1

2 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.

3 StrategicDirection Strategy Formulation (corporate and business level) Strategy Implementation and Control Strategic Restructuring Internal and External Analysis

4 Corporate Strategies Concentration Vertical Integration Unrelated Diversification Related Diversification

5 Advantages 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)

6 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

7 The Vertical Supply Chain Raw Materials Extraction Primary Manufac- turing Final Product Manufac- turing Whole- saling Retailing Vertical Integration: The extent to which an organization is involved in multiple stages of the industry supply chain Vertical Integration: The extent to which an organization is involved in multiple stages of the industry supply chain

8 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

9 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)

10 Related 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

11 Requirements 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)

12 Requirements 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

13 Mergers 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

14 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

15 Mergers That Work Strong Relatedness Friendly Low to Moderate Debt Strong Relatedness Friendly Low to Moderate Debt

16 Mergers 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

17 Strategic 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

18 Problems 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

19 Portfolio Models Busines s Growth Rate Busines s Growth Rate Relative Competitive Position (Relative Market Share) Hig h Lo w High Low