37 Corporate level strategy

R. Swaranalatha

Levels of strategy

Strategy operates at different levels

Corporate strategy

It is the top level decision making and covers decisions dealing with the objectives of the firm, acquisition and allocation of resources and co-ordination of strategies of various strategic business units(SBU) for optimal performance.

The nature of strategic decisions is value-oriented, conceptual and future oriented.

The corporate strategy sets the long-term objectives of the firm and the broad constraints and policies within which a SBU operates. The corporate level will help the SBU define its scope of operations and also limit or enhance the SBUs operations by the resources the corporate level assigns to it.

Below the functional-level strategy, there may be operations level strategies as each function may be divided into several sub functions.

For example, marketing strategy, a functional strategy, can be subdivided into promotion, sales, distribution, pricing strategies, customer service and so on, with each sub function strategy contributing to functional strategy.

Business firms are in dire need to accommodate all changes in the dynamic business environment. Top level management gives utmost priority to keep track with the changes and therefore, formulates strategies needed to accommodate changes at the appropriate time.

Suitable strategies framed by the top level management for the overall company to tide over the changes in the external environment, matching the organisational resources and capabilities are named as corporate strategy.

Corporate strategy is otherwise called as Grand strategy.

According to Thompson & Cats, Baril, 4 E’s to address corporate strategy are

Extend strategy Adopt new business model or enter new business
Expand Strategy Addition of products or services within an existing business.
Exit strategy Drop a product or service line or exit a business.
Enhance strategy Add functionality or improve a product or service that is currently offered. According to Wheeler & Hunger, Corporate Strategy are classified as

1. Stability strateg

2. Growth strategy

3. Retrenchment strategy Stability strategy

Stability Strategy or Stable growth strategy refers to that Strategy meant to keep the organisation at the existing level without putting down the performance.

An organisation would follow stability strategy, if it is satisfied with the same product line, serving the same consumers and maintaining the same market share.

If the top level management does not want to take any risks or accept environmental change that might be associated with the expansion, stability strategy will be the option followed.

Stability strategy is associated with small, privately owned business, which have an established market with loyal customers satisfied with the firm’s product or services.

If the organisation’s competitive advantage lies in the present business and market, it pursues stability strategy.

Stability strategy is fundamentally a defensive approach followed by the firm, to remain in the same position without altering its business operation and competitive advantage.

Variants of stability strategy

The four ways to ensure stable growth are

Incremental growth strategy

Under incremental strategy, the organisations set their objective-achievement level, which was accompanied in the past.

Profit strategy

It is called as harvesting strategy, where the firm is interested in generating cash, when the firm is in the stage of declining sales in the market.

Sustainable growth strategy

This strategy is followed when the organisation perceives that the external conditions are not favourable due to certain critical resource constraints like financial resources or raw materials or unfavourable government policy.

Stability as a pause strategy

It is followed by those organisations whose past history is full of growth.

For Example

Many firms in public sector have adapted this strategy because of stringent restrictions in government policy and lack of budgetary support to expand the capacity.

Indian Business firms related to cement industry, iron and steel industry, coal industry, jute industry and so on have followed this strategy when it faced regulatory restrictions by the government.

Growth strategy

Growth strategy refers to that corporate strategy which supports the business firm to improve the business performance to the next higher level.

A growth strategy is the strategy which a business firm follows to, when it fulfils the objective and takes it to next level upward in significant increment, much higher than an exploration of its past achievement level.

It refers to gradual expansion of the operations of the business firm and the addition of new frontiers in operation. This results in more sales, new customers, more revenues and increase in market share.

Growth strategies can be very risky and involve forecasting and analysis of many factors, which affect expansion such as availability of resources and availability of markets.

Possible growth strategies are

Internal growth strategies: Internal, or organic, growth strategies rely on the company’s own resources by reinvesting some of the profits. Internal growth is planned and slow. Some of the internal growth strategies are

Concentration-Market penetration, Market development and Product development.
Vertical / Horizontal integration- Backward integration and Forward integration
Diversification- Concentric diversification and Conglomerate diversification.
Internationalisation
Digitalisation.

External growth strategies

In an external growth strategy, the company draws on the resources of other companies to leverage its resources. External growth strategies areMergers, Acquisition or take over, joint venture and strategic alliances.

Internal growth strategies

1.Concentration growth strategy

Concentrated growth strategies are strategies that focus on improving current products and markets without changing any other factors. The firm channelizes its resources to achieve the profitable growth of a single product, in a single market, and with a single technology.

This strategy highlights the growth and expansion of a single product or few closely related products or services in the existing line of business.

A strategy of concentration allows for a considerable range of action: the business can attempt capturing a large market share by increasing present customer’s rate of usage, by attracting competitors’ customers, or by inducing nonusers in buying the products or services.

For example: Microsoft is a classic example for using this strategy. It has concentrated on developing and marketing computer software and related products and has become one of the most successful companies.

AMUL has used this strategy to manufacture and market processed dairy products like milk, milk powders, ice creams, curd, yoghurt, processed cheese, flavored milk, etc, and is the forerunner in the dairy market.

There are basically three approaches to pursuing a concentration strategy. The three sub strategies are

a. Market Penetration

b. Market Development

c. Product Development

a. In Market Penetration, the organisation tries to attract and gain market share in the existing product by improving its quality or lowering prices, and aims at expanding its business to new customers in the exisitng market, at a rate higher than the industry rate of growth.

For Example: Prestige opening many number of showrooms in cities.

b.In Market Development, focus is taken to increase the sales through innovative marketing efforts and selling the existing product in new markets either in new territories or segments.

For example: Unilever ltd. Launched Sunsilk shampoo in US market , currently sold in Europe, Latin America and Asia.

c.In Product development, the business firm take steps to achieve phenomenal growth through selling of innovative products and services in the existing markets of the business firm.

For example: Cocacola launched Diet Coke, sweetened with splenda.

2. Vertical / Horizontal Integration

Vertical integration means that a company is producing its own inputs (backward integration) or delivering its own output (forward integration) , rather thandealing with intermediaries.

To pursue backward integration strategy, a company can buy another firm that supplies its raw materials or it can start its own unit to manufacture the needed inputs. This step would eliminate intermediary profits and secure the source of raw materials.

Examples for backward integration:

Tata Chemicals acquires British Salt limited, an UK based white salt producing company to manufacture the needed inputs used in its product.
An ice cream company that buys a dairy farm follows the strategy of backward integration.
Amazon.com followed backward integration when it became not only a bookseller but a book publisher. As a bookseller, Amazon.com buys books from various suppliers, such as publishing companies. By becoming a publisher itself, it has integrated into its business the role of supplier and can sell books that its own publishing company publishes. Examples for forward integration
Most of the oil companies like Bharat Petroleum, Hindustan Petroleum, Reliance Petroleum have their own oil exploration, refining and distribution outlets for selling fuels.
Arvind Mills Limited, which is involved in manufacturing textiles, has initiated its own retail showrooms in the brand name Megamart, Arrows, Flying Machine etc.
Trends In Vogue Private Limited, an initiative of CavinKare group of company, manufacturers of beauty products like shampoos, hair oils, facial creams, talcum powders, hair dyes, and deodorants, has started chain of beauty salon in the name of Green Trends and Limelite, to take its product direct to consumers.Trends in vogue also run a Trends academy which trains the candidates who are recruited in the salon industry.

Vertical integration strategy is a growth strategy as the business operations of the company are expanded by acquisition, within the same industry.

Advantages of vertical integration

1. Better control of costs

2. Efficient use of inputs

3. Better management of business

4. Adds competitive advantage

Disadvantages of vertical integration

1. Difficulty in managing and integrating different functions and operations of the unit

2. Financial burden in acquiring or starting the new unit

3. Reduced flexibility in operations.

Horizontal integration means that the business firms acquire additional units of the competitor involved in the same business and thereby expand their business.

This strategy helps the firm to increase the production level, customer base, market share and profits in the business. It reduces the competition as the firm has hold over the market share and tries to influence the price and quality of the product.

For example: Acquisition of Tetley tea in UK by Tata Tea, India.

Acquisition of Land Rover and Jaguar automobile companies by Tata Motors in 2008.
Acquisition of Bank of Rajasthan and Bank of Madura by ICICI Bank.

3. Diversification

This strategy is concerned with developing new products for new markets through innovation process that are different from the existing business.

The major reason to diversify is to reduce the risk associated with a single industry operation due to changes in business environment.

There are two major types of diversification. They are

1.Related diversification(Concentric diversification)

Related diversification means diversifying into a different industry, but one which is, in some form, related to the existing industry of the business firm with similar technology, customers, market, resources, skills, etc.

The ultimate objective of this strategy is to achieve ‘synergy’, which is achieved when the value of the whole firm becomes greater than the accumulated value of its individual business.

Example: *Samsung producing consumer products using cutting edge technology like home appliances, notebooks, cameras, smart phones, and storage or memory devices and so on. All these products require same competencies in terms of technology, markets, resources and skills.

Brittania industries limited earlier manufacturing biscuits, has ventured into cakes, dairy, rusks and bread.
Unrelated diversification(Conglomerate diversification)

Conglomerate diversification is that strategy which enables a business firm, to venture into new industries with new products and new customers.

Example: *TVS Motors involved in automobiles, venturing into Construction industry.

Reliance group of companies, known for heavy industries, venturing into retail business
Bata company diversifying from footwear to leather accessories like belts, bags, etc.
Tata group ventured into Titan watch brand and Tanishq jewellery.

4. Internationalisation

They are the type of growth expansion strategy, which requires organisations to market their products or services, beyond their domestic or national market.

Reasons for going international

Globalisation
Trade liberalisation
Transport infrastructure
Demand for foreign products by domestic customers
Economies of scale
Favourable government policies and regulations
Cost advantage in business operations

Four types of international strategy are

International strategy – business operations in a foreign market.
Multidomestic strategy – Customisation of products to the local demand conditions in different countries.
Transnational strategy – venturing into a business from a developed country to developing country and initiating the business suiting to local conditions of that country.
Global strategy – offering standardised products and services across many countries all over the world in an undifferentiated manner at competitive prices.

5. Digitalisation

It is the use of digital media to do business operations and satisfy the needs of the customer. It involves different domains like business, social sciences and technology. Example: All E-business ventures like amazon.com, flip kart, snap deal and so on.

B. External Growth Strategy (Co-operative strategy)

Mergers
Acquisitions
Joint ventures
Strategic Alliances

Mergers

It refers to combining two or more firms. The two kinds of merger are:

Merger by Absorption is the combination of two or more firms into an existing company, in which one acquires the assets and liabilities of the other in exchange for stock or cash. All companies except one lose their identity in such a merger.

Example:

Absorption of Tata fertilizers (TFL) by Tata Chemicals Limited (TCL). TCL survived while TFL ceased to exist. TFL transferred all its shares to TFL.

Merger through Consolidation refers to the combination of two or more firms into a new company. In this form, all companies are legally dissolved and a new entity is created.

Example:

Merger of Hindustan Computers Limited, Hindustan Instruments Limited, Indian software Company Limited and Indian Reprographics Limited into an entirely new company called HCL Limited.

The unique feature is that acquiring company takes over the ownership of other companies and combines their operations with its own operations.

Types of Merger

a. Horizontal merger: Combination of firms engaged in the same business.

Example: Merger of Videocon Limited with Thompson Limited.

b. Vertical Merger: Combination of business firms engaged in different activities like supply of raw materials, production of goods, marketing, etc.

Example: Merger of Tata Chemicals with British Salt Limited, UK based white salt producing company.

c. Concentric Merger: Combination of firms related to each other in terms of customer groups or customer functions or alternative strategies.

Example: Combination of firms producing Televisions, Washing Machines and Kitchen Appliances.

d. Conglomerate Merger: Combination of firms unrelated to each other in terms of customer groups, customer functions and alternative technologies.

Example: Merger with Walt Disney Company and American Broadcasting Company.

Reasons for Merger

Availability of advanced manufacturing facilities,
High brand image,
Captive market share,
Loyal customers,
Advanced technology,
Efficient distribution network,
Financial soundness, etc. Objectives of Merger:

To increase the value of the firm.
To stabilise the firm’s earning and sales
To reduce Competition
To diversify the product line
To enjoy tax benefits
To acquire efficient resources quickly and
To promote synergy by increasing profitability and efficiency.

While implementing the merger strategy, certain critical issues like strategic issues, financial issues, managerial issues and legal issues are bound to arise. Advantages of Mergers

Enjoys economies of scale
Utilises funds in efficient allocation of resources.
Can diversify the activities and increase profits and efficiency.
Sick units can be revived through mergers.
Ensures easy market penetration and improves customer loyalty.
Enables easy access to sources of raw materials, finance and Human resources
Skilled labour force can be obtained.
Entrepreneurs find it easy to buy an existing firm with established customers and markets, rather than setting up a new firm

Disadvantages

Causes conflicts and psychological problems of the top management of the merger firms.
Executives of the acquired firm may get a low status in the new firm.
Leads to concentration of economic power, monopolistic competition, higher prices, restricted supply and black marketing.

Guidelines for effective mergers

Mergers must be effectively planned
Valuation of the firm’s stock should be considered in a fair manner.
Legal clauses must be carefully analysed.
Detailed plan and program should be designed.
Authority and responsibility should be clearly designated.
Human considerations must be given equal consideration as that of financial resources.
Activities of merger should be controlled through feedback and management iformation system.

The success of any merger lies in careful performance of three activities. The three steps involved in merger are planning, searching for the firm, screening for the right choice and carrying out the financial evaluation.

Acquisitions/ Takeovers

Takeover is the attempt of one firm to acquire ownership or control over another firm.

Takeovers can be hostile (against the wishes of the acquired firm) or friendly (through mutual consent of buyer and seller).

It is the successful strategy after economic liberalisation.

Example:

Tata Steel India acquired Corus group, UK for $ 12000million.
Videocon, India acquired Daewoo Electronics, Korea for $ 729million.
Tata Motors acquired Jaguar, Land Rover Automobiles in 2007 and
L’oreal Company’s acquisition of Body shop.
Microsoft’s acquisition of Skype for $8 billion.

Advantage of Takeovers

Provides easy growth opportunities.
Creates mobility of efficient resources from one activity to another activity.
Avoids gestation periods and problems involved in new projects.
Increase market share.
Increase profitability of the target firm.
Decrease competition.
Enlarge brand portfolio.
Provide the chance of survival to the sick units.

Disadvantages

Results in monopoly and concentration of economic power.
Interests of the minority shareholders are not protected.
Likelihood of job cuts.
Cultural integration /conflict with new management.

Joint Venture

It is a business agreement in which 2 or more firms agree to develop for a finite time, a new business entity and new assets by contributing equity.

They are partnerships in which two or more firms carry out a specific project or business activity.

Joint ventures can be temporary; disbanding after the project is finished over a period of time.

Features of joint venture

1. It has a scheduled life cycle.

2. It has to be dissolved once purpose is fulfilled after lifecycle.

3. Changes in the business environment force the joint ventures to be redesigned regularly.

4. Promotes competencies among business firms.

5. Promotes synergy between firms by accelerating revenue and new product development.

Strategic Alliances

When two or more firms enter into long term co-operative agreement with their trading partners, to accomplish certain specific objectives over specific period, these relationships are known as strategic alliances.

It promotes synergy and competitive advantage.

Example:

ICICI Bank and Vodafone India, one of India’s largest telecom service providers, announced a strategic alliance to launch a unique mobile money transfer and payment service called ‘m-pesa’.This offering will comprise: a mobile money account with ICICI Bank and a Mobile Wallet.

Retrenchment strategy

Strategy meant to scale down operations and reorganise the business firm or even close down the operations if necessary.

This strategy is useful in the times of tough competition, scarcity of resources and declining economy.

They are

Turnaround strategy– This strategy is followed by the firm, when there is sustained downtrend in the business performance, which can be caused by external factors, and managerial incapability.This is focussed on controlling the present declining trend in performance while improving the long-run efficiency of operations through cost reduction, revenue increase and reduction of products and services.
Divestment or Divestiture – It is the process of selling-off the units to restructure a company around a smaller but stronger portfolio of business, when the units are performing badly Example- HMT limited at Bangalore sold their watch division and focussed on machine tools.
Liquidation- It refers to ending or terminating the business. The company exits its business by liquidating all its assets and ending the business in the existing form. It may be voluntary or forced option.

Hence, the above discussed corporate strategy supports to develop competencies and gain competitive advantage for the business firm.

you can view video on Corporate level strategy

References:

NitishSengupta and Chandan.J.S. (2003). Strategic Management-Contemporary Concepts and Cases, First Edition, Vision Books, New Delhi, p. 19-28.
AbassF.Alkhafaji, (2008), Strategic Management-Formulation, Implementation and Control in a dynamic environment , First Edition, Jaico Publishing House, Mumbai, p. 3-80.
Prasad.L.M, (2008), “Strategic Management”, Fifth edition, Sultan Chand & Sons, New Delhi, p. (35-39).
Jeyarathnam, M. (2012), “Strategic Management”, fourth edition, Himalaya Publishing House, New Delhi.
Vipin Gupta, Kamala Gollakota, Srinivasan, (2005), Business Policy and Strategic Management, Prentice hall of India pvt.Ltd., New Delhi.
Ghosh.P.K., (2010), “Strategic Planning and management”, Sultan Chand & Sons, New Delhi.
Michael Porter, (1980), “Competitive Strategy”, The Free Press, New York.

Web links

www.gemanalyst.com › Finance
https://www.business.illinois.edu/…/Class08%20(Color)-Corporate%20Strategy_GLOB