Strategic formulation: corporate strategy

Strategic formulation: corporate strategy

1. Bushra Iram

2. Strategy formulation: Corporate Strategy

3. Strategy formulation: Strategy formulation is the process by which an organization chooses the most appropriate courses of action to achieve its defined goals. This process is essential to an organization’s success, because it provides a framework for the actions that will lead to the anticipated results. Strategy formulation requires a defined set of six steps for effective implementation. Those steps are: 1. define the organization, 2. define the strategic mission, 3. define the strategic objectives, 4. define the competitive strategy, 5. implement strategies, and 6. evaluate progress.

4. What is corporate strategy A corporate strategy entails a clearly defined, long-term vision that organizations set, seeking to create corporate value and motivate the workforce to implement the proper actions to achieve customer satisfaction . Corporate strategy deals with three key issues facing the corporation as a whole: 1. The firm’s overall orientation toward growth, stability, or retrenchment ( directional strategy ) 2. The industries or markets in which the firm competes through its products and business units ( portfolio analysis ) 3. The manner in which management coordinates activities and transfers resources and cultivates capabilities among product lines and business units ( parenting strategy )

5. Directional Strategy Directional strategy  is the game plan a company decides on and implements to grow business, increase profits, and accomplish goals and objectives . Small businesses to large corporations can create their own types of directional strategies that work for the focus and scope of each individual business. For example, certain companies may find that a directional portfolio strategy works best, while other businesses may choose to follow a parenting directional strategy.

6. Corporate Directional Strategies GROWTH Concentration Vertical Growth Horizontal Growth Diversification Concentric Conglomerate STABILITY Pause/Proceed with Caution No Change Profit RETRENCHMENT Turnaround Captive Company Sell-Out/Divestment Bankruptcy/Liquidation

7. Corporate Directional Strategies A corporation’s directional strategy is composed of three general orientations ( sometimes called 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.

8. Growth strategies E xpand the company’s activities . The two basic growth strategies are: Concentration Diversification

9. Concentration If a company’s current product lines have real growth potential, concentration of resources on those product lines makes sense as a strategy for growth. The two basic concentration strategies are: vertical growth Horizontal growth .

10. Vertical growth Vertical growth can be achieved by taking over a function previously provided by a supplier or by a distributor . Vertical growth results in vertical integration Full Integration Tapper Integration Long-Term Contract Quasi- Integration

11. Full Integration: Under full integration , a firm internally makes 100% of its key supplies and completely controls its distributors. Tapper Integration: With taper integration , a firm internally produces less than half of its own requirements and buys the rest from outside suppliers. Quasi-Integration : With 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. Long-Term Contract: A re agreements between two firms to provide agreed-upon goods and services to each other for a specified period of time.

12. Horizontal Growth. A firm can achieve horizontal growth by expanding its operations into other geographic locations and/or by increasing the range of products and services offered to current markets . Horizontal growth results in horizontal integration —the degree to which a firm operates in multiple geographic locations at the same point on an industry’s value chain.

13. International Entry Options for Horizontal Growth Research indicates that growing internationally is positively associated with firm profitability. Some of the most popular options for international entry are as follows: Exporting : A good way to minimize risk and experiment with a specific product is exporting , Franchising : Under a franchising agreement, the franchiser grants rights to another company to open a retail store using the franchiser’s name and operating system.

14. Licensing: Under a licensing agreement, the licensing firm grants rights to another firm in the host country to produce and/or sell a product. Joint Ventures: Forming a joint venture between a foreign corporation and a domestic company is the most popular strategy used to enter a new country. Acquisitions: A relatively quick way to move into an international area is through acquisitions—purchasing another company already operating in that area. Green-Field Development: If a company doesn’t want to purchase another company’s problems along with its assets, it may choose green-field development and build its own manufacturing plant and distribution system.

15. Production Sharing: Coined by Peter Dracker, the term production sharing means the process of combining the higher labor skills and technology available in developed countries with the lower-cost labor available in developing countries. Turnkey operations: are typically contracts for the construction of operating facilities in exchange for a fee. The facilities are transferred to the host country or firm when they are complete. BOT Concept: The BOT (Build, Operate, Transfer) concept is a variation of the turnkey operation. 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.

16. Diversification Strategies According to strategist Richard Rumelt , companies begin thinking about diversification when their growth has plateaued and opportunities for growth in the original business have been depleted. Concentric (Related) Diversification. Growth through concentric diversification into a related industry may be a very appropriate corporate strategy when a firm has a strong competitive position but industry attractiveness is low.

17. Conglomerate (Unrelated) Diversification. When management realizes that the current industry is unattractive and that the firm lacks outstanding abilities or skills that it could easily transfer to related products or services in other industries, the most likely strategy is conglomerate diversification —diversifying into an industry unrelated to its current one.

18. 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.42 Although the research is not in complete agreement, growth into areas related to a company’s current product lines is generally more successful than is growth into completely unrelated areas.

19. STABILITY STRATEGIES A corporation may choose stability over growth by continuing its current activities without any significant change in direction . Pause/Proceed with Caution Strategy: is , in effect, a timeout—an opportunity to rest before continuing a growth or retrenchment strategy. No-Change Strategy: is a decision to do nothing new—a choice to continue current operations and policies for the foreseeable future. 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.

20. RETRENCHMENT STRATEGIES A company may pursue retrenchment strategies when 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 . These strategies impose a great deal of pressure to improve performance. Turnaround Strategy: emphasizes the improvement of operational efficiency and is probably most appropriate when a corporation’s problems are pervasive but not yet critical.

21. Captive Company Strategy: involves giving up independence in exchange for security. A company with a weak competitive position may not be able to engage in a full-blown turnaround strategy. Sell-Out/Divestment Strategy: If a corporation with a weak competitive position in an industry is unable either to pull itself up by its bootstraps or to find a customer to which it can become a captive company, it may have no choice but to sell out. Bankruptcy/Liquidation Strategy: When a company finds itself in the worst possible situation with a poor competitive position in an industry with few prospects, management has only a few alternatives—all of them distasteful.

22. BCG GROWTH-SHARE MATRIX Using the 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. The BCG Growth-Share Matrix has a lot in common with the product life cycle. As a product moves through its life cycle, it is categorized into one of four types for the purpose of funding decisions:

23. 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. 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. Cash cows typically bring in far more money than is needed to maintain their market share. Dogs have low market share and do not have the potential (because they are in an unattractive industry ) to bring in much cash.

24. BCG Growth-Share Matrix limitations : Unfortunately, the BCG Growth-Share Matrix also has some serious limitations: The use of highs and lows to form four categories is too simplistic. The link between market share and profitability is questionable.79 Low-share businesses can also be profitable.80 For example, Olivetti is still profitably selling manual typewriters through mail-order catalogs. 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 . Small competitors with fast-growing market shares are ignored. Market share is only one aspect of overall competitive position.

25. GE BUSINESS SCREEN General Electric, with the assistance of the McKinsey & Company consulting firm, developed a more complicated matrix. GE Business Screen includes nine cells based on long-term industry attractiveness and business strength competitive position.

26. ADVANTAGES OF PORTFOLIO ANALYSIS Portfolio analysis is commonly used in strategy formulation because it offers certain advantages : 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.

27. LIMITATIONS OF PORTFOLIO ANALYSIS Portfolio analysis does, however, have some very real limitations that have caused some companies to reduce their use of this approach: 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.

28. MANAGING A STRATEGIC ALLIANCE PORTFOLIO Managing groups of strategic alliances is primarily the job of the business unit. Its decisions may escalate, however, to the corporate level . Developing and implementing a portfolio strategy for each business unit and a corporate policy for managing all the alliances of the entire company. Monitoring the alliance portfolio in terms of implementing business unit strategies and corporate strategy and policies. Coordinating the portfolio to obtain synergies and avoid conflicts among alliances. Establishing an alliance management system to support other tasks of multi-alliance management.

29. Corporate Parenting Corporate parenting, in contrast, 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. corporate strategy involves three analytical steps : Examine each business unit (or target firm in the case of acquisition) in terms of its strategic factors. Examine each business unit (or target firm) in terms of areas in which performance can be improved. Analyze how well the parent corporation fits with the business unit (or target firm ).

30. HORIZONTAL STRATEGY AND MULTIPOINT COMPETITION A 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. In multipoint competition, large multi-business corporations compete against other large multi-business firms in a number of markets. These multipoint competitors are firms that compete with each other not only in one business unit, but also in a number of business units .

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