Directional strategy- the firm’s overall orientation toward growth, stability, or retrenchment 2.
Portfolio strategy- the industries or markets in which the firm competes through its products and business units 3. Parenting strategy- the manner in which management coordinates activities, transfer resources, and cultivates capabilities among product lines and business units Corporate strategy is primarily about the choice of direction of the firm as a whole.
In other words, this includes decisions regarding the flow of financial and other resources to and from a company’s product lines and business units. This whole chapter is organized in three parts that examine corporate strategy in terms of directional strategy (orientation toward growth), portfolio analysis (coordination of cash flow among units), and corporate parenting ( building corporate synergies through resource sharing and development). Directional Strategy Every corporation must decide its orientation toward growth by asking the following 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 nationally and/or globally, should we do so through internal development or external acquisitions, mergers or strategic alliances? A corporation’s directional strategy is composed of three general orientations (also 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. Growth Strategies A corporation can grow internally by expanding its operations both globally and domestically, or it can grow externally through mergers, acquisitions, and strategic alliances.
A merger is a transaction involving two or more corporations in which stock is exchanged, but from which only one corporation survives. An acquisition is the purchase of a company that is completely absorbed as an operating subsidiary or division of the acquiring corporation.
A strategic alliance is a partnership of two or more corporations or business units to achieve strategically significant objectives that are mutually beneficial. Growth is a very attractive strategy for two key reasons: • Growth based on increasing market demand may mask flaws in a company-flaws that would be intermediately evident in a stable or declining market. • A growing firm offers more opportunities for advancement, promotion, and interesting job. The two basic growth strategies are concentration on the current product line(s) in one industry and diversification into other product lines in other industries.
Concentration The two basic concentration strategies are vertical growth and horizontal growth. Vertical Growth This can be achieved by taking over a function previously provided by a supplier or by a distributor. Vertical growth results in vertical integration- 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. Specifically, assuming a function previously provided by a supplier is called backward integration-going backward on an industry’s value chain.
Assuming a function previously provided by a distributor is labeled forward integration- going forward on an industry’s value chain. Transaction cost economics proposes that vertical integration is more efficient than contracting for goods and services in the marketplace when the transaction costs of buying goods on the open market become too great.
Harrigan proposes that a company’s degree of vertical integration can range from total ownership of the value chain needed to make and sell a product to no ownership at all.
Under the full integration, a firm internally makes 100% of its key suppliers and completely controls its distributors. With taper integration, a firm internally produces less than half of its own requirements and buys the rest from outside suppliers. With quasi-integration, a company does not make any of its key supplies but purchases most of its requirements from outside suppliers that are under its partial control. Long-term contracts are agreements between two separate firms to provide agreed-upon goods and services to each other for a specified period of time. Horizontal Growth
This can be achieved by expanding the firm’s products into other geographic locations and/or by increasing the range of products and services offered to current markets.
Horizontal growth results in horizontal integration-the degree to which a firm operates in multiple geographic locations at the same point in an industry’s value chain. Horizontal integration for a firm can range from full to partial ownership to long-term contracts. Diversification Strategies The two basic diversification strategies are concentric and conglomerate. Concentric (Related) Diversification
Growth through concentric diversification into a related industry may be very appropriate corporate strategy when a firm has a strong competitive position but industry attractiveness is low. Conglomerate (Unrelated) Diversification When management realizes that the current industry is unattractive and that the firm lacks outstanding abilities or skills that it could easily transfer to related products or services in other industries, the most likely strategy is conglomerate diversification- diversifying into an industry unrelated to its current one.