Corporate Strategy

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Corporate Strategy

  1. 1. THREE KEY ISSUES FACING THE CORPORATION… THE FIRM’S ORIENTATION TOWARD GROWTH, STABILITY, AND RETRENCHMENT (Directional Strategy) THE INDUSTRIES OR MARKETS IN WHICH THE FIRM COMPETES (Portfolio Strategy) THE MANNER IN WHICH MANAGEMENT COORDINATES ACTIVITIES AND TRANSFERS RESOURCES AND CULTIVATES CAPABILITIES AMONG PRODUCT LINES AND BUSINESS UNITS (Parenting Strategy)Corporate headquarters must play the “parent” as it deals with its various lines of business (children).
  2. 2. CONCENTRATION1. HORIZONTAL INTEGRATION  GEOGRAPHIC EXPANSION  Local, Regional, National, Global  INCREASING THE RANGE OF PRODUCTS and/or SERVICES1. VERTICAL INTEGRATION • BACKWARD Long-Term Contracts Quasi-integration Tapered Integration Full Integration • FORWARDDIVERSIFICATION1. CONCENTRIC Related1. CONGLOMERATE Unrelated
  3. 3. DOMESTIC ENTRYINTERNAL DEVELOPMENT & EXPANSIONEXTERNAL ACQUISITIONS & MERGERSSTRATEGIC ALLIANCES & PARTNERSHIPS Licensing, Franchises, Joint VenturesINTERNATIONAL ENTRY EXPORTING LICENSING FRANCHISING JOINT VENTURES ACQUISITIONS GREEN-FIELD DEVELOPMENT PRODUCTION SHARING TURNKEY OPERATIONS MANAGEMENT CONTRACTS
  4. 4. COMPETITIVE POSITION WEAK STRONG --------------------------------------------- RAPID REFORMULATE HORIZONTAL HORIZ & VERTICAL INTEGRATION INTEGRATION VERTICAL DIVERSIFICATION INTEGRATION SELL-OUT/DIVEST CONCENTRIC DIVERSIFICATIONMARKET ---------------------------------------------GROWTH RATE DIVERSIFICATION INTERNATIONAL EXPANSION CAPTIVE FIRM/MERGE DIVERSIFICATION ABANDONMENT SLOW JOINT VENTURE ---------------------------------------
  5. 5. DON’T DIVERSIFY UNLESS… SYNERGY IS ACHIEVED SHAREHOLDER VALUE IS BUILTCONCENTRIC DIVERSIFICATION FINDING A SYNERGISTIC “FIT” Marketing Operations Management MERGING THE FUNCTIONSCONGLOMERATE DIVERSIFICATION FIND FIRMS WHOSE ASSETS ARE UNDERVALUED FIND FIRMS THAT ARE FINANCIALLY DISTRESSED FIND FIRMS WITH BRIGHT PROSPECTS BUT ARE SHORT ON $$$
  6. 6. PROS…1--BUSINESS RISK IS SCATTERED OVER MANY INDUSTRIES2--CAN INVEST CAPITAL IN WHATEVER OFFERS THE BEST PROFIT PROSPECTS3--PROFITABILITY IS MORE STABLE BECAUSE HARD TIMES IN ONE INDUSTRY CAN BE PARTIALLY OFFSET BY GOOD TIMES IN ANOTHER4--IF CORPORATE MANAGERS ARE GOOD AT SPOTTING BARGAIN-PRICED FIRMS WITH BIG UPSIDE PROFIT POTENTIAL, SHAREHOLDER WEALTH WILL BE ENHANCEDCONS…1--TOP MANAGEMENT COMPETENCE Can they tell a good acquisition from a bad one? Can they select good managers to run each business? Do they know what to do if a business unit stumbles?2--DIVERSIFICATION DOES NOTHING TO ENHANCE THE COMPETITIVE STRENGTH OF INDIVIDUAL BUSINESS UNITS Each business unit is on it own No corporate synergy can be achieved3--ARE THE FIRM’S PROFITS MORE STABLE? Do the “up and down” cycles cancel out?4--HOW MUCH DIVERSITY CAN THE FIRM MANAGE SUCCESSFULLY? How broad should our portfolio be?
  7. 7. ONE MAJOR CORE BUSINESS …With a modest diversified portfolio (1/3 or less)NARROWLY DIVERSIFIED …With a few (2-5) related core business units …With a few (2-5) unrelated business unitsBROADLY DIVERSIFIED …With many related business units …With many business units in mostly unrelated industriesA MULTI-BUSINESS FIRM …With several unrelated groups of related businesses
  8. 8. MAKE NEW ACQUISITIONS Related or Unrelated?DIVEST SOME BUSINESS UNITS Poor Performers? Poor Strategic “Fit?”RESTRUCTURE THE WHOLE PORTFOLIONARROW THE DIVERSIFICATION BASEBECOME A DIVERSIFIED MULTINATIONAL, MULTI-INDUSTRY COMPANY (DMNC)
  9. 9. PROFIT “Keep milking the cow, but don’t feed it” Artificially supporting profits by cutting costs Keeping up appearances that everything is still OK A temporary strategy for a worsening environmentPAUSE Consolidate after recent rapid growth A temporary strategy to “catch your breath”PROCEED WITH CAUTION Environment looks scary…wait to see what happensNO-CHANGE A very predictable environment…nothing uncertain ever happens Why tamper with success? What firms did before WalMart came…
  10. 10. OFTEN TRIGGERED BY… DISAPPOINTING PERFORMANCE ECONOMIC DOWNTURN EXCESSIVE DEBT ILL-CHOSEN ACQUISITIONSTURNAROUND Help subsidiaries become profitable Belt-tightening and consolidationCAPTIVE COMPANY Give up independence for security…sell mostly to one large customer “angel” Can scale back on some functions, like marketingSELL-OUT/DIVEST Sell the entire operation to someone as an ongoing business Divest a healthy firm that doesn’t fit our portfolio…or a low-producing businessLIQUIDATION The last resort…no one wants to buy the entire business The assets are worth more than the business…so they’re sold piece by piece
  11. 11. THE BCG GROWTH-SHARE MATRIX (Boston Consulting Group)DIMENSIONS Industry Growth Rate Compared to GDP Relative Market Share Uses ratios instead of absolute market sharesCLASSIFICATIONS Question Marks (or Problem Children or Wildcats) Stars Cows DogsADVANTAGES & IMPLICATIONS It is quantifiable and easy to use Easy to remember terms and their meaning when referring to business units Assumes large market shares => economies of scale => cost leadership Each business unit moves across the matrix in predictable ways over time Focuses attention on cash flows and needs
  12. 12. TOO SIMPLISTIC—IT ONLY HAS A FOUR-CELL MATRIX WHERE DO “AVERAGE” BUSINESSES BELONG?PREJUDICIAL CLASSIFICATION SCHEME DOGS & PROBLEM CHILDREN v. STARS & COWS…VERY BIASED TERMS THE TRENDS & MOVEMENTS OF THESE UNITS SEEM MORE IMPORTANTIS HIGH INDUSTRY GROWTH ALWAYS GOOD?DOES HIGH MARKET SHARE ALWAYS MEAN HIGH PROFITABILITY? FIRMS CAN LOSE MONEY WHILE HOLDING A LARGE MARKET SHARE LOW-SHARE BUSINESSES CAN ALSO BE PROFITABLEONLY CONSIDERS RELATIONSHIP TO THE MARKET LEADER—WHILE OTHERS ARE IGNORED WHAT ABOUT SMALL COMPETITORS WITH FAST-GROWING MARKET SHARES?GROWTH RATE IS ONLY ONE ASPECT OF INDUSTRY ATTRACTIVENESSMARKET SHARE IS ONLY ONE ASPECT OF OVERALL COMPETITIVE POSITION
  13. 13. RELATIVE MARKET SHARE HIGH 1.0 LOW --------------------------------------------- HIGH STARS QUESTION MARKSINDUSTRY 1.0 ---------------------------------------------GROWTH RATE COWS DOGS LOW --------------------------------------------- RELATIVE MARKET SHARE Your market share divided by largest rival’s share INDUSTRY GROWTH RATE Industry growth percentage compared to GDP SIZE OF CIRCLES The significance (revenues) of each SBU to the firm
  14. 14. TWO DIMENSIONS (McKinsey & Co) Industry Attractiveness MARKET SIZE & GROWTH RATE INDUSTRY PROFITABILITY INTENSITY OF COMPETITION BARRIERS TO ENTRY / EXIT SEASONALITY / CYCLICALITY TECHNOLOGICAL & PRODUCT CONSIDERATIONS CAPITAL REQUIREMENTS EMERGING OPPORTUNITIES & THREATS SOCIAL, ENVIRONMENTAL, & POLITICAL FACTORS STRATEGIC FIT WITH OTHER CURRENT LINES OF BUSINESSBusiness Strength / (Competitive Position) RELATIVE MARKET SHARE RELATIVE PRICE, QUALITY, & SERVICE v. RIVALS PROFIT MARGINS and COST POSITION v. RIVALS KNOWLEDGE OF CUSTOMERS & MARKETS TECHNOLOGICAL CAPABILITY & LEADERSHIP FINANCIAL & PHYSICAL RESOURCES CALIBER OF MANAGEMENT & STAFF COMPETENCIES MATCH KEY SUCCESS FACTORS
  15. 15. BUSINESS STRENGTH / COMPETITIVE POSITION STRONG AVERAGE WEAK ---------------------------------------- HIGH WINNER WINNER QUESTION MARKLONG-TERM ----------------------------------- -----INDUSTRY AVERAGE WINNER AVERAGE LOSERATTRACTIVENESS BUSINESS ----------------------------------- ----- PROFIT LOSER LOSER LOW PRODUCER ---------------------------------------- INDIVIDUAL PRODUCT LINES Identified by letter SIZE OF EACH CIRCLE Represents the total revenues in the industry PIE SLICES Represents your share of that market
  16. 16. STRENGTHS USES MORE COMPREHENSIVE MEASURES / VARIABLES IN ASSESSING INDUSTRY ATTRACTIVENESS AND BUSINESS STRENGTH / COMPETITIVE POSITION DOESN’T LEAD TO AS SIMPLISTIC CONCLUSIONS AS THE BCG GRID NINE CELL APPROACH ALLOWS FOR INTERMEDIATE RANKINGS BETWEEN HIGH/LOW AND STRONG/WEAK STRESSES CHANNELING OF RESOURCES TO AREAS WITH THE GREATEST PROBABILITY OF ACHIEVING COMPETITIVE ADVANTAGE AND SUPERIOR PERFORMANCEWEAKNESSES PROVIDES NO REAL GUIDANCE ON THE SPECIFICS OF WHAT STRATEGY TO FOLLOW … IT’S TOO GENERAL CAN’T SPOT UNITS THAT ARE ABOUT TO BECOME WINNERS BECAUSE THEIR INDUSTRIES ARE ENTERING THE TAKEOFF STAGE USE OF NUMERIC ESTIMATES SEEMS OBJECTIVE, BUT IS REALLY VERY SUBJECTIVE SHOULD THE WEIGHTS & FACTORS USED TO ASSESS INDUSTRY ATTRACTIVENESS AND BUSINESS POSITION BE USED GENERICALLY, OR ADJUSTED DEPENDING ON THE INDUSTRY UNDER INVESTIGATION?
  17. 17. TWO DIMENSIONS (Charles Hofer & A. D. Little, Co) Stage of Industry / Market Evolution EARLY DEVELOPMENT RAPID GROWTH / TAKE-OFF SHAKE-OUT MATURITY / SATURATION DECLINE / STAGNATION Business Strength / (Competitive Position) SAME DIMENSIONS AS USED IN THE GE BUSINESS SCREENADVANTAGES Can be used to identify and track developing winners Illustrates how the firm’s businesses are distributed across the stages of industry evolution
  18. 18. BUSINESS STRENGTH / COMPETITIVE POSITION STRONG AVERAGE WEAK EARLY ------------------------------ DEVELOPMENT ------------------------------STAGE OF RAPID GROWTH / TAKE-OFFINDUSTRY / MARKET ------------------------------ SHAKE-OUTEVOLUTION ------------------------------ MATURITY / SATURATION ------------------------------ DECLINE / STAGNATION ------------------------------ ONLY ONE DIMENSION IS DIFFERENT FROM THE GE BUSINESS SCREEN Except for the Stage of Market Evolution, this model is identical to the GE Business Screen
  19. 19. STRENGTHS ENCOURAGES TOP MANAGEMENT TO EVALUATE EACH LINE OF BUSINESS SEPARATELY, AND TO SET OBJECTIVES AND ALLOCATE RESOURCES TO EACH. IT STIMULATES THE USE OF EXTERNALLY-ORIENTED DATA TO SUPPLEMENT MANAGEMENT’S JUDGMENT RAISES THE ISSUE OF CASH FLOW AVAILABILITY FOR USE IN EXPANSION AND GROWTH GRAPHICALLY COMMUNICATES THE MIX OF BUSINESSES THE FIRM HAS INVESTED INWEAKNESSES DEFINING PRODUCT / MARKET SEGMENTS IS DIFFICULT IT SUGGESTS STANDARD STRATEGIES THAT CAN MISS OPPORTUNITIES OR BE IMPRACTICAL PROVIDES AN ILLUSION OF SCIENTIFIC RIGOR, WHEN POSITIONS ARE REALLY BASED ON SUBJECTIVE JUDGMENTS VALUE-LADEN TERMS (cow, dog) LEAD TO SIMPLISTIC STRATEGIES AND SELF-FULFILLING PROPHESIES ITS NOT ALWAYS CLEAR WHAT MAKES AN INDUSTRY ATTRACTIVE OR WHERE A PRODUCT IS IN ITS LIFE CYCLE NAIVELY FOLLOWING PORTFOLIO PRESCRIPTIONS MAY REDUCE PROFITS –DOGS CAN MAKE MONEY!
  20. 20. COMPARING INDUSTRY ATTRACTIVENESS ATTRACTIVENESS OF EACH INDUSTRY IN THE PORTFOLIO Is this a good industry for our organization to be in? EACH INDUSTRY’S ATTRACTIVENESS RELATIVE TO THE OTHERS Which industries are the most / least attractive? ATTRACTIVENRSS OF ALL THE INDUSTRIES AS A GROUP How appealing is the mix of industries? Is the portfolio a “good” one?TO DETERMINE INDUSTRY ATTRACTIVENESS 1--USE GE BUSINESS SCREEN METHODOLOGY 2--SUBJECTIVELY CLASSIFY EACH INDUSTRY FACTOR INTO ONE OF THREE CATEGORIES… HIGHLY ATTRACTIVE AVERAGE NOT ATTRACTIVE
  21. 21. INDUSTRY FACTOR CLASSIFIED ASMARKET SIZE & GROWTH RATE AVERAGEINDUSTRY PROFITABILITY ATTRACTIVEINTENSITY OF COMPETITION UNATTRACTIVEBARRIERS TO ENTRY/EXIT UNATTRACTIVESEASONALITY/CYCLICALITY AVERAGETECHNOLOGY & PRODUCT CONSIDERATIONS AVERAGECAPITAL REQUIREMENTS UNATTRACTIVEEMERGING OPPORTUNITIES & THREATS AVERAGESOCIAL, REGULATORY, & POLITICAL FACTORS AVERAGESTRATEGIC FIT WITH OTHER CURRENT LINES OF BUSINESS ATTRACTIVE OVERALL EVALUATION = AVERAGE
  22. 22. ASSIGN A NUMBER TO EACH INDUSTRY FACTOR USING THE FOLLOWING SCHEME…UNATTRACTIVE = 0, 1, 2, 3 AVERAGE = 4, 5, 6 ATTRACTIVE = 7, 8, 9, 10--------------------------------------------------------- ------INDUSTRY FACTOR ASSIGNED NUMBERMARKET SIZE & GROWTH RATE 6INDUSTRY PROFITABILITY 9INTENSITY OF COMPETITION 2BARRIERS TO ENTRY/EXIT 3SEASONALITY/CYCLICALITY 6TECHNOLOGY & PRODUCT CONSIDERATIONS 5CAPITAL REQUIREMENTS 1EMERGING OPPORTUNITIES & THREATS 5SOCIAL, REGULATORY, & POLITICAL FACTORS 4STRATEGIC FIT WITH OTHER LINES OF BUSINESS 8OVERALL EVALUATION = 49/10 = 4.9 = AVERAGE
  23. 23. 1--ASSIGN WEIGHTS TO EACH INDUSTRY FACTOR (Must add up to 100%)2--THEN ASSIGN NUMBERS TO EACH FACTOR USING THE FOLLOWING SCHEME…UNATTRACTIVE = 0 - 3 AVERAGE = 4 - 6 ATTRACTIVE = 7 - 103--MULTIPLY WEIGHTS BY NUMBERS TO DETERMINE THE WEIGHTED SCORE--------------------------------------------------------- ---WEIGHT INDUSTRY FACTOR ASSIGNED NUMBER.10 MARKET SIZE & GROWTH RATE 6.10 INDUSTRY PROFITABILITY 9.15 INTENSITY OF COMPETITION 2.05 BARRIERS TO ENTRY/EXIT 3.05 SEASONALITY/CYCLICALITY 6.08 TECHNOLOGY & PRODUCT CONSIDERATIONS 5.12 CAPITAL REQUIREMENTS 1.10 EMERGING OPPORTUNITIES & THREATS 5.10 SOCIAL, REGULATORY, & POLITICAL FACTORS 4.15 STRATEGIC FIT WITH OTHER LINES OF BUSINESS 8OVERALL EVALUATION = 4.87 = AVERAGE
  24. 24. USE THE FOLLOWING SCHEME TO CLASSIFY EACH BUSINESS STRENGTH FACTOR… STRONG AVERAGE WEAK--------------------------------------------------------- ------BUSINESS STRENGTH FACTOR CLASSIFIED ASOUR RELATIVE MARKET SHARE STRONGOUR RELATIVE PRICE v. RIVALS AVERAGEOUR QUALITY & SERVICE v. RIVALS AVERAGEOUR RELATIVE COST POSITION v. RIVALS STRONGOUR PROFIT MARGINS v. RIVALS STRONGKNOWLEDGE OF CUSTOMERS & MARKETS AVERAGETECHNOLOGICAL CAPABILITY / LEADERSHIP WEAKFINANCIAL & PHYSICAL RESOURCES AVERAGECALIBER OF MANAGEMENT & STAFF STRONGCOMPETENCIES MATCH KEY SUCCESS FACTORS AVERAGEOVERALL EVALUATION = AVERAGE to STRONG
  25. 25. ASSIGN NUMBERS TO EACH BUSINESS STRENGTH FACTOR …USE THE FOLLOWING…WEAK = 0, 1, 2, 3 AVERAGE = 4, 5, 6 STRONG = 7, 8, 9, 10--------------------------------------------------------- ------INDUSTRY FACTOR ASSIGNED NUMBERRELATIVE MARKET SHARE 7RELATIVE PRICE v. RIVALS 5QUALITY & SERVICE v. RIVALS 6RELATIVE COST POSITION v. RIVALS 8PROFIT MARGINS v. RIVALS 8KNOWLEDGE OF CUSTOMERS & MARKETS 5TECHNOLOGICAL CAPABILITY & LEADERSHIP 2FINANCIAL & PHYSICAL RESOURCES 4CALIBER OF MANAGEMENT & STAFF 8COMPETENCIES MATCH KEY SUCCESS FACTORS 6OVERALL EVALUATION = 59/10 = 5.9 = AVERAGE
  26. 26. 1--ASSIGN WEIGHTS TO EACH COMPETITIVE FACTOR (Must add up to 100%)2--THEN ASSIGN NUMBERS TO EACH FACTOR USING THE FOLLOWING SCHEME… WEAK = (0 – 3) AVERAGE = (4 – 6) STRONG = (7 – 10)3--MULTIPLY WEIGHTS BY NUMBERS TO DETERMINE THE WEIGHTED SCORE--------------------------------------------------------- ---WEIGHT COMPETITIVE BUSINESS STRENGTH ASSIGNED NUMBER.08 RELATIVE MARKET SHARE 7.08 RELATIVE PRICE v. RIVALS 5.15 QUALITY & SERVICE v. RIVALS 6.12 RELATIVE COST POSTION v. RIVALS 8.06 PROFIT MARGINS v. RIVALS 8.15 KNOWLEDGE OF CUSTOMERS & MARKETS 5.05 TECHNOLOGICAL CAPABILITY / LEADERSHIP 2.10 FINANCIAL & PHYSICAL RESOURCES 4.06 CALIBER OF MANAGEMENT & STAFF 8.15 COMPETENCIES MATCH KEY SUCCESS FACTORS 6OVERALL EVALUATION = 5.93 = AVERAGE
  27. 27. WHICH BUSINESS UNITS HAVE THE BEST/WORST PERFORMANCE?ASSESS THE TRENDS RE: Sales Growth Profit Growth Contribution to Company Earnings Return on Capital Invested in the Business (ROA) Cash Flow GeneratedSTRATEGIC FIT ANALYSIS STRATEGIC ATTRACTIVENESS Does this business have cost-sharing or skills-transfer opportunities? FINANCIAL ATTRACTIVENESS Does this business contribute to corporate performance objectives?RANK THE BUSINESS UNITS ON INVESTMENT PRIORITY Which units should get the highest priority regarding financial support?
  28. 28. UNIT A UNIT B UNIT C UNIT DSALES GROWTH .018 .068 .102 .071GROWTH IN PROFITS .032 .062 .103 .044CONTRIBUTION TO CORPEARNINGS (Omit 000s) $ 70 $554 $ 29 $237RETURN ON ASSETS .072 .124 .088 .096GENERATED CASH FLOWS $234 $611 $ 28 $342(Omit 000s)STRATEGICALLY ATTRACTIVE No Yes Yes NoFINANCIALLY ATTRACTIVE Yes Yes No YesINVESTMENT PRIORITY 4 1 2 3
  29. 29. 1. DOES THE PORTFOLIO HAVE ENOUGH BUSINESSES IN ATTRACTIVE INDUSTRIES?2. DOES THE PORTFOLIO CONTAIN TOO MANY MARGINAL BUSINESSES OR QUESTION MARKS?3. DOES THE CORPORATION HAVE ENOUGH CASH COWS TO FINANCE THE STARS AND EMERGING WINNERS?4. DO THE CORE BUSINESSES GENERATE DEPENDABLE PROFITS OR CASH FLOWS?5. IS THE PORTFOLIO VULNERABLE TO SEASONAL OR RECESSIONARY INFLUENCES?6. DOES THE PORTFOLIO CONTAIN BUSINESSES THAT THE CORPORATION DOESN’T NEED TO BE IN?7. IS THE CORPORATION BURDENED WITH TOO MANY BUSINESSES IN AVERAGE-TO-WEAK COMPETITIVE POSITIONS?8. DOES THE MAKEUP OF THE PORTFOLIO PUT THE CORPORATION IN A GOOD POSITION FOR THE FUTURE?
  30. 30. 1. IDENTIFY THE PRESENT CORPORATE STRATEGY2. CONSTRUCT BUSINESS PORTFOLIO MATRICES3. PROFILE THE INDUSTRY AND COMPETITIVE ENVIRONMENT OF EACH BUSINESS UNIT4. EVALUATE THE COMPETITIVE STRENGTH OF EACH INDIVIDUAL BUSINESS5. COMPARE PERFORMANCE RECORDS OF EACH BUSINESS UNIT6. HOW WELL DOES EACH BUSINESS UNIT “FIT” WITH CURRENT CORPORATE STRATEGY?7. RANK THE UNITS FROM HIGHEST TO LOWEST IN INVESTMENT PRIORITY8. CRAFT A SERIES OF MOVES TO IMPROVE OVERALL CORPORATE PERFORMANCE

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