Business Policy and Strategy

Strategy Formulation: Corporate Strategy

Reported by: Michellin Ann Gutierrez BSBA 4th year

Prof. Navarez

Strategy Formulation: Corporate Strategy

Corporate

Strategy

is primarily about the

choice of direction for the firm as a whole.

Strategy Formulation: Corporate Strategy

Corporate Strategy
Directional Strategy overall orientation towards growth, stability, retrenchment Portfolio Strategy industries/markets that the firm competes in through products lines & business units Parenting Strategy coordination and transfer of resources between product lines & business units

Strategy Formulation: Corporate Strategy

Vertical and Horizontal Integration - Value Chain Activities

Vertical Integration: Coordinating upstream activities (those closer to the raw materials) with downstream activities (those closer to the customer)

Acquisitions, Strategic Alliances, Internal Development

Strategy Formulation: Corporate Strategy

Vertical and Horizontal Integration - Value Chain Activities
Benefits of Vertical Integration

reduces or eliminates costs of buying and selling (Transaction Costs)

smoother, more efficient operation

Limits to Vertical Integration

Differences in minimum efficient scale in vertically integrated corporation. Must remain innovative in all Value Chain activities. Possible incompatibilities between managerial skills and corporate cultures that make upstream and downstream activities successful.

Strategy Formulation: Corporate Strategy

Vertical and Horizontal Integration - Value Chain Activities

Horizontal Integration
Coordinating

across the same or similar value chain activities.

Acquisition, Strategic Alliance, Internal Development

Strategy Formulation: Corporate Strategy

Vertical and Horizontal Integration - Value Chain Activities
Horizontal Integration Benefits:

Corporate managers have expertise to recognize undervalued stocks that many individual investors would miss. Corporations have economies of scale for financing acquisitions that individuals do not. Horizontal Integration Costs:

Conglomerate discount: value of stock of conglomerate sells for less than total value of individual stocks. Takeover premiums: corporations usually pay a premium over the normal trading price of the targets stock.

Strategy Formulation: Corporate Strategy

Diversification Strategies

When an industry consolidates and becomes mature, most of the surviving firms have reached the limits of growth using vertical and horizontal growth strategies.

Strategy Formulation: Corporate Strategy Mergers & Acquisitions

Merger: integration of operations of two firms; relatively coequal basis.

Study by McKinsey & Company: only 23% of mergers over a 10-year period generated returns in excess of costs incurred in the deal.

Acquisition: one firm buys controlling interest in another firm; acquired firm becomes subsidiary in acquirers business portfolio.
(Hostile)Takeover: acquisition that was not solicited

Strategy Formulation: Corporate Strategy

Mergers & Acquisitions

Reasons for M & As

Increased market power Capitalizing on core competencies Overcome entry barriers Bypass cost of new product development: Increased speed to market Increased diversification Avoiding excessive competition

Strategy Formulation: Corporate Strategy

Mergers & Acquisitions

Problems with Achieving M & A Success

Integration difficulties

Inadequate evaluation of target

Large or extraordinary debt Inability to achieve synergy Too much diversification Managers overly focused on acquisition/merger Too large (bureaucratic)

Strategy Formulation: Corporate Strategy

International Entry Options

Exporting Licensing Franchising Joint Ventures Acquisitions Green Field Development Production Sharing Turnkey Operations

Strategy Formulation: Corporate Strategy

Stability Strategies

A corporation may choose stability over by continuing its current activities without any significant change in direction.

Strategy Formulation: Corporate Strategy Stability Strategies

Pause/Proceed with Caution Strategy - is, in effect, a timeout an opportunity to rest before continuing a growth or retrenchment strategy.

No change - is a decision to do nothing new a choice to continue current operations and policies for the foreseeable future.

Profit Strategy - is a decision to do nothing new in a worsening situation but instead to act as though the companys problems are only temporary.

Strategy Formulation: Corporate Strategy

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 performances sales are down and profits are becoming losses.

Strategy Formulation: Corporate Strategy Retrenchment Strategies

Turnaround Strategy - emphasizes the improvement of operational efficiency and is probably most appropriate when a corporations problem are pervasive but not yet critical.

Captive Company Strategy

- is the giving up of independence in exchange for security.

Strategy Formulation: Corporate Strategy Retrenchment Strategies

Sell Out/Divestment Strategy

- If a corporation with a weak competitive position in its industry in 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.

Bankruptcy/Liquidation Strategy - When a company finds itself in the worst possible situation with a poor competitive position in an industry with a few prospects, management has only a few alternatives all of them distasteful.

Strategy Formulation: Corporate Strategy Portfolio Analysis

Assessing Business Units Competitive Position
Possession of desirable core competencies Relative market share Profit margins relative to competitors Ability to match or beat rivals on product quality and service Relative cost position Knowledge of customers and markets Technological capabilities Caliber of management

Strategy Formulation: Corporate Strategy

Portfolio Analysis
BCG Growth-Share Matrix

questions marks: business growth rate - high; relative competitive position - weak stars: business growth rate - high; relative competitive position - strong cash cows: business growth rate - low; relative competitive position - strong dogs: business growth rate - low; relative competitive position - weak

BCG Matrix

Strategy Formulation: Corporate Strategy

Portfolio Analysis
Strengths: evaluate businesses individually, raises issues of cash flow for expansion Weaknesses: difficult to define product & market segments, subjective determinations, lack of clarity of product life cycle position, static comparisons.

Strategy Formulation: Corporate Strategy

Impact of the Internet on Corporate Strategy

The Internet has an ever-increasing importance in business. Businesses rely heavily on the Internet for all aspects of their functioning, from reaching out to clients, contacting and ordering from suppliers, marketing, as well as carrying out financial transactions. The Internet is a very important means of communicating, researching, marketing and conducting business.