corporate strategies (1

8/10/2019 Corporate Strategies (1

1/33

Moses Acquaah, Ph.D.

377 Bryan Building

Phone: (336) 334-5305

Email: [email protected]


2/33

What is Corporate Strategy? Those strategies concerned with the broad andlong-term questions of

what business(es) the organization is in or wants to be

in & what it wants to do with those businesses Task involves

Moves to enter new businesses

Actions to boost combined performance of businesses

Ways to capture synergy among related businesses

Establishing investment priorities & steering corporateresources into most attractive units


3/33

Single & Multiple Business

Organizations Single business organizations

Operates primarily in only one industry (e.g., Coca-Cola Beverage Industry; Wrigley Jr. Company

Chewing Gum) Multiple Business Organizations

Operates in more than one industry

Example: PepsiCo Snack Food Industry business(Frito Lay); & Beverage Industry

Philip Morris Companies Tobacco Industry;Brewery Industry (Miller Brewery); & Food ProcessingIndustry (Kraft General Foods).


4/33

Corporate, Competitive &

Functional Strategies Corporate strategy establishes the overall direction

that the organization hopes to go.

Competitive & functional strategies provide themeans or mechanismsfor making sure theorganization gets there.


5/33

Possible Corporate Strategic

Directions(1) Moving the organization ahead -- Organizational

Growth

(2) Keeping the organization where it is --Organizational Stability

(3) Reversing the organizations weaknesses or decline --

Organizational Renewal


6/33

ORGANIZATIONAL GROWTH Growth strategy

Involves the attainment of specific growth objectives byincreasing the level of an firms operations

Typical growth objectives for businesses Increase in sales revenues

Increase in earnings or profits

Other performance measures

Growth objectives of not-for-profit businesses Increasing clients served or patrons attracted

Broadening the geographic area

Increasing programs offered


7/33

Types of Growth Strategies

Organizational

Growth

Diversification

Related

Unrelated Horizontal

Integration

Vertical

Integration

Backward

Forward

ConcentrationInternational


8/33

Concentration StrategyA growth strategy where the firm

Concentrates on its primary line of business

Looks for ways to meet its growth objectives throughincreasing its level of operation in this primary business

When a single-business organization pursues growth,it is using the concentration strategy


9/33

Concentration Strategy Four concentration strategy options

Products

Customers

Current

New

Current New

Product-Market

Exploration

Product

Development

Market

Development

Product/Market

Diversification


10/33

Concentration Strategy Product-Market Exploration Option

Describes attempts by firm to increase sales of itscurrent product(s) in its current market(s) bydepending on its functional & competitive strategies

Product Development Option

Firm create new product for use by its current market(customers)


11/33

Concentration Strategy Market Development Option When a firm sell its current products in new markets

(additional geographic areas or market segments notcurrently served by firm)

Product-Market Diversification Option Where firm seeks to expand both into new products

& new markets

Single-business firm becomes a multiple-businessfirm since it is now operating in a different industry


12/33

Concentration StrategyAdvantage Organization becomes very good at what it does

Drawback

Organization is vulnerable to industry and otherexternal environmental shifts

Concentration strategy is used by both small-sizedand large organizations


13/33

Vertical Integration StrategiesAn organizations attempt to gain control of Its inputs (backward integration) -- supplier Its output (forward integration) -- distributor

Or both inputs and output Purpose is to (1) reduce resource acquisition costs, &

(2) deal with inefficient operations

Vertical Integration Considered a growth strategy because the firms

operations are expanded beyond primary business Mixed empirical results as to whether strategy helps

or hurt performance What is the role of outsourcing in achieving same

objective as vertical integration?


14/33

Vertical Integration Strategies Benefits Reduced purchasing &

selling costs

Improved coordinationof functions &capabilities

Protected proprietarytechnology

Costs Reduced f lexibility as

firm is locked intoproducts &technology

Create an exit barrierdue to existence ofassets that are hard to

sell Difficulties in

integrating variousoperations

Financial costs ofacquiring or starting


15/33

Horizontal Integration

Strategies Expanding the firm's operations throughcombining with competitors operating in thesame industry & doing the same things

It is an appropriate corporate growth strategy aslong as

It enables the company to meet its growth objectives It can be strategically managed to attain a sustainable

competitive advantage

It satisfies legal and regulatory guidelines


16/33

Diversification StrategiesA corporate growth strategy in which a firm expandsits operation by moving into a different industry

Many reasons or motives for diversification

Two major types of diversification

Related (concentric) diversification

Unrelated (conglomerate) diversification


17/33

Why Do Firms Diversify? To Grow Increase sales & profitability beyond what firms

core businesses can provide

Managerial self-serving behavior -- compensation

Managerial hubris -- pride or status that comefrom managing a large business

To more fully utilize existing resources andcapabilities

Skills in sales & marketing, general managementskills & knowledge, distribution channels, etc.


18/33

Why Do Firms Diversify? Risk reduction and/or spreading Escape from unattractive or undesirable industries (e.g.,

tobacco & oil companies)

Stability of profit f lows (CAPM: systematic vs. unsystematicrisks; shareholders & diversified portfolios)

To make use of surplus cash flows Large cash balances attract corporate raiders

Use cash balances to avoid hostile takeovers

To build shareholder value Create synergyamong the businesses of a firm

Make 2 + 2 = 5: The whole should be greater than the sum of

the parts


19/33

Why Do Firms Diversify Synergy can be obtained in three ways Exploiting economies of scale

Exploiting economies of scope

Efficient allocation of capital through the use of portfoliomanagement techniques

Problems that prevent diversified firms fromrealizing synergies A poor understanding of how diversification activities will

fit or be coordinated with existing businesses

Dangers or risks associated with the acquisition of businesses

Problems with the development of internal businesses


20/33

Why Do Firms Diversify? Diversification is capable of increasing shareholdervalue if it passes three tests:

The attractiveness test: The industry must be

structurally attractive or capable of being madeattractive

The cost-of-entry test: The cost of entry must notcapitalize all future profits

The better-off test: Either the new unit must gaincompetitive advantage from its link with thecorporation or vice versa (i.e. synergy)

( )


21/33

Related (Concentric)

Diversification

Related (Concentric) Diversification Diversifying into a different industry but one thats

related in some ways to the organizations currentoperations

Search for strategic synergy, which is the performanceof the sum of the parts is better than the whole The idea that 2 + 2 = 5

Synergy happens because of the interactions and the

interrelatedness of the combined operations and thesharing of resources, capabilities, & distinctivecompetencies


22/33

Related Diversification Builds shareholder value by capturing cross-business

strategic fits

Transferring skills & capabilities from one business toanother

Sharing facilities or resources to reduce costs

Leveraging the use of common brand name

Combining resources to create new competitivestrengths and capabilities


23/33

Related DiversificationAdvantages or Benefits Opportunities to achieve economies of scale and scope

through skill transfers, lower costs, common brand

name, technology, etc. Opportunities to expand product or service offerings

and preserve unity in businesses

Disadvantages

Complexity and difficulty of coordinating different, butrelated businesses (e.g. Philip Morris General Foodand Kraft subsidiaries)

Related diversification is a strategy-drivenapproach to creating shareholder value


24/33

Unrelated Diversification Diversifying into completely different industryfrom the firms current operations

Firm move into industries where there is

No strategic fit to be exploited No meaningful value chain relationships

No unifying strategic theme

E.g.: GE; Walt Disney; Sara Lee

Approach is venture into any business withgoodprofitability prospects


25/33

Unrelated Diversification

Targets for unrelated diversification Firms with undervalued assets

Firms in financial distress

Firms with bright growth prospects but limited capital

Advantages

Business risk spread over different industries Efficient allocation of capital resources

Stability of profits

Enhanced shareholder value


26/33

Unrelated Diversification

Disadvantages Difficulties of competently managing many diverse

businesses

No strategic fits which can be leveraged intocompetitive advantage

Unrelated diversification is afinance-driven

approach to creating shareholder value


27/33

Implementing Growth

Strategies Mergers & Acquisitions A mergeris a legal transaction in which two or more

organizations combine through an exchange of stock,

but only one firm actually remain

An acquisitionis an outright purchase of anorganization by another

What is a Takeover?


28/33

Strategies

Internal Development Organization chooses to expand its operation by

starting a new business from scratch

Choice between mergers-acquisition and internaldevelopment depends on: (See Table 7-4)

The new industrys barriers to entry

Relatedness of new business to the existing one

Speed & development cost associated with each approach

Risks associated with each approach

Stage of the industry life cycle


29/33

Strategies

Strategic Partnering When two or more firms establish a legitimate

relationship by combining their resources, corecompetencies, distinctive capabilities for some

business purpose Arrangement can be used to implement any of the

growth strategies

Vertical Integration

Horizontal Integration Related Diversification


30/33

Implementing Growth

Strategies Types of Strategic Partnerships Joint Venture (JV)

Two or more separate organization form an independent

organization for strategic purposes Partners usually own equal shares of new venture

Used when partners do not want to be legally joined

Long-Term Contract

Legal contract between organizations covering a specificbusiness purpose

Typically between an organization & its suppliers


31/33

Implementing Growth

Strategies Types of strategic Partnerships (contd) Strategic Alliance

Two or more firms share resources, capabilities or

competencies to pursue some business purpose

Similar to JVs but no formation of a separate entity

Often pursued in order to

Partners reap benefits of expanded operations


32/33

ORGANIZATIONAL STABILITY

A strategy where the organization maintains itscurrent size and current level of business operations

When is stability an appropriate strategy?

Industry is in a period of rapid upheaval with severalkey industry & external forces drastically changing,making future highly uncertain

Industry is facing slow or no growth opportunities

Many small business owners follow stability strategyindefinitely


33/33

ORGANIZATIONAL STABILITY

When is stability an appropriate strategy?

Organization has just completed a frenzied period ofgrowth & needs to have some down time in order

for its resources & capabilities to build up strengthagain

large firm in large industry at maturity stage ofindustry life cycle

Implementation of Stability Strategy Not expanding organizations level of operation

Should be a short-run strategy

corporate strategies (1

Documents