Strategy Formulation: Corporate Strategy

By

Aumaima Zamin

Corporate Strategy

• It is the choice of direction for the firm as a whole.

• It involves decisions about the flow of resources to and from firm’s product lines and business units.

Corporate Strategy

• It involves: - Directional strategy: overall

reference to growth, stability and retrenchment.

- Portfolio Strategy: industries or markets in which a firm operates.

- Parenting Strategy: the way a firm coordinates activities, transfer resources and nourishes capabilities among product lines.

Directional Strategy • It is composed of three areas:

- Growth Strategies: expand company’s activities

- Stability Strategies: no change in activities.

- Retrenchment Strategies: reduce the activities.

Growth Strategies • Concentration:

moving resources to more developing product lines in one industry. (vertical & horizontal growth)

• Diversification:

moving resources to product lines in different industries. (concentric & conglomerate)

Concentration

• Vertical growth is performing those functions which were previously done by distributors and suppliers.

• For reducing costs, tapping more markets, offering better quality and obtaining access to customers.

• Vertical growth results in vertical integration (performing multiple activities along a value chain).

Concentration • Vertical integration Continuum: - Full integration: makes & distributes completely. - Taper integration: makes & distributes less than half - Quasi integration: purchases from firms which are under

its control. - Long-term contracts: agreements to provide agreed upon

goods for a specific period of time. Here a supplier cannot have relations with other competitive firms.

Concentration

• Horizontal growth can be done by:

- Either expand firm’s products into other geographic areas

- Or by increasing products in current markets.

• Horizontal growth results in horizontal integration (degree to which a firm operates in multiple geographic areas at the same point in a industry’s value chain i.e. kind of activities performed remains the same but firm works “sideways”.

Diversification

• Concentric Diversification: Moving into a “related” industry, where a firm may use its skills and product knowledge. Products are related.

• Conglomerate Diversification: Moving into an unrelated industry. Focused on financial aspects.

International entry options

• Exporting: Shipping goods manufactured in home country to other countries.

• Licensing: The licensing firm grants rights to another firm to produce & sell a product.

• Franchising: Franchiser grants rights to another firm to open a retail store.

• Joint ventures: Firms combine resources & expertise to develop new products.

• Acquisitions: Purchasing another company working already.

Stability Strategies

• Pause\ Proceed with Caution Strategy: Timeout & temporary strategy, to wait until the environment becomes stable and friendly. Gives an opportunity to take a break after having a prolonged growth strategy or moving to retrenchment.

• No change strategy: Continue current policies, as there is less likelihood of changes in environment.

• Profit strategy: Artificially support profits when a firm’s sales are declining due to problematic situations.

Retrenchment Strategies

• Turnaround Strategy: Emphasizes improvement of operational efficiency. It consists of 2 phases:

- Contraction: initial effort by reducing costs & size. - Consolidation: involves stabilization & strengthening. • Captive company strategy: A firm declares itself

“confined” and seeks for help under a contract.

Retrenchment Strategies

• Sellout / Divestment strategy: Selling the firm completely or one division of low growth after above strategies have not worked out.

• Bankruptcy/Liquidation strategy: Bankruptcy involves giving up Management of the firm to the court. Liquidation involves termination of the firm.

Portfolio Analysis

• BCG Growth Share Matrix: Product lines are plotted against the growth of market and the share of the product.

- Question marks: New products which require a lot of cash. Market is also developing

- Stars: Products that are at their peak and they generate cash for themselves

- Cash cows: Generate far more money than to sustain themselves. They are in the declining stage.

- Dogs: They have low market share & don’t bring enough money.

Portfolio Analysis • GE Business Screen: Consists of a matrix based on

industry attractiveness and business strength.

1. Select criteria to rate the industry. Assess overall industry attractiveness on a scale between 1-5 (5 being the highest)

2. Select the key factors for success of product lines. Assess the strength of each product line attractiveness on a scale between 1-5 (5 being the highest).

3. Plot each product line’s current position

4. Plot the future portfolio.

Corporate Parenting

• Views the corporation as resources and capabilities.

• Focuses on the core competencies of the parent corporation and the value created by the relation between the parent and its businesses.

Develop a Corporate Parenting Strategy

• Examine each business unit in terms of its strategic factors.

• Examine each business unit in terms of performance that can be improved.

• Analyze how well the parent company fits with the business units