11 Framework of Corporate Level Strategies

1.      Learning Outcome

2.      The Concept of Strategy

3.      Hierarchical Levels of Strategy

4.      Corporate Strategy

4.1   Directional Strategy

4.2   Portfolio Strategy

4.3   Corporate Parenting Strategy

5.      Summary

1.   Learning Outcome

After completing this module the students will be able to understand:

• The concept of strategy
• The hierarchical levels of strategy
• The definition of Business
• Corporate Strategy and its components

2. The Concept of Strategy

What it takes for a firm to be successful and to hold on to its success? Certainly it is not a cakewalk for any corporation to achieve success by following the traditional ways of doing business. Even a company like Johnson & Johnson (J&J) that owns a globally established brand like BAND-AID had to fight and overcome certain sets of consumer beliefs in India before it could find the rightful place for its new product category (adhesive bandages). Though at a later stage, BAND-AID became a generic brand name in the Indian market, the Indian consumers had strong beliefs that leaving the wounds open or at best applying a liquid (tincture iodine) and covering it with a piece of cloth will help the wounds heal faster. So, J&J had to break through these beliefs for making its product BAND-AID a success in the Indian market.

http://www.superbrandsindia.com/images/brand_pdf/consumer_1st_edition_2004/band-aid/

The company responded to the consumers’ fascination with the ‘lal dawa’ (red medicine) by changing the color of its medicated pad on the bandage to red. This led to quick acceptance of BAND-AID by the Indian households and it became popular as ‘lal dawa wali patti’.

Chester Irving Barnard in his book ‘The Functions of the Executive’ wrote that if one wants to improve the yield of the crop in a certain field and on testing the soil it is found that the land lacks potash then potash may be said to be the limiting factor in the process of enhancing overall fertility of the soil.

Barnard explained the theory of ‘strategic factor’ by stating that any system or a set of circumstances at a given point of time consists of number of elements, or parts, or factors, which together represent a whole system. To establish a favorable position or accomplishment of the purpose, the organizations must undertake an analysis of such systems or set of circumstances to determine the elements that may be changed or is missing from making of a complete system. On approaching and analyzing, the elements or factors found missing is termed as the ‘limiting factor’. In this case identifying the absence of potash in soil becomes the limiting factor. Now on being aware of what element could be changed or is missing (limiting factor), the next step that becomes crucial is the decision related to action (strategic factor) i.e. how to procure the missing element (potash). Thus, the determination of strategic factor is itself the decision which leads to accomplishment of the purpose.

Barnard further, wrote that the limiting factors are continually changing. Once a limiting factor comes under control then a newer search in the new situation leads to determining another limiting factor to fulfil the next level of purpose. Thus, the limiting factor in case of Johnson & Johnson India at one time was to overcome the consumer beliefs regarding healing of wounds, which the company accomplished by repositioning its product as ‘lal dawa wali patti’ after knowing the consumers’ fascination for ‘lal dawa’. Hence, the strategic factor was to how to reposition the product so as to match the consumer beliefs.

However, to further strengthen the footing of BAND-AID in India, the company in a fine example of marketing insight, captured the focus of the product (BAND-AID) in the area of its application. A new dimension was determined. It was found that most people would not like to waste a longer strip for a small wound. Therefore, the missing element in process of further establishing the product was the application of bandage (new limiting factor), which the company overcame by introducing bandages of varying sizes and shape: strips, patches and spots (new strategic factor). Thus, the strategic factor always determines the action required to meet the immediate situation or the purpose. Strategy, therefore, is the relationship between the means and the ends, that is, the between the objectives we set and the resources at our disposal.

William F. Glueck has defined strategy as the unified, comprehensive and integrated plan that relates the strategic advantage of the firm to the challenges of the environment and is designated to ensure that basic objectives of the enterprises are achieved through proper implementation process.

Image Source: http://www.marketing91.com/4-organizational-units-involved-in-marketing-strategy/

3. Hierarchical Levels of Strategy

Some organisations are single business entities while others are a group of different businesses and functional units. Each of these business units has its own set of goals that may not be necessarily similar to its corporate body. Thus, the role of the corporation then is to manage its business units and products so that each contributes to corporate purposes and remains competitive. This understanding has led to the hierarchical division of strategy at three levels:

1.      Corporate Level Strategy

2.      Business-Unit Level Strategy

3.      Functional Level Strategy

3.1 Corporate Level Strategies: Corporate strategies are concerned with the broader and long-term perspective of the corporation. Whether, an organisation is a small firm involved in a single business or a large, complex firm with several different businesses, the corporate strategy in both cases is about the basic direction of the firm as a whole. In case of single business unit, it could mean larger focus on the functional areas that would increase the firm’s profitability. While, in case of large firm, the corporate strategy is not only about functional activities but also about managing the different business units so as to maximize the contribution of each of the units towards the overall corporate objectives.

Corporate level strategies have much to do with the allocation and at times re-allocation of resources among the different businesses of the firm, building and fostering a portfolio of businesses/products in a way that the overall corporate objectives are achieved. For example: Max India entered into a partnership with Hong Kong’s Hutchison Telecom in 1992 to set up radio paging service. In late, 1990’s with the advent of cellular services in India, Max India could foresee that radio paging technology would be the obsolete technology in future. So the company divested its stake from the paging business in 1996 and reinvested itself in healthcare (Max Healthcare); life insurance (Max New York Life Insurance, now Max Life); IT/ IT-enabled services (Max Ateev, HealthScribe) and clinical studies (Neeman Medical International) in 2000 which were the businesses of future growth.

(Image Source: https://maxindia.com/electronic-components/)

3.2 Business-Unit Level Strategies: These strategies occur at business level or product level. The emphasis is to determine that how the firm will improve its competitive position in a specific industry in which its business unit competes. However, the business level strategies may be classified under two categories of competitive and cooperative strategies. For example, in 2003, Reliance Infocomm followed a competitive strategy where it launched mobile phones (in partnership with Samsung and LG) at Rs. 500, which led to immediate jump in its subscriber base. On the contrast, company like Tata Motors followed a cooperative strategy by forming an alliance with Fiat Chrysler Automobiles (FCA) on product development and manufacturing. Both are working on local development of two-litre multijet diesel engine that is going to benefit both sides.

Image Source: http://www.vehiclepassion.com/2012/05/03/fiat-breaks-free-from-tata-as-distribution-tie-up-comes-to-an-end/

3.3 Functional Level Strategies: These strategies identify the courses of action that each functional department (marketing, R&D, sales, production, HR etc.) in a business unit will assume to achieve corporate and business unit objectives. For example: The country’s largest commercial vehicle manufacturer Tata Motors had to shut production of its truck for the fourth time in 2013 as it struggled because of falling retail demand. The company had done it to avoid piling up of inventory with its dealers. The three- day block closure was planned to ensure alignment of production with demand so as to bringthe costs under control that could have been elevated because of piling of inventory and to maintain the health of the ecosystem (‘Falling demand forces Tata Motors to shut truck plant’ Business Standard, 14 January 2013).

4.   Corporate Strategy

Corporate level strategies have three main components (Fig. 1):

1. Directional Strategy, firm’s overall orientation toward growth, retrenchment and stability.

2. Portfolio Strategy, firm creates value in an industry by managing the portfolio of its businesses and products.

3. Corporate Parenting Strategy, the overall coordination of activities, allocation of resources and harnessing of capabilities across the portfolio (different SBUs/products).

Figure 1: Components of Corporate Strategy

4.1 Directional Strategy: Like any business unit or a product that follows a strategy to improve its competitive position in the marketplace, a corporation must also decide about the direction of its growth by asking the following questions:

1. Whether to expand, harvest or to continue running the present business/product.

2. Should we concentrate our activities within our current industry or should we explore and diversify into other industries.

3.  Should we adopt organic development (internal) or inorganic development (merger & acquisitions) for growth to expand into local or international boundaries.

Hence, based on the above questions, a corporation’s directional strategy comprises of three general orientations (Expansion, Retrenchment and Stability), also termed as grand strategies but before we get to study the three grand strategies in details, let us first focus on understanding the term ‘Business’. Derek F. Abell, has defined business along the three dimensions i.e. customer groups, customer functions, and alternative technologies (Fig. 2).

Figure 2: Three Dimensions for defining a Business

The customer group refers to the market segment that the business caters to or in other words, ‘who’ is being satisfied. Customer function is described to as the value provided to the customer through the businesses/ products or services that is ‘what’ is being satisfied. Finally, the alternative technologies; the ‘how’ of customer satisfaction that includes the different methods by which the value is created for the customer.

Let us take an example of Titan Watches to understand that how the company has related the consumers’ need for time keeping to the business of watches. Different customer needs for watches are well captured by identifying the different market segments (customer group) such as the Sonata and Fast Track brand of watches (economical) targeted towards the masses, Raga towards the upwardly working women in the upper premium segment, Nebula the 18k solid gold watches for niche segment, Zoop for children group. The different models of watches are launched to meet the various customer functions ranging for the basic need of time keeping to use of watches as fashion statement or as a symbol of social status. Further, these watches have added value to the customer base by way of alternative technologies such as automatic, digital, analog, chronograph, smart watch.

Image Source: www.titan.co.in

Such a clarification helps the top management to understand and define a business explicitly that in-return is important for strategic management in many ways. Thus, business definition provides insights to the companies for making a choice among different strategic alternatives. Based on this the companies could look forward to the different directional strategy orientations that best fulfils the overall corporate objectives. Following are the three general orientations of directional strategy that the companies may choose from:

1. Expansion

2. Retrenchment

3. Stability

4.1.1 Expansion Strategy: The companies that do business in growing industries must expand to survive. Expansion strategy is the most popular corporate strategy. The expansion strategy is followed by an organisation when it aims for high growth by substantially broadening the scope of one or more of its businesses in terms of their respective business dimensions (customer group, customer function and alternative technologies) either singly or collectively in order to achieve the overall corporate objectives. The following modules will try to cover in details the various types of expansion strategies i.e. expansion through concentration, diversification, integration, cooperation and internationalization.

Taking an example of Dairy Milk, a chocolate brand owned by Cadbury India, the company followed the expansion strategy by broadening the base of its customer group through its ad campaign ‘Meethe mein kuch meetha ho jaaye’ (Exhibit 1). Chocolates that were earlier target to the children and adolescents were now positioned to adult group. Realizing the Indian culture of enjoying sweets after meals and on auspicious occasion, the company positioned the chocolates to the adult group through its commercials ‘Meethe mein kuch meetha ho jaaye’.

Exhibit 1:

Cadbury India commercial, positioning chocolates to the adult segment

Image Source: http://s2.dmcdn.net/LOteL.jpg

Another example of expansion strategy through the customer function dimension of business is Colgate-Palmolive (India) Limited, the market leader in Oral Care, introduced a beauty-oral care breakthrough – the new Colgate Visible White teeth whitening treatment (Exhibit 2). Comprising a toothbrush to whiten teeth by polishing away surface stains, toothpaste formulated with whitening accelerators and a mouthwash which helps whiten teeth by cleaning mouth effectively. This unique regimen marks a significant advancement in the teeth whitening category adding a new dimension to daily Oral Care in addition to effectively cleaning the mouth (Source: http://www.colgate.co.in/app/Colgate/IN/Corp/News/ ProductArchives/HomePage.cvsp?newsArticle=News_030414, accessed on 12 June 2016).

Exhibit 2:

Colgate-Palmolive (India) extended the product function of it oral care products beyond cleaning of mouth.

While one of the other alternative dimension of business along which a company could look forward for expansion is, ‘alternative technologies’. Recently, Titan has launched its new range of watches under the brand – Titan JUXT smartwatch, engineered by HP (Exhibit 3). It is a fusion of an analog design with a digital punch. In times when people have stopped wearing a watch just because they have upgraded to smartphones that have an active AMOLED display for instructive viewing of time, Titan JUXT is a timely reply from a traditional watch manufacturer to counter competition in the industry. Titan JUXT smartwatch is compatible with any smartphone (Android or iOS) and is able to challenge the popularity of Apple, Samsung Gear S2 and Moto 360 smartwatches.

Exhibit 3:

Titan JUXT, a smartwatch with analog design

Image Source:

http://image3.mouthshut.com/images/Restaurant/Photo/-11807_32457.jpg

4.1.2 Retrenchment Strategy: Sometime companies may have to roll back from its business activities wholly or partially because of weakening of their financial performance resulting from declining market share, poor vision, wrong decisions by management, threat from external business environment and so on. In such given circumstances, the companies may pursue retrenchment strategies to improve its performance. Hence, when an organisation attempts to curtail or eliminate the scope of one or more of its businesses, in terms of their respective customer group, customer function or use of alternative technologies either singly or jointly is termed as retrenchment strategy. The various retrenchment strategies that a company may follow in an attempt to eliminate negative indicators are turnaround, sell-out/divestment, bankruptcy or liquidation.

It is important to have an effective monitoring and control system in place so as to highlight the declining indicators of performance at the very onset. Diminishing profitability, falling sales, shrinking market share, increase in debt, tightening cash flows are some of the indicators of falling performance. These are the situation in which recovery is seen as a strategic option and the different retrenchment strategies are considered as a way out to enhance the overall performance of the organisation.

The turnaround strategy is adopted by an organisation when the problems are controllable but not yet critical. The organisations look forward to the ways by which the process of decline could be reversed. If the corporation is having a multiple business or product lines and selects to cut-off the loss making units, divisions or restrict its product lines, it chooses to adopt the divestment strategy. If none of these actions works, then the company may follow the liquidation strategy that means completely abandoning the business activities.

One of the examples from the recent past is that of Nokia, once the biggest cell phone manufacturer in the world, lost its competitive position to Apple iphone in 2007 as it was slow to adapt to the new generation of devices. Nokia never anticipated that basic telephony will undergo such a radical change. Eventually, Nokia was unable to cope up with the change in the technology and was sold to Microsoft.

Image Source: http://img.tecnomagazine.net/2016/12/nokia-1.jpg

4.1.3 Stability Strategy: A stability strategy is followed by an organisation when one or more of its businesses choose to continue with its present business activities without any significant change in terms of their respective customer group, customer function or alternative technologies, either singly or collectively.

Stability strategies are generally most popular with small enterprises that are contented to have accomplished a desirable size of the firm. Whereas, the larger organisation view stability strategies as short- term; wait & watch strategy. The strategy is conceived to be short lived and used as a time gap arrangement until a particular environment or a given situation stabilizes. Sometimes, the strategy is followed to empower the organisation to consolidate its position/resources in the industry after a prolonged period of rapid growth. For example: Bharti Airtel Limited, one of the Asia’s leading telecom services provider decided to foray into international markets beyond India & Sri Lanka in 2010, while consolidating its leadership position in India. The company consolidated its resources in India and provided better services through upgrade technology to the customers in India in order to strengthen its leadership position to counter domestic competition while continued its growth story through international expansion beyond India & Sri Lanka.

4.2 Portfolio Strategy: One of the other important component of corporate strategy is portfolio strategy. Portfolio is viewed as the total number of individual products or businesses held by a firm. Corporations create value for its customers through their businesses. Therefore, it is for the organisation to manage the portfolio of businesses so that each of the business/product is competitive and contributes to the corporate purpose. The purpose of adopting a portfolio approach is to links the businesses and to help the corporation to channelize the resources to the business unit that hold the greatest potential. The key focus is to decide that in how many, what product line or categories of business a corporation should be in. This may involve decisions regarding increase or decrease of investment in various business units or product lines depending on the expected growth and profitability.

For example: Bharti Airtel Limited, a leading global telecommunications company with operations in 20 countries across Asia and Africa, is structured as four strategic business units – Mobile, Telemedia,

Enterprise/Business and Digital TV. Bharti Airtel offers GSM mobile services in all the 22-telecom circles  of  India  and  is  the  largest mobile   service   provider   in   the country,  based  on  the  number  of customers. The Telemedia business provides   broadband,   IPTV   and telephone services in 87 Indian cities. The    Enterprise business provides end-to-end telecom solutions to corporate customers and national and international long distance services to carriers. The Digital TV business provides DTH services across India. All these services are provided under the Airtel brand.

Image Source: http://www.airtel.in/about-bharti/about-bharti-airtel

Hence, the company’s portfolio approach of corporate strategy would involve managing the portfolio of its various business units so as to meet the corporate objectives i.e. to enhance its focus on expanding operations to international markets beyond India and South Asia and further consolidate its leadership position in India.

4.3 Corporate Parenting Strategy: Corporate parenting generates corporate strategy by focusing on the core competencies of the parent corporation and further, disseminating the best practices to the various business units. Corporate parenting views the corporation in terms of the resources and the capabilities that can be used to build business units value as well as generate synergies across business units. The parental value creation could be of following types:

Stand-alone influence: where each business unit is viewed as a separate profit centre, the value creation is created by taking strategic decisions such as appointment of managers and approval of major capital expenditure to the businesses. For example, Reliance Industry announced an investment of Rs. 1.5 lakh crores in core business of petrochemicals and oil and gas as well as in retail and telecom sectors.

Linkage influence: value is created through improved co-operation and synergy benefits. For example, the expertise of Reliance Industries in oil & gas exploration and production would add value to its refining and marketing division.

Central functions and services: value is created through the provisions of administrative and managerial services to the business units.

Corporate development: value creation through portfolio management (SBUs and products).

Therefore, if there happens to be a good fit between the parent’s skills & resources and the needs & opportunities of the business units, the corporation is likely to create value. While on the other hand, if there is not a good fit, the corporation is likely to destroy value. Michael Gooold and Andrew Campbell have emphasized that the parent company should not only add value to its business units, but should focus on adding more value than any other potential parent company so as to gain parenting advantage.

5. Summary

Strategy is defined as a comprehensive plan to determine the basic long term objectives of an organisation and to adopt a course of action along with allocation of resources necessary for carrying out the overall objectives. Strategy exists at three levels i.e. corporate strategy, business unit strategy and functional strategy. The corporate strategy is concerned with the broader and long-term perspective of the corporation. It sets the overall direction for the organisation to follow. Whereas, the business unit strategy determines that how the firm will improve its competitive position in a specific industry in which its business unit competes. While, functional strategies identify the courses of action that each functional department (marketing, R&D, sales, production, HR etc.) in a business unit will assume to achieve corporate and business unit objectives.

Further, in this module, the different components of corporate strategy i.e. Directional strategy, Portfolio Strategy and Corporate Parenting Strategy are discussed at large.