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CORPORATE-LEVEL STRATEGY
Corporate-level strategies address the entire strategic scope of the enterprise. This is
the "big picture" view of the organization and includes deciding in which product or
service markets to compete and in which geographic regions to operate. For multi-
business firms, the resource allocation process—how cash, staffing, equipment and
other resources are distributed—is typically established at the corporate level. In
addition, because market definition is the domain of corporate-level strategists, the
responsibility for diversification, or the addition of new products or services to the
existing product/service line-up, also falls within the realm of corporate-level
strategy. Similarly, whether to compete directly with other firms or to selectively
establish cooperative relationships—strategic alliances—falls within the purview
corporate-level strategy, while requiring ongoing input from
Table 1
Corporate, Business, and Functional Strategy
Level of
Definition Example
Strategy
Corporate Diversification into new product or
Market definition
strategy geographic markets
Attempts to secure competitive
Business
Market navigation advantage in existing product or
strategy
geographic markets
Support of Information systems, human resource
Functional corporate strategy practices, and production processes that
strategy and business facilitate achievement of corporate and
strategy business strategy
1. What should be the scope of operations; i.e.; what businesses should the firm
be in?
2. How should the firm allocate its resources among existing businesses?
3. What level of diversification should the firm pursue; i.e., which businesses
represent the company's future? Are there additional businesses the firm
should enter or are there businesses that should be targeted for termination or
divestment?
4. How diversified should the corporation's business be? Should we pursue
related diversification; i.e., similar products and service markets, or is
unrelated diversification; i.e., dissimilar product and service markets, a more
suitable approach given current and projected industry conditions? If we
pursue related diversification, how will the firm leverage potential cross-
business synergies? In other words, how will adding new product or service
businesses benefit the existing product/service line-up?
5. How should the firm be structured? Where should the boundaries of the firm
be drawn and how will these boundaries affect relationships across
businesses, with suppliers, customers and other constituents? Do the
organizational components such as research and development, finance,
marketing, customer service, etc. fit together? Are the responsibilities or each
business unit clearly identified and is accountability established?
6. Should the firm enter into strategic alliances—cooperative, mutually-
beneficial relationships with other firms? If so, for what reasons? If not, what
impact might this have on future profitability?
The BCG matrix classifies business-unit performance on the basis of the unit's
relative market share and the rate of market growth as shown in Figure 1.
Figure 1
BCG Model of Portfolio Analysis
Products and their respective strategies fall into one of four quadrants. The typical
starting point for a new business is as a question mark. If the product is new, it has
no market share, but the predicted growth rate is good. What typically happens in an
organization is that management is faced with a number of these types of products
but with too few resources to develop all of them. Thus, the strategic decision-maker
must determine which of the products to attempt to develop into commercially viable
products and which ones to drop from consideration. Question marks are cash users
in the organization. Early in their life, they contribute no revenues and require
expenditures for market research, test marketing, and advertising to build consumer
awareness.
If the correct decision is made and the product selected achieves a high market share,
it becomes a BCG matrix star. Stars have high market share in high-growth markets.
Stars generate large cash flows for the business, but also require large infusions of
money to sustain their growth. Stars are often the targets of large expenditures for
advertising and research and development to improve the product and to enable it to
establish a dominant position in the industry.
Cash cows are business units that have high market share in a low-growth market.
These are often products in the maturity stage of the product life cycle. They are
usually well-established products with wide consumer acceptance, so sales revenues
are usually high. The strategy for such products is to invest little money into
maintaining the product and divert the large profits generated into products with
more long-term earnings potential, i.e., question marks and stars.
Dogs are businesses with low market share in low-growth markets. These are often
cash cows that have lost their market share or question marks the company has
elected not to develop. The recommended strategy for these businesses is to dispose
of them for whatever revenue they will generate and reinvest the money in more
attractive businesses (question marks or stars).
Despite its simplicity, the BCG matrix suffers from limited variables on which to base
resource allocation decisions among the business making up the corporate portfolio.
Notice that the only two variables composing the matrix are relative market share
and the rate of market growth. Now consider how many other factors contribute to
business success or failure. Management talent, employee commitment, industry
forces such as buyer and supplier power and the introduction of strategically-
equivalent substitute products or services, changes in consumer preferences, and a
host of others determine ultimate business viability. The BCG matrix is best used,
then, as a beginning point, but certainly not as the final determination for resource
allocation decisions as it was originally intended. Consider, for instance, Apple
Computer. With a market share for its Macintosh-based computers below ten
percent in a market notoriously saturated with a number of low-cost competitors and
growth rates well-below that of other technology pursuits such as biotechnology and
medical device products, the BCG matrix would suggest Apple divest its computer
business and focus instead on the rapidly growing iPod business (its music download
business). Clearly, though, there are both technological and market synergies
between Apple's Macintosh computers and its fast-growing iPod business. Divesting
the computer business would likely be tantamount to destroying the iPod business.
1. Identifying key success factors. This step allows managers to select the most
appropriate variables for its situation. There is no limit to the number of
variables managers may select; the idea, however, is to use those that are key
in determining competitive strength.
2. Weighing the importance of key success factors. Weighting can be on a scale of
1 to 5, 1 to 7, or 1 to 10, or whatever scale managers believe is appropriate. The
main thing is to maintain consistency across organizations. This step brings
an element of realism to the analysis by recognizing that not all critical success
factors are equally important. Depending on industry conditions, successful
advertising campaigns may, for example, be weighted more heavily than after-
sale product support.
3. Identifying main industry rivals. This step helps managers focus on one of the
most common external threats; competitors who want the organization's
market share.
4. Managers rating their organization against competitors.
5. Multiplying the weighted importance by the key success factor rating.
6. Adding the values. The sum of the values for a manager's organization versus
competitors gives a rough idea if the manager's firm is ahead or behind the
competition on weighted key success factors that are critical for market
success.
GROWTH STRATEGIES
STABILITY STRATEGIES
When firms are satisfied with their current rate of growth and profits, they may
decide to use a stability strategy. This strategy is essentially a continuation of existing
strategies. Such strategies are typically found in industries having relatively stable
environments. The firm is often making a comfortable income operating a business
that they know, and see no need to make the psychological and financial investment
that would be required to undertake a growth strategy.
RETRENCHMENT STRATEGIES
BUSINESS-LEVEL STRATEGIES
ANALYSIS OF BUSINESS-LEVEL
STRATEGIES
Cost leadership provides firms above-average returns even with strong competitive
pressures. Lower costs allow the firm to earn profits after competitors have reduced
their profit margin to zero. Low-cost production further limits pressures from
customers to lower price, as the customers are unable to purchase cheaper from a
competitor. Cost leadership may be attained via a number of techniques. Products
can be designed to simplify manufacturing. A large market share combined with
concentrating selling efforts on large customers may contribute to reduced costs.
Extensive investment in state-of-the-art facilities may also lead to long run cost
reductions. Companies that successfully use this strategy tend to be highly
centralized in their structure. They place heavy emphasis on quantitative standards
and measuring performance toward goal accomplishment.
Efficiencies that allow a firm to be the cost leader also allow it to compete effectively
with both existing competitors and potential new entrants. Finally, low costs reduce
the likely impact of substitutes. Substitutes are more likely to replace products of the
more expensive producers first, before significantly harming sales of the cost leader
unless producers of substitutes can simultaneously develop a substitute product or
service at a lower cost than competitors. In many instances, the necessity to climb up
the experience curve inhibits a new entrants ability to pursue this tactic.
Differentiation strategies require a firm to create something about its product that is
perceived as unique within its market. Whether the features are real, or just in the
mind of the customer, customers must perceive the product as having desirable
features not commonly found in competing products. The customers also must be
relatively price-insensitive. Adding product features means that the production or
distribution costs of a differentiated product will be somewhat higher than the price
of a generic, non-differentiated product. Customers must be willing to pay more than
the marginal cost of adding the differentiating feature if a differentiation strategy is
to succeed.
Differentiation may be attained through many features that make the product or
service appear unique. Possible strategies for achieving differentiation may include
warranty (Sears tools have lifetime guarantee against breakage), brand image (Coach
handbags, Tommy Hilfiger sportswear), technology (Hewlett-Packard laser printers),
features (Jenn-Air ranges, Whirlpool appliances), service (Makita hand tools), and
dealer network (Caterpillar construction equipment), among other dimensions.
Differentiation does not allow a firm to ignore costs; it makes a firm's products less
susceptible to cost pressures from competitors because customers see the product as
unique and are willing to pay extra to have the product with the desirable features.
Differentiation often forces a firm to accept higher costs in order to make a product
or service appear unique. The uniqueness can be achieved through real product
features or advertising that causes the customer to perceive that the product is
unique. Whether the difference is achieved through adding more vegetables to the
soup or effective advertising, costs for the differentiated product will be higher than
for non-differentiated products. Thus, firms must remain sensitive to cost
differences. They must carefully monitor the incremental costs of differentiating
their product and make certain the difference is reflected in the price.
A focus strategy is often appropriate for small, aggressive businesses that do not have
the ability or resources to engage in a nation-wide marketing effort. Such a strategy
may also be appropriate if the target market is too small to support a large-scale
operation. Many firms start small and expand into a national organization. Wal-Mart
started in small towns in the South and Midwest. As the firm gained in market
knowledge and acceptance, it was able to expand throughout the South, then
nationally, and now internationally. The company started with a focused cost-leader
strategy in its limited market and was able to expand beyond its initial market
segment.
Firms utilizing a focus strategy may also be better able to tailor advertising and
promotional efforts to a particular market niche. Many automobile dealers advertise
that they are the largest-volume dealer for a specific geographic area. Other dealers
advertise that they have the highest customer-satisfaction scores or the most awards
for their service department of any dealer within their defined market. Similarly,
firms may be able to design products specifically for a customer. Customization may
range from individually designing a product for a customer to allowing the customer
input into the finished product. Tailor-made clothing and custom-built houses
include the customer in all aspects of production from product design to final
acceptance. Key decisions are made with customer input. Providing such
individualized attention to customers may not be feasible for firms with an industry-
wide orientation.
FUNCTIONAL-LEVEL STRATEGIES.
Functional strategies are frequently concerned with appropriate timing. For example,
advertising for a new product could be expected to begin sixty days prior to shipment
of the first product. Production could then start thirty days before shipping begins.
Raw materials, for instance, may require that orders are placed at least two weeks
before production is to start. Thus, functional strategies have a shorter time
orientation than either business-level or corporate-level strategies. Accountability is
also easiest to establish with functional strategies because results of actions occur
sooner and are more easily attributed to the function than is possible at other levels
of strategy. Lower-level managers are most directly involved with the
implementation of functional strategies.
FURTHER READING:
Dyer, J.H., P. Kale, and H. Singh. "When to Ally and When to Acquire." Harvard
Business Review 82 (2004): 108–116.