CORPORATE STRATEGY

“The Only Way To Predict The Future Is to Invent it!”

J. Scully, Apple Computer

Levels of Strategies

Corporate Level Strategy:

Mission, Vision, Integration, Expansion, Stakeholders Relationships

Business Level Strategy / Competitive:

Strategic Business Units (SBU’s),

Functional Level Strategy:

HRM strategy, Marketing Strategy, Production Strategy.

Corporate Strategy

“All the moves that take place in order to achieve a competitive advantage through the selection and management of a business procedures mix, that may deal with various sectors or markets”

Hitt, Ireland & Hoskisson

Three Major Types of Corporate Strategies:

-Stability Strategies

-Growth Strategies

-Turnaround/Retrenchment Strategies

Stability Corporate Strategies

No-Change Strategy.

No interest in strategic repositioning

Profit Strategy.

Sacrificing future development to immediate profit

Pause Strategy.

After M&A, increase inner control & systems, short-term, the goal is to achieve stability

Caution Strategy.

Careful steps due to turbulence in the macro-environment so as to gain insight & better info for the direction that should follow

Growth Corporate Strategies

Vertical Integration

Horizontal Integration

Diversification

Related Diversification

Unrelated Diversification

Market Penetration

Market Development

Product Development

Turnaround Corporate Strategies

Joint – Ventures (not always a turnaround strategy)

Retrenchment (e.g. bankruptcy)

Divesture

Liquidation

Rectification

Downsizing – Stabilization – Rebuilding

Captivity

Growth Corporate Strategies

“How can you make God laugh?

Tell him your Plans!”

Woody Allen

Growth StrategiesVertical Integration

Backward Integration: the firm takes ownership and control of producing its own inputs – e.g. Henry Ford’s upstream expansion from automobile assembly to the production of his own components, back to the production of basic materials including steel and rubber.

or

Forward Integration: where the firm takes ownership and control of its own customers – e.g. Coca-Cola acquiring its local bottlers.

Full Integration: between two stages of production when all of the 1st stage’s production is transferred to the 2nd stage with no sales or purchases from 3rd parties.

or

Partial Integration: when stages of production are not internally self-sufficient.

Vertical Integration

Examples of Vertical Integration

Long-term Contracts/Strategic Alliances (e.g. Nissan, Toyota JIT)

Short Term Contracts (1 year, not a lot of investments, e.g. GM)

Vendor Partnerships – Relational Contracts

Value Adding Partnerships – many firms cooperating a value chain

Franchising

Vertical Integration

Reasons/advantages for Integrating Vertically:

Strengthen the competitive position of firm’s major business

Quality protection – e.g. McDonald’s or Kodak

Expensive distributors/suppliers

Investment in specialized resources e.g. technological innovation

Building high barriers to entry – e.g. control of raw material flow

Stability of production – economies of scale

Vertical Integration

Disadvantages:

Cost – possible competitive disadvantage - e.g. by company-owned suppliers that operate under high operational cost

Failure to achieve synergies – differences in culture, strategy, bureaucracy, personal interests.

Locks the firm deeper into the industry – problem in case of a negative movement of the demand

Less flexibility – Difficulty in changing suppliers or embracing and implement an innovation.

Unless operating across more stages in the industry’s value chain builds competitive advantage, it is a questionable strategic move.

Horizontal Integration

Development of a firm through acquisitions or creation of competitive companies at the same level of production

Example of horizontal integration: Alpha Bank – Ioniki Bank

Reasons for integrating horizontally:• Create competitiveness • Monopolize a certain market • Economies of scale in the production• Acquire competitors that deal with financial problems and turn

around the situation

Possible Problems (more or less same as in the case of vert. integr):• Locks the firm deeper into the industry• Weak synergy effect or even not at all• High Costs• Legislation Problems

DiversificationAnd NOT Differentiation! Differentiation refers to competitive strategy whereas here we discuss corporate strategy, so:

Concentric or Related Diversification

When the businesses that the firm deals with are connected – e.g. offers products that have similarities in their technology, methods of production or the methods of promotion

Examples in Hellas: Pouliadis, Altec, Intracom

Unrelated or Conglomerate Diversification

When the businesses of the firm are connected with each other

Global Example of Huyndai Corporation: Cars, Electronics, Telecommunications, Petrochemics, Ship Constructing & Constructions, Metals & Iron, Financial Services, Medical Machinery

When Does DiversificationStart to Make Sense?

Strong competitive

position, rapid market

growth -- Not a good

time to diversify

Strong competitive position, slow market

growth -- Diversification is top priority consideration

Weak competitive

position, rapid market

growth -- Not a good

time to diversify

Weak competitive position, slow market

growth -- Diversification merits consideration

When to Diversify? Diminishing growth prospects in present business

Opportunities to add value for customers or gain competitive advantage by broadening present business to include complementary products

Attractive opportunities to transfer existing competencies to new businesses

Potential cost-saving opportunities to be realized by entering related businesses

Availability of adequate financial and organizational resources

Why Diversify?

To build shareholder value

1 + 1 = 3

Diversification is capable of increasing shareholder value if it passes three tests

1. Industry Attractiveness Test

2. Cost of Entry Test

3. Better-Off Test (is there a profit of a competitive advantage?)

Strategy Alternatives fora Company Looking to Diversify

Strategy Options

for a Company

Looking to Diversify

•Build shareholder value by capturing cross-business strategic fits- Transfer skills and capabilities from one business to another

- Share facilities or resources to reduce costs- Leverage use of a common brand name- Combine resources to create new competitive strengths and capabilities

Diversify into Related Businesses

•Spread risks across diverse businesses•Build shareholder value by doing a superior job of choosing businesses to diversify into and of managing the whole collection of businesses in the company’s portfolio

Diversify into Unrelated Businesses

Diversify into Both Relatedand Unrelated Businesses

More specifically Related Diversification...

Should be used in the next cases:

1. Acquiring Information e.g. about new technological advances, competition, trends in the market

2. Cost reduction – e.g. the complete production of steel reduces the cost re-heating & transportation

3. Possible Profits

4. Spread of the Danger e.g. by been locked in the market with 1 product or seasonality or the sales

5. High level of resources usage

6. Increased power in the market

7. Empire Building

8. Motivation of Top Management

More specifically Unrelated Diversification…

Should be used in the next cases:

1. Need of investment of surplus capital

2. Firm is competing in an industry of negative development & profits

3. Spread of Danger

4. Surplus Resources & Management in the firm to compete in another industry

5. A great opportunity to acquire an unrelated business

6. Financial synergies between the two firms

7. Monopolistic legislation forbids related expansion

8. Aspirations of Top Management and Motivation

Identifying a Diversified Company’s Strategy

CorporateStrategy

Approach toallocating investment capital and resources

Narrow or broad-based

diversification

Scope ofgeographicoperations

Moves to addnew businesses

Moves to build positionsin new industries

Efforts to capturecross-businessstrategic fits

Moves to divestweak business units

Is diversificationrelated, unrelatedor a mix?

Diversification Decision…

Should take into consideration: The bureaucratic cost The limits of diversification The number of businesses The coordination of business – control The calculation of profit margin in order to effectively manage

resources.

Empirical Research has shown that:

Related Diversification leads to greater profit usually, Whereas Unrelated Diversification leads to greater development

New trends: Business Venture – e.g. Titan’s Cooperation with Lafarge in Egypt (Devolvement &) Refocusing of businesses/conglomerates

Diversity & Performance

Growth Corporate Strategies

All the above strategies silently assume development of the company both in new products and/or in new markets.

However there also other choices:

Market Penetration

Diversi-fication

Market Development

Product Development

Same Product New Product

New Markets

Same Markets

Market Penetration

Investment of Resources in the most profitable product, market or a technology. The Goals in this situation are:

Increase of product usage by the present customers e.g. reduce the rate of product disposal period (toothbrush), advertise new uses of the product (Johnson & Johnson baby shampoo), incentives to customer to buy more units.

Attract the competitor’s customers e.g. repositioning, promotion efforts, lower prices

Attract of non users e.g. test trial through samples

It is recommended when: the present markets are not saturated, there’s space for usage increase by the present customers, the market shares are decreasing but the market increases, economies of scales, the industry is not dependent upon technological innovations, there are barriers to entry.

Market Development

The company is trying to promote the present products to new markets

It can be done by: Expansion to a new geographical area, locally or globally Attracting customers by other market segments (e.g. industrial

customers) Entering new distribution channels

The particular strategy is recommended when:

There are new, not expensive but reliable distribution channels

There are unexploited or not saturated markets

Sometimes firms have to follow this strategy due to surplus production capacity that has to be channeled somewhere else.

Product Development

New products are developed in present markets or significant reengineering is being done to the same products.

The firm has three options here:

Develops new features of the products – e.g. shape, color, increases the product – in general tries to add value

Develops new types of the product in terms of quality

Develops new products, sizes and models – product proliferation

The particular strategy is recommended when the company has successful products that are in the maturity stage.

Turnaround / Retrenchment Corporate Strategies

Think of a mouse’s wisdom. It never trusts its life to only one exit from its nest.

Plato

Sometimes Things go wrong…

Bad adoption to the environment

Lack of Inner ControlToo much risk taking, unnecessarily in certain occasionsUncontrollable factors such as governmental policies, technological advances, natural disasters.A combination of the above!

A very popular strategy in such situations is Rectification that takes place in three stages:

Downsizing – Stabilization – Rebuilding

Rectification

Reduced Resources – Bad Moral of the Workers – Suspicious Stakeholders - and Lack of Time are the elements that discriminate Rectification from the other strategies!

Downsizing: the goal here is survival retrenchment of costs liquidation of non productive resources even human ones new top executives stop cooperation with marginal customers and marginal products stop operating in distribution channels on low profit

Examples: two towers = 300.000 people lost their jobs, also during the period of 1987-1991 5,6 million people in US lost their jobs and also 5 million executives were sacked!

DownsizingDownsizing usually comes along with:

Sequences in the organizational function – people deal with totally new duties and situations – training is needed

Sequences in the Operating Cost – opposite outcomes e.g. due to external consultants

Sequences in the moral and motivation of the workers – survival syndrome (low productivity and moral, suspicious of everything)

Sequences in the effectiveness and productivity

Sequences in terms of the Stakeholders’ behavior

The next steps are Stabilization and Rebuilding

Stabilization and Rebuilding

Stabilization: - Improve the profit margin – Alter the product mix – Refocus in Profitable Markets – New MIS and Control Systems

Rebuilding: Growth – New Products – New Ventures – Investments in Aggressive Advertising Campaigns – Increase of Capital – New Technologies – Development of the Human Factor

Rectification usually lasts 3 years and the most common mistakes that are likely to occur are:

Over-downsizing – lack of proper management – no coordination and planning of strategic moves

Divesture Strategy

 

Selling a company’s department or more,

When…

Rectification Strategy Failed

A department’s expenses are more than the firm is able to handle

A firm decides to sell a department because it is not profitable or even doesn’t abide by the company’s long term mission/vision

A company due to legislation decides to sacrifice part of its power – e.g. Vodafone in 2000 bought Mannesmann, but the EU granted the acquisition by the term that the 1st one would sell Orange (Mannesmann mobile phone company) to Great Britain

Captivity & Liquidation Strategy

 

Captivity: When a company is dependent of another due to its decision to reduce the range of its activities

The “prisoner” abides by the rules and will of the “savior” since most of the times his survival depends on the 2nd one.

Examples of Ford during 80’s and Viohrom – Colgate Palmolive

Liquidation: THE END! – Everything else has failed…

If the Company want to avoid such situations should always:

1. Constantly Control its “Strategic Health” not only by financial terms but also in terms of competitiveness

2. Seek /Foresee Trends and Position itself in the changing environment

3. Establish the proper business culture to do all the above

Corporate Portfolio Management

Portfolio balanceMarkets

Organisation’s needsAttractiveness of business units

ProfitabilityGrowth rates

Portfolio ‘fit’Synergies between business unitsSynergies with corporate parent

The Growth Share (or BCG) Matrix

Strategy Guidelines Based on Directional Policy Matrix

Indicators of SBU Strength& Market Attractiveness

Thank you very much for your attention

Questions - Discussion