How Corporate Strategy Is Evaluated and Changed

What Corporate Strategy IsSingle-Business Organization is in primarily one industry Ex. Coca-Cola

Multiple-Business Organization is in more than one industry Ex. PepsiCo

Why is this distinction important?

Corporate strategy was defined in Chap. 1 as a strategy concerned with the choices of what businesses to be in and what to do with those business (es). Ex. Pepsi owns Frito-Lay, Quaker Foods in North America, Kraft Foods, and restaurants (KatacoHut). This distinction influences the overall strategic direction of the company, what corporate strategy is used, and how that strategy is implemented and managed.1Three Corporate Directions1. Moving an organization forward Expanding the organizations activities and/or operations2. Keeping an organization as is Not growing but also not falling behind3. Reversing an organizations decline Organization has problems and seeing declines in one or more performance areas

Now that you know the three main types of corporate strategies : Growth, stability, and renewal were going to discuss what they are and how theyre implemented, evaluated, and changed.2 Prentice-Hall 2005 7-3Figure 7.2 Possible Growth StrategiesOrganizationalGrowthConcentrationVertical Integration Backward ForwardHorizontal IntegrationDiversification Related UnrelatedInternational3Five possible types of growth strategies are possible, as this slide shows. Growth Strategy Expands the products offered or markets served by an organization or expands its activities/operations either through current businesses or new businesses. Goals for growth include increased revenues, profits, and financial/performance measures

Example of this growth strategy would be Kraft Foods adding another brand to its portfolio.4 Prentice-Hall 2005 7-5Figure 7.3 Concentration Options CustomersCurrent

NewCurrentNewProduct-MarketExploitationProductDevelopmentMarketDevelopmentProduct/MarketDiversification*Product(s)* not a concentration option5The fourth option shown in the slide, product/market diversification, isnt a concentration option since it involves expanding both into new products and new markets. And once a single-business organization that has concentrated on its core business chooses to move into a business with new products and new markets, it becomes a multiple-business organization since its now operating in a different industry.ConcentrationIs a growth strategy in which an organization concentrates on its primary line of business and looks for ways to meet its growth goals by expanding its core business.

Product market exploitation describes attempts by the organization to increase sales of its current products in its current market. Ex buy 2 get one freeProduct development When an organization creates new products or improved/modified existing products to sell in current markets. Ex. Oreo cookies being turned into Ice cream cones, pie crusts, miniature Oreos, and different filling flavorsMarket development Sells its current products in new markets. Ex. Skin Care products being sold on mainstream levels to men. Cranberrys mktProduct market diversification Expanding into new products and new markets. Usually involves diversifying the organization 6Vertical Integration StrategyOrganization grows by gaining control of its inputs, outputs, or bothBackward integration gains control of its inputs or resources by becoming its supplier

Forward integration gains control of its outputs or products/services by becoming its own distributor

7DiversificationStrategy in which an organization grows by moving into a different industry. 1. Related (concentric) diversification Ex. Apples iTunes, iPod, iPhone

2. Unrelated (conglomerate) diversification Ex. GE, Toyota, Fortune Brands

Diversifying into a different industry but one thats related in some way to the organizations current business Diversifying into a completely different industry not related to the organizations current business

GE has its hands in: electricity, lighting, industrial automation, medical imaging equipment, motors, railway locomotives, aircraft jet engines, and aviation services. It co-owns NBC Universal Toyota has its hands in : Automobiles, prefabricated houses, advertising, roof gardens, and consultingFortune Brands has its hands in: Jim Beam bourbon, Moen Faucets, Cabinets, Titleist Golf balls, and Master Lock padlocks8InternationalCorporate strategy might involve looking for ways to grow by taking advantage of the potential opportunities offered by global markets or by protecting core operations from global competitors

If an organization wants to Go International as it pursues its growth strategy it can use vertical integration techniques to do so. Domestically and Globally. Combining operations of organizations in different countries as well as those in the home market. Chap 8 will cover more of this.9Horizontal Integration StrategyStrategy in which organization grows by combining operations with its competitorsKeeps an organization in the same industry and provides a way to expand market share and strengthen competitive positionEx. LOreal acquired London based retailer Body Shop for 1.1 billion Failed Attempt was Coca Cola trying to purchase Chinas Huiyuan Juice Group for 2.3B10Implementing the Growth StrategiesMergers/Acquisitions

Internal development

Strategic Partnering

11Mergers/AcquisitionsMerger a legal transaction in which two or more organizations combine operations through an exchange of stock and create a third entity

Acquisition an outright purchase of an organization by anotherHostile takeover when organization being acquired doesnt wish to be acquired.

Internal DevelopmentWhen an organization grows by creating and developing new business activities itself. This may be the route the firm chooses when strategic decision makers believe they have the necessary resources, distinctive capabilities, and core competencies to do it themselves.

13Strategic PartneringWhere two or more organizations establish a legitimate relationship by combining their resources, distinctive capabilities, and core competencies for some business purpose. Vertical Integration Partnering with a distributorHorizontal Integration Strategic partnering with competitor3 main types of strategic partneringJoint venture, long term contract, strategic alliance

143 Main types of strategic partneringJoint venture two or more separate organizations form a separate independent organization. Often used as a legal scapegoat, partners will create a new entity to do business. Involves less riskLong term contract legal contract between organizations covering a specific business purpose. Alternative to vertical integrationStrategic alliance were two or more organizations share resources, capabilities, or competencies to pursue some business purpose.Similar to joint venture, but no separate entity

15Stability Strategy This oneWhen an organizations goals are to maintain size and current activities.When and Why?Slow, or no growth industries, there is not a market for expansion due to the red ocean of competitors.If a firm is coming off a steep incline of growth and needs to recoup its resources.If industry life cycle is in maturity or decline stage, expansion is unrealistic.

16Renewal StrategiesStrategies focused on reviving companies facing a recent downturn or those who have unable to achieve a competitive advantageCauses:Declining PerformancePoor ManagementEconomic Downturn

17Reasons for a Renewal Strategy

18Types of Renewal StrategiesRetrenchment a short run renewal strategy designed to address organizational weaknesses that are leading to performance declinesUsed when firm continually fails to meet strategic goalsTurnaround used in situations where organizations performance problems are more severe. Used in situations where firm faces ruin if not implemented.

19Implementing Renewal StrategiesCost cuttingShort run approach to gaining cash to revitalize the organizations performance in the long runRestructuringDivest and Discontinue Selling a process to another firmSpin off Setting up a business unit as a separate, independent businessLiquidation selling off business entirelyDownsizing laying off employees short term fixBankruptcy failure of a business.

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Evaluating Corporate StrategyFour Evaluation Techniques Corporate Goals and Productivity Measures Efficiency & EffectivenessBenchmarkingPortfolio Analysis

Without evaluation strategic managers wouldnt have a clue as to whether the implemented strategies at any level of the organization, were working.21Corporate GoalsCorporate goals indicate the desired end results or targets that strategic managers have established.

Success in meeting the goals at the functional and competitive levels determine whether corporate goals are met. So, attaining functional and competitive levels is how an organization achieves its corporate goals. If the functional and competitive goals aren't reached, an organization cant meet its corporate goals. In evaluating corporate strategy, goals become the standards against which actual performance is measured.22Efficiency, Effectiveness, and Productivity measuresEfficiency- Is an organizations ability to minimize resource use in achieving organizational goals.Effectiveness- is an organizations ability to reach its goals,Productivity- Is a specific measure of how many inputs it took to produce outputs and is typically used in the production-operations area.Effectiveness is the most important concept here because you can be efficient and productive but still not be effective and not reach your goals. Goals meaning profits.23BenchmarkingBenchmarking- The search for the best practices inside or outside an organization.

The actual process of benchmarking may be useful for implementing strategy, whereas the specific benchmarks or best practices can be a standard against which to measure corporate strategy performance.

SW studied Indi 500 pit crews who can change a set of tires in under 15s to see how their gate crews could make their gate turnaround times even faster. SW felt they were the best in the world and their strategic managers reasoned that you aren't making any money on the ground.

The benchmark or best practice was a standard against which to measure one aspect of corporate performance.24Portfolio AnalysisPortfolio- An organizations various business UnitsA Portfolio Analysis is done with a two-dimensional matrices that summarize internal and external factors.Three Main Portfolio Analysis Approaches1 ) The BCG Matrix2) The McKinsey-GE Stoplight Matrix 3) The Product-Market Evolution Matrix

If a corporation has multiple business units in same or different industries the portfolio analysis can be used to evaluate corporate performance.25BCG MatrixMeasure of business units relative market share.Y axis is the measure of the industry growth rate( Cash Usage).X axis is the measure of the relative market share (Cash Generation).

ExamplesCash Cow- JZStar Lady Gaga? Emerging TalentDog- Blink 182

Y cash usageX cash generation

Measure of business units relative market share.The BCG matrix is also known as the growth-share matrix. The fact that this matrix is easy to use and understand is the main reason for its continued popularity as a portfolio assessment tool

Cash cow- This term isa metaphor for a dairy cow that produces milk over the course of its life and requires little maintenance. A dairy cow is an example of a cash cow, as after the initial Capital outlay has been paid off, the animal continues to produce milk for many years to come (J-Z, Coldplay)

Question marks are growing rapidly and thus consume large amounts of cash but because they have small amounts of market shares they do not generate much cash in return. It has the potential to gain market share and become a star or even a cash cow when the market growth slows if market growth declines then it will eventually become a dog. (New Bands)

Stars generate large amounts of cash because of their relative market shares but also consume a lot of cash due to their high growth rate (Lady Gaga)

Dogs have low market share and low growth rate ( Blink 182)26 Prentice-Hall 2005 7-27

McKinsey-GE Stoplight MatrixIndustry (Product-Market) AttractivenessBusiness Strength-Competitive PositionStrongAverageWeak(5)(3)(1)High(5)Medium(3)Low(1)WinnersWinnersWinnersProfitProducersAverageBusinessQuestionmarksLosersLosersLosers27This nine-cell matrix provides a more comprehensive (as compared to the BCG matrix) analysis of a business units internal and external factors. In this matrix the x axis is defines as business strength-competitive position-competitive position. This matrix includes an analysis of the internal resources and capabilities that are believed by strategic managers to be important for success. For instance it might include economies of scale, product quality, manufacturing flexibility workforce moral and whatever a strategic manager thinks needs to be good in order to be competitive. The y axis is defines as industry attractiveness which provides a much broader analysis of your market offerings. Prentice-Hall 2005 7-28Product-Market Evolution MatrixStrongAverageWeakThe Business Units Competitive Position IndustrysStagein theEvolutionaryLife CycleDevelopmentGrowth

DeclineCompetitiveShakeoutMaturitySaturation

ABCDEFGH28This matrix (developed by C.W. Hofer) is based on the product life cycle, which is the Y axis. The X axis is the competitive position as used in the McKinsey matrix. Like the mckinsey matrix the size of the circles correspond to the relative size of the industry and the shaded wedge corresponds to the market share of the business unit. Prentice-Hall 2005 7-29When to Change Corporate StrategiesWhen evaluation showsGrowth objectives arent being attainedOrganizational stability causes organization to fall behindOrganizational renewal efforts arent workingPossible strategies to changeFunctionalCompetitiveCorporate direction29When evaluation shows that the corporate strategies arent having the intended results, strategic managers have to decide whether to act and what actions to take.