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CHAPTER SEVEN
STRATEGY FORMULATION: CORPORATE STRATEGY
This chapter focuses on formulating strategy at the corporate level. Corporate strategy deals with the three key
issues facing the corporation as a whole: (1) the firm’s overall orientation toward growth (directional strategy); (2)
the industries or markets in which the firm competes through its products and business units (portfolio strategy); and
(3) the manner in which management coordinates activities, transfers resources, and cultivates capabilities among
product lines and business units (parenting strategy). Directional strategy is composed of growth, stability, and
1. Understand the three key issues that corporate strategy addresses.
2. Apply the directional strategies of growth, stability, and retrenchment to the organizational environment in
which they work best.
TOPICS OUTLINE COVERED
1. Corporate Strategy
2. Directional Strategy
a. Growth Strategies
3. Portfolio Analysis
a. BCG Growth-Share Matrix
4. Corporate Parenting
a. Developing a Corporate Parenting Strategy
SUGGESTED ANSWERS TO MYMANAGEMENTLAB QUESTIONS
7-1. List the means available to a company for horizontal growth and explain why a company might
pursue one over another.
A firm can achieve horizontal growth by expanding its operations into other geographic locations and/or by
7-2. Evaluate the types of retrenchment strategies that might be used by companies in stagnant industries.
Retrenchment refers to reducing the company’s level of activities. A turnaround strategy emphasizes the
improvement of operational efficiency and is probably the most appropriate when a company’s problems are
2
7-3. How is a diversification strategy related to the sustainable growth and development of an
organization?
The main purpose of a diversification strategy is to seek potential for sharing, extending, and transferring resources
and capabilities between various businesses within the same group, both vertically and horizontally. Some of the
7-4. What are the major factors that an organization needs to analyze before it can consider entering a
foreign market?
When an organization considers entering a foreign market, it needs to analyze the attractiveness of the foreign
market as well as its own potential to establish a competitive advantage in that foreign market. Whether the entry
7-5. Is stability really a strategy or just a term for no strategy?
An argument can be made that stability is not really a strategy in itself, but is just a pause between strategies.
Because one way to view strategy is as a direction the corporation is taking in order to reach its objectives, standing
still has no direction and thus is not a strategy. The text takes the position, however, that stability is a strategy in
7-6. How is corporate parenting different from portfolio analysis? How is it alike? Is it a useful concept in
a global industry?
The basic difference between these two approaches to corporate strategy lies in the questions they attempt to answer.
According to the text, portfolio analysis attempts to answer the following two questions:
3
Corporate parenting attempts to answer two similar, but different, questions:
• What businesses should this company own and why?
• What organizational structure, management processes, and philosophy will foster superior performance
from the company’s business units?
Portfolio analysis attempts to answer these questions by examining the attractiveness of various industries and by
managing business units for cash flow, that is, by using cash generated from mature units to build new product lines.
ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS
These are not found in the text and may be used by the instructor for classroom discussion or exams.
A7-1. How does transaction cost economics apply to vertical growth? To concentric versus conglomerate
diversification?
Transaction cost economics is especially applicable to the question of vertical growth versus outsourcing (i.e., the
classic make-or-buy decision). It argues that vertical growth is more efficient than contracting for goods and services
4
A7-2. Must a corporation have a common thread running through its many activities in order to be
successful? Why or why not?
The concept of a corporate mission implies that throughout a corporation’s many activities, there should be a
“common thread” or unifying theme, and that those corporations with such a common thread are better able to direct
and administer their many activities. This is one way to achieve a “strategic fit” so that overall corporate
A7-3. What is the value of portfolio analysis? Its dangers?
Portfolio analysis is a popular approach to aid the integration and evaluation of environmental data. It is just as
A7-4. What concepts or assumptions underlie the BCG growth-share matrix? Are these concepts valid?
Why or why not?
The product life cycle and the experience curve underlie the BCG growth-share matrix. The development of
question marks into stars and then into cash cows suggests the introduction, growth, and maturity stages of the
product life cycle. Dogs appear to be those products or units on the decline stage of the product life cycle. The
SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE
What is the future of electronic publishing?
After a brief summary of the publication of the first Internet book, Stephen King’s Riding the Bullet, this exercise
asks students to form into small discussion groups to discuss the future of Internet publishing. The exercise proposes
some questions as discussion guides, such as what are the pros and cons of Internet publishing.
The issue of Internet publishing is an important one for the publishing industry. It has the potential to affect
newspapers, periodicals, and books. It is already changing the music industry. For a publisher, its corporate strategy
Moving to Internet publishing could be viewed as part of a horizontal growth strategy. As defined in the chapter,
horizontal growth can be achieved by expanding a firm’s products into other geographic locations and/or by
increasing the range of products and services offered to current markets. It could easily be argued that the Internet is
just another distribution channel for a company’s current products. The problem with this view is that some items
may do well on the Internet, whereas others may not. The issue is which items should be made Internet-accessible?
Currently, most people do not like reading on their computer screens. Products are being invented that may
overcome that resistance. Nevertheless, paper books have many advantages over electronic books. This becomes
Jason Ohler, in his article, “Taming the Technological Beast,” (in the January–February 2001 issue of The Futurist)
proposes a useful exercise to evaluate a new technology. He asks students to assume that they are employed by a
fictitious Science and Technology Administration and that their job is to analyze the effects of a technology before it
is released to the public. He applies his analytical approach to the e-book. Ohler points out, “The e-book is a
splendidly mysterious and engaging technology because of its wild-card status. It continues some traditions,
