Part I: Foundations of Strategic Management and the Strategy Process

Part II: Mission, Vision and Goals of the Corporation

Part III: Internal Strategic Analysis
Part IV: External Strategic Analysis
Part V: Strategy Formulation
Part VI: Strategy Implementation
Part VII: Strategy Evaluation
Part VIII: Business Model Innovation

Part V: Strategy Formulation

Strategic Management Process

0 1 2
Environmental Strategy
Goal setting*
scanning formulation

4 Evaluation and 3 Strategy

control implementation

Source: Wheelen, Hunger (2012), ch. 1.5

 Formulation Of Strategy

Strategy formulation 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
 Corporate Level Strategy

It specifies 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?
Introduction to corporate level Directional Strategies

Opposite: Outsourcing
Directional (Vertical
Disintegration)
strategy
Concentration Diversification
Growth ▪ Vertical integration ▪ Concentric
▪ Horizontal ▪ Conglomerate

▪ Pause/Proceed With Caution

Stability
▪ No Change

▪ Turnaround
Defensive ▪ Sell-out/divestment
▪ Bankruptcy/liquidation

Based on Wheelen, Hunger (2012), ch. 7.1, 7.2

Growth Strategies

Growth Strategies – Ansoff Matrix (1988)

products
existing new
existing

Market Product
Penetration Development

Very common “new

markets

market-strategy”:
Internationalization

Market Diversification
Development
new
Growth Strategies- Integration Strategies

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
Growth Strategies- Integration Strategies cont..

Forward
Integration

Vertical
Integration
Strategies

Backward
Integration
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)
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.
 Horizontal Vs Vertical Integration

❑ Purchasing of computing companies in the

same industries
❑ Purchasing of companies at all
levels of production
❑ Merging with/purchasing firms that supply
similar products
Diversification

The entry of a 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
Growth Strategies- Diversification

Related
Diversification

Diversification
Strategies

Unrelated
Diversification
 Diversification Strategies

▪ Related diversification : adding new but related products or

services

▪ Unrelated diversification : adding new, unrelated products or

services
HOW CAN COMPANIES DIVERSIFY?
Basic Diversification Strategies

Concentric Conglomerate
diversification diversification

= Growth into related Growth into unrelated

industry industries

Goal? Goal?
Search for synergies Financial considerations
(cash flow/risk reduction)

Who? Firms with a strong Who? Current industry

competitive position … lacking attractiveness…

…And outstanding, …Transferable skills

transferable skills missing
HOW CAN COMPANIES DIVERSIFY?
Basic Diversification Strategies

Concentric Conglomerate
diversification diversification

= Growth into related Growth into unrelated

industry industries

Goal? Goal?
Search for synergies Financial considerations
(cash flow/risk reduction)

Who? Firms with a strong Who? Current industry

competitive position … lacking attractiveness…

…And outstanding, …Transferable skills

transferable skills missing
Reasons for Diversification

GROWTH

▪ Escape stagnant or 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
CORE ISSUES IN DIVERSIFICATION DECISIONS

Basic Diversification Strategies

Superior profit derives from two sources:

INDUSTRY
ATTRACTIVENESS
RETURN ON CAPITAL
> COST OF CAPITAL
COMPETITIVE
ADVANTAGE

Diversification decisions involve these same two issues:

▪ How attractive is the industry to be entered?
▪ Can the firm achieve a competitive advantage?
 PORTER’S ESSENTIAL TESTS
If diversification is to 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, From Competitive Advantage to Corporate Strategy, in: HBR, May-Jun 987, p 46
 Transaction Cost vs. Administrative Cost
Performing an activity internally or by using an external
partner generates 2 types of costs

Transaction costs: Administrative costs:

All external cost related to All internal cost related
working with a market partner, performing the activity inside the
company,
e.g. locating, negotiating, and
enforcing a contract e.g. overhead and management

=> if: Administrative cost < Transaction cost → Integrate

Administrative cost > Transaction cost → De-integrate
Grant, Contemporary Strategy Analysis, 8th ed 2013, pp. 297-298
 RELATED VS. UNRELATED DIVERSIFICATION
RELATED DIVERSIFICATION UNRELATED DIVERSIFICATION

▪ Greater synergies ▪ BUT weaker in terms of

synergies

▪ BUT risk of canibalising core

products/services ▪ Lower risk for cannibalization
 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→

Prof. Dr. Anna Rosin

ASSOCIATION VS. CAUSATION – WHAT DO YOU THINK?
Diversification and Performance

Does diversification enhance

profitability?

Or is superior profitability the reason to

diversify?

Based on Palich et al., 2000, pp 154-177; Grant, Contemporary Strategy Analysis, 8th ed 2013, pp 358-360
Means of Diversification

All the previously discussed 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.
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
Merger and Acquisition cont’d …

❑ 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.
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.

Merger And Acquisition Cont’d …

Merger and Acquisition cont’d …

There Could Be Other Reasons

▪ 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.
❑ A joint 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

Joint Ventures
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
2. STABILITY STRATEGY

It is 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

 Defensive Strategies 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

3. DEFENSIVE STRATEGIES
DEFENSIVE STRATEGIES CONT’D …

Decline strategy includes:

• Retrenchment
• Harvesting
• Turn around
• Divestiture

Closure strategy Includes:

• Liquidation
• Filing of bankruptcy
DEFENSIVE STRATEGIES CONT’D …

Regrouping through cost and asset reduction to reverse declining sales and profit.
Retrenchment It focuses on economizing, saving cost, cutting back costs mostly through layoffs,
firing employees etc.

Divestiture
Selling a division or part of an organization

▪ 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
Turn around 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
 PORTFOLIO ANALYSIS
How to Plan 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)
 Source : Robert M. Grant Contemporary Strategy Analysis 8th edition p343

Boston Consulting Group

BCG-matrix
 The Boston Consulting Group
(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.
BCG MATRIX: “NORM STRATEGIES”

high
Portfolio Analysis
„Question
„Stars“

Market growth
marks“
▪ Cash Flow :
▪ Highest for Stars & Cash cows
▪ Lowest for Question marks
and Dogs
„Poor dogs“ „Cash cows“
▪ Investment needs:

low
▪ Highest for Question marks low high
and Stars Relative market share
▪ Lowest for Cash cows and
Dogs

BCG Matrix and Product Life Cycle

 Business-level Strategy

The firm’s business – level strategy is a Purpose of business – level strategy is to

deliberate choice about how it will perform create differences between the firm’s
the value chain’s primary and support position and those of its competitors
activities to create unique value
Business-level Strategic Issues

In selecting 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
In Making A Business –
Level Strategy …

The firm faces a choice between

Performing Activities Differently (Low-Cost Leadership)

Or
Performing Different Activities (Differentiation)
Or
Some Combination Of Them!
Generic Strategies - Porter’s Five Generic Strategies

How to gain competitive advantage? 2 key dimensions:

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

Corporate Vs Business – Level Strategy

Source
Questions?