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Summary Strategic Management Chapter 7: Strategy Formulation: Corporate Strategy
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A summary of Chapter 7 of the book Strategic Management and Business Policy.
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Strategic Management: Chapter7: Strategy formulation:
Corporate Strategy
Corporate Strategy
= The choice of direction for a firm as a whole and the management of its business or
product portfolio.
Three key issues:
- Directional strategy growth, stability, retrenchment.
- Portfolio analysis industries or markets in which the firm competes through its
products and business units.
- Parent strategy coordinates activities and transfers resources and cultivates
capabilities among product lines and business units.
Directional Strategy
Follow a business strategy to improve its competitive position.
A corporation’s directional strategy is composed of three general orientations (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
Continuing growth means increasing sales and a chance to take advantage of the experience
curve to reduce the per-unit cost of products sold, thereby increasing profits.
Growth is a popular strategy because larger businesses tend to survive longer than smaller
companies due to the greater availability of financial resources, organizational routines, and
external ties.
A corporation can grow internally by expanding its operations both globally and
domestically, or it can grow externally through mergers, acquisitions, and strategic alliances.
Merger = two or more corporations in which both companies exchange stock in order to
create one new corporation.
Acquisition = 100% purchase of another company.
Hostile acquisitions = takeovers.
Growth is attractive for two key reasons:
- A growing firm offers more opportunities for advancement, promotion, and
interesting jobs.
- Growth based on increasing market demand may mask flaws in a company.
Two basic growth strategies:
- Concentration: current product line(s) in one industry.
- Diversification: other product lines in other industries.
, Concentration
Vertical Growth
Vertical growth = achieved by taking over a function previously provided by a supplier or
distributor.
Vertical integration = degree to which a firm operates vertically in multiple locations on an
industry’s value chain from extracting raw materials to manufacturing to retailing.
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 labelled forward integration
(going forward on an industry’s value chain).
Although backward integration is often more profitable than forward integration (because of
typical low margins in retailing), it can reduce a corporation’s strategic flexibility.
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:
- Full integration = firm internally makes 100% of its key supplies and completely
controls its distributors.
- Taper integration = firm internally produces less than half of its own requirements
and buys the rest from outside suppliers.
- Quasi-integration = 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 = agreements between two firms to provide agreed-upon goods
and services to each other for a specified period of time.
Horizontal Growth
Horizontal growth = expanding its operations into other geographic locations and/or by
increasing the range of products and services offered to current markets.
Horizontal integration = the degree to which a firm operates in multiple geographic locations
at the same point on an industry’s value chain.
Horizontal growth can be achieved through internal development or externally through
acquisitions and strategic alliances with other firms in the same industry.
International entry options for horizontal growth
A corporation can select from several strategic options the most appropriate method for
entering a foreign market or establishing manufacturing facilities in another country:
- Exporting = shipping goods produced in the company’s home country to other
countries for marketing.
- Licensing = the licensing firm grants rights to another firm in the host country to
produce and/or sell a product.
- Franchising = franchiser grants rights to another company to open a retail store using
the franchiser’s name and operating system.
- Joint venture = foreign corporation and a domestic company is the most popular
strategy used to enter a new country. Combine the resources and expertise needed
to develop new products or technologies.
- Acquisitions = purchasing another company already operating in that area.
- Green-field development. If a company doesn’t want to purchase another company’s
problems along with its assets, it may choose green-field development and build its
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