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Strategy Formulation:Corporate Strategy
1
Corporate Strategy 2
Three Key Issues:
Firm’s directional strategy Firm’s portfolio strategy Firm’s parenting strategy
Corporate Directional Strategies
3
Corporate Strategy 4
Directional Strategy: Orientation toward growth
Expand, cut back, status quo? Concentrate within current industry,
diversify into other industries? Growth and expansion through internal
development or acquisitions, mergers, or strategic alliances?
Corporate Strategy 5
Directional Strategy: Three Grand Strategies:
Growth strategies Stability strategies Retrenchment strategies
Corporate Strategy 6
Growth Strategies: Most widely pursued strategies External mechanisms:
Mergers Transaction involving two or more firms in which
stock is exchanged but only one firm survives. Acquisition
Purchase of a firm that is absorbed as an operating subsidiary of the acquiring firm.
Strategic Alliance Partnership of two or more firms to achieve
strategically significant objectives that are mutually beneficial.
Corporate Strategy 7
2 Basic Growth Strategies:
Concentration– Current product line in one industry
Diversification– Into other product lines in other
industries
Corporate Strategy 8
Basic Concentration Strategies:
Vertical growth
Horizontal growth
Corporate Strategy 9
Concentration:
Vertical growth
Vertical integration Full integration Taper integration Quasi-integration
Backward integration
Forward integration
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Benefits of Vertical Integration reduces or eliminates costs of buying and selling
(Transaction Costs) smoother, more efficient operation
Limits to Vertical Integration Differences in minimum efficient scale in
vertically integrated corporation. Must remain innovative in all Value Chain
activities. Possible incompatibilities between managerial
skills and corporate cultures that make upstream and downstream activities successful.
Corporate Strategy 11
Concentration:
Horizontal Growth
Horizontal integration Coordinating across the same or
similar value chain activities.
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Horizontal Integration Benefits: Corporate managers have expertise to
recognize undervalued stocks that many individual investors would miss.
Corporations have economies of scale for financing acquisitions that individuals do not.
Horizontal Integration Costs: Conglomerate discount: value of stock of
conglomerate sells for less than total value of individual stocks.
Takeover premiums: corporations usually pay a premium over the normal trading price of the target’s stock.
Corporate Strategy 13
Basic Diversification Strategies:
Concentric Diversification
Conglomerate Diversification
Corporate Strategy 14
Diversification:
Concentric:
Growth into related industry Related-Diversified Firm: Less than 70 percent of firm revenues comes from a single business unit, and different business units share numerous links and common attributes.
Search for synergies
Corporate Strategy 15
Diversification:
Conglomerate:
Growth into unrelated industry Less than 70% of firm revenues comes from a single
business, and there are few, if any, links or common attributes among businesses.
Concern with financial considerations
Corporate Strategy 16
InternationalEntry
Options
ExportingLicensing
FranchisingJoint Ventures
AcquisitionsGreen-Field Development
Production SharingTurnkey Operations
BOT ConceptManagement Contracts
Corporate Strategy 17
Stability Strategies:
Pause/proceed with caution
No change
Profit strategies
Corporate Strategy 18
Retrenchment Strategies:
Turnaround
Captive Company Strategy
Selling out
Bankruptcy
Liquidation
Corporate Strategy 19
Portfolio Analysis
How much of our time and money should we spend on our best products to ensure that they continue to be successful?
How much of our time and money should we spend developing new costly products, most of which will never be successful?
Corporate Strategy 20
Portfolio Analysis
BCG (Boston Consulting Group) Matrix Product life cycle and funding decisions
Question marks Stars Cash cows Dogs
BCG Matrix
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GE Business Screen22
Long-term industry attractiveness
Business strength/competitive position
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General Electric’s Business Screen
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.
International Portfolio Analysis
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2 Factors:
Country’s attractiveness• Market size, rate of growth, regulation
Competitive strength• Market share, product fit, contribution
margin, market support
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Portfolio Matrix for Plotting Products by Country
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
Corporate Strategy 26
Portfolio Analysis
Advantages: Top management evaluates each of firm’s
businesses individually Use of externally-oriented data to
supplement management judgment Raises issue of cash flow availability Facilitates communication
Corporate Strategy 27
Portfolio Analysis
Disadvantages: Difficult to define product/market
segments Standard strategies can miss
opportunities Illusion of scientific rigor Value-laden terms
Corporate Strategy 28
Corporate Parenting:
Views 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.
Corporate Strategy 29
Corporate Parenting:
Strategic factors Those elements of a company that
determine its strategic success or failure Performance improvement Analyze fit
Corporate Strategy 30
Corporate Parenting:
Parenting-Fit Matrix Summarizes the various judgments
regarding corporate/business unit fit for the corporation as a whole.
Corporate Strategy 31
Corporate Parenting:
Parenting-Fit Matrix 2 Dimensions
• Positive contributions parent can make• Negative effects parent can have
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Parenting-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
Corporate Strategy 33
Horizontal Strategy: Corporate strategy that cuts across
business unit boundaries to build synergy across business units to improve the competitive position of one or more business units.