Strategy Formulation Corporate strategy

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Strategy FormulationCorporate strategy
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Corporate Strategy

• is primarily about the choice of direction for
  the firm as a whole (small one-product company
  and a large multi business company)
• is also about managing various product lines and
  business units for maximum value (large multi
  business company)

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Corporate Strategy
3 Key Issues The firms overall orientation
toward growth, stability or retrenchment
(directional strategy) The industries or markets
in which the firm competes through its products
and BU (portfolio strategy) The manner in which
management coordinates activities, transfer
resources, and cultivates capabilities among
product lines and BUs (parenting strategy)
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• Corporate Directional Strategy

• Orientation toward growth
• Expansion, contraction, status quo
• Concentration or diversification
• Internal development or acquisitions, mergers, or
  alliances

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Corporate Directional Strategy
3 Grand Strategies
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Corporate Directional Strategy
1. Growth Strategies -- A corporation can
grow internally by expanding its operation both
globally and domestically, or it can grow
externally
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Corporate Directional Strategy

• 1. Growth Strategies --
• External mechanisms
• Mergers (Allied Corporation Signal Companies
  Allied Signal)
• Acquisitions (Procter Gamble acquisition of
  Richardson-Vicks knowing for Oil of Olay and
  Vidal Sassoon brands)
• Strategic alliances

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Corporate Directional Strategy

• 1. Growth Strategies --
• Main advantages
• May mask flaws in a company
• Provide a big cushion for turnaround in case a
  strategic error is made
• Give more bargaining power
• Offer more opportunities for advancement,
  promotion, and interesting jobs
• 2 Basic forms
• Concentration
• Diversification

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Basic Concentration Strategies

• Vertical Growth --
• Vertical integration
• Full integration (100 suppliers controls
  distributors)
• Taper integration (lt50 supplies use own and
  external distribution channels)
• Quasi-integration (buy/sell from outside
  suppliers/distributors that under its partial
  control)
• Long-term contract
• Backward integration
• Forward integration
• Is a logical strategy for a corporation or BU
  with a strong competitive position in a highly
  attractive industry

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Basic Concentration Strategies

• Horizontal Growth / Concentration --
• by expanding the firms products into other
  geographic locations and/or by increasing the
  range of products and services offered to current
  markets.
• Horizontal integration
• Full to partial ownership
• Long-term contracts

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Corporate Directional Strategy

• Basic Diversification Strategies
• Concentric Diversification when a firm has a
  strong competitive position but industry
  attractiveness is low
• Growth into related industry
• Search for synergies
• Conglomerate diversification when industry is
  unattractive and a firm lacks outstanding
  abilities and skills
• Growth into unrelated industry
• Concern with financial considerations

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Corporate Directional Strategy

• Growth into areas related to a companys
  current product lines is generally more
  successful than is growth in completely areas.
• From successful growth projects
• 80 vertical growth
• 50 horizontal growth
• 35 concentric diversification
• 28 conglomerate diversification

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Corporate Directional Strategy

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

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Corporate Directional Strategy

• 2. Stability Strategies --
• Pause/proceed with caution (timeout before
  continuing growth or retrenchment)
• No change (to do nothing new)
• Profit strategies (to support profits by reducing
  investments and short-term expenditures)

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Corporate Directional Strategy

• 3. Retrenchment Strategies --
• Turnaround
• Captive Company Strategy
• Selling out
• Divestment
• Bankruptcy
• Liquidation

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Corporate Strategy

• Portfolio Analysis --
• Resource commitment on best products to ensure
  continued success
• Resource commitment on new costly products high
  risk

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BSG Matrix
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BSG Matrix

• Stars are high market share/high growth
  businesses. The preferred strategy is growth.
• Question marks are low market share/high growth
  businesses. The preferred strategies are growth
  for promising question marks and restructuring or
  divestiture for the other question marks.
• Cash cows are high market share/low growth
  businesses. The preferred strategy is stability
  or modest growth.
• Dogs are low market share/low growth businesses.
  The preferred strategy is retrenchment by
  divestiture.

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BSG Matrix

• Limitations
• Too simplistic
• The link between market share and profitability
  is questionable
• Growth rate is only one aspect of industry
  attractiveness
• Product lines or business units are considered in
  relation to the one market leader
• Market share is only one aspect of overall
  competitive position

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GE/McKinsey Matrix
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GE/McKinsey Matrix

• Business strengths reflect market share,
  technological advantage, product quality,
  operating costs, and price competitiveness.
• Industry attractiveness reflects market size and
  growth, capital requirements and competitive
  intensity.
• Both business strength and industry
  attractiveness are categories as low, medium, and
  high.
• Combining the business strength and industry
  attractiveness variables yields a nine-cell
  matrix that identifies business units as
  winners, question marks, average
  businesses, profit producers, or losers.

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GE/McKinsey Matrix

• Limitations
• It can get quite complicated and cumbersome
• The numerical estimates of industry
  attractiveness and business strength/competitive
  position give the appearance of objectivity, but
  they are in reality subjective judgments
• It cannot effectively depict the positions or
  business units in developing industries

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Portfolio Analysis

• Advantages of portfolio analysis
• It encourages top management to evaluate each of
  the businesses individually and set objectives
  and allocate resources for each.
• It stimulates the use of externally oriented data
  to supplement managements judgment.
• It raises the issue of cash flow availability for
  use in expansion and growth.
• Its graphic depiction facilitates communication.

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Portfolio Analysis

• Limitations of portfolio analysis
• It is not easy to define product/market segments.
• It suggests the use of standard strategies that
  can miss opportunities or be impractical.
• It provides an illusion of scientific rigor when
  in reality positions are based on subjective
  judgments.
• It is not always clear what makes an industry
  attractive or where a product is in its life
  cycle.

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Corporate Strategy

• Corporate Parenting Strategy --
• Strategic factors
• Performance improvement
• Analyze fit

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Corporate Parenting

• Value creation only occurs under three
  conditions
• the parent sees an opportunity for a business to
  improve performance and a role for the parent in
  helping to grasp the opportunity
• the parent has the skills, resources and other
  characteristics needed to fulfill the required
  role
• the parent has sufficient understanding of the
  business and sufficient discipline to avoid other
  value-destroying interventions.

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Corporate Parenting

• According to Campbell, Good and Alexander the
• developing a corporate parenting strategy
  includes
• 3 steps
• To examine each BU in terms of its strategic
  factors.
• To examine each BU in terms of areas in which
  performance can be improved.
• To analyze how well the parent corporation fits
  with the BU.

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Corporate Parenting

• Heartland business has opportunity for
  improvement by the parent and priority for all
  corporate activities
• Edge-of Heartland business has some parenting
  characteristics fit the business, but others do
  not
• Ballast businesses fit very comfortably with the
  parent corporation but contain very few
  opportunities to be improved by the parent
• Alien territory businesses have little
  opportunity to be improved by the corporate
  parent
• Value trap businesses fit well with parenting
  opportunities, but misfit with parents
  understanding of the units strategic factors