Corporate-Level Strategy

K. Rangarajan

INDIAN INSTITUTE OF FOREIGN TRADEINDIAN INSTITUTE OF FOREIGN TRADE

BUSINESS STRATEGYBUSINESS STRATEGY

How to create value for the corporation as a wholeHow to create value for the corporation as a whole

2. Corporate-Level Strategy 2. Corporate-Level Strategy (Companywide Strategy)(Companywide Strategy)

- low cost- low cost- differentiation- differentiation- integrated low cost/differentiation- integrated low cost/differentiation

- focused low cost- focused low cost- focused differentiation- focused differentiation

How to create competitive advantage in each How to create competitive advantage in each business in which the company competesbusiness in which the company competes

1. Business-Level Strategy (Competitive Strategy)(Competitive Strategy)

A Diversified CompanyHas Two Levels of Strategy

1. What businesses should the corporation 1. What businesses should the corporation be in?be in?

2. How should the corporate office manage 2. How should the corporate office manage the array of business units?the array of business units?

Corporate StrategyCorporate Strategy is what makes the corporate is what makes the corporate whole add up to more than the sum of its business whole add up to more than the sum of its business unit partsunit parts

Key Questions of Corporate Strategy

Levels and Types of Diversification

Low Levels of DiversificationLow Levels of Diversification

Moderate to High Levels of DiversificationModerate to High Levels of Diversification

Very High Levels of DiversificationVery High Levels of Diversification

Related linked (mixed)Related linked (mixed) < 70% of revenues from dominant < 70% of revenues from dominant business, and only limited links existbusiness, and only limited links exist

AAAA

BBBB CCCC

Single businessSingle business > 95% of revenues from a single > 95% of revenues from a single business unitbusiness unit

AAAA

Dominant businessDominant business Between 70% and 95% of Between 70% and 95% of revenues from a single business revenues from a single business unitunit BBBB

AAAA

Unrelated-DiversifiedUnrelated-Diversified Business units not closely related Business units not closely related

AAAA

BBBB CCCC

< 70% of revenues from dominant < 70% of revenues from dominant business; all businesses share product, business; all businesses share product, technological and distribution linkagestechnological and distribution linkages

Related constrainedRelated constrainedAAAA

BBBB CCCC

Alternative Diversification StrategiesAlternative Diversification Strategies

Related Diversification Strategies

Unrelated Diversification Strategies

Sharing ActivitiesSharing Activities

Transferring Core CompetenciesTransferring Core Competencies

Efficient Internal Capital Market AllocationEfficient Internal Capital Market Allocation

RestructuringRestructuring

Value-creating Strategies of DiversificationOperational and Corporate RelatednessOperational and Corporate Relatedness

Sharing:Sharing:OperationalOperationalRelatednessRelatedness

BetweenBetweenBusinessBusiness

Corporate Relatedness:Corporate Relatedness: Transferring Skills Into Transferring Skills Into Business Through Corporate HeadquartersBusiness Through Corporate Headquarters

LowLow HighHigh

HighHigh

LowLow

Related Linked Diversification

(Economies of Scope)

UnrelatedUnrelatedDiversificationDiversification

(Financial Economies)(Financial Economies)

Both Operational and Both Operational and Corporate RelatednessCorporate Relatedness(Rare Capability and (Rare Capability and

Can Create Diseconomies Can Create Diseconomies of Scope)of Scope)

Related Constrained Diversification

Vertical Integration(Market Power)

Mergers and AcquisitionsMergers and AcquisitionsMergers and AcquisitionsMergers and Acquisitions

MergerMergerA transaction where two firms agree to integrate their A transaction where two firms agree to integrate their operations on a relatively coequal basis because they operations on a relatively coequal basis because they have resources and capabilities that together may have resources and capabilities that together may create a stronger competitive advantagecreate a stronger competitive advantage

AcquisitionAcquisitionA transaction where one firm buys another firm A transaction where one firm buys another firm with the intent of more effectively using a core with the intent of more effectively using a core competence by making the acquired firm a competence by making the acquired firm a subsidiary within its portfolio of businessessubsidiary within its portfolio of businesses

TakeoverTakeoverAn acquisition where the target firm did not solicit An acquisition where the target firm did not solicit the bid of the acquiring firmthe bid of the acquiring firm

Problems inProblems inAchieving SuccessAchieving Success

Problems inProblems inAchieving SuccessAchieving Success

IntegrationIntegrationdifficultiesdifficulties

Inadequate Inadequate evaluation of targetevaluation of target

Too muchToo muchdiversificationdiversification

Large orLarge orextraordinary debtextraordinary debt

Inability toInability toachieve synergyachieve synergy

Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions

Too largeToo large

IncreasedIncreasedmarket powermarket power

OvercomeOvercomeentry barriersentry barriers

Lower riskLower riskcompared to developing compared to developing

new productsnew products

Cost of newCost of newproduct developmentproduct development

Increased speedIncreased speedto marketto market

IncreasedIncreaseddiversificationdiversification

Avoid excessiveAvoid excessivecompetitioncompetition

AcquisitionsAcquisitions

Reasons forReasons forAcquisitionsAcquisitions

Example: Procter & Gamble’s cutting of its worldwide workforce by 15,000 jobs

Restructuring ActivitiesRestructuring ActivitiesRestructuring ActivitiesRestructuring Activities

Example:Example: Disney’s selling of Fairchild PublicationsDisney’s selling of Fairchild Publications

DownsizingDownsizingWholesale reduction of employeesWholesale reduction of employees

DownscopingDownscopingDownscopingDownscoping

Reducing scope of operationsReducing scope of operations

Selectively divesting or closing non-core businessesSelectively divesting or closing non-core businesses

Leads to greater focusLeads to greater focus

Business-Level Strategy

Business LevelStrategy

Sustainable

Competitive

Advantage

External Environment

Internal Environment

The Basis…………..

StrategyStrategyAn integrated and coordinated set of

actions taken to exploit core

competencies and gain a competitive

advantage.

CoreCompetency

CoreCompetency

The resources and capabilities that have been

determined to be a source of competitive

advantage for a firm over its rivals.

Business Level Strategy

Actions taken to provide value to customers

and gain a competitive advantage by

exploiting core competencies in specific,

individual product markets.

The Basis…………..

Source of Competitive AdvantageSource of Competitive Advantage

CostCost UniquenessUniqueness

Breadth of Competitive

Scope

BroadTargetMarket

BroadTargetMarket

NarrowTargetMarket

NarrowTargetMarket

Focused Low Cost

Differen-tiation

Focused Differen-tiation

Generic Business Level Strategies

CostLeadership

Generic Business Level Strategies

Source of Competitive AdvantageSource of Competitive Advantage

CostCost UniquenessUniqueness

Breadth of Competitive

Scope

BroadTargetMarket

BroadTargetMarket

NarrowTargetMarket

NarrowTargetMarket

CostLeadership

Focused Low Cost

Differen-tiation

Focused Differen-tiation

Integrated

Low Cost/

Differentiation

Integrated

Low Cost/

Differentiation

Integrated Low Cost/Differentiation Strategy

Firms using an Integrated Strategy may:

Adapt more quickly

Learn new skills and technologies

Utilize Flexible Manufacturing Systems to create

differentiated products at low costs

Leverage core competencies through Information

Networks across multiple business units

Utilize Total Quality Management (TQM) to create high

quality differentiated products which simultaneously

driving down costs

Recognize that the Integrated Low Cost/

Differentiation business level strategy involves

a Compromise

The risk is that the firm may become “Stuck in the

Middle” lacking a strong commitment to or

expertise with either type of generic strategy

Integrated Low Cost/Differentiation Strategy

Southwest Airlines

Use a single aircraft model(Boeing 737)

Use secondary airports

Fly short routes

15 minute turnaround time

No meals

No reserved seats

No travel agent reservations

Low Cost

Focus on customer satisfaction

New flight services for business travelers (phones and faxes)

High level of employee dedication

Differentiation

Integrated Low Cost/Differentiation Strategy

Three Intensive Growth Strategies

The Boston Consulting Group’s Portfolio (Growth-Share) Matrix

Process for Applying The Technique

Step 1: Divide the Firm into Strategic Business Units (SBUs)

Step 2: Measure the Growth Rate of Each SBU Market

Step 3: Measure the Relative Market Share of Each SBU

Step 4: Position Each SBU along the Matrix Dimensions

Plotting on the Vertical Axis – Market Growth Rate

Plotting on the Horizontal Axis – Relative Market

Share

Plot Contribution Bubbles

Step 5: Construct a Matrix for All SBU Competitors

Step 6: Assign Optimal Generic Strategies to Each SBU

Step 7: Further Disaggregate the Analysis

Normative Strategies

Business Category

Market Share Thrust

Business Profitability

Investment Required

Net Cash Flow

Stars Hold/Increase High High Around zero or slightly negative

Cash Cows Hold High Low Highly positive

Problem Child (a) Increase None or negative Very high Highly negative

Problem Child (b) Harvest/Divest Low or negative Divest Positive

Dogs Harvest/Divest Low or negative Divest Positive

4-22

BCG Portfolio Matrix, cont.

Dalrymple & Parsons/Marketing Management 7th edition: Chapter

2

20

Balancing the Product PortfolioBalancing the Product Portfolio

Divestment

Question Mark ?Star

Cash Cow

Dog

High

Low

Relative Market Share

Mark

et

Gro

wth

Rate

%%

10x 4x 2x 1x 0.4x 0.1x

Present position

Desired or expected position

A

B

C

D

E

F

GE Strategic Planning Grid

Factors underlying Market Attractiveness and Business Strength in GE Strategic Planning Grid

Market Market AttractivenessAttractiveness

Overall market sizeOverall market size

Annual market growth rateAnnual market growth rate

Historical profit marginHistorical profit margin

Competitive intensityCompetitive intensity

Technological requirementsTechnological requirements

Inflationary vulnerabilityInflationary vulnerability

Energy requirementsEnergy requirements

Environmental impactEnvironmental impact

Social-political-legalSocial-political-legal

WeightWeight

0.200.20

0.200.20

0.150.15

0.150.15

0.150.15

0.050.05

0.050.05

0.050.05

Must be Must be acceptableacceptable

1.01.0

Rating =Rating =

(1-5)(1-5)

44

55

44

22

44

33

22

33

ValueValue

0.800.80

1.1.

0.600.60

0.300.30

0.600.60

0.150.15

0.100.10

0.150.15

3.703.70

Business Business StrengthStrength

Market shareMarket share

Share growthShare growth

Product qualityProduct quality

Brand reputationBrand reputation

Distribution networkDistribution network

0.100.10

0.150.15

0.100.10

0.100.10

0.050.05

44

22

44

55

44

0.400.40

0.300.30

0.400.40

0.500.50

0.200.20

Strategic Groups

The Concept of Strategic Groups– Groups of firms within an industry with

similar strategic characteristics– Permits simplification of competitor analysis

Strategic Group MappingSG: Set of firms pursuing similar strategies with similar resources in the same industry.

# Identify the Features that differentiate firms in the industry

price, quality range

geographic coverage

degree of vertical integration

product line breadth

use of distribution channels

degree of service offered

# Plot the firms on a two variable map using pairs of these differentiating features

#Assign the firms that fall in about the same strategy space to the same strategic group

#Draw circles proportional to the size of the group’s respective share of total industry sales revenue, around each group.

• Variables selected as axes should not be highly correlated

• Variables chosen as axes should expose big differences in how rivals compete

• Variables do not have to be either quantitative or continuous

• Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group.

• If more than two good competitive variables can be used, several maps can be drawn.

Strategic Group Mapping: Guidelines

Strategic Groups in the Pharmaceutical Industry

HighLow R&D SpendingR&D Spending

• Merck• Pfizer

• Eli Lilly

High

Low

Pri

ces

Ch

arg

edP

rice

s C

har

ged

Proprietary Proprietary GroupGroup

Generic Generic GroupGroup

• Ranbaxy• Torrent• Orchid

SWOT Analysis

Strength: It is a resource,skill or advantage relative to competitors

(Fin. Resources, Image,Mkt. Leadership etc)

Weakness: A limitation or deficiency in resources, skills and

capabilities that prevents effective performance

of the firm.

Opportunity: It is major favourable situation in the environment

( New mkt. Segment, changes in Competition,

Tech. Changes etc)

Threat: A major unfavourable situation in the environment

(Entry of Comp., Tech. Change, Slow mkt. Growth etc)

Substantialinternal

strengths

Major environmental

threats

Criticalinternal

weaknesses

Numerous environmentalopportunities

Cell 3: Supports aTurnaround-Oriented strategy

Cell 1: Supports an aggressive strategy

Cell 4: Supports defensive strategy

Cell 2: Supports adiversificationstrategy

SWOT analysis diagram

External (acquisition

or merger forresource

capability)

MaximiseStrengths

Internal(redirectedresourceswithin the

firm)

Overcomeweaknesses

Turnaround or retrenchmentDivestitureLiquidation

Vertical integrationConglomerate diversification

ConcentrationMarket developmentProduct developmentInnovation

Horizontal integrationConcentric diversificationJoint venture

Grand Strategy Selection Matrix

III

III IV

External (acquisition

or merger forresource

capability)

Major environmental

threats

Internal(redirectedresourceswithin the

firm)

Rapid Market Growth

ConcentrationVertical IntegrationConcentric Diversification

Reformulation of ConcentrationHorizontal IntegrationDivestitureLiquidation

Concentric -DiversificationConglomerate -DiversificationJoint Ventures

Turnaround/retrenchmentConcentric DiversificationConglomerate diversificationDivestitureLiquidation

Model of Grand Strategy Clusters

III

IV III