Chap 7 sm full

Strategy Formulation:Corporate Strategy

1

Corporate Strategy 2

Three Key Issues:

Firm’s directional strategy Firm’s portfolio strategy Firm’s parenting strategy

Corporate Directional Strategies

3


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?


Directional Strategy: Three Grand Strategies:

Growth strategies Stability strategies Retrenchment strategies


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.


2 Basic Growth Strategies:

Concentration– Current product line in one industry

Diversification– Into other product lines in other

industries


Basic Concentration Strategies:

Vertical growth

Horizontal growth


Concentration:

Vertical growth

Vertical integration Full integration Taper integration Quasi-integration

Backward integration

Forward integration

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Benefits of Vertical Integration reduces or eliminates costs of buying and selling

(Transaction Costs) smoother, more efficient operation

Limits to Vertical Integration Differences in minimum efficient scale in

vertically integrated corporation. Must remain innovative in all Value Chain

activities. Possible incompatibilities between managerial

skills and corporate cultures that make upstream and downstream activities successful.


Concentration:

Horizontal Growth

Horizontal integration Coordinating across the same or

similar value chain activities.

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Horizontal Integration Benefits: Corporate managers have expertise to

recognize undervalued stocks that many individual investors would miss.

Corporations have economies of scale for financing acquisitions that individuals do not.

Horizontal Integration Costs: Conglomerate discount: value of stock of

conglomerate sells for less than total value of individual stocks.

Takeover premiums: corporations usually pay a premium over the normal trading price of the target’s stock.


Basic Diversification Strategies:

Concentric Diversification

Conglomerate Diversification


Diversification:

Concentric:

Growth into related industry Related-Diversified Firm: Less than 70 percent of firm revenues comes from a single business unit, and different business units share numerous links and common attributes.

Search for synergies


Diversification:

Conglomerate:

Growth into unrelated industry Less than 70% of firm revenues comes from a single

business, and there are few, if any, links or common attributes among businesses.

Concern with financial considerations


InternationalEntry

Options

ExportingLicensing

FranchisingJoint Ventures

AcquisitionsGreen-Field Development

Production SharingTurnkey Operations

BOT ConceptManagement Contracts


Stability Strategies:

Pause/proceed with caution

No change

Profit strategies


Retrenchment Strategies:

Turnaround

Captive Company Strategy

Selling out

Bankruptcy

Liquidation


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

BCG Matrix

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GE Business Screen22

Long-term industry attractiveness

Business strength/competitive position

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General Electric’s Business Screen

AWinners Winners

B

C

Question Marks

D

F

Average Businesses

EWinners

Losers

GLosers H

LosersProfit

Producers

Strong Average Weak

Low

Medium

High

Business Strength/Competitive Position

Indu

stry

Att

ract

ive

ness

Source: Adapted from Strategic Management in GE, Corporate Planning and Development, General Electric Corporation. Used by permission of General Electric Company.

International Portfolio Analysis

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2 Factors:

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

Competitive strength• Market share, product fit, contribution

margin, market support

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Portfolio Matrix for Plotting Products by Country

Harvest/Divest Combine/License

Invest/Grow Dominate/Divest Joint Venture

Lo

wH

igh

High Low

Competitive Strengths

Co

un

try

Att

ract

iven

ess

Selective Strategies


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


Portfolio Analysis

Disadvantages: Difficult to define product/market

segments Standard strategies can miss

opportunities Illusion of scientific rigor Value-laden terms


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.



Strategic factors Those elements of a company that

determine its strategic success or failure Performance improvement Analyze fit



Parenting-Fit Matrix Summarizes the various judgments

regarding corporate/business unit fit for the corporation as a whole.



Parenting-Fit Matrix 2 Dimensions

• Positive contributions parent can make• Negative effects parent can have

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Parenting-Fit Matrix

Edge of Heartland

Heartland

Alien Territory

Low

High

HighLow

FIT between parenting opportunities and parenting characteristics

MIS

FIT

bet

wee

n cr

itica

l suc

cess

fac

tors

an

d p

are

ntin

g ch

arac

teris

tics

Ballast

Value Trap


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.