Corporate strategy decisions and their marketing implications

chapter # 2

Components of a well defined corporate strategy

1. 2. 3.

4.
5.

6.

The overall scope and mission of the organization Company goals and objective. A source of competitive advantage A development strategy for future growth The allocation of corporate resources across firms various businesses The search for synergy via the sharing of corporate resources and competencies.

Corporate scope- defining the firm's mission

A clearly stated mission can help instill a shared sense of direction, relevance and achievement among employees, as well as the positive image of the firm among customers, investors and other stakeholders.

It answers questions like

1.

2.
3. 4.

What is our business? Who are our customers? What kinds of value can we provide to these customers? What should our business be in future?

Market influences on the Corporate Mission

The

firms mission should be compatible with its established values, resources and distinctive competencies. It should also focus the firms efforts on markets , where those resources and competencies will generate value for customers , an advantage over competitors and synergy across its products.

Criteria for defining Corporate Mission

firms specify their domain in physical terms, focusing on products or services or the technology used. Such statements can lead to slow reactions to technological or customer-demand changes. It is better to define a firms mission as what customer needs are to be
Many

satisfied and the functions the firm must perform to satisfy them.

Social values and Ethical Principles

Mission

statements attempt to define the social and ethical boundaries of their strategic domain and outline the ethical principles they will follow in dealings with customers, suppliers and employees. Ethics is concerned with the development of moral standards by which actions and situations can be judged. It focuses on those actions that may result in actual or potential harm of some kind e.g economic, mental, physical to an individual , group or organization.

Why are ethics important?

They

are important because unethical practices can damage the trust between the firm and their suppliers or customers, thereby disrupting the development of long term exchange relationships and resulting in likely loss of sales and profits overtime.

Enhancing the shareholder value: The ultimate objective.

The

firms continued existence depends upon financial relationships with each of these parties. Employees want competitive wages, Customers want high quality at competitive prices, Suppliers and debt holders have financial claims, And shareholders look for cash dividend and higher share value.

Managements primary objective

To

pursue capital investments, acquisitions and business strategies that will produce sufficient future cash flows to return positive value to shareholders. Failure to do so not only will depress the firms stock price and inhibit the firms ability to finance future operations and growth, but also it could make the organization more vulnerable to a takeover by outsiders who promise to increase its values to shareholders.

Strategic issues
In

the long term, customer value and shareholder value converge; a firm can provide attractive returns to shareholders only so long as it satisfies and retains its customers.

Gaining a competitive advantage

1. 2. 3. 4.

5.
6.

A sustainable competitive advantage at the corporate level is based on company resources , resources that other firms do not have , that take a long time to develop and that are hard to acquire. Highly developed information systems Extensive market research operations Cooperative long term relationships with customers Ability to identify and respond to emerging customer needs and desires. Brand name that customers recognize and trust Cooperative alliances with suppliers and distributers.

Corporate growth strategies

Expansion

by increasing penetration of current product-markets. Expansion by developing new products for current customers. Expansion by selling existing products to new segments or countries. Expansion by diversifying.

Expansion by increasing penetration

This

typically require actions such as making product or service improvements , cutting costs and prices, or outspending competitors on advertising or promotions. Additional growth may be possible by encouraging current customers to become more loyal and concentrate their purchases, use more of the product or service, use it more often, or use it in new ways.

Expansion by new products for current customers

Through

product development strategy, the firm can emphasize the introduction of product line extensions or new product or service offerings aimed at existing customers.

Expansion by selling existing products to new segments

The

growth strategy with the greatest potential for many companies is the developments of new markets for their existing goods and services. This may involve the creation of marketing programs aimed at nonuser or occasional user segments of existing markets.

Expansion by diversifying
Firms

also seek growth by diversifying their operations. This is typically riskier than the various expansion strategies because it often involves learning new operations and dealing with unfamiliar customer groups.

Vertical integration
This

is one way for firms to diversify. Forward integration occurs when firms move downstream in terms of the product flow, as when a manufacturer integrates by acquiring or launching a wholesale distributor or retail outlet. Backward integration occurs when a firm moves upstream by acquiring a supplier.

Expansion by diversifying contd.

Related

occurs when a firm internally develops or acquires another business that does not have products or customers in common with its current businesses but that might contribute to internal synergy through sharing production facilities, brand names, R&D know-how, or marketing and distribution skills.

or concentric diversification

Expansion by diversifying contd.

Unrelated

are primarily financial rather than operational. An unrelated diversification involves two businesses that have no commonalities in products, customers, production facilities, or functional areas of expertise. Such diversification mostly occurs when a firms current businesses face decline b/c of decreasing demand, increased competition or product obsolescence . This strategy is riskiest in terms of financial outcomes.

or conglomerate diversification

Expansion by diversifying through organizational relationships or networks

This

refers to coalitions of financial institutions, distributors, and manufacturing firms in a variety of industries that are often grouped around a large trading company that helps coordinate the activities of the various coalition members and markets their goods and services around the world.

Portfolio model BCG Growth share matrix

What

does it do? It helps in analyzing the impact of investing resources in different businesses on the future earnings and cash flows of the entire organization The vertical axis indicates the industrys growth rate and the horizontal axis shows the businesss relative market share.

The BCG Growth Share Matrix

High

Stars 5 4

Question marks 2 3 7 Dogs 12 13

0.1

Market growth rate 10% (in constant dollars)

6 Cash cows

11 10

9
Low 10

1 Relative market share

Source: Adapted from Barry Hedley, Strategy and the Business Portfolio, Long Range Planning 10 (February 1977).

Cash Flows Across Businesses in the BCG Portfolio Model

Growth rate (cash use) High

Stars
Cash Flows

Question marks

Low

Cash cows

Dogs

High

Relative market share

Low

Desired direction of business development

Resource allocation and strategy implications

Question

marks. Also called problem children, need large cash , not only to expand to keep up with the rapidly growing market but also for the marketing activities to build market share and catch the industry leader.

stars
It

is a market leader in a high growth industry. They are critical to the success of the firm. As their industry matures , they move to become cash cows. They often are net users of the cash rather than suppliers, because firm must continue to invest in R&D and marketing acitivities to keep up with rapid market growth and to maintain a leading market share.

Cash cows
They

are the primary generators of profits and cash in corporations. They do not require much additional capital investments. Their markets are stable, and their market share leadership position suggests that they enjoy economies of scale and relatively higher profit margins.

Dogs
They

typically generate low profits or losses. Divestiture is an option for such businesses. Another common strategy is to harvest dog businesses.

Limitations of Growth-share matrix

Market

growth rate is an adequate descriptor of overall industry attractiveness. E.g telecom industry. Relative market share is inadequate as a description of overall competitive strength. e.g IBM The outcomes of a growth-share analysis are highly sensitive to variations in how growth and share are measured. E.g pepsi

Limitations of Growth-share matrix

While

the matrix specifies appropriate investment strategies for each business, it provides little guidance on how best to implement those strategies. The model implicitly assumes that all business units are independent of one another except for the flow of cash

The GE Nine-Cell Matrix

Industry attractiveness High Medium Low High Medium Low

Businesss competitive position

1
2

2
3

3
3

1 Invest/grow 2 Selective investment/ maintain position 3 Harvest/divest

Value based planning

This

provides a basis for comparing the economic returns to be gained from investing in different businesses pursuing different strategies or from alternative strategies that might be adopted by a given business unit.

Factors Affecting the Creation of Shareholder Value Creating Shareholder return Corporate
objective shareholder value Cash flow from operations Sales growth Operating profit margin Income tax rate Operating Dividends Capital gains Valuation components Discount rate Working capital investment Fixed capital investment Investment Debt

Value Value growth drivers duration

Cost of capital

Management decisions

Financing

Source: Reprinted with permission of The Free Press, A Division of Macmillan, Inc., from Crating Shareholder Value by Alfred Rappaport. Copyright 1986 by Alfred Rappaport.

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Sources of synergy
Knowledge

based synergies can be attained by the transfer of competencies, knowledge, or customer related intangibles, such as brand-name recognition and reputations from other units within the firm. Corporate identity and brand can create synergies that enhance the effectiveness and efficiency of the firms marketing efforts for its individual product offerings.

Sources of synergy
Synergy

from shared resources means two or more businesses might produce products in a common plant or use a single sales force to contact common customers. With such sharing, helps increase economies of scale or experience curve effects, it can also improve the efficiency of each of the businesses involved