Chapter 6
Strategy Formulation:
Corporate Strategy
Topics
• Corporate Strategy as Direction
• Corporate Strategy as Portfolio
• Corporate Strategy as Parenting
Corporate Strategy
Three Key Issues:
• Firm’s directional strategy
• Firm’s portfolio strategy
• Firm’s parenting strategy
Corporate Directional
Strategies
Directional Strategy:
– Orientation toward growth
• Expand, cut back, status quo?
• Concentrate within current industry,
diversify into other industries or
geographic regions?
• Growth and expansion through internal
development or acquisitions, mergers, or
strategic alliances?
Directional Strategy:
– Three Grand Strategies:
• Growth strategies
• Stability strategies
• Retrenchment strategies
Growth Strategies:
– Most widely pursued strategies
– External mechanisms:
• Mergers
– Joining of two or more firms where the
emerging entity is comprised of the best
aspects of both firms (synergistic effects).
• 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 Growth Strategies:
– Concentration
– Maintaining current product lines in one
industry
– Diversification
– Movement into new product lines in other
industries
Corporate Strategy
Basic Concentration Strategies:
– Vertical growth
– Horizontal growth
Concentration:
Vertical growth
– Vertical integration
• Full integration- firm internally produces 100% of its key
supplies and distributors.
• Taper integration- firm produces 50% or less of supplies
and purchases the rest externally (focus on key components).
• Quasi-integration- firm ensures component quality through
partial ownership of supplier, but makes no components
internally.
– Backward integration
– Forward integration
Concentration:
Horizontal Growth
– Horizontal integration
Basic Diversification Strategies:
– Concentric Diversification- related
diversification employing existing
competitive strengths, also geographic
diversification in related markets.
– Conglomerate Diversification- unrelated
diversification into dissimilar industries,
primarily done for cash flow and risk
reduction.
Diversification:
Concentric:
– Growth into related industry
– Search for synergies
– Movement into new, related
international markets
Diversification:
Conglomerate:
– Growth into unrelated industry
– Concern with financial considerations,
business cycles
International Diversification Options:
– Exporting
– Licensing
– Franchising
– Joint Ventures
– Mergers & Acquisitions
– Green-field Developments
– Production Sharing
– Turnkey Operations & BOT Concepts
– Management Contracts
Stability Strategies:
– Pause/proceed with caution-
emphasis on making incremental changes
due to large internal/environmental
uncertainties
– No change- a choice to continue current
operations and strategies into the future,
usually applied in stable/mature industries.
– Profit strategies- employing a self-
serving strategy of rejecting change by
viewing problems and change as temporary
conditions
Retrenchment Strategies:
– Turnaround- firm contraction &
consolidation featuring layoffs and
restructuring.
– Captive Company Strategy- giving up
corporate control in exchange for long-term
security, often a vertical integration tool.
– Selling out- characterized by selling of poor
performing SBU (divestment) or firm.
– Bankruptcy- legal protection for
restructuring financial obligations in poor
performing firms.
– Liquidation- termination of firm with selling
of assets.
Corporate Strategy As Portfolio
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?
Portfolio Analysis
BCG (Boston Consulting Group) Matrix
– Product life cycle and funding
decisions
• Question marks
• Stars
• Cash cows
• Dogs
Portfolio Analysis
BCG (Boston Consulting Group) Matrix
– Employs Information on:
• SBU Market Share
• Industry/Business Market Growth Rate
• SBU Market Size
BCG Matrix
GE Business Screen
Long-term industry attractiveness- stage
in industry life cycle, segment growth rate, strength of
competitive forces, extent of industry change…
Business strength/competitive position-
market share, profit margins, change in market share
over time, relative contribution to firm profits & cash
flow, relatedness between product lines, product
reputation in industry….
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
Portfolio Analysis Limitations
BCG Limitations
• Matrix simplicity
• Questionable links between market share & profitability (niche
strategies)
• Growth rate only industry attractiveness measure
• SBUs only compared to industry leaders
GE Business Screen Limitations
• Complicated and cumbersome
• Subjective evaluation criteria
• Does not reflect the potential impact of new products &
services/developing industries.
International Portfolio Analysis
2 Factors:
• Country’s attractiveness
• Market size, growth rate, extent of regulation
• Competitive strength
• Market share, product fit, contribution margin,
market support
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
Corporate Strategy
Portfolio Analysis
Disadvantages:
– Difficult to define product/market
segments
– Standard strategies can miss
opportunities
– Illusion of scientific rigor
– Value-laden terms
Corporate Strategy as Parenting
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.
Corporate Strategy
Corporate Parenting:
• Parenting-Fit Matrix
– Summarizes the various judgments
regarding corporate/business unit fit
for the corporation as a whole.
Corporate Strategy
Corporate Parenting:
• Parenting-Fit Matrix
– 2 Dimensions
• Positive contributions parent can make
• Negative effects parent can have
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
