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STRATEGIC

MANAGEMENT
LECTURE 7

Dr. Mahmoud El Damaty


Consultant Surgeon
AUC & AASTMT Instructor
Lecture SEVEN
• Types of Strategies

• Reference: Strategic Management


and Business Policy, Thomas L.
Wheelan & J. David Hunger

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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.
• This is true whether the firm is a small company or a large multinational corporation
(MNC).
• In a large multiple-business company, in particular, corporate strategy is concerned
with managing various product lines and business units for maximum value.

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Key issues facing the corporation
Corporate strategy deals with 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)

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1 Directional Strategy
A corporation’s directional strategy is composed of three general orientations
(sometimes called grand strategies):
1. Growth strategies expand the company’s activities.
2. Stability strategies make no change to the company’s current activities.
3. Retrenchment strategies reduce the company’s level of activities.

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1.1 Growth Strategies
• By far the most widely pursued corporate directional strategies are those designed
to achieve growth in sales, assets, profits, or some combination.
• Companies that do business in expanding industries must grow to survive.
• Continuing growth means increasing sales and a chance to take advantage of the
experience curve to reduce the per-unit cost of products sold, thereby increasing
profits.

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Why growth strategies?
Growth is a very attractive strategy for two key reasons:
• Growth based on increasing market demand may mask flaws in a company—flaws
that would be immediately evident in a stable or declining market. A growing flow of
revenue into a highly leveraged corporation can create a large amount of
organization slack (unused resources) that can be used to quickly resolve problems
and conflicts between departments and divisions.
• A growing firm offers more opportunities for advancement, promotion, and
interesting jobs. Growth itself is exciting and ego-enhancing for CEOs. The
marketplace and potential investors tend to view a growing corporation as a
“winner” or “on the move.”

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Vertical Growth
• Vertical growth can be achieved by taking over a function previously provided by a
supplier or by a distributor.
• The company, in effect, grows by making its own supplies and/or by distributing its
own products.
• This may be done in order to reduce costs, gain control over a scarce resource,
guarantee quality of a key input, or obtain access to potential customers.
• This growth can be achieved either internally by expanding current operations or
externally through acquisitions.

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Horizontal Growth
• 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.

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Concentric (Related) Diversification
• 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.
• By focusing on the characteristics that have given the company its distinctive
competence, the company uses those very strengths as its means of diversification.
• The firm attempts to secure strategic fit in a new industry where the firm’s product
knowledge, its manufacturing capabilities, and the marketing skills it used so
effectively in the original industry can be put to good use.

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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.
• Rather than maintaining a common thread throughout their organization, strategic
managers who adopt this strategy are primarily concerned with financial
considerations of cash flow or risk reduction.

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1.2 Stability Strategies
• A corporation may choose stability over growth by continuing its current activities
without any significant change in direction.
• Although sometimes viewed as a lack of strategy, the stability family of corporate
strategies can be appropriate for a successful corporation operating in a reasonably
predictable environment.
• They are very popular with small business owners who have found a niche and are
happy with their success and the manageable size of their firms.

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Pause/Proceed with Caution Strategy
• A pause/proceed-with-caution strategy is, in effect, a timeout—an opportunity to
rest before continuing a growth or retrenchment strategy.
• It is a very deliberate attempt to make only incremental improvements until a
particular environmental situation changes.
• It is typically conceived as a temporary strategy to be used until the environment
becomes more hospitable or to enable a company to consolidate its resources after
prolonged rapid growth.

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No-Change Strategy
• A no-change strategy is a decision to do nothing new—a choice to continue current
operations and policies for the foreseeable future.
• Rarely articulated as a definite strategy, a no-change strategy’s success depends on a
lack of significant change in a corporation’s situation.
• The relative stability created by the firm’s modest competitive position in an
industry facing little or no growth encourages the company to continue on its
current course, making only small adjustments for inflation in its sales and profit
objectives.

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Profit Strategy
• 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.
• The profit strategy is an attempt to artificially support profits when a company’s
sales are declining by reducing investment and short term discretionary
expenditures.
• Rather than announce the company’s poor position to shareholders and the
investment community at large, top management may be tempted to follow this
very seductive strategy.

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1.3 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.
• These strategies impose a great deal of pressure to improve performance.
• In an attempt to eliminate the weaknesses that are dragging the company down,
management may follow one of several retrenchment strategies, ranging from
turnaround or becoming a captive company to selling out, bankruptcy, or
liquidation.

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Turnaround Strategy
• Turnaround strategy emphasizes the improvement of operational efficiency and is
probably most appropriate when a corporation’s problems are pervasive but not yet
critical.
• Analogous to a weight reduction diet, the two basic phases of a turnaround strategy
are contraction and consolidation.
• 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.

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Captive Company Strategy
• A captive company strategy involves giving up independence in exchange for
security.
• A company with a weak competitive position may not be able to engage in a full-
blown turnaround strategy.
• The industry may not be sufficiently attractive to justify such an effort from either
the current management or investors.
• Management desperately searches for an “angel” by offering to be a captive
company to one of its larger customers in order to guarantee the company’s
continued existence with a long-term contract.

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Sell-Out/Divestment
Strategy
• If a corporation with a weak competitive position in an industry is unable either to
pull itself up by its bootstraps or to find a customer to which it can become a captive
company, it may have no choice but to sell out.
• 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.
• The hope is that another company will have the necessary resources and
determination to return the company to profitability.

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Bankruptcy/Liquidation Strategy
• When a company finds itself in the worst possible situation with a poor competitive
position in an industry with few prospects, management has only a few
alternatives—all of them distasteful.
• Because no one is interested in buying a weak company in an unattractive industry,
the firm must pursue a bankruptcy or liquidation strategy.
• 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, liquidation is the termination of the firm. When the
industry is unattractive and the company too weak to be sold as a going concern,
management may choose to convert as many saleable assets as possible to cash,
which is then distributed to the shareholders after all obligations are paid.
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2 Portfolio Analysis
• Companies with multiple product lines or business units must also ask themselves
how these various products and business units should be managed to boost overall
corporate performance.
• In portfolio analysis, top management views its product lines and business units as a
series of investments from which it expects a profitable return.

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BCG Growth-share Matrix
• Using the BCG (Boston Consulting Group) Growth-Share Matrix 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.
The relative market share.

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BCG Growth-share Matrix

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BCG Growth-share 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 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. In this declining stage of their life cycle, these products are “milked”
for cash that will be invested in new question marks.
• Dogs have low market share and do not have the potential (because they are in an
unattractive (industry) to bring in much cash they can generate.

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General electric business screen
• General Electric, with the assistance of the McKinsey & Company consulting firm,
developed
• a more complicated matrix.
• GE Business Screen includes nine
• cells based on long-term industry attractiveness and business strength competitive
position.

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General electric business screen

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General electric business screen
To plot product lines or business units on the GE Business Screen, follow these four
steps:
1. Select criteria to rate the industry for each product line or business unit. Assess
overall industry attractiveness for each product line or business unit on a scale
from 1 (very unattractive) to 5 (very attractive).
2. Select the key factors needed for success in each product line or business unit.
Assess business strength/competitive position for each product line or business
unit on a scale of 1 (very weak) to 5 (very strong).
3. Plot each product line’s or business unit’s current position on the matrix.
4. Plot the firm’s future portfolio, assuming that present corporate and business
strategies remain unchanged to find the gap.
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Advantages Of Portfolio Analysis
• 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.

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Limitations of Portfolio Analysis
• 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.

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3 Corporate Parenting
• Corporate parenting 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.
• It 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.
• In the form of corporate headquarters, the parent has a great deal of power in this
relationship.

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Main Goal of Corporate
Headquarters
• The primary job of corporate headquarters is to obtain synergy among the business
units by providing needed resources to units, transferring skills and capabilities
among the units, and coordinating the activities of shared unit functions to attain
economies of scope (as in centralized purchasing).

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Developing A Corporate Parenting
Strategy
• Examine each business unit (or target firm in the case of acquisition) in terms of its
strategic factors.
• Examine each business unit (or target firm) in terms of areas in which performance
can be improved.
• Analyze how well the parent corporation fits with the business unit (or target firm).

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THANK YOU
drdamaty@aucegypt.edu

Dr. Mahmoud Mohamed El Damaty

+201222850959