CHAPTER 7 Strategy

Formulation: Corporate
Strategy

STRATEGIC MANAGEMENT & BUSINESS POLICY

10TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER

7-1
Corporate Strategy

7-2
Corporate Strategy

3 Key Issues –
–Firm’s directional strategy
The firm’s overall orientation towards growth,
stability or retrenchment

–Firm’s portfolio strategy

The industries or markets in which the firm competes

–Firm’s parenting strategy

The manner in which management coordinates activities
and transfers resources and cultivates capabilities among
product lines and business units

7-3
Corporate Strategy

Directional Strategy –
Every corporation must decide its orientation toward growth by asking the
following three questions:

1. Should we expand, cut back, or continue our operations unchanged?

2. Should we concentrate our activities within our current industry, or

should we diversify into other industries?

3. If we want to grow and expand nationally and/or globally, should we do

so through internal development or through external acquisitions,
mergers, or strategic alliances?

7-4
Corporate Strategy

Directional Strategy –
3 Grand Strategies

•Growth strategies
– Concentration or diversification
– Internal development or acquisitions,
mergers, or alliances

•Stability strategies
-status quo

•Retrenchment strategies
-contraction
7-5
Corporate Directional Strategies

7-6
Corporate Strategy

Growth Strategies --

–External mechanisms

•Mergers

•Acquisitions

•Strategic alliances

7-7
Corporate Strategy

Growth Strategies --

–2 Basic forms

•Concentration
»Vertical growth
»Horizontal growth

•Diversification
»Concentric Diversification (RELATED)
»Conglomerate Diversification (UNRELATED)

7-8
Corporate Strategy

Vertical Growth --

–Vertical integration
•Full integration
•Taper integration
•Quasi-integration
•Long-term contract

7-9
Corporate Strategy

Vertical Growth --

–Backward integration

–Forward integration

7-10
Corporate Strategy

Concentration --
–Horizontal Growth

– New Geographic Markets

– Acquiring New Companies

7-11
Corporate Strategy

Basic Diversification Strategies --

–Concentric Diversification (RELATED)

»Growth into related industry
»Search for synergies

–Conglomerate Diversification (UNRELATED)

»Growth into unrelated industry
»Concern with financial considerations

7-12
Corporate Strategy

International Entry Options --

–Exporting
–Licensing
–Franchising
–Joint Ventures
–Acquisitions
–Green-Field Development
–Production Sharing (Outsourcing)
–Turnkey Operation
–BOT Concept (Build, Operate, Transfer)
–Management Contracts
7-13
Corporate Strategy

CONTRAVERSIES IN DIRECTIONAL
GROWTH STRATEGIES
Although research in not in complete agreement, growth
into areas related to a company’s current product
lines is generally more successful than in growth
into completely unrelated areas

Cisco’s three criteria for takeover:

-It must be relatively small

-It must be comparable in organizational culture
-It must be physically close to one of the existing affiliates
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Corporate Strategy

Stability Strategies --

–Pause/proceed with caution

–No change

–Profit strategies

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Corporate Strategy

Retrenchment Strategies --

–Turnaround
–Captive Company Strategy
–Selling out
–Bankruptcy
–Liquidation

7-16
Corporate Strategy

Portfolio Analysis --

–Resource commitment on best products to

ensure continued success

–Resource commitment on new costly products

high risk

7-17
Corporate Strategy

Portfolio Analysis --
…Puts the corporate headquarters into the
role of an internal banker
…Top management views its product lines and
business units as a series of investments from
which it expects a profitable return

7-18
BCG Matrix (Portfolio Analysis)

7-19
GE Business Screen (Portfolio Analysis)

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

7-20
Corporate Strategy

Portfolio Analysis --
Disadvantage:
because it tends to primarily view matters
financially, it regards business units and
product lines as separate and independent.

It fails to deal with the question of :

-- what industries a corporation should enter or
-- with how a corporation can attain synergy among its
product lines and business units.

These questions are addressed by;

“Corporate Parenting Strategy”
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Corporate Strategy

Corporate Parenting Strategy –

…views a corporation in terms of resources
and capabilities that can be used to build
business unit value as well as generate
synergies across business units …
–Strategic factors
Examine each business unit in terms of its
strategic factors
–Performance improvement
Examine each business unit in terms of areas in
which performance can be increased
–Analyze fit
Analyze how well the parent corporation fits with the
business unit 7-22