Chapter 6


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The author cites 3 types of corporate strategy.  1. Directional--growth, stability, retrenchment. 2. Portfolio--products and business units.  3. Parenting--resource allocation and centralized management of business units.



Directional Strategies

Growth strategies include mergers, acquisitions, and strategic alliance.  Mergers are the combining of two firms in which only one of the firms remains.  Acquisition is the scenario in which one firm takes over another firm.  This can be voluntary or involuntary.  Strategic alliance was discussed in chapter 5 notes.  Growth strategies are usually considered to be healthy, but can be misleading indicators of the firms general health.  For instance, an organization could be in growth mode but be masking a cash flow problem.  Organizational slack is a term used to identify amounts of unused resources that could be used to resolve conflicts among divisions and departments (almost all conflict is caused by perceived inequity of resource allocation).  If the organization needs to do a turn around strategy to overcome weaknesses, growth mode will provide resource cushions.  Finally, growth strategies do provide career growth for employees of the organization.


Two specific growth strategies are Concentration and diversification.  Concentration consists of strategies aimed at growth within current product lines.  In chapter 4 notes we discussed vertical integration.  This is a strategy to add various aspects of existing production and distribution channels to the organization.  Backward integration would be acquiring suppliers and manufacturers of goods.  Forward integration would be procuring organizations in the distribution channel for the product or service.  As stated in prior notes, vertical integration provides greater economies of scale.  The firm acquires control of costs and distribution channels for reduced per unit expenditures and improved levels of product distribution and price.


Transaction cost economics is a means for analyzing vertical growth strategies vs. outsourcing strategies.  The Key Theory article on page 137 considers transaction factors that favor integration.  Those are transaction uncertainty, specialized assets, frequent occurrence of transactions between the acquiring firm and the target of acquisition.


There are varying levels of vertical integration.  Full integration is 100% of all supplies or products are through owned entities.  Taper integration is less than half.  Quasi integration is partial control of the suppliers or distributors without actually purchasing them.  For instance the controlling firm could purchase 20% of the other firm’s stock.  Long term contracts are agreements between two firms without actual exchange of ownership.  Many companies are moving away from growth and thus vertical integration strategies.  In fact companies are downsizing by outsourcing functions (discussed in chapter 5 notes).


Horizontal growth strategies focus on expanding the distribution of products or services to new geographic locations.  For instance, KLM purchased controlling stock in Nortwest Airlines to gain access to American and Asian markets.  If KLM purchased ground transportation to take its passengers to home destinations, this would be forward vertical integration.  Horizontal integration consists of working with competitors or acquiring new products.


Horizontal integration uses diversification strategies for growth.  There are two categories, concentric and conglomerate diversification.  Concentric diversification consists of procuring related companies.  This is an example of external concentric diversification.  The company could start related business within the firm.  This is an example of internal concentric diversification.  AMR, the parent company of American Airlines makes most of its money with the SABRE reservation system.  It has spun off this technology to build systems for other firms in the travel/hospitality industry.  Internal for airline reservations.  External for other related industries.


Conglomerate Diversification is where a firm diversifies into unrelated areas.  Tobacco companies have diversified into the food industry.  This form of diversification requires strong analysis of fit between the unrelated industries.  The 1980's provided opportunities for conglomerate diversification through highly leveraged finances.  The result was large conglomerates with holdings that did not fit the parent company.  This created the need for most large firms to divest many of their holdings at huge financial losses.


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International Entry Options.  This information is available in chapter 5 notes.  On page 143, the author expands the discussion of acquisitions.  Green field development is the scenario in which the firm actually rebuilds certain facilities to be used by the acquired company.  This prevents inheriting the physical resource problems of the acquired firm.  It is very costly and not very common.


Production sharing combines highly skilled functions of a developed nation with services provided by a less developed nation.  Computer programmers in India are writing most of the programs used by American software developers. The advantage is reasonably priced high skill labor (in other words, exploitation).


Turnkey operations (not turkey) are contracts in which one firm will develop an operation and turn it over to an entity in the foreign country upon completion. A variant of this is the Build, Operate, and Transfer (BOT) Concept.  Same as turnkey, except the building entity will run the operation for awhile then turn if over to the other interest.  Management contracts provide firms with managerial expertise to run facilities for a company.  The Management company has no ownership and manages the facility for a management fee.  Many hotels are run by management companies.


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Stability Strategies

Most corporations do not look favorable at stability strategies.  They do, however, make sense for many small businesses.  The danger in stability by the small business, is large corporations breaking into the industry.  Can you say, “Blockbuster”?


The Pause/Proceed with Caution strategy is a temporary time out.  The Dell computer company had phenomenal growth followed by internal chaos within the firm.  They put their growth on hold, took care of their infrastructure and are booming again with mail order distribution.


The No Change strategy subscribes to doing nothing new.  This is uncommon, but appropriate for firms with solid markets and few threats and weaknesses.  In today’s environment, this is best suited as a short term strategy.


Profit strategies are usually driven by the stockholders.  These are short term strategies that focus on efficiency (reducing use of resources). 


Retrenchment strategies are employed when the company if facing serious problems in its operations.


A Turnaround strategy addresses acute weaknesses in the organization.  This is a two part strategy.  First the firm contracts to stop the bleeding (of cash).  Then is consolidates to institutionalize the operation of the now smaller firm.  The IBM turnaround strategy is excellent, but they still might fail.  It was recently announced that CEO Louis Gerstner will stay with the firm for five more years.


The captive company strategy is the scenario in which a small firm sacrifices its freedom for the security of being part of a large conglomerate.  The 3M company uses this strategy extensively.  They lure in small start-up firms with state of the are technology with the opportunity for large R&D budgets.  They usually will retain the CEO of the small firm and let that person run the operation within the 3M organization.  If the individual manages to provide acceptable market share and margins, he or she becomes a product champion for the company (Big$$$$$).


Sell out strategies require selling and leaving the industry.  Divestment strategies occur when conglomerates spin-off under performing units.  Bankruptcy provides protection for the firm from creditors for a period of time to permit reorganization.  Liquidation involves terminating the firm completely.


6.3 Portfolio Analysis


This is a means for reviewing the performance of multiple SBU’s collectively.  See the BCG Growth-Share Matrix on next page.  The matrix compares levels of growth with levels of competitive position.  Those SBU’s that are high in position but low in growth are cash cows (reap the profits strategy).  Those that are high in both categories are stars (nurture and reap strategy).  Question marks are high in growth but low in market position (proceed with caution strategy).  Those that are low in both categories are dogs (divest, retrench, pause and see strategies). 


GE’s Business screen is a more complex version of the BCG.  Remember, Jack Welch disbanded the 25 member strategic planning department soon after taking over as CEO.  This model is an example of highly centralized planning specialists.  This is probably an inappropriate approach in today’s competitive markets.  It is the opinion of this prof to simplify, rather than complicate the planning process and to include participation from those who interface with customers.


International Portfolio Analysis provides a good snapshot of collective SBU’s pursuing global ventures.  Country attractiveness is measured against competitive strength.  We saw the importance of sociocultural and legal factors influencing the Asian division of Harley.  This is a good tool for analysis in such areas.


Corporate Parenting is a strategy employed by highly centralized and diversified firms with large resource pools.  They will use the analysis tools to add value to varied targeted SBU’s based on performance and potential.  They do this by first identifying critical success factors (CSF’s) for the SBU based on its industry standards.  They then analyze requirements to convert weaknesses into strengths.  Finally, they determine parental fit.  These criteria are used to determine viability of absorbing the prospective SBU.  Figure 6.5 shows an example of the Parenting-Fit Matrix.  Heartland is a perfect fit.  Edge has pros and cons.  Ballast offers opportunities for limited improvement.  Alien Territory companies are dogs in terms of fit.  Value trap are those firms that actually could be destructive to the parent relationship due to mis diagnosis.


Internal Horizontal strategies provide opportunities to cut across SBU’s for one of two reasons.  First is to build economies of scale for the collective group of SBU’s.  Second, is to develop multipoint competition among SBU’s.  The horizontal strategy very closely resembles the parenting strategy, as resource allocation from the home office is the driving force.




Chapter 6 deals with strategy formulation at the corporate level.  Directional strategies focus on growth, stability, or retrenchment. Integration strategies include vertical and horizontal approaches. Diversification strategies include concentric and conglomerate approaches.


Stability strategies include pause/proceed, no change, and profit strategies.  Retrenchment strategies include turnaround, captive company, sell-out, bankruptcy, and liquidation approaches.


Portfolio analysis provides for multi SBU strategy formulation.  The BCG Matrix is most popular and simple.  GE business screen is somewhat complex. Portfolio by country is conducive to global ventures.  Corporate parenting is a highly centralized approach to resource allocation and uses the Parenting-Fit Matrix for acquisition decision making.  Internal horizontal strategies can either solidify or create internal competition among SBU’s.


This completes our broadcast of Chapter 6 News.  Stay tuned for the Tonight Show, starring Jaaaayyyy Leeeennnnooooooo!


Discussion Board Questions

1.  Please discuss any experiences you may have had with acquisitions and mergers in your organization.  Were you on the acquiring or acquired end?  What happened during the acquisition or merger?  Did the culture for your organization or department change as a result of the acquisition or merger?

2.   If you haven’t had the experiences listed above, can you identify the directional, integration, and diversification strategies present in your firm?  Are they consistent or changing?  Do they seem to be methodically planned, or do you feel like they shift direction without rhyme, reason, or notice?  This question is only for those who have not had the experiences listed in question 1.