Levels of Strategy

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2
 Corporate Strategy

Three Key Issues:

What businesses should the

A. Firm’s directional strategy corporation be in?

B. Firm’s portfolio strategy In Which Industries/Markets should

the corporation be in?

C. Firm’s parenting strategy How should the corporate

office manage the array of
business units

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 A. Firm’s directional strategy
Corporate Strategy is what makes the corporate whole add up to more than
the sum of its business unit parts

A1 A2 A3

A1 i A 2i A3i
A 2ii A 3ii
A 2iii A 3iii
A1 ii A 3iv

Called Directional Strategy because it indicates the direction for SBU’s:

Also Known as the Three Grand Strategies:
•Growth strategies
•Stability strategies 4
•Retrenchment strategies
 CORPORATE-LEVEL STRATEGIES

A 1. GROWTH
Strengths

• Vertical (backward,
forward), or horizontal A2.STABILITY
Organizational Status

integration
• Related or conglomerate
diversification

A3. INVESTMENT
Weaknesses

REDUCTION
A2.STABILITY • Retrenchment
• Divestment

Opportunities Environmental Status Threats 5

 Corporate Strategy
A1.Growth Strategies:
– Internal Growth:
• Capacity Expansion
• New Technology

– External mechanisms:
• Mergers
– Transaction involving two or more firms in which stock
is exchanged but only one firm survives.
• Acquisition
– Purchase of a firm that is absorbed as an operating
subsidiary of the acquiring firm.
• Strategic Alliance
– Partnership of two or more firms to achieve strategically
significant objectives that are mutually beneficial.

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 Corporate Strategy

2 Basic Growth Strategies:

– A1 i.Concentration
– Current product line in one industry

– A1 ii. Diversification
– Into other product lines in other industries

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 Corporate Strategy
A1 I. Concentration Strategies:
Full integration
Taper
integration
Vertical growth Quasi-integration
When a firm produces its own inputs
When a firm owns its own means of distribution

Suppliers Raw Materials Manufacturing Distribution Retail

Backward Integration vs Forward Integration

Horizontal growth
Bottling Plant
Capacity 2000
1000 Lts/Day
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Ansoff’s ‘Direction Matrix’: Provides a
framework for different Growth
Strategies.

Existing PRODUCTS New

A B
Concentration Product Development
Existing
 Consolidation  Existing Competencies
 Market Penetration  New Competencies
 Withdrawal

MARKETS
D C
Market Development Diversification
 New Segments  Existing Competencies
 New Territories  New Competencies
New  New Uses

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10
 Diversification
• When it goes wrong • Corporate decisions
– Glaxo/SmithKline $ 40 B – what business?
– how should they be
– Daimler/Chriysler $36 B managed?
• Kinds of diversification • Why do it at all?
– mergers/acquisitions – synergy
– can be either
– strategic alliances & joint
• related
ventures – horizontal relationships
– internal development • unrelated
– hierarchical

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 Diversification Strategy =
participation in >1 industry (segment),
structuring into separate divisions,
with no single division contributing
>70% of sales revenue

Jo hn son & Jo h nson

C o n su m er P rod u cts P h a rm a ce utica ls D e vices a n d D ia gn o stics

1 8 % o f sa le s; 4 7 % o f sa le s; 3 5 % o f sa le s;
1 3 % o f o p era ting pro fit 6 1 % o f o p era ting pro fit 2 6 % o f o p era ting pro fit

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 Corporate Strategy of
INTERNATIONAL EXPANSION

Exporting
Licensing
Franchising
International Joint Ventures
Entry Means Acquisitions
Options Green-Field Development
Production Sharing
Turnkey Operations
BOT Concept
Management Contracts

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 A2 CORPORATE STABILITY STRATEGIES
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 environment

PAUSE
Consolidate after recent rapid growth
A temporary strategy to “catch your breath”

PROCEED WITH CAUTION

Environment looks scary…wait to see what happens

NO-CHANGE
A very predictable environment…nothing uncertain ever happens
Why tamper with success? What firms did before WalMart came…

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 Corporate Strategy
A 3. Retrenchment Strategies:

– Turnaround

– Captive Company Strategy

– Selling out

– Bankruptcy

– Liquidation
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 Corporate Strategy
The business portfolio is the collection of
Businesses and products that make up the
company.

B. Portfolio Analysis

– How much of our time and money should we spend on our

best products to ensure that they continue to be successful?

– How much of our time and money should we spend

developing new costly products, most of which will never be
successful?

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 Corporate Strategy
B. Portfolio Analysis
B 1. THE BCG GROWTH-SHARE MATRIX
BCG (Boston Consulting Group) Matrix
– Product life cycle and funding
decisions
• Question marks
• Stars
• Cash cows
• Dogs
DIMENSIONS
Industry Growth Rate
Compared to GDP
Relative Market Share
Uses ratios instead of absolute market shares 17
 B1.BCG Matrix
High QUESTION MARKS STAR
• Small share of • Large share of expanding
expanding market market
• Risky • Rapid growth and
MARKET GROWTH

• Prize heifer or problem expansion

child

DOG CASH COW

• Small share of mature • Large share of mature
market market
• Consider divestment • “Milk” cash to fund new
venture (question marks)
Low
Low MARKET SHARE High
SIZE OF CIRCLES The significance (revenues) of each SBU to the firm 18
 BCG Analysis for Kodak

Kodak digital Kodak digital

camera photo printer

Kodak film sales: US, Kodak self-

Canada, & W. Europe service kiosk

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 WEAKNESSES IN THE BCG GROWTH-SHARE
MATRIX
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 IMPORTANT

IS 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 PROFITABLE

ONLY 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 ATTRACTIVENESS

MARKET SHARE IS ONLY ONE ASPECT OF OVERALL COMPETITIVE POSITION

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GE Nine Cell Matrix
 GE Nine Cell Matrix
The GE/McKinsey Matrix is a nine-cell (3 by 3) matrix used
to perform business portfolio analysis as a step in the strategic
planning process.

The GE/McKinsey Matrix identifies the optimum business

portfolio as one that fits perfectly to the company's strengths
and helps to explore the most attractive industry sectors or
markets.

The objective of the analysis is to position each SBU on the

chart depending on the SBU's Strength and the Attractiveness
of the Industry Sector or Market on which it is focused. Each
axis is divided into Low, Medium and High, giving the nine-
cell matrix as depicted below.
 GE Nine Cell Matrix
 Different factors can be used to define Industry Attractiveness. Like:-
Market Size, Market Growth Rate, Demand variability,
Industry
Profitability, Competitive Rivalry, Global Opportunities, Entry and exit
barriers, Capital requirement, Macro environmental Factors (PEST)

 Different factors can also be used to define SBU Strength. Like:-

Market Share, Distribution Channel Access, Financial Resources, R&D
Capability, Brand equity, Production Capacity, Knowledge of customer
and market, Caliber of management. Relative cost position

 The factors and their relative weightings are selected. The rating values
for each factor are entered for each SBU and Industry.
 GE Nine Cell Matrix
Industry Business Unit Strength
Attractiveness

Strong Average Weak

High Grow Grow Hold

Medium Grow Hold Harvest

Low Hold Harvest Harvest

 GE Nine Cell Matrix
 Grow – Business units that fall under grow attract high
investment. Firms may go for product differentiation or Cost
leadership. Huge cash is generated in this phase. Market leaders
exist in this phase.

 Hold – Business units that fall under hold phase attract moderate
investment. Market segmentation, Market penetration, imitation
strategies are adopted in this phase. Followers exist in this phase.

 Harvest - Business units that fall under this phase are

unattractive. Low priority is given in these business units.
Strategies like divestment, Diversification, mergers are adopted
in this phase.
 Market Attractiveness
 Annual market growth
rate
 Overall market size
 Historical profit margin
 Current size of market
 Market structure
 Market rivalry
 Demand variability
 Global opportunities
 Business Strength
 Current market share
 Brand image
 Production capacity
 Corporate image
 Profit margins relative
to competitors
 R & D performance
 Promotional effectiveness
 GE Nine Cell Matrix
Strength
a)It allows intermediate ratings between high and low and between
strong and week.

b)It helps in channeling the corporate resources to business and

achieving competitive advantage and superior performance.

c)It helps in better strategic decision making and better understanding

of business scope.

Weakness
a)It tends to obscure business that are become to winners because their
industries are entering at exit stage.

b)Assessment of business in terms of two factors is not fair.

EXAMPLE OF GE NINE CELL
MATRIX
 B2.GE Business Screen
TWO DIMENSIONS (McKinsey & Co)

Industry Attractiveness

MARKET GROWTH RATE & MARKET SIZE

INDUSTRY PROFITABILITY
INTENSITY OF COMPETITION
BARRIERS TO ENTRY / EXIT
TECHNOLOGICAL CONSIDERATIONS
CAPITAL REQUIREMENTS
EMERGING OPPORTUNITIES & THREATS
SOCIAL, ENVIRONMENTAL, & POLITICAL FACTORS

Business Strength / (Competitive Position)

RELATIVE MARKET SHARE

RELATIVE PRICE, QUALITY, & SERVICE v. RIVALS
PROFIT MARGINS and COST POSITION v. RIVALS
KNOWLEDGE OF CUSTOMERS & MARKETS
FINANCIAL & PHYSICAL RESOURCES
LEVAL OF HR
COMPETENCIES MATCH KEY SUCCESS FACTORS 30
 B2. General Electric’s Business Screen
C
Winners Winners
A Question
High B Marks

D
Industry Attractiveness

Winners
E Average
Businesses
Medium F
Losers

H
Losers
G
Low
Profit SIZE OF EACH CIRCLE :
Producers Losers Represents the total revenues in the
industry
Strong Average Weak PIE SLICES:Represents your
share of that market
Business Strength/Competitive Position

Source: Adapted from Strategic Management in GE, Corporate Planning and Development, General
Electric Corporation. Used by permission of General Electric Company.
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 B3. Shell’s Directional Policy Matrix
Units Competitive Position

Strong Average Weak

Attractive Quit
Leader Try Harder From either
Innovate to This Business
Profits
Find edge or Sector

Leader Custodian Phased

Sectoral Average Withdrawal
Growth
Prospects Wait & Watch From
Sector environment Sector

Generate Phased Disinvest

Cash Withdrawal From this
To invest in From Business Business &
Unattractive Other Sectors areas(Outsourcing) Sector

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 Corporate Strategy

Portfolio Analysis

Disadvantages:
– Difficult to define product/market segments
– Standard strategies can miss opportunities
– Illusion of scientific rigor
– Value-laden terms

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 Corporate Strategy

C. Corporate Parenting:

Views the corporation in terms of

resources and capabilities that can be
used to build business unit value as
well as generate synergies across
business units.

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 Corporate Parenting Issues

• Strategic factors
– Those elements of a company that determine its strategic success
or failure
• Performance improvement -Minimum performance expected

• Analyze fit
• Complementary fit
• Contrast Fit

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 Grand Strategic Alternatives
Horizontal
Concentration
Vertical
Growth

Related
Diversification
Unrelated

Pause

Alternatives Stability No Change

Proceed with
Caution
Turnaround

Retrenchment Divestiture

Liquidation36
 AMAZON.COM ANALYSIS

• What are its internal strengths/weaknesses

and external opportunities/threats?
• What is its corporate level strategy?
• What is its business-level (competitive)
strategy?
• Which of the 7s does it demonstrate?

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 Vision Statement
To become the largest and best online mass retailer
in the world.

Mission Statement
We believe our first responsibility is to our worldwide 1 online customers.2 We pledge
to make every effort to improve the level of customer service throughout the e-
commerce industry by using up-to-date hardware and software 3 and by listening to
our customers. We will offer customers increased product selections 4 to fulfill their
online shopping desires

Key Stakeholders 1. Customers

mentioned in Mission 2. Products or services
Statement 3. Markets
4. Technology
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 Competitive Profile Matrix

Amazon.Com, Barnes & Noble, Wal-Mart Store,

Inc. Inc. Inc.
Weighte Weighted Weighted
Critical Success Weight Rating d Score Rating Score Rating Score
Factors
Market Share 0.30 4 1.20 3 0.90 4 1.20
Price 0.18 3 0.54 3 0.54 4 0.72
Competitiveness
Financial Position 0.10 3 0.30 4 0.40
2 0.20
Product Quality
0.16 3 0.48 3 0.48 3 0.48
Consumer Loyalty
0.26 4 1.04 3 0.78 4 1.04

Total 1.00 3.46 3.00 3.84

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 TOWS Analysis
Strengths Weaknesses
1. Capital resource gathering ability 1. Reliance on single supplier for majority of
2. E-commerce position products (Ingram)
3. Effective promotion, advertising & publicity 2. Has not earned a profit
4. Effective hiring policy 3. No redundant or backup computer systems
6. Strategic focus of management 4. Work force expanding quickly
7. Distribution centers 5. Dependency on leases for office and
8. Exclusive agreements with Internet sites (Associates) distribution centers
Opportunities S-O Strategies ( Aggressive) W-O Strategies( Conservative)
1. Increasing number of Internet users 1. Acquire Yahoo.com for $50 billion 1. Enter into joint venture with or acquision of
2. Increasing B2C e-commerce 2. Establish homepage/link for Spanish speaking Internet startups
3. E-commerce market is fragmented customers 2. Establish homepage/link for Spanish
4. Internet consumer consumption $30 billion by 3. Place five distribution centers close to major US speaking customers
2000 population centers
5. Some upstarts are looking for strategic partners 4 Begin offering Men’s/Boy’s and Women’s/girl’s
6. Brick and mortar companies have higher cost clothing online

Threats S-T Strategies ( Competitive) W-T Strategies ( Defensive)

1. Software advancements 1. Publicize security of online ordering 1. Establish an equivalent or superior computer
2. Security/Privacy of information issues 2. Publicize case of return policy backup system within one year for $10
3. Low barriers to entry 3. Promote ease of use and delivery million Develop and promote a consumer-
4. Competitors buying major suppliers 4. Acquire/purchase Ingram Books for $500 million oriented mission statement
5. Increased frequency of lawsuits 5. Establish direct order links with 2. Purchase Ingram Books for $500 million
6. Seasonality of revenue generation and Internet publishers/manufacturers
usage
7. Competitors obtaining valuable cyberspace real
estate, Growing competitors
8. People use of Internet to find information, not
buy
9. People may start distributing e copies of books

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 Grand Strategy Matrix
RAPID MARKET
GROWTH

Quadrant II Quadrant I

Amazon.com

WEAK
COMPETITIVE STRONG
POSITION COMPETITIVE
POSITION

Quadrant III Quadrant IV

SLOW MARKET
GROWTH

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