05. Strategy Formulation - Corporate Strategy

8/18/2019 05. Strategy Formulation - Corporate Strategy

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Nazrul Islam

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Strategy Formulation – corporateStrategy

Strategy formulation: Corporate Strategy

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Plan of Presentation

q Intr oduction

q DirectionalStrategy

q Por tfolioanalysis

q Cor porateparenting


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Intr oduction

l Corporate strategy is primarily about the choiceof direction for the firm as a whole

l In a large multi-business company, however, corporatestrategy is also about managing various product lines and

business units for maximum value

l It also attempts to obtain synergies among numerousproduct lines and business units so that the corporate

whole is greater than the sum of its individual business

unit part

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Intr oduction

l herefore the Corporate strategy can conveniently viewed in terms of:

Ø Directional strategy:Orientation towards growth, stability and retrenchment

Ø Portfolio analysis:Coordination of cash flow among units

Ø Corporate parenting:Building corporate synergies through resource sharing

and development

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Directional Strategy

Directional strategy is composed of three generalorientations

l !rowth strategies"xpand the company’s activities

l Stability strategies

#a$e no change to the company’s current activities

l %etrenchment strategies

%educe the company’s level of activities

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!rowth Strategies

l !rowth is a very attractive strategy for two $ey reasons:

Ø !rowth based on increasing mar$et demand maymas$ flaws in a company & flaws that would be

immediately evident in a stable or declining mar$et

Ø

' growing firm offers more oppor tunitiesfor advancement, promotion and interesting

(obs

l wo basic growth strategies are:

Ø Concentration: on current product line(s) in oneindu stry

Ø Diversification: into other products lines in other indu str i es

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Concentration Strategy

l If a company’s current product lines have real growthpotential, concentration of resources on those productlines ma$e sense as a strategy for growth

l wo basic concentration strategies are:

Ø

) ertical growth

Ø

*ori+ontal growth

!rowing firms in a growing industry tend to choosethese strategies before they try diversification

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)ertical !r owth

l )ertical growth can be achieved by ta$ing over afunction previously provided by a supplier or by adistributor

l his can be achieved

Ø Internally: by expanding

current operationsØ "xternally: through acuisitions

"xamples:

*enri ord- internal resources to build %iver %ouge Plan outsideDetroit. Process: input iron ore output finished automobiles

DuPont /huge chemical company0- external route- acuire Conoco for the

oil DuPont need to produce synthetic fabrics


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*ori+ontal gr owth

l Can be achieved by expanding the firm’s products into othergeographic locations and1or by increasing the range of products

and services offered to current mar$ets

l "xample: Dell Computers followed a hori+ontal gr owth

strategy by extending its mail order business to the "uropean

continent

l

Can grow hori+ontally thr ough

Ø Inter naldevelopment

Ø "xternally through acuisitions or strategic alliances

in the same industry

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*ori+ontal growth

l *ori+ontal integration for a firm may range from full to partial ownership to long-term contracts

"xample: 23# purchased a controlling sta$e /partialownership0 in 4orthwest 'irlines to obtain access to'merican and 'sian #ar$ets

#any small commuter airlines engage in long-term contracts

with ma(or airlines in order to offer a complete arrangement

for travelers

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Diversification Strategies

l

5nder what conditions6

Ø 7hen industry consolidates and becomes mature

Ø #ost surviving firms have reached the limits to

growth using vertical and hori+ontal growth strategies

Ø 5nable to expand internally in less mature mar$ets

l

wo basic diversification strategies:

Ø Concentric

Ø Conglomerate

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Concentric /%elated0 Diversification

l Concentric diversification into a related industry may bevery appropriate corporate strategy when a firm has a strong

competitive position but industry attractiveness is low

l 'ttempts to secure strategic fit in a new industry where thefirm’s product $nowledge, its manufacturing capabilities, and

the mar$eting s$ills can be put to good use

l Search is for synergy, the concept that two businesseswill generate more profits together than they could

separately.

l he point of commonality may be similar technology, customer usage, distribution, managerial s$ills, or product

similarity

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Conglomerate /unrelated0 Diversification

l 7hen management reali+es that

Ø Current industry is unattractive

Ø irm lac$s outstanding abilities or s$ills thatcould easily transfer to related products or

services in other industries

l "mphasis in conglomerate diversification is on financial

considerations rather than on the product-mar$et synergycommon to concentric diversification

"xample: Purchase of exas !as %esources by CS8 Corporation /arailroad-dominated transportation company0 because most of the gastransmission revenue in winter &railr oad’s lean period

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Stability Strategy

l Popular with small business owners who have found aniche and are happy with their success and the manageable

si+e of their firms

l

5seful in the short run, but can be dangerous if followed for

too long / many small-town businesses discovered when 7al-

#art came to town0

l Some popular strategies are:

Ø Pause1Proceed with caution strategy

Ø 4o Change strategy

Ø Profit strategy

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Pause1Proceed with Caution Strategy

l It is, in effect, a timeout & an opportunity to restbefore continuing a growth or retrenchment strategy

l Conceived to be a temporary strategy to be used until the environment becomes more hospitable or toenable a company to consolidate its resources after

prolonged rapid growth

"xample: Dell Computer Corporation followed in 9;

after growth strategy had resulted in more gr owth

than it could handle

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4o Change Strategy

l Is a decision to do nothing new & a choice to continue current operations and policies for theforeseeable future

l Created by situation li$e:

Ø

ew aggressive new competitors are li$ely toenter such an industry

Ø Corporation has found a reasonable profitableand stable niche for its products

Ø -irm’s modest competitive position in anindustry facing little or no growth

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Profit Strategy

l ' profit strategy is a decision to do nothing new in aworsening situation, but instead to act as though thecompany’s problems are only temporary

l It is an attempt to artificially support profits when acompany’s sales are declining by reducing investmentand short-term discretionary expenditures

l he profit strategy is usually top management’s

passive short-term, and often self-serving response to

the situation.

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%etrenchment Strategies

l Pursue retrenchment strategies when has a wea$competitive position in some or all of its product lines

resulting in poor performance & sales are down and profitsare becoming losses

l Impose a great deal of pressure to impr ove per formance

l Strategies may include:

Ø urnaround Strategy

Ø Captive company strategy

Ø Sell-


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urnaround Strategy

l "mphasi+es the improvement of operational efficiencyand is probably most appropriate when a cor poration’s

problems are pervasive, but not yet critical

l wo basic phases of a turnaround strategy are:

Ø Contraction: initial effort to uic$ly “stop the bleeding” with a general across-the-board cutbac$ in si+e and costs

Ø

Consolidation: he second phase - implements aprogram to stabili+e the now-learner corporation. Plans aremade to deduce unnecessary overhead and to ma$efunctional activities cost (ustified

"xample: I=#’s effective use of turnaround strategy

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Captive Company Strategy

l Is the giving up of independence in exchange for security

l 4ormally becomes captive to one of its larger customers in

order to guarantee the company’s continued existence with

a long-term contract

"xample: Simpson Industries of =irmingham, #ichigan, allowedspecial teams of !eneral #otors to inspect its engine partsfacilities. In return, nearly >?@ of the company’s production wassold to !# through long-term contract

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Sell-


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Portfolio 'nalysis

l 'ids in the classification of a firms businesses for resourceallocation purposes and for selecting a competitive strategy

on the basis of growth potential of each business unit and of

the financial resources that will be either consumed or

produced by the business

l Product lines 1business units form a portfolio of separateinvestments that top management must constantly (uggle to

ensure the best return on the cor poration’s invested money

l wo most popular approaches of Portfolio 'nalysis:

Ø =C! !rowth-Share #atrixØ !" =usiness Screen

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=C! /=oston Consulting !roup0 !rowth-Share #atrix

l "ach of the cor poration’s product lines or business units isplotted on the matrix according to both the growth rate of theindustry in which it competes and its relative mar$et share

l he theory underlying the planning is the experience curve

l he experience curve suggests that the company with thelar gest share of an industry’s cumulative output will also be thelow-cost producer.

l he higher the relative mar$et share, the more profitable isthe business. his is the basis for using growth-share matrixfor strategic planning

l =C! !rowth-Share #atrix ..

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Euestion #ar$sSelecti#e in#estments$ %i#estiture & or

'ea( &irms or t)ose 'it) uncertainprospects an% lac( o& strategic & it

9>

9F

9?

G

B?

%elative #ar$et Share

=C! !rowth-Share #atr ix

3imitations of =C! #atrix

l he =C! model is simplisticH considers only twocompetitive environment factors& relative mar$et shareand industry growth rate.

l *igh relative mar$et share is no guarantee of acost savings or competitive advantage.

l 3ow relative mar$et share is not always an indicatorof competitive failure or lac$ of profitability.

l #ultifactor models /e.g., the #c2insey matrix0 arebetter though imperfect.

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Stars *ggressi#e in#estment to supportcontinue% gro't) an% consoli%atecompetiti#e position o& t)e &irms

I n d u s t r y ! r o w t h % a t e / @ 0

Cash CowsDogs

,In#estments su&&icient to maintaincompetiti#e position- .as) surpluses or liqui%ation an%use% in %e#eloping an% nurturing stars in%ustry e/it

an% selecte% question mar( &irms

9 ? x

9 . x

. 9 x

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!" /!eneral "lectric0 =usiness Screen

l

!" =usiness Screen, in contrast to the =C! !rowth-

Share #atrix, includes much more data in its two $ey

factors than (ust business growth rate and comparable

mar$et share

l or example: Industry attractiveness includes mar$etgrowth rate, industry profitability, si+e, pricing policies,

among other possible opportunities and threats

l =usiness strength or competitive position includesmar$et share, technological position, profitability, and si+e

among other possible strengths and wea$nesses

l !" =usiness Screen

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7inners 7inners C Euestion

*igh' =

;?@B?@ #ar$s

B@ D

7inners 'verage

#edium"

9B@

=usiness

F?@

B?@

3osers

3ow

Profit

Producers

3osers

!9@

*3osers

9?@

Strong 'verage7ea$

=usiness Strength1Competitive Position

!eneral "lectr ic’s =usiness Screen2

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I n

d u s t r y ' t t r a c t i v e n e s s


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Corporate Parenting

l )iews 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

l

!enerates corporate strategy by focusing on the core

strengths /competencies0 of the parent corporation and on the

value created from the relationship between the parent and its

businesses

l Primary (ob is to obtain synergy among business units byproviding needed resources to units, transfer s$ills and

capabilities among units, and by coordinating the activities of

shared unit functions to attain economies of scope

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Developing a Corporate Parenting Strategy

l irst, examine each business unit /or target firm in thecase of acuisition0 in terms of its critical success factors.

"mphasi+e its distinctive strengths /competence0 to ensure

competitive advantage

l Second, examine each business unit /or target firm0 in

terms of areas in which performance can be improved.

l hird, analy+e how well the parent corporation fits with the business unit /or target firm0.

Corporate headuarters must be aware of its own strengths

and wea$nesses in terms of resources, s$ills, and

capabilities.

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Parenting-it #atr ix

l Instead of describing business units in terms oftheir growth potential, competitive position, or

industry structure, the a matrix emphasi+es their fitwith the corporate parent

l Parent fit matrix composed of two dimensions:

Ø he positive contributions that the parent can ma$eØ he negative effects the parent can ma$e

l Combination of these two dimensions creates fivedifferent positions each with its own implications forcorporate strategy

l Parenting-it #atrix

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3ow

*eartland

=allast "dge of

*eartland

*igh

'lien erritory)alue rap

3ow *igh

FIT between parenting opportunities

and parenting cha racteristics

Parenting-it #atr ix32

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M I S F I T b e t w e e n c r i t i c a l s u c c e s s f a c t o r s

A n d p a r e n t i n g c h a r a c t e r i s t i c s


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l *eartland =usiness: *ave opportunities for impr ovementby the parent, and the parent understands their critical

success factors well

l "dge-of-the *eartland business: Some parentingcharacteristics fit the business,but others do not. Such

business units are li$ely to consume much of the parent’s

attention, as the parent tries to understand them better and

transform them into heartland businesses.

l =allast =usinesses: it very comfortably with the parent

corporation but contain very few opportunities to be improved

by the parent.

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l 'lien erritory =usinesses: *ave little opportunity to be

improved by the corporate parent, an a misfit exists between

the parenting characteristics and the unit’s critical factors

l )alue rap =usinesses: it well with parenting

opportunities, they are a misfit with the parent’s

understanding of the unit’s critical success factors

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Thank you

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Competitive Strength

*igh 3ow

Domina te/Divest

Joint Venture

Selective

Stra tegies

Portfolio #atrix for Plotting Products by Country36

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C o u n t r y ' t t r a c t i v e n e s s

* i g h

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l )ertical integration can be:=ac$ward Integration or orward Integration

"xample: #icron used forward integration when it expanded outits successful memory manufacturing business to ma$e andmar$et its own personal computers

l =ac$ward integration more profitable than for war d integration, but increases exit barriers

l )ertical growth is a logical strategy for a corporation orbusiness unit with a strong competitive position in highly

attractive industry & especially when technology is

predictable and mar$ets are growing

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)ertical integration can range from total ownership of the value

chain to no ownership at all. hus there can be:

l ull Integration: a firm internally performs 9??@ of value chain

l aper integration: internally produces less than half of reuirements

l Euasi-integration: does not ma$e any of its $ey supplies, but purchases

most of its reuirements from outside suppliers that are under its partial control

"xample: Purchasing B?@ of common stoc$ of In ocus System,#otorola guaranteed its access to In ocus to manufacture flat-panel video displays

l

3ong&term contracts: agreement between two to provide goods1services to each other for a specified period of time

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05. Strategy Formulation - Corporate Strategy

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