Solution Manual for Strategic Management: Theory and Practice, 3rd Edition, John A.

Parnell,

Solution Manual for Strategic Management: Theory

and Practice, 3rd Edition, John A. Parnell, ISBN-10:
142662882X, ISBN-13: 9781426628825

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Chapter 6
CORPORATE-LEVEL
STRATEGIES

LEARNING OBJECTIVES

1 Explain the three corporate profile options and the advantages and disadvantages of
each.

2 Identify characteristics associated with the three broad corporate strategies.

3 Identify the various means of pursuing corporate growth.

4 Explain when a stability strategy may be more appropriate than a growth strategy.

5 Identify the three variations of the retrenchment strategy.

6 Discuss the usefulness of the BCG matrix in the corporate strategy process.

7 Explain the forms of corporate international involvement.

CHAPTER OVERVIEW

This chapter focuses on two key sets of strategic decisions that must be made at the
corporate level. The first is the corporate profile, a determination of whether the firm will
operate in a single business, in multiple related businesses, or in multiple unrelated
businesses. Each option has its own pros and cons.
6-2 Chapter 6: Corporate-Level Strategies

Second, strategic managers must select a corporate strategy from among three basic
choices: growth, stability, or retrenchment. The chapter discusses a number of variations
of the growth and retrenchment options. In addition, a firm may choose a form of
corporate restructuring to support strategic attempts to revive its competitiveness and
performance.

Portfolio frameworks such as the BCG matrix can assist corporate executives in
managing the relationships among the firm’s business units. However, it should be
emphasized that such frameworks have limitations and should only serve as “food for
thought” in making strategic decisions.

International concerns greatly influence corporate strategy. A variety of conservative and

aggressive options for international involvement exist, each with its own advantages and
disadvantages.

LESSON PLAN

Chapter Opening

The chapter opens with a discussion on the corporate profile. The diversification options
available to the firm (i.e., single business, related businesses, or unrelated businesses) can
be likened to the basic principles of personal investing. Diversification reduces risk for
the investor, but is also likely to reduce performance. Give students a minute to allocate a
single million dollar payout from a lottery (with no additional payments forthcoming)
among investments in three firms: McDonald’s, Dell, and a local utility company. Ask
students who allocated most or all of their funds to a single firm to explain their
decisions. Ask those who divided their funds among the three firms to explain their
rationale.

Small Groups

Several small group activities are possible:

• Ask student groups to identify healthy firms that are implementing, or have
recently implemented, each of the three corporate strategies.
• Identify 4–5 common business units (e.g., McDonald’s, Holiday Inn, etc.) and
announce that a (fictitious) firm has acquired this combination of businesses. Ask
student teams to categorize the businesses along the BCG matrix and provide
suggestions for how the firm might manage its business units as a portfolio.

Homework

Although considerable gains may be associated with international involvement, the costs
and complexities can be great as well. Ask students to research current examples of firms
Chapter 6: Corporate-Level Strategies 6-3

who are succeeding or experiencing difficulties in their international involvement. The

Findarticles (www.findarticles.com) site is a good place to begin the search.

CHAPTER OUTLINE

The corporate-level strategy is the strategy top management formulates for the overall
corporation.

6-1 The Corporate Profile

Three Options:

1. Operate in one industry to concentrate efforts in a single area.

2. Operate in related industries to build synergy among business units. Synergy
occurs when the combination of two organizations results in higher
effectiveness and efficiency than would otherwise be generated separately.
3. Operated in unrelated industries to diversify and reduce risk.

6-2 Strategic Alternatives at the Corporate Level

6-3 Growth Strategies

A firm can seek internal growth, a corporate-level growth strategy in which a firm
expands by internally increasing its size and sales rather than by acquiring other
companies. Alternatively, a firm can seek external growth, a corporate-level growth
strategy whereby a firm acquires other companies. A merger occurs when two or more
firms, usually of roughly similar sizes, combine into one through an exchange of stock.
An acquisition is a form of a merger whereby one firm purchases another, often with a
combination of cash and stock. The remainder of this section discusses different forms of
external growth.

6-3a Horizontal Related Integration

A firm that acquires other companies in the same line of business is engaging in
horizontal integration. Doing so allows a firm operating in a single industry to grow
rapidly without moving into other industries.

6-3b Horizontal Related Diversification

A firm is engaging in horizontal related diversification when it acquires a business
outside its present scope of operation, but with similar or related core competencies, the
firm’s key capabilities and collective learning skills that are fundamental to its strategy,
performance, and long-term profitability.

6-3c Conglomerate Unrelated Diversification

6-4 Chapter 6: Corporate-Level Strategies

When a corporation acquires a business in an unrelated industry to reduce cyclical

fluctuations in cash flows or revenues, it is pursuing conglomerate (unrelated)
diversification.

6-3d Vertical Integration

Vertical integration refers to merging various stages of activities in the distribution
channel. When a firm acquires its suppliers (i.e., expanding “upstream”), it is engaging in
backward integration, whereas a firm acquiring its buyers (i.e., expanding
“downstream”) is engaging in forward integration.

6-3e Strategic Alliances (Partnerships)

Strategic alliances—often called partnerships—occur when two or more firms agree to
share the costs, risks, and benefits associated with pursuing new business opportunities.

6-4 Stability Strategy

Stability—attempting to keep a firm roughly the same size—can be appropriate under

four conditions:

1. Industry growth is slow or non-existent.

2. Costs associated with growth do not exceed its benefits.
3. Growth may place great strains on quality, marketing efforts, and customer
service.
4. Large, dominant firms may not want to risk prosecution for monopolistic
practices associated with growth.

6-5 Retrenchment Strategies

When performance is disappointing, however, a retrenchment strategy may be

appropriate. A firm deliberately reduces its size when it employs a retrenchment strategy.
The three forms of retrenchment ranging from most conservative to most radical are
turnaround, divestment, and liquidation.

6-5a Turnaround
A turnaround seeks to transform the corporation into a leaner, more effective firm, and
includes such actions as eliminating unprofitable outputs, pruning assets, reducing the
size of the workforce, cutting costs of distribution, and reassessing the firm’s product
lines and customer groups.

6-5b Divestment
Divestment—selling one or more of a firm’s business units—may be necessary when the
industry is in decline, or when a business unit drains resources from more profitable
units, is not performing well, or is not synergistic with other corporate holdings.

6-5c Liquidation
Chapter 6: Corporate-Level Strategies 6-5

Liquidation is the strategy of last resort, and terminates the business unit by selling its
assets. In effect, liquidation represents a divestment of all the firm’s business units and
should be adopted only under extreme conditions.

6-6 BCG Growth-Share Matrix

The Boston Consulting Group (BCG) Matrix is corporate portfolio framework that
examines the relationships among business units held by a single firm.

1. Stars (high growth potential & high market share)

2. Question Marks (high growth potential, but low market share)
3. Cash Cows (low growth potential, but high market share)
4. Dogs (low growth potential & low market share)

There are four BCG options for strategic managers:

1. Build market share with stars and question marks.

2. Hold market share with cash cows.
3. Harvest (milk) as much short-term cash as possible.
4. Divest a business unit.

6-7 Global Corporate Strategy

Broadly speaking, a firm can pursue one of three levels of involvement outside of its host
country:

1. International level involvement is limited to importing, exporting, licensing,

or strategic alliances.
2. Multinational level involvement includes direct investments in other countries
and subsidiaries that operate independently from each other.
3. Global level involvement includes direct investments and interdependent
subdivisions abroad.

Under an international licensing agreement, a foreign licensee purchases the rights to

produce a company’s products and/or use its technology in the licensee’s country for a
negotiated fee structure. International franchising is a longer-term form of licensing in
which a local franchisee pays a franchiser in another country for the right to use the
franchiser’s brand names, promotions, materials, and procedures.

CRITICAL THINKING QUESTIONS

• Can a firm succeed over the long term with a stability strategy? Does every firm
need to grow—sooner or later—to maintain success? Explain.
• Would you rather lead a firm with multiple unrelated businesses or one of
comparable size with only a single business? Why?
6-6 Chapter 6: Corporate-Level Strategies

WEB RESOURCES

• http://www.netmba.com/strategy/turnaround: NetMBA discusses the ins and outs

of corporate turnarounds.
• http://www.colorado.edu/ibs/PEC/workplacechange/publications/impacts:
Workplace Change summarizes a number of studies that outline the detrimental
effects of corporate restructurings on employee.
• http://www.exinglobal.typepad.com: Going Global provides resources to help
companies enter the global marketplace.
• http://www.mgmtguru.com/mgt499/TN8.htm: Management Guru discusses why
firms diversify.

ANSWERS TO REVIEW QUESTIONS AND EXERCISES

1. What are the advantages and disadvantages of internal growth as opposed to growth
through mergers and acquisitions?

Internal growth is accomplished when a firm increases revenues, production capacity,

and its work force, whereas external growth is accomplished when other firms are
acquired. Although internal growth enables the firm to preserve its corporate culture and
image while expanding at a more controlled pace, external growth can enable the firm to
grow more expediently.

2. Why would management adopt a stability strategy? Can stability strategies be viable
over time? Why or why not?

A stability strategy can be appropriate when:

• Industry growth is slow or non-existent.

• Costs associated with growth do not exceed its benefits.
• Growth may place great strains on quality and customer service.
• Large, dominant firms may not want to risk prosecution for monopolistic practices.

A stability strategy can be effective over a long period of time. It is not essential that a
healthy firm pursue a growth strategy at any time.

3. When is a retrenchment strategy appropriate? What criteria can help determine what
particular retrenchment strategy should be used?

Broadly speaking, a retrenchment strategy is appropriate when performance is declining.

Evidence of poor performance, such as declining profits or losses, drops in market share,
and reductions in quality or customer service relative to competitors, can trigger the need
for a retrenchment strategy.
Chapter 6: Corporate-Level Strategies 6-7

4. How should the BCG matrix be applied? Are such portfolios always useful to
corporate executives?

The BCG matrix can give strategic managers a perspective on the relationships among its
business units. Although firm-specific conditions may require exceptions to the
guidelines, these frameworks can provide an excellent starting point to consider strategy
in firms with multiple business units.

5. What are the advantages and disadvantages associated with corporations operating in
centralized or decentralized fashions?

Companies that are relatively centralized make many functional decisions at the
corporate level. The more commonality in those functional activities across the firm’s
business units, the greater the tendency is to coordinate those activities at the corporate
level. Centralization can result in efficiencies and consistencies across all business units.

Centralization, however, can also be inefficient, especially when a firm attempts to

“control” the activities of a diverse array of business units. As the organization grows,
larger corporate staffs are required, increasing the distance between corporate
management and the business units. Top managers are forced to rely increasingly on their
staff for information, and they communicate downward to the business units through their
staff, leading to a number of communication and coordination problems, as well as to a
proliferation of bureaucracy.

6. What factors should a firm’s managers consider when determining the degree of
international involvement appropriate for the organization?

There are six primary considerations concerning the appropriate degree of international
involvement:

1. Are customer needs abroad similar to those in the firm’s domestic market? If
so, it may be possible for the firm to develop economies of scale by producing
a higher volume of the same good or service for both markets.
2. Are differences in transportation and other costs abroad favorable and
conducive to producing goods and services abroad? Are these differences
favorable and conducive to exporting or importing goods from one country to
another?
3. Are the firm’s customers or partners already involved in global business? If
so, it may be necessary for the firm to become equally involved.
4. Will it be difficult to distribute goods and services abroad? If competitors
already control distribution channels in another country, expansion into that
country will be difficult.
5. Will government trade policies facilitate or hinder global expansion? For
example, NAFTA facilitates trade among firms in the U.S., Canada, and
Mexico. Similar trading blocks, such as the European Economic Union (EEU)
occur in other parts of the world.
6-8 Chapter 6: Corporate-Level Strategies

6. Will managers in one country be able to learn from managers in other

countries? If so, it is possible that global expansion can improve efficiency
and effectiveness, both abroad and in the host country.

KEY TERMS

Acquisition: A form of a merger whereby one firm purchases another, often with a
combination of cash and stock.

BCG Growth-Share Matrix: A corporate portfolio framework developed by the Boston

Consulting Group that categorizes a firm’s business units by the market share that the
firm holds and the growth rate of firm’s respective markets.

Conglomerate Unrelated Diversification: A form of diversification in which a firm

acquires a business to reduce cyclical fluctuations in cash flows or revenues.

Core Competencies: The firm’s key capabilities and collective learning skills that are
fundamental to its strategy, performance, and long-term profitability.

Corporate-Level Strategy: The strategy that top management formulates for the overall
company.

Corporate Profile: Identification of the industry(ies) in which a firm operates.

Diversification: The process of acquiring companies to increase a firm’s size.

Divestment: A corporate-level retrenchment strategy in which a firm sells one or more of

its business units.

External Growth: A corporate-level growth strategy whereby a firm acquires other

companies.

Forward Integration: A firm’s acquisition of one or more of its buyers.

Growth Strategy: A corporate-level strategy designed to increase profits, sales, and/or

market share.

Horizontal Related Diversification: A form of diversification in which a firm acquires a

business outside its present scope of operation but with similar or related core
competencies.

Horizontal Related Integration: A form of acquisition in which a firm expands by

acquiring other companies in its same line of business.

Internal Growth: A corporate-level growth strategy in which a firm expands by

internally increasing its size and sales rather than by acquiring other companies.
Chapter 6: Corporate-Level Strategies 6-9

International Franchising: A form of licensing in which a local franchisee pays a

franchiser in another country for the right to use the franchiser’s brand names,
promotions, materials, and procedures.

International Licensing: An arrangement whereby a foreign licensee purchases the

rights to produce a company’s products and/or use its technology in the licensee’s
country for a negotiated fee structure.

Liquidation: A corporate-level retrenchment strategy in which a firm terminates one or

more of its business units by the sale of their assets.

Merger: A corporate-level growth strategy in which a firm combines with another firm
through an exchange of stock.

Retrenchment Strategy: A corporate-level strategy designed to reduce the size of the

firm.

Stability Strategy: A corporate-level strategy intended to maintain a firm’s present size

and current lines of business.

Strategic Alliances: A corporate-level growth strategy in which two or more firms agree
to share the costs, risks, and benefits associated with pursuing new business
opportunities. Strategic alliances are often referred to as partnerships.

Synergy: When the combination of two firms results in higher efficiency and
effectiveness that would otherwise be achieved by the two firms separately.

Turnaround: A corporate-level retrenchment strategy intended to transform the firm

into a leaner and more effective business by reducing costs and rethinking the firm’s
product lines and target markets.

Vertical Integration: A form of integration in which a firm expands by acquiring a

company in the distribution channel.

PRACTICE QUIZ

True or False

1. Because firms operating in single industries are more susceptible to industry

downturns, most firms eventually diversify into other industries.
True.
The fact that diversification reduces risk influences most firms operating in a single
industry to diversify sooner or later.
6-1 The Corporate Profile
6-10 Chapter 6: Corporate-Level Strategies

2. The growth strategy is the most effective strategy for a healthy firm.
False.
Due to other factors, a healthy firm may be best advised to pursue any of the three
corporate strategy options, not just growth.
6-3 Growth Strategies

3. Synergy occurs when the combination of two organizations results in higher

effectiveness and efficiency than would otherwise be generated by them separately.
True.
Synergy occurs when the sum value of two businesses together is greater than their
individual values added together.
6-3b Horizontal Related Diversification

4. Strategic alliances typically involve higher bureaucratic and developmental costs when
compared to mergers and acquisitions.
False.
Strategic alliances involve lower bureaucratic and developmental costs when compared
to mergers and acquisitions.
6-3e Strategic Alliances (Partnerships)

5. Corporate restructuring involves the acquisition of business units unrelated to the

firm’s core business unit.
False.
Corporate restructuring includes such actions as realigning divisions in the firm, reducing
the amount of cash under the discretion of senior executives, and acquiring or divesting
business units.
6-5 Retrenchment Strategies

6. The BCG matrix provides managers with a systematic means of determining whether a
growth, stability, or retrenchment strategy should be adopted.
False.
The BCG matrix provides managers with a systematic means of considering the
relationships among business units in its portfolio.
6-6 BCG Growth-Share Matrix

Multiple Choice

7. Diversification allows a firm to

A. concentrate its efforts on a single business.
B. use its resources more effectively.
C. create excess resources.
D. all of the above
B.
If synergy results from diversification, the firm can use its resources more effectively.
6-1 The Corporate Profile
Chapter 6: Corporate-Level Strategies 6-11

8. A firm seeking rapid growth should pursue

A. internal growth.
B. external growth.
C. divestment of poor performing businesses.
D. a restructuring strategy.
B.
External growth offers the most expedient opportunity for firm growth.
6-3 Growth Strategies

9. When a firm purchases both its suppliers and buyers, it is engaging in

A. forward integration.
B. backward integration.
C. both forward and backward integration.
D. none of the above
C.
When a firm acquires its suppliers, it is engaging in backward integration, whereas firms
acquiring their buyers are engaging in forward integration.
6-3d Vertical Integration

10. Which of the following is not a potential reason for selecting a stability strategy?
A. The industry is not growing.
B. Growth may place constraints on customer service.
C. Costs associated with growth exceed its benefits.
D. The stability inherently reduces risk.
D.
Depending on the situation, a stability strategy may reduce or increase risk.
6-4 Stability Strategy

11. Firms operating on an international basis limit their activities to

A. importing and exporting.
B. licensing.
C. strategic alliances.
D. all of the above
D.
The international form of operation includes importing, exporting, licensing, and making
strategic alliances.
6-7 Global Corporate Strategy

12. Which of the following is not an advantage of international joint ventures?

A. Firms gain access to knowledge about a foreign market.
B. Partners have the ability to eliminate risk associated with global expansion.
C. Firms can learn from each other.
D. Entry into the foreign market is secured.
B.
International joint ventures can reduce risk by sharing it with the partner, but risk cannot
be eliminated.
Solution Manual for Strategic Management: Theory and Practice, 3rd Edition, John A. Parnell,

6-12 Chapter 6: Corporate-Level Strategies

6-7 Global Corporate Strategy

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