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Generic corporate strategies

A corporate strategy indicates which businesses a multiproduct or multi-product-line organization will


be in and how resources will be allocated among those businesses.

The generic corporate strategies can be grouped as follow:

1. Concentration on a single business

2. A strategy of vertical integration

3. A strategy of diversification

4. Abandonment and liquidation strategies

5. Corporate turnaround, retrenchment, and portfolio restructuring strategies

6. Strategic alliances

The strategy of concentration on a single business

Concentrating on a single business offers opportunity for a firm to:

•build a distinctive competence by utilizing the full force of organizational resources and managerial
know-how in order to become proficient at doing one thing very well and very efficiently;

•use the firm’s accumulated experience and distinctive expertise to pioneer fresh approaches in:
production technology, and/or in meeting customer needs and/or in product innovation and/or in any
other part of the overall activity/cost chain;

•translate the firm’s distinctive competence and ability to innovate into a reputation for leadership and
excellence.

The risk associated with this strategy is to bet for one lucky number (or putting all of the eggs in one
single basket).

Vertical integration strategies

Vertical integration strategies involve expanding the firm’s range of activities backward into sources of
supply and/or forward toward end-users of the final product. Corporate strategy can aim at becoming
fully integrated, participating in all stages of the process of getting products into the hands of final
users, or the strategic objective may be limited to becoming partially integrated. The strategy of
vertical integration can be achieved either through firm’s own internal start-up entry into more stages
in the industry’s activity chain, or by acquiring an enterprise already positioned in the stage into which
the firm wishes to integrate.

Advantages:
•a smoother, more economical production flow
•product differentiation
•having one’s own capability for accessing end-user markets
•a distribution cost advantage.
Disadvantages:

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•capital requirements may be larger, thus placing a heavy strain on the firm’s financial resources
•problems of balancing capacity at each stage in the activity chain
•introduces additional risks because basically the firm remains in the same industry
The strategy of diversification

There are two generic approaches to corporate diversification: related and unrelated.

In related diversification there is a common linkage or element of “fit” among a firm’s several lines of
businesses. This common element is called strategic fit. Strategic fit exists when the activity-cost
chains of different businesses are sufficiently related that opportunities exist to reduce costs, to
enhance differentiation, or to manage more effectively by coordinating those particular activities in the
industry chains that are closely related. A diversified firm which exploits these activity-cost chain
interrelationships and captures the benefits of strategic fit can achieve a consolidate performance that
is more than the sum of what the businesses can earn pursuing independent strategies (the phenomenon
of 2+2=5).

There are three broad categories of strategic fit:

1. market-related fits – products from different businesses are used by the same customers, sold by
essentially the same marketing and sales methods in the sa,e geographic market, or distributed
through common dealers and retailers;

2. operating fits - arise from interrelationships in the procurement of purchased inputs, in production
technology, in manufacture and assembly, and in such administrative support areas as hiring and
training, finance, accounting and information systems, security and facility maintenance;

3. management fit – emerges when different business units present managers with comparable or
similar types of entrepreneurial, technical, administrative, or operating problems, thereby allowing
the accumulated managerial know-how associated with one line of business to split over and be
useful in managing another line of business.

The essence of unrelated diversification strategy is to venture in any business assumed to be profitable
enough. Possible ways to pursue this strategy include:

•a cash-rich, opportunity-poor company seeking to acquire a number of opportunity-rich, cash-poor


enterprises;

•a firm subject to strong seasonal and cyclical sales patterns diversifying into areas with a
counterseasonal or countercyclical sales pattern;

•a debt-heavy firm seeking to acquire a debt-free firm in order to balance the capital structure of the
former and increase its borrowing capacity;

•acquiring companies in any line of business, so long as the projected profit opportunities equal or
exceed minimum criteria.

Managing a diversified portfolio is a very difficult task. The corporate manager of an unrelated
diversified enterprise must have the talent to hire “good management” to run each of many entirely
different businesses, and to discern when the major strategic proposals of division managers are good
or bad.

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However, without some kind of strategic fit, consolidated performance of an unrelated multibusiness
portfolio will tend to be no better than sum of what individual business units can achieve if they were
independent firms.

Diversification can be achieved through acquisitions, internal development, or joint ventures.

Abandonment and liquidation strategies

Abandonment is a solution when a line of business from portfolio loses its appeal. Normally
unattractive businesses should be divested as fast as is practical.

Divestiture can take either of two forms. In some cases, it works fine to divest a business by spinning
it off as a financially and managerially independent company, with the parent company retaining
partial ownership or not. In other cases, divestiture is best accomplished by selling the unit outright, in
which case a buyer needs to be found.

Liquidation is the most unpleasant and painful. Liquidation follows the rule of law.

Corporate turnaround, retrenchment, and portfolio restructuring strategies

These strategies come into play when senior management undertakes restoration of an ailing corporate
business portfolio to good health, based on a diagnose of the underlying reasons for poor corporate
performance.

How to attempt a turnaround necessarily depends on the roots of poor profitability and the urgency of
any crisis. There are six approaches depending on the causes:

1. focus mainly on restoring the profitability in the money-losing units;

2. implement harvest/divest strategies in the poorly performing units and allocate money and
resources to expansion of the better-performing units;

3. institute economies in all business units;

4. selling off weak businesses and buying new ones in more attractive industries;

5. replace key managers;

6. launching profit improvement programes in all business units.

Retrenchment is a short-run defensive strategy for responding to conditions of general economic


recession, tight money, periods of economic uncertainty, harsh regulations, and internal financial crisis.
The strategy is usually dropped when conditions get better. Retrenchment can be approached in two
ways:

1. pursuing stringent internal economies in all units; reducing operating expenses, postponing capital
expenditure, retiring obsolete equipment, dropping marginally profitable products, closing older
and less efficient plants, reorganizing internal work flows, reducing inventories, and the like.

2. singling out the weakest performing units for major strategy revisions, internal overhaul, and
whatever else may be necessary to restore it to good health.

Portfolio restructuring strategies involve radical surgery on the mix and percentage makeup of the
types of business in the portfolio. The strategy involves both divestitures and acquisitions.