Corporate Level Strategy and Long Term Profitability

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Concentrating on a Single IndustryConcentrating on a Single Industry

The acquisition of additional business activities at the same level of the value chain is referred to as horizontal integration. This form of expansion contrasts with vertical integration by which the firm expands into upstream or downstream activities. Horizontal growth can be achieved by internal expansion or by external expansion through mergers and acquisitions of firms offering similar products and services.

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Advantages of Horizontal IntegrationAdvantages of Horizontal Integration

Economies of scale - achieved by selling more of the same product, for example, by geographic expansion.

Economies of scope - achieved by sharing resources common to different products. Commonly referred to as "synergies."

Increased market power (over suppliers and downstream channel members)

Reduction in the cost of international trade by operating factories in foreign markets.

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Disadvantages of Horizontal Disadvantages of Horizontal IntegrationIntegration

Horizontal integration by acquisition of a competitor will increase a firm's market share. However, if the industry concentration increases significantly then anti-trust issues may arise.

Aside from legal issues, another concern is whether the anticipated economic gains will materialize.

Finally, even when the potential benefits of horizontal integration exist, they do not materialize spontaneously.

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BCG Growth-Share Matrix

The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970's. It is based on the observation that a company's business units can be classified into four categories based on combinations of market growth and market share relative to the largest competitor, hence the name "growth-share".

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Market growth serves as a proxy for industry attractiveness, and relative market share serves as a proxy for competitive advantage. The growth-share matrix thus maps the business unit positions within these two important determinants of profitability.

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BCG Growth-Share MatrixBCG Growth-Share Matrix

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StarsStars

High Market Share / High Market Growth

The company is well-established, and growth is exciting! There should be some strong opportunities here, and you should work hard to realize them.

For example, Apple Computer has a large share in the rapidly growing market for portable digital music players.

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CowsCows

High Market Share / Low Market GrowthThe company is well-established so it's easier to get attention and exploit new opportunities. However it's only worth expending a certain amount of effort, because the market isn't growing, and your opportunities are limited.

Example: Microsoft Softwares

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Question MarksQuestion Marks

Low Market Share / High Market GrowthThese are the opportunities no one knows what to do with. They aren't generating much revenue right now because you don't have a large market share. But, they are in high growth markets so the potential to make money is there.

Hewlett-Packard’s small share of the digital camera market, behind industry leader Canon. However, this is a rapidly growing market.

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DogsDogs

In these areas, the company’s market presence is weak, so it's going to take a lot of hard work to get noticed. The company won't enjoy the scale economies of the larger players, so it's going to be difficult to make a profit. And because market growth is low, it's going to take a lot of hard work to improve the situation.

Example is RC Cola

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Business Strategy Choices to Business Strategy Choices to Complement the Company’s Complement the Company’s Competitive ApproachCompetitive Approach

Strategy considerations in rounding out the company’s overall business strategy includeWhether to enter into strategic alliances or

partnershipsWhether to pursue mergers or acquisitionsWhether to integrate backward or forward

into more stages of the industry value chain

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Business Strategy Choices to Business Strategy Choices to Complement the Company’s Complement the Company’s Competitive ApproachCompetitive Approach

Whether to outsource certain value chain activities

Whether and when to initiate offensive strategies to improve the company’s market position

Whether and when to employ defensive strategies to protect the company’s market position

Choosing when to undertake strategic moves—whether to be a first-mover, fast follower or a late-mover

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Strategic Alliances and Strategic Alliances and Collaborative PartnershipsCollaborative Partnerships

Strategic Alliance - formal collaborative arrangements where two or more companies join forces to achieve mutually beneficial strategic outcomes

Strategically relevant collaboration joint contribution of resourcesshared riskshared controlmutual dependence

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Merger and Acquisition StrategiesMerger and Acquisition Strategies

An attractive strategic option for achieving operating economies, strengthening competencies, and opening avenues to new market opportunitiesMerger -- the combining of two or more

companies into a single entity, with the newly created company often taking on a new name

Acquisition -- is a combination in which one company, the acquirer, purchases and absorbs the operations of another, the acquired

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Vertical Integration: Operating Vertical Integration: Operating Across More Industry Value Chain Across More Industry Value Chain SegmentsSegments

Extend a firm’s competitive scope within the same industry Backward into sources of supply

Forward toward end-users of final product

Can aim at either full or partial integration

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Crude oil deposits

Drilling and extracting crude

Transporting it around the world

Refining it into petroleum products such as petrol/gasoline

Distributing to company-owned retail stations

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Outsourcing Strategies: Narrowing Outsourcing Strategies: Narrowing the Boundaries of the Businessthe Boundaries of the Business

Outsourcing is a consideration whenActivity can be performed better or

more cheaply by outside specialists

Activity is not crucial to achieve asustainable competitive advantage

It improves firm’s ability to innovateFirm can concentrate on core value chain

activities and leverage its resource strengths

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Strategic Options to Improve a Strategic Options to Improve a Company’s Market Position—The Company’s Market Position—The Use of Strategic OffensivesUse of Strategic Offensives

Strategic offensives are called for when a company

Spots opportunities to gain profitable market share at the expense of rivals or

Has no choice but to try to whittle away at a strong rival’s competitive advantage

The best offensives use resource strengths to attack rivals where they are weak

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Choosing the Basis for Competitive Choosing the Basis for Competitive Attack Attack

Primary offensive strategy options Attack the competitive weaknesses of rivals Offer a lower price for an equally good or

better product Pursue continuous product innovation Leapfrog competitors by being the first to

market with next generation technology or products

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Choosing the Basis for Competitive Choosing the Basis for Competitive AttackAttack

Adopt and improve on good ideas of other companies

Attack market segments where a key rival make big profits

Maneuver around competitors to capture unoccupied or less contested market territory

Using hit-and-run or guerilla warfare tactics to grab sales and market share from complacent or distracted rivals

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Choosing the Basis for Competitive Choosing the Basis for Competitive AttackAttack

Capture a rare opportunity or secure an industry’s limited resources Secure the best distributors in a particular

geographic region or country Secure the most favorable retail locations Tie up the most reliable, high-quality

suppliers via exclusive partnerships, long-term contracts, or even acquisition

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Blue Ocean Strategy—A Special Blue Ocean Strategy—A Special Kind of Offensive Kind of Offensive

Blue ocean strategies offer growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand Cirque du Soleil has attracted 10 million

people annually to its shows by “reinventing the circus” - its audience typically doesn’t attend circus events

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Strategic Options to Protect a Strategic Options to Protect a Company’s Market Position—The Company’s Market Position—The Use of Defensive StrategiesUse of Defensive Strategies Defensive strategies help fortify a competitive

position Lower the risk of being attacked Weaken the impact of any attack that occurs Influence challengers to aim their efforts at

other rivals Good defensive strategies help protect

competitive advantage but rarely are the basis for creating it

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Timing A Company’s Strategic Timing A Company’s Strategic MovesMoves

When to make a strategic move is often as crucial as what move to make:

First-mover advantages arise when Pioneering helps build a firm’s image and reputation

with buyers Early commitments produce an absolute cost

advantage over rivals First-time customers remain strongly loyal in making

repeat purchases Constitutes a preemptive strike, making imitation

extra hard or unlikely

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Late-Mover Advantages and First-Late-Mover Advantages and First-Mover DisadvantagesMover Disadvantages

Moving early can be a disadvantage (or fail to produce an advantage) when

When pioneering leadership is more costly than imitation

When innovators’ products are primitive, not living up to buyer expectations

When the demand side of the market is skeptical about the benefits of new technology/product of a first-mover

When rapid technological change allows followers to leapfrog pioneers