Chapter 3

3.1

Background A number of considerations as well as theoretical principles were discussed in Chapter 2 as

regards to realities in the business that necessitate changes in the conduct of business every now and
then. These theories and principles were attributed to as drivers and motivators constantly reminding
business managers to be concerned with addressing the challenges of competition in the business and
consideration for strategic management as well.

Amidst a variety of theories and principles that drive business managers and strategists to be Creative,
innovative and skillful in terms of outcompeting or edging outfits rivals in the business, some of them
stand out than the rest. And if there is any other theory and framework that has somehow greatly
influenced the popularization of the concept of strategic management, one of them or if not the most
dominant of them all, is that of Michael Porter's business competition model introduced in the 1980s: Its
context and component are somehow numerous and need some elaboration that a separate chapter
has been devoted to in this book.

The traditional concept of business competition whereby players within the industry and direct
competitors are very much concerned with how to outdo or outwit each other and be market leaders in
their territory remains to be a concern of business managers. With the advent of the concepts of
strategic management, the popularization of Porter's five forces model and a variety of factors that
make business somehow difficult, the traditional view on business competition has been waning out.
Michael Porter's competition model has played a key role and influence in the practice of strategic
management.

3.2 Porter's Competition Model There is no doubt that in many ways, Michael Porter has made
substantial contribution in the field of strategic management via his business competition model which
originally comes in five major forces; hence, the so-called Porter's Five Forces Competition Model. Back
in the 1980s, the model espoused by Michael Porter was introduced and noticed by business managers
eventually becoming a popular theory in business management in general and in the field of strategic
management in particular. The theory advocates that other than the competition or rivalry among
business organizations producing or selling the same or similar products in the same market sector or
segment, there are other factors or forces that drive business competition. The role of these factors
outside of the traditional perception of competition in the business is so strong that has somehow
justified the need not only for simple business planning but the unique opportunity for practicing
strategic management. The. kind of competition expounded by Michael Porter goes beyond the domain
of price, kind, and quality aspects as dominant factors in competition. When it was introduced, the
model included five major forces but has been expanded to include another important force lumped
into what is called the stakeholders group.

The business competition model espoused by Michael Porter is shown in Figure 14. Originally, Michael
Porter's competition model consists only of five major forces; hence, it was once called Porter's Five
Forces Model. In its original context, the then five forces referred to include rivalry among competing
sellers’ suppliers of key inputs, substitutes, buyers, and potential new entrants. Recently, the said
business competition mode comes with a sixth major component known as stakeholder as shown in
Figure 15. The specific roles played by the forces of the business competition model are individually
addressed or discussed below.

3.3 Rivalry among Competing Sellers

Rivalry among competing sellers or producers constitutes the traditional view of business competition
and this is positioned in the middle block in Porter's competition model. The middle block in Porter's
business competition model refers to the key players or direct competitors within the industry or sector
offering the same or similar products or services. These are the business organizations trying to outdo
each other and eyeing for a share in the market.

For strategic management purposes, rivalry among competing sellers is the most powerful and
important aspect of Porter's competition model. Michael Porter points out that the big factor
determining the strength of rivalry is how actively and aggressively are rivals employing the various
weapons of competition in jockeying for a stronger market position and seeking bigger sales. In
particular, Thompson and Strickland identified the matters of utmost concern; in this group are the
following issues:

a) is price competition vigorous;

b) active efforts to improve quality;

c) are rivals racing to offer better performance features;

d) are rivals racing to offer better customer service;

e) a lot of advertising/sales promotions;

f active efforts to build a stronger dealer network;

g) active product innovation; and

h) active use of other weapons of rivalry.

3.3.1 What causes rivalry to be stronger?

Rivalry among competing sellers may be strong or weak depending on certain conditions. Among the
factors that result to strong or active rivalry and competition among businesses engaged in similar
products or services are as follows:

a) active jockeying for position among rivals and frequent launches of new offensives to, gain sales and
marker share;

b) a number of firms that are relatively equal in size and capability;

c) slow market growth;

d) industry conditions tempt some firms to go on the offensive to boost volume and market share;

e) customers have low costs in switching to rival brands,

f) a successful strategic move carries a big payoff;

g) costs more to get out of business than to stay in; and

h) firms have diverse strategies, corporate priorities, resources, and countries of origin.

3.3.2 Determinants of rivalry

Other than the other factors that cause or result to rivalry within the industry to be considered stiff and
threatening, Pitts and Lei (2000) have identified determinants to rivalries within the sector such as the
following:

a) the level of industry's growth;

b) fixed (or storage) cost/value added; 5

c) intermittent overcapacity;

d) product differences;

e) brand identity;

f) switching costs; and

g) concentration and balance.

3.4 Suppliers of Key Inputs

This includes another group of business organizations outside the middle box of Porter's competition
model in the sense that they do not pose as direct threat to competition. In a sense, the role of suppliers
is to provide inputs or doing supportive role to the key players belonging to the middle box who are
competing with one another. This group includes suppliers of raw materials and other inputs to products
and services offered by the key players in the market or the rivals identified in the middle block of the
Porter model. They are considered part of the competition because of their potential to join the foray by
producing a product or service and joining the direct competition with existing business they used to
deal with as suppliers. In a monopolistic or cartelized situation, suppliers can manipulate prices to
achieve profit goals or favor some of their clients - thus making one of the key players more competitive
in pricing their product.

In the arena of strategic management, the notion that suppliers of raw materials are partners of the
business organization should be taken with apprehension and concern. This is so because suppliers of
raw materials are just like any other business any other business organization motivated and driven by
profit. It is only a matter of time whether to go beyond what they are doing now and go for business
expansion either by diversification or do forward or backward integration. The worst scenario is when a
supplier joins the foray of competition or be in the business concern usually served by the company it
used to serve or supply its product or service as raw material or input. Such an event or scenario may be
perceived as unfair and treacherous but that is the reality of business in a democratic society. Such a
situation will result to an additional player or rivalry within the middle block and situation that will make
competition even much stiffer.

3.4.1 Competitive force of suppliers

Outside of being directly involved in competing with the business organizations they are dealing with,
the competitive force or pressure that suppliers exert may come in many forms. Suppliers are
considered strong competitive force when the following situation prevails:

a) item makes up large portion of product costs, is crucial to production process, and/or significantly
affects product quality;

b) it is costly for buyers to switch suppliers;

c)they have good reputations and growing demand;

d) they can supply a component cheaper than industry members can make it themselves;

e) they do not have to contend with substitutes; and

f) buying firms are not important customers.

3.4:2 Determinants of supplier power

In addition to the competitive force of suppliers enumerated above, Pitts and Lei (2000) identified its
role as a threat to competition given the presence or existence of the following situations:

a) differences in inputs;

b) switching costs of suppliers and firms in the industry

c) presence of substitute inputs

d) supplier concentration;

e) importance of volume to supplier;

f) cost relative to total purchase in the industry; and

g) impact of inputs on costs or differentiation.

3.4.3 Factors affecting supplier bargaining power

Strategically, to avoid turning suppliers into a completely force, there is no other way but to forge a
collaboration with suppliers. Collaboration with suppliers can be done in the form of strategic alliance or
joint venture thus creating competitive pressures in the form of the following situations:

a) Rival sellers are forming long-term strategic partnerships with select suppliers to promote just-in-time
deliveries and reduced inventory and logistic costs

i. speed availability of next-generation components

ii. enhance quality of parts being supplied

iii. reduce suppliers' costs which pave way for lower prices on items supplied

b) competitive advantage potential may accrue to industry rivals doing the best job of managing supply-
chain relationships
3.5 Substitutes

Substitutes generally refer to products or services which prospective buyers can buy or source
elsewhere whose utility, function and/or use is similar (or can act as substitute) to a desired product for
a lesser price or other reasons. Substitutes exert pressure in the market in that product switching (i.e.,
by buying a substitute) can lessen the demand for the product; hence, detrimental to the competing
players as a whole.

Resurgence of new technologies along with continuing efforts to invent and innovate among various
sectors of the economy has made a variety of products and services available to the market. Given
variances in utility and prices as well as prospective buyers exercising their rights and privileges to
choose have given rise to the idea of product substitution and switching.

Substitute products or services are capable of providing similar benefits, value or utility to the buying
party; hence, it is but natural for consumers to exercise their choice given the limitations at their end. In
some cases, the substitute may even have more benefits or utility to buyers and acquisition cost or price
more advantageous to the buyers. Whether the substitute provides more or less benefits to the buyer
and whether it comes more expensive or cheaper in price, the fact remains that there exists a product
or service which prospective buyers can look forward to. What is of major importance to strategists is
that with the substitute, may it be a product or service, there is a constant threat of product switching at
various levels or type of market. For whatever strategic reason, business organizations can switch to
another raw material inputs to their products to enhance competitiveness. Downstream, end-user
market also has the option to buy or switch to another product or service for a variety of reasons
perceived to be much more than that usual product or service which the buyer/consumer used to buy.

Substitutes may not bother business firms if they have a strong or competitive product and considerable
brand loyalty. However, it does matter to strategists when customers are attracted to the products of
firms in other industries. Examples of substitutes include as follows: a) eyeglasses vs. contact lens, b)
sugar vs. artificial sweeteners, c) newspapers vs. TV vs. the Internet, d) e-mail vs. overnight delivery vs.
"snail mail."

3.5.1 Factors affecting competition from substitutes

Product substitutes could be either weak or strong and they may or may not be a matter that should
bother strategists. However, when substitutes come in strong or threaten the company or the industry
as a whole, this is something that should be seriously looked into.

The following scenarios will indicate whether or not substitute products are a strong force and hence
should be given due consideration:

a) sales of substitutes are growing rapidly;

b) producers of substitute products add new capacities;

c) profits of substitute products are up; and

d) popularity of substitute products is growing.

3.5.2 Determinants of substitution threats

Business organizations should regularly monitor technology developments in the industry or sector they
are operating as this situation can lead to developing new products or service that can threaten the very
existence of the business. This is true not only because of the threat of competition from rivals; the
product itself may be considered obsolete if new products considered substitutes have made substantial
gain and this scenario can be threatening not only to one business organization but to the industry as a
whole. The extent of threats of product substitution is indicated by the following developments:

a) relative price of the substitutes;

b performance of the substitutes in the industry;

c) switching costs involved in the act of substitution,

d) buyer's propensity or penchant for substitutes; and

e) regulatory or other factors that tend to promote product substitution.

3.5.3 Switching cost

Switching cost is a factor that leads prospective customers to entertaining or considering the idea of
buying or patronizing other products for a variety of reasons. Basically, switching cost refers to the
amount the buyers can save or forego in exchange for buying other products or services they used to
patronize. For instance, when a product or service is made available or offered to a buyer, whether such
a product is considered substitute or not, the prospective buyer usually takes into account the
acquisition price (of course quality is another major consideration). When opting or buying another
product results to savings on the part of the buyer (without sacrificing the utility objective of the buyer),
the buyer will naturally prefer to buy the product or service of lower price thus displacing the other
product or service the customer used to patronize. In this case, there is no switching cost involved but
the direct benefit of savings on acquisition cost is the direct motivator on the part of the buyer.

In some cases, the product or service being offered is a direct substitute and the price is comparatively
high but the promise of immediate or short and long-term benefits is much more. In this case, there is
switching cost or additional expense in acquiring a product (may it be direct or indirect substitute) that
Would somehow scare the prospective buyer but the amount (or the differential price) involved and the
benefits it promises are matters that are inviting the prospective buyer to further think about it. The
switching cost involved (i.e., the price difference between the old and the new product being offered)
and the benefits it promises results to a decision to consider the idea of buying (or not) the substitute
offered. When the switching cost (i.e., additional cost to the customer is low and considered tolerable) is
perceived to be low or affordable on the part of the buyer, the opportunity for substitute product or
service to displace a traditional product is deemed high. Conversely, when the switching cost is deemed
considerably high or prohibitive on the part of the buyers, the possibility of product substitution is
considered minimal or nil.

3.6 Role of Buyers

Buyers are objects of desire of businesses competing in the same segment or industry. They refer to
prospective clients, buyers, users and consumers of the product or service whose varying purchasing
power and desire to bargain for a price or terms of payment can affect competitiveness of certain
players in the market.

Traditionally, prospective clients or buyers are simply considered as target market for business
organizations. For strategists, buyers are not simply target markets but they also constitute a sector
acting as driving force that can disturb competition or market conditions for after all, market is all about
demand and supply condition.

3.6.1 Competitive force of the buyers

Buyers are considered a strong competitive force in a variety of ways. This is particularly true when the
market is characterized by the so-called buyers' market condition (i.e., buyers influence price levels in a
particular market). Generally, however, buyers are a strong competitive force when they comprise a
large portion of the demand and purchase a sizable percentage of industry's product.

Specifically, the driving forces brought about by buyer’s concerns are as follows:

a) they buy in large quantities:

b) they can integrate backward;

c) industry's product is standardized;

d) their costs in switching to substitutes or other brands are low;

e) they can purchase from several sellers;

f) they have high purchasing power;

g) bargaining leverage;

h) buyer concentration versus firm concentration;

i) buyer switching cost relative to firms switching costs;

j) buyer information;

k) availability of substitute products;

l) price sensitivity;

m) product difference;

n) brand identity;

o) impact on quality and performance;

p) buyer profits; and

q) decision-maker incentives.
3.6.2 When is bargaining power of buyers weak?

Bargaining power of buyers relates to the ability of the prospective buyers to seek discounts or better
deals and prices given certain conditions favorable to them. This is particularly true in the Asian market
where bargaining and quest for discount1s prevalent even with a tag price indicated on the product.
Buyers are considered weak under the following scenarios or situations:

a) buyer switching costs to competing brands are high;

b) there is a surge in buyer demand; and

c) seller-buyer collaboration or partnering provides attractive win-win opportunities.

3.6.3 Dealing with the competitive force of buyers

As buyers appear to be smart in seeking for an advantageous price that somehow affects margin and
profit levels of suppliers or producers, entrepreneurs have to learn and live with this dilemma. While
there are many reasons why investors put up a business, businesses organizations are established
precisely to serve the market or the buyers in particular with profits in mind. There are a variety of
options to take in dealing the buyers; the bottom line is to contain with the competitive force or
influence of the buyers are leveraged or anchored upon any of the following:

a) the price buyers have to pay for the product – make it affordable;

b the quality of the product sold to buyers- make it acceptable to their standards and expectations;

c) services buyers can expect from the business-be sure after sales services are available whenever
needed; and d) other conditions of the sale- make sure that there are other attractive conditions that
come with the selling effort.

3.7 Potential and New Entrants

Potential and new entrants may not be considered active players but in Porter's business competition
model, they are considered threat to existing business concerns. Strategists or strategic managers in
general are supposed to be research-oriented and therefore, they must be aware of new developments
in the academe and research laboratories conscious of the fact that it only a matter of time that
inventions and innovations will be introduced to the market. While potential and new entrants’ must be
unnoticeable, they are considered factors to reckon with the moment a new business organization
comes into existence to launch its products or services. Potential and new entrants refer to business
organizations attempting to or have now joined the market trying hard to make a name for their product
and the business organization as a whole. As new players, the new entrants are likely to introduce a
marketing strategy that will somehow affect the market share of vulnerable players in the market.

3.8 Barriers to New Entrants

New entrants in the industry bring in extra capacity to the industry and any increase in demand can be
an opportunity for new entrants. William, Jenkins, et al. (2004) cited that if the new entrants have
similar product features and benefits to that of existing providers, then the new entrant threat is by
imitation. When this type of imitation produces a similar competitive position and a similarity of
resources, the new entrants face the following entry barriers (Williamson, Jenkins, et al.):
a) economies of scale;

b) access to secret technology (patented and not patented);

c) brand recognition;

d) capital cost entry;

e) access to distribution channels;

f) lack of experience in carrying operational activities leading to learning gaps, producing cost
disadvantages

g) high customer switching costs;

h) access to low-cost inputs (e.g., labor); and

i.) legislative barriers entry.

3.9 The Stakeholders

The term stakeholders emerged in the late 1990s and became widely popular by the early 2000. An
outgrowth of consumerism and intrusion of progressive minds in the business sector, the stakeholder
group is a sector of the economy or society which may be considered an indirect player in the business
arena unlike the other five major components of the Porter business competition model but may have
bearing upon the business as whole. This group includes lobbyists, nongovernment organizations
(NGOs), religious organizations, civil society, professional organizations/societies, grassroots
organization, and other bodies with indirect interests on a particular business. Parties in the stakeholder
group are not buyers, sellers or suppliers, but the noise, efforts and advocacies they pursue can have
substantial or devastating impacts among the players in the business.

CHAPTER 4

CORPORATE LEVEL STRATEGIES

4.1 Categories of Business Organizations

By ownership and structure, business organizations are generally organized either as a corporation
(stock or non-stock corporation), sole or single proprietorship, partnership, or an association like a
cooperative. While some business organizations exist alone and with no affiliation with other business
organization in terms of ownership and influence, others were purposely organized at the instance of
another business organization (i. e., a parent company based abroad or locally). Hence, this new
organization adds up to a preexisting business organization now becoming a family or group of business
organizations with a common set of purpose and directions. In a family or group of companies, new
business organizations or units are not only organized for purposes stated on record and beyond their
current priorities or order of business but for certain strategic reasons which are partly or never known
to employees of the various business organizations.

As the number of independently-organized business of organizations grows, they are now considered
group of companies or conglomerate so to speak. Within the family of member companies, one stands
out as a leading business organization often referred to as mother or parent company which serves as
the core or the unifying factor in the overall strategic direction of the entire business. This lead
organization, which in some cases organized as a holding firm or holding company influences other
small business organizations known as subsidiaries or affiliates which are either partly capitalized or
wholly-owned by the mother or parent company. Hence, some of the members of the business are
either called subsidiary, partly or wholly-owned or simply affiliates or members of the business family.
What is clear by then is that these members or affiliates and subsidiaries form part of the diversified
business group involved in a variety of business concerns with one given out business opportunities for
the other or one is serving as major contractor or supplier of member or affiliates of the business
empire.

4.2 The Nature of Corporate Level Strategy

Whether each member of a business group operates independently, or directly and indirectly supports
one another as interdependent business units, this matter need not be a direct 13 concern of the
employees of the various organizations belonging to the family but this aspect is a vital consideration at
the level of the Board of Directors or owners of the business. While the employees of the different
business units forming part of the conglomerate are focused on their own tasks and all members of the
business organization having their own vision and strategic objectives, each one has to contribute or.
has a role to play, in the vision and mission as well as corporate objectives of the mother firm. At this
stage, the mother or parent company has to be concerned with corporate strategy and the independent
or single business unit (SBU) forming part of the family of business or group of business concerns needs
to be bothered with its own business level strategy.

A highly diversified business organization means a group of individual business organizations with
individual charters or corporate status registered in appropriate agencies of the government.
Corporations and partnerships are typically registered with the Securities and Exchange Commission or
SEC (www.sec.gov.ph) whereas single or sole proprietorship categories of business concerns are
registered with the Department of Trade and Industry or DTI (www.dti.gov.ph). A group of business
organizations or a diversified company may take the form of family of corporations with individual
charters or it may also include business organizations registered as sole or single proprietorship. Socially-
conscious business groups with potential for doing philanthropic work and other public service efforts
associated with the so-called corporate social responsibility sometimes form a foundation or nonprofit
organization declaring it as part of the corporate empire. While there is a noble intent in putting up a
foundation as part of the conglomerate, others consider doing so as part of their tax shield efforts.

The nature of diversified business organization or conglomerates is such that a number of independent
business organizations need to be orchestrated or managed in a way that each business organization is
duty-bound to contribute to the short- and long-term profit objectives of the entire group. Hence, the
need for a corporate level strategy which shall serve as the guiding star of all the individual business
organizations belongs to the group or the conglomerate. The other form of strategy comes in the form
of business level and functional or operating level strategy.

Corporate level strategy essentially refers to broad or corporate-wide strategy synchronizing various
business level strategies into a cohesive and coordinated efforts to achieve the vision of the entire
business organization. It describes a company's overall direction in terms of its general attitude toward
growth and management of its various businesses and product lines Wheelen and Hunger opined that
corporate strategies typically fit within the three main categories of stability, growth, and retrenchment.
Corporate strategy is primarily about the choice of direction for the firm as a whole. Corporate strategy
is also concerned with managing various product lines and business units for maximum value. For
instance, corporate headquarters must play the role of the organizational parent (hence, the term
mother company) that it must deal with various products and smaller business units more popularly
known as subsidiaries or affiliates. Even though each product line or business unit has its own
competitive or cooperative strategy that it capitalizes to have a competitive advantage in the
marketplace, the corporation must coordinate these different business strategies so that the
corporation as a whole will succeed as a "family."

4.3 The 4 E's to Addressing Corporate Strategy

As a large organization that is highly diversified, a conglomerate and with business interests in various
sectors of the economy extending even beyond the geographical or political boundaries of the country
where the business operates, strategy at the corporate level can be addressed in at least four (4) ways
or options as shown in Figure 16. Thompson and Cats-Baril (2003) identified the four generic option as
shown in Figure 16 which for brevity the author labeled as 4 E's in addressing the corporate strategy
options. These four corporate strategy options referred to by Thompson and Cats-Baril that strategists
can consider are as follows:

a) Extend. It means extending the business by going beyond its current business model by adopting a
new business model or entering into new businesses.

b) Expand. This option takes the form of adding products and/or services within the context of the
company’s existing business concern or present area of operation.

c) Exit. This option takes the form of making some sacrifice by dropping some product lines and services
or business units deemed uncompetitive or unprofitable or less profitable to operate.

d) Enhance. This option takes the form of adding functionality or improving a product or service that is
currently being offered.

In light of the so-called digital economy or the information age, Aldrich (1999) opened up the idea of a
business process reengineering (BPR) as presented in the illustrative diagram shown in Figure 17. As
shown in Figure 17, the only choice to stay in the business in view of the challenges of the digital
economy is to either go for parity just to survive and take advantage of the Internet and a whole gamut
of information and communication technology to aspire for prosperity- or else- fail in the business.

4.4 Key Issues in Corporate Level Strategy

As the company grows in size and in number, the need to orchestrate and synchronize business
activities becomes complicated but a necessity. As the business organization becomes bigger, conflicts
and overlaps arise. Just like any other organization, the bigger the organization, the more it is difficult to
manage. As the company grows to become a conglomerate or a diversified business concern, top
management has to make a choice which way to go or which sector or industry to take a dominant role.
While it is desired that each business unit is expected to operate on profit and make profit contribution
to the coffers of the mother unit, this is a theoretical and ideal expectation. However, corporate
strategists believed that such ideal expectation may not be a universal guiding rule because for the
corporate strategists, the dominance in the market or the economy and profitability of the entire
business organization as a whole is considered more important than the level of profitability of any of its
business units. In fact, in some cases and some point in time, some business units or affiliate may
operate with subsidy from mother units or operate at a loss if only to perpetuate the good image of the
conglomerate as a whole.

Among others, the number and size of the business units within the business group and the market or
industry situation it is operating play a role in developing a corporate strategy. Among the key issues and
concerns that need to be addressed in a corporate strategy are as follows:

a) the firm's overall orientation towards growth, stability or retrenchment (directional strategy);

b) the industries or markets in which the firm competes through its products and business units
(portfolio strategy); and

c) the manner in which management coordinates activities, transfers resources, and cultivates
capabilities among product lines and business units (parenting strategy).

4.5 Strategic Choices at the Corporate Level

Williamson, Jenkins, et al. (2004) suggest that in generic term and at the corporate level, the strategic
choices can take the form of any of the following:

a) Business closure. This is an undesired act of folding up or shutting down non-profitable business units
to control or avoid further losses. This effort means avoiding or controlling dissipation of assets of the
firm and recover whatever is first out of the business. Operationally, this means declaring either
bankruptcy liquidation or simply closing down to withdraw from the business.

b) Business disposal. This calls for disposing or unloading some of the members,' Subsidiaries, affiliates
or investments in other business concerns deemed unprofitable or less profitable and/or deemed a
burden to the mother organization. Operationally, this option could take the form of divestiture by way
of selling out the entire business unit or selling its interests or shares in any of its affiliates or members
which the corporation partly owns.

c) Business acquisition. This is an option of business establishments meant to expand their size and
make their presence felt in whatever area they want to do business. It is a growth strategy that in
operations may take the form of acquisition and merger. The idea is to scout for existing firms that the
company can buy out as a whole or it may also take the form of acquiring substantial share in the
ownership or stockholding of the firm, thus, gaining control of its operations and making it a force to
reckon with as part of the conglomerate.

d) Business reorganization. This option may or may not lead to ownership changes among members of
the organization or the conglomerate nor it may result to business acquisition or disposal options.
Rather, it may result to restructuring, reorganizing and consolidating to make the entire organization
more responsive to the needs of the time. It is more of an internal shake-up which is either dressing
down or dressing 'up to make the conglomerate more manageable and competitive. Operationally, it
can take the form of consolidation, and retrenchment (downsizing) or reorganization that may even lead
to expanding organizational structure and manpower complement. Hence, it may also lead to hiring and
firing to make an organization lean and mean.
e) Business start-up. Realizing the need to create new business units to cater to market opportunities,
this option means purposely organizing another business concern instead of simply acquiring an existing
business organization or investing in it. The idea is to create a fresh and liability-free (as opposed to
acquisition or investments in other firms with existing inherent problems) as well as employ a dynamic
team of managers to pursue certain strategy business options to support the vision and mission of the
mother unit. The new business unit may be wholly owned by the firm or in partnership with other
strategy partners which can enhance competitiveness and profitability of the new investment. Typically,
top management of this new unit will come from the officers of the mother unit and also from its
strategic partner it opts to do so.

f) The impact of doing nothing different. Sounding weird and uncalled for, status quo can be an option
if after a thorough study and analysis such situation is deemed appropriate. At the corporate level, any
move to expand, reduce or invest requires serious study. For as long as there is no adverse effect in the
short-term, doing nothing but merely sustaining its market share and profitability is a valid option for
the time being. Operationally, this option is simply status quo which also comes in the form of pause or
no-change strategy as postulated by Wheelen and Hunger (2004).

4.6 The Corporate Expansion Option

Development and growth of the business is not limited to the idea of increasing the sales and income of
a business organization particularly among a group of businesses concerned owned or controlled by a
few investors. There is always that human urge and drive to expand further. Hence, what was once a
single business unit, eventually expands its business operations thereby metamorphosing into a
conglomerate. As a single business expands or grows into a number of companies or business units, the
need to develop a corporate strategy becomes a necessity.

Figuratively, the need and motivation to develop a corporate strategy is explained by the diagram shown
in Figure 18. As shown in Figure 18, a single business organization that is well managed is likely to grow
in size and in number eventually becoming a conglomerate or highly diversified company within many
individual business organizations forming part of the family. Necessarily, there will be a continuing
desire to expand either vertically or horizontally to maintain the company's stature in the industry to
expand even more.

The boundaries between corporate and business level strategies are diagrammatically explained in
Figure 19. As shown in Figure 19, a corporate strategy serves as the supreme strategy for the entire
business group or the business empire with business level strategy taking the form of specific and
company-level or business unit strategy designed to achieve the objective of specific members of the
group of companies - and one that is supportive to the corporate strategy. espoused by its mother
organization.

Another viewpoint of à corporate strategy is diagrammatically explained by Williamson, Jenkins, et al. as

shown in Figure 20. As shown in Figure 20, instead of the centralized corporate strategy radiating out to
form a variety of business levels strategic for each of the strategic business unit forming part of the
business group, there are several business organizations within the group having their own business
level strategies. The corporate strategy serves as the perimeter or limits within which the corporate
grouping will concentrate on with the mother business organization doing some kind of shepherding
role seeing to it that each of the strategic business unit plays within the industry or sector of the
economy it wants to dominate or have its presence felt.

Operationally, large business organizations or conglomerates establish a mother business organization

from which all the other members of the business group take a cue or signal what to do at their
respective levels. Very often, the mother units are organized as holding or management company with
lean and mean organizational structure as well as personnel complement. An example of this is the San
Miguel Corporation and Ayala Corporation. For San Miguel Corporation, under its wings and overall
supervision are a number of subsidiaries and affiliates with interests in food, soft drinks and beverages,
agribusiness and a variety of allied business concerns that are basic to the economy. Ayala Corporation
on the other hand, is another holding company with supervision over a number of business
organizations spanning real estate development and marketing, mall operations, transport and
telecommunications as well as several other business establishments. Common among the mother units
or holding companies is the secondment or detailing of some of its officers to serve as president, general
managers or chief executive officers in the subsidiary or affiliate companies to ensure that business level
strategies are attuned to or in line with the overall corporate strategy.

4.7 Vertical Integration Option

Among others, engaging in the business is bridging the gap between the raw material and the consumer
of product resulting from the processing of such' product. This bridging act results to the concept of
vertical integration. The concept of vertical integration evolves around the notion of how far or close a
business is from the source of raw materials or the final consumer of the product. Vertical integration
involves engaging in business activities to the level of sources of supply or forward in the direction of
final consumers as diagrammatically explained in Figure 18.

In more specific terms, vertical integration strategy is categorized by Harrigan (1983) as a short of
continuum as diagrammatically shown in Figure 21. The vertical integration continuum espoused by
Harrigan postulates that vertical integration strategy may be in full or in part ranging from outsourcing
to full integration. The components of the vertical integration advocated by Harrigan are as follows:

a) Full integration. Under this scenario, the firm internally makes 100 percent of its key supplies and
completely controls its distributors. This means that the firm ventures into the incredible task of creating
or producing all the raw materials it needs to be able to produce a product and does all the needed
services to push the product to the market and sell to its targeted market. By doing so, the business
controls both the supply and distribution chain hoping that the business can maximize the profit given
its role from production to distribution.

b) Taper integration. In this case, a firm internally produces less than half of its own requirements and
buys the rest from outside suppliers. This option takes the form of using its resources to contain a
majority of the inputs to its product so that it has a certain level of control of the market price. The
remaining minority of its inputs or materials is sourced from the open market.

c) Quasi-integration. In this concept, the company does make any of its key supplies but purchases most
of its requirements from outside suppliers that are under its partial ownership or control. This strategy is
somewhat different from taper integration in that it relies more on external sources for a large part of
its needs or raw material inputs for its product. The strategic advantage of this option, however, is that
it sources its raw materials from business organizations where it has investments (e.g., subsidiaries,
affiliates or wholly and partly-owned firms) thereby allowing the company preferred pricing, thus,
having relative advantage over firms sourcing its raw material inputs from the open market. Other than
sourcing its raw materials from subsidiaries or affiliates, it may source these raw materials from other
business organizations it has no interest or ownership but some sort of special arrangement.

d) Long-term contracts. In this scheme, the company signs an agreement or contract with another firm
providing agreed upon goods and services for a specified period off-time. Unlike in quasi-integration, the
company has no investment or ownership privilege upon the firms where it buys its raw materials or
inputs but the provision of the contract or memorandum of agreement or other forms of understanding
'somehow give the company a sort of stability and peace of mind insofar as procuring raw materials
whose acquisition cost has a bearing on the price of its product in the market, hence, its
competitiveness.

4.8 Forward Vertical Integration

Forward vertical integration is another corporate option where the firm engages in business activities in
the area of distribution and retailing of the product or service directly to the customers. What this
means is that a business organization that seeks ownership or is investing in business concerns dealing
with delivery or distribution of its own product lines including opening new retail outlets either fully or
partly-owned is involved in forward vertical integration.

4.8.1 Situations favoring forward integration

The idea behind forward integration is to gain more control of the business activities in the distribution
side in the hope that by doing so, the business can have better control of the market price of its
products or services in the desire that it would rake in more profits for the business. There are
conditions or scenarios favoring taking forward integration options and the following are just some of
them:

a) when an organization's present distributors are especially expensive, or unreliable, or incapable of

meeting the firm's distribution needs;

b) when the availability of quality distributors is so limited as to offer a competitive advantage to those
firms that integrate forward;

c) when an organization competes in an industry that is growing and is expected to continue to grow
markedly; this is a factor because forward integration reduces an organization's ability to diversify if its
basic industry falters;

d) when an organization has both the capital and human resources needed to manage the new business
of distributing its own products;

e) when the advantages of stable production are particularly high; this is a consideration because an
organization can increase the predictability of the demand for its output through forward integration;
and
f) when the present distributors or retailers have high profit margins; this situation suggests that a
company profitably could distribute its own products and price them more competitively by integrating
forward.

4.9 Backward Vertical Integration

Within the industry or sector it is currently serving, getting close to either the source of raw materials or
far away from it to be closer to the consumer side gives the business the option to do either backward
or forward form of vertical integration. This is explained by the diagram shown in Figure 18.

Backward vertical integration is a corporate option to engage in the business concentrating the efforts
at the stage of raw materials production or close the source of raw materials. What it means is that a
business organization investing in new businesses or buying other business concerns dealing with raw
materials or inputs to what they are presently doing is engaged in backward integration strategy.

4.9.1 Conditions favoring backward integration

As opposed to the forward integration option, doing backward integration strategy hopes to gain better
control of its raw materials by engaging in business concerns relating to production, trading and delivery
of raw materials to the business it is undertaking as doing so will hopefully mean lower production cost
for a product and, hence, a low market price for its output which will hopefully translate to
competitiveness.

Just like forward integration option, there are also conditions or scenarios that are considered conducive
to backward integration and some of them. are as follows:

a) when an organization's present suppliers are especially expensive, or unreliable, or incapable of

meeting the firm's needs for parts, components, assemblies, or raw materials;

b) when the numbers of suppliers is small and the number of competitors is large;

c) when the organization competes in an industry that is growing rapidly; this is a factor because
integrated-type strategies (forward, backward, and horizontal) reduce an organization's ability to
diversify in a declining industry;

d) when an organization has both capital and human resources to manage the new business of supplying
its own raw materials;

e) when the advantages of stable prices are particularly important; this is a factor because an
organization can stabilize the cost of its raw materials and the associated price of its product through
backward integration;

f) when the present supplies have high profit margins which suggest that the business of supplying
products or services in the given industry is a worthwhile venture; and

g) when an organization needs to acquire a needed resource quickly

4.10 Horizontal Diversification

The premises and presumption behind the idea of going into horizontal diversification is to allow
expansion by way of adding new products or services. Operationally, this can be done either by
developing new products or services through internal efforts (1.e., research and development) or adding
into its fold new organization with another kind of product or service may it be similar or different to
what the business is handling now. This option can be also done either by merger and acquisition of a
direct or even a non-competing business entity.

Horizontal diversification, however, is generally perceived as a strategy that evolves around the idea of
seeking ownership or increased control over the direct and indirect competitors of the business. Direct
competitors are those business concerns whose products and services are of the same kind with what is
offered by the business and where price and marketing strategies of each firm are strong determinants
to competitiveness. These firms include those firms in direct or head-on course with each other or
belonging to the rival firms within the industry. Indirect competitors on the other hand refer to those
business organizations whose products or services are not in direct collision course or head-on
competition with one another but are potential threats to the business because its products or services
are considered alternatives or substitutes. Business organizations having the same business operations
that somehow affect the level of competition among business rivals are considered indirect competitors.

Unlike vertical integration strategy which talks about whether going vertically forward or backward,
horizontal diversification 1s an option or strategy basically meant to expand the business sideward
either to the left or right side of the business. A firm can horizontally expand or diversify by dealing with
other products or services allied or related with what the company is doing now whether the product is
a new product or an existing product being handled by other business concerns, say a competing
product. For instance, the Philippine Long Distance Telephone Company invested in and eventually
controlled SMART Communications, Inc.

While horizontal integration talks about investments and seeking ownership in other firms, horizontal
diversification is an option that takes into account adding new products or services (to an existing list of
product or service lines) which may be either related or unrelated to what is selling now. What is clear is
that in horizontal diversification, the idea is to add a new line of product or service in the hope that it
can serve a new market and eventually strengthen its position in the other markets.

4.10.1 Situations favoring horizontal integration

Any move to integrate or diversify, either horizontally or vertically is a matter òf a proactive or reactive
bias of the management. A proactive initiative could be motivated by the desire of the top leadership to
be aggressive in the market. A reactive option takes the view of an active player in the market doing
certain efforts in response to an ongoing or emerging market scenario.

Whether the management takes a proactive or reaction option, there are certain conditions that favor
horizontal diversification such as the following:

a) when revenues derived from an organization's current products or services would increase
significantly by adding the new unrelated products;

b) when an organization competes in a highly competitive and/or a no-growth industry, as indicated by

low industry profit margins and returns;

c) when an organization's present channels of distribution can be used to market the new products to
current customers; and
d) when the new products have counter cyclical sales patterns compared to an organization's present
products.

4.11 Conglomerate Diversification

Getting into horizontal diversification either by investing or buying into business organizations directly or
indirectly or not competing with the firm can be categorized into either conglomerate or concentric
diversification. Conglomerate diversification is also known as unrelated diversification and concentric
diversification is also known as related diversification.

Conglomerate or unrelated diversification is a diversification. option that involves investing in or buying

into business organizations whose products and/or services have nothing to do or not related to the
kind of products or services it is presently dealing with. This option allows the company to venture into
other products or services not only as a fallback but as a venue or opportunity for other expansionary
options in the future.

4.11.1 Situations favoring conglomerate diversification

In an effort to extend growth beyond its turf, large companies dream of expanding their image beyond
profit objectives. Fame and corporate image beyond the boundaries of the industry or sector they are
known for are among the motivations that drive corporate giants to go into conglomerate
diversification. There are, however, reasons and justifications favoring conglomerate diversification and
here are some of them:

a) when an organization's basic industry is experiencing declining annual sales and profits;

b) when an organization has the capital and managerial talent needed to compete successfully in a new
industry

c) when an organization has the opportunity to purchase an unrelated business that is an attractive
investment opportunity;

d) when there exists financial synergy between the acquired and acquiring firm; note that a key
difference between concentric and conglomerate diversification is that the former should be based on
some commonality in market, product, or technology, whereas the latter should be based more on
profit considerations;

e) when existing market for an organization's present products are saturated; and

f) when antitrust action could be charged against an organization that historically has concentrated on a
single industry.

4.12 Concentric Diversification

Concentric or related diversification is a corporate diversification option that involves engaging or

dealing with products or services that are somehow related to or associated with what the firm is
presently handling. Doing this option is done either by investing in a new business or start-up or simply
investing in existing business organizations. This option will not only allow the business to grow by
investing in other profitable ventures but this is also a strategy to have in its fold a business concern
whose products or services it can make use of in the furtherance of its primary course of business. This is
also appropriate where the resources of the firm (e.g., human or financial resources) whose potentials
for growth and development remain unexplored or used to the fullest.

4.12.1 Situations favoring concentric diversification

Unlike conglomerate diversification which seeks to grow and expand beyond its usual turf, concentric
diversification focuses on furthering its business dominance in the industry or sector the company is
known for by way of exploring options to handle business or products closely related to what the
business is handling at present. Doing so is possible and favorable under the following conditions:

a) when an organization competes in a no-growth or a slow growth industry;

b) when adding new, but related products significantly would enhance the sales of current products;

c) when new, but related, products could be offered at highly competitive prices;

d) when new, but related, products have seasonal sales levels that counterbalance an organization's
existing peaks and valley;

e) when an organization's products are currently in the decline stage of the product life cycle; and

f) when an organization has a strong management team.

4.13 The Need for Strategic Fit

Opting to venture into vertical integration may it be forward or backward and/or engaging into
horizontal diversification may it be conglomerate or concentric option requires considerations for the
concept of strategic fit or synergy as other authors and scholars put it.

The concept of strategic fit refers to the relatedness in making decisions concerning the appropriateness
of the strategic moves’ vis-a-vis the various operating divisions or business units of the company. Under
normal conditions, there is a presumption that a business organization expanding into other areas takes
into account the direct or indirect relationship of the investments in new business with what the
business is presently engaged in. In other words, there is a strategic fit or degree of relationship or
connectivity among the business concerns owned or managed by the mother unit of the business. The
concept of strategic fit assumes that a corporation should pursue only those strategic alternatives in
which it has a certain level of competence so that there will be no difficulty in running or managing the
group of business concerns as they grow even if they are considered structurally or organizationally
independent.

The concept of strategic fit has been categorized by Thompson and Strickland into three areas as
follows:

a) Product fit. This kind of fit is achieved when distribution channels, sales forces, promotion techniques,
or customers can be handled at the same time for more than one product or service. For instance, a soft
drink business organization can engage in the business dealing with bottled mineral water or any other
product where it can make use of its expertise in marketing and distributing soft drink products.
b) Operating fit. This type of fit involves economies being realized in certain areas like purchasing,
warehousing, production and operations, research and development, or personnel from more than one
product or services. For instance, a company dealing with production of pants and other clothing lines
can enter into the business dealing with underwares and other clothing accessories.

c) Management fit. This kind of fit occurs when managers are given responsibility over areas of
accumulated exposure from one line of business to another. For example, a company with record
success in life insurance business, may opt, to enter in a business dealing with pre-need plans (e.g.,
educational plans, memorial plans, and the like).

4.14 Directions of Corporate Level Strategies

Among conglomerates or diversified business group, the group may expand forward, move somehow
backward by reducing its size or simply stay put. In similar context, corporate level strategy comes in
three general orientations, sometimes called grand strategies. Wheelen and Hunger (2004) theorize that
these strategies are directional in nature and the set of direction it may wish to take is generally
categorized as follows:

1. Growth strategy expands the company's activities,

2. Stability strategies make no change to the company’s current activities; and

3. Retrenchment strategies reduce the company's level of activities.

4.14.1 Growth strategy options

Growth strategy is usually done by large corporations or conglomerates basically aiming at the growth
potentials in terms of size or magnitudes. Growth strategies are essentially designed to achieve growth
in sales, assets, profits, or some combination. Growth could be either internal or external in context.
Internal growth could be achieved by encouraging affiliate business organizations to increase their work
force, production and sales levels. It may also mean not only growth for each of the business firms
within the corporate structure but also the creation of new businesses either in horizontal or vertical
direction. For conglomerates or diversified firms, horizontal internal growth may involve creating new
companies that operate in a related or unrelated business. Vertical internal growth on the other hand
may come in the form of creating related on unrelated businesses within the firm's vertical channel
distribution taking the form of enhanced supplier-customer relationships.

For large organizations as in the corporate level, the following options or strategies fall within the
category of growth strategy:

a) Merger involves a transaction involving two or more corporations in which a stock is exchanged or
swapped among independent business organizations from which only one company survives. Merger
usually occurs between firms of somewhat similar size and are usually "friendly" in nature, meaning
there was a mutual consent among merging companies and not a hostile takeover.

b) Acquisition is an option that involves the purchase of a company then completely absorbed as an
operating subsidiary or division of the acquiring corporation. Like merger, acquisition may occur
between firms of different sizes but, can be either "friendly" or "hostile."
c) Strategic alliance is another option involving partnership among two or more corporations or
business units to achieve strategically significant objectives that are mutually beneficial. The alliance
generally does involve stock purchase or swap but merely normalize the union in the form of a
memorandum of agreement memorandum of understanding or other form of formal or written
agreement between parties designed achieve mutually beneficial goals.

4.14.2 Stability strategies

A corporation may choose stability over growth by continuing its current activities without any
significant change in direction. Given this situation, this option is sometimes viewed as having lack of
strategy as the firm simply opts to stay put or maintain that current array of businesses. There are
presumptions and reasons behind opting for corporate stability strategy and these include this strategy
enables the corporation to focus managerial efforts on the existing businesses with the goal of
enhancing their competitive posture; b) senior managers may perceive that the cost of adding new
businesses may be more than the potential benefits with the passage of time, however, the corporation
may forego the stability strategy and under favorable circumstances again adopt one of the growth
strategies, or under less favorable conditions, some other appropriate strategy.

Operationally, the stability strategy may come in any of the following forms:

a) Pause/proceed with caution. This is in effect, a sort of time out. It is an opportunity to rest before
continuing a growth or retrenchment strategy. It is a very deliberate attempt to make only incremental
improvements until a particular environment situation changes. It is typically conceived as a temporary
strategy to be used until the environment becomes more hospitable or to enable a company to
consolidate its resources after a prolonged rapid growth.

b) No change strategy. It involves 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 corporations’ situation.

c) Profit strategy. It involves a decision to do nothing new in a worsening situation and instead, to act as
though the company's problems are only temporary. The profit strategy is an attempt to artificially
support profits when a company's sales are declining by reducing investment and short-term
discretionary expenditures. Rather than announcing the company's poor position to shareholders and
investment community at large, top management may be tempted to follow this very seductive
strategy. Blaming the company's problems on a hostile environment (such as antibusiness government
policies, unethical competitors, finicky customers, and/or greedy leaders, etc.) management defers
investment and/or cut expenses (such as R & D, maintenance, advertising expenses or even
salary/benefit cuts for management personnel) to stabilize profits during this period. It may even sell
one of its product lines for the cash flow benefits. Obviously, the profit strategy is useful only to help a
company get through a temporary difficulty.

4.14.3 Retrenchment strategies

The notion of retrenchment evolves around the concept of reduction in a variety of aspects usually in
terms of size, capital, personnel complement, and the like. It may take the form in any of the following:
a) Turnaround strategy. This strategy emphasizes on the improvement of operational efficiency and is
probably most appropriate when a corporation's problems are pervasive but not yet critical. The basic
turnaround strategy comes in two ways, namely:

i) Contraction. It is the initial effort to quickly "stop the bleeding" with a general across-the-
board cutback in size and costs.

ii) Consolidation. It implements a program to stabilize the now-learner corporation.

b) Sell-out/Divestment strategy. This strategy is resorted to when a company has a weak competitive
position in its industry and unable to either pull itself up by its bootstraps or find a customer to which it
can become a captive company. The sell-out strategy makes sense if management can still obtain a good
price for it shareholders and the employees can keep their jobs by selling the entire company to another
firm.

c) Bankruptcy strategy. Bankruptcy involves giving up management of the firm to the courts in return
for some settlement of the corporation's obligation. Top management hopes that 29 once the court
decides the claims on the company, the company will be stronger and better able to compete in a more
attractive industry.

d) Liquidation strategy. In contrast to bankruptcy, which seeks to perpetuate the corporation,

liquidation is the termination of the firm's business operation. Because the industry is unattractive and
the company too weak to be sold as a going concern, management may choose to convert as many
saleable assets as possible to cash, which is then distributed to the shareholders after all the obligations
are paid. The benefit of liquidation over bankruptcy is that the Board of Directors, as representatives of
the shareholders, together with the top management makes the decision instead of turning them over
to the court, which may choose to ignore shareholders completely.

4.15 International and Other Entry Options

International entry options strategies usually done by multinational or foreign-based organizations are
designed to explore other markets beyond their usual or original place of doing their business. When the
business profitability in domestic operations is not that attractive anymore and where opportunity for
international market exists, an effective corporate strategy s an entry into the international/global
markets if the financial position can afford it. In entering the international markets, the following
strategies can be explored:

a) Exporting. The basic and traditional or usual strategy to explore the foreign markets which basically
refer to shipping goods produced in the company's home country to other countries. This option means
that the export company usually engages local/domestic company distributor, dealer, indentors, ete.) to
handle its products services as distributors, dealers, or agents.

b) Licensing. It is covered by a document called licensing agreement and this is a scheme wherein the
licensing & firm grant rights to another firm in the host country produce and/or sell a product or service.
The license pays compensation to the licensing firm in return technical expertise and other
considerations referred to in the licensing agreement.
c) Franchising There in what is known as franchising agreement wherein the franchiser grants right a to
another company to open a business, usually a retail store, using the franchiser's name and operating
system. In exchange, the franchisee pays the franchiser a percentage of its sales as a royalty.

d) Joint venture. It involves formation and registration of a new business organization based on
investment sharing agreed upon and intents as well as purposes agreed upon. Companies often form
joint ventures (JV) to combine the resources and expertise needed to develop new products or
technologies. The joint venture option usually results to a new or third business organization managed
or operated by another independent parties though jointly owned or controlled by the joint venture
partners.

e) Acquisition. It is a quick way to move into an international arena and this is done by way of acquiring
or purchasing another company already operating in that area (country or region). Synergistic benefits
can result if the company acquires a firm with strong complementary product lines and a good
distribution network.

f) Greenfield development. It refers to building its own manufacturing plant and distribution system.
This is done in lieu of acquiring the entire company with all its inherent liabilities and problems which
can affect the firm's entry into the domestic market. This is usually a far more complicated and
expensive operation than acquisition, but it allows a company more freedom in designing the plant,
choosing its suppliers, and hiring workforce.

g) Production sharing. This scheme allows combining resources to pursue a business by sharing
whatever proceeds as may be agreed upon. The scheme combines the labor skills in developing
countries and technologies as well as capital available in the developed countries represented by its
investors.

h) Turnkey operations. This scheme generally comes in the form of a contract for the construction of
operating facilities in exchange for a fee. After the completion of the construction and technical
monitoring as to acceptability under the terms of the turnkey contract agreement, the facilities are
transferred to the host country or firm.

i) Management contract. It offers a scheme, as defined in the management contract, through which a
corporation may use some of its personnel to assist a firm in a host country or company for a specified
fee and period of time.

j) Build-Operate-Transfer or BOT concept. Usually adopted in government infrastructure projects, it is a

concept that is actually a variation of the turnkey contract. Instead of turning the facility (e.g., a power
plant or rail transport business) over to the host country when completed, the company operates the
facility for a fixed period of time during which it earns back its investment, plus a profit. It then turns the
facility over to the government at little or no cost to the host country

k) Outsourcing. It essentially refers to de-integration or unbundling of certain business activities

narrowing the scope of the firm's operations, focusing on performing certain "core" value chain
activities and relying on outsiders to perform the remaining value chain activities.

4.16 Strategic Alliance

Aside from the strategic options earlier discussed which involve investment outlays that may result to
restructuring and or forming new business organizations, strategic alliance is another option taken by
business organizations for the purpose achieving mutual advantage and certain strategic or specific
goals.

Strategic alliance is an option to take where it might be costly or disadvantageous to engage in any of
the other strategies already discussed. Operationally, strategic alliance can be done through a process
of exploration and negotiation with targeted parties or business Concerns leading to signing up an
alliance document in the form of memorandum of agreement, memorandum of understanding and/or
contracts stipulating mutual desire to attain specific objective and expressing support for one another.

The level of benefits of strategic alliance from the viewpoO1nt of either parties involved in the alliance is
partly explained by the diagram shown in Figure 22. The continuum of strategic alliance shown in Figure
22 suggests that joint venture and licensing is relatively the best 31 compromise because provisions in
the agreements among parties as defined in joint venture scheme and licensing agreement are
discussed and mutually agreed upon. Where either of the two options cannot be explored for reason
only known to either parties, mutual service consortia can be instead explored but this option shows a
weak and distant relationship indicating that the strategic alliance may have little impact upon the
strategic objectives of either parties. On the other hand, value chain partnership can be explored as it
somehow promises a close and stronger relationship which means it promises more possibility of
achieving strategic objectives among the parties involved.

4.16.1 Objectives in strategic alliance

As the old saying goes, "two heads are better than one" and this has been a basic presumption behind
the idea of exploring Strategic alliance. The mutuality of advantage that can be derived in strategic
alliance is the motivational and driving force behind two or more business organizations considering an
alliance instead of other options like joint venture options. Other than the perceived benefits either
parties expect to have, engaging in strategic alliance is meant to achieve the following:

a) to collaborate on technology development or new product development;

b) to fill gaps in technical or manufacturing expertise;

c) to acquire new competencies;

d) to improve supply chain efficiency;

e) to gain economies of scale in production and/or marketing; and

f) to acquire or improve market access via joint marketing agreements.

4.16.2 Other justifications for strategic alliance

Sometimes, strategic alliance is taken to mean as holy alliance or cooperative strategy meant to pursue
competitiveness. It is an option taken on account of the following reasons and justifications:

a) collaborative arrangements can help a company lower its costs or gain access to needed expertise and
capabilities
b) firms often lack the resources and competitive skills to be successful in very demanding competitive
races

c) allies can be useful in helping a company establish a stronger presence in global markets and helping
it win the race for global market leadership

d) allies with competitively useful technological know-how or expertise can greatly aid a company racing
against rivals for leadership in the “industries of the future” now being created by today's technological
and information age revolution

e) collaborative arrangements with foreign partners can be very helpful in pursuing opportunities in
unfamiliar national markets

f) potential benefits of alliances to achieve global and industry leadership

g) get into critical country markets quickly to accelerate process of building a global presence;

h) gain inside knowledge about unfamiliar markets and cultures

i) access valuable skills and competencies concentrated particular geographic locations

j) establish an inherent advantage for participating target industry

k) master new technologies and build new expertise faster than would be possible internally

l) open up expanded opportunities in target industry combining firm's capabilities with resources of
partner

4.16.3 Some useful guidelines in forming strategic alliances

Forging strategic alliance is an opportunity but in some extreme cases such opportunity may turn into
something that might disadvantageous or even destructive for either parties involved in the alliance.
The following will be of help in dealing with this option particularly on prospecting for the partner in the
alliance:

a) pick a good partner, one that shares a common vision;

b) be sensitive to cultural differences;

c) recognize that the alliance must benefit both sides;

d) both parties have to deliver on their commitments in the agreement;

e) structure decision-making process so actions can be taken swiftly when needed; and

f) parties must do a good job of managing the learning process, adjusting the alliance agreement over
time to fit new circumstances.

4.16.4 Success and failure factors in alliances

Success and failure factors in cooperative strategies and alliances are premised on certain premises and
considerations. The direction to succeed in the partnership is determined by certain factors such as the
following:
a) ability of an alliance to endure depends on how well partners work together;

b) success of partners in responding and adapting to changing conditions; and

c) willingness of partners to renegotiate the bargain.

While cooperative strategies and alliances are designed to combine strengths and meant to achieve
common good and success for either parties, sometimes alliances can lead to failure. Among the factors
and reasons that can lead to failure are as follows

a) diverging objectives and priorities of partners

b) inability of partners to work well together
c)emergence of more attractive technological paths;
d) marketplace rivalry between one or more allies; and
e) merger and acquisition strategies.
4.17 Benefits and Pitfall of Mergers and Acquisitions
Strategic options in combining resources via mergers and acquisitions acquisitions have advantages and
may result to competitiveness. Combining operations by way of merger and acquisition or joint venture
may result in:
a) more or better competitive capabilities;
b) more attractive line-up of products/services;
c) wider geographic coverage;
d) greater financial resources to invest in R&D, add capacity, or expand;
e) cost-saving opportunities;
f) filling in of resource or technological gaps;
g) stronger technological skills; and
h) greater ability to launch next-wave products/services
While there are benefits and advantages, mergers and acquisitions have the following pitfalls or
disadvantages:
a) resistance from rank-and-file employees;
b) hard-to-resolve conflicts in management styles and corporate cultures;
c) tough problems in combining and integrating the operations of the once-different companies; and
d) greater-than-anticipated difficulties in achieving expected cost-savings, sharing of expertise, and
achieving enhanced competitive capabilities.
4.18 Outsourcing: Advantages and Conditions to Consider
The recent development in the global trade and crumbling of ideological beliefs particularly the opening
up of centrally-planned economies giving way for Western views on the conduct of the business has
opened up opportunities for strategy-conscious business organizations. The collapse of communism in
Europe has opened up new democracies and with China nowadays entertains the ideas of the West has
resulted to new opportunities for large multinational companies. The high cost of corporate taxes, high
cost of labor and other costs associated with social services advanced countries has resulted to high
overhead cost for man firms driving these companies to explore options elsewhere. It has also led to the
idea of unbundling of some processes and certain tasks as well as some operations in the value creation
process. This scenario has given rise or popularity to the idea of outsourcing and subcontracting among
large multinational organizations. For instance, garments producing companies have opted to
subcontract some components of their products to other smaller business organizations in developing
or less developed countries where cost of labor is much lower. Similarly, a large number of multinational
firms in the United States and Europe have opted to avail of the call center services offered by firms
whose mother units are in these countries but whose center of operations are either done in the
Philippines, Indonesia or India.
Unbundling certain tasks within the business allows opting for outsourcing which in many ways is
advantageous though it has its drawbacks particularly in terms of ensuring delivery and quality control
aspects. Its advantages lie in the following factors:
a) improves firm's ability to obtain high quality and/or cheaper components or services;
b) improves firm's ability to innovate by interacting with best-in-the-world" suppliers;
c) enhances firm's flexibility should customer needs and market conditions suddenly shift;
d) increases firm's ability to assemble diverse kinds of expertise speedily and efficiently; and
e) allows firm to concentrate its resources on performing those activities internally which it can perform
better than outsiders.
4.18.1 When does outsourcing make sense?
As mentioned earlier, there are advantages in outsourcing but not all of the advantages cited may apply
or be beneficial to each and every company. Aside from considering the advantages of going into
outsourcing, the following conditions and scenarios can be of help in exploring the possibilities of
outsourcing certain tasks or operations:
a) activity can be performed better or more cheaply by outside specialists
b) activity is not crucial to achieve a sustainable competitive advantage
c) risk exposure to changing technology and/or changing buyer preferences is reduced
d) operations are streamlined to
i. cut cycle time
ii. speed decision-making
iii. reduce coordination costs
e) firm can concentrate on doing those "core" value chain activities that best suit its resource strengths
and capabilities
4. 19 Situations Favoring Joint Venture
As earlier mentioned, the motivation that encourages business organizations to go into joint venture is
premised on the fundamental view that two heads are better than one. There are specific situations,
however, that favor venturing into joint venture and here are some of them:
a) when a privately owned (organization is forming a joint venture with a publicly owned organization,
there are some advantages of being privately held, such as close ownership; there are some advantages
of being publicly held, such as access to stock issuances as a source of capital. Sometimes, the unique
advantages of being privately and publicly held can be synergistically combined in a joint venture;
b) when a domestic organization is forming a joint venture with a foreign company, a joint venture can
provide a domestic company with the opportunity for obtaining local management in a foreign century,
thereby reducing risks such as expropriation and harassment by host country officials;
c) when the distinctive competencies of two or more firms complement each other especially well;
d) when some project is potentially very profitable, but requires overwhelming resources and risks, the
Alaskan pipeline is an example;
e) when two or more smaller firms have trouble competing with a large firm, and
f) when there exists a need to introduce a new technology quickly.
4.20 Situations Favoring Retrenchment
While it is normal and proper for business strategists to let the business grow and expand in whatever
manner, there is always limit u everything for which reason, downsizing is an option. Operationally,
downsizing means taking the strategic option to do retrenchment to shrink down the size of the
organization into manageable and profitable levels Ding retrenchment strategy is considered favorable
under the following conditions:
a) when an organization has a clearly distinctive competence, but has failed to meet its objectives and
goals consistently overtime;
b) when an organization is one of the weaker competitors in a given industry;
c) when an organization is plagued by inefficiency, low profitability, poor employee morale, and pressure
from stockholders improve performance;
d) when an organization has failed to capitalize on external opportunities, minimize external threats,
take advantage on internal strengths, and overcome internal weaknesses over time; that is, when the
organization's strategic managers have failed (and possibly will be replaced by more competent
individuals); and
e) when an organization has grown so large so quickly that major internal reorganization is needed.
4.21 Situations Favoring Divestiture
It is always desired for large business organizations or corporate giants to explore avenues for expanding
and spreading their investment in other areas as leverage for unprofitable operations elsewhere. On the
other hand, it is also sometimes justified to withdraw or divest investment in certain areas either by
selling out the stake or shares in one business organization whose profit returns is below the hurdle rate
or expectations of the corporate officers. It may also mean closing down a subsidiary or affiliate it fully
owns.
The following are situations or conditions where divestiture is considered justified:
a) when an organization has pursued a retrenchment strategy and it failed to accomplish needed
improvements;
b when a division needs more resources to be competitive than the company can provide;
c) when a division is responsible for an organization's overall poor performance; and
d) when a division is a misfit with the rest of the organization; this can result from radically different
markets, customers, managers, employees, values, or
4.22 Situations Favoring Liquidation
It is always desired for large business organizations or corporate giants to explore avenues for expanding
and spreading their investment in other areas as leverage for unprofitable operations elsewhere. On the
other hand, it is also sometimes justified to withdrew or divest investment in certain areas either by
selling out the stake or shares in one business organization whose profit returns is below the hurdle rate
or expectations of the corporate officers. It may also mean closing down a subsidiary or affiliate it fully
owns.
The following are situations or conditions where divestiture is considered justified:
a) when an organization has pursued both a retrenchment strategy and a divestiture strategy, and
neither has been successful;
b) when an organization's only alternative is bankruptcy, liquidation represents an orderly and planned
means of obtaining the greatest possible cash for an organization's assets. A company can legally declare
bankruptcy first and then liquidate various divisions to raise needed capital; and
c) when the stockholders of a firm can minimize their losses by selling the organization's assets.
Chapter 5 BUSINESS AND FUNCTIONAL LEVEL STRATEGIES
5.1 The Strategic Business Unit
As expounded in the preceding chapter, the business operation may involve a single business unit in
which case it has its own charter and corporate or organizational structure. However, as a part of a
business family or conglomerate so to speak, such organization is treated as a small or strategic business
unit (SBU) and sometimes treated as a department or unit of a mother business organization for
purposes of corporate planning or doing corporate strategy. Williamson, Jenkins, et al. (2004) defined
strategic business unit (SBU) as a unit that produces products or services for which there is identifiable
group of customers. The units can be also defined geographically (e.g., Asian division, European division)
or according to the nature of their operations (e-g, manufacturing group, marketing group, etc.). The
mother unit or the corporate center normally allows the divisions or units to operate with varying
degrees of operational and strategic autonomy within an overall centrally controlled framework usually
guided by its corporate strategy.
For purposes of discussion in this book, strategic business unit is used synonymously with a single
business organization tor which the concept of business level or functional strategy is deemed
applicable.
5.2 Understanding Strategy and the Business Organization
A business organization of whatever kind (i.e., corporation, partnership, or sole proprietorship) is legally
considered a person that can sue and be sued. As such, the business has to observe the norms and
standards as needed or as it sees fit- and for certain strategic reason. In considering any of the strategic
options the business may have to take, the business organization has to live with the requirements of
laws and the various forces as well as interest groups around it as shown in Figure 23. The groups
identified in Figure 23 are macro or external in context whereas the micro or internal in context are
shown in Figure 24. The various groups shown in Figure 23 may have a common desire in the end but
the fundamental interests and concerns these groups pose upon the business organization vary and
oftentimes conflicting. The stockholders or owners of the business are principally concerned with profits
while the concern of employees/union is basically salaries/wages which the management and
stockholders may want to suppress. In fact, there is always a conflict with the top management and the
lower-level employees/rank and file especially so if the employees are unionized. Of course, there are
direct and indirect competitors that the business organization has to fight for in marketing war and be
competitive all the time. There are government laws, rules, and regulations which could be friendly or
hostile to the business. There are a variety of stakeholder groups who are not prospective customers but
exert a lot of pressure upon the firm along religious, cultural and other tradition that may have some
bearing with the products or services and one that the business has to live with. There are' local and
international standards that have to be observed along with other global/regional socioeconomic and
political pressure that in the short and long term can affect the business. On top of these various factors
are other unseen hands and factors that research efforts have to address all in the name of making the
business competitive amidst macro and micro elements surrounding the business.
The industry or sector where the company belongs is very specific considerations that has to be
addressed as shown in Figure 24 as postulated by Wiliamson and Jenkins (2004). To be able to compete
within the industry it belongs taking into account the various competitive forces as discussed in the
previous chapters particularly those aspects relating to Porter's business competition model, it is a must
for management as well as employees behind the firm to understand the components of its business
environment as presented by Williamson, Jenkins, et al. (2004) as shown in Figure 24.
Vital to strategizing at the level of small business unit or functional level is the fact that within the
organization itself, it has to deal with a number of factors and variables. For one, it has to really know its
resources as well as capabilities and whether such aspects are transformed into competencies resulting
to a competitive product or service. It has to know by heart the market and the environment it is
serving. The business organization needs to be thoroughly and expertly familiar with its processes to be
able to know and develop strategies leading to producing quality products at competitive prices. The
organization needs to have structure in size not-so-small that it has difficulty doing its business or not-
so-huge to make it manageable and overhead burden at tolerable limits. It needs to fully know its
customers' needs and wants as well as level of affordability to be able to develop and market a product
or service within its reach. It has to live with the required synergy and fit with the other business units it
works with and with market and society in general. The organization has to continuously monitor its
performance at various levels all the way to the individual worker to ensure that each of the employee
has a role to play in achieving strategic pursuits and the end goal of achieving the vision and mission.
5.3 Business Level Strategy
Once a corporate strategy has been decided upon and laid down or once a single business has been
established as a start-up company, it must accept the idea of business competition within the industry
or sector it has set foot. Necessarily, the business organization must exert an effort to know the major
players of the industry and decide how to compete in the sector it operates. In fact, a better way to
accept and prepare for this' challenge is to undertake a comprehensive research and business planning
prior to operationalization of the business to be able to face the competition at day one of the business
operation. The firm must address the question of how to compete now and in the future or how to keep
it in a sustainable manner. This scenario gives reason to develop a business level strategy further
translating it all the way to the functional or operating unit strategies.
Unlike a corporate level strategy which looks at developing a broader strategy to provide a common
agenda for a number of individuals or independent business organizations belonging to the group or the
conglomerate, the business level strategy is more focused and meant for the single business concern or
a small business unit forming part of the family of business concerns. The business level strategy serves
as a guide of a single business firm itself as it wades to the competitive world of business. It combines
the strategies used by the various functional units of the business organization to make itself
competitive in the industry it belongs.
Business level strategy is the operational plan of action of a single and independent business that uses
the company's resources and competencies to gain a competitive advantage over its rivals in the market
or industry. It essentially refers to the strategy of a single business concern setting direction as to what
and how the organization will conduct its business. While the corporate strategy orchestrates how the
other members of the business group would conduct their business, business level strategy orchestrates
the various functional units (e. g, marketing, production, administration, finance, and the like) to make
itself competitive and profitable on-going concern. The business level strategy occurs at the business
unit emphasizing the improvement of the competitive position of the firm's products or services in the
specific industry or market segment served by the business unit.
Compared to corporate level strategy which is broader in context on account of a number of business
organizations to work on, business level strategy is relatively much simpler and less complicated as it
takes into account its own business vis-a-vis its external environment in particular its direct competitors.
Unlike corporate level strategies which synchronize various business units comprising of individual or
chartered organizations, business level strategy seeks to synchronize various functional units and their
respective functional strategies into a consistent and well-coordinated effort to achieve the vision of the
business organization. Stahl and Grigsby (1992) simply differentiated corporate and business-level
strategy by way of stating that the corporate strategy concerns with the question as to what business or
business areas do, we want to be in. Business-level strategy on the other hand concerns with the
question of how should the company compete in the chosen business.
5.4 Hierarchy of Strategies
Strategies may come in at least three levels as shown in Figure 25. The diagram shown in Figure 25
defines the order of hierarchy and coverage of the three levels of strategies. The diagram also defines
the context, limits and boundaries of corporate, business and functional level strategies: from a broader
perspective in the form or corporate strategy further transformed into business level strategy at the
single or strategic business units then further translated into functional strategy and further on to more
specific details articulated in the operating level strategy to much smaller operating unit as may be
necessary. The transformation of corporate level strategy into a business level strategy and down to a
functional and operating unit strategy takes the form of a pyramidal diagram as shown in Figure 26. As
implied in the diagram shown in Figure 26, it is clear that in a corporate setting, business level strategy
and its supporting functional and operating strategies has to be coherent or consistent when viewed
either upward or downward to ensure achievement of corporate vision.
5.5 Considerations in Business Level Strategy
Given the notion that business level strategy deals with how a particular independent business
organization or strategic business unit does its business to make it competitive and profitable over the
long-term, certain considerations have to be considered as shown in Figure 27. As shown in Figure 27,
doing a business level strategy is premised on a planned and proactive mode to outcompete the
company's rivals or other players in the industry.
In developing a business level strategy and in order to stay competitive or outdo the firm’s competitors,
substantial efforts should be made to develop strategies thinking note of the following areas of concern:
a) Specific responses to changing conditions;
b) Scope of geographic coverage of the business strategy;
c) Explore collaborative alliance or partnership as necessary;
d) the financial strategy to support the overall business strategy;
e) the specific functional strategies to be undertaken;
f) concern for research and development strategy; and
g) conscious efforts to build competitive advantage.
5.6 Risks of Single Business Concerns
The idea of growing and expanding is a natural direction for a single business to take if only to avoid
business closure when the company becomes less or uncompetitive or for whatever reasons. On the
other hand, not expanding amidst growth and success is by itself an option or a strategy but it comes
with risks. Being an independent and a solo or single business concern means accepting some risks as
follows:
a) Putting all the "eggs" in one industry basket – It theorizes that a single business incurring loss in its
operations could mean going out of the business with nothing to fall back on.
b) Missing profitable business opportunities on account of lack of resources and skills to do so.
4. Unforeseen changes can undermine a single business firm's prospects- A sudden change in market
conditions makes it difficult to adjust or may be too late to do so.
5. Changing customer needs-As customers' needs vary, there is a limited leverage or option to take to
meet varying customer needs and wants.
6. Technological innovation- Unlike large and highly capitalized businesses, technological innovations
threaten solo and small players in the game of productivity and efficiency.
7. If market becomes unattractive, the firm's prospects can quickly dim- It implies that lack, dwindling or
zero demand for the product means eventual exit from the business unlike conglomerates or diversified
business firms who may simply drop off one business unit or product and still continue their business
with the remaining products at hand.
8. Options to grab other opportunities are limited-Being alone with limited resources makes it somehow
difficult to take advantage of other opportunities. Indeed, being alone means living with what the
company can afford and forego or miss out other opportunities
9. Entry of substitutes- -Technology developments open up new opportunities for other entrepreneurs
to join the competition brandishing other kinds of products acting as replacements or substitutes which
may come at cheaper or attractive prices or offers.
5.7 Competitive Strengths of Business Level Strategy
While there are risks for single business concerns, there are competitive strengths in being a single
business unit particularly in the area of developing business level strategy as compared to large or group
of business concerns. To name a few, the following are the pluses of a single business in the context of
developing business level strategy:
a) less ambiguity about "who we are;
b) energies of firm can be directed to a single business path and keeping strategy responsive to industry
change;
c) less chance resources will be stretched thinly over too many competing activities;
d) resources can be focused on building competencies and capabilities that make the firm better at what
it does;
e) higher probability innovative ideas will emerge;
f) top executives can maintain hands-on contact with core business;
g) important competencies more likely to emerge;
h) ability to. parlay experience and reputation into sustainable competitive advantage; and
i) prominent leadership position.
5.8 The Nature of Functional Units
Every business organization, or any formal organization for that matter, usually has various
departments, divisions or units mandated to do specific task or job contributory to the overriding goal of
making profits. This is typified by the illustrative diagram shown in Figure 28. The various departments
or divisions are the particular units doing actions or legworks as well as direct interactions with clients or
customers. These departments or units are identified in the organizational chart of the firm which also
serve as the basis for the plantilla or personnel for the organization
Every functional unit has its own mandate or role to play in the business organization. However, not all
of them need not be bothered with having functional strategies as the nature of work or function is
deemed purely administrative or routine. What is usually clear and written about the functional
departments are the tasks or job that falls within the department//unit or what these units are going to
do from which job descriptions of personnel within the department or unit are drawn upon. How these
functional units will carry out their tasks or what specific strategic tasks these units will do is usually
undocumented or unwritten. This aspect spells out the difference between functional responsibilities
and functional strategies.
5.9 Functional Responsibilities vs. Functional Strategies
Functional responsibilities refer to those tasks, function or activities that a given operating unit (e.g.,
department, division, group, unit, or section) is duty-bound to do by the very nature of its functional
category. For example, marketing department is generally tasked to handle marketing, sales, promotion,
advertising, etc. On the other hand, production department is tasked to do such jobs as fabrication,
assembly and other tasks related to production or manufacturing.
Functional strategy is the approach taken by a functional area or unit to achieve its objectives and
duties by way of maximizing the use of its resources and in light of strategic direction as well as
prevailing market competitions. Functional strategy broadly addresses how the particular mandate or
duty of a concerned department or unit will be done and carried out or how it will operationalize its
duties and responsibilities in view of a highly competitive environment. It is concerned with developing
and nurturing competencies at the department or unit level.
If there are other units much lower than departments or divisions (e.g., sections or similar smaller units),
another form of strategy - a much more detailed strategy - may have to be done and this is referred to
as operating strategy.
5.10 The Role of Functional Strategies
A major factor that determines the competitiveness of the business level strategy is anchored on the
kind and details of the strategies developed at the level of the functional units.
Having either a corporate or business level strategy is meaningful only if it comes with a functional and
operating unit strategies. As shown in Figure 25 and Figure 26, functional strategy is subordinate to
business level strategy. The functional strategies are articulation of the corporate or business level
strategies at the level of the various departments of the business organizations.
Very often, the duties and responsibilities of the various operating functions in the business organization
are defined and elaborated, and in fact, available on record. However, while the functional and
departmental duties are put in writing or on record, departmental strategies are either absent or not
articulately addressed in writing the reasons why some departments are unable to make strategic
contribution towards the achievement of vision and mission statement in measurable terms.
As clearly shown in Figure 26, functional strategies must provide support activities considered
strategically important to the stated corporate or business level objectives. Because there are many
functional departments within the business organization, it is a must that the strategies of the various
departments must be harmonized into a cohesive and consistent set of strategies running in series or
parallel activities. Each of the departmental strategies has to be done in coordination with other
departments or units of the business organization.
5.11 Harmony among Functional Strategies
In formulating functional strategies, managers must be aware that these departmental functions are
interrelated as diagrammatically shown in Figure 29. In attaining its objectives, each functional area
must relate or mesh its activities with tasks of other functional departments. Wright, Kroll, et al. (1996)
emphasized that any change in the functional duties of any of the departments may drive or will
invariably affect the way the other departments operate. Hence, the strategy of one functional area
cannot be viewed in isolation. Rather, the extent to which all the business units' functional tasks mesh
smoothly determines the effectiveness of the firm's central strategy. Any change in the functional duties
and responsibilities will surely have a domino effect which can affect other functional level strategies.
Wright, Kroll, et al. (1996) noted that personnel in each of the functional area tend to view their
operations introspectively and independently of other functions resulting to discordant or incoherent
strategies as if an orchestra playing without a musical piece. This scenario can be avoided if doing
strategic planning exercise is part of organizational culture and regular, monitoring of functional
activities and strategies are regularly done. Inconsistent functional strategies will not only deter
achievement of strategic goals but they will also likely to result to consumer or client dissatisfaction.
More than simply being interrelated, functional and operating level strategies, the functional units must
be developed taking into account commonality as vision-mission among various functional and
operating level units as illustrated by the diagram shown in Figure 30. The various functional and
operating level units may have differences in functions, duties and strategies of doing their tasks but all
of these units have one thing in common-the stated vision mission statement.
5.12 Nature and Characteristics of Functional Strategies
Among the secrets of a good business level strategy is the content and details of the functional level
strategy. Because they contain operational details, functional level strategies are usually held
confidential among certain parties. In fact, in some extreme cases, some operational details of certain
strategic and tactical operations are held in confidence or unknown to some of the players in pursuing
the ends of the strategy if only to get things done. Whatever the contents of the functional strategies
are and to whom those details are known to, what is important is that in the end, the functional
strategies will deliver the expectations in real quantifiable numbers within prescribed periods. In
general, the functional strategies have the following characteristics:
a) it is a game plan for a strategically-relevant function, activity, or business process
b) it provides details how key activities will be managed
c) it. provides a supportive role to the business level strategy
d) it specifies how functional objectives are to be achieved
Moreover, functional strategies highlight the role of every department or unit in terms of:
a) role and scope of activities of each department or unit
b) it provides the direction which department needs to pursue
c) it defines the contribution to firm's overall mission
5.12.1 Examples of functional objectives
As discussed earlier, functional strategies are unit specific. As a whole, the overall target or objectives of
the functional strategy may not be made public but must be known to all the members or the unit so
that the objectives will be supplanted in the consciousness of everyone. In the process, this will serve as
motivation and driver for everyone to give due course. Deep in the minds and hearts of every employee
is a duty to do which is concretely laid down in their respective performance targets.
The following are just a few of the examples of objectives or targets of functional level strategies:
a) Human resource strategy
“To contribute to organizational success by developing effective leaders, creating high performance
teams, and maximizing the potential of individuals."
b) Corporate security
““To provide services for the protection of corporate personnel and assets through preventive measures
and investigations."
5.13 Operating Strategies
Operating strategies are tasks that are more specific compared to functional strategies as implied in
Figure 26. As the term implies, operating strategies are more operational compared to functional
strategies as the tasks are usually done at ground level with more precise details. It can come in the
form of functional strategy but on a lower scale context like the operating strategies for units much
lower in size than a typical functional department (e.g., unit, section, etc.) and may be temporary in
nature (e.g., task force, special project, etc.).
5.13.1 Concerns of operating strategies
The general concerns of operating strategy are anchored on the idea of supporting the functional level
strategy. Its specific concerns are as follows:
a) narrower strategies for managing grassroots activities and strategically-relevant operating units; and
b) add detail to business and functional strategies.
How to concretize operational strategies is shown by the diagram espoused by Chase, Jacobs and
Aquilano (2002) as shown in Figure 31. The diagram shown in Figure 31 is further presented in a more
detailed framework as shown in Figure 32 which shows more specific details what to do down the line to
address and support a business level strategy.
For instance, operationalizing a strategy to address customers' needs can be done by way of product
development efforts resulting to more products (e.g., more brands, models, other designs) thereby
giving the prospective customers a choice to address or target and eventually satisfy a wider market.
5.13.2 Examples of operating strategy
Motivated and driven by the functional level strategy, operating unit needs to articulate in detail as how
to go about delivering the expectations at the unit level. The following are examples of operating
strategy:
a) Improving Delivery and Order-Filling
Manufacturer of plumbing equipment emphasizes quick delivery and accurate order-filling as keystones
of its customer service approach. Warehouse manager takes the following approaches:
i) Inventory stocking strategy allowing 99% of all orders to be completely filled without backordering any
item; and
ii) Staffing strategy of maintaining workforce capability to ship any order within 24 hours.
b) Boosting Worker Productivity
To boost productivity by 10%, managers of firm with low-price, high-volume strategy take the following
actions:
i) Recruitment manager develops selection process designed to weed out all but best-qualified
candidates;
ii) Information systems manager devises ways to use technology to boost productivity of office workers:
iii) Compensation manager devises improved incentive compensation plan; and
iv) Purchasing manager obtains new efficiency increasing tools and equipment.
5.14 Strategic Business-Level Options
The principles in strategic options to grow or expand as discussed in the corporate level strategies (refer
to Chapter 2) are in a way applicable as strategic business options. In principle, the variety of growth,
stability and retrenchment strategies discussed in Chapter 2 can be considered as business level option
if the ton leadership has bold strategic ambitions and it has all the resources to do so as well as a
burning desire and bulldog tenacity to compete in the market.
In reality, a single business unit is constrained by a variety of factors that limit its operation within the
business or industry it is currently operating. Given this, the strategic business option is limited by its
resources and internal capacity. Very often, single business units are limited to varying their marketing
strategies for a particular product or service and to a certain extent, developing other products or
services.
Available to single business units as strategic business options are marketing-related in context like
product development, market penetration and market development. These options which any
independent or single business unit can pursue are briefly described as follows:
a) Product development option. As a strategy, product development is a research and development
option that seeks to develop new product or service resulting to a variety of products or services the
company can offer thereby accessing other market segments or sectors. Through in-house research and
development along with market research efforts, small business organizations will be able to develop a
new product or service which they can launch as they wish to. If product research and development as
well as market research is not within the capability of the company, then the company can commission
external consultants to the job or simply do a low-end research activity which in the end will hopefully
enable the firm to develop and launch a different or innovative kind of product or service.
b) Market development. As a strategy, market development seeks to explore additional market share by
developing other markets in other geographical areas using the same line of products or services. In
other words, if the existing market served by the business is getting highly competitive and too difficult
for the firm to make a profit, then it can explore or develop other market areas by branching out or
serving other location where competition is much less or tolerable.
c) Market penetration. As a strategy, market penetration is pursuing concentrated and vigorous efforts
to push a product or service using a variety of marketing strategies or tools generally focused on
promotional efforts. It concerns with dealing with existing products or services but it requires substantial
marketing efforts to push harder the product to expand sales in the same market segment or to serve
and penetrate other markets in the same location. 5,14.1 Situations favoring product development
Whenever practical and possible, product development options should be explored. Product
development strategy is favorable under the following situations:
a) when an organization has successful products that are in the maturity stage of the product life cycle;
the idea here is to attract satisfied customers to try new (improved) products as a result of their positive
experience with the organization's present products or services
b) when an organization competes in an industry that is characterized by rapid technological
developments;
c) when major competitors offer better-quality products at comparable prices;
d) when an organization competes in a high-growth industry; and
e) when an organization has especially strong research and development capabilities.
5.14.2 Situations favoring market development
When the following situations or scenarios occur, it is logically an attractive option to go into market
development:
a) when new channels of distribution are available that are reliable, inexpensive, and of good quality
b) when an organization is very successful at what it does
c) when new untapped or unsaturated markets exist
d) when an organization has the needed capital and human
e) resources to manage expanded operations
f) when an organization has excess production capacity when an organization's basic industry rapidly is
becoming global in scope.
5.14.3 Situations favoring market penetration
There are situations or scenarios where it is considered appropriate to venture into market penetration
as a strategic option. When the following situations exist, it is deemed to be conducive to possibly
consider market penetration options:
a) when current markets are not saturated with a particular product or service
b) when the usage rate of present customers could be increased significantly
c) when the market shares of major competitors have been declining while total industry sales have
been increasing
d) when the correlation between dollar sales and dollar marketing expenditures historically has been
high
e) when increased economies of scale provide major competitive advantage
5.15 Generic Performance Improvement Strategies
Improving the performance of the business may come in many different ways and approaches or
strategies. Any option that may have to be taken is a matter of justifying the efforts taking into account
the stated vision-mission and the level of data or information available to the top management at the
time the strategy was crafted. Under any circumstance, the desire to improve the performance of the
business is a generic consideration. For instance, the need to improve the performance could be in
terms of sales volume to be generated or the level of profit expectations. In this particular
consideration, G. S. Day (1984) has developed a working diagram that will serve as a guide as shown in
Figure 35. As shown in Figure 33, the need to improve sales volume can be addressed by considering
such options as market penetration, product development, market development, and forward
integration. On the other hand, the need to address improvement in profit expectations can be dealt
with by considering such options as increase yield, reduce costs, vertical integration, reduce investment
intensity and selectivity/focus.