Group 1 presentation 2.. 1

1. How does horizontal growth differ from
vertical growth as a corporate strategy? From
concentric diversification?
2. What are the tradeoffs between an internal
and an external growth strategy? What
approach is best as an international entry
strategy?
3. Is stability really a strategy or is it just a
term for no strategy?

Prentice Hall, Inc. ©2010 6-3
Corporate strategy- The choice of direction of
the firm as a whole and the management of
its business or product portfolio and
includes:
 Directional Strategy
 Portfolio Analysis
 Parenting Strategy

Directional strategy- The firm’s overall
orientation toward Growth, Stability, or
Retrenchment;
Just as every product or business unit must
follow a business strategy to improve
its competitive position, every
corporation must decide its orientation
toward growth by asking the following
three questions:

1. Should we expand, cut back, or
continue our operations unchanged?
2. Should we concentrate our activities
within our current industry or should
we diversify into other industries?
3. If we want to grow and expand,
should we do so through internal
development or through external
acquisitions, mergers, or strategic
alliances?

A corporation’s directional strategy is
composed of three general orientations
toward growth (sometimes called grand
strategies):
Growth strategies expand the
company’s activities.
Stability strategies make no change to
the company’s current activities
Retrenchment strategies reduce the
company’s level of activities.

1. what is Growth Strategies?
By far the most widely pursued corporate strategies of
business firms are those designed to achieve
growth in sales, assets, profits, or some
combination of these. The growth strategies can be
Vertical or Horizontal growth. Growth could be
Concentrated or Diverse.

We use Concentration Growth if the company’s
current product lines have real growth potential,
concentration of resources on those product lines
makes sense as a strategy for growth. There are two
basic concentration Strategies: Vertical and Horizontal
Growth.

Vertical Growth:
Taking over a function previously
provided by Suppliers or a Distributor to
reduce cost, gain control over a scarce
resource. This results in Vertical
Integration (VI), the degree to which a
firm operates vertically in multiple
locations on an industry’s value chain
from extracting raw materials to
manufacturing, to retailing.

Backward integration:
Assuming a function
previously provided by a
distributor. Forward
integration: Assuming a
function previously provided
by a supplier.

Vertical integration is more
efficient than contracting
for goods and services in
the marketplace when the
transaction costs of buying
on the open market become
too great

It results in the Horizontal
Integration (HI) The degree to which a
firm operates in multiple locations at
the same point in theindustry’s value
chain.

A popular method of horizontal growth is to expand
internationally into other countries. Research indicates
that going international is positively associated with firm
Profitability.
Some of the more popular options for international entry
Are:

 Exporting
 Licensing
 Franchising
 Joint Venture
 Acquisitions
Green-Field Development
Production Sharing
 Turn-key Operations
 BOT Concept
 Management Contracts

Shipping goods produced in the company’s
home country to other countries.
Licensing
Granting rights to another firm in the host
country to produce and/or sell a product.
Franchising
Granting rights to another company to open a
retail store using the franchiser’s name and
operating system

Joint Venture
The most popular entry strategy, joint ventures are
used to combine the resources and expertise
needed to develop new products or
technologies. It also enables a firm to enter a country
that restricts foreign ownership. The corporation
can enter another country with fewer assets at
stake and thus lower risk.

Acquisitions
A relatively quick way to move into another country is
to purchase another firm already operating in that
area. Synergistic benefits can result if the company
acquires a firm with strong complementary product
lines and a good distribution network.
Management Contracts

Green- Field Development
If a company doesn’t want to purchase
another company’s problems along
with its assets, it may choose to build
its own manufacturing plant and
distribution system. This is usually a
far more complicated and expensive
operation than acquisition, but it
allows a company more freedom in
designing the plant, choosing
suppliers, and hiring a workforce

Production Sharing
When labor costs are high at home, the
corporation can combine the higher labor
skills and technology available in the
developed countries with the lower-cost
labor available in developing countries.

Turn-key Operations
These are typically contracts for the construction of
operating facilities in exchange for a fee. The facilities are
transferred to the host country or firm when they are
complete. The customer is usually a government agency
of country that has decreed that a particular product must
be produced locally and under its control.

6-22
BOT(build, operate, transfer) Concept.
Instead of turning the facility (usually a power
plant or toll road) over to the host country when
completed (as is with the turnkey operation),
the company operates the facility for a fixed
period of time during which it earns back its
investment, plus a profit. It then turns the
facility over to the government at little or no
cost to the host country.

Management Contracts. Once a turnkey operation is
completed, the corporation assists local management in
the operation for a specified fee and period of time.
Management contracts are common when a host
government expropriates part or all of a foreign-owned
company’s holdings in its country. The contracts allow
the firm to continue to earn some income from its
investment and keep the operations going until local
management is trained.

Prentice Hall, Inc.
©2010 6-24
Diversification Strategies
Diversification is a corporate strategy to
enter into a new market or industry which
the business is not currently in, whilst also
creating a new product for that new market.

6.2 Directional Strategy
Why use diversification?
If a current company’s product line do not have
much growth potential.
Diversification is a part of four main strategies
defined by Igor Ansoff's Product/Market
matrix.

Diversification is the most risky section of the
Ansoff's matrix, as the business has no
experience in the new market and does not
know if the product is going to be successful.
There are two basic diversification strategies:
1.Concentric
2.Conglomerate

Concentric (Related) Diversification- growth into a
related industry when a firm has a strong
competitive position but attractiveness is low.
By focusing on the characteristics that have
given the company its distinctive competence, the
company uses those very strengths as its means
of diversification.

The firm attempts to secure a strategic fit in a
new industry where it can apply its product
knowledge, manufacturing capabilities, and the
marketing skills it used so effectively in the
original industry.
The products produced will be related in a way;
communality may be in the use of technology,
customer usage or distribution.

Prentice Hall, Inc.
©2010 6-30
Synergy- when two businesses will generate
more profits together than they could
separately.

Prentice Hall, Inc.
©2010 6-31
Diversification Strategies
Conglomerate (Unrelated) Diversification- growth
into an unrelated industry
 Management realizes that the current industry is
unattractive
 Firm lacks outstanding abilities or skills that it could
easily transfer to related products or services in other
industries.

Managers who adopt this strategy are
concerned primarily with financial considerations
of cash flow or risk reduction.
 This is also a good strategy for a firm that is
able to transfer its own excellent management
system into less well managed acquired firms.

Prentice Hall, Inc.
©2010 6-33
Stability Strategies- continuing activities without
any significant change in direction.
 The stability family of corporate strategies
can be appropriate for a successful corporation
operating in a reasonably predictable
environment.
 Stability strategies can be very useful in the short
run but can be dangerous if followed for too long
because the changes in environment are
dynamic.

Pause/Proceed with caution strategy
is, in effect, a time-out—an opportunity to rest
before continuing a growth or retrenchment
strategy.
It is typically a temporary strategy to be used
until the environment becomes more hospitable or
to enable a company to consolidate its resources
after prolonged rapid growth.
This was the strategy followed by many
companies during the recession of 2008 and 2009
when credit was tight and sales were slim.

No Change Strategy
is a decision to do nothing new—a choice to
continue current operations and policies for the
foreseeable future.
The corporation has probably found a
reasonably profitable and stable niche for its
products.
EG: Most small-town businesses probably follow
this strategy before reputable businesses likeWal-
Mart, Niavis, Ok, Shoprite enters their areas.

Profit Strategy
The profit strategy is an attempt to artificially
support profits when a company’s sales are
declining by reducing investment and short-term
discretionary expenditures.
is a decision to do nothing new in a worsening
situation, but instead to act as though the
company’s problems are only temporary.

Top managers do not announce the poor
position of the organization to the stockholders
but rather use seductive measures such as:
Defer investments, cut expenses such as R&D,
maintenance and advertising etc. so as to keep
profits at a stable level during this period.
This is a useful strategy to get through a
temporary difficulty or when a company is
making itself more attractive for a potential
buyer.

Prentice Hall, Inc.
©2010 6-38
Retrenchment Strategies- used when the firm has a
weak competitive position in some or all of its product
lines from poor performance.
 These strategies generate a great deal of pressure to
improve performance
 In an attempt to eliminate the weaknesses that are
dragging the company down, management may follow
one of several retrenchment strategies:

Prentice Hall, Inc.
©2010 6-39
Retrenchment Strategies
Turnaround strategy- emphasizes the improvement of
operational efficiency when the corporation’s problems
are pervasive but not critical.
Contraction is the initial effort to quickly “stop the bleeding”
with a general, across-the-board cutback in size and costs.
 For example, when Howard Stringer was selected to be
CEO of Sony Corporation, he immediately implemented
the first stage of a turnaround plan by eliminating 10,000
jobs, closing 11 of 65 plants, and divesting many
unprofitable electronics businesses.

Consolidation is the implementation of a program to
stabilize the new leaner corporation.
To streamline the company, management develops
plans to reduce unnecessary overhead and justify the
costs of functional activities.
This is a crucial time for the organization. If the
consolidation phase is not conducted in a positive
manner, many of the company’s best people will leave.

Prentice Hall, Inc.
©2010 6-41
Captive Company Strategy- company gives
up independence in exchange for security
 This strategy is becoming another company’s
sole supplier or distributor in exchange for a
long-term commitment from that company.
 A company with a weak competitive position
may offer to be a captive company to one of its
larger customers in order to guarantee the
company’s continued existence with a long-
term contract.

By using this strategy the corporation may be able to
reduce the scope of some of its functional activities, such
as marketing, thus reducing costs significantly.
EG: in order to become the sole supplier of an auto
part to General Motors, Simpson Industries of
Birmingham, Michigan, agreed to have its engine parts
facilities and books inspected and its employees
interviewed by a special team from GM. In return,
nearly 80 percent of the company’s production was
sold to GM through long-term contracts

Normally if a corporation with a weak
competitive position in this industry is unable
either to pull itself up by its bootstraps or to find
a customer to which it can become a captive
company, it may have no choice but to sell out
and leave the industry completely.
Sell-out strategy- selling out the company out right
where management can still obtain a good price for its
shareholders and the employees can keep their jobs
by selling the company to another firm.

Divestment- sale of a division with low growth
potential
This strategy is applicable if the corporation has
multiple business lines.
EG: This was the strategy Ford used when it sold
its struggling Jaguar and Land Rover units to Tata
Motors in 2008 for $2 billion.

Prentice Hall, Inc.
©2010 6-45
Retrenchment Strategies:
 When a company finds itself in the worst
possible situation with a poor competitive
position in an industry with few prospects,
management has only a limited number of
alternatives, all of them distasteful.
 Because no one is interested in buying a
weak company in an unattractive industry, the
firm must pursue a bankruptcy or liquidation
strategy.

Bankruptcy- company gives up management of
the firm to the courts in return for some settlement
of the corporation’s obligations.
EG: Faced with a recessionary economy and
falling market demand for casual dining,
restaurants like Bennigan’s Grill & Tavern and
Steak & Ale, that once thrived by offering mid-
priced menus withpotato skins and thick
hamburgers, filed for bankruptcy in July 2008.

Liquidation- is piecemeal sell of all the organization’s assets i.e.
management terminates the firm.
 Because the company cannot be sold as a going concern, assets
are sold for cash and creditors are paid and then shareholders receive
their portion.
EG: In Zimbabwe 149 companies by December 2013 applied for
liquidation because of empowerment law requiring foreign owned
companies to be 51% owned by local blacks was making it difficult for
potential investors to put their money in distressed companies.
The benefit of liquidation over bankruptcy is that the board of directors, as a
representative of the stockholders, together with top management, makes the
decisions instead of turning them over to the court, which may choose to ignore
stockholders completely.

Prentice Hall, Inc.
©2010 6-48
Portfolio analysis- management views its product lines
and business units as a series of investments from
which it expects a profitable return. It is a resource
commitment on best products to ensure continued
success.
Techniques include:
 BCG Matrix
 GE Business Screen

G.E.industry attractiveness includes market growth rate,
industry profitability, size, and pricing practices,
among other possible opportunities and threats.
Business strength/competitive position includes
market share as well as technological position,
profitability, and size, among other possible strengths
and weaknesses.
The area of each circle is in proportion to the size of
the industry in terms of sales. The pie slices within the
circles depict the market share of each product line.
Step 1 Select criteria to rate the industry for each
product line or business unit. Assess overall industry
attractiveness for each product line or business unit
on a scale from 1 (very unattractive) to 5 (very
attractive).

GE
Step 2 Select the key factors needed for success in each
product line or business unit. Assess business
strength/competitive position for each product line or
business unit on a scale of 1 (very weak) to 5 (very
strong).
Step 3 Plot each product line’s or business unit’s
current position on a matrix as depicted
Step 4 Plot the firm’s future portfolio, assuming that
present corporate and business strategies remain
unchanged. If there is a performance gap between
projected and desired portfolios, this gap should serve
as a stimulus for management to seriously review the
corporation’s current mission, objectives, strategies,
and policies.
Pntice Hall, Inc. ©2010 7-53

Prentice Hall, Inc.
©2010 6-54
Advantages of Portfolio Analysis
 Encourages top management to evaluate each of the
corporation’s businesses individually and to set
objectives and allocate resources for each
 Stimulates the use of externally oriented data to
supplement management’s judgment
 Raises the issue of cash flow availability to use in
expansion and growth

Portfolio analysis simplifies complex
situations and provides a valuable overview of
the strengths and weaknesses of a company’s
mix of businesses and products.
The technique is forward-looking and can
play an important role in delivering improved
returns for stockholders over the medium to
long term.
Portfolio analysis can help understanding of
diversification and identify risks in a
company’s portfolio, for example by drawing
attention to an overemphasis on particular
areas.

Prentice Hall, Inc.
©2010 6-56
Limitations of Portfolio Analysis
 Defining product/market segments is difficult
 Suggest the use of standard strategies that can miss
opportunities or be impractical
 Provides an illusion of scientific rigor when in reality
positions are based on objective judgments
 Value-laden terms such as cash cow and dog can
lead to self-fulfilling prophecies
 Lack of clarity on what makes an industry attractive or
where a product is in its life cycle

Cont’dExcessively short-term use of portfolio analysis can
lead to frequent and expensive switches of company
resources.
Acquiring or divesting businesses can be complex and
time-consuming. One should take these costs into
account before acting on marginal recommendations
on portfolio changes.
Market share is not the same as profitability: firms
with low market share can be quite profitable (e.g.
mail order catalogs).

Prentice Hall, Inc.
©2010 6-58
Managing a Strategic Alliance Portfolio
1. Developing and implementing a portfolio strategy
for each business unit and a corporate policy for
managing all the alliances of the entire company
2. Monitoring the alliance portfolio in terms of
implementing business units’ strategies and
corporate strategy and policies
3. Coordinating the portfolio to obtain synergies and
avoid conflicts among alliances (working
together).
4. Establishing an alliance management system to
support other tasks of multi-alliance management

Future trends
The future current trends are in two areas: These are
service and resource portfolios.
The service portfolio is a slightly surprising trend.
The resource portfolio is a topic of current discussion
The larger the organization, the greater the resource
portfolio challenge.
This information is available through Thinking Portfolio
& Risk analysis in the journal entitled “Global Strategic
Trends in Portfolio management 2016”

Prentice Hall, Inc.
©2010 6-60
Portfolio analysis tends to primarily view matters
financially where as
Corporate parenting- views a corporation in terms of
resources and capabilities that can be used to build
business unit value as well as generate synergies
across business units
 Generates corporate strategy by focusing on the
core competencies of the parent corporation and
the value created from the relationship between the
parent and its businesses

Corporate Parenting
If there is a good fit between the parent’s skills and
resources and the needs and opportunities of the
business units, the corporation is likely to create
value.
If, however, there is not a good fit, the corporation is
likely to destroy value.

Prentice Hall, Inc.
©2010 6-62
Developing a Corporate Parenting Strategy
1. Examine each business unit in terms of its
strategic factors
2. Examine each business unit in terms of areas in
which performance can be improved
3. Analyze how well the parent corporation fits with
the business unit
6.4 Corporate Parenting

Prentice Hall, Inc.
©2010 6-63
Horizontal strategy- cuts across business unit
boundaries to build synergy across business
units and to improve competitive position in one
of more business units
Multipoint competition- large multi-business
corporations compete against other large multi-
business firms in a number of markets
6.4 Corporate Parenting

Current trend gaps
Global
Market
Current
portfolio
Recommende
d portfolio
Gap
% weight % weight % weight % weight
United States 44 57 36 21
Developed
international
43 36 55 19
Emerging
markets
13 7 9 2
Not classified 0 0 0 0
The table below compares the weights of the current and recommended
portfolios relative to the global market distribution.

trends
Global Diversification strategy
International investing can help enhance the diversification of a
portfolio as it spreads risk across several economies and financial
markets.
There is a wide range of returns generated from each individual
country market as driven by individual geopolitical or economic
factors. Investments across a greater number of individual country
markets investments may provide more effective diversification.
7-65

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