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CHAPTER 7
STRATEGY FORMULATION;CORPORATE STRATEGY
STRATEGIC MANAGEMENT AND BUSINESS POLICY
11th Edition
Thomas L. Wheelen
J. David Hunger
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Corporate Strategy 2
In Alice’s 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.
Strategies in Action
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THERE IS NO GOOD OR POOR STRATEGY…
BUT THERE IS AN APPROPRIATE STRATEGY
Strategies in Action
Corporate Strategy
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-- Establishing long-term objectives-- Generating alternative strategies-- Selecting strategies to pursue-- Best alternative - achieve mission & objectives
Nature of Strategy Analysis & Choice
Strategy Analysis & Choice
Corporate Strategy
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Vision Mission Objectives External audit Internal audit Past successful strategies
Strategy Analysis & Choice
Alternative Strategies Derive From --
Corporate Strategy
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Strategy Analysis & Choice
Generating Alternatives --
Participation in generating alternative strategies should be as broad as possible
Corporate Strategy
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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.
Corporate Strategy
Business strategy analyzes each individual business of Disney relative to its’ competitors, e.g. ABC, one of Disney’s TV networks need a business strategy to succeed against NBC, FOX,…etc.
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Types of Strategies
(A)IntegrationStrategies
1. Forward Integration
2. BackwardIntegration
3. HorizontalIntegration
Corporate Strategy
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Integration Strategies
Gain Control Over --
Distributors
Suppliers
Competitors
When a company expands its business functions into areas that are at different points of the same production path
Corporate Strategy
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Forward Integration Strategies
Gain Control Over --
Distributors
Retailers
Integration Strategies
Corporate Strategy
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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
Integration Strategies
Corporate Strategy
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Backward Integration Strategies
Ownership or Control --
Firm’s suppliers
Integration Strategies
Corporate Strategy
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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
Integration Strategies
Corporate Strategy
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Horizontal Integration Strategies
Ownership or Control --
Firm’s competitors
Integration Strategies
Used as a growth strategy, eg. M&A, takeover.
Corporate Strategy
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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
Integration Strategies
Corporate Strategy
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Types of Strategies
(B)IntensiveStrategies
4. MarketPenetration
5. MarketDevelopment
6. ProductDevelopment
Corporate Strategy
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Intensive Strategies
Intensive Efforts --
Improve competitive position with existing products
Corporate Strategy
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Market Penetration Strategies
Increased Market Share of--
Present products/services
Present markets
Greater marketing efforts
Intensive Strategies
Corporate Strategy
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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
Intensive Strategies
Corporate Strategy
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Market Development Strategies
New Markets --
Present products/services to new geographic areas
Intensive Strategies
Corporate Strategy
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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
Intensive Strategies
Corporate Strategy
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Product Development Strategies
Increased Sales --
Improving present products/services
Developing new products/services
Intensive Strategies
Corporate Strategy
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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
Intensive Strategies
Corporate Strategy
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Types of Strategies
(C)Diversification
Strategies
7. ConcentricDiversification
8. ConglomerateDiversification
9. HorizontalDiversification
Corporate Strategy
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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.
Corporate Strategy
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Concentric Diversification Strategies
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 firm’s market by attracting new groups of buyers.
Diversification Strategies
A related diversification strategy
Corporate Strategy
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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 products—decline stage of product life cycle
Strong management team
Diversification Strategies
Corporate Strategy
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Conglomerate Diversification Strategies
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 firm’s 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.
Diversification Strategies
An unrelated diversification strategy
Corporate Strategy
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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
Diversification Strategies
Corporate Strategy
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Horizontal Diversification Strategies
Addition of new & unrelated products/services that are technologically/commercially unrelated to current products, but which may appeal to current customers.
Diversification Strategies
An unrelated diversification strategy
Corporate Strategy
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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
Diversification Strategies
Corporate Strategy
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Types of Strategies
(D)DefensiveStrategies
10. Retrenchment
11. Divestiture
12. Liquidation
Corporate Strategy
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Retrenchment Strategies
Sometimes called Turnaround or Reorganizational strategy
Regrouping --Cost & asset reduction to reverse declining sales & profit, thus strategists work with limited resources.
Defensive Strategies
Bankruptcy- an effective retrenchment strategy to avoid major debt obligations.
Corporate Strategy
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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
Defensive Strategies
Corporate Strategy
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Divestiture Strategies
Selling a division or part of an organization.
Used to raise capital for further strategic investments.
Defensive Strategies
Corporate Strategy
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Divestiture Strategies
Guidelines --Retrenchment failed to attain improvements
Division needs more resources than are available
Division responsible for firm’s overall poor performance
Division is a mis-fit with organization
Large amount of cash is needed and cannot be raised through other sources
Defensive Strategies
Corporate Strategy
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Liquidation Strategies
Company’s assets, in parts, for their tangible worth
Better to cease operating than to continue losing sums of money
Selling
Defensive Strategies
Corporate Strategy
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Liquidation Strategies
Guidelines --
Retrenchment & divestiture failed
Only alternative is bankruptcy
Minimize stockholder loss by selling firm’s assets
Defensive Strategies
Corporate Strategy
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Strategic Examples
ForwardIntegration
Doll maker & mail order firm, Pleasant Co., opened a retail store in Manhattan
BackwardIntegration
McDonalds recently acquired a paper cup producer
HorizontalIntegration
Callaway Golf recently acquired Top-Flite Golf Company
Corporate Strategy
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Strategic Examples
MarketPenetration
SABMiller Plc spent $500 million in 2003 on marketing its Miller brands of beer
Market Development
JetBlue is adding dozens of new routes
ProductDevelopment
GM developing hydrogen powered automobiles or Pfizer developing a new antismoking pill
Corporate Strategy
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Strategic Examples
ConcentricDiversification
Microsoft launched its first personal computers that double as entertainment centers
ConglomerateDiversification
The video-rental firm Blockbuster may acquire the DVD and music direct-marketing firm Columbia House
HorizontalDiversification
Viacom acquired Comedy Central, from AOL
Corporate Strategy
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Strategic Examples
RetrenchmentAmerica West Airlines closing its hub at Columbus, Ohio and laying off 390 employees
DivestitureConocoPhillips recently sold its Circle K convenience store chain to Alimentation Couche-Tard, a Canadian firm
LiquidationSprint liquidated its Web-hosting division
Corporate Strategy
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A strategic management tool used to determine what type of corporate strategy a company should undertake
Strategic Position & ACtion Evaluation (SPACE) Matrix
Corporate Strategy
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SPACE MatrixFS
+6
+1
+5+4+3
+2
-6
-5
-4
-3
-2
-1-6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6
ES
CA IS
Conservative Aggressive
Defensive Competitive
Corporate Strategy
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SPACE DimensionsFinancial Strength Ratings
ROI 1.0
Leverage 1.0
Liquidity 3.0
Working capital 4.0
Total 9.0
Industry Strength
Growth potential 4.0
Profit potential 2.0
Technological know-how 4.0
Total 10.0
Corporate Strategy
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SPACE Dimensions
Environmental Stability Ratings
Competitive pressure -4.0
Price elasticity -5.0
Price range of competing products -4.0
Total -13.0
Competitive Advantage
Market share -2.0
Product Quality -5.0
Product life cycle -2.0
Total -9.0
Corporate Strategy
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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.
Corporate Strategy
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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.
Corporate Strategy
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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.
Corporate Strategy
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SPACE Matrix
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,
Suggested strategies
Corporate Strategy