Corporate Strategy

Corporate strategy is primarily about the choice of

direction for the corporation as a whole. The basic
purpose of a corporate strategy is to add value to the
individual businesses in it. A corporate strategy involves
decisions relating to the choice of businesses, allocation of
resources among, different businesses, transferring skills
and capabilities in such a way as to obtain synergies
among product lines and business units, so that the
corporate whole is greater than the sum of its individual
business units.
 Types of Corporate Strategies

There are four types of strategic alternatives

available at corporate level.
Stability strategy
Growth/Expansion Strategies
Defensive strategies
Combination Strategy
 Stability strategy
Stability strategy implies continuing the current activities of the
firm without any significant change in direction.
If the environment is unstable and the firm is doing well, then it
may believe that it is better to make no changes.
Stability strategy is most likely to be pursued by small businesses or
firms in a mature stage of development.
Stability strategies are implemented by ‘steady as it goes’
approaches to decisions. No major functional changes are made in the
product line, markets or functions.
stability strategy is not a ‘do nothing’ approach nor does it mean
that goals such as profit growth are abandoned.
The stability strategy can be designed to increase profits through
such approaches as improving efficiency in current operations
Why do companies pursue a stability strategy?
othe firm is doing well or perceives itself as successful
oit is less risky
oit is easier and more comfortable
othe environment is relatively unstable
otoo much expansion can lead to inefficiencies
Situations where a stability strategy is more
advisable than the growth strategy
if the external environment is highly dynamic and
unpredictable
strategic managers may feel that the cost of growth
may be higher than the potential benefits
excessive expansion may result in violation of anti
trust laws
 Types of stability strategies

Pause/Process with caution strategy – some

organizations pursue stability strategy for a
temporary period of time until the particular
environmental situation changes, especially if they
have been growing too fast in the previous period.
Stability strategies enable a company to consolidate
its resources after prolonged rapid growth.
Sometimes, firms that wish to test the ground
before moving ahead with a full-fledged grand
strategy employ stability strategy first.
No change strategy – a no change strategy is a
decision to do nothing new i.e continue current
operations and policies for the foreseeable future. If
there are no significant opportunities or threats
operating in the environment, or if there are no
major new strengths and weaknesses within the
organization or if there are no new competitors or
threat of substitutes, the firm may decide not to do
anything new.
Profit strategy – the profit strategy is an attempt to
artificially maintain profits by reducing
investments and short-term expenditures. Rather
than announcing the company’s poor position to
shareholders and other investors at large, top
management may be tempted to follow this
strategy. Obviously, the profit strategy is useful to
get over a temporary difficulty, but if continued for
long, it will lead to a serious deterioration in the
company’s position. The profit strategy is thus
usually the top management’s short term and often
self serving response to the situation.
 Growth/Expansion Strategies
Growth strategies are the most widely pursued
corporate strategies. Companies that do business in
expanding industries must grow to survive. A
company can grow internally by expanding its
operations or it can grow externally through
mergers, acquisitions, joint ventures or strategic
alliances.
 Reasons for pursuing growth strategies –
 to obtain economies of scale
to attract merit
to increase profits
to become a market leader
to fulfill natural urge
to ensure survival
Growth strategies can be divided into three broad
categories

Intensive strategies
Integration strategies
Diversification strategies
 Integration Strategies
integration basically means combining activities relating to
the present activity of a firm. Such a combination can be
done on the basis of the industry value chain. A company
performs a number of activities to transform an input to
output. These activities include right from the procurement
of raw materials to the production of finished goods and
their marketing and distribution to the ultimate customers.
These activities are also called value chain activities. The
firm that adopts integration may move forward or backward
the industry value chain
 Integration is basically of two types

Vertical integration
Horizontal integration
Vertical Integration – involves gaining
ownership or increased control over suppliers or
distributors.
Vertical integration is of two types
Backward integration –
involves gaining ownership of firm’s suppliers.
For example, a manufacture of finished products may take
over the business of a supplier who manufactures raw
materials, component parts and other inputs.
It decreases the dependability of the supply and quality of
raw materials used as production inputs.
This strategy is generally adopted when
present suppliers are unreliable, too costly or cannot
meet firm’s needs
 the firm’s industry is growing rapidly
Number of suppliers is small, but the number of
competitors is large
Stable prices are important to stabilize cost of raw
materials
Present suppliers are getting high margins
The firm has both capital and HR to manage the new
business
Forward integration – involves gaining ownership
or increased control Over distributors or retailers.
This strategy is generally adopted when
the present distributors are expansive, unreliable or
incapable of meeting the firm’s needs
the availability of quality distributors is limited
the firm’s industry is growing and will continue to grow
the advantages of stable production are high
present distributors or retailers have high profit margins
the firm has both capital and HR to manage new business
 Advantages of vertical integration
a secure supply of raw materials or distribution channels
control over raw materials and other inputs required for
production or distribution channels
access to new business opportunities and technologies
elimination of need to deal with a wide variety of suppliers
and distribution
Disadvantages of vertical integration
 increased costs, expenses and capital requirements
loss of flexibility in investments
problems associated with unbalanced facilities or unfulfilled
demand
additional administrative costs associated with managing a
more complex set of activities
Horizontal Integration – is a strategy seeking
ownership or increased control over a firm’s competitors.

Advantages are
it eliminates or reduces competition
it yields access to new markets
it provides economies of scale
it allows transfer of resources and capabilities
 Diversification strategies

Diversification strategies is the process of adding new

businesses to existing businesses of the company. In other
words, diversification adds new products or markets in the
existing ones. A diversified company is one that has two
or more distinct businesses. The diversification strategy is
concerned with achieving a greater market from a greater
range of products in order to maximize profits. From the
risk point of view, companies attempt to spread their risk
by diversifying into several products or industries.
Diversification can be achieved through a variety of ways:
through mergers and acquisitions
through joint ventures and strategic alliances
through starting up a new unit

Reasons for diversification

saturation or decline of the current business
better opportunities
sharing of resources and strengths
new avenues for reducing costs
obtain technologies and products
use of brand name
risk minimization
 Types of Diversification

A. concentric diversification
B. conglomerate diversification
 Concentric diversification

adding to new, but related business is called Concentric

diversification.
It involves acquisition of businesses that are related to
the acquiring firm in terms of technology, markets or
products.
The selected new business has compatibility with the
firm’s current business.
 Advantages

businesses sharing tangible and intangible resources

increasing the firm’s stock value
increases the growth rate of the firm
better use of funds than ploughing them back into internal
growth
improves the stability of earning and sales
balances the product line when the life cycle of the current
products have peaked
helps to acquire a needed resource quickly
achieves tax savings
increases efficiency and profitability through synergy
reduces risk
 Conglomerate diversification

adding to new, but unrelated businesses Is called

conglomerate diversification.
The new businesses will have no relationship to the
company’s technology, products or markets.
Advantages
business risk is scattered over diverse industries
financial resources are invested in industries that offer the
best profit prospects
buying distressed businesses at a low price can enhance
shareholder wealth
company profitability can be more stable in economic
upswings and downswings
 Disadvantages
a. it is difficult to manage different businesses
effectively
b. the new businesses may not provide any
competitive advantage if it has no strategic fits
 Differences between
concentric and conglomerate diversification
Sr.No Concentric Diversification Conglomerate
Diversification
1 Diversifying into businesses related to Diversifying into businesses unrelated
the existing business to the existing business

2 There is commonality in markets, No commonality in markets, products

products or technology or technology

3 Main objective is to increase Main objective is to increase

shareholder value through ‘synergy’ by shareholder value through profit
sharing skills, resources and maximization
capabilities
4 Less risky More risky
 Means to achieve diversification

i. Mergers & Acquisitions

ii. Joint ventures
iii. Strategic alliances
iv. Internal development
Mergers & Acquisitions – a merger occurs when two or more
organizations of about equal size combine to become one through an
exchange of stock or cash or both.

Mergers can take place in different ways

Acquisition occurs when a large organization purchases a
smaller firm, or vice versa.
Consolidation is when both firms dissolve their identity to
create a new firm. It is also known as amalgamation.
Friendly merger – when both firms desire a merger or
acquisition, it is termed as friendly merger
Demerger – or split or division of a company is the opposite
of mergers and acquisition. This happens when a part of the
undertaking is transferred to a newly formed company or to an
existing company. The size of the company after demerger
would reduce
Takeover –

a surprise attempt by one company to acquire control of

another Company against the will of the current
management is called a takeover or hostile takeover.

 It is usually done through the purchase of controlling

share of voting stock in a publicly traded company.

 In the case of takeover, the acquiring firms retains its

identity whereas the target firm loses its identity after
restructuring.
 Types of mergers

horizontal merger – companies producing the same product

or doing same business join together.

Vertical merger – joining of two or more companies

involved in different stages of production or distribution of the
same product or service.

Lateral or allied merger – when the firms producing

different products which are related in some way come together
Conglomerate merger – the merger of two or more
companies producing unrelated products.

Concentric merger – if the activities of the segments

brought together are so related that there is carryover of
specific management functions or complimentarily in relative
strengths among them

Circular merger – when firms belonging to the different

industries and producing altogether different products combine
together under the banner of central agency.
 The Merger Process

i. Identify industries
ii. Select sectors
iii. Choose companies
iv. Evaluate cost of acquisition and returns
v. Rank the candidates – strategic fit, financial fit,
cultural fit
vi. Identify good candidates
vii. Decide the extent of acquisition/retention
viii.Merger implementation
ix. Post-merger integration
 Demerits of M & A

1. sometimes expensive premiums are paid to acquire a

business
2. a number of difficulties are faced in integrating the
activities and resources of the acquired firm into the
operations of the acquiring firm
3. synergies can be quickly imitated by the competitors
4. cultural clashes create a major challenge, which may
doom the induced benefits
Joint Ventures – joint ventures are assuming an
increasingly prominent role in the strategy of leading firms.

oA joint venture occurs when two or more companies join

together to form a separate legal entity, where each of the
partners own equal or near equal stake.

o These ventures are formed to capitalize on each other’s

distinctive competencies.

oThe most common forms of a joint venture include those

between an international firm with a domestic firm.
 Types of joint ventures

1.Diversification joint venture – a firm may diversify

into new products or markets through a joint venture. In
such joint ventures, the specific benefits arise from
transfer of technical, managerial and financial expertise
from one business to another

2.Market entry joint ventures – in this type of joint

ventures, two or more firms in different businesses enter
a new business where they could capitalize on their
combined capabilities
 Strategic Alliances

In strategic alliances, two or more firms jointly Cooperate

for mutual gain. Each partner brings knowledge or
Resources to the partnership. For example, one partner
provides Manufacturing capabilities while the other partner
provides marketing .

Marketing expertise. In the long run, partners can learn

from each other and develop new core competencies.
 Advantages of strategic alliances

•improvement of efficiency, access to knowledge,

•Overcoming local government regulations, overcoming

restrictions in competition

•Issues involved – assess and value partner knowledge,

determine knowledge accessibility,

•Evaluate case of knowledge transfer, establish knowledge

connections between the partners,

•Ensure that cultures are in alignment

 Defensive strategies

These strategies are also called retrenchment

strategies. A company may pursue retrenchment
strategies when it has a weak competitive position
in some or all of the product lines resulting in poor
performance – sales are down and profits are
dwindling.
In an attempt to eliminate the weaknesses that are dragging the
company down, management may follow one or more of the
following retrenchment strategies

A. Turnaround

B. Divestment

C. Bankruptcy

D. liquidation
 Turnaround

A firm is said to be sick when it faces a severe

cash crunch or a consistent downtrend in its
operating profits. Such firms become insolvent
unless appropriate internal and external actions
are taken to change the financial picture of the
firm. This process of recovery is called
turnaround strategy.
 The three phases of turnaround

First phase – is the diagnosis of impending trouble. Many

authors and research studies have indicated distinct early
warning signals of corporate sickness

Second phase – involves analyzing the causes of sickness

to restore the firm on its profit track. These measures are
of both short-term and long-term nature

The third and final phase – involves implementation of

change process and its monitoring
When turnaround becomes necessary
Decreasing market share

Decreasing sales

Decreasing profitability

Increasing dependence on debt

Failure to reinvest sufficiently in the business

Lack of planning

Inflexible chief executive

Management succession problems

A management team unwilling to learn from its competitors

 Types of turnaround strategies

a) Strategic turnaround

b) Operating turnaround
Divestiture – selling a division or part of an organization is
called divestiture
Generally used in the following circumstances
when the business cannot be turned around

when the business needs more resources than the company

can provide

when a business is responsible for a firm’s overall poor

performance

when a business is a misfit with the rest of the organization

when a large amount of cash is required quickly

 Types
1. Spin-off – a new company comes into existence.
The shareholders of the parent company become the
shareholders of the new company spun off. It is a kind
of demerger when an existing parent company
distributes on a pro-rata basis the shares of the new
company to the shareholders of the parent company
free of cost. There is no money transaction,
subsidiary’s assets are not revalued, and transaction is
treated as stock dividend. Both the companies exist
and carry on their businesses independently after spin-
off.
2. Sell-off – it is a form of restructuring, where a firm sells
a division to another company. When the business unit is
sold, payment is received generally in the form of cash or
securities
3. Voluntary corporate liquidation or bust-ups – it is also
known as complete sell-off. The companies normally go for
voluntary liquidation because they create value to the
shareholders. Here the firm sells its assets/divisions to
multiple parties which may result in a higher value being
realized than if they had to be sold as a whole. Through a
series of spin-offs or sell-offs a company may go ultimately
for liquidation
4. Equity carveouts – it is a different type of divestiture
and different form of spin-off and sell-off. The parent
company may sell a 100% interest in subsidiary company
or it may choose to remain in the subsidiary’s line of
business by selling only a partial interest (shares) and
keeping the remaining percentage of ownership.
 Bankruptcy

This is a form of defensive strategy. It allows organizations

to file a petition in the court for legal protection to the firm,
in case the firm is not in a position to pay its debt. The
court decides the claims on the company and settles the
corporation’s obligations.
 Liquidation

occurs when an entire company is dissolved and its

assets are sold. It is a strategy of the last resort. When
there are no buyers for a business which wants to be sold,
the company may be wound up and its assets may be sold
to satisfy debt obligations.
Liquidation becomes inevitable under the following
circumstances –
when an organization has pursued both turnaround
strategy and divestiture strategy, but failed
when an organization’s only alternative is bankruptcy.
When the shareholders of a company can minimize their
losses by selling the assets of a business
 Combination strategy

A company can pursue a combination of two or more

corporate strategies simultaneously. But a combination
strategy can be exceptionally risky if carried too far. No
organization can afford to pursue all the strategies that
might benefit the firm. Difficult decisions must be made.
Priorities must be established. Organizations like
individuals have limited resources, so organizations must
choose among alternative strategies