Chapter 6 Strategy

7/28/2019 Chapter 6 Strategy

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CORPORATE LEVELSTRATEGY

STRATEGIC MANAGEMENT

BUAD 4980


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CORPORATE LEVEL STRATEGY

Making Diversification Work

Diversification

The process of firms expanding their operations

by entering new businesses.

STRATEGIC MANAGEMENT BUAD 4980


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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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Diversification initiatives must create value for

shareholders

Mergers and acquisitions

Strategic alliances

Joint ventures

Internal development

Diversification should be synergistic



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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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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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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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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 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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Can involve changes in

Assets

Capital / Financial Structure

Management




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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


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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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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- 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


http://www.innnovatewithkraft.com/http://www.innnovatewithkraft.com/


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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

Chapter 6 Strategy

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