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GSB – MBA –TM IVStrategic Management

Unit III Corporate Strategy

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Corporate strategyIs primarily about the choice of direction for the entire

firm.Deals with 3 key issues

> firm’s overall orientation toward growth, stability, or retrenchment – directional strategy

> industries and markets in which the firm competes through its products and business units – coordination of cash flow among units - portfolio strategy

> the manner in which management coordinates activities and transfers resources and cultivates capabilities among product lines and business units – building corporate synergy through resource sharing and development - parenting strategy

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In a multi business company, it is also aboutmanaging various product lines and business

units for max value – hq will play the role ofthe organisational parent in that it must deal with

various products and business units - children. Even though each product line or business unit has its own competitive or cooperative strategy, the corporation must coordinate these different business strategies so that the corporation as a whole succeeds as a “family”.

• Corporate strategy includes decisions regarding;

- flow of financial and other resources to and from a co’s product lines and BUs

- through a series of coordinating devices

- transfers skills and capabilities between Bus – aims at synergy.

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Directional strategy(orientation towards growth)> Should we expand, cut back or continue unchanged?> Should we concentrate within the current industry or diversify?> Do we want to grow or expand

through internal development or through external acquisitions, mergers or joint ventures?

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Directional strategy is composed of 3 general orientations toward growth – called grand strategies;

> Growth strategies expand the co’s current activities

> Stability strategies make no change in the co’s current activities

> Retrenchment strategies reduce the co’s level of activities.

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Growth strategiesGrowth in sales, assets, profits, combination

of these. These may be;> concentration

(Intensification) - within one product line or industry

> diversification – into other products or industries.

These can be achieved internally throughInvestment in new product development or

externally through mergers, acquisitions, or strategic alliance.

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A merger involves 2 or more corporations in which stock is exchanged, but from which only one corporation survives – usually between similar firms and are friendly. The resulting firm may have a name derived from its composite firms.

An acquisition is the purchase of a company that is completely absorbed as an operating subsidiary or a division of the acquiring corporation - usually between firms of different size and can be either friendly or hostile. Hostile acquisitions are called takeovers.

A strategic alliance is a partnership of 2 or more corporations or business units t achieve strategically significant objectives that are mutually beneficial

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Corporate Directional Strategies Growth

Concentration - Vertical growth - horizontal growth

Diversification - concentric

- conglomerate

Stability Retrenchment - pause/proceed with caution - turnaround - No change - captive company - profit - Sell out/divestment

- Bankruptcy/liquidation

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Why concentration strategiesIf co’s current product lines have real growth potential

concentration of resources on those will be a good strategy for growth;

> Vertical integration; - taking over the function provided by a supplier – backward integration – that of distributor – forward integration - logical strategy for a corporation or business unit with a strong competitive position in a highly attractive industry – can range from full integration – firm makes 100% key supplies and distributors or taper integration where the firm produces less than half of its key supplies - to no integration, firm uses long term contracts to provide key supplies and distribution. Outsourcing-use of long term contracts to reduce internal administrative costs.

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Vertical Integration can be achieved internally or externally ; Eg., Henry Ford used co resources to build the River Rouge Plant outside Detroit. The manufacturing process was integrated to the point that iron ore entered one end of the long plant and finished automobiles rolled out the other end into a huge parking lot. In contrast, Du Pont, the huge chemical co., chose the external route to backward vertical integration by acquiring Conoco for oil needed for its synthetic fabrics.

• . Though backward integration is more profitable than forward integration it can reduce the corporation’s strategic flexibility by creating an encumbrance of expensive assets that might be hard to sell – exit barrier.

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Horizontal integration – The degree to which a firm operates in multiple

geographic locations at the same point in an industry’s value chain – growth can be achieved by expanding the firm’s products into other geographic locations or by increasing the range of products and services offered to current markets - a co can acquire market share, production facilities, distribution ownership to long term contracts– may range from full to partial outlets, or specialised technology through internal development or external acquisitions or via jt ventures with another firm in the same industry.

• May range from full to partial ownership to long term contracts;

• E.g., KLM, the Dutch airline, purchased a controlling stake (partial ownership)in NW airlines to obtain access to American and Asian markets. KLM was unable to acquire all of NW’s stock because of US Govt regulations forbidding foreign ownership of domestic airlines.

• Many small commuter airlines engage in long term contracts with major airlines to offer a complete arrangement for travelers.

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Why use Diversification strategiesIf a co’s current product lines do not have

much growth potential, management may choose to diversify – > Concentric (related) diversification - Expansion into a related industry – appropriate when a firm has strong competitive position but industry attractiveness is low – By focusing on the features that have given the co its distinctive competence, the co uses theses strengths as a means of diversification

• - attempts to achieve a a strategic fit in a new industry where it can apply the firm’s product knowledge, manufacturing capabilities, marketing skills, etc put to good use –the corporation’s products are related in some way; they possess some common thread; the search is for synergy – the two businesses can generate more profits together than they can separately. The point of commonality may be similar technology, customer usage, distribution, managerial skills, or product similarity. 16

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> Conglomerate or unrelated diversification – diversifying into an industry unrelated to its current one - Current industry unattractive and the firm lacks outstanding abilities or skills it could easily transfer to related or unrelated products or services in other industries, this is the most likely strategy. – financial considerations of cash flow and risk reduction are more important than product-market strategy.

e.g., A cash rich company with few opportunities for growth in its industry may move into another industry where opportunities are great but cash is hard to find.

When a co with a seasonal and therefore uneven cash flow purchases a firm in an unrelated industry with complementing seasonal cash flow.

Eg., The CSX Corporation (a rail-road dominated transportation company) purchased a natural gas transmission business (Texas Gas Resources), as gas transmission revenue was realised in the winter months when railroads experience is a seasonally lean period.

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What are stability strategies? Appropriate for a successful corporation operating in a

reasonably predictable environment – useful only in the short run but may be dangerous if followed for too long.

Can be;> pause and proceed with caution strategy> no-change strategy> profit strategy

Pause and proceed with caution – a time-out,

an opportunity to rest before continuing a growth or retrenchment strategy - appropriate as a temporary strategy to consolidate- till environment becomes more hospitable – to enable a co to consolidate its resources after proolonged rapid growth - high growth industry with an uncertain future.

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e.g., Dell Computer Corpn in 1993 followed this strategy –growth more than it could handle- 285% in 2 yrs – selling PCs by mail enabled it to under-price Compaq Computer and IBM, but could not keep up with the needs of $2Bilion, 5600 employees selling PCs in 95 countries. Dell was not giving up growth but merely putting it in limbo until it could hire new managers, improve the structure and build new facilities.

Why use no-change strategy?-A decision to do nothing new –to continue current

operations and policies for the foreseeable future.- small adjustments for inflation- reasonably profitable and safe niche. Most small town businesses follow this strategy before a Wal-Mart moves into their area..

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Why use a profit strategy?- A decision to do nothing new in a worsening situation,

but instead to act as though the co’s problems are only temporary – to artificially support profits when sales decline by reducing investment and short term discretionary expenditures – rather than announcing the real position to stakeholders, management may be tempted to follow this seductive strategy –blame co’s problems on hostile environment (such as anti-business govt policies, unethical competitors, finicky customers, or greedy lenders).- defers investment or cuts expenses, such as R&D, maintenance , advtg, etc. – to keep profits stable- may even sell a product line to keep cash flow – useful only to help a co get through temporary difficulty - if pursued for long will lead to serious deterioration in competitive position – top management’s passive, short term, self-serving response to the situation.

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What are retrenchment strategies?Pressure to improve performance, when the co is facing

a weak competitive position in some or all product lines –sales down – losses – CEO under pressure to do something quickly or be fired; to eliminate the weaknesses, that drag the co down, management may follow one of several strategies from turnaround or becoming a captive company to selling out , bankruptcy, or liquidation.

Why use a turnaround strategy?Improvement of operational efficiency – appropriate

when a corporation’s problems are pervasive, but not yet critical – contraction and consolidation.

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Contraction is the cut-back in size and costs. Consolidation is the implementation of a program to stabilise the now leaner corporation – reduce overhead, justify costs of functional activities – if not conducted in a positive manner, best people may leave- if all are involved, stronger orgn

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Why use a captive company strategy?

- Becoming another co’s sole supplier or distributor in exchange for a long term commitment from that co – sacrifices independence for security- reduce the scope of some of its functional activities – reduction in costs.

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Why use a sell out or divestment strategy?

Weak competitive position – unable to improve, or find a customer to become a captive co., no choice but to sell out – if multi product, may divest – selling a unit.

e.g., Monsanto realised in 1977 that the chemical business, for which it was known, was hurting its growth as a corporation- Chemical division’s performance has been overshadowed by advances in biotechnology, agricultural products - divestment seemed viable.

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ITC divested its ITC Classic Financial Services because the unit got into a financial mess. While the industry as a whole was beset with problems, the unit was in a bad shape, trapped in litigation.

Parle divested its soft drinks business by selling its brands including Thums Up to Coca Cola, because of the heavy competition anticipated from the 2 MNC giants.

Tatas divested Excel Industries, a profit-making co, because, it fell outside the new definition of Tata’s core businesses.

Shaw Wallace divested many of its businesses as it wanted to regain its concentration on its core businesses like liquor.

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> Hoechst India Ltd divested its manufacturing facility at Kandla in favour of IPCA Laboratories – because of the loss of the USSR market.> GE divested its computer as well as ac businesses as it could not achieve the desired position of no1 or 2.> Glaxo divested its food division to Heinz following its decision to stick to pharmaceuticals.> SRF divested its associate Co, SRF Finance td, by selling it to GE Capital, as a part of its p[olicy to divert all non core businesses.> Dunlop India divested stage by stage – mounting losses since 90s, all turnaround efforts failed- WB and TN units closed- sold real estate in Mumbai for Rs100 crores –came under BIFR purview.> UB group, divested Hindustan Polymers. Sold its paint division in the Far East that operated under BERGER International – dropping non-synergic businesses –HP was sold to LG Chemicals of Korea – to concentrate on ts core business of beer, liquor, pharma and engineering services.

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Why use a bankruptcy or liquidation strategy?

Worst possible situation with poor competitive position in an industry with little prospect – bankruptcy, giving up management of the firm to the courts in settlement of the corporation’s obligations- chapter eleven reorganisation; - liquidation is the piecemeal sale of firm’s assets- industry is unattractive and future is bleak – management takes decision instead of the court.