Corporate Performance Evaluation

Environmental ScanningO

T

S

WVision

Mission

Goals

Objectives

STRATEGIES

Functional

Corporate

PoliciesProgramsBudgets

ProceduresEvaluation

STRATEGIC MANAGEMENT PROCESS

External Environment

Internal Environment

Business

UNIT 8- CORPORATE STRATEGY

STRATEGIES

Functional

CorporateBusiness

Corporate

Strategy

Parenting

Strategy

PortfolioStrateg

y

Directional

Strategy

Corporate strategy deals with three key issues facing the corporation as a whole:

STRATEGY FORMULATION- CORPORATE STRATEGY

1. The firm's overall orientation toward growth, stability or retrenchment -How should we grow?

2. The industries in which the firm competes through its products and business units

3. The manner in which management coordinates activities, transfers resources, and cultivates capabilities among units (Head Quarters is called the Organizational “Parent” that creates synergy among the business unit “Children”)

Corporate

Strategy

Directional

Strategy

Corporate strategy deals with three key issues facing the corporation as a whole:

STRATEGY FORMULATION- CORPORATE STRATEGY

1. The firm's overall orientation toward growth, stability or retrenchment -How should we grow?

Parenting

Strategy

PortfolioStrateg

y

Corporate

Strategy

DirectionalStrategy

RetrenchmentStrategies

StabilityStrategies

GrowthStrategies

“Directional Strategy Types”

1. Expand the company’s activities

2. Make no change to the company’s current activities

3. Reduce the company’s current level of activities

Retrenchment

Strategy

Portfolio Strategy

Corporate

Strategy

DirectionalStrategy

Retrenchment

Strategies

StabilityStrategies

GrowthStrategies

Growth Strategies –Means to GrowInternalGrowth

ExternalGrowth

Growth Strategies –Means to GrowA corporation can grow:

Internally by expanding its operations domestically and globally

Externally through mergers, acquisitions and strategic alliances

-Merger is a transaction involving two or more companies in which stock is exchanged but only one corporation survives. The companies are of somewhat similar size and are usually “friendly”. The resulting firm is likely to have a name derived from its composite firms e.g. Daimler –Chrysler.

- An acquisition is the (friendly or hostile) purchase of a company that is completely absorbed as an operating subsidiary or division of the acquiring corporation ( Oracle’s acquisition of People Soft). Hostile acquisition is called “takeover”

- A strategic alliance is partnership of two or more corporations or business units to achieve strategically significant objectives that are mutually beneficial. Usually strategic alliances involve partnerships, technology licensing agreements or joint ventures. (Sony –Ericsson)

Corporate

Strategy

DirectionalStrategy

Retrenchment

Strategies

StabilityStrategies

GrowthStrategies

Diversification

Strategy

Concentration

Strategy

Growth Strategies –Basic Forms

ExternalGrowth

InternalGrowth

CONCENTRATION - concentrating (investing)“resources” on current product lines when current products show growth potential. Growing firms in growing industries choose this path before they try diversification.

DIVERSIFICATION -branching out into new industries when the current one consolidates and matures.

Corporate

Strategy

DirectionalStrategy

GrowthStrategies

Concentration

Strategy

Basic Concentration Strategies

Diversification

Strategy

RetrenchmentStrategies

StabilityStrategies

Current or New Markets

Current

Products

Corporate

Strategy

DirectionalStrategy

GrowthStrategies

Concentration

Strategy Horizontal Integration

Vertical Integration Backward

Forward

Geographic

Product Range

Basic Concentration Strategies

Diversification

Strategy

RetrenchmentStrategies

StabilityStrategies

Current or New Markets

Current

Products

Vertical IntegrationThe degree to which a firm owns its upstream suppliers and its downstream buyersis referred to as vertical integration. Because it can have a significant impact on abusiness unit's position in its industry with respect to cost, differentiation, and otherstrategic issues, the vertical scope of the firm is an important consideration incorporate strategy.Expansion of activities downstream is referred to as forward integration, andexpansion upstream is referred to as backward integration.The concept of vertical integration can be visualized using the value chain. Considera firm whose products are made via an assembly process. Such a firm mayconsider backward integrating into intermediate manufacturing or forwardintegrating into distribution.

Degree of Vertical IntegrationFull Integration -Internally makes 100% of key supplies and

controls 100% of its distribution.Taper Integration –Less than 50% (Backward Taper and Forward

Tapper Integration are possible)Quasi-Integration - No internal supplies or own distribution (Effected through partial Control of partners to achieve ‘quasi-

backward’ or ‘quasi-forward’ integration)------------------------------------------------------------------------------

---------Long-term Contract- Two firms agree on supplies for

specified periodTRANSACTION COST ECONOMICS (The decision basis to

choose between vertical integration and long term contracts)

Factors Favoring Vertical Integration The following situational factors tend to favor vertical integration:Taxes and regulations on market transactionsObstacles to the formulation and monitoring of contracts.Strategic similarity between the vertically-related activities.Sufficiently large production quantities so that the firm can

benefit from economies of scale.Reluctance of other firms to make investments specific to

the transactionFactors Against Vertical IntegrationThe following situational factors tend to make vertical integration less attractive:The quantity required from a supplier is much less than the

minimum efficientscale for producing the product.The product is a widely available commodity and its

production cost decreasessignificantly as cumulative quantity increases.The core competencies between the activities are very

different. The vertically adjacent activities are in very different types

of industries. For example, manufacturing is very different from retailing.

The addition of the new activity places the firm in competition with another player with which it needs to cooperate. The firm then may be viewed as a competitor rather than a partner

Horizontal Integration(Line Expansion)

The acquisition of additional business activities at the same level of the value chain is referred to as horizontal integration. This form of expansion contrasts with vertical integration by which the firm expands into upstream or downstream activities.

Horizontal growth can be achieved by internal expansion or by external expansion through mergers and acquisitions of firms offering similar products and services.

Some examples of horizontal integration include:The Standard Oil Company's acquisition of 40

refineries.An automobile manufacturer's acquisition of a sport

utility vehiclemanufacturer.A media company's ownership of radio, television,

newspapers, books, and magazines.

Advantages of Horizontal IntegrationThe following are some benefits sought by firms that horizontally integrate:

Economies of scale - acheived by selling more of the same product, for

example, by geographic expansion.Economies of scope - achieved by sharing resources

common to differentproducts. Commonly referred to as "synergies.“Increased market power (over suppliers and downstream channel members)Reduction in the cost of international trade by operating

factories in foreignmarkets.

Sometimes benefits can be gained through customer perceptions of linkages

between products. For example, in some cases synergy can be achieved by using the same brand name to promote multiple products. However, such extensions can have drawbacks, as pointed out by Al Ries and Jack Trout in their marketing classic, Positioning.

Corporate

Strategy

DirectionalStrategy

GrowthStrategies

Diversification

Strategy

Concentration

Strategy Horizontal Integration

Vertical Integration

Conglomerate

(Unrelated)

Diversification

Concentric (Related)

Diversification

Backward

Forward

Geographic

Product Range

Basic Diversification Strategies

– Growth into related industry

– Search for synergies

– Growth into unrelated industry

– Concern with financial considerations

When current industrymatures or becomes less attractive

RetrenchmentStrategies

StabilityStrategies

Current

Products

Current or New Markets

International Entry Options

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

Corporate

Strategy

DirectionalStrategy

StabilityStrategies

GrowthStrategies

Diversification

Strategy

Concentration

Strategy

ProfitStrategy

Pause/Proceed with

cautionStrategy

No change strategy

Horizontal Integration

Vertical Integration

Conglomerate

/UnrelatedDiversificat

ion

Concentric /Related

Diversification

Backward

Forward

Geographic

Product Range

Stability Strategy - Types

(Time-out before growth or retrenchment)

(No specific strategic changes)(Do nothing new in a worsening situation; defer investments and cut costs to stabilize profits)

RetrenchmentStrategies

Current or New Markets

Current

Products

Corporate

Strategy

DirectionalStrategy

Retrenchment

Strategies

StabilityStrategies

GrowthStrategies

Diversification

Strategy

Concentration

Strategy

ProfitStrategy

Pause/Proceed with

cautionStrategy

No change strategy

Horizontal Integration

Vertical Integration

Conglomerate

/UnrelatedDiversificat

ion

Concentric /Related

Diversification

Backward

Forward

Geographic

Product Range

Retrenchment Strategy - Types

(Time-out before growth or retrenchment)

(No specific strategic changes)(Do nothing new in a worsening situation; defer investments and cut costs to stabilize profits)

Bankruptcy/Liquidation

Strategy

Turn aroundStrategy

Sellout/Divestment

strategy

Captive CompanyStrategy

attempt to improve efficiency through contraction &consolidation)

Current or New Markets

Current

Products

GROWTH(in sales/assets/profits/or a combination)

(Internal Vs External Growth)Concentration (on current product line/Industry) - Vertical Integration (Backward and Forward) - Horizontal Integration (product range or geographic expansion)Diversification (into other products/Industries) -Concentric (related) -strategic fit /distinctive competence/synergy - Conglomerate( unrelated) – when current industry is unattractive or when firm lacks distinctive competence STABILITY- Pause /Proceed with caution (time-out

before growth or retrenchment) - No Change- Profit (do nothing new in a worsening situation; defer investments and cut costs to stabilize profits)

RETRENCHMENT-Turnaround (attempt to improve efficiency through contraction &Consolidation)-Captive Company - Sell-Out/Divestment-Bankruptcy/ Liquidation

Directional

Strategy

Growth

Retrenchment

Stability

Emerging

Maturing

Declining

Industry Life Cycle Corporate and Strategy Choices

StabilityGrowth

Retrench-

ment

Corporate

Strategy

PortfolioStrateg

y

Directional

Strategy

Portfolio Strategy

• Deals with decisions on industries in which the firm competes through its products and business units

• Deals with “resource commitment” on best products to ensure continued success

Portfolio analysisPortfolio analysis (such as the BCG Growth Share Matrix and the GE Business Screen) is a useful technique for evaluating the contributions of various business units to corporate performance and allocating the strategic resources of the firm among businesses.

• The firm's overall orientation toward growth,

stability or retrenchment • How should we grow – which business

should grow, which should be stabilized and which should be retrenched?

Parentin

gStrategy

BCG Growth-Share MatrixCompanies that are large enough to be organized into strategic business units face the challenge of allocating resources among those units. In the early 1970's the Boston Consulting Group developed a model for managing a portfolio of different business units (or major product lines). The BCG growth-share matrix displays the various business units on a graph of the market growth rate vs. market share relative to competitors:

BCG –Matrix : Allocating ResourcesResources are allocated to business units according to where they are situated on the grid as follows:

Cash Cow - a business unit that has a large market share in a mature, slow

growing industry. Cash cows require little investment and generate cash thatcan be used to invest in other business units.Star - a business unit that has a large market share in a fast

growing industry.Stars may generate cash, but because the market is growing rapidly they require investment to maintain their lead. If successful, a star will become a cash cow when its industry matures.

Question Mark (or Problem Child) - a business unit that has a small market

share in a high growth market. These business units require resources to grow market share, but whether they will succeed and become stars is unknown.

Dog - a business unit that has a small market share in a mature industry. A

dog may not require substantial cash, but it ties up capital that could better bedeployed elsewhere. Unless a dog has some other strategic purpose, it shouldbe liquidated if there is little prospect for it to gain market share

Emerging

Maturing

Declining

INDUSTRY LIFE CYCLE

Question

Marks StarsCash Cows Dogs

Corporate

Strategy

Parenting

Strategy

• The manner in which management coordinates activities, transfers resources, and cultivates capabilities among units

• Analyses ‘strategic fit’

Parenting Strategy

Parenting strategyParenting strategy deals with what businesses the company should own and with what structure, management processes, and philosophy it should foster for superior performance from the company's business units.

Directional

Strategy

PortfolioStrategy

How does horizontal growth differ from vertical growth as a corporate strategy? From concentric

diversification?Horizontal growth is the expanding of a firm's activities into other

geographic regions and/or by increasing the range of products and services offered to current markets. It often involves the acquisition of another firm in the same industry (an example of external growth), but it could also be through the expansion of a firm's products in its current markets (e.g., through line extensions) or expansion into another geographic region (an example of internal growth). One example of external horizontal growth would be if Anheuser-Busch bought Coors. An internal example was Coors' expansion into the eastern U.S.

Vertical growth, in contrast, involves a firm's taking over a function

previously performed by a supplier or a distributor. This would typically involve the addition of activities in other industries either forward (downstream)or backward (upstream) on the value chain of current products or services. The additions are primary justified in terms of support of the current product lines regardless of their being in other industries (and thus can be argued to be diversification). Concentric diversification, in contrast, is the addition of products or divisions which are related to the corporation's main business, but are added because of the attractiveness of other industries rather than because they support the activities of the current product lines. The additions may be through acquisition or through internal development. The firm buys or develops another division which is similar to its present product-line. Anheuser-Busch's diversification into snack foods to complement its line of beers is an example of concentric diversification. The products are not alike, but have a "common thread" relating them. If Coca Cola bought RC Cola, it would be an example of horizontal integration. If it purchased its distributors, this would be an example of forward vertical integration. Its acquisition of Taylor Wines, however, was an example of concentric diversification

What are the tradeoffs between an internal and an external growth strategy? What approach is best as an

international entry strategy?Research suggests that there is no significant sales or profit advantage to either external or internal growth. There are, however, some tradeoffs for each approach. Here are some of them:

INTERNAL GROWTHPros

More likely to be based on some proprietary development giving competitive advantage.

More likely to fit well with current business units/products

Can finance slowly out of retained earnings.

If plan no good, can always cut losses before in too deep.

Cons May take a long time to

develop a new product or new concept.

May be hard to get current managers to try something new.

May ignore other uses of money with quicker return.

Favored program may take time away from current businesses

EXTERNAL GROWTHPros

Can grow quickly. Good way to use financial

leverage to boost EPS. Don't have to build anything from

scratch. Can generate a lot of excitement

on Wall Street and boost stock price.

Cons All or nothing gamble. Need a lot of money and/or

financial moxie to do it right. Can purchase someone else's

problems. 50% of all acquisitions fail to

achieve the purchaser's objective.

What approach is best as an international entry strategy?In terms of international entry strategies, internal growth through green field development is usually expensive and time consuming, but allows the firm to use its own competencies to achieve success.

Joint ventures, licensing, and acquisitions take less time and are often less expensive at first, but may end up being more expensive if the other firm has a lot of problems.

Is stability really a strategy or is it just a term for no strategy?

An argument can be made that stability is not really a strategy in itself, but is just a pause between strategies. Since one way to view strategy is as a direction the corporation is taking in order to reach its objectives, standing still has no direction and thus is not a strategy.

However, stability is a strategy in itself. Just as no decision is the same as making a decision, it is argued that even though stability may be viewed as not choosing a strategy, it is therefore a strategy by default.

Stability may be a very appropriate long-term strategy for a small business in which the owner/manager does not want the corporation to grow beyond his/her abilities to manage it personally and is very happy with the level of life style the business provides.

Typically, however, stability is perceived only as a viable short-term strategy while management is waiting for key factors needed for growth to fall into place. Nevertheless, to the extent that stability helps explain the movement of a corporation toward its objectives, it deserves to be called a strategy.

Must a corporation have a common thread running through its many activities in order to be successful? Why or why

not?The concept of a corporate mission implies that throughout a corporation's

many activities, there should be a "common thread" or unifying theme, and that those corporations with such a common thread are better able to direct and administer their many activities. This is one way to achieve a "strategic fit" so that overall corporate effectiveness and efficiency are achieved.

There are, however, a number of corporations which do not have a common thread connecting their divisions, yet are successful. These corporations are often referred to as conglomerates because they are an assemblage of separate firms having different products in different markets but operating together under one corporate umbrella. Operating in effect as holding companies, they typically have no real common thread other than return on investment (i.e., financial synergy). Berkeley Hathaway and General Electric are just two of the many examples of successful conglomerates. They can be very successful because their operations in many diverse businesses allow them to spread their risks over many different markets.

Just as the common thread concept implies a heavy marketing orientation, the conglomerate approach implies a heavy finance orientation. The lack of concern for a common thread enables a conglomerate to acquire and sell off divisions without regard to any synergy other than financial. Corporate strategy makers are thus able to focus entirely on ROI. They only need to involve themselves in divisional (business) strategies to the extent that funds are requested to support the strategies.

The problem with this approach, however, is that corporate top management typically does not understand divisional problems in any sense other than financial and is thus strongly tempted to sell off troubled divisions rather than help them recover. One could therefore conclude that a common thread is not necessary for corporate success, at least in the short run. The classic article by Hayes and Abernathy ("Managing Our Way to Economic Decline," HBR, July-August, 1980), does imply, however, that such a heavy financial orientation leads to short-run thinking and may actually cause long-run decline.

What determines whether a company should make or buy key inputs for its products?

The decision to make key inputs (vertical growth strategy) may be done in order to reduce costs, gain control over a scarce resource, guarantee quality of a key input, or obtain access to potential customers. This growth can be achieved either internally by expanding current operations or externally through acquisitions.

Henry Ford, for example, used internal company resources to build his River Rouge Plant outside Detroit. The manufacturing process was integrated to the point that iron ore entered one end of the long plant and finished automobiles rolled out the other end into a huge parking lot. In contrast, Cisco Systems, the maker of Internet hardware, chose the external route to vertical growth by purchasing Radiata, Inc., a maker of chip sets for wireless networks. This acquisition gave Cisco access to technology permitting wireless communications at speeds previously only possible with wired connections.

Vertical growth is a logical strategy for a corporation or business unit with a strong competitive position in a highly attractive industry - especially when technology is predictable and markets are growing. To keep and even improve its competitive position, the company may use backward integration to minimize resource acquisition costs and inefficient operations as well as forward integration to gain more control over product distribution. The firm, in effect, builds on its distinctive competence by expanding along the industry’s value chain to gain greater competitive advantage.

Transaction cost economics proposes that vertical growth (integration) is more efficient than contracting for goods and services in the marketplace when the transaction costs of buying goods on the open market become too great. When highly vertically integrated firms become excessively large and bureaucratic, however, the costs of managing the internal transactions may become greater than simply purchasing the needed goods externally - thus justifying outsourcing over vertical growth.

Are S.W.O.T analysis and Portfolio Analysis similar?

These two approaches are alike in a number of ways. They are both attempts to summarize the key strategic factors coming out of an in-depth analysis of the external and internal environment of a corporation or business unit. They are also easy to remember buzz-words for use in the situational analysis. Terms like S.W.O.T., cash cows, and dogs help remind that the basis of strategic management is environmental assessment.

They are different in terms of what they stand for. S.W.O.T. is merely an acronym for Strengths, Weaknesses, Opportunities, and Threats. It is not really a technique to aid in situation analysis. It merely is a buzz-word to help a person remember to search for strategic variables in the internal and external environment of the firm.

Portfolio analysis, in contrast, is a term for a whole series of different techniques for analyzing internal and external environmental factors. Neither is really a substitute for the other and can actually complement each other.

What is the value of portfolio analysis?Portfolio analysis is the most recommended

approach to aid the integration and evaluation of environmental data.

It is just as useful for a single business corporation with a number of separate products as it is for a large corporation with autonomous operating divisions.

By carefully examining both market or industry factors and business strengths or market share, it is possible to pinpoint factors of strategic importance to corporate or divisional success.

Portfolio analysis thus serves as a convenient technique for comparing external opportunities and threats with internal strengths and weaknesses.

What concepts or assumptions underlie the BCG growth-share matrix?

The product life cycle and the experience curve underlie the BCG growth-share matrix.

The development of question marks into stars and then into cash cows suggests the introduction, growth, and maturity stages of the product life cycle. Dogs appear to be those products or units on the decline stage of the product life cycle.

The experience curve is certainly key to understanding the implications of the BCG matrix. The experience curve is based on the idea that unit production costs decline by some fixed percentage as the accumulated volume of production in units doubles.

In order in make a question mark product a star, the suggested manufacturing strategy is to build capacity ahead of demand in order to achieve the lower unit costs that develop from the experience curve. On the basis of some future point on the experience curve, the idea is to price the product very low to preempt competition and quickly increase market demand and thus market share. The resulting high number of units sold and high market share should result in high profits when overall market growth slows and the company reduces its investment in the product - thus a cash cow is born.

BCG Matrix : CriticismsThe BCG matrix provides a framework for allocating resources among different business units and allows one to compare many business units at a glance.However, the approach has received some negative criticism for the followingreasons:

The link between market share and profitability is questionable since

increasing market share can be very expensive.

The approach may overemphasize high growth, since it ignores the potential

of declining markets.

The model considers market growth rate to be a given. In practice the firm

may be able to grow the market.

These issues are addressed by the GE / McKinsey Matrix, which considers marketgrowth rate to be only one of many factors that make an industry attractive, andwhich considers relative market share to be only one of many factors describing the competitive strength of the business unit.

How is corporate parenting different from portfolio analysis? How is it alike? Is it a

useful concept in a global industry?

The basic difference between these two approaches to corporate strategy lies in the questions they attempt to answer. According to the text, portfolio analysis attempts to answer the following two questions:

How much of our time and money should we spend on our best products and business units in order to ensure that they continue to be successful?

How much of our time and money should we spend developing new costly products, most of which will never be successful?

The basic theme of portfolio analysis its emphasis on cash flow. Portfolio analysis puts corporate headquarters into the role of an internal banker. In portfolio analysis, top management views its product lines and business units as a series of investments from which it expects to get a profitable return. The product lines/business units form a portfolio of investments which top management must constantly juggle to ensure the best return on the corporation's invested money.

Corporate Parenting Vs Portfolio Analysis –contd. Corporate parenting attempts to answer two similar, but

different questions:

What businesses should this company own and why? What organizational structure, management processes, and

philosophy will foster superior performance from the company's business units?

Portfolio analysis attempts to answer these questions by examining the attractiveness of various industries and by managing business units for cash flow, that is, by using cash generated from mature units to build new product lines. Unfortunately, portfolio analysis 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. As suggested by its name, portfolio analysis tends to primarily take a financial point of view and views business units and product lines as if they were separate and independent investments.

Corporate parenting, in contrast, 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. The central job of corporate headquarters is not to be a banker, but to coordinate diverse units to achieve synergy. This is especially important in a global industry in which a corporation must manage interrelated business units for global advantage. Corporate parenting is similar to portfolio analysis in that it attempts to manage a set of diverse product lines/business units to achieve better overall corporate performance.