C ORPORATE S TRATEGY
Corporate strategies are concerned with the broad, long-term
question of what business(es) you are in and what you will
do with those businesses.
First, consider what we mean by a “business.” A singlebusiness organization operates primarily in one industry. A
multiple-business organization operate in more than one
industry.
We can think of structural organization of the enterprise;
that is, a business may comprise the entire enterprise, or a
single division of that enterprise, or a brand within that
division, or even a single product line within that brand. In
a large enterprise, we would refer to each “business” as a
strategic business unit (SBU ). An SBU has a unique
mission, subject only to the mission of the enterprise. It has
its own objectives, which are independent of those of other
SBU s in the enterprise.
The advantages of having multiple SBU s would include
specialized management, administrative economies of scale,
various synergies, and diversified risk. Let’s say that you
owned a firm that had operations in two industries, such as
an apple orchard and a bakery. Each would be an SBU,
since the strategy for one would be indep endent of the
strategy for the other.
measure growth in terms of sales revenues, profits, return on
investment or other performance measures, growth
strategies dominate corporate strategy.
Growth strategies are also important in the not-for-profit
sector, as agencies strive to increase the number of clients
that they serve, to broaden their geographic area, or increase
the number of programs offered.
There are five major types of growth strategies:
• Concentration
• Vertical integration
• Horizontal integration
• Diversification
• International
C O N C E N T R A T IO N S T R A TE G I E S
In a concentration strategy, an SBU concentrates on its
primary line of business. It seeks growth by extending this
line through innovation and product development and/or by
gaining new customers. A concentration strategy might
involve:
• Product-Market Exploitation: developing current
products and its current customers
It’s unlikely that a manager would have specialized
knowledge of both agriculture and restaurants. Having
separate, specialized management would maximize the
value of each operation.
• Product Develo pment: creating new products for its
current customer base
• Market D evelopment: pushing its current products to
new customers
There would be administrative economies of scale, since
the fixed costs of purchasing, human resource administration, advertising, accounting, and legal work could be
spread over more operations, which would be more efficient
than having two purchasing departments, two HR
departments, two accounting departments and so on.
By having operations in two industries, the enterprise
has diversified its risk. If a blight destroyed this year’s app le
harvest, the restaurant can continue to be profitable,
assuming it can find replacement suppliers.
The drawback to multiple SBU s is the difficulty of
coordinating diverse operations and balancing competing
demands for resources.
G ROWTH S TRATEGIES
The overarching goal of every private-sector firm is
sustainable growth in its value. Growth strategies are
designed to attain specific growth objectives. Whether you
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Products
Customers
In this case, synergies could exist, as a result of vertical
integration. For example, the bakery may have recipes that
are perfectly matched to the kind of apples produced. The
bakery could count on reliable delivery and quality
standards.
• Product-Market Diversification: developing new
products for new customers
Current
New
Current
Product-Market
Exploitation
Product
Development
New
Market Development
Product/Market
Diversification
V ERTICAL IN T E G R A TI O N S T R A TE G Y
By becoming vertically integrated, an enterprise seeks to
control some or all of its input or outputs. Acquiring or
creating an SBU that supplies raw materials to an existing
SBU is known as backward integration. E xamples would be
a flour company that purchased a wheat farm, or a paper
company that purchased a forest.
Adding an SBU that uses all or part of the production of
an existing SBU is called forward integration. Examples of
forward integration would include a cattle ranch that
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Vertical integration reduces costs, improves reliability
and quality of inputs, and reduces market risks. Vertical
integration also reduces a firm’s flexibility, since it is tied
into one supplier or one customer. Vertically integrated
firms are more difficult to manage, since the specialized
knowledge and skills to run one SBU may not be app licable
to another SBU.
INTERN ATIONAL S T R A TE G I E S
Global Integration
purchased a leather tannery or a oil refinery that purchased
a string of gas stations.
High
Trans-National
Approach
Global Approach
M ulti-Dom estic
Approach
Low
Low
High
Local Market Responsiveness
H ORIZO NTAL IN T EG R AT IO N
In contrast, a horizontal integration combines operations of
similar operations. The result is an enterprise whose SBUs
would normally compete against each other. For example,
Proctor and Gamble own Old Spice, Secret, and Sure—three
competing brands of antiperspirant. GAP, Inc., owns Banana
Republic, Old Navy and GAP stores. Horizontal integration
may be useful in expanding geographic markets. For
example, a regional gasoline chain in the midwest might
purchase a similar regional chain in the midsouth. It can also
allow market segmentation. For example, General M otors’
Saturn line appeals to young buyers, Pontiac app eals to
young older buyers, and Cadillac appeals to more affluent
buyers.
Horizontal integration reduces competition, and may be
subject to antitrust laws. S till, it is easy to manage, since the
management skills necessary for one SBU can be readily
adapted to another SBU.
Methods of entering foreign markets:
• Exporting
• Licensing
• Franchising
• Direct Investment
Key parameters:
• 1995-2005: half of all units established by U.S.
franchisors were opened outside U.S.
• 500 U.S. franchises have a global presence
• Foreigner’s
consistency
love
of
recognized
brands
and
D IVERSIFICATION S TRATEGY
A diversification strategy allows an enterprise to expand
into new industries. When the new industry is related to the
existing firm, we call that a related or concentric
diversification. When the new SBU is not related to existing
operations, we call it an unrelated diversification.
Concentric diversification typically capitalizes on one or
more similarities, such as the same operational skills and
capabilities, product similarities, similar technologies, the
same customer-base, or the same marketing channels. For
example, a pharmaceutical firm might acquire a vitamin
firm. Both use similar manufacturing techniques,
technologies, packaging, and marketing channels.
Typically an unrelated diversification occurs when a
firm desires to make a strategic move from one industry to
another, as when General Electric added nuclear reactors to
its toaster ovens.
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