Chapters 7&8 – Strategy Formulation: Corporate Strategy, Functional Strategy and Strategic Choice 1

CHAPTER 7: Strategy Formulation – Corporate Strategy

7-1: CORPORATE STRATEGY

Corporate strategy - a strategy that states a company’s overall direction in terms of its general attitude toward growth
and the management of its various business and product lines - addresses three key issues facing the corporation as a
whole:

1. The firm’s overall orientation toward growth, stability, or retrenchment (directional strategy)
2. The industries or markets in which the firm competes through its products and business units (portfolio analysis)
3. The manner in which management coordinates activities, transfers resources, and cultivates capabilities among
product lines and business units (parenting strategy).

WHY CARE ABOUT CORPORATE STRATEGY?

 Need to be able to take educated risks and not afraid to lose (predictive rather than reactive to market changes)
 Companies must choose between alternatives every day (the average CEO is involved in an average of 139 tasks
per week and 50% of their choices were made in nine minutes or less)
 Being top today does not guarantee that you’ll still be there tomorrow (ex. US auto manufacturers)

7-2: DIRECTIONAL STRATEGY

DIRECTINOAL STRATEGIES
Orientation toward growth

Expand the company’s Make no change to the Reduce the company’s

activities company’s current level of activities
activities

GROWTH STRATEGY
 Most widely pursued, particularly in expanding industries
 Growth comes either internally (say, becoming global) or externally (say, merging with or acquiring another
business)
 Concentration (vertical and horizontal growth) or Diversification
o Vertical Growth: a strategy in which a firm takes over a function previously provided by a supplier(
backward integration) or distributor (forward integration).
 The company, in effect, grows by making its own supplies and/or by distributing its own products
o Horizontal growth: involves expanding the firm’s products into other geographic locations and/or
increasing the range of products and services offered to current markets
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Horizontal integration: the degree to which a firm operates in multiple geographic locations at the
same point in an industry’s value chain
 GENERALLY,, diversification leads to higher survival rate than concentration, but the order can make a difference.

STABILITY STRATEGY
 Sometimes considered a “lack” of a strategy; Best suited for predictable environments
 Stability strategies can be very useful in the short run, but they can be dangerous if followed for too long.
Some of the more popular of these strategies are the pause/proceed-with-caution, no-change, and profit
strategies.
o Pause/Proceed with caution – or, a ‘timeout’-why would this be needed?
 in effect, a timeout—an opportunity to rest before continuing a growth or retrenchment
strategy.
 It is a very deliberate attempt to make only incremental improvements until a particular
environmental situation changes. It is typically conceived as a temporary strategy to be used until
the environment becomes more hospitable or to enable a company to consolidate its resources
after prolonged rapid growth.
o No-change – if you’re a small business in a medium-sized town, and Wal-Mart isn’t there yet, you should
not be using this strategy….
 a decision to do nothing new—a choice to continue current operations and policies for the
foreseeable future.
 Rarely articulated as a definite strategy, a no-change strategy’s success depends on a lack of
significant change in a corporation’s situation.
 Many small-town businesses followed this strategy before Wal-Mart moved into their areas and
forced them to rethink their strategy or drove them out of business before they could react.
o Profit – pretend nothing is wrong, instead assume loss in profit is due to random occurrence and focus on
just getting it back
 a decision to do nothing new in a worsening situation but instead to act as though the company’s
problems are only temporary.
 The profit strategy is an attempt to artificially support profits when a company’s sales are
declining by reducing investment and short-term discretionary expenditures.
 The profit strategy is useful only to help a company get through a temporary difficulty. It may also
be a way to boost the value of a company in preparation to be acquired or for going public via an
initial public offering (IPO).
 OBVIOUSLY, this is a risky strategy for many firms…

RETRENCHMENT STRATEGIES
 Companies with a weak competitive position
 Turnaround Strategy: (sometimes referred to as transformation) emphasizes the improvement of operational
efficiency and is probably most appropriate when a corporation’s problems are pervasive but not yet
critical.
o For these efforts to be something more than a profit protection, the company has to deal with three
phases of the effort—Contraction, Consolidation, and Rebirth.
 Contraction is the initial effort to quickly “stop the bleeding” with a general, across-the-board
cutback in size and costs.
 consolidation, implements a program to stabilize the now-leaner corporation. To streamline
the company, plans are developed to reduce unnecessary overhead and to make functional
activities cost-justified.
 re-birth, happens if the company is successful with its efforts and starts growing profitably
again.
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 Captive Company Strategy: involves giving up independence in exchange for security. A company with a
weak competitive position may not be able to successfully implement a full-blown turnaround strategy for a
variety of reasons.
o Management searches for an “angel” by offering to be a captive company to one of its larger
customers or another player in the industry in order to guarantee the company’s continued
existence.
o In the case of selling to a competitor, the company is generally able to protect many of the jobs and
in many cases operate as an independent entity.
 Sell-Out/ Divestment Strategy: a retrenchment option used when a company has weak competitive position
resulting in poor performance
o If a corporation with a weak competitive position in an industry is unable either to pull itself up by
its bootstraps or to find a customer or competitor to which it can become a captive company, it may
have no choice but to sell out.
o If the corporation has multiple business lines and it chooses to sell off a division with low growth
potential, this is called divestment
 Divestment is often used after a corporation acquires a multiunit corporation in order to
shed the units that do not fit with the corporation’s new strategy.
 Liquidation/Bankruptcy
 Case in point: Circuit City
o Retrenched by contracting wages down and consolidating interiors to be more ‘bog-box’ style and less
stylish
o CEO Philip Schoonover abandoned ship in 2008
o Closed 155 stores in November 2008 and but its work force by 17% and declared bankruptcy (promising
not to liquidate)
o Liquidated in 2009

7-3: PORTFOLIO ANALYSIS

BCG Growth-Share Matrix: The boston consulting group matrix. A simple way to portray a corporation’s portfolio
of products or divisions in terms of growth and cash flow

BCG Growth-Share Matrix

Chapters 7&8 – Strategy Formulation: Corporate Strategy, Functional Strategy and Strategic Choice 4

 Question marks (sometimes called “problem children” or “wildcats”) are new products with the potential for
success, but needing a lot of cash for development. If such a product is to gain enough market share to become a
market leader and thus a star, money must be taken from more mature products and spent on the question mark.
This is a “fish or cut bait” decision in which management must decide if the business is worth the investment
needed. For example, after years of fruitlessly experimenting with an electric car, General Motors finally decided in
2006 to take a chance on developing the Chevrolet Volt.59 To learn more of GM’s decision to build the electric car,
see the Sustainability Issue feature.
 Stars are market leaders that are typically at or nearing the peak of their perceived product life cycle and are able to
generate enough cash to maintain their high share of the market and usually contribute to the company’s profits.
The Fitbit bracelet has been a star performer for the company with the product still commanding more than 30% of
the market share in 2016.60,61
 Cash cows typically bring in far more money than is needed to maintain their market share. In this maturing or even
declining stage of their life cycle, these products are “milked” for cash that will be invested in new question marks.
Expenses such as advertising and R&D are reduced. Apple’s iPhone (once a true star) represented more than 60% of
Apple revenues even as sales started falling in 2016. This flagship product of the company provides vast resources
that have been poured into the Apple Watch among others.62 Question marks unable to obtain dominant market
share (and thus become stars) by the time the industry growth rate inevitably slows become dogs.
 Dogs have low market share and do not have the potential (usually because they are in an unattractive industry
without a significant market position) to bring in much cash. According to the BCG Growth-Share Matrix, dogs should
be either sold off or managed carefully for the small amount of cash they can generate. IBM sold its PC business to
China’s Lenovo Group in order to focus on its growing services business.

Limitations to the Model

 The use of highs and lows to form four categories is too simplistic.
 The link between market share and profitability is questionable.63 Low-share businesses can also be profitable.64The
long-play record virtually disappeared in the 1990s and early 2000s as CDs, downloads, and then streaming music took
hold of the masses. Today, there are still companies pressing in-house vinyl records and doing so very profitably. At the
same time there has been a resurgence in demand for cassette tapes!65
 Growth rate is only one aspect of industry attractiveness.
 Product lines or business units are considered only in relation to one competitor: the market leader. Small competitors
with fast-growing market shares are ignored.
 Market share is only one aspect of overall competitive position.

7-4: CORPORATE PARENTING

CORPORTE PARENTING
Would you rather have…. Good parents, or bad parents?
 Create value by influencing – or parenting – the businesses they own
 The ‘better parents’ create more value through their owned businesses, known as parenting advantage
 Value is created by providing needed resources and transferring skills where required
 Which company makes more sense to own Skype?
o eBay owned it first, but Microsoft owns it now. Think about what each company can offer to a VoIP
service.
 Effective corporate parenting involves three steps:
o 1. Look for the factors that are already good and emphasize them (known as ‘centers of excellence’)
o 2. Look for areas that need to be improved upon
o 3. Analyze the parents’ own strengths and weaknesses and consider how they align best
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Horizontal Strategy and Multipoint Competition

 Horizontal Strategy: a corporate strategy that cuts across business unit boundaries to build synergy between
business units and to improve the competitive position of one or more business units.
 When used to build synergy, it acts like a parenting strategy. When used to improve the competitive
position of one or more business units, it can be thought of as a corporate competitive strategy.
 Multipoint Competition: large multibusiness corporations compete against other large multibusiness firms in a
number of markets.
 These multipoint competitors are firms that compete with each other not only in one business unit, but
also in a number of business units.
 Multipoint competition is likely to become even more prevalent in the future, as corporations become
global competitors and expand into more markets through strategic alliances.

CHAPTER 8: Funtional Strategy and Strategic Choice

8-1: FUNCTIONAL STRATEGY

FUNCTIONAL STRATEGIES
 Approach taken to achieve corporate objectives by maximizing resource productivity
 Important to ‘match’ the strategy through all levels of the organization (ex. Walmart’s lowest price strategy)
 Take many forms:
o Marketing strategy
o Financial strategy
o Research and development (R&D) Strategy
o Operations strategy
o Purchasing strategy
o Logistics strategy
o Human resources management (HRM) strategy
o Information technology (IT) strategy
 Knowing which one to pursue is visceral and often ‘gut-feeling’ of experienced CEOs

MARKETING STRATEGY
 deals with pricing, selling, and distributing a product
 common approaches:
o market development (find more people to use your current product)
o product development (find alternative uses for existing products)
o push (‘buying’ their way onto shelves) versus
o push (increasing advertising to have consumers demand more of the product)
 online presence allows for ‘dynmaic pricing’ – that is, varying the price of a product based on demand, market
segment, or availability
 Uber is known for this, raising their prices any time demand grows high enough in order to maintain driver-
passenger ratios

FINANCIAL STRATEGY
 Examines financial implications and picks the best course of action
 Usually attempts to maximize the financial value of the firm
 Leveraged-buyout (LBO) most popular (company buys another with debt in the form of a loan, then pay back the
loan using sales of the acquired company’s assets)
 Management of dividends and stock prices

R&D STRATEGY
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 Product and process innovation and improvement

 Also deals with where to access new technology (build themselves or find someone else who makes it)
 Often needs to rely on external sources to keep current

OPERATIONS STRATEGY
Determines:
 How and where a product or service is to be manufactured
 Level of vertical integration in the production process
 Deployment of physical resources
 Relationships with suppliers

PURCHASING STRATEGY
 Obtaining raw materials, parts and supplies needed to perform operations functions
 Leads to a sustainability issue…
 Multiple, sole, and parallel sourcing decisions can overcome these issues

OTHER MAJOR STRATEGIES

 Logistics strategy: flow of products in and out of the manufacturing process
 HRM Strategy: hiring of low-skilled (but low cost) employees versus highly0skilled (but relative costly) employees
 IT strategy: provide competitive advantage through technology

8-2: THE SOURCING DECISION: LOCATION OF FUNCTIONS

THE SOURCING DECISION: MAKE OR BUY?

 If the firm is not competent in a specific area, it may choose to outsource (purchase externally what used to be
internal)
 Helps to focus on core competencies
 Almost anything can be outsourced – even employees (16% of firms outsource their HR)
 Firms can also engage in offshoring – sending the function or activity or activity to another country (often with
cheaper labour or more specialty in that industry)
o Typically sent to India, Indonesia, China, Bulgaria, and Philippines
o Average annual salary ~ $6,000 when converted
 However, there can be risks:
o Outsourcing something that should be done in-house
o Selecting the wrong vendor
o Writing a poor contract
o Overlooking personnel issues
o Losing control over the outsourced activity
o Overlooking the hidden cost of outsourcing
o Failing to plan an exit strategy
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8-3: STRATEGIES TO AVOID

STRATEGIES TO AVOID – MATCHING BAD IDEAS WITH FAILED COMPANIES