This paper explores the topic of corporate strategy and how it fits within the strategic management process. Specifically, we'll examine the various types of corporate strategy, providing a framework to recognize when a given strategy is most appropriate. Also, we'll provide real-life examples of corporate strategy in action, along with an overview of corporate portfolio tools used in corporate strategy formulation.
Strategy is defined as "the art of devising or employing plans or stratagems toward a goal" (Merriam-Webster online, 2007). Within a broad business context, strategy is an integrated set of plans for achieving long-term organizational goals. Multiunit corporations have three levels of organizational strategy: corporate strategy, business strategy, and functional strategy. "Corporate strategy concerns two different questions: what businesses should the company be in and how the corporate office should manage the array of business units" (Porter, 1987). In a broad sense, corporate strategy establishes the overall direction of the firm. Also, corporate strategy is a smaller part of a larger and distinct process known as the strategic management process, consisting of several interrelated stages, of which corporate strategy development falls within the strategy formulation stage. (There are four fundamental stages of strategic management: environmental scanning, strategy formulation, strategy implementation, evaluation and control.) Strategy formulation exists on a three-level hierarchy (see Figure 1 below). Typically, the strategy formulation process is an interactive top-down process beginning with corporate-level strategy developed by top management, followed by the business and functional levels of strategy. Yet, depending on the organization, managers at the functional and business levels provide varying degrees of input throughout the entire strategy formulation process.
Business Strategy -- Once corporate strategies are developed, the focus is upon formulating business-level strategies. Business strategy is sometimes referred to as competitive strategy(Porter, 1980), i.e., strategy that gives the firm a competitive advantage. Business strategy development occurs within a multi-unit firm's divisions and subsidiaries, sometimes referred to as strategic business units or SBUs. A firm's internal strengths are sources of competitive advantage and are collectively defined as a firm's core competency. Porter (1985) outlines a set of generic business strategies, such as a cost leadership strategy, emphasizing low-cost production or distribution of products. Also, differentiation strategy may be used, which distinguishes company products and services on the basis of superior service, quality, unique features, etc. Either strategy may opt to target abroad market or focus on a narrow market segment.
Functional strategy flows out of an organization's functional departmental areas, developed in furtherance of the aforementioned corporate and business-level strategies. Functional area strategies include:
- Operations Strategy -- Designing production processes that meet customer product/service requirements.
- Financial Strategy -- Preparing budgets and securing needed financial resources.
- Marketing Strategy -- Identifying customers, customer requirements, pricing strategies, promotional methods, and distribution channels.
- Human Resource Strategy -- Recruiting, selecting, training, compensating, and organizing employees.
- Research & Design Strategy -- Creating new products or updating existing products and services.
Corporate strategy responds to a number of questions related to how a firm intends to compete on a broad scale. How will the corporation grow? What businesses will the firm compete with? Is growth strategy an appropriate option to choose from? If so, does the firm possess the financial capability to grow? Is the firm's target market attractive enough to allow for growth in their current industry? Must the firm look outside of its current industry for growth opportunities, and if so, which industries? These are but a few of the questions corporate strategy addresses. Depending on the answers to these questions, corporate-level strategy is addressed through growth strategy or a defensive strategy alignment.
Note that growth strategies may be pursued by internal or external means. For example, when choosing internal growth mechanisms, a firm develops and markets new products, improves upon existing products, or sells existing products to new markets. Alternatively, when a firm implements external growth strategies, the firm acquires growth assets outside of the organization.
Growth strategy is that strategy employed to grow a firm's profits and lies within two broad categories: diversification and concentration (Wheelen and Hunger, 2006). Diversification strategy adds products/ services somewhat related or unrelated to the firm's core business. Concentration strategies are those growth strategies whereby a firm maintains a competitive focus within their particular industry. The two types of concentration strategies are vertical integration and horizontal integration.
With vertical integration strategy, a firm takes over the supply function and/or distribution function that was previously handled by outsiders. There are several types of vertical integration strategies: forward vertical integration, backward vertical integration, and full integration.
Forward vertical integration strategy involves a manufacturer assuming the distribution function for their product. A failed attempt at forward vertical integration is personal computer maker Gateway's attempt to distribute PCs through company-owned retail stores. This strategy was a failure due to the high overhead costs associated with their bricks-and-mortar retail stores. Gateway switched to marketing PCs exclusively through their website and over the phone.
More successful examples of companies taking over the distribution function are found in the factory outlet shopping mall phenomenon. In effect, various manufacturers sell their products directly to consumers through company-owned stores -- companies such as Nike, Tommy Hilfiger, Sketchers, Pepperidge Farms, Samsonite, etc. However, unlike Gateway, these companies do not rely on forward vertical integration entirely, as they also rely upon third-party retailers for the bulk of their sales. More on the degrees of vertical integration shall be discussed later in the topic.
Backward vertical integration is when a firm assumes the supply function for their respective value chain. With increasing global competition and the rising costs of commodities, (e.g. copper, rubber, aluminum, iron, and oil etc.), a trend shows an increased amount of backward vertical integration activity. In order to ensure reliable supply and to control costs, manufacturers have been acquiring suppliers of critical inputs to their production processes. Examples include: Japan tire manufacturer Bridgestone's purchase of an Indonesian rubber plantation, and Toyota acquiring a controlling interest in its main supplier of batteries for its hybrid vehicles (Gross, 2006).
On the other hand, Bob Evans Farms Inc. has always relied on a backward vertical integration strategy. Best known for offering pork sausage products to the retail grocery market, Bob Evans controls the supply function of their business by raising and slaughtering hogs on company-owned farms, then preparing and packaging their park sausage products for sale.
Full integration occurs when a firm takes over the entire value chain of supplying the inputs of production (i.e., raw materials or component parts), manufacturing the product, and distribution of the product to the ultimate consumer. Examples of complete vertical integration are oil and gas companies such as ExxonMobil, BP, and Royal Dutch Shell PLC, etc. These fully integrated companies engage in oil exploration, extract crude oil with their own drilling operations, refine oil into gasoline at company-owned refineries, and then distribute gasoline products through company-owned gas stations.
Note that vertical integration exists in varying degrees along the value chain. The ranges of vertical integration are: non-integration, quasi-integration, taper integration, and full integration (Harrigan, 1984).
- Full Integration (discussed above) is when a manufacturer retains in-house responsibility for its supplies and is the sole distributor of its products.
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