foundations of strategic management, 2e

Foundations of Strategic Management, 2e.

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Learning Objectives

Knowledge of

• the types of corporate strategies, including vertical integration and diversification

• the advantages and disadvantages of acquisition and alliance formation

• the appropriate use and interpretation of portfolio models.


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StrategicStrategicDirectionDirection

Strategy FormulationStrategy Formulation(corporate and (corporate and business level)business level)

Strategy ImplementationStrategy Implementationand Controland Control

Strategic RestructuringStrategic Restructuring

Internal and External Internal and External AnalysisAnalysis


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Corporate Strategies

• Concentration

• Vertical Integration

• Unrelated Diversification

• Related Diversification


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Advantages of ConcentrationAdvantages of Concentration

• Allows a firm to master one business– In-depth knowledge– Easier to achieve competitive advantage

• Organizational resources under less strain• Lack of ambiguity concerning strategic direction

– Consensus• Sometimes found more profitable than other strategies

(dependent on industry, of course)

• Allows a firm to master one business– In-depth knowledge– Easier to achieve competitive advantage

• Organizational resources under less strain• Lack of ambiguity concerning strategic direction

– Consensus• Sometimes found more profitable than other strategies

(dependent on industry, of course)


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Disadvantages of Concentration

Disadvantages of Concentration

• Risky in unstable environments

• Product obsolescence and industry maturity

• Cash flow problems

• Risky in unstable environments

• Product obsolescence and industry maturity

• Cash flow problems


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The Vertical Supply ChainThe Vertical Supply Chain

RawMaterialsExtraction

PrimaryManufac-turing

FinalProductManufac-turing

Whole-saling Retailing

Vertical Integration: The extent to which an organizationis involved in multiple stages of the industry supply chainVertical Integration: The extent to which an organizationis involved in multiple stages of the industry supply chain


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When to Vertically Integrate

When to Vertically Integrate

• When it costs less to do so– Stated cost of product or service– Time and resources devoted to contract creation and

enforcement (transaction costs)• Transaction costs are high (market failure) when:

– Highly uncertain future– One or small number of suppliers– Knowledge differences– Asset specificity

• When it costs less to do so– Stated cost of product or service– Time and resources devoted to contract creation and

enforcement (transaction costs)• Transaction costs are high (market failure) when:

– Highly uncertain future– One or small number of suppliers– Knowledge differences– Asset specificity


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Unrelated Diversification

Unrelated Diversification

• Antitrust laws and financial theories made it popular

• Not a particularly high performing strategy for most firms (with a few notable exceptions)

• Antitrust laws and financial theories made it popular

• Not a particularly high performing strategy for most firms (with a few notable exceptions)


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Related DiversificationRelated Diversification

• Based on tangible and intangible relatedness

• In theory, can lead to synergy (but synergy is often illusive)

• Often a higher performing strategy than unrelated diversification (lower risk and higher profitability)

• Can lead to corporate-level distinctive competencies

• Based on tangible and intangible relatedness

• In theory, can lead to synergy (but synergy is often illusive)

• Often a higher performing strategy than unrelated diversification (lower risk and higher profitability)

• Can lead to corporate-level distinctive competencies


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Requirements for Synergy CreationRequirements for Synergy Creation

• Relatedness– Tangible--same physical resources for multiple

purposes– Intangible--capabilities developed in one area can be

used elsewhere

(continued)

• Relatedness– Tangible--same physical resources for multiple

purposes– Intangible--capabilities developed in one area can be

used elsewhere

(continued)


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Requirements for Synergy CreationRequirements for Synergy Creation

• Fit– Strategic--matching of organizational capabilities--

complementary resources and skills– Organizational--similar processes, cultures, systems

and structures• Managerial actions to share resources and skills• Benefits must outweigh costs of integration

• Fit– Strategic--matching of organizational capabilities--

complementary resources and skills– Organizational--similar processes, cultures, systems

and structures• Managerial actions to share resources and skills• Benefits must outweigh costs of integration


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Mergers and AcquisitionsMergers and Acquisitions

• High Premiums• Increased Interest

Costs• High Advisory Fees• Poison Pills• High Turnover• Managerial

Distraction• Less Innovation• Lack of Fit• Increased Risk

• High Premiums• Increased Interest

Costs• High Advisory Fees• Poison Pills• High Turnover• Managerial

Distraction• Less Innovation• Lack of Fit• Increased Risk


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Typical Pre- to Post-Acquisition Organizational Changes

Typical Pre- to Post-Acquisition Organizational Changes

• Profitability Declines

• R & D Declines

• Patent Activity Declines

• Financial Leverage Increases

• Profitability Declines

• R & D Declines

• Patent Activity Declines

• Financial Leverage Increases


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Mergers That Work

Mergers That Work

• Strong Relatedness

• Friendly

• Low to Moderate Debt

• Strong Relatedness

• Friendly

• Low to Moderate Debt


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Mergers that Don’t WorkMergers that Don’t Work

• Large or Extraordinary Debt

• Inadequate Target

Evaluation

• Ethical Concerns

• Top Management Team

and/or Structure Changes

• Multiple Acquisitions

• Large or Extraordinary Debt

• Inadequate Target

Evaluation

• Ethical Concerns

• Top Management Team

and/or Structure Changes

• Multiple Acquisitions


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Strategic AlliancesStrategic Alliances

• Resource sharing--marketing, technology, raw materials and components, financial, managerial, political

• Speed of entry• Spread risk of failure• Lock in exclusive arrangements• Draw on specific strengths of countries• Outsourcing

• Resource sharing--marketing, technology, raw materials and components, financial, managerial, political

• Speed of entry• Spread risk of failure• Lock in exclusive arrangements• Draw on specific strengths of countries• Outsourcing


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Problems with AlliancesProblems with Alliances• Only partial control and

limited profitability

• High administrative costs

• Possible lack of fit

• Risk of opportunism

• Only partial control and limited profitability

• High administrative costs

• Possible lack of fit

• Risk of opportunism


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Portfolio ModelsPortfolio Models

BusinessGrowthRate

BusinessGrowthRate

Relative Competitive Position (Relative Market Share)Relative Competitive Position (Relative Market Share)

HighHigh

LowLow

HighHigh LowLow