Strategy Formulation

Corporate strategy

Corporate Strategy

• is primarily about the choice of direction for the firm as a whole (small one-product company and a large multi business company)

• is also about managing various product lines and business units for maximum value (large multi business company)

Corporate Strategy

3 Key Issues –

The firm’s overall orientation toward growth, stability or retrenchment (directional strategy)

The industries or markets in which the firm competes through its products and BU (portfolio strategy)

The manner in which management coordinates activities, transfer resources, and cultivates capabilities among product lines and BUs (parenting strategy)

Corporate Directional Strategy

Orientation toward growth

Expansion, contraction, status quo

Concentration or diversification

Internal development or acquisitions, mergers, or alliances

Corporate Level Strategy

3 Grand Strategies

EXPANSION/GROWTH•Through

Concentration•Through Integration

•Through Internationalization

STABILITY•No Change Strategies

•Pause/Proceed with caution

•Profit Strategies

RETRENCHMENT•Turnaround

•Divestment/ Sell out

•Liquidation

Combination Strategy

Other than growth, stability & retrenchment there is one more strategy named as Combination Strategy

It is followed when an organization adopts a mixture of growth, stability & retrenchment strategies

E.g.– A paints company augments its offering of decorative paints to provide a wider variety to its customers (stability) & expands its product range to include industrial & automotive paints (expansion). Simultaneously, it decides to close down the division which undertakes large scale painting contract job ( retrenchment)

Corporate Directional Strategy

Growth/ Expansion Strategies --

A corporation can grow internally by expanding its operation both globally and domestically, or it can grow externally

Growth Strategies

Mergers (Allied Corporation+ Signal Companies= Allied Signal)

Acquisitions (Procter & Gamble acquisition of Richardson-Vicks knowing for Oil of Olay brand)

Strategic alliances

Concentration Strategies:

i. Market Penetration – aggressively targeting current markets with existing product specialties

ii. Market Development/Geographic Expansion – expanding into new markets

iii. Market Segmentation – dividing existing

markets

iv. Product Development – modify existing

products, or develop new but related

products

Integration Strategies

Vertical integration Full integration (100% suppliers +controls

distributors) Quasi-integration (buy/sell from outside

suppliers/distributors that under its partial control) Long-term contract

Backward integration Forward integration Horizontal Integration

Is a logical strategy for a corporation or BU with a strong competitive position in a highly attractive industry

Diversification Strategies –

Concentric Diversification – when a firm has a strong competitive position but industry attractiveness is low Growth into related industry Search for synergies

Conglomerate diversification – when industry is unattractive and a firm lacks outstanding abilities and skills Growth into unrelated industry Concern with financial considerations

Risks of Diversification:

Diversification, especially unrelated, is a complex strategy to formulate & implement

It demands a wide variety of skills It might result in decreasing commitment to a

single business It often does not result in the promised rewards It increases the administrative costs of

managing, integrating & controlling a wide portfolio of business

International Entry Options --

Exporting Licensing Franchising Joint Ventures Acquisitions Production Sharing Turnkey Operation BOT Concept (Build, Operate, Transfer) Management Contracts

2. Stability Strategies --

Pause/proceed with caution (timeout before continuing growth or retrenchment)

No change (to do nothing new)

Profit strategies (to support profits by reducing investments and short-term expenditures)

3. Retrenchment Strategies --

Turnaround Selling out Divestment Liquidation

Corporate Strategy

Portfolio Analysis --

Resource commitment on best products to ensure continued success

Resource commitment on new costly products high risk

BCG Matrix

The BCG model is a well-known portfolio management tool used in Product life cycle theory that was invented in the early 1970’sby the Boston Consulting Group. The BCG model can be used to determine what priorities should be given in the product portfolio of a business unit.Placing products in the BCG model results in 4 categories in a portfolio of a company.

1. Stars

2. Question Marks

3. Cash Cows

4. Dogs

-high growth, high market share

-high market share in a growing market

-generate large amounts of cash because of their strong relative market share, but also consume a lot of cash due to their growth rate

-If market share is kept, Stars are likely to grow into cash cows

-These products are in growing markets but have low market share.

-Question marks are essentially new products where buyers have yet to discover them.

-The marketing strategy is to get markets to adopt these products.

- Question marks have high demands and low returns due to low market share.

- These products need to increase their market share quickly or they become dogs.

-- The best way to handle Question marks is to either invest heavily in them to gain market share or to sell them.

-Cash cows are in a position of high market share in a mature market.

- If competitive advantage has been achieved, cash cows have high profit margins and generate a lot of cash flow.

-Because of the low growth, promotion and placement investments are low.

- Investments into supporting infrastructure can improve efficiency and increase cash flow more.

- Cash cows are the products that businesses strive for.

-Dogs are in low growth markets and have low market share.

-Dogs should be avoided and minimized.

- Expensive turn-around plans usually do not help.

BCG Matrix

Limitations:

Too simplistic The link between market share and profitability is

questionable Growth rate is only one aspect of industry

attractiveness Product lines or business units are considered in

relation to the one market leader Market share is only one aspect of overall

competitive position

GE/McKinsey Matrix

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

Business strengths reflect market share, technological advantage, product quality, operating costs, and price competitiveness.

Industry attractiveness reflects market size and growth, capital requirements and competitive intensity.

Both business strength and industry attractiveness are categories as low, medium, and high.

Combining the business strength and industry attractiveness variables yields a nine-cell matrix that identifies business units as “winners,” “question marks,” “average businesses,” “profit producers,” or “losers.”

GE/McKinsey Matrix

Limitations:

It can get quite complicated and cumbersome The numerical estimates of industry attractiveness

and business strength/competitive position give the appearance of objectivity, but they are in reality subjective judgments

It cannot effectively depict the positions or business units in developing industries

GE/McKinsey Matrix

Portfolio Analysis

Advantages of portfolio analysis:

It encourages top management to evaluate each of the businesses individually and set objectives and allocate resources for each.

It stimulates the use of externally oriented data to supplement management’s judgment.

It raises the issue of cash flow availability for use in expansion and growth.

Its graphic depiction facilitates communication.

Portfolio Analysis

Limitations of portfolio analysis:

It is not easy to define product/market segments. It suggests the use of standard strategies that can

miss opportunities or be impractical. It provides an illusion of scientific rigor when in

reality positions are based on subjective judgments. It is not always clear what makes an industry

attractive or where a product is in its life cycle.

Corporate Strategy

Corporate Parenting Strategy --

Strategic factors

Performance improvement

Analyze fit

Corporate Parenting

Value creation only occurs under three conditions:

the parent sees an opportunity for a business to improve performance and a role for the parent in helping to grasp the opportunity

the parent has the skills, resources and other characteristics needed to fulfill the required role

the parent has sufficient understanding of the business and sufficient discipline to avoid other value-destroying interventions.

Corporate Parenting

Developing a corporate parenting strategy includes

3 steps:

To examine each BU in terms of its strategic factors. To examine each BU in terms of areas in which

performance can be improved. To analyze how well the parent corporation fits with

the BU.