6 Strategy Formulation Corporate Strategy

Global Business Strategy
Strategy Formulation: Corporate Strategy
Prof. Sergio Galarza Manrique

Objectives
• What is Corporate Strategy?
• Growth Strategies.
• International Entry Options.
• Stability Strategies.
• Retrenchment Strategies.
• Mergers and Acquisitions.
• Strategic Alliances.
• Portfolio Analysis.
• BCG Growth-Share Matrix.
• GE Business Screen.
• International Portfolio Analysis.
• Corporate Parenting.
• Parenting-Fit Matrix.
Corporate Strategy
Corporate Strategy deals with three key issues facing the corporation
as a whole:
1. The firm’s overall orientation toward growth, stability, or

retrenchment (directional strategy).
2. The industries or markets in which the firm competes through its

products and business units (portfolio strategy).
3. The manner in which management coordinates activities and

transfers resources and cultivates capabilities among product lines
and business units (parenting strategy).

Corporate Strategy
Corporate Strategy is primarily about the choice of direction for the firm
as a whole.
This is true whether the firm is small, medium-size or large. In a large

corporation, corporate strategy is also about managing various product
lines and business units for maximum value. Corporate headquarters
must play the role of the organizational «parent», in that it must deal
with various product and business unit «children.»

Corporate Strategy
Even though each product line or business unit has its own
competitive or cooperative strategy that it uses to obtain its own
competitive advantage in the marketplace, the corporation must
coordinate these different business strategies so that the corporation
as a whole succeeds as a «family.»
Synergy is necessary among all the product lines or business units

so that the corporate as a whole is greater that the sum of its
individual business unit parts.

Directional Strategy
Just as every product or business unit must follow a business strategy to

improve its competitive position, every corporation must decide its
orientation toward growth by asking the following three questions:
1. Should we expand, cut back, or continue our operations unchanged?
2. Should we concentrate our activities within our current industry or

should we diversify into other industries?
3. If we want to grow and expand nationally and / or globally, should we

do so through internal development or through external acquisitions,
mergers, or strategic alliances?

Directional Strategy
A corporation´s directional strategy is composed of three general

orientations (sometimes called grand strategies):
1. Growth strategies: expand the company´s activities.
2. Stability strategies: make no change to the company´s current

activities.
3. Retrenchment strategies: reduce the company´s level of activities.

Directional Strategy (Growth Strategies)
The two basic growth strategy types are:
1. Concentration (on the current product line in one industry), and
2. Diversification (into other product lines in other industries).

(A) Concentration: if a company´s current product lines have real growth

potential, concentration of resources on those products make sense as a
strategy for growth.
The two basic concentration strategies are vertical growth and

horizontal growth.
(A1) Vertical Growth: vertical growth can be achieved by taking over a

function previously provided by a supplier or by a distributor.

The company grows by making its own supplies and / or by distributing its
own products. This growth can be achieved either internally by expanding
current operations or externally through acquisitions.
Vertical growth results in Vertical integration, the degree to which a firm

operates vertically in multiple locations on an industry´s value chain from
extracting raw materials to manufacturing to retailing.
Backward integration: going backward on an industry´s value chain

(suppliers).
Forward integration: going forward on an industry´s value chain.
(distributors).
Backward integration is usually more profitable than forward integration.

(A2) Horizontal growth: can be achieved by expanding the firm´s

products into other geographic locations and / or by increasing the range
of products and services offered to current markets.
A company can grow horizontally through internal development or

externally through acquisitions or strategic alliances with another firm in
the same industry.
Horizontal growth results in horizontal integration, the degree to which a

firm operates in multiple geographic locations at the same point in an
industry´s value chain.

(B) Diversification Strategies:
When an industry consolidates and becomes mature, most of the surviving

firms have reached the limits of growth using vertical and horizontal
growth strategies. They may have no choice but to diversify into different
industries if they want to continue growing.
The two basic diversification strategies are concentric and

conglomerate.

(B1) Concentric Diversification: is a diversification into a related

industry. That may be a very appropriate corporate strategy when a firm
has a strong competitive position but industry attractiveness is low. The
firm attempts to secure strategic fit in a new industry where the firm´s
product knowledge, its manufacturing capabilities, and the marketing skills
it used are so effectively in the original industry that can be put to good
use.
The corporation´s products or processes are related in some way: they
possess some common thread.
The search is for synergy, the concept that two business will generate
more profits together than they could separately.
The point of commonality may be similar technology, customer usage,

distribution, managerial skills, or product similarity.
(B2) Conglomerate Diversification: diversifying into an industry

unrelated to its current one.
This corporate strategy occurs when managers realize that the current
industry is unattractive and the firm lacks outstanding capabilities or skills
that it could easely transfer to related products or services in other
industries.
Rather than maintaining a common thread throughout their organization,

strategic managers who adopt this strategy are primarily concerned with
financial considerations of cash flow or risk reduction.
The emphasis in conglomerate diversification is on financial

considerations rather than on the product-market synergy common to
concentric diversification.

By far the most widely pursued corporate directional strategies are those
designed to achieve growth in sales, assets and profits.
Companies must reach «critical mass», that is, gaining the necessary
economy of large-scale production.
A corporation can grow internally by expanding its operations both

globally and domestically, or it can grow externally through mergers,
acquisitions, and strategic alliances.
Merger: is a transaction involving two or more corporations in which stock

is exchanged, but from which only one corporation survives.

Mergers usually occur between firms of somewhat similar size and usually
«friendly». The resulting firm is likely to have a name derived from its
composite firms.

Acquisition: is the purchase of a company that is completely absorbed as

an operating subsidiary or division of the acquiring corporation.
Acquisitions usually occur between firms of different sizes and can be

either friendly or hostile. Hostile acquisitions are often called takeovers.
Strategic Alliance: is a partnership of two or more corporations or

business units to achieve strategically significant objectives that are
mutually beneficial.

International Entry Options:
In today´s world, growth usually has international implicationto produce

and / or sell a product. The licensee pays compensation to the licensing
firm in return for technical expertise.

In today´s world, growth usually has international implications.
Some of the more popular options for international entry are as follows:
Exporting: shipping goods produced in the company´s home country to

other countries.
Licensing: is a strategy in which the licensing firm grants rights to another

firm in the host country to produce and / or sell a product. The licensee
pays compensation to the licensing firm in return for technical expertise.

Joint Ventures: is a strategy in which companies combine the resources

and expertise needed to develop new products or technologies.
Acquisitions: purchasing another company already operating in a certain

area.
Research indicates that wholly-owned subsidiaries are more successful in

international undertakings than are strategic alliances, such as joint
ventures.

Green-Field Development: building its own manufacturing plant and

distribution system.
Production Sharing: is the process of combining the higher labor skills

and technology available in the developed countries with the lower-cost
labor available in developing countries.
Turnkey Operations: are typically contracts for the construction of

operating facilities in exchange for a fee. The facilities are transferred to
the host country or firm when they are complete.

BOT (build, operate, transfer) Concept: is a variation of the turnkey

operation. Instead of turning the facility over to the host country when
completed, the company operates the facility for a fixed period of time,
during which it earns back its investment, plus a profit. It then turns the
facility over to the government at little or no cost for the host country.
Management Contracts: offer a means through which a corporation may

use some of its personnel to assist a firm in a host country for a specified
fee and period of time.

Conclusions about Growth Strategies:
Research suggests that growth into areas related to a company´s current

product lines is generally more successful than is growth into
completetely unrelated areas.
One study indicates the following results of success: vertical growth

(80%), horizontal growth (50%), concentric diversification (35%),
conglomerate diversification (28%).
Other study reveals that firms that grow through acquisitions do not
perform financially as well as firms that grow through internal means.

Directional Strategy (Stability Strategies)
A corporation may choose stability over growth by continuing its current

activities without any significant change in direction.
Some of the most popular of these strategies are the pause / proceed with
caution, no change, and profit strategies.
Pause / Proceed with Caution Strategy: is a timeout, an opportunity to

rest before continuing a growth or retrenchment strategy. It is a very
deliberate attempt to make only incremental improvements until a
particular environmental situation changes.
No Change Strategy: is a decision to do nothing new, a choice to

continue current operations and policies for the foreseeable future.

Directional Strategy (Stability Strategies)
Profit Strategy: is a decision to do nothing new in a worsening situation,

but instead to act as though the company´s problems are only temporary.
The profit strategy is an attempt to artificially support profits when a
company´s sales are declining by reducing investment and short-term
discretionary expenditures.

Directional Strategy (Retrenchment Strategies)
A corporation may pursue retrenchment strategies when it has a weak

competitive position in some or all of its product lines resulting in poor
performance (sales are down and profits are becoming losses).
In an attempt to eliminate the weaknessess that are dragging the

company down, management may follow one of several retrenchment
strategies:
Turnaround Strategy: emphasizes the improvement of operational

efficiency and is probably most appropriate when a corporation´s
problems are pervasive, but not yet critical. The two basic phases of a
turnaround strategy are contraction and consolidation.

Contraction is the inital effort to quickly «stop the bleeding» with a

general across-the-board cutback in size and costs. The second phase,
consolidation, implements a program to stabilize the now-learner
organization.
Captive Company Strategy: is the giving up of independence in

exchange for security.
Management desperately searches for an «angel» by offering to be a

captive company to one of its largest customers in order to guarantee
the company´s continued existence with a long-term contract.

Sell-Out / Divestment Strategy: if a company is unable to follow the

two previous strategies it may have no choice but to sell out and leave
the industry. This strategy makes sense if management can still obtain a
good price for its shareholders by selling the entire company to another
firm.
If a corporation has multiple business lines and it chooses to sell off a

division with low growth potential, this is called divestment.
Bankruptcy / Liquidation Strategy: this is the worse possible

scenario, no one is interested in buying a weak company in an
unattractive industry.

Bankruptcy is the giving up of management of the firm to the courts in

return for some settlement of the corporation´s obligations. Top
management hopes that once the court decides the claims on the
company, it will be stronger and better able to compete in a more
attractive industry.

Liquidation: is the termination of the firm.
Because the industry is unattractive and the company too weak to be

sold as a going concern, management may choose to convert as many
saleable assets as possible to cash, which is then distributed to the
shareholders after all obligations are paid.
The benefit of liquidation over bankruptcy is that the board of directors,

as representatives of the shareholders, together with top management
make the decisions instead of turning them over to the court, which may
choose to ignore shareholders completely.

Portfolio Analysis
Companies with multiple product lines or business units must ask

themselves how these various products and business units should be
managed to boost overall corporate performance.
One of the most popular aids to developing corporate strategy in a

multibusiness corporation is Portfolio Analysis.
Portfolio Analysis puts the corporate headquarters into the role of an

internal banker.
In portfolio analysis top management views its products lines and

business units as a series of investments from which it expects a
profitable return.

Portfolio Analysis
The product lines / business units form a portfolio of investments that top
management must constantly juggle to ensure the best return on the
corporation´s invested money.
Two of the most popular approaches are the BCG Growth-Share Matrix
and the GE Business Screen.

Portfolio Analysis
BCG Growth-Share Matrix.
The BCG (Boston Consulting Group) Growth-Share Matrix is the simplest

way to portray a corporation´s portfolio of investments.
Each of the corporation´s product lines or business units is plotted on the

matrix according to both the growth rate of the industry in which it
competes and its relative market share.
The business growth rate is the percentage of market growth, that is, the
percentage by which sales of a particular business unit classification of
products have increased.

Portfolio Analysis
The BCG Growth-Share Matrix has a lot of common with the product life
cycle. As a product moves through its life cycle, it is categorized into one
of four types for the purpose of funding decisions:
• Question marks.
• Stars.
• Cash cows.
• Dogs.

Portfolio Analysis
Stars Question Marks

22 Drawbacks
20 • Assumes market share is key
18 to high profitability.
• Too simplistic.
16
14 • Focus only on industry growth
and market share as factors.
12
• Ignores all but market leader.
10
Cash Cows Dogs
8
6
4
2
0
Relative Competitive Position

(firm’s market share/share of largest competitor)

Portfolio Analysis
• Question marks: are new products with the potential for success,
but they need a lot of cash for development.
• Stars: are market leaders typically at the peak of their product life
cycle and are usually able to generate enough cash to maintain their
high share of the market.
• Cash cows: typically bring in far more money than is needed to

maintain their market share. In this declining stage of their life cycle
these products are «milked» for cash that will be invested in
question marks.

Portfolio Analysis
• Dogs: have low market share and do not have the potential
(because they are in an unattractive industry) to bring in much cash.
According to the BCG Growth-Share Matrix, dogs should be either
sold off or managed carefully for the small amount of cash they can
generate.

Portfolio Analysis
The goal of any company is to maintain a balanced portfolio so it can

be self-sufficient in cash and always working to harvest mature
products in declining industries to support new ones in growing
industries.
Advantages of the BCG Growth-Share Matrix:
• It is quantifiable and easy to use.
• Cash cows, dogs, and stars are an easy to remember way to refer
to a corporation´s business units or products.

Portfolio Analysis
Disadvantages of the BCG Growth-Share Matrix:

• The use of highs and lows to form four categories is too simplistic.
• The link between market share and profitability is not necessarily

strong. Low-share businesses can also be profitable.
• Growth rate is only one aspect of industry attractiveness.
• Product lines or business units are considered only in relation to

one competitor: the market leader. Small competitors with fast-
growing market shares are ignored.
• Market share is only one aspect of overall competitive position.

Portfolio Analysis
GE Business Screen.
General Electric with the assistance of Mc Kimsey and Company

consulting firm, developed a more complicated matrix.
As shown in the following table, the GE Business Screen includes

nine cells of long-term industry attractiveness and business strengh /
competitive position. The GE Business Screen in contrast to the BCG
Growth-Share Matrix includes much more data in its two key factors
than just business growth rate and comparable market share.

General Electric’s Business Screen
C Industry Attractiveness
Winners Winners • Market growth rate
A Question
High B Marks • Industry profitability
• Size
D
• Pricing practices
Winners Bus. Strength/Comp. Position
E Average • Market share
Businesses
Medium F • Technological position
Losers • Profitability
• Size
Drawbacks
H
Losers • Complicated, cumbersome
G
• Subjective judgments appear to
Low
Profit be objective b/c of numbers
Producers Losers assigned
• Cannot incorporate positions of
Strong Average Weak new products/businesses in
developing industries
Business Strength/Competitive Position
Portfolio Analysis
GE Business Screen.
At GE, business attractiveness includes:
• Market growth rate.
• Industry profitability.
• Size.
• Pricing practices.

Portfolio Analysis
GE Business Screen.
At GE, business strengh or competitive position includes:
• Market share.
• Technological position.
• Profitability.
• Size.
The individual product lines and business units are identified by a

letter and plotted as circles on the GE Business Screen. The area of
each circle is in proportion to the size of the industry in terms of
sales.

Portfolio Analysis
GE Business Screen.
The pie slices within the circles depict the market share of each
product line or business unit.

Portfolio Analysis
GE Business Screen.
To plot product lines or business units on the GE Business Screen,

we must follow four steps:
• Step 1: select criteria to rate the industry for each product line or
business unit. Assess overall industry attractiveness for each
product line or business unit on a scale from 1 (very unattractive)
to 5 (very strong).
• Step 2: select the key factors needed for success in each product
line or business unit. Assess business strenght / competitive
position for each product line or business unit on a scale of 1 (very
weak) to 5 (very strong).

Portfolio Analysis
GE Business Screen.
• Step 3: plot each product line´s or business unit´s current position

on a matrix like that in the following matrix.
• Step 4: plot the firm´s future portfolio assuming that present

corporate and business strategies remain unchanged. Is there a
projected gap between projected and desired portfolios? If so, this
gap should serve as a stimulus to seriously review the
corporation´s current mission, objectives, strategies, and policies.

Portfolio Analysis
GE Business Screen.
Overall, the nine-cell GE Business Screen is an improvement over

the BCG Growth-Share Matrix. This matrix considers many more
variables and does not lead to such simplistic conclusions.
Advantages of the GE Business Screen:
• The attractiveness of an industry can be assessed in many

different ways (other than simply growth rate).
• Allows Users to select whatever criteria they feel are most

appropriate to their situation.

Portfolio Analysis
GE Business Screen.
Disadvantages of the GE Business Screen:
• It can get quite complicated and cumbersome.
• The numerical estimates of industry attractiveness and business

strenght/competitive position give the appearance of objetivity, but
they are in reality subjective judgments that may vary from one
person to another.
• It cannot effectively depict the positions of new products or

business units in developing industries.

International Portfolio Analysis
To aid international strategic planning, portfolio analysis can be

applied to international markets. Two factors form the axes of the
matrix:
Country´s Attractiveness: is composed of:
• Market size.
• Market rate of growth.
• Extent and type of government regulation.
• Economic and political factors.

Product´s Competitive Strenght: is composed of:
• Market share.
• Product fit.
• Contribution margin.
• Market support.
Depending on where a product fits on the matrix, it should either

receive more funding or be harvested for cash.

Competitive Strengths
High Low
Country Attractiveness
• Market size
Invest/Grow Dominate/Divest • Market growth rate
Joint Venture
• Gov’t regulation
• Econ/political factors
Product Competitive Strengths
• Market share
Selective • Product fit
Strategies
• Contribution margin
• Market support
Harvest/Divest
Combine/License

Portfolio Analysis might not be useful, however, to corporations

operating in a global industry rather than a multidomestic one.
Porter argues against the use of portfolio analysis on a country-by-

country basis:
In a global industry, however, managing international activities like a

portfolio will undermine the possibility of achieving competitive
advantage. In a global industry, a firm must in some way integrate its
activities on a worldwide basis to capture the linkage among
countries.

Advantages of Portfolio Analysis:
• It encourages top management to evaluate each of the

corporation´s businesses individually and to set objectives and
allocate resources for each.
• It stimulates the use of externally oriented data to supplement
management´s judgment.
• It raises the issue of cash flow availability for use in expansion and
growth.
• Its graphic depiction facilitates communication.

Limitations of Portfolio Analysis:
• It is not easy to define product / market segments.

• It suggests the use of standard strategies that can miss
opportunities or be impractical.
• It provides an illusion of scientific rigor when in reality positions are
based on subjective judgments.
• Its value-laden terms like cash cow and dog can lead to self-
fulfilling prophecies.
• It is not always clear what makes an industry attractive or where a
product is in its life-cycle.
• Naively following the prescriptions of a portfolio model may
actually reduce corporate profits if they are used inappropriately.

Corporate Parenting
Corporate strategists must address two crucial questions:
• What businesses should this company own and why?
• What organizational structure, management processes, and

philosophy will foster superior performance from the company´s
business units?
Portfolio Analysis attempts to answer these questions by examining

the attractiveness of various industries and by managing business
units for cash flow, that is, by using cash generated from mature units
to build new product lines.

Corporate Parenting
Portfolio analysis fails to deal with the question of what industries a

corporation should enter or with how a corporation can attain synergy
among its product lines and business units.
As stated previously, portfolio analysis tends to primarily view matters

financially, regarding business units and product lines as separate
and independent investments.

Corporate Parenting
Corporate Parenting in contrast, views the corporation in terms

of resources and capabilities that can be used to build business
unit value as well as generate synergies across business units.
According to some especialists:
Multibusiness companies create value by influencing – or parenting –

the businesses they own. The best parent companies create more
value than any of their rivals would if they owned the same
businesses. Those companies have what we call parenting
advantage.

Corporate Parenting
Corporate parenting generates corporate strategy by focusing on the

core competencies of the parent corporation and on the value
created from the relationship between the parent and its businesses.
This approach to corporate strategy is useful not only in deciding

what new businesses to acquire, but also in choosing how each
existing business unit should be best managed.
The primary job of corporate headquarters is to obtain synergy

among the business units by providing needed resources to units,
transferring skills and capabilities among the units, and by
coordinating the activities of shared multifunctions to attain
economies of scope.

Parenting-Fit Matrix
The Parenting-Fit Matrix summarizes the various judgments

regarding corporate / business unit fit for the corporation as a whole.
Instead of describing business units in terms of their growth potential,
competitive position, or industry structure, such a matrix emphasizes
their fit with the corporate parent.
As shown in the following slide, the parenting-fit matrix is composed

of two dimensions: the positive contributions that the parent can
make and the negative effects the parent can make. The combination
of these two dimensions creates five different positions, each with its
own implications for corporate strategy.

Low
Heartland
Ballast
Edge of
Heartland
Alien
Territory
Value Trap
High
Low High
FIT between parenting opportunities
and parenting characteristics

Heartland Businesses:
Have opportunities for improvement by the parent, and the parent

understands their critical success factors well. These businesses
should have priority for all corporate activities.
Edge-of-Heartland Businesses:
Some parenting characteristics fit the business, but others do not.

The parent may not have all the characteristics needed by a unit, or
the parent may not really understand all of the unit´s critical success
factors.

Ballast Businesses:
Fit very confortably with the parent corporation but contain very few
opportunities to be improved by the parent.
This is likely to be the case in units that have been with the
corporation for many years and have been very successful. The
parent may have added value in the past, but it can no longer find
further parenting opportunities.

Alien Territory Businesses:
Have little opportunity to be improved by the corporate parent, and a

misfit exists between the parenting characteristics and the unit´s
critical success factors.
There is little potential for value creation, but high potential for value
destruction on the part of the parent.
Value Trap Businesses:
Fit well with parenting opportunities, but they are a misfit with the
parent´s understanding of the unit´s critical success factors.

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Global Business Strategy

Strategy Formulation: Corporate Strategy

Prof. Sergio Galarza Manrique

1. The firm’s overall orientation toward growth, stability, or

2. The industries or markets in which the firm competes through its

3. The manner in which management coordinates activities and

Global Business Strategy

This is true whether the firm is small, medium-size or large. In a large

Global Business Strategy

Synergy is necessary among all the product lines or business units

Global Business Strategy

Just as every product or business unit must follow a business strategy to

1. Should we expand, cut back, or continue our operations unchanged?

2. Should we concentrate our activities within our current industry or

3. If we want to grow and expand nationally and / or globally, should we

Global Business Strategy

A corporation´s directional strategy is composed of three general

1. Growth strategies: expand the company´s activities.

2. Stability strategies: make no change to the company´s current

3. Retrenchment strategies: reduce the company´s level of activities.

Global Business Strategy

The two basic growth strategy types are:

1. Concentration (on the current product line in one industry), and

2. Diversification (into other product lines in other industries).

Global Business Strategy

(A) Concentration: if a company´s current product lines have real growth

The two basic concentration strategies are vertical growth and

(A1) Vertical Growth: vertical growth can be achieved by taking over a

Global Business Strategy

Vertical growth results in Vertical integration, the degree to which a firm

Backward integration: going backward on an industry´s value chain

Backward integration is usually more profitable than forward integration.

Global Business Strategy

(A2) Horizontal growth: can be achieved by expanding the firm´s

A company can grow horizontally through internal development or

Horizontal growth results in horizontal integration, the degree to which a

Global Business Strategy

(B) Diversification Strategies:

When an industry consolidates and becomes mature, most of the surviving

The two basic diversification strategies are concentric and

Global Business Strategy

(B1) Concentric Diversification: is a diversification into a related

The point of commonality may be similar technology, customer usage,

(B2) Conglomerate Diversification: diversifying into an industry

Rather than maintaining a common thread throughout their organization,

The emphasis in conglomerate diversification is on financial

Global Business Strategy

A corporation can grow internally by expanding its operations both

Merger: is a transaction involving two or more corporations in which stock

Global Business Strategy

Global Business Strategy

Acquisition: is the purchase of a company that is completely absorbed as

Acquisitions usually occur between firms of different sizes and can be

Strategic Alliance: is a partnership of two or more corporations or

Global Business Strategy

International Entry Options:

In today´s world, growth usually has international implicationto produce

Global Business Strategy

International Entry Options:

In today´s world, growth usually has international implications.

Exporting: shipping goods produced in the company´s home country to

Licensing: is a strategy in which the licensing firm grants rights to another

Global Business Strategy