1. Corporate-level Strategy
CHAPTER 7
Corporate-level Strategy
and Restructuring

2. Learning Objectives
Understand the basic corporate-level strategies and their strengths and weaknesses
Identify the factors that are necessary for a diversification strategy to produce synergy
Analyze existing and suggest potential corporate-level competencies for a firm
Suggest methods to avoid pitfalls and enhance the probability of success in mergers and acquisitions
Understand the basic types of restructuring and how restructuring can be successfully executed
Create a portfolio matrix for a corporation and understand what it means

3. Corporate-level Strategy Formulation Responsibilities
Direction Setting
Establishment and communication of organizational mission, vision, enterprise strategy and long-term goal
Development of Corporate-level Strategy
Broad approach to corporate-level strategy—concentration, vertical integration, diversification, international expansion
Selection of resources and capabilities in which to develop corporate-level distinctive competencies
Selection of Businesses and Portfolio Management
Buy and sell businesses
Allocation of resources to business units for capital equipment, R&D, etc.

4. Corporate-level Strategy Formulation Responsibilities
Selection of Tactics for Diversification and Growth
Choice among methods of diversification—internal venturing, acquisitions, joint ventures
Management of Resources
Acquisition of resources and/or development of competencies leading to a sustainable competitive advantage for the entire corporation
Hire, fire and reward business-unit managers
Ensure that the business units (divisions) within the corporation are well managed, including strategic management. Provide training where appropriate
Develop a high-performance corporate management structure
Develop control systems to ensure that strategies remain relevant and that the corporation continues to progress towards its goals

5. Corporate-level Strategies
Concentration
Internal
Growth
Mergers
and
Acquisitions
Joint
Ventures
Vertical Integration
Concentration
Related Diversification
Unrelated Diversification

6. Advantages and Disadvantages of Concentration
Allows an organization to master one business
Less strain on resources, allowing more of an opportunity to develop a sustainable competitive advantage
Lack of ambiguity concerning strategic direction
Often found to be a profitable strategy, depending on the industry
Disadvantages
Dependence on one area is problematic if the industry is unstable
Primary product may become obsolete
Difficult to grow when the industry matures
Significant changes in the industry can be very hard to deal with
Cash flow can be a serious problem

7. Advantages and Disadvantages of Vertical Integration
Internal Costs
Need for overhead to coordinate vertical integration
Burden of excess capacity if not all output is used
Poorly organized firms do not enjoy enough synergy to compensate for the higher costs
Internal Benefits
Integration economies can eliminate steps, reduce duplication and cut costs
Improved coordination reduces inventorying and other costs
Avoids time-consuming tasks, such as price shopping, communicating design details and negotiating contracts

8. Advantages and Disadvantages of Vertical Integration
Competitive Dangers
Obsolete processes may be perpetuated
Reduces strategic flexibility due to being “locked in” to a business
May link to unprofitable adjacent businesses
Lose access to information from suppliers or customers
May not be potential for synergy because vertically integrated businesses are so different
May use the wrong method of vertical integration (i.e., full integration instead of contracting)
Competitive Benefits
Avoid getting shut out of the market for rare inputs
Improve marketing or technological intelligence
Can create differentiation through coordinated effort
Superior control of firm’s market environment
Increased ability to create credibility for new products
Synergies could be created by coordinating vertical activities carefully

9. Transactions Costs Transactions costs economics Make or Buy Decisions
Study of economic transactions and their costs
Transactions costs are reflected by the time and resources devoted to contract creation and enforcement
Make or Buy Decisions
Firms should usually buy what they need in the market as long as they do not have to expend an undue amount of time or other resources in contract creation and enforcement
A market failure means that these costs are high and it is in the best interests of the firm to vertically integrate instead of buying from the market

10. Transactions Costs Transactions costs tend to be high when:
The future is highly uncertain
There are only one or a small number of suppliers
One party to the transaction has superior information
Asset specificity--asset investment that can be used for only one purpose
Transaction costs are high (market failure) when:
Highly uncertain future
One or small number of suppliers
Knowledge differences
Asset specificity

11. Substitutes for Full Vertical Integration
Taper Integration
Produce some in-house and buy the rest
Quasi Integration
Purchase most of what you need from a supplier in which the purchaser holds an ownership stake (i.e., stock)
Long-term Contracts
Helps achieve some of the benefits of vertical integration, such as more assurance of supply or more control over quality

12. Reasons for Diversification
Strategic Reasons
Risk reduction through investments in dissimilar businesses or less dynamic environments
Stabilization or improvement in earnings
Improvement in growth
Use of excess cash from slower-growing traditional areas (a form of organizational slack)
Application of resources, capabilities or core competencies to related areas
Generation of synergy through economies of scope
Use of excess debt capacity (also a form of organizational slack)
Ability to learn new technologies
Increase in market power

13. Reasons for Diversification
Motives of the CEO
Desire to increase the value of the firm
Desire to increase personal power and status
Desire to increase personal rewards such as salary and bonuses
Craving for a more interesting and challenging management environment

14. Requirements for the Creation of Synergy
Relatedness
Tangible--same physical resources for multiple purposes
Intangible--capabilities developed in one area can be used elsewhere
Managerial actions to share resources or skills
Benefits must exceed costs of integration

15. Requirements for the Creation of Synergy
Fit
Strategic--matching of organizational capabilities--complementary resources and skills (based on relatedness, as described above)
Organizational--similar processes, cultures, systems and structures
Dominant logic--the way managers deal with managerial tasks, the things they value, and their general management approach

16. Potential Sources of Synergy from Related Diversification
Operations Synergies
Common parts designs: Larger purchased quantities allows lower cost per unit
Common processes and equipment: Combined equipment purchases and engineering support allow lower costs
Common new facilities: Larger facilities may allow economies of scale

17. Potential Sources of Synergy from Related Diversification
Operations Synergies (Continues)
Shared facilities and capacity: Improved capacity utilization allows lower per unit overhead costs
Combined purchasing activities: Increased influence leading to lower costs, and lower cost shipping arrangements
Shared computer systems: Lower per unit overhead costs and can spread the risk of investing in higher priced systems
Combined training programs: Lower training costs per employee

18. Potential Sources of Synergy from Related Diversification
R&D / Technology
Shared R&D programs: Spread overhead cost and risk of R&D to more than one business
Technology transfer: Faster, lower cost adoption of technology at the second business
Development of new core businesses: Access to capabilities and innovation not available in the market
Multiple use of creative researchers: Opportunities for innovation across business via individual experience and business analogy

19. Potential Sources of Synergy from Related Diversification
Marketing
Shared brand names: Build market influence faster and at lower cost through a common name
Shared advertising and promotion: Lower unit costs and tie-in purchases
Shared distribution channels: Bargaining power to improve access and lower costs
Cross-selling and bundling: Lower costs and more integrated view of the marketplace

20. Potential Sources of Synergy from Related Diversification
Management
Similar industry experience: Faster response to industry trends
Transferable core skills: Experience with previously tested, innovative strategies and skills in strategy and program development

21. Forces that Undermine Synergies
Management Ineffectiveness
Too little effort to coordinate between businesses means synergies will not be created
Too much effort to coordinate between businesses can stifle creativity
Administrative Costs
Additional layers of management and staff add costs
Executives in larger organizations are often paid higher salaries
Delays from and expense of meetings and planning sessions necessary for coordination
Extra travel and communications costs to achieve coordination

22. Forces that Undermine Synergies
Poor Strategic Fit
Relatedness without strategic fit decreases the opportunity for synergy
Overstated (or imaginary) opportunities for synergies
Industry evolution that undermines strategic fit
Overvaluing potential synergies often results in paying too much for a target firm or in promising too much improvement to stakeholders
Poor Organizational Fit
Incompatible cultures and management styles
Incompatible strategies, priorities, and reward systems
Incompatible production processes and technologies
Incompatible computer and budgeting systems

23. Unrelated Diversification
Conglomerates
Large, unrelated diversified firms
Popularity of Unrelated Diversification in the 50s, 60s and early 70s
Rigid antitrust enforcement
Financial theories supported the idea that risk could be reduced by investing in businesses in unrelated businesses with uneven revenue streams

24. Unrelated Diversification
Most Research Suggests that Unrelated Diversification is Not High Performing
Places unusual demands on managers
Trend is towards reducing diversification (refocusing)
In spite of the negative evidence, some firms have been successful with this strategy

25. Mergers and Acquisitions
M&A Basics
Mergers occur any time two organizations combine into one
Acquisitions occur when one firm buys another firm
Most mergers are in the form of an acquisition, so these terms are often used as synonyms
M&As tend to depress profitability, reduce innovation and increase leverage, at least in the short run
Industry Consolidation
Occurs as competitors merge together
A dominant trend in the U.S. and elsewhere

26. Mergers and Acquisitions
Corporate Raiders
Engage in acquisitions, typically against the will of target companies (called hostile)
Hostile acquisitions tend to be more expensive
May motivate target firm managers to be more responsive to stockholder interests (reduce agency costs)

27. Problems with Mergers and Acquisitions
High Costs
High Premiums Typically Paid By Acquiring Firms
Increased Interest Costs from Higher Leverage
High Advisory Fees and Other Transaction Costs
Poison Pills—things target companies do so they are less attractive to takeover

28. Problems with Mergers and Acquisitions
Strategic Problems
High Turnover Among the Managers of the Acquired Firm
Short-Term Managerial Distraction—takes managers away from the critical tasks of the core businesses
Long-Term Managerial Distraction—lose sight of the factors that lead to success in their core businesses
Less Innovation
No Organizational Fit—cultures or systems don’t combine well
Increased Risk—increased leverage. Also the risk of unsuccessful management

29. Successful Mergers and Acquisitions
Low debt
Friendly negotiations
Complementary resources (relatedness)
Cultures and management styles are similar (organizational fit)
Post-merger sharing of resources
Due diligence before merger
Learning occurs

30. Corporate-level Distinctive Competencies
Come from achieving shared advantage across the businesses of a multi-business firm
Integrated managerial skills
Attracting and retaining competent top managers
Shared use of resources that are hard to acquire except through experience
A well-developed strategic planning system
Shared use of resources that contribute significantly to perceived customer benefits
Excellent R&D
Resources that can be widely applied across businesses
Excellence in tax management

31. Strategic Restructuring
Retrenchment (Downsizing)
Turnaround through workforce reductions, plant closings, outsourcing, cost controls, etc.
Downsizing is dangerous to the health of an organization
Refocusing (Downscoping)
Reducing diversification through selling off nonessential businesses
Divestiture--reverse acquisition
Spin-off--current shareholders are issued stock
Chapter 11 Reorganization
Legal filing allowing protection from creditors and others while problems are worked out
Should probably be a strategy of last resort

32. Strategic Restructuring
Leveraged Buyouts
Private purchase of a business unit by managers, employees, unions or private investors
High levels of debt
Asset sales typically lead to a smaller, more focused firm
Stifle innovation
Changes to Organizational Design
Switch to a new organizational structure
More decentralized or more centralized, depending on needs
Linked also to changes in the culture of a firm
Reengineering involves radical redesign of core business processes to achieve dramatic improvements in efficiency and quality

33. Boston Consulting Group (BCG) Matrix
High
Star ?
Business
Growth
Rate
Cash
Cow
Dog
Low
High
Low
Relative Competitive Position (Relative Market Share)

34. Major Concepts in Chapter 7
Corporate-level strategy focuses on the selection of businesses in which the firm will compete, and on the tactics used to enter and manage those businesses
Primary corporate-level responsibilities include establishing direction for the whole organization, formulation of a corporate strategy, selection of businesses, selection of growth tactics, and resource management
Concentration is associated with a focus on one business area, which allows the company to specialize; however, the firm is dependent on one business for its growth and profitability

35. Major Concepts in Chapter 7
Vertical integration allows a firm to become its own supplier or customer, which can provide more control over processes and quality. However, the firm is still dependent on one business
According to the theory of transaction costs economics, firms should generally purchase what they need from the market, unless transactions costs are high.
Unrelated diversification was popular in the past due to financial theories and rigid antitrust enforcement; however, unrelated firms are hard to manage and there is a recent trend towards refocusing

36. Major Concepts in Chapter 7
Mergers and acquisitions are the quickest way to diversify; however, they are fraught with difficulties, and most of them fail to meet expectations
Restructuring approaches include retrenchment (downsizing), refocusing (downscoping), Chapter 11 reorganization, leveraged buyouts (LBOs) and changes to organizational design