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

2. 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

3. Strategies in Action THERE IS NO GOOD OR POOR STRATEGY…
BUT THERE IS AN APPROPRIATE STRATEGY
Corporate Strategy

4. 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

5. Strategy Analysis & Choice
Alternative Strategies Derive From --
Vision
Mission
Objectives
External audit
Internal audit
Past successful strategies
Corporate Strategy

6. Strategy Analysis & Choice
Generating Alternatives --
Participation in generating alternative strategies should be as broad as possible
Corporate Strategy

7. 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

8. (A) Integration Strategies 3. Horizontal Integration
Types of Strategies
1. Forward Integration
(A) Integration Strategies
2. Backward Integration
3. Horizontal Integration
Corporate Strategy

9. 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

10. Integration Strategies
Forward Integration Strategies
Gain Control Over --
Distributors
Retailers
Corporate Strategy

11. 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

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

13. 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

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

15. 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

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

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

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

19. 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

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

21. 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

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

23. 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 comparable prices
Compete in high-growth industry
Strong R&D capabilities
Corporate Strategy

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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

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

33. 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

34. 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

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

36. 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

37. 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

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

39. 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

40. 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

41. 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

42. 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

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

44. 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

45. SPACE Dimensions Financial Strength Ratings ROI 1.0 Leverage 1.0
Liquidity
Working capital
Total
Industry Strength
Growth potential 4.0
Profit potential
Technological know-how 4.0
Total
Corporate Strategy

46. SPACE Dimensions Environmental Stability Ratings
Competitive pressure
Price elasticity
Price range of competing products -4.0
Total
Competitive Advantage
Market share
Product Quality
Product life cycle
Total
Corporate Strategy

47. 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

48. 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

49. 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

50. 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