corporate-level strategy. level of strategies corporate business unit/ division function operation

Corporate-Level Strategy

Level of strategies

corporate

Business unit/ division

function

operation

headquarterheadquarter

Division A Division B Division C

finance marketing Product..

CorporateCorporate

BusinessBusiness

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Directional Strategies

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Expansion Adaptive Strategy:– Orientation toward growth

Expand, cut back, status quo? Concentrate within current industry, diversify into

other industries? Growth and expansion through internal development

or acquisitions, mergers, or strategic alliances?


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Basic Growth Strategies:

Concentration– Current product line in one industry

– Vertical Integration– Market Development– Product Development– Penetration

Diversification– Into other product lines in other industries


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Expansion of ScopeBasic Concentration Strategies:

Vertical growthHorizontal growth


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Vertical growth

– Vertical integration Full integration Taper integration Quasi-integration

– Backward integration

– Forward integration


Copyright © Houghton Mifflin Company. All

rights reserved. 9 | 9

Full and Taper Integration

Stages in the Raw-Material-to-Consumer Value Chain

Upstream Downstream

Stages in the Raw-Material-to-Consumer Value Chain in the Personal Computer Industry

End userDistributionAssemblyIntermediatemanufacturer

Raw materials

Examples:Examples:Dow ChemicalDow ChemicalUnion CarbideUnion CarbideKyoceraKyocera

Examples:Examples:IntelIntelSeagateSeagateMicronMicron

Examples:Examples:AppleAppleHpHpDellDell

Examples:Examples:Best BuyBest BuyOffice MaxOffice Max

Vertical Integration

Integration backward into supplier functions– Assures constant supply of inputs.– Protects against price increases.

Integration forward into distributor functions– Assures proper disposal of outputs.– Captures additional profits beyond activity costs.

Integration choice is that of which value-adding activities to compete in and which are better suited for others to carry out.

Creating Value Through Vertical Integration

Advantages of a vertical integration strategy:– Builds entry barriers to new competitors by denying

them inputs and customers.– Facilitates investment in efficiency-enhancing

assets that solve internal mutual dependence problems.

– Protects product quality through control of input quality and distribution and service of outputs.

– Improves internal scheduling (e.g., JIT inventory systems) responses to changes in demand.

Creating Value Through Vertical Integration

Disadvantages of vertical integration– Cost disadvantages of internal supply purchasing.– Remaining tied to obsolescent technology.– Aligning input and output capacities with

uncertainty in market demand is difficult for integrated companies.

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Horizontal Growth

– Horizontal integration


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Basic Diversification Strategies:

– Concentric Diversification

– Conglomerate Diversification


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Concentric Diversification

– Growth into related industry– Search for synergies


Concentration on a Single Business

SEARSCoca-ColaCoca-ColaMcDonaldsMcDonalds

Southwest Airlines

Concentration on a Single Business

Advantages– Operational focus on a

single familiar industry or market.

– Current resources and capabilities add value.

– Growing with the market brings competitive advantage.

Disadvantages– No diversification of market

risks.– Vertical integration may be

required to create value and establish competitive advantage.

– Opportunities to create value and make a profit may be missed.

Diversification

Related diversification– Entry into new business activity based on shared

commonalities in the components of the value chains of the firms.

Unrelated diversification– Entry into a new business area that has no

obvious relationship with any area of the existing business.

Related Diversification

3M3M

Hewlett PackardHewlett Packard

Marriott

Unrelated Diversification

Tyco

Amer Group Amer Group

ITTITT

Diversification and Corporate Performance: A Disappointing History

A study conducted by Business Week and Mercer Management Consulting, Inc., analyzed 150 acquisitions that took place between July 2000 and July 2005. Based on total stock returns from three months before, and up to three years after, the announcement:

30 percent substantially eroded shareholder returns. 20 percent eroded some returns. 33 percent created only marginal returns. 17 percent created substantial returns.A study by Salomon Smith Barney of U.S. companies acquired

since 1997 in deals for $15 billion or more, the stocks of the acquiring firms have, on average, under-performed the S&P stock index by 14 percentage points and under-performed their peer group by four percentage points after the deals were announced.

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Unrelated (Conglomerate) Diversification– Growth into unrelated industry– Concern with financial considerations


Reasons for Diversification

Reasons to Enhance Strategic Reasons to Enhance Strategic CompetitivenessCompetitiveness

• Economies of scope/scale

• Market power

• Financial economics

IncentivesIncentives

ResourcesResources

ManagerialManagerialMotivesMotives

Incentives with Neutral Incentives with Neutral Effects on Strategic Effects on Strategic CompetitivenessCompetitiveness

• Anti-trust regulation

• Tax laws

• Low performance

• Uncertain future cash flows

• Firm risk reduction


ResourcesResources



Incentives to Diversify

External Incentives:External Incentives: Relaxation of anti-trust regulation allows more related Relaxation of anti-trust regulation allows more related

acquisitions than in the pastacquisitions than in the past Before 1986, higher taxes on dividends favored spending Before 1986, higher taxes on dividends favored spending

retained earnings on acquisitionsretained earnings on acquisitions After 1986, firms made fewer acquisitions with retained After 1986, firms made fewer acquisitions with retained

earnings, shifting to the use of debt to take advantage of tax earnings, shifting to the use of debt to take advantage of tax deductible interest paymentsdeductible interest payments

Incentives to Diversify

Internal Incentives:Internal Incentives: Poor performance may lead some firms to diversify an Poor performance may lead some firms to diversify an

attempt to achieve better returnsattempt to achieve better returns Firms may diversify to balance uncertain future cash flowsFirms may diversify to balance uncertain future cash flows Firms may diversify into different businesses in order to Firms may diversify into different businesses in order to

reduce riskreduce risk

Resources and Diversification

Besides strong incentives, firms are more likely to Besides strong incentives, firms are more likely to diversify if they have the resources to do sodiversify if they have the resources to do so

Value creation is determined more by appropriate Value creation is determined more by appropriate use of resources than incentives to diversifyuse of resources than incentives to diversify

Managerial Motives (Value Managerial Motives (Value Reduction)Reduction)

• Diversifying managerial employment risk

• Increasing managerial compensation


ResourcesResources



Managerial Motives to Diversify

Managers have motives to diversifyManagers have motives to diversify – diversification increases size; size is associated with diversification increases size; size is associated with

executive compensationexecutive compensation– diversification reduces employment riskdiversification reduces employment risk– effective governance mechanisms may restrict such effective governance mechanisms may restrict such

motivesmotives

Bureaucratic Costs and the Limits of Diversification

Number of businesses– Information overload can lead to poor resource allocation

decisions and create inefficiencies.Coordination among businesses

– As the scope of diversification widens, control and bureaucratic costs increase.

– Resource sharing and pooling arrangements that create value also cause coordination problems.

Limits of diversification– The extent of diversification must be balanced with its

bureaucratic costs.

Relationship Between Diversification and Performance

Per

form

ance

Per

form

ance

Level of DiversificationLevel of Diversification

DominantBusiness

UnrelatedBusiness

RelatedConstrained

Restructuring:Contraction of Scope

Why restructure?– Pull-back from overdiversification.– Attacks by competitors on core

businesses.– Diminished strategic advantages of

vertical integration and diversification.Contraction (Exit) strategies

– Retrenchment– Divestment– spinoffs of profitable SBUs to investors;

management buy outs (MBOs).– Harvest– halting investment, maximizing cash flow.– Liquidation– Cease operations, write off assets.

Why Contraction of Scope?

The causes of corporate decline– Poor management– incompetence, neglect– Overexpansion– empire-building CEO’s– Inadequate financial controls– no profit responsibility– High costs– low labor productivity– New competition– powerful emerging competitors– Unforeseen demand shifts– major market changes– Organizational inertia– slow to respond to new competitive

conditions

The Main Steps of Turnaround

Changing the leadership– Replace entrenched management with new managers.

Redefining strategic focus– Evaluate and reconstitute the organization’s strategy.

Asset sales and closures– Divest unwanted assets for investment resources.

Improving profitability– Reduce costs, tighten finance and performance controls.

Acquisitions– Make acquisitions of skills and competencies to strengthen

core businesses.

Adaptive Strategies

Maintenance of ScopeEnhancement

Status Quo

Market Entry Strategies

Acquisition:Acquisition: a strategy through which one organization buys a a strategy through which one organization buys a controlling interest in another organization with the intent of controlling interest in another organization with the intent of making the acquired firm a subsidiary business within its own making the acquired firm a subsidiary business within its own portfolioportfolio

Licensing:Licensing: a strategy where the organization purchases the a strategy where the organization purchases the right to use technology, process, etc. right to use technology, process, etc.

Joint Venture:Joint Venture: a strategy where an organization joins with a strategy where an organization joins with another organization(s) to form a new organizationanother organization(s) to form a new organization

AcquisitionsAcquisitions

Reasons for Making Acquisitions

IncreaseIncreasemarket powermarket power

OvercomeOvercomeentry barriersentry barriers

Cost of newCost of newproduct developmentproduct development Increase speedIncrease speed

to marketto market

IncreaseIncreasediversificationdiversification

Reshape firm’sReshape firm’scompetitive scopecompetitive scope

Lower risk comparedLower risk comparedto developing newto developing new

productsproducts

Learn and developLearn and developnew capabilitiesnew capabilities

Reasons for Making Acquisitions:

Factors increasing market powerFactors increasing market power– when a firm is able to sell its goods or services above when a firm is able to sell its goods or services above

competitive levels orcompetitive levels or– when the costs of its primary or support activities are below when the costs of its primary or support activities are below

those of its competitorsthose of its competitors– usually is derived from the size of the firm and its resources usually is derived from the size of the firm and its resources

and capabilities to compete and capabilities to compete Market power is increased byMarket power is increased by

– horizontal acquisitionshorizontal acquisitions– vertical acquisitionsvertical acquisitions– related acquisitionsrelated acquisitions

Increased Market PowerIncreased Market Power


Barriers to entry includeBarriers to entry include– economies of scale in established competitorseconomies of scale in established competitors– differentiated products by competitorsdifferentiated products by competitors– enduring relationships with customers that create product enduring relationships with customers that create product

loyalties with competitorsloyalties with competitors

acquisition of an established company acquisition of an established company – may be more effective than entering the market as a may be more effective than entering the market as a

competitor offering an unfamiliar good or service that is competitor offering an unfamiliar good or service that is unfamiliar to current buyersunfamiliar to current buyers

Cross-border acquisitionCross-border acquisition

Overcome Barriers to EntryOvercome Barriers to Entry


Significant investments of a firm’s resources are Significant investments of a firm’s resources are required torequired to– develop new products internallydevelop new products internally– introduce new products into the marketplaceintroduce new products into the marketplace

Acquisition of a competitor may result inAcquisition of a competitor may result in– lower risk compared to developing new productslower risk compared to developing new products– increased diversificationincreased diversification– reshaping the firm’s competitive scopereshaping the firm’s competitive scope– learning and developing new capabilities learning and developing new capabilities – faster market entryfaster market entry– rapid access to new capabilitiesrapid access to new capabilities


An acquisition’s outcomes can be estimated more An acquisition’s outcomes can be estimated more easily and accurately compared to the outcomes of an easily and accurately compared to the outcomes of an internal product development processinternal product development process

Therefore managers may view acquisitions as lowering Therefore managers may view acquisitions as lowering riskrisk

Lower Risk Compared to Developing Lower Risk Compared to Developing New ProductsNew Products


It may be easier to develop and introduce new products It may be easier to develop and introduce new products in markets currently served by the firmin markets currently served by the firm

It may be difficult to develop new products for markets It may be difficult to develop new products for markets in which a firm lacks experiencein which a firm lacks experience– it is uncommon for a firm to develop new products internally to it is uncommon for a firm to develop new products internally to

diversify its product linesdiversify its product lines– acquisitions are the quickest and easiest way to diversify a firm acquisitions are the quickest and easiest way to diversify a firm

and change its portfolio of businessesand change its portfolio of businesses

Increased DiversificationIncreased Diversification


Firms may use acquisitions to reduce their Firms may use acquisitions to reduce their dependence on one or more products or marketsdependence on one or more products or markets

Reducing a company’s dependence on specific Reducing a company’s dependence on specific markets alters the firm’s competitive scopemarkets alters the firm’s competitive scope

Reshaping the Firms’ Competitive ScopeReshaping the Firms’ Competitive Scope


Acquisitions may gain capabilities that the firm does Acquisitions may gain capabilities that the firm does not possessnot possess

Acquisitions may be used toAcquisitions may be used to– acquire a special technological capabilityacquire a special technological capability– broaden a firm’s knowledge basebroaden a firm’s knowledge base

– reduce inertiareduce inertia

Learning and Developing New CapabilitiesLearning and Developing New Capabilities

AcquisitionsAcquisitions

Problems With AcquisitionsIntegrationIntegrationdifficultiesdifficulties

InadequateInadequateevaluation of targetevaluation of target

Large orLarge orextraordinary debtextraordinary debt

Inability toInability toachieve synergyachieve synergy

Too muchToo muchdiversificationdiversification

Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions

Resulting firmResulting firmis too largeis too large

Problems With Acquisitions

Integration challenges includeIntegration challenges include– melding two disparate corporate culturesmelding two disparate corporate cultures– linking different financial and control systemslinking different financial and control systems– building effective working relationships (particularly when building effective working relationships (particularly when

management styles differ)management styles differ)– resolving problems regarding the status of the newly resolving problems regarding the status of the newly

acquired firm’s executivesacquired firm’s executives– loss of key personnel weakens the acquired firm’s loss of key personnel weakens the acquired firm’s

capabilities and reduces its valuecapabilities and reduces its value

Integration DifficultiesIntegration Difficulties


Evaluation requires that hundreds of issues be Evaluation requires that hundreds of issues be closely examined, includingclosely examined, including– financing for the intended transactionfinancing for the intended transaction– differences in cultures between the acquiring and target firmdifferences in cultures between the acquiring and target firm– tax consequences of the transactiontax consequences of the transaction– actions that would be necessary to successfully meld the actions that would be necessary to successfully meld the

two workforcestwo workforces Ineffective due-diligence process mayIneffective due-diligence process may

– result in paying excessive premium for the target companyresult in paying excessive premium for the target company

Inadequate Evaluation of TargetInadequate Evaluation of Target


Firm may take on significant debt to acquire a Firm may take on significant debt to acquire a companycompany

High debt can High debt can – increase the likelihood of bankruptcyincrease the likelihood of bankruptcy– lead to a downgrade in the firm’s credit ratinglead to a downgrade in the firm’s credit rating– preclude needed investment in activities that contribute to preclude needed investment in activities that contribute to

the firm’s long-term successthe firm’s long-term success

Large or Extraordinary DebtLarge or Extraordinary Debt


Synergy exists when assets are worth more when Synergy exists when assets are worth more when used in conjunction with each other than when they used in conjunction with each other than when they are used separatelyare used separately

Firms experience transaction costs (e.g., legal fees) Firms experience transaction costs (e.g., legal fees) when they use acquisition strategies to create when they use acquisition strategies to create synergysynergy

Firms tend to underestimate indirect costs of Firms tend to underestimate indirect costs of integration when evaluating a potential acquisitionintegration when evaluating a potential acquisition

Inability to Achieve SynergyInability to Achieve Synergy


Diversified firms must process more information of Diversified firms must process more information of greater diversity greater diversity

Scope created by diversification may cause Scope created by diversification may cause managers to rely too much on financial rather than managers to rely too much on financial rather than strategic controls to evaluate business units’ strategic controls to evaluate business units’ performancesperformances

Acquisitions may become substitutes for innovationAcquisitions may become substitutes for innovation

Too Much DiversificationToo Much Diversification


Managers in target firms may operate in a state of Managers in target firms may operate in a state of virtual suspended animation during an acquisitionvirtual suspended animation during an acquisition

Executives may become hesitant to make decisions Executives may become hesitant to make decisions with long-term consequences until negotiations have with long-term consequences until negotiations have been completedbeen completed

Acquisition process can create a short-term Acquisition process can create a short-term perspective and a greater aversion to risk among perspective and a greater aversion to risk among top-level executives in a target firmtop-level executives in a target firm

Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions


Additional costs may exceed the benefits of the Additional costs may exceed the benefits of the economies of scale and additional market powereconomies of scale and additional market power

Larger size may lead to more bureaucratic controls Larger size may lead to more bureaucratic controls Formalized controls often lead to relatively rigid and Formalized controls often lead to relatively rigid and

standardized managerial behaviorstandardized managerial behavior Firm may produce less innovationFirm may produce less innovation

Too LargeToo Large

Strategic Alliance

A strategic alliance is a cooperative strategy in whichA strategic alliance is a cooperative strategy in which– firms combine some of their resources and capabilitiesfirms combine some of their resources and capabilities– to create a competitive advantageto create a competitive advantage

A strategic alliance involvesA strategic alliance involves– exchange and sharing of resources and capabilitiesexchange and sharing of resources and capabilities– co-development or distribution of goods or servicesco-development or distribution of goods or services

CombinedCombinedResourcesResources

CapabilitiesCapabilitiesCore CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

Strategic Alliance

Firm AFirm A Firm BFirm B

Mutual interests in designing, manufacturing,Mutual interests in designing, manufacturing,or distributing goods or servicesor distributing goods or services

Types of Cooperative Strategies

Joint venture: two or more firms create an Joint venture: two or more firms create an independent company by combining parts of their independent company by combining parts of their assetsassets

Equity strategic alliance: partners who own different Equity strategic alliance: partners who own different percentages of equity in a new venturepercentages of equity in a new venture

Nonequity strategic alliances: contractual Nonequity strategic alliances: contractual agreements given to a company to supply, produce, agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity or distribute a firm’s goods or services without equity sharingsharing

Strategic Alliances

Margin Margin

Primary Activities

Sup

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Act

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Marketing & Sales

Outbound Logistics

Operations

Inbound LogisticsFirm

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Mgm

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Margin Margin

Primary Activities

Sup

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Act

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Marketing & Sales

Outbound Logistics

Operations


Inf

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Hum

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Ver

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SupplierSupplier

• vertical complementary strategic vertical complementary strategic alliance is formed between firms alliance is formed between firms that agree to use their skills and that agree to use their skills and capabilities in different stages of capabilities in different stages of the value chain to create value the value chain to create value for both firmsfor both firms

• outsourcing is one example of outsourcing is one example of this type of alliancethis type of alliance

Strategic Alliances

Margin Margin

Primary Activities

Sup

port

Act

iviti

es Service

Marketing & Sales

Outbound Logistics

Operations


Inf

rast

ruct

ure

Hum

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Mgm

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Tec

hnol

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evel

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Pro

cure

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Margin Margin

Primary Activities

Sup

port

Act

iviti

es Service

Marketing & Sales

Outbound Logistics

Operations


Inf

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Hum

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Mgm

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evel

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BuyerBuyerPotential CompetitorsPotential Competitors

• horizontal complementary strategic alliance is formed horizontal complementary strategic alliance is formed between partners who agree to combine their resources and between partners who agree to combine their resources and skills to create value in the same stage of the value chainskills to create value in the same stage of the value chain

• focus on long-term product development and distribution opportunities

• the partners may become competitorsthe partners may become competitors• requires a great deal of trust between the partnersrequires a great deal of trust between the partners

BuyerBuyer

corporate-level strategy. level of strategies corporate business unit/ division function operation

Documents

basic growth strategies

vertical integration

vertical integrationadvantages

consumer value chainstages

market demand

product quality

internal scheduling

internal development