Chapter 7 Strategy Formulation; Corporate Strategy Strategic Management and Business Policy 11th Edition Thomas L. Wheelen J. David Hunger

Strategies in Action 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. 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 Disney’s TV networks need a business strategy to succeed against NBC, FOX,…etc. Corporate Strategy

(A) Integration Strategies 3. Horizontal Integration 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 Corporate Strategy

Integration Strategies Backward Integration Strategies Ownership or Control -- Firm’s suppliers Corporate Strategy

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 Corporate Strategy

Integration Strategies Horizontal Integration Strategies Used as a growth strategy, eg. M&A, takeover. Ownership or Control -- Firm’s competitors Corporate Strategy

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 Corporate Strategy

(B) Intensive Strategies Types of Strategies 4. Market Penetration (B) Intensive Strategies 5. Market Development 6. Product Development Corporate Strategy

Intensive Strategies Intensive Efforts -- Improve competitive position with existing products Corporate Strategy

Market Penetration Strategies Intensive Strategies Market Penetration Strategies Increased Market Share of-- Present products/services Present markets Greater marketing efforts Corporate Strategy

Market Penetration Strategies 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 Corporate Strategy

Market Development Strategies Intensive Strategies Market Development Strategies New Markets -- Present products/services to new geographic areas Corporate Strategy

Market Development Strategies 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 Corporate Strategy

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

Product Development Strategies 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 Corporate Strategy

Types of Strategies 7. Concentric Diversification (C) Diversification Strategies 8. Conglomerate Diversification 9. Horizontal Diversification Corporate Strategy

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

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 firm’s market by attracting new groups of buyers. Corporate Strategy

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 products—decline stage of product life cycle Strong management team Corporate Strategy

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 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. Corporate Strategy

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 Corporate Strategy

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. Corporate Strategy

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 Corporate Strategy

(D) Defensive Strategies Types of Strategies 10. Retrenchment (D) Defensive Strategies 11. Divestiture 12. Liquidation Corporate Strategy

Retrenchment Strategies 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. Corporate Strategy

Retrenchment Strategies 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 Corporate Strategy

Divestiture Strategies Defensive Strategies Divestiture Strategies Selling a division or part of an organization. Used to raise capital for further strategic investments. Corporate Strategy

Divestiture Strategies Defensive Strategies 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 Corporate Strategy

Liquidation Strategies Defensive Strategies Liquidation Strategies Selling Company’s assets, in parts, for their tangible worth Better to cease operating than to continue losing sums of money Corporate Strategy

Liquidation Strategies Defensive Strategies Liquidation Strategies Guidelines -- Retrenchment & divestiture failed Only alternative is bankruptcy Minimize stockholder loss by selling firm’s assets Corporate Strategy

Strategic Examples Forward Integration Backward Integration Doll maker & mail order firm, Pleasant Co., opened a retail store in Manhattan Backward Integration McDonalds recently acquired a paper cup producer Horizontal Integration Callaway Golf recently acquired Top-Flite Golf Company Corporate Strategy

Strategic Examples Market Penetration Market Development SABMiller Plc spent $500 million in 2003 on marketing its Miller brands of beer Market Development JetBlue is adding dozens of new routes Product Development GM developing hydrogen powered automobiles or Pfizer developing a new antismoking pill Corporate Strategy

Strategic Examples Concentric Diversification Microsoft launched its first personal computers that double as entertainment centers Conglomerate Diversification The video-rental firm Blockbuster may acquire the DVD and music direct-marketing firm Columbia House Horizontal Diversification Viacom acquired Comedy Central, from AOL Corporate Strategy

Strategic Examples Retrenchment Divestiture Liquidation America West Airlines closing its hub at Columbus, Ohio and laying off 390 employees Divestiture ConocoPhillips recently sold its Circle K convenience store chain to Alimentation Couche-Tard, a Canadian firm Liquidation Sprint liquidated its Web-hosting division Corporate Strategy

Strategic Position & ACtion Evaluation (SPACE) Matrix A strategic management tool used to determine what type of corporate strategy a company should undertake Corporate Strategy

SPACE Matrix FS Conservative Aggressive CA IS Defensive Competitive ES +6 +5 +4 +3 +2 +1 CA IS -6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6 -1 -2 -3 -4 Defensive -5 Competitive -6 ES Corporate Strategy

SPACE Dimensions Financial 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

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

SPACE Matrix Steps required to develop a SPACE Matrix are as follows: Select a set of variables to define the financial strength (FS), competitive advantage (CA), environmental stability (ES), and industry strength (IS). 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

SPACE Matrix Steps required to develop a SPACE Matrix are as follows: 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. Mark the average scores for FS, IS, ES, and CA on the appropriate X&Y axis in the SPACE Matrix. 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

SPACE Matrix Steps required to develop a SPACE Matrix are as follows: 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: Aggressive, Competitive. Defensive, and Conservative. Corporate Strategy

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, Corporate Strategy