Strategic Management and

Business Policy 15e, Global Edition

Chapter 7
Strategy Formulation:
Corporate Strategy

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Learning Objectives
• Explain the three key issues that corporate strategy
addresses
• Apply the directional strategies of growth, stability, and
retrenchment to the organizational environment in which they
work best
• Understand the differences between vertical and horizontal
growth as well as concentric and conglomerate diversification
• Apply portfolio analysis to guide decisions in companies with
multiple products and businesses
• Develop a parenting strategy for a multiple-business
corporation

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Corporate Strategy (1 of 2)
• Corporate strategy
– the choice of direction of the firm as a whole
and the management of its business or product
portfolio and concerns
– True regardless of size
– Addresses three key issues facing the
corporation as a whole:

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Corporate Strategy (2 of 2)
• Directional strategy
– the firm’s overall orientation toward growth, stability or
retrenchment
• Portfolio analysis
– industries or markets in which the firm competes
through its products and business units
• Parenting strategy
– the manner in which management coordinates
activities and transfers resources and cultivates
capabilities among product lines and business units

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Figure 7-1: Corporate Directional Strategies

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Directional Strategy
• Every corporation must decide its orientation toward
growth by asking the following three questions:
1. Should we expand, cut back, or continue our
operations unchanged?
2. Should we concentrate our activities within our
current industry, or should we diversify into other
industries?
3. If we want to grow and expand nationally and/or
globally, should we do so through internal
development or through external acquisitions, mergers, or
strategic alliances?

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Directional Strategy
Composed of three general orientations or
Grand Strategies:
• Growth strategies: expand the company’s
activities
• Stability strategies: make no change to
the company’s current activities
• Retrenchment strategies: reduce the
company’s level of activities
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Growth Strategies
• Growth in sales, profit, assets or some combination of all
• Organic Growth vs. Inorganic Growth
• Merger
– a transaction involving two or more corporations in
which both companies exchange stock in order to
create one new corporation
– Usually friendly: both parties believe it is in the best
interests to combine their companies
– Mergers of equals if companies of equal sizes
– Resulting firm is likely to have a name derived from its
composite firms

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Growth Strategies
• Acquisition
– purchase of another company
– In some cases the purchased company
continues to operate as an independent
entity(WhatsApp and Facebook) and in others
it is completely absorbed as an operating
subsidiary or division of the acquiring firm
– Usually occur between firms of different sizes
and can be either friendly or hostile(takeovers)

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Growth Strategies

• The basic two growth strategies are:

– Concentration on the current product line or
innovative product line(s) within one industry
through vertical and horizontal growth
– Diversification into other product lines in other
industries through concentric and
conglomerate diversification

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Concentration Strategies
• Vertical growth
– achieved by taking over a function previously
provided by a supplier or distributor
– To reduce cost, gain control over a scarce
resource, guarantee quality of a key input, or
obtain access to potential customers
– Can be organic or inorganic
– Highly attractive industry and growing markets

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Concentration Strategies

• 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
– A firm builds on its distinctive competencies by
expanding along the industry’s value chain to
gain greater competitive advantage

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 Vertical Integration

 Backward integration
 assuming a function previously provided by a
supplier
 Minimizes cost of resource acquisition and
inefficient operations
 Generally more profitable than forward,
typically low margins in retailing
 Reduces a company’s strategic flexibility
(expensive assets) and thus makes it difficult to
exit the market
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 Vertical Integration

 Forward integration
 assuming a function previously provided by a
distributor
 Gain more control over product distribution

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Concentration Strategies
• Transaction cost economies
– Vertical integration is more efficient than
contracting for goods and services in the
marketplace when the transaction costs of
buying on the open market become too great
– But when highly integrated firms become
excessively large and bureaucratic, purchasing
the needed good externally becomes simpler
– Outsourcing and Vertical Integration are
situation specific.
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Vertical Integration Continuum

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Concentration Strategies
• Full integration
– a firm internally makes 100% of its key suppliers and
completely controls its distributors
– British Petroleum and Royal Dutch Shell
• Taper integration (concurrent sourcing)
– Backward taper integration: a firm internally produces
less than half of its own requirements and buys the rest
from outside suppliers.
– Forward taper integration: a firm sells part of its goods
through company-owned stores and the rest through
general wholesalers.

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Concentration Strategies
• 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
– Seat on the other firms BoD guarantees information
and control
• Long-term contracts
– agreements between two firms to provide agreed-upon
goods and services to each other for a specific time
– To be vertical, it has to be exclusive and end up as a
captive company

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Concentration Strategies
• Horizontal growth
– expansion of operations into other geographic locations
and/or increasing the range of products and services
offered to current markets
– Increasingly achieved through international expansion
– Organic and inorganic
• Horizontal integration
– the degree to which a firm operates in multiple
geographic locations at the same point in an industry’s
value chain

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Diversification Strategies
• Occurs when growth has plateaued and
opportunities for growth in the original
business have been depleted
• Occurs when an industry consolidates,
becomes mature, and most of the surviving
companies have reached the limits of
growth using vertical and horizontal growth
strategies.
• Require sophisticated management
techniques
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Diversification Strategies
• Concentric (Related) diversification
– growth into a related industry when a firm has a
strong competitive position but industry
attractiveness is low
– Success is function of the company’s leading
position in its core business and industry

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Diversification Strategies
• Conglomerate (unrelated) diversification
– Management realizes that the current industry is
unattractive
– Firm lacks outstanding abilities or skills that it could
easily transfer to related products or services in other
industries
– So diversify into an industry unrelated to its current one
– Financial considerations of cash flow or risk reduction
– E.G. Company X with seasonal cashflows purchases
unrelated with complementing cashflows OR
– Company X, cash rich in an industry with few growth
opportunity moves to growing industry but cash is hard
to find
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Controversies in Directional Strategies
• Is vertical growth better than horizontal
growth?
• Is concentration better than diversification?
• Is concentric diversification better than
conglomerate diversification?

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 Stability Strategies
 By continuing its current activities without any
significant change in direction
 Can be viewed as lack of strategy but can be
appropriate for a successful corporation operating
in a reasonably predictable environment
 Very popular with small business who have a
niche and are happy with their success and
manageable firm’s size
 Can be useful in short run but dangerous in the
long run

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Stability Strategies
• Pause/proceed with caution strategy
– A time-out; an opportunity to rest before continuing a
growth or retrenchment strategy
– Very deliberate attempt to make only small changes until
environment changes
– Temporary strategy

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Stability Strategies
• No-change strategy
– decision to do nothing new—a choice to continue
current operations and policies for the foreseeable
future.
– Success depends on a lack of significant change in
corporation’s situation
– No obvious opportunities or threats/ few aggressive
competitors are likely to enter such an industry
– Company is ok with its niche that is reasonably
profitable
– Future expected to continue as an extension of the
present
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Stability Strategies

• Profit strategy
– Decision to do nothing new in a worsening situation but
instead to act as though the company’s problems are
only temporary and result of hostile environment
– Attempt to artificially support profits when company’s
sales are declining by reducing investments and SR
discretionary expenses
– Useful if company in preparation of IPO or being
acquired????
– Top management’s self-serving approach

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Retrenchment Strategies (1 of 4)
• Retrenchment strategies
– Used when the firm has a weak competitive
position in some or all of its product lines from
poor performance
– These strategies impose a great deal of
pressure to improve performance
– To eliminate weakness taking the company
down, management can choose one or more of
the following strategies:

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Retrenchment Strategies
• Turnaround strategy (transformation)
– emphasizes the improvement of operational efficiency
when the corporation’s problems are pervasive but not
yet critical

Contraction: initial effort to quickly “stop the

bleeding” across the board but in size and costs
Consolidation: implementation of a program to
stabilize the now- leaner corporation
Rebirth: if the company is successful with its efforts
and starts growing profitably again

https://www.youtube.com/watch?v=1FW9_mavGfQ
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Retrenchment Strategies
• Captive company strategy
– Company gives up independence in exchange for security
– Company not strong enough to do a turnaround; poor sales and
increasing losses so management looks for an “angel”.
– Yahoo! Gave in to the captive strategy by hiring investment
bankers to sell the company
• Sell-out strategy
– Management can still obtain a good price for its shareholders and
the employees can keep their jobs by selling the company to
another firm
• Divestment
– Sale of a division with low growth potential
– E.g., Ford selling Jaguar and Land Rover to Tata Motors
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Retrenchment Strategies
• Bankruptcy
– Worst possible situation with poor competitive position
in the industry
– No one is interested in purchasing the company so
gives up management of the firm to the courts in return
for some settlement of the corporation’s obligations;
Chapter 11
– Seek to perpetuate the corporation
• Liquidation
– management terminates the firm
– Industry is unattractive and company too weak to be
sold as going concern

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Portfolio Analysis
• Portfolio analysis
– How much of our time and money should we
spend on our best business units and products
to ensure that they continue to be successful?
– How much of our time and money should we
spend developing new costly products, most of
which will never be successful?
– Management views its product lines and
business units as a series of investments from
which it expects a profitable return
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BCG Growth-Share Matrix (1 of 3)

Figure 7-3: BCG Growth-Share Matrix

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BCG Growth-Share Matrix (2 of 3)
• Question marks (wildcats and problem child)
– new products with the potential for success but need a
lot of cash for development
– To become stars, money must be taken from cash
cows and spent here

• Stars
– market leaders that are typically at or nearing 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

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BCG Growth-Share Matrix (3 of 3)
• Cash cows
– products that bring in far more money than is needed
to maintain their market share
– Usually in a declining stage of their life cycle, so their
money will be invested in new question marks
• Dogs
– Question marks unable to obtain market share in an
industry with a slowing growth rate become dogs
– products with low market share and do not have the
potential to bring in much cash

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Advantages and Limitations of
Portfolio Analysis (1 of 3)
Advantages
• Encourages top management to evaluate each of
the corporation’s businesses individually and to
set objectives and allocate resources for each
• Stimulates the use of externally oriented data to
supplement management’s judgment.
• Raises the issue of cash flow availability to use in
expansion and growth.
• Graphic depiction facilitates communication.
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Advantages and Limitations of
Portfolio Analysis (2 of 3)
Limitations
• Defining product/market segments is difficult.
• Suggest the use of standard strategies that can miss
opportunities or be impractical.
• Provides illusion of scientific rigor.
• Value-laden terms such as cash cow and dog can lead to self-
fulfilling prophecies
• No clear what makes an industry attractive or where a product
is in its life cycle.
• Naively following prescriptions of model may reduce corporate
profits if used inappropriately.
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Advantages and Limitations of
Portfolio Analysis (3 of 3)
Limitations
• Use of highs and lows to form categories is too simplistic.
• 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.
• Market share is only one aspect of overall competitive
position.

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Corporate Parenting
• 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
– Generates corporate strategy by focusing on
the core competencies of the parent
corporation and the value created from the
relationship between the parent and its
businesses

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Developing a Corporate
Parenting Strategy
1. Examine each business unit in terms of its
strategic factors.
2. Examine each business unit in terms of areas in
which performance can be improved.
3. Analyze how well the parent corporation fits with
the business unit.

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