CH 7 Strategy Formulation: Corporate Strategy

Vertical Integration

Backward Integration: Assuming a function previously provided by a supplier Forward Integration: Assuming a function previously provided by a distributor

Bankruptcy and Liquidation

Bankruptcy involves giving up management of the firm to the courts in return for some settlement of the corporation's obligations. In contrast to bankruptcy, which seeks to perpetuate a corporation, liquidation is the termination of the firm.

Directional Strategy

Growth strategies expand the company's activities. Stability strategies make no change to the company's current activities. Retrenchment strategies reduce the company's level of activities.

Turnaround Strategy, Contraction, and Consolidation

Turnaround Strategy emphasizes the improvement of operational efficiency and is probably most appropriate when a corporation's problems are pervasive but not yet critical. Contraction is the initial effort to quickly "stop the bleeding" with a general, across-the-board cutback in size and costs. The second phase, consolidation, implements a program to stabilize the now-leaner corporation.

Corporate Strategy

Corporate strategy is primarily about the choice of direction for a firm as a whole and the management of its business or product portfolio.

Horizontal Strategy and Multipoint Competition

A horizontal strategy is a corporate strategy that cuts across business unit boundaries to build synergy between business units and to improve the competitive position of one or more business units. In multipoint competition, large multi-business corporations compete against other large multi-business firms in a number of markets. These multipoint competitors are firms that compete with each other not only in one business unit, but also in a number of business units.

Captive Company Strategy, Sell-Out Strategy, and Divestment

A Captive Company Strategy involves giving up independence in exchange for security. The Sell-Out Strategy makes sense if management can still obtain a good price for its shareholders and the employees can keep their jobs by selling the entire company to another firm. If the corporation has multiple business lines and it chooses to sell off a division with low growth potential, this is called divestment.

Retrenchment Strategies

A company may pursue retrenchment strategies when it has a weak competitive position in some or all of its product lines resulting in poor performance—sales are down and profits are becoming losses.

Horizontal Growth and Horizontal Integration

A firm can achieve horizontal growth by expanding its operations into other geographic locations and/or by increasing the range of products and services offered to current markets. Horizontal growth results in horizontal integration—the degree to which a firm operates in multiple geographic locations at the same point on an industry's value chain

Stability Strategies

A pause/proceed-with-caution strategy is, in effect, a timeout—an opportunity to rest before continuing a growth or retrenchment strategy. A no-change strategy is a decision to do nothing new—a choice to continue current operations and policies for the foreseeable future. A profit strategy is a decision to do nothing new in a worsening situation but instead to act as though the company's problems are only temporary.

Tasks Necessary for Managing a Strategic Alliance Portfolio

A study of 25 leading European corporations found four tasks of multi-alliance management that are necessary for successful alliance portfolio management: 1. Developing and implementing a portfolio strategy for each business unit and a corporate policy for managing all the alliances of the entire company 2. Monitoring the alliance portfolio in terms of implementing business units' strategies and corporate strategy and policies 3. Coordinating the portfolio to obtain synergies and avoid conflicts among alliances 4. Establishing an alliance management system to support other tasks of multi-alliance management

Corporate Parenting

Corporate parenting, or parenting strategy, in contrast, views a 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 parenting generates corporate strategy by focusing on the core competencies of the parent corporation and on the value created from the relationship between the parent and its businesses

3 Key Issues of Corporate Strategy

Corporate strategy addresses three key issues facing the corporation as a whole: 1. The firm's overall orientation toward growth, stability or retrenchment (directional strategy). 2. The industries or markets in which the firm competes through its products and business units (portfolio analysis). 3. The manner in which management coordinates activities and transfers resources and cultivates capabilities among product lines and business units (parenting strategy).

Concentric (Related) Diversification and Synergy

Growth through concentric diversification into a related industry may be a very appropriate corporate strategy when a firm has a strong competitive position but industry attractiveness is low. The search is for synergy, the concept that two businesses will generate more profits together than they could separately.

Vertical Integration Continuum

Harrigan proposes that a company's degree of vertical integration can range from total ownership of the value chain needed to make and sell a product to no ownership at all. (See Figure 7-2.) *See Chart in Slides*

Corporate Directional Strategies

Having chosen the general orientation (such as growth), a company's managers can select from several more specific corporate strategies such as concentration within one product line/industry or diversification into other products/industries. (See Figure 7-1.) *Look at Chart in Slides* A corporation's directional strategy is composed of three general orientations (sometimes called grand strategies): Growth, Stability, and Retrenchment *Look at Chart in Slides*

Portfolio Analysis

In portfolio analysis, top management views its product lines and business units as a series of investments from which it expects a profitable return

Portfolio Analysis

Industries or markets in which the firm competes through its products and business units

Controversies in Directional Strategies

Is vertical growth better than horizontal growth? Is concentration better than diversification? Is concentric diversification better than conglomerate diversification?

Merger and Acquisition

Merger: a transaction involving two or more corporations in which stock is exchanged but in which only one corporation survives Acquisition: 100% purchase of another company

Backwards and Forward Integration

More specifically, assuming a function previously provided by a supplier is called backward integration (going backward on an industry's value chain). Assuming a function previously provided by a distributor is labeled forward integration (going forward on an industry's value chain).

Limitations of Portfolio Analysis

Portfolio analysis does, however, have some very real limitations that have caused some companies to reduce their use of this approach: Defining product/market segments is difficult. 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. Its value-laden terms such as cash cow and dog can lead to self-fulfilling prophecies. It is not always clear what makes an industry attractive or where a product is in its life cycle. Naively following the prescriptions of a portfolio model may actually reduce corporate profits if they are used inappropriately.

Advantages of Portfolio Analysis

Portfolio analysis is commonly used in strategy formulation because it offers certain advantages: ■ It encourages top management to evaluate each of the corporation's businesses individually and to 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.

BCG Matrix

Question Marks (sometimes called "problem children" or "wildcats") are new products with the potential for success, but they need a lot of cash for development. Stars are market leaders that are typically at or nearing the peak of their product life cycle and are able to generate enough cash to maintain their high share of the market and usually contribute to the company's profits. Cash cows typically bring in far more money than is needed to maintain their market share. Dogs have low market share and do not have the potential (because they are in an unattractive industry) to bring in much cash.

International Entry Options for Horizontal Growth

Some of the most popular options for international entry are as follows: Exporting Licensing Franchising Joint Venture Acquisitions Green-Field Development Production Sharing Turn-Key Operations BOT Concept Management Contracts

Directional Strategy

The firm's overall orientation toward growth, stability or retrenchment

Parenting Strategy

The manner in which management coordinates activities and transfers resources and cultivates capabilities among product lines and business units

Developing a Corporate Parenting Strategy

The search for appropriate corporate strategy involves three analytical steps: 1. Examine each business unit in terms of its strategic factors 2. Examine each business unit in terms of areas in which performance can be improved 3. Analyze how well the parent corporation fits with the business unit

Transaction Cost Economies

Transaction cost economics proposes that vertical integration is more efficient than contracting for goods and services in the marketplace when the transaction costs of buying goods on the open market become too great.

Full Integration and Taper Integration

Under full integration, a firm internally makes 100% of its key supplies and completely controls its distributors. With taper integration (also called concurrent sourcing), a firm internally produces less than half of its own requirements and buys the rest from outside suppliers (backward taper integration).

BCG Matrix Limitations

Unfortunately, the BCG Growth-Share Matrix also has some serious limitations: ■ The use of highs and lows to form four categories is 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 only in relation to one competitor: the market leader. Small competitors with fast-growing market shares are ignored. ■ Market share is only one aspect of overall competitive position.

BCG Growth - Share Matrix

Using the BCG (Boston Consulting Group) Growth-Share Matrix depicted in Figure 7-3 is the simplest way to portray a corporation's portfolio of investments. Each of the corporation's product lines or business units is plotted on the matrix according to both the growth rate of the industry in which it competes and its relative market share.

Vertical Growth

Vertical growth can be achieved by taking over a function previously provided by a supplier or distributor. Vertical growth results in vertical integration—the degree to which a firm operates vertically in multiple locations on an industry's value chain from extracting raw materials to manufacturing to retailing.

Conglomerate (Unrelated) Diversification

When management realizes that the current industry is unattractive and that the firm lacks outstanding abilities or skills that it could easily transfer to related products or services in other industries, the most likely strategy is conglomerate diversification—diversifying into an industry unrelated to its current one.

Quasi-Integration and Long-Term Contacts

With quasi-integration, a company does not make any of its key supplies but purchases most of its requirements from outside suppliers that are under its partial control (backward quasi-integration). Long-term contracts are agreements between two firms to provide agreed-upon goods and services to each other for a specified period of time.