1. Corporate-Level Strategy and Long-Run profitability
Chapter 7
Corporate-Level Strategy and Long-Run profitability

2. Corporate-Level Strategy
The principle concern:
to identify the industry or industries a company should participate in to maximize long-run profitability
Several options!!! DS!!!

3. Concentration on a Single Industry
A company chooses to focus its resources and capabilities on competing successfully within the confines of a particular product market
Examples of companies that pursue 1 strategy:
McDonalds
Starbuck’s

4. Horizontal Integration
The process of acquiring or merging with industry competitors to achieve the competitive advantage that comes with large size
Merger- an agreement between two companies to pool their resources in a combined operation
Acquisition - Occurs when a company uses capital resources to purchase another company.
An increase in horizontal integration = an increased level of concentration in an industry

5. Horizontal Integration
Advantages
Lowers operating costs
Increases product differentiation (can be accomplished through product bundling)
Reduces rivalry within an industry
Increases bargaining power over suppliers and buyers
Disadvantages
Problems with merging cultures, managers and operations.
Problems with the Federal Trade Commission if a company grows too large

6. Horizontal Integration: EXERCISE
Use the internet to research a company that has implemented Horizontal Integration.
What prompted them to do this?
Has their profitability increased?
By producing more of their own ‘inputs’ has the firm truly reduced costs? Or is there economies of scale in the industry that they cannot capitalize on? Is this true in all industries or is this industry unique?

7. Outsourcing Functional Activities
Outsourcing of non-core functional activities
Advantages- specialists,

8. Vertical Integration
Expanding operations into industries that produce inputs or into industries that use, distribute, or sell the company’s product
A company can enter a new industry to increase its long-run profitability
A company that concentrates on a single business may be missing out on the opportunity to create value through vertical integration

9. Figures 7.1: Stages in the Raw-Materials-to-Customer Value-Added Chain

10. Figure 7.2: The Raw-Materials-to-Customer Value-Added Chain in the Personal Computer Industry

11. Figure 7.3: Full and Taper Integration

12. Vertical Integration Advantages Disadvantages
Enables company to build barriers to new competition
Facilitates investments in specialized assets
Protects product quality
Results in improved scheduling
Disadvantages
May actually increase cost of inputs
Suppliers have less incentive to be efficient
Ties a company into old, obsolescent, and high cost technology

13. Vertical Integration: EXERCISE
Use the internet to research a company that has implemented Vertical Integration.
What prompted them to do this?
Has their profitability increased?
By selling products to end users, do you think that they have cannibalized some of their market presence?

14. Concentration on a Single Industry (cont’d)
Advantages
Concentrates all resources and capabilities to strengthening its competitive position in one industry
Disadvantages
Vertical integration may be necessary
May miss out on other opportunities to create more value and increase profitability

15. Related Diversification
Exhibit 6.3

16. “Growth does not always lead a business to build on success
“Growth does not always lead a business to build on success. All too often it converts a highly successful business into a mediocre large business.”
- Richard Branson
“The corporate strategies of most companies have dissipated instead of created shareholder value.”
- Michael Porter

17. Diversification
A diversified company is one that operates in two or more industries in order to find ways to use distinctive competencies to increase the value of products in other industries to consumers and to increase long-run profitability
A company may choose to diversify when they have excess resources
Concept of related diversification and unrelated diversification

18. Figure 7.5: Sharing Resources at Procter & Gamble

19. Diversification (cont’d)
Diversification can help a company create value in 3 main ways:
Permitting superior internal governance
Transferring competencies among businesses
Realizing economies of scope

20. Figure 7.4: Transfer of Competencies at Philip Morris

21. Value-Adding Corporate Parents
Envisioning Strategic Intent
Central Services and Resources
Focus
Clarity to external stakeholders
Clarity to business units
Investment
Scale advantages
Transferable management capabilities
Intervention at Business Level
Expertise
Monitor performance
Action to improve performance
Challenge/develop strategic ambitions
Coaching/training
Develop strategic capabilities
Achieve synergies
Provide expertise/services
Knowledge creation/sharing
Leverage
Brokering linkages/accessing external networks

22. Value-Destroying Corporate Parents
Bureaucracy
Adds cost
Hinders responsiveness
Buffer from reality
Financial safety net
Diversity and size
Lack of clarity on overall vision
Managerial ambition
Empire building

23. Portfolio managers, synergy managers and parental developers
Exhibit 6.6

24. Restructuring
Restructuring- implementing strategies for reducing the scope of the company by removing exiting business areas
Why restructure?
Because the stock of highly diversified companies is often assigned a lower valuation relative to earnings than stocks of less diversified enterprises
In an attempt to boost returns to shareholders

25. Restructuring (cont’d)
Restructuring can be beneficial due to diminished advantages of vertical integration or diversification
Restructuring can be a reaction to:
Managers pursuing too much diversification
Diversification for the wrong reasons
Failed Acquisition

26. “The very best takeovers are thoroughly hostile
“The very best takeovers are thoroughly hostile. I’ve never seen a really good company taken over. I’ve only seen bad ones.” - James Goldsmith
© RoyaltyFree/ Stockdisc/ Getty Images

27. Exit Strategies Three main exit strategies: Divestment- most favorable
Harvest- only works under specific conditions
Liquidation- least favorable

28. Divestment Selling a business unit to the highest bidder
A company can sell to:
Independent Investors
Other Companies

29. Management Buyout
The managers of a business unit may be interested in purchasing it and assuming the high risk associated with the purchase
Management often purchases a business unit through the sale of high-yield bonds

30. Harvest
Halting investments in order to maximize short-to-medium term cash flow
If employees catch on, morale can sink very quickly and the strategy may fail

31. Liquidation Shutting down the operation of a business or business unit
Least attractive strategy because the company is required to write off its investments in the unit that is shutting down

32. Further readings and Questions
Study the M & A strategies of BP
Study the Outsourcing strategies of some good companies such as BP

33. Corporate Portfolio Management
Portfolio balance
Markets
Organisation’s needs
Attractiveness of business units
Profitability
Growth rates
Portfolio ‘fit’
Synergies between business units
Synergies with corporate parent

34. The Growth Share (or BCG) Matrix
Exhibit 6.8

35. Public Sector Portfolio Matrix
Source: J.R. Montanari and J.S. Bracker, Strategic Management Journal, vol. 7, no. 3 (1986), reprinted by permission of John Wiley & Sons Ltd.
Exhibit 6.9

36. Indicators of SBU Strength and Market Attractiveness
Exhibit 6.10a

37. Market Attractiveness/SBU Strength Matrix
Exhibit 6.10b

38. Strategy Guidelines Based on Directional Policy Matrix
Exhibit 6.10c

39. International investment opportunities based on the directional policy matrix
Source: Harrel, G.D. and R.D. Kiefer (1993), ‘Multinational market portfolio in global strategy development’, International Marketing Review 10 (1); Phillips, C., I. Duole, and R. Lowe, International Marketing Strategy, Routledge 1994, pp. 137–8.
Exhibit 6.10d

40. References Essential of Strategic Management, Chapter 7
Some topics in the last few slides taken from Exploring Corporate Strategy- 7th Edition- Chapter 06