corporate-level strategies key terms corporate-level strategy – specifies actions a firm takes to...
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Corporate-Level Strategies
Key Terms Corporate-Level Strategy – specifies
actions a firm takes to gain a competitive advantage by selecting and managing a portfolio of businesses that compete in different product markets or industries. WHERE ARE WE GOING TO COMPETE?
Snack Foods Beverages Foods
Frito-Lay North AmericaFrito-Lay International
Pepsi-Cola North AmericaGatorade/Tropicana North AmericaPepsiCo Beverages International
Quaker North America
Snack Foods
Frito-Lay North America
Lay’sRuffles DoritosSantitasFritos CheetosRold Gold
Funyuns Sunchips Cracker Jack Chester’s popcornGrandma’s cookiesMunchos Smartfood Baken-ets fried pork skinsOberto meat snacks
Snack Foods
Frito-Lay International
Bocabits wheat snacksCrujitos corn snacksFandangos corn snacksHamkas snacksNiknaks cheese sticksQuavers potato snacksSabritas potato chips Twisties cheese snacks
Walkers potato crispsWalkers Square potato snacksWalkers Monster Munch Corn snacks Miss Vickie’s potato chipsGamesa cookiesDippasSonric’s sweet snacks
Snack Foods
Frito-Lay International
Bocabits wheat snacksCrujitos corn snacksFandangos corn snacksHamkas snacksNiknaks cheese sticksQuavers potato snacksSabritas potato chips Twisties cheese snacks
Walkers potato crispsWalkers Square potato snacksWalkers Monster Munch Corn snacks Miss Vickie’s potato chipsGamesa cookiesDippasSonric’s sweet snacks
Beverages
Pepsi-Cola North America
Pepsi-ColaMountain DewSliceMugSierra MistFruitWorks
Lipton Dole Aquafina Frappuccino SoBe AMP
Beverages
Gatorade/Tropicana North America
GatoradePropelTropicanaDole juices
Beverages
PepsiCo Beverages International
Loóza juices and nectarsCopella juicesFrui’Vita juicesTropicana 100 juices
Foods
Quaker North America
Quaker OatsCap’n Crunch cerealLife cerealQuisp cerealKing Vitaman cerealMother’s cereal
Quaker rice cakes and granola barsRice-A-Roni side dishesNear East couscous/pilafsAunt Jemima mixes & syrupsQuaker grits
Foods
Quaker North America
Quaker OatsCap’n Crunch cerealLife cerealQuisp cerealKing Vitaman cerealMother’s cereal
Quaker rice cakes and granola barsRice-A-Roni side dishesNear East couscous/pilafsAunt Jemima mixes & syrupsQuaker grits
Business Level Strategies
How are we going to compete and gain a competitive advantage in each of our businesses?
Snack Foods Beverages Foods
Corporate Level Strategy1) What businesses do we want to compete in?2) How do manage effectively across businesses
Where did they go?
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Corporate-level strategy
Specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets Expected to help firm earn above-average returns Value ultimately determined by degree to which “the
businesses in the portfolio are worth more under the management of the company then they would be under any other ownership - Synergy
Product diversification (PD): primary form of corporate-level strategy
Goals of Corporate Strategy
Moves to enter new businesses
Boosting combined performance of the businesses
Capturing synergies and turning them into competitive advantages
Establishing investment priorities and steering resources into business units
4 Conditions of Successful Diversification• 1) Growing industries with complementary
products and technologies• Apple IPhone
• 2) Leverage existing capabilities which match the KSFs in other arenas• Disney Cruise Lines
• 3) Closely related moves which reduce costs• Kroger & Fred Meyer
• 4) Powerful brand and reputation• Marguerittaville, NASCAR Café, or Emril’s
Product Diversification
Primary form of corporate-level strategy Entails the scope of the industries and markets in
which the firm competes Defines how managers buy, create, and sell
different businesses to match skills and strengths with opportunities
Is expected to reduce variability in the firm's profitability, generating earnings from several different business units
Its development and monitoring carry a cost which must be balanced with benefits to establish an ideal portfolio of businesses
Levels and Types of Diversification
Curvilinear Relationship between Diversification and Performance
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Procter & Gamble’s Diversification Strategy
Purpose of diversification: Use expertise and knowledge gained in one business by diversifying into a business where it can be used in a related way Builds synergy: value added by corporate office adds up
to more than the value if different businesses in the portfolio were separate and independent
Procter & Gamble (P&G) Product mix: beauty products targeting women and baby
care products 2005: Acquired Gillette (consumer health care products)
focused on masculine market
Related Diversification at Disney
Entertainment/Production
Theme Parks
Resorts
Entertainment/Broadcasting
Cruise Lines
Retailing
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Levels of Diversification (N=3) (Cont’d)
2. Moderate to High Levels Related Constrained Diversification Strategy
Less than 70% of revenue comes from the dominant business
Direct links (I.e., share products, technology and distribution linkages) between the firm's businesses
Related Linked Diversification Strategy (Mixed related and unrelated)
Less than 70% of revenue comes from the dominant business
Mixed: Linked firms sharing fewer resources and assets among their businesses (compared with related constrained, above), concentrating on the transfer of knowledge and competencies among the businesses
Tyco ElectronicsTyco Telecommunications
Tyco Fire and SecurityTyco Safety Products
Tyco HealthcareTyco Plastics
Tyco AdhesivesTyco Flow Control
Tyco Electrical and Metal ProductsTyco Fire and Building Products
Tyco Infrastructure Services
GE
Advanced materialsCommercial loans
AppliancesInsurance
Jet enginesElectric power generation
Medical imagingNBU Universal
Chemical TreatmentEquipment services and rentals
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Levels of Diversification (N=3 ) (Cont’d)
3. Very High Levels: Unrelated Less than 70% of revenue comes from dominant business
No relationships between businesses
Unrelated Diversification
Key Terms
Financial Economies – cost savings realized through improved allocations of financial resources based on investments inside or outside the firm
Drawbacks for Unrelated
Demanding requirements Limited to no opportunities to share
advantages
Creating Value with Diversification Strategies
Operational relatedness - sharing activities
Corporate relatedness - transferring knowledge
Value-Creating Strategies of Diversification
Diversification and the Multidivisional Structure
Key Terms Multidivisional Structure (M-form) –
organizational structure which ties together several operating divisions, each representing a separate business or profit center to which responsibility for daily operations and business-unit strategy is delegated
Original Benefits of the M-form
It enabled corporate officers to more accurately monitor the performance of each business, which simplified the problem of control
It facilitated comparisons between divisions, which improved the resource allocation process
It stimulated managers of poorly performing divisions to look for ways of improving performance
Diversification and the Multidivisional Structure
Key Terms Organizational Controls – guide the use of strategy, indicate
how to compare actual results with expected results, and suggest corrective actions to take when the difference between actual and expected results is unacceptable
Strategic Controls – subjective criteria intended to verify that the firm is using appropriate strategies for the conditions in the external environment and the company's competitive advantages (used for "sharing" strategies)
Finance Controls – objective criteria used to measure firm performance against previously established quantitative standards (used for unrelated diversification)
Operational Relatedness – Sharing Activities
Activity sharing requires sharing strategic control over business units
Pursuing appropriate coordination mechanisms can lead to successful creation of economies of scope
Activity sharing can be risky because business-unit ties create links between outcomes and can cause organizational difficulties that interfere with success
More attractive results are obtained through activity sharing when facilitated by a strong corporate office
Variations of the M-form
Cooperative
Strategic business-unit (SBU)
Competitive
Cooperative Form of the Multidivisional Structure
Key Terms
Cooperative Form – organizational structure using horizontal integration to bring about interdivisional cooperation
Cooperative Form of the Multidivisional Structure
Cooperative Form of the Multidivisional Structure
All of the divisions share one or more corporate strengths
Interdivisional sharing depends on cooperation
Links resulting from effective integration mechanisms support sharing of both tangible and intangible resources
Centralization is one integrating mechanism that can be used to link activities among divisions, allowing firms to exploit common strengths and share competencies
Success is influenced by how well information is processed among divisions
Success can be influenced by managerial commitment levels and the response to some lost managerial autonomy
The Strategic Business-Unit Form of the Multidivisional Structure
Key Terms
Strategic Business-Unit (SBU) Form – multidivisional organization structure with three levels used to support the implementation of a diversification strategy
SBU Form of the Multidivisional Structure
SBU Form of the Multidivisional Structure Divisions within each SBU are related in terms of
shared products and/or markets
Divisions of one SBU have little in common with division of other SBUs
Divisions within each SBU share product or market competencies to develop economies of scope
Integrations used in cooperative form are equally effective for the SBU form
Each SBU is a profit center
Financial controls are more vital for evaluating performance
The Competitive Form of the Multidivisional Structure
Key Terms
Competitive Form – organizational structure in which the firm's divisions are completely independent
Competitive Form of the Multidivisional Structure
Competitive Form of the Multidivisional Structure
Divisions do not share common corporate strengths
Integration devices are not developed to coordinate activities across divisions
Efficient capital markets in unrelated strategies require organizational arrangements that emphasize divisional competition rather than cooperation
Specific performance expectations and accountability for independent divisions stimulate internal competition for future resources
Competitive Form of the Multidivisional Structure
Headquarters maintains a distant relationship to avoid intervention in divisional affairs
Strategic controls are used to monitor performance relative to targeted returns
Headquarters remains responsible for cash flow allocation, performance appraisal, resource allocation, and the legal aspects related to acquisitions
Benefits of Internal Competition
Internal competition creates flexibility
Internal competition challenges the status quo and inertia
Internal competition motivates effort
Competing For Advantage
Part III – Creating Competitive Advantage
Chapter 9 – Acquisition and Restructuring Strategy
Mergers, Acquisitions, and Takeovers: What Are the Differences?
Key Terms Merger - strategy through which two
firms agree to integrate their operations on a relatively co-equal basis.
Acquisition - strategy through which one firm buys a controlling, 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio.
Mergers, Acquisitions, and Takeovers – What Are the Differences?
Key Terms Takeover – special type of acquisition
strategy wherein the target firm did not solicit the acquiring firm's bid
Hostile Takeover – unfriendly takeover strategy that is unexpected and undesired by the target firm
Mergers and AcquisitionsReasons of Acquisitions
Market Power
Overcome Entry Barriers
Increased Speed
Lower Risk
New Technologies/Capabilities
Diversify
Gain Competitive Advantages
Reduced profits in current industry
Reduce overdependence
Mergers and AcquisitionsProblems with Acquisitions
Integration of two firms
Overpayment/Debt
Overestimation of Synergy
Overdiversification
Managerial energy absorption
Become too large
Substitute for innovation
Inadequate evaluation
Transaction costs
Mergers and Acquisitions
Results
Poor Performance
Who Wins?
Acquired FirmShareholders
Failures of Acquisitions
30 - 40% average acquisition premium
Acquiring firm’s value drops 4% in the 3 months following acquisitions
30 - 50% of acquisitions are later divested
Acquirers underperform S&P by 14%, peers by 4%
3 month performance before and after 30% substantial losses, 20% some losses,
33% marginal returns, 17% substantial returns
Why, then, do executives acquire?
Often, for personal reasons
Firm size and executive compensation are related
When do executives loss their jobs? 1) Acquired - larger firms harder to acquire 2) Performing poorly - employment risk is
reduced as returns are less volatile
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Effective Acquisitions
Complementary assets or resources Friendly acquisitions facilitate integration of firms Effective due-diligence process (assessment of target firm
by acquirer, such as books, culture, etc.) Financial slack Low debt position
High debt can… Increase the likelihood of bankruptcy
Lead to a downgrade in the firm’s credit rating
Preclude needed investment in activities that contribute to the firm’s long-term success
Innovation Flexibility and adaptability
When/Why to Diversify?
To create shareholder value
Porter’s Three Point Test
1) Attractiveness Test
2) Cost of Entry Test
3) Better off Test
Should pass all 3
Types of Acquisitions to Increase Market Power Horizontal Acquisitions
Acquisition in the same industry
Exploits cost- and revenue-based synergies
Similarities lead to smoother integration and higher performance
Vertical Acquisitions Increase of market power by controlling
more of the value chain
Related Acquisitions Acquisition of a firm in a highly related industry
Increase of market power by leveraging core competencies to gain a competitive advantage
Entry Barriers that Acquisitions Overcome
Economies of scale in established competitors
Differentiated products by competitors
Enduring relationships with customers that create product loyalties with competitors