Colombo International Nautical

and Engineering College

Strategic Management

Strategy Formulation
Corporate Level Strategy
Corporate Level Issues/ Key Themes
 Corporate Strategy
– Firm’s directional strategy - Firms’ overall
orientation toward growth, stability, or
retrenchment

– Firm’s portfolio strategy - the industries or

markets in which the firm competes through its
products and business units

– Firm’s parenting strategy - manner in which

management coordinates activities, transfer
resources and cultivate capabilities among
product lines and business units.
 Directional Strategies
• Growth strategies – A directional strategy
that expands company’s current activities
• Stability strategy – Corporate strategy to
make no change to the company’s current
direction or activities.
• Retrenchment strategy – Corporate strategy
to reduce a company’s level of activities and
return it to profitability
Growth Strategies
 Growth Strategies – Ansoff
Matrix by Igor Ansoff – HBR 1957
 Existing PRODUCTS New

Existing INCREASING RISK

MARKET
PRODUCT
PENETRATION
DEVELOPMENT
CONSOLIDATION

INCREASING RISK
Sell new products in
Sell more in existing
existing markets
Markets
MARKETS
MARKET
Development DIVERSIFICATION

Achieve higher Sell new products in new

New markets
sales/market share
of existing products
in new markets
 Market Penetration
• This is the objective of higher market share in
existing markets
• Organisations seeking greater market
penetration may face two constraints
– Retaliation from competitors
– Legal constraints from official competition
regulators. E.g. Competition Commission in the UK
and European Commission in EU
 Consolidation
• Consolidation is where organisations focus
defensively on their current markets with
current products
• Consolidation is not orientated to growth
• Consolidation can take two forms
– Defending market share – E.g. differentiation
strategies to build customer loyalty and switching
cost
– Downsizing or divestment – divesting or closing
peripheral businesses
 Consolidation – Other perspective
• The term ‘consolidation’ is sometimes also used
to describe strategies of buying up rivals in a
fragmented industry, particularly one in decline.
• By acquiring weaker competitors, and closing
capacity, the consolidating company can gain
market power and increase overall efficiency.
• As this form of consolidation increases market
share, it could be seen as a kind of market
penetration, but here the motivation is essentially
defensive.
 Product Development
• This is where organisations deliver modified or
new products to existing markets
• Product development can be expensive
– New strategic capabilities – heavy investments for
mastering new technologies, marketing
capabilities etc.
– Project management risk – A 380, a 11bn (£7.6bn)
Airbus double-decker airline project, which
suffered two years of delays in the mid-2000s
because of wiring problems.
 Market Development
• This is the strategy of selling an existing product to
new markets.
• This could involve selling to an overseas market, or a
new market segment
– New segments - Nintendo are making hand held games
consoles (e.g. DS) appeal to the adult/grey market by
introducing games such as Brain Train
– New users – E.g. Aluminium for aerospace and
automobiles
– New geographies – E.g. Damro in India and Australia
 Diversification
• Diversification is defined as a strategy that
takes an organisation away from both its
existing markets and its existing products

• This is the process of selling different goods or

services in unrelated/ new markets.

• This is the most risky of all four strategies

– E.g. the Virgin group, JKH
Diversification
 Product/Market Diversification

Diversification is a strategy which takes the

organisation into new markets and products or
services
Related Diversification
 Related Diversification
Strategy development beyond current products and
markets, but within the capabilities or value network
of the organisation

• Vertical integration is backward or forward

integration into adjacent activities in the value
Network
• Horizontal integration is development into
activities which are complementary or adjacent
to present activities. E.g. Google has spread
horizontally into news, images and maps,
amongst other services
 Backward and Forward Integration
• Backward integration is development into
activities concerned with the inputs into the
company’s current business
• Forward integration is development into
activities which are concerned with a company’s
outputs
• Vertical integration
– Backward integration into input activities
– Forward integration into output activities
 Reasons for Vertical Integration
• To reduce costs
• To gain control over scare resources
• To guarantee quality of a key input
• To obtain access to potential customers
 Problems of Related Diversification
• Underestimating new capabilities required
– E.g. Car manufacturing and servicing
• Overestimating synergies
– E.g. Car manufacturing and servicing
• Time and cost of top manager attention
• Business unit complexity - Difficulties for
business units to share resources/adapt policies

In summary, a simple statement such as ‘relatedness

matters’ has to be questioned.
 Horizontal integration
• Horizontal integration is development into
activities which are complementary or
adjacent to present activities.

• A firm can grow horizontally through internal

development (Organic Growth) or externally
through acquisition or strategic alliances with
another firm in the same industry.
 Vertical and Horizontal Integrations

Textile producer Textile producer

Shirt manufacturer Shirt manufacturer

Clothing store Clothing store

Acquisitions or mergers of suppliers or customer businesses are vertical integration

Acquisitions or mergers of competing businesses are horizontal integrations
 Related Diversification

Exhibit 6.3
 Reasons for Diversification
• Value creation
– Efficiency gains from applying existing
resources/capabilities to new markets/products
• Economies of scope
• Benefits of synergy
– Applying/ stretching corporate managerial and
parenting capabilities to new markets/ products/
services. E.g. Dominant logic
– Increased market power from diverse product/
service range
• Cross subsidy
• Possible monopoly in long-run
 Reasons for Diversification (Cntd)
• Less obvious value creation
– In response to environmental change (E.g. Decline)
• To defend existing value (E.g. Microsoft)
• Or straying (moving away) too far from dominant logic? (it
is logic which locks a company into thinking about making
money in only one way)
– To spread risk across range of businesses
• Investors can diversify more effectively?
• Important for private businesses
– In response to expectations of powerful stakeholders
• Pressure from financial analysts to produce constant growth
 Dominant General Management
Logic or Dominant Logic
• Dominant logic is the set of corporate-level
managerial competencies applied across the
portfolio of business. In other words, a common way
of thinking about strategy across different
businesses.
• Negatively, it is logic which locks a company into
thinking about making money in only one way. It is
often used when talking about inefficient reasons
for diversification of a company. E.g. Kodak
Unrelated Diversification/
Conglomerate Strategy
 Unrelated Diversification/
Conglomerate Diversification
Development of products/services beyond the
current capabilities or value network

– Generally unfavourable
• No economies of scope
• Cost of headquarters
– Can succeed in some cases
• Exploit dominant logic - E.g. Berkshire Hathaway, where
Buffet deliberately avoided buying high-technology
businesses because he knew they were outside his
dominant logic
• Countries with underdeveloped markets can be fertile
grounds for conglomerates.
Diversification and Performance

Research studies of
diversification have
generally found some
performance
benefits, with related
diversifiers
outperforming both
firms that remain
specialised
and those which have
unrelated diversified
strategies.
Stability Strategies
 Stability strategies

–Pause/proceed with caution-attempt to make only

incremental improvements until a particular
environmental situation changes

–No change-continue current operations and policies

for the foreseeable future

–Profit strategies-artificially supports profits when a

company’s sales are declining by reducing
investments and short term discretionary expenditure
Retrenchment Strategies
 Retrenchment Strategies
–Turnaround-improvement of operational
efficiency when corporate problems are pervasive
but not yet critical.
–Captive Company Strategy-giving up of
independence in exchange for security
–Selling out
–Bankruptcy-giving up management of the firm to
the courts in return for some settlement of the
corporations' obligation
–Liquidation-termination of the firm
Corporate Directional Strategies
Corporate Parenting
 Corporate Parenting

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.

The corporate parent refers to the levels of

management above that of the business units, and
therefore without direct interaction with buyers and
competitors
The Multi-Business Organisation
 Value-Adding Corporate Parents
Envisioning Vision or Strategic Intent Central Services and Resources

Focus Capital for investment

Clarity to external stakeholders Scale advantages-infrastructure,
Clarity to business units support services
Transferable management capabilities

Intervention at Business Level Expertise

Monitor performance Provide expertise/services

Action to improve performance Knowledge creation/sharing
Challenge/develop strategic ambitions Leverage
Coaching/training Brokering linkages/accessing external
Develop strategic capabilities networks
Achieve synergies
 Value-Destroying Corporate Parents
• Adding management cost
• Bureaucracy
– Adds cost
– Hinders responsiveness
• Buffer from reality
– Financial safety net
• Diversity and size
– Lack of clarity on overall vision
• Managerial ambition
– Empire building
 Corporate Parenting Roles
• Portfolio manager is a corporate parent acting as
an agent on behalf of financial markets and
shareholders
• Synergy manager is a corporate parent seeking
to enhance value across business units by
managing synergies across business units
• Parental developer is a corporate parent seeking
to employ its own competences as a parent to
add value to its businesses and build parenting
skills that are appropriate for its portfolio of
business units
 Portfolio managers, synergy
managers and parental developers
 Corporate Portfolio
Management
(Pls refer Internal Analysis)
 Corporate Portfolio Management
• Portfolio balance
– Markets
– Organisation’s needs
• Attractiveness of business units
– Profitability
– Growth rates
• Portfolio ‘fit’
– Synergies between business units
– Synergies with corporate parent
International Strategies
International Strategy Framework
Internationalisation Drivers
Drivers of Internationalisation
 Reasons for International Diversity
Market-based Exploit cultural/
geographic differences
Globalisation of markets & competition Cash in on differences in culture

Following customers Administrative differences

Bypass limitations in home market Specific geographical/
economic differences
Utilise strategic capabilities Economic benefits
Broaden market size Economies of scale
Internationalise value-adding activities Stabilisation of earnings across markets

Enhance knowledge
The Nine Strategic Windows
National and International
Sources of Advantage
National and International Sources
of Advantage
• Organisations can improve the configuration
of its value chain and network by taking
advantage of country specific differences.
• There are two principal opportunities
available:
– the exploitation of particular national advantages,
often in the company’s home country, and
– sourcing advantages overseas via an international
value network.
Diamond Model
 Porter’s Diamond Model
• Factor Conditions: production factors required for a given
industry, e.g.., skilled labour, logistics and infrastructure.
• Demand Conditions: extent and nature of demand within the
nation concerned for the product or service.
• Related Industries: the existence, extent and international
competitive strength of other industries in the nation
concerned that support or assist the industry in question.
• Corporate Strategy, Structure and Rivalry: the conditions in
the home market that affect how corporations are created,
managed and grown; the idea being that firms that have to
fight hard in their home market are more likely to be able to
succeed in international markets.
 The international value network
• The sources of advantage need not be purely
domestic.
• For international companies, advantage can be
drawn from the international configuration of
their value network.
• Here the different skills, resources and costs of
countries around the world can be systematically
exploited in order to locate each element of the
value chain in that country or region where it can
be conducted most effectively and efficiently.
 Global Sourcing and Location
Advantage
• Global sourcing - purchasing services and
components from the most appropriate suppliers
around the world regardless of their location
• Different locational advantages can be identified
(Any reason for a firm to locate production, or a
stage of production, in a particular place) :
– Cost advantages include labour costs, transportation
and communications costs and taxation and investment
incentives.
– Unique capabilities
– National characteristics
Market Selection
Assessing country attractiveness
possible criteria
Market size
Market growth
Absence of barriers
Profit potential
Competitive structure
Entry opportunities
Compatibility
Language
Currency
Legal systems
Technical standards
Culture
Consumption patterns
 12C framework for analysing
international markets
Country
Concentration
Culture/consumer behaviour
Choices
Consumption
Contractual obligations
Commitment
Channels
Communications
Capacity to pay
Currency
Caveats (Warning of specific conditions)
International investment opportunities

based on the directional policy matrix

 Country Evaluation
Country Attractiveness- Company Strength Matrix
 International Strategies
Hofstede’s Cultural Similarities
Cross-Country Similarities
Inter-Country Differences
• Power-distance
•PESTILE differences • Collectivism vs. individualism
•Barriers to entry • Femininity vs. masculinity
• Uncertainty avoidance
•Market entry methods • Long- vs. short-term orientation

Cultural Similarities: For example, Anglo-Saxons; Hispanic; Nordic; Germanic; Arabic; Other.
 Hoftede’s Model of National Cultures

• Power-distance
• Collectivism vs. individualism
• Femininity vs. masculinity
• Uncertainty avoidance
• Long- vs. short-term orientation
• Indulgence
 Hofstede’s comparative analysis

Distinguished four dimensions:

• Power distance (high or low)
– High – accept inequality of wealth and power: e.g. France,
Brazil
– Low – do not accept inequality – e.g. Sweden, UK
• Uncertainty avoidance
– Low – tolerate ambiguity - e.g. US, Australia
– High – uncomfortable with uncertainty, prefer clarity –
e.g. Latin America, southern Europe
 Hofstede (continued)

• Individual/collectivism
– Individualist societies stress individual responsibility and
success - e.g. US, UK
– Collectivist societies stress loyalty to group in return for
support – e.g. in South America, Asia
• Masculinity/femininity
– M. societies show assertive behaviour – e.g. Japan, Italy,
Arab countries
– F. societies show modest behaviour, interest in quality of
life – e.g. Sweden, Norway, Denmark
 Long-term Orientation

A basic orientation towards time that values patience

Long-term Orientation
Short- term orientation
Respect for traditions
Little money available for
investment
Quick results expected
Respect for social and status
obligations regardless of cost
Concern with possessing the
truth
Long-term orientation
Adaptation of traditions to a
modern context
Funds available for
investment
Perseverance towards slow
results
Respect for social and status
obligations within limits
Concern with respecting the
demands of virtue (moral
standards)
 Indulgence

Allows free gratification of basic and natural human

drives related to enjoying life and having fun
 Indulgence
Indulgent
People feel healthier and
happier
A perception of personal life
control
Leisure ethic
Optimism, positive attitude
More extraverted personalities
Having friends very important
Active participation in sports
Less moral discipline
Looser sexual mores (customs
and conventions)
Restrained
People feel less happy and
less healthy
What happens to me is not
my doing
Work ethic
Pessimism, cynicism
More introverted
personalities
Having friends less important
Less sports participation
Stricter moral discipline
Stricter sexual mores
Mode of Entry
 Entry Modes (1)
Exporting Advantages
No operations in host country
Economies of scale
Internet access for small firms
Exporting Disadvantages
No benefit from location advantages
of host
Limited local knowledge
Dependence on intermediaries
Exposure to trade barriers
Transportation costs
Slow response to customers
JV/Alliance Advantages
Shared investment risk
Complementary resources
Possible government condition
JV/Alliance Disadvantages
Difficult to select and agree with
partner
Managing relationship
Loss of competitive advantage
through imitation
Limits integration/coordination of
activities across countries
 Entry Modes (2)
Licensing Advantages
Contractually agreed income
Limit financial/economic risk
Licensing Disadvantages
Difficult to select and agree with
partner
Loss of competitive advantage
through imitation
Limits benefit from location
advantages of host
FDI Advantages
Control of resources/capabilities
Integration/coordination of activities
across countries
Acquisitions – rapid entry
Greenfield – state of art and
government finance
FDI Disadvantages
Substantial investment – financial
exposure
Problems of integration/
coordination of acquisitions
Greenfield – time consuming and
unpredictable cost
 Market Entry Methods
Time

Quick ss Joint Venture

Le
Partnership/Alliance

Manufacturing abroad

ues Contracting
Iss
l
ro
o nt
C Franchising

Licensing

e Indirect export
or
M
Direct export.

Slow Organically Market Entry

Methods
Methods of Market Entry
International Strategies
 International Strategies
• Issues
– Global-local
– Centralised/decentralised
• Generic Strategies
– Multi-domestic
• Value adding activities located in national markets
• Products/services adapted to local requirements
– Global
• Standardised products
• Produced in centralised location
International Corporate Strategies
Roles in an International
Portfolio
Subsidiary roles in Multinational
Firms
 Subsidiary roles in Multinational
Firms
• Strategic leaders (in the context of international
strategy) are subsidiaries that not only hold
valuable resources and capabilities but are also
located in countries that are crucial for
competitive success. E.g. Japanese and European
subsidiaries in the USA often play this role.
• Contributors are subsidiaries with valuable
internal resources but located in countries of
lesser strategic significance, can nevertheless
play key roles in a multinational organisation’s
competitive success.
 Subsidiary roles in Multinational
Firms
• Implementers simply execute strategies developed
elsewhere and may generate surplus financial
resources to help fund initiatives elsewhere. In this
sense, they are similar to the ‘cash cows’ of the BCG
matrix. The danger is that they turn into the
equivalent of ‘dogs’.
• Black holes are subsidiaries located in countries that
are crucial for competitive success but with low-level
resources or capabilities. They have some of the
characteristics of ‘question marks’ in the BCG matrix,
requiring heavy investment E.g. American and
European firms in Japan
Questions and Discussions

Thank you.