Chapter 7

Corporate Strategies I
Moses Acquaah, Ph.D.
377 Bryan Building
Phone: (336) 334-5305
Email: acquaah@uncg.edu

Lecture Objectives
Define corporate strategy.
Explain the difference between a single-business firm and a
multiple-business firm.
Discuss how corporate strategy is related to the other firm
strategies.
Explain the corporate strategic directions available to firms.
Describe the various organizational growth strategies.
Discuss the reasons/motives for diversification
Discuss the advantages and disadvantages of related &
unrelated diversification.
Explain how growth strategies can be implemented.
Describe when organizational stability is an appropriate
strategic choice.

What is Corporate Strategy?

Those strategies concerned with the broad and longterm questions of
what business(es) the organization is in or wants to be in
& what it wants to do with those businesses

Task involves
Moves to enter new businesses
Actions to boost combined performance of businesses
Ways to capture synergy among related businesses

Establishing investment priorities & steering

corporate resources into most attractive units

Single & Multiple Business

Organizations
Single business organizations
Operates primarily in only one industry (e.g., Coca-Cola
Beverage Industry; Wrigley Jr. Company Chewing
Gum)

Multiple Business Organizations

Operates in more than one industry
Example: PepsiCo Snack Food Industry business
(Frito Lay); & Beverage Industry
Philip Morris Companies Tobacco Industry; Brewery
Industry (Miller Brewery); & Food Processing Industry
(Kraft General Foods).

Corporate, Competitive &

Functional Strategies
Corporate strategy establishes the overall
direction that the organization hopes to go.
Competitive & functional strategies provide
the means or mechanisms for making sure
the organization gets there.

Possible Corporate Strategic

Directions
(1) Moving the organization ahead -Organizational Growth
(2) Keeping the organization where it is -Organizational Stability
(3) Reversing the organizations weaknesses or
decline -- Organizational Renewal

ORGANIZATIONAL GROWTH
Growth strategy
Involves the attainment of specific growth objectives by
increasing the level of an firms operations

Typical growth objectives for businesses

Increase in sales revenues
Increase in earnings or profits
Other performance measures

Growth objectives of not-for-profit businesses

Increasing clients served or patrons attracted
Broadening the geographic area
Increasing programs offered

Types of Growth Strategies

Concentration

International

Organizational
Growth
Diversification
Related
Unrelated

Horizontal
Integration

Vertical
Integration
Backward
Forward

Concentration Strategy
A growth strategy where the firm
Concentrates on its primary line of business
Looks for ways to meet its growth objectives
through increasing its level of operation in this
primary business

When a single-business organization

pursues growth, it is using the concentration
strategy

Concentration Strategy
Four concentration strategy options
Products
Current

Customers

Current

New

Product-Market
Exploration
Market
Development

New
Product
Development
Product/Market
Diversification

Concentration Strategy
Product-Market Exploration Option
Describes attempts by firm to increase sales of
its current product(s) in its current market(s) by
depending on its functional & competitive
strategies

Product Development Option

Firm create new product for use by its current
market (customers)

Concentration Strategy
Market Development Option
When a firm sell its current products in new
markets (additional geographic areas or market
segments not currently served by firm)

Product-Market Diversification Option

Where firm seeks to expand both into new
products & new markets
Single-business firm becomes a multiplebusiness firm since it is now operating in a
different industry

Concentration Strategy
Advantage
Organization becomes very good at what it does

Drawback
Organization is vulnerable to industry and other
external environmental shifts

Concentration strategy is used by both smallsized and large organizations

Vertical Integration Strategies

An organizations attempt to gain control of
Its inputs (backward integration) -- supplier
Its output (forward integration) -- distributor
Or both inputs and output
Purpose is to (1) reduce resource acquisition costs, & (2)
deal with inefficient operations

Vertical Integration
Considered a growth strategy because the firms
operations are expanded beyond primary business
Mixed empirical results as to whether strategy helps or
hurt performance
What is the role of outsourcing in achieving same
objective as vertical integration?

Vertical Integration Strategies

Benefits
Reduced purchasing &
selling costs
Improved coordination
of functions &
capabilities
Protected proprietary
technology

Costs
Reduced flexibility as
firm is locked into
products & technology
Create an exit barrier
due to existence of
assets that are hard to
sell
Difficulties in
integrating various
operations
Financial costs of
acquiring or starting up

Horizontal Integration Strategies

Expanding the firm's operations through combining
with competitors operating in the same industry &
doing the same things
It is an appropriate corporate growth strategy as
long as
It enables the company to meet its growth objectives
It can be strategically managed to attain a sustainable
competitive advantage
It satisfies legal and regulatory guidelines

Diversification Strategies
A corporate growth strategy in which a firm
expands its operation by moving into a
different industry
Many reasons or motives for diversification
Two major types of diversification
Related (concentric) diversification
Unrelated (conglomerate) diversification

Why Do Firms Diversify?

To Grow
Increase sales & profitability beyond what firms core
businesses can provide
Managerial self-serving behavior -- compensation
Managerial hubris -- pride or status that come from
managing a large business

To more fully utilize existing resources and

capabilities
Skills in sales & marketing, general management skills
& knowledge, distribution channels, etc.

Why Do Firms Diversify?

Risk reduction and/or spreading
Escape from unattractive or undesirable industries (e.g., tobacco &
oil companies)
Stability of profit flows (CAPM: systematic vs. unsystematic risks;
shareholders & diversified portfolios)

To make use of surplus cash flows

Large cash balances attract corporate raiders
Use cash balances to avoid hostile takeovers

To build shareholder value

Create synergy among the businesses of a firm
Make 2 + 2 = 5: The whole should be greater than the sum of the
parts

Why Do Firms Diversify

Synergy can be obtained in three ways
Exploiting economies of scale
Exploiting economies of scope
Efficient allocation of capital through the use of portfolio
management techniques

Problems that prevent diversified firms from

realizing synergies
A poor understanding of how diversification activities will fit
or be coordinated with existing businesses
Dangers or risks associated with the acquisition of businesses
Problems with the development of internal businesses

Why Do Firms Diversify?

Diversification is capable of increasing
shareholder value if it passes three tests:
The attractiveness test: The industry must be
structurally attractive or capable of being made
attractive
The cost-of-entry test: The cost of entry must not
capitalize all future profits
The better-off test: Either the new unit must gain
competitive advantage from its link with the
corporation or vice versa (i.e. synergy)

Related (Concentric) Diversification

Related (Concentric) Diversification
Diversifying into a different industry but one thats
related in some ways to the organizations current
operations
Search for strategic synergy, which is the
performance of the sum of the parts is better than the
whole
The idea that 2 + 2 = 5

Synergy happens because of the interactions and the

interrelatedness of the combined operations and the
sharing of resources, capabilities, & distinctive
competencies

Related Diversification
Builds shareholder value by capturing
cross-business strategic fits
Transferring skills & capabilities from one
business to another
Sharing facilities or resources to reduce costs
Leveraging the use of common brand name
Combining resources to create new competitive
strengths and capabilities

Related Diversification
Advantages or Benefits
Opportunities to achieve economies of scale and scope
through skill transfers, lower costs, common brand name,
technology, etc.
Opportunities to expand product or service offerings and
preserve unity in businesses

Disadvantages
Complexity and difficulty of coordinating different, but
related businesses (e.g. Philip Morris General Food and
Kraft subsidiaries)

Related diversification is a strategy-driven approach

to creating shareholder value

Unrelated Diversification
Diversifying into completely different
industry from the firms current operations
Firm move into industries where there is
No strategic fit to be exploited
No meaningful value chain relationships
No unifying strategic theme

E.g.: GE; Walt Disney; Sara Lee

Approach is venture into any business with
good profitability prospects

Unrelated Diversification
Targets for unrelated diversification
Firms with undervalued assets
Firms in financial distress
Firms with bright growth prospects but limited capital

Advantages
Business risk spread over different industries
Efficient allocation of capital resources
Stability of profits
Enhanced shareholder value

Unrelated Diversification
Disadvantages
Difficulties of competently managing many
diverse businesses
No strategic fits which can be leveraged into
competitive advantage
Unrelated diversification is a finance-driven
approach to creating shareholder value

Implementing Growth Strategies

Mergers & Acquisitions
A merger is a legal transaction in which two or
more organizations combine through an exchange
of stock, but only one firm actually remain
An acquisition is an outright purchase of an
organization by another
What is a Takeover?

Implementing Growth Strategies

Internal Development
Organization chooses to expand its operation by
starting a new business from scratch
Choice between mergers-acquisition and internal
development depends on: (See Table 7-4)

The new industrys barriers to entry

Relatedness of new business to the existing one
Speed & development cost associated with each approach
Risks associated with each approach
Stage of the industry life cycle

Implementing Growth Strategies

Strategic Partnering
When two or more firms establish a legitimate
relationship by combining their resources, core
competencies, distinctive capabilities for some
business purpose
Arrangement can be used to implement any of
the growth strategies
Vertical Integration
Horizontal Integration
Related Diversification

Implementing Growth Strategies

Types of Strategic Partnerships
Joint Venture (JV)
Two or more separate organization form an
independent organization for strategic purposes
Partners usually own equal shares of new venture
Used when partners do not want to be legally joined

Long-Term Contract
Legal contract between organizations covering a
specific business purpose
Typically between an organization & its suppliers

Implementing Growth Strategies

Types of strategic Partnerships (contd)
Strategic Alliance
Two or more firms share resources, capabilities or
competencies to pursue some business purpose
Similar to JVs but no formation of a separate entity
Often pursued in order to
Partners reap benefits of expanded operations

ORGANIZATIONAL STABILITY
A strategy where the organization maintains its
current size and current level of business
operations
When is stability an appropriate strategy?
Industry is in a period of rapid upheaval with several
key industry & external forces drastically changing,
making future highly uncertain
Industry is facing slow or no growth opportunities
Many small business owners follow stability strategy
indefinitely

ORGANIZATIONAL STABILITY
When is stability an appropriate strategy?
Organization has just completed a frenzied period
of growth & needs to have some down time in
order for its resources & capabilities to build up
strength again
large firm in large industry at maturity stage of
industry life cycle

Implementation of Stability Strategy

Not expanding organizations level of operation
Should be a short-run strategy