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Strategic Management & Business Policy: Thomas L. Wheelen J. David Hunger
Strategic Management & Business Policy: Thomas L. Wheelen J. David Hunger
13TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER
Two Strategy Levels
• Business-level Strategy (Competitive)
– Each business unit in a diversified firm
chooses a business-level strategy as its
means of competing in individual product
markets
• Corporate-level Strategy (Companywide)
– Specifies actions taken by the firm to gain a
competitive advantage by selecting and
managing a group of different businesses
competing in several industries and product
Copyright © 2004 South-Western. All rights 6–2
reserved.markets
Corporate-Level Strategy: Key Questions
• Corporate-level Strategy’s Value
The degree to which the businesses in the
portfolio are worth more under the management
of the company than they would be under other
ownership
What businesses should
the firm be in?
How should the corporate
office manage the
group of businesses?
Business Units
Copyright © 2004 South-Western. All rights reserved. 6–3
Directional strategy- the firm’s overall orientation
toward growth, stability, or retrenchment
Concentration
• Vertical
• Horizontal
Diversification
• Concentric
• Conglomerate
Exxon-Mobil
Big oil got even bigger in 1999, when Exxon and Mobil signed a $81 billion agreement to merge and
form Exxon Mobil. Not only did Exxon Mobil become the largest company in the world, it reunited its
19th century former selves, John D. Rockefeller’s Standard Oil Company of New Jersey (Exxon) and
Standard Oil Company of New York (Mobil). The merger was so big, in fact, that the FTC required a
massive restructuring of many of Exxon & Mobil’s gas stations, in order to avoid outright
monopolization (despite the FTC’s 4-0 approval of the merger).
ExxonMobil remains the strongest leader in the oil market, with a huge hold on the international
market and dramatic earnings. In 2008, ExxonMobil occupied all ten spots in the “Top Ten Corporate
Quarterly Earnings” (earning more than $11 billion in one quarter) and it remains one of the world’s
largest publicly held company (second only to Walmart).
Diversification might be undertaken for a variety of reasons, some more value creating than others
Three potentially value-creating reasons for diversification are as follows.
First, there may be efficiency gains from applying the organisation’s existing
resources or capabilities to new markets and products or services . These are often described as
economies of scope, by contrast to economies of scale. If an organisation has under-utilised
resources or capabilities that it cannot effectively close or dispose of to other potential users, it can
make sense to use these resources or capabilities by diversification into a new activity. In other
words, there are economies to be gained by extending the scope of the organisation’s activities.
Economies of scope may apply to both tangible resources, such as halls of residence or cable
networks, and intangible resources and capabilities, such as brands or skills. Sometimes these
scope benefits are referred to as the benefits of synergy, by which is meant the benefits that
might be gained where activities or processes complement each other such that their combined
effect is greater than the sum of the parts.
Thiswas the strategy Dell followed after its growth strategy had resulted in more
growth than it
could handle. Explained CEO Michael Dell, “We grew 285% in two years, and we’re
having
some growing pains.” Selling personal computers by mail enabled Dell to underprice
competitors, but it could not keep up with the needs of a $2 billion, 5,600-employee
company
selling PCs in 95 countries. Dell did not give up on its growth strategy; it merely put it
temporarily in limbo until the company was able to hire new managers, improve the
structure,
and build new facilities.60 This was a popular strategy in late-2008 during a U.S.
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financial
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 nochan
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 facin
little or no growth encourages the company to continue on its current course, making onl
small adjustments for inflation in its sales and profit objectives. There are no obvious
opportunities
or threats, nor is there much in the way of significant strengths or weaknesses. Few
aggressive
new competitors are likely to enter such an industry.
One of the most common and long-standing ways of conceiving of the balance
of a portfolio of businesses is in terms of the relationship between market
share and market growth identified by the Boston Consulting Group (BCG).
A star is a business unit which has a high market share in a growing market.
The business unit may be spending heavily to gain that share, but experience
curve benefits should mean that costs are reducing over time and, it is to be
hoped, at a rate faster than that of competitors.
A question mark (or problem child) is a business unit in a growing market, but
without a high market share. It may be necessary to spend heavily to increase
market share, but if so, it is unlikely that the business unit is achieving
sufficient cost reduction benefits to offset such investments.
Dogs are business units with a low share in static or declining markets and are
thus the worst of all combinations. They may be a cash drain and use up a
disproportionate amount of company time and resources.
It is argued that market growth rate is important for a business unit seeking to dominate a market
because it may be easier to gain dominance when a market is in its growth state. So ‘stars’ are
particularly attractive. But if all competitors in the growth stage are trying to gain market share,
competition will be very fierce.
So it will be necessary to invest in that business unit in order to gain share and market dominance.
Moreover, it is likely that such a business unit will need to price low or spend high amounts on
advertising and selling, or both. These businesses are ‘question marks’ or ‘problem children’. They
have potential but can eat up investment and are likely to be yielding low margins in seeking to
beat competition and gain share. Investing here is high risk unless this potentially low-margin
activity is financed by products earning higher profit levels.
Higher profit levels are most likely to come from products that have a high share in more mature,
stable markets. This is where competition is likely to be less fierce and high share should have
given rise to experience curve benefits. Of course the reverse is the case; if a business in a
mature market does not have high share, it may be very difficult to take it from competitors. All this
leads to the idea of the need for a balanced mix of business units in a portfolio.
Some firms might take a different view. For example, if the corporate aspira-
tion is one of high growth in income and the business is prepared to invest to
gain that growth, then a parent may be prepared to support more stars and
question marks than one who is concerned with stable cash generation and con-
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centrating Hall, Inc. ©2012or building its cash cows.
preserving 7-42
BCG Matrix- Limitations
Advantages:
• Encourages top management to evaluate each of the
corporation’s businesses individually and to set
objectives and allocate resources for each
• Stimulates the use of externally oriented data to
supplement management’s judgment
• Raises the issue of cash flow availability to use in
expansion and growth