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Strategy FormulationStrategy Formulation
Corporate strategyCorporate strategy
Prof. Rushen Chahal
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Corporate Strategy
is primarily about the choice of direction
for the firm as a whole (small one-productcompany and a large multi business company)
is also about managing various product
lines and business units for maximum
value (large multi business company)
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Corporate Strategy
3 Key Issues
The firms overall orientation toward growth,
stability or retrenchment (directional strategy)
The industries or markets in which the firm
competes through its products and BU (portfolio
strategy)
The manner in which management coordinates
activities, transfer resources, and cultivates
capabilities among product lines and BUs
(parenting strategy)
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Corporate Directional Strategy
Orientation toward growth
Expansion, contraction, status quo
Concentration or diversification
Internal development or acquisitions,
mergers, or alliances
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Corporate Directional Strategy
3 Grand Strategies
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Corporate Directional Strategy
1. Growth Strategies --A corporation can grow internally by expandingits operation both globally and domestically, orit can grow externally
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Corporate Directional Strategy
1. Growth Strategies --
External mechanisms:
Mergers (Allied Corporation+ Signal Companies=
Allied Signal)
Acquisitions (Procter & Gamble acquisition of
Richardson-Vicks knowing for Oil of Olay andVidal Sassoon brands)
Strategic alliances
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Corporate Directional Strategy
1. Growth Strategies --
Main advantages: May mask flaws in a company
Provide a big cushion for turnaround in case astrategic error is made
Give more bargaining power
Offermore opportunities for advancement,
promotion, and interesting jobs
2Basic forms: Concentration
Diversification
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Basic Concentration Strategies
Vertical Growth -- Vertical integration
Full integration (100% suppliers +controls
distributors)
Taper integration (
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Horizontal Growth / Concentration --
by expanding the firms products into other
geographic locations and/or by increasing
the range ofproducts and services offeredto current markets.
Horizontal integration
Full to partial ownership Long-term contracts
Basic Concentration Strategies
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Corporate Directional Strategy
Basic Diversification Strategies
Concentric Diversification when a firm has astrong competitive position but industryattractiveness is low Growth into related industry
Search for synergies
Conglomerate diversification when industry
is unattractive and a firm lacks outstandingabilities and skills Growth into unrelated industry
Concern with financial considerations
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Corporate Directional Strategy
Growth into areas related to a companyscurrent product lines is generally moresuccessful than is growth in completelyareas.
From successful growth projects: 80% vertical growth
50% horizontal growth
35% concentric diversification 28% conglomerate diversification
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Corporate Directional Strategy
International Entry Options --
Exporting
Licensing
Franchising
JointVentures
Acquisitions
Green-Field Development
Production Sharing
Turnkey Operation BOT Concept (Build, Operate, Transfer)
Management Contracts
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Corporate Directional Strategy
2. Stability Strategies --
Pause/proceed with caution (timeout
before continuing growth or retrenchment)
No change (to do nothing new)
Profit strategies (to support profits byreducing investments and short-term
expenditures)
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Corporate Directional Strategy
3. Retrenchment Strategies --
Turnaround
Captive Company Strategy
Selling out
Divestment
Bankruptcy Liquidation
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Corporate Strategy
PortfolioAnalysis --
Resource commitment on best
products to ensure continued success
Resource commitment on new costly
products high risk
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BSG Matrix
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BSG Matrix
Stars are high market share/high growth businesses. The
preferred strategy is growth.
Question marks are low market share/high growth
businesses. The preferred strategies are growth forpromising question marks and restructuring or divestiture
for the other question marks.
Cash cows are high market share/low growth
businesses. The preferred strategy is stability ormodest
growth.
Dogs are low market share/low growth businesses. The
preferred strategy is retrenchment by divestiture.
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BSG Matrix
Limitations:
Too simplistic
The link between market share and profitability isquestionable
Growth rate is only one aspect of industry
attractiveness
Product lines or business units are considered in
relation to the one market leader
Market share is only one aspect of overall
competitive position
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GE/McKinseyMatrix
AWinners Winners
B
C
QuestionMarks
D
F
Average
Businesses
EWinners
Losers
GLosers
H
LosersProfit
Producers
Strong Average Weak
Low
Medium
High
Business Strength/Competitive Position
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Business strengths reflect market share,technological advantage, product quality, operating
costs, and price competitiveness.
Industry attractiveness reflects market size and
growth, capital requirements and competitive intensity. Both business strength and industry
attractiveness are categories as low, medium, and
high.
Combining the business strength and industry
attractiveness variables yields a nine-cell matrix that
identifies business units as winners, question
marks, average businesses, profit producers, or
losers.
GE/McKinseyMatrix
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Limitations:
It can get quite complicated and cumbersome The numerical estimates of industry attractiveness
and business strength/competitive position give the
appearance of objectivity, but they are in reality
subjective judgments
It cannot effectively depict the positions or business
units in developing industries
GE/McKinseyMatrix
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Portfolio Analysis
Advantages of portfolio analysis:
It encourages topmanagement to evaluate each of
the businesses individually and set objectives andallocate resources for each.
It stimulates the use of externally oriented data to
supplement managements judgment.
It raises the issue of cash flow availability for use inexpansion and growth.
Its graphic depiction facilitates communication.
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Portfolio Analysis
Limitations of portfolio analysis:
It is not easy to define product/market segments. It suggests the use of standard strategies that can
miss opportunities or be impractical.
It provides an illusion of scientific rigor when in
reality positions are based on subjective judgments.
It is not always clear what makes an industry
attractive or where a product is in its life cycle.
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Corporate Strategy
Corporate Parenting Strategy --
Strategic factors
Performance improvement
Analyze fit
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Corporate Parenting
Value creation only occurs under three conditions:
the parent sees an opportunity for a business to improve
performance and a role for the parent in helping to grasp
the opportunity
the parent has the skills, resources and other
characteristics needed to fulfill the required role
the parent has sufficient understanding of the business
and sufficient discipline to avoid other value-destroyinginterventions.
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Corporate Parenting
According to Campbell, Good and Alexander the
developing a corporate parenting strategy includes
3 steps:
To examine each BU in terms of its strategic factors.
To examine each BU in terms of areas in which
performance can be improved.
To analyze how well the parent corporation fits withthe BU.
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Corporate Parenting
Heartland business has opportunity for
improvement by the parent and priority for all
corporate activities
Edge-ofHeartland business has some parenting
characteristics fit the business, but others do not
Ballast businesses fit very comfortably with theparent corporation but contain very few opportunities
to be improved by the parent
Alien territory businesses have little opportunity to
be improved by the corporate parent Value trap businesses fit well with parenting
opportunities, but misfit with parents understanding
of the units strategic factors