CORPORATE LEVEL STRATEGY

CHAPTER 7

Learning Objectives
At the end of this chapter, the student should be able to:
1. Describe the nature of a strategy;
2. Identify the elements in corporate strategy formulation, and
3. Discuss different corporate strategies.

CONCEPT AND NATURE OF A STRATEGY

The term "strategy" comes from the Greek word strategia which refers to the art of a troop leader
or a general. Dess et al. (2012) defines strategy as the analysis, decision, and action that enables a
company to succeed. Wheelen and Hunger (2010) define it as the comprehensive plan that states how a
company will achieve its mission and objectives. In the context of strategic management, this text defines
strategy as a plan formulated after an extensive critical analysis of a company's resources which is then
implemented in order for a company to achieve its mission and objectives effectively.

Companies that formulate their strategies without critically analyzing the external and internal
environments are likely to face business difficulties which could lead to failure. Weak and defective
strategies are hollow. Good and effective strategies make companies achieve competitive advantage and
overcome competitive disadvantage. They guide a company to take the most appropriate steps in the
event of adversaries and unfavorable changes in the environment. They can also be used as a basis for
performance analysis.

Characteristics of a Good and Effective Strategy

A good and effective strategy has the following features:

1. It is based on critical analyses of different factors comprising a company's environment.

2. It is supported by relevant data obtained from reliable sources.
3. It is directed to and aligned with the organizational goals and objectives of a company.
4. It is clear and realistic.
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.
10. It depicts the nature of a business and its priorities.

Strategic Types of Businesses

The level or intensity of competition in an industry influences the strategy that a company may
formulate and adopt. However, despite similar forces and elements faced by companies in a particular
industry, businesses still adopt different ways of reacting to situations. Wheelen and Hunger (2010)
referred to them as strategic types which represent the category of companies based on their common
strategic orientation and combination of structure, culture, and processes.

The four strategic types are as follows:

1. Defenders. These are businesses with few product lines, and they intend to defend them from
new products entering the market. Their foremost concern is how to improve their operating
activities in terms of cost reduction. Being cost- 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 products. Product development,
innovation, and new market are the essence of their strategy orientation. Creativity for them is
more important than efficiency in operations.

3. Analyzers. These are multi-divisional companies that compete in at least two types of industries,
one stable and one variable, while maintaining stability and flexibility.

4. Reactors. These are businesses that do not have firm or consistent strategic orientations. They
adopt piecemeal or quick-response strategies which are oftentimes ineffective to meet the
pressures, changes, and challenges of the environment.

Hierarchy of Strategies

The types of strategies according to hierarchy are as follows:

1. Corporate strategy
2. Business strategy
3. Functional strategy

A corporate strategy, which is usually formulated by the top-level management, is a

comprehensive master plan that describes the overall direction of a company. A business strategy, which
occurs at the business or product unit, describes how a company improves its competitive position in a
specific industry. A functional strategy is a plan taken by functional areas that is intended to maximize the
productivity of a resource to achieve competitive advantage.

These three strategies do not operate independently of each other but complement and support
each other. For example, the business strategy must be aligned with the corporate strategy to achieve
organizational goals and objectives. In a similar manner, the business strategy must support the functional
strategy in the maximization of resource productivity. Figure 7.1 presents the hierarchy of the strategies
and the concerns of each level.
 Corporate strategy Overall direction of a
(Top-level management) company

Business strategy Competitiveness in the

(Middle-level management) industry

Functional strategy Resource productivity and

(Lower-level management) maximization

Figure 7.1 Hierarchy of strategies

Strategy formulation, the first stage of the strategic management process, is the process, of
developing a comprehensive plan to effectively manage the external environmental strategic forces (e.g.,
opportunities and threats) relative to a company's strengths and weaknesses. Strategy formulation occurs
after a thorough and critical analysis of the environment is conducted. It is not however, a rigid and fixed
process. When new developments happen in the environment while the strategies are being formulated,
the new development is considered in setting the direction of the strategies.

CORPORATE STRATEGY

The formulation of a corporate strategy is conducted by the top-level management, with inputs from
the middle - and lower-level managements and other stakeholders in the form of quantitative or
qualitative information. It is concerned with the overall direction of a company and is considered the
general or grand strategy of the company. This strategy is broadly categorized into three general
orientations as follows:

1. Growth strategy
2. Stability strategy
3. Retrenchment strategy

GROWTH STRATEGY

A growth strategy is a corporate strategy that a company may adopt if it aims to expand its present
operating activities. In short, the company intends to grow. Growth may happen internally or externally.
Internal growth occurs when a company expands its operation domestically or globally. On the other
hand, external growth happens when a company enters into mergers, acquisitions, or strategic alliances.

Growth strategies are broadly classified into two as follows:

1. Concentration strategy
2. Diversification strategy
Concentration Strategy

A concentration strategy is appropriate to adopt when a company can reasonably determine that its
current product lines have real growth potentials. This strategy works effectively when an industry is
growing and attractive.

The two types of concentration strategies are as follows:

1. Horizontal growth strategy

2. Vertical growth strategy

Horizontal growth strategy. In a horizontal growth strategy, a business expands its operations in two
ways as follows:

1. By entering into other geographic locations

2. By increasing the range of product lines for the current market

A horizontal growth strategy results in a horizontal integration where a company operates in various
geographic locations. A company can make an international entry using the following mechanisms

1. Exporting - A company ships goods to other foreign countries.

2. Licensing - A company enters into an agreement with another company from another country to
produce or sell the product/s of the former.

3. Franchising - A company enters into an agreement with a franchiser to use the name and system
of the latter.

4. Joint venture - A company combines its resources with other companies from foreign countries
to produce new products.

5. Acquisition - A company purchases a foreign company.

6. Green field development - A company constructs its own plant and invests with other assets in a
foreign country.

7. Turnkey operations - A company constructs operating facilities and transfers the same to the host
country when completed.

8. BOT (build, operate, transfer) scheme - A company constructs facilities, operates then when
completed, and turns them over to the host country.

Vertical growth strategy. A company takes over the functions of a supplier and a distribute in a
vertical growth strategy. It results in a vertical integration where a company takes full responsibility of all
activities in the value chain (e.g. from the acquisition of raw materials up to the delivery to final
customers). The degrees of vertical integration are categorized as follows:

1. Full integration - A company takes 100% control of the value chain.

2. Taper integration (backward integration) - A company acquires not more than 50% of its
requirements from outsiders.

3. Quasi-integration (forward integration) - A company purchases most of its requirements from

outsiders.

4. Long-term contracts - A company enters into an agreement with other companies to provide
goods to each other over a specified period of time.

Diversification Strategy

A diversification strategy is an appropriate growth strategy when the original industry appears to
have matured, plateaued, and consolidated already. Diversification growth strategies can be categorized
as follows:

1. Concentric diversification strategy

2. Conglomerate diversification strategy

Concentric diversification strategy. The concentric diversification growth strategy is more,

appropriate in a less attractive industry and for a company with a strong competitive position. In this case,
a company has a greater chance to succeed by utilizing its core competency in exploiting a related
industry. For example, a company manufacturing refrigerators employs concentric diversification as its
growth strategy when it starts to manufacture air-conditioning units for houses and commercial units.

Conglomerate diversification strategy. Conglomerate diversification happens when a company

enters another industry which is not related to the industry where it presently belongs. A company may
consider this strategy as its growth strategy when its present industry is no longer attractive and it lacks
the required abilities to transfer resources to related products or services. For example, a company
engaged in transportation may enter the manufacturing industry.

STABILITY STRATEGY

Another type of corporate strategy is stability strategy. In this strategy, a company plans to continue
its current activities without substantial change in its direction. It is effective for short-term planning but
may be detrimental if used for long-term planning. Small businesses can benefit using this strategy
because they usually belong to a predictable environment.
 The common types of stability strategies are the following

1. Pause or proceed-with-caution strategy

2. No-change strategy
3. Profit strategy

Pause or Proceed-with-Caution Strategy

In a pause or proceed-with-caution strategy, a company takes a temporary timeout from its major
activities while observing changes in its external environment. It is a temporary strategy. In such a
situation, a company does not make significant moves until the environment becomes favorable to them.
This is the strategy adopted by most companies when there is a financial crackdown and a pessimistic
economic outlook.

The pause or proceed-with-caution strategy does not imply that a company will shut down its
operations. It only temporarily stops major critical activities before shifting to the growth or retrenchment
strategy. The company makes a deeper critical analysis of the environment before making any bold steps.
This will enable the company to consolidate its resources for a competitive position before moving to the
growth strategy.

No-Change Strategy

When an industry is not facing turbulent variables and a company is enjoying the fruits of its
continued successful activities, it may adopt the no-change strategy as its corporate strategy. This
indicates that the company, which has a dominant position in the market, will not take anything new;
rather, it will continue implementing its current activities in the near future.

The no-change strategy is effective when an industry is relatively stable with little expected growth,
and consolidation is not expected to occur in the foreseeable future. However, businesses that are not
maintaining successful operations may find this strategy detrimental.

Profit Strategy

As a corporate strategy, the profit strategy is a temporary plan for a company in its desire to increase
its profits when revenues are declining. It is a cost-cutting mechanism to address a decline in profit
because of a decrease in sales. Companies may reduce their discretionary expenditures operating
expenses on advertising, research and development expenditures, and investments as a way of supporting
the profits.

In a profit strategy, a company usually has a disadvantaged position in an industry. The management
blames their company's poor position in relation to the external factors of the enairehment such as the
lack of government support, unethical competition, financial crackdown or unfavorable market
conditions. This strategy may not be beneficial for a company if adopted as? long-term strategy.
RETRENCHMENT STRATEGY

The third type of corporate strategy that a top-level management may formulate is the
retrenchment strategy. This is the strategy to be adopted when a company experiences poor competitive
position and operating performance and competitive disadvantage.

The most common retrenchment strategies include the following:

1. Turnaround strategy
2. Captive company strategy
3. Sell-out or divestment strategy
4. Bankruptcy or liquidation strategy

Turnaround Strategy

The turnaround strategy is adopted when a company is not yet critically bleeding financially. A
company intends to improve its operational efficiency by adopting drastic actions for a leaner
organization. It undergoes two basic phases- contraction and consolidation.

In contraction, being the initial stage of this strategy, there is an overall cost reduction in the entire
company. Businesses that do not appear profitable are divested, processing plants are closed, and jobs
across the company are eliminated to have a strong lean business. In the consolidation stage, resources
are consolidated, programs are developed, and the remaining best and qualified personnel are motivated
to establish a new look and a strong company that can achieve competitive advantage in an industry.

Captive Company Strategy

The captive company strategy is adopted by a company that has a weak competitive position in an
industry and does not have the capability to implement a complete turnaround strategy. In this strategy,
a weak company becomes the captive of a strong company, which is usually its customers, in order to
have continued existence. This means that the majority of the sales of the weak company is dependent
on the strong company, which is conducted through long term contracts. It is inevitable for the weak
company to lose its corporate independence in exchange for financial security.

Sell-out or Divestment Strategy

The term "sell-out" implies that a business is selling the entire company, including all the business
units and divisions. However, divestment occurs when a company only sells its division or business unit
that does not operate profitably. This strategy is adopted when a company has a weak competitive
position in an industry and is not able to look for a strong partner to whom its business unit can be a
captive. A sell-out or divestment strategy is a favorable option when a company is able to look for a good
price for the company.

Bankruptcy or Liquidation Strategy

The bankruptcy or liquidation strategy is adopted when a company that is suffering heavy losses
terminates its operations. In bankruptcy, a company gives up its management to a court and settles some
financial obligations in return. Meanwhile, liquidation involves the conversion of non-cash assets to cash
through selling to settle financial obligations. This is usually the last strategy that a company adopts when
it has a very weak competitive position in an industry and nobody is willing to buy the company.

In the formulation of a corporate strategy, there are several factors that must be considered. One
important factor is the industry itself. An industry must be evaluated in terms of its growth, level of
competition, factors and barriers influencing competition, industry structure, and its present stage in the
industry cycle.

Another important factor that must be considered is the status of a company in an industry.
Companies that have competitive advantage tend to adopt the growth strategy as their corporate
strategy, but companies with weak competitive positions consider the retrenchment strategy.

Figure 8.3 presents the different types of corporate strategies and the different variations under
them.

CRAFTING A CORPORATE LEVEL STRATEGY

There are several suggested ways of formulating corporate level strategies, as there can be various
conflicting issues that a company may attempt to resolve. The three key issues that must settled first in
the formulation of a corporate level strategy are as follows:

1. The overall orientation of a company toward growth, stability, or retrenchment

2. The industry or the market that a company intends to compete in
3. The manner in which a company builds its capabilities and supports its functional units.

Considering the significant contributions of the three key issues, the best way to formulate corporate
strategy is by doing the following:

1. Conduct a critical environmental analysis.

2. Set the overall orientation of the company.
3. Identify the industry or market to compete in.
4. Define how the company transfers resources to its business or functional units.

These steps are not rigid and distinct from each other; rather, the entire process is reiterative. It
involves continuous refinement by moving from one step to another. The bottom line of these steps is to
answer the following "how" questions:

1. For the growth strategy: How can growth be achieved in a company?

2. For the stability strategy: How can the current performance be continued to achieve stability?
3. For the retrenchment strategy. How can the present operating activities discontinue but receive
a fair return on investment?

Conduct a critical environmental analysis. The first step in strategy formulation is to conduct a deep
and critical environmental analysis. It is intended for the gathering of reliable and relevant information as
basis when making a sound forecast about an industry (e.g., expected trends, growth, and competitive
forces) and the capability of a company to exploit its resources for competitive advantage. Figure 6.3 of
Chapter 6 presents the interrelated and interdependent activities when conducting an environmental
analysis.

Set the overall orientation of the company. With the relevant and reliable data on hand provided
by an environmental analysis, the next 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 the future overall
direction of a company, the industry, particularly its growth and life cycle, customer behavior and
preferences, societal factors, and internal environment factors, should be highly considered.

Identify the industry or market to compete in. At the corporate level, it must be clear what industry
or market a company will compete in. This is especially true if a company adopts the growth strategy. A
company cannot serve all types of customers with different tastes, preferences, and priorities. This way,
a company will be able to focus its efforts and activities toward its ultimate direction. This is easily
facilitated with the ajd of a portfolio analysis, particularly the BCG growth-share matrix model.

Define how the company transfers resources to its 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 how its different functional units create synergy as it
transfers resources from one unit to another. At the corporate level, the different functional units must
be able to obtain synergy in view of the resources, skills, and capabilities provided to them. This cascades
down to the achievement of competitive advantage.
 CORPORATE STRATEGY
(Overall Direction of a Company)

Growth Strategy Stability Strategy Retrenchment Strategy

(To achieve growth in sales and assets) (To continue current activities) (To discontinue present activities)

Concentration Strategy Pause or Proceed-with-Caution Turnaround Strategy

(More appropriate in a Strategy
(Companies drastically streamline
growing industry) (Companies do not make
their operations by cutting costs
significant changes in their
and selling non-profitable business
direction but observe
Horizontal Growth Strategy units to have a leaner but
movements in the industry.)
competitive organization)
(Entering into a new market)
No Change Strategy
(Companies with dominant
positions in a stable industry opt
(Exporting, licensing, franchising, Captive Company Strategy
to continue enjoying their
joint venture, acquisition, green-
successful operations and do not (Companies with weak positions in
field development, turnkey
plan to make major changes.) the industry) become captives of
operation, and BOT)
other companies with strong
industry positions.
Profit Strategy
Vertical Growth Strategy (Companies that are
(Taking over the functions of experiencing a decline in sales
suppliers and distributors) consider cutting their costs and Sell-out or Divestment Strategy
investments to support profits.)
(Companies sell a division of or the
Full integration, backward entire business for a good price.)
integration, forward integration,
and long-term contracts

Diversification Strategy
(More appropriate in a mature Bankruptcy or Liquidity Strategy
industry)
(Companies give up their
management to a court or convert
Concentric Diversification Strategy assets to cash to settle financial
obligations.)
(More appropriate when a
company has a strong competitive
position in a less attractive industry

Conglomerate
Diversification Strategy
(More appropriate in a less attractive
industry and when a company is
unable to transfer resources to
related products or services.