SM-Module- 4

STRATEGY FORMULATION
 CORPORATE STRATEGY
MBA205
n STRATEGY FORMULATION
n The business vision and mission, the process
of developing vision and mission, the
importance of vision and mission statement,
characteristics of mission statement,
n Long-term Objectives, Types of strategies,
Levels of strategies,
n Integration strategies, Intensive strategies,
Diversification strategies, Defensive
strategies,
What is a Vision Statement?

n A vision statement describes what a

company desires to achieve in the long-
run, generally in a time frame of five to
ten years, or sometimes even longer. It
depicts a vision of what the company will
look like in the future and sets a defined
direction for the planning and execution
of corporate-level strategies.
 Key Elements of a Good Vision
Statement
n While companies should not be too ambitious in
defining their long-term goals, it is critical to set a
bigger and further target in a vision statement that
communicates a company’s aspirations and motivates
the audience. Below are the main elements of an
effective vision statement:
1. Forward-looking
2. Motivating and inspirational
3. Reflective of a company’s culture and core values
4. Aimed at bringing benefits and improvements to the
organization in the future
5. Defines a company’s reason for existence and where it
is heading
What is a Mission Statement?

n A mission statement is a precise statement

that defines what a company does and
what purpose it serves. It is generally a
short, 1-2 sentence statement that may
incorporate the company’s corporate
strategy and long-term vision.
Microsoft’s mission statement

n Microsoft is an American multinational

company that develops, manufactures,
licenses, and sells technology products,
including computer software,
electronics, and personal computers. It is
also one of the largest corporations in
the world, alongside companies such as
Apple, Inc. and [Link], Inc.
“To empower every person and every
organization on the planet to achieve more.”
n The statement above is an example of a
mission statement that provides a broad
enough scale of scope to explain what the
company does, and it is also inspirational
and aspirational. It also defines
Microsoft’s strategy, which is reaching out
to the world and empowering all
individuals and organizations.
n When creating a mission statement for a
company, it can be helpful to create answers
to these questions about the business:
n What do we do?
n Why do we do it?
n Who do we do it for?
n What would happen if we did not do this?
n Why is this work important? Why does it
matter?
n While mission statements should be written to
be as timeless and enduring as possible, it’s
not uncommon to revise a mission statement as
the company evolves over time. A business will
review its statement periodically to ensure it
process of developing vision
and mission
 1. Define your end game
n Start by understanding why your product or
service matters. What does it help people do? How
does it better their lives?
n Think about our career personality test example
for a moment. What’s the end result there?
n Think of it this way: Your company is the road on
which your customers are running a race. Once
they cross the finish line, what do they get? This
can help you see how what you’re doing makes a
difference for your customers, your community,
or even the world.
 2. Pinpoint when you know
you’ve made it
n When you look five or 10 years down the road (let’s
stop there for now), what fills out your win
column? Jot down everything that comes to mind.
n Turning back to our personality test scenario, do
you want to become the world’s most trusted
resource for career exploration?
n Do you want to create a world where nobody hates
their jobs?
n Do you want every person to have confidence in
their next career step?
n Remember, this is your chance to be ambitious and
be bold, so don’t be timid.
 3. Pull together your vision
n Ok, you’re almost there. You have two
elements locked down:
n What you ultimately produce and why
it matters
n How you’ll know when you’re successful
n Now, similarly to what you did with
your mission statement, it’s time to
start piecing them together using
different combinations and wording to
see what you come up with.
Long-Term Objectives

n Strategic managers recognize that short-run

profit maximization is rarely the best approach
to achieving sustained corporate growth and
profitability
n To achieve long-term prosperity, strategic
planners commonly establish long-term
objectives in seven areas:
q Profitability – Productivity
q Competitive Position – Employee
Development
q Employee Relations – Productivity
q Tech Leadership – Public Responsibility
1 Integration strategies
Vertical Integration
Forward Integration
Backward Integration
Horizontal Integration
2 Intensive strategies
Market Penetration
Market Development
Product Development
3 Diversification strategies
Concentric Diversification
Conglomerate Diversification
4 Defensive strategies
Turnaround Strategies
Divestment Strategies
Liquidation Strategies
5 Porter's Generic strategies
Broad Low-Cost Strategy
Broad Differentiation Strategy
Focussed Low-Cost Strategy
Focussed Differentiation Strategy
Best Cost Provider Strategy
 Grand and Generic Strategies
1 Integration strategies 4 Defensive strategies
1 Vertical Integration 9 Turnaround Strategies
2 Forward Integration 10 Divestment Strategies
3 Backward Integration 11 Liquidation Strategies
4 Horizontal Integration 5 Porter's Generic strategies
2 Intensive strategies 12 Broad Low-Cost Strategy
4 Market Penetration 13 Broad Differentiation Strategy
5 Market Development 14 Focussed Low-Cost Strategy
Focussed Differentiation
6 Product Development 15
Strategy
3 Diversification strategies 16 Best Cost Provider Strategy
7 Concentric Diversification
Conglomerate
8
Diversification
Qualities of Long-Term Objectives

n There are seven criteria that should be

used in preparing long-term objectives:
q Acceptable
q Flexible
q Measurable over time
q Motivating
q Suitable
q Understandable
q Achievable
Strategy and Competitive Advantage

n Competitive advantage exists when a firm’s

strategy gives it an edge in
q Attracting customers and
q Defending against competitive forces
Key to Gaining a Competitive Advantage
n Convince customers firm’s product / service
offers superior value
q A good product at a low price
q A superior product worth paying more for
q A best-value product
 Sources of Competitive Advantage

Competitive
Advantages
(Sources of Rates of Profit in
Excess of the Competitive Level)

Avoid Be Better Than

Competitors Competition
Attractiv Attractiv Attracti
e e ve Cost Differentiation
Industry Strategic Niche Advantage Advantage
Group
Entry Mobility Isolating
Barriers Barriers Mechanisms
Porter’s Generic Strategies

Generic strategies - help ‘position’ the

firm to best advantage
n Overall cost leadership strategy – seeks
to be lowest cost provider
n Differentiation strategy – seeks to create
something unique, unmatched by
competitors
n Focus strategy – seeks to identify a
particular segment within the broader
market and to dominate that segment
What Is “Competitive Strategy”?
n Deals exclusively with a company’s
business plans to compete successfully
q Specific efforts to please customers

q Offensive and defensive moves

to counter maneuvers of rivals

q Responses to prevailing market conditions

q Initiatives to strengthen its market position

n Narrower in scope than business strategy

The Five Generic Competitive
Strategies
Generic Strategies

n A long-term or grand strategy

must be based on a core idea
about how the firm can best
compete in the marketplace. The
popular term for this core idea is
generic strategy.
3 Generic Strategies

1. Striving for overall low-cost leadership in

the industry.
2. Striving to create and market unique products
for varied customer groups through
differentiation.
3. Striving to have special appeal to one or more
groups of consumers or industrial buyers,
focusing on their cost or differentiation
concerns.
Requirements for
Generic Competitive Strategies
Low-Cost Leadership

n Low-cost producers
usually excel at cost
reductions and efficiencies
n They maximize economies of
scale, implement cost-cutting
technologies, stress reductions
in overhead and in
administrative expenses, and use
volume sales techniques to
propel themselves up the
earning curve
n A low-cost leader is able to use
its cost advantage to charge
lower prices or to enjoy higher
profit margins
Differentiation

n Strategies dependent on differentiation are

designed to appeal to customers with a
special sensitivity for a particular product
attribute
n By stressing the attribute above other
product qualities, the firm attempts to
build customer loyalty
n Often such loyalty translates into a
firm’s ability to charge a premium price
for its product
n The product attribute also can be the
marketing channels through which it is
delivered, its image for excellence, the
features it includes, and its service
network
Focus

n A focus strategy, whether

anchored in a low-cost base or a
differentiation base, attempts to
attend to the needs of a
particular market segment
n A firm pursuing a focus strategy is
willing to service isolated geographic
areas; to satisfy the needs of customers
with special financing, inventory, or
servicing problems; or to tailor the
product to the somewhat unique
demands of the small- to medium-sized
customer
n The focusing firms profit from their
willingness to serve otherwise ignored
or underappreciated customer segments
Low-Cost Provider Strategies
Keys to Success
n Make achievement of meaningful lower costs
than rivals the theme of firm’s strategy
n Include features and services in product
offering that buyers consider essential
n Find approaches to achieve a cost advantage
in ways difficult for rivals to copy or match
Low-cost leadership means low
overall costs, not just low
manufacturing or production costs!
Options: Achieving a Low-Cost
Advantage
Option 1: Use lower-cost edge to

nUnder price competitors and attract price-

sensitive buyers in enough numbers to
increase total profits

Option 2: Maintain present price, be content with

present market share, and use lower-cost edge to

nEarn a higher profit margin on each unit

sold, thereby increasing total profits
Approaches to Securing a
Cost Advantage
Approach 1
Do a better job than rivals of performing
value chain activities efficiently and cost
effectively
Approach 2

Revamp value chain to bypass cost-producing

activities that add little value from the
buyer’s perspective
Keys to Success in Achieving
Low-Cost Leadership
n Scrutinize each cost-creating activity,
identifying cost drivers
n Use knowledge about cost drivers to
manage
costs of each activity down year after
year
n Find ways to restructure value chain
to eliminate
nonessential work steps and low-value
activities
n Work diligently to create cost-conscious
corporate cultures
q Feature broad employee participation in
continuous cost-improvement efforts and limited
perks for executives
q Strive to operate with exceptionally small
corporate staffs
n Aggressively pursue investments in
resources and capabilities that promise to
drive costs out of the business
Differentiation Strategies
Objective
n Incorporate differentiating features that cause
buyers to prefer firm’s product or service over
brands of rivals
Keys to Success
Find ways to differentiate that create value for
buyers and are not easily matched or cheaply
copied by rivals

n Not spending more to achieve differentiation

than the price premium that can be charged
Benefits of Successful
Differentiation

A product / service with unique,

appealing attributes allows a firm to
è Command a premium price and/or
è Increase unit sales and/or
Which
hat is
unique?
è Build brand loyalty
= Competitive Advantage
 Types of Differentiation Themes

n Unique taste -- KFC

n Multiple features -- Microsoft Windows and Office
n Wide selection and one-stop shopping -- BIGBAZAR
n Superior service – FedEx
n Spare parts availability -- Caterpillar
n More for your money -- McDonald’s
n Prestige -- Rolex
n Quality manufacture -- Honda, Toyota
n Technological leadership -- 3M Corporation
n Top-of-line image -- INFY
Sustaining Differentiation: Keys
to Competitive Advantage
n Most appealing approaches to differentiation
q Those hardest for rivals to match or imitate
q Those buyers will find most appealing
n Best choices to gain a longer-lasting, more
profitable competitive edge
q New product innovation
q Technical superiority
q Product quality and reliability
q Comprehensive customer service
q Unique competitive capabilities
Best-Cost Provider Strategies
n Combine a strategic emphasis on low-cost with a
strategic emphasis on differentiation
q Make an upscale product at a lower cost
q Give customers more value for the money
Objectives
n Deliver superior value by meeting or exceeding
buyer expectations on product attributes and
beating their price expectations
n Be the low-cost provider of a product with
good-to-excellent product attributes, then use
cost advantage to underprice comparable
brands
Competitive Strength of a
Best-Cost Provider Strategy
n A best-cost provider’s competitive advantage comes
from matching close rivals on key product
attributes and beating them on price
n Success depends on having the skills and
capabilities to provide attractive performance and
features at a lower cost than rivals
n A best-cost producer can often out-compete both
a low-cost provider and a differentiator when
q Standardized features/attributes
won’t meet diverse needs of buyers
q Many buyers are price and value sensitive
Risk of a Best-Cost
Provider Strategy
n A best-cost provider may get squeezed
between strategies of firms using low-
cost and differentiation strategies

q Low-cost leaders may be able to siphon

customers away with a lower price

q High-end differentiators may be able to

steal customers away with better product
attributes
Focus / Niche Strategies

n Involve concentrated attention on a narrow piece of the

total market

Objective
Serve niche buyers better than rivals

Keys to Success
n Choose a market niche where buyers have distinctive
preferences, special requirements, or unique needs
n Develop unique capabilities to serve needs of target
buyer segment
 Approaches to Defining Market
Niche
n Geographic uniqueness

n Specialized requirements in
using product/service

n Special product attributes

appealing only to niche buyers
Focus / Niche Strategies
and Competitive Advantage
Approach 1
n Achieve lower costs than
rivals in serving the segment --
A focused low-cost strategy
Approach 2
Which
n Offer niche buyers something
hat is
unique?
different from rivals --
A focused differentiation strategy
 Deciding Which Generic
Competitive Strategy to Use
n Each positions a company differently in its
market
n Each establishes a central theme for how a
company will endeavor to outcompete rivals
n Each creates some boundaries for
maneuvering as market circumstances unfold
n Each points to different ways of
experimenting with the basics of the strategy
n
The big
Each risk – Selecting
entails a “stuck
differences in in the middle”
product line,
strategy!
production emphasis,
This rarely produces marketingcompetitive
a sustainable emphasis,
and means to
advantage or sustain the competitive
a distinctive strategy position.
1. Generic Strategy
2. Grand Strategy
3. Strategic Alliance
4. Collaborative Partnership
5. Mergers & Acquisition Strategy
6. Joint Ventures
7. Outsourcing strategy
8. GE Nine Cell
9. BCG Matrix
Strategic Alliance & Collaborative
Partnership
n The basic idea behind formation of a
strategic alliance is to generate
synergistic effect which helps in
generating competitive advantage.
n This is based on the idea that “ If you
can’t do a thing alone, join hands with
others.” It is for a specific task or for a
specific period without having equity
interest.
n It aims at creating a win-win situation for
all partners.
Why Strategic Alliance?

n Adding value to products/services

n Improving market access
n Strengthening operations
n Adding technological strength
n Enhancing strategic growth
n Building financial strength
Stages of Strategic Alliance

n Initial Euphoria
n Honeymoon period
n Dawning realization
n Aftershock
n Damage control
The reasons for Strategic
Alliances are
n It brings different competencies of
partners together.
n This combination of competencies is
able to produce better results as
compared to the sum total of the
results of individual organizations
competencies taken together.
n In the age of changing technology
and markets forces, all
organizations cannot develop
matching competencies. Therefore, in
order to match environmental
requirements, they join hand with
others to complement their
competencies.
n In many cases, new product
development costs are quite
high. In order to bear such
costs, many organizations
collaborate among themselves,
share costs and outcomes of
new products.
n Sometimes, global alliance are formed
with organizations of another country to
ease entry barriers as local
organizations may be well aware about
the local business conditions.
n Strategic alliance are formed to create
opportunities to learn either the new way
of doing a thing or doing new thing.
For success the essentials are

n Each partner should have Trust between

them and no suspicion.
n Good understanding between partners.
When the business shows downtrend,
there will be more mis-understanding and
quarrels leading to litigation.
n Partrners should not compete each
other. There should be transparency and
limitations in their own accepted duties.
No intervention.
Collaborative Partners

n Any alliance is passable with

minimum two partners and any
number of partners with the
Core Competence (competitive
skills), commitment and
expertised back ground on these
lines
n There are essential qualifications
that make the Partnership
successful.
n A corporate-level growth strategy
in which two or more firms agree to
share the costs, risks and benefits
associated with pursuing new
business opportunities. The
strategic alliances are often
referred to as partnership
Factors should be considered in
choosing alliance partners
n Drivers - What benefit are offered by
collaboration?
n Partners - Which partners should be chosen?
n Facilitators - Does the external environment
favor a partnership?
n Components - Activities and processes in the
network.
n Effectiveness - Does the previous history of
alliances generate good results?
n Market Orientation – Whether partners are harder
to control and may not have the same commitment
to the end user?
Selection of the right kind of partner
is the most essential part of Strategic
Alliance.
n a good partner helps the Co achieve
strategic goals such as achieving market
access,
n (1)share the costs and risk of new
product development, or gaining access
to critical core competencies.
n (2) A good partner shares the firm’s
vision for the purpose of the alliance.
This will make them firmly united and
holds good relations.
n (3) A good partner is unlikely to try to
exploit the alliance opportunistically for
its self interest.
n Giving little to the partner where more is
to be given – technical know how. All
these verification can be made by
referring their behavior with earlier
partnership with other firms.
Mergers & Acquisition Strategy

n Merger or Amalgamation: is the

integration of two or more business. Is
also the joining of two separate Cos to
form a single Co – an external strategy
for growth of the organization.
n A corporate-level growth strategy in
which a firm combines with another firm
through an exchange of stock.
n A merger occurs when two or more firms,
usually of similar sizes, combine into one
through an exchange of stock.
n Mergers are generally undertaken to
share or transfer resources and or
improve competitiveness by developing
synergy. The name of the merged Co will
go after merging. There will be one
Company i.e. Merger.
Reasons for Merger

n Quick entry in the business.- There is no

gestation time and familiarity of the product or
service to the market and customers.
n Faster Growth Rate - The volume of business
can be raised rapidly with less risk. You can
overcome a competitors in certain cases. Ready
utilities like production, marketing, distribution,
research & Development.
n Diversification Advantages - If the acquiring Co
or Merger Co wants to diversify
n they can takeover the same product Co
and enter into the business with less
time..
n Reduction in Competitors and Dependence
- You can eliminate Competitors and
increase in your market share. You can
enjoy a ready market.
n Tax advantage - If the merged Co possessing
accumulated losses can be set off by the
Merger Co.
n Synergistic Advantages - The complementary
capabilities can be achieved like
n 2 + 2 = 5 in Marketing, investment, operating
(utilization of common facilities,
n personnel, overheads, inventories etc), Common
Management and avoiding
n duplicating of managerial and other personnel.
JOINT VENTURE

n A joint venture (often abbreviated JV)

is an entity formed between two or
more parties to undertake economic
activity together.
n The parties agree to create a new
entity by both contributing equity,
and they then share in the revenues,
expenses, and control of the
enterprise.
n The venture can be for one specific
project only, or a continuing
business relationship such as the
Fuji Xerox joint venture.
n This is in contrast to a strategic
alliance, which involves no equity
stake by the participants, and is a
much less rigid arrangement.
n The solution is a set of joint
ventures, which are commercial
companies (children) created and
operated for the benefit of the
co-owners (parents)
n The joint venture extends the
supplier-consumer
relationship and has
strategic advantages for
both partners
Types of International Joint Ventures
n Traditional equity joint-venture
q Two parents from two different countries

n Trinational
q Two parents from two different countries, set
up a venture in a third country

n Cross-national
q Two parents of same nationality, venture
located in a different country
 Motives for IJV Formation
To take existing To diversify into a new
products to new business
markets
New Markets

To strengthen the To bring foreign

existing business products to local
markets
Existing Markets

Existing Products New Products

 Partners’ Contributions
n Complementary skills
q Unique and continuing contributions
q Once skills are redundant, IJV may be terminated
q Different logics in different firms
n Learning races (biotech firms)
n Long-term relationships (buyer-supplier relationships)

n Cooperative cultures
q Work together for joint benefit
q Avoid decision-making stalemates
q Avoid a confrontational stance

n Seek similarities among the partners when

possible (size, industry, rural vs. urban location,
functional background)
Joint Ventures - Plus
n Gain “local” knowledge/access.
q In-depth knowledge local market.
q Distribution system.
q Access to low-cost labor or raw
materials.
q Technology/Manufacturing/Process
know-how.
n Fewer resources required.
n Risk reduction:
q Less capital exposed.
q Looks “better” to government.
n Sometimes the only way in.
 OUTSOURCING
n Outsourcing is subcontracting a process, such as
product design or manufacturing, to a third-party
company.

n The decision to outsource is often made in the

interest of lowering cost or making better use of
time and energy costs, redirecting or conserving
energy directed at the competencies of a particular
business, or to make more efficient use of land,
labor, capital, (information) technology and
resources.
n Outsourcing became part of the business lexicon
during the 1980s.
n It is essentially a division of labour.
n Outsourcing involves the transfer of the
management and/or day-to-day execution of
an entire business function to an external
service provider.
n The client organization and the supplier
enter into a contractual agreement that
defines the transferred services.
n Under the agreement the supplier acquires
the means of production in the form of a
transfer of people, assets and other
resources from the client.
n The client agrees to procure the services from the
supplier for the term of the contract.

n Business segments typically outsourced include

information technology, human resources,
facilities, real estate management, and accounting.

n Many companies also outsource customer support

and call center functions like telemarketing, CAD
drafting, customer service, market research,
manufacturing, designing, web development,
content writing and engineering.
The Top Five Strategic Reasons for
Outsourcing

1. Improve business focus

2. Access to world-class capabilities
3. Accelerated reengineering benefits
4. Shared risks
5. Free resources for other purposes
Strategic Alliances

n Strategic alliances are

distinguished from joint
ventures because the companies
involved do not take an equity
position in one another
n In some instances, strategic
alliances are synonymous with
licensing agreements
n Outsourcing arrangements vary
Consortia

n Consortia are defined as large

interlocking relationships between
businesses of an industry
n In Japan such consortia are known as
keiretsus, in South Korea as chaebols
n Their cooperative nature is growing in
evidence as is their market success
Risks of the Generic Strategies
The Value Disciplines

n Operational Excellence n Product Leadership

q This strategy attempts q Companies that pursue the
to lead the industry in discipline of product
price and convenience by leadership strive to
pursuing a focus on produce a continuous
lean and efficient state of state-of-the-art
operations products and services
n Customer Intimacy
q Customer intimacy
means continually
tailoring and shaping
products and services
to fit an increasingly
refined definition of the
customer
Grand Strategies

n Grand strategies, often called master or

business strategies, provide basic direction
for strategic actions
• Indicate the time period over which long-rang
objectives are to be achieved
• Any one of these strategies could serve as the
basis for achieving the major long-term
objectives of a single firm
• Firms involved with multiple industries,
businesses, product lines, or customer groups
usually combine several grand strategies
Concentrated Growth
1. Concentrated growth is the strategy of
the firm that directs its resources to
the profitable growth of a single
product, in a single market, with a single
dominant technology
2. Concentrated growth strategies lead to
enhanced performance
3. Specific conditions favor concentrated
growth
4. The risks and rewards vary
 Market Development
n Market development commonly ranks second
only to concentration as the least costly and
least risky of the 15 grand strategies
n It consists of marketing present products, often
with only cosmetic modifications, to customers
in related market areas by adding channels of
distribution or by changing the content of
advertising or promotion
n Frequently, changes in media selection,
promotional appeals, and distribution are used
to initiate this approach
Product Development
n Product development
involves the
substantial
modification of
existing products or
the creation of new
but related products
that can be marketed
to current customers
through established
channels
Innovation
n These companies seek to reap the initially high
profits associated with customer acceptance
of a new or greatly improved product
n Then, rather than face stiffening competition
as the basis of profitability shifts from
innovation to production or marketing
competence, they search for other original or
novel ideas
n The underlying rationale of the grand
strategy of innovation is to create a new
product life cycle and thereby make similar
existing products obsolete
Horizontal Integration

n When a firm’s long-term strategy is

based on growth through the
acquisition of one or more similar firms
operating at the same stage of the
production-marketing chain, its grand
strategy is called horizontal
integration
n Such acquisitions eliminate competitors
and provide the acquiring firm with
access to new markets
Vertical Integration

n When a firm’s grand strategy is to

acquire firms that supply it with inputs
(such as raw materials) or are
customers for its outputs (such as
warehouses for finished products),
vertical integration is involved
n The main reason for backward
integration is the desire to increase the
dependability of the supply or quality of
the raw materials used as production
inputs
Vertical and Horizontal
Integration
Concentric Diversification

n Concentric diversification involves the

acquisition of businesses that are related to
the acquiring firm in terms of technology,
markets, or products
n With this grand strategy, the selected new
businesses possess a high degree of
compatibility with the firm’s current
businesses
n The ideal concentric diversification occurs
when the combined company profits increase
the strengths and opportunities and decrease
the weaknesses and exposure to risk (BB-
Lipton)
Conglomerate Diversification

n Occasionally a firm, particularly a very large

one, plans acquire a business because it
represents the most promising investment
opportunity available. This grand strategy is
commonly known as conglomerate
diversification.
n The principal concern of the acquiring firm is
the profit pattern of the venture
n Unlike concentric diversification,
conglomerate diversification gives little
concern to creating product-market synergy
with existing businesses
Turnaround

The firm finds itself with declining profits

n Among the reasons are economic recessions,
production inefficiencies, and innovative
breakthroughs by competitors
n Strategic managers often believe the firm can
survive and eventually recover if a concerted
effort is made over a period of a few years to
fortify its distinctive competences. This is
turnaround.
n Two forms of retrenchment:
q Cost reduction
q Asset reduction
Elements of Turnaround

n A turnaround situation represents absolute and

relative-to-industry declining performance of a
sufficient magnitude to warrant explicit turnaround
actions
n The immediacy of the resulting threat to company
survival is known as situation severity
n Turnaround responses among successful firms
typically include two stages of strategic activities:
retrenchment and the recovery response
n The primary causes of the turnaround situation have
been associated with the second phase of the
turnaround process, the recovery response
Divestiture

n A divestiture strategy involves the sale

of a firm or a major component of a
firm
n When retrenchment fails to accomplish
the desired turnaround, or when a
nonintegrated business activity achieves
an unusually high market value,
strategic managers often decide to sell
the firm
n Reasons for divestiture vary
Liquidation

n When liquidation is the grand strategy,

the firm typically is sold in parts, only
occasionally as a whole—but for its
tangible asset value and not as a going
concern
n Planned liquidation can be worthwhile
(GM)
Bankruptcy
n Liquidation bankruptcy—agreeing to a
complete distribution of firm assets to
creditors, most of whom receive a small
fraction of the amount they are owed
n Reorganization bankruptcy—the
managers believe the firm can remain
viable through reorganization
n Two notable types of bankruptcy
q Chapter 7
q Chapter 11
Motivations for Diversification
1. Increase firm’s stock value
2. Increase growth rate of firm
3. Investment is better use of funds than
using them for internal growth
4. Improves stability of earnings and sales
5. Balance or fill out product line
6. Diversify product line
7. Acquire a needed resource quickly
8. Achieve tax savings
9. Increase efficiency and profitability
 Diversification Strategies

Concentric Diversification
n Involves acquisition of businesses related to
acquiring firm in terms of technology, markets, or
products
Conglomerate Diversification
n Involves acquisition of a business because it
represents a promising investment opportunity
• Primary motivation is profit pattern of venture

n Difference between the approaches

• Concentric diversification emphasizes commonality
whereas conglomerate diversification emphasizes
profits for each individual unit
What Is Unrelated
Diversification?
n Involves diversifying into businesses with
q No strategic fit
q No meaningful value chain
relationships
q No unifying strategic theme
n Basic approach – Diversify into any industry
where potential exists
to realize good financial results
n While industry attractiveness and cost-of-entry
tests are important, better-off test is
secondary
 Turnaround Strategy

Involves a concerted effort over

a period of time to fortify a firm’s
distinctive competencies,
returning it to profitability
 Terms Used in Turnaround Strategy
n A turnaround situation represents absolute and
relative-to-industry declining performance of a
sufficient magnitude to warrant explicit turnaround
actions
n The immediacy of the resulting threat to company
survival posed by the turnaround situation is known
as situation severity
n Turnaround responses typically include two stages
of strategic activities
q Retrenchment

q Recovery response
Divestiture and Liquidation Strategies

Divestiture Strategy
• Involves selling a firm or a major component
of a firm
• Reasons for divestiture
n Partial mismatches between acquired firm and
parent firm
n Corporate financial needs
n Government antitrust action
Liquidation Strategy
• Involves selling parts of a firm, usually for its
tangible asset value and not as a going
concern
 The Strategy of Bankruptcy

n Two approaches
• Liquidation – Involves complete distribution of a
firm’s assets to creditors, most of whom receive a
small fraction of amount owed
• Reorganization – Involves creditors temporarily
freezing their claims while a firm reorganizes and
rebuilds its operations more profitably
n Advantage of a reorganization bankruptcy
• Proactive option offering maximum repayment of a
firm’s debt in the future if a recovery strategy is
successful
Corporate Combination Strategies

Joint Ventures
n Involves establishing a third company (child),
operated for the benefit of the co-owners
(parents)
Strategic Alliance
n Involves creating a partnership between two or
more companies that contribute skills and
expertise to a cooperative project
• Exists for a defined period

• Does not involve the exchange of equity

Corporate Combination Strategies
(contd.)

n Consortia are defined as large interlocking relationships

between businesses of an industry. In Japan such
consortia are known as keiretsus, in South Korea as
chaebols
n A Japanese keiretsu is an undertaking involving up to 50
different firms that are joined around a large trading
company or bank and are coordinated through
interlocking directories and stock exchanges
n Chaebols are typically financed through government
banking groups and largely are run by professional
managers trained by participating firms expressly for the
job
The Top Five Strategic Reasons for
Outsourcing

1. Improve business focus

2. Access to world-class capabilities
3. Accelerated reengineering benefits
4. Shared risks
5. Free resources for other purposes