Developing Corporate

Strategies
 Lecture Objectives
• Define corporate strategy.
• Explain the difference between a single-business firm and a
multiple-business firm.
• Discuss how corporate strategy is related to the other firm
strategies.
• Explain the corporate strategic directions available to firms.
• Describe the various organizational growth strategies.
• Discuss the reasons/motives for diversification
• Discuss the advantages and disadvantages of related &
unrelated diversification.
• Explain how growth strategies can be implemented.
 What is Corporate Strategy?
• Those strategies concerned with the broad and
long-term questions of
– what business(es) the organization is in or wants to be in
& what it wants to do with those businesses
• Task involves
– Moves to enter new businesses
– Actions to boost combined performance of businesses
– Ways to capture synergy among related businesses
– Establishing investment priorities & steering
corporate resources into most attractive units
 Single & Multiple Business
Organizations
• Single business organizations
– Operates primarily in only one industry (e.g., Coca-Cola
– Beverage Industry; Wrigley Jr. Company – Chewing
Gum)
• Multiple Business Organizations
– Operates in more than one industry
– Example: PepsiCo – Snack Food Industry business (Frito
Lay); & Beverage Industry
Corporate, Competitive & Functional
Strategies

• Corporate strategy establishes the overall

direction that the organization hopes to go.
• Competitive & functional strategies provide
the means or mechanisms for making sure
the organization gets there.
Possible Corporate Strategic Directions

(1) Moving the organization ahead --

Organizational Growth
(2) Keeping the organization where it is --
Organizational Stability
(3) Reversing the organization’s weaknesses or
decline -- Organizational Renewal
 ORGANIZATIONAL GROWTH
• Growth strategy
– Involves the attainment of specific growth objectives by
increasing the level of an firm’s operations
• Typical growth objectives for businesses
– Increase in sales revenues
– Increase in earnings or profits
– Other performance measures
 Types of Growth Strategies

International
Concentration

Organizational
Growth
Diversification
Vertical
•Related
Integration
•Unrelated Horizontal
•Backward
Integration
•Forward
 Concentration Strategy
• A growth strategy where the firm
– Concentrates on its primary line of business
– Looks for ways to meet its growth objectives
through increasing its level of operation in this
primary business
• When a single-business organization pursues
growth, it is using the concentration strategy
 Concentration Strategy
• Four concentration strategy options
Products
Current New

Product-Market Product
Current
Customers Exploration Development

Market Product/Market
New Diversification
Development
 Concentration Strategy
• Product-Market Exploration Option
– Describes attempts by firm to increase sales of its
current product(s) in its current market(s) by
depending on its functional & competitive
strategies
• Product Development Option
– Firm create new product for use by its current
market (customers)
 Concentration Strategy
• Market Development Option
– When a firm sell its current products in new
markets (additional geographic areas or
market segments not currently served by firm)
• Product-Market Diversification Option
– Where firm seeks to expand both into new
products & new markets
– Single-business firm becomes a multiple-
business firm since it is now operating in a
different industry
 Concentration Strategy

• Advantage
– Organization becomes very good at what it does
• Drawback
– Organization is vulnerable to industry and other
external environmental shifts
• Concentration strategy is used by both small-
sized and large organizations
Vertical Integration Strategies
• An organization’s attempt to gain control of
– Its inputs (backward integration) -- supplier
– Its output (forward integration) -- distributor
– Or both inputs and output
– Purpose is to (1) reduce resource acquisition costs, &
(2) deal with inefficient operations
• Vertical Integration
– Considered a growth strategy because the firm’s
operations are expanded beyond primary business
– Mixed empirical results as to whether strategy helps or
hurt performance
– What is the role of outsourcing in achieving same
objective as vertical integration?
 Vertical Integration Strategies
• Benefits
– Reduced purchasing & selling
costs
– Improved coordination of
functions & capabilities
– Protected proprietary
technology
– Increase entry barriers to
potential competitors
– Lead to expansion of core
competencies
• Costs
– Reduced flexibility as firm is
locked into products &
technology
– Create an exit barrier due
to existence of assets that
are hard to sell
– Difficulties in integrating
various operations
– Financial costs of acquiring
or starting up
 Diversification Strategies

• A corporate growth strategy in which a firm

expands its operation by moving into a
different industry
• Many reasons or motives for diversification
• Two major types of diversification
– Related (concentric) diversification
– Unrelated (conglomerate) diversification
 Why Do Firms Diversify?

• To Grow
– Increase sales & profitability beyond what firm’s
core businesses can provide
• To more fully utilize existing resources and
capabilities
– Skills in sales & marketing, general management
skills & knowledge, distribution channels, etc.
 Why Do Firms Diversify?
• Risk reduction and/or spreading
– Escape from unattractive or undesirable industries (e.g.,
tobacco & oil companies)
– Stability of profit flows (CAPM: systematic vs. unsystematic
risks; shareholders & diversified portfolios)
• To make use of surplus cash flows
– Large cash balances attract corporate raiders
– Use cash balances to avoid hostile takeovers
 Why Do Firms Diversify?
• Diversification is capable of increasing
shareholder value if it passes three tests:
– The attractiveness test: The industry must be
structurally attractive or capable of being made
attractive
– The cost-of-entry test: The cost of entry must
not capitalize all future profits
– The better-off test: Either the new unit must gain
competitive advantage from its link with the
corporation or vice versa (i.e. synergy)
Related (Concentric) Diversification
• Related (Concentric) Diversification
– Diversifying into a different industry but one
that’s related in some ways to the organization’s
current operations
– Search for strategic “synergy”, which is the
performance of the sum of the parts is better
than the whole
• The idea that 2 + 2 = 5
– Synergy happens because of the interactions and
the interrelatedness of the combined operations
and the sharing of resources, capabilities, &
distinctive competencies
 Related Diversification
• Builds shareholder value by capturing cross-
business “strategic fits”
– Transferring skills & capabilities from one business
to another
– Sharing facilities or resources to reduce costs
– Leveraging the use of common brand name
– Combining resources to create new competitive
strengths and capabilities
 Related Diversification
• Advantages or Benefits
– Opportunities to achieve economies of scale and scope
through skill transfers, lower costs, common brand name,
technology, etc.
– Opportunities to expand product or service offerings and
preserve unity in businesses
• Disadvantages
– Complexity and difficulty of coordinating different, but
related businesses (e.g. …)
 Unrelated Diversification
• Diversifying into completely different
industry from the firm’s current operations
• Firm move into industries where there is
– No strategic fit to be exploited
– No meaningful value chain relationships
– No unifying strategic theme

• Approach is venture into any business with

good profitability prospects
 Unrelated Diversification
• Targets for unrelated diversification
– Firms with undervalued assets

– Firms in financial distress

– Firms with bright growth prospects but limited capital

• Advantages
– Business risk spread over different industries
– Efficient allocation of capital resources
– Stability of profits
– Enhanced shareholder value
 Unrelated Diversification
• Disadvantages
– Difficulties of competently managing many
diverse businesses
– No strategic fits which can be leveraged into
competitive advantage

• Unrelated diversification is a finance-driven

approach to creating shareholder value
Implementing Growth Strategies
• Strategic Partnering
– When two or more firms establish a legitimate
relationship by combining their resources, core
competencies, distinctive capabilities for some
business purpose
– Arrangement can be used to implement any of
the growth strategies
• Vertical Integration
• Horizontal Integration
• Related Diversification
Implementing Growth Strategies
• Types of Strategic Partnerships
– Joint Venture (JV)
• Two or more separate organization form an
independent organization for strategic purposes
• Partners usually own equal shares of new venture
• Used when partners do not want to be legally
joined
– Long-Term Contract
• Legal contract between organizations covering a
specific business purpose
• Typically between an organization & its suppliers
Implementing Growth Strategies

• Types of strategic Partnerships (cont’d)

– Strategic Alliance
• Two or more firms share resources, capabilities or
competencies to pursue some business purpose

• Similar to JV’s but no formation of a separate entity

• Often pursued in order to

• Partners reap benefits of expanded operations