Corporate Level Strategy
Written by Scott Scheper for Gaebler Ventures
We take a look at the corporate business strategies and see what entrepreneurs can learn from strategies set by large corporations. It turns out that corporate strategic objectives such as growth, stability and retrenchment are very relevant to small business owners and entrepreneurs.
You'll rarely hear the term "corporate level strategy" uttered in the realm of entrepreneurship.
This is because corporate level strategy revolves around asking, "What business are we going to be in? What business should we abandon? What types of portfolio businesses should we hold?"
When you think corporate strategy, you think of large corporations. Take Pepsi, for example. Each quarter Pepsi evaluates their portfolio businesses (whether it be in beverages, snacks or fast food). After viewing the performance of each, they decide to either cut activity in one or increase focus in one.
Entrepreneurs are on the complete opposite side of the spectrum. Instead of holding a diversified portfolio of mini-companies, entrepreneurs are fully invested in one company, their own.
Although the last thing on an entrepreneur's mind is corporate strategy, it's important to understand corporate strategy for two reasons.
First, every investor wants to see an exit strategy in a potential investment. Today, more than ever, companies are banking on acquisitions as the exit strategy. If you're hoping for this exquisite exit, you'll need to understand why larger companies acquire smaller ones.
Second, it's important to understand corporate strategy because many concepts can, in fact, be applied to an entrepreneur's strategy.
In this article, we discuss three important elements of corporate strategy.
A company seeking growth faces a subset of growth choices: horizontal growth (concentration), diversification and vertical integration.
- Horizontal Growth. There are three components to horizontal growth. First, a company may decide to pursue new customers. Second, a company may decide to pursue new products. Third, a company may decide to pursue new geographic locations.
- Vertical Integration. Vertical integration is integration along a supply chain. For example, if a retailer starts manufacturing the products it sells, it is increasing its level of vertical integration. Vertical integration may be backward or forward. Never adopt this strategy when suppliers are weak. Beware of the disadvantages of vertical integration. Cost, efficiency can cause others to adopt economies of scale. Additionally, if the industry is characterized by lots of changes and is hypercompetitive, one should avoid vertical integration.
- Diversification. There are two types of diversification. The first type, related diversification, is the common core of one's resources and capabilities. With related diversification, synergy rises because the related activity can increase value and the economies of scale can save money. Second, unrelated diversification is used to lower the relative risk. Essentially, it's like holding a portfolio. The more uncorrelated each portfolio is relative to another, the better. This concept applies to businesses as well. When launching your new venture, think of ways to diversify specific applications of your business. For instance, release your product to different markets to hedge risk of total failure.
When a company is seeking slow growth or stagnation, management may seek a strategy that centers on stability. There are three elements to this strategy:
- Pause. If the internal resources are already stretched thin, companies will often scale down a bit and focus on quality control.
- Proceeding with Caution. If there's a problem in the macroenvironment, the company may seek a strategy that proceeds with only formidable growth
- Profit (Cash Cows). If a company is a cash cow and has a solid customer base--with loyalty--it becomes wise to pull back on R&D.
Retrenchment revolves around cutting sales. Retrenchment is a corporate-level strategy that seeks to reduce the size or diversity of an organization's operations. Retrenchment is also a reduction of expenditures in order to become financially stable. Retrenchment is a pullback or a withdrawal from offering some current products or serving some markets. In a military situation a retrenchment provides a second line of defense. Retrenchment is often a strategy employed prior to or as part of a Turnaround strategy.
There are five activities that characterize retrenchment:
- Captive Company. Essentially, a captive company's destiny is tied to a larger company. For some companies, the only way to stay viable is to act as an exclusive supplier to a giant company. A company may also be taken captive if their competitive position is irreparably weak.
- Turnaround. If your company is steadily losing profit or market share, a turnaround strategy may be needed. There are two forms of turnarounds: First, one may choose contractions (cutting labor costs, PP&E and Marketing). Second, they may decide to consolidate
- Bankruptcy. This may also be a viable legal protective strategy. Bankruptcy without a customer base is truly a bad place. However, if one declares bankruptcy with loyal customers, there is at least a possibility of a turnaround.
- Divestment. This is a form of retrenchment strategy used by businesses when they downsize the scope of their business activities. Divestment usually involves eliminating a portion of a business. Firms may elect to sell, close, or spin-off a strategic business unit, major operating division, or product line. This move often is the final decision to eliminate unrelated, unprofitable, or unmanageable operations.
- Liquidation. This is very simple. Take the book value of assets, subtract depreciation and sell the business. This may be hard for some companies to do because there may be untapped potential in the assets.
Scott Scheper is a venture finance enthusiast and serial entrepreneur hailing from Orange County, CA. Scott recently graduated from Chapman University where he was a Cheverton Fellow and graduated with honors in Finance, Management and Marketing.
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