Chapter 6

Strategy Formulation:
Corporate Strategy

PowerPoint Slides
Anthony F. Chelte
Western New England College

Prentice Hall, 2004 Chapter 6 1

Wheelen/Hunger
 Corporate Strategy

Three Key Issues:

• Firm’s directional strategy

• Firm’s portfolio strategy
• Firm’s parenting strategy

Prentice Hall, 2004 Chapter 6 2

Wheelen/Hunger
 Corporate Directional
Strategies

Prentice Hall, 2004 Chapter 6 3

Wheelen/Hunger
 Corporate Strategy

Directional Strategy:
– Orientation toward growth
• Expand, cut back, status quo?
• Concentrate within current industry,
diversify into other industries?
• Growth and expansion through internal
development or acquisitions, mergers, or
strategic alliances?

Prentice Hall, 2004 Chapter 6 4

Wheelen/Hunger
 Corporate Strategy

Directional Strategy:
– Three Grand Strategies:
• Growth strategies
• Stability strategies
• Retrenchment strategies

Prentice Hall, 2004 Chapter 6 5

Wheelen/Hunger
 Corporate Strategy
Growth Strategies:
– Most widely pursued 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.

Prentice Hall, 2004 Chapter 6 6

Wheelen/Hunger
 Corporate Strategy

2 Basic Growth Strategies:

– Concentration
– Current product line in one industry

– Diversification
– Into other product lines in other industries

Prentice Hall, 2004 Chapter 6 7

Wheelen/Hunger
 Corporate Strategy

Basic Concentration Strategies:

– Vertical growth

– Horizontal growth

Prentice Hall, 2004 Chapter 6 8

Wheelen/Hunger
 Corporate Strategy
Concentration:

Vertical growth

– Vertical integration
• Full integration
• Taper integration
• Quasi-integration

– Backward integration

– Forward integration

Prentice Hall, 2004 Chapter 6 9

Wheelen/Hunger
 Corporate Strategy

Concentration:

Horizontal Growth

– Horizontal integration

Prentice Hall, 2004 Chapter 6 10

Wheelen/Hunger
 Corporate Strategy

Basic Diversification Strategies:

– Concentric Diversification

– Conglomerate Diversification

Prentice Hall, 2004 Chapter 6 11

Wheelen/Hunger
 Corporate Strategy

Diversification:

Concentric:

– Growth into related industry

– Search for synergies

Prentice Hall, 2004 Chapter 6 12

Wheelen/Hunger
 Corporate Strategy

Diversification:

Conglomerate:

– Growth into unrelated industry

– Concern with financial considerations

Prentice Hall, 2004 Chapter 6 13

Wheelen/Hunger
 Corporate Strategy

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

Prentice Hall, 2004 Chapter 6 14

Wheelen/Hunger
 Corporate Strategy
Stability Strategies:

– Pause/proceed with caution

– No change

– Profit strategies

Prentice Hall, 2004 Chapter 6 15

Wheelen/Hunger
 Corporate Strategy
Retrenchment Strategies:

– Turnaround

– Captive Company Strategy

– Selling out

– Bankruptcy

– Liquidation

Prentice Hall, 2004 Chapter 6 16

Wheelen/Hunger
 Corporate Strategy

Portfolio Analysis

– How much of our time and money should we

spend on our best products 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?

Prentice Hall, 2004 Chapter 6 17

Wheelen/Hunger
 Corporate Strategy
Portfolio Analysis

BCG (Boston Consulting Group) Matrix

– Product life cycle and funding
decisions
• Question marks
• Stars
• Cash cows
• Dogs

Prentice Hall, 2004 Chapter 6 18

Wheelen/Hunger
 BCG Matrix

Prentice Hall, 2004 Chapter 6 19

Wheelen/Hunger
 GE Business Screen

Long-term industry attractiveness

Business strength/competitive position

Prentice Hall, 2004 Chapter 6 20

Wheelen/Hunger
 General Electric’s Business Screen
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 Source: Adapted from Strategic
Management in GE, Corporate Planning
and Development, General Electric
Strong Average Weak Corporation. Used by permission of
General Electric Company.
Business Strength/Competitive Position

Prentice Hall, 2004 Chapter 6 21

Wheelen/Hunger
 International Portfolio Analysis
2 Factors:

• Country’s attractiveness
• Market size, rate of growth, regulation

• Competitive strength
• Market share, product fit, contribution
margin, market support
Prentice Hall, 2004 Chapter 6 22
Wheelen/Hunger
 Portfolio Matrix for Plotting Products by Country
Competitive Strengths

High Low

Dominate/Divest

High
Invest/Grow
Joint Venture
Country Attractiveness

Selective
Strategies

Harvest/Divest
Low

Combine/License

Prentice Hall, 2004 Chapter 6 23

Wheelen/Hunger
 Corporate Strategy
Portfolio Analysis

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

Prentice Hall, 2004 Chapter 6 24

Wheelen/Hunger
 Corporate Strategy
Portfolio Analysis

Disadvantages:
– Difficult to define product/market
segments
– Standard strategies can miss
opportunities
– Illusion of scientific rigor
– Value-laden terms

Prentice Hall, 2004 Chapter 6 25

Wheelen/Hunger
 Corporate Strategy
Corporate Parenting:

• 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.

Prentice Hall, 2004 Chapter 6 26

Wheelen/Hunger
 Corporate Strategy
Corporate Parenting:

• Strategic factors
– Those elements of a company that
determine its strategic success or
failure
• Performance improvement
• Analyze fit

Prentice Hall, 2004 Chapter 6 27

Wheelen/Hunger
 Corporate Strategy

Corporate Parenting:

• Parenting-Fit Matrix
– Summarizes the various judgments
regarding corporate/business unit fit
for the corporation as a whole.

Prentice Hall, 2004 Chapter 6 28

Wheelen/Hunger
 Corporate Strategy

Corporate Parenting:

• Parenting-Fit Matrix
– 2 Dimensions
• Positive contributions parent can make
• Negative effects parent can have

Prentice Hall, 2004 Chapter 6 29

Wheelen/Hunger
 Parenting-Fit Matrix
Low

MISFIT between critical success factors Heartland

and parenting characteristics
Ballast

Edge of
Heartland

Alien
Territory

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

Prentice Hall, 2004 Chapter 6 30

Wheelen/Hunger
 Corporate Strategy

Horizontal Strategy:
– Corporate strategy that cuts across
business unit boundaries to build
synergy across business units to
improve the competitive position of
one or more business units.

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Wheelen/Hunger