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Strategy
Formulation:Corporate
Strategy
Chapter 7
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Learning Objectives
Understand the three aspects of corporate strategy
Apply the directional strategies of groth! stabilityand retrenchment
Understand the di"erences beteen vertical andhori#ontal groth as ell as concentric andconglomerate diversi$cation
%dentify strategic options to enter a foreign country
Apply portfolio analysis to guide decisions incompanies ith multiple products and businesses
&evelop a parenting strategy for a multiple'businesscorporation
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Corporate Strategy
Corporate strategy the choice of direction of the $rm as a
hole and the management of itsbusiness or product portfolio andconcerns
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Corporate Strategy
Directional strategy the $rm0s overall orientation toard
groth! stability or retrenchment
Portfolio analysis industries or mar1ets in hich the $rm
competes through its products and
business units
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Corporate Strategy
Parenting strategy the manner in hich management
coordinates activities and transfersresources and cultivates capabilitiesamong product lines and business units
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Corporate &irectionalStrategies
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&irectional Strategy
Growth strategies e4pand the company0s activities
Stability strategies ma1e no change to the company0s
current activities
Retrenchment strategies reduce the company0s level of activities
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5roth Strategies
Merger a transaction involving to or more
corporations in hich stoc1 ise4changed but in hich only onecorporation survives
Acquisition -,,6 purchase of another company
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Concentration Strategies
Vertical growth achieved by ta1ing over a function
previously provided by a supplier ordistributor
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Concentration Strategies
Vertical integration the degree to hich a $rm operates
vertically in multiple locations on anindustry0s value chain from e4tractingra materials to manufacturing toretailing
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9ertical %ntegration
Bacwar!integration assuming a
functionpreviouslyprovided by a
supplier
"orwar!integration assuming a
functionpreviouslyprovided by a
distributor
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9ertical %ntegration
#ransaction cost economies vertical integration is more ecient
than contracting for goods and servicesin the mar1etplace hen the transactioncosts of buying on the open mar1etbecome too great
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9ertical %ntegrationContinuum
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9ertical %ntegration
"ull integration a $rm internally ma1es -,,6 of its 1ey
supplies and completely controls itsdistributors
#aper integration a $rm internally produces less than half
of its on re;uirements and buys therest from outside suppliers
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9ertical %ntegration
$uasi%integration a company does not ma1e any of its 1ey
supplies but purchases most of itsre;uirements from outside suppliers thatare under its partial control
&ong%term contracts
agreements beteen to $rms to provideagreed'upon goods and services to eachother for a speci$c period of time
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Concentration Strategies
'ori(ontal growth e4pansion of operations into other
geographic locations and
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%nternational *ntry Options for
=ori#ontal 5roth
)*porting &icensing"ranchisi
ng+oint
Venture
Acquisitions
Green%"iel!
De,elopment
Pro!uction Sharing
#urn%-ey.peration
s
B.#Concept
Management
Contracts
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&iversi$cation Strategies
Concentric /Relate!0!i,ersi1cation
groth into a related industry hen a$rm has a strong competitive positionbut attractiveness is lo
Synergy
the concept that to businesses illgenerate more pro$ts together thanthey could separately
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&iversi$cation Strategies
Conglomerate /2nrelate!0!i,ersi1cation
diversifying into an industry unrelatedto its current one
>anagement reali#es that the currentindustry is unattractive?
Firm lac1s outstanding abilities or s1illsthat it could easily transfer to relatedproducts or services in other industries?
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Controversies in
&irectional Strategies
%s vertical groth better thanhori#ontal groth@
%s concentration better thandiversi$cation@
%s concentric diversi$cation better
than conglomerate diversi$cation@
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Stability Strategies
Pause3Procee! with caution strategy an opportunity to rest before continuing a groth
or retrenchment strategy
4o%change strategy decision to do nothing nea choice to continue
current operations and policies for theforeseeable future
Pro1t strategies decision to do nothing ne in a orsening
situation but instead to act as though thecompany0s problems are only temporary
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Betrenchment Strategies
Retrenchment strategies used hen the $rm has a ea1
competitive position in some or all of itsproduct lines from poor performance
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Betrenchment Strategies
#urnaroun! strategy emphasi#es the improvement of operational
eciency hen the corporation0s problems
are pervasive but not critical
Contraction e"ort to ;uic1ly stop the bleedingD across the
board but in si#e and costsConsoli!ation
stabili#ation of the ne leaner corporation
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Betrenchment Strategies
Capti,e company strategy company gives up independence in e4change
for security
Sell%out strategy management can still obtain a good price for
its shareholders and the employees can 1eeptheir jobs by selling the company to another$rm
Di,estment sale of a division ith lo groth potential
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Betrenchment Strategies
Banruptcy company gives up management of the
$rm to the courts in return for somesettlement of the corporation0sobligations
&iqui!ation management terminates the $rm
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)ortfolio Analysis
Portfolio analysis management vies its product lines and
business units as a series ofinvestments from hich it e4pects apro$table return
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EC5 5rothShare >atri4
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EC5 >atri4
$uestion mars ne products ith the potential for success
but need a lot of cash for development
Stars mar1et leaders that are typically at or
nearing the pea1 of their product life cycle
and are able to generate enough cash tomaintain their high share of the mar1et andusually contribute to the company0s pro$ts
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EC5 >atri4
Cash cows products that bring in far more money
than is needed to maintain their mar1etshare
Dogs products ith lo mar1et share and do
not have the potential to bring in muchcash
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EC5 >atri4Limitations
Use of highs and los to form categories istoo simplistic?
Lin1 beteen mar1et share and pro$tability
is ;uestionable?5roth rate is only one aspect of industry
attractiveness?
)roduct lines or business units areconsidered only in relation to one competitor?
>ar1et share is only one aspect of overallcompetitive position?
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Advantages and Limitations of
)ortfolio Analysis
A!,antages
*ncourages top management to evaluateeach of the corporation0s businesses
individually and to setobjectivesandallocate resources for each
Stimulates the use of e4ternally oriented
data to supplementmanagement0sjudgment
Baises the issue of cash o availability touse in e4pansion and groth
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Advantages and Limitations of
)ortfolio Analysis
&imitations
&e$ning product
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Gas1s Hecessary for >anaging aStrategic Alliance )ortfolio
-?&eveloping and implementing aportfolio strategy for each businessunit and a corporate policy formanaging all the alliances of theentire company
+?>onitoring the alliance portfolio interms of implementing businessunits0 strategies and corporatestrategy and policies
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Gas1s Hecessary for >anaging aStrategic Alliance )ortfolio
/?Coordinating the portfolio to obtainsynergies and avoid conicts amongalliances
2?*stablishing an alliancemanagement system to supportother tas1s of multi'alliancemanagement
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Corporate )arenting
Corporate parenting vies a corporation in terms of
resources and capabilities that can beused to build business unit value as ellas generate synergies across businessunits
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Corporate )arenting
5enerates corporate strategy byfocusing on the core competenciesof the parent corporation and thevaluecreated from the relationshipbeteen the parent and itsbusinesses
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&eveloping a Corporate
)arenting Strategy
-?*4amine each business unit in termsof its strategic factors
+?*4amine each business unit in termsof areas in hich performance canbe improved
/?Analy#e ho ell the parentcorporation $ts ith the businessunit
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=ori#ontal Strategy and
>ultipoint Competition
'ori(ontal strategy cuts across business unit boundaries to
build synergy across business units andto improve competitive position in oneof more business units
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=ori#ontal Strategy and
>ultipoint Competition
Multipoint competition large multi'business corporations
compete against other large multi'business $rms in a number of mar1ets
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