Levels of Strategy

Three levels of the strategy

1. level: The corporate level At this level the fundamental task is to develop a balanced portfolio of businesses which will achieve the goals of the corporation and satisfy its stakeholders. 2. level: The strategic business unit level (SBU) At this level the business, or set of activities is given and the major task for strategic planner at this level is for business to succeed against competitors and also satisfy corporate success criteria. 3. level: The functional level: At this level the major task is to provide an appropriate functional strategies ( finance and accounting, marketing, R+D, production, personnel) for SBU or corporate level strategy.

A Simple Organization Chart (Single Product Business)

Business Level Strategy Business

Research and Development Manufacturing

Marketing

Human Resources

Finance

Functional Level Strategy

A Simple Organization Chart (Dominant or Related Product Business)

Corporate Level Multibusiness Corporation

Business Level

Business 1 (Related)

Business 2 (Related)

Business 3 (Related)

Functional Level Research and Manufacturing Development Marketing Human Resources Finance

An example of an Unrelated Product Business (Note: By itself, an SBU can be considered a related product business) SBU: a single business or collection of related businesses that is independent and formulates its own strategy

A (Multi-business) Corporation

Ex.: G.E. (General Electric Corp.)

Strategic Business Unit 1

S.B.U. 2

Company 1

Co. 2

Co. 3

Division 1

Div. 2

Div. 3

Corporate Level Strategy

What businesses are we in? What businesses should we be in? Four areas of focus
Diversification management (acquisitions and divestitures) Synergy between units Investment priorities Business level strategy approval (but not crafting)

Corporate-Level Strategies
Valuable strengths

Concentric Diversification (Economies Corporate of Scope) growth strategies Conglomerate Diversification (Risk Mgt.) Corporate stability strategies Corporate retrenchment strategies Can still go for business-level growth (economies of scale) Environmental Status
Critical environmental threats

Firm Status

Critical weaknesses Abundant environmental opportunities

Organizational Strategies occur on 3 levels: Corporate(Grand), Business, and Functional A. Corporate(Grand)level strategies: - 1. Growth (a. concentration; b. diversification) - 2. Retrenchment - 3. Stability (status quo) - 4. Combination (multiple strategies)

1a. Growth through concentration concentrating on your existing specialization

i. market penetration aggressively targeting current markets with existing product specialties ii. market development/geographic expansion expanding into new markets iii. market segmentation dividing existing markets iv. product development modify existing products, or develop new but related products

1b. Growth through diversification branching out into new areas

i. horizontal integration expanding across the general industry (e.g. Coke acquires Minutemaid). ii. vertical integration expanding into industries populated by suppliers/buyers (e.g. Ford buys steel plant). iii. conglomerate diversification expanding into unrelated industries (e.g. GM buys Hersheys candy). iv. joint venture expanding together with another company in order to diversity efficiently.

2. Retrenchment
i. Turnaround downsizing existing company/divisions ii. Divestiture selling off existing divisions/subdivisions iii. Liquidation Chapter 11 bankruptcy

3. Stability - maintain status quo (e.g. continuous improvement) 4. Combination multiple use of strategies

Corporate Level Issues

The Multi-Business Organisation

Exhibit 6.2

Reasons for Diversification (1)

Value creation
Efficiency gains from applying existing resources/capabilities to new markets/products
Economies of scope Benefits of synergy

Applying corporate managerial capabilities to new markets/products/services

Dominant logic

Increased market power from diverse product/service range

Cross subsidy Possible monopoly in long-run

Reasons for Diversification (2)

Less obvious value creation
In response to environmental change
To defend existing value Or straying too far from dominant logic?

To spread risk across range of businesses

Investors can diversify more effectively? Important for private businesses

In response to expectations of powerful stakeholders

Pressure from financial analysts to produce constant growth

Business Level Strategy

How do we support the corporate strategy? How do we compete in a specific business arena? Three types of business level strategies: Low cost producer Differentiator Focus Four areas of focus Generate sustainable competitive advantages Develop and nurture (potentially) valuable capabilities Respond to environmental changes Approval of functional level strategies

Functional / Operational Level Strategy

Functional: How do we support the business level strategy? Operational: How do we support the functional level strategy? An example. Business L.S.: Become the low cost producer of widgets Functional L.S. (Mfg.): Reduce manufacturing costs by 10% Operational (Plant #1): Increase worker productivity by 15%

 B. Business level strategies

1. Michael Porters Competitive Strategies: i. low cost (e.g. Wal-Mart)

ii. differentiation (Volvo/Mercedes) iii. focus (Pennys/Pea in a Pod) 2. Adaptive business level strategies:
a. prospecting b. defending c. analyzing

 B. Business level strategies (contd)

3. Product life cycle i. introduction stage ii. growth stage iii. maturity stage iv. decline stage

Product Life Cycle:

 C. Functional level strategies

i. Marketing ii. Manufacturing

iii. Human resources

iv. Etc.

What is the portfolio stratregy?

From viewpoint of strategic management the corporations are collections of different product-marketconsumer-resource packages. These are the SBUs. We can describe the sum of SBUs, as portfolio. The portfolio analysis:
Combines the assessment of business position with market attractiveness evaluation, which emerges from external analysis in general and market analysis, in particular. Includes multiple SBUs in the same analysis and addresses the SBU investment decision - which organizational units should receive resources, which should have resource withheld , and which should be resource generators. Offers baseline recommendations concerning the investment strategies for each SBU based on an assessment of business position and market attractiveness.

Corporate Portfolio Management

Portfolio balance
Markets Organisations needs

Attractiveness of business units

Profitability Growth rates

Portfolio fit
Synergies between business units Synergies with corporate parent

The Growth Share (or BCG) Matrix

Strategic implication of the BCG matrix

The strategies for the overall portfolio products are concerned with the issue of balance, I.e. is the portfolio of products balanced internally in terms of the following? Are there a sufficient number of cash cows to support those other products in the portfolio which are at stages of their lifecycles when they are require cash?

Are there questions-marks which have resonable prospects of becoming future stars and which do not , at present, constitute a disproportionate drain on current cash flow?
Are there an appropriate number of stars which will provide sufficient cash generation when the current cash cows are no longer able to fulfill this role? Are there any dogs and if so why?

How to do a portfolio analysis?

Construct a summary of the industry and competitive environment of each business units. Appraising the strength and competitive position of each business unit. Understanding how each business unit ranks against its rivals on the key factors for competitive success. Identifying the external opportunities, threats and strategic issues peculiar to each business units. Determining how much corporate financial support is needed to fund each units business strategy and what corporate skills and resources could be deployed to boots the competitive strength of various business units. Comparing the relative attractiveness of the businesses in the corporate portfolio. Compare the businesses on various historical and projected performance measures - sale growth, profit margin, return on investment, and the like. Checking the corporate portfolio to ascertain whether the mix of businesses is adequately balanced

The Industry Life Cycle

Industry Sales
Introduction

Growth

Maturity

Decline

Time
Drivers of industry evolution : demand growth creation and diffusion of knowledge

Assumptions and limitations of BCG

The use of highs and lows to make just four categories is too simplistic. The link between market share and profitability isnt necessarily strong. Low-share businesses can be profitable, too (and vica versa.) Growth rate only one aspect of industry attractiveness. High-growth market may not always be the best for every business unit or product line. It considers the product line or business unit only relation to one competitor: the market leader. It misses small competitors with fast-growing market share. Market share is only one aspect of overall competitive position.

Indicators of SBU Strength and Market Attractiveness

Market Attractiveness/SBU Strength Matrix

Strategy Guidelines Based on Directional Policy Matrix