STRATEGIC

MANAGEMENT
 Today’s Agenda
■ Understand the three aspects of
corporate strategy
■ Apply the directional strategies of growth,
stability, and retrenchment
■ Understand the differences between
vertical and horizontal growth as well as
concentric and conglomerate
diversification
■ Develop a parenting strategy for a
multiple-business corporation
Corporate Strategy

Adjacent
Businesses

Core Adjacent Core Business

Formula for
Business Businesses
Repeatable Expansion

Adjacent Adjacent
Businesses Businesses
Corporate Strategy – Nike

Balls Core Business

Formula for
Repeatable Expansion

Athletic
Shoes
Golf Apparel In 1987, Nike’s operating profits were only
$164 million compared to Reebok’s much
larger $309 million. Fifteen years later,
Nike’s operating profits had grown to
$1.1 billion while Reebok’s had declined to
Adjacent
Equipment $247 million.2 Reebok was subsequently
Businesses
acquired by Adidas in 2005 while Nike went
on to generate operating profits of $2.4
billion in 2008
 3 Key Issues of Corporate Strategy

The industries or markets in which the firm competes

through its products and business units (coordination of
Directional Strategy cash flow among units)

Portfolio Analysis
The firm’s overall orientation toward growth, stability, or
retrenchment (orientation toward growth)
Parenting Strategy

The manner in which management coordinates activities

and transfers resources and cultivates capabilities among
product lines and business units (the building of
corporate synergies)
Corporate Strategy - greater than the sum of its individual
business unit parts
Directional
1. Should we expand, cut back, or continue
Strategy our operations unchanged?

Let’s review an example of 2. Should we concentrate our activities within

Nike : our current industry, or should we diversify
https://www.youtube.com into other industries?
/watch?v=RZ-i3A4_6HE
http://panmore.com/nike- 3. If we want to grow and expand nationally
and/or globally, should we do so through
inc-generic-strategy-
internal development or through external
intensive-growth-
acquisitions, mergers, or strategic alliances?
strategies
https://www.youtube.com
/watch?v=5ydv9oRPavI
Corporate Directional Strategies
Growth Strategies
in sales, assets, profits or some combination

Internal External
Expand operations Mergers
domestically or globally Acquisitions /takeovers
Expand a product line Strategic Alliances
(Concentration)
Diversify products
(Diversification)
Vertical Growth/Vertical Integration
Backward/Forward

A vertical growth strategy means scaling

products/services inside an existing market.
Typically, businesses add additional features or
capabilities to existing products/services. You
might also add products/services to
complement existing products/services or take
over a function previously provided by a
supplier or by a distributor.
Pros:
Allows you to go deeper into existing markets
Most popular growth strategy
Cons:
Typically requires more money
Workforce capacity problems

Examples: Instagram is much more than just a

photo-sharing app. This tool enables users to
share videos. In recent years, they rolled out
reels.
Growth Strategies
in sales, assets, profits or some combination

A horizontal growth strategy can be

expanding products/services to new markets.
This can be done by developing a new market
or penetrating an existing market. Additionally,
you might try to apply existing assets to a new
business domain.
Pros:
•Highly lucrative
•Better long-term ROI
Cons:
•Challenges unique to new markets
•Increased competition

Example: Uber launched in San Francisco, but

later rolled out to thousands of locations across
the globe. Additionally, the company launched
UberEats.
 Growth Strategies
in sales, assets, profits or some combination
Prior to starting its own content studio, Netflix was at the
end of the supply chain because it distributed films and
television shows created by other content creators.
However, Netflix leaders realized they could generate Facebook aimed at strengthening its position in the
greater revenue by creating their own original content. In social sharing area and found that acquiring Instagram
2013, the company expanded its original content is the best strategy to fulfill this as it was an excellent
offerings opportunity to enhance its market share by new
audience access and reduce competition. Though
Facebook has acquired Instagram, still Instagram has
its own independent social media platform.
Vertical Integration Continuum

Reflection Questions
■ Which one is more profitable backward or forward integration? Why?
■ What is the interplay between vertical integration and exit barriers?
■ What is the interplay between vertical integration and entry barriers?
■ When might outsourcing be more efficient over vertical integration?
Horizontal Integration

Reflection Questions
■ What can be the relationship of horizontal integration and monopoly?
■ How can horizontal integration bring a competitive advantage?
■ How does globalization impact the horizontal integration of businesses?

International Entry

Exporting. Licensing, Franchising, Joint Ventures, Acquisitions, Green Field Development,

Production Sharing, Turnkey Operations, BOT, Management contracts
Diversification Strategies

Concentric diversification into a related industry may be a very appropriate

corporate strategy when a firm has a strong competitive position but industry
attractiveness is low.

Example: PepsiCo adopted a related diversification strategy when it broadened its product line from
soft drinks to fast food franchises and snack foods.

Conglomerate (Unrelated) Diversification. When management realizes that the current

industry is unattractive and that the firm lacks outstanding abilities or skills that it could easily
transfer to related products or services in other industries. able to transfer its own excellent
management system into less-well-managed acquired firms.

Example: Berkshire Hathaway has interests in furniture retailing, razor blades, airlines, paper,
broadcasting, soft drinks, and publishing.
Stability Strategies
In predictable environments
Common to smaller businesses
Useful in a short term, can be dangerous for too long.

Pause-Proceed with Caution No Change Strategy Profit Strategy

Only incremental improvements Doing nothing new Focus on cash flow benefits
Wait time before growth Slight adjustments for inflation Artificially supporting profits
Wait time before retrenchment No obvious opportunities or threats
Post-growth condition Stable strengths

Small town stores before Walmart

 Retrenchment Strategies
Weak competitive position
Loss in profits, lowered sales

Turnaround Captive Company Sell-out/Divestment

Focus on operational efficiency Obtaining security by becoming an Obtain a good price for shareholders
Contraction – across the board exclusive supplier Keep jobs for employees
cuts Simpson to GT NorthWest Airlines purchased by
Consolidation – cut overheads, Delta.
cost-justified activities Divestment – selling an unit
Ford selling Jaguar and Land Rover
Bankruptcy/Liquidation Strategy
When a company finds itself in the worst possible situation
with a poor competitive position in an industry with few In contrast to bankruptcy, which
prospects, management has only a few alternatives—all of seeks to perpetuate a corporation,
them distasteful. liquidation is the termination
Bankruptcy involves giving up management of the firm to the of the firm.
courts in return for some settlement of the corporation’s
obligations.
Corporate Parenting
Corporate parenting, in contrast, views a corporation in terms of resources and capabilities
that can be used to build business unit value as well as generate synergies across
business units.

Focus on the Parent company’s core business and the

value of relationship between a parent and its
businesses.

Companies that have a good fit between their strategy

and their parenting roles are better performers than
those companies that do not have a good fit
Developing Corporate Parenting Strategy

Examine each business unit (or target firm in the case of acquisition) in terms of its
strategic factors

Examine each business unit (or target firm) in terms of areas in which performance
can be improved – parenting opportunities

Analyze how well the parent corporation fits with the business unit (or target firm)