Presentation on theme: "Corporate-Level Strategy K. Rangarajan INDIAN INSTITUTE OF FOREIGN TRADE BUSINESS STRATEGY."— Presentation transcript:
Corporate-Level Strategy K. Rangarajan INDIAN INSTITUTE OF FOREIGN TRADE BUSINESS STRATEGY
How to create value for the corporation as a whole 2. Corporate-Level Strategy (Companywide Strategy) - low cost - differentiation - integrated low cost/differentiation - focused low cost - focused differentiation How to create competitive advantage in each business in which the company competes (Competitive Strategy) 1. Business-Level Strategy (Competitive Strategy) A Diversified Company Has Two Levels of Strategy
1. What businesses should the corporation be in? 2. How should the corporate office manage the array of business units? Corporate Strategy is what makes the corporate whole add up to more than the sum of its business unit parts Key Questions of Corporate Strategy
Levels and Types of Diversification Low Levels of Diversification Moderate to High Levels of Diversification Very High Levels of Diversification Related linked (mixed) < 70% of revenues from dominant business, and only limited links exist AABBCC Single business > 95% of revenues from a single business unit AA Dominant business Between 70% and 95% of revenues from a single business unit BB AA Unrelated-Diversified Business units not closely related AABBCC < 70% of revenues from dominant business; all businesses share product, technological and distribution linkages Related constrained AA BBCC
Alternative Diversification Strategies Related Diversification Strategies Unrelated Diversification Strategies Sharing Activities Transferring Core Competencies Efficient Internal Capital Market Allocation Restructuring
Value-creating Strategies of Diversification Operational and Corporate Relatedness Sharing:OperationalRelatednessBetweenBusiness Corporate Relatedness: Transferring Skills Into Business Through Corporate Headquarters LowHigh High Low Related Linked Diversification (Economies of Scope)UnrelatedDiversification (Financial Economies) Both Operational and Corporate Relatedness (Rare Capability and Can Create Diseconomies of Scope) Related Constrained Diversification Vertical Integration (Market Power)
Mergers and Acquisitions Merger A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage Acquisition A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses Takeover An acquisition where the target firm did not solicit the bid of the acquiring firm
Problems in Achieving Success Problems in Achieving Success Integrationdifficulties Inadequate evaluation of target Too much diversification Large or extraordinary debt Inability to achieve synergy Managers overly focused on acquisitions Too large Increased market power Overcome entry barriers Lower risk compared to developing new products Cost of new product development Increased speed to market Increaseddiversification Avoid excessive competition Acquisitions Reasons for Acquisitions
Example: Procter & Gamble’s cutting of its worldwide workforce by 15,000 jobs Restructuring Activities Example: Disney’s selling of Fairchild Publications Downsizing Wholesale reduction of employees DownscopingDownscoping Reducing scope of operations Selectively divesting or closing non-core businesses Leads to greater focus
Business Level Strategy Sustainable Competitive Advantage External Environment Internal Environment The Basis…………..
Strategy An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage. Core Competency Core Competency The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals. Business Level Strategy Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets. The Basis…………..
Integrated Low Cost/Differentiation Strategy Firms using an Integrated Strategy may: Adapt more quickly Learn new skills and technologies Utilize Flexible Manufacturing Systems to create differentiated products at low costs Leverage core competencies through Information Networks across multiple business units Utilize Total Quality Management (TQM) to create high quality differentiated products which simultaneously driving down costs
Recognize that the Integrated Low Cost/ Differentiation business level strategy involves a Compromise The risk is that the firm may become “Stuck in the Middle” lacking a strong commitment to or expertise with either type of generic strategy Integrated Low Cost/Differentiation Strategy
Southwest Airlines Use a single aircraft model (Boeing 737) Use secondary airports Fly short routes 15 minute turnaround time No meals No reserved seats No travel agent reservations Low Cost Focus on customer satisfaction New flight services for business travelers (phones and faxes) High level of employee dedication Differentiation Integrated Low Cost/Differentiation Strategy
Three Intensive Growth Strategies
The Boston Consulting Group’s Portfolio (Growth-Share) Matrix
Process for Applying The Technique Step 1: Divide the Firm into Strategic Business Units (SBUs) Step 2: Measure the Growth Rate of Each SBU Market Step 3: Measure the Relative Market Share of Each SBU Step 4: Position Each SBU along the Matrix Dimensions Plotting on the Vertical Axis – Market Growth Rate Plotting on the Horizontal Axis – Relative Market Share Plot Contribution Bubbles Step 5: Construct a Matrix for All SBU Competitors Step 6: Assign Optimal Generic Strategies to Each SBU Step 7: Further Disaggregate the Analysis
Normative Strategies Business Category Market Share Thrust Business Profitability Investment Required Net Cash Flow StarsHold/IncreaseHigh Around zero or slightly negative Cash CowsHoldHighLowHighly positive Problem Child (a)IncreaseNone or negativeVery highHighly negative Problem Child (b)Harvest/DivestLow or negativeDivestPositive DogsHarvest/DivestLow or negativeDivestPositive
4-22 BCG Portfolio Matrix, cont.
GE Strategic Planning Grid
Factors underlying Market Attractiveness and Business Strength in GE Strategic Planning Grid Market Attractiveness Overall market size Annual market growth rate Historical profit margin Competitive intensity Technological requirements Inflationary vulnerability Energy requirements Environmental impact Social-political-legalWeight Must be acceptable 1.0 Rating = (1-5) Value Business Strength Market share Share growth Product quality Brand reputation Distribution network
Strategic Groups The Concept of Strategic Groups –Groups of firms within an industry with similar strategic characteristics –Permits simplification of competitor analysis
Strategic Group Mapping SG: Set of firms pursuing similar strategies with similar resources in the same industry. # Identify the Features that differentiate firms in the industry price, quality range geographic coverage degree of vertical integration product line breadth use of distribution channels degree of service offered # Plot the firms on a two variable map using pairs of these differentiating features #Assign the firms that fall in about the same strategy space to the same strategic group #Draw circles proportional to the size of the group’s respective share of total industry sales revenue, around each group.
Variables selected as axes should not be highly correlated Variables chosen as axes should expose big differences in how rivals compete Variables do not have to be either quantitative or continuous Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group. If more than two good competitive variables can be used, several maps can be drawn. Strategic Group Mapping: Guidelines
Strategic Groups in the Pharmaceutical Industry High Low R&D Spending Merck Pfizer Eli Lilly High Low Prices Charged Proprietary Group Generic Group Ranbaxy Torrent Orchid
SWOT Analysis Strength: It is a resource,skill or advantage relative to competitors (Fin. Resources, Image,Mkt. Leadership etc) Weakness: A limitation or deficiency in resources, skills and capabilities that prevents effective performance of the firm. Opportunity: It is major favourable situation in the environment ( New mkt. Segment, changes in Competition, Tech. Changes etc) Threat: A major unfavourable situation in the environment (Entry of Comp., Tech. Change, Slow mkt. Growth etc)
Substantial internal strengths Major environmental threats Critical internal weaknesses Numerous environmental opportunities Cell 3: Supports a Turnaround- Oriented strategy Cell 1: Supports an aggressive strategy Cell 4: Supports defensive strategy Cell 2: Supports a diversification strategy SWOT analysis diagram
External (acquisition or merger for resource capability) Maximise Strengths Internal (redirected resources within the firm) Overcome weaknesses Turnaround or retrenchment Divestiture Liquidation Vertical integration Conglomerate diversification Concentration Market development Product development Innovation Horizontal integration Concentric diversification Joint venture Grand Strategy Selection Matrix I II III IV
External (acquisition or merger for resource capability) Major environmental threats Internal (redirected resources within the firm) Rapid Market Growth Concentration Vertical Integration Concentric Diversification Reformulation of Concentration Horizontal Integration Divestiture Liquidation Concentric - Diversification Conglomerate - Diversification Joint Ventures Turnaround/retrenchment Concentric Diversification Conglomerate diversification Divestiture Liquidation Model of Grand Strategy Clusters II I IV III