CORPORATE LEVEL STRATEGIES

Corporate level Strategy specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets CLS help companies select new strategic positions – that are expected to increase firm’s value Help the firm earn above-average returns by creating value.

Strategy Formulation: Corporate Strategy
What businesses the corporation should be in? How should corporate headquarters manager its group of businesses?

Corporate Strategy is what makes the whole company greater than the sum of its business units.(SYNERGY)

Corporate Strategy

 Directional

Strategy – overall orientation towards growth, stability, retrenchment
Strategy– industries/markets that the firm competes in through products lines & business units

 Portfolio

 Parenting

Strategy – coordination and transfer of resources between product lines & business units

Corporate sub-strategies
Whether dealing with Corporate or businesslevel strategy, there are four generic ways in which alternatives can be considered: Stability Growth Retrenchment Combinations

1.

2.
3. 4.

Stability Sub-Strategy

  

No-change Profit- reduce cost, do everything to maintain profitability Pause/Proceed with caution most likely to be pursued by small businesses firms in a mature stage of development.

continuing the current activities of the firm without any significant change in direction. environment is unstable and the firm is doing well satisfied with the same consumer groups and maintaining the same market share, satisfied with incremental improvements of functional performance management does not want to take any risks that might be associated with expansion or growth.

Why do companies pursue a stability strategy?
    

the firm is doing well or perceives itself as successful it is less risky it is easier and more comfortable the environment is relatively unstable too much expansion can lead to inefficiencies

Situations where a stability strategy is advisable
 

if the external environment is highly dynamic and unpredictable strategic managers may feel that the cost of growth may be higher than the potential benefits excessive expansion may result in violation of anti trust laws

Types of Stability strategy
1) Pause/Process with caution strategy : temporary period of time until environmental situation changes, consolidate its resources after prolonged rapid growth, test the ground before moving ahead.  2) No change strategy –decision to do nothing new i.e. continue current operations and policies for the foreseeable future.  3) Profit strategy – the profit strategy is an attempt to artificially maintain profits by reducing investments and short-term expenditures.

Growth Strategy
When a firm increases the level of objectives higher than what it has achieved in the immediate past, in terms of market share, sale revenue, etc.,  or  strategic decisions centre around increased functional performance in major aspects.

When to adopt a Growth strategy?

•Manageable •Considering Environmental Demands •Natural Choice when environment poses opportunities

Expansion /Growth

Diversification Concentration- market penetration, market development, product development (Ansoff Matrix) Cooperation- Merger& Acquisition, JV, Strategic Alliances Internationalization

Retrenchment
Substantial reduction in scope of its activities  Turnaround-turning around an organization to profitability  Divestment-sale or liquidation of a portion of a business, or a major division, profit center or SBU.  Liquidation- closing down an organization and selling its assets

Ansoff Matrix

DIVERSIFICATION
Involves entry into fields where both products and markets are significantly different from those of a firm’s initial base
.

Levels and Types of Diversification
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Low Levels of Diversification

William Wrigley Jr. Company: sells its products in more than 180 countries and maintains 14 factories in various countries. In 2004, Wrigley purchased the Life Savers and Altoids businesses- diversification in to confectionary market.

Single Business 95% of business from a single business unit

Low Levels of Diversification

  

United Parcel service (UPS): Generates its 70-95% of its revenue within a single business area. 74% revenue-US package delivery business 17% revenue-international package business 9% revenue-firm’s non-package business

Dominant Business Between 70 and 95% of business from a single business unit

Moderate to High Levels of Diversification
Times Warner •Share Tech. based resources across television business •High speed internet connection •Phone service business •Wireless service

Related Constrained <70% of revenues from dominant business; all businesses share product, technological and distribution linkages.

Related Linked (mixed related and unrelated)

<70% of revenues from dominant business;  There are limited links between businesses  Concentration on transferring knowledge and core competencies between business  General electric

Very High Levels of Diversification

Unrelated < 70% of revenue comes from the dominant business, and there are no common links between businesses

Reasons for Diversification
1.Value –Creating Diversification

Economies of Scope(related div) - Sharing Activities - Transferring Core Competencies Market Power (related div) -Blocking Competitors thru multipoint competition - Vertical Integration Financial Economies(Unrelated Div) -Efficient internal capital Allocation

2.Value Neutral Diversification
  

Low performance Uncertain future cash flows Risk reduction for firm

3.Value –reducing Diversification

Diversifying managerial employment risk Increasing managerial compensation

Types of Diversification
Related Diversification: offers firms the potential to extend and leverage their distinctive competences and resources into new industries that share common characteristics. Why ? 1) Focus on internal development 2) Building mutually reinforcing businesses 3) Making distinctive competence hard to imitate and durable

Value-Creating Diversification: Related Strategies
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Johnson and Johnson
 

Engages in the research and development, manufacture, and sale of various products in the health care field worldwide 3 segments  Consumer segment

Products for baby care, skin care, oral care, wound care, and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products Products for anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology, and virology Products for circulatory disease management, orthopaedic joint reconstruction and spinal care, wound care and women’s health, minimally invasive surgical, blood glucose monitoring and insulin delivery, and diagnostic products, as well as disposable contact lenses

Pharmaceutical segment

Medical Devices and Diagnostics segment

Value-Creating Diversification: Unrelated Strategies
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Creates value through two types of financial economies Financial economies – cost savings realized
through improved allocations of financial resources based on investments inside or outside firm
Efficient internal capital market allocation (versus external capital market)  Restructuring of acquired assets

Firm A buys firm B and restructures assets so it can operate more profitably, then A sells B for a profit in the external market

Types of related diversification

Related constrained diversification: operational relatedness(tangible resources and capabilities) Related-linked diversification: corporate relatedness(intangible resources such as technical know-how, experience, expertise etc)

Unrelated Diversification

also called Conglomerates When a firm seeks to enter new industries without relying on a distinctive competence to link up business units

Value-Creating Diversification: Unrelated Strategies
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United Technologies Corporation  Provides technology products and services to the building systems and aerospace industries worldwide
    


Otis segment – elevators and escalators Carrier segment – air conditioning and refrigeration UTC Fire and Security segment. Pratt and Whitney segment - aircraft engines; parts and services Hamilton Sundstrand segment - aerospace products and aftermarket services Sikorsky segment – helicopters UTC also engages in the development and marketing of distributed generation power systems and fuel cell power plants for stationary, transportation, space, and defense applications

Value-creating Strategies of Diversification:
Operational and Corporate Readiness
Both Operational and Corporate Relatedness (Rare Capability and can Create Diseconomies of Scope)

Sharing: Operational Relatedness Between Businesses

Related Constrained Diversification
High

Vertical Integration (Market Power)

Unrelated Low Diversification (Financial Economies)

Related Linked Diversification (Economies of Scope)

Low High Corporate Readiness: Transferring Skills into Businesses Through Corporate Headquarters