8 Strategy Formulation and Implementation


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CHAPTER OUTLINE
Thinking Strategically What Is Strategic Management? Grand Strategy Global Strategy Purpose of Strategy Levels of Strategy The Strategic Management Process Strategy Formulation Versus Implementation Situation Analysis Formulating Corporate-Level Strategy Portfolio Strategy The BCG Matrix Formulating Business-Level Strategy Porter’s Competitive Forces and Strategies Partnership Strategies Formulating Functional-Level Strategy Strategy Implementation and Control Leadership Structural Design Information and Control Systems Human Resources Implementing Global Strategies

Strategy Formulation and Implementation

LEARNING OBJECTIVES After studying this chapter, you should be able to

1 Define the components of strategic management.

2 Describe the strategic planning process and SWOT analysis.

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Understand Grand Strategies for domestic and international operations

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Define corporate-level strategies and explain the portfolio approach.

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Describe business-level strategies, including Porter’s competitive forces and strategies and partnership strategies.

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Explain the major considerations in formulating functional strategies.

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Enumerate the organizational dimensions used for implementing strategy.

Management Challenge

Coke might be the world’s most powerful brand, but that has not helped much lately. When Douglas Daft took over as CEO of the Coca-Cola Company, he inherited a host of troubles. Soda sales had slumped in the important U.S. market and to a lesser extent around the world, and Coke had failed to match rival Pepsi’s aggressive moves into nonsoda businesses. A high-profile racial discrimination suit in the United States and a soda-contamination scare overseas had damaged the company’s reputation and its relationships with customers, governments, and bottlers. Under the previous CEO, M. Douglas Ivester, there was no real sense of crisis at Coke’s headquarters, where managers pretty much continued business as usual. The Australian-born Daft knew that needed to change if Coca-Cola was to remain one of the world’s most admired and

respected companies. During his first year on the job, Daft began dismantling the stale old regime at headquarters and brought in new top managers willing to make the tough changes to turn the company around. He also spent much of his time repairing relationships with government regulators in Europe and handling the backlash from financially strapped bottlers who charged that Coke had been trying to eke out profits at the bottlers’ expense. Despite these early moves, Coke’s sales and profits have stayed flat and the stock has continued to decline. The CEO knows he needs to come up with a powerful strategic plan to reignite the company in a hurry.1
If you were the CEO of Coca-Cola, what strategies might you adopt to regain the competitive edge? How would you go about formulating and implementing a new strategic plan?

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C H A P T E R 8 Strategy Formulation and Implementation

The story of Coca-Cola illustrates the importance of strategic planning. Coke had been stumbling along for years, ever since the departure of beloved Chairman and CEO Roberto Goizueta. The late Goizueta had been a master at providing vision and strategic direction for the company, but his hand-picked successor, Douglas Ivester, proved incapable of keeping Coke on the path of success. Now, employees, board members, and investors are hoping Douglas Daft can formulate and implement strategies that can ignite growth and revive the troubled company.
Every company is concerned with strategy. Japan’s Fuji Photo Film Company developed a strategy of being a low-cost provider to compete with Kodak. Fuji’s relentless internal cost-cutting enabled the company to offer customers lower prices and gradually gain market share over the giant U.S. firm.2 Hershey devised a new strategy of being a fierce product innovator to compete with Mars in the candy wars.3 Hershey scored big with the introduction of such products as Twizzlers twisted licorice sticks, Jolly Rancher lollipops, and Bites, bite-sized pieces of favorite candy bars. Strategic blunders can hurt a company. Mattel suffered in recent years by losing sight of its core business and trying to compete as a maker of computer games. New CEO Robert A. Eckert has implemented a “back to basics” strategy that he hopes will get the toymaker back on track.4
Managers at Mattel, Hershey, Fuji, and Coca-Cola are all involved in strategic management. They are finding ways to respond to competitors, cope with difficult environmental changes, meet changing customer needs, and effectively use available resources. Research has shown that strategic thinking and planning positively affects a firm’s performance and financial success.5 Strategic planning has taken on new importance in today’s world of globalization, deregulation, advancing technology, and changing demographics and lifestyles. Managers are responsible for positioning their organizations for success in a world that is constantly changing. Today’s top companies thrive by changing the rules of an industry to their advantage or by creating entirely new industries.6 For example, Champion Enterprises was going broke selling inexpensive, factory-built houses. CEO Walter Young Jr. says, “People thought we were in the trailer park business. It was a real perception problem.” Young wanted to redraw the rules of the manufactured housing industry. Today, Champion is thriving by building full-size houses in its factories and offering customers such options as porches, skylights, and whirlpool baths.7
In this chapter, we focus on the topic of strategic management. First we define components of strategic management and then discuss a model of the strategic management process. Next we examine several models of strategy formulation. Finally, we discuss the tools managers use to implement their strategic plans.
Thinking Strategically
Chapter 7 provided an overview of the types of goals and plans that organizations use. In this chapter, we will explore strategic management, which is considered one specific type of planning. Strategic planning in for-profit business organizations typically pertains to competitive actions in the marketplace. In not-for-profit organizations such as the Red Cross, strategic planning pertains to events in the external environment. The final responsibility for strategy rests with top managers and the chief executive. For an organization to succeed, the CEO must be actively involved in making the

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tough choices and trade-offs that define and support strategy.8 However, senior executives at such companies as General Electric, 3M, and Johnson & Johnson want middle- and low-level managers to think strategically. Some companies also are finding ways to get front-line workers involved in strategic thinking and planning. Strategic thinking means to take the long-term view and to see the big picture, including the organization and the competitive environment, and to consider how they fit together. Understanding the strategy concept, the levels of strategy, and strategy formulation versus implementation is an important start toward strategic thinking.
What Is Strategic Management?
Strategic management is the set of decisions and actions used to formulate and implement strategies that will provide a competitively superior fit between the organization and its environment so as to achieve organizational goals.9 Managers ask questions such as, “What changes and trends are occurring in the competitive environment? Who are our customers? What products or services should we offer? How can we offer those products and services most efficiently?” Answers to these questions help managers make choices about how to position their organization in the environment with respect to rival companies.10 Superior organizational performance is not a matter of luck. It is determined by the choices that managers make. Top executives use strategic management to define an overall direction for the organization, which is the firm’s grand strategy.

strategic management The set of decisions and actions used to formulate and implement strategies that will provide a competitively superior fit between the organization and its environment so as to achieve organizational goals.
grand strategy The general plan of major action by which an organization intends to achieve its longterm goals.

Grand Strategy
Grand strategy is the general plan of major action by which a firm intends to achieve its long-term goals.11 Grand strategies fall into three general categories: growth, stability, and retrenchment. A separate grand strategy can also be defined for global operations.
Growth. Growth can be promoted internally by investing in expansion or externally by acquiring additional business divisions. Internal growth can include development of new or changed products, such as Starbucks’ introduction of Frappuccino, a bottled coffee drink, or expansion of current products into new markets, such as Avon’s attempt to begin selling products in major retail stores. External growth typically involves diversification, which means the acquisition of businesses that are related to current product lines or that take the corporation into new areas. The number of companies choosing to grow through mergers and acquisitions is astounding, as organizations strive to acquire the size and resources to compete on a global scale, to invest in new technology, and to control distribution channels and guarantee access to markets. WorldCom, once an obscure long-distance carrier, has acquired more than 40 companies in the past decade and expanded into local phone services, data transmission, and Internet traffic. Another strategy for international growth is the formation of a joint venture, such as WorldCom’s venture with Spanish telecom giant Telefónica, which extended WorldCom’s reach into South America.12 This chapter’s Leading Online box describes how eBay is pursuing a growth strategy.
Stability. Stability, sometimes called a pause strategy, means that the organization wants to remain the same size or grow slowly and in a controlled fashion.

Kingsley Management LLC is pursuing a growth strategy with its high-tech car washes trademarked “Swash.” So far, the Boston-based company has single-bay car washes in only three markets—Rochester, New York, Greenville, North Carolina, and Jacksonville, Florida—but founders Matthew Lieb (standing) and Chris Jones (in the driver’s seat) are aiming for growth by forming partnerships to add their stateof-the-art car washes to gas stations and hypermarkets and developing plans for multi-bay units in high-traffic areas. At Swash, a customer pulls up to an ATM-like machine, pays with cash, credit, or a prepaid card, watches video instructions, and gets a software-controlled brushless wash, all in less than five minutes.

©Chuck Eaton

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C H A P T E R 8 Strategy Formulation and Implementation

Leading Online

EBay: Building on Success
A t a time when almost every Internet and technology company is handing out pink slips, the scene is quite different within the walls of San Jose, California-based eBay. In fact, the online auction company is planning to add to its work force of 2,400. EBay, which began as a site for selling collectibles, is pursuing a growth strategy, successfully molding itself into a platform for selling everything from computers to clothes. Every 60 minutes on the site, 120 PCs, 10 diamond rings, and 1,200 articles of clothing are sold, and someone buys a Corvette every three hours.
EBay CEO Meg Whitman sees her biggest job as keeping the company nimble and maintaining community spirit as the organization grows. From day one, eBay has been profitable, and in the second quarter of 2001, the company reported profits of $24.6 million, more than triple those reported a year earlier. Part of the reason for the success is because top managers have kept their focus on the community of buyers and sellers even as they have invested steadily in the company’s growth.
There are several elements to eBay’s strategic plan for growth. First, to branch out from its auction format, the company purchased Half.com, a site where new and used items

can be listed at a fixed price. In addition, the company added a new feature called “Buy It Now,” which allows users to acquire an item immediately, omitting the time-consuming auction process altogether. About 35 percent of all items listed by sellers on eBay now offer that option, which speeds up the rate of trading on the site. Another approach has been to allow businesses such as J. C. Penney, IBM, and Sun Microsystems to set up virtual storefronts. Ebay expected to attract around 2,000 businesses, but nearly 10 times that number wanted a piece of the action, recognizing the inexpensive potential for reaching millions of consumers. On the global front, eBay has acquired iBazar, a European trading site, and invested in the growth of its German, Canadian, and U.K. operations.
Mark Goldstein, former CEO of BlueLight.com, the online unit of Kmart, says, “eBay is what all of us wanted our Internet businesses to be.” Even as e-commerce stalls in today’s declining economy, online shoppers-turned-bargain-hunters surf the value-priced aisles of eBay, finding anything and everything. In fact, eBay is rapidly becoming “the Wal-Mart of the Internet.”
SOURCE: Miguel Helft, “What Makes eBay Unstoppable?” The Industry Standard (August 6–13, 2001), 32–37.

The corporation wants to stay in its current business, such as Allied Tire Stores, whose motto is, “We just sell tires.” After organizations have undergone a turbulent period of rapid growth, executives often focus on a stability strategy to integrate strategic business units and ensure that the organization is working efficiently. Mattel is currently pursuing a stability strategy to recover from former CEO Jill Barad’s years of big acquisitions and new businesses. The current top executive is seeking only modest new ventures to get Mattel on a slower-growth, more stable course.13
Retrenchment. Retrenchment means that the organization goes through a period of forced decline by either shrinking current business units or selling off or liquidating entire businesses. The organization may have experienced a precipitous drop in demand for its products or services, prompting managers to order across-the-board cuts in personnel and expenditures. For example, Nortel Networks, described in Chapter 3, laid off 20,000 employees and closed several business units to cope with reduced demand. Some mid-sized companies are scaling back or abandoning their Web-based businesses because of poor results and a declining economy. Gaylord Entertainment, a Nashville-based entertainment company that traces its roots to the Grand Ole Opry, had counted on digital entertainment as a growth business, but just two years later managers closed the Gaylord Digital subsidiary, cut jobs, and put the company’s Web business up for sale. Top executives felt that a period of retrenchment was necessary to strengthen profitability across the company.

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Liquidation means selling off a business unit for the cash value of the assets, thus terminating its existence. An example is the liquidation of Minnie Pearl Fried Chicken. Divestiture involves the selling off of businesses that no longer seem central to the corporation. Germany’s Siemens recently sold businesses that make power cables, automatic teller machines, and diesel locomotives because these businesses no longer seemed central to the company, which is staking much of its future on telecommunications.14 Studies show that between 33 percent and 50 percent of all acquisitions are later divested. When Figgies International Inc. sold 15 of its 22 business divisions, including crown jewel Rawlings Sporting Goods, and when Sears sold its financial services businesses, both corporations were going through periods of retrenchment, also called downsizing.15

Global Strategy
In addition to the three preceding alternatives—growth, stability, and retrenchment—companies may pursue a separate grand strategy as the focus of global business. In today’s global corporations, senior executives try to formulate coherent strategies to provide synergy among worldwide operations for the purpose of fulfilling common goals. A systematic strategic planning process for deciding on the appropriate strategic alternative should be used. The grand strategy of growth is a major motivation for both small and large businesses going international. Each country or region represents a new market with the promise of increased sales and profits.
In the international arena, companies face a strategic dilemma between global integration and national responsiveness. Organizations must decide whether they want each global affiliate to act autonomously or whether activities should be standardized and centralized across countries. This choice leads managers to select a basic grand strategy alternative such as globalization versus multidomestic strategy. Some corporations may seek to achieve both global integration and national responsiveness by using a transnational strategy. The three global strategies are shown in Exhibit 8.1.
Globalization. When an organization chooses a strategy of globalization, it means that its product design and advertising strategies are standardized throughout the world.16 This approach is based on the assumption that a single global market exists for many consumer and industrial products. The theory is that people everywhere want to buy the same products and live the same way. People everywhere want to drink Coca-Cola and eat McDonald’s hamburgers.17 A globalization strategy can help an organization reap efficiencies by standardizing product design and manufacturing, using common suppliers, introducing products around the world faster, coordinating prices, and eliminating overlapping facilities. Ford Motor Company’s Ford 2000 initiative built a single global automotive operation. By sharing technology, design, suppliers, and manufacturing standards worldwide, Ford saved $5 billion during the first three years.18 Similarly, Gillette Company, which makes grooming products such as the Mach3 for men and the Venus razor for women, has large production facilities that use common suppliers and processes to manufacture products whose technical specifications are standardized around the world.19
Globalization enables marketing departments alone to save millions of dollars. For example, Colgate-Palmolive Company sells Colgate toothpaste in more than 40 countries. For every country where the same commercial runs,

globalization The standardization of product design and advertising strategies throughout the world.

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E x h i b i t 8.1
Global Corporate Strategies

C H A P T E R 8 Strategy Formulation and Implementation

High

Globalization Strategy
• Treats world as a single global market
• Standardizes global product/advertising strategies

Transnational Strategy
• Seeks to balance global efficiencies and local responsiveness
• Combines standardization and customization for product/advertising strategies

Need for Global Integration

Multidomestic Strategy
• Handles markets independently for each country
• Adapts product/ advertising to local tastes and needs

SOURCE: Based on Michael A. Hitt, R. Duane Ireland, and Robert E. Hoskisson, Strategic Management: Competitiveness and Globalization (St. Paul, Minn.: West, 1995), 239.

Low Low

High Need for National Responsiveness

multidomestic strategy The modification of product design and advertising strategies to suit the specific needs of individual countries.
transnational strategy A strategy that combines global coordination to attain efficiency with flexibility to meet specific needs in various countries.

it saves $1 million to $2 million in production costs alone. More millions have been saved by standardizing the look and packaging of brands.20
Multidomestic Strategy. When an organization chooses a multidomestic strategy, it means that competition in each country is handled independently of industry competition in other countries. Thus, a multinational company is present in many countries, but it encourages marketing, advertising, and product design to be modified and adapted to the specific needs of each country.21 Many companies reject the idea of a single global market. They have found that the French do not drink orange juice for breakfast, that laundry detergent is used to wash dishes in parts of Mexico, and that people in the Middle East prefer toothpaste that tastes spicy. Procter & Gamble standardized diaper design across European markets, but discovered that Italian mothers preferred diapers that covered the baby’s navel. This design feature was so important to the successful sale of diapers in Italy that the company eventually incorporated it specifically for the Italian market. Baskin-Robbins introduced a green-tea flavored ice cream in Japan, and Häagen-Dazs developed a new flavor called dulce de leche primarily for sale in Argentina.22
Transnational Strategy. A transnational strategy seeks to achieve both global integration and national responsiveness.23 A true transnational strategy is difficult to achieve, because one goal requires close global coordination while the other goal requires local flexibility. However, many industries are finding that, although increased competition means they must achieve global efficiency, growing pressure to meet local needs demands national responsiveness.24 One company that effectively uses a transnational strategy is

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These KitKat candy bars, being stocked by a salesperson in a Malaysian shop, are manufactured with locally grown beans— at a price 30 percent below imports. Nestlé, the world’s biggest branded food company, rejects the idea of a single global market, opting for a multidomestic strategy that handles competition in each country independently. The Switzerlandbased powerhouse is charging across the developing world by hiring people in the region, manipulating ingredients or technology for local conditions, and slapping on one of the company’s 8,000 brand names. Of those 8,000 worldwide brands, only 750 are registered in more than one country.

©Munshi Ahmed

Caterpillar, Inc., a heavy equipment manufacturer. Caterpillar achieves global efficiencies by designing its products to use many identical components and centralizing manufacturing of components in a few large-scale facilities. However, assembly plants located in each of Caterpillar’s major markets add certain product features tailored to meet local needs.25
Although most multinational companies want to achieve some degree of global integration to hold costs down, even global products may require some customization to meet government regulations in various countries or some tailoring to fit consumer preferences. In addition, some products are better suited for standardization than others. Most large multinational corporations with diverse products will attempt to use a partial multidomestic strategy for some product lines and global strategies for others. Coordinating global integration with a responsiveness to the heterogeneity of international markets is a difficult balancing act for managers, but an increasingly important one in today’s global business world.

Purpose of Strategy
Within the overall grand strategy of an organization, executives define an explicit strategy, which is the plan of action that describes resource allocation and activities for dealing with the environment and attaining the organization’s goals. The essence of formulating strategy is choosing how the organization will be different.26 Managers make decisions about whether the company will perform different activities or will execute similar activities differently than competitors do. Strategy necessarily changes over time to fit environmental conditions, but to remain competitive, companies develop strategies that focus on core competencies, develop synergy, and create value for customers.
Core Competence. A company’s core competence is something the organization does especially well in comparison to its competitors. A core competence represents a competitive advantage because the company acquires expertise that competitors do not have. A core competence may be in the area

strategy The plan of action that prescribes resource allocation and other activities for dealing with the environment and helping the organization attain its goals.
core competence A business activity that an organization does particularly well in comparison to competitors.

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DELL COMPUTER http://www.dell.com

C H A P T E R 8 Strategy Formulation and Implementation
of superior research and development, expert technological know-how, process efficiency, or exceptional customer service.27 At Amgen, a pharmaceutical company, strategy focuses on the company’s core competence of highquality scientific research. Rather than starting with a specific disease and working backward, Amgen takes brilliant science and finds unique uses for it.28 Boeing Corporation has a core competence in flexible design and assembly of aircraft.29 And Home Depot thrives because of a strategy focused on superior customer service. Managers stress to all employees that listening to customers and helping them solve their do-it-yourself worries takes precedence over just making a sale.30 In each case, leaders identified what their company does particularly well and built strategy around it. Dell Computer has succeeded with its core competencies of speed and cost efficiency.
Dell Computer is constantly changing, adapting, and finding new ways to master its environment, but one thing hasn’t changed from the days when Michael Dell first began building computers in his dorm room: the focus on speed and low cost. Most observers agree that a major factor in Dell’s success is that it has retained a clear image of what it does best. The company spent years developing a core competence in speedy delivery by squeezing time lags and inefficiencies out of the manufacturing and assembly process, then extended the same brutal standards to the supply chain. Good relationships with a few key suppliers and precise coordination mean that Dell can sometimes receive parts in minutes rather than days.
The system is most evident at Dell’s new OptiPlex factory in Austin, Texas, where Dell first introduced a new way of making PCs, called Metric 12, that combines just-in-time inventory delivery with a complicated, integrated computer system that practically hands a worker the right part—whether it be any of a dozen different microprocessors or a combination of software—at just the right time. The goal of the new system is not only to cut costs, but also to save time by decreasing the number of worker touches per machine. Rather than building computers in progressive, assembly-line fashion, small teams of workers at OptiPlex build a complete machine by following precise guidelines and using the components that arrive in carefully indicated racks in front of them. A small glassed-in office above the factory floor functions as a control tower, where employees take orders, alert suppliers, order parts, and arrange shipping, much of this handled over the Internet. By using sophisticated supply-chain software, Dell can keep a few hours’ worth of parts on hand and replenish only what it needs throughout the day. Dell’s just-in-time system works so smoothly that nearly 85 percent of orders are built, customized, and shipped within eight hours.
Dell’s fixation with speed and thrift comes directly from the top. Michael Dell believes the core competencies that made Dell a star in PCs and servers can also make the company a winner as it moves into developing low-cost storage systems and Internet services. To anyone who doubts that Dell can compete in this new market, he says, “Bring them on. We’re coming right at them.”31 ❖

synergy The condition that exists when the organization’s parts interact to produce a joint effect that is greater than the sum of the parts acting alone.

Synergy. When organizational parts interact to produce a joint effect that is greater than the sum of the parts acting alone, synergy occurs. The organization may attain a special advantage with respect to cost, market power, technology, or management skill. When properly managed, synergy can create additional value with existing resources, providing a big boost to the bottom line.32 A good example is PepsiCo’s new “Power of One” strategy, which is aimed at leveraging

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the synergies of its soft drink and snack-food divisions to achieve greater market power. PepsiCo CEO Roger Enrico has used the company’s clout with supermarkets to move Pepsi drinks next to Frito-Lay snacks on store shelves, increasing the chance that when shoppers pick up chips and soda, the soda of choice will be a Pepsi product. Managers are betting that the strength of FritoLay, which enjoys near-total dominance of the snack-food market, will gain not only greater shelf space for Pepsi, but increased market share as well.33
Synergy can also be obtained by good relations with suppliers, as at Dell Computer, or by strong alliances among companies. Sweden’s appliance giant Electrolux partnered with Ericsson, the Swedish telecommunications giant, in a joint venture called e2 Home to create a new way to make and sell appliances. Together, Electrolux and Ericsson are offering products such as the Screenfridge, a refrigerator with Internet connections that enables users to check traffic conditions, order take-out, or buy groceries, and an experimental pay-per-use washing machine. Neither company could have offered these revolutionary products on its own. “The technology was there, the appliances were there, but we needed a way to connect those two elements—to add value for consumers,” said Per Grunewald, e2 Home’s president.34
Value Creation. Delivering value to the customer should be at the heart of strategy. Value can be defined as the combination of benefits received and costs paid by the customer. Managers help their companies create value by devising strategies that exploit core competencies and attain synergy. Managers at California’s Gallo Winery are finding new ways to use core competencies to create better value. Gallo, long-famous for its inexpensive wines, produces one of every four bottles of wine sold in the U.S. Today, the company is pouring $100 million into Gallo of Sonoma, a line of upscale wines with value prices. As the low-cost producer, Gallo is able to sell upscale wines for $1 to $30 less per bottle than comparable-quality competitors.35 Likewise, McDonald’s made a thorough study of how to use its core competencies to create better value for customers, resulting in the introduction of “Extra Value Meals” and the decision to open restaurants in different locations, such as inside Wal-Mart and Sears stores.36

Levels of Strategy
Another aspect of strategic management concerns the organizational level to which strategic issues apply. Strategic managers normally think in terms of three levels of strategy—corporate, business, and functional—as illustrated in Exhibit 8.2.37
Corporate-Level Strategy. The question, “What business are we in?” concerns corporate-level strategy. Corporate-level strategy pertains to the organization as a whole and the combination of business units and product lines that make up the corporate entity. Strategic actions at this level usually relate to the acquisition of new businesses; additions or divestments of business units, plants, or product lines; and joint ventures with other corporations in new areas. An example of corporate-level strategy is Cisco Systems, which bought 71 companies between the years of 1993 and 2000 to complement the company’s core business of selling hardware and software for the Internet. Rather than pouring money into research, Cisco managers’ strategy has been to buy companies that make products that will round out Cisco’s existing product line and move the company into new markets. Now, many analysts

corporate-level strategy The level of strategy concerned with the question, “What business are we in?” Pertains to the organization as a whole and the combination of business units and product lines that make it up.

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8 Strategy Formulation and Implementation