CHAPTER 8 - Corporate Strategy

CHAPTER 8: CORPORATE LEVEL STRATEGY

8.1 Corporate Level Strategy Corporate strategy strategy defines the scope of the industries and markets within which the organization organization competes in order to achieve its organizational purpose. 8.2 Growth Strategies There are four strategies that an organization might follow: market penetration, market development, product development and diversification. The first three strategies are relevant to organizations that operate within the boundaries of an individual business. However, an organization that seeks to broaden its scope of  activities will be concerned with how it can best diversify into different businesses. -

Market penetration: seeks to increase the market share in its existing

markets by utilizing its existing products

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relatively low risk. To achieve

market penetration the organization will usually improve its product quality and levels of service. Where the market is growing, market penetration is relatively simple to achieve. However, in a mature market, a strategy of  market penetration implies taking market share from your competitor which will invite retaliation. -

Product development : involves developing new products for your existing

markets. This strategy is necessary where organizations are faced with shorter product life-cycles, such as: consumer electronics, computer software, etc. New product development can be expensive and carries a greater risk of failure. However, an organization that actively monitors consumers’ requirements is better placed to match their products to consumers’ needs. -

Market development : involves entering new markets with the firm’s

existing products. The existing product may undergo some slight modification to ensure that it fits these new markets better. Certain social and cultural adjustments are made to ensure that the product more closely meets the needs of particular geographical market segments. Its experience of the markets will be less complete -

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increasing increasing the level of risk.

Diversification: seeks to broaden its scope of activities by moving away

from its current products and markets and into new products and new

markets

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the greatest level of risk. It may be necessary where an

organization’s existing products and markets offer little opport unity for growth. Given that risk can be mitigated by diversifying into related businesses. 8.3 Related Diversification Related diversification refers to entry into a related industry in which there is still some link with the organization’s value chain. The aim is to choose an industry in which it retains a close match with the resources and capabilities which provide it with competitive advantage

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generate synergy.

Related diversification can be separated into vertical integration and horizontal  integration. -

Horizontal: same stage in supply chain

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Vertical: different stage in supply chain + Vertical forwards: control over a customer + Vertical backwards: control over a supplier

Transaction cost analysis: including the search costs, the costs involved in negotiating, the costs of monitoring, and the cost of enforcement. 8.4 Unrelated Diversification Unrelated diversification refers to a situation where an organization moves into a totally unrelated industry

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the diversified industry carries the greatest element of 

uncertainty  risk. Three reasons for diversification: -

Existing markets are saturated or declining

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Regulatory authorities view vertical and horizontal integration by the organization as uncompetitive

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Not having all eggs in one basket

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A carefully managed conglomerate can produce a sound growth strategy.

8.5 Implementing Growth Strategies This includes mergers and acquisitions, internal developments, joint ventures, and strategic alliances.

8.5.1 Mergers and Acquisitions A merger occurs when two organizations join together to share their combined resources. Shareholders from each organization become shareholders in the new combined organization. An acquisition occurs when one organization seeks to acquire another, often smaller organization. Where payment is only in the form of cash, the acquired shareholders will no longer be owners. However, where the acquisition is unwelcome, and contested, it is referred to as a takeover. The benefits to be derived from mergers and acquisitions are speed, market entry, and rapid access to capabilities. The disadvantages of mergers and acquisitions include paying a premium price for the acquired company

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increasing financial risk. Also, the problem of combining

different cultures may not have been properly considered, such that any reorganization is slow to release value to shareholders. Porter’s three criteria for increasing shareholder value in acquisit ions: -

Attractiveness: achieving above-average returns

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Cost of entry: should not be so expensive

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Competitive advantage or better-off: present an opportunity for competitive advantage for the parent organization.

8.5.2 Internal Development A benefit of internal development is that organization experiences less financial risk, and grows at a rate that it is able to control

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does not need to use valuable

resources trying to manage different cultures. The main disadvantage is the time it takes the organization to build up necessary strategic capabilities. With product cycle times reducing, a firm developing internally may not be able to exploit market opportunities. 8.5.3 Joint Ventures and Strategic Alliances A joint venture exists when two organizations form a separate independent company in which they own shares equally.

Strategic alliances take place when two or more separate organizations share some of their resources and capabilities but stop short of forming a separate organization. The ultimate aim of strategic alliances is to learn from partners. 8.6 Portfolio Analysis 8.6.1 Boston Consulting Group Matrix The BCG matrix plots an organization’s business units according to its industry  growth rate and its relative market share. Industry growth rate can be determined by reference to the growth rate of the overall economy. A business unit’s relative market share is defined as the ratio of its market share in relation to its largest competitor within the industry. A business unit can fall within one of four strategic categories in which it will be characterized as a star, question mark, cash cow, or dog: -

Stars: high growth and high market share. Over the long term, investment in stars will pay dividends as their large market share will enable them to generate cash as the market slows and they become cash cows.

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Cash cows: experience high market share but in low-growth or mature industries.

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Question marks: compete in high-growth industries but have low market share.

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Dogs: have a low market share within a low-growth industry.

8.6.2 The General Electric-McKinsey Matrix This matrix comprises a nine-cell matrix. The axes comprise industry attractiveness and business strength/competitive position. Unlike the BCG matrix, there is an attempt to broaden the analysis of a business unit’s internal and external factors. Each business unit is represented by a circle and plotted on the matrix. Each industry that a business unit operates within is graded on a scale of 1 (very unattractive) to 5 (very attractive). Each business unit can be assessed for its business strength, and competitive position on a scale of 1 (very weak) to 5 (very strong). 8.7 Corporate Parenting

The concept of corporate parenting is useful in helping an organization to decide which new businesses it should acquire. There are four ways in which the corporate parent can create value for their businesses: -

Stand-alone influence: the parent company setting performance targets and approving major capital expenditure for the business.

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Linkage influence: enhancing the linkages that may be present between different businesses. The aim is to increase value through synergy.

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Functional and services influence: provide services which are more cost effective than the business can undertake themselves or purchase from external suppliers.

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Corporate development activities: through its activities in acquisitions, divestments, and alliances.

8.8 Strategic Evaluation One method is to assess the strategy according to its suitability, feasibility, and acceptability. These three criteria help managers to be explicit about any assumptions that may underpin their strategies. In the real world, it may be unlikely that an organization’s strategy fulfills all three criteria. In this case, the organization must decide on the strategy which fits its stated aims and objectives more closely. Rumelt (1995) proposes four tests of consistency, consonance, advantage, and feasibility to evaluate a strategy. Conclusion: In evaluating strategies, executives must be aware of both the

organization’s internal resources and capabilities and how these meet the needs of  the external environment. In addition, the opinions of stakeholders who have the power and influence to affect strategy must be taken into account.