STRATEGY FORMULATION

5.1. CORPORATE STRATEGY

Corporate strategy- the choice of direction of
the firm as a whole and the management of its
business or product portfolio and concerns:

Directional strategy
Portfolio strategy/ analysis
Parenting strategy
CORPORATE STRATEGY
Directional strategy- the firm’s overall
orientation toward growth, stability, or retrenchment.
Portfolio analysis- industries or markets in which
the firm competes through its products and business
units.
Parenting strategy- the manner in which
management coordinates activities and transfers
resources and cultivates capabilities among product
lines and business units.
5.1. Directional Strategy
A corporate directional strategy is composed of three
general orientations/ grand strategies.
Directional Strategy
Growth Strategies:
Most widely pursued strategies
External mechanisms:
 Mergers
 Transaction involving two or more firms in which stock is
exchanged but only one firm survives.
 Similar size, friendly
 Acquisition
 Purchase of a firm that is absorbed as an operating
subsidiary of the acquiring firm.
 Different sizes, friendly or hostile.
 Strategic Alliance
 Partnership of two or more firms to achieve strategically
significant objectives that are mutually beneficial.
Directional Strategy
I. Growth Strategy
The two basic growth strategies are:
1) Concentration
• Vertical
• Horizontal
2) Diversification
• Concentric
• Conglomerate
Directional Strategy
1) Concentration Strategies
 Maintaining current product lines in one industry
Vertical growth- taking over the function previously provided
by a supplier or by a distributor and results in vertical
integration.
Vertical integration- the degree to which a firm operates
vertically in multiple locations on an industry’s value chain
from extracting raw materials to manufacturing to retailing
 Backward integration- assuming a function previously provided by
a supplier.
 Forward integration- assuming a function previously provided by a
distributor.
Directional Strategy
Vertical Integration Continuum
Directional Strategy
 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.
Directional Strategy
Horizontal growth- expansion of operations into other
geographic locations and/or increasing the range of
products and services offered to current markets
Horizontal growth is achieved through:
 Internal development
 Acquisitions
 Strategic alliances

Horizontal integration- the degree to which a firm

operates in multiple geographic locations at the same
point on an industry’s value chain
Directional Strategy
International Entry Options for Horizontal Growth
Exporting
Licensing • Green-Field
Franchising Development
Joint Venture • Production Sharing
Acquisitions • Turn-key
Operations
• BOT Concept
• Management
Contracts
Directional Strategy
2) Diversification Strategies
 Movement into new product lines in other industries

Concentric (Related) Diversification-

growth into a related industry when a firm has a
strong competitive position but industry
attractiveness is low
Directional Strategy
Controversies in Directional Strategies

 Is vertical growth better than horizontal growth?

 Is concentration better than diversification?
 Is concentric diversification better than
conglomerate diversification?
Directional Strategy
II. Stability Strategy
Stability Strategies- continuing activities without any
significant change in direction
 Pause/Proceed with caution strategy- an opportunity to rest
before continuing a growth or retrenchment strategy.
 No change strategy- continuance of current operations and
policies.
 Profit Strategies- to do nothing new in a worsening situation
but instead to act as though the company’s problems are only
temporary.
Directional Strategy
III. Retrenchment Strategy
Retrenchment Strategies- used when the firm has a
weak competitive position in some or all of its product
lines from poor performance.
Directional Strategy
Turnaround strategy- emphasizes the
improvement of operational efficiency when the
corporation’s problems are pervasive but not
critical
The two basic phases:
 Contraction- effort to quickly “stop the bleeding”
across the board cutback in size and costs.

 Consolidation- stabilization of the now- leaner

corporation
Directional Strategy
Captive Company Strategy- company gives up
independence in exchange for security.

Sell-out strategy- management can still obtain a

good price for its shareholders and the employees can
keep their jobs by selling the company to another firm.

Divestment- sale of a division with low growth

potential.
Directional Strategy
Bankruptcy- company gives up management of
the firm to the courts in return for some
settlement of the corporation’s obligations

Liquidation- management terminates the firm

5.1.2. Portfolio Analysis
Portfolio analysis- management views its
product lines and business units as a series of
investments from which it expects a profitable
return

Popular portfolio analysis techniques include:

 BCG Growth-Share Matrix
 GE Business Screen
Portfolio Analysis
Portfolio Analysis
I) BCG Matrix

Question marks- new products with the potential for

success but require a lot of cash for development.

Stars- market leaders at the peak of their product cycle

and are able to generate enough cash to maintain
their high market share and usually contribute to the
company’s profits.
Portfolio Analysis
Cash cows- products that bring in far more
money than is needed to maintain their market
share.

Dogs- products with low market share and do not

have the potential to bring in much cash.
Portfolio Analysis
BCG Matrix- Limitations
 Use of highs and lows to form categories is
too simplistic
 Link between market share and profitability
is questionable
 Growth rate is only one aspect of industry
attractiveness
 Product lines or business units are considered only
in relation to one competitor
 Market share is only one aspect of overall
competitive position
Portfolio Analysis
II) GE Business Screen
Two Key Factors:
Long-term industry attractiveness- stage in industry life
cycle, segment growth rate, strength of competitive
forces, extent of industry change…
Business strength/competitive position- market share,
profit margins, change in market share over time,
relative contribution to firm profits & cash flow,
relatedness between product lines, product reputation
in industry….
 C
Winners Winners
A Question
High B Marks

D
Industry Attractiveness

Winners
E Average
Businesses
Medium F
Losers

H
Losers
G
Low
Profit
Producers Losers

Strong Average Weak

Business Strength/Competitive Position
Portfolio Analysis

GE Business Screen Limitations

 Complicated and cumbersome
 Subjective evaluation criteria
 Does not reflect the potential impact of new
products & services/developing industries.
5.1.3 Parenting Strategy
Corporate Parenting: Views the corporation in terms of
resources and capabilities that can be used to build
business unit value as well as generate synergies across
business units.
Corporate parenting generates corporate strategy by
focusing on the core competencies of the parent
corporation and on the value created from the relationship
b/n the parent and its businesses.
Developing A Corporate Parenting Strategy
Three analytical Steps:
1. Examine each business unit(or targets firm) in terms
of its strategic factors
2. Examine each business unit(or target firm) in terms
of areas in which performance can be improved.
(parenting opportunities)
3. Analyze how well the parent corporation fits with the
business unit(target firm)
Parenting Strategy
Parenting-Fit Matrix: Summarizes the various judgments
regarding corporate/business unit fit for the corporation
as a whole.
Fit b/n parent’s skills and resources with business unit’s
needs and opportunities.
The parenting –fit matrix is composed of two dimensions:
a) the positive contributions that the parent can make
b) the negative effects the parent can make
The combination of these two dimensions creates five
different positions-each with its own implications for
the corporate strategy.
 Low

MISFIT between critical success factors

Heartland
and parenting characteristics
Ballast

Edge of
Heartland

Alien
Territory

Value Trap
High
Low High
FIT between parenting opportunities
and parenting characteristics
Parenting Strategy
Heartland Businesses:
Lie at the top right corner of the matrix.
Have opportunities for improvement by the parent
and the parent understands their strategic factors
well.
They should have priority for all corporate activities
Parenting Strategy
Edge- of-Heartland Businesses:
Some parenting characteristics fit the business, but
others do not.
The parent may not have all the characteristics
needed by a unit, or the parent may not really
understand all of the unit’s strategic factors.
They have the possiblity of being transformed into
heartland businesses.
Parenting Strategy
Ballast Businesses:
They fit very comfortably with the parent corporation
but contain very few opportunities to be improved by
the parent.
They might be businesses with the corporation for
many years and have been very successful.
There may be a possibility of becoming alien territory
as environment changes.
Corporate decision makers should consider divesting
this unit as soon as they can get price that exceeds the
expected value of future cash flows.
Parenting Strategy
Alien Territory Businesses:
Have little opportunity to be improved by the
corporate parent, and a misfit exists between the
parenting characteristics and the units’ strategic
factors.
There is little potential for value creation but high
potential for value destruction on the part of the
parent.
These units are usually small and are often remnants
of past experiments with diversification, businesses
acquired as part of a larger purchase or pet projects of
Parenting Strategy
Value Trap Businesses:
They fit well with the parenting opportunities, but
they are a misfit with the parent’s understanding of
the units’ strategic factors.