Monday, December 19, 2011

Corporate Strategy

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Corporate Strategy

Ø Corporate strategy deals with three Key Issues in Corporate Strategy

1. The firm’s overall orientation toward growth, stability, or retrenchment directional strategy

. The industries or markets in which the firm competes portfolio strategy

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. The manner in which management contributes to and coordinates activities of business units parenting strategy


Ø Directional Strategy

· Orientation toward growth

§ Expand, cut back, status quo?

§ Concentrate within current industry, diversify into other industries?

§ Growth and expansion through internal development or acquisitions, mergers, or strategic alliances?

Ø Three Grand Directional Strategies

1. Growth strategies

. Stability strategies

. Retrenchment strategies

v Growth Strategies

· Most widely pursued strategies � greater market cap, more options, etc.

· External mechanisms

§ Mergers

o Transaction involving two or more firms in which stock is exchanged but only one firm survives.

§ Acquisition

o Purchase of a firm that is absorbed as an operating subsidiary of the acquiring firm.

§ Strategic Alliance

o Partnership of two or more firms to achieve strategically significant objectives that are mutually beneficial.

Ø Basic Growth Strategies

· Concentration

§ Current product line in one industry

· Diversification

§ Into other product lines in other industries

Ø Basic Concentration Strategies

· Vertical growth

· Horizontal growth

Ø Vertical growth

· Vertical integration

§ Full integration

§ Taper integration

§ Quasi-integration � ownership

§ Backward (upstream) integration

§ Forward (downstream) integration

Ø Horizontal Growth

· Horizontal integration

Ø Basic Diversification Strategies

· Concentric (Related) Diversification

· Conglomerate (Unrelated) Diversification

Ø Concentric - RELATED

· Growth into related industry

· Search for synergies

Ø Conglomerate - UNRELATED

· Growth into unrelated industry

· Concern with financial considerations

v Stability Strategies

Ø Pause/proceed with caution (Dell 85% growth, then pause)

Ø No change

Ø Profit strategies (artificially hold up profits hoping problems are temporary)

v Retrenchment Strategies

Ø Turnaround (pervasive but not critical problems, eg IBM)

Ø Captive Company Strategy (find angel to be captive to, eg. GM)

Ø Selling out/Divesting (Rover to BMW; AMC to Chrysler)

Ø Bankruptcy � Chapter 11 (continue firm by handing it over to court supervision)

Ø Liquidation � Chapter 1 (terminate firm; PTP and AOL)

Portfolio Analysis

Ø Portfolio analysis put top management in the role of internal banker that views product lines and business units as a series of investments that need to be managed to maximize returns.

Ø This involves questions

1. How much of our time and money should we spend on our best products and business units to ensure that they continue to be successful?

. How much of our time and money should we spend developing new costly products, most of which will never be successful?

Ø Three models of portfolio analysis

1. BCG (Boston Consulting Group) Matrix

v Product life cycle and funding decisions

i. Question marks

ii. Stars

iii. Cash cows

iv. Dogs

. GE Business Screen

v Long-term industry attractiveness

v Business strength/competitive position

. International Portfolio Analysis

v Factors

1. Country’s attractiveness

v Market size, rate of growth, regulation

v Competitive strength

. Market share, product fit, contribution margin, market


Ø Portfolio Analysis Advantages

· Top management evaluates each of firm’s businesses individually

· Use of externally-oriented data to supplement management judgment

· Raises issue of cash flow availability

· Facilitates communication

Ø Portfolio Analysis Disadvantages

· Difficult to define product/market segments

· Standard strategies can miss opportunities

· Illusion of scientific rigor

· Value-laden terms

Corporate Parenting

Ø Corporate Parenting

· Views the corporation in terms of resources and capabilities that can be used to build business unit value as well as generate synergies across business units.

· Focuses on the core competencies of the parent and the value created by the relationship among the parent and the business units.

Ø Parenting-Fit Matrix

· Summarizes the various judgments regarding corporate/business unit fit for the corporation as a whole.

· Method

1. Examine each potential unit in terms of Strategic factors

· Those elements of a company that determine its strategic success or failure (internal and external, or SWOT analysis)

. Examine each potential unit in terms of areas where performance can be improved (parenting opportunities)

· What can the parent bring to the table (mfg expertise, relationships, R&D management)

. Analyze fit

Ø Horizontal Strategy and Multipoint Competition

· Corporate strategy that cuts across business unit boundaries to build synergy across business units to improve the competitive position of one or more business units.

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