CORPORATE LEVEL STRATEGIES

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Two Levels of Strategy

Corporate
Stability Growth Retrenchment Stability

Business
Cost (price) Leadership Differentiation Focus

Foundations of Business strategies

Business strategies are the courses of action adopted by an 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 overall returns 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

COMPETITIVE SCOPE Cost leadership
Focussed Cost leadership
Low-cost products/services

Broad target

Differentiation

Narrow target

Focussed differentiation

Differentiated products/services COMPETITIVE ADVANTAGE

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

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)

Examples
Focus
Broad (Wal-Mart - rural) Narrow (NSP - activists, NRI - network administrators) Segmented (Computer security spooks and commerce, Financial services rich, poor and inbetween.)

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 alternatives available 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 organisation at incremental improvement of functional performance without any significant change in direction Pause/Proceed with caution strategy- an opportunity to rest before continuing a growth or retrenchment strategy No change strategy- continuance of current operations and policies Profit Strategies- to do nothing new in a worsening situation but instead to act as though the companys problems 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 to survive. A company can grow internally by expanding its operations or it can grow externally through mergers, acquisitions, joint ventures or strategic alliances.
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Reasons for pursuing growth strategies:

Firms generally pursue growth strategies for the following reasons:
i. ii. iii. iv. v. vi.
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To obtain economies of scale To attract merit To increase profits To become a market leader To fulfill natural urge 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

Growth Through Concentration

Concentrate resources on a single business
Concentrate vertically, i.e., backward or forward (supply or distribution) Concentrate horizontally by growing geographically or by expanding product or service offering

Means to Accomplish Growth

Mergers Acquisitions Internal Growth Strategic Alliances International

Growth Strategy: Concentration and Diversification

Merger- a transaction involving two or more corporations in which stock is exchanged but in which only one corporation survives Acquisition- the purchase of a company that is completely absorbed by the subsidiary or division of the acquiring corporation

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Concentration strategies Vertical growth- taking over the function previously

provided by a supplier or by a distributor Vertical integration- the degree to which a firm operates vertically in multiple locations on an industrys value chain from extracting raw materials to 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 related to the existing businesses. 2. Commonality in markets, products or technology. 3. Main objective to increase shareholder value through synergy, achieved through sharing of skills, resources and capabilities. 4. Less risky Concentric Diversification 1. The company diversifies into businesses that are unrelated to the existing businesses. 2. No commonality in markets, products or technology. 3. The main objective is to increase shareholder value through profit maximization.

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

Concentric (Related) Diversification

Outperform unrelated diversification Best when
low industry attractiveness strong business strengths strong competitive position

Allows use of distinctive competence Seek synergy

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

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. ii.
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Turnaround Divestment

iii iv.
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Retrenchment Strategies
Used when the firm has a weak competitive position in some 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 corporations problems are pervasive but not critical

Contraction- effort to quickly stop the bleeding across the board but in size and costs Consolidation- stabilization of the new leaner corporation
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Captive Company Strategy- company gives up

independence in exchange for security

Sell-out strategy- management can still obtain a good

price for its shareholders and the employees can keep their 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 to

the courts in return for some settlement of the corporations 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 applied either simultaneously (at the same time in different businesses) or sequentially (at different times in the same business). But this can be exceptionally risky if carried too far. No organization can afford to pursue 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 defensive strategies.
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 toward

growth, stability, or retrenchment

Portfolio analysis- industries or markets in which the firm

competes through its products and business unites

Parenting strategy- the manner in which management

coordinates activities & transfers resources & cultivates capabilities among product lines and business units

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Concentration strategies Transaction cost economies- vertical integration is

more efficient than contracting for goods and services in the marketplace when the transaction costs of buying on the open market become too great

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Full integration- a firm internally makes 100% of its key suppliers and completely controls its distributors Taper integration- a firm internally produces less than half of its own requirements and buys the rest from outside suppliers

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Quasi-integration- a company does not make any of its key supplies but purchases most of its requirements from outside suppliers that are under its partial control Long-term contracts- agreements between 2 firms to provide agreed-upon goods and services to each other for a specific period of time

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Horizontal growth- expansion of operations into other

geographic locations and/or increasing the range of products 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 the same 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 related

industry when a firm has a strong competitive position but attractiveness is low
than they could separately

Synergy - when two businesses generate more profits together

Conglomerate (Unrelated) Diversification - growth into an

unrelated industry Management realizes that the current industry is unattractive Firm lacks outstanding abilities or skills that it could easily transfer 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 lines

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

Popular portfolio analysis techniques include: BCG Matrix GE Business Screen

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