Strategy Formulation : Strategy Formulation : Corporate StrategyCorporate Strategy

Corporate StrategyCorporate Strategy

• Directional: orientation toward growthDirectional: orientation toward growth• Portfolio Analysis: coordination of cash among Portfolio Analysis: coordination of cash among

unitsunits• Corporate Parenting: building synergies among Corporate Parenting: building synergies among

units through resource sharingunits through resource sharing

Corporate Directional Corporate Directional StrategiesStrategies

• Stability

Pause/Proceed with Caution

No Change

Profit

• Growth

Concentration

Vertical Growth

Horizontal Growth

Diversification

Concentric

Conglomerate• Retrenchment

Turnaround

Captive Company

Sell-Out/Divestment

Bankruptcy/Liquidation

International Entry International Entry StrategiesStrategies

• ExportingExporting• LicensingLicensing• Joint venturesJoint ventures• AcquisitionsAcquisitions• Green-field developmentGreen-field development• Production sharingProduction sharing• Turnkey operationsTurnkey operations• BOT conceptBOT concept• Management contractsManagement contracts

Stability StrategiesStability Strategies

• Pause/Proceed with caution strategy : an Pause/Proceed with caution strategy : an opportunity to rest before continuing a growth or opportunity to rest before continuing a growth or a retrenchment strategya retrenchment strategy

• No-change strategy : to continue current No-change strategy : to continue current operations and do nothing newoperations and do nothing new

• Profit strategy : an attempt to artificially support Profit strategy : an attempt to artificially support profit by reducing investment and short term profit by reducing investment and short term discretionary expendituresdiscretionary expenditures

Retrenchment StrategiesRetrenchment Strategies

• Turnaround strategy : improve the operation Turnaround strategy : improve the operation efficiency. (contraction (stop the bleeding) and efficiency. (contraction (stop the bleeding) and consolidation (stabilize the leaner operation)consolidation (stabilize the leaner operation)

• Captive company strategy: giving up Captive company strategy: giving up independence in exchange for securityindependence in exchange for security

• Sell out : selling the entire firm to another firmSell out : selling the entire firm to another firm• Divestment : sell off a division with slow growth Divestment : sell off a division with slow growth

potentialpotential

• Bankruptcy : giving up the management of the Bankruptcy : giving up the management of the firm to the courts in exchange for some firm to the courts in exchange for some settlement of the company’s obligationssettlement of the company’s obligations

• Liquidation: the termination of a firmLiquidation: the termination of a firm

Portfolio AnalysisPortfolio Analysis

• Top management views its products line and Top management views its products line and business units as a series of investments from business units as a series of investments from which it expects a profitable returnwhich it expects a profitable return

• This concept can also be used to develop This concept can also be used to develop strategies for international marketsstrategies for international markets

• Two approaches for portfolio analysis:Two approaches for portfolio analysis:

1.1. BCG Growth-Share MatrixBCG Growth-Share Matrix

2.2. GE Business ScreenGE Business Screen

BCG Growth-Share MatrixBCG Growth-Share Matrix

• Is based on the product life cycle theory and the Is based on the product life cycle theory and the concept of the experience curveconcept of the experience curve

• Each of the corporation’s product lines or Each of the corporation’s product lines or business units is plotted on the matrix according business units is plotted on the matrix according to the growth rate of the industry in which it to the growth rate of the industry in which it competes and its relative market sharecompetes and its relative market share

• The matrix assumes that a growing market is The matrix assumes that a growing market is attractiveattractive

BCG Growth-Share MatrixBCG Growth-Share Matrix

Stars Question Marks

Cash Cows Dogs

22

20

18

16

14

12

10

8

6

4

2

0

10x

4x 2x1.

5x 1x

0.5x

0.4x

0.3x

0.2x

0.1x

Relative Competitive Position

Bus

ine

ss G

row

th R

ate

(P

erce

nt)

Source: B. Hedley, “Strategy and the Business Portfolio,” Long Range Planning (February 1997), p. 12. Reprinted with permission.

Limitations of the BCG Growth-Limitations of the BCG Growth-Share matrixShare matrix

• The use of highs and lows to form 4 categories is too The use of highs and lows to form 4 categories is too simplisticsimplistic

• The link between market share and profitability is The link between market share and profitability is questionablequestionable

• Growth rate is only one aspect of industry attractivenessGrowth rate is only one aspect of industry attractiveness• Product lines or business units are considered only in Product lines or business units are considered only in

relation to one competitor, the market leaderrelation to one competitor, the market leader• Market share is only one aspect of overall competitive Market share is only one aspect of overall competitive

positionposition

GE Business ScreenGE Business Screen

• It includes more data than the BCG growth –It includes more data than the BCG growth –share matrixshare matrix

• Includes 9 cells based on long-term industry Includes 9 cells based on long-term industry attractiveness and business attractiveness and business strength/competitive position strength/competitive position

• Industry attractiveness includes market growth Industry attractiveness includes market growth rate, industry profitability, size, pricing practicesrate, industry profitability, size, pricing practices

• Business strength includes market share, Business strength includes market share, technological position, profitability, sizetechnological position, profitability, size

General Electric’s Business General Electric’s Business ScreenScreen

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.

Limitations of GE Business Limitations of GE Business ScreenScreen

• It can get complicatedIt can get complicated• The numerical estimates of industry The numerical estimates of industry

attractiveness and business strength could be attractiveness and business strength could be subjective and vary from 1 person to anothersubjective and vary from 1 person to another

• It cannot effectively depict the position of new It cannot effectively depict the position of new products or business units in developing products or business units in developing industriesindustries

International Portfolio International Portfolio AnalysisAnalysis

• Based on 2 factors: country attractiveness and a product’s Based on 2 factors: country attractiveness and a product’s competitive strengthcompetitive strength

• Country attractiveness is composed of market size, Country attractiveness is composed of market size, market growth rate, extent and type of government market growth rate, extent and type of government regulationsregulations

• Product’s competitive strength is composed of its market Product’s competitive strength is composed of its market share, product fit, contribution margin and market supportshare, product fit, contribution margin and market support

• Depending on where the product fits on the matrix, it Depending on where the product fits on the matrix, it should receive more funding or be harvested for cashshould receive more funding or be harvested for cash

Portfolio Matrix for Plotting Products by Portfolio Matrix for Plotting Products by CountryCountry

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

Source: G. D. Harrell and R. O. Kiefer, “Multinational Strategic Market Portfolios,” MSU Business Topics (Winter 1981), p. 7. Reprinted by permission.

Advantages of Portfolio Advantages of Portfolio AnalysisAnalysis

• It encourages top management to evaluate each It encourages top management to evaluate each business unit and to set objectives and allocate business unit and to set objectives and allocate resources for eachresources for each

• Encourages the use of external data to Encourages the use of external data to supplement management judgementsupplement management judgement

• Studies cash flow availability for use in Studies cash flow availability for use in expansion and growthexpansion and growth

Limitations of Portfolio Limitations of Portfolio AnalysisAnalysis

• It is not easy to define product/market segmentsIt is not easy to define product/market segments• Standard strategies can miss opportunities or be Standard strategies can miss opportunities or be

impracticalimpractical• Is based on subjective judgmentIs based on subjective judgment• Industry attractiveness can be misleadingIndustry attractiveness can be misleading• May prevent corporations from improving the May prevent corporations from improving the

position of some viable products or business position of some viable products or business unitsunits

Corporate ParentingCorporate Parenting

• What business should the company own and What business should the company own and why?why?

• What organizational structure, management What organizational structure, management processes, and philosophy will foster superior processes, and philosophy will foster superior performance from the company’s business performance from the company’s business units?units?

Corporate ParentingCorporate Parenting

• It views the corporation in terms of resources and It views the corporation in terms of resources and capabilities that can be used to build business unit value capabilities that can be used to build business unit value as well as generate synergies across business unitsas well as generate synergies across business units

• Multi-business companies create value by influencing – or Multi-business companies create value by influencing – or parenting the businesses they ownparenting the businesses they own

• The best parent companies create more value than any of The best parent companies create more value than any of their rivals would if they owned the same business. their rivals would if they owned the same business.

• Those companies have parenting advantage Those companies have parenting advantage

Developing a Corporate Developing a Corporate Parenting StrategyParenting Strategy

1.1. Examine each business unit (or target firm to be Examine each business unit (or target firm to be acquired) in terms of its strategic factorsacquired) in terms of its strategic factors

2.2. Examine each business unit (or target firm) in Examine each business unit (or target firm) in terms of areas in which performance can be terms of areas in which performance can be improvedimproved

3.3. Analyze how well the parent corporation fits with Analyze how well the parent corporation fits with the business unitthe business unit

Parenting Fit MatrixParenting Fit Matrix

• Is composed of 2 dimensions: the positive Is composed of 2 dimensions: the positive contribution that the parent can make and the contribution that the parent can make and the negative effects the parent can makenegative effects the parent can make

• The combination of these two dimensions create The combination of these two dimensions create five positionsfive positions

Parenting-Fit MatrixParenting-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 Source: Adapted from M. Alexander, A. Campbell, and M. Goold, “A New Model for Reforming the Planning Review Process,” Planning Review (January/February 1995), p. 17. Reprinted by permission.

Horizontal Strategy and Multi- Horizontal Strategy and Multi- Point CompetitionPoint Competition

• Horizontal strategy : corporate strategy to Horizontal strategy : corporate strategy to achieve synergy among business units to achieve synergy among business units to improve their competitive positionimprove their competitive position

• Multi-point competition: when large multi Multi-point competition: when large multi business corporations compete with other large business corporations compete with other large multi business corporations in different markets, multi business corporations in different markets, the corporate parent may help its business unit the corporate parent may help its business unit to improve competitive position in a specific to improve competitive position in a specific marketmarket