CORPORATE STRATEGY

What is a corporate strategy?

Consider the following information to answer the question, "What is corporate strategy?" A
corporate strategy is a multi-level strategy employed by a company to define its goals and
structure its approach to attain them. Depending on the size and nature of the business, the
strategy may be formed with the aim of increasing profits, selling a business or expanding to
new markets. It aims to achieve the most profitable allocation of resources and organisational
structure.
● Corporate strategy is about strategic decisions about determining overall scope and
direction of a corporation and the way in which its various business units work
together to attain particular goals.
● Corporate-level strategy is an action taken to gain a competitive advantage through
the selection and management of combination of businesses competing in several
industries or product markets.
● Corporate strategies are normally expected to help the firm earn above- average
profits and create value for the shareholders. Corporate strategy addresses the issues
of a multi-business firm as a whole.

Difference between corporate strategy and business strategy

There are a few notable differences between corporate and business strategy. A corporate
strategy looks at the larger structure that is the mother company, its various business units
and products, how they connect and the overall brand. It seeks to identify the markets to enter
and the products it may produce. A business strategy only focuses on the individual business
unit and how to grow its profits or get a bigger share of the existing market. A corporate
strategy has a much wider scope compared to a business strategy, which is limited to a
specific product or market. The business strategy usually complies with the goals of the
corporate strategy.
Corporate level strategy is concerned with two main questions:

(1) What business areas should a company participate in so as to maximise its long-term
profitability?

(2) What strategies should it use to enter into and exit from business areas?

According to Glueck, there are four generic ways in which alternatives can be considered:
stability, expansion, retrenchment, and combination. These generic strategies are sometimes
referred to as grand strategies. Firms explore generic strategy alternatives while formulating
their corporate strategy because only through this exploration can they locate the particular
route best suited for achieving the chosen growth objective.

Some of the types of corporate level strategies are as follows:-

1. Stability Strategy 2. Expansion Strategy 3. Retrenchment Strategy 4. Combination

Strategy 5. Merger Strategy

When a company finds that it should continue in the existing business and is doing
reasonably well in that business but has no scope for significant growth, stability is the
strategy to be adopted.

1. Stability Strategy-

Jauch and Glueck observe, ‘a stability strategy is a strategy that a firm pursues when-

1. It continues to serve the customers in the same product or service, market, and function
sectors as defined in its business definition, or in very similar sectors.

2. Its main strategic decisions focus on incremental improvement of functional performance.

The stability strategy is not a “do nothing” strategy. It may involve incremental
improvements.
Long-term stability strategy also requires reinvestment, R& D and innovation. However, the
business definition remains the same.

Reasons for Adopting Stability Strategy:

1. The company is doing fairly well or perceives itself as successful and expects the same in
the future.

2. The stability strategy is less risky. Frequent changes involving new products or new ways
of doing things may lead to failure of the firm. The larger the firm and the more successful it
has been, the greater is the resistance to the risk.

3. The stability strategy can evolve because the managers prefer action to thought and do not
tend to consider any other alternatives. Many of the firms that follow stability strategy do this
unconsciously. Such companies react to the changes in the forces in the environment.

4. To follow a stability strategy, it is easier and more comfortable for all concerned as
activities take place in routines.

5. The management pursuing stability strategy does not have the mind-set of a strategist to
appraise the environmental opportunities and threats and take advantage of the opportunities.

6. The company that has core competence in the existing business does not want to take the
risk of diverting attention from the current business by opting for diversification.

7. It is a frequently employed strategy.

An organization adopts the stability strategy when it aims at an incremental improvement of

its functional performance but marginal changes to one or more of its businesses in terms of
their respective customer groups, customer functions or alternative technologies are required.
Its focus is confined to improving functional efficiencies in an increment way, through better
deployment and utilization of resources.
The stability strategy does not mean an absence of concern about business growth and
improvement in profit. Firms adopting the stability route do seek and plan for business
growth and profit improvement with modest targets.

Stability strategy is effective when the firm is doing well and the environment is relatively
stable. Stability strategy does not involve a redefinition of the business of the corporation.
Since products, markets and functions remain the same, the business definition also does not
change.

Forms of Stability Strategy:

i. Incremental Growth Strategy: In this strategy, the firm usually concentrates on one
product or service line and grows slowly and incrementally by entering new territories, taking
up new product lines etc.

ii. Profit Strategy: This strategy is followed when the objective of the firm is to generate
cash immediately for itself or for the stockholder, profit strategies are followed. The profit
strategy is usually called the end game strategy.

iii. Pause Strategy: If any enterprise feels that higher growth becomes both inefficient and
unmanageable, or when a firm requires breathing spells to stabilise itself before taking up a
new mission, it may restrict its growth at a certain balanced level. In doing so, it may
concentrate on source utility, better operations etc. to attain a higher level of efficiency.

2. Expansion Strategy-

Jauch and Glueck defines expansion strategy ‘as a strategy that a firm pursues when-

1. It serves the public in additional product or service sectors or adds markets or functions to
its definition.

2. It focuses its strategic decisions on major increases in the pace of activity within its present
business definition.’
This strategy involves redefining the business either adding to the scope of activity or
substantially increasing the efforts of the present business. When expansion strategy is
pursued, it could lead to addition of new products or new markets or functions. Even without
a change in business definition many firms undertake major increases in the pace of
activities. Expansion strategy is often considered as “entrepreneurial” strategy where firms
develop and introduce new products and markets or penetrate markets to build share.
Expansion is usually thought of as the way to improve performance. Strategists need to
distinguish between desirable and undesirable expansion.

Reasons for Adopting Expansion Strategy:

1. If business environments are volatile, expansion may be a necessary strategy for survival.
2. Many executives may feel more satisfied with the prospects of growth expansion.
3. The Chief Executive Officer may feel pride in presiding over organizations perceived to be
growth-oriented.
4. Some executives believe that expansion is in the benefit of the society.
5. Expansion provides more financial and other rewards.
6. Expansion enables us to reap advantages from the experience curve and scale of
operations.
A company can adopt expansion strategy in the following five ways:

1. Concentration
2. Integration
3. Diversification
4. Cooperation
5. Internationalization

1. Concentration: Concentration involves converging resources in one or more of a firm’s

businesses in terms of products, markets or functions in such a manner that it results in
expansion. Concentration strategies are variously known as intensification, focus or
specialisation. Peters and Waterman advocated a parameter to successful firms that they
called “stick to the knitting”. Concentration strategies, in other words, are the ‘stick to the
knitting’ strategies. Excellent firms tend to rely on doing what they know they are best at
doing.

Concentration strategies involve investment of resources in a product line for an identified

market with the help of proven technology.

This may be done following through the below strategies:

(i) Market penetration
(ii) Market development
(iii) Product development

(i) Market Penetration:

Market penetration as a deliberate strategy involves gaining market share through improving
quality or productivity, and increasing marketing activity. This is true for the long-term
desirability of obtaining a dominant market share. However, the nature of the market and the
position of competitors determine the ease with which a business can pursue a strategy of
market penetration.

In a growing market, it may be comparatively easy for companies with a small share, or new
competitors, to gain market share because the absolute level of sales of the established
companies may still be increasing; and in some cases, those companies may be unable or
unwilling to meet the new demand.

In static markets, market penetration can be much more difficult to achieve. In mature
markets the market penetration is still more difficult due to the advantageous cost structure of
market leaders that prevent the sudden entry of competitors with lower market share.
However, the complacency of market leaders may allow smaller- share competitors to gain
share or may build a reputation in a market segment of little interest to the market leader,
from which it penetrates the wider market.

Sometimes market penetration, particularly of mature markets, can be achieved through

collaboration with others. In declining markets, the market penetration is possible to the
extent other firms exit from the market. If they do, it may be relatively easy for a company to
increase its share of that market.

(ii) Market Development:

Market development refers to the attempts of an organization to maintain the security of its
present products while venturing into new market areas. It includes- (a) entering new market
segments, (b) exploiting new uses for the product and (c) spreading into new geographical
areas.

In capital-intensive industries a company with specific assets may have its distinctive
competence with the product and not the market, and hence the continued exploitation of the
product by market development would be a preferred strategy. Most capital goods companies
have developed this way by opening up more overseas markets as old markets have become
saturated.

Exporting is a method of market development. However, there are several reasons why
organizations might want to develop beyond exporting and internationalise by locating some
of their manufacturing, distribution or marketing operations overseas.

(iii) Product Development:

Product development is the creation of new or improved products to replace existing ones.
The company maintains the security of its present markets while changing products or
developing new ones.

The wet shaving industry is an example that depends on product development to create
successive waves of consumer demand. For instance, in 1989 Gillette came out with its new
Sensor shaving system that significantly increased its market share. In turn, Wilkinson Sword
responded with its version of the product.

2. Integration: Integration refers to combining activities related to the present activities of a

firm, on the basis of the value chain. Recall that a value chain is a set of interrelated activities
an organization performs right from the procurement of basic raw materials to the marketing
of finished products to the ultimate consumers. Integration as an expansion strategy results in
a widening of the scope of the business definition of a firm.

3. Diversification: Diversification is a much-used and talked about strategy. Diversification

means identifying directions of development that take the organization away from both its
current products and markets at the same time. In reality, it is not a single strategy but a set of
strategies that involve all the dimensions of strategic alternatives such as internal or external,
related or unrelated, horizontal or vertical and active or passive diversification.

4. Cooperative Expansion:

Corporate strategies could consider the possibility of competition co-existing with

cooperation. The term ‘co-opetition’ explains the idea of simultaneous competition with
cooperation among rival firms for mutual benefit.

The strategic alternatives based on cooperation among firms could take the following
forms:
1. Mergers
2. Takeover or Acquisitions
3. Joint Ventures
4. Strategic Alliances

5. Internationalisation: International strategies are a kind of expansion strategies that need

firms to market their products or services beyond the domestic market. For this purpose, a
firm would have to assess the international environment, evaluate its own capabilities, and
devise strategies to enter foreign markets. Some firms, when they face slower growth rates at
home or a restricted domestic market, open up new markets in other countries. This has been
a major reason for Japanese expansion. Before exploring the international markets further,
firms must identify and consider a critical mass of GNP, population growth, competitor
activity in the market, ability to produce domestically or in the foreign market.
Sometimes firms can introduce new products sooner in a foreign market than at home. For
instance, U.S.-based pharmaceutical firms do so.

Sometimes firms may find that producing in that location can be more beneficial than
exporting to a given country. For example, a host government may restrict imports to the
country if there is a given level of ‘domestic-content’ production in existence.

Such protective policies serve as a trade barrier, accordingly, companies tend to establish
manufacturing and marketing facilities in each major country in which they do business.
However, some countries provide incentives to locate production facilities there.

For the same reason, supplier will often locate new facilities in countries where their
customers are located. Japanese car companies established manufacturing plants in US

Supply of raw materials or technology may also be a reason for choosing to locate production
facilities in another country. For example Canadian firms have invested in developing nations
where new deposits of important ores or other resources have been found.

It should be noted that movement toward international markets is frequently incremental.

Most firms begin by exporting that involves relatively low investment and risk. Then a firm
may engage in a joint marketing venture with a foreign local who will act as its agent. Once a
foreign presence is obtained, the firm may decide to expand its activities. Expansion at this
stage may take place in the development of specialised products, new investments in local
manufacturing facilities or direct investment in the foreign market.

3. Retrenchment Strategy-

Retrenchment strategy may require a firm to redefine its business and may involve
divestment of a major product line or an SBU, abandon some markets or reduce its functions.
Retrenchment in pace may necessitate a firm to use layoffs, reduce R&D or marketing or
other outlays, increase the collection of receivables etc.
The efforts aimed at redefining the business and reducing the pace of activities can improve
performance of a firm. Retrenchment in combination with expansion is not uncommon.
“Retrenchment alone is probably the least frequently used generic strategy”

Retrenchment strategy involves a partial or total withdrawal either from products, markets or
functions in one or more of a firm’s businesses.

Retrenchment strategy is generally followed during the period of decline of a business when
it is thought possible to bring profitability back to the firm. If the prospects of restoring
profitability are not good, abandoning market share, reducing expenses and assets can use
controlled divestment.

Reasons for following retrenchment strategy:

1. The firm is doing poorly.

2. If there is pressure from various groups of stakeholders to improve performance.
3. If better opportunities of doing business are available elsewhere a firm can better utilize its
strengths.
The retrenchment strategy is particularly followed for dealing with crises. For minor crises
pace retrenchment will be suitable, for moderate crises, divestiture of some division or units
may be inevitable whereas for serious crises, a liquidation strategy will be imperative.

A retrenchment strategy can take any of the following forms:

1. Turnaround strategy
2. Divestment or divestiture strategy
3. Liquidation strategy
When business is in decline but is worth saving, the organization adopts a turnaround
strategy. While adopting a divestiture strategy, an organization cuts off the loss-making units,
divisions, or SBUs, curtails its product line, or reduces the functions performed. If none of
these remedies work, then it may opt to eliminate the activity totally, resulting in liquidation
strategy.
4. Combination Strategy-

When an organization adopts a mix of stability, expansion and retrenchment either

simultaneously or sequentially for the purpose of improving its performance, it is said to
follow the combination generic strategy. With combination strategies, the strategists
consciously apply several generic strategies to different parts of the firm or to different future
periods.

“The logical possibilities for a simultaneous approach are stability in some areas, expansion
in others; stability in some area, retrenchment in others; retrenchment in some areas,
expansion in other; and all three strategies in different areas of the company. The logical
possibilities for time-phased combinations are greater, especially when the products, markets,
and functions are considered and when the choice occurs through changing the pace or the
business definition.” For example a paints company adopts combination strategies when it
augments its offering of decorative paints to provide a greater variety to its customers
(stability) and increases its product range to add industrial and automotive paints (expansion),
and closes down the paint-contracting division (retrenchment).

Reasons for following Combination strategies:

1. When the organization is large and faces a fast changing complex environment.
2. The company’s products are in different stages of the life-cycle.
3. A combination strategy is suitable for a multiple-industry firm at the time of recession.
4. The combination strategy is best for firms, divisions of which perform unevenly or do not
have the same future potential.

5. Merger Strategy:

Economic implications of mergers and acquisitions have long been an interest to economics.
A Merger by definition combines two firms leaving one surviving firm. An Acquisition, on
the other hand, describes the purpose of one firm by another.

Mergers are also often classified based on the type of merger firms’ activities as:
i. Vertical Mergers
ii. Horizontal Mergers
iii. Conglomerate Mergers.
A merger is classified as Vertical if integrating firms belong to the neighbouring stages of
production such as a wine maker purchasing a bottle or cork factory. A Horizontal merger, on
the other hand, describes the case where firms who are involved in the same business line get
together and form a separate firm. The third category of mergers is called conglomerates and
they occur between firms with unrelated lines of business.