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7 Strategy Corporation: Corporate Strategy

Corporate strategy deals with three key issues facing the corporation as a whole:

1. The firm’s overall orientation toward growth, stability, or retrenchment (directional strategy)

2. The industries or markets in which the firm competes through its products and business units
(portfolio analysis)

3. The manner in which management coordinates activities and transfers resources and cultivates

capabilities among product lines and business units (parenting strategy)

Corporate strategy is primarily about the choice of direction for a firm as a whole and the management
of its business or product portfolio, Corporate strategy, therefore, includes decisions regarding the flow
of financial and other resources to and from a company’s product lines and business units.

7.2 Directional Strategy

GROWTH STRATEGIES
A corporation can grow internally by expanding its operations both globally and
domestically, or it can grow externally through mergers, acquisitions, and strategic
alliances. A merger is a transaction involving two or more corporations in which stock is
exchanged but in which only one corporation survives. Mergers usually occur between firms
of somewhat similar size and are usually “friendly.” The resulting firm is likely to have a
name derived from its composite firms.

Growth is a very attractive strategy for two key reasons:

 Growth based on increasing market demand may mask defects in a company—
defects that would be immediately evident in a stable or declining market.
 A growing flow of revenue into a highly leveraged corporation can create a large
amount of organization slack (unused resources) that can be used to quickly resolve
problems and conflicts between departments and divisions.
 Growth also provides a big cushion for turnaround in case a strategic error is made.
 Larger firms also have more bargaining power than do small firms and are more
likely to obtain support from key stakeholders in case of difficulty.
 A growing firm offers more opportunities for advancement, promotion, and
interesting jobs.
 Growth itself is exciting and ego-enhancing for CEOs. The marketplace and potential
investors tend to view a growing corporation as a “winner” or “on the move.”
 Executive compensation tends to get bigger as an organization increases in size.
 Large firms are also more difficult to acquire than are smaller ones; thus an
executive’s job in a large firm is more secure.
 1. Concentration
If a company’s current product lines have real growth potential, concentration of resources
on those product lines makes sense as a strategy for growth. The two basic concentration
strategies are vertical growth and horizontal growth. Growing firms in a growing industry
tend to choose these strategies before they try diversification.
Vertical Growth. can be achieved by taking over a function previously provided by a
supplier or by a distributor. The company, in effect, grows by making its own supplies and/or
by distributing its own products. This may be done in order to reduce costs, gain control
over a scarce resource, guarantee quality of a key input, or obtain access to potential
customers. This growth can be achieved either internally by expanding current operations or
externally through acquisitions

 Vertical growth is a logical strategy for a corporation or business unit with a strong competitive
position in a highly attractive industry—especially when technology is predictable and markets are
growing.12 To keep and even improve its competitive position, a company may use backward
integration to minimize resource acquisition costs and inefficient operations as well as forward
integration to gain more control over product distribution
Transaction cost economics proposes that vertical integration is more efficient than contracting for
goods and services in the marketplace when the transaction costs of buying goods on the open market
become too great. When
1. Under full integration, a firm internally makes 100% of its key supplies and
completely controls its distributors.
2. With taper integration (also called concurrent sourcing), a firm internally produces
less than half of its own requirements and buys the rest from outside suppliers
(backward taper integration).
3. With quasi-integration, a company does not make any of its key supplies but
purchases most of its requirements from outside suppliers that are under its partial
control (backward quasi-integration)
4. Long-term contracts are agreements between two firms to provide agreed-upon
goods and services to each other for a specified period of time. This cannot really be
considered to be vertical integration unless it is an exclusive contract that specifies
that the supplier or distributor cannot have a similar relationship with a competitive
firm.
 Horizontal Growth. Afirm can achieve horizontal growth by expanding its operations into other
geographic locations and/or by increasing the range of products and services offered to current
markets. Research indicates that firms that grow horizontally by broadening their product lines have
high survival rates.
Horizontal growth can be achieved through internal development or externally through acquisitions
and strategic alliances with other firms in the same industry

International Entry Options for Horizontal Growth

Some of the most popular options for international entry are as follows:
_ Exporting: A good way to minimize risk and experiment with a specific product is
exporting, shipping goods produced in the company’s home country to other countries for
marketing. The company could choose to handle all critical functions itself, or it could
contract these functions to an export management company.
_ Licensing: Under a licensing agreement, the licensing firm grants rights to another firm
in the host country to produce and/or sell a product. The licensee pays compensation to the
licensing firm in return for technical expertise. This is an especially useful strategy if the
trademark or brand name is well known, but the company does not have sufficient funds to
finance its entering the country directly. This strategy is also important if the country makes
entry
via investment either difficult or impossible.
_ Franchising: Under a franchising agreement, the franchiser grants rights to another
company to open a retail store using the franchiser’s name and operating system. In
exchange, the franchisee pays the franchiser a percentage of its sales as a royalty.
Franchising provides an opportunity for a firm to establish a presence in countries where the
population or per capita spending is not sufficient for a major expansion effort.
_ Joint Ventures: Forming a joint venture between a foreign corporation and a domestic
company is the most popular strategy used to enter a new country. 26 Companies often form
joint ventures to combine the resources and expertise needed to develop new products or
technologies. A joint venture may be an association between a company and a firm in the
host country or a government agency in that country.
_ Acquisitions: Relatively quick way to move into an international area is through
acquisitions— purchasing another company already operating in that area. Synergistic
benefits can result if the company acquires a firm with strong complementary product lines
and a good distribution network.
_ Green-Field Development: If a company doesn’t want to purchase another company’s
problems along with its assets, it may choose green-field development and build its own
manufacturing plant and distribution system. Research indicates that firms possessing high
levels of technology, multinational experience, and diverse product lines prefer green-field
development to acquisitions.32 This is usually a far more complicated and expensive
operation than acquisition, but it allows a company more freedom in designing the plant,
choosing suppliers, and hiring a workforce.
_ Production Sharing: means the process of combining the higher labor skills and
technology available in developed countries with the lower-cost labor available in developing
countries. Often called outsourcing, one example is Maytag’s moving some of its
refrigeration production to a new plant in Reynosa, Mexico, in order to reduce labor costs.
_ Turnkey Operations: are typically contracts for the construction of operating facilities in
exchange for a fee. The facilities are transferred to the host country or firm when they are
complete. The customer is usually a government agency.
_ BOT Concept: is a variation of the turnkey operation. Instead of turning the facility
(usually a power plant or toll road) over to the host country when completed, the company
operates the facility for a fixed period of time during which it earns back its investment plus
a profit. It then turns the facility over to the government at little or no cost to the host
country.35
_ Management Contracts: A large corporation operating throughout the world is likely to
have a large amount of management talent at its disposal. Management contracts offer a
means through which a corporation can use some of its personnel to assist a firm in a host
country for a specified fee and period of time. Management contracts are common when a
host government expropriates part or all of a foreign-owned company’s holdings in its
country. The contracts allow the firm to continue to earn some income from its investment
and keep the operations going until local management is trained.

2. Diversification Strategies
According to strategist Richard Rumelt, companies begin thinking about diversification when
their growth has plateaued and opportunities for growth in the original business have been
depleted. 37 This often occurs when an industry consolidates, becomes mature, and most of
the surviving firms have reached the limits of growth using vertical and horizontal growth
strategies.
i. Concentric (Related) Diversification. Growth through concentric
diversification into a
related industry may be a very appropriate corporate strategy when a firm has a strong
competitive position but industry attractiveness is low. Research indicates that the
probability of succeeding by moving into a related business is a function of a company’s
position in its core business. For companies in leadership positions, the
chances for success are nearly three times higher than those for followers. 38 By focusing on
the characteristics that have given the company its distinctive competence, the company
uses those very strengths as its means of diversification. The firm attempts to secure
strategic fit in a new industry where the firm’s product knowledge, its manufacturing
capabilities, and the marketing skills it used so effectively in the original industry can be put
to good use.39 The corporation’s products or processes are related in some way: they
possess some common thread.
The search is for synergy, the concept that two businesses will generate more profits
together than they could separately.

ii. Conglomerate (Unrelated) Diversification. When management realizes that the

current industry is unattractive and that the firm lacks outstanding abilities or skills
that it could easily transfer to related products or services in other industries, the
most likely strategy is conglomerate diversification—diversifying into an industry
unrelated to its current one.
Rather than maintaining a common thread throughout their organization, strategic
managers who adopt this strategy are primarily concerned with financial considerations of
cash flow or risk reduction. This is also a good strategy for a firm that is able to transfer its
own excellent management system into less-well-managed acquired firms

STABILITY STRATEGIES
Acorporation may choose stability over growth by continuing its current activities without
any significant change in direction. Although sometimes viewed as a lack of strategy, the
stability family of corporate strategies can be appropriate for a successful corporation
operating in a reasonably predictable environment.59 They are very popular with small
business owners who have found a niche and are happy with their success and the
manageable size of their firms. Stability strategies can be very useful in the short run,

1. Pause/Proceed with Caution Strategy is, in effect, a timeout—an opportunity

to rest before continuing a growth or retrenchment strategy. It is a very deliberate
attempt to make only incremental improvements until a particular environmental
situation changes. It is typically conceived as a temporary strategy to be used until
the environment becomes more hospitable or to enable a company to consolidate its
resources after prolonged rapid growth.
2. No-Change Strategy is a decision to do nothing new—a choice to continue
current operations and policies for the foreseeable future. Rarely articulated as a
definite strategy, a nochange strategy’s success depends on a lack of significant
change in a corporation’s situation. The relative stability created by the firm’s
modest competitive position in an industry facing little or no growth encourages the
company to continue on its current course, making only small adjustments for
inflation in its sales and profit objectives. There are no obvious opportunities or
threats, nor is there much in the way of significant strengths or weaknesses. Few
aggressive new competitors are likely to enter such an industry
3. Profit Strategy is a decision to do nothing new in a worsening situation but
instead to act as though the company’s problems are only temporary. The profit
strategy is an attempt to artificially support profits when a company’s sales are
declining by reducing investment and shortterm discretionary expenditures. The
profit strategy is useful only to help a company get through a temporary difficulty.
Unfortunately, the strategy is seductive and if continued long enough it will lead to a
serious deterioration in a corporation’s competitive position. The profit strategy is
typically top management’s passive, short-term, and often self-serving response to a
difficult situation. In such situations, it is often better to face the problem directly by
choosing a retrenchment strategy.

RETRENCHMENT STRATEGIES
A company may pursue retrenchment strategies when it has a weak competitive position in
some or all of its product lines resulting in poor performance—sales are down and profits are
becoming losses. These strategies impose a great deal of pressure to improve performance.
In an attempt to eliminate the weaknesses that are dragging the company down,
management may follow one of several retrenchment strategies:
Turnaround Strategy emphasizes the improvement of operational efficiency and is
probably most appropriate when a corporation’s problems are pervasive but not yet critical.
Research shows that poorly performing firms in mature industries have been able to
improve their performance by cutting costs and expenses and by selling off assets. 61
Analogous to a weight reduction diet, the two basic phases of a turnaround strategy are
contraction and consolidation.62 Contraction is the initial effort to quickly “stop the
bleeding” with a general, across-the board
cutback in size and costs.

Captive Company Strategy Management desperately searches for an “angel” by

offering to be a captive company to one of its larger customers in order to guarantee the
company’s continued existence with a long-term contract. In this way, the corporation may
be able to reduce the scope of some of its functional activities, such as marketing, thus
significantly reducing costs.
The weaker company gains certainty of sales and production in return for becoming heavily
dependent on another firm for at least 75% of its sales.
Sell-Out/Divestment Strategy
If a corporation with a weak competitive position in an industry is unable either to pull itself
up by its bootstraps or to find a customer to which it can become a captive company, it may
have no choice but to sell out. The sell-out strategy makes sense if management can still
obtain a good price for its shareholders and the employees can keep their jobs by selling the
entire company to another firm. The hope is that another company will have the necessary
resources and determination to return the company to profitability
If the corporation has multiple business lines and it chooses to sell off a division with low
growth potential, this is called divestment. Divestment is often used after a corporation
acquires a multi-unit corporation in order to shed the units that do not fit with the
corporation’s new strategy.

Bankruptcy/Liquidation Strategy
When a company finds itself in the worst possible situation with a poor competitive position
in an industry with few prospects, management has only a few alternatives—all of them
distasteful.
Because no one is interested in buying a weak company in an unattractive industry, the firm
must pursue a bankruptcy or liquidation strategy. Bankruptcy involves giving up
management of the firm to the courts in return for some settlement of the corporation’s
obligations.
In contrast to bankruptcy, which seeks to perpetuate a corporation, liquidation is the
termination of the firm. When the industry is unattractive and the company too weak to be
sold as a going concern, management may choose to convert as many saleable assets as
possible to cash, which is then distributed to the shareholders after all obligations are paid.

7.3 Portfolio Analysis

In portfolio analysis, top management views its product lines and business units as a
series of investments from which it expects a profitable return.
BCG GROWTH-SHARE MATRIX
_ Question marks (sometimes called “problem children” or “wildcats”) are new products
with the potential for success, but they need a lot of cash for development. If such a product
is to gain enough market share to become a market leader and thus a star, money must be
taken from more mature products and spent on the question mark. This is a “fish or cut bait”
decision in which management must decide if the business is worth the investment needed.
_ Stars are market leaders that are typically at the peak of their product life cycle and are
able to generate enough cash to maintain their high share of the market and usually
contribute to the company y’s profits.
_ Cash cows typically bring in far more money than is needed to maintain their market
share. In this declining stage of their life cycle, these products are “milked” for cash that will
be invested in new question marks. Expenses such as advertising and R&D are reduced.
Question marks unable to obtain dominant market share (and thus become stars) by the
time the industry growth rate inevitably slows become dogs.
_ Dogs have low market share and do not have the potential (because they are in an
unattractive industry) to bring in much cash. According to the BCG Growth-Share Matrix,
dogs should be either sold off or managed carefully for the small amount of cash they can
generate.

BCG Growth-Share Matrix also has some serious limitations:

1. _ The use of highs and lows to form four categories is too simplistic.
2. _ The link between market share and profitability is questionable. 79 Low-share
businesses can also be profitable.
3. _ Growth rate is only one aspect of industry attractiveness.
4. _ Product lines or business units are considered only in relation to one competitor: the
market leader. Small competitors with fast-growing market shares are ignored.
5. _ Market share is only one aspect of overall competitive position.

GE BUSINESS SCREEN
The GE Business Screen, in contrast to the BCG Growth-Share Matrix, includes much more
data in its two key factors than just business growth rate and comparable market share. For
example, at GE, industry attractiveness includes market growth rate, industry profitability,
size, and pricing practices, among other possible opportunities and threats. Business
strength or competitive position includes market share as well as technological position,
profitability, and size, among other possible strengths and weaknesses.
This portfolio matrix, however, does have some shortcomings:
_ It can get quite complicated and cumbersome.
_ The numerical estimates of industry attractiveness and business strength/competitive
position give the appearance of objectivity, but they are in reality subjective judgments that
may vary from one person to another.
_ It cannot effectively depict the positions of new products or business units in developing
industries.

7.4 Corporate Parenting views a corporation in terms of resources and

capabilities that can be used to build business unit value as well as generate synergies
across business units

HORIZONTAL STRATEGY AND MULTIPOINT COMPETITION

Ahorizontal strategy is a corporate strategy that cuts across business unit boundaries to
build synergy across business units and to improve the competitive position of one or more
business units.96 When used to build synergy, it acts like a parenting strategy. When used to
improve the competitive position of one or more business units, it can be thought of as a
corporate competitive strategy. In multipoint competition, large multi-business
corporations compete against other large multi-business firms in a number of markets.
These multipoint competitors are firms that compete with each other not only in one
business unit, but also in a number of business units.