9.
CORPORATE STRATEGIES
1. Corporate advantage
2. Growth and development of company
2.1 Matrix of market growth rate vs. competitive position
2.2 Extended growth vector
2.3 Planning gap
2.4 Extent of portfolio
3. Growth strategies
3.1 Vertical integration strategy
3.2 Related diversification strategy
3.3 Unrelated diversification strategy
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Content of corporate strategy
Corporate strategy
How to arrange a portfolio of businesses to fulfill corporate goals?
- allocation of capital investment into contemporary businesses
- reduction of investment or liquidation of weak or losing businesses
- enlargement of portfolio with new businesses
- strengthening the competitive positions and profitability of contemporary
businesses
- creating the competitive advantage through related businesses
Corporate strategy is the strategy of the company making business in a few or
many industries, it is a multi-business company, it is not a single-business
company.
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1. Corporate advantage
Corporate (competitive) advantage of an enterprise acting in numerous industries is a
result of allocation of enterprise resources into its business units.
It manifests as an ability to enter a new business, to be successful in it and to create a
synergy among businesses in portfolio.
Extending of corporate portfolio by a form of:
* vertical integration,
* related and unrelated diversification.
Corporate (competitive) advantage in inter-industry context arises like a superstructure
over business units and their competitive advantages. It is not a sum of these advantages,
but it creates a quality of a new kind, in which there are dominated:
- correlation,
- coordination,
- transfer of skills and
- economies from internal transactions between business units.
1. Corporate advantage
- traditional (not too efficient) concept: a focus on individual elements of corporate
strategy - resources, businesses and organization
- the essence of newer concept of corporate advantage: an integrated whole of
resources, businesses and organization - the way a company creates value through the
configuration and coordination of its multi-business activities - more efficient concept
An outstanding corporate strategy is not a random collection of individual building
blocks but a carefully constructed system of interdependent parts. It actively directs
executivesʼ decisions about:
- the resources, the corporation will develop
- the businesses, the corporation will compete in
- the organization, that will make it all come to life
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The triangle of corporate strategy
Strong corporate strategy: Competitive advantage
- high-quality resources
- strong market position in attractive industries
- efficient administration and organization
Resources Businesses
True corporate advantage: Zdroje Podnikania
- tight fit at each angle as well
Coordination Control
Organization
Choices along the resource continuum – the foundation of corporate strategy
Resources (assets, skills, capabilities) – unifying/integrating and determining
element of other elements
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Relatedness of products or resources
Example: Thermostats – quasi related diversification
Industrial thermostats – strong R&D capabilities, expertise in strict tolerance,
made-to-order production, technically sophisticated sales forces of industrial
engineers
Household thermostats – R&D is not critical for success in that market, required
expertise in design, product appearance, or packaging, capabilities for mass
production, knowing how to distribute through industry representatives to mass
marketers and contractors
* Outer similarity (product) is in contradiction with inner preconditions
(resources).
* Entry to similar (related) businesses/industries is based on relatedness of
resources but not products!
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Resource continuum
A corporation’s location on the continuum constrains the set of businesses it
should compete in and limits its choices about design of its organization along the
other dimensions below.
general nature of resources specialized
wide scope of businesses narrow
transferring coordination mechanism sharing
financial control systems operating
small corporate office size large 7
Coordination: transferring or sharing resources
Deploying key resources where they are important for a competitive advantage of
individual businesses is at the heart of corporate strategy:
- resources can be transferred across businesses with a minimum coordination, or
- in other cases, a common resource can be shared, like a sales force or MIS system,
- transferring vs. sharing resources depend on kind of resource.
* transferred/dispersed resources (general):
- brand name, best demonstrated practices – things that can be used in several
businesses simultaneously without conflict, small intervention and coordination of
corporate headquarters,
- Nike brand (new line of sporting goods), Disney (new protagonist of cartoon – Herkules);
Newell (inventory management).
* relatively simple dissemination (consultants, experienced manager, project team, internal
interest in the useful resources).
* shared/centralised resources (specialized):
- a joint sales force, component-manufacturing facility – more difficult to manage,
competition and conflict between businesses,
- Pepsico - Tricon Global Restaurants (Taco Bell, Pizza Hut, KFC – jointly purchased
tissue paper).
* more explicit coordination because the same resource is shared by numerous businesses
and therefore its use by one unit can affect its use by another unit. 8
Control: financial or operating one
* financial control: limited number of objective output indicators (ROA, aggregate
sales growth)
* operating control: detail evaluation of managerial decisions and actions
- the choice of kind of control primarily depends on the nature of businesses in
portfolio and the relative expertise of corporate executives
* financial control – general resources, unrelated business units, most appropriate
in mature and stable industries, less suitable in fast-moving and high-tech
businesses, complicated in interdependent business units, less requirements to
corporate managers, smaller corporate headquarters
* operating control – specialized resources, related business units, assessment that
captures the nuances of a particular business, to be very familiar with businesses
in the firmʼs portfolio, more interactions between corporate and unit managers,
larger corporate headquarters 9
2. Growth and development of company
Reasons and arguments for extension of corporate portfolio
2.1 Matrix of market growth rate vs. competitive position
2.2 Extended growth vector
2.3 Planning gap
2.4 Extent of portfolio
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2.1 Matrix of market growth rate vs. competitive position
Competitive position
Weak Strong
Strategy Options Strategy Options
- Reformulate single-business - Continue single-business concentration
concentration (to achieve turnaround) - International expansion (if market
- Acquire another firm in the same opportunities exist)
Rapid business - Vertical integration (if it strengthens the
- Vertical integration firm’s competitive position)
- Diversification - Related diversification (to transfer skills and
- Be acquired by a stronger rival expertise built up in the company’s core
Market business to adjacent business)
Growth - Abandonment
Rate
Strategy Options Strategy Options
- Reformulate single-business strategy - International expansion
(to achieve turnaround) - Related diversification
- Merger with a rival firm - Unrelated diversification
Slow - Vertical integration - Joint ventures into new areas
- Diversification - Vertical integration
- Harvest / divest - Continue single business concentration
- Liquidation – exit (a last resort in the (achieve growth by taking market share from
event all else falls) weaker rivals) 11
2.2 Extended growth vector
Present products Improved products New products -
and new products – unrelated technologies
related technologies
Product substitute
Present Penetration of and expansion of
customers market product line
Related diversification
based on marketing and
Product differentiation technology
New customers and
at the present market segmentation
markets
Unrelated conglomerate
New markets Market diversification
development
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2.3 Planning gap
Growth
Sale goals
or
profit
Unrelated
diversification
Related
Related diversification
diversification
Risk
Change of business strategy
Strategy of Unchanged
concentration present
strategy
Present Future
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2.4 Extent of portfolio
Marginal value-added and cost of expansion
MVA – marginal value added (gradual depletion of the most profitable
opportunities, the law of declining revenues),
MBC – marginal bureaucratic cost (costs of coordination and control of business
units)
Dollars MBC
MVA
D1 D2 D3
Extent of diversification
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3. Growth strategies
3.1 Vertical integration strategy
To integrate vertically means to move or enlarge a business to the areas serving as
supplying or purchasing for core products or services.
Backward integration – extending to the supplying area.
Upward integration – extending to the purchasing area.
Fully integrated company – produces all the inputs and sales all the products by oneself.
Tapered integrated company – other, independent companies share inputs and outputs too.
The main motive for establishing vertical integration – strengthen and reinforce
competitive advantage of core business.
Vertical integration has got a purpose only, if every additional phase of business process
boosts corporate (competitive) advantage. Potential contribution to the corporate
(competitive) advantage has to be assessed individually.
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3.1 Vertical integration strategy
Higher effect can be achieved by use of the resources and relations:
- economy of production costs in technologically connecting processes,
- decrease of costs of sale, advertisement, transport,
- improvement of quality control, because all the production and operation process is
controlled from the single center,
- protection of own, original technology in the consequence of well concealed know-
how,
- removing a dependency on suppliers and purchasers and downsizing a vulnerability
originated by these parties.
Disadvantages of vertical integration:
- higher costs, because own suppliers are not exposed a competitive pressure, tapered
integration is more advantageous,
- sensitivity to technology change, a weak place negatively influences efficiency of all
the chain,
- sensitivity to change of demand, because vertical integration is specialized according
to technology and product, it is difficult to find a substitute use of operation capacity.
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3.2 Diversification strategy
Increased effect and corporate competitive advantage are awaited from synergetic
relations between particular businesses. Synergetic effect appears as:
- economies of scale or economies of large-scale performance of operations or
enlargement of production,
- economies of scope or economies of joint or multi-purpose (shared) use of resources
and capabilities,
- decrease of risk level, which is dispersed into many different businesses,
- economies of internalization of transactions (no internationalization),
- contribution from internal market of capital and labour (in comparison of external
market):
- better approach to information about performance and perspectives of BUs,
- more effective allocation of resources,
- larger independency,
- costs savings of internal transfer of employees (recruiting and firing).
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3.2.1 Related diversification
Strategy of related diversification means to enter businesses with mutual relation of
strategic fit (match, harmony).
The most frequent forms of related diversification:
- entrance to business where possibly to use sale, advertisement and distribution activities
from the existing business,
- use of the very related technologies,
- transfer of know-how and experiences from one business to another one,
- transfer of trade mark and goodwill to the new product or services,
- acquiring new businesses, which significantly support a position of core business.
The most frequent places of strategic fit in business chain:
1. Fit in marketing area:
- the same customers, distribution channels, joint wholesale and retail merchants,
- similar sale support.
2. Fit in production area:
- use of the same production equipment and skills, similar production methods and know
how, common suppliers and raw material sources, the same materials.
3. Fit in management area: 18
- managerial methods and experience are transferable in other business.
3.2.2 Unrelated diversification strategy
Unrelated diversification means to diversify to whatever industry with profit
opportunity. An appropriate candidate is followed and assessed according to criteria:
- indicators of profitability (ROA, ROE, ROI),
- industry growth potential,
- capital input for recovery and development of fixed assets,
- vulnerability of industry towards recession, inflation, high interest rate or change of
government policy,
- real or potential social and ecological problems, e. g. requirements of trade union,
activity of ecological movements, keeping rules of occupational safety.
Highly attractive opportunities are companies in specific situation:
* companies with undervalued assets. Market value of company is lower than accounting
value.
* companies in financial tightness. Company will be financially restored.
* companies with good growth perspectives, but with a lack of capital.
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3.2.2 Unrelated diversification strategy
Attractiveness of unrelated diversification:
- business risk is scattered in the set of industries,
- capital resources can be invested in whatever industry with the best profit
perspective,
- profitability of the whole company is more balanced,
- shareholder wealth increases according to financial and strategic skillfulness of
company headquarter to buy attractive companies.
Negative features of unrelated diversification:
- high demands for company headquarter to manage very miscellaneous businesses,
- small or no occurrence of strategic fit,
- balanced composition of miscellaneous businesses is not overly confirmed,
economy cycle influences a majority of businesses.
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