Purpose This exercise focuses on how risky various alternative strategies are fo

ID: 354755 • Letter: P

Question

Purpose
This exercise focuses on how risky various alternative strategies are for organizations to pursue. Different degrees of risk are based largely on varying degrees of externality, defined as movement away from present business into new markets and products. In general, the greater the degree of externality, the greater the probability of loss resulting from unexpected events. High-risk strategies generally are less attractive than low-risk strategies.

Instructions
Step 1 On a separate sheet of paper, number vertically from 1 to 10. Think of 1 as “most risky,” 2 as “next most risky,” and so forth to 10, “least risky.”
Step 2 Write the following strategies beside the appropriate number to indicate how risky you believe the strategy is to pursue and WHY

horizontal integration

related diversification

liquidation

forward integration

backward integration

product development

market development

market penetration

retrenchment

unrelated diversification.

Explanation / Answer

In this, we intend to create a new market for our existing product. For successful implementation of this strategy, we would be required to invest in developing a new marketing campaign and establish a new product positioning. In this strategy, we shall be unacquainted with the market dynamics of this new market. As there is no certainty about how the new customers will react to this exposure, the ROI over the investment will be unpredictable.

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1 Unrelated Diversification In this strategy, a company intends to create a new product for a an unknown market, where the product will have established market players and we shall also be unaware about the market dynamics of this new market. We would be bound to invest more to overcome the cost of new entrant & the cost of new production facility inspite of high uncertainty of success and high risk in this strategy. 2 Related Diversification In this strategy, we develop a new product for the market in which we are already established in. Thus, we shall be well acquainted with the market dynamics and hence, thus chances of failure decreases to a great extent. In addition to this, it might also be possible that we could also utilize the already established systems/networks and thus reducing the investment requirement for this strategy. 3 Product Development In this strategy, we are just developing a new product very closely related to our present product and present market, thus our expertise from the previous products will assist us in making prudent decisions in this case. We can also make minor alterations in our established production line & also use the same distribution networks for our new product. Hence, we can also say that the investment requirement for this strategy will will be quiet less and thus, the risk will also be lesser. 4 Market Development

5 Horizontal Integration In this strategy, we integrate our competitors product into our product line and thus, enhancing our product assortment. This will provide us with readymade new product and also provide an exposure to a new market without much of an investment. But there are also cases where horizontal integration led to self cannibalization or image dissociation in the customers thus causing huge losses for the business. 6 Backward Integration it is a cost reduction and capability enhancing strategy where we attempt to pull in our supplier side functions into our business. This helps us achieve greater control over our supply chain and thus reducing the supply chain risk. But not having expertise in the supplier side function may lead us to incur higher cost in those functions and hence preventing us from enjoying the cost benefits of the strategy. Eventhough the investment made on this strategy is a bit risky but there is low risk to the established revenue stream. 7 Forward Integration It is also a cost reduction and capability enhancing strategy where we attempt to pull in our distribution side functions into our business. This helps us achieve greater control over our supply chain and thus reducing the supply chain risk. But not having expertise in the distribution side function may lead us to incur higher cost in those functions and hence preventing us from enjoying the cost benefits of the strategy and may also cause higher customer dissatisfaction due to poor distribution of products. Eventhough the investment made on this strategy is a bit risky but there is low risk to the established revenue stream. 8 Market Penetration In this, we intend to improve upon the exposure of our present product to new segment of the customers. For being successful in this strategy, we would be required to invest in developing a new marketing campaign and possibly establish a new product positioning. As there is no certainty about how the customers will react to this exposure, the ROI over the investment will be unpredictable. It might also happen that the new product positioning creates a dissociation in the mind of the present customers and thus, impacting the present revenue flow. 9 Retrenchment It is a cost reduction, process improving strategy where we make expense pruning. This is very low risk strategy as the maximum failure in this case is that the organization might fail to achieve its cost reduction targets. 10 Liquidation In this strategy, the organization is closed down. As there is no liability associated to closure of business, this strategy has the least risk.

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