Chapter 7: Strategy Formulation: Corporate Strategy

Corporate strategy

the choice of direction of the firm as a whole and the management of its business or product
portfolio and concerns

1. Directional strategy: The firm’s overall orientation toward growth, stability or

retrenchment
2. Portfolio analysis: industries or markets in which the firm competes through its
products and business units
3. Parenting strategy: the manner in which management coordinates activities and
transfers resources and cultivates capabilities among product lines and business units.

I. Corporate Directional Strategies

a) Growth strategies :expand the company’s activities
b) Stability strategies : make no change to the company’s current activities
c) Retrenchment strategies : reduce the company’s level of activities

A. Growth Strategies

Merger: a transaction involving two or more corporations in which stock is exchanged but in
which only one corporation survives

Acquisition: 100% purchase of another company

Two basic Growth Strategies are concentration and diversification

1) Concentration Strategies
1.A) Vertical growth: achieved by taking over a function previously provided by a supplier or
distributor

Vertical growth results in Vertical integration: the degree to which a firm operates vertically in
multiple locations on an industry’s value chain from extracting raw materials to manufacturing
to retailing

Vertical Integration

Backward integration: assuming a function previously provided by a supplier

Forward integration: assuming a function previously provided by a distributor

Vertical Integration

Transaction cost economies

vertical integration is more efficient than contracting for goods and services in the marketplace
when the transaction costs of buying on the open market become too great
Vertical Integration Continuum

Full integration: a firm internally makes 100% of its key supplies and completely controls its
distributors

Taper integration: a firm internally produces less than half of its own requirements and buys the
rest from outside suppliers

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

Long-term contracts: Agreements between two firms to provide agreed-upon goods and
services to each other for a specific period of time

1. B) Horizontal growth
Expansion of operations into other geographic locations and/or increasing the range of products
and services offered to current markets.

Horizontal integration: the degree to which a firm operates in multiple geographic locations at
the same point on an industry’s value chain.

Horizontal growth
Horizontal growth can be achieved through internal development or external through
acquisitions and strategic alliances with other firms in same industry.

Horizontal growth is increasingly being achieved in today’s world through international

expansion.

This type pf growth can be achieved internationally through many different strategies.

International Entry Options for Horizontal Growth (Subjective)

There are several popular options for international entry.

Exporting is a good way to minimize risk and experiment with a specific product.
Exporting involves shipping goods produced in the company's 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. The licensee pays compensation to the licensing firm in
return for technical expertise.

Franchising agreement, the franchiser grants rights to another company to open a retail
store using the franchiser's name and operating system. In exchange, the franchisee pays
the franchiser a percentage of its sales as a royalty.

Joint Venture Forming a joint venture between a foreign corporation and a domestic
company is the most popular strategy used to enter a new country. Companies often form
joint ventures to combine the resources and expertise needed to develop new products or
technologies.

Acquisitions: A relatively quick way to move into an international area is through

acquisitions - purchasing another company already operating in that area.

Green_field development: If a company doesn't want to purchase another company's

problems along with its assets, it may choose green-field development - building its own
manufacturing plant and distribution system.

Production sharing is the process of combining the higher labor skills and technology
available in the developed countries with the lower-cost labor available in developing
countries .Often called outsourcing.

Turnkey operations are typically contracts for the construction of operating facilities in
exchange for a fee.
The BOT (Build, Operate, Transfer) concept is a variation of the turnkey operation.
Instead of turning the facility over to the host country when completed, the company
operates the facility for a fixed period of time during which it earns back its investment,
plus a profit.

Management contracts offer a means through which a corporation may use some of its
personnel to assist a firm in a host country for a specified fee and period of time.

2) Diversification Strategies
2.1) Concentric (Related) diversification:

Growth into a related industry when a firm has a strong competitive position but attractiveness
is low.
The search is for Synergy: the concept that two businesses will generate more profits together
than they could separately, the point of commonality may be similar technology customer
usage, distribution, managerial skills, or product similarity

2.2) Conglomerate (Unrelated) diversification

Management realizes that the current industry is unattractive.Diversifying into an industry

unrelated to its current one.

The emphasis in conglomerate diversification is on sound investment and value oriented

management rather than on product-market synergy common to concentric diversification.

Firm lacks outstanding abilities or skills that it could easily transfer to related products or
services in other industries.

B. Stability Strategies
A corporation may choose stability over growth by continuing its current activities without
any significant change in direction. Although sometimes viewed as a lack of strategy.
 These are very popular with small business owners who have found a niche and are very
happy with their success and the manageable size of their firms.

1) Pause/Proceed with caution strategy

Is in effect a timeout-an opportunity to rest before continuing a growth or retrenchment
strategy.

2) No-change strategy
A decision to do nothing new—a choice to continue current operations and policies for the
foreseeable future.

3) Profit strategies
A decision to do nothing new in a worsening situation but instead to act as though the
company’s problems are only temporary. The profit strategy is an attempt to artificially support
profits when a company’s sales are declining by reducing investment and short-term
directionary expenditures.

C. Retrenchment Strategies( subjective)

A retrenchment strategy may be used when a company has a weak competitive position in
some or all of its product lines resulting in poor performance - sales are down and profits
are becoming losses.
The more popular options are:

1.Turnaround strategy emphasizes the improvement of operational efficiency and is

probably most appropriate when a corporation's problems are pervasive, but not yet critical.
The two basic phases of a turnaround strategy are contraction and consolidation.
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.

2.Captive company strategy

is the giving up of independence in exchange for security.
Management desperately searches for an “angel” by offering to be a captive company to
one of its larger customers in order to guarantee the company’s existence with long term
contract.
3.Sell Out/ Divestment Strategy:
If a corporation with a weak competitive position in this industry is unable either to pull
itself up by its bootstraps or to find a customer to which it can become a captive company,
it may have no choice but to sell out.
The sell-out strategy makes sense if management can still obtaina good price for its
shareholders and the employees can keep their jobs by selling the entire company to
another firm.
Divestment If the corporation has multiple business lines and it chooses to sell off a
division with low growth potential, this is called divestment.

4.Bank ruptcy/liquidation strategy:

Bankruptcy involves giving up management of the firm to the courts in return for some
settlement of the corporation's obligations.
Liquidation is the termination of the firm.

II. Portfolio analysis

Companies with multiple product lines or business units must also ask themselves how these
various products and business units should be managed to boost overall corporate
performance.
management views its product lines and business units as a series of investments from which it
expects a profitable return

BCG growth-Share Matrix (subjective)

Using the BCG (Boston Consulting Group) Growth-Share Matrix is the simplest way to portray a
corporation’s portfolio of investments. Each of the corporation’s product lines or business units
is plotted on the matrix according to both the growth rate of the industry in which it competes
and its relative market share.

As a product moves through life cycle, it’s generally categorized into one of 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.if such a product
is to gain enough market share to become a leader and thus a star,Money must be taken
from mature product and spent on question mark ,management must decide if the business
worth the investment needed.
Stars are market leaders that are typically at or nearing 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 company’s profits.
Cash cows typically bring in far more money than is needed to maintain their market share.
In this declining stage of their life cycle, these products are "milked" for cash that will be
invested in new question marks.
Dogs have low market share and do not have the potential to bring in much cash. Dogs
should be either sold off or managed carefully for the small amount of cash they can
generate. Exp IBM sold PC business to Lenovo

The BCG is a very well-known portfolio concept with some clear advantages.it is
quantifiable and esy to use, easy to remember terms for referring to a corporation’s business
units or products.

Unfortunately, the BCG Growth-Share Matrix also has some serious limitations:
■ The use of highs and lows to form four categories is too simplistic.
■ The link between market share and profitability is questionable, low share businesses
can also be profitable

Advantages and Limitations of Portfolio Analysis

Advantages

 Encourages top management to evaluate each of the corporation’s businesses

individually and to set objectives and allocate resources for each
 Stimulates the use of externally oriented data to supplement management’s judgment
 Raises the issue of cash flow availability to use in expansion and growth

Limitations

 Defining product/market segments is difficult

 Suggest the use of standard strategies that can miss opportunities or be impractical

Tasks Necessary for Managing a Strategic Alliance Portfolio

1. Developing and implementing a portfolio strategy for each business unit and a
corporate policy for managing all the alliances of the entire company

2. Monitoring the alliance portfolio in terms of implementing business units’ strategies and
corporate strategy and policies

3. Coordinating the portfolio to obtain synergies and avoid conflicts among alliances

4. Establishing an alliance management system to support other tasks of multi-alliance

management
III. Corporate parenting
It has been suggested that corporate strategies address two crucial question:

 What business dhould this company own and why?

 What organizational structure, management processes and philosophy will foster
superior performance from the company’s business units?

Portfolio analysis fails to deal with the question of what industries a corporation should
enter or how a corporation can attain synergy among its product lines and business
units.

Corporate parenting or parenting synergy 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, according to Campbell:

Corporate parenting Generates corporate strategy by focusing on the core competencies of the
parent corporation and the value created from the relationship between the parent and its
businesses.in the form of corporate HQ , the parent has a great deal of power in its relationship.

The primary job of corporate headquarters is, therefore to obtain synergy among the business
unit by providing need resources to units transferring skills and capabilities among the units and
coordinating the activities of shared unit and functions to attain economic of scope.

Developing a Corporate Parenting Strategy

The search for appropriate corporate strategy involves three analytical steps

1. Examine each business unit in terms of its strategic factors:

A center of excellence is an organizational unit that embodies a set of capabilities that has
bees 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
firm.

2. Examine each business unit in terms of areas in which performance can be improved

3. Analyze how well the parent corporation fits with the business unit

Horizontal Strategy and Multipoint Competition

Horizontal strategy: cuts across business unit boundaries to build synergy across business units
and to improve competitive position in one of more business units

Multipoint competition: large multi-business corporations compete against other large multi-
business firms in a number of market.