Lecture 4
Strategy Formulation – Corporate Strategy
Relationship between various
strategic decisions
Where and What?
How?
What is the
current strategy,
implicit or
explicit?
What assumptions
have to hold for
the current
strategy to be
viable?
What is happening
in the larger, social,
political, technical
and financial
environments?
What are our
growth, size, and
profitability goals?
In which markets
will we compete?
In which
businesses?
In which
geographic areas?
Related to Competitive Strategy
What do we do?
Why are we here?
What kind of
company are we?
What kind of
company do we
want to become?
What kind of
company must we
become?
What is our
objective? What are
the ends we seek?
What is our current
strategy, implicit or
explicit?
What courses of
action might lead to
the ends we seek?
What are the means
at our disposal?
How are our actions
restrained and
constrained by the
means at our
disposal?
What risks are
involved and which
ones are serious
enough that we
should plan for them?
Related to Corporate Strategy
Who are we?
Related to Strategy in General
Related to Mission & Vision
Relationship between various
strategy thoughts
What is the current
strategy, implicit or
explicit? What
assumptions have to
hold for it to be viable?
What is happening in
industry, competitors,
and in general?
What are growth, size,
and profitability goals?
What products and
services will we offer?
To what customers or
users?
How will selling/buying
decisions be made?
How will we distribute
our products and
services?
What capabilities and
capacities will we
require? Which ones are
core?
What will we make,
what will we buy, and
what will we acquire
through alliance?
What are our options?
On what basis will we
compete?
Corporate Strategy

Key issues to be dealt with in corporate
strategy
◦ Directional Strategy
◦ Portfolio Strategy
◦ Parenting Strategy

Includes decisions regarding the flow of
financial and other resources to and from
a company’s product lines and businesses
Directional Strategy

Key Questions
◦ Should we expand, cut back or continue our
operations unchanged?
◦ Should we concentrate our activities within our
current industry or should we diversify into other
industries?
◦ How do we grow? Through internal development
or through external acquisitions, mergers or
strategic alliances?

General orientations
◦ Growth strategies
◦ Stability strategies
◦ Retrenchment strategies
Directional Strategy
Growth
• Concentration
• Vertical
Growth
• Horizontal
Growth
• Diversification
• Concentric
• Conglomerate
Stability
• Pause/ Proceed
with caution
• No change
• Profit
Retrenchment
• Turnaround
• Captive
company
• Sell-out/
Divestment
• Bankruptcy/
Liquidation
Growth Strategies


Most widely used strategies
Companies can grow in 2 ways
◦ Internally by expanding operations both globally and
domestically
◦ Externally through
 Mergers: similar size, mostly friendly,
 Acquisitions: one party is large, either friendly or hostile
 Strategic alliances:





To obtain technology and/ or manufacturing capabilities
To obtain access to specific markets
To reduce financial risk
To reduce political risk
To achieve or ensure competitive advantage
Mutual Service
Consortia
JV/ Licensing
Arrangement
Value Chain
Partnership
Continuum of strategic alliance
Weak and Distant
Strong and Close
Growth Strategies

Growth is a very attractive strategy for the
following reasons:
◦ Growth typically masks weaknesses, provides
organizational slack (unused resources), larger firms
have more bargaining power
◦ More opportunities for employee advancement,
exciting and ego-enhancing for CEOs

Basic growth strategies
◦ Concentration
 Vertical Integration
 Horizontal Integration
◦ Diversification
 Concentric
 Conglomerate
Vertical Integration



Vertical growth can be achieved by taking over a function
previously done by a supplier or by a distributor resulting in
vertical integration
Key drivers of vertical growth: gain control over resources,
guarantee quality of a key input, access to potential customers
Vertical integration types
◦ Backward or forward

Transaction cost economics
◦ Transaction costs of buying goods on the open market vs. costs of
managing the internal transactions

Vertical integration continuum:
Full
Integration

Taper
Integration
Quasi
Integration
Long-term
Contract
Vertical integration especially backward reduces agility of the
company
Horizontal Integration

Expanding the firms products into other
geographic locations and/or by increasing
the range of products/ services offered to
current markets
Diversification Strategies

Concentric diversification
◦ Strong competitive position
◦ Search for synergy to generate more profits together than they
could separately
◦ Common thread through all businesses

Conglomerate diversification
◦ Primary concern is with financial considerations of cash flow or
risk reduction
◦ Cash-rich company with few opportunities to grow in the
current industry
◦ Smoothening out of seasonal business, prevent threat to the
current business

Which growth strategy is the best?
International Entry Options





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


Exporting
Licensing
Franchising
Joint Ventures
Acquisitions
Green-field development
Production sharing (combining higher labor skills
with low cost operations e.g. outsourcing)
Turnkey operations (production setup)
BOT concept (govt. contracts)
Management Contracts (e.g. TCIL)
Stability Strategies
Pause/ proceed with caution strategy
 No change strategy
 Profit strategy

Retrenchment strategies

Turnaround strategy
◦ Contraction to quickly stop the bleeding
◦ Consolidation
◦ Frequently involves management change, ->situation
analysis -> emergency action plan -> business structuring
-> return to normalcy

Captive company strategy: become a supplier to a
larger company
Sell-out/ Divestment strategy
 Bankruptcy/ Liquidation strategy

Portfolio Analysis
BCG Growth-share matrix
 GE Business Screen
 International Portfolio analysis

BCG Growth share matrix
GE Business Screen

Market Attractiveness
◦
◦
◦
◦
◦
◦
◦

Growth Rate
Mkt Size
Demand variability
Industry profitability
Industry rivalry
Global opportunities
Macroenvironmental factors
Business Unit strength
◦
◦
◦
◦
◦
◦
Market Share
Growth in Mkt share
Brand equity
Distribution channel access
Production capacity
Profit margin relative to competitors
Hold
Corporate Parenting






Primarily for multi-business organizations
Focus on core competencies of the parent
organization
Primarily driven by the corporate headquarters
Not only define what new businesses to start but
also defining the way the businesses will be
managed
Obtain synergy with various businesses
Role is to facilitate and transfer the knowledge
assets from the corporate company to the
individual businesses
Developing a corporate parenting
strategy



First examine each business unit (or target
firm) in terms of its strategic factors
Second examine each business unit (or
target firm) in which performance can be
improved
Third, analyze how well the parent
corporation fits with the business unit (or
target firm)
◦ Corporate hq must be aware of its strengths and
weaknesses in terms of skills, resources and
capabilities
Parenting-fit matrix
Misfit between strategic factors and
parenting characteristics
High
Ballast
e.g. Laptop biz for IBM
Alien Territory
Heartland
Heartland
Edge of
Heartland
Value Trap
Low
FIT between parenting opportunities and parenting characteristics
High