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CORPORATE STRATEGY
“The Only Way To Predict The Future Is to Invent it!”
J. Scully, Apple Computer
Levels of Strategies
Corporate Level Strategy:
Mission, Vision, Integration, Expansion, Stakeholders Relationships
Business Level Strategy / Competitive:
Strategic Business Units (SBU’s),
Functional Level Strategy:
HRM strategy, Marketing Strategy, Production Strategy.
Corporate Strategy
“All the moves that take place in order to achieve a competitive advantage through the selection and management of a business procedures mix, that may deal with various sectors or markets”
Hitt, Ireland & Hoskisson
Three Major Types of Corporate Strategies:
-Stability Strategies
-Growth Strategies
-Turnaround/Retrenchment Strategies
Stability Corporate Strategies
No-Change Strategy.
No interest in strategic repositioning
Profit Strategy.
Sacrificing future development to immediate profit
Pause Strategy.
After M&A, increase inner control & systems, short-term, the goal is to achieve stability
Caution Strategy.
Careful steps due to turbulence in the macro-environment so as to gain insight & better info for the direction that should follow
Growth Corporate Strategies
Vertical Integration
Horizontal Integration
Diversification
Related Diversification
Unrelated Diversification
Market Penetration
Market Development
Product Development
Turnaround Corporate Strategies
Joint – Ventures (not always a turnaround strategy)
Retrenchment (e.g. bankruptcy)
Divesture
Liquidation
Rectification
Downsizing – Stabilization – Rebuilding
Captivity
Growth Corporate Strategies
“How can you make God laugh?
Tell him your Plans!”
Woody Allen
Growth StrategiesVertical Integration
Backward Integration: the firm takes ownership and control of producing its own inputs – e.g. Henry Ford’s upstream expansion from automobile assembly to the production of his own components, back to the production of basic materials including steel and rubber.
or
Forward Integration: where the firm takes ownership and control of its own customers – e.g. Coca-Cola acquiring its local bottlers.
Full Integration: between two stages of production when all of the 1st stage’s production is transferred to the 2nd stage with no sales or purchases from 3rd parties.
or
Partial Integration: when stages of production are not internally self-sufficient.
Vertical Integration
Examples of Vertical Integration
Long-term Contracts/Strategic Alliances (e.g. Nissan, Toyota JIT)
Short Term Contracts (1 year, not a lot of investments, e.g. GM)
Vendor Partnerships – Relational Contracts
Value Adding Partnerships – many firms cooperating a value chain
Franchising
Vertical Integration
Reasons/advantages for Integrating Vertically:
Strengthen the competitive position of firm’s major business
Quality protection – e.g. McDonald’s or Kodak
Expensive distributors/suppliers
Investment in specialized resources e.g. technological innovation
Building high barriers to entry – e.g. control of raw material flow
Stability of production – economies of scale
Vertical Integration
Disadvantages:
Cost – possible competitive disadvantage - e.g. by company-owned suppliers that operate under high operational cost
Failure to achieve synergies – differences in culture, strategy, bureaucracy, personal interests.
Locks the firm deeper into the industry – problem in case of a negative movement of the demand
Less flexibility – Difficulty in changing suppliers or embracing and implement an innovation.
Unless operating across more stages in the industry’s value chain builds competitive advantage, it is a questionable strategic move.
Horizontal Integration
Development of a firm through acquisitions or creation of competitive companies at the same level of production
Example of horizontal integration: Alpha Bank – Ioniki Bank
Reasons for integrating horizontally:• Create competitiveness • Monopolize a certain market • Economies of scale in the production• Acquire competitors that deal with financial problems and turn
around the situation
Possible Problems (more or less same as in the case of vert. integr):• Locks the firm deeper into the industry• Weak synergy effect or even not at all• High Costs• Legislation Problems
DiversificationAnd NOT Differentiation! Differentiation refers to competitive strategy whereas here we discuss corporate strategy, so:
Concentric or Related Diversification
When the businesses that the firm deals with are connected – e.g. offers products that have similarities in their technology, methods of production or the methods of promotion
Examples in Hellas: Pouliadis, Altec, Intracom
Unrelated or Conglomerate Diversification
When the businesses of the firm are connected with each other
Global Example of Huyndai Corporation: Cars, Electronics, Telecommunications, Petrochemics, Ship Constructing & Constructions, Metals & Iron, Financial Services, Medical Machinery
When Does DiversificationStart to Make Sense?
Strong competitive
position, rapid market
growth -- Not a good
time to diversify
Strong competitive position, slow market
growth -- Diversification is top priority consideration
Weak competitive
position, rapid market
growth -- Not a good
time to diversify
Weak competitive position, slow market
growth -- Diversification merits consideration
When to Diversify? Diminishing growth prospects in present business
Opportunities to add value for customers or gain competitive advantage by broadening present business to include complementary products
Attractive opportunities to transfer existing competencies to new businesses
Potential cost-saving opportunities to be realized by entering related businesses
Availability of adequate financial and organizational resources
Why Diversify?
To build shareholder value
1 + 1 = 3
Diversification is capable of increasing shareholder value if it passes three tests
1. Industry Attractiveness Test
2. Cost of Entry Test
3. Better-Off Test (is there a profit of a competitive advantage?)
Strategy Alternatives fora Company Looking to Diversify
Strategy Options
for a Company
Looking to Diversify
•Build shareholder value by capturing cross-business strategic fits- Transfer skills and capabilities from one business to another
- Share facilities or resources to reduce costs- Leverage use of a common brand name- Combine resources to create new competitive strengths and capabilities
Diversify into Related Businesses
•Spread risks across diverse businesses•Build shareholder value by doing a superior job of choosing businesses to diversify into and of managing the whole collection of businesses in the company’s portfolio
Diversify into Unrelated Businesses
Diversify into Both Relatedand Unrelated Businesses
More specifically Related Diversification...
Should be used in the next cases:
1. Acquiring Information e.g. about new technological advances, competition, trends in the market
2. Cost reduction – e.g. the complete production of steel reduces the cost re-heating & transportation
3. Possible Profits
4. Spread of the Danger e.g. by been locked in the market with 1 product or seasonality or the sales
5. High level of resources usage
6. Increased power in the market
7. Empire Building
8. Motivation of Top Management
More specifically Unrelated Diversification…
Should be used in the next cases:
1. Need of investment of surplus capital
2. Firm is competing in an industry of negative development & profits
3. Spread of Danger
4. Surplus Resources & Management in the firm to compete in another industry
5. A great opportunity to acquire an unrelated business
6. Financial synergies between the two firms
7. Monopolistic legislation forbids related expansion
8. Aspirations of Top Management and Motivation
Identifying a Diversified Company’s Strategy
CorporateStrategy
Approach toallocating investment capital and resources
Narrow or broad-based
diversification
Scope ofgeographicoperations
Moves to addnew businesses
Moves to build positionsin new industries
Efforts to capturecross-businessstrategic fits
Moves to divestweak business units
Is diversificationrelated, unrelatedor a mix?
Diversification Decision…
Should take into consideration: The bureaucratic cost The limits of diversification The number of businesses The coordination of business – control The calculation of profit margin in order to effectively manage
resources.
Empirical Research has shown that:
Related Diversification leads to greater profit usually, Whereas Unrelated Diversification leads to greater development
New trends: Business Venture – e.g. Titan’s Cooperation with Lafarge in Egypt (Devolvement &) Refocusing of businesses/conglomerates
Diversity & Performance
Growth Corporate Strategies
All the above strategies silently assume development of the company both in new products and/or in new markets.
However there also other choices:
Market Penetration
Diversi-fication
Market Development
Product Development
Same Product New Product
New Markets
Same Markets
Market Penetration
Investment of Resources in the most profitable product, market or a technology. The Goals in this situation are:
Increase of product usage by the present customers e.g. reduce the rate of product disposal period (toothbrush), advertise new uses of the product (Johnson & Johnson baby shampoo), incentives to customer to buy more units.
Attract the competitor’s customers e.g. repositioning, promotion efforts, lower prices
Attract of non users e.g. test trial through samples
It is recommended when: the present markets are not saturated, there’s space for usage increase by the present customers, the market shares are decreasing but the market increases, economies of scales, the industry is not dependent upon technological innovations, there are barriers to entry.
Market Development
The company is trying to promote the present products to new markets
It can be done by: Expansion to a new geographical area, locally or globally Attracting customers by other market segments (e.g. industrial
customers) Entering new distribution channels
The particular strategy is recommended when:
There are new, not expensive but reliable distribution channels
There are unexploited or not saturated markets
Sometimes firms have to follow this strategy due to surplus production capacity that has to be channeled somewhere else.
Product Development
New products are developed in present markets or significant reengineering is being done to the same products.
The firm has three options here:
Develops new features of the products – e.g. shape, color, increases the product – in general tries to add value
Develops new types of the product in terms of quality
Develops new products, sizes and models – product proliferation
The particular strategy is recommended when the company has successful products that are in the maturity stage.
Turnaround / Retrenchment Corporate Strategies
Think of a mouse’s wisdom. It never trusts its life to only one exit from its nest.
Plato
Sometimes Things go wrong…
Bad adoption to the environment
Lack of Inner ControlToo much risk taking, unnecessarily in certain occasionsUncontrollable factors such as governmental policies, technological advances, natural disasters.A combination of the above!
A very popular strategy in such situations is Rectification that takes place in three stages:
Downsizing – Stabilization – Rebuilding
Rectification
Reduced Resources – Bad Moral of the Workers – Suspicious Stakeholders - and Lack of Time are the elements that discriminate Rectification from the other strategies!
Downsizing: the goal here is survival retrenchment of costs liquidation of non productive resources even human ones new top executives stop cooperation with marginal customers and marginal products stop operating in distribution channels on low profit
Examples: two towers = 300.000 people lost their jobs, also during the period of 1987-1991 5,6 million people in US lost their jobs and also 5 million executives were sacked!
DownsizingDownsizing usually comes along with:
Sequences in the organizational function – people deal with totally new duties and situations – training is needed
Sequences in the Operating Cost – opposite outcomes e.g. due to external consultants
Sequences in the moral and motivation of the workers – survival syndrome (low productivity and moral, suspicious of everything)
Sequences in the effectiveness and productivity
Sequences in terms of the Stakeholders’ behavior
The next steps are Stabilization and Rebuilding
Stabilization and Rebuilding
Stabilization: - Improve the profit margin – Alter the product mix – Refocus in Profitable Markets – New MIS and Control Systems
Rebuilding: Growth – New Products – New Ventures – Investments in Aggressive Advertising Campaigns – Increase of Capital – New Technologies – Development of the Human Factor
Rectification usually lasts 3 years and the most common mistakes that are likely to occur are:
Over-downsizing – lack of proper management – no coordination and planning of strategic moves
Divesture Strategy
Selling a company’s department or more,
When…
Rectification Strategy Failed
A department’s expenses are more than the firm is able to handle
A firm decides to sell a department because it is not profitable or even doesn’t abide by the company’s long term mission/vision
A company due to legislation decides to sacrifice part of its power – e.g. Vodafone in 2000 bought Mannesmann, but the EU granted the acquisition by the term that the 1st one would sell Orange (Mannesmann mobile phone company) to Great Britain
Captivity & Liquidation Strategy
Captivity: When a company is dependent of another due to its decision to reduce the range of its activities
The “prisoner” abides by the rules and will of the “savior” since most of the times his survival depends on the 2nd one.
Examples of Ford during 80’s and Viohrom – Colgate Palmolive
Liquidation: THE END! – Everything else has failed…
If the Company want to avoid such situations should always:
1. Constantly Control its “Strategic Health” not only by financial terms but also in terms of competitiveness
2. Seek /Foresee Trends and Position itself in the changing environment
3. Establish the proper business culture to do all the above
Corporate Portfolio Management
Portfolio balanceMarkets
Organisation’s needsAttractiveness of business units
ProfitabilityGrowth rates
Portfolio ‘fit’Synergies between business unitsSynergies with corporate parent
The Growth Share (or BCG) Matrix
Strategy Guidelines Based on Directional Policy Matrix
Indicators of SBU Strength& Market Attractiveness
Thank you very much for your attention
Questions - Discussion