Chapter 6 Strategy Formulation Corporate Strategy Dr Vijaya

Chapter 6 Strategy Formulation: Corporate Strategy Dr. Vijaya Kumar Skyline College 1

Corporate Strategy Three Key Issues: • • • Firm’s directional strategy Firm’s portfolio strategy Firm’s parenting strategy 2

Corporate Directional Strategies 3

Corporate Strategy 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? 4

Corporate Strategy Directional Strategy: – Three Grand Strategies: • Growth strategies • Stability strategies • Retrenchment strategies 5

Corporate Strategy 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. 6

Corporate Strategy 2 Basic Growth Strategies: – Concentration – Current product line in one industry – Diversification – Into other product lines in other industries 7

Corporate Strategy Basic Concentration Strategies: – Vertical growth – Horizontal growth 8

Corporate Strategy Concentration: Vertical growth – Vertical integration • Full integration • Taper integration • Quasi-integration – Backward integration – Forward integration 9

Corporate Strategy Concentration: Horizontal Growth – Horizontal integration 10

Corporate Strategy Basic Diversification Strategies: – Concentric Diversification – Conglomerate Diversification 11

Corporate Strategy Diversification: Concentric: – Growth into related industry – Search for synergies 12

Corporate Strategy Diversification: Conglomerate: – Growth into unrelated industry – Concern with financial considerations 13

Corporate Strategy International Entry Options Exporting Licensing Franchising Joint Ventures Acquisitions Green-Field Development Production Sharing Turnkey Operations BOT Concept Management Contracts 14

Corporate Strategy Stability Strategies: – Pause/proceed with caution – No change – Profit strategies 15

Corporate Strategy Retrenchment Strategies: – Turnaround – Captive Company Strategy – Selling out – Bankruptcy – Liquidation 16

Corporate Strategy 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? 17

Corporate Strategy Portfolio Analysis BCG (Boston Consulting Group) Matrix – Product life cycle and funding decisions • • Question marks Stars Cash cows Dogs 18

BCG Matrix 19

GE Business Screen Long-term industry attractiveness Business strength/competitive position 20

General Electric’s Business Screen High Winners A Winners B C Question Marks Industry Attractiveness D Winners E Medium Average Businesses F Losers G Low Profit Producers Strong H Losers Average Weak Source: Adapted from Strategic Management in GE, Corporate Planning and Development, General Electric Corporation. Used by permission of General Electric Company. Business Strength/Competitive Position 21

International Portfolio Analysis 2 Factors: • Country’s attractiveness • Market size, rate of growth, regulation • Competitive strength • Market share, product fit, contribution margin, market support 22

Portfolio Matrix for Plotting Products by Country Attractiveness High Competitive Strengths High Low Invest/Grow Dominate/Divest Joint Venture Low Selective Strategies Harvest/Divest Combine/License 23

Corporate Strategy 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 24

Corporate Strategy Portfolio Analysis Disadvantages: – Difficult to define product/market segments – Standard strategies can miss opportunities – Illusion of scientific rigor – Value-laden terms 25

Corporate Strategy 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. 26

Corporate Strategy Corporate Parenting: • Strategic factors – Those elements of a company that determine its strategic success or failure • • Performance improvement Analyze fit 27

Corporate Strategy Corporate Parenting: • Parenting-Fit Matrix – Summarizes the various judgments regarding corporate/business unit for the corporation as a whole. 28

Corporate Strategy Corporate Parenting: • Parenting-Fit Matrix – 2 Dimensions • Positive contributions parent can make • Negative effects parent can have 29

Parenting-Fit Matrix MISFIT between critical success factors and parenting characteristics Low Heartland Ballast Edge of Heartland Alien Territory Value Trap High Low High FIT between parenting opportunities and parenting characteristics 30

Corporate Strategy 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. 31