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CHAPTER 7

STRATEGY FORMULATION; CORPORATE STRATEGY

STRATEGIC MANAGEMENT AND BUSINESS POLICY 11th Edition


Thomas L. Wheelen J. David Hunger

Strategies in Action

In Alices Adventure in Wonderland, Alice asks the Cheshire cat, Would you tell me please, which way I ought to go from here? That depends a good deal on where you want to go to, says the cat.

Corporate Strategy

Strategies in Action

THERE IS NO GOOD OR POOR STRATEGY BUT THERE IS AN APPROPRIATE STRATEGY

Corporate Strategy

Strategy Analysis & Choice


Nature of Strategy Analysis & Choice -- Establishing long-term objectives -- Generating alternative strategies -- Selecting strategies to pursue -- Best alternative - achieve mission & objectives

Corporate Strategy

Strategy Analysis & Choice


Alternative Strategies Derive From -

Vision Mission Objectives External audit Internal audit Past successful strategies

Corporate Strategy

Strategy Analysis & Choice


Generating Alternatives -Participation in generating alternative strategies should be as broad as possible

Corporate Strategy

Strategy Analysis & Choice


Corporate Strategy Vs. Business Strategy
Walt Disney
Corporate strategy evaluates whether the corporation should own theme parks, restaurants, movie production, and how the corporation can add value to each of these individual business. Business strategy analyzes each individual business of Disney relative to its competitors, e.g. ABC, one of Disneys TV networks need a business strategy to succeed against NBC, FOX,etc.
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Types of Strategies
1. Forward Integration

(A) Integration Strategies

2. Backward Integration

3. Horizontal Integration

Corporate Strategy

Integration Strategies
When a company expands its business functions into areas that are at different points of the same production path Gain Control Over --

Distributors

Suppliers
Competitors
Corporate Strategy

Integration Strategies
Forward Integration Strategies Gain Control Over -Distributors

Retailers

Corporate Strategy

Integration Strategies Forward Integration Strategies

Guidelines -Current distributors expensive or unreliable Availability of quality distributors limited Firm competes in industry expected to grow markedly Firm has both capital & HR to manage new business of distribution

Current distributors have high profit margins


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Integration Strategies
Backward Integration Strategies

Ownership or Control -Firms suppliers

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Integration Strategies Backward Integration Strategies Guidelines -Current suppliers expensive or unreliable # of suppliers is small; # competitors is large High growth in industry sector Firm has both capital & HR to manage new business Stable prices are important Current suppliers have high profit margins
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Integration Strategies
Horizontal Integration Strategies
Used as a growth strategy, eg. M&A, takeover.

Ownership or Control -Firms competitors

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Integration Strategies Horizontal Integration Strategies Guidelines -Gain monopolistic characteristics w/o federal government challenge Competes in growing industry

Increased economies of scale major competitive advantages


Faltering due to lack of managerial expertise or need for particular resource
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Types of Strategies
4. Market Penetration

(B)

Intensive Strategies

5. Market Development

6. Product Development

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Intensive Strategies
Intensive Efforts -Improve competitive position with existing products

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Intensive Strategies
Market Penetration Strategies

Increased Market Share of-Present products/services


Present markets Greater marketing efforts

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Intensive Strategies Market Penetration Strategies


Guidelines -Current markets not saturated Usage rate of present customers can be increased significantly

Shares of competitors declining; industry sales increasing


Increased economies of scale provide major competitive advantage
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Intensive Strategies
Market Development Strategies

New Markets -Present products/services to new geographic areas

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Intensive Strategies
Market Development Strategies Guidelines -New channels of distribution reliable, inexpensive, good quality Firm is successful at what it does Untapped/unsaturated markets Excess production capacity

Basic industry rapidly becoming global


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Intensive Strategies Product Development Strategies Increased Sales -Improving present products/services
Developing new products/services

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Intensive Strategies Product Development Strategies


Guidelines -Products in maturity stage of life cycle Industry characterized by rapid technological development Competitors offer better-quality products @ comparable prices

Compete in high-growth industry


Strong R&D capabilities
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Types of Strategies
7. Concentric Diversification

(C)

Diversification Strategies

8. Conglomerate Diversification

9. Horizontal Diversification

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Diversification Strategies
The diversification strategies include:
internal development of new products or markets, acquisition of a firm, alliance with a complementary company, licensing of new technologies.

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Diversification Strategies
Concentric Diversification Strategies
A related diversification strategy
The addition of new & related products/services which have technological/commercial synergy with current products/services, and which will appeal to new customer groups. The objective is to benefit from synergy effects due to the complementarities of activities, thus expand the firms market by attracting new groups of buyers.
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Diversification Strategies
Concentric Diversification Strategies Guidelines -Compete in no/slow growth industry New & related products enhances sales of current products New & related products offered at competitive prices Current productsdecline stage of product life cycle Strong management team
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Diversification Strategies
Conglomerate Diversification Strategies
An unrelated diversification strategy
Marketing of new & unrelated products/services that have no technological/commercial synergies with current products, but which may appeal to new groups of customers. The strategy has little relationship with the firms current business. Therefore, the reasons of adopting the strategy: - to improve the profitability of the company, - to get a better reception in markets as the company gets bigger.
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Diversification Strategies
Conglomerate Diversification Strategies

Guidelines -Declining annual sales & profits Capital & managerial ability to compete in new industry Financial synergy between acquired and acquiring firms

Current markets for present products - saturated

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Diversification Strategies
Horizontal Diversification Strategies
An unrelated diversification strategy Addition of new & unrelated products/services that are technologically/commercially unrelated to current products, but which may appeal to current customers.

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Diversification Strategies Horizontal Diversification Strategies

Guidelines -Adding new products/services would significantly increase revenues

Highly competitive and/or no-growth industry; low margins & returns


Current distribution channels can be used New products have counter cyclical sales patterns
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Types of Strategies
10. Retrenchment

(D)

Defensive Strategies

11. Divestiture

12. Liquidation

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Defensive Strategies
Retrenchment Strategies
Sometimes called Turnaround or Reorganizational strategy

Regrouping -Cost & asset reduction to reverse declining sales & profit, thus strategists work with limited resources.
Bankruptcy- an effective retrenchment strategy to avoid major debt obligations.
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Defensive Strategies Retrenchment Strategies


Guidelines -Failed to meet objectives & goals consistency; has distinctive competencies Firm is one of weaker competitors Inefficiency, low profitability, poor employee morale, pressure for stockholders Strategic managers have failed Rapid growth in size; major internal reorganization necessary
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Defensive Strategies
Divestiture Strategies

Selling a division or part of an organization.

Used to raise capital for further strategic investments.

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Defensive Strategies Divestiture Strategies

Guidelines -Retrenchment failed to attain improvements Division needs more resources than are available

Division responsible for firms overall poor performance


Division is a mis-fit with organization Large amount of cash is needed and cannot be raised through other sources
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Defensive Strategies Liquidation Strategies

Selling Companys assets, in parts, for their tangible worth

Better to cease operating than to continue losing sums of money

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Defensive Strategies
Liquidation Strategies Guidelines -Retrenchment & divestiture failed
Only alternative is bankruptcy Minimize stockholder loss by selling firms assets

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Strategic Examples
Forward Integration
Doll maker & mail order firm, Pleasant Co., opened a retail store in Manhattan

Backward Integration
Horizontal Integration

McDonalds recently acquired a paper cup producer

Callaway Golf recently acquired Top-Flite Golf Company

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Strategic Examples
Market Penetration
SABMiller Plc spent $500 million in 2003 on marketing its Miller brands of beer

Market Development
Product Development

JetBlue is adding dozens of new routes


GM developing hydrogen powered automobiles or Pfizer developing a new antismoking pill

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Strategic Examples
Concentric Diversification
Conglomerate Diversification
Microsoft launched its first personal computers that double as entertainment centers
The video-rental firm Blockbuster may acquire the DVD and music direct-marketing firm Columbia House

Horizontal Diversification

Viacom acquired Comedy Central, from AOL

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Strategic Examples
Retrenchment
America West Airlines closing its hub at Columbus, Ohio and laying off 390 employees
ConocoPhillips recently sold its Circle K convenience store chain to Alimentation Couche-Tard, a Canadian firm

Divestiture

Liquidation

Sprint liquidated its Web-hosting division

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Strategic Position & ACtion Evaluation (SPACE) Matrix

A strategic management tool used to determine what type of corporate strategy a company should undertake

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SPACE Matrix
Conservative FS
+6 +5 +4 +3 +2 +1

Aggressive

CA
-6 -5 -4 -3 -2 -1 -1 -2 -3 -4 +1 +2 +3 +4 +5 +6

IS

Defensive
Corporate Strategy

-5 -6

Competitive ES
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SPACE Dimensions
Financial Strength ROI Leverage Liquidity Working capital Total Industry Strength Growth potential Profit potential Technological know-how Total
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Ratings 1.0 1.0 3.0 4.0 9.0

4.0 2.0 4.0 10.0


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SPACE Dimensions
Environmental Stability Competitive pressure Price elasticity Ratings -4.0 -5.0

Price range of competing products


Total Competitive Advantage

-4.0
-13.0

Market share
Product Quality Product life cycle

-2.0
-5.0 -2.0

Total
Corporate Strategy

-9.0

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SPACE Matrix
Steps required to develop a SPACE Matrix are as follows:

1. Select a set of variables to define the financial strength (FS), competitive advantage (CA), environmental stability (ES), and industry strength (IS). 2. Assign a numerical value ranging from +1 (worst) to +6 (best) to each of the variables that make up the FS and IS dimensions. Assign a numerical value ranging from -1 (best) to -6 (worst) to each of the variables that make up the ES and CA dimensions. On the FS and CA axes, make comparisons to competitors. On the IS and ES axes, make comparisons to other industries.
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SPACE Matrix
Steps required to develop a SPACE Matrix are as follows:

3. Compute an average score for FS, CA, IS and ES by summing the values given to variables of each dimension and then by dividing by the number of variables included in the perspective dimensions. 4. Mark the average scores for FS, IS, ES, and CA on the appropriate X&Y axis in the SPACE Matrix.
5. Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on y.

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SPACE Matrix
Steps required to develop a SPACE Matrix are as follows:

6. Draw a directional vector form the origin of the space Matrix through the new intersection point. The vector reveals the type of strategies recommended for the organization: a) Aggressive,
b) Competitive. c) Defensive, and d) Conservative.
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SPACE Matrix
Suggested strategies

Aggressive strategies : Mkt. penetration, mkt. development, product development, backward/forward/horizontal integration, conglomerate/concentric/horizontal diversification. Conservative strategies: Mkt. penetration, mkt. development, product development, & concentric diversification. Defensive strategies: Retrenchment, divestiture, & liquidation. Competitive strategies: Backward/forward/horizontal integration, mkt. penetration, mkt. development, product development,
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Corporate Strategy