Business- Versus Corporate-level Strategy

Think of corporate-level strategy as the umbrella or roll-up for a bundle of business-level strategies (see Chapter 5: Business-level Strategy). While business-level strategy focuses on how an organization generates value by positioning products and services relative to the offerings of other firms in the same industry or market, corporate-level strategy deals with a portfolio of distinct products and services in multiple industries and markets (Dyer et al., 2015, pp. 109–110). When dealing at the business level, managers ask, “How can we be successful in this business?” When dealing with corporate-level strategy, they ask, “In what industry or industries should our firm compete?”

The build-borrow-buy framework is a strategic tool that guides corporate-level decisions on how to acquire the resources or capabilities needed for growth and competitive advantage. Firms can choose to build internally by developing new products and technologies or entering markets on their own, often referred to as organic growth; borrow through partnerships, alliances, or joint ventures to access resources without full ownership; or buy by acquiring another company that already possesses the desired assets. By systematically evaluating which approach best fits their objectives, timeline, and risk tolerance, executives can select the most effective method for expanding or strengthening their organization.

The executives in charge of a firm such as The Walt Disney Company must routinely decide whether to remain within their present industries or venture into new ones. In Disney’s case, the firm has expanded from its original business (films) and into television, theme parks, travel, publishing, and others. In contrast, many firms never expand beyond their initial choice of an industry domain.

Directional Strategies

Of utmost importance to any corporate strategy is to assess the environment and determine whether growth, stability, or retrenchment is most important. If markets are expanding, a business that doesn’t also expand is losing ground. But markets eventually stabilize and then they decline; participating firms must decide to get bigger, pause growth, or get smaller. Collectively, these three questions about growth, stability, and retrenchment are often referred to as directional strategies, we’ll address each component in varying detail.

• Growth – Addressed first, this is the largest category as most organizations aspire to grow, and growth is essentially the default state for businesses. Here we describe concentration, integration, diversification, and cooperative strategies.
• Stability – This strategy aims to maintain the firm’s current position or pause growth in a mature market and consists of the pausing/caution and maintain/profit approaches.
• Retrenchment – This strategy involves getting smaller or exiting markets to maximize returns and is addressed through the concepts of downsizing, divestment, spin-off, and liquidation.

Concentration Strategies

Concentration strategies involve trying to compete successfully within a single, broad industry. According to Harry Igor Ansoff, an applied mathematician and known as one of the fathers of strategic management, there are three concentration strategies: (1) market penetration, (2) market development, and (3) product development. A firm can use one, two, or all three as part of their efforts to excel within an industry (Ansoff, 1957). Ansoff described these strategies in a matrix (Figure 6.2). Ansoff’s Matrix is a tool for understanding at a high-level, the general direction of growth. It helps a firm match products and markets (Ansoff, 1980). The firm must decide whether to prioritize increasing profit or growth and how the firm will achieve it. No one strategy is appropriate for all companies at all times! In this model, markets are defined as customer groups, and products are items sold to customers (Watts et al., 1998).

Market Penetration

Market penetration involves increasing the firm’s share within existing markets using existing products. Often firms will rely on advertising to attract new customers within existing markets using loyalty programs, coupons, and sales promotions. Nike, for example, features famous athletes in print and television ads designed to take market share within the athletic shoes business from Adidas and other rivals (Edwards, 2014).

Market Development

Market development involves selling existing products within new markets. One way to reach a new market is to enter a new retail channel. Starbucks has stepped beyond selling only coffee beans in its stores and now sells beans in grocery stores. This enables Starbucks to reach consumers that do not visit its coffee houses. Entering new geographic areas and adding new sales or distribution channels are other ways to pursue market development.

Product Development

Product development involves creating new products to serve existing markets. In the 1940s, for example, Disney expanded its offerings within the film business by going beyond cartoons and creating movies featuring real actors. More recently, McDonald’s has gradually moved more of its menu toward healthy items to appeal beyond its existing base and to attract customers who are concerned about nutrition.

In 2009, Starbucks introduced VIA, an instant coffee variety that executives hoped would appeal to their customers when they do not have easy access to a Starbucks store or a coffee pot. The soft drink industry experiences frequent product development efforts (Edwards, 2014). Coca-Cola and Pepsi regularly introduce new varieties—in the United States, Coca-Cola has 14 varieties and Pepsi has 13—to take market share from each other and from their smaller rivals (Coca-Cola, Inc., n.d.; PepsiCo, Inc., n.d.).

Integration Strategies

Horizontal Integration

Rather than rely on their own efforts, some firms try to expand their presence in an industry by acquiring or merging with one of their rivals. This strategic move is known as horizontal integration. An acquisition takes place when one company purchases another company. Generally, the acquired company is smaller than the firm that purchases it. A merger joins two companies into one; mergers typically involve similarly sized companies (Hitt et al., 2017, pp, 206–211). Disney was much bigger than Miramax and Pixar when it joined with these firms in 1993 and 2006, respectively. Thus, these two horizontal integration moves are considered acquisitions.

Horizontal integration can be attractive for several reasons. In many cases, horizontal integration is aimed at lowering costs by achieving greater economies of scale. This was the reasoning behind several mergers of large oil companies including BP and Amoco in 1998, Exxon and Mobil in 1999, and Chevron and Texaco in 2001. Oil exploration and refining are expensive. Executives in charge of each of these six corporations believed that greater efficiency could be achieved by combining with a former rival. Horizontal integration taken alongside Porter’s Five Forces Model (see Chapter 3: External Environment) highlights that such moves reduce the intensity of rivalry and make the industry more profitable.

Some purchased firms are attractive because they own strategic resources like brand names. Acquiring Tasty Baking was appealing to Flowers Foods, for example, because the name Tastykake is well known for quality in heavily populated areas of the northeastern United States. Some purchased firms have market share that is attractive.

Horizontal integration can also provide access to new distribution channels or avenues for getting products or services from creation to end consumers or buyers. Some observers were puzzled when Zuffa, the parent company of the Ultimate Fighting Championship (UFC), purchased rival mixed martial arts (MMA) promoter Strikeforce. UFC had such a dominant position within MMA that Strikeforce seemed to add very little for Zuffa. Unlike UFC, however, Strikeforce had gained exposure on network television through broadcasts on CBS and its partner Showtime. Thus, acquiring Strikeforce helped Zuffa gain mainstream exposure for its product (Wagenheim, 2011).

Despite the potential benefits of mergers and acquisitions, their financial results are often disappointing. One study found that more than 60% of mergers and acquisitions erode, while fewer than one in six increases shareholder wealth (Henry, 2002). Some of these moves struggle because the cultures of the two companies cannot be meshed. The 2002 purchase of Compaq Computer Corporation by Hewlett-Packard (HP) was an attempt to infuse speed (Compaq’s decision culture was reputed to be quick) into HP’s staid and methodic decision-making culture in a fast-moving personal computer market. Instead, the move created conflicts in management styles that ultimately led to the split of the company in 2015.

Other acquisitions fail because the buyer pays more for a target company than the company is worth and the buyer never earns back its premium. In the end, between 30% and 45% of mergers and acquisitions are undone, often at huge losses (Hitt et al., 2001). For example, Mattel purchased The Learning Company in 1999 for $3.6 billion and sold it a year later for $430 million—12% of the original purchase price. Similarly, Daimler-Benz bought Chrysler in 1998 for $37 billion. When the acquisition was undone in 2007, Daimler recovered only $1.5 billion worth of value—a mere 4% of what it paid. Thus, executives need to be cautious when considering horizontal integration.

Vertical Integration

When pursuing a vertical integration strategy, a firm gets involved in new portions of the value chain (Figure 6.4). This is moving closer to suppliers (backward) or customers (forward). This approach can be very attractive when a firm’s suppliers or buyers have too much power over the firm and are becoming increasingly profitable at the firm’s expense. By entering the domain of a supplier or a buyer, executives can reduce or eliminate the leverage that the supplier or buyer has over the firm. Considering vertical integration alongside Porter’s Five Forces Model (see Chapter 3: External Environment) highlights that such moves can create greater profit potential.

Vertical integration is the future of streaming services like Spotify. While Spotify is primarily a music streaming service, they learned the value of creating and distributing original, organic content to compete effectively in the steaming content market. Their current operating model puts them in the middle between creators and consumers where music labels extract about 75% of Spotify’s revenue annually. Following a Netflix-style of vertical integration, Spotify hopes to remain relevant in today’s ever-changing streaming industry (Kopf, 2022).

Firms can pursue vertical integration on their own, such as when Apple opened stores bearing its brand, or through a merger or acquisition, such as when eBay purchased PayPal. Oil companies are among the most vertically integrated firms. Firms such as ExxonMobil and ConocoPhillips can be involved in all stages of the value chain including crude oil exploration, drilling for oil, shipping oil to refineries, refining crude oil into products such as gasoline, distributing fuel to gas stations, and operating gas stations.

Vertical integration also creates risks. Venturing into new portions of the value chain can take a firm into very different businesses. A lumberyard that started building houses, for example, would find that the skills it developed in the lumber business have very limited value to home construction. Such a firm would be better off selling just lumber to contractors.

Vertical integration can also create complacency—for example, a situation in which an aluminum company is purchased by a can company. People within the aluminum company may believe that they don’t need to worry about quality because the can company is guaranteed to use their products. Some companies try to avoid this problem by forcing their subsidiary to compete with outside suppliers, but this undermines the reason for purchasing the subsidiary in the first place.

A backward vertical integration strategy involves a firm moving back along the value chain and entering a supplier’s business. Some firms use this strategy when executives are concerned that a supplier has too much power over their firm. In the early days of the automobile business, Ford Motor Company created subsidiaries that provided key inputs to vehicles such as rubber, glass, and metal. This approach ensured that Ford would not be hurt by suppliers holding out for higher prices or providing materials of inferior quality.

A forward vertical integration strategy involves a firm moving further down the value chain to enter a buyer’s business. Disney has pursued forward vertical integration by operating more than 300 retail stores that sell merchandise based on Disney’s characters and movies. This allows Disney to capture profits that would otherwise be enjoyed by another store. Each time a Hannah Montana book bag is sold through a Disney store, the firm makes more profit than it would if the same book bag were sold by a retailer such as Target.

Diversification Strategies

Firms using diversification strategies enter entirely new industries. While vertical integration involves a firm moving into a new part of a value chain where it already competes, diversification requires moving into new value chains. Firms accomplish portfolio diversification through a merger, acquisition, or strategic alliance, or by expanding into new industries without the involvement of another firm.

Firms diversify to gain market power in terms of reducing overall costs of operation, create synergy between existing products or services, and expand competition to multiple markets. They also diversify to leverage the operational (vertical integration) or corporate relatedness (horizontal integration) of their value chains and to obtain technologies or competencies needed to remain competitive.

If a firm can be successful without diversification, there is little motivation to do so. However, pressures for continuous growth or diminishing opportunities in existing markets may press a firm to consider entering new markets. Whether the corporate-level strategy is to acquire existing businesses, to expand through more organic, internal development means, or to pool resources with other firms using joint ventures, leaders must determine whether the target market makes sense.

Three Tests for Diversification

A proposed diversification move should pass these three tests or be rejected.

1. Attractiveness Test – How attractive is the industry that a firm is considering entering? Unless the industry has strong profit potential, entering it may be very risky.
2. Cost-of-Entry Test – How much will it cost to enter the industry? Executives need to be sure that their firm can recoup the expenses it must absorb to diversify.
3. Better Off Test – Will the new unit and the firm be better off? Unless one side or the other gains a competitive advantage, diversification should be avoided (Porter, 1987).

Levels of Diversification

“Businesses are said to be related when their value chains possess competitively valuable cross-business relationships” (Gamble et al., 2012).

Figure 6.6 visually describes five specific levels of diversification in terms of the relationships of the products in a corporate portfolio. Each of the lettered discs represent a different possible business product or service, the connecting lines between the discs, or lack thereof, describe the relationship of each business to the others. A solid line between two potential products is a related diversification; the lack of a line between potential products reflects an unrelated diversification.

At the lowest levels, diversification either doesn’t exist (a single business) or diversification is very modest. Notice how the disc representing dominant business A is larger than its supporting business B. In the next three levels, three products exist in the corporate portfolio but with different relationships.

Related Diversification

Because related diversification leverages strategic fit, companies that engage in related diversification are more likely to achieve gains in shareholder value. Related diversification occurs when a firm moves into a new industry that has important similarities with the firm’s existing industry or industries. Because films and television are both types of entertainment, Disney’s purchase of ABC is an example of related diversification. Some firms that engage in related diversification aim to develop or exploit a core competency to become more successful. A core competency (see Chapter 4: Internal Resources) is a skill set that is difficult for competitors to imitate, can be leveraged in different businesses, and contributes to the benefits enjoyed by customers within each business (Prahalad & Hamel, 1990). For example, Newell Rubbermaid is skilled at identifying underperforming brands and integrating them into their three business groups: (1) home and family, (2) office products, and (3) tools, hardware, and commercial products.

In February 2019, Spotify announced it had acquired two companies, Gimlet Media Inc. and Anchor. The move allows Spotify to add the capability to produce and publish podcasts as well as strengthen its existing role as a music provider by adding podcasting options. Gimlet Media Inc. was founded in 2014 and has become home to numerous award-winning podcasts including Reply All, StartUp, and Crimetown. Anchor claimed that a third of all podcasts were created using its platform (Russell, 2019).

Sometimes the benefits of related diversification that executives hope to enjoy are not achieved. For example, neither soft drinks nor cigarettes are products that consumers need. Companies must convince consumers to buy these products through marketing activities such as branding and advertising. Thus, on the surface, the acquisition of 7Up by Philip Morris seemed to offer the potential for Philip Morris to take its existing marketing skills and apply them within a new industry. Unfortunately, the possible benefits to 7Up never materialized.

The moderate levels of diversification depicted in Figure 6.6 reflect constrained and linked relationships. In the figure, constrained refers to a tighter relationship than linked. Think of it as constraints being stronger ties than linkages. Links can be broken relatively easily compared to relationship constraints. Notice in the related linked example there is a relationship for product C with both products A and B, but no relationship between products A and B other than what is shared through C.

Unrelated Diversification

Why would a soft-drink company buy a movie studio? It’s hard to imagine the logic behind such a move, but Coca-Cola did just that when it purchased Columbia Pictures in 1982 for $750 million. This is a good example of unrelated diversification, which occurs when a firm enters an industry that lacks any important similarities with the firm’s existing industry or industries. In this case, Coca-Cola’s investment paid off—Columbia was sold to Sony for $3.4 billion just seven years later.

Rakuten Group Inc., a business that started in e-commerce, expanded into fintech, mobile, travel, insurance, sports management, video streaming, ad and marketing data, and almost all services used in daily digital life. Using their strengths in e-commerce, their fintech capabilities are taking over the online banking market in Japan. With strong brand recognition and a broad customer base, Rakuten is leveraging its e-commerce ecosystem with Japanese consumers who have embraced the convenience of online transactions. Rakuten’s success has become a wakeup call for large and regional banks in Japan during an economy depressed by the coronavirus (Uranaka, 2021).

Most unrelated diversification efforts, however, do not have happy endings. Harley-Davidson, for example, once tried to sell Harley-branded bottled water. Starbucks tried to diversify into offering Starbucks-branded furniture. Both efforts were disasters. Although Harley-Davidson and Starbucks both enjoy iconic brands, these strategic resources simply did not transfer effectively to the bottled water and furniture businesses.

Research suggests that companies that pursue a related diversification strategy enjoy higher performance and survive longer than those with a narrower scope (Bercovitz & Mitchell, 2007). Related research indicates that growth in areas related to a company’s current product line (vertical integration) is generally more successful than growth into completely unrelated areas (horizontal integration) (Carow et al., 2004). For example, one study of various growth projects examined how many were still in existence after 22 years. The results were vertical integration, 80%; horizontal integration, 50%; related constrained, 35%; and unrelated diversification, 28% (Pennings et al., 1994). These findings support that companies should first exploit their existing assets and capabilities before looking for new ones, but that they should also diversify their portfolio of products (Stadler, 2007).

Cooperative Strategies

In addition to strictly competitive moves, firms can also benefit from cooperating with one another. Cooperative moves include strategies such as forming joint ventures or strategic alliances which may allow firms to enjoy successes that could not otherwise be realized. This is because cooperation enables firms to share (rather than duplicate) resources, to learn from one another’s strengths, and arguably to address own-firm weaknesses. Firms that enter cooperative relationships take on risks, however, including the loss of control over operations, loss of trade secrets to other firms, and possibly being taken advantage of by partners.

Joint Ventures

A joint venture is a cooperative arrangement that involves two or more organizations each contributing to the creation of a new entity. The partners in a joint venture share decision-making authority, control of the operation, and any profits that the joint venture earns. Naturally, firms tend to form joint ventures, rather than pursuing the opportunity themselves, when there is some key advantage in working with another entity or group of entities (shared risk or size of investment) sufficient to justify the additional effort necessary to create and start a joint venture.

International expansion is one area where joint ventures are commonly found. The risk and cost of entering a different geographic area, and associated culture, can lead firms into creating a joint venture to reduce risk, cultural learning, and costs of market entry. In 2011, a joint venture was created between American multinational company Merck & Co. and Indian multinational company Sun Pharmaceutical Industries Ltd. The purpose of the joint venture was to create and sell generic drugs in developing countries. In a press release, a top executive at Sun stressed that each side had important strengths to contribute: “This joint venture reinforces [Sun’s] strategy of partnering to launch products using our highly innovative delivery technologies around the world. Merck has an unrivaled reputation as a world leading, innovative, research-driven pharmaceutical company” (Merck, 2011). Both firms contributed executives to the new organization, reflecting the shared decision making and control involved in joint ventures.

In other cases, a joint venture is designed to counter a shared threat. In 2008, brewers SABMiller and Molson Coors Brewing Company created a joint venture called MillerCoors, combining their U.S. beer operations to better compete against industry leader Anheuser-Busch, which held approximately 50% of the U.S. beer market. The combined venture controlled roughly 30% of the U.S. market and managed a wide portfolio of brands including Miller Lite, Coors Light, Blue Moon Belgian White, Coors Banquet, Leinenkugel’s, Miller High Life, Milwaukee’s Best, Molson Canadian, Peroni Nastro Azzurro, and Pilsner Urquell; making MillerCoors a more formidable competitor than either company could have been alone. The two parent companies remained separate while sharing U.S. operations. In 2016, when AB InBev acquired SABMiller, regulatory conditions required SABMiller to divest its 58% stake in MillerCoors to Molson Coors for approximately $12 billion, making Molson Coors the sole owner. In 2020, Molson Coors retired the MillerCoors name and rebranded as Molson Coors Beverage Company. (Kendall, 2019)

Strategic Alliances

A strategic alliance is a cooperative arrangement between two or more organizations that does not involve the creation of a new entity. In 2011, for example, Twitter (rebranded in 2023 as X) announced the formation of a strategic alliance with Yahoo! Japan (rebranded as LY Corporation in 2023). The alliance involved relevant Tweets appearing within various functions offered by Yahoo! Japan (Rao, 2011). The alliance simply involves the two firms collaborating as opposed to creating a new entity together.

Another example from 2025, Starbucks Corporation announced a joint venture with Chinese investment firm Boyu Capital to manage and expand its operations across China. Under the agreement, Boyu Capital holds a 60% stake in the venture while Starbucks retains 40% ownership along with full control of its brand and intellectual property. This alliance is strategically significant for Starbucks because China represents one of the fastest-growing coffee markets in the world, with an estimated market value of $5.80 billion in 2026 and continued growth projected through the decade as coffee culture expands among younger Chinese consumers (Starbucks Corporation, 2026).

Colocation

Colocation occurs when goods and services offered under different brands are located relatively close to one another. In many cities, for example, theaters and art galleries are clustered together in one neighborhood. Similarly, auto malls that contain several different car dealerships are found in many areas. Restaurants and hotels located near one another provide customers with a variety of choices. A set of colocated firms can attract a bigger set of customers collectively than the sum attracted to individual locations. If a desired play is sold out, a restaurant is overcrowded, or a hotel overbooked, customers can simply patronize another firm in the area.

Because of these benefits, savvy executives in some firms colocate their own brands. The industry where Brinker International competes is revealed by its stock ticker symbol: EAT. This firm often sites outlets of the multiple restaurant chains it owns on the same street. The Sandman hotel chain and Denny’s often sit side by side, saving the Sandman the cost of establishing a restaurant for their customers. Yum! Brands takes this clustering strategy one step further by locating more than one of its brands—A&W, Long John Silver’s, Taco Bell, KFC, and Pizza Hut—within a single store.

Co-opetition

Although competition and cooperation are usually viewed as separate processes, the concept of co-opetition highlights a complex interaction that is becoming increasingly popular in many industries. Ray Noorda, the founder of software firm Novell, coined the term to refer to a blending of competition and cooperation between two firms. The pharmaceutical companies, Merck and Roche, are rivals in some markets, but the firms are working together to develop tests to detect cancer and to promote a hepatitis treatment. NEC (a Japanese electronics company) has three different relationships with HP, Inc.: customer, supplier, and competitor. Some units of each company work cooperatively with the other company, while other units are direct competitors. NEC and HP, Inc. could be described as “frenemies”—part friends and part enemies.

In their book titled, not surprisingly, Co-opetition, Adam Brandenberger and Barry Nalebuff suggest that cooperation is generally best suited for “creating a pie,” while competition is best suited for “dividing it up” (Brandenberger & Nalebuff, 1996). In other words, firms tend to cooperate in activities located far in the value chain from customers, while competition generally occurs close to customers. The New United Motor Manufacturing, Inc. (NUMMI) example illustrates this tendency—General Motors and Toyota worked together on design and manufacturing but worked separately on distribution, sales, and marketing. Similarly, a research study focused on Scandinavian firms found that, in the mining equipment industry, firms cooperated in material development, but they competed in product development and marketing. In the brewing industry, firms worked together on the return of used bottles but not in distribution (Bengtsson & Kock, 2000).

Stability Strategies

Publicly traded companies find it difficult to maintain stock price without growth. However, when the environment is changing or highly uncertain, the decline of a market demands little new capital. When a market is fragmenting, stability approaches can be successful. Care should be taken, however, not to confuse complacency with a predictable business environment that is stable. The latter may benefit from a stability strategy, but the former may only cover up operational problems until it is too late (Wheelen et al, 2018).Pausing/Caution

Generally considered an interim or temporary strategy, pausing is appropriate when a firm needs to consolidate resources after a period of rapid and prolonged growth when the future is uncertain. Similarly, the firm may perceive its competitive environment as ready to change or about to enter a period of uncertainty. A caution strategy is like a kayaker approaching a blind bend in a river and hearing the noise of rapids ahead; the paddler must keep their craft moving to maintain control in the current but will use caution until they know whether to paddle right or left. Instead, they’ll be ready to accelerate as the path ahead becomes clearer. Caution is called for because the industry may be on the verge of attracting new entrants or may be facing new threats (Wheelen et al, 2018).

Maintain/Profit

Two other situations in the external market call for stability strategies. If growth in an industry has moderated or plateaued, with no obvious opportunities or threats, a firm might react by embracing a maintenance strategy that keeps all things consistent, without changes, until conditions change. Such a situation is unlikely to attract new entrants. Firms with strong balance sheets might investigate innovation in the hope of finding a new growth path; those with weaker balance sheets might look to retrench or restructure (see the next section on strategies for getting smaller). If the situation appears temporary, a firm might decide to cut short-term discretionary expenses such as marketing, advertising, hiring, or maintenance to stabilize profits until conditions improve. Both are passive approaches and can be problematic if the temporary conditions become more protracted. A more aggressive plan is to look for opportunities for horizontal integration or acquisition (Wheelen et al, 2018).

Downsizing

“In what industry or industries should our firm compete?” is the central question addressed by corporate-level strategy. In some cases, the answer that executives arrive at involves getting smaller (downsizing) by exiting one or more industries or markets.

Retrenchment

In the early 20th century, many military battles were fought in a series of parallel trenches. If an attacking army advanced enough to force a defending army to abandon a trench, the defenders would move back to the next trench and try to refortify their position. This small retreat was preferable to losing the battle entirely. Trench warfare inspired the business term retrenchment. Firms following a retrenchment strategy shrink one or more of their business units. Much like an army under attack, firms using this strategy hope to make just a small retreat rather than losing a battle for survival. Retrenchment is often accomplished through laying off employees. By shrinking the size of a firm, sometimes referred to as downsizing or rightsizing, executives hope that the firm can survive as a profitable enterprise.

The rising costs for natural disasters, rebuilding supplies and labor, and lawsuits related to rebuilding have prompted Farmers Insurance, State Farm, and Allstate to reconsider their marketing of home, auto, and umbrella insurance products. In Florida, Farmers has ended sales of all three products under its own brand, representing 30% of the policies it sells in the state. Meanwhile, State Farm and Allstate have stopped selling new home insurance policies in California; rather than pick up the gap, Farmers decided to limit its issuances of new policies in California to just 7,000 per month. The trade body for the insurance industry, the American Property Casualty Insurance Association, blamed state rules for the retrenchment (Eaglesham, 2023).

Restructuring

Executives sometimes decide that bolder moves than retrenchment are needed for their firms to be successful in the future. Such bolder moves are referred to as restructuring. Divestment refers to selling off part of a firm’s operations. In some cases, divestment reverses a forward vertical integration strategy, such as when Ford sold Hertz. Divestment can also be used to reverse backward vertical integration. General Motors (GM), for example, turned a parts supplier called Delphi Automotive Systems Corporation from a GM subsidiary into an independent firm. This was done via a spin-off, which involves creating a new company whose stock is owned by investors. GM stockholders received 0.69893 shares of Delphi for every share of stock they owned in GM. A stockholder, who owned 100 shares of GM, received 69 shares of the new company plus a small cash payment in lieu of a fractional share.

Divestment also serves to undo diversification strategies. Divestment can be especially appealing to executives in charge of firms that have engaged in unrelated diversification. Investors often struggle to understand the complexity of diversified firms, and this can result in relatively poor performance by the stocks of such firms. This is known as a diversification discount. Executives sometimes attempt to unlock hidden shareholder value by breaking up diversified companies.

Executives are sometimes forced to admit that the operations that they want to abandon have no value. If selling off part of a business is not possible, the next best option may be liquidation. This involves simply shutting down portions of a firm’s operations, often at a tremendous financial loss. GM has done this by scrapping its Geo, Saturn, Oldsmobile, and Pontiac brands. Ford followed this approach by shutting down its Mercury brand. Such moves are painful because massive investments are written off but becoming “leaner and meaner” may save a company from total ruin.

Portfolio Planning and Corporate-level Strategy

Executives in charge of firms involved in many different businesses must figure out how to manage such portfolios. General Electric (GE), for example, competes in a very wide variety of industries, including financial services, insurance, television, theme parks, electricity generation, light bulbs, robotics, medical equipment, railroad locomotives, and aircraft jet engines. When leading a company such as GE, executives must decide which units to grow, which ones to shrink, and which ones to abandon.

A business unit that generates too little cash flow to completely fund its own operation is referred to as a cash hog. This is different from the BCG designation of either a dog or a question mark but shares some characteristics of both, see Toolkit: The Boston Consulting Group (BCG) Matrix below. Such a business often requires cash from other sources or other business units to survive. For example, if a cash hog needs to purchase new equipment or upgrade its computer system to keep up with orders, the parent company will need to provide the capital—the division would be unable to make the investment otherwise. If a cash hog continues to be a financial drain on the company with little outlook for improvement, management may have to consider selling, spinning off, or otherwise dismantling the operation. Corporations are less likely to unload a cash hog if its products or services provide greater value than will the freed-up capital. Likewise, a cash hog’s product or service may be essential to a cash cow’s existence. For example, HP famously sells its printers at a loss while it makes profit margins in excess of 50% on some of its printing supplies, a tactic often referred to as the razor blade business model.

An integrated and systematic matching of a company’s resources and capabilities to its opportunities at hand within the external environment helps to determine strategic fit. Portfolio planning can be a useful tool to determine strategic fit. Portfolio planning is a process that helps executives assess their firms’ prospects for success within each of its industries, offers suggestions about what to do within each industry, and provides ideas for how to allocate resources across industries. Portfolio planning first gained widespread attention in the 1970s, and it remains a popular tool among executives today.

Dominance in Portfolio Planning

Understanding how dominance operates within portfolio planning is helpful for effective corporate-level strategy. The term “dominant” can refer to either a firm’s market power or its portfolio scope, each shaping strategic decisions in distinct ways. In this context, a dominant firm is one that commands significant market power—often controlling a large share of its industry—thanks to its size, brand recognition, and resources. In contrast, a dominant business describes a company whose revenues are primarily concentrated in a single core area (typically 70%–95%), regardless of whether it dominates the market. Secondary activities exist but do not substantially influence overall strategy. Thus, dominance may reflect either market position or revenue concentration and diversification.

One way companies maintain dominance, especially those with broad portfolios, is through economies of scope. This concept refers to cost savings achieved by producing a variety of goods that share similar resources. For example, Kleenex Corporation leverages economies of scope by using its paper production capabilities to offer diverse products—such as sanitation wipes and paper towels—across multiple segments. By spreading inputs across different product lines, Kleenex can subsidize prices in competitive segments and reinforce its strategic position, illustrating how resource leveraging supports both market power and portfolio efficiency.

Toolkit: The Boston Consulting Group (BCG) Matrix

The Boston Consulting Group’s BCG Matrix, (Figure 6.10), is the best-known approach to portfolio planning (“What is the growth share matrix?” n.d.). Using the matrix requires a firm’s business lines to be categorized as high or low along two dimensions: its share of the market and the growth rate of its industry. High market share units within slow-growing industries are called cash cows. Because their industries have bleak prospects, profits from cash cows should not be invested back into cash cows but rather diverted to more promising businesses. Low market share units within slow-growing industries are called dogs. These units are good candidates for divestment. High market share units within fast-growing industries are called stars. These units have bright prospects and thus are good candidates for growth. Finally, low-market-share units within fast-growing industries are called question marks. Executives must decide whether to build these units into stars or to divest them.

Limitations of Portfolio Planning

Although portfolio planning is useful, this tool has important limitations. First, portfolio planning oversimplifies the reality of competition by focusing on just two dimensions when analyzing a company’s operations within an industry. Many dimensions are important to consider when making strategic decisions. Second, portfolio planning can create motivational problems among employees. For example, if workers know that their firm’s executives believe in the BCG Matrix and that their subsidiary is classified as a dog, then they may give up hope for the future. Similarly, workers within cash cow units could become dismayed once they realize that the profits that they help create will be diverted to boost other areas of the firm. Third, portfolio planning does not help identify new opportunities. Because this tool only addresses existing businesses, it cannot reveal what new industries a firm should consider entering.

An alternative to the BCG Matrix was developed with the help of a leading consulting firm. GE developed the attractiveness-strength matrix to examine its diverse activities. Also known as the GE-McKinsey Matrix, this planning approach involves rating each of a firm’s businesses in terms of the attractiveness of the industry and the firm’s strength within the industry. The resulting matrix adds a third dimension to the BCG’s two, segmenting attractiveness and strength into low-medium-high levels (Sridharan, 2022).

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