BME 4004 (Strategic Management)

CHAPTER 07 | CORPORATE LEVEL STRATEGY

The four strategic types are as follows:
Learning Objectives:
1. Defenders. These are businesses with few product lines,
At the end of this chapter, the student should be able to:
and they intend to defend them from new products entering
1. Describe the nature of a strategy;
the market. Their foremost concern is how to improve their
2. Identify the elements in corporate strategy formulation, and
operating activities in terms of cost reduction. Being cost-
3. Discuss different corporate strategies.
and efficiency-oriented, they are unlikely to make bolder
steps to innovate and move to new areas.
2. Prospectors. These are companies with broad lines of
CONCEPT AND NATURE OF A STRATEGY products. Product development, innovation, and new
market are the essence of their strategy orientation.
● The term "strategy" comes from the Greek word strategia Creativity for them is more important than efficiency in
which refers to the art of a troop leader or a general. operations.
● Dess et al. (2012) defines strategy as the analysis, 3. Analyzers. These are multi-divisional companies that
decision, and action that enables a company to succeed. compete in at least two types of industries, one stable and
● Wheelen and Hunger (2010) define it as the one variable, while maintaining stability and flexibility.
comprehensive plan that states how a company will 4. Reactors. These are businesses that do not have firm or
achieve its mission and objectives. consistent strategic orientations. They adopt piecemeal or
quick-response strategies which are oftentimes ineffective
In the context of strategic management, this text defines to meet the pressures, changes, and challenges of the
strategy as a plan formulated after an extensive critical analysis of a environment.
company's resources which is then implemented in order for a
company to achieve its mission and objectives effectively. HIERARCHY OF STRATEGIES

Companies that formulate their strategies without critically The types of strategies according to hierarchy are as follows:
analyzing the external and internal environments are likely to face 1. Corporate strategy
business difficulties which could lead to failure. Weak and defective 2. Business strategy
strategies are hollow. Good and effective strategies make companies 3. Functional strategy
achieve competitive advantage and overcome competitive
disadvantage. They guide a company to take the most appropriate A corporate strategy, which is usually formulated by the
steps in the event of adversaries and unfavorable changes in the top-level management, is a comprehensive master plan that
environment. They can also be used as a basis for performance describes the overall direction of a company. A business strategy,
analysis. which occurs at the business or product unit, describes how a
company improves its competitive position in a specific industry. A
CHARACTERISTICS OF A GOOD AND EFFECTIVE STRATEGY functional strategy is a plan taken by functional areas that is intended
to maximize the productivity of a resource to achieve competitive
A good and effective strategy has the following features: advantage.
1. It is based on critical analyses of different factors comprising These three strategies do not operate independently of
a company's environment. each other but complement and support each other. For example, the
2. It is supported by relevant data obtained from reliable business strategy must be aligned with the corporate strategy to
sources. achieve organizational goals and objectives. In a similar manner, the
3. It is directed to and aligned with the organizational goals and business strategy must support the functional strategy in the
objectives of a company. maximization of resource productivity. Figure 7.1 presents the
4. It is clear and realistic. hierarchy of the strategies and the concerns of each level.
5. It considers a company's limitations in resources and
capabilities.
6. It provides operational directions and guides a company's
decision-making.
7. It covers a long-term period.
8. It uses key indicators that are realistic, measurable, and
attainable.
9. It makes use of reasonable assumptions based on available
information. Figure 7.1 Hierarchy of Strategies
10. It depicts the nature of a business and its priorities.
Strategy formulation, the first stage of the strategic
STRATEGIC TYPES OF BUSINESSES management process, is the process, of developing a comprehensive
plan to effectively manage the external environmental strategic forces
The level or intensity of competition in an industry influences (e.g., opportunities and threats) relative to a company's strengths and
the strategy that a company may formulate and adopt. However, weaknesses. Strategy formulation occurs after a thorough and critical
despite similar forces and elements faced by companies in a particular analysis of the environment is conducted. It is not however, a rigid
industry, businesses still adopt different ways of reacting to situations. and fixed process. When new developments happen in the
Wheelen and Hunger (2010) referred to them as strategic types which environment while the strategies are being formulated, the new
represent the category of companies based on their common strategic development is considered in setting the direction of the strategies.
orientation and combination of structure, culture, and processes.
Chapter 7 | 1
 HIERARCHY OF STRATEGIES 2. Vertical Growth Strategy. A company takes over the functions of
CORPORATE STRATEGY a supplier and a distribute in a vertical growth strategy. It results in a
vertical integration where a company takes full responsibility of all
The formulation of a corporate strategy is conducted by the activities in the value chain (e.g. from the acquisition of raw materials
top-level management, with inputs from the middle - and lower-level up to the delivery to final customers). The degrees of vertical
managements and other stakeholders in the form of quantitative or integration are categorized as follows:
qualitative information. It is concerned with the overall direction of a 1. Full integration - A company takes 100% control of the
company and is considered the general or grand strategy of the value chain.
company. This strategy is broadly categorized into three general 2. Taper integration (backward integration) - A company
orientations as follows: acquires not more than 50% of its requirements from
1. Growth strategy outsiders.
2. Stability strategy 3. Quasi-integration (forward integration) - A company
3. Retrenchment strategy purchases most of its requirements from outsiders.
4. Long-term contracts - A company enters into an
GROWTH STRATEGY agreement with other companies to provide goods to each
other over a specified period of time.
A growth strategy is a corporate strategy that a company
may adopt if it aims to expand its present operating activities. In DIVERSIFICATION STRATEGY
short, the company intends to grow. Growth may happen internally or
externally. Internal growth occurs when a company expands its A diversification strategy is an appropriate growth
operation domestically or globally. On the other hand, external growth strategy when the original industry appears to have matured,
happens when a company enters into mergers, acquisitions, or plateaued, and consolidated already. Diversification growth
strategic alliances. strategies can be categorized as follows:
Growth strategies are broadly classified into two as follows: 1. Concentric diversification strategy
1. Concentration strategy 2. Conglomerate diversification strategy
2. Diversification strategy
1. Concentric Diversification Strategy. The concentric
CONCENTRATION STRATEGY diversification growth strategy is more, appropriate in a less attractive
industry and for a company with a strong competitive position. In this
A concentration strategy is appropriate to adopt when a case, a company has a greater chance to succeed by utilizing its
company can reasonably determine that its current product lines core competency in exploiting a related industry. For example, a
have real growth potentials. This strategy works effectively when an company manufacturing refrigerators employs concentric
industry is growing and attractive. diversification as its growth strategy when it starts to manufacture
air-conditioning units for houses and commercial units.
The two types of concentration strategies are as follows:
1. Horizontal growth strategy 2. Conglomerate Diversification Strategy. Conglomerate
2. Vertical growth strategy diversification happens when a company enters another industry
which is not related to the industry where it presently belongs. A
1. Horizontal Growth Strategy. In a horizontal growth strategy, a company may consider this strategy as its growth strategy when its
business expands its operations in two ways as follows: present industry is no longer attractive and it lacks the required
● By entering into other geographic locations abilities to transfer resources to related products or services. For
● By increasing the range of product lines for the current example, a company engaged in transportation may enter the
market manufacturing industry.

A horizontal growth strategy results in a horizontal STABILITY STRATEGY

integration where a company operates in various geographic
locations. A company can make an international entry using the Another type of corporate strategy is stability strategy. In
following mechanisms: this strategy, a company plans to continue its current activities
1. Exporting - A company ships goods to other foreign without substantial change in its direction. It is effective for short-term
countries. planning but may be detrimental if used for long-term planning. Small
2. Licensing - A company enters into an agreement with businesses can benefit using this strategy because they usually
another company from another country to produce or sell belong to a predictable environment.
the product/s of the former.
3. Franchising - A company enters into an agreement with a The common types of stability strategies are the following:
franchiser to use the name and system of the latter. 1. Pause or proceed-with-caution strategy
4. Joint venture - A company combines its resources with 2. No-change strategy
other companies from foreign countries to produce new 3. Profit strategy
products.
5. Acquisition - A company purchases a foreign company. 1. Pause or Proceed-with-Caution Strategy. In a pause or
6. Green field development - A company constructs its own proceed-with-caution strategy, a company takes a temporary timeout
plant and invests with other assets in a foreign country. from its major activities while observing changes in its external
7. Turnkey operations - A company constructs operating environment. It is a temporary strategy. In such a situation, a company
facilities and transfers the same to the host country when does not make significant moves until the environment becomes
completed. favorable to them. This is the strategy adopted by most companies
8. BOT (build, operate, transfer) scheme - A company when there is a financial crackdown and a pessimistic economic
constructs facilities, operates then when completed, and outlook.
turns them over to the host country.

2
 The pause or proceed-with-caution strategy does not imply the weak company is dependent on the strong company, which is
that a company will shut down its operations. It only temporarily stops conducted through long term contracts. It is inevitable for the weak
major critical activities before shifting to the growth or retrenchment company to lose its corporate independence in exchange for financial
strategy. The company makes a deeper critical analysis of the security.
environment before making any bold steps. This will enable the
company to consolidate its resources for a competitive position 3. Sell-Out or Divestment Strategy. The term "sell-out" implies that a
before moving to the growth strategy. business is selling the entire company, including all the business units
and divisions. However, divestment occurs when a company only sells
2. No-Change Strategy. When an industry is not facing turbulent its division or business unit that does not operate profitably. This
variables and a company is enjoying the fruits of its continued strategy is adopted when a company has a weak competitive position
successful activities, it may adopt the no-change strategy as its in an industry and is not able to look for a strong partner to whom its
corporate strategy. This indicates that the company, which has a business unit can be a captive. A sell-out or divestment strategy is a
dominant position in the market, will not take anything new; rather, it favorable option when a company is able to look for a good price for
will continue implementing its current activities in the near future. the company.
The no-change strategy is effective when an industry is
relatively stable with little expected growth, and consolidation is not 4. Bankruptcy or Liquidation Strategy. The bankruptcy or liquidation
expected to occur in the foreseeable future. However, businesses strategy is adopted when a company that is suffering heavy losses
that are not maintaining successful operations may find this strategy terminates its operations. In bankruptcy, a company gives up its
detrimental. management to a court and settles some financial obligations in return.
Meanwhile, liquidation involves the conversion of non-cash assets to
3. Profit Strategy. As a corporate strategy, the profit strategy is a cash through selling to settle financial obligations. This is usually the
temporary plan for a company in its desire to increase its profits when last strategy that a company adopts when it has a very weak
revenues are declining. It is a cost-cutting mechanism to address a competitive position in an industry and nobody is willing to buy the
decline in profit because of a decrease in sales. Companies may company.
reduce their discretionary expenditures operating expenses on
advertising, research and development expenditures, and investments CRAFTING A CORPORATE LEVEL STRATEGY
as a way of supporting the profits.
In a profit strategy, a company usually has a disadvantaged Considering the significant contributions of the three key
position in an industry. The management blames their company's issues, the best way to formulate corporate strategy is by doing the
poor position in relation to the external factors of the environment following:
such as the lack of government support, unethical competition, 1. Conduct a critical environmental analysis.
financial crackdown or unfavorable market conditions. This strategy 2. Set the overall orientation of the company.
may not be beneficial for a company if adopted as long-term strategy. 3. Identify the industry or market to compete in.
4. Define how the company transfers resources to its business
RETRENCHMENT STRATEGY or functional units.

The third type of corporate strategy that a top-level Conduct a critical environmental analysis. The first step in
management may formulate is the retrenchment strategy. This is strategy formulation is to conduct a deep and critical environmental
the strategy to be adopted when a company experiences poor analysis. It is intended for the gathering of reliable and relevant
information as basis when making a sound forecast about an industry
competitive position and operating performance and competitive (e.g., expected trends, growth, and competitive forces) and the capability
disadvantage. of a company to exploit its resources for competitive advantage. Figure
The most common retrenchment strategies include the following: 6.3 of Chapter 6 presents the interrelated and interdependent activities
1. Turnaround strategy when conducting an environmental analysis.
2. Captive company strategy
Set the overall orientation of the company. With the relevant
3. Sell-out or divestment strategy
and reliable data on hand provided by an environmental analysis, the next
4. Bankruptcy or liquidation strategy step is to set the overall orientation of a company. A company can choose
to adopt the growth, stability, or retrenchment strategy. When deciding on
1. Turnaround Strategy. The turnaround strategy is adopted when a the future overall direction of a company, the industry, particularly its
company is not yet critically bleeding financially. A company intends to growth and life cycle, customer behavior and preferences, societal
factors, and internal environment factors, should be highly considered.
improve its operational efficiency by adopting drastic actions for a
leaner organization. It undergoes two basic phases- contraction and Identify the industry or market to compete in. At the
consolidation. corporate level, it must be clear what industry or market a company will
In contraction, being the initial stage of this strategy, there is compete in. This is especially true if a company adopts the growth
an overall cost reduction in the entire company. Businesses that do not strategy. A company cannot serve all types of customers with different
appear profitable are divested, processing plants are closed, and jobs tastes, preferences, and priorities. This way, a company will be able to
focus its efforts and activities toward its ultimate direction. This is easily
across the company are eliminated to have a strong lean business. In facilitated with the ajd of a portfolio analysis, particularly the BCG
the consolidation stage, resources are consolidated, programs are growth-share matrix model.
developed, and the remaining best and qualified personnel are
motivated to establish a new look and a strong company that can Define how the company transfers resources to its
achieve competitive advantage in an industry. business or functional units. Different functional units do not operate
independently for their own growth and success. The last stage of
corporate strategy formulation involves a business being able to define
2. Captive Company Strategy. The captive company strategy is how its different functional units create synergy as it transfers resources
adopted by a company that has a weak competitive position in an from one unit to another. At the corporate level, the different functional
industry and does not have the capability to implement a complete units must be able to obtain synergy in view of the resources, skills, and
turnaround strategy. In this strategy, a weak company becomes the capabilities provided to them. This cascades down to the achievement of
captive of a strong company, which is usually its customers, in order to competitive advantage.
have continued existence. This means that the majority of the sales of