CORPORATE

LEVEL
STRATEGY
Chapter Two 1
 CORPORATE LEVEL
STRATEGY
 It is about being in the right mix of businesses.
 It is concerned more with the question of where to compete than with how to compete in a particular
industry (business unit strategy)
 In this issue are: the definition of businesses in which the firm will participate and the deployment of
resources among those businesses.
 It results in decision involving businesses to add, to retain, to emphasize, to deemphasize and to
divest.
 Single industry firm-operates in one line of business.
 Related diversified firm-operates in several industries and the business units benefit from a common
set of core competencies.
 It typically grows internally through R&D

 Unrelated business firm - operates in businesses that are not related to one another.

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 BUSINESS UNIT STRATEGY
 What is a business unit?
 A small company within a big one that has accountability for a unique
customer or market segment or service or product line
 A business unit in one firm competes with a business unit in another firm.
 Revenues are generated and costs are incurred here.
 Business unit strategies deal with how to create ad maintain competitive
advantage in each of the industries in which a company has chosen to
participate.

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BUSINESS UNIT STRATEGIES
 It deals with how to create and maintain competitive advantage in each of
the industries in which a company has chosen to participate.
Planning Models: Business Unit Mission: The BCG Model

High Cash source Low High

High High
Hold Build
“Star” “Question mark”
Cash Use

Hold Build
Market Cash
Growth Use
rate
“Cash cow” “Dog”
Harvest Divest
Low Low
Divest
High Low
Harvest 4
Relative market share
High Low
BCG MODEL
 Question marks –
 Question marks are businesses or products with low market share but which
operate in higher growth markets. This suggests that they have potential, but may
require substantial investment in order to grow market share at the expense of
more powerful competitors. Management have to think hard about "question
marks" - which ones should they invest in? Which ones should they allow to fail
or shrink?

 Stars –
 Stars are high growth businesses or products competing in markets where they are
relatively strong compared with the competition. Often they need heavy
investment to sustain their growth. Eventually their growth will slow and,
assuming they maintain their relative market share, will become cash cows.

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BCG MODEL
 Cash Cows –
 Cash cows are low-growth businesses or products with a relatively high market
share. These are mature, successful businesses with relatively little need for
investment. They need to be managed for continued profit - so that they continue
to generate the strong cash flows that the company needs for its Stars.

 Dogs –
 Unsurprisingly, the term "dogs" refers to businesses or products that have low
relative share in unattractive, low-growth markets. Dogs may generate enough
cash to break-even, but they are rarely, if ever, worth investing in.

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FINANCIAL GOAL
SETTING
 Normally 4 steps can be applied to any financial goal setting
exercise for individuals
1. Identify and write down your financial goals, (e.g. for individuals, to
send your kids to college or University, a new car, house purchase,
vacation, retirement etc
2. Break each financial goal down into several short-term (less than 1
year), medium-term (1 to 3 years) and long-term (5 years or more)
goals
3. Educate yourself and do your research
4. Evaluate your progress as often as needed. Review your progress
monthly, quarterly, or at any other interval you feel comfortable
with, but at least semi-annually, to determine if your program is
working.
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FINANCIAL GOAL SETTING
Investment centers represent decentralized units where the

manager is given maximum freedom for making decision
pertaining not only to the product mix, pricing, customer
relationships and production methods but also to determine the
level and type of assets used in the unit.
 The performance of an investment centre is thus gauged on the
basis of assets employed and by relating the profits to the assets
employed. This approach is known as Return on Investment
(ROI)

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RETURN ON INVESTMENT
(ROI)
It is the percentage of return on funds invested in the business

by its owners
 In short, this ratio tells the owner whether or not all the efforts
put into the business has been worthwhile.
 If the ROI is less than the rate of return on an alternative, risk-
free investment such as a bank savings account, the owner may
be wiser to sell the instrument, put the money in such a savings
instrument, and avoid the daily struggles of small business
management.

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RETURN ON INVESTMENT
(ROI)
The ROI is calculated as follows:

Return on Investment = Net Profit / Net Worth

 Financial statements express only monetary aspects; businesses

don’t get reflected. Thus ROI doesn’t give a complete picture
of the happenings in a business.
 ROI leads to excessive focus on improving profitability and
not wealth maximization or shareholder value
maximization, recognition, social wealth etc.

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ECONOMIC VALUE ADDED
(EVA)
Implies the difference between net operating profits after taxes

and total cost of funds
 It offers a consistent approach to setting goals and measuring
performance, communicating with investors, evaluating
strategies and allocating capital.
 It is the measure that captures the true economic profit of the
organization.
 Maximizing EVA means the same as maximizing long-term
yield on shareholders’ investment.
 EVA= Net operating profits after taxes (-) (total capital*WACC)
 NOPAT = Operating Income x (1 - Tax Rate)
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 It is based on the past performance of the corporate enterprise.
 Basically to determine whether the firm is earning a higher rate
of return on the entire invested funds than the cost of such funds
 If positive- increase in shareholders value
 Else, erosion of existing wealth of its shareholders. It indicates that the
company is destroying value even though it has a positive and growing
EPS
 EVA requires company to be more careful about resource mobilization,
allocation and investment decisions
 It measures the productivity of all the factors of production
 It holds the company accountable for the cost of capital used for
expansion or growth.

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EVA VERSUS ROI
 ROI is Comprehensive measure in which anything that affects financial
statements is reflected in this ratio
 ROI is Simple to calculate, easy to understand and meaningful in an absolute
sense
 In ROI, the performance of different units or against competitors can be
used as a basis for comparison, whereas, absolute amount of EVA doesn’t
provide basis for comparison.
 With EVA all business units have the same profit objective for comparable
investments, whereas, ROI provides different incentives for investments
across business units.
 Decision that increases a center’s ROI may decrease its overall profits.

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EVA VERSUS ROI
 If an investment center’s performance is measured by EVA,
investments that produce a profit in excess of the cost of capital
will increase EVA and therefore be economically attractive to
the manager.
 Different interest rates may be used for different types of assets
to take into account different degrees of risk.
 EVA has a stronger positive correlation with changes in a
company’s market value.

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FREE CASH FLOW (FCF)
 A measure of financial performance calculated as operating cash flow minus
capital expenditures.
 It represents the cash that a company is able to generate after laying out the
money required to maintain or expand its asset base
 Free cash flow is important because it allows a company to pursue
opportunities that enhance shareholder value. Without cash, it's tough
to develop new products, make acquisitions, pay dividends and reduce debt.
FCF is calculated as:
Net income + (Amortization / Depreciation) - changes in working capital
- capital expenditure (same as cash from operations)

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MARKET GAP
 An opportunity in a market where no supplier provides a product or service that buyers need
 Gap analysis: Simply ask two questions - where are we now? and where do we want to be?
The difference between the two is the GAP

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EPS (EARNING PER SHARE)
 EPS measures the profits available to the equity shareholders on each share held.
 The formula is:
EPS = Net Profits Available to Equity Holders / Number of Ordinary Shares Outstanding

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P/E (PRICE TO EARNING
RATIO)
 It is the ratio between the market price of the shares of a firm
and the firm's earnings per share. The formula is:
P/E ratio = Market Price of Share / Earnings per Share
 It indicates the growth, shareholder orientation, and corporate
image of a company.

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