Corporate-Level Strategy and Long- Run profitability Chapter 7.
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Transcript of Corporate-Level Strategy and Long- Run profitability Chapter 7.
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Corporate-Level Strategy and Long-
Run profitability
Chapter 7
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7 | 2Copyright © Houghton Mifflin Company. All rights reserved.
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!!!
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7 | 3Copyright © Houghton Mifflin Company. All rights reserved.
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
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7 | 4Copyright © Houghton Mifflin Company. All rights reserved.
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
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7 | 5Copyright © Houghton Mifflin Company. All rights reserved.
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
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7 | 6Copyright © Houghton Mifflin Company. All rights reserved.
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?
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7 | 7Copyright © Houghton Mifflin Company. All rights reserved.
Outsourcing Functional Activities
• Outsourcing of non-core functional activities • Advantages- specialists,
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7 | 8Copyright © Houghton Mifflin Company. All rights reserved.
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
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7 | 9Copyright © Houghton Mifflin Company. All rights reserved.
Figures 7.1: Stages in the Raw-Materials-to-Customer Value-Added Chain
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7 | 10Copyright © Houghton Mifflin Company. All rights reserved.
Figure 7.2: The Raw-Materials-to-Customer Value-Added Chain in the Personal Computer Industry
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7 | 11Copyright © Houghton Mifflin Company. All rights reserved.
Figure 7.3: Full and Taper Integration
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7 | 12Copyright © Houghton Mifflin Company. All rights reserved.
Vertical Integration
Advantages– 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
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7 | 13Copyright © Houghton Mifflin Company. All rights reserved.
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?
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7 | 14Copyright © Houghton Mifflin Company. All rights reserved.
Concentration on aSingle 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
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7 | 15Copyright © Houghton Mifflin Company. All rights reserved.
Related Diversification
Exhibit 6.3
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7 | 16Copyright © Houghton Mifflin Company. All rights reserved.
“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- Richard Branson
“The corporate strategies of most companies have dissipated instead of created shareholder value.”
- Michael Porter- Michael Porter
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7 | 17Copyright © Houghton Mifflin Company. All rights reserved.
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
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7 | 18Copyright © Houghton Mifflin Company. All rights reserved.
Figure 7.5: Sharing Resources at Procter & Gamble
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7 | 19Copyright © Houghton Mifflin Company. All rights reserved.
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
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7 | 20Copyright © Houghton Mifflin Company. All rights reserved.
Figure 7.4: Transfer of Competencies at Philip Morris
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7 | 21Copyright © Houghton Mifflin Company. All rights reserved.
Value-Adding Corporate Parents
Envisioning Strategic Intent Central Services and Resources
FocusClarity to external stakeholders Clarity to business units
InvestmentScale advantagesTransferable management capabilities
Intervention at Business Level Expertise
Monitor performanceAction to improve performanceChallenge/develop strategic ambitionsCoaching/trainingDevelop strategic capabilitiesAchieve synergies
Provide expertise/servicesKnowledge creation/sharingLeverageBrokering linkages/accessing external networks
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7 | 22Copyright © Houghton Mifflin Company. All rights reserved.
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
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7 | 23Copyright © Houghton Mifflin Company. All rights reserved.
Portfolio managers, synergy managersand parental developers
Exhibit 6.6
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7 | 24Copyright © Houghton Mifflin Company. All rights reserved.
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
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7 | 25Copyright © Houghton Mifflin Company. All rights reserved.
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
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7 | 26Copyright © Houghton Mifflin Company. All rights reserved.
“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
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7 | 27Copyright © Houghton Mifflin Company. All rights reserved.
Exit Strategies
• Three main exit strategies:– Divestment- most favorable– Harvest- only works under specific conditions– Liquidation- least favorable
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7 | 28Copyright © Houghton Mifflin Company. All rights reserved.
Divestment
• Selling a business unit to the highest bidder• A company can sell to:
– Independent Investors– Other Companies
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7 | 29Copyright © Houghton Mifflin Company. All rights reserved.
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
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7 | 30Copyright © Houghton Mifflin Company. All rights reserved.
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
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7 | 31Copyright © Houghton Mifflin Company. All rights reserved.
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
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7 | 32Copyright © Houghton Mifflin Company. All rights reserved.
Further readings and Questions
• Study the M & A strategies of BP
• Study the Outsourcing strategies of some good companies such as BP
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7 | 33Copyright © Houghton Mifflin Company. All rights reserved.
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
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7 | 34Copyright © Houghton Mifflin Company. All rights reserved.
The Growth Share (or BCG) Matrix
Exhibit 6.8
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7 | 35Copyright © Houghton Mifflin Company. All rights reserved.
Public Sector Portfolio Matrix
Exhibit 6.9
Source: J.R. Montanari and J.S. Bracker, Strategic Management Journal, vol. 7, no. 3 (1986), reprinted by permission of John Wiley & Sons Ltd.
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7 | 36Copyright © Houghton Mifflin Company. All rights reserved.
Indicators of SBU Strength and Market Attractiveness
Exhibit 6.10a
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7 | 37Copyright © Houghton Mifflin Company. All rights reserved.
Market Attractiveness/SBU Strength Matrix
Exhibit 6.10b
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7 | 38Copyright © Houghton Mifflin Company. All rights reserved.
Strategy Guidelines Based on Directional Policy Matrix
Exhibit 6.10c
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7 | 39Copyright © Houghton Mifflin Company. All rights reserved.
International investment opportunities
based on the directional policy matrix
Exhibit 6.10d
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.
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7 | 40Copyright © Houghton Mifflin Company. All rights reserved.
References
• Essential of Strategic Management, Chapter 7
• Some topics in the last few slides taken from Exploring Corporate Strategy- 7th Edition- Chapter 06