Chapter 7 Strategy Formulation; Corporate Strategy

CHAPTER 7

STRATEGY FORMULATION;CORPORATE STRATEGY

STRATEGIC MANAGEMENT AND BUSINESS POLICY

11th Edition

Thomas L. Wheelen

J. David Hunger

Corporate Strategy 2

In Alice’s Adventure in Wonderland, Alice asks the Cheshire cat, “Would you tell me please, which way I ought to go from here?” “That depends a good deal on where you want to go to”, says the cat.

Strategies in Action

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THERE IS NO GOOD OR POOR STRATEGY…

BUT THERE IS AN APPROPRIATE STRATEGY

Strategies in Action

Corporate Strategy

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-- Establishing long-term objectives-- Generating alternative strategies-- Selecting strategies to pursue-- Best alternative - achieve mission & objectives

Nature of Strategy Analysis & Choice

Strategy Analysis & Choice

Corporate Strategy

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Vision Mission Objectives External audit Internal audit Past successful strategies


Alternative Strategies Derive From --

Corporate Strategy

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Generating Alternatives --

Participation in generating alternative strategies should be as broad as possible

Corporate Strategy

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Corporate Strategy Vs. Business Strategy

Walt Disney

Corporate strategy evaluates whether the corporation should own theme parks, restaurants, movie production, and how the corporation can add value to each of these individual business.

Corporate Strategy

Business strategy analyzes each individual business of Disney relative to its’ competitors, e.g. ABC, one of Disney’s TV networks need a business strategy to succeed against NBC, FOX,…etc.

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Types of Strategies

(A)IntegrationStrategies

1. Forward Integration

2. BackwardIntegration

3. HorizontalIntegration

Corporate Strategy

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Integration Strategies

Gain Control Over --

Distributors

Suppliers

Competitors

When a company expands its business functions into areas that are at different points of the same production path

Corporate Strategy

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Forward Integration Strategies

Gain Control Over --

Distributors

Retailers


Corporate Strategy

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Forward Integration Strategies

Guidelines --Current distributors – expensive or unreliable

Availability of quality distributors – limited

Firm competes in industry expected to grow markedly

Firm has both capital & HR to manage new business of distribution

Current distributors have high profit margins


Corporate Strategy

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Backward Integration Strategies

Ownership or Control --

Firm’s suppliers


Corporate Strategy

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Backward Integration Strategies

Guidelines --Current suppliers – expensive or unreliable

# of suppliers is small; # competitors is large

High growth in industry sector

Firm has both capital & HR to manage new business

Stable prices are important

Current suppliers have high profit margins


Corporate Strategy

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Horizontal Integration Strategies

Ownership or Control --

Firm’s competitors


Used as a growth strategy, eg. M&A, takeover.

Corporate Strategy

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Horizontal Integration Strategies

Guidelines --Gain monopolistic characteristics w/o federal government challenge

Competes in growing industry

Increased economies of scale – major competitive advantages

Faltering due to lack of managerial expertise or need for particular resource


Corporate Strategy

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Types of Strategies

(B)IntensiveStrategies

4. MarketPenetration

5. MarketDevelopment

6. ProductDevelopment

Corporate Strategy

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Intensive Strategies

Intensive Efforts --

Improve competitive position with existing products

Corporate Strategy

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Market Penetration Strategies

Increased Market Share of--

Present products/services

Present markets

Greater marketing efforts


Corporate Strategy

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Market Penetration Strategies

Guidelines --

Current markets not saturated

Usage rate of present customers can be increased significantly

Shares of competitors declining; industry sales increasing

Increased economies of scale provide major competitive advantage


Corporate Strategy

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Market Development Strategies

New Markets --

Present products/services to new geographic areas


Corporate Strategy

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Market Development Strategies

Guidelines --

New channels of distribution – reliable, inexpensive, good quality

Firm is successful at what it does

Untapped/unsaturated markets

Excess production capacity

Basic industry rapidly becoming global


Corporate Strategy

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Product Development Strategies

Increased Sales --

Improving present products/services

Developing new products/services


Corporate Strategy

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Product Development Strategies

Guidelines --Products in maturity stage of life cycle

Industry characterized by rapid technological development

Competitors offer better-quality products @ comparable prices

Compete in high-growth industry

Strong R&D capabilities


Corporate Strategy

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Types of Strategies

(C)Diversification

Strategies

7. ConcentricDiversification

8. ConglomerateDiversification

9. HorizontalDiversification

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Diversification Strategies

The diversification strategies include:

•internal development of new products or markets,

•acquisition of a firm,

•alliance with a complementary company,

•licensing of new technologies.

Corporate Strategy

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Concentric Diversification Strategies

The addition of new & related products/services which have technological/commercial synergy with current products/services, and which will appeal to new customer groups.

The objective is to benefit from synergy effects due to the complementarities of activities, thus expand the firm’s market by attracting new groups of buyers.


A related diversification strategy

Corporate Strategy

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Concentric Diversification Strategies

Guidelines --Compete in no/slow growth industry

New & related products enhances sales of current products

New & related products offered at competitive prices

Current products—decline stage of product life cycle

Strong management team


Corporate Strategy

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Conglomerate Diversification Strategies

Marketing of new & unrelated products/services that have no technological/commercial synergies with current products, but which may appeal to new groups of customers.

The strategy has little relationship with the firm’s current business. Therefore, the reasons of adopting the strategy: - to improve the profitability of the company, - to get a better reception in markets as the company gets bigger.


An unrelated diversification strategy

Corporate Strategy

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Conglomerate Diversification Strategies

Guidelines --

Declining annual sales & profits

Capital & managerial ability to compete in new industry

Financial synergy between acquired and acquiring firms

Current markets for present products - saturated


Corporate Strategy

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Horizontal Diversification Strategies

Addition of new & unrelated products/services that are technologically/commercially unrelated to current products, but which may appeal to current customers.


An unrelated diversification strategy

Corporate Strategy

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Horizontal Diversification Strategies

Guidelines --

Adding new products/services would significantly increase revenues

Highly competitive and/or no-growth industry; low margins & returns

Current distribution channels can be used

New products have counter cyclical sales patterns


Corporate Strategy

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Types of Strategies

(D)DefensiveStrategies

10. Retrenchment

11. Divestiture

12. Liquidation

Corporate Strategy

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Retrenchment Strategies

Sometimes called Turnaround or Reorganizational strategy

Regrouping --Cost & asset reduction to reverse declining sales & profit, thus strategists work with limited resources.

Defensive Strategies

Bankruptcy- an effective retrenchment strategy to avoid major debt obligations.

Corporate Strategy

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Retrenchment Strategies

Guidelines --Failed to meet objectives & goals consistency; has distinctive competencies

Firm is one of weaker competitors

Inefficiency, low profitability, poor employee morale, pressure for stockholders

Strategic managers have failed

Rapid growth in size; major internal reorganization necessary


Corporate Strategy

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Divestiture Strategies

Selling a division or part of an organization.

Used to raise capital for further strategic investments.


Corporate Strategy

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Divestiture Strategies

Guidelines --Retrenchment failed to attain improvements

Division needs more resources than are available

Division responsible for firm’s overall poor performance

Division is a mis-fit with organization

Large amount of cash is needed and cannot be raised through other sources


Corporate Strategy

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Liquidation Strategies

Company’s assets, in parts, for their tangible worth

Better to cease operating than to continue losing sums of money

Selling


Corporate Strategy

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Liquidation Strategies

Guidelines --

Retrenchment & divestiture failed

Only alternative is bankruptcy

Minimize stockholder loss by selling firm’s assets


Corporate Strategy

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Strategic Examples

ForwardIntegration

Doll maker & mail order firm, Pleasant Co., opened a retail store in Manhattan

BackwardIntegration

McDonalds recently acquired a paper cup producer

HorizontalIntegration

Callaway Golf recently acquired Top-Flite Golf Company

Corporate Strategy

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Strategic Examples

MarketPenetration

SABMiller Plc spent $500 million in 2003 on marketing its Miller brands of beer

Market Development

JetBlue is adding dozens of new routes

ProductDevelopment

GM developing hydrogen powered automobiles or Pfizer developing a new antismoking pill

Corporate Strategy

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Strategic Examples

ConcentricDiversification

Microsoft launched its first personal computers that double as entertainment centers

ConglomerateDiversification

The video-rental firm Blockbuster may acquire the DVD and music direct-marketing firm Columbia House

HorizontalDiversification

Viacom acquired Comedy Central, from AOL

Corporate Strategy

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Strategic Examples

RetrenchmentAmerica West Airlines closing its hub at Columbus, Ohio and laying off 390 employees

DivestitureConocoPhillips recently sold its Circle K convenience store chain to Alimentation Couche-Tard, a Canadian firm

LiquidationSprint liquidated its Web-hosting division

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A strategic management tool used to determine what type of corporate strategy a company should undertake

Strategic Position & ACtion Evaluation (SPACE) Matrix

Corporate Strategy

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SPACE MatrixFS

+6

+1

+5+4+3

+2

-6

-5

-4

-3

-2

-1-6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6

ES

CA IS

Conservative Aggressive

Defensive Competitive

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SPACE DimensionsFinancial Strength Ratings

ROI 1.0

Leverage 1.0

Liquidity 3.0

Working capital 4.0

Total 9.0

Industry Strength

Growth potential 4.0

Profit potential 2.0

Technological know-how 4.0

Total 10.0

Corporate Strategy

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SPACE Dimensions

Environmental Stability Ratings

Competitive pressure -4.0

Price elasticity -5.0

Price range of competing products -4.0

Total -13.0

Competitive Advantage

Market share -2.0

Product Quality -5.0

Product life cycle -2.0

Total -9.0

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SPACE Matrix

Steps required to develop a SPACE Matrix are as follows:

1. Select a set of variables to define the financial strength (FS), competitive advantage (CA), environmental stability (ES), and industry strength (IS).

2. Assign a numerical value ranging from +1 (worst) to +6 (best) to each of the variables that make up the FS and IS dimensions. Assign a numerical value ranging from -1 (best) to -6 (worst) to each of the variables that make up the ES and CA dimensions. On the FS and CA axes, make comparisons to competitors. On the IS and ES axes, make comparisons to other industries.

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SPACE Matrix


3. Compute an average score for FS, CA, IS and ES by summing the values given to variables of each dimension and then by dividing by the number of variables included in the perspective dimensions.

4. Mark the average scores for FS, IS, ES, and CA on the appropriate X&Y axis in the SPACE Matrix.

5. Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on y.

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SPACE Matrix


6. Draw a directional vector form the origin of the space Matrix through the new intersection point. The vector reveals the type of strategies recommended for the organization:

a) Aggressive,

b) Competitive.

c) Defensive, and

d) Conservative.

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SPACE Matrix

Aggressive strategies :

Mkt. penetration, mkt. development, product development, backward/forward/horizontal integration, conglomerate/concentric/horizontal diversification.

Conservative strategies:

Mkt. penetration, mkt. development, product development, & concentric diversification.

Defensive strategies:

Retrenchment, divestiture, & liquidation. Competitive strategies:

Backward/forward/horizontal integration, mkt. penetration, mkt. development, product development,

Suggested strategies

Corporate Strategy

Chapter 7 Strategy Formulation; Corporate Strategy

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Transcript of Chapter 7 Strategy Formulation; Corporate Strategy