1. How does horizontal growth differ from

vertical growth as a corporate strategy? From

concentric diversification?

2. What are the tradeoffs between an internal

and an external growth strategy? What approach is best as an international entry strategy?

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

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Corporate strategy- The choice of direction of the firm as a whole and the management of its business or product portfolio and includes:

Directional Strategy Portfolio Analysis Parenting Strategy

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Directional strategy- The firm’s overall orientation toward Growth, Stability, or Retrenchment;

Just as every product or business unit must follow a business strategy to improve its competitive position, 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, should we do so through internal development or through external acquisitions, mergers, or strategic alliances?

A corporation’s directional strategy is composed of three general orientations toward growth (sometimes called grand strategies): Growth strategies expand the company’s activities.Stability strategies make no change to the company’s current activitiesRetrenchment strategies reduce the company’s level of activities.

1. what is Growth Strategies?By far the most widely pursued corporate strategies of

business firms are those designed to achieve growth in sales, assets, profits, or some combination of these. The growth strategies can be Vertical or Horizontal growth. Growth could be Concentrated or Diverse.

We use Concentration Growth if the company’s current product lines have real growth potential, concentration of resources on those product lines makes sense as a strategy for growth. There are two basic concentration Strategies: Vertical and Horizontal Growth.

Vertical Growth: Taking over a function previously provided by Suppliers or a Distributor to reduce cost, gain control over a scarce resource. This results in Vertical Integration (VI), the degree to which a firm operates vertically in multiple locations on an industry’s value chain from extracting raw materials to manufacturing, to retailing.

Backward integration: Assuming a function previously provided by a distributor. Forward integration: Assuming a function previously provided by a supplier.

Vertical integration is more efficient than contracting for goods and services in the marketplace when the transaction costs of buying on the open market become too great

It results in the Horizontal

Integration (HI) The degree to which a firm operates in multiple locations at the same point in theindustry’s value

chain.

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A popular method of horizontal growth is to expand internationally into other countries. Research indicates that going international is positively associated with firm Profitability.

Some of the more popular options for international entry

Are:

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Exporting Licensing Franchising Joint Venture Acquisitions

Green-Field DevelopmentProduction Sharing Turn-key Operations BOT Concept Management Contracts

Shipping goods produced in the company’s home country to other countries.

Licensing

Granting rights to another firm in the host country to produce and/or sell a product.

Franchising

Granting rights to another company to open a retail store using the franchiser’s name and operating system

Joint VentureThe most popular entry strategy, joint ventures are

used to combine the resources and expertise needed to develop new products or

technologies. It also enables a firm to enter a country that restricts foreign ownership. The corporation can enter another country with fewer assets at stake and thus lower risk.

Acquisitions

A relatively quick way to move into another country is to purchase another firm already operating in that area. Synergistic benefits can result if the company acquires a firm with strong complementary product lines and a good distribution network.

Management Contracts

Green- Field Development

If a company doesn’t want to purchase another company’s problems along with its assets, it may choose to build its own manufacturing plant and distribution system. This is usually a far more complicated and expensive operation than acquisition, but it allows a company more freedom in designing the plant, choosing suppliers, and hiring a workforce

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Production SharingWhen labor costs are high at home, the

corporation can combine the higher labor skills and technology available in the developed countries with the lower-cost labor available in developing countries.

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Turn-key Operations

These are typically contracts for the construction of operating facilities in exchange for a fee. The facilities are transferred to the host country or firm when they are complete. The customer is usually a government agency of country that has decreed that a particular product must be produced locally and under its control.

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BOT(build, operate, transfer) Concept. Instead of turning the facility (usually a power

plant or toll road) over to the host country when completed (as is with the turnkey operation), the company operates the facility for a fixed period of time during which it earns back its investment, plus a profit. It then turns the facility over to the government at little or no cost to the host country.

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Management Contracts. Once a turnkey operation is completed, the corporation assists local management in the operation for a specified fee and period of time. Management contracts are common when a host government expropriates part or all of a foreign-owned company’s holdings in its country. The contracts allow the firm to continue to earn some income from its investment and keep the operations going until local management is trained.

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Diversif ication Strategies

Diversification is a corporate strategy to enter into a new market or industry which the business is not currently in, whilst also creating a new product for that new market.

6.2 Directional StrategyWhy use diversification?If a current company’s product line do not have

much growth potential.

Diversification is a part of four main strategies defined by Igor Ansoff's Product/Market matrix.

6.2 Directional Strategy

6.2 Directional StrategyDiversification is the most risky section of the

Ansoff's matrix, as the business has no experience in the new market and does not know if the product is going to be successful.

There are two basic diversification strategies:1.Concentric2.Conglomerate

6.2 Directional StrategyConcentric (Related) Diversification- growth into a related industry when a firm has a strong competitive position but attractiveness is low.

By focusing on the characteristics that have given the company its distinctive competence, the company uses those very strengths as its means of diversification.

6.2 Directional StrategyThe firm attempts to secure a strategic fit in a

new industry where it can apply its product knowledge, manufacturing capabilities, and the marketing skills it used so effectively in the original industry.

The products produced will be related in a way; communality may be in the use of technology, customer usage or distribution.

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Synergy- when two businesses will generate more profits together than they could separately.

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Diversification Strategies

Conglomerate (Unrelated) Diversification- growth into an unrelated industry

Management realizes that the current industry is unattractive

Firm lacks outstanding abilities or skills that it could easily transfer to related products or services in other industries.

6.2 Directional StrategyManagers who adopt this strategy are

concerned primarily with financial considerations of cash flow or risk reduction.

This is also a good strategy for a firm that is able to transfer its own excellent management system into less well managed acquired firms.

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Stability Strategies- continuing activities without any significant change in direction.

The stability family of corporate strategiescan be appropriate for a successful corporation operating in a reasonably predictable environment.

Stability strategies can be very useful in the short run but can be dangerous if followed for too long because the changes in environment are dynamic.

6.2 Directional StrategyPause/Proceed with caution strategyis, in effect, a time-out—an opportunity to rest before continuing a growth or retrenchment strategy. It is typically a temporary strategy to be used until the environment becomes more hospitable or to enable a company to consolidate its resources after prolonged rapid growth. This was the strategy followed by many companies during the recession of 2008 and 2009 when credit was tight and sales were slim.

6.2 Directional StrategyNo Change Strategyis a decision to do nothing new—a choice to continue current operations and policies for the foreseeable future.The corporation has probably found a reasonably profitable and stable niche for its products.EG: Most small-town businesses probably follow this strategy before reputable businesses likeWal-Mart, Niavis, Ok, Shoprite enters their areas.

6.2 Directional StrategyProfit Strategy

The profit strategy is an attempt to artificially support profits when a company’s sales are declining by reducing investment and short-term discretionary expenditures.is a decision to do nothing new in a worsening situation, but instead to act as though the company’s problems are only temporary.

6.2 Directional StrategyTop managers do not announce the poor

position of the organization to the stockholders but rather use seductive measures such as:

Defer investments, cut expenses such as R&D, maintenance and advertising etc. so as to keep profits at a stable level during this period.

This is a useful strategy to get through a temporary difficulty or when a company is making itself more attractive for a potential buyer.

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Retrenchment Strategies- used when the firm has a weak competitive position in some or all of its product lines from poor performance.

These strategies generate a great deal of pressure to improve performance

In an attempt to eliminate the weaknesses that are dragging the company down, management may follow one of several retrenchment strategies:

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Retrenchment Strategies

Turnaround strategy- emphasizes the improvement of operational efficiency when the corporation’s problems are pervasive but not critical.

Contraction is the initial effort to quickly “stop the bleeding” with a general, across-the-board cutback in size and costs.

For example, when Howard Stringer was selected to be CEO of Sony Corporation, he immediately implemented the first stage of a turnaround plan by eliminating 10,000 jobs, closing 11 of 65 plants, and divesting many unprofitable electronics businesses.

6.2 Directional StrategyConsolidation is the implementation of a program to stabilize the new leaner corporation.

To streamline the company, management develops plans to reduce unnecessary overhead and justify the costs of functional activities.

This is a crucial time for the organization. If the consolidation phase is not conducted in a positive manner, many of the company’s best people will leave.

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Retrenchment Strategies

Captive Company Strategy- company gives up independence in exchange for security

This strategy is becoming another company’s sole supplier or distributor in exchange for a long-term commitment from that company.

A company with a weak competitive position may offer to be a captive company to one of its larger customers in order to guarantee the company’s continued existence with a long-term contract.

6.2 Directional StrategyBy using this strategy the corporation may be able to

reduce the scope of some of its functional activities, such as marketing, thus reducing costs significantly.

EG: in order to become the sole supplier of an auto part to General Motors, Simpson Industries of Birmingham, Michigan, agreed to have its engine parts facilities and books inspected and its employees interviewed by a special team from GM. In return, nearly 80 percent of the company’s production was sold to GM through long-term contracts

6.2 Directional StrategyNormally if a corporation with a weak

competitive position in this industry is unable either to pull itself up by its bootstraps or to find a customer to which it can become a captive company, it may have no choice but to sell out and leave the industry completely.

Sell-out strategy- selling out the company out right where management can still obtain a good price for its shareholders and the employees can keep their jobs by selling the company to another firm.

6.2 Directional StrategyRetrenchment Strategies

Divestment- sale of a division with low growth potentialThis strategy is applicable if the corporation has multiple business lines.

EG: This was the strategy Ford used when it sold its struggling Jaguar and Land Rover units to Tata Motors in 2008 for $2 billion.

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Retrenchment Strategies: When a company finds itself in the worst

possible situation with a poor competitive position in an industry with few prospects, management has only a limited number of alternatives, all of them distasteful.

Because no one is interested in buying a weak company in an unattractive industry, the firm must pursue a bankruptcy or liquidation strategy.

6.2 Directional StrategyBankruptcy- company gives up management of the firm to the courts in return for some settlement of the corporation’s obligations.

EG: Faced with a recessionary economy and falling market demand for casual dining, restaurants like Bennigan’s Grill & Tavern and Steak & Ale, that once thrived by offering mid-priced menus withpotato skins and thick hamburgers, filed for bankruptcy in July 2008.

6.2 Directional StrategyLiquidation- is piecemeal sell of all the organization’s assets i.e. management terminates the firm. Because the company cannot be sold as a going concern, assets are sold for cash and creditors are paid and then shareholders receive their portion.

EG: In Zimbabwe 149 companies by December 2013 applied for liquidation because of empowerment law requiring foreign owned companies to be 51% owned by local blacks was making it difficult for potential investors to put their money in distressed companies.

The benefit of liquidation over bankruptcy is that the board of directors, as a representative of the stockholders, together with top management, makes the decisions instead of turning them over to the court, which may choose to ignore stockholders completely.

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Portfolio analysis- management views its product lines and business units as a series of investments from which it expects a profitable return. It is a resource commitment on best products to ensure continued success.

Techniques include: BCG Matrix GE Business Screen

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G.E.industry attractiveness includes market growth rate, industry profitability, size, and pricing practices, among other possible opportunities and threats.

Business strength/competitive position includes market share as well as technological position, profitability, and size, among other possible strengths and weaknesses.

The area of each circle is in proportion to the size of the industry in terms of sales. The pie slices within the circles depict the market share of each product line.

Step 1 Select criteria to rate the industry for each product line or business unit. Assess overall industry attractiveness for each product line or business unit on a scale from 1 (very unattractive) to 5 (very attractive).

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GEStep 2 Select the key factors needed for success in each

product line or business unit. Assess business strength/competitive position for each product line or business unit on a scale of 1 (very weak) to 5 (very strong).

Step 3 Plot each product line’s or business unit’s current position on a matrix as depicted

Step 4 Plot the firm’s future portfolio, assuming that present corporate and business strategies remain unchanged. If there is a performance gap between projected and desired portfolios, this gap should serve as a stimulus for management to seriously review the corporation’s current mission, objectives, strategies, and policies.

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Advantages of Portfolio Analysis

Encourages top management to evaluate each of the corporation’s businesses individually and to set objectives and allocate resources for each

Stimulates the use of externally oriented data to supplement management’s judgment

Raises the issue of cash flow availability to use in expansion and growth

Portfolio analysis simplifies complex situations and provides a valuable overview of the strengths and weaknesses of a company’s mix of businesses and products.

The technique is forward-looking and can play an important role in delivering improved returns for stockholders over the medium to long term.

Portfolio analysis can help understanding of diversification and identify risks in a company’s portfolio, for example by drawing attention to an overemphasis on particular areas.

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Limitations of Portfolio Analysis

Defining product/market segments is difficult Suggest the use of standard strategies that can miss

opportunities or be impractical Provides an illusion of scientific rigor when in reality

positions are based on objective judgments Value-laden terms such as cash cow and dog can

lead to self-fulfilling prophecies Lack of clarity on what makes an industry attractive or

where a product is in its life cycle

Cont’dExcessively short-term use of portfolio analysis can lead to frequent and expensive switches of company resources.

Acquiring or divesting businesses can be complex and time-consuming. One should take these costs into account before acting on marginal recommendations on portfolio changes.

Market share is not the same as profitability: firms with low market share can be quite profitable (e.g. mail order catalogs).

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Managing a Strategic Alliance Portfolio

1. Developing and implementing a portfolio strategy for each business unit and a corporate policy for managing all the alliances of the entire company

2. Monitoring the alliance portfolio in terms of implementing business units’ strategies and corporate strategy and policies

3. Coordinating the portfolio to obtain synergies and avoid conflicts among alliances (working together).

4. Establishing an alliance management system to support other tasks of multi-alliance management

Future trendsThe future current trends are in two areas: These are

service and resource portfolios.The service portfolio is a slightly surprising trend. The resource portfolio is a topic of current discussionThe larger the organization, the greater the resource

portfolio challenge.This information is available through Thinking Portfolio

& Risk analysis in the journal entitled “Global Strategic Trends in Portfolio management 2016”

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Portfolio analysis tends to primarily view matters financially where as

Corporate parenting- 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

Generates corporate strategy by focusing on the core competencies of the parent corporation and the value created from the relationship between the parent and its businesses

Corporate ParentingIf there is a good fit between the parent’s skills and

resources and the needs and opportunities of the business units, the corporation is likely to create value.

If, however, there is not a good fit, the corporation is likely to destroy value.

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Developing a Corporate Parenting Strategy

1. Examine each business unit in terms of its strategic factors

2. Examine each business unit in terms of areas in which performance can be improved

3. Analyze how well the parent corporation fits with the business unit

6.4 Corporate Parenting

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Horizontal strategy- cuts across business unit boundaries to build synergy across business units and to improve competitive position in one of more business units

Multipoint competition- large multi-business corporations compete against other large multi-business firms in a number of markets

6.4 Corporate Parenting

Current trend gaps

Global Market

Current portfolio

Recommended portfolio

Gap

% weight % weight % weight % weight

United States 44 57 36 21

Developed international

43 36 55 19

Emerging markets

13 7 9 2

Not classified 0 0 0 0

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The table below compares the weights of the current and recommended portfolios relative to the global market distribution.

trendsGlobal Diversification strategy International investing can help enhance the diversification of a

portfolio as it spreads risk across several economies and financial markets.

There is a wide range of returns generated from each individual country market as driven by individual geopolitical or economic factors. Investments across a greater number of individual country markets investments may provide more effective diversification.

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