CHAPTER 4: CORPORATE LEVEL STRATEGIES

Categories of Business Organizations

• Corporation– Stock or non-stock

• Sole/ Single Proprietorship• Partnership• Cooperative

• Group of companies/ Conglomerate– Growing number of independently organized

business organization

• Mother or parent company– Serves as the core or the unifying factor in the

overall strategic direction of the entire business.

• Holding firm / holding company– Influences other small business organizations

known as subsidiaries• Subsidiaries / Affiliates

– Partly capitalized or wholly owned by the mother company

• Diversified business group– Involves a variety of business concerns with one

given out business opportunities for the other or one is serving as major contractor or supplier of member or affiliates of the business empire

The Nature of Corporate Level Strategy

• Corporate strategy– independent or single business unit (SBU) forming

part of the family of business or group business concerns needs to be bothered with its own business level strategy

The Nature of Corporate Level Strategy

• Highly diversified business organizations– Group of individuals business organizations with

individual charters or corporate status registered in appropriate agencies of the government

• Corporate level strategy– Serves as the guiding star of all the individual

business organizations belongs to the group of the conglomerate

– broad or corporate wide strategy synchronizing various business level strategies into a cohesive and coordinated efforts to achieve the vision of the entire business organization

3 main categories acc. Wheelen and Hunger– Stability– Growth – Retrenchment

The 4 E’s to addressing Corporate Strategy by Thompson and Cats-Baril

a. Extend• Extending the business by going beyond its

current business model by adapting a new business model or entering into new businesses

b. Expand• This option takes the form of adding products or

services within the context of the companies’ existing business concern or present area of operation

The 4 E’s to addressing Corporate Strategy by Thompson and Cats-Baril

a. Exit • This option takes the form of making some

sacrifice by dropping some product lines and services or business units deemed uncompetitive or unprofitable or less profitable to operate

b. Enhance • This option takes the form of adding functionality

or improving a product or service that is currently being offered

Ways that a Business Strategy can evolve

EXTEND

EXPAND

ENHANCE

EXIT

ENHANCEMENTAdd functionality or improve a product or service that is currently offered

EXTENSIONAdopt new business model or enter new businesses

EXITDrop a product or service line or exit a business

EXPANSIONAdd products and services within an existing business

Key Issues in Corporate Level Strategy

• The firm’s overall orientation towards growth, stability, or retrenchment (directional strategy)

• The industries or markets in which the firm competes through its products and business units (portfolio strategy)

• The manner in which management coordinates activities, transfers resources and cultivates capabilities among product lines and business units (parenting stategy)

Current Choices Faced by Executives in the Digital Economy

Yesterday Today Tomorrow

Trigger Point

BPR and other Cost Cutting and Operational Initiatives

Advantage

Parity

DecayRIP

Redefine and

Reposition

Adopt Best Practices

Business as Usual

Prosper

Survive

Fail

Strategic Choices at the Corporate Level

• Business closure– An undesired act of folding up or shutting down

non-profitable business units to control or avoid further losses

• Business disposal– Calls for disposing or unloading some of the

members subsidiaries, affiliates or investments

Strategic Choices at the Corporate Level

• Business acquisition– Option of business establishment meant to

expand their size and make their presence felt in whatever area they want to do business

• Business reorganization– This option may or may not lead to ownership

changes among members of the organization

Strategic Choices at the Corporate Level

• Business start-up– Realizing the need create new business units to

cater to market opportunities• The impact of doing nothing different

– This option is simply status quo which also comes in the form of pause or no change strategy

The Corporate Expansion Option

As shown in the next figure, a single business organization that is well managed is likely to grow in size and in number eventually becoming a conglomerate or highly diversified company within many individual business organizations forming part of the family.

Basic Model for Integration and Diversification Options

VERTICAL

INTEGRATION

INDIRECT

COMPETITORS Horizontal integration / diversification

Forward integration

Horizontal diversification

Horizontal integration

Backward integration

The Company

Customers / End Users

Suppliers

Hierarchy of Strategy

cFunctional strategy

Business(Division level strategy)

Corporate strategy

Corporate Strategy and Business Strategy

Business strategy 1Business strategy 2Business strategy 3Business strategy 4

Corporate

Vertical Integration Option

Evolves around the notion of how far or close a business is from the source of raw materials or the final consumer of the product

Involve engaging in business activities to the level of sources of supply or forward in the direction of final consumers

Vertical Integration Continuum

• Espoused by Harrigan postulates that vertical integration strategy may be in full or in part ranging from outsourcing to full integration

Continuum of Vertical Integration Option

Full Integration

Taper Integration

Quasi Integration

Long-term contract

Forward Vertical Integration

• An option where the firm engages in business activities in the area of distribution and retailing of the product or service directly to the customers

Situations favoring forward integration

• present distributors are especially expensive or unreliable or incapable of meeting the firm’s distribution needs;

• availability of quality distributors is so limited as to offer a competitive advantage to those firms that integrate forward;

• advantages of stable production are particularly high;

Situations favoring forward integration

• organization competes in an industry that is growing and is expected to continue to grow markedly;

• organization has both the capital and human resources needed to manage the new business of distributing its own products;

• present distributors or retailers have high profit margins

Backward Vertical Integration

• A corporate option to engage in the business concentrating the efforts at the stage of raw materials production or close the source of raw materials

Situations favoring backward integration

• present suppliers are especially expensive or unreliable or incapable of meeting the firm’s distribution needs;

• The number of suppliers is small and the number of competitors is large;

• organization competes in an industry that is growing rapidly;

Situations favoring backward integration

• Organization’s present channels of distribution can be used to market the new products to current customers;

• New products have counter cyclical sales patterns compared to an organization’s present products

Conglomerate Diversification

Conglomerate diversification (unrelated diversification)

a diversification option that involves investing in or buying into business organizations whose products and/or services have nothing to do or not related to the kind of products it is presently dealing with.

Situations favoring conglomerate diversification

• Organization’s basic industry is experiencing declining annual sales and profits;

• Organization has the capital and managerial talent needed to compete successfully;

• Organization has the opportunity to purchase an unrelated business;

Situations favoring conglomerate diversification

• Financial synergy exists between the acquired and acquiring firm;

• Existing market for an organization’s present products are saturated; and

• Antitrust action could be charged against an organization that historically has concentrated on a single industry

Concentric Diversification

• Concentric diversification (related diversification)

A corporate diversification option that involves engaging or dealing with products or services that are somehow related to or associated with what the firm is presently handling.

Situations favoring concentric diversification

• Organization competes in a no-growth or a slow-growth industry;

• Adding new, but related products significantly would enhance the sales of current products;

• New, but related, products could be offered at highly competitive prices;

Situations favoring concentric diversification

• New, but related, products have seasonal sales levels that counterbalance an organization’s existing peaks and valley;

• Organization’s products are currently in the decline stage of the product life cycle; and

• Organization has strong management team

Strategic Fit

the relatedness in making decisions concerning the appropriateness of the strategic moves vis-à-vis the various operating divisions or business units of the company

Degree of relationship or connectivity

Categories of strategic fit acc. To Thompson and Strickland

• Product fit• Operating fit• Management fit

Directions of Corporate Level Strategies

According to Wheelen and Hunger:• Growth strategy• Stability strategy• Retrenchment strategy

Growth Strategy Options

Designed to achieve growth in sales, assets, profits or some combination

Categories:• Merger• Acquisition• Strategic alliance

Stability strategies

This option is sometimes viewed as having lck of strategy s the firm simply opts to stay put or maintain the current array of businesses

Forms:• Pause/proceed with caution• No change strategy• Profit strategy

Retrenchment strategiesEvolves around the concept of reduction in a

variety of aspects usually in terms of size, capital, personnel complement and the like.

Forms:• Turnaround strategy

– Contraction – Consolidation

• Sell-out/Divestment strategy• Bankruptcy strategy• Liquidation strategy

International and Other Entry Options

Usually done by multinational or foreign-based organizations

designed to explore other markets beyond their usual or original place of doing their business

Strategies in entering the Int’l markets

• Exporting• Licensing• Franchising• Joint venture• Acquisition• Greenfield

development• Production sharing

• Turnkey operations• Management contract• Build-Operate-

Transfer or BOT concept

• Outsourcing

Strategic Alliance

Used for the purpose of achieving mutual advantage and certain strategic or specific goals

Done through a process of exploration and negotiation with targeted parties or business concerns leading to signing up an alliance document in the form of memorandum of agreement, memorandum of understanding and /or contracts stipulating mutual desire to attain specific objective and expressing support for one another.

Objectives in strategic alliance

• To collaborate on technology development or new product development;

• To fill gaps in technical or manufacturing expertise;

• To acquire new competencies• To improve supply chain efficiency• To gain economies of scalein production and

marketing; and• To acquire or improve market access via joint

marketing agreements

Guidelines in forming strategic alliances

• Pick a good partner, one that shares a common vision;

• Be sensitive to cultural differences;• Recognize that the alliance must benefit both

sides• Both parties have to deliver on their

commitments in the agreement;

Guidelines in forming strategic alliances

• Structure decision-making process so actions can be taken swiftly when needed; and

• Parties must do a good job of managing the learning process, adjusting the alliance agreement over time to fit new circumstances

Success factors in alliances:

• Ability of an alliance to endure depends on how well partners work together;

• Success of partners in responding and adapting to changing conditions; and

• Willingness of partners to renegotiate the bargain.

Failure factors in alliances:

• Diverging objectives and priorities of partners;• Inability of partners to work well together;• Emergence of more attractive technological

paths;• Marketplace rivalry between one or more

allies; and• Merger and acquisition strategies.

Benefits of mergers and acquisition

• More or better competitive capabilities;• More attractive line-up of products/services;• Wider geographic coverage;• Greater financial resources to invest in R&D,

add capacity, or expand;• Cost-saving opportunities;• Filling in of resource or technological skills; • Greater ability to launch next-wave

products/services

Pitfalls of merger and acquisition

• Resistance from rank-and-file employees;• Hard-to-resolve conflicts in management styles

and corporate cultures;• Tough problems in combining and integrating

the operations of the once-different companies; and

• Greater-than-anticipated difficulties in achieving expected cost-savings, sharing of expertise, and achieving enhanced competitive capabilities

Advantages of Outsourcing

• Improves firm’s ability to obtain high quality and/or cheaper components or services;

• Improves firm’s ability to innovate by interacting with “best-in-the-world” suppliers;

• Enhances firm’s flexibility• Increases firm’s ability to assemble diverse

kinds of expertise speedily and efficiently;• Allows firm to concentrate its resources on

performing those activities internally

Conditions to consider in outsourcing:

• Activity can be performed better or more cheaply by outside specialists

• Activity is not crucial to achieve a sustainable competitive advantage

• Risk exposure to changing technology and/or changing buyer preferences is reduced

Conditions to consider in outsourcing:

• Operations are streamlined to– Cut cycle time– Speed decision-making– Reduce coordination costs

• Firm can concentrate on doing those “core” value chain activities that best suit its resource strengths and capabilities

Situations favoring Joint Venture:

• When privately owned organization is forming a joint venture with a publicly owned organization;

• When a domestic organization is forming a joint venture with a foreign company;

• The distinctive competencies of two or more firms complement each other especially well;

Situations favoring Joint Venture:

• When some project is potentially very profitable, but requires overwhelming resources and risks;

• When two or more smaller firms have trouble competing with a large firm; and

• When there exists a need to introduce a new technology quickly.

Situations favoring Retrenchment:

• An organization has a clearly distinctive competence but has failed to meet its objectives and goals consistently over time;

• An organization is one of the weaker competitors in a given industry;

• An organization is plagued by inefficiency, low profitability, poor employee morale, and pressure from stockholders improve performance;

Situations favoring Retrenchment:

• An organization has failed to capitalized on external opportunities, minimize external threats, take advantage on internal strengths, and overcome internal weakness over time;

• An organization has grown so large so quickly that major internal reorganization is needed.

Situations favoring Divestiture:

• When an organization has pursued a retrenchment strategy and it failed to accomplish needed improvements;

• When a division needs more resources to be competitive than the company ca provide;

• When a division is responsible for an organizations overall poor performance; and

• When a division is a misfit with the rest of the organization.

Situations favoring Liquidation:

• When an organization has pursued both retrenchment strategy and a divestiture strategy;

• When an organization’s only alternative is bankruptcy;

• When the stockholders of a firm can minimize their losses by selling the organization’s assets.

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