7.1 Introduction

You have now completed your strategic analysis. You analyzed a company’s overall organizational performance and its external and internal environments. You synthesized the analysis using a SWOT analysis and determined the firm’s strategic issue and strategic alternatives.

This chapter focuses on how firms use strategic analysis to formulate strategy. You learn strategy formulation beginning at the broadest level of a firm—the corporate level. Then in the next chapter, you learn about business-level strategy, which is the strategy all firms formulate at the strategic business unit level. In Part V, you learn about four strategies that are embedded in business-level strategy: innovation strategy, sustainability and ethics strategy, technology strategy, and multinational strategy.

Firms use strategic analysis to formulate strategy. When you conduct a case analysis, you analyze the strategies companies have formulated for their effectiveness and congruence with the firm’s mission, purpose, vision, and values as well as their other strategies.

In this chapter, you learn about corporate-level strategy, synergy, and the role synergy plays in corporate-level strategy. Next you learn how diversification, including related and unrelated diversification, is used by firm executives to address corporate-level strategy. Then you learn how company leaders use vertical integration, including forward vertical integration and backward vertical integration, to address a firm’s corporate-level strategy. You also learn how geographical scope is used to address a company’s corporate-level strategy. Additionally, you learn about portfolio planning and the BCG matrix, a model for assessing a firm’s portfolio. Finally, you learn how corporate-level strategy is relevant to new business graduates.

7.2 Corporate-Level Strategy

Let’s begin by explaining corporate-level strategy.

Where Are We Going?

Recall that there are three stages to the strategic management process—strategic analysis, strategy formulation, and strategy implementation—and each stage aligns with a foundational question of strategic management. You have now completed your strategic analysis, which addresses the question “Where are we?” Strategy formulation begins to answer “Where are we going?” Lastly, strategy implementation addresses “How are we going to get there?” Corporate-level strategy is the first strategy you learn, and like all strategy formulation, it addresses the question of where a firm is going.

C-Suite and Board of Directors

There are three levels of strategy in an organization: corporate-level, business-level, and functional-level. Strategy is formulated at all three levels. Corporate-level strategy is the broadest level of strategy. The corporate level of a company consists of the C-suite, and if the company is large enough, it includes the board of directors.

Strategy can be described as a firm’s answer to three critical strategic questions that every organization needs to answer. “Where to play?” is answered at the corporate level with corporate-level strategy. “How to win?” is addressed in strategic business units by business-level strategy, and the third question, “Have we earned a right to win?”, is addressed by strategies that are embedded in business-level strategy, such as innovation strategy, sustainability and ethics strategy, technology strategy, and multinational strategy.

Where to Play?

“Where to play?” investigates where the firm is going to compete, considering which industries, markets, market segments, businesses, and regions in which the firm wants to operate (or play). This is largely determined by the firm’s assessment of the attractiveness and profit potential of alternative markets, market segments, and businesses and the synergies between them. The answers to the question of where to play also provide important solutions to issues related to the allocation of limited company resources to different businesses. In this sense, it is also important for every organization to decide where not to play. Overall, “where to play” strategy can be described as the firm’s search for markets and market segments that are attractive today and in the future.

Therefore, formulating corporate-level strategy focuses on where a firm is going—its direction for the future. Corporate-level strategy is the broadest level of strategy and is the responsibility of senior executives and the board of directors. Corporate-level strategy further answers the question where a company is going to “play”: where it is going to compete.

Volatile, Uncertain, Complex, and Ambiguous (VUCA) Environment

When executives analyze their organizational environments, they consider factors that relate to both the external environment and the internal environment of the firm. The external analysis focuses on an outside-in perspective of the firm. The internal analysis focuses on an inside-out perspective of the firm. You analyze companies through these same lenses when you conduct a case analysis.

When strategic management leaders and managers formulate strategy, they focus on an outside-in perspective. All successful strategies are driven by outside-in perspectives, including corporate-level and business-level strategy as well as the strategies embedded in business-level strategies, such as innovation, sustainability and ethics, technology, and multinational strategies.

This means that companies need to carefully monitor their external environment, analyzing trends and developing strategies that are forward-looking. Firms must navigate an external environment that is volatile, uncertain, complex, and ambiguous (VUCA), where change and disruption have become the new normal.

Volatility refers to rapid and unpredictable changes in the environment and can include many things, such as sudden shifts in consumer demand, disruptive technology like the rise of AI, and fluctuating stock prices. Uncertainty means lack of clear information and predictability and may include things such as the effects of climate change and unanticipated competitor moves like the launch of a new product or service. Complexity occurs when there are many interrelated factors and one area changes, causing long-ranging ripple effects; this makes it challenging to fully understand and manage the possible ramifications of proposed actions. The global supply chain responding to tariffs is an excellent example of complexity. Finally, ambiguity means there are multiple correct answers with various tradeoffs, making decision-making a challenge; it can also mean there are multiple interpretations to the same situation, making finding a correct answer challenging. Companies that conduct business globally face significant ambiguity, including customer reactions to foreign products and the impact of foreign regulations.

A VUCA environment is characterized by all these factors intertwined, further complicating strategic analysis, strategy formulation, and strategy implementation. As you know, strategic management is a structured process to analyze, evaluate, and interpret information to support evidenced-based decisions. The data-driven decisions of strategic management all occur in a VUCA environment.

Synergy

Corporate-level strategy seeks ways to generate synergy. Synergy means that the whole is greater or better than the sum of its parts. In business, synergy occurs when two or more strategic business units or businesses perform more effectively together than they do independently. To review, a strategic business unit is a fully functional unit of a business that has its own vision and direction and may be part of a larger organizational unit like a division. It may be based on markets served, products offered, or regions served. Smaller firms may have only one strategic business unit, and large corporations may have multiple. Firms gain synergy in various ways, such as by sharing administrative overhead expenses like accounting, human resources, and sales and marketing when two business units are combined. This is an opportunity to capture operational efficiency.

Focus

Corporate-level strategy is a companywide strategy that focuses on creating and maintaining a firm’s competitive advantage by creating synergy within and between multiple industries, markets, market segments, and businesses, across multiple industry value chain(s), and in different geographical locations. The industry value chain concept is reviewed in section 7.4.

Therefore, corporate-level strategy focuses on these questions:

1. In what industries, markets, market segments, and businesses should a firm operate? This is a question of diversification.
2. In what stage of the industry value chain(s) should the company participate? This is a question of vertical integration.
3. Where should the organization compete geographically? This is a question of geographical scope.

7.3 Diversification

In what industries, markets, market segments, and businesses a firm should operate is a question of diversification.

Let’s first clarify the distinction between differentiation and diversification.

Differentiation

Differentiation is how a company makes its products distinct from its competitors. Apple makes a Mac distinct from a PC and an iPhone different from a Galaxy phone.

Diversification

Diversification refers to how a company simultaneously deals with different products and services in different industries, markets, market segments, and businesses. After the firm decides which industries, markets, market segments, and businesses it wants to operate in, it then decides which products and services it is going to offer.

For example, Apple’s range of products—desktop computers, laptops, iPhones, iPads, and watches—represent product diversification. Another example of product diversification is L’Oréal. L’Oréal initially focused on hair products and diversified its product lines to include skincare and cosmetics.

It is diversification, not differentiation, that is the focus of corporate-level strategy. There is a strong business case for diversification. Diversification helps with the firm’s risk management because the firm doesn’t “put all of its eggs in one basket.” Through diversification, a company spreads its risk by participating in different industries, markets, market segments, and businesses. Beyond risk management, diversification allows the firm to leverage its resources, capabilities, and core competencies into different industries, which drives growth for the firm.

There are multiple types of diversification to consider. You will likely consider diversification from multiple points of view throughout your business education. As it relates to corporate-level strategy, we focus on two types of diversification: related diversification and unrelated diversification. One important subcategory is geographic diversification. In corporate-level strategy, geographical diversification is covered in questions of geographical scope.

To understand related and unrelated diversification, it is helpful to understand single business firms and dominant business firms first.

Single Business Firm

A single business firm is a firm that derives 95 percent or more of its revenues from one business.

Dominant Business Firm

A dominant business firm derives between 70 percent and 95 percent of its revenues from one business.

Related Diversification

Related diversification refers to expanding into new and similar markets, market segments, and businesses in a new industry that has similarities to a firm’s current industry or industries. In contrast to a single business firm or a dominant business firm, a company that engages in a related diversification strategy receives less than 70 percent of its revenues from a single business and the remaining revenue from a business or businesses that are related to the primary business. Related diversifiIt also encourages and supports synergies.

For example, Unilever was originally a soap manufacturer but engaged in related diversification by expanding its product line to include personal care such as skincare like Vaseline lotion and Axe deodorant.

Unrelated Diversification

Unrelated diversification refers to expanding into new markets, market segments, and businesses in a new industry that has little or no similarities to a firm’s current industry or industries. In contrast to a single business firm or a dominant business firm, a company that engages in an unrelated diversification strategy receives less than 70 percent of its revenues from a single business and the remaining revenue from a business or businesses that are unrelated to the primary business. Unrelated diversification has positive impacts on the firm’s risk management because it expands into new markets, market segments, and businesses. On the other hand, this approach does not involve synergies, one of the main drivers of corporate strategy.

For example, Unilever also engaged in unrelated diversification by expanding into food products such as Hellmann’s mayonnaise and Magnum ice cream.

Amazon started as an online bookstore before expanding into different sectors, such as streaming services (Prime Video) and grocery stores (Whole Foods). Google initially started as a search engine and then diversified its services to include Google Drive, where users can store files, photos, and more. Additionally, Google expanded into advertising with Google Ads. Sony initially focused on electronics but has expanded its products line to movies and music production.

In contrast to single and dominant business firms, firms that engages in both related and unrelated diversification strategy receives less than 70 percent of their revenues from a single business. Both related and unrelated diversification require significant resources to execute. Related diversification is considered less risky and often produces greater profit potential. This is because the company already has expertise with the industry that it can apply to the new products and services. However, there are times when expanding into a new industry taps into significant profits.

Diversification and Financial Performance

When considering whether to enter new businesses in new industries, consider how attractive the new industry is. New business in new industries must have strong profit potential to make the risk worth taking.

In choosing between related or unrelated diversification, it is useful to analyze the external environment of the firm. As you learned in Chapter 4, a PESTEL analysis gives an analysis of the general environment and a Porter’s Five Forces analysis provides an analysis of the industry environment. You also analyzed strategic groups as a way of analyzing the competitive environment. Together, these analyses support an evidenced-based decision about related or unrelated diversification.

Is unrelated diversification better or worse than related diversification? While this needs to be answered on a company-specific basis, there is a sweet spot between both forms of diversification that leads to the highest financial performance.

The graph in figure 7.5 suggests that there is an optimal degree of diversification, and in most cases, related diversification is associated with the strongest firm performance. High and low levels of diversification are generally associated with lower overall performance, while moderate levels of diversification are associated with higher firm performance. This implies that companies that focus on a single business, as well as companies that pursue unrelated diversification, often fail to achieve additional value creation. Firms that compete in single markets could potentially benefit from economies of scope by leveraging their core competencies into adjacent markets.

Ways Firms Diversify

Now that we have reviewed related and unrelated diversification and the impact of diversification on financial performance, let’s consider ways to diversify. To explore ways that firms choose to diversify, we introduce a make-contract-create-acquire continuum, illustrated in figure 7.6.

Companies may diversify by using internal development to make their own products or to design new services. They also may enter into contracts with other companies to achieve diversification. This includes nonequity and equity alliances. Firms can diversify by creating a new company through a joint venture. Finally, companies may acquire additional companies as a means of diversification through mergers and acquisitions.

Make: Internal Development

When considering different ways to diversify, organizations may use internal development to make their own new products or design new services by leveraging their existing resources and expertise.

Apple is an example of a company that often uses internal development to diversify its products and services.

Companies can also develop and launch whole new business lines through internal development. For example, Microsoft expanded from mostly software development to offering full tech solutions by diversifying its offerings through internal development, producing products like Microsoft Teams for collaboration and Azure for cloud services.

Contract: Strategic Alliances

Strategic alliances are mutually beneficial contractual relationships between two organizations, allowing them to work together on specific goals while maintaining their independence. Strategic alliances are an example of horizontal integration. Nonequity and equity strategic alliances are both means of diversification.

Equity Strategic Alliance

An equity strategic alliance is created when one company contracts with another company to purchase a certain equity percentage of the other company.

For example, in 2010, Panasonic invested $30 million in the automaker Tesla by purchasing shares of Tesla common stock in a private placement, which is a sale of stock to preselected investors rather than on a public exchange. The purpose of this equity strategic alliance was to build a stronger relationship between Panasonic and Tesla. Panasonic was able to expand its footprint in the electric vehicle market. Tesla was able to improve its battery packs and reduce its costs through Panasonic’s market position as one of the world’s leading battery cell manufacturers. The relationship between the two companies continues to this day.

Figure 7.9 depicts Panasonic Energy Company President Naoto Noguchi presenting Tesla Chief Technology Officer JB Straubel with the first production lithium-ion cells manufactured at Panasonic’s facility in Suminoe, Japan.

Nonequity Strategic Alliance

Nonequity strategic alliances are created when two or more companies enter a contractual relationship to pool their resources and capabilities together. These alliances allow companies to expand their networks and improve their services without requiring equity stakes from other organizations.

Turkish Airlines, for example, has established a number of nonequity strategic alliances with other carriers, including Air Canada, United Airlines, and Lufthansa. Through these nonequity strategic alliances, Turkish Airlines is able to keep its independence while expanding the range of routes it offers and enhancing passenger connection.

Create: Joint Ventures

In addition to embracing internal development and strategic alliances, two organizations also may diversify by creating an entirely new company. An example of this is a joint venture.

Joint ventures are established when two companies establish a new shared entity. For example, when two parent companies, Company A and Company B, create a child company, Company C, this is a joint venture. Each partner is invested in the new venture and shares joint responsibility for the new entity’s success. Joint ventures are another example of diversification through horizontal integration.

In 2007, Hulu was initially established as a joint venture between NBCUniversal, the Walt Disney Company, Providence Equity, and 21st Century Fox. These companies came together to create Hulu, a streaming platform that provides TV shows, movies, and original content.

When both Company A and Company B own 50 percent of the child company, this is a 50-50 joint venture.

For example, in 2012, Microsoft and General Electric Healthcare signed an agreement to create Caradigm, a new company. Microsoft and General Electric Healthcare each owned 50 percent. The purpose of this joint venture was to develop and market an open healthcare intelligence platform through the creation of Caradigm. Microsoft had the technical capability, and General Electric Healthcare had the expertise with healthcare. This is an example of a 50-50 joint venture.

Subsequently, in 2016, General Electric Healthcare bought out Microsoft’s share in the company, and in 2018, General Electric Healthcare sold Caradigm to Inspirata. This illustrates how joint ventures may serve a current corporate strategy until the company must respond to a dynamic market and choose to engage in other forms of diversification and divestment.

If Company A owns 70 percent and Company B owns 30 percent, the joint venture is a majority-owned joint venture.

For example, until recently, China required all manufacturing operations to be at least 50 percent Chinese owned. In 2003, BMW and Chinese automobile manufacturer Brilliance Auto Group entered a 50-50 joint venture to produce and sell BMW vehicles in China. When Chinese regulations changed, the relationship between BMW and Brilliance Auto Group changed. In 2022, the two firms entered into a majority-owned joint venture, with BMW owning 75 percent of the joint venture. This is another example of how relationships between firms change. A PESTEL analysis is a good strategic management framework to assess changing governmental regulations in the general (macro) environment.

Acquire: Mergers and Acquisitions (M&A)

Finally, firms may acquire another company as a method of diversifying. Mergers and acquisitions are means of acquiring another company. Both are examples of horizontal integration.

A merger occurs when two companies of similar size voluntarily join forces and create a new, singular business.

For example, in 1999, Exxon and Mobil merged to create ExxonMobil, the largest publicly traded oil company in the world. Both companies were about the same size and decided to join together voluntarily. By merging, they combined their expertise, resources, and market power. This helped them become more efficient and competitive in the global oil and gas industry. The merger allowed ExxonMobil to grow stronger and lead the market in exploration, refining, and energy production.

Acquisitions occur when one company buys another company, absorbing the purchased company into the buyer. Acquisitions are more common than mergers.

For example, in 2016, Marriott bought Starwood Hotels and Resorts Worldwide, making them part of the Marriott International company and creating the world’s largest hotel chain.

In 2017, Amazon bought Whole Foods Market. In 2023, Microsoft acquired Activision Blizzard, a video game holding company. A holding company’s primary business is holding a controlling interest in the securities of other companies.

We consider joint ventures, strategic alliances, and mergers and acquisitions again in Chapter 9 when we focus on innovation, as these are mechanisms that allow firms to innovate through cooperation.

Reducing and Reversing Diversification

Continuously assessing and managing diversification includes evaluating a firm’s current offering of products and services and assessing the potential value of changing the firm’s current offerings by expanding into additional products and services. A firm also may consider reducing or divesting the offerings of its current product and service lines.

Retrenchment

Business borrowed the term retrenchment from warfare. In the wars of the early twentieth century, battles were fought using trench warfare. When an attacking army reached a trench, the defending army fell back to the next trench. This was called retrenchment, which allowed the retreating army to refortify its position. The partial retreat was an effort to remain in the battle with the goal of winning the battle.

In business, retrenchment is a reduction in size and product offerings to continue to make profits. It is also referred to as downsizing or rightsizing, which often requires laying off employees.

Divestment

When reducing a company’s size and offerings is insufficient to address the company’s strategic goals, then divestment may be an option. Selling an unprofitable business or product line can be a way of reversing diversification. Companies may divest complete product lines and businesses. They may also sell part of a company. Selling part of a company, such as a division of strategic business unit, is known as a spinoff.

7.4 Vertical Integration

As you recall, corporate-level strategy is a companywide strategy that focuses on creating and maintaining a firm’s competitive advantage by creating synergy within and between multiple industries, markets, market segments, and businesses, across multiple industry value chain(s), and in different geographical locations.

To consider at what stage of the industry value chain(s) a company should participate requires an understanding of industry value chains and how analyzing them relates to corporate strategy.

A supply chain and an industry value chain are related ideas.

Supply Chain

A supply chain includes the steps of product production from multiple entities, from raw materials to the final delivered product. Using jewelry production as an example, valuable metals such as gold, silver, and platinum are extracted from mines. Mining companies ship these to suppliers, who shape the raw materials. Then, manufacturing companies design the products in workshops, where they also do quality control. After this process, the produced jewelry is distributed to retailers, who market and sell them to customers and offer customer support and service.

Industry Value Chain

An industry value chain considers the ways a firm adds value to each step (or “node”) in the production process.

Analyze an Industry Value Chain

Chapter 4, “Analyzing the Internal Environment,” considered several strategic management frameworks, including the VRIO and value chain analyses. A company value chain analysis examines internal company practices and their optimization relative to creating value for customers and a sustainable competitive advantage for the firm. An industry value chain analysis differs in that it emphasizes value creation as it examines the production stages, from raw material procurement to the delivery of the final product.

An industry value chain analysis examines each node of a product’s value chain to analyze value creation at each. Among other things, these nodes include sourcing of raw materials, costs associated with production and distribution, and characteristics that drive customers’ willingness to pay for the product. Aspects of each node have the ability to impact total costs and expected margins of the final delivered product. An industry value chain analysis is used to identify opportunities for increased profit through, for example, more effective cost control pricing, product positioning, and product distribution strategies.

Imagine an industry value chain for the production of gourmet cakes. In figure 7.13, the value chain includes the following nodes: wheat farmer, wheat processing plant, dairy farmer, dairy processing plant, baking facility, distribution, and bistro. To analyze the value chain, analyze each level or node for the value added to the overall process of producing gourmet cakes. This includes an analysis of the profit margin of each step in the process.

The stage of the industry value chain(s) at which the company should participate is a question of business integration—more specifically, vertical integration.

Business Integration

Business integration is the process of combining different components of a business into a unified and cohesive operation. There is horizontal and vertical integration.

Horizontal Integration

Horizontal integration is business expansion that focuses on relationships with another company in the same business line.

Continuing with our example of a value chain for producing gourmet cakes, let’s now consider horizontal integration. An example of horizontal integration would be a wheat processing plant merging with or acquiring another wheat processing plant. If a wheat processing plant significantly expands its capacity so that it takes up more market share, this internal development can also be a form of horizontal integration. If a distributor merged with another distributor or a bistro acquired another bistro, these would also be examples of horizontal integration.

Vertical Integration

Vertical integration is a business expansion strategy where a company takes control over one or more stages in the production or distribution of its products.

Continuing with our example of a value chain for producing gourmet cakes, an example of vertical integration would be any business along the vertical dimension of the value chain deciding to diversify into another business along the vertical dimension of the value chain such as a dairy processing plant diversifying by opening a baking facility.

Backward Vertical Integration

Backward vertical integration occurs when a firm moves backward along the industry value chain and enters a supplier’s business. For example, Volkswagen purchased turbine manufacturing facilities to guarantee consistent supply of parts for its power generation equipment.

In our example of a value chain for producing gourmet cakes, a dairy processing plant purchasing a dairy farm is an example of backward vertical integration. If the bistro decided to change its business model from purchasing gourmet cakes to making them in-house, that also would be an example of backward vertical integration. This would be a significant change for the bistro. The bistro would need the physical space and equipment to make cakes, it would need to hire talented patisserie chefs, and it would need to establish relationships with suppliers to ensure they had reliable supplies to make the cakes.

These decisions are supported by an industry chain analysis. In Chapter 4, you learned that one of the four elements of a Porter’s Five Forces analysis is the bargaining power of suppliers. Analyzing the bargaining power of suppliers is also important when considering backward vertical integration. Using multiple strategic analysis tools informs an evidenced-based decision whether to choose a backward vertical integration approach.

Forward Vertical Integration

When a company moves further forward down the industry value chain and enters a buyer’s business, that is forward vertical integration. When a microbrewery purchases a pub, that is an example of forward vertical integration. Amazon’s acquisition of Whole Foods is another example.

In our example of a value chain for producing gourmet cakes, the baking facility deciding to distribute the cakes would be example of forward vertical integration. Many companies outsource business activities that do not contribute to their core competencies, hiring organizations that specialize in goods delivery, such as Fedex. Amazon is an example of a company that brought delivery back in-house. This is a good strategic choice for Amazon due to the importance of delivery and the percentage of its online shopping business that relies on delivery. Companies that require special delivery conditions for their products, which may be fragile or heat sensitive, sometimes provide their own deliveries. Paxton & Whitfield, a London cheesemonger, provides its own overnight deliveries in recyclable ice packs. In our example, an industry value chain analysis may convince the baking facility that it is worth the investment to deliver its own cakes.

In Chapter 4, you learned that another of the four elements of a Porter’s Five Forces analysis is the bargaining power of buyers. Analyzing this power is important when considering forward vertical integration. Using multiple strategic analysis tools informs an evidenced-based decision whether to choose a forward vertical integration approach.

Vertical integration, both backward and forward, occurs when a company controls different stages along the industry value chain. When considering a company’s position in the industry value chain(s), a firm evaluates its current position and assesses the potential value of expanding through backward and forward vertical integration. The firm also evaluates the benefits of contracting its presence in the chain(s) and changing its portfolio either incrementally or radically with a combination of retaining, expanding, and reducing positions in the industry value chain(s).

Conducting an industry value chain analysis allows corporate executives to make evidenced-based decisions about which stage of the industry value chain the firm should occupy. Combining a value chain analysis and a Porter’s Five Forces analysis gives a strong evidence base to decide how to manage a firm’s position along its value chain(s).

7.5 Geographical Scope

So far, we have discussed corporate-level strategy based on synergy and the industry value chain. There is a third factor to consider. Where the organization should compete geographically is a question of geographical scope—where geographically firms provide their products and services.

Companies evaluate the potential benefits of offering their products and services in local, regional, national, and multinational markets. Formulating multinational strategy is considered in detail in Chapter 12.

Companies evaluate geographical markets for their current line of products or for new lines of products. When considering where the firm will provide its products and services, it evaluates its current geographical markets and assesses the potential value of expanding into new geographical markets; it also evaluates the value of changing its portfolio either incrementally or radically with a combination of retaining, expanding, and reducing their offering geographically.

The question of where to provide products and services is important for brick-and-mortar businesses. It is equally essential for companies that offer either all or a portion of their products and services online. For example, when a company expands its market through online sales, it must address many new issues, such as transportation for delivering its products. U.S.-based companies that expand into a wider local market within a state may encounter different local laws and regulations, such as differences in taxation. Expanding into new U.S. states requires knowledge of both federal and state laws, such as those that govern labor practices. International expansion considers a wide range of factors and is the topic of Chapter 12.

7.6 Portfolio Planning

A firm’s business portfolio consists of all the products and services it sells, all the business it is in, and all the market segments, markets, and industries in which it participates.

An essential part of continuously assessing and managing corporate-level strategy includes portfolio planning. Portfolio planning addresses how a firm should manage its portfolio of businesses, like strategic business units or divisions, to achieve synergy and create value. It also addresses how the parent company adds value to its business divisions and strategic business units.

There are many models to describe business portfolios. The Boston Consulting Group (BCG) matrix is a framework that supports portfolio planning.

The Boston Consulting Group (BCG) Matrix

The BCG matrix is designed to help companies decide how to prioritize their different businesses. A company with multiple strategic business units needs to make important decisions as to which strategic business units are the most attractive, which will receive more resources than other strategic business units, which will receive new investments, and which are not attractive enough anymore and need to be divested.

These questions touch on the topic of corporate portfolio management. Ideally, a corporation wants to operate successful businesses in attractive markets. Following this logic, the BCG matrix uses the market growth rate as an indicator of how attractive the strategic business unit’s market is. The relative market share is used as an indicator of how well the business or strategic business units are doing in the specific market. A high relative market share means that the business is doing well compared to its competitors. Ideally, a corporation wants a relatively high market share in attractive markets, as measured by market growth rates.

The BCG matrix maps a firm’s businesses along two dimensions. The first is relative market share, and the second is market growth rate. This produces four quadrants, each with its own symbol: dog, cash cow, question mark, and star. To use the BCG matrix, first plot a firm’s business units or product lines along these two dimensions, and then decide whether it is best to liquidate them, reinvest their profits into other product lines, or significantly invest in them.

Dogs

The Boston Consulting Group uses the term pet for the quadrant most commonly referred to as dogs (bcg.com). For fans of dogs or any pet, either name is unfortunate, as dogs in the BGC matrix are those businesses or product lines that have a low relative market share and a low market growth rate. Dogs are strong candidates for liquidation, divestment, or repositioning in the portfolio.

Cash Cows

Cash cows have a high relative market share and a low market growth rate. Cash cows are best “milked” for cash to reinvest. These businesses or product lines have poor performance potential. Therefore, profits from cash cows are best diverted to business and product lines with more profit potential.

Question Marks

Question marks have a low relative market share and a high market growth rate. Executives decide whether to invest in them or divest them, depending on their potential profit.

Stars

Stars have a high relative market share and a high market growth rate. Because of their high profit potential, companies should significantly invest in stars.

Limitations to the BCG Matrix

Like many portfolio planning tools, the BCG matrix has limitations. The positioning and attractiveness of different strategic business units is influenced by many complex factors, but relative market share and market growth rate oversimplifies this. The BCG is best used as a broad first indication of the positioning and attractiveness of different strategic business units. Once a BCG matrix has been applied to a firm’s businesses, it is important to then consider other relevant factors that influence the positioning and attractiveness of different strategic business units before a decision is made to divest, reinvest profits, or invest in the product line.

7.7 Analyze Corporate-Level Strategy

Corporate executives and boards of directors focus on formulating corporate-level strategies. When you conduct a case analysis, you analyze a firm’s corporate-level strategy. This is step six in the case analysis process.

7.8 Why Corporate-Level Strategy Is Important to Business Graduates

Because corporate-level strategy operates at the highest level of a firm, it may appear distant or irrelevant to the work of recent business graduates. However, that is not the case. For business graduates starting as business support unit managers in support business units of large companies, such as marketing managers, corporate-level strategy has a direct influence on the implementation of functional-level strategy, which is a key responsibility for functional managers. In formulating corporate-level strategies, corporate executives and divisional or strategic business unit managers may solicit data analysis from functional business managers, such as managers of business information technology, accounting, and human resource management.

As a companywide strategy that focuses on creating and maintaining a firm’s competitive advantage by creating synergy within and between multiple industries, markets, market segments, and businesses, across multiple industry value chain(s), and in different geographical locations, corporate-level strategy must reflect current, accurate, and relevant data analysis that only business support unit managers have direct access to. Therefore recent graduates are an essential part of ensuring a firm’s successful corporate-level strategy.

Business graduates joining smaller companies will spend more time working closely with executives responsible for corporate-level strategy from the start. Business graduates that enter either internal or external consulting roles require a high level of competence with corporate-level strategy to communicate to corporate executives how their consulting projects fit into the overall corporate-level strategy of the firm. For business graduates who already are or will become entrepreneurs, fluency with corporate-level strategy is essential to establishing and growing a successful firm.

7.9 Conclusion

Formulating a firm’s corporate-level strategy focuses on finding a direction for the firm’s future. Corporate-level strategy is the broadest level of strategy and is the responsibility of senior executives and the board of directors, who must answer the question of where the firm is going to compete. Corporate-level strategy is a companywide strategy that focuses on creating and maintaining a firm’s competitive advantage by creating synergy within and between multiple industries, markets, market segments, and businesses, across multiple industry value chain(s), and in different geographical locations. In what industries, markets, market segments, and businesses a firm should operate is a question of diversification. At what stage of the industry value chain(s) the company should participate is a question of vertical integration. Where the organization should compete geographically is a question of geographical scope. The BCG matrix is one framework that addresses portfolio planning.

Figure Descriptions

Figure 7.1: Purple hierarchical organizational chart displaying the structure of a company’s management and strategic planning. At the top is a rectangle labeled “Board of directors.” Below this, another rectangle labeled “Corporate office (corporate executives).” This level of hierarchy represents corporate-level strategy. Below this, two rectangles are labeled “Division 1 (division 1 manager)” and “Division 2 (division 2 manager).” Below this, there are four SBU boxes (each with one manager). There are two SBU boxes beneath Division 1 and two SBU boxes beneath Division 2. This level of hierarchy represents business-level strategy, innovation strategy, sustainability and ethics strategy, technology strategy, and multinational strategy. Below the SBUs are five “Business support Unit 1” boxes, dedicated to finance, operations, human resources (HRM), IT, and sales and marketing, each managed by their own business support unit manager. This level of hierarchy represents functional level strategy.

Figure 7.5: First quadrant of an X-Y graph. The x-axis represents diversification and the y-axis represents financial performance. The graph features a purple parabolic curve that opens downwards. From left to right, the curve is labeled (1) single business (low diversification and low financial performance), (2) dominant business (slightly higher diversification and high financial performance), (3) related diversification (moderate diversification and high financial performance), and (4) unrelated diversification (high diversification and low financial performance).

Figure 7.6: Horizontal purple arrow pointing in both directions. From left to right, the main sections of the arrow are (1) Make (includes internal development), (2) Contract (includes nonequity strategic alliance an equity strategic alliance), (3) Create (includes joint venture), and (4) Acquire (includes mergers and acquisitions).

Figure 7.13: Illustration of the stages of a supply chain, presented vertically in a column. Each stage includes an icon and a profit margin. Stages from top to bottom: wheat farmer, wheat processing plant, dairy farmer, dairy processing plant, baking facility, distribution, and bistro. This graphic is purple.

Figure 7.14: Illustration of the stages of a supply chain, presented vertically in a column. Each stage includes an icon and a profit margin. Stages from top to bottom: wheat farmer, wheat processing plant, dairy farmer, dairy processing plant, baking facility, distribution, and bistro. This is repeated three times (i.e., there are three wheat farmers, below that are three wheat processing plants, below that are three dairy farmers, and so on). Three stages are highlighted horizontally: wheat processing plant, distribution, and bistro. This graphic is purple.

Figure 7.15: Illustration of the stages of a supply chain, presented vertically in a column. Each stage includes an icon and a profit margin. Stages from top to bottom: wheat farmer, wheat processing plant, dairy farmer, dairy processing plant, baking facility, distribution, and bistro. This is repeated three times (i.e., there are three wheat farmers, below that are three wheat processing plants, below that are three dairy farmers, and so on). One entire supply chain is highlighted vertically. This graphic is purple.

Figure 7.16: Illustration of the stages of a supply chain, presented vertically in a column. Each stage includes an icon and a profit margin. Stages from top to bottom: wheat farmer, wheat processing plant, dairy farmer, dairy processing plant, baking facility, distribution, and bistro. An upward black arrow begins at the dairy processing plant and points to the dairy farmer. Another black arrow begins at the bistro and points up towards the baking facility. This graphic is purple.

Figure 7.17: Illustration of the stages of a supply chain, presented vertically in a column. Each stage includes an icon and a profit margin. Stages from top to bottom: wheat farmer, wheat processing plant, dairy farmer, dairy processing plant, baking facility, distribution, and bistro. A black arrow begins at the baking facility and points down towards distribution. This graphic is purple.

Figure 7.18: First quadrant of an X-Y axis with four purple boxes. The x-axis represents relative market share and the y-axis represents market growth rate. Both axis range from low to high. Low relative market share and low market growth rate is marked dog. High relative market share and high market growth rate is marked star. High relative market share and low market growth rate is marked cash cow. Low relative market share and high market growth rate is marked with a question mark.

Figure References

Figure 7.1: Three levels of strategy. Kindred Grey. 2025. CC BY.

Figure 7.2: L’Oréal. DennisM. 2011. Public domain. https://commons.wikimedia.org/wiki/File:LOreal_Hoofddorp_Netherlands.jpg

Figure 7.3: Magnum ice cream bar. cyclonebill. 2008. CC BY-SA 2.0. https://commons.wikimedia.org/wiki/File:Flickr_-_cyclonebill_-_Magnum_Double_Caramel.jpg

Figure 7.4: Google. Jijithecat. 2014. CC BY-SA 4.0. https://commons.wikimedia.org/wiki/File:Googleplex-Patio-Aug-2014.JPG

Figure 7.5: Diversification and financial performance. Kindred Grey. 2025. CC BY.

Figure 7.6: How to diversify. Kindred Grey. 2025. CC BY.

Figure 7.7: Apple. Joe Ravi. 2011. CC BY-SA 4.0. https://commons.wikimedia.org/wiki/File:Apple_Headquarters_in_Cupertino.jpg

Figure 7.8: Microsoft. 2015. CC BY 3.0. https://commons.wikimedia.org/wiki/File:Building_92_of_Microsoft_Redmond_Campus_-_panoramio.jpg

Figure 7.9: Panasonic’s President, Naoto Noguchi, and Tesla’s Chief Technology Officer, JB Straubel. Tesla Motors Inc. 2010. Public doamin. https://commons.wikimedia.org/wiki/File:Tesla_Panasonic.jpg

Figure 7.10: Turkish Airlines. Bulent KAVAKKORU. 2014. CC BY-SA 2.0. https://flic.kr/p/p2JPac

Figure 7.11: Marriott. Billy Hathorn. 2013. CC BY 3.0. https://commons.wikimedia.org/wiki/File:Marriott_Hotel,_San_Antonio,_TX_IMG_7595_1_1.jpg

Figure 7.12: Marriott hotels. Jkan997. 2018. CC BY-SA 4.0. https://commons.wikimedia.org/wiki/File:Marriott_hotels_map.png

Figure 7.13: Industry value chain for the production of gourmet cakes. Kindred Grey. 2025. CC BY. Includes the following icons from the Noun Project (Noun Project license): Wheat (sentya irma, 2024, https://thenounproject.com/icon/wheat-7330935), factory (Kevin, 2022, https://thenounproject.com/icon/factory-5053342), cow (Laymik, 2019, https://thenounproject.com/icon/cow-2717641), stand mixer (I’m Vattie, 2024, https://thenounproject.com/icon/stand-mixer-6983675), box truck (Andrianxia, 2024, https://thenounproject.com/icon/box-truck-6945195), and cafe (Ruby, 2023 https://thenounproject.com/icon/cafe-6111062)

Figure 7.14: Horizontal integration. Kindred Grey. 2025. CC BY. Includes the following icons from the Noun Project (Noun Project license): Wheat (sentya irma, 2024, https://thenounproject.com/icon/wheat-7330935), factory (Kevin, 2022, https://thenounproject.com/icon/factory-5053342), cow (Laymik, 2019, https://thenounproject.com/icon/cow-2717641), stand mixer (I’m Vattie, 2024, https://thenounproject.com/icon/stand-mixer-6983675), box truck (Andrianxia, 2024, https://thenounproject.com/icon/box-truck-6945195), and cafe (Ruby, 2023 https://thenounproject.com/icon/cafe-6111062)

Figure 7.15: Vertical integration. Kindred Grey. 2025. CC BY. Includes the following icons from the Noun Project (Noun Project license): Wheat (sentya irma, 2024, https://thenounproject.com/icon/wheat-7330935), factory (Kevin, 2022, https://thenounproject.com/icon/factory-5053342), cow (Laymik, 2019, https://thenounproject.com/icon/cow-2717641), stand mixer (I’m Vattie, 2024, https://thenounproject.com/icon/stand-mixer-6983675), box truck (Andrianxia, 2024, https://thenounproject.com/icon/box-truck-6945195), and cafe (Ruby, 2023 https://thenounproject.com/icon/cafe-6111062)

Figure 7.16: Backward vertical integration. Kindred Grey. 2025. CC BY. Includes the following icons from the Noun Project (Noun Project license): Wheat (sentya irma, 2024, https://thenounproject.com/icon/wheat-7330935), factory (Kevin, 2022, https://thenounproject.com/icon/factory-5053342), cow (Laymik, 2019, https://thenounproject.com/icon/cow-2717641), stand mixer (I’m Vattie, 2024, https://thenounproject.com/icon/stand-mixer-6983675), box truck (Andrianxia, 2024, https://thenounproject.com/icon/box-truck-6945195), and cafe (Ruby, 2023 https://thenounproject.com/icon/cafe-6111062)

Figure 7.17: Forward vertical integration. Kindred Grey. 2025. CC BY. Includes the following icons from the Noun Project (Noun Project license): Wheat (sentya irma, 2024, https://thenounproject.com/icon/wheat-7330935), factory (Kevin, 2022, https://thenounproject.com/icon/factory-5053342), cow (Laymik, 2019, https://thenounproject.com/icon/cow-2717641), stand mixer (I’m Vattie, 2024, https://thenounproject.com/icon/stand-mixer-6983675), box truck (Andrianxia, 2024, https://thenounproject.com/icon/box-truck-6945195), and cafe (Ruby, 2023 https://thenounproject.com/icon/cafe-6111062)

Figure 7.18: The BCG matrix. Kindred Grey. 2025. CC BY. Includes the following icons from the Noun Project (Noun Project license): Cow (Laymik, 2019, https://thenounproject.com/icon/cow-2717641) and Dog (Daniel Ducrocq, 2013, https://thenounproject.com/icon/dog-14830)