Common Types of Corporate Strategies
Growth StrategyGrowth platforms are specifically named initiatives selected by a business organization to fuel revenue and earnings growth.
Learning ObjectivesDistinguish between the varying integrations and diversifications that allow businesses to pursue strategic growth
- Strategic growth platforms are long-term initiatives for high-scale revenue increases. Generic examples of commonly selected strategic-growth platforms include pursuing specific and new product areas or entering new distribution channels.
- Diversification is a form of corporate strategy that seeks to increase profitability through greater sales volume obtained from new products or new markets.
- Market development strategy entails expanding the current incumbent market through new users or new uses.
- Market penetration occurs when a company penetrates a market in which current products already exist, enabling the business to compete head to head with incumbents in the market.
- New product development (NPD) is the internal process of bringing a new product to market.
- Integration, either horizontal or vertical, is a merger or acquisition process of entering new, related industries (for example, acquiring a supplier or a competitor in a related industry).
- diversification: A corporate strategy in which a company acquires or establishes a business other than that of its current product.
- horizontal integration: The merger or acquisition of new business operations.
- vertical integration: The integrating of successive stages in the production and marketing process under the ownership or control of a single management organization.
- Apple Computer's targeting of "personal music systems" to accelerate growth faster than with its personal computer business alone.
- IBM's coining of the term "e-business," and its subsequent use as the organizing theme for all that the company did in the late 1990s.
- Google's entry into the operating system and laptop realms.
Types of StrategiesThere are a number of different growth strategies, but the most common are:
- Horizontal integration – The merger or acquisition of new business operations. An example of horizontal integration would be Apple entering the search-engine market or a new industry related to laptops and smartphones.
- Vertical integration – Integrating successive stages in the production and marketing process under the ownership or control of a single management organization. An example might include a gas-station company acquiring a oil refinery.
- Diversification – A corporate strategy in which a company acquires or establishes a business other than that of its current product. Diversification can occur either at the business-unit level or at the corporate level. At the business-unit level, diversification is most likely to involve expansion into a new segment of an industry in which the business already competes. At the corporate level, it generally means entrance into a promising business outside the scope of the existing business unit.
Other Product / Market Growth Types
Market PenetrationMarket penetration occurs when a company penetrates a market in which current products already exist. This strategy generally requires great competitive strength, a strong brand, or both, as most market penetrations demand actively taking market share from current incumbents. It is an aggressive and often risky approach to growth.
Market Development StrategyMarket development strategy entails expanding the potential market through new users or new uses for a product. The strategy is best accomplished through identifying unique niche needs in a specific type of user and filling those needs. Market research is critical in development strategies. New users can be defined as new geographic segments, new demographic segments, new institutional segments, or new psychographic segments.
New Product DevelopmentIn business and engineering, new product development (NPD) is the process of developing, researching, and bringing a new product to market. A product is a set of benefits offered for exchange and can be tangible (that is, something physical you can touch) or intangible (for example, a service, experience, or belief). Identifying new needs or new ways of filling them and developing a new process or product that accomplishes this aim are the goal of this growth strategy. NPD requires investment in research and development, usually over the long term, and extensive trial and error.
Consolidation StrategyIn business, consolidation refers to the mergers and acquisitions of many smaller companies into much larger ones for economic benefit.
Learning ObjectivesExplain the relevance of consolidation from a strategic management perspective
- Mergers and acquisitions (M&A) is an aspect of corporate strategy dealing with the buying, selling, dividing, and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location, or acquire new sectors or locations.
- Consolidation occurs when two companies combine to form a new enterprise altogether, eliminating competition and creating broader economies of scale or scope.
- Generally speaking, a merger is a combination of organizations which each abandons its previous brand and business models, creating a new organization with the combined capacities of each.
- In an acquisition, one organization buys out another, with the acquired business usually placing its processes under the brand name of the acquirer.
- The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. However, on average and across most commonly studied variables, M&A activity does necessarily not improve financial performance.
- Because of the costs involved, consolidation is a very high-level strategic decision. All stakeholders on both ends should be consulted, and agreements will often take many months or years to conclude.
- merger: The legal union of two or more corporations into a single entity, with assets and liabilities typically assumed by the buying party.
- consolidation: The act or process of consolidating, making firm, or uniting; the state of being consolidated; solidification; combination.
- acquisition: The act or process of acquiring.
Mergers and AcquisitionsMergers and acquisitions (M&A) are aspects of corporate strategy, corporate finance, and management that deal with the buying, selling, dividing, and combining of different companies and similar entities. This activity can help an enterprise grow rapidly in its sector or location of origin or expand into a new field or new location. M&A is different from joint ventures and other forms of strategic alliance, as mergers or acquisitions aim to create a single organization.
The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared. Generally speaking, a merger is a combination of organizations in which each abandons its previous brand and business models, creating a new organization with the combined capacities of each one. In an acquisition, one organization buys out another, with the acquired company usually placing its processes under the brand name of the acquirer.
Merger DynamicsIn the pure sense of the term, a merger happens when two firms, often about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist independently; a new company, GlaxoSmithKline, was created.
The classic example of consolidation is the merger of Bell Atlantic with GTE, out of which resulted Verizon Communications. Not every merger with a new name is successful. By consolidating into YRC Worldwide, the combined company lost the considerable value of both Yellow Freight and Roadway Corp.
RationaleThe dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance: economy of scale, economy of scope, increased revenue or market share, cross-selling, synergy, taxation, geographical or other diversification, resource transfer, vertical integration, and hiring.
However, on average and across the most commonly studied variables, acquiring firms' financial performance does not positively change as a function of their acquisition activity (King, D. R.; Dalton, D. R.; Daily, C. M.; Covin, J. G. 2004. "Meta-analyses of Post-acquisition Performance: Indications of Unidentified Moderators." Strategic Management Journal 25 (2): 187–200. doi:10.1002/smj.371). Other motives for merger and acquisition that may not add shareholder value include diversification, manager overconfidence, empire-building, and management compensation.
Managerial ImplicationsBecause of the costs involved, consolidation is a very high-level strategic decision. All stakeholders in both organizations should be consulted, and agreements will often take many months or years to conclude. Cultural conflicts between two different organizations are not uncommon, as the mission, vision, and values of the individuals and groups within them are likely to differ. Managing this type of change strategically is complex and rife with conflict. Mismanagement during these processes can minimize the potential synergistic gains and reduce the efficacy of the new strategic plan.
Global StrategyGlobal strategy, as defined in business terms, is an organization's strategic guide to pursuing various geographic markets.
Learning ObjectivesExplain the concept of global strategy within the context of international business and a globalized economy
- A global strategy may be appropriate in industries where firms face strong pressures to reduce costs but weak pressures for local responsiveness, allowing these firms to sell a standardized product worldwide.
- Companies using a global strategy may achieve economies of scale to improve margins or low price points.
- Globalization is not limited to cost leadership. Differentiation strategies also enable economies of scope, either fulfilling different needs in different markets with a similar series of products, or developing new products based upon the needs and consumption habits of a new market.
- Other primary strategic reasons for globalization are to build supplier relationships, to improve access to raw materials (unique to a given region), and to cut costs by relying on other regions' specializations.
- With global markets in mind, strategic managers must expand their perspective and use varied models to generate different strategies for different places.
- fixed costs: A cost of business which does not vary with output or sales; overheads.
- centralized: Having power concentrated in a single, central authority.
- multinational: Operating, or having subsidiary companies in multiple countries (especially more than two).
When to Go Global
Cost LeadershipA global strategy may be appropriate in industries where firms face strong pressures to reduce costs but weak pressures to respond locally; globalization therefore allows these firms to sell a standardized product worldwide. By expanding to a broader consumer base, these firms can take advantage of scale economies (cost advantages that an enterprise obtains due to expansion) and learning-curve effects because they are able to mass-produce a standard product that can be exported (providing that demand is greater than the costs involved).
Market ExpansionGlobalization is not limited to cost leadership, however. Differentiation strategies also enable economies of scope, either fulfilling different needs in different markets with a similar series of products, or developing new products based upon the needs and consumption habits of a new market. Differentiation as part of a global strategy will often require localization, as organizations must adapt to consumer tastes better to compete in the new country. For example, Coca Cola tastes different depending on the country where it is bought because of differences in local preferences.
SourcingOther popular and primary strategic reasons for globalization include building supplier relationships, improving access to raw materials (unique to a given region), and cutting costs by using other regions' specializations. Starbucks sources coffee beans from all over the world, as climate dramatically affects the type and quality of the bean. The globalization strategy of Starbucks—while it includes selling in many countries—is hugely depending on global sourcing, and strategic managers must carefully monitor this process for costs and benefits.
Global strategies require firms to coordinate tightly their product and pricing strategies across international markets and locations; therefore, firms that pursue a global strategy are typically highly centralized.
Corporate Strategy ImplicationsWith global markets in mind, strategic managers must expand their perspective and use varied models to generate different strategies for different places. For example, companies must now conduct a PESTEL analysis for each region in which they operate and recognize expense and competition deviations between regions. For example, tariffs in country A may be much higher than country B, but country B has fewer individuals willing to pay a high price for the good the organization is selling. Managers must conduct a cost/benefit analysis to identify which country actually offers the best profit potential. These analyses are how strategists incorporate global concerns into strategic management.
Cooperative StrategyA strategic alliance is a cooperation where each member expects the benefit from cooperation will outweigh the cost of individual efforts.
Learning ObjectivesIdentify the steps involved in forming a strategic alliance to employ cooperative strategies
- A strategic alliance is a relationship between two or more parties to pursue a set of agreed-upon goals or to meet a critical business need while remaining independent organizations. This form of cooperation lies between mergers and acquisitions and organic growth.
- Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property.
- Upper management is tasked with the complex process of identifying good partners and generating agreements of mutual benefit. Strategic alliances can be high-cost, complex strategic components.
- Strategic alliances allow each partner to concentrate on its own best capabilities, learn and develop other competences, and assure adequate suitability of resources and competencies.
- alliance: The state of being allied; the act of allying or uniting; a union or connection of interests between families, states, parties, etc.
Reasons for Strategic AllianceThe alliance is a cooperation or collaboration that aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property.
The alliance often involves technology transfer (access to knowledge and expertise), economic specialization (David C. Mowery, Joanne E. Oxley, Brian S. Silverman. Strategic Alliances and Interfirm Knowledge Transfer. Winter 1996. Strategic Management Journal, Vol. 17, Special Issue: Knowledge and the Firm, pp. 77-91), shared expenses, and shared risk.
Cooperative sourcing is a collaboration or negotiation between different companies with similar business processes. To save costs, the competitor with the best production capability can insource the business process of the other competitors. This practice is especially common in IT-oriented industries as a result of low to no variable costs, e.g. banking. Since all of the negotiating parties can be outsourcers or insourcers, the main challenge in this collaboration is to find a stable coalition and the company with the best production function. High switching costs, costs for searching potential cooperative sourcers, and negotiating may result in inefficient solutions.
Forming a Strategic AllianceUpper management is tasked with the developing complex interactive strategies when entering a strategic alliance. Aligning stakeholders from different businesses and ensuring the costs do not outweigh the benefits requires careful managerial consideration. The following steps highlight key aspects of the strategic alliance process:
- Strategy development involves studying the alliance's feasibility, objectives, and rationale; it also entails focusing on the major issues and challenges and development of resource strategies for production, technology, and people. It requires aligning alliance objectives with the overall corporate strategy.
- Partner assessment involves analyzing a potential partner's strengths and weaknesses; creating strategies to accommodate all partners' management styles; preparing appropriate partner selection criteria; understanding a partner's motives for joining the alliance; and addressing resource capability gaps that may exist for a partner.
- Contract negotiation involves determining whether all parties have realistic objectives; forming high-caliber negotiating teams; defining each partner's contributions and rewards as well as protecting any proprietary information; addressing termination clauses and penalties for poor performance; and highlighting the degree to which arbitration procedures are clearly stated and understood.
- Alliance operations comprise addressing senior management 's commitment; finding the caliber of resources devoted to the alliance; linking budgets and resources to strategic priorities; measuring and rewarding alliance performance; and assessing the performance and results of the alliance.
- Alliance termination entails winding down the alliance—for instance, when its objectives have been met or cannot be met or when a partner adjusts priorities or reallocates resources elsewhere.
Potential Benefits of Strategic Alliances
Benefits of strategic alliances vary according to each business's strengths and objectives and may include:
- Pooling expensive resources and share development or R & D costs on new products
- Locking in supply chains
- Building credibility with customers ("Our strategic partners include...")
- Allowing each partner to concentrate on activities that best match its capabilities
- Learning from partners and developing competencies that may be more widely exploited elsewhere
- Creating adequate suitability of resources and competencies for an organization to survive
E-Business StrategyIn the emerging global economy, e-business has become an increasingly necessary component of business strategy.
Learning ObjectivesDefine and explain the general value chain of an e-business strategy and its advantages
- The integration of information and communications technology (ICT) has revolutionized relationships within organizations and among organizations and individuals. It has also enhanced productivity, encouraged greater customer participation, enabled mass customization, and reduced costs.
- Companies use ICT to enhance e-business, which includes any process that a business organization (either a for-profit, governmental, or non-profit entity) conducts over a computer-mediated network.
- E-business enhances three primary processes: those related to production, customer focus, and internal management.
- e-commerce: Commercial activity conducted via the Internet.
- e-learning: An online platform for training modules, whether internal or external to an organization.
- e-business: A business that operates partially or primarily over the Internet, usually providing services to other businesses.
Electronic-business methods enable companies to link their internal and external data-processing systems more efficiently and flexibly, to work more closely with suppliers and partners, and to better satisfy the needs and expectations of customers. In practice, e-business is more than just e-commerce. While e-business refers to a strategic focus with an emphasis on the functions that occur using electronic capabilities, e-commerce is a subset of an overall e-business strategy.
E-Business ProcessE-business involves business processes that span the entire value chain: electronic purchasing and supply-chain management, electronic order processing, customer service, and business partner collaboration. Special technical standards for e-business facilitate the exchange of data between companies. E-business software allows the integration of intrafirm and interfirm business processes. E-business can be conducted using the Internet, intranets, extranets, or some combination of these.
In the emerging global economy, e-commerce and e-business have become increasingly necessary components of business strategy and strong catalysts for economic development. The integration of information and communications technology (ICT) in business has revolutionized relationships within organizations and those among organizations and individuals. Specifically, the use of ICT in business has enhanced productivity, encouraged greater customer participation, and enabled mass customization.
Advantages of E-CommerceE-business enhances three primary processes:
- Production processes including procurement, ordering and replenishment of stocks; processing of payments; electronic access to suppliers; and production control processes
- Customer-focused processes including promotional and marketing efforts, Internet sales, customer purchase orders and payments, and customer support
- Internal management processes including employee services, training, internal information-sharing, videoconferencing, and recruiting. Electronic applications enhance information flow between production and sales forces to improve sales-force productivity. ICT improves the efficiency of work-group communications and electronic publishing of internal business information.