Strategy Formulation

Corporate Strategy

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 Objectives
• Understand the concept of Corporate Strategy.
• Learn the different types of Corporate Strategies.
• Learn the different types of Growth Strategies and why companies select
each one of them.
• Understand the internal and external means of how companies can achieve
Growth Strategies.
• Learn the different types of international entry options and why companies
select each one of them.
Corporate Strategy
Corporate Strategy
 Corporate Strategy

Corporate Strategy:
Describes a company's overall direction in terms of its general attitude
toward growth and the management of its various businesses and
product lines.
 Corporate Strategy
Just as every product or business unit must follow a business strategy to
improve its competitive position, every corporation must decide its orientation
toward growth by asking the following three questions:

1. Should we expand, cut back, or continue our operations unchanged?

2. Should we concentrate our activities within our current industry or should we

diversify into other industries?

3. If we want to grow and expand nationally and / or globally, should we do so

through internal development or through external acquisitions, mergers, or
strategic alliances?
 Corporate Strategy
A corporation´s directional strategy is composed of three general orientations
(sometimes called grand strategies):

1. Growth strategies: expand the company´s activities.

2. Stability strategies: make no change to the company´s current activities.

3. Retrenchment strategies: reduce the company´s level of activities.

Growth Strategies
 Growth Strategies
The two basic growth strategy types are:

1. Concentration (on the current product

line in one industry), and

2. Diversification (into other product lines

in other industries).
 Concentration Strategies

Concentration Strategy: if a company´s current product lines have

real growth potential, concentration of resources on those products
make sense as a strategy for growth.

The two basic concentration strategies are:

• Vertical Growth.

• Horizontal Growth.
 Vertical Growth

Vertical Growth: vertical growth can be achieved by taking over a function

previously provided by a supplier or by a distributor.

The company grows by making its own supplies and / or by distributing its own
products.

This growth can be achieved either:

• Internally by expanding current operations, or

• Externally through acquisitions.

 Vertical Growth
Vertical Growth results in Vertical Integration, the degree to which a firm
operates vertically in multiple locations on an industry´s value chain.

Backward Integration: going backward on an industry´s value chain

(suppliers).

Forward Integration: going forward on an industry´s value chain.

(distributors).

Backward integration is usually more profitable than forward integration.

 Vertical Growth
Backward Integration Forward Integration
Vertical Growth
 Vertical Growth
Backward Integration Forward Integration
 Horizontal Growth
Horizontal Growth: can be achieved by expanding the firm´s products into
other geographic locations and / or by increasing the range of products and
services offered to current markets.

A company can grow horizontally through internal development or externally

through acquisitions or strategic alliances with another firm in the same
industry.

Horizontal Growth results in Horizontal Integration, the degree to which a

firm operates in multiple geographic locations at the same point in an industry´s
value chain.
Horizontal Growth
 Diversification Strategies

Diversification Strategy: when an industry consolidates and becomes

mature, most of the surviving firms have reached the limits of growth
using vertical and horizontal growth strategies.
They may have no choice but to diversify into different industries if they
want to continue growing.
The two basic diversification strategies are:
• Concentric.
• Conglomerate.
 Concentric Diversification
Concentric Diversification: is a diversification into a related industry.

That may be a very appropriate corporate strategy when a firm has a strong
competitive position but industry attractiveness is low.

The firm attempts to secure strategic fit in a new industry where the firm´s
product knowledge, its manufacturing capabilities, and the marketing skills it
used are so effectively in the original industry that can be put to good use.

The corporation´s products or processes are related in some way: they

possess some common thread.
 Concentric Diversification
The search is for synergy, the concept that two business will generate more
profits together than they could separately.

The point of commonality may be similar technology, customer usage,

distribution, managerial skills, or product similarity.
Concentric Diversification
Concentric Diversification
Concentric Diversification
 Conglomerate Diversification
Conglomerate Diversification: diversifying into an industry unrelated to its
current one.
This corporate strategy occurs when managers realize that the current industry
is unattractive and the firm lacks outstanding capabilities or skills that it could
easely transfer to related products or services in other industries.
Rather than maintaining a common thread throughout their organization,
strategic managers who adopt this strategy are primarily concerned with
financial considerations of cash flow or risk reduction.
The emphasis in conglomerate diversification is on financial considerations
rather than on the product-market synergy common to concentric
diversification.
Conglomerate Diversification
Conglomerate Diversification
Conglomerate Diversification
 Growth Strategies
Internal vs. External Means
 Internal vs. External Growth
All the previous growth options can be achieved by:

1. Internal Growth: through internal development.

2. External Growth: through mergers, acquisitions, strategic alliances,

etc.
 Mergers
Merger: is a transaction involving two or more corporations in which stock is
exchanged, but from which only one corporation survives.
Mergers usually occur between firms of somewhat similar size and usually
«friendly». The resulting firm is likely to have a name derived from its
composite firms

Is a merger between:
• LAN, Chile.
• TAM, Brasil.
Mergers

Is a merger between:
• Glaxo Wellcome.
• SmithKline Beecham.

Was a merger between:

• Daimler-Benz.
• Chrysler Corporation.
Mergers

South Korea
Mergers

Youku Tudou is a
merger between two
biggest video sites in
China.
 Acquisitions
Acquisition: is the purchase of a company that is completely absorbed
as an operating subsidiary or division of the acquiring corporation.
Acquisitions usually occur between firms of different sizes and can be
either friendly or hostile.
Hostile acquisitions are often called takeovers.
Acquisitions
Acquisitions
Acquisitions

Walmart acquired
Yihaodian to
compete with
Alibaba online
store.
 Strategic Alliances
Strategic Alliance: is a partnership of two or more corporations or
business units to achieve strategically significant objectives that are
mutually beneficial.
It is an effective way to grow by external means.

• Mutual Service Consortia. • Franchising.

• Joint Venture. • Value-Chain Partnership.

• Licensing.
 Growth Strategies
International Entry Options
 International Entry Options
In today´s world, growth usually has international implications.
Some of the more popular options for international entry are as follows:

• Exporting. • Green Field Development.

• Licensing. • Production Sharing.
• Franchising. • Turnkey Operations.
• Acquisitions. • BOT Concept.
• Joint Venture. • Management Contract.
 Exporting
Exporting: shipping goods produced in the company´s home country to
other countries.
 Licensing
Licensing: is a strategy in which the licensing firm grants rights to
another firm in the host country to produce and / or sell a product.
The licensee pays compensation to the licensing firm in return for
technical expertise.
 Franchising
Franchising is the practice of the right to use a firm’s business model
and brand for a prescribed period of time. For the franchisor, the
franchise is an alternative to building “chain stores”.
 Joint Venture

Joint Ventures: is a strategy in which companies combine the

resources and expertise needed to develop new products or
technologies.

Chery Jaguar Land Rover

Automotive Company Ltd.

Pfizer, Inc joined with Zhejiang Hisun

Pharmaceutical Co., Ltd., and formed a JV in
the host city of Hangzhou:
Hisun-Pfizer Pharmaceuticals Co., Ltd.
 Acquisitions
Acquisitions: purchasing another company already operating in a
certain area.
Research indicates that wholly-owned subsidiaries are more successful
in international undertakings than are strategic alliances, such as joint
ventures.
Acquisitions in Asia
Acquisitions in Asia
 Green-Field Development

Green-Field Development: building its own manufacturing plant and

distribution system.

Bintan Resorts

Developed by: PT Bintan

Resorts Cakrawala -
Indonesia

Project land size: 1,300

hectares
 Green-Field Development

Location: Phnom Penh, Cambodia.

Height: 560 meters.
Floors: 133
Build by: Sino Great Wall International
(China).
Budget: US$ 2,700 millions.
 Production Sharing

Production Sharing: is the process of combining the higher labor skills

and technology available in the developed countries with the lower-cost
labor available in developing countries.
 Production Sharing

Apple “iPhone City” - Zhengzhou

 Turnkey Operations

Turnkey Operations: are typically contracts for the construction of

operating facilities in exchange for a fee. The facilities are transferred to
the host country or firm when they are complete.

Hitachi Plant Construction, Ltd.

Turnkey Contract for Supply of
Utilities to Brewery for Sapporo
Vietnam Ltd.
Turnkey Operations
 Turnkey Operations
Franchising is also another form of Turnkey Operations.
 BOT Concept
BOT (build, operate, transfer) Concept: is a variation of the turnkey
operation. Instead of turning the facility 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 for the host country.
 BOT Concept

THSR runs 349.5 km, Taipei to Kaohsiung (105

min).
Speed: 300 km/h.
Managed by: Taiwan High Speed Rail
Corporation (THSRC).
Cost: US$ 18 billion.
The line opened on 5 January 2007.
Targets 90% of Taiwan's population (129,000
passengers per day).
 Management Contract
Management Contract: offer a means through which a corporation
may use some of its personnel to assist a firm in a host country for a
specified fee and period of time.

Jorge Chavez International Airport

 Management Contract

Intercontinental Phnom Penh Hotel

 Conclusions
Conclusions about Growth Strategies:

Research suggests that growth into areas related to a company´s current

product lines is generally more successful than is growth into completetely
unrelated areas.

One study indicates the following results of success: vertical growth (80%),
horizontal growth (50%), concentric diversification (35%), conglomerate
diversification (28%).

Other study reveals that firms that grow through acquisitions do not perform
financially as well as firms that grow through internal means.
 Thanks!

Ronald Huerta-Mercado H. – ronald.huertamercado@usil.pe