Strategy Formulation: Corporate Strategy

STRATEGIC ANALYSIS IN MULTI-BUSINESS COMPANY

Evaluate the relative attractiveness of each industry Evaluate the relative competitive positions and business strength of each of the companys business units. Rank the past performance of different business units from best to worst and rank their future performance prospects from best to worst.

STRATEGIC ANALYSIS IN MULTI-BUSINESS COMPANY

Determine which businesses have important strategic fits with other businesses in the portfolio and how well each business fits in with the parent companys direction and strategy. Rank the business units from highest to lowest in investment priority.

Corporate Strategy

Three Key Issues: Firms directional strategy Firms portfolio strategy Firms parenting strategy

Corporate Directional Strategies

Corporate Strategy
Directional Strategy:
Orientation toward growth
Expand? Growth and expansion through internal development or acquisitions, mergers, or strategic alliances? Organic and Inorganic??

Corporate Strategy
Growth Strategies:
External mechanisms:
Mergers
Transaction involving two or more firms in which stock is exchanged but only one firm survives.

Acquisition
Purchase of a firm that is absorbed as an operating subsidiary of the acquiring firm.

Strategic Alliance
Partnership of two or more firms

Corporate Strategy
2 Basic Growth Strategies:
Concentration
Current product line in one industry

Diversification
Into other product lines in other industries

Corporate Strategy
Basic Concentration Strategies:
Vertical growth Horizontal growth

Corporate Strategy
Concentration:

Vertical growth
Vertical integration
Full integration Quasi-integration

Backward integration Forward integration

Corporate Strategy

Basic Diversification Strategies:

Concentric Diversification Conglomerate Diversification

Corporate Strategy
Diversification:
Concentric:
Growth into related industry Search for synergies

Corporate Strategy
Diversification:
Conglomerate:
Growth into unrelated industry Concern with financial considerations

GROWTH STRATEGIES
INTENSIVE : MARKET PENETRATION MARKET DEVELOPMENT PRODUCT DEVELOPMENT FORWARD INTEGRATION BACKWARD INTEGRATION HORIZONTAL INTEGRATION CONCENTRIC CONGLOMERATE

INTEGRATIVE

DIVERSIFIED

Corporate Strategy

International Entry Options

Exporting Licensing Franchising Joint Ventures Acquisitions Green-Field Development

Corporate Strategy
Stability Strategies: Pause/proceed with caution No change

Profit strategies

Corporate Strategy
Retrenchment Strategies: Turnaround Selling out Bankruptcy Liquidation

Corporate Strategy
Portfolio Analysis BCG (Boston Consulting Group) Matrix
Product life cycle and funding decisions
Question marks Stars Cash cows Dogs

BCG Matrix

Index of Sustainable Growth

g*= [ P (1 D) (1 + L)] / [T P (1 D) (1+L)]
where P = Net profit before taxes/net sales x 100 D = Target dividends/profit after tax L = Total liabilities/net worth T = Total assets/net sales x 100

BCG MATRIX
THE MATRIX IS FORMED USING INDUSTRY GROWTH RATE AND RELATIVE MARKET SHARE AS THE AXES
EACH BUSINESS UNIT IN THE CORPORTAE PORTFOLIO APPEARS AS A BUBBLE ON THE FOUR CELL MATRIX, WITH THE SIZE OF THE BUBBLE SCALED TO THE PERCENT OF REVENUES IT REPRESENTS IN THE OVERALL CORPORATE PORTFOLIO

BCG [CONT.]
EARLY BCG METHODOLOGY PLACED THE DIVIDING LINE BETWEEN HIGH AND LOW INDUSTRY GROWTH RATES AT TWICE THE REAL GDP GROWTH RATE, PLUS INFLATION
THIS IS AN ARBITRARY DIVIDING LINE- ALL THAT IS CRITICAL IS THAT THOSE BUSINESSES WHICH ARE GROWING FASTER THAN THE ECONOMY AS A WHOLE WIND UP IN HIGH GROWTH CELLS (ABOVE THE HORIZONTAL LINE), AND THOSE GROWING SLOWER WIND UP IN THE SLOW GROWTH CELLS (BELOW THE HORIZONTAL LINE)

BCG [CONT.]
RELATIVE MARKET SHARE IS THE RATIO OF THE BUSINESSS MARKET SHARE TO THE MARKET SHARE HELD BY THE LARGEST RIVAL FIRM IN THE INDUSTRY
IF BUSINESS A HAS A 15% SHARE OF ITS INDUSTRYS TOTAL VOLUME, AND AS LARGEST RIVAL HAS 30%, AS RELATIVE MARKET SHARE IS 0.5 IF BUSINESS B HAS A MARKET-LEADING SHARE OF 40%, AND ITS LARGEST RIVAL HAS 30%, BS RELATIVE SHARE IS 1.3 ONLY BUSINESSES THAT ARE MARKET SHARE LEADERS WILL HAVE A RMS GREATER THAN 1. THEY WILL BE PLACED TO THE LEFT OF THE VERTICLE LINE ON THE MATRIX

PRESCRIPTION FOR ? MARKS

EITHER INVEST AGGRESSIVELY, AND GROW TO A STAR PERFORMER OR
DIVEST AND SHIFT RESOURCES TO BUSINESSES WITH BETTER PROSPECTS

BCG--STARS
BUSINESSES WITH HIGH RELATIVE MARKET SHARE POSITIONS IN HIGHGROWTH INDUSTRIES. THEY OFFER EXCELLENT PROFIT AND GROWTH OPPORTUNITIES. THESE ARE THE UNITS THE FIRM DEPENDS ON TO BOOST OVERALL PERFORMANCE OF THE PORTFOLIO. NEW STARS CAN BE CASH HOGS, HOWEVER

PRESCRIPTION FOR STARS

MAINTAIN MARKET SHARE LEADERSHIP INVEST ADEQUATELY TO KEEP ABREAST OF RAPID INDUSTRY GROWTH THESE BUSINESS ARE DESTINED TO BECOME THE CASH COWS OF THE FUTURE-AS INDUSTRY MATURES, ADJUST STRATEGY ACCORDINGLY

CASH COWS
THESE ARE BUSINESSES WHICH ARE MARKET SHARE LEADERS IN MATURE INDUSTRIES
THEY GENERATE SUBSTANTIAL CASH SURPLUSES OVER WHAT IS NEEDED FOR REINVESTMENT AND GROWTH THE SURPLUSES MAY BE USED TO PAY CORPORATE DIVIDENDS, FINANCE ACQUISITIONS, AND PAY FOR EMERGING STARS THE CORE BUSINESS IN ANY PORTFOLIO IS USUALLY A CASH COW

PRESCRIPTION FOR CASH COWS

EVERY EFFORT SHOULD BE MADE TO KEEP STRONG CASH COW BUSINESSES IN HEALTHY CONDITION TO PRESERVE THEIR CASH GENERATING CAPABILITIES OVER THE LONG TERM THE GOAL SHOULD BE TO FORTIFY AND DEFEND A COWS POSITION WEAKENING COWS, AS A RESULT OF STRONGER COMPETITION OR INCREASED CAPITAL REQUIREMENTS SHOULD BE SLAUGHTERED

DOGS
THESE ARE BUSINESSES IN SLOW GROWTH INDUSTRIES, WHERE WE ARE NOT THE MARKET LEADER THESE BUSINESSES HAVE POOR PROSPECTS FOR THE FUTURE TOO MANY FIRMS SPEND ALL THEIR TIME CONCENTRATING ON THEIR DOGS, RATHER THAN THEIR MORE PROMISING BUSINESSES

PRESCRIPTION FOR DOGS

SHOOT EM

GE Business Screen

Long-term industry attractiveness

Business strength/competitive position

INTERNAL FACTORS
MARKET SHARE SALES FORCE MARKETING CUSTOMER SERVICE R&D MANUFACTURING DISTRIBUTION FINANCIAL RESOURCES IMAGE PRODUCT SCOPE QUALITY / RELIABILITY MANAGERIAL COMPETENCE

EXTERNAL FACTORS
MARKET SIZE MARKET GROWTH RATE CYCLICALITY COMPETITIVE STRUCTURE BARRIERS TO ENTRY INDUSTRY PROFITABILITY TECHNOLOGY INFLATION REGULATION MANPOWER AVAILABILITY SOCIAL ISSUES ENVIRONMENTAL ISSUES POLITICAL ISSUES LEGAL ISSUES

General Electrics Business Screen

C Winners A High Winners B Question Marks D Winners E Medium

Average Businesses F Losers

Losers G Low Profit Producers Strong Average

Losers Weak

Business Strength/Competitive Position

STRATEGY IMPLICATIONS
THE IMPLICATIONS ARE SIMILAR TO THE BCG MATRIX.PRIORITY FOR INVESTMENT. BUSINESSES IN THE 3 UPPER CELLS ARE TOP PRIORITIES FOR INVESTMENT; NEXT ARE BUSINESSES IN THE LEFT-RIGHT DIAGONAL-THEY HAVE A MEDIUM PRIORITY FOR INVESTMENT;THOSE IN THE 3 LOWER RIGHT CELLS ARE CANDIDATES FOR DIVESTITURE

International Portfolio Analysis

2 Factors:
Countrys attractiveness
Market size, rate of growth, regulation

Competitive strength
Market share, product fit, contribution margin, market support

Portfolio Matrix for Plotting Products by Country

Competitive Strengths High Low

Invest/Grow

Dominate/Divest Joint Venture

Selective Strategies

Harvest/Divest Combine/License

Corporate Strategy
Portfolio Analysis Advantages:
Top management evaluates each of firms businesses individually Use of externally-oriented data to supplement management judgment Raises issue of cash flow availability Facilitates communication

Corporate Strategy
Portfolio Analysis

Disadvantages:
Difficult to define product/market segments Standard strategies can miss opportunities Illusion of scientific rigor Value-laden terms

Corporate Strategy
Corporate Parenting: Views the corporation in terms of resources and capabilities that can be used to build business unit value as well as generate synergies across business units.

Corporate Strategy
Corporate Parenting: Strategic factors
Those elements of a company that determine its strategic success or failure

Performance improvement Analyze fit

Corporate Strategy
Corporate Parenting:
Parenting-Fit Matrix
Summarizes the various judgments regarding corporate/business unit fit for the corporation as a whole.

Corporate Strategy
Corporate Parenting:
Parenting-Fit Matrix
2 Dimensions
Positive contributions parent can make Negative effects parent can have

Parenting-Fit Matrix
Low
Heartland Ballast Edge of Heartland

Alien Territory Value Trap High Low FIT between parenting opportunities and parenting characteristics High

Opportunity for Market Development

Scope for Diversification

Related Vertical integration (FI&BI) Concentric Unrelated Conglomerate

Market

New

Potential Market

Unknown Market

Old

TODAYS BUSINESS
Existing Market

Need for Product Development Available Market

Old

New

Product

MARKET PENETRATION
SEEKING INCREASING MARKET SHARE FOR PRESENT MARKETS THROUGH GREATER MARKETING EFFORTS. E.G. ?? WHEN : CURRENT MARKET IS NOT SATURATED WITH COMPANYS PRODUCTS USAGE RATE OF PRESENT CUSTOMERS COULD BE SIGNIFICANTLY INCREASED. COMPETITOR SHARE GOING DOWN ECONOMIC SALE IS BETTER HOW : FREQUENCY OF USES QUANTITY NEW APPLICATION TACTICS : ADVERTISEMENT TRADE DISCOUNTS PROMOTIONS PRICE

PRODUCT DEVELOPMENT
SEEKING INCREASING SALES BY MODIFYING/IMPROVING/ DEVELOPING NEW PRODUCTS. E.G. ?? WHEN : PLC - MATURITY STAGE TECHNOLOGY DEVELOPMENT TO MEET COMPETITION OF BETTER QUALITY AND PRICE HIGH GROWTH INDUSTRY STRONG R&D HOW : ADDITIONAL PRODUCT FEATURES EXPANSION OF PRODUCT LINE NEW GENERATION PRODUCTS

FORWARD INTEGRATION
GAINING OWNERSHIP OR INCREASING CONTROL OVER DISTRIBUTOR OR RETAILER E.G. ?? WHEN : ADVANTAGE OF VALUE ADDITION CHAIN MONEY & RESOURCES INDUSTRY IS GROWING/WILL GROW DEMAND OF EARLIER PRODUCT IS INCREASING

BACKWARD INTEGRATION
SEEKING OWNERSHIP OR INCREASING CONTROL OF SUPPLIERS (COST ADVANTAGE) E.G. ?? WHEN : SUPPLIERS UNRELIABLE/ENPENSIVES/ INCAPABLE SUPPLIERS FEW, COMPEITION HIGH GROWING INDUSTRY COMPANY HAS RESOURCES COST ADVANTAGE

HORIZONTAL INTEGRATION
SEEKING OWNERSHIP/CONTROL OF COMPANY

E.G. ??
WHEN :

TO BEAT COMPETITION GROWING INDUSTRY ECONOMICS OF SCALE RESOURCES

MARKET DEVELOPMENT
INTRODUCING PRESENT PRODUCTS INTO NEW GEOGRAPHICAL AREA / MARKET E.G. ?? WHEN : NEW CHANNEL OF DISTRIBUTION ARE AVAILABLE/RELIABLE/INEXPENSIVE/ GOOD QUALITY ORGANISATION IS SUCCESS NEW UNTAPPED/UNSATURATED MARKET HAS NEEDED RESOURCES EXCESS PRODUCTION CAPABILITY DOMESTIC/GLOBAL SCOPE INCREASING

CONCENTRIC DIVERSIFICATION
ADDING NEW BUT RELATED

E.G. ??
WHEN :

NO-GROWTH / SLOW INDUSTRY EXISTING GOODS SALE INCREASING SYNERGY POSSIBLE EXPERTISE AVAILABLE PLC - END

CONGLOMERATE DIVERSIFICATION
ADDING NEW BUSINESS BUT UNRELATED E.G. ?? WHEN : DECLINING INDUSTRY AVAILABLE RESOURCES INVESTMENT OPPORTUNITY PRODUCT MARKET SATURATED LEGAL CONSTRAINTS

JOINT VENTURE
TWO OR MORE THAN TWO ORGANISATIONS FORM A COMPANY FOR COMMON OBJECTIVE E.G. ?? WHEN : SKILL NOT AVAILABLE TOO LARGE A PROJECT RISK IS TOO HIGH REQUIRED FUNDS NOT AVAILABLE

What it entails?
Which business Corporation should be in and should be out? Same as business strategy, in case of single business unit Also decides [a] Future Direction [b] Resources, Risk & Returns prioritization [c] Corporate Parenting Advantages