module3-corporate level strategy
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Module3-Corporate Level StrategyTRANSCRIPT
Seven areas in which Long term objectives have to be established Profitability Productivity Competitive Position Employee Development Employee Relations Technological Leadership Public Responsibility
Scope of Operations Which product or service markets should the company compete
in? Which geographic markets should the company serve?
Extent and type of diversification How broad should the corporate portfolio of businesses be? Should related or unrelated diversification be pursued? Are there new businesses the company should enter? Are there existing businesses the company should terminate or
divest? Organizational structure and integration
How should the company be structured? How much should the company integrate its various lines or
units of business? Deployment of resources
How should the company allocate resources among business units?
Which business units will be stressed?
Acceptable Flexible Measurable Motivating Suitable to Mission Understandable Achievable – the BOD & Ceo are
involved in developing strategies at corporate level. It should be innovative, pervasive and futuristic in nature.
Growth Strategies Type: Concentration - Diversification –integration- new product development strategy-expansion(jv,
licensing, franchising, vertical expansion, horizontal expansion)
Level: Vertical Integration vs. Horizontal Integration Geographic location: International Growth vs. Domestic
Growth Stability Strategies
Pause, Digest and Consolidate after rapid growth or some turbulent events
Retrenchment Strategies (renewal strategies ) Turnaround through cost cutting, downsizing, divestment Bankruptcy and restructuring Liquidation
Focusing on expanding the company’s primary lines of business
Potential benefits of concentration Allows the company to specialize in and master one
business No dilution of management’s attention – the management
can focus on what the company knows and does best Drawbacks of concentration
The current industry may become mature and even decline The industry conditions can be too unstable Too much dependence on a single industry makes the
company vulnerable to risks of product obsolescence (due to changes in, e.g., technology or consumer preferences)
Miss the opportunity to leverage resources and capabilities to other businesses
It is a strategy in which a firms long term strategy is based on growth through acquisition of one or more similar firms operating at the same stage of the production-marketing chain
Potential benefits of horizontal integration Gain scale economies in production Cost savings from economics of scope by combining similar
operations (e.g., marketing and distribution) of different companies and reducing duplication of resources
Create value through product bundling, total solution and cross selling
Reduce the threat from substitutes Increase market power over suppliers and buyers May help increase market penetration and/or expand market
coverage geographically Drawbacks of horizontal integration
Not easy to integrate operations of companies with different cultures
Synergies may be more imaginary than real Reduction in competition can generate antitrust issues
It is a process in which a firm's grand strategy is to acquire firms that supply it with inputs (such as raw materials) or are customers for its outputs (such as warehouses for finished products).
Potential benefits of backward integration Lower transaction (purchasing) costs and capture additional profits
from expanded operations Have better control over the supply of inputs Reduce the bargaining power of supplier
Potential benefits of forward integration Lower transaction (selling) costs and capture additional profits Have better control over the distribution of products and services Reduce the bargaining power of distributors/buyers
Drawbacks of vertical integration Product costs may rise if best-cost external suppliers are not used Susceptible to industry fluctuations and cycles May face risks with growing maturity of the industry Increase bureaucratic costs
Diversification is a set of strategies. these strategies involve all the dimensions of strategic involvement. it may involve internal or external, related or unrelated, horizontal or vertical
Diversification involves a substantial change in the business definition singly or jointly in terms of customer functions, customer groups, or alternative technologies of one or more of a firm’s businesses.
Types Concentric diversification Conglomerate diversification
When they have excess resources, capabilities, and core competencies that have multiple uses
Diminishing growth prospects in present industry
Cost saving opportunities Capture strategic fits Capture financial economies Spread business risk Leverage brand name
When an organization takes up an activity in such a manner that it is related to the existing business definition of one or more of a firm’s businesses, either in terms of customer groups, customers functions or alternative technologies, it is called concentric diversification
Types MARKETING RELATED DIVERSIFICATION.
TECHNOLOGY RELATED DIVERSIFICATION.
MARKETING AND TECHNOLOGY RELATED DIVERSIFICATION.
Marketing related concentric diversification:
When a similar type of product is offered with the help of unrelated technology…
Technology related concentric diversification:
When a new type of product or service is provided with the help of related technology…
Marketing and technology related concentric diversification:
when a similar type of product or service is provided with the help of related technology…
(Advantages) Enable a firm to attain synergy by exchange of resources
and skills. To avail economies of scale (Disadvantage) Increase in risk and commitment Reduction in Flexibility Thus, the acquiring firm searches for new businesses
whose products, markets, distribution channels, technologies and resource requirements are similar to but not identical with its own, whose acquisition results in synergies but not complete interdependence
Involves diversifying into businesses whose value chains possess competitively valuable “strategic fits” with the value chain(s) of the present business(es)
Capturing the “strategic fits” makes related diversification a 1 + 1 = 3 phenomenon
Johnson and Johnson Engages in the research and development, manufacture, and sale
of various products in the health care field worldwide 3 segments
Consumer segment▪ Products for baby care, skin care, oral care, wound care,
and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products
Pharmaceutical segment ▪ Products for anti-infective, antipsychotic, cardiovascular,
dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management
Medical Devices and Diagnostics segment▪ Products for circulatory disease management, orthopedic
joint reconstruction and spinal care, wound care and women’s health, blood glucose monitoring and diagnostic products, as well as disposable contact lenses
When an organization adopts a strategy which requires taking up those activities which are unrelated to the existing business definition of one or more of its business either in terms of their respective customer groups , customer functions or alternative technologies it is called conglomerate diversification.
Involves diversifying into businesses with No strategic fit No meaningful value chain
relationships No unifying strategic theme
Approach is to venture into “any businessin which we think we can make a profit”
(Advantages) Better management and allocation of cash flows. Realizing a high return on investment. Reduction of risk by spreading investment in different
business and industries.
(Disadvantages) Diversion of resources and attention to other areas
leading to a lack of concentration. Facing the risks of managing entirely new business. They may seek a balance in their portfolio between
current businesses with cyclical sales and acquired businesses with countercyclical sales, between high-cash/low-opportunity and low-cash/high-opportunity businesses or between debt-free and high leveraged businesses.
United Technologies Corporation Provides technology products and services to the
building systems and aerospace industries worldwide Otis segment – elevators and escalators Carrier segment – air conditioning and
refrigeration UTC Fire and Security segment. Pratt and Whitney segment - aircraft engines;
parts and services Hamilton Sundstrand segment - aerospace
products and aftermarket services Sikorsky segment – helicopters UTC also engages in the development and
marketing of distributed generation power systems and fuel cell power plants for stationary, transportation, space, and defense applications
Dominant-business firms One major core business accounting for 50 - 80
percent of revenues, with several small related or unrelated businesses accounting for remainder
Narrowly diversified firms Diversification includes a few (2 - 5) related or
unrelated businesses Broadly diversified firms
Diversification includes a wide collection of either related or unrelated businesses or a mixture
Multibusiness firms Diversification portfolio includes several unrelated
groups of related businesses
Step 1: Assess long-term attractiveness of each industry firm is in
Step 2: Assess competitive strength of firm’s business units
Step 3: Check competitive advantage potential of cross-business strategic fits among business units
Step 4: Check whether firm’s resources fit requirements of present businesses
Step 5: Rank performance prospects of businesses and determine priority for resource allocation
Step 6: Craft new strategic moves to improve overall company performance
Companies with undervalued assets
Capital gains may be realized
Companies in financial distress
May be purchased at bargain prices and turned around
Companies with bright growth prospects but short on investment capital
Cash-poor, opportunity-rich companies are coveted acquisition candidates
A strategic alliance is a cooperative strategy in which firms combine some of their resources and
capabilities to create a competitive advantage
A strategic alliance involves exchange and sharing of resources and capabilities co-development or distribution of goods or services
Ways to enter foreign markets Exporting Licensing or Franchising Direct investment (joint ventures or wholly owned
subsidiaries) These alternative options vary in their degree of
speed, control, and risk, as well as the required level of investment and market knowledge.
Types of cross border market differences Differences in consumer tastes and preferences Differences in buying habits Differences in infrastructure and distribution channels Differences in Govt. regulations
Gain access to new markets with attractive growth
Capitalize on resource strengthsand competencies
Enablecost reduction
Diversifybusiness risks across a
wider market base
Get access to valuable natural resources
and raw materials
Multi-country
Competition
Global
Competition
Strategic Alliances and Joint Ventures Combine resources with foreign
partner(s) Multicountry
Think-global, act-local Tailor strategy to each country
Global Think-global, act-global Pursue same basic strategy worldwide
Stability Strategy A strategy that seeks to maintain the status quo
to deal with the uncertainty of a dynamic environment, when the industry is experiencing slow- or no-growth conditions, or if the owners of the firm elect not to grow for personal reasons.
It maintains the present status of the organization by concentrating on their present resources and rapidly develops a meaningful competitiveness with the market requirements.
Diversification efforts have become too broad, resulting in difficulties in profitably managing all the businesses
Deteriorating market conditions in a once-attractive industry
Lack of strategic or resource fit of a business A business is a cash hog with questionable
long-term potential A business is weakly positioned in its industry Businesses that turn out to be “misfits” One or more businesses lack compatibility of
values essential to cultural fit
Sometimes the profit of a company decline due to various reasons like economic recession, production inefficiencies and innovative breakthrough by competitors.
In many cases the management believes that such a firm can survive and eventually recover if a concerted effort is made over a period of a few years to fortify its distinctive competences.
This is known as turnaround strategy. It is the temporary reduction in the activities
to make a stronger organisation. This is called downsizing or rightsizing.
Turnaround typically begins with one or both of the following forms of retrenchment being employed either singly or in combination.
1. Cost reduction It is done by decreasing the workforce through employee
attrition, leasing rather than purchasing equipment, extending the life of machinery, eliminating promotional activities, laying off employees, dropping items from a production line and discontinuing low-margin customers.
2. Asset reduction This includes sale of land, buildings and equipment not
essential to the basic activity of the firm. Research have showed that turnaround almost always was
associated with changes in top management. New managers are believed to introduce new perspectives, raise
employee morale and facilitate drastic actions like deep budgetary cuts in established programs.
Turnaround situation The model begins with the depiction of external and internal
factors as causes of a firm's performance downturn. When these factors continue to detrimentally impact the
firm, its financial health is threatened. Unchecked decline places the firm in a turnaround situation. Turnaround situations may be a result of years of gradual
slowdown or months of sharp decline. For a declining firm, stabilizing operations and restoring
profitability almost always entail strict cost reduction followed by shrinking back to those segments of the business that have been the best prospects of attractive profit margins.
Situation severity The urgency of the resulting threat to company survival
posed by the turnaround situation is known as situation severity.
Severity is the governing factor in estimating the speed with which the retrenchment response will be formulated and activated.
When severity is low stability can be achieved through cost reduction alone.
When severity is high cost reduction must be supplemented with more drastic asset reduction measures.
Assets targeted for divestiture are those determined to be underproductive.
More productive resources are protected and will become the core business in the future plan of the company
Turnaround response Turnaround response among successful firms typically
include two strategic activities: Retrenchment phase Recovery phase
Retrenchment phase It consists of cost-cutting and asset-reducing activities. The primary objective of this process is to stabilize the
firm's financial condition. Firms in danger of bankruptcy or failure attempt to halt
decline through cost and asset reductions. It is very important to control the retrenchment process in
a effective and efficient manner for any turnaround to be successful.
After the stability has been attained through retrenchment, the next step of recovery phase begins.
Recovery phase The primary causes of the turnaround situation
will be associated with the recovery phase. For firms that declined as a result of external
problems, turnaround most often has been achieved through creative new entrepreneurial strategies.
For firms that declined as a result of internal problem, turnaround has been mostly achieved through efficiency strategies.
Recovery is achieved when economic measures indicate that the firm has regained its pre-downturn levels of performance.
This strategy involves the sale of a firm or a major component of a firm
Reasons Partial mismatched between acquired firm
& parent firm Corporate financial needs Government antitrust actions
Hurdles Finding a buyer who is willing to pay a
premium above the value of a going concern’s fixed assets
It is a strategy through which the business agrees to a complete distribution of their assets to creditors, most of whom receive a small part of what they are owed
Outcome The business closes its doors Investors loose their money Employees loose their jobs Manager’s loose their credibility
As per this strategy the firm sells its parts at tangible asset value and not as a going concern.
It minimizes the losses of all the stakeholders
Corporate Strategies
GROWTH• Vertical (backward, forward), or horizontal integration• Related or conglomerate diversification
STABILITY
INVESTMENT REDUCTION• Retrenchment• Divestment
STABILITY
Environmental Status ThreatsOpportunities
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