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Nazrul Islam
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Strategy Formulation – corporateStrategy
Strategy formulation: Corporate Strategy
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Plan of Presentation
q Intr oduction
q DirectionalStrategy
q Por tfolioanalysis
q Cor porateparenting
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Intr oduction
l Corporate strategy is primarily about the choiceof direction for the firm as a whole
l In a large multi-business company, however, corporatestrategy is also about managing various product lines and
business units for maximum value
l It also attempts to obtain synergies among numerousproduct lines and business units so that the corporate
whole is greater than the sum of its individual business
unit part
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Intr oduction
l herefore the Corporate strategy can conveniently viewed in terms of:
Ø Directional strategy:Orientation towards growth, stability and retrenchment
Ø Portfolio analysis:Coordination of cash flow among units
Ø Corporate parenting:Building corporate synergies through resource sharing
and development
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Strategy Formulation – corporateStrategy
Directional Strategy
Directional strategy is composed of three generalorientations
l !rowth strategies"xpand the company’s activities
l Stability strategies
#a$e no change to the company’s current activities
l %etrenchment strategies
%educe the company’s level of activities
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!rowth Strategies
l !rowth is a very attractive strategy for two $ey reasons:
Ø !rowth based on increasing mar$et demand maymas$ flaws in a company & flaws that would be
immediately evident in a stable or declining mar$et
Ø
' growing firm offers more oppor tunitiesfor advancement, promotion and interesting
(obs
l wo basic growth strategies are:
Ø Concentration: on current product line(s) in oneindu stry
Ø Diversification: into other products lines in other indu str i es
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Concentration Strategy
l If a company’s current product lines have real growthpotential, concentration of resources on those productlines ma$e sense as a strategy for growth
l wo basic concentration strategies are:
Ø
) ertical growth
Ø
*ori+ontal growth
!rowing firms in a growing industry tend to choosethese strategies before they try diversification
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)ertical !r owth
l )ertical growth can be achieved by ta$ing over afunction previously provided by a supplier or by adistributor
l his can be achieved
Ø Internally: by expanding
current operationsØ "xternally: through acuisitions
"xamples:
*enri ord- internal resources to build %iver %ouge Plan outsideDetroit. Process: input iron ore output finished automobiles
DuPont /huge chemical company0- external route- acuire Conoco for the
oil DuPont need to produce synthetic fabrics
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Strategy Formulation – corporateStrategy
*ori+ontal gr owth
l Can be achieved by expanding the firm’s products into othergeographic locations and1or by increasing the range of products
and services offered to current mar$ets
l "xample: Dell Computers followed a hori+ontal gr owth
strategy by extending its mail order business to the "uropean
continent
l
Can grow hori+ontally thr ough
Ø Inter naldevelopment
Ø "xternally through acuisitions or strategic alliances
in the same industry
!
*ori+ontal growth
l *ori+ontal integration for a firm may range from full to partial ownership to long-term contracts
"xample: 23# purchased a controlling sta$e /partialownership0 in 4orthwest 'irlines to obtain access to'merican and 'sian #ar$ets
#any small commuter airlines engage in long-term contracts
with ma(or airlines in order to offer a complete arrangement
for travelers
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Diversification Strategies
l
5nder what conditions6
Ø 7hen industry consolidates and becomes mature
Ø #ost surviving firms have reached the limits to
growth using vertical and hori+ontal growth strategies
Ø 5nable to expand internally in less mature mar$ets
l
wo basic diversification strategies:
Ø Concentric
Ø Conglomerate
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Concentric /%elated0 Diversification
l Concentric diversification into a related industry may bevery appropriate corporate strategy when a firm has a strong
competitive position but industry attractiveness is low
l 'ttempts to secure strategic fit in a new industry where thefirm’s product $nowledge, its manufacturing capabilities, and
the mar$eting s$ills can be put to good use
l Search is for synergy, the concept that two businesseswill generate more profits together than they could
separately.
l he point of commonality may be similar technology, customer usage, distribution, managerial s$ills, or product
similarity
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Conglomerate /unrelated0 Diversification
l 7hen management reali+es that
Ø Current industry is unattractive
Ø irm lac$s outstanding abilities or s$ills thatcould easily transfer to related products or
services in other industries
l "mphasis in conglomerate diversification is on financial
considerations rather than on the product-mar$et synergycommon to concentric diversification
"xample: Purchase of exas !as %esources by CS8 Corporation /arailroad-dominated transportation company0 because most of the gastransmission revenue in winter &railr oad’s lean period
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Stability Strategy
l Popular with small business owners who have found aniche and are happy with their success and the manageable
si+e of their firms
l
5seful in the short run, but can be dangerous if followed for
too long / many small-town businesses discovered when 7al-
#art came to town0
l Some popular strategies are:
Ø Pause1Proceed with caution strategy
Ø 4o Change strategy
Ø Profit strategy
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Pause1Proceed with Caution Strategy
l It is, in effect, a timeout & an opportunity to restbefore continuing a growth or retrenchment strategy
l Conceived to be a temporary strategy to be used until the environment becomes more hospitable or toenable a company to consolidate its resources after
prolonged rapid growth
"xample: Dell Computer Corporation followed in 9;
after growth strategy had resulted in more gr owth
than it could handle
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4o Change Strategy
l Is a decision to do nothing new & a choice to continue current operations and policies for theforeseeable future
l Created by situation li$e:
Ø
ew aggressive new competitors are li$ely toenter such an industry
Ø Corporation has found a reasonable profitableand stable niche for its products
Ø -irm’s modest competitive position in anindustry facing little or no growth
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Profit Strategy
l ' profit strategy is a decision to do nothing new in aworsening situation, but instead to act as though thecompany’s problems are only temporary
l It is an attempt to artificially support profits when acompany’s sales are declining by reducing investmentand short-term discretionary expenditures
l he profit strategy is usually top management’s
passive short-term, and often self-serving response to
the situation.
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%etrenchment Strategies
l Pursue retrenchment strategies when has a wea$competitive position in some or all of its product lines
resulting in poor performance & sales are down and profitsare becoming losses
l Impose a great deal of pressure to impr ove per formance
l Strategies may include:
Ø urnaround Strategy
Ø Captive company strategy
Ø Sell-
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urnaround Strategy
l "mphasi+es the improvement of operational efficiencyand is probably most appropriate when a cor poration’s
problems are pervasive, but not yet critical
l wo basic phases of a turnaround strategy are:
Ø Contraction: initial effort to uic$ly “stop the bleeding” with a general across-the-board cutbac$ in si+e and costs
Ø
Consolidation: he second phase - implements aprogram to stabili+e the now-learner corporation. Plans aremade to deduce unnecessary overhead and to ma$efunctional activities cost (ustified
"xample: I=#’s effective use of turnaround strategy
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Captive Company Strategy
l Is the giving up of independence in exchange for security
l 4ormally becomes captive to one of its larger customers in
order to guarantee the company’s continued existence with
a long-term contract
"xample: Simpson Industries of =irmingham, #ichigan, allowedspecial teams of !eneral #otors to inspect its engine partsfacilities. In return, nearly >?@ of the company’s production wassold to !# through long-term contract
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Sell-
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Portfolio 'nalysis
l 'ids in the classification of a firms businesses for resourceallocation purposes and for selecting a competitive strategy
on the basis of growth potential of each business unit and of
the financial resources that will be either consumed or
produced by the business
l Product lines 1business units form a portfolio of separateinvestments that top management must constantly (uggle to
ensure the best return on the cor poration’s invested money
l wo most popular approaches of Portfolio 'nalysis:
Ø =C! !rowth-Share #atrixØ !" =usiness Screen
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=C! /=oston Consulting !roup0 !rowth-Share #atrix
l "ach of the cor poration’s product lines or business units isplotted on the matrix according to both the growth rate of theindustry in which it competes and its relative mar$et share
l he theory underlying the planning is the experience curve
l he experience curve suggests that the company with thelar gest share of an industry’s cumulative output will also be thelow-cost producer.
l he higher the relative mar$et share, the more profitable isthe business. his is the basis for using growth-share matrixfor strategic planning
l =C! !rowth-Share #atrix ..
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Euestion #ar$sSelecti#e in#estments$ %i#estiture & or
'ea( &irms or t)ose 'it) uncertainprospects an% lac( o& strategic & it
9>
9F
9?
G
B?
%elative #ar$et Share
=C! !rowth-Share #atr ix
3imitations of =C! #atrix
l he =C! model is simplisticH considers only twocompetitive environment factors& relative mar$et shareand industry growth rate.
l *igh relative mar$et share is no guarantee of acost savings or competitive advantage.
l 3ow relative mar$et share is not always an indicatorof competitive failure or lac$ of profitability.
l #ultifactor models /e.g., the #c2insey matrix0 arebetter though imperfect.
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Nazrul Islam
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Stars *ggressi#e in#estment to supportcontinue% gro't) an% consoli%atecompetiti#e position o& t)e &irms
I n d u s t r y ! r o w t h % a t e / @ 0
Cash CowsDogs
,In#estments su&&icient to maintaincompetiti#e position- .as) surpluses or liqui%ation an%use% in %e#eloping an% nurturing stars in%ustry e/it
an% selecte% question mar( &irms
9 ? x
9 . x
. 9 x
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!" /!eneral "lectric0 =usiness Screen
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!" =usiness Screen, in contrast to the =C! !rowth-
Share #atrix, includes much more data in its two $ey
factors than (ust business growth rate and comparable
mar$et share
l or example: Industry attractiveness includes mar$etgrowth rate, industry profitability, si+e, pricing policies,
among other possible opportunities and threats
l =usiness strength or competitive position includesmar$et share, technological position, profitability, and si+e
among other possible strengths and wea$nesses
l !" =usiness Screen
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7inners 7inners C Euestion
*igh' =
;?@B?@ #ar$s
B@ D
7inners 'verage
#edium"
9B@
=usiness
F?@
B?@
3osers
3ow
Profit
Producers
3osers
!9@
*3osers
9?@
Strong 'verage7ea$
=usiness Strength1Competitive Position
!eneral "lectr ic’s =usiness Screen2
Nazrul Islam
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I n
d u s t r y ' t t r a c t i v e n e s s
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Strategy Formulation – corporateStrategy
Corporate Parenting
l )iews 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
l
!enerates corporate strategy by focusing on the core
strengths /competencies0 of the parent corporation and on the
value created from the relationship between the parent and its
businesses
l Primary (ob is to obtain synergy among business units byproviding needed resources to units, transfer s$ills and
capabilities among units, and by coordinating the activities of
shared unit functions to attain economies of scope
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Developing a Corporate Parenting Strategy
l irst, examine each business unit /or target firm in thecase of acuisition0 in terms of its critical success factors.
"mphasi+e its distinctive strengths /competence0 to ensure
competitive advantage
l Second, examine each business unit /or target firm0 in
terms of areas in which performance can be improved.
l hird, analy+e how well the parent corporation fits with the business unit /or target firm0.
Corporate headuarters must be aware of its own strengths
and wea$nesses in terms of resources, s$ills, and
capabilities.
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Parenting-it #atr ix
l Instead of describing business units in terms oftheir growth potential, competitive position, or
industry structure, the a matrix emphasi+es their fitwith the corporate parent
l Parent fit matrix composed of two dimensions:
Ø he positive contributions that the parent can ma$eØ he negative effects the parent can ma$e
l Combination of these two dimensions creates fivedifferent positions each with its own implications forcorporate strategy
l Parenting-it #atrix
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3ow
*eartland
=allast "dge of
*eartland
*igh
'lien erritory)alue rap
3ow *igh
FIT between parenting opportunities
and parenting cha racteristics
Parenting-it #atr ix32
Nazrul Islam
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M I S F I T b e t w e e n c r i t i c a l s u c c e s s f a c t o r s
A n d p a r e n t i n g c h a r a c t e r i s t i c s
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l *eartland =usiness: *ave opportunities for impr ovementby the parent, and the parent understands their critical
success factors well
l "dge-of-the *eartland business: Some parentingcharacteristics fit the business,but others do not. Such
business units are li$ely to consume much of the parent’s
attention, as the parent tries to understand them better and
transform them into heartland businesses.
l =allast =usinesses: it very comfortably with the parent
corporation but contain very few opportunities to be improved
by the parent.
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l 'lien erritory =usinesses: *ave little opportunity to be
improved by the corporate parent, an a misfit exists between
the parenting characteristics and the unit’s critical factors
l )alue rap =usinesses: it well with parenting
opportunities, they are a misfit with the parent’s
understanding of the unit’s critical success factors
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Thank you
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Competitive Strength
*igh 3ow
Domina te/Divest
Joint Venture
Selective
Stra tegies
Portfolio #atrix for Plotting Products by Country36
Nazrul Islam
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C o u n t r y ' t t r a c t i v e n e s s
* i g h
3 o w
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Strategy Formulation – corporateStrategy
l )ertical integration can be:=ac$ward Integration or orward Integration
"xample: #icron used forward integration when it expanded outits successful memory manufacturing business to ma$e andmar$et its own personal computers
l =ac$ward integration more profitable than for war d integration, but increases exit barriers
l )ertical growth is a logical strategy for a corporation orbusiness unit with a strong competitive position in highly
attractive industry & especially when technology is
predictable and mar$ets are growing
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)ertical integration can range from total ownership of the value
chain to no ownership at all. hus there can be:
l ull Integration: a firm internally performs 9??@ of value chain
l aper integration: internally produces less than half of reuirements
l Euasi-integration: does not ma$e any of its $ey supplies, but purchases
most of its reuirements from outside suppliers that are under its partial control
"xample: Purchasing B?@ of common stoc$ of In ocus System,#otorola guaranteed its access to In ocus to manufacture flat-panel video displays
l
3ong&term contracts: agreement between two to provide goods1services to each other for a specified period of time
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