1. Chapter 7 Corporate Strategies I
Moses Acquaah, Ph.D.
377 Bryan Building
Phone: (336)

2. Lecture Objectives Define corporate strategy.
Explain the difference between a single-business firm and a multiple-business firm.
Discuss how corporate strategy is related to the other firm strategies.
Explain the corporate strategic directions available to firms.
Describe the various organizational growth strategies.
Discuss the reasons/motives for diversification
Discuss the advantages and disadvantages of related & unrelated diversification.
Explain how growth strategies can be implemented.
Describe when organizational stability is an appropriate strategic choice.

3. What is Corporate Strategy?
Those strategies concerned with the broad and long-term questions of
what business(es) the organization is in or wants to be in & what it wants to do with those businesses
Task involves
Moves to enter new businesses
Actions to boost combined performance of businesses
Ways to capture synergy among related businesses
Establishing investment priorities & steering corporate resources into most attractive units

4. Single & Multiple Business Organizations
Single business organizations
Operates primarily in only one industry (e.g., Coca-Cola – Beverage Industry; Wrigley Jr. Company – Chewing Gum)
Multiple Business Organizations
Operates in more than one industry
Example: PepsiCo – Snack Food Industry business (Frito Lay); & Beverage Industry
Philip Morris Companies – Tobacco Industry; Brewery Industry (Miller Brewery); & Food Processing Industry (Kraft General Foods).

5. Corporate, Competitive & Functional Strategies
Corporate strategy establishes the overall direction that the organization hopes to go.
Competitive & functional strategies provide the means or mechanisms for making sure the organization gets there.

6. Possible Corporate Strategic Directions
(1) Moving the organization ahead -- Organizational Growth
(2) Keeping the organization where it is -- Organizational Stability
(3) Reversing the organization’s weaknesses or decline -- Organizational Renewal

7. ORGANIZATIONAL GROWTH
Growth strategy
Involves the attainment of specific growth objectives by increasing the level of an firm’s operations
Typical growth objectives for businesses
Increase in sales revenues
Increase in earnings or profits
Other performance measures
Growth objectives of not-for-profit businesses
Increasing clients served or patrons attracted
Broadening the geographic area
Increasing programs offered

8. Types of Growth Strategies
International
Concentration
Organizational
Growth
Diversification
Related
Unrelated
Vertical
Integration
Backward
Forward
Horizontal
Integration

9. Concentration Strategy
A growth strategy where the firm
Concentrates on its primary line of business
Looks for ways to meet its growth objectives through increasing its level of operation in this primary business
When a single-business organization pursues growth, it is using the concentration strategy

10. Concentration Strategy
Four concentration strategy options
Products
Current
New
Product
Development
Current
Product-Market
Exploration
Customers
Product/Market
Diversification
Market
Development
New

11. Concentration Strategy
Product-Market Exploration Option
Describes attempts by firm to increase sales of its current product(s) in its current market(s) by depending on its functional & competitive strategies
Product Development Option
Firm create new product for use by its current market (customers)

12. Concentration Strategy
Market Development Option
When a firm sell its current products in new markets (additional geographic areas or market segments not currently served by firm)
Product-Market Diversification Option
Where firm seeks to expand both into new products & new markets
Single-business firm becomes a multiple-business firm since it is now operating in a different industry

13. Concentration Strategy
Advantage
Organization becomes very good at what it does
Drawback
Organization is vulnerable to industry and other external environmental shifts
Concentration strategy is used by both small-sized and large organizations

14. Vertical Integration Strategies
An organization’s attempt to gain control of
Its inputs (backward integration) -- supplier
Its output (forward integration) -- distributor
Or both inputs and output
Purpose is to (1) reduce resource acquisition costs, & (2) deal with inefficient operations
Vertical Integration
Considered a growth strategy because the firm’s operations are expanded beyond primary business
Mixed empirical results as to whether strategy helps or hurt performance
What is the role of outsourcing in achieving same objective as vertical integration?

15. Vertical Integration Strategies
Benefits
Reduced purchasing & selling costs
Improved coordination of functions & capabilities
Protected proprietary technology
Costs
Reduced flexibility as firm is locked into products & technology
Create an exit barrier due to existence of assets that are hard to sell
Difficulties in integrating various operations
Financial costs of acquiring or starting up

16. Horizontal Integration Strategies
Expanding the firm's operations through combining with competitors operating in the same industry & doing the same things
It is an appropriate corporate growth strategy as long as
It enables the company to meet its growth objectives
It can be strategically managed to attain a sustainable competitive advantage
It satisfies legal and regulatory guidelines

17. Diversification Strategies
A corporate growth strategy in which a firm expands its operation by moving into a different industry
Many reasons or motives for diversification
Two major types of diversification
Related (concentric) diversification
Unrelated (conglomerate) diversification

18. Why Do Firms Diversify? To Grow
Increase sales & profitability beyond what firm’s core businesses can provide
Managerial self-serving behavior -- compensation
Managerial “hubris” -- pride or status that come from managing a large business
To more fully utilize existing resources and capabilities
Skills in sales & marketing, general management skills & knowledge, distribution channels, etc.

19. Why Do Firms Diversify? Risk reduction and/or spreading
Escape from unattractive or undesirable industries (e.g., tobacco & oil companies)
Stability of profit flows (CAPM: systematic vs. unsystematic risks; shareholders & diversified portfolios)
To make use of surplus cash flows
Large cash balances attract corporate raiders
Use cash balances to avoid hostile takeovers
To build shareholder value
Create synergy among the businesses of a firm
Make = 5: The whole should be greater than the sum of the parts

20. Why Do Firms Diversify Synergy can be obtained in three ways
Exploiting economies of scale
Exploiting economies of scope
Efficient allocation of capital through the use of portfolio management techniques
Problems that prevent diversified firms from realizing synergies
A poor understanding of how diversification activities will “fit” or be coordinated with existing businesses
Dangers or risks associated with the acquisition of businesses
Problems with the development of internal businesses

21. Why Do Firms Diversify?
Diversification is capable of increasing shareholder value if it passes three tests:
The attractiveness test: The industry must be structurally attractive or capable of being made attractive
The cost-of-entry test: The cost of entry must not capitalize all future profits
The better-off test: Either the new unit must gain competitive advantage from its link with the corporation or vice versa (i.e. synergy)

22. Related (Concentric) Diversification
Diversifying into a different industry but one that’s related in some ways to the organization’s current operations
Search for strategic “synergy”, which is the performance of the sum of the parts is better than the whole
The idea that = 5
Synergy happens because of the interactions and the interrelatedness of the combined operations and the sharing of resources, capabilities, & distinctive competencies

23. Related Diversification
Builds shareholder value by capturing cross-business “strategic fits”
Transferring skills & capabilities from one business to another
Sharing facilities or resources to reduce costs
Leveraging the use of common brand name
Combining resources to create new competitive strengths and capabilities

24. Related Diversification
Advantages or Benefits
Opportunities to achieve economies of scale and scope through skill transfers, lower costs, common brand name, technology, etc.
Opportunities to expand product or service offerings and preserve unity in businesses
Disadvantages
Complexity and difficulty of coordinating different, but related businesses (e.g. Philip Morris’ General Food and Kraft subsidiaries)
Related diversification is a strategy-driven approach to creating shareholder value

25. Unrelated Diversification
Diversifying into completely different industry from the firm’s current operations
Firm move into industries where there is
No strategic fit to be exploited
No meaningful value chain relationships
No unifying strategic theme
E.g.: GE; Walt Disney; Sara Lee
Approach is venture into any business with good profitability prospects

26. Unrelated Diversification
Targets for unrelated diversification
Firms with undervalued assets
Firms in financial distress
Firms with bright growth prospects but limited capital
Advantages
Business risk spread over different industries
Efficient allocation of capital resources
Stability of profits
Enhanced shareholder value

27. Unrelated Diversification
Disadvantages
Difficulties of competently managing many diverse businesses
No strategic fits which can be leveraged into competitive advantage
Unrelated diversification is a finance-driven approach to creating shareholder value

28. Implementing Growth Strategies
Mergers & Acquisitions
A merger is a legal transaction in which two or more organizations combine through an exchange of stock, but only one firm actually remain
An acquisition is an outright purchase of an organization by another
What is a Takeover?

29. Implementing Growth Strategies
Internal Development
Organization chooses to expand its operation by starting a new business from scratch
Choice between mergers-acquisition and internal development depends on: (See Table 7-4)
The new industry’s barriers to entry
Relatedness of new business to the existing one
Speed & development cost associated with each approach
Risks associated with each approach
Stage of the industry life cycle

30. Implementing Growth Strategies
Strategic Partnering
When two or more firms establish a legitimate relationship by combining their resources, core competencies, distinctive capabilities for some business purpose
Arrangement can be used to implement any of the growth strategies
Vertical Integration
Horizontal Integration
Related Diversification

31. Implementing Growth Strategies
Types of Strategic Partnerships
Joint Venture (JV)
Two or more separate organization form an independent organization for strategic purposes
Partners usually own equal shares of new venture
Used when partners do not want to be legally joined
Long-Term Contract
Legal contract between organizations covering a specific business purpose
Typically between an organization & its suppliers

32. Implementing Growth Strategies
Types of strategic Partnerships (cont’d)
Strategic Alliance
Two or more firms share resources, capabilities or competencies to pursue some business purpose
Similar to JV’s but no formation of a separate entity
Often pursued in order to
Partners reap benefits of expanded operations

33. ORGANIZATIONAL STABILITY
A strategy where the organization maintains its current size and current level of business operations
When is stability an appropriate strategy?
Industry is in a period of rapid upheaval with several key industry & external forces drastically changing, making future highly uncertain
Industry is facing slow or no growth opportunities
Many small business owners follow stability strategy indefinitely

34. ORGANIZATIONAL STABILITY
When is stability an appropriate strategy?
Organization has just completed a frenzied period of growth & needs to have some “down” time in order for its resources & capabilities to build up strength again
large firm in large industry at maturity stage of industry life cycle
Implementation of Stability Strategy
Not expanding organization’s level of operation
Should be a short-run strategy