Strategy Formulation

Corporate-Level Strategies

Developing a Business Strategy

WHERE?

HOW?

NOW?

Strategy formulation
Strategic formation is a combination of such main processes which are as follows: Performing a situation analysis, self-evaluation and competitor analysis: both internal and external; both micro-environmental and macro-environmental.
Concurrent

with this assessment, objectives are set. These objectives should be parallel to a time-line; some are in the short-term and others on the long-term. This involves crafting vision statements (long term view of a possible future), mission statements (the role that the organization gives itself in society), overall corporate objectives (both financial and strategic), strategic business unit objectives (both financial and strategic), and tactical objectives.

Corporate Level Strategies

The strategy top managemnt formulates for the over all corporation

In corporate strategy, Johnson, Scholes and Whittington present a model in which strategic options are evaluated against three key success criteria: Suitability; would it work? Feasibility; can it be made to work? Acceptability; will they work it?

Corporate Restructuring

A process that may include a broad set of decisions and transactions, such as changing the organization of work itself in the firm, reducing the amount of cash under the discretion of senior executives, and acquiring and divesting the business units.

Organizational Restructuring Financial Restructuring Portfolio Restructuring

Long-Term Objectives

Results expected from pursuing certain strategies. Strategies represent actions to accomplish longterm objectives.

Long-Term Objectives Objectives -Quantifiable Measurable Realistic Understandable Challenging

Long-Term Objectives Objectives -Hierarchical Obtainable Congruent Time-line

Financial vs. Strategic Objectives Financial Objectives

Growth in revenues Growth in earnings Higher dividends Higher profit margins Higher Earnings per share Improved cash flow

Financial vs. Strategic Objectives Strategic Objectives

Larger market share Quicker on-time delivery than rivals Quicker design-to-market times than rivals Lower costs than rivals Higher product quality than rivals Wider geographic coverage than rivals

Types of Strategies
A Large Company

Corp Level Division Level Functional Level Operational Level

Types of Strategies
A Small Company Company Level

Functional Level Operational Level

The Balanced Scorecard Robert Kaplan & David Norton --

Strategy evaluation & control technique Balance financial measures with nonfinancial measures Balance shareholder objectives with customer & operational objectives

Corporate Level Strategies

a) b) c) d) e) f) g) h)

Growth Strategies
Internal Growth Horizontal Integration Horizontal related diversification Horizontal unrelated diversification (Conglomerate diversification) Vertical integration of related businesses Vertical integration of unrelated businesses Mergers Strategic alliances

a) b) c)

Stability Strategies Retrenchment Strategies

Turnaround Divestment Liquidation

Example: What corporate strategies are in use? (1)

Dell acquires Apple.

Horizontal Intergration. Dell and Apple both make personal computers. If thats what you see, they are in the same industry and so this is horizontal integration like United Airlines acquiring American. Related Diversification. Dell makes PCs, Apple makes an operating system for PCs. From that perspective, this is related diversification where the synergy is likely using Dells marketing prowess to leverage Apples operating system technology. Backwards vertical integration. Intel is a key supplier to Dell, of microprocessors.

Dell acquires Intel.

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Example: What corporate strategies are in use? (2)

Microsoft acquires Prentice-Hall.

Unrelated diversification. Microsoft is in high-technology, Prentice-Hall is in publishing (they publish our textbook). There is no clear relatedness here. Horizontal Integration or related diversification. Microsoft primarily does operating systems (Windows) and applications (Excel). Apple does primarily operating systems (Mac OS) and PCs (Macintosh). So they are in the same industry (operating systems) which means horizontal integration, and in related industries (PCs, PC applications) which means related diversification.

Microsoft acquires Apple.

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Example: What corporate strategies are in use? (3)

Intel acquires Dell. Forward vertical integration. Dell is one of Intels main customers. Microsoft dominates the PC operating system business. Concentration strategy build on your existing strengths. Gateway (PC company) closes 35 retail stores to restore profitability. Retrenchment. Intel discontinues selling PCs to avoid competing with customers. Exit. This actually happened and represents strategic exit (Intel was financially strong) rather than exit under duress.

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Example: What corporate strategies are in use? (4)

Procter & Gamble sells Tide detergent in Italy Global product strategy sell the same product everywhere. But maybe, Tide is not really Tide everywhere there are changes made to the formula but the brand is the same. That leans toward a multidomestic strategy. Procter & Gamble sells Joy dishwashing liquid virtually worldwide and Salvo dishwashing liquid in Latin America. Joy alone is a Global strategy. But if combined with Salvo, the company is adjusting its strategy to conform to local preferences, and that means the overall corporate strategy looks multidomestic.

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Corporate-Level Strategies

Corporate strategies are dynamic

Corporations enter and exit businesses simultaneously Growth: Make the corporation larger. Grow each business. Enter more businesses and markets than you are exit. Stability: Essentially sticking with the current businesses Retrenchment: Make the corporation smaller. Prune unprofitable parts of each business. Exit more businesses than you are entering.

Big Question: Why should there be corporate-level strategies at all? Why shouldnt the businesses compete on their own? There must be a core competency that can be translated into competitive advantage within the different businesses

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Corporate-Level Growth Strategies

Concentration (focus on existing businesses):

Grow existing business units, often by entering new markets

Integration Vertical or horizontal Can be organic (own unit) or acquisition Diversification

Related or unrelated Explicitly about acquisition International Expansion: Existing business units enter new markets Can be organic (own unit) or acquisition

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Growth through diversification

Diversification is explicitly about acquiring or merging with other corporations or business units. Related diversification - grow by merging with or acquiring firms in different, but related, industries Goal: strategic fit that allows synergy Synergy: When two units produce additional value through operating together rather than separately. Unrelated diversification - grow by merging with or acquiring firms in different and unrelated industries Goal: ? reduce cyclicality On average less successful than related diversification
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Corporate Tinkertoys: Diversification and Integration around the airline industry

Airline Industry Related Diversification
National Rent-a-Car Chrysler American Airlines United Airlines Boeing

Unrelated Diversification

.
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Vertical Integration

Vertical Integration A strategy that allows an organization to create value by producing its own inputs or distributing its own products. Backward vertical integration

occurs when a firm seeks to reduce its input costs by producing its own inputs (generics). occurs when a firm performs functions its customers did, itself for example, distributes its outputs or products to lower distribution costs and ensure quality service to customers (Compaq vs. Dell).

Forward vertical integration

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Airline Industry Example: Diversification and Integration

Vertical Integration Airline Industry Horizontal Integration Backward
American Airlines National Rent-a-Car Chrysler United Airlines Boeing

Vertical Integration Forward

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International Expansion: To customize or not to customize?

Global product strategy: Same product, same marketing approach Multinational / Ethnocentric everywhere. Standardization provides for lower production cost. Ignores national differences that local competitors can address to their advantage. Multidomestic product strategy: Customize products, marketing in Transnational / Polycentric each national market Helps gain local market share. Raises production costs. Which one?: how much do national environments differ?
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Retrenchment and Exit

Retrenchment action to address weaknesses that are leading to performance declines, to:
stabilize operations (shutting retail stores) revitalize organizational resources and capabilities prepare to compete effectively once again

Exit shutting down or selling the business

Often difficult for managers (e.g., steel, flag carriers)

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