FORMULATING CORPORATE LEVEL STRATEGIES
Strategic options / Grand Strategies
Based on the above strategies a firm can take the following grand strategies at corporate level:
Forward integration–this involves gaining ownership or increased control over distribution channels. It eliminates resale mark up, hastens inventory turnover and allows firm to quickly take advantages of falling component prices. It is preferred in the following circumstances:
- When present distributors are expensive unreliable or incapable
- When availability of quality distributors is limited
- When industry is growing steadily
- When firm has capital and human resources needed.
Backward strategies– this is a strategy of seeking ownership or increased control over suppliers. It is appropriate under the following conditions:Delmonte.
- When present suppliers are expensive ,unreliable or incapable
- When number of suppliers is small and competitors are many.
- When the firm has enough resources
Horizontal strategies–this is a strategy of seeking ownership or increased control over competitors. It may take form of mergers or takeovers. It is appropriate under the following conditions:
- When integration enables the firm to gain monopolistic characteristics
- When economies of scale provide a major competitive advantages
- When firm have enough resources.
- When there is need to diversify.
These are mainly strategies that attempt to use the firm’s strengths in order to exploit opportunities and minimize threats. They include:
Market penetration strategy–this seeks to increase the market share of present products in present markets through marketing effort. It may be used alone or in combinations with other strategies. it involves increasing the number of sales personnel, increasing advertising and sales promotion. It is preferred in the following conditions:
- When the current market is not saturated
- When the usage rate of the current customers can be increased
- When market share of competitors has declined.
Market development strategy-this involves introducing present products into new markets which could be domestic or international. It is preferred under the following conditions:
- When existing distribution channels are reliable and cheap
- When the firm is very successful
- When a new unsaturated market exists.
- When the organization has excess production capacity
- When the present market is saturated.
Product development strategy– this seeks to increase sales by improving or modifying present production. It usually entails large research and development expenditure. Product development is an option under the following circumstances:
- It the organization has successful products that are maturing
- When the industry has rapid technological development
- When major competitors offer better quality products
- When the firm has a strong research and development team.
Concentric diversification-this is the strategy where the firm introduces new but related products for present customers. It is appropriate under the following conditions:
- When the firm is competing in a slow growth industry
- If adding new but related product can enhance sales of the current product.
- When the firm has a strong management that can manage both products
- When the current product are in decline stage.
Horizontal diversification– this is a strategy where the firm adds new unrelated products but for the current consumers. It is necessary under the following conditions:
- When it can significantly add to the revenue of the organization
- When the industry is highly competitive but without growth
- When the present channels of distributions can be used to market the new products.
Conglomerate diversification-this is a strategy of adding new unrelated products without necessarily focusing on the current consumers. It is necessary under the following conditions.
- When the basic industry is experiencing decline.
- When the firm has excess resources that need to be utilized.
- Where there exists financial synergy between two industries.
Joint ventures-these occur when two or more companies form temporary partnership for the purpose of capitalizing on some opportunities. The conditions necessary for joint includes:
- when the distinctive competences of the two companies can complement each other
- when there is need to introduce new technology
- when the project is potentially very profitable but requires a lot of resources and high risk
- when a private organization wishes to get political protection
Retrenchment strategy-this occurs when an firm regroups through cost and asset reduction t reverse a declining sales and profit trend. it is sometimes called turn around or re-organization strategy. It is designs to fortify the firm on its basic distinctive competencies. It involves selling off assets to raise capital needed, reducing product lines, closing marginal business, reducing number of employees and institutionalizing expenses control systems so as to operate within limited resources.
Divestiture-this is selling of a division or part of the firm. it is used to raise capital for further strategic acquisitions or investments. it sometimes may be part of the overall retrenchment strategy to get rid of unprofitable businesses.
Liquidation–this is selling of the companies assets for their tangible worth. it is a recognition of defeat. it becomes the best option under conditions such;
- When the firm has unsuccessfully pursued both retrenchment and divestiture
- When the shareholders can minimize losses by selling off the assets.
Developing Business level strategies.
They are Formulated using Portfolio analysis.
have to assess their respective attractiveness and decide how much support each unit deserves.
Portfolio analysis is done through all or any of the following models:
BCG Portfolio Matrix.–
BCG is acronym for Boston Consulting Group.
Bigger Companies that are having units to be organized into strategic business units face the challenge of allocating resources among themselves and thus compete even within the group. In the early 1970’s the Boston Consulting Group developed a model for managing a portfolio of different business units (or major product lines). The model states that where a firm has portfolios which are autonomous divisions or profit centre of the firm, and the firm competes in different industries, a different strategy may need to be developed for each business unit. The BCG strategy is designed to enhance a multi-divisional firm’s effort to formulate strategies. This matrix graphically portrays differences among the divisions in terms of relative market share and industry growth rate.
This connotes low market share, competing in high growth industry-such business need cash but their cash generation is low. They are called question marks because the firm must decide whether to strengthen them by perusing intensive strategy or sell them off.
- Star-This represents the firms’ best long term opportunities for growth and profitability. It has a high market share and high industry growth rate. Such business should receive substantial investment, to maintain or strengthen their dominance in the market. The possible strategic decisions should include integration and intensive strategies. Joint ventures may also be appropriate when opportunity present themselves.
- Cash Cow-this have a relative market share position but compete in a low growth industry. They are called cash cows because they generate cash in excess of their needs. They are often milked to finance others. They should be managed well to maintain their position as long as possible. Product development or concentric diversification may be alternative strategies for strong cash cow. However as the cash cow become weak, retrenchment or divestiture becomes better options.
- Dog-this have low relative market share and compete in a slow or no growth market. They are described as dogs because of their weak internal and external positions. They are often diversified, liquidated or retrenched.