operating at the same stage of the production marketing chain, its grand strategy is called horizontal integration. Such acquisitions provide access to new markets for the acquiring firm and eliminate competitors. |
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Horizontal Integration –
Seeking ownership or increased control over competitors
a hospital group may purchase another
Guidelines for Horizontal Integration –
Firm can gain monopolistic characteristics without being challenged by federal government
Competes in growing industry
Increased economies of scale provide major competitive advantages
Faltering due to lack of managerial expertise or need for particular resources
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Benefits of vertical integration strategy: Allow a firm to gain control over: . Distributors (forward integration) . Suppliers (backward integration) . Competitors (horizontal integration) |
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Diversification strategies Diversification strategies –
Becoming less popular as organizations are finding it more difficult to manage diverse business activities
Concentric diversification
Conglomerate diversification
Horizontal diversification
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Concentric diversification Diversification involves the addition of a business related to the firm in terms of technology, markets, or products, it is concentric diversification. |
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Concentric Diversification –
Adding new, but related, products or services
Guidelines for Concentric Diversification –
Competes in no- or slow-growth industry
Adding new & related products increases sales of current products
New & related products offered at competitive prices
Current products are in decline stage of the product life cycle
Strong management team
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Conglomerate Diversification –
Adding new, unrelated products or services
Guidelines for Conglomerate Diversification –
Declining annual sales and profits
Capital and managerial talent to compete successfully in a new industry
Financial synergy between the acquired and acquiring firms
Exiting markets for present products are saturated
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Difference The principal difference between the two types of diversification is that concentric acquisitions emphasize some commonality in markets, products, or technology, whereas conglomerate acquisitions are based principally on profit considerations. |
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Horizontal Diversification –
Adding new, unrelated products or services for present customers
Guidelines for Horizontal Diversification –
Revenues from current products/services would increase significantly by adding the new unrelated products
Highly competitive and/or no-growth industry with low margins and returns
Present distribution channels can be used to market new products to current customers
New products have counter cyclical sales patterns compared to existing products
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