CHAPTER 7 Strategy Formulation: Corporate Strategy

Corporate strategy deals with three key issues facing the corporation as a whole:
1. The firms overall orientation toward growth, stability, or retrenchment (directional strategy)
2. The industries or markets in which the firm competes through its products and business
units (portfolio analysis)
3. The manner in which management coordinates activities and transfers resources and cultivates
capabilities among product lines and business units (parenting strategy)
Corporate strategy is primarily about the choice of direction for a firm as a whole and the management
of its business or product portfolio.3
Directional strategy is composed of three general orientations (sometimes called grand strategies):
_ Growth strategies expand the companys activities.
_ Stability strategies make no change to the companys current activities.
_ Retrenchment strategies reduce the companys level of activities.

GROWTH STRATEGIES
A corporation can grow internally by expanding its operations both globally and domestically,
or it can grow externally through mergers, acquisitions, and strategic alliances.
A merger is a transaction involving two or more corporations in which stock is exchanged but in which only one corporation survives.
An acquisition is the purchase of a company that is completely absorbed as an operating subsidiary or division of the acquiring
corporation.
Acquisitions usually occur between firms of different sizes and can be either friendly or hostile. Hostile
acquisitions are often called takeovers.
Growth is a very attractive strategy for two key reasons:
_ Growth based on increasing market demand may mask flaws in a company
organization slack (unused resources)
_ A growing firm offers more opportunities for advancement, promotion, and interesting
jobs. Growth itself is exciting and ego-enhancing for CEOs.
The two basic growth strategies are concentration on the current product line(s) in one
industry and diversification into other product lines in other industries.

Concentration
The two basic concentration strategies are vertical growth and horizontal growth.
Vertical growth can be achieved by taking over a function previously provided by a supplier or by a distributor.
vertical integrationthe degree to which a firm operates vertically
in multiple locations on an industrys value chain from extracting raw materials to manufacturing
to retailing.
Assuming a function previously provided by a supplier is called backward integration (going backward
on an industrys value chain).
Assuming a function previously provided by a distributor is labeled forward integration (going
forward on an industrys value chain)
Transaction cost economics proposes that vertical integration is more efficient than contracting
for goods and services in the marketplace when the transaction costs of buying goods
on the open market become too great.

Vertical Integration Continuum

full integration, a firm internally makes w of its key supplies and completely
controls its distributors.
taper integration (also called concurrent sourcing), a firm internally produces less
than half of its own requirements and buys the rest from outside suppliers (backward taper integration).
quasi-integration, a company does not make any of its key supplies but purchases most of its requirements from outside
suppliers that are under its partial control (backward quasi-integration)
Long-term contracts are agreements between two firms to provide agreed-upon goods and services to each other for a
specified period of time.
Horizontal Growth. A firm can achieve horizontal growth by expanding its operations into other geographic locations and/or by
increasing the range of products and services offered to current markets.
horizontal integrationthe degree to which a firm operates in multiple geographic locations at the same point on
an industrys value chain.

International Entry Options for Horizontal Growth

Some of the most popular options for international entry are as follows:
_ Exporting, shipping goods produced in the companys home country to other countries for marketing.
_ Licensing agreement, the licensing firm grants rights to another firm in the host country to produce and/or sell a
product.
Franchising agreement, the franchiser grants rights to another company to open a retail store using the franchisers
name and operating system.
Joint Ventures: Forming a joint venture between a foreign corporation and a domestic
company is the most popular strategy used to enter a new country
_ Acquisitions purchasing another company already operating in that area.
_ Green-Field Development:
_ Production Sharing: Coined by Peter Drucker, the term production sharing means the
process of combining the higher labor skills and technology available in developed countries with the lower-cost labor available in
developing countries. Often called outsourcing
Turnkey Operations: Turnkey operations are typically contracts for the construction of
operating facilities in exchange for a fee.
_ BOT Concept: The BOT (Build, Operate, Transfer) concept is a variation of the
turnkey operation
_ Management Contracts offer a means through which a corporation can use some of its personnel to assist a firm
in a host country for a specified fee and period of time.

Diversification Strategies
The two basic diversification strategies are concentric and conglomerate
concentric diversification into a related industry may be a very appropriate corporate strategy when a firm
has a strong competitive position but industry attractiveness is low.
synergy, the concept that two businesses will generate more profits together than they could
separately
conglomerate diversificationdiversifying into an industry unrelated to its current one.

Cisco uses three criteria to judge whether a company is a suitable candidate for takeover:
_ It must be relatively small.
_ It must be comparable in organizational culture.
_ It must be physically close to one of the existing affiliates. 58

STABILITY STRATEGIES
Pause/Proceed with Caution Strategy
pause/proceed-with-caution strategy is, in effect, a timeoutan opportunity to rest before
continuing a growth or retrenchment strategy. It is

No-Change Strategy
no-change strategy is a decision to do nothing newa choice to continue current operations
and policies for the foreseeable future.

Profit Strategy
profit strategy is a decision to do nothing new in a worsening situation but instead to act as
though the companys problems are only temporary.
.

RETRENCHMENT STRATEGIES
Turnaround Strategy
Turnaround strategy emphasizes the improvement of operational efficiency and is probably
most appropriate when a corporations problems are pervasive but not yet critical.
two basic phases of a turnaround strategy are contraction and consolidation.62
Contraction is the initial effort to quickly stop the bleeding with a general, across-the
board cutback in size and costs.
The second phase, consolidation, implements a program to stabilize the now leaner
corporation. To streamline the company, plans are developed to reduce unnecessary overhead and
to make functional activities cost-justified.

Captive Company Strategy

A captive company strategy involves giving up independence in exchange for security. A company with a
weak competitive position may not be able to engage in a full-blown turnaround strategy.

Sell-Out/Divestment Strategy
The sell-out strategy makes sense if management can still obtain a good price for its shareholders and the
employees can keep their jobs by selling the entire company to another firm.
If the corporation has multiple business lines and it chooses to sell off a division with low growth potential,
this is called divestment.

Bankruptcy/Liquidation Strategy
Bankruptcy involves giving up management of the firm to the courts in return for some settlement of the
corporations obligations.
liquidation is the termination of the firm.

Portfolio Analysis
must also ask themselves how these various products and business units should be managed to boost overall corporate
performance:
How much of our time and money should we spend on our best products and business
units to ensure that they continue to be successful?
_ How much of our time and money should we spend developing new costly products, most
of which will never be successful?
_

In portfolio analysis, top management views its product lines and business units as a series of investments from which it
expects a profitable return.
four types for the purpose of funding decisions:
_ Question marks (sometimes called problem children or wildcats) are new products
with the potential for success, but they need a lot of cash for development.
_ Stars are market leaders that are typically at the peak of their product life cycle and are
able to generate enough cash to maintain their high share of the market and usually contribute
to the companys profits.
_ Cash cows typically bring in far more money than is needed to maintain their market
share.
_ Dogs have low market share and do not have the potential (because they are in an unattractive
industry) to bring in much cash.

Corporate Parenting
Corporate parenting, in contrast, views a corporation in terms of resources and capabilities
that can be used to build business unit value as well as generate synergies across business units.
a center of excellence is an organizational unit that embodies a set of
capabilities that has been explicitly recognized by the firm as an important source of value
creation, with the intention that these capabilities be leveraged by and/or disseminated to
other parts of the fir

DEVELOPING A CORPORATE PARENTING STRATEGY

1. Examine each business unit (or target firm in the case of acquisition) in terms of its
strategic factors:
2. Examine each business unit (or target firm) in terms of areas in which performance
can be improved:
3. Analyze how well the parent corporation fits with the business unit (or target firm):

HORIZONTAL STRATEGY AND MULTIPOINT COMPETITION

A horizontal strategy is a corporate strategy that cuts across business unit boundaries to build
synergy across business units and to improve the competitive position of one or more business
units
In multipoint competition, large multi-business corporations compete against
other large multi-business firms in a number of markets.