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Chapter 5:

CORPORATE-LEVEL STRATEGY
(part 1)

5|1

Corporate Strategy concerns 2 key questions:

1. What businesses should the firm in?
2. How should the corporate office manage
the array of business units?

Corporate-level strategy specifies actions to be

taken by the firm to gain a competitive advantage
by selecting & managing a group of different
businesses competing in several industries &
product markets

Horizontal integration
Concept
Horizontal integration is the process of acquiring or merging with industry
competitors to achieve the competitive advantages that arise from a large
size and scope of operations

Examples
- Boeing merged with McDonald Douglas
- Compaq acquired DEC and then itself was acquired by HP
- Work with your partners: find 3 cases of horizontal integrations in Vietnam

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Horizontal integration
Advantages???

Disadvantages???

Horizontal integration
Advantages
(1)lowers the cost structure,
(2)increases product differentiation,
(3) replicates the business model,
(4) reduces rivalry within the industry, and
(5) increases bargaining power over suppliers and
buyers.

Horizontal integration
Disadvantages
-very different company cultures;
-high management turnover company (hostile one);
-Overestimate the benefits
-underestimate the problems
.

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Corporate Growth Strategies

2. Vertical integration strategy
a. Definition: vertical integration means that a company is expanding its
operations either backward into an industry that produces inputs for the
company’s products or forward into an industry that uses or distributes the
company’s products for strengthening their competitive position in the main
industry.

Component
Raw part Distribu-
manufactu- Assembly End-user
materials tion
ring

Upstream industries Downstream industries

5|7

Apple: 2001: Apple stores

Dell, Sony

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Corporate Growth Strategies

2. Vertical integration strategy

b. Form of vertical integration

Backward integration: a company produces input for its products.
Forward integration: a company uses or distributes its products

c. Level of vertical integration

Full integration: a company produces all of a particular input needed for its
processes or disposes of all of its output through its own operations.
Taper integration: a company buys from independent suppliers in addition to
company-owned suppliers or disposes of its output through independent
outlets in addition to company-owned outlets.

5 | 10

Corporate Growth Strategies

2. Vertical integration strategy

d. Advantages of a vertical integration

- Cost reduction: including production cost and trading cost.
- Protects product quality through control of input quality and
distribution and service of outputs.
- Builds entry barriers to new competitors by denying them
inputs and customers.
- Facilitates investment in efficiency-enhancing specialized
assets that solve internal mutual dependence problems.
- Improves internal scheduling (e.g., JIT inventory systems)
responses to changes in demand.

5 | 11

Corporate Growth Strategies

2. Vertical integration strategy

d. Disadvantages of a vertical integration

- Cost disadvantages: the lack of an incentive for internal
suppliers to reduce their operating costs and strategic
flexibility in times of changing technology or uncertain
demand.
– Management becomes more complicated
– Technological change: remaining tied to obsolescent
technology.
– Aligning input and output capacities with uncertainty in
market demand is difficult for integrated companies

5 | 12

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Alternatives to vertical integrations:

Corporative relationship
Short-term contracts & competitive bidding
Last for a year or less to establish price and
conditions.
GM: competitive bidding
Advantages:
Competitive price -> lower cost
Disadvantages:
Supplier is not willing to invest to upgrade
technology
Not willing to production schedule (JIT scheme)

Strategic alliances
Long-term, cooperative relationships; both
companies agree to make specialized
investments and work jointly to find ways
to lower costs or increase product quality
so that they both gain from their
relationship.
Relatively stable long-term partnership
Mutual benefit
Avoid bureaucratic costs

Strategic alliances
Japanese car makers:
Jointly implementing JIT inventory systems
sharing future component-parts designs to
improve quality and lower assembly costs.

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Building Long-Term
Cooperative Relationships
Hostage talking: a means of
guaranteeing that a partner will keep its
side of the bargain

Credible commitment: a believable

promise or pledge to support the
development of a long-term relationship

Building long-term relationships

Maintaining market discipline
periodically renegotiated
parallel sourcing policies (Toyota)

Strategic outsourcing
The decision to allow one or more of a
company’s value-chain activities or
functions to be performed by independent
specialist companies that focus all their
skills and knowledge on just one kind of
activity.
Outsourcing entire function (manufacturing)
Outsourcing one activity (pension – HRM)

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Strategic outsourcing

Strategic outsourcing

Benefits
Lower its cost structure,
Increase product differentiation,
Focus on the distinctive competencies

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drawbacks
Holdup
become too dependent on the specialist
provider of an outsourced activity and that the
specialist will use this fact to raise prices
beyond some previously agreed-on rate
Loss of information
A company that is not careful can lose
important competitive information when it
outsources an activity.

Corporate Growth Strategies

3. Diversification strategy
a. Definition: diversification strategy is the process of adding
new businesses to the company that are distinct from its
established operations.

5 | 23

Corporate Growth Strategies

3. Diversification strategy
b. Form of diversification
Unrelated diversification:
Entry into a new business area that has no obvious relationship with any
area of the existing business.
Related diversification:
Diversification into a new business activity in a different industry that is
related to a company’s existing business activity or activities, by
commonalities between components of each activity’s value chain.

SBU 1 SBU 2

- Transferring core competencies (marketing, production...)

- Sharing activities(technology, distribution channel…)
5 | 24

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Corporate Growth Strategies

3. Diversification strategy
c. Advantages and disadvantages of diversification
strategy
Advantages
- Disperse risks.
- Exploit economies of scales.
- Using redundant resources and achieve the purpose of high rate
growth.

5 | 25

Corporate Growth Strategies

3. Diversification strategy
c. Advantages and disadvantages of diversification
strategy
Disadvantages
- Difficulties in management and operation.
+ As the scope of diversification widens, control and bureaucratic costs
increase.
+ Resource sharing and pooling arrangements that create value also
cause coordination problems.
– Information overload can lead to poor resource allocation decisions
and create inefficiencies.

5 | 26

Sony’s corporate-level strategy

8 | 27

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Chapter 5:

CORPORATE-LEVEL STRATEGY
(part 2)

5 | 28

Portfolio Analysis
Portfolio analysis, which is one of a key element
in the self-analysis of the company, extends
strengths assessment in three direction.
First, it combines the assessment of business position
with a market attractiveness evaluation which emerges
from external analysis (in general) and market analysis
(in particular).
Second, it includes the analysis of multiple SBUs in one
analysis which addresses the SBU investment decision.
It focuses on the issues of which SBUs should receive
the available cash.
Third, it offers baseline recommendations concerning the
investment strategies for each SBU.
5/29

How attractive is group of businesses firm is in?

How good is overall performance outlook over
next five years?
If previous answers are not satisfactory, what
should firm do to:
- Get out of some businesses
- Strengthen position of remaining ones
- Acquire new businesses to boost prospects
for better performance

5/30

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Portfolio Models can be used to provide

strategic insights by:

— Acting as a diagnostic aid

— Providing a conceptual framework
— Being a prescriptive guide
— Being a planning tool

Different Portfolio Models

There are different portfolio models.

However, in this module, two of them will
be discussed.
The BCG matrix (growth-share matrix),
introduced by the Boston Consulting
Group.
McKinsey Matrix (The business strength-
industry attractiveness matrix) associated
with General Electric and McKinsey & Co.

BCG Matrix
Three steps to set up BCG matrix:
Identify SBUs and evaluate SBUs’ potential.
Positioning SBUs in the matrix.
Identify strategic objectives for each SBU.

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Step 1: Identify and evaluate SBUs’ potential

The first step in the portfolio analysis is to identify the
key businesses making up the company. The
company’s key businesses (a company division, a
product line, or a single product or brand) are called
strategic business units (SBU).
It may be less difficult to define SBUs in multibusiness
organizations (such as General Electric, Christian Dior,
etc) which are diversified into many different businesses.

How to Identify SBUs?

The following are some characteristics and

attributes of an SBU:
It is the basic competitive unit of a company.
It has a specific and identifiable group of customers.
It has specific and identifiable competitors.
It can be measured as an independent entity in terms of
profit and loss.
Therefore, it may require a separate marketing strategy.

In order to identify the company’s SBUs, one of the

simplest way is to develop a matrix.
On the horizontal axis, there will be the customer groups
the company currently serve.
On the vertical axis, there will be product or product
groupings the company currently serve.
To define the company SBUs, each customer group will
be needed to match up with the product or product
groupings.
When the matrix is finished, there will be some blocks
containing “x”. X represent where the company’ have a
strategic business unit.
It is the company versus the competition for a specific
group of customers, with a specific set of products as a
competitive tool.

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Customer Customer Customer

Group 1 Group 2 Group 3

Product(s) 1 X X

Product(s) 2 X X

Product(s) 3 X X

Step 1: Identify and evaluate SBUs’ potential

In Boston Consulting Group’s BCG Matrix

Analysis, SBUs are evaluated from two ways; (a)
The attractiveness of the SBU’s market (market
growth) and (b) the strength of the SBU’s
position in that market (market share).

Step 1: Identify and evaluate SBUs’ potential

Relative market share:

Calculated by dividing firm’s market share by market share of

firm’s largest rival
Typical dividing line between “high” and “low” relative market
share businesses placed at about 1.
Businesses on left are share leaders
Businesses on right are in below-average relative market
share positions

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Step 1: Identify and evaluate SBUs’ potential

Market Growth rate:

The growth dimension is usually set at a 10-percent

annual growth rate
“High Growth” businesses are in markets growing
faster than economy
“Low growth” businesses are in markets growing
slower than economy

Step 2: Positioning SBUs in the matrix

Market Growth Rate (Vertical)

Relative Market Share (Horizontal)
Each business is a “circle” with size scaled to
portion of total corporate revenues generated
In BCG approach, the company classifies all its
SBUs into 4 types as “star”, “cash cow”,
“question mark” and “dog” according to their
market growth and relative market share.

BCG MATRIX
HIGH
STAR QUESTION MARK
M
A
R
K
E
T
?
G CASH COW DOG
R
O
W
T
H

LOW
HIGH RELATIVE MARKET SHARE LOW

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Step 3: Identify strategic objectives for each SBU

Stars; are high-growth, high-share businesses

or products. They often need heavy investment
to finance their rapid growth. Therefore, they
may not be producing a positive cash flow.
The business strategy will generally be for
growth fueled by externally acquired capital.
Eventually, their growth will slow, and they will
turn into cash cows.

Step 3: Identify strategic objectives for each SBU

Cash cows; are low-growth, high-share

businesses or products. These established
and successful SBUs need less investment to
keep their market share. They produce a lot of
cash to be used for other business units of the
company. They are either milked for
investment in stars or question marks or
harvested if there is little optimism for a stable
future.

Step 3: Identify strategic objectives for each SBU

Question marks; sometimes called problem

children, are low-share business units in high-
growth markets. They need a lot of cash to
keep and increase their share; they can not
generate enough cash themselves.
Management must decide which question
mark it should build into stars and which
should phase out.

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Step 3: Identify strategic objectives for each SBU

Dogs; are low-growth, low-share businesses

and products. They often have poor
profitability. Therefore, the business strategy
for a dog is most often to divest, but
occasionally to hold for possible strategic
repositioning as a question mark or cash cow.

Within the portfolio context there are FOUR basic

strategies that can be pursued:

BUILD - a strategy of building market share

HOLD - a strategy of holding share relative to
competitors and to market growth rate
HARVEST - a cash out strategy with little or no
new investment
QUIT - a strategy of exit or withdrawal

BCG MATRIX
HIGH

M STAR QUESTION MARK

A
R Strategies: Build Strategies: Build/Harvest
K Quit
E
T

G CASH COW DOG

R
O Strategies: Hold/Harvest Strategies: Harvest/Quit
W Build (?)
T
H
LOW
HIGH RELATIVE MARKET SHARE LOW
C. M. Clarke-Hill

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BCG CASH FLOW POSITION CHART

M HIGH
STAR QUESTION MARK
A
R Modest positive Large negative cash
K or negative flow
E
cash flow
T

G CASH COW DOG

R
O Large positive cash Modest positive or
W flow
T
negative cash flow
H LOW
HIGH RELATIVE MARKET SHARE LOW

BCG PRODUCT DYNAMICS PORTFOLIO CHART

HIGH
STAR QUESTION MARK
M
A
R
K
E
T

G
Success
R Sequence
O
W Disaster Sequence
T
H
CASH COW DOG
LOW
HIGH RELATIVE MARKET SHARE LOW

Assumptions under which the matrix is based

Cash Generated is proportional to Relative

Market Share
Cash is needed to keep pace with market
growth rate
Additional cash is needed to increase
market share
Growth rate eventually slows to allow cash
to be generated

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Using the matrix

Check for internal balance

Look for trends
Evaluate the competition
Consider factors not captured by the
display
Develop possible target portfolios
Check for financial balance

PORTFOLIO BALANCE ?

The balanced portfolio is

regarded as desirable - can we
have other ‘unbalanced’
portfolios?
Too many stars?
Too many cash cows?
Too many question marks?
Too many dogs?

Too many stars - (high growth oriented

companies)

Problems of cash flow

High marketing investments in high growth
markets are a pre-requisite to build or hold
market share
Problems of high growth can be
problematical - need for high borrowings

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Too many question marks

Negative cash flows can be problematic for

development - can be undercapitalised
Question marks can become cash traps
High development costs must be capped
Question marks are costly in management time
Can question marks be ‘turned around’?

Too many cash cows -

(profit orientated company)
Excessive cash inflows
Where is the future growth to come from?
High profitability can be used to fund
dividends
How do you plan for fading cash cows ?

Too many dogs - a company in decline

No growth
Modest cash flows
Where is the future to be
But DOGS can be profitable in the short run
Slow or fast decline in the business fortune

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Market growth
A B

High
(average
growth
Investment
rate of the X%
demand
economy)
Low

Relative
Low 1 High market share
Cash
generation
possibility

C D

High
(average
growth Investment
rate of the X% demand
economy)

Low

High Relative
Low 1
Cash market
generation share
possibility

Market growth
A B

High
(average
growth
Investment
rate of the X%
demand
economy)
Low

Relative
Low 1 High market share
Cash
generation
possibility

Portfolio that lacks Portfolio that lacks adequate

potential business for the resources and cash flow
future

C D

High
(average
growth Investment
rate of the X% demand
economy)

Low

High Relative
Low 1 market
Cash
generation share
possibility

Portfolio that lacks positive cash BALANCE PORTFOLIO

flow

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BCG BALANCED MATRIX

HIGH
STAR QUESTION MARK
M
A
10 5
R
2
K 3
E
T
6
G CASH COW DOG
R 4
O
W
1
9
T
H 8
7
LOW

HIGH RELATIVE MARKET SHARE LOW

Weaknesses of BCG matrix

Four-cell matrix hides fact that many businesses

are in “average” growth rate markets and have
“average” relative market share positions
Misleading simplification to categorise businesses
into just four types
Matrix doesn’t identify which businesses offer best
investment opportunities
Being a leader in a slow growth market doesn’t
guarantee cash cow status.

Weaknesses of BCG matrix

Assessment of relative long-term attractiveness

of business units requires more than just
market growth and relative market share
Connection between relative market share and
profitability is not as tight as experience curve
effect implies. Many firms with small relative
market shares are profitable.

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The McKinsey Matrix

To eliminate some of the limitations of the BCG
growth/share matrix, a more complete matrix
analysis was developed by the General Electric
planners and mostly used McKinsey & Co - a
management consulting firm.
The primary improvement of BS/IA matrix is that
it allows for the analysis of multiple variables
(rather than only market share and growth)
depending on the context.
And, rather than focusing on cash flow , it
concerns potential future return on investment.

McKinsey Matrix
Three steps to set up McKinsey matrix:
Identify SBUs and evaluate SBUs’ potential.
Positioning SBUs in the matrix.
Identify strategic objectives for each SBU.

Step 1: Identify and evaluate SBUs’ potential

In McKinsey Matrix Analysis, SBUs are

evaluated from two ways; (a) The
attractiveness of the SBU’s market and (b)
the strength of the SBU’s position in that
market.

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Step 1: Identify and evaluate SBUs’ potential

Industry attractiveness:
-> identify the opportunities and threats of the industry,
including 4 steps:
1st step: Select factors to compare long term
attractiveness of each industry.

Market Size Social Impact

Growth Rate Regulation
Profit Margin Environment
Competition Barriers to Exit/Entry
Intensity Technology & Capital

Step 1: Identify and evaluate SBUs’ potential

Industry attractiveness:
-> identify the opportunities and threats of the
industry, including 4 steps:
2nd step: Assign weights to each
attractiveness factor.
The weight will be based on their importance to
the business, and a rating based on favorable or
unfavorable conditions in the environment
(opportunity or threat?).

Step 1: Identify and evaluate SBUs’ potential

Industry attractiveness:
-> identify the opportunities and threats of the industry,
including 4 steps:
3rd step: Rate each industry on each
attractiveness factor, using scale of 1 to 5.

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Step 1: Identify and evaluate SBUs’ potential

Industry attractiveness:
-> identify the opportunities and threats of the industry,
including 4 steps:
4th step: Calculate weighted ratings (the rating
for each factor is then multiplied by its weight to
obtain the value); sum to get to get an overall
industry attractiveness rating for each market.
3: modest industry attractiveness
> 3: high industry attractiveness
< 3: low industry attractiveness

Industry Weight Rating Value

Attractiveness (present trend;
1=not attractive
5=very attractive)

Growth 0.25 2 0.5

Profit margins 0.35 4 1.4
Comp. intensity 0.3 2 0.6
Regulation 0.1 4 0.4
Total value for industry attractiveness 2.9

Step 1: Identify and evaluate SBUs’ potential

Business position/competitive strength:

-> including 4 steps:
1st step: Select factors to compare competitive
strength of each business unit
Market Share
Core Competencies
Profit Margin vs Competitors
Ability to Match Price/Service
Relative Costs
Knowledge
Technological Ability
Management Capability

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Step 1: Identify and evaluate SBUs’ potential

Business position/competitive strength:

-> including 4 steps:
2nd step: Assign weight to each competitive
strength factor.
The weight will be based on its importance to the
company, relative to other selected variables. The total
point must equal 1. The weights can be determined by
management or, when possible, by customer surveys.

Step 1: Identify and evaluate SBUs’ potential

Business position/competitive strength:

-> including 4 steps:
3rd step: Rate each business on each factor
using scale of 1 to 5.

Step 1: Identify and evaluate SBUs’ potential

Business position/competitive strength:

-> including 4 steps:
4th step: Calculate weighted ratings (the rating
for each factor is then multiplied by its weight to
obtain the value); sum to get an overall
business unit strength rating for each
business
3: modest competitive strength
> 3: great competitive strength
< 3: weak competitive strength

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Business Strength Weight Rating Value

(importance (performance; (Weight
to the firm: 1=poor, 5= × Rating)
must add up excellent)
to 1)

Profit 0.3 4 1.2

Pro/ser qual. 0.3 4 1.2
Man. Skills 0.2 4 0.8
Location 0.1 3 0.3
Atmosphere 0.1 2 0.2
Total value for business strength 3.7

Step 2: Positioning SBUs in the matrix

Industry attractiveness (Horizontal)

Competitive strength (Vertical)
Quantitative measures of market attractiveness
and business strength used to plot each
business unit’s position in the matrix
Each business is a “circle” with size scaled to
portion of total corporate revenues
In McKinsey approach, the company classifies
all its SBUs into 3 types.

McKinsey Matrix
Industry Attractiveness
High Medium Low

High

Medium Build/Grow
Selectivity
/earnings
Low Harvest
/Divest

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Step 3: Identify strategic objectives for each SBU

The position on the matrix (determined

according to the weight, rating and value) will
indicate the appropriate strategy (as in the BCG
matrix).
Businesses in three cells at upper left have top
investment priority. General strategic
prescription is “grow and build”. It defines the
businesses that will receive the resources to
grow. The market is high or medium in
attractiveness and the organization has high or
enough skills and resources to take advantage
of the market.

Businesses in lower right of matrix are strong

candidates for harvesting or divestment. May be
candidates for “overhaul and reposition
strategy”. It defines the businesses that lack
opportunity in terms of market and or company
capabilities. They are managed to harvest their
resources or are just divested.
Business in three diagonal cells given medium
investment priority. It defines businesses that
are to receive selective investment, and where
caution is the operating style.

Advantages of attractiveness/strength
matrix
Allows for intermediate rankings between high &
low and strong & weak
Incorporates wider variety of strategically relevant
variables
Stresses channelling of corporate resources to
businesses with greatest potential for competitive
advantage and superior performance.

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Limitations of BS/IA Matrix

Although richer and more broadly applicable than
the BCG growth-share matrix, it can be more
subjective in the selection and weighting of the
factors.
Different business units may involve different
factors which makes the analysis ambiguous.
As it is the case with the BCG growth-share
matrix, the results are very sensitive to the
definition of the product market. E.g. luxury cars,
all cars?

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