Corporate-Level Strategy MANA 5336

2 Directional Strategies

3 Expansion Adaptive Strategy: – Orientation toward growth Expand, cut back, status quo? Concentrate within current industry, diversify into other industries? Growth and expansion through internal development or acquisitions, mergers, or strategic alliances? Directional Strategies

4 Basic Growth Strategies: Concentration – Current product line in one industry – Vertical Integration – Market Development – Product Development – Penetration Diversification – Into other product lines in other industries Directional Strategies

5 Expansion of Scope Basic Concentration Strategies: Vertical growth Horizontal growth Directional Strategies

6 Vertical growth – Vertical integration Full integration Taper integration Quasi-integration – Backward integration – Forward integration Directional Strategies

Stages in the Raw-Material-to- Consumer Value Chain UpstreamDownstream

Stages in the Raw-Material-to-Consumer Value Chain in the Personal Computer Industry End userDistributionAssembly Intermediate manufacturer Raw materials Examples: Dow Chemical Union Carbide Kyocera Examples: Intel Seagate Micron Examples: Apple Hp Dell Examples: Best Buy Office Max

Vertical Integration Integration backward into supplier functions – Assures constant supply of inputs. – Protects against price increases. Integration forward into distributor functions – Assures proper disposal of outputs. – Captures additional profits beyond activity costs. Integration choice is that of which value-adding activities to compete in and which are better suited for others to carry out.

Creating Value Through Vertical Integration Advantages of a vertical integration strategy: – Builds entry barriers to new competitors by denying them inputs and customers. – Facilitates investment in efficiency-enhancing assets that solve internal mutual dependence problems. – Protects product quality through control of input quality and distribution and service of outputs. – Improves internal scheduling (e.g., JIT inventory systems) responses to changes in demand.

Creating Value Through Vertical Integration Disadvantages of vertical integration – Cost disadvantages of internal supply purchasing. – Remaining tied to obsolescent technology. – Aligning input and output capacities with uncertainty in market demand is difficult for integrated companies.

12 Horizontal Growth – Horizontal integration Directional Strategies

13 Basic Diversification Strategies: – Concentric Diversification – Conglomerate Diversification Directional Strategies

14 Concentric Diversification – Growth into related industry – Search for synergies Directional Strategies

Concentration on a Single Business SEARS Coca-Cola McDonalds Southwest Airlines

Concentration on a Single Business Advantages – Operational focus on a single familiar industry or market. – Current resources and capabilities add value. – Growing with the market brings competitive advantage. Disadvantages – No diversification of market risks. – Vertical integration may be required to create value and establish competitive advantage. – Opportunities to create value and make a profit may be missed.

Diversification Related diversification – Entry into new business activity based on shared commonalities in the components of the value chains of the firms. Unrelated diversification – Entry into a new business area that has no obvious relationship with any area of the existing business.

J&J Related Diversification 3M Hewlett Packard Marriott

GE Unrelated Diversification Tyco Amer Group ITT

Reasons for Diversification Reasons to Enhance Strategic Competitiveness Economies of scope/scale Market power Financial economics Incentives Resources ManagerialMotives

Incentives with Neutral Effects on Strategic Competitiveness Anti-trust regulation Tax laws Low performance Uncertain future cash flows Firm risk reduction Incentives Resources ManagerialMotives Reasons for Diversification

Resources and Diversification Besides strong incentives, firms are more likely to diversify if they have the resources to do so Besides strong incentives, firms are more likely to diversify if they have the resources to do so Value creation is determined more by appropriate use of resources than incentives to diversify Value creation is determined more by appropriate use of resources than incentives to diversify

Managerial Motives (Value Reduction) Diversifying managerial employment risk Increasing managerial compensation Incentives Resources ManagerialMotives Reasons for Diversification

Bureaucratic Costs and the Limits of Diversification Number of businesses – Information overload can lead to poor resource allocation decisions and create inefficiencies. Coordination among businesses – As the scope of diversification widens, control and bureaucratic costs increase. – Resource sharing and pooling arrangements that create value also cause coordination problems. Limits of diversification – The extent of diversification must be balanced with its bureaucratic costs.

Relationship Between Diversification and Performance Performance Level of Diversification Dominant Business Unrelated Business Related Constrained

Restructuring: Contraction of Scope Why restructure? – Pull-back from overdiversification. – Attacks by competitors on core businesses. – Diminished strategic advantages of vertical integration and diversification. Contraction (Exit) strategies – Retrenchment – Divestment– spinoffs of profitable SBUs to investors; management buy outs (MBOs). – Harvest– halting investment, maximizing cash flow. – Liquidation– Cease operations, write off assets.

Why Contraction of Scope? The causes of corporate decline – Poor management– incompetence, neglect – Overexpansion– empire-building CEO’s – Inadequate financial controls– no profit responsibility – High costs– low labor productivity – New competition– powerful emerging competitors – Unforeseen demand shifts– major market changes – Organizational inertia– slow to respond to new competitive conditions

The Main Steps of Turnaround Changing the leadership – Replace entrenched management with new managers. Redefining strategic focus – Evaluate and reconstitute the organization’s strategy. Asset sales and closures – Divest unwanted assets for investment resources. Improving profitability – Reduce costs, tighten finance and performance controls. Acquisitions – Make acquisitions of skills and competencies to strengthen core businesses.

Adaptive Strategies Maintenance of Scope Enhancement Status Quo

Market Entry Strategies Acquisition: a strategy through which one organization buys a controlling interest in another organization with the intent of making the acquired firm a subsidiary business within its own portfolio Acquisition: a strategy through which one organization buys a controlling interest in another organization with the intent of making the acquired firm a subsidiary business within its own portfolio Licensing: a strategy where the organization purchases the right to use technology, process, etc. Licensing: a strategy where the organization purchases the right to use technology, process, etc. Joint Venture: a strategy where an organization joins with another organization(s) to form a new organization Joint Venture: a strategy where an organization joins with another organization(s) to form a new organization

Acquisitions Reasons for Making Acquisitions Increase market power Overcome entry barriers Cost of new product development Increase speed to market Increasediversification Reshape firm’s competitive scope Lower risk compared to developing new products Learn and develop new capabilities

Diversification and Corporate Performance: A Disappointing History A study conducted by Business Week and Mercer Management Consulting, Inc., analyzed 150 acquisitions that took place between July 2000 and July Based on total stock returns from three months before, and up to three years after, the announcement: 30 percent substantially eroded shareholder returns. 20 percent eroded some returns. 33 percent created only marginal returns. 17 percent created substantial returns. A study by Salomon Smith Barney of U.S. companies acquired since 1997 in deals for $15 billion or more, the stocks of the acquiring firms have, on average, under-performed the S&P stock index by 14 percentage points and under-performed their peer group by four percentage points after the deals were announced.

Acquisitions Problems With Acquisitions Integrationdifficulties Inadequate evaluation of target Large or extraordinary debt Inability to achieve synergy Too much diversification Managers overly focused on acquisitions Resulting firm is too large

Strategic Alliance A strategic alliance is a cooperative strategy in which A strategic alliance is a cooperative strategy in which – firms combine some of their resources and capabilities – to create a competitive advantage A strategic alliance involves A strategic alliance involves – exchange and sharing of resources and capabilities – co-development or distribution of goods or services

CombinedResourcesCapabilities Core Competencies ResourcesCapabilities ResourcesCapabilities Strategic Alliance Firm A Firm B Mutual interests in designing, manufacturing, or distributing goods or services

Types of Cooperative Strategies Joint venture: two or more firms create an independent company by combining parts of their assets Joint venture: two or more firms create an independent company by combining parts of their assets Equity strategic alliance: partners who own different percentages of equity in a new venture Equity strategic alliance: partners who own different percentages of equity in a new venture Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing

Strategic Alliances Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurement Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurement Vertical Alliance Supplier vertical complementary strategic alliance is formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value for both firmsvertical complementary strategic alliance is formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value for both firms outsourcing is one example of this type of allianceoutsourcing is one example of this type of alliance

Strategic Alliances Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurement Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurement Buyer Potential Competitors horizontal complementary strategic alliance is formed between partners who agree to combine their resources and skills to create value in the same stage of the value chainhorizontal complementary strategic alliance is formed between partners who agree to combine their resources and skills to create value in the same stage of the value chain focus on long-term product development and distribution opportunities the partners may become competitorsthe partners may become competitors requires a great deal of trust between the partnersrequires a great deal of trust between the partners Buyer