Strategy Formulation

Corporate strategy

Prof. Rushen Chahal

Corporate Strategy

is primarily about the choice of direction for the firm as a whole (small one-product
company and a large multi business company)
is

also about managing various product lines and business units for maximum value (large multi business company)

Corporate Strategy
3 Key Issues The firms overall orientation toward growth, stability or retrenchment (directional strategy) The industries or markets in which the firm competes through its products and BU (portfolio strategy) The manner in which management coordinates activities, transfer resources, and cultivates capabilities among product lines and BUs (parenting strategy)

Corporate Directional Strategy Orientation toward growth

Expansion, contraction, status quo Concentration or diversification Internal development or acquisitions, mergers, or alliances

Corporate Directional Strategy

3 Grand Strategies

Corporate Directional Strategy

1. Growth Strategies -A corporation can grow internally by expanding its operation both globally and domestically, or it can grow externally

Corporate Directional Strategy

1. Growth Strategies -External mechanisms:



Mergers (Allied Corporation+ Signal Companies= Allied Signal) Acquisitions (Procter & Gamble acquisition of Richardson-Vicks knowing for Oil of Olay and Vidal Sassoon brands) Strategic alliances

Corporate Directional Strategy

1. Growth Strategies -Main advantages:

 

 

May mask flaws in a company Provide a big cushion for turnaround in case a strategic error is made Give more bargaining power Offer more opportunities for advancement, promotion, and interesting jobs

2 Basic forms:
 

Concentration Diversification

Basic Concentration Strategies



Vertical Growth -Vertical integration  Full integration (100% suppliers +controls distributors)  Taper integration (<50% supplies; use own and external distribution channels)  Quasi-integration (buy/sell from outside suppliers/distributors that under its partial control)  Long-term contract Backward integration Forward integration

Is a logical strategy for a corporation or BU with a strong competitive position in a highly attractive industry

Basic Concentration Strategies



Horizontal Growth / Concentration -by expanding the firms products into other geographic locations and/or by increasing the range of products and services offered to current markets. Horizontal integration  Full to partial ownership  Long-term contracts

Corporate Directional Strategy

Basic Diversification Strategies


Concentric Diversification when a firm has a strong competitive position but industry attractiveness is low
Growth into related industry Search for synergies

Conglomerate diversification when industry is unattractive and a firm lacks outstanding abilities and skills
Growth into unrelated industry Concern with financial considerations

Corporate Directional Strategy

Growth into areas related to a companys current product lines is generally more successful than is growth in completely areas. From successful growth projects:
80 % vertical growth 50% horizontal growth 35% concentric diversification 28% conglomerate diversification

Corporate Directional Strategy

International Entry Options -Exporting Licensing Franchising Joint Ventures Acquisitions Green-Field Development Production Sharing Turnkey Operation BOT Concept (Build, Operate, Transfer) Management Contracts

Corporate Directional Strategy

2. Stability Strategies -Pause/proceed with caution (timeout before continuing growth or retrenchment) No change (to do nothing new) Profit strategies (to support profits by reducing investments and short-term expenditures)

Corporate Directional Strategy

3. Retrenchment Strategies -Turnaround Captive Company Strategy Selling out Divestment Bankruptcy Liquidation

Corporate Strategy

Portfolio Analysis -Resource commitment on best products to ensure continued success Resource commitment on new costly products high risk

BSG Matrix

BSG Matrix


Stars are high market share/high growth businesses. The preferred strategy is growth. Question marks are low market share/high growth businesses. The preferred strategies are growth for promising question marks and restructuring or divestiture for the other question marks. Cash cows are high market share/low growth businesses. The preferred strategy is stability or modest growth. Dogs are low market share/low growth businesses. The preferred strategy is retrenchment by divestiture.

BSG Matrix
Limitations:
 

Too simplistic The link between market share and profitability is questionable Growth rate is only one aspect of industry attractiveness Product lines or business units are considered in relation to the one market leader Market share is only one aspect of overall competitive position

GE/McKinsey Matrix
C Winners A High Winners B Question Marks D Winners E Medium

Average Businesses F Losers

Losers G Low Profit Producers Strong Average

Losers Weak

Business Strength/Competitive Position

GE/McKinsey Matrix


Business strengths reflect market share, technological advantage, product quality, operating costs, and price competitiveness. Industry attractiveness reflects market size and growth, capital requirements and competitive intensity. Both business strength and industry attractiveness are categories as low, medium, and high. Combining the business strength and industry attractiveness variables yields a nine-cell matrix that identifies business units as winners, question marks, average businesses, profit producers, or losers.

GE/McKinsey Matrix
Limitations:
 

It can get quite complicated and cumbersome The numerical estimates of industry attractiveness and business strength/competitive position give the appearance of objectivity, but they are in reality subjective judgments It cannot effectively depict the positions or business units in developing industries

Portfolio Analysis
Advantages of portfolio analysis:


It encourages top management to evaluate each of the businesses individually and set objectives and allocate resources for each. It stimulates the use of externally oriented data to supplement managements judgment. It raises the issue of cash flow availability for use in expansion and growth. Its graphic depiction facilitates communication.

Portfolio Analysis
Limitations of portfolio analysis:
 

It is not easy to define product/market segments. It suggests the use of standard strategies that can miss opportunities or be impractical. It provides an illusion of scientific rigor when in reality positions are based on subjective judgments. It is not always clear what makes an industry attractive or where a product is in its life cycle.

Corporate Strategy

Corporate Parenting Strategy -Strategic factors Performance improvement Analyze fit

Corporate Parenting
Value creation only occurs under three conditions:


the parent sees an opportunity for a business to improve performance and a role for the parent in helping to grasp the opportunity the parent has the skills, resources and other characteristics needed to fulfill the required role the parent has sufficient understanding of the business and sufficient discipline to avoid other value-destroying interventions.

Corporate Parenting
According to Campbell, Good and Alexander the developing a corporate parenting strategy includes 3 steps:
 

To examine each BU in terms of its strategic factors. To examine each BU in terms of areas in which performance can be improved. To analyze how well the parent corporation fits with the BU.

Corporate Parenting
Heartland business has opportunity for improvement by the parent and priority for all corporate activities Edge-of Heartland business has some parenting characteristics fit the business, but others do not Ballast businesses fit very comfortably with the parent corporation but contain very few opportunities to be improved by the parent Alien territory businesses have little opportunity to be improved by the corporate parent Value trap businesses fit well with parenting opportunities, but misfit with parents understanding of the units strategic factors