BM2212

STRATEGY FORMULATION: CORPORATE STRATEGY

Vision, Mission, and Objectives

Strategy formulation is the investigation, analysis, and decision-making by outlining the company's
competitive advantages, finding areas of weakness that limit its ability to expand, creating the corporate
mission, outlining realistic goals and establishing policy standards.
To build a good strategy, organizations need to have a common purpose. Purpose is the primary and
basic reason for an organization’s existence, not only to inspire the organization but also to help
employees in an organization to develop their priorities and roles and to understand the priorities and
roles of their colleagues.
The following are the critical elements that an organization must develop before strategy formulation:

Figure 1. Hierarchy of Goals

Source: Strategic Management: Text & Cases (10th ed.), 2021. p. 68

 Vision. It refers to the desired future state or “big picture” of what an organization desires to achieve.
A vision is a goal that is massively inspiring, in-depth, and long-term. It represents a destination that
is driven by and evokes passion. It communicates a company's beliefs and governing principles to the
community and the members of its organization.

A good vision should be brief, clear, and well beyond narrow financial objectives. Although they
cannot be accurately measured by a specific indicator of how well they are being achieved, they
provide a fundamental statement of an organization’s values, aspirations, and goals.

John Kotter, an American educator, and business consultant, lists in his book “Leading Change” all the
characteristics that should be included in an effective vision:
1. Imaginable: A good vision conveys a picture of what the future will be.
2. Desirable: It appeals to the long-term interests of employees, customers, stockholders, and
others who have a stake in the enterprise.
3. Feasible: It comprises realistic and attainable goals.
4. Focused: It Is clear enough to guide decision-making.
5. Flexible: It is general enough to allow individual initiative and alternative responses in light
of changing conditions.

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6. Communicable: Is easy to communicate; can be successfully explained within five (5) minutes

Example:
Samsung: “To inspire the world with our innovative technologies, products, and design that enrich
people’s lives and contribute to social prosperity by creating a new future.”

 Mission. A mission statement is more specific and action-oriented than a vision. It outlines the
organization’s primary purpose and the basis of competition and competitive advantage. Effective
mission statements have the greatest impact when it reflects an organization’s enduring,
comprehensive strategic priorities and response to multiple primary stakeholders (customers,
employees, suppliers, and shareholders).

The following are the general characteristics of a good mission statement:

1. Concise. It must be short so that everyone can remember and understand.
2. Outcome-oriented. It should be measurable so that the company can visibly see progress.
3. Inclusive. It must include all the stakeholders involved in implementing a company’s strategy.

Example:
Philippine Airlines:
“To deliver safe, reliable, efficient, and pleasant travel experience exceeding passenger
expectations. To provide a satisfying career to our employees and adequate returns to
stockholders. To represent the best of the Philippines, the Best of Filipinos to the world. ”

 Strategic Objectives. These are the specific and measurable results focused on achieving an
organization's mission. The strategic objectives generally guide how the organization can fulfill or
move toward the higher goals (mission and vision) in a more specific and well-defined time frame.

For objectives to be meaningful and effective, they must possess the following criteria:
1. Measurable. At least one indicator must measure progress against fulfilling the objective.
2. Specific. This means providing a clear message as to what needs to be accomplished.
3. Appropriate. It must be consistent with the organization’s vision and mission.
4. Realistic. Given the organization’s capabilities and environmental opportunities, it must be an
achievable target. In essence, it must be challenging but doable.
5. Timely. There must be a time frame for achieving the
objective.

Example: One of Facebook’s strategic objectives is coordinating with governments to allow their
citizens to access the online social network. This intensive strategy aligns with Facebook’s
corporate mission and vision statements, emphasizing growth through global market reach.

Corporate Strategy
Corporate-level strategy is primarily about the choice of direction for a firm and the management of its
various product lines and business units for maximum value. It includes decisions regarding the flow of
financial and other resources, transfer of skills and capabilities developed in one unit to other units that
need such resources, and synergy among multiple product lines and business units.
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The three (3) key issues that corporate strategy addresses are the following:
 Directional strategy. It refers to the firm’s overall orientation toward growth, stability, or
retrenchment.
 Portfolio analysis. It includes the industries or markets in which the firm competes through its
products and business units.
 Parenting strategy. It is how the management coordinates activities, transfers resources, and
cultivates capabilities among product lines and business units.

Directional Strategy
Bamford et al. (2018) stated that a corporation’s directional strategy is composed of three (3) general
orientations:

 Growth strategies. These refer to the firm’s actions to expand its activities. It is the most widely
pursued corporate directional strategy due to its design to achieve growth in sales, assets, and
profits.

The two (2) basic growth strategies involve:

1. Concentration (Vertical Growth). It can be achieved through considerable growth in your
respective industry. It means expanding supply chains to reach more outlets, adding new
features to existing products, and offering new products in the same market. Companies may
take this initiative to reduce costs, gain control over scarce resources, guarantee key input
quality, or obtain access to potential customers. Vertical growth is divided into two (2) types:

 Backward integration. It refers to the process in which a company purchases or internally

produces certain inputs of its supply chain that could be utilized in production. This
backward movement strategy is initiated to ensure supply, bargaining leverage with
suppliers, and bring down production costs.

Example: Jollibee Foods Corporation (JFC) may buy farms and plant their own ingredients to
obtain a cheaper deal instead of buying from a supplier.
 Forward integration. Forward integration is a strategy where the company gains control of
the business activities ahead in the value chain. The ultimate goal is to increase power and
ownership over their value chain, synergize the operations, reduce total expenses, and
become closer to the end consumer in the value chain.

Example: Jollibee Foods Corporation (JFC) expanded its market share by purchasing
Chowking Food Corp., Greenwich Pizza Corp., and Baker Fresh Foods Philippines, among
others.

2. Diversification (Horizontal growth.) It can be achieved by expanding a company’s operation into

other geographic locations or increasing the range of products and services offered to current
markets.
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The diversification strategies involve the following:

 Concentric diversification. It can be achieved by expanding the production portfolio by
adding new products to fully utilize the potential of existing technologies and marketing
systems. It occurs when the organization adds related products or markets to its existing
product line.

Example: PepsiCo adopted a concentric diversification strategy when it broadened its

product line from soft drinks to fast food franchises and snack foods.

 Conglomerate diversification. It can be achieved by moving new products or services that

have no technological or commercial relations with current products, equipment, or
distribution channels but may appeal to new customers.

Example: Alphabet is Google’s parent company which operates in many other areas such as
life sciences projects, driverless cars, start-up investing, fiber optics, and home devices
(Sarokin, 2018).

 Stability strategies. These refer to the firm’s actions to make no changes in its current activities. The
following are the types of stability strategies:

1. Pause/Proceed-with-Caution Strategy. 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 prolonged rapid growth.

Example: Dell followed its growth strategy by selling personal computers by mail, which brought
massive profits for the organization. However, it resulted in more growth than the company
could handle. Subsequently, the management was forced to temporarily stop the marketing
effort until they could hire additional managers, improve their company structure, and build
new facilities.

2. No-Change Strategy. It is a decision to do nothing new. It is demonstrated by a management's

choice to continue current operations and policies for a company's foreseeable future.

Example: The cigarette industry is a great example of a no-change stability strategy. When you
look at the cigarette industry, the market players have not changed for more than a century. So,
cigarette players adopt a no-change stability strategy.

3. Profit Strategy. It is a decision to do nothing new in a worsening situation but act as though the
company’s problems are only temporary. The profit strategy attempts to artificially support
profits when a company’s sales decline by reducing investment and short-term discretionary
expenditures.

Example: Cebu Pacific Airlines has shown resilience in the face of COVID-19 by introducing
cheaper flights while implementing safety measures in line with global standards and ramping
its cargo shipment services to ensure that its domestic and international operations continue.

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 Retrenchment strategies. These refer to the firm’s actions to pursue cutback or ultimate divestment
when it has a weak competitive position in some or all of its product lines resulting in poor
performance. The following are the types of retrenchment strategies:

1. Turnaround Strategy. It emphasizes improving operational efficiency and is most appropriate to

implement when a corporation’s problems are pervasive but not yet critical. Companies improve
their performance by cutting costs or selling off assets. This strategy involves three (3) phases:
Contraction, Consolidation, and Rebirth.
 Contraction is the initial effort to quickly “stop the bleeding” with the general purpose of
cutting back on company size and costs.
 Consolidation implements a plan to reduce unnecessary expenses.
 Rebirth happens if the company is successful with its efforts and starts growing profitably
again.

2. Captive Company Strategy. It involves giving up independence in exchange for security. In this
way, the corporation may reduce the scope of some of its functional activities to reduce costs
significantly.

Example: After years of cost-cutting moves, acquisitions, and selling off assets, Yahoo! finally gave
in to the captive strategy by hiring investment bankers to sell the company.

3. Sell-out/Divestment Strategy.
 A sell-out involves selling the entire company to another firm at a good deal, given that the
shareholders and the employees can keep their jobs.

Example: American Airlines was sold to U.S. Airways for an $11 billion or P550 billion deal in
2015 (Harlan, 2015).

 A divestment, on the other hand, involves selling a division of a company with low growth
potential.

Example: P&G used this strategy when it sold more than half of its brands and consolidated
others to focus on just 65 brands (Bamford et al., 2018).

4. Bankruptcy/Liquidation Strategy.
 Bankruptcy involves giving up management of the firm to the courts in return for some
settlement of the corporation’s obligations.

Example: Philippine Airlines Inc. filed for bankruptcy in New York with a lender-supported
plan that helped the country’s main carrier recover after the pandemic devastated global
travel.

 Liquidation involves the termination of the whole firm. When the industry is unattractive, and
the company is too weak to be sold, management may choose to convert as many saleable
assets as possible to cash, to be distributed to the shareholders after all obligations are paid.

Example: Hertz, an Auto rental company, filed for liquidation in May with $24.35 billion in
liabilities. The company’s attempts to move into the consumer travel market failed since its
competitors Avis Budget Group (CAR) and Enterprise Holdings maintained market share.
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Portfolio Analysis
In portfolio analysis, top management views its product lines and business units as a series of
investments from which it expects a profitable return. A strategic business unit is a single business or a
collection of related businesses that can be planned separately from the rest of the company. It has its
own competitors and a manager responsible for strategic planning and profit performance.

Strategic Business Unit (SBU) aims to develop different strategies and assign appropriate funding. Once
it has defined SBUs, management must decide how to allocate corporate resources to each.

Figure 1. Boston Consultancy Group (BCG) Matrix

Source: Strategic Management: Text and Cases (10th Edition), 2021. p. 240

BCG’s Growth-Share Matrix used relative market share and the annual market growth rate as criteria for
investment decisions, classifying SBUs as dogs, cash cows, question marks, and stars.

 Stars. These are products within a company’s product line, which can be considered a market leader
since they generate enough cash to maintain their high share of the market and usually contribute
to the company’s profits.

Example: The Fitbit bracelet has been a star performer for the company, with the product still
commanding more than 30% of the market share in 2016 (Bamford et al., 2018).

 Question marks. These are new products with the potential for success but need a lot of cash
investments for development. These suggest that if a product is perceived to gain enough market
share to become a market leader, money must be taken from more mature products and spent on
the question mark.

Example: After years of fruitlessly experimenting with an electric car, General Motors finally
decided in 2006 to take a chance developing the Chevrolet Volt (Bamford et al., 2018).

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 Cash cows. These typically bring in far more money than is needed to maintain their market share.
In this maturing or even declining stage of their life cycle, these products are “milked” for cash that
will be invested in new question marks.

Example: Apple’s iPhone represented more than 60% of Apple’s revenues, even as sales started
falling in 2016. This company's flagship product provides vast resources that have been poured into
the Apple Watch, among others (Bamford et al., 2018).

 Dogs. These have a low market share and do not have the potential to bring in much cash for the
company.

Example: IBM sold its PC business to China’s Lenovo Group to focus on its growing services business
(Bamford et al., 2018).

Corporate Parenting
According to Bamford et al. (2018), corporate parenting generates corporate strategy by focusing on the
core competencies of the parent corporation and the value created from the relationship between the
parent and its businesses. In the form of corporate headquarters, the parent has great power in this
relationship.

If there is a good fit between the parent’s skills and resources and the needs and opportunities of the
business units, the corporation is likely to create value. The following are the steps involved in
developing a corporate parenting strategy:

1. Examine each business unit in terms of its strategic factors. Corporate headquarters must establish
centers of excellence across the corporation. A center of excellence is an organizational unit that
embodies a set of capabilities that has been explicitly recognized by the firm as an important source
of value creation, with the intention that these capabilities be leveraged or disseminated to other
parts of the firm.

Example: Strategic business units can save time and effort spent on building an established brand
and broad customer base that already exists in the parent organization of the SBUs. At the same
time, they can prevent themselves from the everyday challenges of the larger company.

2. Examine each business for performance improvement. Corporate headquarters must consider
parenting opportunities for the organization.

Example: Two (2) business units might increase leverage by combining their sales forces. In another
instance, a parent company may help improve the performance of a business unit with poor
manufacturing and logistics skills.

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3. Analyze how well the parent corporation fits with the business unit. Corporate headquarters must
be aware of its own strengths and weaknesses in terms of resources, skills, and capabilities. The
corporate parent must assess whether it has the characteristics that fit the parenting opportunities
in each business unit. It must also assess whether there is a misfit between the parent’s
characteristics and the critical success factors of each business unit.

Example: A corporate center acts as a parent to the corporate businesses by nurturing and growing
them synergistically as dependent entities.

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