GSB – MBA –TM IV

Strategic Management

Unit III
Corporate Strategy

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 Corporate strategy
Is primarily about the choice of direction for the entire
firm.
Deals with 3 key issues
> firm’s overall orientation toward growth,
stability, or retrenchment – directional strategy
> industries and markets in which the firm
competes through its products and business units –
coordination of cash flow among units - portfolio
strategy
> the manner in which management coordinates
activities and transfers resources and cultivates
capabilities among product lines and business units –
building corporate synergy through resource
sharing and development - parenting strategy
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In a multi business company, it is also about
managing various product lines and business
units for max value – hq will play the role of
the organisational parent in that it must deal with
various products and business units - children.
Even though each product line or business unit
has its own competitive or cooperative strategy,
the corporation must coordinate these different
business strategies so that the corporation as
a whole succeeds as a “family”.
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• Corporate strategy includes decisions
regarding;
- flow of financial and other resources
to and from a co’s product lines and BUs
- through a series of coordinating
devices
- transfers skills and capabilities
between Bus – aims at synergy.
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 Directional strategy
(orientation towards growth)
> Should we expand, cut back or
continue unchanged?
> Should we concentrate within the
current industry or diversify?
> Do we want to grow or expand
through internal development or through
external acquisitions, mergers or joint
ventures?
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Directional strategy is composed of 3 general
orientations toward growth – called grand
strategies;
> Growth strategies expand the co’s current
activities
> Stability strategies make no change in the
co’s current activities
> Retrenchment strategies reduce the co’s
level of activities.

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 Growth strategies
Growth in sales, assets, profits, combination
of these. These may be;
> concentration (Intensification)
- within one product line or industry
> diversification – into other
products or industries.
These can be achieved internally through
Investment in new product development or
externally through mergers, acquisitions,
or strategic alliance.
.
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A merger involves 2 or more corporations in which stock
is exchanged, but from which only one corporation
survives – usually between similar firms and are
friendly. The resulting firm may have a name derived
from its composite firms.
An acquisition is the purchase of a company that is
completely absorbed as an operating subsidiary or a
division of the acquiring corporation - usually between
firms of different size and can be either friendly or
hostile. Hostile acquisitions are called takeovers.
A strategic alliance is a partnership of 2 or more
corporations or business units t achieve strategically
significant objectives that are mutually beneficial

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 Corporate Directional Strategies
Growth
Concentration
- Vertical growth
- horizontal growth
Diversification
- concentric
- conglomerate

Stability Retrenchment
- pause/proceed with caution - turnaround
- No change - captive company
- profit - Sell out/divestment
- Bankruptcy/liquidation

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 Why concentration strategies
If co’s current product lines have real growth potential
concentration of resources on those will be a good
strategy for growth;
> Vertical integration; - taking over the function
provided by a supplier – backward integration – that
of distributor – forward integration - logical strategy
for a corporation or business unit with a strong
competitive position in a highly attractive industry –
can range from full integration – firm makes 100%
key supplies and distributors or taper integration
where the firm produces less than half of its key
supplies - to no integration, firm uses long term
contracts to provide key supplies and distribution.
Outsourcing-use of long term contracts to reduce
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internal administrative costs.
Vertical Integration can be achieved internally
or externally ; Eg., Henry Ford used co
resources to build the River Rouge Plant
outside Detroit. The manufacturing process was
integrated to the point that iron ore entered one
end of the long plant and finished automobiles
rolled out the other end into a huge parking lot.
In contrast, Du Pont, the huge chemical co.,
chose the external route to backward vertical
integration by acquiring Conoco for oil needed
for its synthetic fabrics.
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• . Though backward integration is more
profitable than forward integration it can
reduce the corporation’s strategic flexibility
by creating an encumbrance of expensive
assets that might be hard to sell – exit
barrier.

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Horizontal integration –
The degree to which a firm operates in multiple
geographic locations at the same point in an
industry’s value chain – growth can be achieved by
expanding the firm’s products into other geographic
locations or by increasing the range of products and
services offered to current markets - a co can
acquire market share, production facilities,
distribution ownership to long term contracts– may
range from full to partial outlets, or specialised
technology through internal development or
external acquisitions or via jt ventures with another
firm in the same industry. 13
• May range from full to partial ownership to long
term contracts;
• E.g., KLM, the Dutch airline, purchased a
controlling stake (partial ownership)in NW
airlines to obtain access to American and Asian
markets. KLM was unable to acquire all of NW’s
stock because of US Govt regulations forbidding
foreign ownership of domestic airlines.
• Many small commuter airlines engage in long
term contracts with major airlines to offer a
complete arrangement for travelers.

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 Why use Diversification strategies
If a co’s current product lines do not have much
growth potential, management may choose to
diversify –
> Concentric (related) diversification - Expansion
into a related industry – appropriate when a firm has
strong competitive position but industry
attractiveness is low – By focusing on the features
that have given the co its distinctive competence,
the co uses theses strengths as a means of
diversification
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• - attempts to achieve a a strategic fit in a new
industry where it can apply the firm’s product
knowledge, manufacturing capabilities, marketing
skills, etc put to good use –the corporation’s
products are related in some way; they possess some
common thread; the search is for synergy – the two
businesses can generate more profits together than
they can separately. The point of commonality may
be similar technology, customer usage, distribution,
managerial skills, or product similarity.

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 > Conglomerate or unrelated
diversification – diversifying into an industry
unrelated to its current one - Current industry
unattractive and the firm lacks outstanding
abilities or skills it could easily transfer to
related or unrelated products or services in
other industries, this is the most likely strategy.
– financial considerations of cash flow and risk
reduction are more important than product-
market strategy.
e.g., A cash rich company with few
opportunities for growth in its industry may
move into another industry where opportunities
are great but cash is hard to find.
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When a co with a seasonal and therefore
uneven cash flow purchases a firm in an
unrelated industry with complementing
seasonal cash flow.
Eg., The CSX Corporation (a rail-road
dominated transportation company)
purchased a natural gas transmission
business (Texas Gas Resources), as gas
transmission revenue was realised in the
winter months when railroads experience
is a seasonally lean period.
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 What are stability strategies?
Appropriate for a successful corporation operating in a
reasonably predictable environment – useful only in
the short run but may be dangerous if followed for too
long.
Can be;
> pause and proceed with caution strategy
> no-change strategy
> profit strategy
Pause and proceed with caution – a time-out,
an opportunity to rest before continuing a growth or
retrenchment strategy - appropriate as a temporary
strategy to consolidate- till environment becomes
more hospitable – to enable a co to consolidate its
resources after proolonged rapid growth - high growth 19
industry with an uncertain future.
e.g., Dell Computer Corpn in 1993 followed this
strategy –growth more than it could handle- 285%
in 2 yrs – selling PCs by mail enabled it to under-
price Compaq Computer and IBM, but could not
keep up with the needs of $2Bilion, 5600
employees selling PCs in 95 countries. Dell was
not giving up growth but merely putting it in limbo
until it could hire new managers, improve the
structure and build new facilities.
Why use no-change strategy?
-A decision to do nothing new –to continue current
operations and policies for the foreseeable future.-
small adjustments for inflation- reasonably profitable
and safe niche. Most small town businesses follow this
strategy before a Wal-Mart moves into their area. .20
 Why use a profit strategy?
- A decision to do nothing new in a worsening situation,
but instead to act as though the co’s problems are
only temporary – to artificially support profits when
sales decline by reducing investment and short term
discretionary expenditures – rather than announcing
the real position to stakeholders, management may be
tempted to follow this seductive strategy –blame co’s
problems on hostile environment (such as anti-
business govt policies, unethical competitors, finicky
customers, or greedy lenders).- defers investment or
cuts expenses, such as R&D, maintenance , advtg,
etc. – to keep profits stable- may even sell a product
line to keep cash flow – useful only to help a co get
through temporary difficulty - if pursued for long will lead to
serious deterioration in competitive position – top
management’s passive, short term, self-serving response to
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the situation.
 What are retrenchment strategies?
Pressure to improve performance, when the co is facing
a weak competitive position in some or all product
lines –sales down – losses – CEO under pressure to
do something quickly or be fired; to eliminate the
weaknesses, that drag the co down, management
may follow one of several strategies from turnaround
or becoming a captive company to selling out ,
bankruptcy, or liquidation.
Why use a turnaround strategy?
Improvement of operational efficiency – appropriate
when a corporation’s problems are pervasive, but not
yet critical – contraction and consolidation.
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Contraction is the cut-back in size and
costs. Consolidation is the
implementation of a program to stabilise
the now leaner corporation – reduce
overhead, justify costs of functional
activities – if not conducted in a positive
manner, best people may leave- if all are
involved, stronger orgn

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 Why use a captive company strategy?

- Becoming another co’s sole supplier or

distributor in exchange for a long term
commitment from that co – sacrifices
independence for security- reduce the
scope of some of its functional activities –
reduction in costs.

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Why use a sell out or divestment strategy?

Weak competitive position – unable to

improve, or find a customer to become a
captive co., no choice but to sell out – if
multi product, may divest – selling a unit.
e.g., Monsanto realised in 1977 that the
chemical business, for which it was known,
was hurting its growth as a corporation-
Chemical division’s performance has been
overshadowed by advances in
biotechnology, agricultural products -
divestment seemed viable.
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ITC divested its ITC Classic Financial Services
because the unit got into a financial mess. While
the industry as a whole was beset with problems,
the unit was in a bad shape, trapped in litigation.
 Parle divested its soft drinks business by selling its
brands including Thums Up to Coca Cola, because
of the heavy competition anticipated from the 2
MNC giants.
 Tatas divested Excel Industries, a profit-making co,
because, it fell outside the new definition of Tata’s
core businesses.
Shaw Wallace divested many of its businesses as it
wanted to regain its concentration on its core
businesses like liquor.
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> Hoechst India Ltd divested its manufacturing facility at
Kandla in favour of IPCA Laboratories – because of the loss of
the USSR market.
> GE divested its computer as well as ac businesses as it
could not achieve the desired position of no1 or 2.
> Glaxo divested its food division to Heinz following its decision
to stick to pharmaceuticals.
> SRF divested its associate Co, SRF Finance td, by selling it
to GE Capital, as a part of its p[olicy to divert all non core
businesses.
> Dunlop India divested stage by stage – mounting losses since
90s, all turnaround efforts failed- WB and TN units closed- sold
real estate in Mumbai for Rs100 crores –came under BIFR
purview.
> UB group, divested Hindustan Polymers. Sold its paint
division in the Far East that operated under BERGER
International – dropping non-synergic businesses –HP was sold
to LG Chemicals of Korea – to concentrate on ts core business
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of beer, liquor, pharma and engineering services.
 Why use a bankruptcy or
liquidation strategy?
Worst possible situation with poor
competitive position in an industry with
little prospect – bankruptcy, giving up
management of the firm to the courts in
settlement of the corporation’s obligations-
chapter eleven reorganisation; - liquidation
is the piecemeal sale of firm’s assets-
industry is unattractive and future is bleak
– management takes decision instead of
the court.
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