CHAPTER 7 Concentration - If a company’s current product

lines have real growth potential, concentration of

The vignette about Nike illustrates the
resources on those product lines makes sense as a
importance of corporate strategy to a firm’s
strategy for growth.
survival
Two basic concentration strategies are:
and success. Corporate strategy deals with three
key issues facing the corporation as a whole: vertical growth and horizontal growth.
1. The firm’s overall orientation toward growth, Vertical growth can be achieved by taking over a
stability, or retrenchment (directional strategy) function previously provided by a supplier or by a
distributor.
2. The industries or markets in which the firm
competes through its products and business • Vertical integration - the degree to which a
firm operates vertically in multiple locations
units (portfolio analysis)
on an industry’s value chain from extracting
3. The manner in which management coordinates raw materials to manufacturing to retailing.
activities and transfers resources and cultivates • Previously provided by a supplier is called
capabilities among product lines and business units backward integration (going backward on
(parenting strategy) an industry’s value chain).
• Assuming a function previously provided by
Corporate strategy is primarily about the choice of
a distributor is labeled forward integration
direction for a firm as a whole and the management
(going forward on an industry’s value
of its business or product portfolio.
chain).
A corporation’s directional strategy is composed
Transaction cost economics proposes that vertical
of three general orientations (sometimes called
integration is more efficient than contracting for
grand strategies):
goods and services in the marketplace when the
 Growth strategies expand the company’s transaction costs of buying goods on the open
activities. market become too great.
 Stability strategies make no change to the VERTICAL INTEGRATION (CONTINUUM)
company’s current activities.
• FULL INTEGRATION - firm internally
 Retrenchment strategies reduce the company’s makes 100% of its key supplies and
level of activities completely control sits distributors.
Merger is a transaction involving two or more • TAPER INTEGRATION - (also called
concurrent sourcing), a firm internally
corporations in which stock is exchanged but in
produces less than half of its own
which only one corporation survives
requirements and buys the rest from outside
Acquisition is the purchase of a company that is suppliers (backward taper integration).
completely absorbed as an operating subsidiary or • QUASI-INTEGRATION - a company does
division of the acquiring corporation. not make any of its key supplies but
purchases most of its requirements from
The two basic growth strategies are:
outside suppliers that are under its partial
Concentration on the current product line(s) in one control (backward quasi-integration).
industry • LONG-TERM CONTRACT - are
agreements between two firms to provide
Diversification into other product lines in other
agreed-upon goods and services to each
industries
other for a specified period of time.
Horizontal Growth - firm can achieve horizontal BOT Concept: The BOT (Build, Operate,
growth by expanding its operations into other Transfer) concept is a variation of the turnkey
geographic locations and/or by increasing the range operation.
of products and services offered to current markets.
Management Contracts: A large corporation
• HG results horizontal integration - the operating throughout the world is likely to have a
degree to which a firm operates in multiple large amount of management talent at its disposal.
geographic locations at the same point on
Diversification Strategies
an industry’s value chain.
According to strategist Richard Rumelt,
International Entry Options for Horizontal
companies begin thinking about diversification
Growth
when their growth has plateaued and opportunities
Exporting: A good way to minimize risk and for growth in the original business have been
experiment with a specific product is exporting, depleted.
Licensing: Under a licensing agreement, the Concentric (Related) Diversification. Growth
licensing firm grants rights to another firm in the through concentric diversification into a related
host country to produce and/or sell a product. industry may be a very appropriate corporate
strategy when a firm has a strong competitive
Franchising: Under a franchising agreement, the position but industry attractiveness is low.
franchiser grants rights to another company to open
a retail store using the franchiser’s name and Conglomerate (Unrelated) Diversification. When
operating system. management realizes that the current industry is
unattractive and that the firm lacks outstanding
Joint Ventures: Forming a joint venture between a abilities or skills that it could easily transfer to
foreign corporation and a domestic company is the related products or services in other industries, the
most popular strategy used to enter a new country.
most likely strategy is conglomerate
Acquisitions: A relatively quick way to move into diversification—diversifying into an industry
an international area is through acquisitions— unrelated to its current one.
purchasing another company already operating in Cisco uses three criteria to judge whether a
that area. company is a suitable candidate for takeover:
Green-Field Development: If a company doesn’t  It must be relatively small.
want to purchase another company’s problems
along with its assets, it may choose green-field  It must be comparable in organizational culture.
development and build its own manufacturing plant
 It must be physically close to one of the existing
and distribution system.
affiliates.
Production Sharing: Coined by Peter Drucker, the
Stability Strategy - A corporation may choose
term production sharing means the process of
stability over growth by continuing its current
combining the higher labor skills and technology
activities without any significant change in
available in developed countries with the lower-cost
direction.
labor available in developing countries, often called
outsourcing. pause/proceed-with-caution strategy - is, in
effect, a timeout—an opportunity to rest before
Turnkey Operations: are typically contracts for the
continuing a growth or retrenchment strategy.
construction of operating facilities in exchange for a
fee. no-change strategy is a decision to do nothing new
a choice to continue current operations and policies
for the foreseeable future.
Profit strategy is a decision to do nothing new in a with the potential for success, but they need a lot of
worsening situation but instead to act as though the cash for development.
company’s problems are only temporary.
Stars are market leaders that are typically at the
Rentrenchment Strategies - A company may peak of their product life cycle and are able to
pursue retrenchment strategies when it has a weak generate enough cash to maintain their high share of
competitive position in some or all of its product the market
lines resulting in poor performance sales are down
Cash cows typically bring in far more money than
and profits are becoming losses.
is needed to maintain their market share.
Turnaround strategy emphasizes the improvement
Dogs have low market share and do not have the
of operational efficiency and is probably most
potential (because they are in an unattractive
appropriate when a corporation’s problems are
industry) to bring in much cash.
pervasive but not yet critical.
Unfortunately, the BCG Growth-Share Matrix
Captive company strategy involves giving up
also has some serious limitations:
independence in exchange for security.
 The use of highs and lows to form four categories
Sell-out strategy makes sense if management can
is too simplistic.
still obtain a good price for its shareholders and the
employees can keep their jobs by selling the entire  The link between market share and profitability is
company to another firm. questionable.79 Low-share businesses can also be
profitable.80 For example, Olivetti is still profitably
If the corporation has multiple business lines and it
selling manual typewriters through mail-order
chooses to sell off a division with low growth
catalogs.
potential, this is called divestment.
 Growth rate is only one aspect of industry
Bankruptcy involves giving up management of the
attractiveness.
firm to the courts in return for some settlement of
the corporation’s obligations.  Product lines or business units are considered
only in relation to one competitor: the market
liquidation is the termination of the firm.
leader. Small competitors with fast-growing market
portfolio analysis, top management views its shares are ignored.
product lines and business units as a series of
 Market share is only one aspect of overall
investments from which it expects a profitable
competitive position.
return. The product lines/business units form a
portfolio of investments GE Business Screen, follow these four steps:
Two portfolio techniques are 1. Select criteria to rate the industry for each
product line or business unit. Assess overall
• BCG Growth-Share Matrix
industry attractiveness for each product line or
• GE Business Screen
business unit on a scale from 1 (very unattractive)
BCG (Boston Consulting Group) Growth-Share to 5 (very attractive).
Matrix - is the simplest way to portray a
2. Select the key factors needed for success in each
corporation’s portfolio of investments.
product line or business unit. Assess
it is categorized into one of four types for the
business strength/competitive position for each
purpose of funding decisions:
product line or business unit on a scale of 1 (very
Question marks (sometimes called “problem weak) to 5 (very strong).
children” or “wildcats”) are new products
3. Plot each product line’s or business unit’s current  Defining product/market segments is difficult.
position on a matrix
 It suggests the use of standard strategies that can
4. Plot the firm’s future portfolio, assuming that miss opportunities or be impractical.
present corporate and business strategies remain
 It provides an illusion of scientific rigor when in
unchanged. Is there a performance gap between
reality positions are based on subjective judgments.
projected and desired portfolios? If so, this gap
should serve as a stimulus to seriously review the  Its value-laden terms such as cash cow and dog
corporation’s current mission, objectives, strategies, can lead to self-fulfilling prophecies.
and policies.
 It is not always clear what makes an industry
Overall, the nine-cell GE Business Screen is an attractive or where a product is in its life cycle.
improvement over the BCG Growth Share Matrix.
 Naively following the prescriptions of a portfolio
This portfolio matrix, however, does have some model may actually reduce corporate
shortcomings:
profits if they are used inappropriately.
 It can get quite complicated and cumbersome.
Corporate parenting, in contrast, views a
 The numerical estimates of industry corporation in terms of resources and capabilities
attractiveness and business strength/competitive that can be used to build business unit value as well
position give the appearance of objectivity, but they as generate synergies across business units.
are in reality subjective judgments that
Corporate parenting generates corporate strategy
may vary from one person to another.
Campbell, Goold, and Alexander recommend that
 It cannot effectively depict the positions of new the search for appropriate corporate strategy
products or business units in developing involves three analytical steps:
industries. 1. Examine each business unit (or target firm
in the case of acquisition) in terms of its
ADVANTAGES AND LIMITATIONS OF
strategic factors:
PORTFOLIO ANALYSIS
2. Examine each business unit (or target firm)
Portfolio analysis is commonly used in strategy in terms of areas in which performance can
formulation because it offers certain be improved:
3. Analyze how well the parent corporation fits
advantages:
with the business unit (or target firm):
 It encourages top management to evaluate each
horizontal strategy is a corporate strategy that cuts
of the corporation’s businesses individually and to
across business unit boundaries to build synergy
set objectives and allocate resources for each.
across business units and to improve the
 It stimulates the use of externally oriented data to competitive position of one or more business units.
supplement management’s judgment.
 It raises the issue of cash-flow availability for use
in expansion and growth.
 Its graphic depiction facilitates communication.
Portfolio analysis does, however, have some very
real limitations that have caused some
companies to reduce their use of this approach:
 CHAPTER 8 Purchasing strategy deals with obtaining the raw
materials, parts, and supplies needed to perform the
Functional strategy - is the approach a functional
operations function.
area takes to achieve corporate and business unit
objectives and strategies by maximizing resource W. Edward Deming, a well-known management
productivity. consultant, strongly recommended sole sourcing as
the only manageable way to obtain high supplier
Marketing strategy deals with pricing, selling, and
quality.
distributing a product.
Logistics strategy deals with the flow of products
Product development strategy, a company or unit
into and out of the manufacturing process.
can
Three trends related to this strategy are evident:
1) develop new products for existing markets or
• Centralization
2) develop new products for new markets.
• Outsourcing
Financial strategy examines the financial • Internet
implications of corporate and business-level
strategic options and identifies the best financial
course of action. HRM strategy, among other things, addresses the
leveraged buyout, a company is acquired in a issue of whether a company or business unit should
transaction financed largely by debt, usually hire a large number of low-skilled employees who
obtained from a third party, such as an insurance receive low pay, perform repetitive jobs, and are
company or an investment banker. most likely quit after a short time (the
McDonald’s restaurant strategy) or hire skilled
R&D strategy - deals with product and process employees who receive relatively high pay and
innovation and improvement. are cross-trained to participate in self - managing
work teams
Mix of different types of R&D (basic, product, or
process) and with the question of how new Information technology strategy to provide
technology should be accessed through internal business units with competitive advantage.
development, external acquisition, or strategic
alliances. Outsourcing is purchasing from someone else a
product or service that had been previously
One of the R&D choices is to be either a: provided internally. Thus, it is the reverse of vertical
integration.
Technological leader, pioneering an innovation, or
Offshoring is the outsourcing of an activity or a
Technological follower, imitating the products of
function to a wholly owned company or an
competitors.
independent provider in another country.
Porter suggests that deciding to become a
conducted by European and North American
technological leader or follower can be a way of
firms found seven major errors that should be
achieving either overall low cost or differentiation.
avoided:
Operations strategy determines how and where a
1. Outsourcing activities that should not be
product or service is to be manufactured, the level
outsourced: Companies failed to keep core
of vertical integration in the production process, the
activities in-house.
deployment of physical resources, and relationships
with suppliers. 2. Selecting the wrong vendor: Vendors were not
trustworthy or lacked state-of-the-art processes.
3. Writing a poor contract: Companies failed to According to the real-options approach, when the
establish a balance of power in the relationship. future is highly uncertain, it pays to have a broad
range of options open.
4. Overlooking personnel issues: Employees lost
commitment to the firm. Strategic managers should ask four questions to
assess the importance of stakeholder concerns in a
5. Losing control over the outsourced activity:
particular decision:
Qualified managers failed to manage the outsourced
activity. 1. How will this decision affect each stakeholder,
especially those given high and medium
6. Overlooking the hidden costs of outsourcing:
Transaction costs overwhelmed other savings. priority?
7. Failing to plan an exit strategy: Companies 2. How much of what each stakeholder wants is he
failed to build reversibility clauses into the contract. or she likely to get under this alternative?
3. What are the stakeholders likely to do if they
don’t get what they want?
In determining functional strategy, the strategist
must: 4. What is the probability that they will do it?
 Identify the company’s or business unit’s core
competencies
political strategy is a plan to bring stakeholders
 Ensure that the competencies are continually into agreement with a corporation’s actions.
being strengthened
 Manage the competencies in such a way that best
If there is little fit, management must decide if it
preserves the competitive advantage they create
should:
 Take a chance on ignoring the culture
STRATEGIES TO AVOID
 Manage around the culture and change the
Managers who have made poor analyses or lack implementation plan
creativity may be trapped into considering some of
 Try to change the culture to fit the strategy
the following strategies to avoid:
 Change the strategy to fit the culture
• Follow the leader:
• Hit another home run:
• Arms race:
Strategic choice is the evaluation of alternative
• Do everything: strategies and selection of the best alternative.
• Losing hand:
According to Paul Nutt, an authority in decision
Corporate scenarios are pro forma (estimated making, half of the decisions made by managers are
future) balance sheets and income statements that failures.
forecast the effect each alternative strategy and its
various programs will likely have on division and
corporate return on investment. Two techniques help strategic managers avoid the
Risk is composed not only of the probability that consensus trap that Alfred Sloan found:
the strategy will be effective but also of the amount 1. Devil’s advocate: The idea of the devil’s
of assets the corporation must allocate to that advocate originated in the medieval Roman
strategy and the length of time the assets will be
unavailable for other uses.
 Catholic Church as a way of ensuring that
impostors were not canonized as saints.
2. Dialectical inquiry requires that two
proposals using different assumptions be
generated for each alternative strategy under
consideration. (Can be traced back to Plato
and Aristotle)
Regardless of the process used to generate strategic
alternatives, each resulting alternative must be
rigorously evaluated in terms of its ability to meet
four criteria:
1. Mutual Exclusivity: Doing any one alternative
would preclude doing any other.
2. Success: It must be feasible and have a good
probability of success.
3. Completeness: It must take into account all the
key strategic issues.
4. Internal Consistency: It must make sense on its
own as a strategic decision for the entire firm and
not contradict key goals, policies, and strategies
currently being pursued by the firm or its units.

DEVELOPING POLICIES
When crafted correctly, an effective policy
accomplishes three things:
 It forces trade-offs between competing resource
demands.
 It tests the strategic soundness of a particular
action.
 It sets clear boundaries within which employees
must operate while granting them freedom to
experiment within those constraints.
Policies tend to be rather long lived and can even
outlast the particular strategy that created them.
These general policies—such as “The customer is
always right” (Nordstrom) or “Low prices, every
day” (Wal-Mart)—can become, in time, part of a
corporation’s culture.
Managing policy is one way to manage the
corporate culture.