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Chapter Six Learning Outcomes
6.1 Define corporate strategy. 6.2 Discuss organizational growth strategies. 6.3 Describe the organizational stability strategy. 6.4 Describe organizational renewal strategies. 6.5 Discuss how corporate strategy is evaluated and changed. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Learning Outcome 6.1 Explain What Corporate Strategy Is The struggling US economy is challenging many companies across a range of industries providing evidence of the challenges associated with corporate strategy Corporate strategy Is concerned with the choices of what businesses to be in and what to do with those businesses Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Single and Multiple-Business Organizations
A single business organization is primarily in one industry Coca-Cola is considered a single business organization It competes in the beverage industry A multiple business organization is in more than one industry PepsiCo, also in the beverage business, competes in other industries One thing we need to know in relation to an organization’s corporate strategy is whether it’s a single- or multiple-business organization. A single-business organization is primarily in one industry. For instance, Coca-Cola can be considered a single-business organization because it competes primarily in the beverage industry. Coke’s biggest competitor, PepsiCo, is a multiple-business organization because it’s in different industries. Its business units include its Pepsico Americas Beverage (beverage business), Frito Lay North America (snack food business), Quaker Oats North America (prepared foods business), and then its global businesses—Latin America Foods, Europe, Asia/Middle East/Africa. PepsiCo also spun off a business—its restaurant unit, which included Taco Bell, Pizza Hut, and KFC and which is now known as YUM! Brands Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Single and Multiple-Business Organizations – cont’d
The distinction between single and multiple business organizations is important It influences an organization’s overall strategic direction It determines what corporate strategy is used It defines how that strategy is implemented and managed, which relates to functional and competitive strategies This distinction between single- and multiple-business organizations is important because it influences an organization’s overall strategic direction, what corporate strategy is used, and how that strategy is implemented and managed. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

The corporate strategy establishes the overall direction that the organization hopes to go and the other organizational strategies—functional and competitive—provide the means for making sure the organization gets there. Figure 6.1 shows how corporate strategy fits into the overall strategic management in action process. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

What Are the Corporate Strategic Directions?
Strategic decision makers can choose from three corporate strategic directions Moving an organization forward Keeping the organization as is Reversing an organization’s decline Strategic decision makers can choose from three corporate strategic directions: (1) moving an organization forward, (2) keeping an organization as is, or (3) reversing an organization’s decline. Let’s look at each of these directions. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

What Are the Corporate Strategic Directions?
Moving forward Managers hope to expand or grow the organization’s activities or operations Keeping an organization as is Involves an effort at stability Reversing a decline When an organization falls behind, it is an effort at renewal Moving forward means an organization’s strategic managers hope to expand the organization’s activities or operations—that is, to grow. How? By choosing a growth strategy (or strategies) that is appropriate, given the situation. Keeping an organization as is means it’s not growing, but also isn’t falling behind. This is a stability strategy. Finally, reversing a decline describes situations in which an organization has problems and may be seeing declines in one or more performance areas. These situations are typically addressed with a renewal strategy. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Learning Review: Learning Outcome 6.1
What is corporate strategy? Contrast single business and multiple business organizations. How is corporate strategy related to other organizational strategies? List each of the three corporate strategic directions Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Learning Outcome 6.2 Discuss Organizational Growth Strategies Growth is appealing and serves to attract new customers and gain new resources A growth strategy is one that expands products offered or markets served or expands its activities or operations through current or new businesses Growth helps achieve goals through increasing revenues, profits, or other measures A growth strategy is one that expands the products offered or markets served by an organization or expands its activities or operations either through current business(es) or through new business(es). Organizations use growth strategies to meet performance goals they may have. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Possible Growth Strategies
Concentration When an organization focuses on its primary line of business and looks for ways to meet its growth goals by expanding its core business There are three concentration options Product – market exploitation Product development option Market development option Concentration is a growth strategy in which an organization concentrates on its primary line of business and looks for ways to meet its growth goals by expanding its core business. When an organization grows by adding products or opening new locations, it’s using the concentration strategy. Three concentration options are shown in Figure 6.3 and reflect various combinations of current product(s) and market(s), and new product(s) and market(s). Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Concentration Strategies
Product-Market exploitation Attempt to increase sales of current products in current markets and might include incentives or advertizing Product development option Creates new products or new features on current products, which would be sold in current markets Market development option When selling current products in new markets Product–market exploitation describes attempts by the organization to increase sales of its current product(s) in its current market(s). How? It might use incentives to get current customers to buy more of the current product. Using the product development option, organizations create new products to sell to its current market (customers). A “new” product? might be one with new features (options, sizes, and ingredients) that often are aimed at current customers. The market development option describes when an organization sells its current products in new markets. These might be additional geographic areas or might be other market segments not currently served. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Concentration Strategies – cont’d
A concentration strategy is one that looks for ways to grow the core business using different combinations of products and markets Product market diversification is not usually viewed as a concentration option as it involves expansion into both new products and new markets the concentration strategy, an organization looks for ways to grow its core business using different combinations of product(s) and market(s). The focus is on finding ways to meet growth goals by concentrating on its core business. The remaining option shown in Figure 6.3—product–market diversification—isn’t usually viewed as a concentration option as it involves expanding into new products and new markets. This strategic move usually involves diversifying, which we’ll discuss in a later chapter section. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

The advantage of a concentration strategy is an organization becomes good at what it does The develop knowledge of the industry and of their competitors Functional and competitive strategies can be tuned to know what customers want and how to best provide it Everyone can concentrate on exploiting resources, competencies, and capabilities critical to success The advantage of the concentration strategy is that an organization becomes very good at what it does. Strategic managers know the industry and their competitors well. The organization’s functional and competitive strategies can be fine-tuned to ensure that a sustainable competitive advantage is developed because strategic managers know what customers want and know how to provide it. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

The main drawback is that the organization is vulnerable to changes in the industry and the external environment The key is to recognize significant trends and adjusting the organization’s direction Concentration strategy may be effective for small companies, but larger often start off by this approach and may continue using it The main drawback of the concentration strategy is that the organization is vulnerable to both industry and other external changes. This risk can be minimized by noticing significant trends, but strategic managers need to be willing to adjust the organization’s direction, should that become necessary. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Vertical Integration Is a strategy that grows by gaining control of its inputs (backward) or its outputs (forward) Backward integration The organization becomes its own supplier Example: eBay bought an online payment business Forward integration The organization becomes its own distributor Example: Apple Computer opened retail outlets The vertical integration strategy is one in which an organization grows by gaining control of its inputs (backward), its outputs (forward), or both. In backward vertical integration, the organization gains controls of its inputs or resources by becoming its own supplier. In forward vertical integration, the organization gains control of its outputs (products or services) by becoming its own distributor such as through an outlet store or maybe through franchising. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Vertical Integration – cont’d
Vertical integration strategy is a growth strategy because an organization expands its activities and operations by becoming a source of supply or distribution However, expanding into industries connected to its primary business means it is still a single business organization It is taking another path to meeting growth goals by controlling different parts of the value chain The vertical integration strategy is a growth strategy because an organization expands its activities and operations by becoming a source of supply or a source of distribution. However, because it’s expanding into industries connected to its primary business, it’s still considered a single-business organization. It’s simply taking another path to meeting growth goals by controlling different parts of the value chain. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Horizontal Integration
This strategy is used to grow the organization by combining operations with its competitors Allows an organization to expand market share and strengthen its competitive position in it’s same industry Is it legal? U.S. Federal Trade Commission and Department of Justice evaluates whether antitrust implications. In the horizontal integration strategy, an organization grows by combining operations with its competitors. This growth strategy keeps an organization in the same industry and provides a way to expand market share and strengthen competitive position. If government regulators perceive that competition is likely to decrease or that the end consumer would be unfairly impacted, the combined business probably will not be allowed. Copyright © Pearson Education, Inc. publishing as Prentice Hall

Diversification This strategy enables a company to grow by moving into a different industry. There are two types of diversification Related Unrelated Related Diversification Is diversifying into a different industry, but related to the company’s current business The diversification strategy is a strategy in which an organization grows by moving into a different industry. There are two major types of diversification—related and unrelated. Related (concentric) diversification is diversifying into a different industry but one that’s related in some way to the organization’s current business. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Diversification – cont’d
Unrelated diversification Diversifying into a completely different industry, not related to the company’s current business Diversification is an attempt at a “strategic” fit Effort is to transfer resources, distinctive capabilities, and core competencies to the new industry It is an attempt at synergy that seeks to enhance performance of both businesses Unrelated (conglomerate) diversification is diversifying into a completely different industry not related to the organization’s current business. Either strategy results in a multiple-business organization because it’s no longer in just one industry. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Synergy occurs when shared resources, capabilities, and competencies enable greater performance by two entities when combined Unrelated diversification is when an organization seeks growth by moving into industries in which there is no strategic fit How does synergy happen? Through the interactions that occur as operations are combined and resources, capabilities, and core competencies are shared. Organizations often will use the unrelated diversification approach when its core industry and related industries don’t offer enough growth potential. For an organization to pursue and achieve its growth goals, it has to look elsewhere. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Research shows that related diversification is superior to unrelated diversification because it allows the effective use of current resources, capabilities, and core competencies However, unrelated diversification can be a valuable strategy at times, depending on how effectively the diverse operations are managed If an organization can develop and exploit the potential synergies in the resources, capabilities, and core competencies of its diversified operations, then it’s likely to create a sustainable competitive advantage. The ability to strategically manage diverse businesses and develop a sustainable competitive advantage—no matter how related the different industries might be—is crucial. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

International This is another growth strategy that seeks to take advantage of potential opportunities offered by global markets or by protecting core operations from global competitors This approach will be discussed at greater length in Chapter 7 According to Figure 6.2 on p. 161, another growth strategy is international. An organization’s corporate strategies might involve looking for ways to grow by taking advantage of the potential opportunities offered by global markets or by protecting the organization’s core operations from global competitors Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Implementing the Growth Strategies
There are three basic ways that growth strategies can be implemented: Mergers/Acquisitions Internal development Strategic partnering Mergers-Acquisitions Involves the purchase of an organization that enables a firm to combine operations with that company it has merged with or acquired Choosing a strategy is only part of the picture. That strategy must be implemented. For the growth strategies, implementation options include (1) mergers–acquisitions, (2) internal development, and (3) strategic partnering. A merger is a legal transaction in which two or more organizations combine operations through an exchange of stock and create a third entity. Mergers usually take place between organizations similar in size and are usually “friendly”—that is, a merger is usually acceptable to all the concerned parties. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Mergers and Acquisitions
Merger is a legal transaction in which two parties combined operations through an exchange of stock to create a new entity Usually they take place between organizations of similar size and it is considered “friendly”, it is acceptable to all parties Acquisition is an outright purchase of one company by another Can be hostile and involve different sized firms A merger is a legal transaction in which two or more organizations combine operations through an exchange of stock and create a third entity. Mergers usually take place between organizations similar in size and are usually “friendly”—that is, a merger is usually acceptable to all the concerned parties. An acquisition is an outright purchase of an organization by another. The purchased organization is absorbed by the purchasing organization. When an organization being acquired doesn’t want to be acquired, it’s often referred to as a hostile takeover Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Internal development Internal development involves creating and developing new business activities within Rather than face risks and challenges of combining new businesses, a company seeks to develop crucial capabilities to meet desired goals In internal development, an organization grows by creating and developing new business activities itself. In this approach, strategic decision makers believe they have the necessary resources, distinctive capabilities, and core competencies to do it themselves Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Strategic Partnering This is a grow effort that seeks to minimize the challenges and risks or buying a business or developing its own The three main types of strategic partnerships are: joint ventures, long-term contracts strategic alliances In the world of strategic partnering, two or more organizations establish a legitimate relationship (partnership) by combining their resources, distinctive capabilities, and core competencies for some business purpose. It’s an umbrella term that covers a variety of situations from loose relationships among partnering organizations to formal legal arrangementsThe three main types of strategic partnerships are: (1) joint ventures, (2) long-term contracts, and (3) strategic alliances. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Joint Ventures (JV) Two or more organizations form separate and equal independent organization for strategic purposes It minimizes the financial and political/legal constraints that accompany M&A or internal development Example: Clorox and Proctor & Gamble entered a JV to develop garbage bags and plastic wrap In a joint venture, two or more separate organizations form a separate independent organization for strategic purposes. In this cooperative arrangement, the strategic partners typically own equal shares of the new joint venture. A joint venture is often used when the partners do not want to or cannot legally join together permanently Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Long Term Contracts Long term contract Covers a specific business purpose Viewed as variation of vertical integration between company and supplier Both partners understand the importance of long term benefits to meet cost or quality expectations Creates assured outlet for products Another type of strategic partnership is a long-term contract, a legal contract between organizations covering a specific business purpose. Long term contracts typically have been used between an organization and its suppliers. They’re often viewed as a variation of vertical integration without an organization having to buy the supplier or internally develop its own supply source Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Strategic Alliance Strategic alliance Two or more organizations share different resources, capabilities, or competencies to pursue some business purpose; requires trust Different than joint venture because there is no separate legal entity formed In the strategic alliance, two or more organizations share resources, capabilities, or competencies to pursue some business purpose. In the case of a strategic alliance, however, there’s no separate entity formed. Instead, the partnering organizations simply share whatever they need to in order to do whatever they want to do. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Define growth strategy Describe the various corporate growth strategies Discuss how the corporate growth strategies can be implemented Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Learning Outcome 6.3 Describe the Organizational Stability Strategy It may seem odd for an organization to want to remain where it is However, it may make sense when resources, capabilities, or competencies are stretched to limits and growth might risk the organization’s competitiveness Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

When is Stability an Appropriate Strategic Choice?
In period of rapid upheaval with several industry and general external forces drastically changing This demands investment in current businesses or functions When there is slow or no growth opportunities Allows the firm to analyze their strategic options – diversification, vertical or horizontal integration Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Learning Outcome 6.3 Describe the Organizational Stability Strategy The stability strategy makes sense when resources, capabilities, or competencies are stretched to limits and growth might risk the organization’s competitiveness Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

When is Stability an Appropriate Strategic Choice?
In period of rapid upheaval with several industry and general external forces drastically changing This demands investment in current businesses or functions When there is slow or no growth opportunities Allows the firm to analyze their strategic options – diversification, vertical or horizontal integration An organization’s strategic managers also might choose a stability strategy if it has been growing rapidly and needs some “down” time to build up its resources and capabilities again. Stability also might be an appropriate strategy for large firms in an industry that’s in the maturity stage of the industry life cycle Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Implementing Stability Strategy
Primarily, this means not growing, but not allowing decline While it may not mean putting new products on the market, it may mean evaluating what is being done and determining what might be done better Stability can be appropriate, but it is short term If weaknesses exist or performance declines, it may embark on renewal effort During stability, the organization won’t be doing such things as putting new products out on the market, developing ne programs, or adding production capacity. This doesn’t mean that organizational resources, capabilities, and core competencies don’t change during periods of stability. In fact, organizations often use this time to assess operations and activities and strengthen and reinforce those that need it. The stability period essentially gives the organization an opportunity to “take a breather” and prepare itself for pursuing growth. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

What is a stability strategy? Why might an organization choose a stability strategy? Describe how a stability strategy is implemented. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Learning Outcome 6.4 Describe Organizational Renewal Strategies When managers have not been effective and unable to develop or exploit a competitive advantage the organization will need for something to be done in order to survive Renewal strategies are used to put the organization back on the path to successfully achieving its strategic goals We’ll discuss two organizational renewal strategies—retrenchment and turnaround—and how these strategies are implemented. Before we get into a discussion of these specific strategies, we need to look at some possible causes and indicators of performance declines. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

What Leads to Performance Declines?
Poor management judgment is evident when: Decisions to expand too rapidly or over-expand Inadequate financial controls or high costs Managers unaware of trends or changes in the external environment Performance is declining Figure 6.5 shows the main causes of performance decline that researchers have identified. As you can see, the primary cause of corporate decline is poor management as all other causes can be traced to it. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Signs of Declining Performance
Excess number of personnel Unnecessary and cumbersome administrative procedures Fear of conflict or taking risks Tolerating work incompetence at any level or in any area of the organization Lack of clear vision, mission, or goals Ineffective or poor communication within various units and between various units Table 6.2, page 172, lists some of the signs when performance declines might be imminent. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Retrenchment Retrenchment Short run strategy designed to address weaknesses that are leading to performance declines Not necessary to have negative financial returns, usually occurs if unable to meet strategic goals The retrenchment strategy is a short-run renewal strategy designed to address organizational weaknesses that are leading to performance declines. In a retrenchment situation, an organization doesn’t necessarily have negative financial returns. Instead, the usual situation in retrenchment is that the organization hasn’t been able to meet its strategic goals. Revenues and profits aren’t negative but may be declining, and the organization needs to do something to reverse the slide or it soon may face significant performance declines leading to severe financial problems. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Retrenchment – cont’d Is a military term refers to going back to the “trenches” to stabilize, revitalize, and prepare for entering battle again The point is to address issues before they lead to severe problems Retrenchment is a military term that describes when a military unit “goes back to the trenches” to stabilize, revitalize, and prepare for entering battle again. Strategic managers must stabilize operations, replenish or revitalize organizational resources and capabilities, and prepare to compete once again. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Turnaround Designed for situations in which the organization’s performance are more serious Often when the organization is facing severe external and internal pressures and must make strategic changes in order to remain viable There is no guarantee the turnaround will accomplish the desired results, but without it the organization will not survive The turnaround strategy is a renewal strategy that’s designed for situations in which the organization’s performance problems are more serious. An organization has to be “turned around” or its very survival may be in jeopardy. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Implementing Renewal Strategies
Cost cutting Reducing costs to bring performance results back in line with expectations It can be across the board or selective The effort should avoid cutting costs in those areas critical to retain or exploit competitiveness Redundancies, inefficiencies, or waste in activities should be eliminated Restructuring/downsizing are severe approaches Implementing the renewal strategies involves two actions: cutting costs and restructuring. A retrenchment strategy typically does not involve as extensive a use of these actions as a turnaround strategy does. Cost cutting can be across-the-board (implemented in all areas of the organization) or selective (implemented in selected areas). Obviously, in a turnaround strategy, the cuts need to be more extensive and comprehensive. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Restructuring This includes refocusing on the primary businesses and involve Selling or divestment Spin off Liquidation Downsizing Divestment might occur when the business is desired by another company and is no longer a strategic fit Research has shown organizational refocusing to be the most beneficial form of restructuring an organization can do. Frequently, when an organization finds that a business unit isn’t performing up to expectations or doesn’t fit in with the organization’s long-run direction, strategic managers will choose to sell it. The process of selling a business to another organization where it will continue as an ongoing business is called divestment. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Restructuring – cont’d
Spin off Involves removing a business unit and setting it up as a separate, independent business by distributing its shares of stock Liquidation When no buyer exists or there is no possible spin off, a business unit will be discontinued This is a strategic action of last resort Another possibility for restructuring is to remove a business unit through a spin-off, which typically involves setting up a business unit as a separate, independent business by distributing its shares of stock. In liquidation a business shuts down completely. A business unit that’s liquidated will not continue as an ongoing business. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Restructuring – cont’d
Downsizing Is a quick way to cut costs by elimination jobs It can be effective when done strategically Table 6.3 lists some recommendations Part of an organization’s cost-cutting or restructuring efforts might involve downsizing, an organizational restructuring in which individuals are laid off from their jobs. Although downsizingcan be a quick way to cut costs, simply cutting the number of employees without some type of strategic analysis of where employee cuts might be most beneficial is dangerous Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Discuss the causes of corporate decline Describe the two organizational renewal strategies What two strategic actions are used in implementing the renewal strategies? Describe organizational restructuring actions Why are most organizational renewal strategies used in combination? Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Learning Outcome 6.5 Discuss How Corporate Strategy is Evaluated and Changed Competitive strategy and functional strategies have been aligned with organizational goals How do you know its working? Has it been successful? How can that be evaluated? Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Evaluating Corporate Strategies
This is an important part of the entire strategic management process There are four main evaluation techniques Corporate goals Efficiency, effectiveness, productivity Benchmarking Portfolio analysis Evaluation is an important part of the entire strategic management process. Without evaluation, strategic managers wouldn’t have a clue as to whether the implemented strategies—at any level of the organization—were working. We will look at four main evaluation techniques: (1) corporate goals; (2) efficiency, effectiveness, and productivity measures; (3) benchmarking; and (4) portfolio analysis. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

What types of corporate goals might an organization have? Figure 6.6 lists some of common ones. For a publicly held corporation, maximizing stockholder wealth is an important goal. Why? As the organization’s legal owners, stockholders expect an appropriate return on their investment in exchange for providing capital. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Efficiency, Effectiveness, and Productivity Measures
Efficiency is an organization’s ability to minimize resource use in goal attainment Effectiveness is an organization’s ability to reach its goals Productivity is a specific measure of how many inputs it takes to produce outputs Efficiency is an organization’s ability to minimize resource use in achieving organizational goals. Effectiveness is an organization’s ability to reach its goals. Productivity is a specific measure of how many inputs it took to produce outputs and is typically used in the production– operations area. It’s measured by taking the overall output of goods and services produced, divided by the inputs used in generating that output. These three measures assess how well an organization works and achieve desired ends Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Benchmarking Is the search for the best practices inside or outside an organization The benchmarking process can be used to implement strategy Specific benchmarks or best practices can be a standard against which to measure performance Using benchmarks, strategic managers can evaluate whether an organization is being managed well or if improvements are needed Benchmarking is the search for best practices inside or outside an organization. The actual process of benchmarking may be useful for implementing strategy, whereas the specific “benchmarks” or best practices can be a standard against which to measure corporate strategy performance. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Portfolio Analysis When a company has multiple brands, a portfolio is its various business units Portfolio analysis is done through one of three different matrices Boston Consulting Group (BCG) matrix McKinsey-GE stoplight matrix Product –market evolution matrix An organization’s “portfolio” is it’s various business units. Portfolio analysis is done with two-dimensional matrices that summarize internal and external factors. We’re going to focus on three main portfolio analysis approaches: (1) the BCG matrix, (2) the McKinsey–GE stoplight matrix, and (3) the product–market evolution matrix. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Portfolio Analysis – cont’d
BCG matrix Focuses on growth share Determines whether a business unit is a cash producer or cash user Measures a business unit’s market share compared to the market share of the largest rival in the industry There are four areas within this matrix ‘ “dog”, “question mark”, “star”, and “cash cow” The BCG matrix (also known as the growth-share matrix) was created by the Boston Consulting Group as a way to determine whether a business unit was a cash producer or a cash user. It’s a simple, four-cell matrix. The X axis is a measure of a business unit’s relative market share. The Y axis is a measure of the industry growth rate. Likewise, in a very general sense, industry growth rate is a proxy for the external opportunities and threats facing the business unit. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

BCG Matrix – cont’d “DOG” A business unit with low growth and low market share Requires significant cash investments to continue operation May be a business to divest, liquidate, or harvest; using excess cash to support other businesses A business unit with low relative market share and low industry growth rate is classified as a dog. According to the BCG analysis, a dog offers few growth prospects and, in fact, may require significant investments of cash just to maintain its position. The strategic recommendation for a business unit evaluated as a dog often is to exit that industry by either divesting or liquidating. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

BCG Matrix – cont’d “Question mark” These are low in competitive strength, though it is in an industry with potential If meeting the cash needs for development that would allow it to achieve “star” status, a firm may invest If the cash infusion does not allow for the business to become a star, a firm may divest business unit with low relative market share and high industry growth rate is classified as a question mark. The question marks are low in competitive strengths, but they’re in an industry where there’s a lot of potential. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

BCG Matrix – cont’d “Star” A business with high market share and high growth potential Stars may take significant cash infusion to maintain market leadership or they may take little cash if the industry is not that competitive This is the strongest position in the matrix A business unit with high relative market share and high industry growth rate is classified as a star. Stars are the leading business units in an organization’s portfolio. Depending on how competitive the industry is, stars may take significant cash resources to maintain their market leadership position or they may take little cash if they’re in an industry where competitive rivalry isn’t high. The recommendation for a business unit evaluated as a star is to maintain its strong position while taking advantage of the significant growth opportunities in the industry. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

BCG Matrix – cont’d “Cash cow” These are businesses with high market share in an industry with a low growth rate These are strong cash providers, but additional cash infusion will not alter the position So, positive cash flows from these businesses should be used to support stars and question marks with potential Finally, a business unit with high relative market share but low industry growth rate is a cash cow. Cash cows are strong cash providers. The positive cash flows from cash cows should be used to support those question marks with potential and to support the stars Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

McKinsey-GE Spotlight Matrix
Provides a more comprehensive analysis of a business unit’s internal and external factors More than relative market share, it includes an analysis of the internal resources and capabilities believed to be important to business success Industry attractiveness includes such factors as profitability, number of competitors, ethical standards, technological stability of the market, market growth rate The McKinsey–GE Stoplight Matrix was developed by McKinsey and Company for GE. This nine-cell matrix (shown in Figure 6.7) provides a more comprehensive analysis of a business unit’s internal and external factors. This analysis is more than just relative market share! It includes an analysis of the internal resources and capabilities that are believed by strategic managers to be important for success in this business. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

In this matrix, the X axis is defined as business strength– competitive position. The Y axis is defined as industry attractiveness, which again provides a much broader analysis than the BCG’s industry growth rate. Industry attractiveness might include such factors as average industry profitability, number of competitors, ethical standards, technological stability of the market, market growth rate, and so forth Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Product-Market Evolution Matrix
This looks at individual competitive position and stage in the product life-cycle This also suffers from the same subjectivity biases as McKinsey matrix All portfolio matrices seek to assess performance and help a firm decide what to support, what to acquire, and what to sell. The product–market evolution matrix was developed by C. W. Hofer and is based on the product life cycle, which serves as the Y axis. The six stages in the product life cycle include Development, Growth, Competitive Shakeout, Maturity, Saturation, and Decline. The X axis (internal analysis of the business unit) is the same analysis of competitive position as used in the McKinsey matrix. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Changing Corporate Strategies
Strategic managers must decide whether to act and, if so, what actions to take Changes to functional and competitive strategies might be necessary, modifications or even drastic action might be needed to achieve desired results The key is to understand the opportunities and threats, strengths and weaknesses facing the organization and the need to design appropriate strategies to exploit resources, capabilities, and core competencies If the evaluation of corporate strategies shows that they aren’t having the intended results—growth objectives aren’t being attained, organizational stability is causing the organization to fall behind, or organizational renewal efforts aren’t working—then some changes are obviously needed. Then, strategic managers have to decide whether to act and what actions to take. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Why is it important to evaluate corporate strategies? What are the four ways to evaluate corporate strategies? Describe each of the portfolio analysis matrices including how it’s used, the cells in the matrix, and its advantages and drawbacks. Why might an organization’s corporate strategy need to be changed? How might an organization’s strategy be changed? Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

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