CORPORATE

STRATEGY
STRATEGY
FORMULATION
TEAM 4
 LEARNING OBJECTIVES
After reading this chapter, you should be able to:
Understand the three Identify strategic
aspects of corporate options to enter a
strategy foreign country

Apply portfolio analysis to guide

Apply the directional decisions
strategies of growth, in companies with multiple
stability, and retrenchment products and

businesses

Understand the differences between

Develop a parenting
vertical and horizontal growth as
strategy for a
well as
concentric and conglomerate
multiple-business
diversification corporation

What is Corporate
Strategy?
Corporate strategy is primarily about To deal with each of the key
the choice of direction for a firm as a issues, this chapter is organized
whole and the management of its into three parts that examine
business or product portfolio. This is corporate strategy in terms of
true whether the firm is a small directional strategy (orientation
company or a large multinational toward growth), portfolio analysis
corporation (MNC). In a large multiple- (coordination of cash flow among
business company, in particular, units), and corporate parenting
corporate strategy is concerned with
(the building of corporate synergies
managing various product lines and
through resource sharing and
business units for maximum value.
development).
 DIRECTIONAL STRATEGY
A corporation’s directional strategy is composed of three general orientations
(sometimes called grand strategies)

Growth Stability Retrenchment

Strategies Strategies Strategies
expand the company’s make no change to the reduce the company’s
activities. company’s current level of activities.

activities.

Concentration
- Vertical Growth Pause/Proceed with Turnaround
- Horizontal Growth Caution Captive Company
Diversification No Change Sell-Out/Divestment
- Concentric Profit Bankruptcy/Liquidation
- Conglomerate
 GROWTH Vertical Growth
STRATEGIES
Concentration Vertical growth can be achieved by taking over
a function previously provided by a supplier
or by a distributor. The company, in effect,
grows by making its own supplies and/or by
distributing its own products. This may be
done in order to reduce costs, gain control
over a scarce resource, guarantee quality of a
key input, or obtain access to potential
customers. This growth can be achieved either
internally by expanding current operations or
externally through acquisitions.
Vertical BACKWARD INTEGRATION
Growth

(going backward on an industry’s

results in... value chain

Assuming a function

previously
provided by a supplier

VERTICAL INTEGRATION
the degree to which a firm
operates vertically in multiple
FORWARD INTEGRATION

locations on an industry’s value (going forward on an industry’s

chain from extracting raw value chain
materials to manufacturing to
Assuming
a function
retailing
previously provided by a

distributor
 VERTICAL INTEGRATION
CONTINUUM
Harrigan proposes that a company’s degree of vertical integration can range
from total ownership of the value chain needed to make and sell a product to no
ownership at all.

Full Integration Taper Integration

(also called concurrent sourcing)
Under this, a firm internally makes
100% of its key supplies and
With this, a firm internally
completely controls its distributors.
produces less than half of its own
Large oil companies, such as British
requirements and buys the rest from
Petroleum and Royal Dutch Shell,
outside suppliers (backward taper
are fully integrated
integration).
Quasi-integration Long-term contracts

This are agreements between two firms

With this, a company does not
to provide agreed-upon goods and
make any of its key supplies but services to each other for a specified
purchases most of its period of time. This cannot really be
requirements from outside considered to be vertical integration
suppliers that are under its unless it is an exclusive contract that
partial control (backward specifies that the supplier or
quasi-integration). distributor cannot have a similar
relationship with a competitive firm.
 GROWTH Horizontal Growth
STRATEGIES
Concentration A firm can achieve horizontal growth by
expanding its operations into other
geographic locations and/or by increasing
the range of products and services offered to
current markets. Research indicates that
firms that grow horizontally by broadening
their product lines have high survival rates.
Horizontal growth results in horizontal
integration—the degree to which a firm
operates in multiple geographic locations at
the same point on an industry’s value chain.
INTERNATIONAL ENTRY OPTIONS Franchising
FOR HORIZONTAL GROWTH
Under a franchising agreement, the franchiser grants
Some of the most popular options for international rights to another company to open a retail store using
entry are as follows: the franchiser’s name and operating system. In
exchange, the franchisee pays the franchiser a
Exporting percentage of its sales as a royalty.

A good way to minimize risk and experiment with a Joint Ventures

specific product is exporting, shipping goods produced
in the company’s home country to other countries for Forming a joint venture between a foreign
marketing. corporation and a domestic company is the most
popular strategy used to enter a new country.
Companies often form joint ventures to combine the
Licensing resources and expertise needed to develop new
Under a licensing agreement, the licensing firm grants products or technologies.
rights to another firm in the host country to produce
and/or sell a product. The licensee pays compensation Acquisitions
to the licensing firm in return for technical expertise.
A relatively quick way to move into an international
area is through acquisitions— purchasing another
company already operating in that area. Synergistic
benefits can result if the company acquires a firm
with strong complementary product lines and a good
distribution network.
 Green-Field development BOT Concept

If a company doesn’t want to purchase another The BOT (Build, Operate, Transfer) concept is a
company’s problems along with its assets, it may choose variation of the turnkey operation. Instead of
green-field development and build its own turning the facility (usually a power plant or toll
manufacturing plant and distribution system. road) over to the host country when completed,
the company operates the facility for a fixed
Production Sharing period of time during which it earns back its
investment plus a profit.

Coined by Peter Drucker, the term production sharing

means the process of combining the higher labor skills
and technology available in developed countries with the
Management Contracts
lower-cost labor available in developing countries. Often
called outsourcing. A large corporation operating throughout the world
is likely to have a large amount of management
Turnkey Operations talent at its disposal. Management contracts offer a
means through which a corporation can use some
of its personnel to assist a firm in a host country for
Turnkey operations are typically contracts for the
a specified fee and period of time.
construction of operating facilities in exchange for a fee.
The facilities are transferred to the host country or firm
when they are complete.
 GROWTH STRATEGIES
Diversification Strategies
According to strategist Richard Rumelt, companies
begin thinking about diversification when their
growth has plateaued and opportunities for growth in
the original business have been depleted. The two
basic diversification strategies are concentric and
conglomerate.
 Concentric (Related)
Diversification
Growth through concentric diversification into a related industry
may be a very appropriate corporate strategy when a firm has a
strong competitive position but industry attractiveness is low. The
search is for synergy, the concept that two businesses will generate
more profits together than they could separately. The point of
commonality may be similar technology, customer usage,
distribution, managerial skills, or product similarity.
Conglomerate (Unrelated)
Diversification
When management realizes that the current industry is
unattractive and that the firm lacks outstanding abilities
or skills that it could easily transfer to related products or
services in other industries, the most likely strategy is
conglomerate diversification—diversifying into an
industry unrelated to its current one.
STABILITY STRATEGIES 2 No-Change Strategy

A corporation may choose stability over growth by

continuing its current activities without any significant
A no-change strategy is a decision to do nothing new—a
change in direction. Some of the more popular of these
choice to continue current operations and policies for the
strategies are the pause/proceed-with-caution, no-
foreseeable future. The relative stability created by the
change, and profit strategies.
firm’s modest competitive position in an industry facing
little or no growth encourages the company to continue on
its current course, making only small adjustments for
1 Pause/Proceed with Caution
Strategy
inflation in its sales and profit objectives.

A pause/proceed-with-caution strategy is, in effect, a 3 Profit Strategy

timeout—an opportunity to rest before continuing a
growth or retrenchment strategy. It is a very deliberate
A profit strategy is a decision to do nothing new in a
attempt to make only incremental improvements until a
worsening situation but instead to act as though the
particular environmental situation changes. It is typically
company’s problems are only temporary. The profit
conceived as a temporary strategy to be used until the
strategy is an attempt to artificially support profits when
environment becomes more hospitable or to enable a
a company’s sales are declining by reducing investment
company to consolidate its resources after prolonged rapid
and short-term discretionary expenditures. Rather than
growth.
announce the company’s poor position to shareholders
and the investment community at large, top management
may be tempted to follow this very seductive strategy.
 RETRENCHMENT STRATEGIES
A company may pursue retrenchment strategies when it has a weak competitive position in some or all of its
product lines resulting in poor performance—sales are down and profits are becoming losses. These strategies
impose a great deal of pressure to improve performance. In an attempt to eliminate the weaknesses that are
dragging the company down, management may follow one of several retrenchment strategies:

1 Turnaround Strategy 2 Captive Company Strategy

Turnaround strategy emphasizes the

A captive company strategy involves giving up
improvement of operational efficiency and is
independence in exchange for security. A
probably most appropriate when a corporation’s
company with a weak competitive position
problems are pervasive but not yet critical.
may not be able to engage in a full-blown
turnaround strategy. The industry may not be
Two basic phases of a turnaround strategy:
sufficiently attractive to justify such an effort
Contraction - the initial effort to quickly “stop the
from either the current management or
bleeding” with a general, across the board
investors.
cutback in size and costs.

Consolidation - implements a program to stabilize

the now leaner corporation.
 3 Sell-Out/Divestment 4 Bankruptcy/Liquidation
Strategy Strategy

The sell-out strategy makes sense if Bankruptcy - involves giving up management of

management can still obtain a good price for the firm to the courts in return for some
its shareholders and the employees can keep settlement of the corporation’s obligations.
their jobs by selling the entire company to
another firm. If the corporation has multiple Liquidation - the termination of the firm. When
business lines and it chooses to sell off a the industry is unattractive and the company too
division with low growth potential, this is weak to be sold as a going concern, management
called divestment. may choose to convert as many saleable assets as
possible to cash, which is then distributed to the
shareholders after all obligations are paid.
 PORTFOLIO ANALYSIS

In portfolio analysis, top management views its product

lines and business units as a series of investments from
which it expects a profitable return. The product
lines/business units form a portfolio of investments that
top management must constantly juggle to ensure the best
return on the corporation’s invested money. Two of the
most popular portfolio techniques are the BCG Growth-
Share Matrix and GE Business Screen.
BCG GROWTH-SHARE
MATRIX
Using the BCG (Boston Consulting Group)
Growth-Share Matrix depicted in Figure 3.3 is
the simplest way to portray a corporation’s
portfolio of investments. Each of the
corporation’s product lines or business units
is plotted on the matrix according to both the
growth rate of the industry in which it
competes and its relative market share. A
unit’s relative competitive position is defined
as its market share in the industry divided by
that of the largest other competitor.
The BCG Growth-Share Matrix has a lot in common with the product life cycle. As a product moves
through its life cycle, it is categorized into one of four types for the purpose of funding decisions:

Question Marks Cash Cows

(sometimes called “problem children” or Typically bring in far more money than is
“wildcats”) are new products with the needed to maintain their market share. In
potential for success, but they need a lot of this declining stage of their life cycle,
cash for development. these products are “milked” for cash that
will be invested in new question marks.

Stars Dogs
Market leaders that are typically at the Have a low market share and do not have
peak of their product life cycle and are the potential (because they are in an
able to generate enough cash to maintain unattractive industry) to bring in much
their high share of the market and usually cash. According to the BCG Growth-Share
contribute to the company’s profits. Matrix, dogs should be either sold off or
managed carefully for the small amount
of cash they can generate.
EXAMPLE:
Unfortunately, the BCG Growth-Share Matrix also has
some serious limitations:
The use of highs and lows to form four categories is too simplistic.

The link between market share and profitability is questionable. Low-share

businesses can also be profitable.

Growth rate is only one aspect of industry attractiveness.

Product lines or business units are considered only in relation to one

competitor: the market leader. Small competitors with fast-growing market
shares are ignored.

Market share is only one aspect of overall competitive position.

GE Business Screen
General Electric, with the assistance of the
McKinsey & Company consulting firm,
developed a more complicated matrix. As
depicted in Figure 3.4, the GE Business
Screen includes nine cells based on long-
term industry attractiveness and business
strength competitive position. The GE
Business Screen, in contrast to the BCG
Growth-Share Matrix, includes much more
data in its two key factors than just business
growth rate and comparable market share.
To plot product lines or business units on the GE Business
Screen, follow these four steps:
1. Select criteria to rate the industry for each product line or business
unit.

2. Select the key factors needed for success in each product line or
business unit.

3. Plot each product line’s or business unit’s current position on a

matrix.

4. Plot the firm’s future portfolio, assuming that present corporate and
business strategies remain unchanged.
 CORPORATE PLANNING

Corporate parenting, in contrast,

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.
 DEVELOPING A CORPORATE
PARENTING STRATEGY

Campbell, Goold, and Alexander recommend that the search for appropriate
corporate strategy involves three analytical steps:

1. Examine each business 2. Examine each business 3. Analyze how well the
unit (or target firm in the unit (or target firm) in parent corporation fits
case of acquisition) in terms terms of areas in which with the business unit (or
of its strategic factors: performance can be target firm):
improved:
Corporate headquarters must
People in the business units These are considered to be
be aware of its own strengths
probably identified the parenting opportunities. A
and weaknesses in terms of
strategic factors when they parent company has world-class
resources, skills, and
were generating business expertise in these areas could
capabilities.
strategies for their units. improve that unit’s
performance. The corporate
parent could also transfer some
people from one business unit
who have the desired skills to
another unit that is in need of
those skills.
 BALANCE SCORECARD APPROACH

financial measures that tell the results of actions already taken
The balanced scorecard combines
with operational measures on customer satisfaction, internal processes, and the corporation’s
innovation and improvement activities—the drivers of future financial performance. Thus, steering
controls are combined with output controls. In the balanced scorecard, management develops goals
or objectives in each of four areas

3 Internal Business
1 Financial Perspective

How do we appear to What must we excel at?

shareholders?

2 Customer 4 Innovation and Learning

How do customers view us? Can we continue to improve

and create value?

THANK
YOU!