CHAPTER 6

Strategy Formulation: Corporate Strategy

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 Corporate Strategy

Corporate Strategy Deals with 3 Key

Issues:

–Firm’s directional strategy

–Firm’s portfolio strategy

–Firm’s parenting strategy

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 Corporate Directional Strategies

Directional Strategy
Refer to the Orientation Toward Growth

Managers decide on 3 grand strategies based on the following questions:

1. Expand, cut back, or stays the same (status quo)?
2. Concentrate within current industry or diversify into other
industries?
3. If expansion then decide if through internal development,
acquisitions, mergers, or strategic alliances?

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 Corporate Directional Strategies

1. Growth Strategies --
–External mechanisms:
•Mergers - Transaction involving two or more firms in which stock is
exchanged but only one firm survives.
•Acquisition - Purchase of a firm that is absorbed as an operating
subsidiary of the acquiring firm.
•Strategic Alliance - Partnership of two or more firms to achieve
strategically significant objectives that are mutually beneficial.

–2 Basic forms:
•Concentration
•Diversification

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 Corporate Directional Strategies

Basic Concentration Strategies --

Vertical Growth --
–Vertical integration
•Full integration
•Taper integration (make less then 50% of components)
•Quasi-integration (partial Ownership of supplier
•Long-term contract

–Backward integration
–Forward integration
Horizontal Growth / Concentration --
–Horizontal integration:
•Degree firms operate in multiple locations at the same point in value
chain
•Expand in multiple locations or increase range of products/services
offered to current markets
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 Corporate Directional Strategies

Basic Diversification Strategies –

Concentric (Related) Diversification --
–Growth into related industry
–Search for synergies

Conglomerate (Unrelated) diversification --

–Growth into unrelated industry
–Concern with financial considerations

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 Corporate Directional Strategies

Exporting
Licensing
Franchising
International Joint Ventures
Entry Acquisitions
Options Green-Field Development
Production Sharing
Turnkey Operations
BOT Concept
Management Contracts

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 Corporate Directional Strategies

2. Stability Strategies --

–Pause/proceed with caution

–No change

–Profit strategies

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 Corporate Directional Strategies

3. Retrenchment Strategies --

–Turnaround
–Captive Company Strategy
–Selling out
–Bankruptcy
–Liquidation

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 Corporate Strategy

II. Portfolio Analysis --

–Resource commitment on best products to

ensure continued success
•How much of our time and money should we spend
on our best products to ensure that they continue to
be successful?

–Resource commitment on new costly products

high risk
•How much of our time and money should we spend
developing new costly products, most of which will
never be successful?

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 BCG Matrix (Portfolio Analysis)

–Funding Decisions and Product Life Cycle

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 GE Business Screen (Portfolio Analysis)

C
Winners Winners
A Question
High B Marks

D
Industry Attractiveness

Winners
E Average
Businesses
Medium F
Losers

H
Losers
G
Low
Profit
Producers Losers

Strong Average Weak

Business Strength/Competitive Position

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 Portfolio Analysis

Portfolio Analysis: Pros & Cons

Advantages:

•Top management evaluates each of firm’s businesses

individually
•Use of externally-oriented data to supplement management
judgment
•Raises issue of cash flow availability
•Facilitates communication

Disadvantages:

•Difficult to define product/market segments

•Standard strategies can miss opportunities
•Illusion of scientific rigor
•Value-laden terms

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 Corporate Strategy

III. Corporate Parenting Strategy --

– Views the corporation in terms of resources and
capabilities that can be used to build business
unit value as well as generate synergies across
business units
– If there is good fit between Parent’s skills and
resources with the needs and opportunities of
the business units, the corporation is likely to
create value
– STEPS:
1. Identify Strategic Factors responsible for firm’s success
and/or failure
2. Identify areas for performance improvement
3. Analyze fit between parent and business units
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 Parenting-Fit Matrix
Low

MISFIT between critical success factors Heartland

and parenting characteristics
Ballast

Edge of the
Hart

Alien
Territory

Value Trap
High
Low High
FIT between parenting opportunities
and parenting characteristics

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