Leader: Salimo, Patrick

Members:
Biocarles, Shayne
Quizon, Charina May
Santos, Micaela

STRATEGY FORMULATION:
CORPORATE STRATEGY
Learning Objectives:
> Understanding the three aspects of corporate strategy

> Apply the directional strategies of growth, stability, and

retrenchment

> Understanding the differences between vertical and horizontal

growth as well as concentric and conglomerate diversification

> Identify strategic options to enter a foreign country

> Apply portfolio analysis to guide decisions in companies with

multiple products and business

> Develop a parenting strategy for a multiple-business corporation

Corporate Strategy

• primarily about the

choice of direction for a
firm as a whole and the
management of its
business or product
portfolio
Three Aspects of
Corporate Strategy:

1. Directional Strategy
2. Portfolio Analysis
3. Parenting Strategy
1. Directional Strategy

• The firm’s overall

orientation toward
growth, stability, or
retrenchment
2. Portfolio Analysis

• The industries or markets in

which the firm competes through
its products and business units
3. Parenting Strategy

• The manner in which

management coordinates
activities and transfers
resources and cultivates
capabilities among product
lines and business units
1. Directional Strategies:
• Growth
– Concentration
• Vertical Growth
• Horizontal Growth
– Diversification
• Concentric
• Conglomerate
• Stability
• Retrenchment
Directional Strategies

it sometimes called
grand strategies.
Directional Strategies:

1.Growth Strategies
- expand company’s
activities.
Growth Strategies

• Merger
transaction involving two or more
corporations in which stock is
exchanged but in which only one
corporation survives.
Growth Strategies

• Acquisition
the purchase of a
company that is
completely absorbed as
an operating subsidiary or
division of the acquiring
corporation.
Concentration
Concentration

• Vertical Growth
can be achieved by
taking over a function
previously provided by
a supplier or by a
distributor.
Concentration
• Vertical Growth

Vertical Integration
- the degree to which a firm operates
vertically in multiple locations on an
industry’s value chain from extracting
raw materials to manufacturing to
retailing
Concentration
• Vertical Growth

Backward Integration
- going backward on an
industry’s value chain.
Concentration

• Vertical Growth

Forward Integration
- going forward on an industry’s
value chain
• Vertical Growth

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.
• Vertical Growth

Full Integration
A firm internally makes 100%
of its key supplies and completely
controls its distributors.
• Vertical Growth

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).
• Vertical Growth

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).
• Vertical Growth

Long-term Contracts
agreements between two
firms to provide agreed-upon
goods and services to each
other for a specified period of
time.
Growth Strategies

• Horizontal Growth
Firm can achieve it by
expanding its operations into other
geographic locations and/or by
increasing the range of products
and services offered to current
markets.
Growth Strategies
• Horizontal Growth

Horizontal Integration
– degree to which a firm
operates in multiple
geographic locations at
the same point on an
industry’s value chain.
International Entry Options
for Horizontal Growth
Most popular options for
International Entry are:

• Exporting
shipping goods
produced in the
company’s home country
to other countries for
marketing.
Most popular options for
International Entry are:

• Licensing
the licensing firm grants
rights to another firm in the host
country to produce and/or sell a
product.
Most popular options for
International Entry are:

• Franchising
the franchiser grants
rights to another company
to open a retail store
using the franchiser’s
name and operating
system.
Most popular options for
International Entry are:

• Joint Ventures
to combine the resources
and expertise needed to
develop new products or
technologies.
Most popular options for
International Entry are:

• Acquisitions
purchasing another
company already
operating in that area.
Most popular options for
International Entry are:

• Green-Field Development
build its own manufacturing
plant and distribution system.
Most popular options for
International Entry are:

• Production Sharing
Often called outsourcing.
Process of combining the
higher labor skills and
technology available in
developed countries with the
lower-cost labor available in
developing countries.
Most popular options for
International Entry are:

• Turnkey Operations
typically contracts for the
construction of operating facilities
in exchange for a fee.
Most popular options for
International Entry are:

• BOT (Build, Operate,

Transfer) concept
a variation of the
turnkey operation.
Most popular options for
International Entry are:

• 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.
Diversification
Strategies
Diversification Strategies

• Concentric (Related)
Diversification
a very appropriate corporate
strategy when a firm has a strong
competitive position but industry
attractiveness is low.
Concentric (Related) Diversification

• Synergy
the concept that
two businesses will
generate more profits
together than they
could separately
Diversification Strategies

• Conglomerate (Unrelated)
Diversification.
diversifying into an industry
unrelated to its current one.
Directional Strategies:

2. Stability Strategies
- make no change to
the company’s
activities.
Directional Strategies:

3. Retrenchment
Strategies
- reduce the
company’s level of
activities.
CONTROVERSIES IN
DIRECTIONAL
GROWTH
STRATEGIES
CONTROVERSIES IN
DIRECTIONAL GROWTH
STRATEGIES

• Research reveals that companies

following a related diversification
strategy appear to be higher
performers and survive longer than
do companies with narrower scope
following a pure concentration
strategy.
CONTROVERSIES IN
DIRECTIONAL GROWTH
STRATEGIES

• In terms of diversification strategies,

research suggests that the
relationship between relatedness and
performance is curvilinear in the
shape of an inverted U-shaped curve.
CONTROVERSIES IN
DIRECTIONAL GROWTH
STRATEGIES

• If a new business is very similar to that of the

acquiring firm, it adds little new to the corporation
and only marginally improves performance. If the
new business is completely different from the
acquiring company’s businesses, there may be
very little potential for any synergy. If, however,
the new business provides new resources and
capabilities in a different, but similar, business,
the likelihood of a significant performance
improvement is high.
STABILITY
STRATEGIES
Stability Strategies

• The stability family of corporate

strategies can be appropriate for a
successful corporation operating in a
reasonably predictable environment.
Stability Strategies

• Stability strategies can be very

useful in the short run, but they
can be dangerous if followed for
too long.
POPULAR STABILITY STRATEGIES

• Pause/Proceed with Caution Strategy

- a timeout—an opportunity to rest before
continuing a growth or retrenchment
strategy.
- temporary strategy to be used until the
environment becomes more hospitable or
to enable a company to consolidate its
resources after prolonged rapid growth.
POPULAR STABILITY
STRATEGIES

• 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 no-change strategy’s success depends on
a lack of significant change in a
corporation’s situation.
POPULAR STABILITY
STRATEGIES
• 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.
- is an attempt to artificially support
profits when a company’s sales are
declining by reducing investment and short
term discretionary expenditures.
RETRENCHMENT
STRATEGIES
Retrenchment Strategies

• 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.
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.
SEVERAL RETRENCHMENT
STRATEGIES
• Turnaround Strategy
2 Basic Phases:
 Contraction - is the initial effort to
quickly “stop the bleeding” with a
general, across-the board cutback in
size and costs.
 Consolidation - implements a
program to stabilize the now leaner
corporation.
SEVERAL RETRENCHMENT
STRATEGIES

• Captive Company Strategy

- involves giving up independence in
exchange for security.
- 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.
SEVERAL RETRENCHMENT STRATEGIES

• Sell-Out/Divestment 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.
- If the corporation has multiple business
lines and it chooses to sell off a division with
low growth potential, this is called
divestment.
SEVERAL RETRENCHMENT STRATEGIES

• Bankruptcy/Liquidation Strategy

- Bankruptcy involves giving up

management of the firm to the courts in
return for some settlement of the
corporation’s obligations.
- Liquidation is the termination of the
firm.
SEVERAL RETRENCHMENT STRATEGIES

• Bankruptcy/Liquidation Strategy
The benefit of liquidation over
bankruptcy is that the board of directors, as
representatives of the shareholders,
together with top management make the
decisions instead of turning them over to
the bankruptcy court, which may choose to
ignore shareholders completely.
PORTFOLIO
ANALYSIS
Portfolio Analysis

One of the most popular aids to developing

corporate strategy in a multiple-business
corporation.

Top management views its product lines and

business units as a series of investments
from which it expects a profitable return.
Portfolio Analysis

Portfolio Techniques
–BCG Growth-Share Matrix
–GE Business Screen
Portfolio Techniques

> BCG (Boston Consulting Group)

Growth-Share Matrix
is the simplest way to portray a
corporation’s portfolio of investments.
Each of the corporation’s product lines or
business units is plotted on the matrix according
to both the growth rate of the industry in which it
competes and its relative market share.
Portfolio Techniques

A unit’s relative competitive position is defined as its market

share in the industry divided by that of the largest other
competitor. By this calculation, a relative market share
above 1.0 belongs to the market leader. The business
growth rate is the percentage of market growth, that is, the
percentage by which sales of a particular business unit
classification of products have increased. The matrix
assumes that, other things being equal, a growing market is
attractive.
BCG Growth-Share Matrix
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.
BCG Growth-Share Matrix

• 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’s profits.
BCG Growth-Share Matrix

• 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.
BCG Growth-Share Matrix

• Dogs
have low market share and do
not have the potential to bring in
much cash.
BCG Growth-Share Matrix

• The key to success is assumed to be

market share. Firms with the highest
market share tend to have a cost
leadership position based on
economies of scale, among other
things.
BCG Growth-Share Matrix

• The goal of any company is to

maintain a balanced portfolio so it can
be self-sufficient in cash and always
working to harvest mature products in
declining industries to support new
ones in growing industries.
BCG Growth-Share Matrix

Advantages
• It is quantifiable and easy to use.
• Cash cow, dog, question mark, and
star are easy to-remember terms for
referring to a corporation’s business
units or products. _x0002_
BCG Growth-Share Matrix

Limitations
• The use of highs and lows to form four categories is
too simplistic.
• The link between market share and profitability is
questionable.
• Growth rate is only one aspect of industry
attractiveness.
• Product lines or business units are considered only
in relation to one competitor: the market leader.
• Market share is only one aspect of overall
competitive position.
GE Business Screen
• It includes nine cells based on long-term
industry attractiveness and business
strength competitive position.
• 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.
GE Business Screen
GE Business Screen

• Four steps to plot product lines or business

units on the GE Business Screen:

1. Select criteria to rate the industry for each product

line or business unit. Assess overall industry
attractiveness for each product line or business
unit on a scale from 1 (very unattractive) to 5 (very
attractive).
GE Business Screen

• Four steps to plot product lines or business

units on the GE Business Screen:

2. Select the key factors needed for success in

each product line or business unit. Assess
business strength/competitive position for each
product line or business unit on a scale of 1
(very weak) to 5 (very strong).
 GE Business Screen

• Four steps to plot product lines or

business units on the GE Business
Screen:

3. Plot each product line’s or business unit’s current

position on a matrix.
4. Plot the firm’s future portfolio, assuming that
present corporate and business strategies
remain unchanged.
 GE Business Screen
The GE Business Screen considers many more variables
and does not lead to such simplistic conclusions.

Some shortcomings of GE BUSINESS SCREEN:

1. It can get quite complicated and cumbersome.
2. 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.
3. It cannot effectively depict the positions of new products
or business units in developing
industries.
 Advantages of
Portfolio Analysis

• It encourages top management to evaluate each

of the corporation’s businesses individually
• and to set objectives and allocate resources for
each.
• It stimulates the use of externally oriented data to
supplement management’s judgment.
• It raises the issue of cash-flow availability for use
in expansion and growth.
• Its graphic depiction facilitates communication.
Limitations of
Portfolio Analysis
• Defining product/market segments is difficult.
• It suggests the use of standard strategies that can miss
opportunities or be impractical.
• It provides an illusion of scientific rigor when in reality
positions are based on subjective
• judgments.
• Its value-laden terms such as cash cow and dog can lead
to self-fulfilling prophecies.
• It is not always clear what makes an industry attractive or
where a product is in its life cycle.
• Naively following the prescriptions of a portfolio model
may actually reduce corporate profits if they are used
inappropriately.
Managing A
Strategic Alliance Portfolio

• Alliances are thus recognized as an

important source of competitive
advantage and superior performance.
• Managing groups of strategic alliances is
primarily the job of the business unit.
Four tasks of
Multi-Alliance Management
1. Developing and implementing a portfolio
strategy for each business unit and a corporate
policy for managing all the alliances of the entire
company.
2. Monitoring the alliance portfolio in terms of
implementing business unit strategies and
corporate strategy and policies.
3. Coordinating the portfolio to obtain synergies
and avoid conflicts among alliances.
4. Establishing an alliance management system to
support other tasks of multi-alliance management.
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.
It generates corporate strategy by focusing
on the core competencies of the parent
corporation and on the value created from
the relationship between the parent and its
businesses.
Corporate Parenting

Research indicates that companies that have a

good fit between their strategy and their parenting
roles are better performers than those companies
that do not have a good fit.
The primary job of corporate headquarters is,
therefore, to obtain synergy among the business
units by providing needed resources to units,
transferring skills and capabilities among the units,
and coordinating the activities of shared unit
functions to attain economies of scope.
Developing A
Corporate Parenting Strategy

1. Examine each business unit (or target firm

in the case of acquisition) in terms of its
strategic factors.
2. Examine each business unit (or target
firm) in terms of areas in which performance
can be improved.
3. Analyze how well the parent corporation
fits with the business unit (or target firm).
Horizontal Strategy and
Multipoint Competition

• Horizontal 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.
Horizontal Strategy and
Multipoint Competition
• Multipoint competition
- large multi-business corporations
compete against other large multi-business
firms in a number of markets.

Multipoint competition and the resulting

use of horizontal strategy may actually slow
the development of hypercompetition in an
industry.
Case Study

Nestle and the Twenty-First Century

• In 2000, Nestle had about 230,000

employees, more than 500 factories, and
17 R&D facilities with a combined budget
of about U.S.$600 million.
Case Study

The company is the world’s largest seller of

powdered/condensed milk, non-dairy
creamers, soluble coffee, mineral water
and chocolate and confectionery products.
The firm is the No. 2 seller of ice cream,
behind Unilever.
Questions:

• What is Nestle corporate strategy?

-
Questions:

• What is Nestle diversification strategy?

- Nestle diversification strategy generated
most of revenue through related constrained
diversification from major business share
product, technological, and distribution
linkages. Nestle had transformed from a
manufacturer into a truly diversified global
food company.
Kamsahamnida!