1. Chapter 6
Corporate Strategies

2. Learning Objectives To understand:
the types of corporate strategies, including concentration, vertical integration and both related and unrelated diversification
merger and acquisition strategies and their advantages and disadvantages
how firms use strategic alliances and joint ventures and their advantages and disadvantages
the appropriate use and interpretation of portfolio models.

3. The Strategic Management Process
Internal and External Analysis
Strategy Formulation
(corporate and business level)
Strategic
Direction
Strategy Implementation
and Control
Strategic Restructuring

4. Major Corporate-Level Strategy Formulation Responsibilities
Direction setting—Mission, vision, ethics, long-term goals for the entire corporation
Development of corporate-level strategy—Selection of broad approach to corporate-level strategy: concentration, vertical integration, diversification, international expansion. Selection of resources and capabilities in which to build corporate-wide distinctive competencies
Selection of businesses and portfolio management—Management of the corporate portfolio. Emphasis given to each business unit via resource allocations.
Selection of tactics for diversification and growth–Internal venturing, acquisitions and/or joint ventures
Management of resources—Acquisition and/or development of competencies leading to sustainable competitive advantage. Oversee development of business-level strategies in the business units. Develop an effective management and organizational structure.

5. Corporate Strategies Concentration Vertical Integration
Unrelated Diversification
Related Diversification
Concentration strategies involve participation in one business. Often, over time, firms decide it is in their best interest to move into other businesses as well. They can move forward or backward in their own supply chain (vertical integration), move into completely different businesses, or move into businesses that are similar to their core business.

6. Advantages of Concentration
Allows a firm to master one business
In-depth knowledge
Easier to achieve competitive advantage
Organizational resources under less strain
Prevents proliferation of management levels and staff functions
Sometimes found more profitable than other strategies (dependent on industry, of course)
Most organizations begin with a single or small group of products and services and a single market, referred to as a concentration strategy.
Concentration strategies have sometimes been found to be more profitable than other types of corporate, or multi-business, strategies. The profitability of a concentration strategy is largely dependent on the industry in which a firm is involved.
A single business approach allows an organization to master one business and industry environment.
Since all resources are directed at doing one thing well, the organization may be in a better position to develop the resources and capabilities necessary to establish a sustainable competitive advantage.
A concentration strategy can prevent the proliferation of management levels and staff functions that are often associated with large multi-business firms, and that add overhead costs and limit flexibility of business units.
A concentration strategy allows a firm to invest profits back into the business, rather than competing with other corporate holdings for the investment funds.

7. Disadvantages of Concentration
Risky in unstable environments
Product obsolescence and industry maturity
Cash flow problems
The risks of a concentration strategy include: over dependency on one product or business area, which may change dramatically, product obsolescence and industry maturity, uneven cash flow and profitability, and insufficient challenge and stimulation for management.
Many successful organizations abandon their concentration strategies at some point due to market saturation, increased competition or some other reason.
Discussion Prompt: In recent years, Amazon.com has moved from on-line book retailing, to retailing of a much broader line of products including electronics, toys, and home and garden equipment. Has Amazon moved from a concentration strategy, or do they continue to operate in one business? (This question encourages students to think about industry definition and industry boundaries.)

8. The Vertical Supply Chain
Final
Product
Manufac-
turing
Raw
Materials
Extraction
Primary
Manufac-
turing
Whole-saling
Retailing
Vertical integration is the term used to describe the extent to which a firm is involved in several stages of the industry supply chain.
A typical industry supply chain involves extraction, primary manufacturing, final product manufacturing, wholesaling, and retailing.
Vertical Integration: The extent to which an organization
is involved in multiple stages of the industry supply chain

9. When to Vertically Integrate
Common reasons for vertical integration
Increased control over quality of supplies or the way the product is marketed
Better information about supplies or markets
Greater opportunities for differentiation through coordinated effort
Opportunity to make greater profits by performing another function in the vertical supply chain
Firms may pursue vertical integration for a variety of reasons, including increased control over the quality of supplies or the way a product is marketed, better or more complete information about supplies or markets, greater opportunity for product differentiation through coordinated effort, or simply because they believe they can enhance profits through assuming one of the functions that was previously performed by another company.
Transaction cost economics, which is the study of economic exchanges and their costs, provides a cost perspective on vertical integration that helps explain when vertical integration may be appropriate.
Research has not generally found vertical integration to be a highly profitable strategy relative to the other corporate-level strategies. Vertical integration can "lock firms in" to unprofitable adjacent businesses.
Vertical integration may be associated with reduced administrative, selling, and R&D costs, but higher production costs, which may be a result of a lack of incentive on the part of internal suppliers to keep their costs down.
Vertical integration often requires substantially different skills than those currently possessed by the firm, making it similar to unrelated diversification.
Discussion Prompt: Vertical integration is becoming an increasingly common strategy in the broadcast and entertainment industries. The actions of AOL Time Warner, Viacom, and others illustrate this trend of involving the same company in the creation, production, distribution, and delivery to consumers of entertainment and news content. What are the likely consequences of these trends over time? Will these companies experience some of the same problems that other vertically integrated firms have experienced?

10. Transactions Costs and Vertical Integration
Basic Proposition: Firms should buy what they need from the market as long as transactions costs are low.
Transactions costs are reflected by the time and resources needed to create and enforce a contract to purchase goods and services.
If transactions costs are high, the market fails to provide the best deal
Transactions costs are high (the market fails) if:
Highly uncertain future
One or small number of suppliers
One party to a transaction has more knowledge about the transaction than the other
An organization has to invest in an asset that can only be used to produce a specific good or service (asset specificity)
Firms may pursue vertical integration for a variety of reasons, including increased control over the quality of supplies or the way a product is marketed, better or more complete information about supplies or markets, greater opportunity for product differentiation through coordinated effort, or simply because they believe they can enhance profits through assuming one of the functions that was previously performed by another company.
Transaction cost economics, which is the study of economic exchanges and their costs, provides a cost perspective on vertical integration that helps explain when vertical integration may be appropriate.
Research has not generally found vertical integration to be a highly profitable strategy relative to the other corporate-level strategies. Vertical integration can "lock firms in" to unprofitable adjacent businesses.
Vertical integration may be associated with reduced administrative, selling, and R&D costs, but higher production costs, which may be a result of a lack of incentive on the part of internal suppliers to keep their costs down.
Vertical integration often requires substantially different skills than those currently possessed by the firm, making it similar to unrelated diversification.
Discussion Prompt: Vertical integration is becoming an increasingly common strategy in the broadcast and entertainment industries. The actions of AOL Time Warner, Viacom, and others illustrate this trend of involving the same company in the creation, production, distribution, and delivery to consumers of entertainment and news content. What are the likely consequences of these trends over time? Will these companies experience some of the same problems that other vertically integrated firms have experienced?

11. Unrelated Diversification
Large, highly diversified firms are called conglomerates
Not a high performing strategy for most firms (with a few notable exceptions) in industrialized nations like the U.S.
Difficult for a top manager to understand and appreciate the core technologies, key success factors and special requirements of each business area
Firms that pursue unrelated diversification are often called conglomerates.
Research has demonstrated that unrelated firms have lower profitability and higher levels of risk than firms pursuing other corporate-level strategies.
Unrelated diversification places significant demands on corporate-level executives due to increased complexity and technological changes across industries, which may reduce the effectiveness of management.

12. Related Diversification
Based on tangible and intangible relatedness
In theory, can lead to synergy (but synergy is often illusive)
Often a higher performing strategy than unrelated diversification (lower risk and higher profitability)
Can lead to corporate-level distinctive competencies
Related diversification is based on similarities that exist among the products, services, markets, or resource conversion processes of two businesses. These similarities are supposed to lead to synergy, which means that the whole is greater than the sum of its parts.
Most of the research on diversification strategies indicates that some form of relatedness among diversified businesses, rather than unrelatedness, leads to higher financial performance.
Relatedness comes in two forms, tangible and intangible. Tangible relatedness means that the organization has the opportunity to use the same physical resources for multiple purposes.
Intangible relatedness occurs any time capabilities developed in one area can be applied to another area. When executed properly, intangible relatedness can result in managerial synergy

13. Requirements for Synergy Creation
Relatedness
Tangible--same physical resources for multiple purposes
Intangible--capabilities developed in one area can be used elsewhere
(continued)
Examples of synergy resulting from tangible relatedness include 1) using the same marketing or distribution channels for multiple related products, 2) buying similar raw materials for related products through a centralized purchasing office to gain purchasing economies, 3) providing corporate training programs to employees from different divisions that are all engaged in the same type of work, 4) advertising multiple products simultaneously, and 5) manufacturing in the same plants.
Synergy based on intangible resources such as brand name or management skills and knowledge may be more conducive to the creation of a sustainable competitive advantage, since intangible resources are hard to imitate and are never used up.

14. Requirements for Synergy Creation
Fit
Strategic--matching of organizational capabilities--complementary resources and skills
Organizational--similar processes, cultures, systems and structures
Managerial actions to share resources and skills
Benefits must outweigh costs of integration
Even if relatedness is evident, synergy has to be created, which means that the two related businesses must fit together and that organizational managers must work at creating efficiencies from the combination process.
Strategic fit refers to the complementary matching of strategic organizational capabilities. If two organizations in two related businesses combine their resources, but they are both strong in the same areas and weak in the same areas, then the potential for synergy is diminished.
Organizational fit occurs when two organizations or business units have similar management processes, cultures, systems and structures. Organizational fit makes organizations compatible, which facilitates resource sharing, communication, and transference of knowledge and skills.

15. Diversification Methods
Internal Ventures
Mergers and Acquisitions
Joint Ventures
Concentration strategies involve participation in one business. Often, over time, firms decide it is in their best interest to move into other businesses as well. They can move forward or backward in their own supply chain (vertical integration), move into completely different businesses, or move into businesses that are similar to their core business.

16. Internal Ventures
Internal ventures make use of the research and development programs of the organization
Provides high level of control over the venture
Proprietary information need not be shared with other firms
All profits are retained by the venturing company
Disadvantages of internal ventures:
Risk of failure is high
They take a lot of time
Concentration strategies involve participation in one business. Often, over time, firms decide it is in their best interest to move into other businesses as well. They can move forward or backward in their own supply chain (vertical integration), move into completely different businesses, or move into businesses that are similar to their core business.

17. Mergers and Acquisitions
Mergers and acquisitions are sometimes seen as a way to “buy” innovation rather than having to produce it in-house:
Fast way to enter new markets
Acquire new products or services
Learn new technologies
Acquire needed knowledge and skills
Vertically integrate
Broaden markets geographically
Fill needs in the corporate portfolio
Concentration strategies involve participation in one business. Often, over time, firms decide it is in their best interest to move into other businesses as well. They can move forward or backward in their own supply chain (vertical integration), move into completely different businesses, or move into businesses that are similar to their core business.

18. Mergers and Acquisitions
Most research indicates that mergers and acquisitions perform poorly:
High premiums
Increased interest costs
High advisory fees
Poison pills
High turnover
Managerial distraction
Less innovation
Lack of fit
Increased risk
Concentration strategies involve participation in one business. Often, over time, firms decide it is in their best interest to move into other businesses as well. They can move forward or backward in their own supply chain (vertical integration), move into completely different businesses, or move into businesses that are similar to their core business.

19. Mergers that Don’t Work
Large or extraordinary debt
Overconfident or incompetent management
Ethical concerns
Changes in top management team and/or organizational
Inadequate analysis (due diligence)
Diversification away from the firm’s core
Unsuccessful mergers are associated with a large amount of debt, overconfident or incompetent managers, poor ethics, changes in top management or the structure of the acquiring organization, and diversification away from the core area in which the firm is strongest.
Discussion Prompt: There are many high profile examples of acquisition moves that have failed because of poor strategic and/or organizational fit. Ask students to identify some examples and discuss in class some of the problems that occurred.

20. Mergers That Work Strong relatedness Friendly negotiations
Low-to-moderate debt
Continued focus on core strengths of firm
Careful selection of and negotiations with target firm
Strong cash or debt position
Similar firm cultures and management styles
Sharing resources across companies
The successful mergers were related to low-to-moderate amounts of debt, a high level of relatedness leading to synergy, friendly negotiations (no resistance), a continued focus on the core business, careful selection of and negotiations with the acquired firm, and a strong cash or debt position.
The largest shareholder gains from merger occurred when the cultures and the top management styles of the two companies were similar (organizational fit).

21. Strategic Alliances and Joint Ventures
Resource sharing--marketing, technology, raw materials and components, financial, managerial, political
Speed of entry
Spread risk of failure
Increase strategic flexibility
Learn from venture partners
A strategic alliance is formed by two or more organizations to develop new products or services, enter new markets, or improve resource conversion processes. When the arrangement is contractual and the alliance operates independently of the organizations that form them, then the alliance typically is called a joint venture.
Strategic alliances and joint ventures can help organizations achieve many of the same objectives that are sought through mergers and acquisitions.
Since joint ventures and alliances involve more than one company, they can draw on a much larger resource base. The resources that are most likely to be transferable through a joint venture are marketing, technology, raw materials, finances, management, and political commitments.
Joint ventures and alliances can enhance speed of entry into a new field or market because of the expanded base of resources from which ventures can draw, and spread the risk of failure among all of the participants.

22. Problems with Strategic Alliances and Joint Ventures
Only partial control and shared profitability
High administrative costs
Possible lack of fit
Risk of opportunism
Foreign joint ventures are even more risky due to potential for miscommunications, misunderstandings and lack of shared knowledge about the constraints of the external environment
Joint ventures are limiting, in that each organization only has partial control over the venture and enjoys only a percentage of the growth and profitability it creates. Other weaknesses include high administrative costs, concerns about lack of organizational fit, and risk of opportunism by venture partners.
Successful joint ventures and alliances require careful planning and execution.

23. Portfolio Models ? High Business Growth Rate Low High Low
Portfolio management refers to managing the mix of businesses in the corporate portfolio, including decisions about the division of organizational resources and where to invest new capital.
In spite of their use in many organizations, portfolio management techniques are the subject of a considerable amount of criticism.
Boston Consulting Group Matrix is based on two factors, industry growth rate and relative market share. Industry growth rate is the growth rate of the industry in which a particular business unit is involved. Relative market share is calculated as the ratio of the business unit's size to the size of its largest competitor.
The two factors are used to plot all of the businesses in which the organization is involved, represented as Stars, Question Marks (also called Problem Children), Cash Cows and Dogs.
Cash Cows tend to generate more cash than they can effectively reinvest, while Question Marks require additional cash to sustain rapid growth and Stars generate about as much cash as they use, on average.
The standard BCG prescription is this: achieve high market share leadership and become a Star or a Cash Cow.
The problem with this standard strategy prescription is that it may only be valid for firms pursuing a low-cost leadership strategy. The use of market share as a measure of competitive strategy carries with it the implicit assumption that size has led to economies of scale and learning effects, and that these effects have resulted in competitive success through the creation of a low-cost position.
Differentiation and focus competitive strategies are not incorporated into the model. Companies that are successful in pursuing focus strategies (through low cost or differentiation) in low growth industries may be classified as Dogs even though their profit streams are strong. For example, Rolex would qualify as a Dog.
Only two factors are considered and only two divisions, high and low, are used for each factor. Also, growth rate is inadequate as the only indicator of the attractiveness of an industry. For example, some fast growing industries have never been particularly profitable. Market share is also an insufficient indicator of competitive position.
The BCG Matrix is based on past information rather than assessments of current and future conditions.
The General Electric Business Screen employs measures of industry attractiveness and business strengths that are defined by the organization.
The GE Business Screen, in particular, is flexible enough to accommodate a wide variety of indicators of industry attractiveness and competitive strength.
Low
High
Low
Relative Competitive Position (Relative Market Share)