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CORPORATE LEVELSTRATEGY
STRATEGIC MANAGEMENT
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CORPORATE LEVEL STRATEGY
Making Diversification Work
Diversification
The process of firms expanding their operations
by entering new businesses.
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Making Diversification Work
In which businesses should a corporation
compete?
How should these businesses be managedto jointly create more value than if they were
freestanding units?
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CORPORATE LEVEL STRATEGY
Making Diversification Work
Diversification initiatives must create value for
shareholders
Mergers and acquisitions
Strategic alliances
Joint ventures
Internal development
Diversification should be synergistic
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Making Diversification Work
Related businesses(horizontal relationships)
Sharing tangible resources
Sharing intangible resources
Unrelated businesses(hierarchical relationships)
Value creation derives from corporate office
Leveraging support activities
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Related Diversification
A firm entering a different business in which it
can benefit from leveraging core
competencies, sharing activities, or building
market power
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Economies of Scope
Cost savings from leveraging core
competencies or sharing related activities
across businesses in a corporation
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Core Competencies
A firms strategic resources that reflect the
collective learning in the organization
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Core Competencies
Core competencies reflect the collective
learning in a firm:
How to coordinate diverse production skills
How to integrate multiple technologies
How to market diverse products and services
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Core Competencies
Core competencies must enhance
competitive advantages by creating superior
customer value
Different businesses in the firm must be
similar in at least one important way related
to the core competence
Core competencies must be difficult for
competitors to imitate or find substitutes
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CORPORATE LEVEL STRATEGY
Sharing Resources
Corporations can also achieve synergy by
sharing tangible and value-creating
resources across their business units
Common manufacturing facilities
Distribution channels
Sales forces
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Sharing Resources
Sharing activities provide value in two
primary ways:
Cost savings
Revenue enhancements
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Market Power
Firms abilities to profit through restricting or
controlling supply to a market or coordinating
with other firms to reduce investment.
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Pooled Negotiating Power
Similar business units working together can
have stronger bargaining position relative to:
Suppliers
Customers
Competitors
Abuse of bargaining power may negativelyaffect relationships with customers, suppliers
and competitors
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Vertical Integration
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Vertical Integration
Benefits
A secure source of raw materials or distribution
channels.
Protection of and control over valuable assets.
Access to new business opportunities.
Simplified procurement and administrative
procedures
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Vertical Integration
Risks
Costs and expenses associated with increased
overhead and capital expenditures
Loss of flexibility resulting from large
investments
Problems associated with unbalanced capacities
along the value chain Additional administrative costs associated with
managing a more complex set of activities
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Making Vertical Integration Decisions
Is the company satisfied with the quality and value
provided by our present suppliers and distributors?
Are there activities in our value chain presently being
outsourced or contracted to others that could beinternalized to increase profit?
Is there a high level of demand stability and future
growth for the organizations products?
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Making Vertical Integration Decisions
Do we have the necessary competencies to execute
the vertical integration strategies?
Will the vertical integration initiative have potential
negative impacts on our stakeholders?
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Transaction Costs
Contract or outsourcing can result in continuing
transaction costs that have to be factored into the
benefits of vertical integration
Search costs Negotiating costs
Contract development costs
Monitoring and enforcement costs
These costs must be compared to the added
administrative costs associated with vertical
integration
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Unrelated Diversification
Entering a different business that has little
horizontal interaction with other businesses
of a firm.
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Corporate Parenting and Restructuring
Parenting advantage
Positive contributions of corporate administration
to a new business as a result of expertise and
support provided
Corporate Restructuring
Corporate administration making substantial
changes to the assets, capital structure, and/ormanagement in a new business
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Corporate Restructuring
Corporate management must have:
Insight to detect undervalued companies or
businesses with high potential for transformation
Required skills and resources to turn the
businesses around
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Corporate Restructuring
Can involve changes in
Assets
Capital / Financial Structure
Management
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CORPORATE LEVEL STRATEGY
Portfolio Management
Assessing the competitive position of a
portfolio of businesses within a corporation,
Developing strategic alternatives for each
business
Identifying priorities for the allocation of
resources across the businesses
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Portfolio Matrix (Boston Consu l ting Group)
BUSINESS UNITS
$
BUSINESS REVENUE
$$$
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Portfolio Management
Develop corporate expertise in identifying acquisition
candidates that complement existing businesses or
meet corporate growth objectives
Determine most efficient allocation of corporateresources to support new businesses
Determine optimal capital allocation to fund all the
businesses in the portfolio
Provide high quality oversight and support for units
Develop appropriate strategic goals and
performance management systems
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Means to Achieve Diversification
Acquisitions or mergers
Pooling resources of other companies with a
firms own resource base
Joint venture
Strategic alliance
Internal development
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Mergers and Acquisitions
A means of obtaining valuable resources that
can help an organization expand its product
offerings and services (integration)
Can lead to consolidation within an industry
and can force other players to merge
Provide new market segments or increased
market share through acquisitions
Faster form of diversification than internal
development or integration
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Mergers and Acquisitions
Limitations / Risks
Take-over premiums can be high, decreasing
return on investment
Competing firms may be able to imitate any
advantages realized, or copy synergies that
result from the M&A
There can be many organizational cultural
issues that may counter the intended benefits
from M&A endeavors.
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Strategic Alliances and Joint Ventures
Joint Ventures involve two or more partnerscreating a new corporate entity, with each
partner contributing equity and/or assets
Strategic Alliances are cooperativeagreements or relationships between
separate companies
Formal (contractual agreements)
Informal relationship
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CO O S G
Strategic Alliances and Joint Ventures
Introduce successful product or service into a
new market
Partner provides marketing expertise or existing
market development
Partner firms can reduce manufacturing (or
other) costs in the value chain
Pool capital, value-creating activities, facilities
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Strategic Alliances and Joint Ventures
Develop or incorporate new technologies
Use expertise of two or more companies to bring
technology to market
Develop products technologically beyond the
capability of the companies acting independently
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Strategic Alliances and Joint Ventures
- Downsides Improper partner match
Each partner must bring desired complementary
strengths to partnership
Strengths contributed by each should be unique
Partners must be compatible organizationally
Partners must trust one another
Partnership agreements must be specific and
cover contingencies
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Managerial Motives Can Erode the
Value of Acquisitions Growth for growths sake
Egotism (win at all costs mentality) Anti-takeover tactics
Greenmail
Golden parachute
Poison pills
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Internal Development
Allows companies to capture all the value of
product development without having to pay
acquisition premiums or share profits with
partners More time consuming to implement than
acquisition or strategic partnership with well-
positioned company
Firm must have all the internal capabilities -
tangible and intangible resources to
effectively implement
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Case Analysis: Toyotas Diversification into
Home Manufacturing Toyota extended its automobile expertise into
factory-built, high quality manufactured homes in
Japan
Homes are 85% completed at the factory in modules
for final erection at the home site
Toyota applied its manufacturing principles, such as
JIT, and continuous improvement systems to
efficiently build custom modular homes
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Case Analysis: Steve Jobs Discusses
Apples Core Competence Apple doesnt enter businesses where it cannot
control or own the primary technology
For all of Apples products, this translates to
complete control over the development of the unique
software employed in its devices
Apple become so adept at developing the unique
operating systems and software for its devices that is
has very few competitors who can match the
companys expertise
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Case Analysis: American Ido l Far More
Than Just a Television Show German media giant Bertlesmann owns numerous
widely-popular TV shows, such as American Idol
Bertlesmann leveraged its early success with
American Idol by duplicating it in over 30 countries
In each country, the American Idol format is
customized to accommodate cultural differences,
achieving similar popularity as in the US
Bertlesmann has increased its revenue streams from
American Idol through licensing broadcasting rights,
product merchandise, CDs and concerts
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Case Analysis: How 3Ms Efforts toIncrease Market Power Backf ired
3M was subject to multiple class-action lawsuits by LePages
over alleged unfair retail bundled rebates over 3Ms tape
products
3M offered bundled rebates to major retailers who exceeded
high sales targets for each of six 3M product lines
LePages argued that the rebate volumes were so large that
retailers would exclude offering any competing product
LePages was 3Ms only significant competitor in these markets
LePage asserted that 3Ms strategy was not only to rewardlarge volume buyers, but to purposefully eliminate LePages as
a competitor
The courts found in favor of LePages and awarded treble
damages
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Case Analysis:
Vertical Integration at Shaw Industries Shaw Industries is a dominant carpet manufacturer in the US,
owned by Berkshire Hathaway
Shaw has achieved success through a high degree of
backward and forward integration Through vertical integration, Shaw has developed a high
degree of cost control
Shaw has integrated backward to produce a significant volume
of polypropylene fiber used in its carpets, limiting its exposure
to supplier pressure
The company has integrated forward to acquire large floor-
covering retailers in an effort to control retail pricing
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Case Analysis: Campbell Soup Divests
Godiva to Focus on its Core Business Campbell Soup sold its Godiva Chocolate business
in 2007
Godiva had been a profitable brand with high growth
potential
Campbell Soup sold the company because it didnt
fit the corporate focus on offering nutritious products
and focus on simple meals
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Case Analysis: CrowdsourcingKraftsStrategic Alliance With a Bagel Maker
Kraft Foods seeks out small businesses and entrepreneurs with
products and inventions that might be compatible with Krafts
market focus
Kraft has a websitewww.innnovatewithkraft.com to provide a
forum of communication about ideas from inventors andinnovative entrepreneurs
Through this process, Kraft was approached by a specialty
bagel maker that invented, and manufactured on a small scale,
a cream cheese filled bagel
Kraft had been attempting to create a similar product, but had
encountered process problems producing the filled bagel
Through a partnership with the small company, Kraft was able
to develop the product and brand it for the national market
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Case Analysis: The Ritz-Carlton LeadershipCenter A Successful Internal Venture
Ritz-Carlton has a renowned reputation for quality and service
The company has won the Malcolm Baldrige National Quality
Award twice
In 2000, the company established the Ritz-Carlton LeadershipCenter, offering leadership development programs,
benchmarking seminars and workshops to outside companies
The program has become extremely successful and attracted
companies from many industries
Workshop topics include leadership, employee development,
customer service and quality
The Leadership Center has produced significant revenues for
Ritz-Carlton
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Case Analysis: Cornelius Vanderbilt
Going to Great Lengths to Correct a Wrong! In the mid-1800s Cornelius Vanderbilt, owner of the steamship
line Accessory Transit Company, took an extended vacation to
Europe aboard his yacht
Upon his return from Europe, he discovered that two of hisbusiness associates, to whom he had granted power of
attorney over the steamship business, had taken over this
company
Vanderbilt invested to create a competing steamship business
and put his former associates out of business, regaining controlof his orignal company
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Case Analysis: How Anti-Takeover Measures MayBenefit Multiple Stakeholders Not Just
Management
Anti-takeover measures can often be interpreted as means of
protecting incumbent management, rather than shareholders
and other stakeholders
As a result of some hostile takeover attempts, numerous stateshave put in place legislation favoring stakeholders during
takeover litigation
Examples of situations where stakeholder interests
(employees) were preserved include the hostile takeover
attempt to purchase Dayton-Hudson (now Target)
Stakeholder interests (customers) were ignored during Oracles
extended hostile takeover of PeopleSoft and the acquisition
became strictly a financial deal