Strategy Formulation Corporate Strategy

8/3/2019 Strategy Formulation Corporate Strategy

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Strategy FormulationStrategy Formulation

Corporate strategyCorporate strategy

Prof. Rushen Chahal


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Corporate Strategy

is primarily about the choice of direction

for the firm as a whole (small one-productcompany and a large multi business company)

is also about managing various product

lines and business units for maximum

value (large multi business company)


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Corporate Strategy

3 Key Issues

The firms 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)


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Corporate Directional Strategy

Orientation toward growth

Expansion, contraction, status quo

Concentration or diversification

Internal development or acquisitions,

mergers, or alliances


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3 Grand Strategies


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1. Growth Strategies --A corporation can grow internally by expandingits operation both globally and domestically, orit can grow externally


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1. Growth Strategies --

External mechanisms:

Mergers (Allied Corporation+ Signal Companies=

Allied Signal)

Acquisitions (Procter & Gamble acquisition of

Richardson-Vicks knowing for Oil of Olay andVidal Sassoon brands)

Strategic alliances


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1. Growth Strategies --

Main advantages: May mask flaws in a company

Provide a big cushion for turnaround in case astrategic error is made

Give more bargaining power

Offermore opportunities for advancement,

promotion, and interesting jobs

2Basic forms: Concentration

Diversification


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Basic Concentration Strategies

Vertical Growth -- Vertical integration

Full integration (100% suppliers +controls

distributors)

Taper integration (


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Horizontal Growth / Concentration --

by expanding the firms products into other

geographic locations and/or by increasing

the range ofproducts and services offeredto current markets.

Horizontal integration

Full to partial ownership Long-term contracts

Basic Concentration Strategies


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Basic Diversification Strategies

Concentric Diversification when a firm has astrong competitive position but industryattractiveness is low Growth into related industry

Search for synergies

Conglomerate diversification when industry

is unattractive and a firm lacks outstandingabilities and skills Growth into unrelated industry

Concern with financial considerations


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Growth into areas related to a companyscurrent product lines is generally moresuccessful than is growth in completelyareas.

From successful growth projects: 80% vertical growth

50% horizontal growth

35% concentric diversification 28% conglomerate diversification


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International Entry Options --

Exporting

Licensing

Franchising

JointVentures

Acquisitions

Green-Field Development

Production Sharing

Turnkey Operation BOT Concept (Build, Operate, Transfer)

Management Contracts


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2. Stability Strategies --

Pause/proceed with caution (timeout

before continuing growth or retrenchment)

No change (to do nothing new)

Profit strategies (to support profits byreducing investments and short-term

expenditures)


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3. Retrenchment Strategies --

Turnaround

Captive Company Strategy

Selling out

Divestment

Bankruptcy Liquidation


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Corporate Strategy

PortfolioAnalysis --

Resource commitment on best

products to ensure continued success

Resource commitment on new costly

products high risk


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BSG Matrix


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BSG Matrix

Stars are high market share/high growth businesses. The

preferred strategy is growth.

Question marks are low market share/high growth

businesses. The preferred strategies are growth forpromising question marks and restructuring or divestiture

for the other question marks.

Cash cows are high market share/low growth

businesses. The preferred strategy is stability ormodest

growth.

Dogs are low market share/low growth businesses. The

preferred strategy is retrenchment by divestiture.


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BSG Matrix

Limitations:

Too simplistic

The link between market share and profitability isquestionable

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


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GE/McKinseyMatrix

AWinners Winners

B

C

QuestionMarks

D

F

Average

Businesses

EWinners

Losers

GLosers

H

LosersProfit

Producers

Strong Average Weak

Low

Medium

High

Business Strength/Competitive Position


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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/McKinseyMatrix


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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/McKinseyMatrix


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Portfolio Analysis

Advantages of portfolio analysis:

It encourages topmanagement to evaluate each of

the businesses individually and set objectives andallocate resources for each.

It stimulates the use of externally oriented data to

supplement managements judgment.

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

Its graphic depiction facilitates communication.


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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.


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Corporate Strategy

Corporate Parenting Strategy --

Strategic factors

Performance improvement

Analyze fit


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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-destroyinginterventions.


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Corporate Parenting

According to Campbell, Good and Alexander the

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 withthe BU.


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Corporate Parenting

Heartland business has opportunity for

improvement by the parent and priority for all

corporate activities

Edge-ofHeartland business has some parenting

characteristics fit the business, but others do not

Ballast businesses fit very comfortably with theparent corporation but contain very few opportunities

to be improved by the parent

Alien territory businesses have little opportunity to

be improved by the corporate parent Value trap businesses fit well with parenting

opportunities, but misfit with parents understanding

of the units strategic factors

Documents

Strategy Formulation Corporate Strategy