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- 1. Part V: StrategyFormulation Part I: Part II: Part III: Part IV: Foundations of Strategic Management and the StrategyProcess Mission, Vision and Goals of the Corporation Internal Strategic Analysis External Strategic Analysis Part V: Strategy Formulation Part VI: Strategy Implementation Part VII:, StrategyEvaluation Part VIII : Corporate Social Responsibility
- 2. Strategic Management Process Source:Wheelen, Hunger (2012), ch. 1.5 Strategy formulation Strategy implementation Evaluation and control Environmental scanning 1 2 3 4 Goal setting* 0
- 3. Formulation Of Strategy Strategyformulation is what an organization is going to do – example; choosing cost leadership strategy/differentiation etc. Strategies exist at different levels in an organization & are classified into three major categories according to their scope of coverage i.e., they are classified into: ❑ Corporate, ❑ Business and ❑ Functional level strategies
- 4. Corporate Level Strategy Itspecifies actions a firm takes to gain a competitive advantage by selecting & managing a group of different businesses competing in different product markets. A corporate-level strategy is concerned with two key questions: ❑ What business should the firm be in? ❑ How should the corporate office manage its group of businesses?
- 5. Based on Wheelen,Hunger (2012), ch. 7.1, 7.2 Directional strategy Growth Stability Defensive ▪ Pause/Proceed With Caution ▪ No Change ▪ Turnaround ▪ Sell-out/divestment ▪ Bankruptcy/liquidation Concentration ▪ Vertical integration ▪ Horizontal Diversification ▪ Concentric ▪ Conglomerate Introduction to corporate level Directional Strategies Opposite: Outsourcing (Vertical Disintegration)
- 6. Market Penetration Product Development Market Development Diversification existing new new existing products markets Growth Strategies– Ansoff Matrix (1988) Growth Strategies Very common “new market-strategy”: Internationalization
- 7. Growth Strategies- IntegrationStrategies Integration strategy focuses on moving to different industry level, different product & technology but the basic market remains the same. There are two types of integrative growths: 1.Vertical integration 2.Horizontal integration
- 8. Growth Strategies- IntegrationStrategies cont.. Vertical Integration Strategies Forward Integration Backward Integration
- 9. Integration Strategy Cont’d… Vertical Integration Vertical Integration involves extending an organization’s present business in two possible directions. ❑ Forward integration moves the organization into distributing its own products or services (Gaining ownership or increased control over distributors or retailers) ❑ Backward integration moves an organization into supplying some or all the products or services used in producing its present products or services (Seeking ownership or increased control of a firm’s suppliers)
- 10. Integration Strategy Cont’d… Horizontal integration Horizontal integration occurs when an organization adds one or more businesses that produce similar products or services and that are operating at the same stage in the product market chain. ▪ Its Seeking ownership or increased control over competitors. ❑ Almost all horizontal integration is accomplished by buying another organization in the same business.
- 11. Horizontal Vs VerticalIntegration ❑ Purchasing of computing companies in the same industries ❑ Merging with/purchasing firms that supply similar products ❑ Purchasing of companies at all levels of production
- 12. Diversification The entry ofa firm or business unit into new lines of activity, either by processes of internal business development or through other ways acquisition, which entail changes in its administrative structure, systems and other management processes
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- 14. Diversification Strategies ▪ Relateddiversification : adding new but related products or services ▪ Unrelated diversification : adding new, unrelated products or services
- 15. HOW CAN COMPANIESDIVERSIFY? Basic Diversification Strategies Concentric diversification = Growth into related industry Goal? Search for synergies Who? Firms with a strong competitive position … …And outstanding, transferable skills Conglomerate diversification Growth into unrelated industries Goal? Financial considerations (cash flow/risk reduction) Who? Current industry lacking attractiveness… …Transferable skills missing
- 16. HOW CAN COMPANIESDIVERSIFY? Basic Diversification Strategies Concentric diversification = Growth into related industry Goal? Search for synergies Who? Firms with a strong competitive position … …And outstanding, transferable skills Conglomerate diversification Growth into unrelated industries Goal? Financial considerations (cash flow/risk reduction) Who? Current industry lacking attractiveness… …Transferable skills missing
- 17. GROWTH ▪ Escape stagnantor declining industries (e.g., Tobacco, oil, newspapers) ▪ Satisfy managers’ egos ▪ Serve shareholders’ interest ▪ Size effects (economies of scale & scope, stability, employee attractiveness, credibility . RISK SPREADING ▪ Reduction of the variance of profit flows etc. → ▪ BUT often not of value for shareholders - they can hold diversified portfolios themselves VALUE CREATION Putting different businesses under common ownership in order to increase their profitability (synergies, economies of scope and skills →) Based on Grant, Contemporary Strategy Analysis, 8th ed 2013, pp 350-52 Reasons for Diversification
- 18. CORE ISSUES INDIVERSIFICATION DECISIONS Basic Diversification Strategies Superior profit derives from two sources: INDUSTRY ATTRACTIVENESS Diversification decisions involve these same two issues: ▪ How attractive is the industry to be entered? ▪ Can the firm achieve a competitive advantage? RETURN ON CAPITAL > COST OF CAPITAL COMPETITIVE ADVANTAGE
- 19. If diversification isto create shareholder value, it must meet three tests: 1. The attractiveness test: diversification must be directed towards attractive industries (or have the potential to become attractive) 2. The cost of entry test: the cost of entry shall be lower than all future profits 3. The better-off test: either the new unit must gain competitive advantage from its link with the company, or vice-versa (i.e., some form of “synergy” must be present) PORTER’S ESSENTIAL TESTS Porter, From Competitive Advantage to Corporate Strategy, in: HBR, May-Jun 987, p 46
- 20. Transaction Cost vs.Administrative Cost Grant, Contemporary Strategy Analysis, 8th ed 2013, pp. 297-298 Performing an activity internally or by using an external partner generates 2 types of costs Transaction costs: All external cost related to working with a market partner, e.g. locating, negotiating, and enforcing a contract Administrative costs: All internal cost related performing the activity inside the company, e.g. overhead and management => if: Administrative cost < Transaction cost → Integrate Administrative cost > Transaction cost → De-integrate
- 21. RELATED VS. UNRELATEDDIVERSIFICATION RELATED DIVERSIFICATION UNRELATED DIVERSIFICATION ▪ BUT weaker in terms of synergies ▪ Lower risk for cannibalization ▪ Greater synergies ▪ BUT risk of canibalising core products/services
- 22. Prof. Dr. AnnaRosin Diversification and Profitability Diversification and Performance ▪ No consistent relationship ▪ Some evidence of a curvilinear relationship: ▪ Diversification first increases profitability ▪ Beyond the optimum further diversification reduces profitability (maybe due to increased complexity?) ▪ McKinsey & Co.: ▪ Benefits from moderate diversification ▪ Especially for firms that have run out of growth opportunities→
- 23. ASSOCIATION VS. CAUSATION– WHAT DO YOU THINK? Diversification and Performance Based on Palich et al., 2000, pp 154-177; Grant, Contemporary Strategy Analysis, 8th ed 2013, pp 358-360 Does diversification enhance profitability? Or is superior profitability the reason to diversify?
- 24. All the previouslydiscussed growth strategies could be implemented either through internal growth or external growth (acquisition, merger, or joint ventures). Internal Growth ❑ Internal growth occurs when a company expands its current market share, its markets, or its products through the use of internal resources. ❑ Generally, internal growth strategies work well for companies want to grow via product development or market development. Means of Diversification
- 25. Merger and Acquisition Merger– is a strategy through which two or more firms agree to integrate their operations on a relatively co-equal basis ▪ Therefore, in merger, a single new company will be established with new name, organizational structure, issuing new stock & other changes ▪ However, the shareholders of the former firms will become shareholders of the new enlarged organization
- 26. ❑ Acquisition –a strategy through which one firm buys a controlling of 100% interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio. ❑ Therefore, an acquisition is a marriage of unequal partners with one organization buying the other. ❑ The shareholders of the acquired firm cease to be owners of the acquiring company – unless payment is made in terms of shares. Merger and Acquisition cont’d …
- 27. Merger And AcquisitionCont’d … What are the main reasons of an acquisition or merger strategy? ❑ The main reasons why firms use these strategies is to strategic competitiveness & earn above average returns ❑ These can be achieved through increasing the market value of the stock – synergistic effect.
- 28. Merger and Acquisitioncont’d … ▪ Securing or protecting sources of raw materials/components ▪ To gain access to distribution channels ▪ To make use of underutilized resources of the company ▪ To increase market power – horizontal, vertical & related acquisitions ▪ To enter a new market, offer new products & avoiding cost of new product development (Acquisition as substitute for innovation) ▪ To overcome entry barriers(cross-border acquisition )etc. There Could Be Other Reasons
- 29. Joint Ventures ❑ Ajoint Venture occurs when two or more organizations pool their resources for a given project or a business product. ❑ A joint venture can be on either a temporary or permanent basis ❑ Joint ventures are especially popular between firms in different countries
- 30. Joint Ventures cont’d… There are several reasons why a joint venture may be attractive to respective participants: ▪ By pooling their resources, the organizations may be capable of doing things that they could not do separately ▪ By joining with another firm or firms, the companies share the risk of the venture. ▪ Certain gov.t sponsored aggressively encouraged joint ventures for the purpose involving minority business. ▪ International companies are often encouraged by host countries to enter joint ventures with local companies
- 31. 2. STABILITY STRATEGY Itis also called neutral strategy occurs when an organization is satisfied with its current situation & wants to maintain the status quo. Reasons for using stability strategy: The company is doing well “if it works, don’t fix it” The management wants to avoid additional hassles associated with growth Resources has been exhausted because of earlier growth strategies
- 32. 3. DEFENSIVE STRATEGIES DefensiveStrategies most often used as a short-term solution to: ❑ Reverse a negative trend ❑ Overcome a crisis or problem situation It could be classified into decline &closure strategies
- 33. DEFENSIVE STRATEGIES CONT’D… • Retrenchment • Harvesting • Turn around • Divestiture Decline strategy includes: • Liquidation • Filing of bankruptcy Closure strategy Includes:
- 34. Retrenchment Regrouping through costand asset reduction to reverse declining sales and profit. It focuses on economizing, saving cost, cutting back costs mostly through layoffs, firing employees etc. Divestiture Selling a division or part of an organization Turn around ▪ A defensive strategy followed by an organization when it feels that the decision made earlier is wrong and needs to be undone before it damages the profitability of the company. ▪ It is a restructuring process that converts the loss-making company into a profitable one. Liquidation Selling all of a company’s assets, in parts, for their tangible worth DEFENSIVE STRATEGIES CONT’D …
- 35. PORTFOLIO ANALYSIS How toPlan a Corporate Portfolio? ➢ The business portfolio is the collection of businesses (SBUs) & products that make up the company. ➢ SBU Is a unit of the company that has a separate mission & objectives. It Can be a company division, a product line or even individual brands Types of portfolio techniques / matrixes in use, the most well known of which are: ▪ The Boston Consulting Group – BCG-Matrix (Hedley, 1977) ▪ The General Electric Screen – GE-Matrix (Hofer and Schendel, 1978)
- 36. Boston Consulting Group BCG-matrix Source: Robert M. Grant Contemporary Strategy Analysis 8th edition p343
- 37. The Boston ConsultingGroup (BCG) Matrix Cont’d … ❑ Stars: The leading SBUs in a company’s portfolio. They offer attractive long-term profit & growth opportunities – still growing but not generating high profit ❑ Question marks: can become a star if nurtured properly. To become a market leader, a question mark requires substantial net injections of cash – it is cash hungry ❑ Cash cows: are cost leaders in their industries. The capital investment requirements of cash cows are not substantial – such businesses generate a strong positive cash flow ❑ Dogs: are unlikely to generate a positive cash flow & may become cash hogs. They may require substantial capital investments just to maintain their low market share.
- 38. BCG MATRIX: “NORMSTRATEGIES” „Question marks“ „Stars“ „Poor dogs“ „Cash cows“ Market growth high low low high Relative market share Portfolio Analysis ▪ Cash Flow : ▪ Highest for Stars & Cash cows ▪ Lowest for Question marks and Dogs ▪ Investment needs: ▪ Highest for Question marks and Stars ▪ Lowest for Cash cows and Dogs BCG Matrix and Product Life Cycle
- 39. The firm’s business– level strategy is a deliberate choice about how it will perform the value chain’s primary and support activities to create unique value Purpose of business – level strategy is to create differences between the firm’s position and those of its competitors Business-level Strategy
- 40. Business-level Strategic Issues Inselecting business-level strategy, the firm should determine: Who will be served? Refers to types of customers What needs those target customers have that the firm will satisfy? Refers to the benefits & features of products How those needs will be satisfied? Refers to core competencies
- 41. In Making ABusiness – Level Strategy … The firm faces a choice between Performing Activities Differently (Low-Cost Leadership) Or Performing Different Activities (Differentiation) Or Some Combination Of Them!
- 42. Generic Strategies -Porter’s Five Generic Strategies How to gain competitive advantage? 2 key dimensions:
- 43. Alternative Approaches Business Strategy ▪Can approaches once considered as “stuck in the middle” be attractive today? Hybrid Strategies, e.g. considered by the “Strategy Clock” ▪ Is the “Positioning approach” still sufficient? Delta-Model Blue Ocean https://upload.wikimedia.org/wikipedia/commons/thumb/a/a8/Swedish_Windsor_Chairs.jpg/640px-Swedish_Windsor_Chairs.jpg + flaticon
- 44. Corporate Vs Business– Level Strategy Source
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