Strategy
Formulation:
Corporate
Strategy
Chapter 7
Learning Objectives
Understand the three aspects of corporate strategy
Apply the directional strategies of growth, stability and
retrenchment
Understand the differences between vertical and horizontal
growth as well as concentric and conglomerate
diversification
Identify strategic options to enter a foreign country
Apply portfolio analysis to guide decisions in companies with
multiple products and businesses
Develop a parenting strategy for a multiple-business
corporation
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Corporate Strategy
Corporate strategy
the choice of direction of the firm as a whole and
the management of its business or product
portfolio and concerns
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Corporate Strategy
Directional strategy
the firm’s overall orientation toward growth,
stability or retrenchment
Portfolio analysis
industries or markets in which the firm competes
through its products and business units
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Corporate Strategy
Parenting strategy
the manner in which management coordinates
activities and transfers resources and cultivates
capabilities among product lines and business
units
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Corporate Directional Strategies
Figure 7-1
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Directional Strategy
Growth strategies
expand the company’s activities
Stability strategies
make no change to the company’s current
activities
Retrenchment strategies
reduce the company’s level of activities
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Growth Strategies
Merger
a transaction involving two or more corporations
in which stock is exchanged but in which only one
corporation survives
Acquisition
100% purchase of another company
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Concentration Strategies
Vertical growth
achieved by taking over a function previously
provided by a supplier or distributor
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Concentration Strategies
Vertical integration
the degree to which a firm operates vertically in
multiple locations on an industry’s value chain
from extracting raw materials to manufacturing to
retailing
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Vertical Integration
Backward integration Forward integration
assuming a function assuming a function
previously provided previously provided
by a supplier by a distributor
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Vertical Integration
Transaction cost economies
vertical integration is more efficient than
contracting for goods and services in the
marketplace when the transaction costs of buying
on the open market become too great
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Vertical Integration Continuum
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Vertical Integration
Full integration
a firm internally makes 100% of its key supplies
and completely controls its distributors
Taper integration
a firm internally produces less than half of its own
requirements and buys the rest from outside
suppliers
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Vertical Integration
Quasi-integration
a company does not make any of its key supplies
but purchases most of its requirements from
outside suppliers that are under its partial control
Long-term contracts
agreements between two firms to provide
agreed-upon goods and services to each other for
a specific period of time
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Concentration Strategies
Horizontal growth
expansion of operations into other geographic
locations and/or increasing the range of products
and services offered to current markets
Horizontal integration
the degree to which a firm operates in multiple
geographic locations at the same point on an
industry’s value chain
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International Entry Options for Horizontal
Growth
Franchisin
Exporting Licensing g
Joint Acquisitio Green-Field
Venture ns Development
Productio Turn-Key BOT
n Sharing Operations Concept
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Diversification Strategies
Concentric (Related) diversification
growth into a related industry when a firm has a
strong competitive position but attractiveness is
low
Synergy
the concept that two businesses will generate
more profits together than they could separately
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Diversification Strategies
Conglomerate (Unrelated) diversification
diversifying into an industry unrelated to its
current one
Management realizes that the current industry is
unattractive.
Firm lacks outstanding abilities or skills that it could
easily transfer to related products or services in
other industries.
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Controversies in
Directional Strategies
Is vertical growth better than horizontal
growth?
Is concentration better than diversification?
Is concentric diversification better than
conglomerate diversification?
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Stability Strategies
Pause/Proceed with caution strategy
an opportunity to rest before continuing a growth or
retrenchment strategy
No-change strategy
decision to do nothing new—a choice to continue current
operations and policies for the foreseeable future
Profit strategies
decision to do nothing new in a worsening situation but
instead to act as though the company’s problems are only
temporary
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Retrenchment Strategies
Retrenchment strategies
used when the firm has a weak competitive
position in some or all of its product lines from
poor performance
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Retrenchment Strategies
Turnaround strategy
emphasizes the improvement of operational
efficiency when the corporation’s problems are
pervasive but not critical
Contraction
effort to quickly “stop the bleeding” across the board
but in size and costs
Consolidation
stabilization of the new leaner corporation
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Retrenchment Strategies
Captive company strategy
company gives up independence in exchange for
security
Sell-out strategy
management can still obtain a good price for its
shareholders and the employees can keep their jobs
by selling the company to another firm
Divestment
sale of a division with low growth potential
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Retrenchment Strategies
Bankruptcy
company gives up management of the firm to the
courts in return for some settlement of the
corporation’s obligations
Liquidation
management terminates the firm
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Portfolio Analysis
Portfolio analysis
management views its product lines and business
units as a series of investments from which it
expects a profitable return
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BCG Growth—Share Matrix
Figure 7-3
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BCG Matrix
Question marks
new products with the potential for success but
need a lot of cash for development
Stars
market leaders that are typically at or nearing the
peak of their product life cycle and are able to
generate enough cash to maintain their high share
of the market and usually contribute to the
company’s profits
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BCG Matrix
Cash cows
products that bring in far more money than is
needed to maintain their market share
Dogs
products with low market share and do not have
the potential to bring in much cash
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BCG Matrix—Limitations
Use of highs and lows to form categories is too
simplistic.
Link between market share and profitability is
questionable.
Growth rate is only one aspect of industry
attractiveness.
Product lines or business units are considered only in
relation to one competitor.
Market share is only one aspect of overall competitive
position.
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Advantages and Limitations of Portfolio
Analysis
Advantages
Encourages top management to evaluate each of
the corporation’s businesses individually and to set
objectives and allocate resources for each
Stimulates the use of externally oriented data to
supplement management’s judgment
Raises the issue of cash flow availability to use in
expansion and growth
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Advantages and Limitations of Portfolio
Analysis
Limitations
Defining product/market segments is difficult
Suggest the use of standard strategies that can miss
opportunities or be impractical
Value-laden terms such as cash cow and dog can
lead to self-fulfilling prophecies
Lack of clarity on what makes an industry attractive
or where a product is in its life cycle
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Tasks Necessary for Managing a Strategic
Alliance Portfolio
1. Developing and implementing a portfolio
strategy for each business unit and a
corporate policy for managing all the
alliances of the entire company
2. Monitoring the alliance portfolio in terms of
implementing business units’ strategies and
corporate strategy and policies
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Tasks Necessary for Managing a Strategic
Alliance Portfolio
3. Coordinating the portfolio to obtain synergies
and avoid conflicts among alliances
4. Establishing an alliance management system
to support other tasks of multi-alliance
management
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Corporate Parenting
Corporate parenting
views a corporation in terms of resources and
capabilities that can be used to build business unit
value as well as generate synergies across
business units
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Corporate Parenting
Generates corporate strategy by focusing on
the core competencies of the parent
corporation and the value created from the
relationship between the parent and its
businesses
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Developing a Corporate
Parenting Strategy
1. Examine each business unit in terms of its
strategic factors
2. Examine each business unit in terms of areas
in which performance can be improved
3. Analyze how well the parent corporation fits
with the business unit
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Horizontal Strategy and
Multipoint Competition
Horizontal strategy
cuts across business unit boundaries to build
synergy across business units and to improve
competitive position in one of more business
units
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Horizontal Strategy and
Multipoint Competition
Multipoint competition
large multi-business corporations compete against
other large multi-business firms in a number of
markets
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