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Corporate Strategy

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  • 1. Corporate Strategy
    • What is it?
    • What are its main concerns?
    • How is it different from business-level strategy?
  • 2. History of Corporate Strategy: 1950s & 1960s
    • Conglomerates
    • Undervalued companies & general mgmt skills
    • The reality of this period
    • Contributions to C.S.:
      • Concept of corporate strategy
      • SWOT
      • Structure follows strategy
      • Strategic fit
  • 3. Examples of Strategic Fit
    • Resource strengths are well matched to the KSFs of industries the firm competes in
    • Adequate managerial expertise exists to cope with problems of current businesses
    • Ability exists to transfer resources and capabilities from one business to another
    • Good financial fit is when a business:
      • Contributes to achievement of corporate objectives
      • Enhances shareholder value
  • 4. History of Corporate Strategy: 1970s
    • Unrelated diversification still in vogue
    • Search for portfolio planning tools
    • Contributions to C.S.:
      • BCG Matrix & GE Matrix
      • Rumelt’s diversification typology
      • Valuable internal capital allocation (Williamson ‘75)
  • 5. The BCG Growth-Share Business Portfolio Matrix Circle Size = proportion of total revenue business contributes to corp.
  • 6. Weaknesses of the BCG Matrix
    • No average position
    • Oversimplification
    • Position in matrix  investment success
    • Cash cows defending shrinking market share
    • 2 dimensions -- inadequate
    • Cash flow emphasis
  • 7. Constructing a GE Attractiveness/Strength Matrix
    • Use quantitative measures of industry attractiveness and business strength to plot location of each business in matrix
    • Each business unit appears as a circle
      • Area of circle is proportional to size of business as a percent of company revenues
      • (Or area of circle can represent relative size of industry with pie slice showing the company’s market share)
  • 8. Procedure: Rating the Relative Attractiveness of Each Industry
    • Step 1 : Select industry attractiveness factors
    • Step 2 : Assign weights to each factor (sum of weights = 1.0)
    • Step 3 : Rate each industry on each factor (use scale of 1 to 10)
    • Step 4 : Calculate weighted ratings; sum to get an overall industry attractiveness rating for each industry
  • 9. Example: Rating Industry Attractiveness Rating Scale: 1 = Unattractive; 10 = Very attractive Attractiveness Rating 5 8 2 6 4 7 4 5 Weighted Industry Rating 0.75 2.40 0.10 0.30 0.20 1.05 0.60 0.50 5.90 Weight 0.15 0.30 0.05 0.05 0.05 0.15 0.15 0.10 1.00 Industry Attractiveness Factor Market size and projected growth Intensity of competition Emerging industry opportunities and threats Social, political, regulatory, and environmental factors Seasonality and cyclical influences Resource requirements Industry profitability Degree of risk and uncertainty Sum of weights Industry attractiveness rating
  • 10. Rating the Competitive Strength of Each Business
    • Step 1 : Select competitive strength factors
    • Step 2 : Assign weights to each factor (sum of weights = 1.0)
    • Step 3 : Rate each business on each factor (use scale of 1 to 10)
    • Step 4 : Calculate weighted ratings; sum to get an overall attractiveness rating for each business
  • 11. Example: Rating a Business Unit’s Competitive Strength Rating Scale: 1 = Weak ; 10 = Strong Bargaining leverage Strength Rating 5 8 2 6 4 7 4 5 Weighted Strength Rating 1.00 2.00 0.10 0.60 0.20 1.05 0.40 0.50 5.85 Weight 0.20 0.25 0.05 0.10 0.05 0.15 0.10 0.10 1.00 Competitive Strength Measure Relative market share Ability to compete on cost Ability to match rivals on quality or service Technology/innovation capabilities How well resources match KSFs Brand name reputation/image Degree of profit relative to rivals Sum of weights Competitive strength rating
  • 12. General Electric’s Industry Attractiveness-Business Strength Matrix Low High Medium Average Strong Weak
    • Market Size
    • Growth Rate
    • Profit Margin
    • Intensity of Competition
    • Seasonality
    • Cyclicality
    • Resource Requirements
    • Social Impact
    • Regulation
    • Environment
    • Opportunities & Threats
    • Relative Market Share
    • Reputation/ Image
    • Bargaining Leverage
    • Ability to Match Quality/Service
    • Relative Costs
    • Profit Margins
    • Fit with KSFs
    Industry Attractiveness Business Strength Rating Scale: 1 = Weak ; 10 = Strong 6.7 3.3 10.0 1.0 1.0 3.3 6.7
  • 13. Strategy Implications of Attractiveness/Strength Matrix
    • Businesses in upper left corner
      • Accorded top investment priority
      • Strategic prescription is grow and build
    • Businesses in three diagonal cells
      • Given medium investment priority
      • Invest to maintain position
    • Businesses in lower right corner
      • Candidates for harvesting or divestiture
      • May be candidates for an overhaul and reposition strategy
  • 14. The Attractiveness/Strength Matrix
    • Allows for intermediate rankings between high and low and between strong and weak
    • Incorporates a wide variety of strategically relevant variables
    • Stresses allocating corporate resources to businesses with greatest potential for
      • Competitive advantage and
      • Superior performance
  • 15. Rumelt’s Diversification Typology No linkages < 70% from dominant business Very High Level: Unrelated Only some businesses share linkages < 70% from dominant business Moderate-High Level: Related Linked All businesses share linkages < 70% from dominant business Moderate-High Level: Related-Constrained Linkages between two businesses 70% to 95% from a single business Low Level : Dominant Business N/A > 95% from a single business Low Level : Single Business Linkages Between Business Source of Revenues Levels of Diversification
  • 16. History of Corporate Strategy: 1980s
    • Sticking to the Knitting
    • Restructuring: Downsizing, Downscoping, & LBOs
    • Corporate Raiders
    • Contributions to C.S.:
      • Value-Based Strategy
      • New Concepts: Market for Control & Free Cash Flows
      • Porter’s Generic Corporate Strategies
      • Resource-Based View of the Firm
  • 17. Value-Based Strategy
    • Computed Value:
      • Discount forecasted cash flows using WACC
      • Compute share value
    • Imputed Value:
      • Apply industry average P:E ratio to company earnings to get imputed share value.
    • Computed < Imputed … improve or sell
  • 18. Porter’s Generic Corporate Strategies
    • Portfolio Management
    • Restructuring
    • Transferring Skills
    • Sharing Activities
  • 19. Corporate Strategy in the ‘90s & Beyond
    • Restructuring & Refocusing Continues, yet ...
    • Record Number of Mergers & Acquisitions
    • Issues Confronted in this Course:
      • Are there generic corporate strategies?
      • What are the key elements of C.S.?
      • How do you achieve a corporate advantage?
      • Is any corporate advantage sustainable?
      • How far should one diversify?

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