1. Miles A. Zachary MGT 4380

2. Concentration strategies involve trying to compete only in a single industry Market Penetration-firm attempts to gain additional market share in their existing market with existing products Most firms rely on crafty advertising to attract new customers Market Development-firm attempts to sell existing products in a new market Firms can enter new retail channels and/or geographical regions Product Development-involves creating new products to serve existing markets New products vary in their relatedness to existing products

3. Beyond a firm’s own efforts, firm’s can horizontally integrate with other firms and competitors Horizontal integration involves merging with or acquiring other firms Acquisitions occur when one firm purchases another Generally, the purchased company is smaller and possess resources and/or capabilities a firm needs or wants Mergers occur when two (or more) firms join Typically, firms are similarly sized and stand to gain an efficiency through merging

4. Horizontal integration can be attractive for several reasons: Can lower costs and increase economies scale Increase stock of strategic resources Access to valuable distribution channels However, horizontal integration has its challenges: Can destroy shareholder wealth Meshed cultures may conflict Resources acquired may have been overpriced Executives should approach horizontal integration carefully since many M&As are costly failures

5. In vertical integration, a firm attempts to become involved in new portions of a value chain Vertical integration is attractive when a firm’s suppliers or buyers have considerable power over the firm The attractiveness of vertical integration is compounded when a suppliers and/or buyers are highly profitable Firms can either integrate into a new market on their own or through a merger/acquisition TCE argues that firms vertically integrate when transaction costs rise above a tolerable threshold Oil companies remain some of the most vertically- integrated firms in business

6. Advantages Firms may be able to better understand their upstream or downstream business Greater control over processes/customize operations Disadvantages Expanding firm operations can take a firm into drastically different businesses; operations outside firm capabilities Can create complacency Some firms try to circumvent this problem by making subsidiaries compete with outside contractors

7. Backward vertical integration typically involves a firm moving backward in the value chain Executives may backward integrate if they feel a firm’s suppliers have too much power Ex.-For many years, Ford relied on a subsidiary to manufacture basic vehicle components

8. Forward vertical integration refers to a firm moving further down a value chain Executives may consider forward vertical integration when buyers have too much power Ex.-In the early 1990’s, Ford felt pressure from large rental car companies to lower their prices; in response, Ford forward-integrated by acquiring Hertz

9. Diversification strategies are used by firms to enter new industries Vertical integration = firm move into a new part of the value chain Diversification = firm move to a new value chain Many firms diversify through mergers and acquisitions Three (3) questions for diversification How attractive is the industry? What is the cost of industry entry? Will the new unit and the parent firm be better off?

10. Related diversification involves diversifying into an industry similar to the firm’s existing industry or industries A related diversification strategy allows a firm to leverage their core competencies Core competencies are skill-sets unique to a firm that are difficult for competitors to imitate and contribute to benefits enjoyed by customers within each business Ex.-Disney’s purchase of ABC broadcasting proved successful

11. Unrelated diversification involves a firm entering an industry with little to no similarity with their existing industry Unrelated diversification is a risky strategy since firms are expanding (expending resources) into a market that is unfamiliar Firm may lack the sufficient resources and capabilities to be successful Ex.-Starbucks coffee had considerable trouble expanding into the furniture industry

12. Retrenchment involves a firm eliminating or scaling back one or more business units Similar to trench warfare, retrenchment is often preferable to loosing the entire firm Firms often retrench through laying-off employees Retrenchment allows a firm to save money to remain competitive

13. When executives need stronger strategies to remain competitive, they may turn to divestment Divestment involves selling-off one or more of a firm’s business unit(s) Reversing a forward integration strategy-divesting a business unit later in the value chain Ex.-Ford sold Hertz after forward integrating with them in the early 1980’s Reversing a backward integration strategy-divesting a business unit earlier in the value chain Ex.-GM sold Delphi Automotive Systems, a previously in- house business unit responsible for making auto parts

14. Divestment can be useful to unlock hidden shareholder value of unrelated diversified firms Investors seldom understand the motivation for unrelated diversification By breaking up such firms, investors may be more likely to invest in each firm Ex.-Fortune Brands is attempting to divest three business units (spirits, household goods, and golf equipments) into three individual firms “in the interest of long-term shareholder value” Other times, firms must accept that a business unit has no value and liquidate assets

15. Determining the right corporate strategy for heavily diversified firms is very difficult Executives use portfolio planning strategies to determine which units to grow, shrink, and eliminate Portfolio planning helps executives determine how business units are fairing in their industries The Boston Consulting Group (BCG) matrix is a well- known and popular typology for categorizing and prioritizing business units

16. Business units are categorized along two (2) different dimensions Market share Market growth Business units with: High market share/low market growth = cash cows High market share/high market growth = stars Low market share/low market growth = dogs Low market share/high market growth = question marks Profits from cash cows should be invested in stars Dogs should be eliminated or divested Question marks should be evaluated whether to be invested in (stars) or eliminated (dogs)