© 2012 South-Western, a part of Cengage Learning Corporate-Level Strategy and Long-Run Profitability Chapter 7 Essentials of Strategic Management, 3/e Charles W.L. Hill | Gareth R. Jones

© 2012 South-Western, a part of Cengage Learning Corporate-Level Strategy The principle concern: to identify the industry or industries a company should participate in to maximize long-run profitability

© 2012 South-Western, a part of Cengage Learning Concentration on a Single Industry A company chooses to focus its resources and capabilities on competing successfully within the confines of a particular product market Examples of companies that pursue 1 strategy: McDonalds Starbuck’s Neiman Marcus

© 2012 South-Western, a part of Cengage Learning Concentration on a Single Industry (cont’d) Advantages Concentrates all resources and capabilities to strengthening its competitive position in one industry Disadvantages Vertical integration may be necessary May miss out on other opportunities to create more value and increase profitability

© 2012 South-Western, a part of Cengage Learning Horizontal Integration The process of acquiring or merging with industry competitors to achieve the competitive advantage that comes with large size Merger- an agreement between two companies to pool their resources in a combined operation Acquisition - Occurs when a company uses capital resources to purchase another company. An increase in horizontal integration = an increased level of concentration in an industry

© 2012 South-Western, a part of Cengage Learning Horizontal Integration Advantages Lowers operating costs Increases product differentiation (can be accomplished through product bundling) Reduces rivalry within an industry Increases bargaining power over suppliers and buyers Disadvantages Problems with merging cultures, managers and operations. Problems with the Federal Trade Commission if a company grows too large

© 2012 South-Western, a part of Cengage Learning Vertical Integration Expanding operations into industries that produce inputs or into industries that use, distribute, or sell the company’s product A company can enter a new industry to increase its long-run profitability A company that concentrates on a single business may be missing out on the opportunity to create value through vertical integration

© 2012 South-Western, a part of Cengage Learning Vertical Integration Advantages Enables company to build barriers to new competition Facilitates investments in specialized assets Protects product quality Results in improved scheduling Disadvantages May actually increase cost of inputs Suppliers have less incentive to be efficient Ties a company into old, obsolescent, and high cost technology

© 2012 South-Western, a part of Cengage Learning Diversification A diversified company is one that operates in two or more industries in order to find ways to use distinctive competencies to increase the value of products in other industries to consumers and to increase long-run profitability A company may choose to diversify when they have excess resources

© 2012 South-Western, a part of Cengage Learning Diversification (cont’d) Diversification can help a company create value in 3 main ways: Permitting superior internal governance Transferring competencies among businesses Realizing economies of scope

© 2012 South-Western, a part of Cengage Learning Restructuring Restructuring- implementing strategies for reducing the scope of the company by removing exiting business areas Why restructure? Because the stock of highly diversified companies is often assigned a lower valuation relative to earnings than stocks of less diversified enterprises In an attempt to boost returns to shareholders

© 2012 South-Western, a part of Cengage Learning Restructuring (cont’d) Restructuring can be beneficial due to diminished advantages of vertical integration or diversification Restructuring can be a reaction to: Managers pursuing too much diversification Diversification for the wrong reasons Failed Acquisition

© 2012 South-Western, a part of Cengage Learning Exit Strategies Three main exit strategies: Divestment- most favorable Harvest- only works under specific conditions Liquidation- least favorable

© 2012 South-Western, a part of Cengage Learning Divestment Selling a business unit to the highest bidder A company can sell to: Independent Investors Other Companies

© 2012 South-Western, a part of Cengage Learning Harvest Halting investments in order to maximize short-to-medium term cash flow If employees catch on, morale can sink very quickly and the strategy may fail

© 2012 South-Western, a part of Cengage Learning Liquidation Shutting down the operation of a business or business unit Least attractive strategy because the company is required to write off its investments in the unit that is shutting down