C HAPTER 7
S TRATEGY F ORMULATION ;
C ORPORATE S TRATEGY
S TRATEGIC M ANAGEMENT
AND B USINESS P OLICY
11 th Edition
Thomas L. Wheelen
J. David Hunger

Strategies in Action
In Alice’s Adventure in Wonderland, Alice asks the Cheshire cat, “Would you tell me please, which way I ought to go from here?” “
That depends a good deal on where you want to go to”, says the cat.
Corporate Strategy
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Strategies in Action
THERE IS NO GOOD OR POOR
STRATEGY…
BUT THERE IS AN APPROPRIATE
STRATEGY
Corporate Strategy
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Strategy Analysis & Choice
Nature of Strategy Analysis & Choice
-- Establishing long-term objectives
-- Generating alternative strategies
-- Selecting strategies to pursue
-- Best alternative - achieve mission & objectives
Corporate Strategy
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Strategy Analysis & Choice
Alternative Strategies Derive From --






Vision
Mission
Objectives
External audit
Internal audit
Past successful strategies
Corporate Strategy
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Strategy Analysis & Choice
Generating Alternatives --
Participation in generating alternative strategies should be as broad as possible
Corporate Strategy
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Strategy Analysis & Choice
Corporate Strategy Vs.
Business Strategy
Walt Disney
Corporate strategy evaluates whether the corporation should own theme parks, restaurants, movie production, and how the corporation can add value to each of these individual business.
Business strategy analyzes each individual business of
Disney relative to its ’ competitors, e.g. ABC, one of
Disney ’s TV networks need a business strategy to succeed against NBC, FOX, …etc.
Corporate Strategy
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Types of Strategies
(A)
Integration
Strategies
1. Forward
Integration
2. Backward
Integration
3. Horizontal
Integration
Corporate Strategy
7

Integration Strategies
When a company expands its business functions into areas that are at different points of the same production path
Gain Control Over --

Distributors

Suppliers

Competitors
Corporate Strategy
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Integration Strategies
Forward Integration Strategies
Gain Control Over --

Distributors

Retailers
Corporate Strategy
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Integration Strategies
Forward Integration Strategies
Guidelines --

Current distributors – expensive or unreliable

Availability of quality distributors – limited

Firm competes in industry expected to grow markedly

Firm has both capital & HR to manage new business of distribution

Current distributors have high profit margins
Corporate Strategy
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Integration Strategies
Backward Integration Strategies
Ownership or Control --
 Firm’s suppliers
Corporate Strategy
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Integration Strategies
Backward Integration Strategies
Guidelines --

Current suppliers – expensive or unreliable

# of suppliers is small; # competitors is large

High growth in industry sector

Firm has both capital & HR to manage new business

Stable prices are important

Current suppliers have high profit margins
Corporate Strategy
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Integration Strategies
Horizontal Integration Strategies
Used as a growth strategy, eg. M&A, takeover.
Ownership or Control --

Firm ’s competitors
Corporate Strategy
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Integration Strategies
Horizontal Integration Strategies
Guidelines --

Gain monopolistic characteristics w/o federal government challenge

Competes in growing industry

Increased economies of scale – major competitive advantages

Faltering due to lack of managerial expertise or need for particular resource
Corporate Strategy
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Types of Strategies
(B)
Intensive
Strategies
4. Market
Penetration
5. Market
Development
6. Product
Development
Corporate Strategy
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Intensive Strategies
Intensive Efforts --

Improve competitive position with existing products
Corporate Strategy
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Intensive Strategies
Market Penetration Strategies
Increased Market Share of--

Present products/services

Present markets

Greater marketing efforts
Corporate Strategy
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Intensive Strategies
Market Penetration Strategies
Guidelines --

Current markets not saturated

Usage rate of present customers can be increased significantly

Shares of competitors declining; industry sales increasing

Increased economies of scale provide major competitive advantage
Corporate Strategy
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Intensive Strategies
Market Development Strategies
New Markets --

Present products/services to new geographic areas
Corporate Strategy
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Intensive Strategies
Market Development Strategies
Guidelines --

New channels of distribution – reliable, inexpensive, good quality

Firm is successful at what it does

Untapped/unsaturated markets

Excess production capacity

Basic industry rapidly becoming global
Corporate Strategy
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Intensive Strategies
Product Development Strategies
Increased Sales --

Improving present products/services

Developing new products/services
Corporate Strategy
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Intensive Strategies
Product Development Strategies
Guidelines --

Products in maturity stage of life cycle

Industry characterized by rapid technological development

Competitors offer better-quality products @ comparable prices

Compete in high-growth industry

Strong R&D capabilities
Corporate Strategy
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Types of Strategies
(C)
Diversification
Strategies
7. Concentric
Diversification
8. Conglomerate
Diversification
9. Horizontal
Diversification
Corporate Strategy
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Diversification Strategies
The diversification strategies include:
•internal development of new products or markets,
•acquisition of a firm,
•alliance with a complementary company,
•licensing of new technologies.
Corporate Strategy
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Diversification Strategies
Concentric Diversification Strategies
A related diversification strategy
 The addition of new & related products/services which have technological/commercial synergy with current products/services, and which will appeal to new customer groups.

The objective is to benefit from synergy effects due to the complementarities of activities, thus expand the firm’s market by attracting new groups of buyers.
Corporate Strategy
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Diversification Strategies
Concentric Diversification Strategies
Guidelines --

Compete in no/slow growth industry

New & related products enhances sales of current products

New & related products offered at competitive prices

Current products —decline stage of product life cycle

Strong management team
Corporate Strategy
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Diversification Strategies
Conglomerate Diversification Strategies
An unrelated diversification strategy

Marketing of new & unrelated products/services that have no technological/commercial synergies with current products, but which may appeal to new groups of customers.
 The strategy has little relationship with the firm’s current business. Therefore, the reasons of adopting the strategy:
- to improve the profitability of the company,
- to get a better reception in markets as the company gets bigger.
Corporate Strategy
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Diversification Strategies
Conglomerate Diversification Strategies
Guidelines --

Declining annual sales & profits

Capital & managerial ability to compete in new industry

Financial synergy between acquired and acquiring firms

Current markets for present products - saturated
Corporate Strategy
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Diversification Strategies
Horizontal Diversification Strategies
An unrelated diversification strategy
Addition of new & unrelated products/services that are technologically/commercially unrelated to current products, but which may appeal to current customers.
Corporate Strategy
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Diversification Strategies
Horizontal Diversification Strategies
Guidelines --

Adding new products/services would significantly increase revenues

Highly competitive and/or no-growth industry; low margins & returns

Current distribution channels can be used

New products have counter cyclical sales patterns
Corporate Strategy
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Types of Strategies
(D)
Defensive
Strategies
10. Retrenchment
11. Divestiture
12. Liquidation
Corporate Strategy
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Defensive Strategies
Retrenchment Strategies
Sometimes called Turnaround or Reorganizational strategy
Regrouping --

Cost & asset reduction to reverse declining sales & profit, thus strategists work with limited resources.

Bankruptcy- an effective retrenchment strategy to avoid major debt obligations.
Corporate Strategy
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Defensive Strategies
Retrenchment Strategies
Guidelines --

Failed to meet objectives & goals consistency; has distinctive competencies

Firm is one of weaker competitors

Inefficiency, low profitability, poor employee morale, pressure for stockholders

Strategic managers have failed

Rapid growth in size; major internal reorganization necessary
Corporate Strategy
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Defensive Strategies
Divestiture Strategies

Selling a division or part of an organization.

Used to raise capital for further strategic investments.
Corporate Strategy
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Defensive Strategies
Divestiture Strategies
Guidelines --

Retrenchment failed to attain improvements

Division needs more resources than are available
 Division responsible for firm’s overall poor performance

Division is a mis-fit with organization

Large amount of cash is needed and cannot be raised through other sources
Corporate Strategy
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Defensive Strategies
Liquidation Strategies
Selling
 Company’s assets, in parts, for their tangible worth

Better to cease operating than to continue losing sums of money
Corporate Strategy
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Defensive Strategies
Liquidation Strategies
Guidelines --

Retrenchment & divestiture failed

Only alternative is bankruptcy
 Minimize stockholder loss by selling firm’s assets
Corporate Strategy
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Strategic Examples
Forward
Integration
Doll maker & mail order firm,
Pleasant Co., opened a retail store in Manhattan
Backward
Integration
McDonalds recently acquired a paper cup producer
Horizontal
Integration
Callaway Golf recently acquired
Top-Flite Golf Company
Corporate Strategy
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Strategic Examples
Market
Penetration
SABMiller Plc spent $500 million in
2003 on marketing its Miller brands of beer
Market
Development
JetBlue is adding dozens of new routes
Product
Development
GM developing hydrogen powered automobiles or Pfizer developing a new antismoking pill
Corporate Strategy
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Strategic Examples
Concentric
Diversification
Conglomerate
Diversification
Horizontal
Diversification
Microsoft launched its first personal computers that double as entertainment centers
The video-rental firm Blockbuster may acquire the DVD and music direct-marketing firm Columbia
House
Viacom acquired Comedy Central, from AOL
Corporate Strategy
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Strategic Examples
Retrenchment
Divestiture
Liquidation
America West Airlines closing its hub at Columbus, Ohio and laying off 390 employees
ConocoPhillips recently sold its
Circle K convenience store chain to Alimentation Couche-Tard, a
Canadian firm
Sprint liquidated its Web-hosting division
Corporate Strategy
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Strategic Position & ACtion
Evaluation (SPACE) Matrix
A strategic management tool used to determine what type of corporate strategy a company should undertake
Corporate Strategy
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SPACE Matrix
Conservative
+6
+5
+4
+3
FS
+2
+1
Aggressive
CA
-6 -5 -4 -3 -2 -1
Defensive
-1
-2
-3
-4
-5
-6
ES
+1 +2 +3 +4 +5 +6
Competitive
Corporate Strategy
IS
43

Financial Strength
ROI
Leverage
Liquidity
Working capital
Total
Industry Strength
Growth potential
Profit potential
Technological know-how
Total
Corporate Strategy
Ratings
1.0
1.0
3.0
4.0
9.0
4.0
2.0
4.0
10.0
44

Environmental Stability
Competitive pressure
Price elasticity
Price range of competing products
Total
Competitive Advantage
Market share
Product Quality
Product life cycle
Total
Ratings
-4.0
-5.0
-4.0
-13.0
-2.0
-5.0
-2.0
-9.0
Corporate Strategy
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SPACE Matrix
Steps required to develop a SPACE Matrix are as follows:
1.
Select a set of variables to define the financial strength (FS), competitive advantage (CA), environmental stability (ES), and industry strength
(IS).
2.
Assign a numerical value ranging from +1 (worst) to +6
(best) to each of the variables that make up the FS and
IS dimensions. Assign a numerical value ranging from
-1 (best) to -6 (worst) to each of the variables that make up the ES and CA dimensions. On the FS and CA axes, make comparisons to competitors. On the IS and
ES axes, make comparisons to other industries.
Corporate Strategy
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SPACE Matrix
Steps required to develop a SPACE Matrix are as follows:
3.
Compute an average score for FS, CA, IS and ES by summing the values given to variables of each dimension and then by dividing by the number of variables included in the perspective dimensions.
4.
Mark the average scores for FS, IS, ES, and CA on the appropriate X&Y axis in the SPACE Matrix.
5.
Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on y.
Corporate Strategy
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SPACE Matrix
Steps required to develop a SPACE Matrix are as follows:
6.
Draw a directional vector form the origin of the space
Matrix through the new intersection point. The vector reveals the type of strategies recommended for the organization: a) Aggressive, b) Competitive.
c) Defensive, and d) Conservative.
Corporate Strategy
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SPACE Matrix
Suggested strategies




Aggressive strategies :
Mkt. penetration, mkt. development, product development, backward/forward/horizontal integration, conglomerate/concentric/horizontal diversification.
Conservative strategies:
Mkt. penetration, mkt. development, product development, & concentric diversification.
Defensive strategies:
Retrenchment, divestiture, & liquidation.
Competitive strategies:
Backward/forward/horizontal integration, mkt. penetration, mkt. development, product development,
Corporate Strategy
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