Download - Corporate level Stratergies
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Jai Narain Vyas University,
Jodhpur
(Five years’ Law Integrated Program, Law Faculty)
Project Assignment Academic Year
2015-16
Sub: Strategic Management
Topic: “Corporate level strategies”
Submitted To: Submitted By:
Ms. Tripati K. Sandeep K Bohra
Roll No.: 20 (B.B.A LL.B.)
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PREFACE
As a part of the BBA Curriculum and in order to
gain practical Knowledge in the field of
management, we are required to make a report on
“Strategic Management”. The Basic Objective
behind doing this project report is to get knowledge
of different aspects of Strategies and Diversification
used in different levels of Corporate Sector.
In this project report we have included various
concepts, effects and implications regarding
complexities and hardships popped out in the
making of corporate level strategies.
Doing this Project report helped me to enhance my
knowledge regarding the work in to the role of
strategist in making of effective and tremendous
strategies at the glance of the corporation. Through
this report I come to know about importance of
hard work, research work and role of devotion
towards the work.
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ACKNOWLEDGEMENT
To make any project, essential requirement is able
guidance and references without which project is
incomplete. I am very much thankful to Professor
Ms. Tripati and who has provided me an
opportunity and motivation to gain knowledge
through this type of project. I shall get practical
knowledge from this project and this will help me a
lot in my career.
I am also thankful to Jai Narain Vyas University,
Jodhpur for providing facility of library and
computer laboratory, which are proved as valuable
input resources for preparing my project.
I am also obliged by my classmates, whose co-
operation has contributed major part in my project.
At last but not the least, I am thankful to all my
friends and other persons who have directly and
indirectly helped me during preparation of report.
Thank You
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List of Contents
1. Introduction................................................................................................................................................ 5
i) Corporate Strategy definition ........................................................................................................... 5
ii) Strategic Planning ........................................................................................................................... 6
iii) Product Diversification Strategy ................................................................................................. 7
Objectives ................................................................................................................................................... 7
Approach ..................................................................................................................................................... 7
iv) Growth level Diversification ......................................................................................................... 7
2. Levels of Diversification ......................................................................................................................... 8
i) Low Levels of Diversification............................................................................................................ 9
ii) Moderate and High Levels of Diversification .......................................................................... 9
iii) Very High Levels of Diversification ............................................................................................ 9
3. Reasons for Diversification .................................................................................................................. 10
i) Corporate-Level-Strategy: Creating Value through Diversification ................................... 10
ii) Corporate-level-strategy: Value-neutral Diversification ..................................................... 11
iii) Corporate-level-strategy: Value-reducing Diversification .................................................. 11
4. Importance of Diversification in Strategy ....................................................................................... 12
i) Avoiding Downturns ......................................................................................................................... 12
ii) Competitive Defence ..................................................................................................................... 12
iii) Stabilizing Influence ..................................................................................................................... 12
iv) Company Risks ............................................................................................................................... 13
Undiversifiable ........................................................................................................................................ 13
Diversifiable ............................................................................................................................................. 13
5. Portfolio Analysis ................................................................................................................................... 14
i) Introduction to Portfolio Analysis ................................................................................................. 14
ii) Levels of Portfolio Analysis......................................................................................................... 14
a) Analysing Returns ......................................................................................................................... 14
b) Risk Aversion .............................................................................................................................. 14
c) Dispersion of Returns ................................................................................................................... 14
iii) Portfolio Analysis Tools ............................................................................................................... 14
a) Nine cell industry attractiveness and competitive strength matrix ................................. 15
b) BCG growth share matrix ....................................................................................................... 15
References ............................................................................................................................................................ 16
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1. Introduction
Strategy is different from tactics. Tactics is a scheme for a specific
manoeuvre whereas strategy is the overall plan for deploying
resources to establish a favourable position.
According to Thompson & Strickland – “A company’s strategy
consists of the combination of competitive moves and business
approaches that managers employ to please customers and
compete successfully and achieve organizational objectives.”
Corporate level strategy includes:
Reach - defining the issues that are corporate responsibilities;
these might include identifying the overall goals of the
corporation, the types of businesses in which the corporation
should be involved, and the way in which businesses will be
integrated and managed.
Managing Activities and Business Inter relationships - Corporate
strategy seeks to develop synergies by sharing and coordinating
staff and other resources across business units, investing financial
resources across business units, and using business units to
complement other corporate business activities.
i) Corporate Strategy definition
Corporate Strategy define as, “The overall scope and direction of
a corporation and the way in which its various business
operations work together to achieve particular goals”.
Specifies actions a firm takes to gain a competitive advantage by
selecting and managing a group of different businesses competing
in different product markets
Corporate-level strategy concerns:
The scope of the markets and industries the firm competes
in.
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How the firm manages their portfolio of businesses.
Mode of entry into new businesses.
Internal development, acquisitions/ merger, joint
venture/ strategic alliance.
Level and type of diversification.
Capturing synergies between business units.
Allocating corporate resources.
ii) Strategic Planning
Strategic planning is a defined, recognizable set of activities
designed to achieve organizational objectives and goals. The
techniques for strategic planning may vary but the substantive
issues are essentially the same.
These include:
a) Establishing and periodically confirming the organization’s
mission and its corporate strategy.
b) Setting strategic or enterprise-level financial and non-
financial goals and objectives.
c) Developing broad plan of action necessary to attain these
goals and objectives, allocating resources on a basis
consistent with strategic directions, and managing the
various lines of business as an investment “portfolio”.
d) Communicating the strategy at all levels, as well as
developing action plans at lower levels that are supportive of
those at the enterprise level.
e) Monitoring results, measuring progress, and making such
adjustments as are required to achieve the strategic intent
specified in the strategic goals and objectives.
f) Reassessing mission, strategy, strategic goals and objectives,
and plans at all levels and, if required, revising any or all of
them.
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iii) Product Diversification Strategy
A product diversification strategy is a form of business
development. Small businesses that implement the strategy can
diversify their product range by modifying existing products or
adding new products to the range. The strategy provides
opportunities to grow the business by increasing sales to existing
customers or entering new markets.
Objectives
Set your objectives for product diversification. You can take a
defensive approach with the objective to protect your business if,
for example, demand drops for your products or you face strong
competition. This might be important for news companies that
have built their business on a single product. Declining market
share or revenue could threaten the survival of your business.
Alternatively, you can take an offensive approach where you see a
strong market opportunity but can’t take advantage of it with your
existing products.
Approach
You can approach product diversification in a number of ways.
You can modify your existing products so that the new version
appeals to a different group of customers. If you make tools for
building professionals, for example, consider developing a version
that appeals to amateur users. An alternative strategy is to offer
new products to your existing customers. A retailer of fruit and
vegetables could introduce a range of health foods that appeal to
the same customer group. Another approach is to add a new
product to your range, aimed at a new group of customers.
iv) Growth level Diversification
Growth strategies in business also include diversification, where a
small company will sell new products to new markets. This type of
strategy can be very risky, according to gaebler.com. A small
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company will need to plan carefully when using a diversification
growth strategy. Marketing research is essential because a
company will need to determine if consumers in the new market
will potentially like the new products.
Most small companies have plans to grow their business and increase sales and profits. However, there are certain methods companies must use for implementing a growth strategy. The method a company uses to expand its business is largely contingent upon its financial situation, the competition and even government regulation. Some common growth strategies in business include market penetration, market expansion, product expansion, diversification and acquisition.
2. Levels of Diversification (See Figure 1 Different Levels of Diversification)
Figure 1 Different Levels of Diversification
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i) Low Levels of Diversification
A firm pursing a low level of diversification uses either a single- or
a dominant-business corporate-level diversification strategy.
A single-business diversification strategy is a corporate-level
strategy wherein the firm generates 95% or more of its sales
revenue from its core business area.
With the dominant-business diversification strategy, the firm
generates between 70% and 95% of its total revenue within a single
business area. United Parcel Service (UPS) uses this strategy.
ii) Moderate and High Levels of Diversification
A firm generating more than 30%of its revenue outside a dominant
business and whose businesses are related to each other in some
manner uses a related diversification corporate-level strategy.
The diversified company with a portfolio of businesses with only a
few links between them is called a mixed related and unrelated
firm and is using the related linked diversification strategy.
Compared with related constrained firms, related linked firms
share fewer resources and assets between their businesses,
concentrating instead on transferring knowledge and core
competencies between the businesses. As with firms using each
type of diversification strategy, companies implementing the
related linked strategy constantly adjust the mix in their portfolio
of businesses as well as make decisions about how to manage their
businesses.
iii) Very High Levels of Diversification
A highly diversified firm that has no relationships between its
businesses follows an unrelated diversification strategy.
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3. Reasons for Diversification
i) Corporate-Level-Strategy: Creating Value through
Diversification
Corporate-level strategy focuses on two key, but related issues:
what businesses should the corporation compete in and how can
the corporation best manage them in a synergistic manner in order
to maximize value. (Dess, 2010).
Dess, Lumpkin and Eisner explain it well when they compare core
competencies with a tree. While the trunk and limbs represent a
company’s core products and the leaves and flowers represent
end-products, the core competencies are the roots of the tree.
The roots provide the nourishment for the core and end products
but are not readily visible when looking at the tree as a whole.
However, the roots/core competencies are the glue that holds the
business together. For core competencies to create value for the
business, it must meet three criteria:
a) The core competency must enhance the company’s competitive advantage by creating customer value.
b) The different businesses within the corporation must be similar in at least one way related to the core competencies.
c) The core competencies must be difficult to replicate or imitate by competitors.
Managers must be cautious. There are numerous studies that have shown that a majority of alliances fail – demonstrating that they did not meet the goals of the parent companies or delivers strategic benefits.1
1 Kale and Singh, 2009
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ii) Corporate-level-strategy: Value-neutral Diversification
In the value neutral diversification, there are some areas in which
corporate strategies made with the full endeavour. The following
areas in which corporate strategies are concern are:-
a) Antitrust Regulation and Tax Laws
b) Low Performance
c) Uncertain Future Cash Flows
d) Synergy and Firm Risk Reduction
e) Tangible and Intangible Resources and Diversification
Value-neutral reasons for diversification include those of a desire to match
and thereby neutralize a competitor’s market power (such as to neutralize
another firm’s advantage by acquiring a similar distribution outlet).
Decisions to expand a firm’s portfolio of businesses to reduce managerial risk
can have a negative effect on the firm’s value. Greater amounts of
diversification reduce managerial risk in that if one of the businesses in a
diversified firm fails, the top executive of that business remains employed by
the corporation.
In addition, because diversification can increase a firm’s size and thus
managerial compensation, managers have motives to diversify a firm to a
level that reduces its value.
iii) Corporate-level-strategy: Value-reducing Diversification
In the value reducing/destroying diversification, there are some
areas in which corporate strategies made with the full endeavour.
The following areas in which corporate strategies are concern are:-
a) Diversifying Managerial employment risk.
b) Increasing Managerial compensation.
Diversification destroys value because it, for instance, creates
inefficient internal capital markets during the course of
overinvestment in low performing-business (Stulz, 1990); or due to
internal power efforts that generate influence costs (Rajan,
Servaes, and Zingales, 2000) Moreover, managers of divisions that
have a future perspective in the firm are encouraged to persuade
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the top management of the firm to conduct resources in their
direction (Meyer, Milgrom and Roberts, 1992).
4. Importance of Diversification in Strategy
Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries and other categories. It aims to maximize return by investing in different areas that would each react differently to the same event. Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk.
Following are the importance of diversification:
i) Avoiding Downturns
A conservative reason to diversify is to avoid major repercussions when an industry or sector suffers a downturn. Some single-business or single-product organizations couldn't survive a lengthy decline in their industry. A fashion retailer often sells in multiple product categories, for instance, because fashion is so trendy and unpredictable. Being diversified protects the company against changes. Many fashion retailers also expand into new store formats, such as for children or babies, to diversify.
ii) Competitive Defence
Another reason to diversify is that under-served locations or customers have
available revenue for somebody in your industry to take advantage of. If your
company doesn't diversity and expand to fill the additional demand,
competitors are likely to do so. If you get in first, you can often increase your
customer base or establish yourself as a top provider. Movie rental provider
Blockbuster dissolved, in part, because it failed to protect against competitors
moving into new DVD-by-mail and online-streaming formats.
iii) Stabilizing Influence
Diversity also helps your company build stability. If you concentrate too
heavily on a single industry or product, you risk volatility in revenue and
resources as demand rises and falls. If your business stretches across many
industries or categories, you may have more predictability. Advertising
agencies often diversify clients to avoid major drops in revenue and having to
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cut significant staff if a single industry falters. Losing a client here or there
isn't as destabilizing if the company is diversified.
iv) Company Risks
As important and valuable as diversification is, it does have drawbacks and
risks. When you expand, you potentially lose focus on what your best
products or offerings are. You also have to spread out your business
investments and costs, which may prevent you from putting enough money in
cash-cow sectors or products. If you expand, you need experts to work for you
or partner with you to achieve success in newer, unproven areas.
Investors confront two main types of risk when investing:
Undiversifiable
Also known as "systematic" or "market risk," undiversifiable risk is associated with
every company. Causes are things like inflation rates, exchange rates, political
instability, war and interest rates. This type of risk is not specific to a particular
company or industry, and it cannot be eliminated, or reduced, through
diversification; it is just a risk that investors must accept.
Diversifiable
This risk is also known as "unsystematic risk," and it is specific to a company,
industry, market, economy or country; it can be reduced through diversification. The
most common sources of unsystematic risk are business risk and financial risk. Thus,
the aim is to invest in various assets so that they will not all be affected the same way
by market events.
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5. Portfolio Analysis
i) Introduction to Portfolio Analysis
Portfolio analysis involves quantifying the operational and financial impact of the portfolio. It is vital to evaluate the performances of investments and timing the returns effectively.
The analysis of a portfolio extends to all classes of investments such as bonds, equities, indexes, commodities, funds, options and securities. Portfolio analysis gains importance because each asset class has peculiar risk factors and returns associated with it. Hence, the composition of a portfolio affects the rate of return of the overall investment.
ii) Levels of Portfolio Analysis
Portfolio analysis is broadly carried out for each asset at three levels:
a) Analysing Returns
While performing portfolio analysis, prospective returns are calculated through the
average and compound return methods. An average return is simply the arithmetic
average of returns from individual assets. However, compound return is the
arithmetic mean that considers the cumulative effect on overall returns.
b) Risk Aversion
This method analyses the portfolio composition while considering the risk appetite of
an investor. Some investors may prefer to play safe and accept low profits rather
than invest in risky assets that can generate high returns.
c) Dispersion of Returns
It is the measure of volatility or standard deviation of returns for a particular asset.
Simply put, dispersion refers is the difference between the real interest rate and the
calculated average return.
iii) Portfolio Analysis Tools
Useful Tools for Portfolio Analysis Include:
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a) Nine cell industry attractiveness and competitive strength matrix
b) BCG growth share matrix
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References Dess, L. &. (2010).
Meyer, Milgrom and Roberts. (1992).
Rajan, Servaes, and Zingales. (2000).
Stulz. (1990).
Reuters 2013 ed. March