Corporate Strategy

**Strategic ManagementCorporate Strategy

Dr. R.K. Mitra

**Corporate Strategy Corporate Strategy signifies

If growth and expansion,

Concentric (current industry) ORDiversification (Beyond current industry)

STRATEGIC MANAGEMENT FIRMORIENTATION TO GROWTHEXPAND?CUT BACK ?CONTINUE WHERE WE ARE

**STRATEGIC MANAGEMENT

Corporate StrategyOverall three types of strategic orientation

GROWTHSTABILITYRETRENCHMENT

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Corporate StrategyHunger, Flynn and Wheelen identified nine cells of corporate strategy:STRATEGIC MANAGEMENT StrongAverageWeak1 GrowthConcentration via Vertical Integration 2 GrowthConcentration via Horizontal Integration 3 RetrenchmentTurnaround 4StabilityPause or Proceed with Caution 5 Growth Concentration via Horizontal IntegrationStabilityNo Change or Profit Strategy6RetrenchmentCaptive Company or Selling Out 7GrowthConcentric Diversification 8GrowthConglomerate Diversification 9Retrenchment Bankruptcy or Liquidation HighMedium LowBusiness Strength/Competitive Position (BS/CP)Industry attractiveness (IA)

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Corporate StrategyGrowth Strategies: Cell Nos. 1,2,5,7 and 8STRATEGIC MANAGEMENT StrongAverageWeak1 GrowthConcentration via Vertical Integration 2 GrowthConcentration via Horizontal Integration 3 4 5 67GrowthConcentric Diversification 8GrowthConglomerate Diversification 9HighMedium LowBusiness Strength/Competitive Position (BS/CP)Industry attractiveness (IA)

*Corporate Strategy: Growth Strategies Cell No. 1: BS/CP

Vertical IntegrationBackward (upstream industries)Forward (downstream industries)Examples:IBM integrated backward to produce disk drives and forward into computer software and consultancy. STRATEGIC MANAGEMENT IA

StrategyIndustryMeansGrowthCurrentVerticalIntegration

StrongHigh 1 GrowthConcentration viaVertical Integration

*Corporate Strategy: Growth Strategies

Vertical IntegrationApples StoresLafarge integrated backward to supply limestone for a query at Bangladesh for its cement production at a plant in India. STRATEGIC MANAGEMENT

*Corporate Strategy: Growth Strategies Vertical IntegrationCell No. 1:

Vertical Integration is logical for reasons-High Industry attractiveness compels the firm to stay in that industry.Attractiveness results more competitors to enter. An existing firm comes under pressure to improve its competitive position.

STRATEGIC MANAGEMENT BS/CPIA



*Corporate Strategy

Vertical IntegrationVertical Integration helps to improve competitive position (Backward-minimize resource. acquisition costs;Forward- gain control over quality and distribution. STRATEGIC MANAGEMENT Cell No. 1:BS/CPIA


*Corporate Strategy

Vertical Integration: Ways to achieve Cell No. 1:

Vertical Integration can be achieved Internally-Ex: Lafarge by acquiring mining lease from Bangladesh Govt. Henry Ford built his River Rouge Plant by integrating manufacturing process to the point iron ore entered. STRATEGIC MANAGEMENT BS/CPIA



*Corporate Strategy

Vertical Integration: Ways to achieveExternallyEx: Du Pont, the chemical company, chose external route to backward integration by acquiring Conoco for oil needed in the production of fabrics. STRATEGIC MANAGEMENT

*Corporate StrategyVertical Integration and Value ChainSTRATEGIC MANAGEMENT Raw materialsComponent parts manufacturingFinal assembly Retail CustomerBackward vertical integration into upstream industriesForward vertical integration into downstream industries. Backward Vertical IntegrationForward Vertical IntegrationIncorporates more stages of the value chain closer to the beginning of the Value Chain (upstream)Incorporates more stages of the value chain closer to the end of the Value Chain (downstream)

*Corporate Strategy

Vertical Integration: Its ValueThe value of vertical integration: Can we determine?

It is sometimes possible to observe which stages of the value chain a firm is engaging in, and thus the level of that firms vertical integration. Sometimes, however, it is more difficult to directly observe a firms level of vertical integration. This is especially true when a firm believes that its level of vertical integration is a potential source of competitive advantage. In this case, the firm would not likely reveal this information freely to competitors. STRATEGIC MANAGEMENT

*Corporate StrategyVertical Integration: Its valueThe value of the Value Chain: Can we determine?

However, it is possible to get a sense of the degree of a firms vertical integration from a close examination of the firms value added as a percentage of sales.

Value added as a percentage of sales measures that percentageSTRATEGIC MANAGEMENT

*Corporate Strategy

Vertical Integration: Its valueThe value of the Value Chain: Can we determine?

Value added as a percentage of sales measures that percentageSTRATEGIC MANAGEMENT

*Corporate StrategyVertical Integration: Its valueThe value of vertical integration: Can we determine?

of sales measures that percentage of a firms sales that is generated by activities done within the boundaries of a firm. A firm with a high ratio between value added and sales has brought many of the value-creating activities associated with its business inside its boundaries, consistent with a high level of vertical integration. A firm with a low ratio between value added and sales does not have, on average, as high a level of vertical integration. STRATEGIC MANAGEMENT

*Corporate Strategy

Vertical Integration: Firm CapabilitiesFirms should vertically integrate into those businesses which posses valuables, rare, costly-to-imitate resources and capabilities.How flexible vertical integration is?Once a firm vertically integrates, it commits its organizational structure, management controls and other policies.Undoing vertical integration would imply changing all these aspects. STRATEGIC MANAGEMENT

*Corporate StrategyVertical Integration: Arguments for Building Barrier to EntryFacilitate investment in specialized assets (North-rop & Boeing)Protecting Product QualityArguments against Vertical IntegrationHigh cost supplies from company owned suppliersLack of Competition(Ex: GMs glassmaking Div. sales only to Car-making Div.)May lock a company into an old/inefficient technology.STRATEGIC MANAGEMENT

*Corporate Strategy

Vertical Integration: Alternatives Full integration Vs. Taper Integration Taper integration occurs when a firm relies both on independent suppliers and company owned suppliers. ORIt sells parts of output through independent retailers and some through company owned outlets.

In such cases, the company owned entities compete with independent suppliers.

STRATEGIC MANAGEMENT

*Corporate StrategyVertical Integration: AlternativesFull Integration & Taper IntegrationSTRATEGIC MANAGEMENT In-house suppliersIn-house manufacturingIn-house Distributors CustomersIn-house suppliersIn-house manufacturingIn-house Distributors CustomersOutside suppliersIndependent distributors Strategic Alliances: Long-term Co-operative Relations

*Corporate Strategy

Vertical Integration: Alternatives Strategic Outsourcing:Strategic outsourcing is the decision to allow one or more of a companys value chain activities or functions to be performed by independent specialist companies that focus all their skills and knowledge on just one kind of activity.


*Corporate Strategy

Vertical Integration: Alternatives Strategic Outsourcing

STRATEGIC MANAGEMENT Research & developmentCOMPANY BOUNDARY BEFORE OUTSOURCINGProduction Marketing & sales Customer service COMPANY BOUNDARY AFTER OUTSOURCINGResearch & developmentOutsourced Marketing & Sales Outsourced Production Customer service Strategic Outsourcing of Primary Value Creation Functions

*Corporate StrategyHorizontal IntegrationCell No.2 & 5

Horizontal integration occurs -When a firm expands its activities into other geographical locations and/or by increasing the range of products and services offered to current market. Although industry attractiveness is high, competitive position is average. A firm may attempt to solidify and strengthen its position in the current industry by working to shore up its weakness. STRATEGIC MANAGEMENT IABS/CP

StrategyIndustryMeansGrowthCurrentHorizontal Integration

AverageHigh 2 GrowthConcentration via Horizontal Integration

AverageMedium 5GrowthConcentration via Horizontal Integration -No Change or Profit Strategy

*Corporate Strategy

Horizontal IntegrationM&A are the most common tools of horizontal integration. An acquisition occurs when a company uses its capital resources to purchase another company;A merger is an agreement to pool operations and create a new entity. STRATEGIC MANAGEMENT

*Corporate Strategy

Horizontal Integration: Arguments for

Lower costs due to scalesBetter product differentiation (product lines of acquired or merged companies.)Reduced Industry RivalryIncreased Bargaining Power STRATEGIC MANAGEMENT

*Corporate StrategyDiversificationCell No. 7:

As the firm has a strong industry competitiveness but industry attractiveness is low, it may use its distinctive competencies in diversifying.Look for a strategic fit in a new industry, where it can apply its tested competencies. STRATEGIC MANAGEMENT BS/CPIA

StrategyIndustryMeansGrowthRelated IndustryDiversification

StrongLow 7 GrowthConcentric Diversification

*Corporate StrategyDiversification: Common Thread(Related)

The point of commonality between the current industry and the new industry could be similar technology, customer use, distribution, products, managerial skill etc. Empirical evidences show that firms that go for diversification to related industry are those who are leaders in their core business.Diversification (related) can be externally or internally.


*Corporate StrategyDiversification (Unrelated)Cell No. 8:

A firms competitive position is average and industry attractiveness is low. These two factors push towards diversification into unrelated industry.


StrategyIndustryMeansGrowthUn-related IndustryDiversification Conglomerate

AverageLow 8 GrowthConglomerate Diversification

*Corporate StrategyDiversification (Unrelated): Synergy

Some sort of move from a mature industry to a younger industry and hence timing is a key factor: early entry strategy proves much more profitable. The commonality is not of product market technology, the emphasis on conglomerate diversification is financial synergy.

STRATEGIC MANAGEMENT Cell No. 8:BS/CPIA

AverageLow 8 GrowthConglomerate Diversification

*Corporate StrategyDiversification (Unrelated)

Ex:A cash rich firm with little opportunities in current industry may move to a new industry with more opportunities. Usually, external route to M&A is more popular than slow process of internal route.


*Corporate StrategyStabilityCell No. 4:

A firm with strong competitive position but medium attractiveness is unlikely to go for a major change in corporate strategy.


StrategyIndustryMeansStabilityCurrent Pause or proceed with caution

StrongMedium 4 StabilityPause or Proceed with Caution

*Corporate Strategy Stability: Pause or Proceed with Caution

Usually, a firm facing a prolonged growth tend to pause to consolidate as the industry attractiveness dips.Michael Dell We grew by 28.5% in 2 years and we are having growing pains STRATEGIC MANAGEMENT

*Corporate StrategyStability Strategy: No change Cell No. 5:

Neither significant opportunities or threats nor strength and weakness. Makes small adjustments in sales and profits.A short-term strategy. STRATEGIC MANAGEMENT BS/CPIA

StrategyIndustryMeansGrowthCurrent No change

AverageMedium

Stability No Change or Profit Strategy

*Corporate StrategyRetrenchment: Turnaround Cell No. 3:

The turnaround strategy probably is most appropriate when a corporation is in a highly attractive industry and its problems are pervasive but not yet critical. This strategy emphasizes the improvement of operational efficiency. Two basis phases of turnaround strategy are contraction and consolidation. STRATEGIC MANAGEMENT IABS/CP

StrategyIndustryMeansRetrenchment Current Turnaround

WeakHigh

3RetrenchmentTurnaround

*Corporate StrategyRetrenchment: Turnaround

Contraction is the initial effort to stop the bleeding quickly with across-the-board cutbacks in size and costs. Consolidation is the implementation of a program to stabilize the now leaner corporation. To streamline the company, management develops plans to reduce unnecessary overhead and to justify the costs of functional activities. This time is crucial for the organization. If management doesnt conduct the consolidation phase in a positive manner, many of the companys best people will live. STRATEGIC MANAGEMENT

*Corporate StrategyRetrenchment: Turnaround

If all resources are encouraged to get involved in productivity improvements, the firm is likely to emerge from this strategic retrenchment period a much stronger and better organized company. It improves its competitive position and is able once again to expand the business. STRATEGIC MANAGEMENT

*Corporate StrategyRetrenchment: Captive Company or Selling Out Cell No. 6:

A company with a weak competitive position in an industry of only medium (and probably declining) attractiveness may not be able to engage in a full-blown turnaround strategy.The industry isnt sufficiently attractive to justify such an effort either from the current management or from investors. Nevertheless, a company in this situation faces poor sales STRATEGIC MANAGEMENT BS/CPIA

StrategyIndustryMeansRetrenchment Current Captive Co. or Selling out

WeakMedium

6RetrenchmentCaptive Company or Selling Out

*Corporate StrategyRetrenchment: Captive Company or Selling Out

Management desperately searches for an angel by offering to be a captive company to one of its larger customers in order to guarantee the companys continued existence with a long-term contract. Reduction in the scope of some of its functional activities, such as marketing, thus reducing costs significantly. STRATEGIC MANAGEMENT


This strategy became popular during the 1980s in the moderately attractive auto parts and electronics parts industries for small firms with weak competitive positions. For example, in order to become the sole supplier of a part to General Motors, Simpson Industries of Birmingham, Michigan, agreed to have its engine parts facilities and books inspected and its employees interviewed by a special team from GM. In return, GM purchased nearly 80% of the companys production through long-term contracts.



The selling out strategy makes sense if a company doesnt see any way to build some strengths or shore up its weaknesses and management believes that the industry isnt soon likely to become more attractive. It can still obtain a good price by selling out to firms with moderately attractive positions (cell 5) that are expanding through horizontal integration. STRATEGIC MANAGEMENT


Johnson Products, a pioneer in hair care products for African-American and other ethnic markets, over time lost its competitive position to larger cosmetics companies who had entered Johnson Products niche. After numerous attempts to turn the company around, the Johnson family finally decided to sell out to Ivax Corporation while they could still get a decent price for the firm. STRATEGIC MANAGEMENT

*Corporate StrategyRetrenchment: Liquidation and Bankruptcy Cell No. 9:

When a company finds itself in the worst possible situation with a weak competitive position in an industry of low attractiveness, managements alternatives are limited and all are distasteful. Because no one is interested in buying a weak company in an unattractive industry, the firm ultimately must pursue a bankruptcy or liquidation strategy. STRATEGIC MANAGEMENT BS/CPIA

StrategyIndustryMeansRetrenchment Current Liquidation or Bankruptcy

WeakLow

9RetrenchmentBankruptcy or Liquidation

*Corporate StrategyRetrenchment: Liquidation Bankruptcy Bankruptcy involves giving up management of the firm to the courts in return for some settlement of the corporations obligations. Top management hopes that, after the court decides the claims, the company will be stronger and better able to compete in a more attractive industry. In contrast to bankruptcy, which seeks to perpetuate the corporation, liquidation terminates the firm. When the industry is unattractive and the company is too weak to be sold as a going concern, STRATEGIC MANAGEMENT

*Corporate StrategyRetrenchment: Liquidation & Bankruptcy management may choose to convert as many stable assets as possible to cash, which the company then distributes to its shareholders after paying all obligations. STRATEGIC MANAGEMENT

*STRATEGIC MANAGEMENT

Corporate Strategy BCG Portfolio Matrix StarsQuestion Marks Cash Cows Dogs Relative Competitive PositionBusiness Growth Rate (Percent)02481012141618202210x 4x 2x 1.5x 1x 0.5x 0.4x 0.3x 0.2x 0.1x

*Corporate StrategyFour-Cell, BCG Growth-Share Matrix A units relative competitive position is defined as its market share in the industry divided by that of the largest other competitors. By this calculation, a relative market share above 1.0 belongs to the market leader. The business growth rate is the percentage of market growth, that is, the percentage by which sales of a particular line of products have increased. A basic assumption of this method is that, other things being equal, a growing market is an attractive one. STRATEGIC MANAGEMENT

*Corporate StrategyFour-Cell, BCG Growth-Share Matrix

The line separating areas of high and low relative competitive position is set at 1.5 times. A product line or business unit must have relative strengths of at least this magnitude to ensure that it will have the dominant position needed to be a star or cash cow. In contrast, a product line or unit having a relative competitive position of less than 1.0 has dog status. STRATEGIC MANAGEMENT


The growth-share matrix has a lot in common with the product life cycle. Companies in a fast-growing industry typically introduce new products. Initially, these products are called question marks. Question marks (sometimes called problem children or wildcats) are new products that have potential for success but that need a lot of cash for development. If one of these products is to gain enough market share to become a market leader and thus a star, funds must be re-allocated from one or more mature products to the question mark. STRATEGIC MANAGEMENT


Stars are market leaders typically at the peak of their product life cycle and usually generate enough cash to maintain their high share of the market. When their market growth rate slows, stars become cash cow products. Cash cows typically bring in far more money than needed to maintain their market share. As these products move along the decline state of their life cycles, management milks them for cash to invest in new question mark products. STRATEGIC MANAGEMENT


Question mark products that fail to obtain a dominant market share (and thus become a star) by the time the industry growth rate inevitably slows become dogs. Dogs are those products with low market share that do not have the potential (because they are in an unattractive industry) to bring in much cash. According to the BCG growth-share matrix, dogs should be either sold off or managed carefully for the small amount of cash they can generate.


*STRATEGIC MANAGEMENT Overcome WeaknessMaximize strengths External (acquisition or merger for resource capability)Internal (redirected resources within the firm) Retrenchment -Turnaround-Divestiture-Liquidation-Captive Conglomerate diversification

-Market development -Product development-InnovationConcentric-Horizontal integration -Concentric diversification-Joint venture -Vertical IntegrationIIIIIIIVCorporate StrategyGrand Strategy Selection Matrix

*STRATEGIC MANAGEMENT Rapid market growth Slow market growth Weak competitive position Strong competitive position Concentrated growth *Vertical integrationConcentric diversificationIIIIVIIIReformulation of concentrated growth *Horizontal integrationDivestiture Liquidation Concentric diversification Conglomerate diversificationJoint ventures RretrenchmentConcentric diversificationConglomerate diversificationDivestitureLiquidation* This is usually via market development, product development, or a combination of both Corporate StrategyGrand Strategy Selection Matrix

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Strategy focuses on building competitive advantage by creating/defending a unique position and exploiting a valuable set of resources. Those positions and resources are created by virtuous cycles. Business Models activate those cycles.

Business Model and Strategy

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Business Model

Business Model

Business Model and Strategy Large VolumeEconomics of scale LowCosts Low fares Choices

PoliciesAssets Governance ConsequencesRigid FlexibleBM of LCA

*Virtuous Cycle 1:

Business Model Low Cots (fixed)Low fares High volumesGreater bargaining power 4123

*Virtuous Cycle 2: Business Model Low fixed costsLow faresHigh volume High aircraft utilization 4321

*Virtuous Cycle 3: Business Model Low variable costs Low fares Expectation of lowered quality of services No meals 2341

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Tactics are the specific actions a firm takes to implement its strategies. Examples of tactics include decisions firms make about various attributes of their products:

SizeShapeColour PriceSpecific advertising approaches adopted by a firmSpecific sales and marketing efforts. TACTICS

*Several industries provide excellent examples of these kinds of tactical interactions. In consumer goods, for example, if one company increases its sales by adding a lemon scent to laundry detergent, then lemon scents start showing up in everyones laundry detergent. If Coke starts selling a soft drink with half the sugar and half the carbs of regular Coke, can Pepsis low-sugar/low-carb product be far behind? And when surprisingly, these kinds of tactical changes, because they initially may be valuable and rare, are seldom costly to imitate, and thus are typically only sources of temporary competitive advantage. TACTICS

**THANK YOU

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Corporate Strategy