Chapter 7 Strategy Formulation; Corporate Strategy

Chapter 7Strategy Formulation;Corporate Strategy Strategic Management and Business Policy 11th Edition Thomas L. Wheelen J. David Hunger

Strategies in Action In Alice’s Adventure in Wonderland, Alice asks the Cheshire cat, “Would you tell me please, which way I ought to go from here?” “ That depends a good deal on where you want to go to”, says the cat. Corporate Strategy

Strategies in Action THERE IS NO GOOD OR POOR STRATEGY… BUT THERE IS AN APPROPRIATE STRATEGY Corporate Strategy

Strategy Analysis & Choice --Establishing long-term objectives -- Generating alternative strategies -- Selecting strategies to pursue -- Best alternative - achieve mission & objectives Nature of Strategy Analysis & Choice Corporate Strategy

Strategy Analysis & Choice Alternative Strategies Derive From -- • Vision • Mission • Objectives • External audit • Internal audit • Past successful strategies Corporate Strategy

Strategy Analysis & Choice Generating Alternatives -- Participation in generating alternative strategies should be as broad as possible Corporate Strategy

Strategy Analysis & Choice Corporate Strategy Vs. Business Strategy Walt Disney Corporate strategyevaluates whether the corporation should own theme parks, restaurants, movie production, and how the corporation can add value to each of these individual business. Business strategyanalyzes each individual business of Disney relative to its’ competitors, e.g. ABC, one of Disney’s TV networks need a business strategy to succeed against NBC, FOX,…etc. Corporate Strategy

Types of Strategies 1. Forward Integration (A)IntegrationStrategies 2. BackwardIntegration 3. HorizontalIntegration Corporate Strategy

Integration Strategies When a company expands its business functions into areas that are at different points of the same production path • Gain Control Over -- • Distributors • Suppliers • Competitors Corporate Strategy

Integration Strategies Forward Integration Strategies Gain Control Over -- • Distributors • Retailers Corporate Strategy

Integration Strategies Forward Integration Strategies Guidelines -- • Current distributors – expensive or unreliable • Availability of quality distributors – limited • Firm competes in industry expected to grow markedly • Firm has both capital & HR to manage new business of distribution • Current distributors have high profit margins Corporate Strategy

Integration Strategies Backward Integration Strategies Ownership or Control -- • Firm’s suppliers Corporate Strategy

Integration Strategies Backward Integration Strategies Guidelines -- • Current suppliers – expensive or unreliable • # of suppliers is small; # competitors is large • High growth in industry sector • Firm has both capital & HR to manage new business • Stable prices are important • Current suppliers have high profit margins Corporate Strategy

Integration Strategies Horizontal Integration Strategies Used as a growth strategy, eg. M&A, takeover. Ownership or Control -- • Firm’s competitors Corporate Strategy

Integration Strategies Horizontal Integration Strategies Guidelines -- • Gain monopolistic characteristics w/o federal government challenge • Competes in growing industry • Increased economies of scale – major competitive advantages • Faltering due to lack of managerial expertise or need for particular resource Corporate Strategy

Types of Strategies 4. MarketPenetration (B)IntensiveStrategies 5. MarketDevelopment 6. ProductDevelopment Corporate Strategy

Intensive Strategies Intensive Efforts -- • Improve competitive position with existing products Corporate Strategy

Intensive Strategies Market Penetration Strategies Increased Market Share of-- • Present products/services • Present markets • Greater marketing efforts Corporate Strategy

Intensive Strategies Market Penetration Strategies Guidelines -- • Current markets not saturated • Usage rate of present customers can be increased significantly • Shares of competitors declining; industry sales increasing • Increased economies of scale provide major competitive advantage Corporate Strategy

Intensive Strategies Market Development Strategies New Markets -- • Present products/services to new geographic areas Corporate Strategy

Intensive Strategies Market Development Strategies Guidelines -- • New channels of distribution – reliable, inexpensive, good quality • Firm is successful at what it does • Untapped/unsaturated markets • Excess production capacity • Basic industry rapidly becoming global Corporate Strategy

Intensive Strategies Product Development Strategies Increased Sales -- • Improving present products/services • Developing new products/services Corporate Strategy

Intensive Strategies Product Development Strategies Guidelines -- • Products in maturity stage of life cycle • Industry characterized by rapid technological development • Competitors offer better-quality products @ comparable prices • Compete in high-growth industry • Strong R&D capabilities Corporate Strategy

Types of Strategies 7. ConcentricDiversification (C)DiversificationStrategies 8. ConglomerateDiversification 9. HorizontalDiversification Corporate Strategy

Diversification Strategies • The diversification strategies include: • internal development of new products or markets, • acquisition of a firm, • alliance with a complementary company, • licensing of new technologies. Corporate Strategy

Diversification Strategies Concentric Diversification Strategies A related diversification strategy • The addition of new&related products/services which have technological/commercial synergy with current products/services, and which will appeal to new customer groups. • The objective is to benefit from synergy effects due to the complementarities of activities, thus expand the firm’s market by attracting new groups of buyers. Corporate Strategy

Diversification Strategies Concentric Diversification Strategies Guidelines -- • Compete in no/slow growth industry • New & related products enhances sales of current products • New & related products offered at competitive prices • Current products—decline stage of product life cycle • Strong management team Corporate Strategy

Diversification Strategies Conglomerate Diversification Strategies An unrelated diversification strategy • Marketing of new & unrelated products/services that have no technological/commercial synergies with current products, but which may appeal to new groups of customers. • The strategy has little relationship with the firm’s current business. Therefore, the reasons of adopting the strategy: - to improve the profitability of the company, - to get a better reception in markets as the company gets bigger. Corporate Strategy

Diversification Strategies Conglomerate Diversification Strategies Guidelines -- • Declining annual sales & profits • Capital & managerial ability to compete in new industry • Financial synergy between acquired and acquiring firms • Current markets for present products - saturated Corporate Strategy

Diversification Strategies Horizontal Diversification Strategies An unrelated diversification strategy Addition of new & unrelated products/services that are technologically/commercially unrelated to current products, but which may appeal to current customers. Corporate Strategy

Diversification Strategies Horizontal Diversification Strategies Guidelines -- • Adding new products/services would significantly increase revenues • Highly competitive and/or no-growth industry; low margins & returns • Current distribution channels can be used • New products have counter cyclical sales patterns Corporate Strategy

Types of Strategies 10. Retrenchment (D)DefensiveStrategies 11. Divestiture 12. Liquidation Corporate Strategy

Defensive Strategies Retrenchment Strategies Sometimes called Turnaround or Reorganizational strategy Regrouping -- • Cost & asset reduction to reverse declining sales & profit, thus strategists work with limited resources. • Bankruptcy- an effective retrenchment strategy to avoid major debt obligations. Corporate Strategy

Defensive Strategies Retrenchment Strategies Guidelines -- • Failed to meet objectives & goals consistency; has distinctive competencies • Firm is one of weaker competitors • Inefficiency, low profitability, poor employee morale, pressure for stockholders • Strategic managers have failed • Rapid growth in size; major internal reorganization necessary Corporate Strategy

Defensive Strategies Divestiture Strategies • Selling a division or part of an organization. • Used to raise capital for further strategic investments. Corporate Strategy

Defensive Strategies Divestiture Strategies Guidelines -- • Retrenchment failed to attain improvements • Division needs more resources than are available • Division responsible for firm’s overall poor performance • Division is a mis-fit with organization • Large amount of cash is needed and cannot be raised through other sources Corporate Strategy

Defensive Strategies Liquidation Strategies Selling • Company’s assets, in parts, for their tangible worth • Better to cease operating than to continue losing sums of money Corporate Strategy

Defensive Strategies Liquidation Strategies Guidelines -- • Retrenchment & divestiture failed • Only alternative is bankruptcy • Minimize stockholder loss by selling firm’s assets Corporate Strategy

Strategic Examples Corporate Strategy

Strategic Position & ACtion Evaluation (SPACE) Matrix A strategic management tool used to determine what type of corporate strategy a company should undertake Corporate Strategy

SPACE Matrix FS Conservative Aggressive +6 +5 +4 +3 +2 +1 CA IS -6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6 -1 -2 -3 -4 Defensive -5 Competitive -6 ES Corporate Strategy

SPACE Dimensions Financial Strength Ratings ROI 1.0 Leverage 1.0 Liquidity 3.0 Working capital 4.0 Total 9.0 Industry Strength Growth potential 4.0 Profit potential 2.0 Technological know-how 4.0 Total 10.0 Corporate Strategy

SPACE Dimensions Environmental Stability Ratings Competitive pressure -4.0 Price elasticity -5.0 Price range of competing products -4.0 Total -13.0 Competitive Advantage Market share -2.0 Product Quality -5.0 Product life cycle -2.0 Total -9.0 Corporate Strategy

SPACE Matrix Steps required to develop a SPACE Matrix are as follows: Select a set of variables to define the financial strength (FS), competitive advantage (CA), environmental stability (ES), and industry strength (IS). Assign a numerical value ranging from +1 (worst)to+6 (best) to each of the variables that make up the FS and IS dimensions. Assign a numerical value ranging from -1 (best) to -6 (worst) to each of the variables that make up the ES and CA dimensions. On the FS and CA axes, make comparisons to competitors. On the IS and ES axes, make comparisons to other industries. Corporate Strategy

SPACE Matrix Steps required to develop a SPACE Matrix are as follows: Compute an average score for FS, CA, IS and ES by summing the values given to variables of each dimension and then by dividing by the number of variables included in the perspective dimensions. Mark the average scores for FS, IS, ES, and CA on the appropriate X&Y axis in the SPACE Matrix. Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on y. Corporate Strategy

SPACE Matrix Steps required to develop a SPACE Matrix are as follows: • Draw a directional vector form the origin of the space Matrix through the new intersection point. The vector reveals the type of strategies recommended for the organization: • Aggressive, • Competitive. • Defensive, and • Conservative. Corporate Strategy

SPACE Matrix Suggested strategies • Aggressive strategies : Mkt. penetration, mkt. development, product development, backward/forward/horizontal integration, conglomerate/concentric/horizontal diversification. • Conservative strategies: Mkt. penetration, mkt. development, product development, & concentric diversification. • Defensive strategies: Retrenchment, divestiture, & liquidation. • Competitive strategies: Backward/forward/horizontal integration, mkt. penetration, mkt. development, product development, Corporate Strategy

Chapter 7 Strategy Formulation; Corporate Strategy