Strategic Management

Corporate Level Strategy

Professor Robert Hattemer 1

Levels of Strategy

• Corporate level
– What businesses?
– Allocate resources
• Business level (SBU)
– Which products / services,
markets?
– Achieve competitive
advantage
• Operational level
– Functional strategies, e.g.
marketing, purchasing

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Chapter 1 1
 Categorization of Strategies (Bea/Haas)
Corporate Strategy

Growth Strategy Stabilization Strategy Retrenchment Strategy

Product-Market Strategies (Ansoff)

Local, Nat., Int‘l., Global

Autonomy, Cooperation, Integration

Business Unit Strategy

Cost Leadership Differentiation Niche Strategy

Functional Department Strategies

Purchasing Production Distribution Financing HR Strategy Technology

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Ansoff Matrix
Products

Existing New

Existing Market Product

Penetration Development
Markets

Market
Diversification
New Development

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Chapter 1 2
 Market Penetration
Defend Share
Market Expansion

Customer Winbacks
Win Non- Expand
Users Distribution

Buy Market Share

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Market Development: Different Segments

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Chapter 1 3
 Market Development: New Geographies

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Product Development

Product Modifications Product Line Extensions

New Product Development

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Chapter 1 4
 Ansoff Matrix: Strategic Direction for Growth
• Market Penetration (current markets, current products):
– Customer retention (defend share): CRM, Key Account Management, Loyalty
programs
– Total market expansion (stimulation): “use more” campaigns (e.g., Nimm 2),
suggest new uses (e.g., Kellog’s Special K)
– Customer winbacks (share growth from competitors): promotional activities,
competition on price, expand distribution
– Customer acquisitions (win non-users in market): convince “conservatives” and
“laggards” (e.g., internet access)
• Market Development (new markets, current product)
– Customer acquisition in new segments, geographies
• Product Development (current markets, new products)
– New product development, product line expansion
• Diversification (new markets, new products)

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Options for Diversification

Vertical Backward
Diversification

Lateral Business’ Horizontal

Diversification Value Chain Diversification

Vertical Forward
Diversification

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Chapter 1 5
 Horizontal Diversification

• The company uses the existing value chain to make new products or
services and achieve greater economies of scale
• Example: Eckes: Used its bottling facilities for fruit juices to also fill and
sell wines

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Vertical Backward Diversification

• The business performs functions that were previously done by suppliers,

thus getting new sources of revenues, spreading its risk and decreasing
the power of suppliers

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 Vertical Forward Diversification
• The business performs functions that were previously handled by
distributors or customers, i.e., these functions occur after the product has
been manufactured or the service delivered

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Lateral Diversification
• The business engages in activities outside the current
industry, thus entering new or unrelated industries and
markets. There is often no clear relationship between the
businesses and not much potential for synergies.

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 Growth Strategies: Autonomy, Cooperation, Integration

• Autonomy Strategy: autonomous growth through

activation of the organization’s existing potential and
resources
• Cooperation Strategy: creation of synergies in a
particular function/market through cooperation with
another organization (Strategic Alliance or Joint Venture)
– Marketing-Orientation: Star Alliance, Disney/McDonald’s
– Technology-Orientation: Toll-Collect (Daimler, Siemens etc.)
– Production-Orientation: EDS/GM, Nokia/Microsoft
• Integration Strategy: growth through acquisitions of
other organizations (mergers, friendly or hostile
takeovers): Banking industry, Cisco

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Reasons for Collaboration and Integration

EXERCISE
• Divide into groups of 3 or 4 and brainstorm for 10 minutes what typical reasons
for collaboration and integration strategies might be. Think also of examples
that illustrate the underlying rationale from the involved companies’
perspectives?
• What are some potential problems that may arise?

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 Main Reasons for Collaboration and Integration

• Risk reduction
• Sharing of different but linked competences
• Economies of scale and scope
• Complementary technologies
• Blocking competition, increasing market share
• Overcoming government-mandated investment or trade
barriers
• Gaining local know-how for international expansion
• Vertical integration

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Potential Problem Areas in Collaborations

• Initial rationale and strategy may

change over time
• Cultural differences and language
problems
• Incompatible management styles and
systems
• Coordination and integration problems
• Changes in the market and the
competitive environment
• Unintended transfer of resources,
know-how and personnel

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Chapter 1 9
 Options for Integration and Collaboration

Suppliers
Vertical Upstream
backward alliance
integration

Diversified Horizontal
Producers of alliance alliance
Substitute or Global
Competitors
Unrelated Business
Products Diversified Horizontal
integration integration

Vertical Downstream
forward alliance
integration
Distributors or
Source: Stonehouse et. al: Global and Customers
Transnational Business, 2004

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Types of Integration and Collaboration

Vertical backward or upstream integration or collaboration: The
business performs activities previously done by a supplier, thus getting
new sources of revenue, spreading its risk and decreasing the power of
suppliers

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 Types of Integration and Collaboration
Vertical forward or downstream integration or collaboration:
The business performs activities previously done by
customers or distribution channels or enters into a long-term
collaboration
Disney & McDonalds Disney & Pixar*

* Initially when Pixar started

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Types of Integration and Collaboration

Horizontal integration or collaboration:
– Leverage like supply chains to create synergies, fill portfolio gaps,
acquire technologies or patents
– Examples: pharmaceutical industry, FMCGs, automotive industry,
financial services industries

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 Types of Integration and Collaboration
Diversified integration or collaboration:
– Spread risks, leverage brand names, gain access to finance and
different technologies, expand portfolio
– Examples:

2014: Bought Nest Labs for $3.2 bn. Nest

offers products for home protection and
monitoring.
2014: Partners with GM, Honda and Audi to
bring Android into cars
2017: Bought phone engineering division
from HTC to develop its Pixel phone

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Merger and Acquisition Strategies

• M&As are driven by the desire to achieve any of the
following 6 strategic objectives:
– Create a more cost-efficient operation out of the combined
companies
– Expand geographic coverage
– Extend the company’s business and core competences
into new product categories
– Gain quick access to new technologies, key resources and
competitive capabilities
– Invent a new industry or lead the convergence of
industries whose boundaries are being blurred
– Gain market share and reduce number of competitors

2017: $13.7 bn

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 M&As: Creating Cost Efficiencies
• Typically in same industry
• Efficiencies in operations: close inefficient plants, optimize plant
utilization
• Cost reductions in back-office, administrative and support functions
• Reductions in supply chain costs
• Example: Financial services, airline, automotive industry

2013: $ 11bn

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M&As: Expanding Geographic Coverage

• Acquire rivals with operations in desired locations (e.g., Starbucks “pushing

out” small coffee shops)
• Expand internationally
▪ Gain strong foothold by purchasing established brand, customer base, market know-
how (e.g., Nestle, P&G, Kraft, Unilever)

2010: $1.8bn

2017 €1.3bn

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 M&As: Extending into New Product Categories
• Fill gaps in product lines
• Quicker or cheaper to buy than to develop
• Examples:

2016: Bayer paid $66 bn to expand 2022: Amazon completed acquisition

into genetically engineered products
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of MGM studios for $8.45 billion to
obtain exclusive rights to many
classic movies (e.g. Gone with the
Wind, Ben Hur, James Bond movies
etc.)

M&As: Gaining Access to New Technologies

Bolster technological know-how
Gain access to patents
Bypass time and effort on R&D
Maintain technological edge
Examples:
2011: Bought Motorola Mobile to
acquire know-how in mobile
technologies and to control
17,000 patents.
2017: Bought part of HTC’s
engineering group

2017: Apple buys Shazam for Acquired more than 300 companies
$400M to integrate song since its founding in1968.
identification in iTunes.

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 M&As: Inventing a New Industry
Often driven by changes in technology
Convergence of industries in the long-term is likely
Examples:

Telecommunications company/ISP AOL acquired publishing,

entertainment and cable TV company Time Warner to create a
diversified media company.

Traditional telecom companies are buying content

providers.

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M&As: Strengthening the Share Position

• “Buy” competitor‘s market share
• Reduce number of competitors or substitutes in
market
• Avoid costly customer acquisition campaigns
• Examples

2005: $16 bn

2011: $39 bn Failed

2014: $23 bn

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 M&As: Hidden Drivers

• In addition to the six

strategic reasons, M&As
are often driven by less
visible factors:
– Institutional shareholder
expectations
– Managerial ambition (e.g.,
Daimler-Chrysler)
– Speculative motives of some
stakeholders

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From Theory to Practice

CASE STUDY
• Read the short descriptions of events in the Starbucks timeline at
the bottom of the pages in the article The Barista Principle.
Categorize these activities according to the Ansoff strategies and
the various options for collaboration and integration.

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 Stabilization Strategies

• Objective: Maintain existing position

• Often transitional strategies during economic cycles with a high
degree of risk or uncertainty
– Pause and proceed with caution—taking a timeout
– No change whatsoever—continue current operations
– Profit-focus—support profits in a worsening economic climate by
reducing investment and short-term discretionary expenditures

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Retrenchment Strategies

• Divestment or significant cutbacks may represent the only

means to provide shareholder value
• Reasons:
– Lacking profits, market saturation, environmental developments
– Offer from a potential buyer
– Need to reduce surplus capacity
– Improve liquidity
– Focus on core competencies, change in corporate vision and
values
• Common retrenchment strategies:
– Turnaround/Re-Structuring: consolidation and contraction
(Motorola, Sony, Dystar)
– Management/Employee Buy-out (United Airlines)
– Spin-Off (Hoechst, Lucent, AT&T Wireless)
– Sell-Off of business units (AT&T, Siemens, Daimler)
– Liquidation (Pan Am)
– Bankruptcy (MCI Worldcom)

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Chapter 1 17
 Strategies in Declining Markets

Relative Strengths Relative Weaknesses

Positive Industry
Increase or Retreat Structure in spite
maintain selectively or of Decline
investment harvest

Retreat Negative Industry

Exit Structure during
selectively or
immediately Decline
harvest

Source: Harrell/Kiefer: Multinational Market

Portfolios in Global Strategy Development, 1993

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The Parent’s Impact

• Value-adding activities:
▪ Envisioning: strategic intent & mission, image, setting
expectations and standards
▪ Intervening: monitoring performance, challenging and
developing strategy, supporting SBU in problem situations
▪ Coaching and training: developing people and capabilities,
achieving synergies
▪ Providing central services and expertise: investment, scale
advantages from resource sharing, managerial capabilities,
KMS

• Value-destroying activities:
▪ Systems and hierarchies that delay decisions
▪ Lack of focus and identity
▪ HQ-centric behavior and ambitions
▪ Lack of accountability for financial performance
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 Roles of the Parent: Portfolio Manager

• Acts as an agent for financial markets by

acquiring and divesting companies
• Strategic requirements:
▪ Identify and acquire undervalued assets
▪ Divest low-performing SBUs and sell good
performers at a premium

• Organizational requirements
▪ Autonomous SBUs
▪ Small low-cost corporate staff
▪ Incentives based on SBU results

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Roles of the Parent: Synergy Manager

• Manage synergies across business units to
achieve economies of scope
• Strategic requirements:
▪ Sharing resources or activities
▪ Sharing skills and competencies
▪ Avoiding excessive costs of sharing and transfer

• Organizational requirements:
▪ Collaborative SBUs
▪ Corporate staff serves as integrators
▪ Overcoming resistance to sharing or transferring
▪ Incentives based in part on corporate results

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 Roles of the Parent: Parental Developer

• Use central competences to create value in

SBUs
• Strategic requirements:
▪ Parent has relevant resources and capabilities
▪ Portfolio is suited to parent’s expertise

• Organizational requirements:
▪ Corporate managers understand SBUs
▪ Linkages between parent and SBU
▪ Incentives based on SBU performance
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From Theory to Practice

CASE EXAMPLE: The Virgin Group

• Work in groups of 3 or 4 and answer the following questions:
• What is the corporate rationale of Virgin as a group of companies?
• Are there any relationships of a strategic nature between businesses within the
Virgin portfolio?
• How does the Virgin Group, as a corporate parent, add value to its businesses?
• What were the main issues facing the Virgin Group at the end of the case and how
should they be tackled?

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Chapter 1 20
 Bibliography

Boddy, D.: Management: An Introduction, 6th Ed., Pearson, 2013

Johnson, G./Scholes, K./Whittington, R.: Exploring Corporate Strategy, 9th Ed.,
Prentice Hall, 2012
Porter, Michael: Competitive Strategy: Techniques for Analyzing Industries and
Competition, Free Press, 2004
Porter, Michael: The Competitive Advantage of Nations, Free Press, 1990
Stonehouse, G., Campbell, D., Hamill, J., Purdie, T.: Global and Transnational
Business, 2nd Ed., Wiley, 2004
Thompson, A./Peteraf, M./Gamble, J./Strickland, J.: Crafting & Executing Strategy,
19th ed., McGraw-Hill, 2013

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