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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