Strategy_Formulation_Corporate_Strategy by RushenChahal

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									Strategy Formulation

Corporate strategy




  Prof. Rushen Chahal
Corporate Strategy



• is primarily about the choice of direction
for the firm as a whole (small one-product
company and a large multi business company)

• isalso about managing various product
lines and business units for maximum
value (large multi business company)
Corporate Strategy
3 Key Issues –

  The firm’s 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)
Corporate Directional Strategy

  Orientation toward growth

    Expansion, contraction, status quo

    Concentration or diversification

 Internal development or acquisitions,
 mergers, or alliances
Corporate Directional Strategy


 3 Grand Strategies
Corporate Directional Strategy




1. Growth Strategies --
  A corporation can grow internally by expanding
  its operation both globally and domestically, or
  it can grow externally
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 and
          Vidal Sassoon brands)
         Strategic alliances
Corporate Directional Strategy

1. Growth Strategies --
     Main advantages:
         May mask flaws in a company
         Provide a big cushion for turnaround in case a
          strategic error is made
         Give more bargaining power
         Offer more opportunities for advancement,
          promotion, and interesting jobs

     2 Basic forms:
         Concentration
         Diversification
    Basic Concentration Strategies

   Vertical Growth --
       Vertical integration
         Full integration (100% suppliers +controls
          distributors)
         Taper integration (<50% supplies; use own and
          external distribution channels)
         Quasi-integration (buy/sell from outside
          suppliers/distributors that under its partial control)
         Long-term contract
       Backward integration
       Forward integration

   Is a logical strategy for a corporation or BU with a strong
    competitive position in a highly attractive industry
Basic Concentration Strategies

   Horizontal Growth / Concentration --
     by expanding the firm’s products into other
     geographic locations and/or by increasing
     the range of products and services offered
     to current markets.

       Horizontal integration
         Full to partial ownership
         Long-term contracts
Corporate Directional Strategy

Basic Diversification Strategies –
   Concentric Diversification – when a firm has a
    strong competitive position but industry
    attractiveness is low
       Growth into related industry
       Search for synergies

   Conglomerate diversification – when industry
    is unattractive and a firm lacks outstanding
    abilities and skills
       Growth into unrelated industry
       Concern with financial considerations
Corporate Directional Strategy

Growth into areas related to a company’s
current product lines is generally more
successful than is growth in completely
areas.

From successful growth projects:
   80 % vertical growth
   50% horizontal growth
   35% concentric diversification
   28% conglomerate diversification
 Corporate Directional Strategy
International Entry Options --

     Exporting
     Licensing
     Franchising
     Joint Ventures
     Acquisitions
     Green-Field Development
     Production Sharing
     Turnkey Operation
     BOT Concept (Build, Operate, Transfer)
     Management Contracts
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 by
     reducing investments and short-term
     expenditures)
 Corporate Directional Strategy


3. Retrenchment Strategies --

    Turnaround
    Captive Company Strategy
    Selling out
    Divestment
    Bankruptcy
    Liquidation
 Corporate Strategy

Portfolio Analysis --

    Resource commitment on best
     products to ensure continued success

    Resource commitment on new costly
     products high risk
BSG Matrix
    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 for
    promising 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 or modest
    growth.
   Dogs are low market share/low growth businesses. The
    preferred strategy is retrenchment by divestiture.
    BSG Matrix

Limitations:

   Too simplistic
   The link between market share and profitability is
    questionable
   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
GE/McKinsey Matrix
                                              C
            Winners          Winners
              A                               Question
     High                       B              Marks

                                                   D

            Winners
              E             Average
                           Businesses
   Medium                      F
                                               Losers


                                                   H
                              Losers
                                G
     Low
              Profit
            Producers                          Losers


             Strong          Average              Weak
               Business Strength/Competitive Position
GE/McKinsey Matrix
   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/McKinsey Matrix


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
Portfolio Analysis

Advantages of portfolio analysis:

   It encourages top management to evaluate each of
    the businesses individually and set objectives and
    allocate resources for each.
   It stimulates the use of externally oriented data to
    supplement management’s judgment.
   It raises the issue of cash flow availability for use in
    expansion and growth.
   Its graphic depiction facilitates communication.
    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.
 Corporate Strategy


Corporate Parenting Strategy --

    Strategic factors

    Performance improvement

    Analyze fit
    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-destroying
    interventions.
    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 with
    the BU.
Corporate Parenting
   Heartland business has opportunity for
    improvement by the parent and priority for all
    corporate activities
   Edge-of Heartland business has some parenting
    characteristics fit the business, but others do not
   Ballast businesses fit very comfortably with the
    parent 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 parent’s understanding
    of the unit’s strategic factors

								
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