Chapter Six

Strategy Formulation: Corporate Strategy

Chapter ObjectivesChapter Objectives

• To review key elements and issues that corporate strategy corporate strategy addresses:addresses:

Orientation toward growth (Directional Strategy)Orientation toward growth (Directional Strategy)

Coordination of cash among units (Portfolio Analysis)Coordination of cash among units (Portfolio Analysis)

Building synergies among units through resource sharing Building synergies among units through resource sharing (Corporate Parenting) (Corporate Parenting)

• To discuss the trade-offs between internally and externally-generated growth strategies and how these influence the success of international expansion efforts.

Directional StrategiesDirectional Strategies

• How does a company determine what its directional strategy should be?

• Three key questions for management:

1. Should we expand, cut back, or continue with our operations as they currently are?

2. Should we concentrate on our current activities or diversify?

3. If we want to expand (domestically or internationally), should we develop through internal or external methods?

Acquisitions

Mergers

Strategic alliances

GrowthGrowth

StabilityStability

RetrenchmentRetrenchment

Directional StrategiesDirectional Strategies

Concentration Strategies:• Vertical Integration: backward & forward options

Full integration Taper integration Quasi-integration Captive companies

• Horizontal Integration: The degree to which a firm operates in multiple geographic locations at the same point in a value chain (full/partial ownership or l.t. contracts).

Diversification Strategies:• Concentric: growth into related industry

Leverage product knowledge, manufacturing ability, marketing skills built in current industry.

Goal is to take advantage of synergies. Can use internal or external means.

• Conglomerate: Primary concerns are financial, smoothing seasonal cash flows. Current industry is unattractive Firms lacks skills that would be easily transferable to related industry

Directional Strategies: GrowthDirectional Strategies: Growth

International entry options include: exporting, licensing, jv’s, acquisitions, greenfield development, production sharing, turnkey operations, BOT operations, management contracts.

Directional Strategies: Stability Directional Strategies: Stability

Pause/Proceed with Caution:• A “time-out”• Management deliberately decides to wait until a situation is resolved or its

environment changes.

No Change: • Decision to do nothing, make no changes to operations, policies.• Often is not a conscious decision, but rather a strategy by default because of

the stability of a firm’s industry and low market growth prospects.• Firm expects little new competition.

Profit Strategy:• Decision to do nothing in a worsening situation & act as if problems are

temporary.• Artificially support profits by reducing investments & s.t. expenditures.• Used to get firm through temporary, difficult period.• Can become seductive & leave firm in worse position.

Stability strategies are popular with successful companies operating in predictable environments, specifically those in niche markets (I.e. family businesses). Can be useful short-term.

Directional Strategies: Retrenchment Directional Strategies: Retrenchment

Turnaround:• Focus on improvement of operational efficiency. Two phases:

Contraction: Initial effort to “stop the bleeding” with general, across-the-board cutbacks in size & cost.

Consolidation: Implementation of a program to stabilize the “leaner” firm. Critical phase – threat of loss of best employees. See p. 149 for IBM’s 1990s turnaround strategy.

Captive Company: Giving up independence in exchange for security of captive customer.

Sell-out/Divestment: • Sell-out: Leave industry entirely. A good option if firm can attract good value.• Divestment: Sell division with low growth potential, other problems.

Bankruptcy/Liquidation: • Bankruptcy: Giving management control to courts to settle financial obligations.

Often leaves firms stronger and able to compete in focused industry.• Liquidation: Termination of a firm by converting saleable assets to cash to be

distributed to shareholders after lenders.

Pursued when a company has weak competitive position in some or all of its businesses- lower sales and profitability.

Portfolio AnalysisPortfolio Analysis

The process top management must undertake to determine how various product lines and business units should be managed for the best performance levels.

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• To view a firm’s businesses through a financial screen, regarding business units To view a firm’s businesses through a financial screen, regarding business units and products as separate and individual investments.and products as separate and individual investments.

• Corporate HQ plays role of internal banker.Corporate HQ plays role of internal banker.

• Corporate HQ reviews each business unit/product line to determine expected Corporate HQ reviews each business unit/product line to determine expected returns.returns.

Business units and divisions are juggled for overall profit maximization.Business units and divisions are juggled for overall profit maximization.

They are usually assigned “roles” in the portfolioThey are usually assigned “roles” in the portfolio

• Two popular approaches: Two popular approaches: BCG Growth-Share MatrixBCG Growth-Share Matrix GE Business ScreenGE Business Screen

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 (firm’s market share/share of largest competitor)

Ind

us

try

Gro

wth

Rat

e

(Per

cen

t)

Drawbacks• Assumes market share is key to high profitability.

• Too simplistic.

• Focus only on industry growth and market share.

• Ignores all but market leader.

General Electric’s Business ScreenGeneral 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

Ind

us

try

Att

ract

iven

ess

Industry Attractiveness

• Market growth rate

• Industry profitability

• Size

• Pricing practices

Bus. Strength/Comp. Position

• Market share

• Technological position

• Profitability

• SizeDrawbacks

• Complicated, cumbersome

• Subjective judgments appear to be objective b/c of numbers assigned

• Cannot incorporate positions of new products/businesses in developing industries

International Portfolio AnalysisInternational Portfolio Analysis

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

Country Attractiveness

• Market size

• Market growth rate

• Gov’t regulation

• Econ/political factors

Product Competitive Strengths

• Market share

• Product fit

• Contribution margin

• Market support

Portfolio Analysis: Advantages & LimitationsPortfolio Analysis: Advantages & Limitations

Advantages:

• Encourages HQ mgmt. to evaluate each business unit individually, setting objectives and allocating resources for each.

• Stimulates the use of externally-oriented data to supplement mgmt’s judgment.

• Raises issue of cash flow availability to expansion and growth uses.

• Facilitates communication (graphic nature)

Limitations:

• May be difficult to define product and market segments.

• Suggests the use of standard strategies that may not be relevant.

• Inputs and results may appear to be objective.

• Value-laden terms may be self-fulfilling prophecies.

• No clarity in what makes an industry attractive or where product is in life cycle.

• Does not obviate the need for all levels of mgmt to use market and product knowledge and not blindly accept results of such analyses.

Corporate ParentingCorporate Parenting

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

• Two questions HQ management must address:

1. What businesses should this company own and why?

2. What organizational structure, management processes, and philosophy will foster superior performance in and across business units?

• Focus is on core competencies of the parent and synergies of relationship between parent and subsidiaries.

Parent’s role is to obtain synergies among business units by:

Providing necessary resources to units

Transferring skills/capabilities among units

Coordinating share unit functions to achieve economies of scope

• Useful for:

Deciding on new businesses to acquire.

How to manage each existing business unit.

Corporate ParentingCorporate Parenting

• To determine appropriate corporate strategy, Parco follows three steps:

1. Examine each business unit (or acquisition target) in terms of its critical success factors.

• Elements of a company that determine success or failure

• Emphasize distinctive competences/competitive advantage

2. Examine each business unit (or acquisition target) in terms of areas in which performance can be improved. Because of objectivity, HQ may be able to spot such areas better than business unit mgmt.

• Opportunities for economies of scope (in functional area)

• Transfer or parent skill to business units

• Transfer of human resources among business units

3. Analyze how well Parco fits with business unit/acquisition target

• Parco must know own strengths & weaknesses

• Must also be able to determine misfits with business units/targets

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 c

riti

cal

succ

ess

fac

tors

and

par

en

tin

g c

har

act

eris

tic

s

Ballast

Value Trap

Emphasizes businesses’ fit with Parco in terms of positive or negative Parco contributions.

ConclusionsConclusions

Top management must continually scan the internal and external environments to create and maintain the best composition of business

units and product/service lines as well as the most appropriate individual strategies for those businesses.

This ensures that the firm creates and manages an overall strategy that best utilizes the firm’s resources and maximizes shareholder value.