Corporate-Level Strategy. Level of strategies corporate Business unit/ division function operation.
Corporate-Level Strategy
description
Transcript of Corporate-Level Strategy
Corporate-Level Strategy
MANA 5336
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Directional Strategies
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Expansion Adaptive Strategy:– Orientation toward growth
Expand, cut back, status quo? Concentrate within current industry, diversify into
other industries? Growth and expansion through internal development
or acquisitions, mergers, or strategic alliances?
Directional Strategies
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Basic Growth Strategies:Concentration
– Current product line in one industry– Vertical Integration– Market Development– Product Development– Penetration
Diversification– Into other product lines in other industries
Directional Strategies
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Expansion of ScopeBasic Concentration Strategies:
Vertical growthHorizontal growth
Directional Strategies
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Vertical growth
– Vertical integration Full integration Taper integration Quasi-integration
– Backward integration
– Forward integration
Directional Strategies
Stages in the Raw-Material-to-Consumer Value Chain
Upstream Downstream
Stages in the Raw-Material-to-Consumer Value Chain in the Personal Computer Industry
End userDistributionAssemblyIntermediatemanufacturerRaw materials
Examples:Examples:Dow ChemicalDow ChemicalUnion CarbideUnion CarbideKyoceraKyocera
Examples:Examples:IntelIntelSeagateSeagateMicronMicron
Examples:Examples:AppleAppleHpHpDellDell
Examples:Examples:Best BuyBest BuyOffice MaxOffice Max
Vertical Integration
Integration backward into supplier functions– Assures constant supply of inputs.– Protects against price increases.
Integration forward into distributor functions– Assures proper disposal of outputs.– Captures additional profits beyond activity costs.
Integration choice is that of which value-adding activities to compete in and which are better suited for others to carry out.
Creating Value Through Vertical Integration
Advantages of a vertical integration strategy:– Builds entry barriers to new competitors by denying
them inputs and customers.– Facilitates investment in efficiency-enhancing
assets that solve internal mutual dependence problems.
– Protects product quality through control of input quality and distribution and service of outputs.
– Improves internal scheduling (e.g., JIT inventory systems) responses to changes in demand.
Creating Value Through Vertical Integration
Disadvantages of vertical integration– Cost disadvantages of internal supply purchasing.– Remaining tied to obsolescent technology.– Aligning input and output capacities with
uncertainty in market demand is difficult for integrated companies.
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Horizontal Growth
– Horizontal integration
Directional Strategies
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Basic Diversification Strategies:
– Concentric Diversification
– Conglomerate Diversification
Directional Strategies
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Concentric Diversification
– Growth into related industry– Search for synergies
Directional Strategies
Concentration on a Single Business
SEARSCoca-ColaCoca-ColaMcDonaldsMcDonalds
Southwest Airlines
Concentration on a Single Business
Advantages– Operational focus on a
single familiar industry or market.
– Current resources and capabilities add value.
– Growing with the market brings competitive advantage.
Disadvantages– No diversification of market
risks.– Vertical integration may be
required to create value and establish competitive advantage.
– Opportunities to create value and make a profit may be missed.
Diversification
Related diversification– Entry into new business activity based on shared
commonalities in the components of the value chains of the firms.
Unrelated diversification– Entry into a new business area that has no
obvious relationship with any area of the existing business.
Related Diversification
3M3M
Hewlett PackardHewlett Packard
Marriott
Unrelated Diversification
TycoAmer Group Amer Group
ITTITT
Diversification and Corporate Performance: A Disappointing History
A study conducted by Business Week and Mercer Management Consulting, Inc., analyzed 150 acquisitions that took place between July 2000 and July 2005. Based on total stock returns from three months before, and up to three years after, the announcement:
30 percent substantially eroded shareholder returns. 20 percent eroded some returns. 33 percent created only marginal returns. 17 percent created substantial returns.A study by Salomon Smith Barney of U.S. companies acquired
since 1997 in deals for $15 billion or more, the stocks of the acquiring firms have, on average, under-performed the S&P stock index by 14 percentage points and under-performed their peer group by four percentage points after the deals were announced.
Directional Strategies
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Unrelated (Conglomerate) Diversification– Growth into unrelated industry– Concern with financial considerations
Directional Strategies
Directional Strategies
Reasons for Diversification
Reasons to Enhance Strategic Reasons to Enhance Strategic CompetitivenessCompetitiveness
• Economies of scope/scale• Market power• Financial economics
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
Incentives with Neutral Incentives with Neutral Effects on Strategic Effects on Strategic CompetitivenessCompetitiveness
• Anti-trust regulation• Tax laws• Low performance• Uncertain future cash flows• Firm risk reduction
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
Reasons for Diversification
Incentives to Diversify
External Incentives:External Incentives: Relaxation of anti-trust regulation allows more related Relaxation of anti-trust regulation allows more related
acquisitions than in the pastacquisitions than in the past Before 1986, higher taxes on dividends favored spending Before 1986, higher taxes on dividends favored spending
retained earnings on acquisitionsretained earnings on acquisitions After 1986, firms made fewer acquisitions with retained After 1986, firms made fewer acquisitions with retained
earnings, shifting to the use of debt to take advantage of tax earnings, shifting to the use of debt to take advantage of tax deductible interest paymentsdeductible interest payments
Incentives to Diversify
Internal Incentives:Internal Incentives: Poor performance may lead some firms to diversify an Poor performance may lead some firms to diversify an
attempt to achieve better returnsattempt to achieve better returns Firms may diversify to balance uncertain future cash flowsFirms may diversify to balance uncertain future cash flows Firms may diversify into different businesses in order to Firms may diversify into different businesses in order to
reduce riskreduce risk
Resources and Diversification
Besides strong incentives, firms are more likely to Besides strong incentives, firms are more likely to diversify if they have the resources to do sodiversify if they have the resources to do so
Value creation is determined more by appropriate Value creation is determined more by appropriate use of resources than incentives to diversifyuse of resources than incentives to diversify
Managerial Motives (Value Managerial Motives (Value Reduction)Reduction)
• Diversifying managerial employment risk
• Increasing managerial compensation
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
Reasons for Diversification
Managerial Motives to Diversify
Managers have motives to diversifyManagers have motives to diversify – diversification increases size; size is associated with diversification increases size; size is associated with
executive compensationexecutive compensation– diversification reduces employment riskdiversification reduces employment risk– effective governance mechanisms may restrict such effective governance mechanisms may restrict such
motivesmotives
Bureaucratic Costs and the Limits of Diversification
Number of businesses– Information overload can lead to poor resource allocation
decisions and create inefficiencies.Coordination among businesses
– As the scope of diversification widens, control and bureaucratic costs increase.
– Resource sharing and pooling arrangements that create value also cause coordination problems.
Limits of diversification– The extent of diversification must be balanced with its
bureaucratic costs.
Relationship Between Diversification and Performance
Perf
orm
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Perf
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Level of DiversificationLevel of Diversification
DominantBusiness
UnrelatedBusiness
RelatedConstrained
Restructuring:Contraction of Scope
Why restructure?– Pull-back from overdiversification.– Attacks by competitors on core
businesses.– Diminished strategic advantages of
vertical integration and diversification.Contraction (Exit) strategies
– Retrenchment– Divestment– spinoffs of profitable SBUs to investors;
management buy outs (MBOs).– Harvest– halting investment, maximizing cash flow.– Liquidation– Cease operations, write off assets.
Why Contraction of Scope?
The causes of corporate decline– Poor management– incompetence, neglect– Overexpansion– empire-building CEO’s– Inadequate financial controls– no profit responsibility– High costs– low labor productivity– New competition– powerful emerging competitors– Unforeseen demand shifts– major market changes– Organizational inertia– slow to respond to new competitive
conditions
The Main Steps of Turnaround
Changing the leadership– Replace entrenched management with new managers.
Redefining strategic focus– Evaluate and reconstitute the organization’s strategy.
Asset sales and closures– Divest unwanted assets for investment resources.
Improving profitability– Reduce costs, tighten finance and performance controls.
Acquisitions– Make acquisitions of skills and competencies to strengthen core
businesses.
Adaptive Strategies
Maintenance of ScopeEnhancementStatus Quo
Market Entry Strategies
Acquisition:Acquisition: a strategy through which one organization buys a a strategy through which one organization buys a controlling interest in another organization with the intent of controlling interest in another organization with the intent of making the acquired firm a subsidiary business within its own making the acquired firm a subsidiary business within its own portfolioportfolio
Licensing:Licensing: a strategy where the organization purchases the a strategy where the organization purchases the right to use technology, process, etc. right to use technology, process, etc.
Joint Venture:Joint Venture: a strategy where an organization joins with a strategy where an organization joins with another organization(s) to form a new organizationanother organization(s) to form a new organization
AcquisitionsAcquisitions
Reasons for Making Acquisitions
IncreaseIncreasemarket powermarket power
OvercomeOvercomeentry barriersentry barriers
Cost of newCost of newproduct developmentproduct development Increase speedIncrease speed
to marketto market
IncreaseIncreasediversificationdiversification
Reshape firm’sReshape firm’scompetitive scopecompetitive scope
Lower risk comparedLower risk comparedto developing newto developing new
productsproducts
Learn and developLearn and developnew capabilitiesnew capabilities
Reasons for Making Acquisitions:
Factors increasing market powerFactors increasing market power– when a firm is able to sell its goods or services above when a firm is able to sell its goods or services above
competitive levels orcompetitive levels or– when the costs of its primary or support activities are below when the costs of its primary or support activities are below
those of its competitorsthose of its competitors– usually is derived from the size of the firm and its resources usually is derived from the size of the firm and its resources
and capabilities to compete and capabilities to compete Market power is increased byMarket power is increased by
– horizontal acquisitionshorizontal acquisitions– vertical acquisitionsvertical acquisitions– related acquisitionsrelated acquisitions
Increased Market PowerIncreased Market Power
Reasons for Making Acquisitions:
Barriers to entry includeBarriers to entry include– economies of scale in established competitorseconomies of scale in established competitors– differentiated products by competitorsdifferentiated products by competitors– enduring relationships with customers that create product enduring relationships with customers that create product
loyalties with competitorsloyalties with competitors acquisition of an established company acquisition of an established company
– may be more effective than entering the market as a may be more effective than entering the market as a competitor offering an unfamiliar good or service that is competitor offering an unfamiliar good or service that is unfamiliar to current buyersunfamiliar to current buyers
Cross-border acquisitionCross-border acquisition
Overcome Barriers to EntryOvercome Barriers to Entry
Reasons for Making Acquisitions:
Significant investments of a firm’s resources are Significant investments of a firm’s resources are required torequired to– develop new products internallydevelop new products internally– introduce new products into the marketplaceintroduce new products into the marketplace
Acquisition of a competitor may result inAcquisition of a competitor may result in– lower risk compared to developing new productslower risk compared to developing new products– increased diversificationincreased diversification– reshaping the firm’s competitive scopereshaping the firm’s competitive scope– learning and developing new capabilities learning and developing new capabilities – faster market entryfaster market entry– rapid access to new capabilitiesrapid access to new capabilities
Reasons for Making Acquisitions:
An acquisition’s outcomes can be estimated more An acquisition’s outcomes can be estimated more easily and accurately compared to the outcomes of an easily and accurately compared to the outcomes of an internal product development processinternal product development process
Therefore managers may view acquisitions as lowering Therefore managers may view acquisitions as lowering riskrisk
Lower Risk Compared to Developing Lower Risk Compared to Developing New ProductsNew Products
Reasons for Making Acquisitions:
It may be easier to develop and introduce new products It may be easier to develop and introduce new products in markets currently served by the firmin markets currently served by the firm
It may be difficult to develop new products for markets It may be difficult to develop new products for markets in which a firm lacks experiencein which a firm lacks experience– it is uncommon for a firm to develop new products internally to it is uncommon for a firm to develop new products internally to
diversify its product linesdiversify its product lines– acquisitions are the quickest and easiest way to diversify a firm acquisitions are the quickest and easiest way to diversify a firm
and change its portfolio of businessesand change its portfolio of businesses
Increased DiversificationIncreased Diversification
Reasons for Making Acquisitions:
Firms may use acquisitions to reduce their Firms may use acquisitions to reduce their dependence on one or more products or marketsdependence on one or more products or markets
Reducing a company’s dependence on specific Reducing a company’s dependence on specific markets alters the firm’s competitive scopemarkets alters the firm’s competitive scope
Reshaping the Firms’ Competitive ScopeReshaping the Firms’ Competitive Scope
Reasons for Making Acquisitions:
Acquisitions may gain capabilities that the firm does Acquisitions may gain capabilities that the firm does not possessnot possess
Acquisitions may be used toAcquisitions may be used to– acquire a special technological capabilityacquire a special technological capability– broaden a firm’s knowledge basebroaden a firm’s knowledge base– reduce inertiareduce inertia
Learning and Developing New CapabilitiesLearning and Developing New Capabilities
AcquisitionsAcquisitions
Problems With AcquisitionsIntegrationIntegrationdifficultiesdifficulties
InadequateInadequateevaluation of targetevaluation of target
Large orLarge orextraordinary debtextraordinary debt
Inability toInability toachieve synergyachieve synergy
Too muchToo muchdiversificationdiversification
Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions
Resulting firmResulting firmis too largeis too large
Problems With Acquisitions
Integration challenges includeIntegration challenges include– melding two disparate corporate culturesmelding two disparate corporate cultures– linking different financial and control systemslinking different financial and control systems– building effective working relationships (particularly when building effective working relationships (particularly when
management styles differ)management styles differ)– resolving problems regarding the status of the newly resolving problems regarding the status of the newly
acquired firm’s executivesacquired firm’s executives– loss of key personnel weakens the acquired firm’s loss of key personnel weakens the acquired firm’s
capabilities and reduces its valuecapabilities and reduces its value
Integration DifficultiesIntegration Difficulties
Problems With Acquisitions
Evaluation requires that hundreds of issues be Evaluation requires that hundreds of issues be closely examined, includingclosely examined, including– financing for the intended transactionfinancing for the intended transaction– differences in cultures between the acquiring and target firmdifferences in cultures between the acquiring and target firm– tax consequences of the transactiontax consequences of the transaction– actions that would be necessary to successfully meld the actions that would be necessary to successfully meld the
two workforcestwo workforces Ineffective due-diligence process mayIneffective due-diligence process may
– result in paying excessive premium for the target companyresult in paying excessive premium for the target company
Inadequate Evaluation of TargetInadequate Evaluation of Target
Problems With Acquisitions
Firm may take on significant debt to acquire a Firm may take on significant debt to acquire a companycompany
High debt can High debt can – increase the likelihood of bankruptcyincrease the likelihood of bankruptcy– lead to a downgrade in the firm’s credit ratinglead to a downgrade in the firm’s credit rating– preclude needed investment in activities that contribute to preclude needed investment in activities that contribute to
the firm’s long-term successthe firm’s long-term success
Large or Extraordinary DebtLarge or Extraordinary Debt
Problems With Acquisitions
Synergy exists when assets are worth more when Synergy exists when assets are worth more when used in conjunction with each other than when they used in conjunction with each other than when they are used separatelyare used separately
Firms experience transaction costs (e.g., legal fees) Firms experience transaction costs (e.g., legal fees) when they use acquisition strategies to create when they use acquisition strategies to create synergysynergy
Firms tend to underestimate indirect costs of Firms tend to underestimate indirect costs of integration when evaluating a potential acquisitionintegration when evaluating a potential acquisition
Inability to Achieve SynergyInability to Achieve Synergy
Problems With Acquisitions
Diversified firms must process more information of Diversified firms must process more information of greater diversity greater diversity
Scope created by diversification may cause Scope created by diversification may cause managers to rely too much on financial rather than managers to rely too much on financial rather than strategic controls to evaluate business units’ strategic controls to evaluate business units’ performancesperformances
Acquisitions may become substitutes for innovationAcquisitions may become substitutes for innovation
Too Much DiversificationToo Much Diversification
Problems With Acquisitions
Managers in target firms may operate in a state of Managers in target firms may operate in a state of virtual suspended animation during an acquisitionvirtual suspended animation during an acquisition
Executives may become hesitant to make decisions Executives may become hesitant to make decisions with long-term consequences until negotiations have with long-term consequences until negotiations have been completedbeen completed
Acquisition process can create a short-term Acquisition process can create a short-term perspective and a greater aversion to risk among perspective and a greater aversion to risk among top-level executives in a target firmtop-level executives in a target firm
Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions
Problems With Acquisitions
Additional costs may exceed the benefits of the Additional costs may exceed the benefits of the economies of scale and additional market powereconomies of scale and additional market power
Larger size may lead to more bureaucratic controls Larger size may lead to more bureaucratic controls Formalized controls often lead to relatively rigid and Formalized controls often lead to relatively rigid and
standardized managerial behaviorstandardized managerial behavior Firm may produce less innovationFirm may produce less innovation
Too LargeToo Large
Strategic Alliance
A strategic alliance is a cooperative strategy in whichA strategic alliance is a cooperative strategy in which– firms combine some of their resources and capabilitiesfirms combine some of their resources and capabilities– to create a competitive advantageto create a competitive advantage
A strategic alliance involvesA strategic alliance involves– exchange and sharing of resources and capabilitiesexchange and sharing of resources and capabilities– co-development or distribution of goods or servicesco-development or distribution of goods or services
CombinedCombinedResourcesResources
CapabilitiesCapabilitiesCore CompetenciesCore Competencies
ResourcesResourcesCapabilitiesCapabilities
Core CompetenciesCore Competencies
ResourcesResourcesCapabilitiesCapabilities
Core CompetenciesCore Competencies
Strategic AllianceFirm AFirm A Firm BFirm B
Mutual interests in designing, manufacturing,Mutual interests in designing, manufacturing,or distributing goods or servicesor distributing goods or services
Types of Cooperative Strategies
Joint venture: two or more firms create an Joint venture: two or more firms create an independent company by combining parts of their independent company by combining parts of their assetsassets
Equity strategic alliance: partners who own different Equity strategic alliance: partners who own different percentages of equity in a new venturepercentages of equity in a new venture
Nonequity strategic alliances: contractual Nonequity strategic alliances: contractual agreements given to a company to supply, produce, agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity or distribute a firm’s goods or services without equity sharingsharing
Strategic Alliances
Margin Margin
Primary Activities
Sup
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Marketing & Sales
Outbound Logistics
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SupplierSupplier
• vertical complementary strategic vertical complementary strategic alliance is formed between firms alliance is formed between firms that agree to use their skills and that agree to use their skills and capabilities in different stages of capabilities in different stages of the value chain to create value the value chain to create value for both firmsfor both firms
• outsourcing is one example of outsourcing is one example of this type of alliancethis type of alliance
Strategic Alliances
Margin Margin
Primary Activities
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BuyerBuyerPotential CompetitorsPotential Competitors
• horizontal complementary strategic alliance is formed horizontal complementary strategic alliance is formed between partners who agree to combine their resources and between partners who agree to combine their resources and skills to create value in the same stage of the value chainskills to create value in the same stage of the value chain
• focus on long-term product development and distribution opportunities
• the partners may become competitorsthe partners may become competitors• requires a great deal of trust between the partnersrequires a great deal of trust between the partners
BuyerBuyer