What Is Corporate Strategy? (With Types And Importance)
Updated 7 September 2023
Most companies make certain decisions at various stages regarding future strategies and steps that it may take to expand, stabilise or absolve itself. An effective corporate strategy helps in deciding the company's goals, mitigating risks and enhancing sustainable returns. It looks at all the business units, parameters, scopes, redundancies and correlations to make a suitable plan. In this article, we discuss what is corporate strategy, its types, characteristics and how it is different from a business strategy.
What Is Corporate Strategy?
Consider the following information to answer the question, "What is corporate strategy?"
A corporate strategy is a multi-level strategy employed by a company to define its goals and structure its approach to attain them. Depending on the size and nature of the business, the strategy may be formed with the aim of increasing profits, selling a business or expanding to new markets. It aims to achieve the most profitable allocation of resources and organisational structure.
Difference Between Corporate Strategy And Business Strategy
There are a few notable differences between corporate and business strategy. A corporate strategy looks at the larger structure that is the mother company, its various business units and products, how they connect and the overall brand. It seeks to identify the markets to enter and the products it may produce.
A business strategy only focuses on the individual business unit and how to grow its profits or get a bigger share of the existing market. A corporate strategy has a much wider scope compared to a business strategy, which is limited to a specific product or market. The business strategy usually complies with the goals of the corporate strategy.
Importance Of A Corporate Strategy
A corporate strategy is important, as it can help indicate the future success and health of the company. Here are some reasons why a corporate strategy is important:
Larger company overview: Instead of considering each business unit, this strategy focuses on the entire company.
Organisational rearrangement: It can help re-engineer an organisation radically if required.
Problem identification: A corporate strategy helps identify existing or potential problems in an organisation that could impede its ability to achieve its goals.
Prevent counterproductive measures: It can help prevent the implementation of any other plan or strategy that can be counterproductive or not viable for the company's healthy growth.
Guidance for business strategies: A corporate strategy gives a starting point to build individual business unit strategies.
Contingency plans: It can help the company create appropriate contingency plans to implement when the need arises.
Types Of Corporate Strategies
The primary aim of formulating a corporate strategy is to distribute its resources in the best way to derive maximum returns and achieve the company's goals. Here are the different types of corporate strategies:
A stability strategy is often preferred by many companies that are currently satisfied with its market position. They continue to delve into the same market and sell the same product but may incorporate research and development and innovation to the existing products. This type of strategy ensures a continuous flow of revenue. The company may try to engage their target market by presenting offers and trials to them.
The expansion strategy is suitable for a firm that has already established its foothold within a certain market and aspires to grow in other markets or expand its product offerings. They may want to develop and sell new products, increase their market share or internationalise a business that has already saturated the domestic market. Expansion may involve the diversification of the business functions and thus a larger allocation of resources. This strategy results in greater returns as compared to the previous performance of the company. It can also mean more growth opportunities for the employees.
Sometimes, an organisation retreats from its current position or performance to prevent itself from becoming insolvent. This may occur during an economic recession or crisis, or if the initial business plan failed to produce the desired results. A company may implement a retrenchment strategy at various levels and in different areas of the business. For example, a company may decide to completely stop the production of a particular product and thus eliminate all costs associated with it. This can reduce the number of employed staff or its fixed assets and variable costs.
This type of strategy is a combination of the previous three types: stability, expansion and retrenchment. A company may adopt a combination strategy after they have weighed the pros and cons of each of their products or business units. The retrenchment strategy works for some of its businesses that do not yield enough in returns compared to the efforts or costs involved. Other products or businesses that may have been performing well can get a further boost with an expansion or stability strategy.
How To Evaluate And Choose A Strategy?
While evaluating and choosing the right strategy for a company, look at the results of the general industry and internal assessments while considering the factors to achieve company success. This is usually referred to as a SWOT analysis. SWOT stands for:
Strengths: These refer to the key areas where an organisation is currently excelling, such as customer brand loyalty, innovative technology and balance sheets. After identifying its strengths, the company may decide on how to capitalise on them.
Weaknesses: These are areas where the firm needs to improve its performance. The weak areas include lower brand loyalty amongst customers, not enough capital, hurdles in the supply chain or debt.
Opportunities: These are external factors that a company can leverage. Some examples of opportunities include reduced tariffs that give the business a chance to expand into new markets.
Threats: Threat factors impact a company negatively. For example, a higher cost of raw materials may reduce the profit margin or force a company to increase its MRP (maximum retail price). Sometimes, previously dormant competition may become very active and threaten a brand.
Related: SWOT Analysis Guide (With Examples)
Characteristics Of A Corporate Strategy
When deciding on the most suitable corporate strategies, here are some of the characteristics to keep in mind:
1. Forward integration
This refers to a company's advancement along the supply chain. They may try to take on a role that was previously served by another company or entity in the value chain. The company attempting a forward integration can be a clothing company that wishes to get into direct distribution and retail of its product by opening retail outlets. Previously, a different company or outlet may have been fulfilling this role.
For example, the supply chain for a clothing business may look like the example below:
Cotton - Cotton fabric or cloth - Cotton garment or clothing - Distribution - Retailing - Consumer
2. Backward integration
While forward integration implies moving forward in the supply or value chain, backward integration is a movement in the opposite direction. For example, a clothing company might want to start producing the raw materials that it currently sources from another company. This could mean reduced production costs, thus increasing the profit margins on the final product. A company can consider increasing the need for higher production capacity if the predicted returns are high.
3. Horizontal integration
Horizontal integration occurs when two companies of the same product offering or within the same industry merge. They may have been competitors but after analysing some external and internal factors they have realised that a merger may be in the best interests of the companies and the market. A merger comes with many demands, such as the need for learning new procedures, eliminating elements of each company that do not serve anymore and continuing to enhance the strategies and products that have been working.
A business may use a diversification strategy to venture into new markets or launch a new product. Diversification can be of three types: concentric diversification, conglomerate diversification and horizontal diversification.
Concentric diversification means launching a new product within an existing product line. In a conglomerate diversification strategy, a company may introduce a product or service that differs vastly from its current products and services. Horizontal diversification involves tapping into the current customer base, identifying a need within that customer base and launching a new product to meet that need or demand.
Turnaround means improving the efficacy and quality of current products to increase sales. Companies improve turnaround by boosting their testing procedures and raising the quality assurance standards. This can significantly increase profits by enhancing the customer experience.
A profit strategy primarily focuses on increasing the profit margin of the business by reducing costs and increasing prices. Cost-cutting measures include trying to source the raw materials from cheaper suppliers or identifying aspects of the product or service that may be redundant and doing away with them.
This is a retrenchment strategy where a company plans to improve its financial standing by absolving the assets or business units that may be redundant. This is possible by selling or closing a business unit or filing for bankruptcy.
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