Corporate level strategies generally pertain to large corporations with multi-businesses as to how they manage and allocate resources among these businesses. Such a strategy helps the management in balancing resources with market opportunities in each business area. Top managers are responsible for formulating corporate level strategy, and they generally look ahead for five years or longer.
A “grand strategy” is a comprehensive general strategy which provides the basis for strategic direction that will accomplish the organization’s long- term goals. Grand strategies include three types of strategies, namely growth, stability and retrenchment.
While in stability strategy, management maintains the status quo if the company is doing well and does not want to take risks associated with more aggressive growth, both the growth strategy and retrenchment strategy have a number of different ways to achieve the results.
Growth means expansion of the operations of the company and addition of new areas of operation. This would mean more sales, more revenues, more employees and more of the market share.
This expansion can be achieved by introducing the existing product into new markets or by differentiating the product or service and increasing the consumer base in the existing market or new products can be developed to diversify a company’s product line.
Growth strategies can be very risky and involve forecasting and analysis of many factors that affect expansion such as availability of resources and markets. Growth is not only necessary but also desirable since growth is an indication of effective management and it attracts quality amployees as a result. However, growth must be properly planned and controlled, otherwise organizations can fail. This is evident from failure of Laker Airways and W.T. Grant Company. Both these companies tried to expand without building the necessary infra-structure and resources to handle such an expansion.
Among the possible growth strategies are concentration, vertical or horizontal integration and diversification.
This strategy focuses on effecting the growth of a single product or a few closely related products or services. Also known as “market penetration strategy”, it directs its efforts in gaining a larger share of the current market by expanding into new markets with the same product or with developing closely related new products.
- Vertical integration:
Vertical integration means that a company is producing its own inputs (backward integration), or delivering its own outputs (forward integration). A company can acquire another company that supplies its resources or it can set up its own plant to produce inputs.
This step would eliminate intermediary profits and secure the sources of materials. For example, General Motors (GM) may be buying its tires from Firestone so that if GM bought and acquired Firestone or if it produced its own tires then it would be adopting backward integration strategy.
Similarly, if General Motors opened it own distribution channels rather than going through the automobile dealers, it will be following forward integration. Liz Claiborne Inc., a clothing producer, engaged in forward integration by opening its own retail stores and sold directly to the consumers rather than selling through department stores.
- Horizontal integration:
When managers expand their organizations by acquiring one or more competitors, they are applying horizontal integration. It eliminates the threat of competitors and also broadens the reach of the current product line by acquiring competitor’s customers.
For example, when Giddings and Lewis, a machine tool manufacturer based in Wisconsin, acquired rival Cross & Trecker, the combination resulted in a much stronger global presence and higher market share.
This strategy entails affecting growth through the development of new areas that are different from current businesses. One reason to diversify is to reduce the risk that can be associated with a single industry operation due to changes in environmental conditions.
For example, Textron Inc. is in aerospace business as well as commercial products such as auto parts and financial services. The aerospace business is down because of cuts in defence spending but these losses are being cushioned by other businesses.
Banks are diversifying into stocks brokerages. Avon Products, a cosmetics company has diversified into jewelry business. Philip Morris, a company producing tobacco products acquired Miller Brewing Company producing beer and also acquired a soft drink soda company Seven-Up.
Stability strategy implies “to leave the well enough alone.” If the environment is stable and the organization is doing well, then it may believe that it is better to make no changes. An organization would apply stability strategy if it is satisfied with the same product line, serving the same consumer groups and maintaining the same market share and the management does not want to take any risks that might be associated with expansion. The management may not be motivated and adventurous to try new strategies to change the status quo.
Stability strategy is most likely to be pursued by small, privately owned businesses which have established solid and satisfactory customer bases and are doing well as per their expectations.
Retrenchment primarily means reduction in product, services or personnel. This strategy is generally useful in the face of tough competition, scarcity of resources and declining economy. Under certain situations, retrenchment strategy becomes highly necessary for the very survival of the company, even though it may reflect poorly on the management of such a company.
Retrenchment strategies include harvest, turnaround, divestiture, bankruptcy and liquidation.
This strategy entails minimizing investments while at the same time attempting to maximize short-run cash flow and profits with the intention of eventually liquidating the company. A harvest strategy is often used when future growth in the market is doubtful.
If this strategy becomes apparent, the morale of employees as well as the confidence of customers and suppliers in the company declines, making it difficult for the company to attain its short-term goals.
This strategy is designed to shift from a negative direction to a positive one. This can be achieved by restructuring the organizational operations in order to restore the appropriate levels of profitability.
A successful turnaround can be achieved by giving high priority to the core business area and divesting from diversified activities. Some of the common features in turnaround situations are:
- Changes in leadership
- Redefining the company’s strategic focus.
- Divesting or closing unwanted assets
- Taking steps to improve the profitability of remaining operations.
- Making acquisitions to rebuild core operations.
It is a process of selling off divisions or subsidiaries to restructure a company around a smaller but stronger portfolio of businesses. This strategy is especially useful when these divisions are performing poorly.
Selling off a division or a unit is a frequently used strategy, when the unit is sold to a company which is in the same line of business as the unit. The purchaser way be willing to pay a higher price in such a case in order to increase the size of his own business. The money thus realized can be used to restructure the declining business into profitability.
Bankruptcy is a form of court protection from creditors when an organization has been in decline for a long period of time and is unable to meet its obligations and needs time and opportunity to reorganize itself for a turnaround.
The time period for reorganization is determined by the court and during that period the organization is protected from its creditors and other contract obligations while it attempts to regain financial stability.
For example, when Continental Airlines filed for bankruptcy protection, it renegotiated airline lease arrangement, received a $ 20 million cash infusion from a major bank and cut costs to stay in business and win back customers to make the airline more financially stable.
Liquidation simply means end or termination of the business. The company moves to exit the business either by liquidating its assets or by selling the whole business, thus ending its existence in the current form.
Liquidation may be voluntary or it may be forced upon an organization by the court when its liabilities exceed its assets so that a reorganization would not bring the company back to financial stability. For example, Eastern Airlines, one of the major U.S. air carriers, established in 1928, was forced to liquidate in 1991 when all other remedies to reverse the airline’s huge losses failed.
Setting Organizations’ objectives: The key component of any strategy statement is to set the long-term objectives of the organization. It is known that strategy is generally a medium for realization of organizational objectives. Objectives stress the state of being there whereas Strategy stresses upon the process of reaching there. Strategy includes both the fixation of objectives as well the medium to be used to realize those objectives. Thus, strategy is a wider term which believes in the manner of deployment of resources so as to achieve the objectives.
While fixing the organizational objectives, it is essential that the factors which influence the selection of objectives must be analyzed before the selection of objectives. Once the objectives and the factors influencing strategic decisions have been determined, it is easy to take strategic decisions.
Evaluating the Organizational Environment: The next step is to evaluate the general economic and industrial environment in which the organization operates. This includes a review of the organizations competitive position. It is essential to conduct a qualitative and quantitative review of an organizations existing product line. The purpose of such a review is to make sure that the factors important for competitive success in the market can be discovered so that the management can identify their own strengths and weaknesses as well as their competitors’ strengths and weaknesses.
After identifying its strengths and weaknesses, an organization must keep a track of competitors’ moves and actions so as to discover probable opportunities of threats to its market or supply sources.
Setting Quantitative Targets: In this step, an organization must practically fix the quantitative target values for some of the organizational objectives. The idea behind this is to compare with long term customers, so as to evaluate the contribution that might be made by various product zones or operating departments.
Aiming in context with the divisional plans: In this step, the contributions made by each department or division or product category within the organization is identified and accordingly strategic planning is done for each sub-unit. This requires a careful analysis of macroeconomic trends.
Performance Analysis: Performance analysis includes discovering and analyzing the gap between the planned or desired performance. A critical evaluation of the organizations past performance, present condition and the desired future conditions must be done by the organization. This critical evaluation identifies the degree of gap that persists between the actual reality and the long-term aspirations of the organization. An attempt is made by the organization to estimate its probable future condition if the current trends persist.
Choice of Strategy: This is the ultimate step in Strategy Formulation. The best course of action is actually chosen after considering organizational goals, organizational strengths, potential and limitations as well as the external opportunities.