Corporate-level Strategy Diversification (Related and Unrelated) Integration (Vertical and Horizontal) Contraction Strategies Resource Allocation Decisions BCG Matrix Industry Attractiveness/Competitive Strength

What are the three levels of strategy? What does each level deal with? How does one know that a firm is pursuing a corporate-level strategy?

Corporate-level or strictly Business-level? Disney? Wal-Mart? General Electric?

Corporate-level Strategy Corporate-level strategy is guided by a vision of how “the firm as a whole can create economic value.” Philip Morris (Cigarettes) Kraft Foods Miller Brewing P.M. Capital

Philip Morris Corporation (Altria) Kraft Foods Divested 3/07 P.M. Capital Philip Morris (Cigarettes) Miller Brewing Divested for $5.6 billion The corporation is seen as a system of interdependent parts.

Corporate-level Strategies Expansion strategies include: Diversification (Related and Unrelated) Vertical Integration Horizontal Integration Contraction Strategies include: Divestiture (including Spin-off) Liquidation Corporate Turnaround Corporate Retrenchment Portfolio Restructuring

Diversification Why do firms diversify? (Rationale Tests) Stabilize Cash Flows (seasonal fluctuations) Attractiveness test (Porter’s Five Forces, size, growth rate, remote environmental conditions, industry profit margins) Cost of Entry (Barriers to entry, capital investments, debt) Better off tests (economies of scope, possible strategic fits)

Diversification There are two kinds of diversification Unrelated Ex. Virgin: (Five industries): Airlines, music, beverage, retailing, e-commerce, financial services Related Ex. Johnson and Johnson (at least 6 industries): Baby products, Health and Personal Care Products, Pharmaceutical, Medical Devices, Contact Lenses.

Economies of Scope: When it is less costly for two or more businesses to operate under one centralized management than to remain independent. (Linking value chain activities)

Related Diversification Firms start or acquire businesses in different industries; value chains for both businesses should have strategic fits (or links). Four kinds of strategic fits: Technology (using same/similar technological infrastructure) Operating (manufacturing processes) Market (similar or the same distribution channels or customers) Managerial (management know-how or expertise)

Benefits of Strategic Fits Strategic Fits provide opportunities for skills transfer or cost savings. Firms are able to: Transfer valuable expertise, technological know-how or other capabilities (Hotels and Assisted Living Facilities) Combine the related activities of separate businesses into a single operation to achieve lower costs of operations or administration (Economies of Scope) Exploit brand equity by using a well-known brand name (Johnson and Johnson) Cross-business collaboration to create or leverage valuable resources or capabilities.

Opportunities for Costs Savings or Skills Transfer Support Activities Purchased Supplies Inbound Logistics Distribution and Outbound Logistics Sales and Marketing Operations Service Opportunities for Costs Savings or Skills Transfer Purchased Supplies Inbound Logistics Distribution and Outbound Logistics Sales and Marketing Operations Service Support Activities

How do firms develop an advantage at the corporate level?

Resource Based View – Corporate Level Strategy Companies should diversify around their core businesses; and the creation of synergies by appropriately leveraging the firm’s resources. Even at the corporate level, resources are still king!!! New Criteria for diversification: 1. Strategic fits 2. Ability to exploit core competencies across different businesses (e.g., brand management, R&D, innovation) 3. Managerial skills and know-how

DISNEY Parks Studio And Entertainment Resorts Consumer Media Products Networks

RESOURCES PROVIDE THE BASIS FOR RELATEDNESS

Horizontal Integration Firms seek ownership or increased control over competitors. (e.g., consolidation, mergers and acquisitions) Motivations for horizontal integration: Achieve economies of scale/rationalization Technology exchanges Co-opting or blocking competition Facilitate international expansion Pfizer + Warner Lambert Pfizer SmithKline Beckman + Beecham Group SmithKline Beecham SmithklineBeecham + GlaxoWellcome GlaxoSmithkline

Conditions Favoring Horizontal Integration 1. When an organization can gain monopolistic characteristics without being challenged by the federal government. 2. Growing and mature industries. 3. When economies of scale will lead to a competitive advantage. 4. When the organization has both the capital and managerial talent needed to fully manage the expanded organization. 5. When competitors are faltering due to lack of managerial experience or lack of key resources.

Vertical Integration Firms attempt to gain ownership or increased control over suppliers or distribution channels. Assumption underlying a vertical integration strategy: Control over inputs or distribution channels increases opportunities for cost savings or value creation.

Advantages of Vertical Integration include: A secure source of “raw materials” or distribution channels. Protection of or control over valuable assets, proprietary technology Access to new business opportunities Simplified procurement and administrative procedures Greater control over costs of components Reduction in transactions cost Ability to maintain or cultivate a reputation for outstanding quality or service

Disadvantages of Vertical Integration include: Costs and expenses associated with increased overhead and capital expenditures Loss of flexibility from large investments Problems associated with unbalanced capacities along the industry value chain. Low demand can lead to underutilization of capacity High demand can result in a dependence on outside suppliers Higher administrative costs associated with managing a more complex set of activities. Transfer pricing dilemmas

Merck & Co., Inc. Neuroscience Biotechnology Animal Health Products Managed Care Pharmaceuticals

Merck & Co., Inc. (C-L Strategy) Related Diversification Animal Health Products Related Diversification Management Fits Operating Fits Technology Fits Managed Care Prescriptions Biotechnology Pharmaceuticals Backward integration Forward integration

Contraction Strategies Divestiture: Selling off business units (as a whole) Spin-off: Business Unit gains financial and managerial independence (parent company may retain some ownership) Liquidation: Selling off a business’ assets Corporate Retrenchment: When then company attempts to reduce the overall scope of its diversification Portfolio Restructuring: Changing the mix of industries that are represented in the corporate portfolio. Corporate Turnaround: Asset Reduction and/or Cost Reduction

Resource Allocation Decisions are Complex Corporate-level managers must grasp the relative merits of investment proposals coming from a range of businesses: in DIFFERENT sectors with DIFFERENT time horizons in DIFFERENT competitive positions from management teams with DIFFERING credibilities

Investment decisions require a balance of: Financial considerations Growth considerations

Boston Consulting Group Matrix Market Share High Low Industry Sales Growth Rate High Moo!! Low

Stars Star businesses: Have a strong competitive position in rapidly growing industries Are major contributors to corporate revenue Offer excellent profit potential What about the cash?

Question Marks Question Marks operate in high growth industries but have relatively low market shares Rapid growth makes them attractive from an industry standpoint but What about the cash?

Cash Cows Why are cash cows particularly valuable? What about the cash? They can be milked for cash to: Pay corporate dividends Finance new acquisitions Invest in young stars and question marks Moo!!

Dogs Dogs have a weak market position and low profit potential Dogs are unable to generate attractive cash flows Are Dog business units good for anything?

What are the limitations of the BCG Matrix?

Industry Attractiveness Market Size and Projected Growth Rate Intensity of Competition Emerging Opportunities and threats Cross-industry Strategic Fits Resource Requirements Seasonal/Cyclical Influences Macro Factors (Social/Political/Legal/etc) Industry Profitability Industry Uncertainty and Business Risk

Competitive Strength Relative Market Share Costs relative to Competitors’ Costs Ability to Match or Beat Rivals on Key Product Attributes Ability to benefit from Strategic Fits Bargaining Power over Suppliers and Buyers Caliber of Alliances Brand Image and Reputation Competitively Valuable Capabilities Profitability Relative to Competitors

Industry Attractiveness – Competitive Strength Matrix Competitive Strength/Market Position Strong Weak 10 6.7 3.3 High High Priority Low Priority High Priority 6.7 Industry Attractiveness High Priority Low Priority Medium Priority 3.3 Low Priority Medium Priority Medium Priority Low