Prentice Hall, 2002Chapter 6 Wheelen/Hunger 1 Chapter 6 Strategy Formulation: Corporate Strategy

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 2 Corporate Strategy Three Key Issues: Firm’s directional strategy: The firm’s overall orientation toward growth, stability, or retrenchment. Firm’s portfolio strategy: The industries or markets in which the firm competes through its products and business units. Firm’s parenting strategy: The manner in which management coordinates activities and transfers resources and cultivates capabilities among product lines and business units.

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 3 Corporate Directional Strategies

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 4 Corporate Strategy Directional Strategy: –Orientation toward growth Expand, cut back, status quo? Concentrate within current industry, diversify into other industries? Growth and expansion through internal development or acquisitions, mergers, or strategic alliances?

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 5 Corporate Strategy Directional Strategy: –Three Grand Strategies: Growth strategies Stability strategies Retrenchment strategies

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 6 Corporate Strategy Growth Strategies: –Most widely pursued strategies –External mechanisms: Mergers –Transaction involving two or more firms in which stock is exchanged but only one firm survives. Acquisition –Purchase of a firm that is absorbed as an operating subsidiary of the acquiring firm. Strategic Alliance –Partnership of two or more firms to achieve strategically significant objectives that are mutually beneficial.

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 7 Corporate Strategy 2 Basic Growth Strategies: –Concentration –Current product line in one industry –Diversification –Into other product lines in other industries

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 8 Corporate Strategy Basic Concentration Strategies: –Vertical growth –Horizontal growth

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 9 Corporate Strategy Concentration: Vertical growth –Vertical integration Full integration Taper integration Quasi-integration –Backward integration –Forward integration

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 10 Corporate Strategy Concentration: Transaction Cost Economics: –Proposes that vertical integration is more efficient than contracting for goods and services in the marketplace when the transaction costs of buying goods on the open market become too great.

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 11 Corporate Strategy Concentration: Degree of vertical integration: –Full Integration –Taper Integration –Quasi-Integration –Long term contracts

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 12 Corporate Strategy Concentration: Horizontal Growth –Horizontal growth can be achieved by expanding the firm’s products into other geographic locations and/or by increasing the range of products and services offered to current markets. –Horizontal integration: The degree to which a firm operates in multiple geographic locations at the same point in an industry’s value chain. It ranges from full to partial ownership to long term contracts.

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 13 Corporate Strategy Basic Diversification Strategies: –Concentric (Related) Diversification –Suitable when a firm has a strong competitive position but industry attractiveness is low –Conglomerate (Unrelated) Diversification –Suitable when a management realizes that the current industry is unattractive

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 14 Corporate Strategy International Entry Options Exporting Licensing Franchising Joint Ventures Acquisitions Green-Field Development Production Sharing Turnkey Operations BOT Concept Management Contracts

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 15 Corporate Strategy Stability Strategies: –Pause/proceed with caution –No change –Profit strategies

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 16 Corporate Strategy Retrenchment Strategies: –Turnaround –Captive Company Strategy –Selling out –Bankruptcy –Liquidation

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 17 Corporate Strategy Portfolio Analysis –How much of our time and money should we spend on our best products to ensure that they continue to be successful? –How much of our time and money should we spend developing new costly products, most of which will never be successful?

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 18 Corporate Strategy Portfolio Analysis BCG (Boston Consulting Group) Matrix –Product life cycle and funding decisions Question marks Stars Cash cows Dogs

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 19 BCG Matrix

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 20 GE Business Screen Long-term industry attractiveness Business strength/competitive position

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 21 General Electric’s Business Screen A Winners B C Question Marks D F Average Businesses E Winners Losers G H Profit Producers StrongAverageWeak Low Medium High Business Strength/Competitive Position Industry Attractiveness Source: Adapted from Strategic Management in GE, Corporate Planning and Development, General Electric Corporation. Used by permission of General Electric Company.

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 22 International Portfolio Analysis 2 Factors: Country’s attractiveness Market size, rate of growth, regulation Competitive strength Market share, product fit, contribution margin, market support

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 23 Portfolio Matrix for Plotting Products by Country Harvest/Divest Combine/License Invest/Grow Dominate/Divest Joint Venture Low High Low Competitive Strengths Country Attractiveness Selective Strategies

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 24 Corporate Strategy Portfolio Analysis Advantages: –Top management evaluates each of firm’s businesses individually –Use of externally-oriented data to supplement management judgment –Raises issue of cash flow availability –Facilitates communication

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 25 Corporate Strategy Portfolio Analysis Disadvantages: –Difficult to define product/market segments –Standard strategies can miss opportunities –Illusion of scientific rigor –Value-laden terms

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 26 Corporate Strategy Corporate Parenting: Views the corporation in terms of resources and capabilities that can be used to build business unit value as well as generate synergies across business units.

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 27 Corporate Strategy Corporate Parenting: Strategic factors –Those elements of a company that determine its strategic success or failure Performance improvement Analyze fit

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 28 Corporate Strategy Corporate Parenting: Parenting-Fit Matrix –Summarizes the various judgments regarding corporate/business unit fit for the corporation as a whole.

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 29 Corporate Strategy Corporate Parenting: Parenting-Fit Matrix –2 Dimensions Positive contributions parent can make Negative effects parent can have

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 30 Parenting-Fit Matrix Edge of Heartland Alien Territory Low High Low FIT between parenting opportunities and parenting characteristics MISFIT between critical success factors and parenting characteristics Ballast Value Trap

Prentice Hall, 2002Chapter 6 Wheelen/Hunger 31 Corporate Strategy Horizontal Strategy: –Corporate strategy that cuts across business unit boundaries to build synergy across business units to improve the competitive position of one or more business units.