CHAPTER 7 Strategy

Formulation: Corporate
Strategy

STRATEGIC MANAGEMENT & BUSINESS POLICY

THOMAS L. WHEELEN J. DAVID HUNGER

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 Corporate Strategy

Formula for growth in a mature market (Zook and Allen)

A. Push out the boundaries around core business into
adjacent businesses.
B. Develop a formula for expanding in a predictable,
repeatable way.

Nike Strategy
1. Establish a leading position for athletic shoes in the new
market.
2. Launch a clothing line endorsed by a top athlete.
3. Form distribution lines with key suppliers.
4. Introduce higher margin equipment in the new market.

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 Corporate Strategy

3 Key Issues –

–Firm’s directional strategy

–Firm’s portfolio strategy

–Firm’s parenting strategy

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 Corporate Directional Strategies

3 Grand Directional Strategies

–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
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 Corporate Strategy

Growth Strategies -- External mechanisms

•Mergers
•Similar sized firms
•Usually friendly
•One company results

•Acquisitions
•Different sized firms
•Friendly or hostile takeover
•Acquired company becomes subsidiary/division

•Strategic alliances
•Partnerships
•Mutual benefits for members

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 Corporate Strategy

Growth Strategies --

–2 Basic forms

•Concentration – current products in same industry

•Diversification – different products in different industries

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 Corporate Strategy

Concentration
• If a company’s current product lines have real growth
potential, concentration of resources on those product
lines makes sense as a strategy for growth.
• The two basic concentration strategies are vertical
growth and horizontal growth.

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 Corporate Strategy

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

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 Corporate Strategy

Transaction Cost Economics

Three conditions for internalizing a vertical transaction:

1. High level of uncertainty surrounding the
transaction
2. Assets are highly specialized
3. Frequent transactions

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 Corporate Strategy

Degree of Vertical Growth -- Vertical integration

•Full integration
• a firm internally makes 100% of its key supplies and
completely controls its distributors.

•Taper integration
• a firm internally produces less than half of its own
requirements and buys the rest from outside suppliers

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 Corporate Strategy

Cont…
• Quasi-integration
• 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.
• Long-term contract
• Long-term contracts are agreements between two firms
to provide agreed-upon goods and services to each other
for a specified period of time.

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 Corporate Strategy

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.
• Research indicates that firms that grow horizontally
by broadening their product lines have high survival
rates

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 Corporate Strategy

Diversification
Mature, consolidated industries push
companies to look to other markets/industries
for growth

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 Corporate Strategy

Basic Diversification Strategies --

–Concentric Diversification
synergy of product knowledge,
manufacturing capability and/or marketing
skills

–Conglomerate Diversification
Unrelated markets/industries, focusing on
financial considerations and sound
investment strategy

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 Corporate Strategy

International Entry Options --

–Exporting
–Licensing
–Franchising
–Joint Ventures
–Acquisitions
–Green-Field Development

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 Corporate Strategy

International Entry Options –

(limited involvement)

–Production Sharing - Outsourcing

–Turnkey Operation
–BOT Concept (Build, Operate, Transfer)
–Management Contracts

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 Corporate Strategy

CISCO(Corps Information Systems

Control Officer) acquisition decision
rules
1.Is company relatively small?
2.Is it comparable in corporate culture?
3.Is it physically close to one of the existing
affiliates?

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 Corporate Strategy

Stability Strategies –
Status Quo (common in small businesses)

–Pause/proceed with caution

Absorb change

–No change
Future is an extension of the present

–Profit strategies
Temporary, self serving to management

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 Corporate Strategy

Retrenchment Strategies --
Eliminate weaknesses, improve performance

–Turnaround
contraction/consolidation
–Captive Company Strategy
angel investor/customer/supplier
–Selling out/Divestment
sell the company or low growth division
–Bankruptcy
court settles obligations/restructures
–Liquidation
termination of the firm

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 Corporate Strategy

Portfolio Analysis --
Management views the product lines or business
units as investments that should provide a return
on investment

–Resource commitment on best products to

ensure continued success

or

–Resource commitment on new costly products

which may be high risk

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 Corporate Strategy

Boston Consulting Group Growth – Share Matrix

– Relative Competitive position
Your unit share / share of the largest competitor
– Business Growth Rate
% market growth

Assumptions:
– Experience Curve
Large Share = Cost advantage
– Life Cycle
Mature markets = Slow growth

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BCG Matrix (Portfolio Analysis)

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 Corporate Strategy

BCG Growth Share Limitations

– Too simplistic
– Low-share businesses can be profitable
– Growth rate is only one aspect of industry
– Products/Businesses only consider one
competitor
– Market share is only one aspect of
competitive position

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 Corporate Strategy

GE(General Electric) Business Screen

(McKinsey & Co.)
– Industry Attractiveness
market growth rate, industry profitability, size, pricing
– Business Strength (competitive position)
market share, technology position, profitability, size

– Circle size represents the industry sales

– Pie slices represent your market share

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 GE Business Screen (Portfolio Analysis)

C
Winners Winners
A Question
High B Marks

Winners
E Average
Businesses
Medium F
Losers

H
Losers
G
Low
Profit
Producers Losers

Strong Average Weak

Business Strength/Competitive Position

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 Corporate Strategy

GE Business Screen Limitations

– Complicated and cumbersome(heavy)

– Numerical estimates are subjective
– Can not effectively represent new products or
developing markets

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 Corporate Strategy

Corporate Parenting Strategy –

View the organization in terms of resources and
capabilities used to build business unit value and
generate synergies across units

–Strategic factors
“Center of Excellence”
–Performance improvement
Skill and/or knowledge transfer
–Analyze fit
Parent strengths and weaknesses

Learning Organization + Tacit Knowledge

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 Corporate Strategy

Multipoint Competition and Horizontal Strategies

Large multi-business corporations compete against
other large multi-business corporations in a number
of markets.

Potentially reducing competition among industry

members.

Collusion??

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