Corporate Strategy

This paper explores the topic of corporate strategy and how it fits within the strategic management process. Specifically, we'll examine the various types of corporate strategy, providing a framework to recognize when a given strategy is most appropriate. Also, we'll provide real-life examples of corporate strategy in action, along with an overview of corporate portfolio tools used in corporate strategy formulation.

Strategy is defined as "the art of devising or employing plans or stratagems toward a goal" (Merriam-Webster online, 2007). Within a broad business context, strategy is an integrated set of plans for achieving long-term organizational goals. Multiunit corporations have three levels of organizational strategy: corporate strategy, business strategy, and functional strategy. "Corporate strategy concerns two different questions: what businesses should the company be in and how the corporate office should manage the array of business units" (Porter, 1987). In a broad sense, corporate strategy establishes the overall direction of the firm. Also, corporate strategy is a smaller part of a larger and distinct process known as the strategic management process, consisting of several interrelated stages, of which corporate strategy development falls within the strategy formulation stage. (There are four fundamental stages of strategic management: environmental scanning, strategy formulation, strategy implementation, evaluation and control.) Strategy formulation exists on a three-level hierarchy (see Figure 1 below). Typically, the strategy formulation process is an interactive top-down process beginning with corporate-level strategy developed by top management, followed by the business and functional levels of strategy. Yet, depending on the organization, managers at the functional and business levels provide varying degrees of input throughout the entire strategy formulation process.

Business Strategy -- Once corporate strategies are developed, the focus is upon formulating business-level strategies. Business strategy is sometimes referred to as competitive strategy(Porter, 1980), i.e., strategy that gives the firm a competitive advantage. Business strategy development occurs within a multi-unit firm's divisions and subsidiaries, sometimes referred to as strategic business units or SBUs. A firm's internal strengths are sources of competitive advantage and are collectively defined as a firm's core competency. Porter (1985) outlines a set of generic business strategies, such as a cost leadership strategy, emphasizing low-cost production or distribution of products. Also, differentiation strategy may be used, which distinguishes company products and services on the basis of superior service, quality, unique features, etc. Either strategy may opt to target abroad market or focus on a narrow market segment.

Functional strategy flows out of an organization's functional departmental areas, developed in furtherance of the aforementioned corporate and business-level strategies. Functional area strategies include:

• Operations Strategy -- Designing production processes that meet customer product/service requirements.
• Financial Strategy -- Preparing budgets and securing needed financial resources.
• Marketing Strategy -- Identifying customers, customer requirements, pricing strategies, promotional methods, and distribution channels.
• Human Resource Strategy -- Recruiting, selecting, training, compensating, and organizing employees.
• Research & Design Strategy -- Creating new products or updating existing products and services.

Applications

Corporate strategy responds to a number of questions related to how a firm intends to compete on a broad scale. How will the corporation grow? What businesses will the firm compete with? Is growth strategy an appropriate option to choose from? If so, does the firm possess the financial capability to grow? Is the firm's target market attractive enough to allow for growth in their current industry? Must the firm look outside of its current industry for growth opportunities, and if so, which industries? These are but a few of the questions corporate strategy addresses. Depending on the answers to these questions, corporate-level strategy is addressed through growth strategy or a defensive strategy alignment.

Note that growth strategies may be pursued by internal or external means. For example, when choosing internal growth mechanisms, a firm develops and markets new products, improves upon existing products, or sells existing products to new markets. Alternatively, when a firm implements external growth strategies, the firm acquires growth assets outside of the organization.

Growth Strategy

Growth strategy is that strategy employed to grow a firm's profits and lies within two broad categories: diversification and concentration (Wheelen and Hunger, 2006). Diversification strategy adds products/ services somewhat related or unrelated to the firm's core business. Concentration strategies are those growth strategies whereby a firm maintains a competitive focus within their particular industry. The two types of concentration strategies are vertical integration and horizontal integration.

Concentration Strategies

With vertical integration strategy, a firm takes over the supply function and/or distribution function that was previously handled by outsiders. There are several types of vertical integration strategies: forward vertical integration, backward vertical integration, and full integration.

Forward vertical integration strategy involves a manufacturer assuming the distribution function for their product. A failed attempt at forward vertical integration is personal computer maker Gateway's attempt to distribute PCs through company-owned retail stores. This strategy was a failure due to the high overhead costs associated with their bricks-and-mortar retail stores. Gateway switched to marketing PCs exclusively through their website and over the phone.

More successful examples of companies taking over the distribution function are found in the factory outlet shopping mall phenomenon. In effect, various manufacturers sell their products directly to consumers through company-owned stores -- companies such as Nike, Tommy Hilfiger, Sketchers, Pepperidge Farms, Samsonite, etc. However, unlike Gateway, these companies do not rely on forward vertical integration entirely, as they also rely upon third-party retailers for the bulk of their sales. More on the degrees of vertical integration shall be discussed later in the topic.

Backward vertical integration is when a firm assumes the supply function for their respective value chain. With increasing global competition and the rising costs of commodities, (e.g. copper, rubber, aluminum, iron, and oil etc.), a trend shows an increased amount of backward vertical integration activity. In order to ensure reliable supply and to control costs, manufacturers have been acquiring suppliers of critical inputs to their production processes. Examples include: Japan tire manufacturer Bridgestone's purchase of an Indonesian rubber plantation, and Toyota acquiring a controlling interest in its main supplier of batteries for its hybrid vehicles (Gross, 2006).

On the other hand, Bob Evans Farms Inc. has always relied on a backward vertical integration strategy. Best known for offering pork sausage products to the retail grocery market, Bob Evans controls the supply function of their business by raising and slaughtering hogs on company-owned farms, then preparing and packaging their park sausage products for sale.

Full integration occurs when a firm takes over the entire value chain of supplying the inputs of production (i.e., raw materials or component parts), manufacturing the product, and distribution of the product to the ultimate consumer. Examples of complete vertical integration are oil and gas companies such as ExxonMobil, BP, and Royal Dutch Shell PLC, etc. These fully integrated companies engage in oil exploration, extract crude oil with their own drilling operations, refine oil into gasoline at company-owned refineries, and then distribute gasoline products through company-owned gas stations.

Note that vertical integration exists in varying degrees along the value chain. The ranges of vertical integration are: non-integration, quasi-integration, taper integration, and full integration (Harrigan, 1984).

• Full Integration (discussed above) is when a manufacturer retains in-house responsibility for its supplies and is the sole distributor of its products.
• Taper Integration occurs when a firm is forward or backward vertically integrated, yet relies on outside firms for supplying only a portion of production inputs or a portion of distribution needs.
• Quasi-Integration is an arrangement whereby a company does not make any supplies or distribute any of its products, but owns a partial interest in a supplier or distributor to guarantee access to supplies and distribution channels. For example, in a forward quasi-integration arrangement, PepsiCo could purchase a partial equity interest in Kroger supermarket chain in order to ensure access to Kroger's distribution network. Or in a backward quasi-integration arrangement, GM could conceivably acquire a minority equity interest in a supplier of automotive electrical components.
• Non-integration involves the use of contractual arrangements, i.e., long-term agreements between the firm and its suppliers and/or distributors to provide services over a specified time period. With this type of arrangement, no ownership transfer or exchange of assets occurs. The automotive industry commonly makes use of such non-integration arrangements.
• Horizontal Integration is when a firm acquires a competitor in the same industry. Also, horizontal integration tends to be the most preferred growth strategy for many industries. Mergers and acquisitions are the typical method by which horizontal integration is achieved (David, 1996).

For example, the personal computer industry has undergone a number of horizontally integrated transactions with Gateway Computer's acquisition of low-cost rival e-Machines, and HP's merger with rival pc-maker Compaq. Likewise, in the telecommunications sector, SBC Communications merged with AT&T. Automotive industry examples of horizontal integration are Ford Motor's acquisition of Volvo, Jaguar, Aston Martin, and Land Rover, as a way of quickly moving into a high-end automotive segment. Other examples include GM's acquisition of Swedish car-maker Saab, and Germany's Daimler-Benz acquisition of US-based Chrysler Corp.

Diversification Strategies

Diversification strategies are of two varieties: concentric diversification and conglomerate diversification.

Concentric diversification is an assortment of related products in the firm's portfolio. As one of the world's largest food and beverage companies, PepsiCo Inc. represents an example of concentric diversification (http://pepsico.com/PEP%5FCompany/BrandsCompanies/index.cfm). The company's related business units include:

• Frito-Lay snacks
• Pepsi-Cola beverages
• Gatorade sports drinks
• Tropicana juices
• Quaker Foods

On the other hand, conglomerate diversification is a collection of unrelated lines of business in the corporate portfolio. For example, when many people think of General Electric (GE), they automatically think of light bulbs or appliances; yet the GE of today is a truly diversified conglomerate, made up of six business units:

• GE Infrastructure consists of aircraft engines, energy, oil and gas, rail and water process technologies, and more.
• GE Commercial Finance provides loans, operating leases, financing programs, commercial Insurance, and reinsurance products.
• GE Health offers medical imaging and information technologies, medical diagnostics, patient monitoring systems, performance improvement, drug discovery, and biopharmaceutical manufacturing technologies.
• GE Industrial includes appliances, lighting and inducts, factory automation systems, etc.
• GE Money offers financial products such as credit cards, personal loans, mortgage, and motor solutions.
• NBC Universal is a media and entertainment business consisting of news production, movies, theme parks etc. (http://www.ge.com/en/company/businesses/ge%5Fnbc%5Funiversal.htm)

Defensive Strategy

Defensive strategies are those strategies used when experiencing financial trouble, indicated by declining sales and profits. The need for retrenchment strategy may be due to an industry-wide problem (e.g., an unattractive industry such as a typewriter company) or a firm-specific problem (e.g., poor management, lack of financial resources, etc.). With this in mind, there are four types of defensive strategies that firms employ: retrenchment, divestiture, joint venture, and liquidation (David, 1996).

Retrenchment strategy (also known as turnaround strategy) involves the imposition of cost reductions, with an emphasis on improving the operational efficiency of the firm. An example of a successful turnaround effort is Nissan Motors Ltd.

In 1999, after seven straight years of record unprofitability, Nissan named as its new CEO, Carlos Ghosn, an executive vice president from Renault. As part of his retrenchment strategy, Ghosn closed manufacturing plants in Japan, reduced employee headcount by 21,000, cut in half the number of suppliers to around 600, and reduced parts costs by 20 percent. Under Ghosn's leadership, Nissan went from a $5.5 billion loss in fiscal 2000 to a $2.7 billion profit in 2001 -- far exceeding expectations (http://www.gsb.stanford.edu/news/headlines/vftt%5Fghosn.shtml).

Divestiture involves the spin-off of a firm's business units that are unprofitable or do not represent a good strategic fit with the firm's core business. IBM's former desktop personal computer business is a prime example. In 2004, IBM sold its personal computer business to Chinese computer maker Lenovo Group for $1.75 billion. IBM's rationale for the deal was a continuation of IBM's strategy shift from selling low-margin hardware products to selling higher-margin consulting services, software, and high-end computers. Likewise, IBM viewed the deal as an inroad to the vast, fast growing Chinese market for servers and technical services (Spooner and Kanellos, 2004).

Joint ventures are temporary partnerships between two firms, typically utilized when both firms wish to capitalize on a mutually beneficial opportunity. Technically speaking, the IBM/ Lenovo deal is a divesture transaction, yet it also contains elements of a joint venture between the two companies, with IBM maintaining an 18% equity investment in Lenovo. For example, Lenovo has been the preferred supplier of PCs to IBM and was allowed to use the IBM brand for five years. Also, IBM has provided marketing support to Lenovo via the IBM corporate sales force. From a benefits perspective, the deal rid IBM of its personal computer business, while gaining an entry point into China for other IBM products and services. On the other hand, Lenovo gained access to IBM's extensive corporate customer base, the IBM name, and IBM's marketing expertise (Spooner and Kanellos, 2004).

Liquidation -- Liquidation involves selling off a company's assets for their tangible net worth and signals the end of the firm's existence. This strategy is employed when a firm is losing significant amounts of money with no prospect of recovery; all other retrenchment strategies have been tried, yet were either inappropriate, or ended in failure. Generally, liquidation occurs as part of a court-ordered bankruptcy sale under Chapter 7 bankruptcy. However, a firm may undertake a voluntary path to liquidation outside of bankruptcy, yet this route is less common. Examples of firms forced to liquidate are passenger airline carriers Trans World Airlines (TWA) and Pan American Airways. Note that Chapter 7 liquidation is not to be confused with a Chapter 11 bankruptcy in which a firm is allowed to reorganize its financial affairs in the hopes of remaining an ongoing firm. (For more information on the types of corporate bankruptcies, visit the U.S. Security and Exchange Commission website at: http://www.sec.gov/investor/pubs/bankrupt.htm.)

Factors Influencing Corporate Strategy Choice

There are a number of factors influencing the choice of corporate strategy (David, 1996):

Forward Integration

• Used when a firm's present distributors are too expensive, or incapable of meeting distribution needs;
• The availability of quality distributors is limited in number;
• Competing in an industry experiencing high market growth; or
• Used if the organization has the capital and capability to manage the distribution function.

Backward Integration

• Present suppliers are too expensive, unreliable or incapable of meeting the firm's needs;
• Number of suppliers is limited, with many existing competitors;
• Industry is experiencing rapid growth;
• Resources are needed quickly; or
• Used if the organization has the capital and capability to manage the business of supplying its own parts.

Horizontal Integration

• The industry is a growth industry;
• Increased economies of scale provide competitive advantage;
• Used if the organization has the capital and capability to manage an expanded business; or
• Competitors are failing due to a lack of managerial expertise -- expertise your firm possesses.

Concentric Diversification

• Poor growth prospects exist in the current industry;
• New related products or services would enhance the sale of existing products;
• Related products can be offered for sale at competitive prices;
• New products offer a seasonal counterbalance against the seasonality of existing products; or
• Current products are in a decline stage of their life cycle.

Conglomerate Diversification

• Industry is declining in sales and profits;
• Does the organization have the capital and capability to manage a diversified business line?;
• Existing markets are saturated;
• An attractive investment exists in an unrelated business; or
• Antitrust concerns prevent pursuing companies in the same industry.

Also, Porter (1987) identifies three tests for making diversification choices that are most likely to create shareholder value.

1. Attractiveness test -- Is the industry attractive or capable of being made attractive?

• 2. Cost-of-entry test -- Is the cost of entry reasonable enough so as not to jeopardize future profits?
• 3. Better-off test -- Does the parent corporation offer competitive advantage to the new unit or will the new unit bring a competitive advantage? In other words, are meaningful synergies likely to result between the new unit and the corporation?

Joint Venture

• The distinctive competencies of the two firms complement one another;
• A reduction in risks results from an alliance;
• Appropriate for smaller firms having trouble competing against larger firms; or
• There is a need to get a new technology to market quickly.

Retrenchment

• The firm has a weak competitive position;
• The firm is plagued by inefficiency, low profits, or stock holder pressure to improve performance;
• The organization has grown so large that an internal reorganization needs to take place; or
• A distinctive competency exists, yet the firm has failed to capitalize on it.

Divestiture

• The retrenchment strategy was a failure;
• A product line or division needs more resources in order to compete and survive;
• A division is performing poorly;
• A division is a poor strategic fit with the firm's overall corporate vision; or
• An infusion of cash is needed but can't be obtained elsewhere.

Liquidation

• Pursued when divestiture and retrenchment have failed;
• When bankruptcy is the only alternative -- liquidation allows for the orderly sale of assets; or
• Liquidation allows the firm's stockholders to minimize their losses.

Corporate Portfolio Approaches

As noted previously, "Corporate strategy concerns two different questions: what businesses should the company be in and how the corporate office should manage the array of business units" (Porter, 1987). As for managing the array of business units, there are several corporate portfolio approaches. One of the first portfolio approaches developed is the BCG (Boston Consulting Group) matrix. The BCG matrix is a two-dimensional analysis of a business unit's strength, determined by relative market growth rate and relative market share. Market growth rate is the annual growth rate in which the firm competes, with market share being the firm's market shares relative to all other direct competitors.

1. Cash cows are profitable business units with a low market share and high growth rate. They should be milked for cash, with the cash flow being deployed elsewhere.

• 2. Dogs possess a low market share and low growth rate and should be liquidated or divested.
• 3. Question marks are typically found within new product areas and have a low market share with a high growth rate. Given their high growth rates, question marks should be infused with cash to develop them into stars.
• 4. Successful question marks become stars; stars have a high growth rate and high market shares, hence a growth strategy of integration would be employed here (Thompson and Martin, 2005).

The BCG matrix's simplicity -- a recognized strength -- is also one of its weaknesses. The market growth rate dimension (one indication of industry attractiveness) and relative market share (one determinant of competitive advantage) overlook other important determinants of profitability. In response to this limitation, consulting firm McKinsey and Co. derived a more comprehensive model from the BCG Matrix, i.e., the GE Business Screen Matrix. The GE matrix, developed for GE by Mckinsey, considers a three-dimensional analysis of high, medium, and low industry attractiveness and competitive position. Industry attractiveness is substituted for BCG's market growth rate, and is comprised of external factors such as entry barriers, market growth, industry profitability, market size, pricing trends, etc. Competitive position replaces BCG's market share measure, and includes internal strengths and weakness factors including market share, relative brand strength, management strength, profitability, size, etc.(Thompson and Martin, 2005).

Conclusion

Corporate strategy does not exist in a vacuum -- it is a smaller, yet integral part of a larger and distinct process known as the strategic management process, interrelating with the formulation of a firm's business strategy, as well as its functional strategy. Is there one best corporate strategy? The answer is an unequivocal no -- there is no single best corporate strategy. Likewise, the process of developing corporate strategy has become a more daunting task in light of the global competitive forces firms must confront. Corporate strategy is dependent on numerous factors as outlined with respect to industry attractiveness and the relative competitive strengths of the respective company. Once again, the fact that corporations operate in a global environment greatly complicates the formulation and coordination of corporate strategy. Hence, the formulation of corporate strategy is a dynamic, interactive, iterative process, sometimes requiring midstream adjustments as a result of unexpected changes in the firm's competitive environment. Therefore, the wrong corporate strategy choices, in addition to improper implementation, can mean the difference between success and failure.

Terms & Concepts

BCG Matrix: A portfolio analysis tool to assess business unit strength, determined by relative market growth rate and relative market share.

Business Strategy: Also known as competitive strategy, it is that strategy developed by the firm's strategic business units that gives the firm its competitive advantage.

Concentration Strategies: Growth strategies whereby a firm maintains a competitive focus within their particular industry.

Concentric Diversification: The development or acquisition of business-lines related to the firm's existing corporate portfolio.

Conglomerate Diversification: The addition of unrelated lines of business to the corporate portfolio.

Corporate Strategy: The game-plan developed by top management for how a corporation intends to compete within its respective industry.

Core Competency: The collection of a firm's internal strengths that are sources of competitive advantage.

Defensive Strategies: Those strategies a firm employs when experiencing financial trouble.

Diversification Strategy: Adding related or unrelated products/services to the firm's core business.

Divestiture: Spin-offs of a firm's business assets because of unprofitability or because it does not represent a good strategic fit with the firm's core business.

Functional Strategy: Strategy flowing from organizations' functional areas, developed in furtherance of the corporate and business-level strategies.

Forward Vertical Integration Strategy: A manufacturer taking over the distribution function for their particular product.

Backward Vertical Integration: A manufacturer assuming the supply function for their respective value chain.

Full Vertical Integration: A firm taking over the entire value chain of supplying the inputs of production (i.e., raw materials or component parts), manufacturing the product, and distribution of the product.

GE Business Screen Matrix: A more comprehensive derivation of the BCG Matrix, which considers portfolio analysis on low, medium, and high dimensions, based on industry attractiveness and competitive position.

Horizontal Integration: When a firm acquires competitors in the same industry.

Joint Ventures: Temporary partnerships between two firms, used when both firms wish to capitalize on a mutually beneficial opportunity.

Liquidation: Selling off a company's assets for their tangible net worth; signals the end of the firm's existence.

Non-Integration: The use of contractual arrangements, i.e., long-term agreements between the firm and its suppliers and/or distributors to provide services over a specified time period.

Quasi-Integration: An arrangement whereby a company does not make any supplies or distribute any of its products, but owns a partial interest in a supplier or distributor to guarantee access to supplies or distribution channels.

Retrenchment Strategy: The imposition of cost reductions, with an emphasis on improving the operational efficiency of the firm.

Strategic Business Units: Divisions and subsidiaries within a multi-business firm.

Strategy: "The art of devising or employing plans or stratagems toward a goal" (Merriam-Webster, 2007).

Taper Integration: A firm relies on outside firms for: 1) supplying only a portion of production inputs or 2) distributing a portion of its products.

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Suggested Reading

Ansoff, H.I. (1957). Strategies for diversification. Harvard Business Review, 35(5), 113-124. Retrieved May 07, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=6769323&site=ehost-live

Campbell, A., Goold, M., & Alexander, M. (1995). Corporate strategy: The quest for parenting advantage. Harvard Business Review, 73(2), 120-132. Retrieved May 01, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9503282004&site=ehost-live

Farid, M., & Flynn, D. (1992). The strategic choice of Chapter 11: An examination of the critical factors. Review of Business, 13(4), 32. Retrieved May 02, 2007, from EBSCO Online Database Business Source Complete.http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9607035565&site=ehost-live

Harrigan, K., & Porter, M. (1983). End-game strategies for declining industries. Harvard Business Review, 61(4), 111. Retrieved May 02, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=3868184&site=ehost-live

Henderson, V., & Hobson, D. (2011). Optimal liquidation of derivative portfolios. Mathematical Finance, 21 (3), 365-382. Retrieved November 20, 2013 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=60573352&site=ehost-live