A directional strategy allows a company to specify the principles it wishes to embody and the goals it strives to attain. Businesses use directional strategies as a model for directing operational decisions and processes. Directional strategies require managers to focus a business's operational efforts and resources on reaching higher growth levels, sustaining a stable environment or enforcing budgetary restrictions, depending on the company's needs and objectives.
Before a company can choose a directional strategy, managers must assess where the company currently stands, where they want it to go and what resources they have available. Abstract items, such as the vision statement, the mission statement and the desired strategic outcomes, must mesh with the company's current financial situation to determine the correct course of action. For instance, if a company has few resources, poor credit and minimal experience, it may not be in the best position to pursue a growth strategy.
Companies that follow a growth strategy seek to pursue new markets, develop new products and find new income sources. A vertical growth strategy involves selling new products to existing customers. An example of a vertical growth strategy for a soft drink manufacturer would be to offer sugar-free or healthier alternatives to their standard products. A horizontal growth strategy includes seeking out new markets for potential customers. The soft drink company could also pursue a horizontal strategy by pursuing marketing opportunities overseas.
A strategy focused on stability focuses on keeping operational changes to a minimum and maintaining the status quo. Companies may pursue this strategy if they have a stable, reliable profit margin and want to avoid the risk that comes with pursuing new opportunities. Managers also may opt for a stability strategy on a temporary basis, as they build resources toward the next expansion project. For example, a soft drink company may adopt a stability strategy if it has steady profits on its existing drinks and hold off on introducing new flavors.
The goals of a retrenchment strategy are reducing costs, cutting back on existing products and reducing the company's workforce. The idea is that a temporary retrenchment will allow the company to consolidate its resources and bounce back when conditions are more favorable. Companies may opt for a retrenchment strategy due to economic downturns, industry-wide problems or internal issues. The soft drink company in the previous examples may opt for a retrenchment strategy due to decreased demand, increased cost of ingredients or health issues related to its products.