corp level strategy sess 6

7/29/2019 Corp Level Strategy Sess 6

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CORPORATE LEVEL STRATEGIES

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Two Levels of Strategy

Corporate

Stability

Growth

Retrenchment Stability

Business

Cost (price) Leadership Differentiation

Focus


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Foundations of Business strategies

Business strategies are the courses of action adopted byan organisation for each of its businesses separately to

serve identified customer groups and provide value to

the customer by satisfaction of their needs.

Corporate-level strategies lay down the framework in

which business strategies operate.

The function of corporate-level strategy is to deal with a

portfolio of businesses in such a manner that the overallreturns are optimised.

Business definition is at the core of business strategies.

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Corporate Strategy

Strategy formulation in a multi-business enterprise is different

from strategy formulation in a single-business enterprise.

In a single-business enterprise, the key question is how to

compete successfully in the chosen market.

So, there is only one-level strategy known as Business-level

Strategy.

But in a multi-business enterprise, which is involved in several

businesses, there is a need to have strategies at two levels a

corporate level strategy for the company as a whole and a business

level strategy for each of the separate businesses of the company.

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Corporate Strategy

Corporate strategy is primarily about the choice of

direction for the Corporation as a whole. The basic

purpose of a corporate strategy is to add value to the

individual businesses in it.

The essence of a corporate strategy vis-a-vis a

business-level Strategy is summarized in next slide.

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The Essence of Corporate Strategy

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Generic business strategies

Cost

leadershipDifferentiation

Focussed

Cost

leadership

Focussed

differentiation

Broad

target

Narrow

target

Low-costproducts/services

Differentiatedproducts/services

COMPETITIVE ADVANTAGE

COMPETITIV

E

SCOPE

Adapted from M.E. Porter: Competitive Advantage: Creating and Sustaining Superior Performance New York: Free Press,

1985, p. 12.

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Cost leadership business strategy

When the competitive advantage of an organisation lies

in lower cost of products or services relative to what the

competitors have to offer, it is termed as cost leadership.

Achieving cost leadership

Conditions under which cost leadership strategy is used

Benefits and risks of cost leadership strategy

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Differentiation business strategy

When the competitive advantage of an organisation lies in

special features incorporated into the product / service which

is demanded by customers who are willing to pay for it then

the strategy adopted is the differentiation business strategy.

Achieving differentiation

Conditions under which differentiation is used

Benefits and risks of differentiation strategy

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Focus business strategy

Focus business strategies essentially rely on

either cost leadership or differentiation but

cater to a narrow segment of the total market.

Achieving focus

Conditions under which focus strategies are used

Benefits and risks of focus strategies

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Business Level Strategies

Cost (price) leadership

Efficiency and scale

Differentiation

Quality, design, support/service, image -- that

make a product or service special

Focus

Explicit tie to a broad or narrow

market segment


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Examples

Cost (price) leadership

Videocon (logistics, volume)

Easyday (location, services, salespeople)

Indigo (corporate culture, service)

Differentiation

Quality (Mercedes)

Design (Apple) Service ( Haldiram).

Image (Nike).

Special niches (Tanishq jewellery)


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Examples

Focus

Broad (Wal-Mart - rural)

Narrow (NSP - activists, NRI - networkadministrators)

Segmented (Computer security spooks and

commerce, Financial services rich, poor and in-

between.)


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Tactics for business strategies

Timing tactics First movers and late movers

Advantages and disadvantages of being a first mover

Market location tactics Market leader

Market challenger

Market follower

Market nichers

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Types Of Corporate Strategies

There are four types of strategic alternativesavailable at corporate level. They are:

1. Stability Strategy

2. Growth / Expansion Strategies

3. Defensive Strategies

4. Combination Strategy

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1. Stability strategies

No-change strategy

Profit strategy

Pause / proceed-with-caution strategy

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Stability Strategies

Stability strategies result from attempts by an organisationat incremental improvement of functional performance

without any significant change in direction

Pause/Proceed with caution strategy- an opportunity torest before continuing a growth or retrenchment strategy

No change strategy- continuance of current operations andpolicies

Profit Strategies- to do nothing new in a worseningsituation but instead to act as though the companysproblems are only temporary

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2. Growth / Expansion Strategies

Growth strategies are the most widely pursued

corporate strategies. Companies that do

business in expanding industries must grow tosurvive. A company can grow internally by

expanding its operations or it can grow

externally through mergers, acquisitions, jointventures or strategic alliances.

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Reasons for pursuing growth strategies:

Firms generally pursue growth strategies for the

following reasons:

i. To obtain economies of scale

ii. To attract merit

iii. To increase profits

iv. To become a market leader

v. To fulfill natural urge

vi. To ensure survival

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Growth strategies can be divided into three

broad categories:

Intensive strategies

Integration strategies

Diversification strategies

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Growth Strategies

Concentration

Vertical and Horizontal

Diversification

Concentric

Conglomerate


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Growth Through Concentration

Concentrate resources on a single business

Concentrate vertically, i.e., backward or forward

(supply or distribution)

Concentrate horizontally by growinggeographically or by expanding product or service

offering


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Means to Accomplish Growth

Mergers

Acquisitions

Internal Growth Strategic Alliances

International


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Growth Strategy:Concentration and Diversification

Merger- a transaction involving two or more

corporations in which stock is exchanged but in whichonly one corporation survives

Acquisition- the purchase of a company that is

completely absorbed by the subsidiary or division ofthe acquiring corporation

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Concentration strategies

Vertical growth- taking over the function previouslyprovided by a supplier or by a distributor

Vertical integration- the degree to which a firmoperates vertically in multiple locations on anindustrys value chain from extracting raw materialsto manufacturing to retailing

Backward integration- assuming a function previously

provided by a supplier Forward integration- assuming a function previously

provided by a distributor

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Concentric and Conglomerate

Diversifications

Concentric Diversification

1. The company diversifies into

businesses relatedto theexisting businesses.

2. Commonalityin markets,products or technology.

3. Main objective to increase

shareholder value through

synergy, achieved through

sharing of skills, resourcesand capabilities.

4. Less risky

Concentric Diversification

1. The company diversifies into

businesses that are unrelatedto the existing businesses.

2. No commonalityin markets,products or technology.

3. The main objective is to

increase shareholder value

through profitmaximization.

4. More risky

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Diversification

Used if firms current product lines do not

have much growth potential

Benefits

Economies of Scope

Increase market power

Share infrastructure

Maintain growth


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Concentric (Related) Diversification

Outperform unrelated diversification

Best when

low industry attractiveness

strong business strengths

strong competitive position

Allows use of distinctive competence

Seek synergy


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Conglomerate (Unrelated)

Diversification

Best when

Firm operates in unattractive industry

Firm lacks abilities or skills easily transferable to

related industry Focus is financial & not core competence or

synergy

Balance cash flows

Reduce risk


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3. Defensive strategies

Also called retrenchment strategies - are the last resort . A

company may pursue retrenchment strategies when it has a

weak competitive position in some/all of its product lines

resulting in poor performance sales are down and profits

are dwindling. In an attempt to eliminate the

weaknesses that are dragging the company down,

management may follow one or more of the following

retrenchment strategies.

i. Turnaround iii Bankruptcy

ii. Divestment iv. Liquidation

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Retrenchment Strategies

Used when the firm has a weak competitive position insome or all of its product lines from poor performance

Turnaround strategies

Divestment strategies

Liquidation strategies

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Retrenchment Strategies

Turnaround strategy-emphasizes the improvement of

operational efficiency when the corporationsproblems are pervasive but not critical

Contraction- effort to quickly stop the bleedingacross the board but in size and costs

Consolidation- stabilization of the new leanercorporation

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Captive Company Strategy- company gives upindependence in exchange for security

Sell-out strategy- management can still obtain a goodprice for its shareholders and the employees can keeptheir jobs by selling the company to another firm

Divestment- sale of a division with low growth potential

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Bankruptcy- company gives up management of the firm tothe courts in return for some settlement of thecorporations obligations

Liquidation- management terminates the firm

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Turnaround strategies

Turnaround strategies derive their name from the action

involved, i.e. reversing a negative trend and turning

around the organisation to profitability.

Conditions for turnaround

Managing turnaround

Approaches to turnaround

Action plan for turnaround

Role of external agencies in turnaround

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Divestment strategies

Divestment strategy involves the sale or

liquidation of a portion of business, or a major

division, profit centre or SBU.

Reasons for divestment

Approaches to divestment

Decision to divest

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Liquidation strategies

Liquidation involves closing down an

organisation and selling its assets.

Why is liquidation difficult or undesirable? Planned liquidation

Legal aspects of liquidation

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4. Combination strategies

Combination strategies are a mixture of stability,expansion or retrenchment strategies appliedeither simultaneously (at the same time in differentbusinesses) or sequentially (at different times in the

same business). But this can be exceptionally riskyif carried too far. No organization can afford topursue all the strategies that might benefit the firm.Difficult decisions must be made. Priorities must be

established. Sequential combination

Simultaneous combination

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Combination Strategy

In large diversified companies, a combination

strategy is commonly employed when

different divisions pursue different strategies.

Also, organizations struggling to survive may

employ a combination of several defensivestrategies.

Corporate parenting views the corporation in

terms of resources and capabilities that can be used

to build business units value as well as generate

synergies across business units.

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Corporate restructuring

Corporate- or business-level restructuring

means changes in the composition of an

organisation's set of businesses in order to

create a more profitable enterprise.

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Directional strategy- the firms overall orientation towardgrowth, stability, or retrenchment

Portfolio analysis- industries or markets in which the firmcompetes through its products and business unites

Parenting strategy- the manner in which management

coordinates activities & transfers resources & cultivatescapabilities among product lines and business units

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Concentration strategies

Transaction cost economies- vertical integration ismore efficient than contracting for goods and

services in the marketplace when the transactioncosts of buying on the open market become toogreat

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Full integration- a firm internally makes 100% of itskey suppliers and completely controls its distributors

Taper integration- a firm internally produces lessthan half of its own requirements and buys the restfrom outside suppliers

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Quasi-integration- a company does not make any ofits key supplies but purchases most of itsrequirements from outside suppliers that are underits partial control

Long-term contracts- agreements between 2 firms toprovide agreed-upon goods and services to eachother for a specific period of time

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Horizontal growth- expansion of operations into othergeographic locations and/or increasing the range ofproducts and services offered to current markets

Horizontal growth is achieved through:

Internal development

Acquisitions

Strategic alliances

Horizontal integration-the degree to which a firm

operates in multiple geographic locations at thesame point on an industrys value chain

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International Entry Options for Horizontal Growth

Exporting

Licensing

Franchising

Joint Venture

Acquisitions

Green-Field Development

Production Sharing

Turn-key Operations

BOT Concept

Management Contracts

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Diversification Strategies

Concentric (Related) Diversification -growth into a relatedindustry when a firm has a strong competitive position butattractiveness is low

Synergy -when two businesses generate more profits togetherthan they could separately

Conglomerate (Unrelated) Diversification -growth into anunrelated industry

Management realizes that the current industry is unattractive

Firm lacks outstanding abilities or skills that it could easilytransfer to related products or services in other industries

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Controversies in Directional Strategies

Is vertical growth better than horizontal

growth? Is concentration better than diversification?

Is concentric diversification better than

conglomerate diversification?

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Portfolio analysis- management views its product linesand business units as a series of investments fromwhich it expects a profitable return

Popular portfolio analysis techniques include:

BCG Matrix

GE Business Screen

corp level strategy sess 6

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