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STRATEGIC MANAGEMENT PROCESS UNIT 8- CORPORATE STRATEGY

External Environment

Corporate Performance Evaluation Environmental Scanning

S
Internal Environment

Vision Mission Goals Objectives STRATEGIES Corporate


Business

Functional Policies Programs Budgets Procedures Evaluation

STRATEGIES Corporate
Business

Functional

STRATEGY FORMULATION- CORPORATE STRATEGY


Corporate strategy deals with three

key issues facing the corporation as a whole:


1. The firm's overall orientation toward growth, stability or retrenchment -How should we grow?

Directional Strategy

Corporate Strategy

Portfolio Strategy

2. The industries in which the firm competes through its products and business units

3. The manner in which management coordinates Parenting activities, transfers resources, and cultivates capabilities among units (Head Quarters is Strategy called the Organizational Parent that creates synergy among the business unit Children)

STRATEGY FORMULATION- CORPORATE STRATEGY


Corporate strategy deals with three

key issues facing the corporation as a whole:


1. The firm's overall orientation toward growth, stability or retrenchment -How should we grow?

Directional Strategy

Corporate Strategy

Portfolio Strategy

Parenting Strategy

Directional Strategy Types

Growth Strategies

1. Expand the companys activities

Directional Strategy
Stability Strategies

Corporate

2. Make no change to the companys current activities

Strategy

Portfolio Strategy

Retrenchment Strategy

Retrenchment Strategies

3. Reduce the companys current level of activities

Growth Strategies Means to Grow


Internal Growth

Growth Strategies

External Growth

Directional Strategy
Stability Strategies

Corporate Strategy

Retrenchment Strategies

Growth Strategies Means to Grow


A corporation can grow:
Internally by expanding its operations domestically and globally Externally through mergers, acquisitions and strategic alliances -Merger is a transaction involving two or more companies in which stock is exchanged but only one corporation survives. The companies are of somewhat similar size and are usually friendly . The resulting firm is likely to have a name derived from its composite firms e.g. Daimler Chrysler. - An acquisition is the (friendly or hostile) purchase of a company that is completely absorbed as an operating subsidiary or division of the acquiring corporation ( Oracle s acquisition of People Soft). Hostile acquisition is called takeover - A strategic alliance is partnership of two or more corporations or business units to achieve strategically significant objectives that are mutually beneficial. Usually strategic alliances involve partnerships, technology licensing agreements or joint ventures. (Sony Ericsson)

Growth Strategies Basic Forms


CONCENTRATION - concentrating (investing) resources on current product lines when current products show growth potential. Growing firms in growing industries choose this path before they try diversification. DIVERSIFICATION -branching out into new industries when the current one consolidates and matures.
External Growth Concentration Strategy

Growth Strategies Diversification Strategy

Internal Growth

Directional Strategy
Stability Strategies

Corporate Strategy

Retrenchment Strategies

Basic Concentration Strategies


Current Products

Concentration Strategy Growth Strategies


Current or New Markets

Diversification Strategy

Directional Strategy
Stability Strategies

Corporate Strategy

Retrenchment Strategies

Basic Concentration Strategies


Current Products

Concentration Strategy Growth Strategies


Current or New Markets

Vertical Integration Horizontal Integration

Forward Backward
Product Range

Geographic

Diversification Strategy

Directional Strategy
Stability Strategies

Corporate Strategy

Retrenchment Strategies

Vertical Integration
The degree to which a firm owns its upstream suppliers and its downstream buyers is referred to as vertical integration. Because it can have a significant impact on a business unit's position in its industry with respect to cost, differentiation, and other strategic issues, the vertical scope of the firm is an important consideration in corporate strategy. Expansion of activities downstream is referred to as forward integration, and expansion upstream is referred to as backward integration. The concept of vertical integration can be visualized using the value chain. Consider a firm whose products are made via an assembly process. Such a firm may consider backward integrating into intermediate manufacturing or forward integrating into distribution.

Degree of Vertical Integration Full Integration -Internally makes 100% of key supplies and controls 100% of its
distribution.

Taper Integration

Less than 50% (Backward Taper and Forward Tapper Integration are possible)

Quasi-Integration - No internal supplies or own distribution (Effected through


partial Control of partners to achieve quasi-backward or quasi-forward integration)

--------------------------------------------------------------------------------------Long-term Contract- Two firms agree on supplies for specified period TRANSACTION COST ECONOMICS (The decision basis to choose between vertical integration and long term contracts)

Factors Favoring Vertical Integration


The following situational factors tend to favor vertical integration: Taxes and regulations on market transactions Obstacles to the formulation and monitoring of contracts. Strategic similarity between the vertically-related activities. Sufficiently large production quantities so that the firm can benefit from economies of scale. Reluctance of other firms to make investments specific to the transaction

Factors Against Vertical Integration


The following situational factors tend to make vertical integration less attractive: The quantity required from a supplier is much less than the minimum efficient scale for producing the product. The product is a widely available commodity and its production cost decreases significantly as cumulative quantity increases. The core competencies between the activities are very different. The vertically adjacent activities are in very different types of industries. For example, manufacturing is very different from retailing. The addition of the new activity places the firm in competition with another player with which it needs to cooperate. The firm then may be viewed as a competitor rather than a partner

Horizontal Integration
(Line Expansion) The acquisition of additional business activities at the same level of the value chain is referred to as horizontal integration. This form of expansion contrasts with vertical integration by which the firm expands into upstream or downstream activities. Horizontal growth can be achieved by internal expansion or by external expansion through mergers and acquisitions of firms offering similar products and services. Some examples of horizontal integration include: The Standard Oil Company's acquisition of 40 refineries. An automobile manufacturer's acquisition of a sport utility vehicle manufacturer. A media company's ownership of radio, television, newspapers, books, and magazines.

Advantages of Horizontal Integration


The following are some benefits sought by firms that horizontally integrate: Economies of scale - acheived by selling more of the same product, for example, by geographic expansion. Economies of scope - achieved by sharing resources common to different products. Commonly referred to as "synergies.Increased market power (over suppliers and downstream channel members) Reduction in the cost of international trade by operating factories in foreign markets. Sometimes benefits can be gained through customer perceptions of linkages between products. For example, in some cases synergy can be achieved by using the same brand name to promote multiple products. However, such extensions can have drawbacks, as pointed out by Al Ries and Jack Trout in their marketing classic, Positioning.

Basic Diversification Strategies


Current Products

Concentration Strategy Growth Strategies


Current or New Markets

Vertical Integration Horizontal Integration Concentric (Related) Diversification Conglomerate (Unrelated) Diversification

Forward Backward
Product Range

Geographic
Growth into related industry Search for synergies Growth into unrelated industry Concern with financial considerations

Diversification Strategy

Directional Strategy

When current industry matures or becomes less attractive

Corporate Strategy

Stability Strategies

Retrenchment Strategies

International Entry Options


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

Stability Strategy - Types


Current Products

Concentration Strategy Growth Strategies


Current or New Markets

Vertical Integration Horizontal Integration Concentric /Related Diversification Conglomerate /Unrelated Diversification

Forward Backward
Product Range

Geographic

Diversification Strategy

Directional Strategy
Stability Strategies

Pause/Proceed with caution Strategy No change strategy Profit Strategy

(Time-out before growth or retrenchment) (No specific strategic changes)


(Do nothing new in a worsening situation; defer investments and cut costs to stabilize profits)

Corporate Strategy

Retrenchment Strategies

Retrenchment Strategy - Types


Current Products

Concentration Strategy Growth Strategies


Current or New Markets

Vertical Integration Horizontal Integration Concentric /Related Diversification Conglomerate /Unrelated Diversification

Forward Backward
Product Range

Geographic

Diversification Strategy

Directional Strategy
Stability Strategies

Pause/Proceed with caution Strategy No change strategy Profit Strategy Turn around Strategy

(Time-out before growth or retrenchment) (No specific strategic changes)


(Do nothing new in a worsening situation; defer investments and cut costs to stabilize profits)
attempt to improve efficiency through contraction &consolidation)

Corporate Strategy

Retrenchment Strategies

Captive Company Strategy Sellout/Divestment strategy Bankruptcy/Liquidation Strategy

GROWTH
(in sales/assets/profits/or a combination)

(Internal Vs External Growth)


Concentration (on current product line/Industry)
- Vertical Integration (Backward and Forward) - Horizontal Integration (product range or geographic expansion)

Diversification (into other products/Industries)


Growth -Concentric (related) -strategic fit /distinctive competence/synergy - Conglomerate( unrelated) when current industry is unattractive or when firm lacks distinctive competence STABILITY -Pause /Proceed with caution (time-out before growth or retrenchment) - No Change - Profit (do nothing new in a worsening situation; defer investments and cut costs to stabilize profits)

Directional Strategy

Stability

Retrenchment RETRENCHMENT -Turnaround (attempt to improve efficiency through contraction &Consolidation) -Captive Company -Sell-Out/Divestment -Bankruptcy/ Liquidation

Industry Life Cycle Corporate and Strategy Choices

Maturing

Emerging

Declining

Growth

Stability

Retrenchment

Portfolio Strategy
Directional Strategy
The firm's overall orientation toward growth, stability or retrenchment How should we grow which business should grow, which should be stabilized and which should be retrenched?

Corporate Strategy

Portfolio Strategy

Deals with decisions on industries in which the firm competes through its products and business units Deals with resource commitment on best products to ensure continued success

Parenting Strategy

Portfolio analysis
Portfolio analysis (such as the BCG Growth Share Matrix and the GE Business Screen) is a useful technique for evaluating the contributions of various business units to corporate performance and allocating the strategic resources of the firm among businesses.

BCG Growth-Share Matrix


Companies that are large enough to be organized into strategic business units face the challenge of allocating resources among those units. In the early 1970's the Boston Consulting Group developed a model for managing a portfolio of different business units (or major product lines). The BCG growth-share matrix displays the various business units on a graph of the market growth rate vs. market share relative to competitors:

BCG Matrix : Allocating Resources


Resources are allocated to business units according to where they are situated on the grid as follows:
Cash Cow - a business unit that has a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be used to invest in other business units. Star - a business unit that has a large market share in a fast growing industry. Stars may generate cash, but because the market is growing rapidly they require investment to maintain their lead. If successful, a star will become a cash cow when its industry matures. Question Mark (or Problem Child) - a business unit that has a small market share in a high growth market. These business units require resources to grow market share, but whether they will succeed and become stars is unknown. Dog - a business unit that has a small market share in a mature industry. A dog may not require substantial cash, but it ties up capital that could better be deployed elsewhere. Unless a dog has some other strategic purpose, it should be liquidated if there is little prospect for it to gain market share

INDUSTRY LIFE CYCLE

Maturing

Emerging

Declining

Question Marks

Stars

Cash Cows

Dogs

Parenting Strategy
Directional Strategy

Corporate Strategy

Portfolio Strategy

Parenting Strategy

The manner in which management coordinates activities, transfers resources, and cultivates capabilities among units Analyses strategic fit

Parenting strategy Parenting strategy deals with what businesses the company should own and with what structure, management processes, and philosophy it should foster for superior performance from the company's business units.

How does horizontal growth differ from vertical growth as a corporate strategy? From concentric diversification?
Horizontal growth is the expanding of a firm's activities into other geographic regions and/or by increasing the range of products and services offered to current markets. It often involves the acquisition of another firm in the same industry (an example of external growth), but it could also be through the expansion of a firm's products in its current markets (e.g., through line extensions) or expansion into another geographic region (an example of internal growth). One example of external horizontal growth would be if Anheuser-Busch bought Coors. An internal example was Coors' expansion into the eastern U.S. Vertical growth, in contrast, involves a firm's taking over a function previously performed by a supplier or a distributor. This would typically involve the addition of activities in other industries either forward (downstream)or backward (upstream) on the value chain of current products or services. The additions are primary justified in terms of support of the current product lines regardless of their being in other industries (and thus can be argued to be diversification). Concentric diversification, in contrast, is the addition of products or divisions which are related to the corporation's main business, but are added because of the attractiveness of other industries rather than because they support the activities of the current product lines. The additions may be through acquisition or through internal development. The firm buys or develops another division which is similar to its present product-line. Anheuser-Busch's diversification into snack foods to complement its line of beers is an example of concentric diversification. The products are not alike, but have a "common thread" relating them. If Coca Cola bought RC Cola, it would be an example of horizontal integration. If it purchased its distributors, this would be an example of forward vertical integration. Its acquisition of Taylor Wines, however, was an example of concentric diversification

What are the tradeoffs between an internal and an external growth strategy? What approach is best as an international entry strategy?
Research suggests that there is no significant sales or profit advantage to either external or internal growth. There are, however, some tradeoffs for each approach. Here are some of them:
INTERNAL GROWTH Pros More likely to be based on some proprietary development giving competitive advantage. More likely to fit well with current business units/products Can finance slowly out of retained earnings. If plan no good, can always cut losses before in too deep. Cons May take a long time to develop a new product or new concept. May be hard to get current managers to try something new. May ignore other uses of money with quicker return. Favored program may take time away from current businesses EXTERNAL GROWTH Pros Can grow quickly. Good way to use financial leverage to boost EPS. Don't have to build anything from scratch. Can generate a lot of excitement on Wall Street and boost stock price.

Cons All or nothing gamble. Need a lot of money and/or financial moxie to do it right. Can purchase someone else's problems. 50% of all acquisitions fail to achieve the purchaser's objective.

What approach is best as an international entry strategy?


In terms of international entry strategies, internal growth through green field development is usually expensive and time consuming, but allows the firm to use its own competencies to achieve success. Joint ventures, licensing, and acquisitions take less time and are often less expensive at first, but may end up being more expensive if the other firm has a lot of problems.

Is stability really a strategy or is it just a term for no strategy?


An argument can be made that stability is not really a strategy in itself, but is just a pause between strategies. Since one way to view strategy is as a direction the corporation is taking in order to reach its objectives, standing still has no direction and thus is not a strategy. However, stability is a strategy in itself. Just as no decision is the same as making a decision, it is argued that even though stability may be viewed as not choosing a strategy, it is therefore a strategy by default. Stability may be a very appropriate long-term strategy for a small business in which the owner/manager does not want the corporation to grow beyond his/her abilities to manage it personally and is very happy with the level of life style the business provides. Typically, however, stability is perceived only as a viable short-term strategy while management is waiting for key factors needed for growth to fall into place. Nevertheless, to the extent that stability helps explain the movement of a corporation toward its objectives, it deserves to be called a strategy.

Must a corporation have a common thread running through its many activities in order to be successful? Why or why not?
The concept of a corporate mission implies that throughout a corporation's many activities, there should be a "common thread" or unifying theme, and that those corporations with such a common thread are better able to direct and administer their many activities. This is one way to achieve a "strategic fit" so that overall corporate effectiveness and efficiency are achieved. There are, however, a number of corporations which do not have a common thread connecting their divisions, yet are successful. These corporations are often referred to as conglomerates because they are an assemblage of separate firms having different products in different markets but operating together under one corporate umbrella. Operating in effect as holding companies, they typically have no real common thread other than return on investment (i.e., financial synergy). Berkeley Hathaway and General Electric are just two of the many examples of successful conglomerates. They can be very successful because their operations in many diverse businesses allow them to spread their risks over many different markets. Just as the common thread concept implies a heavy marketing orientation, the conglomerate approach implies a heavy finance orientation. The lack of concern for a common thread enables a conglomerate to acquire and sell off divisions without regard to any synergy other than financial. Corporate strategy makers are thus able to focus entirely on ROI. They only need to involve themselves in divisional (business) strategies to the extent that funds are requested to support the strategies. The problem with this approach, however, is that corporate top management typically does not understand divisional problems in any sense other than financial and is thus strongly tempted to sell off troubled divisions rather than help them recover. One could therefore conclude that a common thread is not necessary for corporate success, at least in the short run. The classic article by Hayes and Abernathy ("Managing Our Way to Economic Decline," HBR, July-August, 1980), does imply, however, that such a heavy financial orientation leads to short-run thinking and may actually cause long-run decline.

What determines whether a company should make or buy key inputs for its products?
The decision to make key inputs (vertical growth strategy) may be done in order to reduce costs, gain control over a scarce resource, guarantee quality of a key input, or obtain access to potential customers. This growth can be achieved either internally by expanding current operations or externally through acquisitions. Henry Ford, for example, used internal company resources to build his River Rouge Plant outside Detroit. The manufacturing process was integrated to the point that iron ore entered one end of the long plant and finished automobiles rolled out the other end into a huge parking lot. In contrast, Cisco Systems, the maker of Internet hardware, chose the external route to vertical growth by purchasing Radiata, Inc., a maker of chip sets for wireless networks. This acquisition gave Cisco access to technology permitting wireless communications at speeds previously only possible with wired connections. Vertical growth is a logical strategy for a corporation or business unit with a strong competitive position in a highly attractive industry - especially when technology is predictable and markets are growing. To keep and even improve its competitive position, the company may use backward integration to minimize resource acquisition costs and inefficient operations as well as forward integration to gain more control over product distribution. The firm, in effect, builds on its distinctive competence by expanding along the industrys value chain to gain greater competitive advantage. Transaction cost economics proposes that vertical growth (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. When highly vertically integrated firms become excessively large and bureaucratic, however, the costs of managing the internal transactions may become greater than simply purchasing the needed goods externally - thus justifying outsourcing over vertical growth.

Are S.W.O.T analysis and Portfolio Analysis similar?


These two approaches are alike in a number of ways. They are both attempts to summarize the key strategic factors coming out of an in-depth analysis of the external and internal environment of a corporation or business unit. They are also easy to remember buzz-words for use in the situational analysis. Terms like S.W.O.T., cash cows, and dogs help remind that the basis of strategic management is environmental assessment. They are different in terms of what they stand for. S.W.O.T. is merely an acronym for Strengths, Weaknesses, Opportunities, and Threats. It is not really a technique to aid in situation analysis. It merely is a buzz-word to help a person remember to search for strategic variables in the internal and external environment of the firm. Portfolio analysis, in contrast, is a term for a whole series of different techniques for analyzing internal and external environmental factors. Neither is really a substitute for the other and can actually complement each other.

What is the value of portfolio analysis?


Portfolio analysis is the most recommended approach to aid the integration and evaluation of environmental data. It is just as useful for a single business corporation with a number of separate products as it is for a large corporation with autonomous operating divisions. By carefully examining both market or industry factors and business strengths or market share, it is possible to pinpoint factors of strategic importance to corporate or divisional success. Portfolio analysis thus serves as a convenient technique for comparing external opportunities and threats with internal strengths and weaknesses.

What concepts or assumptions underlie the BCG growth-share matrix?


The product life cycle and the experience curve underlie the BCG growth-share matrix. The development of question marks into stars and then into cash cows suggests the introduction, growth, and maturity stages of the product life cycle. Dogs appear to be those products or units on the decline stage of the product life cycle. The experience curve is certainly key to understanding the implications of the BCG matrix. The experience curve is based on the idea that unit production costs decline by some fixed percentage as the accumulated volume of production in units doubles. In order in make a question mark product a star, the suggested manufacturing strategy is to build capacity ahead of demand in order to achieve the lower unit costs that develop from the experience curve. On the basis of some future point on the experience curve, the idea is to price the product very low to preempt competition and quickly increase market demand and thus market share. The resulting high number of units sold and high market share should result in high profits when overall market growth slows and the company reduces its investment in the product - thus a cash cow is born.

BCG Matrix : Criticisms


The BCG matrix provides a framework for allocating resources among different business units and allows one to compare many business units at a glance. However, the approach has received some negative criticism for the following reasons: The link between market share and profitability is questionable since increasing market share can be very expensive. The approach may overemphasize high growth, since it ignores the potential of declining markets. The model considers market growth rate to be a given. In practice the firm may be able to grow the market. These issues are addressed by the GE / McKinsey Matrix, which considers market growth rate to be only one of many factors that make an industry attractive, and which considers relative market share to be only one of many factors describing the competitive strength of the business unit.

How is corporate parenting different from portfolio analysis? How is it alike? Is it a useful concept in a global industry?
The basic difference between these two approaches to corporate strategy lies in the questions they attempt to answer. According to the text, portfolio analysis attempts to answer the following two questions: How much of our time and money should we spend on our best products and business units in order 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? The basic theme of portfolio analysis its emphasis on cash flow. Portfolio analysis puts corporate headquarters into the role of an internal banker. In portfolio analysis, top management views its product lines and business units as a series of investments from which it expects to get a profitable return. The product lines/business units form a portfolio of investments which top management must constantly juggle to ensure the best return on the corporation's invested money.

Corporate Parenting Vs Portfolio Analysis contd.


Corporate parenting attempts to answer two similar, but different questions: What businesses should this company own and why? What organizational structure, management processes, and philosophy will foster superior performance from the company's business units? Portfolio analysis attempts to answer these questions by examining the attractiveness of various industries and by managing business units for cash flow, that is, by using cash generated from mature units to build new product lines. Unfortunately, portfolio analysis fails to deal with the question of what industries a corporation should enter or with how a corporation can attain synergy among its product lines and business units. As suggested by its name, portfolio analysis tends to primarily take a financial point of view and views business units and product lines as if they were separate and independent investments. Corporate parenting, in contrast, 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. The central job of corporate headquarters is not to be a banker, but to coordinate diverse units to achieve synergy. This is especially important in a global industry in which a corporation must manage interrelated business units for global advantage. Corporate parenting is similar to portfolio analysis in that it attempts to manage a set of diverse product lines/business units to achieve better overall corporate performance.