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 W AYNE T HOMAS S PIES 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 BU 301 B USINESS P OLICY: U NIT 6 P AGE 6.4 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. W AYNE T HOMAS S PIES BU 301 B USINESS P OLICY: U NIT 6 P AGE 6.5