corporate-level strategy and long- run profitability chapter 7

Corporate-Level Strategy and Long-

Run profitability

Chapter 7

7 | 2Copyright © Houghton Mifflin Company. All rights reserved.

Corporate-Level Strategy

• The principle concern:– to identify the industry or industries a company

should participate in to maximize long-run profitability

– Several options!!! DS!!!


Concentration on a Single Industry

• A company chooses to focus its resources and capabilities on competing successfully within the confines of a particular product market

• Examples of companies that pursue 1 strategy:– McDonalds– Starbuck’s


Horizontal Integration

• The process of acquiring or merging with industry competitors to achieve the competitive advantage that comes with large size

• Merger- an agreement between two companies to pool their resources in a combined operation

• Acquisition - Occurs when a company uses capital resources to purchase another company.

• An increase in horizontal integration = an increased level of concentration in an industry


Horizontal Integration

Advantages– Lowers operating costs– Increases product

differentiation (can be accomplished through product bundling)

– Reduces rivalry within an industry

– Increases bargaining power over suppliers and buyers

Disadvantages– Problems with

merging cultures, managers and operations.

– Problems with the Federal Trade Commission if a company grows too large


Horizontal Integration: EXERCISE

• Use the internet to research a company that has implemented Horizontal Integration.– What prompted them to do this?– Has their profitability increased?– By producing more of their own ‘inputs’ has the firm

truly reduced costs? Or is there economies of scale in the industry that they cannot capitalize on? Is this true in all industries or is this industry unique?


Outsourcing Functional Activities

• Outsourcing of non-core functional activities • Advantages- specialists,


Vertical Integration

• Expanding operations into industries that produce inputs or into industries that use, distribute, or sell the company’s product

• A company can enter a new industry to increase its long-run profitability

• A company that concentrates on a single business may be missing out on the opportunity to create value through vertical integration


Figures 7.1: Stages in the Raw-Materials-to-Customer Value-Added Chain


Figure 7.2: The Raw-Materials-to-Customer Value-Added Chain in the Personal Computer Industry


Figure 7.3: Full and Taper Integration


Vertical Integration

Advantages– Enables company to

build barriers to new competition

– Facilitates investments in specialized assets

– Protects product quality

– Results in improved scheduling

Disadvantages– May actually increase

cost of inputs– Suppliers have less

incentive to be efficient

– Ties a company into old, obsolescent, and high cost technology


Vertical Integration: EXERCISE

• Use the internet to research a company that has implemented Vertical Integration.– What prompted them to do this?– Has their profitability increased?– By selling products to end users, do you think that

they have cannibalized some of their market presence?


Concentration on aSingle Industry (cont’d)

• Advantages– Concentrates all

resources and capabilities to strengthening its competitive position in one industry

• Disadvantages– Vertical integration

may be necessary– May miss out on other

opportunities to create more value and increase profitability


Related Diversification

Exhibit 6.3


“Growth does not always lead a business to build on success. All too often it converts a highly successful business into a mediocre large business.”

- Richard Branson- Richard Branson

“The corporate strategies of most companies have dissipated instead of created shareholder value.”

- Michael Porter- Michael Porter


Diversification

• A diversified company is one that operates in two or more industries in order to find ways to use distinctive competencies to increase the value of products in other industries to consumers and to increase long-run profitability

• A company may choose to diversify when they have excess resources

• Concept of related diversification and unrelated diversification


Figure 7.5: Sharing Resources at Procter & Gamble


Diversification (cont’d)

• Diversification can help a company create value in 3 main ways:– Permitting superior internal governance– Transferring competencies among businesses– Realizing economies of scope


Figure 7.4: Transfer of Competencies at Philip Morris


Value-Adding Corporate Parents

Envisioning Strategic Intent Central Services and Resources

FocusClarity to external stakeholders Clarity to business units

InvestmentScale advantagesTransferable management capabilities

Intervention at Business Level Expertise

Monitor performanceAction to improve performanceChallenge/develop strategic ambitionsCoaching/trainingDevelop strategic capabilitiesAchieve synergies

Provide expertise/servicesKnowledge creation/sharingLeverageBrokering linkages/accessing external networks


Value-Destroying Corporate Parents• Bureaucracy

– Adds cost– Hinders responsiveness

• Buffer from reality– Financial safety net

• Diversity and size– Lack of clarity on overall vision

• Managerial ambition– Empire building


Portfolio managers, synergy managersand parental developers

Exhibit 6.6


Restructuring

• Restructuring- implementing strategies for reducing the scope of the company by removing exiting business areas

• Why restructure?– Because the stock of highly diversified companies is

often assigned a lower valuation relative to earnings than stocks of less diversified enterprises

– In an attempt to boost returns to shareholders


Restructuring (cont’d)

• Restructuring can be beneficial due to diminished advantages of vertical integration or diversification

• Restructuring can be a reaction to:– Managers pursuing too much diversification– Diversification for the wrong reasons– Failed Acquisition


“The very best takeovers are thoroughly hostile. I’ve never seen a really good company taken over.I’ve only seen bad ones.” - James Goldsmith

© RoyaltyFree/ Stockdisc/ Getty Images


Exit Strategies

• Three main exit strategies:– Divestment- most favorable– Harvest- only works under specific conditions– Liquidation- least favorable


Divestment

• Selling a business unit to the highest bidder• A company can sell to:

– Independent Investors– Other Companies


Management Buyout

• The managers of a business unit may be interested in purchasing it and assuming the high risk associated with the purchase

• Management often purchases a business unit through the sale of high-yield bonds


Harvest

• Halting investments in order to maximize short-to-medium term cash flow

• If employees catch on, morale can sink very quickly and the strategy may fail


Liquidation

• Shutting down the operation of a business or business unit

• Least attractive strategy because the company is required to write off its investments in the unit that is shutting down


Further readings and Questions

• Study the M & A strategies of BP

• Study the Outsourcing strategies of some good companies such as BP


Corporate Portfolio Management• Portfolio balance

– Markets– Organisation’s needs

• Attractiveness of business units– Profitability– Growth rates

• Portfolio ‘fit’– Synergies between business units– Synergies with corporate parent


The Growth Share (or BCG) Matrix

Exhibit 6.8


Public Sector Portfolio Matrix

Exhibit 6.9

Source: J.R. Montanari and J.S. Bracker, Strategic Management Journal, vol. 7, no. 3 (1986), reprinted by permission of John Wiley & Sons Ltd.


Indicators of SBU Strength and Market Attractiveness

Exhibit 6.10a


Market Attractiveness/SBU Strength Matrix

Exhibit 6.10b


Strategy Guidelines Based on Directional Policy Matrix

Exhibit 6.10c


International investment opportunities

based on the directional policy matrix

Exhibit 6.10d

Source: Harrel, G.D. and R.D. Kiefer (1993), ‘Multinational market portfolio in global strategy development’, International Marketing Review 10 (1); Phillips, C., I. Duole, and R. Lowe, International Marketing Strategy, Routledge 1994, pp. 137–8.


References

• Essential of Strategic Management, Chapter 7

• Some topics in the last few slides taken from Exploring Corporate Strategy- 7th Edition- Chapter 06

corporate-level strategy and long- run profitability chapter 7

Documents

profitabilitya company

single industrya company

companys producta company

new industry

industry unique

industry competitors

capital resources

customer valueadded