6-1 Corporate Strategies Chapter 6 Copyright © 2013 Pearson Education, Inc. publishing as Prentice...

6-1

Corporate Strategies

Chapter 6

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

6-2

Chapter Six Learning Outcomes

6.1 Define corporate strategy.6.2 Discuss organizational growth strategies.6.3 Describe the organizational stability strategy.6.4 Describe organizational renewal strategies.6.5 Discuss how corporate strategy is evaluated and changed.


6-3

Learning Outcome 6.1

Explain What Corporate Strategy Is• The struggling US economy is challenging

many companies across a range of industries providing evidence of the challenges associated with corporate strategy

• Corporate strategy– Is concerned with the choices of what businesses

to be in and what to do with those businesses


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Single and Multiple-Business Organizations

• A single business organization is primarily in one industry– Coca-Cola is considered a single business

organization– It competes in the beverage industry

• A multiple business organization is in more than one industry– PepsiCo, also in the beverage business, competes

in other industries


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Single and Multiple-Business Organizations – cont’d

• The distinction between single and multiple business organizations is important – It influences an organization’s overall strategic

direction– It determines what corporate strategy is used– It defines how that strategy is implemented and

managed, which relates to functional and competitive strategies


6-6Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

6-7

What Are the Corporate Strategic Directions?

• Strategic decision makers can choose from three corporate strategic directions– Moving an organization forward– Keeping the organization as is– Reversing an organization’s decline


6-8

What Are the Corporate Strategic Directions?

• Moving forward– Managers hope to expand or grow the

organization’s activities or operations• Keeping an organization as is– Involves an effort at stability

• Reversing a decline– When an organization falls behind, it is an effort at

renewal


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Learning Review: Learning Outcome 6.1

• What is corporate strategy?• Contrast single business and multiple business

organizations.• How is corporate strategy related to other

organizational strategies?• List each of the three corporate strategic

directions


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Discuss Organizational Growth Strategies• Growth is appealing and serves to attract new

customers and gain new resources• A growth strategy is one that expands

products offered or markets served or expands its activities or operations through current or new businesses– Growth helps achieve goals through increasing

revenues, profits, or other measuresCopyright © 2013 Pearson Education, Inc. publishing as Prentice Hall


6-12

Possible Growth Strategies

• Concentration – When an organization focuses on its primary line

of business and looks for ways to meet its growth goals by expanding its core business

• There are three concentration options– Product – market exploitation– Product development option– Market development option



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Concentration Strategies

• Product-Market exploitation– Attempt to increase sales of current products in

current markets and might include incentives or advertizing

• Product development option– Creates new products or new features on current

products, which would be sold in current markets• Market development option– When selling current products in new markets


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Concentration Strategies – cont’d

• A concentration strategy is one that looks for ways to grow the core business using different combinations of products and markets– Product market diversification is not usually

viewed as a concentration option as it involves expansion into both new products and new markets


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• The advantage of a concentration strategy is an organization becomes good at what it does– The develop knowledge of the industry and of

their competitors– Functional and competitive strategies can be

tuned to know what customers want and how to best provide it

– Everyone can concentrate on exploiting resources, competencies, and capabilities critical to success


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• The main drawback is that the organization is vulnerable to changes in the industry and the external environment– The key is to recognize significant trends and

adjusting the organization’s direction• Concentration strategy may be effective for

small companies, but larger often start off by this approach and may continue using it


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Vertical Integration

• Is a strategy that grows by gaining control of its inputs (backward) or its outputs (forward)

• Backward integration– The organization becomes its own supplier– Example: eBay bought an online payment business

• Forward integration– The organization becomes its own distributor – Example: Apple Computer opened retail outlets


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Vertical Integration – cont’d

• Vertical integration strategy is a growth strategy because an organization expands its activities and operations by becoming a source of supply or distribution– However, expanding into industries connected to

its primary business means it is still a single business organization

– It is taking another path to meeting growth goals by controlling different parts of the value chain


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Horizontal Integration

• This strategy is used to grow the organization by combining operations with its competitors – Allows an organization to expand market share

and strengthen its competitive position in it’s same industry

• Is it legal?– U.S. Federal Trade Commission and Department of

Justice evaluates whether antitrust implications.


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Diversification

• This strategy enables a company to grow by moving into a different industry.

• There are two types of diversification– Related– Unrelated

• Related Diversification– Is diversifying into a different industry, but related

to the company’s current business



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Diversification – cont’d

• Unrelated diversification– Diversifying into a completely different industry,

not related to the company’s current business• Diversification is an attempt at a “strategic” fit– Effort is to transfer resources, distinctive

capabilities, and core competencies to the new industry

– It is an attempt at synergy that seeks to enhance performance of both businesses


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• Synergy occurs when shared resources, capabilities, and competencies enable greater performance by two entities when combined

• Unrelated diversification is when an organization seeks growth by moving into industries in which there is no strategic fit


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• Research shows that related diversification is superior to unrelated diversification because it allows the effective use of current resources, capabilities, and core competencies– However, unrelated diversification can be a

valuable strategy at times, depending on how effectively the diverse operations are managed


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International

• This is another growth strategy that seeks to take advantage of potential opportunities offered by global markets or by protecting core operations from global competitors– This approach will be discussed at greater length

in Chapter 7


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Implementing the Growth Strategies

• There are three basic ways that growth strategies can be implemented:– Mergers/Acquisitions– Internal development– Strategic partnering

• Mergers-Acquisitions– Involves the purchase of an organization that

enables a firm to combine operations with that company it has merged with or acquired


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Mergers and Acquisitions

• Merger is a legal transaction in which two parties combined operations through an exchange of stock to create a new entity– Usually they take place between organizations of

similar size and it is considered “friendly”, it is acceptable to all parties

• Acquisition is an outright purchase of one company by another– Can be hostile and involve different sized firms


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Internal development

• Internal development involves creating and developing new business activities within– Rather than face risks and challenges of combining

new businesses, a company seeks to develop crucial capabilities to meet desired goals


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Strategic Partnering

• This is a grow effort that seeks to minimize the challenges and risks or buying a business or developing its own

• The three main types of strategic partnerships are: 1. joint ventures, 2. long-term contracts3. strategic alliances


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Joint Ventures (JV)

– Two or more organizations form separate and equal independent organization for strategic purposes

– It minimizes the financial and political/legal constraints that accompany M&A or internal development

– Example: Clorox and Proctor & Gamble entered a JV to develop garbage bags and plastic wrap


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Long Term Contracts

• Long term contract– Covers a specific business purpose– Viewed as variation of vertical integration

between company and supplier– Both partners understand the importance of long

term benefits to meet cost or quality expectations– Creates assured outlet for products


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Strategic Alliance

• Strategic alliance– Two or more organizations share different

resources, capabilities, or competencies to pursue some business purpose; requires trust

– Different than joint venture because there is no separate legal entity formed


6-34

Learning Review: Learning Outcome 6.2

• Define growth strategy• Describe the various corporate growth

strategies• Discuss how the corporate growth strategies

can be implemented


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Describe the Organizational Stability Strategy• It may seem odd for an organization to want

to remain where it is– However, it may make sense when resources,

capabilities, or competencies are stretched to limits and growth might risk the organization’s competitiveness


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When is Stability an Appropriate Strategic Choice?

• In period of rapid upheaval with several industry and general external forces drastically changing– This demands investment in current businesses or

functions• When there is slow or no growth

opportunities– Allows the firm to analyze their strategic options –

diversification, vertical or horizontal integration


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• Describe the Organizational Stability Strategy• The stability strategy makes sense when

resources, capabilities, or competencies are stretched to limits and growth might risk the organization’s competitiveness


6-38

When is Stability an Appropriate Strategic Choice?

• In period of rapid upheaval with several industry and general external forces drastically changing– This demands investment in current businesses or

functions• When there is slow or no growth

opportunities– Allows the firm to analyze their strategic options –

diversification, vertical or horizontal integration


6-39

Implementing Stability Strategy

• Primarily, this means not growing, but not allowing decline– While it may not mean putting new products on

the market, it may mean evaluating what is being done and determining what might be done better

• Stability can be appropriate, but it is short term– If weaknesses exist or performance declines, it

may embark on renewal effort


6-40

Learning Review:Learning Outcome 6.3

• What is a stability strategy?• Why might an organization choose a stability

strategy?• Describe how a stability strategy is

implemented.


6-41


Describe Organizational Renewal Strategies• When managers have not been effective and

unable to develop or exploit a competitive advantage the organization will need for something to be done in order to survive– Renewal strategies are used to put the

organization back on the path to successfully achieving its strategic goals


6-42

What Leads to Performance Declines?

• Poor management judgment is evident when:– Decisions to expand too rapidly or over-expand– Inadequate financial controls or high costs– Managers unaware of trends or changes in the

external environment– Performance is declining



6-44

Signs of Declining Performance• Excess number of personnel• Unnecessary and cumbersome administrative

procedures• Fear of conflict or taking risks• Tolerating work incompetence at any level or

in any area of the organization• Lack of clear vision, mission, or goals• Ineffective or poor communication within

various units and between various units


6-45

Retrenchment

• Retrenchment– Short run strategy designed to address

weaknesses that are leading to performance declines

– Not necessary to have negative financial returns, usually occurs if unable to meet strategic goals


6-46

Retrenchment – cont’d

– Is a military term refers to going back to the “trenches” to stabilize, revitalize, and prepare for entering battle again

– The point is to address issues before they lead to severe problems


6-47

Turnaround

– Designed for situations in which the organization’s performance are more serious

– Often when the organization is facing severe external and internal pressures and must make strategic changes in order to remain viable

– There is no guarantee the turnaround will accomplish the desired results, but without it the organization will not survive


6-48

Implementing Renewal Strategies

• Cost cutting– Reducing costs to bring performance results back

in line with expectations– It can be across the board or selective– The effort should avoid cutting costs in those areas

critical to retain or exploit competitiveness– Redundancies, inefficiencies, or waste in activities

should be eliminated– Restructuring/downsizing are severe approaches


6-49

Restructuring

• This includes refocusing on the primary businesses and involve– Selling or divestment– Spin off– Liquidation– Downsizing

• Divestment might occur when the business is desired by another company and is no longer a strategic fit


6-50

Restructuring – cont’d

• Spin off– Involves removing a business unit and setting it up

as a separate, independent business by distributing its shares of stock

• Liquidation• When no buyer exists or there is no possible

spin off, a business unit will be discontinued– This is a strategic action of last resort


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Restructuring – cont’d

• Downsizing– Is a quick way to cut costs by elimination jobs– It can be effective when done strategically– Table 6.3 lists some recommendations


6-52


• Discuss the causes of corporate decline• Describe the two organizational renewal

strategies• What two strategic actions are used in

implementing the renewal strategies?• Describe organizational restructuring actions• Why are most organizational renewal

strategies used in combination?


6-53


Discuss How Corporate Strategy is Evaluated and Changed

• Competitive strategy and functional strategies have been aligned with organizational goals– How do you know its working? – Has it been successful?– How can that be evaluated?


6-54

Evaluating Corporate Strategies

• This is an important part of the entire strategic management process

• There are four main evaluation techniques– Corporate goals– Efficiency, effectiveness, productivity– Benchmarking– Portfolio analysis



6-56

Efficiency, Effectiveness, and Productivity Measures

• Efficiency is an organization’s ability to minimize resource use in goal attainment

• Effectiveness is an organization’s ability to reach its goals

• Productivity is a specific measure of how many inputs it takes to produce outputs


6-57

Benchmarking

• Is the search for the best practices inside or outside an organization – The benchmarking process can be used to

implement strategy– Specific benchmarks or best practices can be a

standard against which to measure performance– Using benchmarks, strategic managers can

evaluate whether an organization is being managed well or if improvements are needed


6-58

Portfolio Analysis

• When a company has multiple brands, a portfolio is its various business units

• Portfolio analysis is done through one of three different matrices– Boston Consulting Group (BCG) matrix– McKinsey-GE stoplight matrix– Product –market evolution matrix


6-59

Portfolio Analysis – cont’d

• BCG matrix– Focuses on growth share– Determines whether a business unit is a cash

producer or cash user– Measures a business unit’s market share

compared to the market share of the largest rival in the industry

– There are four areas within this matrix ‘ “dog”, “question mark”, “star”, and “cash cow”


6-60

BCG Matrix – cont’d

• “DOG”– A business unit with low growth and low market

share – Requires significant cash investments to continue

operation– May be a business to divest, liquidate, or harvest;

using excess cash to support other businesses


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• “Question mark”– These are low in competitive strength, though it is

in an industry with potential– If meeting the cash needs for development that

would allow it to achieve “star” status, a firm may invest

– If the cash infusion does not allow for the business to become a star, a firm may divest


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• “Star”– A business with high market share and high

growth potential – Stars may take significant cash infusion to

maintain market leadership or they may take little cash if the industry is not that competitive

– This is the strongest position in the matrix


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• “Cash cow”– These are businesses with high market share in an

industry with a low growth rate– These are strong cash providers, but additional

cash infusion will not alter the position– So, positive cash flows from these businesses

should be used to support stars and question marks with potential


6-64

McKinsey-GE Spotlight Matrix

• Provides a more comprehensive analysis of a business unit’s internal and external factors– More than relative market share, it includes an

analysis of the internal resources and capabilities believed to be important to business success

– Industry attractiveness includes such factors as profitability, number of competitors, ethical standards, technological stability of the market, market growth rate



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Product-Market Evolution Matrix

• This looks at individual competitive position and stage in the product life-cycle– This also suffers from the same subjectivity biases

as McKinsey matrix

• All portfolio matrices seek to assess performance and help a firm decide what to support, what to acquire, and what to sell.


6-67

Changing Corporate Strategies

• Strategic managers must decide whether to act and, if so, what actions to take– Changes to functional and competitive strategies

might be necessary, modifications or even drastic action might be needed to achieve desired results

– The key is to understand the opportunities and threats, strengths and weaknesses facing the organization and the need to design appropriate strategies to exploit resources, capabilities, and core competencies

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 7- 67

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• Why is it important to evaluate corporate strategies?• What are the four ways to evaluate corporate

strategies?• Describe each of the portfolio analysis matrices

including how it’s used, the cells in the matrix, and its advantages and drawbacks.

• Why might an organization’s corporate strategy need to be changed?

• How might an organization’s strategy be changed?



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