Corporate Level Strategy Growth of Product Markets through Concentration and Diversification.
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Transcript of Corporate Level Strategy Growth of Product Markets through Concentration and Diversification.
Corporate Level Strategy
Growth of Product Marketsthrough Concentration
and Diversification
Corporate Level Strategy
Portfolio: Which businesses should we enter? Which should we exit? What binds our businesses together?
Resource allocation: How should money and other resources be allocated among business units?
Horizontal units: Which functions should be shared? What are the costs of coordination?
M-form Organization Structure
Reasons for Growth
Attract investors with competitive returns
Attract & retain talented managers and employees
Scale and scope economies
Better leverage with buyers, suppliers
Can there be too much growth?
At 20%, firm would double in < four years Problems
Overburden internal processes Second and third tier management teams can’t
keep up pace
Concentrated Growth
Expansion within single product marketProduct Development
Extend product line: add models and sizes Modify product: add features, ingredients Complementary products
Market Development New geographic markets New channels of distribution New uses
Horizontal Integration
Acquisition of firms at same stage of supply chain
Objectives Greater market share Economies of scale Increased power over suppliers and buyers Fast growth Remove competitors
Diversified Growth
Expansion into new product markets
Types of Diversification Related Diversification Vertical Integration By-product Diversification Unrelated (Conglomerate) Diversification
Related Diversification
Purpose: scope economies (synergies)Cost sharing (procurement, distribution)Enhanced revenues (cross-selling, bundling, one-stop
shopping)Resource sharing: common brand, reputation,
technological expertise, managerial talent, systems and processes, culture
Examples of Related Diversification
Honda into cars, motorcycles, lawn mowers and generators: competence in engines and power trains
Canon into copiers, laser printers, and cameras: competencies in optics, imaging and processor controls
Minebea from ball bearings to semiconductors: competence in miniaturized manufacturing
A Portfolio of Resources
Resource-based view of the firm Resources: root of competitive advantage Portfolio of capabilities, not businesses
Don’t enter markets without a resource advantageUse single resource in several business, e.g., Bic --
pens, lighters, razorsDevelop resource in one market; move into others
from position of strength
Vertical Integration
Entry into new business at earlier (backward) or later (forward) stages of the supply chain
Stages of the Supply Chain1. Raw material extraction2. Primary manufacturing3. Fabrication of commodity products4. Product production5. Marketing and distribution6. Retailing
Aluminum: An Example
Upstream: add value by creating commodities Mining Refining of mined ore Manufacture of primary aluminumDownstream: add value through designing, positioning,
marketing of products Fabrication of aluminum products Marketing and distribution of products Sale in retail stores
Upstream versus Downstream
Upstream1. Standardization2. Low cost3. Process Innovation4. Manufacturing5. Technology Intensive6. Supply Dominated7. Maximize End Users8. Sales Push
Downstream1. Differentiation2. High margins
3. Product Innovation4. R&D, Advertising5. People Intensive6. Marketing Dominated7. Target End Users8. Market Pull
Purposes of Vertical Integration
Achieve control over qualityImprove supply and distribution coordinationScarce resources: increase dependability of supply
or distributionRaise entry barriers against new competitorsProtection of proprietary knowledgeContracts can’t be written due to uncertainty or
low frequency of transactions
Drawbacks to Vertical Integration
No competition = less efficiency, higher costsSignificant in-house development = reduced product
varietyBureaucratic costs increaseFirm competes with buyers and suppliersResources spent on new core competencies
compromise existing competenciesCapacity imbalance (excess upstream capacity to
ensure supply under all demand conditions)
By-product Diversification
Selling secondary output of firm products in the open market
e.g., a lumber company sells sawdust, an airline sells training
Alcoa Aluminum 1969
Unrelated Diversification (Conglomerates)
Collection of autonomous divisions with no shared functions/resources
Some of the best known companies in history: Beatrice, GE, ITT, Siemens
At different times both admired and vilified
Do they add value to their component businesses?
Arguments in Favor of Conglomerates
Portfolio is efficient Better information on businesses than outside
investors Quicker transfer capital between divisions than
market mechanismsParent supports divisions through economic slumps Effective in mediating transactions when markets
don’t work well (e.g., internal capital market)
Arguments Against Conglomerates
Portfolio is inefficient Divisions assume cost of running HQ Can’t dispose of unwanted properties quickly Acquisitions are made at a premium
Parent companies support troubled divisions longer than investors keep troubled stocks
Debt, reputation of one division negatively affects entire company
Difficult to manage
Diversification Through Merger and Acquisition
Key Drivers
Seeking synergyScale and scope economiesGaining access to restricted marketsOvercoming barriers to entryGaining market power (market share)Acquiring technologies, products, quicklyAcquiring otherwise unavailable resourcesPooling resources, e.g., R&DIndustry overcapacity
Tests of Entry by Acquisition
1. Will returns exceed cost of capital?2. Will the firm have a competitive advantage?3. Is the cost reasonable?
Price of premiums Cost of overcoming entry barriers
4. Will the acquisition add value? One-time value (make changes, then sell Ongoing value (keep for long term)
Reasons for Failure of Acquisitions
Empire building versus true business needInsufficient due diligence (target and alternatives)Overpayment (hard to value acquisition targets)Assimilation difficulties
Underestimate difficulties of integration Unfamiliarity: foreign market, new business Culture clashes Failure to retain key managers and personnel
Diversification Through Alliances andJoint Ventures
Types of Strategic Alliances
Non-equity alliance: cooperation between firms managed through contracts (licensing, supply or distribution)
Equity alliance: equity investments by one firm in the other in addition to contracts; creates a partnership
Joint venture: type of equity alliance; cooperating firms form new, independent firm in which partners invest and share any profits
Motivations for Equity Alliances/Joint Ventures
Exploit economies of scaleManage risk by sharing costsLearn from competitors (risky)Entry into new markets, especially foreignManage uncertainty
Using Joint Venture for Acquisition
Buyer and seller form joint ventureBuyer has time to assess value of intangible
assets (e.g., brands, distribution networks) and learn the business
Time period defined but buyer has choicesPrice depends on length and final value of JVFor selling an underperforming but high-potential
business When disentanglement will be slow, complex
JV for Acquisition: Pros and Cons
AdvantagesHigh caliber people more likely to stayFewer defections of suppliers and distributorsSeller gets better priceBuyer assured of valueDisadvantagesSeller burden high in time and attentionComplicated structure adds to overheadEffort of getting goals and cultures in sync
Risks of Alliances
Misrepresentation of skills & abilitiesConflicts
Goals (beginning of alliance) Performance metrics (life of alliance) Strategic direction (end of alliance)
Vulnerability of valuable resources -- sharing without full control
Factors Determining Corporate Combination Strategy
SynergyResources
Market Conditions
Type of Synergy Strategy ExampleSequenced: one company completes tasks and passes the results to a partner to do its part
Equity alliance (one company invests in an equity stake in the other)
Bristol-Myers Squibb took a 20% equity stake in ImClone in return for marketing rights to ImClone’s cancer-fighting drug, Erbitux, and 40% of its annual profits.
Pooled: managing own resources and combining results for greater profits
Nonequity alliance
An airline and a hotel chain agree to let hotel guests earn frequent-flyer miles.
Integrated: both firms execute tasks through close knowledge sharing
Acquisition Exxon and Mobil had to boost efficiency throughout their value chains to stay competitive. Combined all assets and functions.
Resources Strategy ExampleMust combine hard resources, (e.g., manufacturing plants) to get desired synergies
Acquisition Home-improvement company Masco quickly scales up its acquired firms’ manufacturing capacity to generate scale economies.
You must combine soft resources (e.g., workforces) to get synergies
Equity alliance
A commercial bank buys an equity stake in a securities firm rather than acquiring it, believing the bank’s culture and compensation structure could drive away key people.
Collaboration will result in extensive redundant resources.
Acquisition When Hewlett-Packard and Compaq merged, they saved$2B eliminating redundancies across every function.
Market Conditions Strategy ExampleThe new entity will face high market uncertainty (e.g., you’re unsure whether consumers or regulators will embrace or support it)
Nonequity or
Equity alliance
Bristol-Myers Squibb lost $650 million when its equity alliance partner ImClone’s drug Erbitrux failed an FDA review. But it would have lost $3.5 billion if it had previously decided to acquire ImClone.
You’ll have rivals for potential partners
Acquisition Pfizer initially allied with Warner-Lambert to make Lipitor, a blockbuster. Pfizer wanted a closer relationship with Warner-Lambert, ultimately acquiring it after other companies expressed interest in it and submitted bids.
Factor Strategy1. Types of Synergies
PooledSequencedIntegrated
Nonequity alliancesEquity alliancesAcquisitions
2. Nature of Resources: Relative value of soft to hard resources
LowLow/MediumHigh
Nonequity alliancesAcquisitionsEquity alliances
3. Extent of Redundant Resources
LowMediumHigh
Nonequity alliancesEquity alliancesAcquisition
4. Degree of Market Uncertainty
LowLow/MediumHigh
Nonequity alliancesAcquisitionsEquity alliances
5. Level of Competition
LowMediumHigh
Nonequity alliancesEquity alliancesAcquisitions
Appendices
Value Building in Multibusiness Companies
Market-related opportunitiesOperating opportunitiesManagement opportunities
Value Building in Multibusiness Companies: Market-related Opportunities
Opportunities to Build Value Potential Competitive Advantage Impediments to Achieving
Enhanced Value
Shared sales force activities or shared sales office, or both
Shared after-sale service and repair work
• Lower selling costs• Better market coverage• Stronger technical advice to
buyers• Enhanced convenience for buyers• Improved access to buyers
• Buyers have different purchasing habits toward the products
• Different salespersons are more effective in representing product
• Some products get more attention
• Lower servicing costs• Better use of service personnel• Faster servicing of customer calls
• Different equipment or different labor skills, or both, needed to handle repairs
• Buyers may do some in-house repairs
Shared brand name
• Stronger brand image and company reputation
• Increased buyer confidence in brand
• Company reputation is hurt if quality of one product is lower
Value Building in Multibusiness Companies: Market-related Opportunities
Opportunities to Build Value Potential Competitive Advantage Impediments to Achieving
Enhanced Value
Shared advertising and promotional activities
Common distribution channels
• Lower costs• Greater clout in purchasing ads
• Appropriate forms of messages are different
• Appropriate timing of promotions is different
• Lower distribution costs• Enhanced bargaining power with
distributors/retailers for shelf space and positioning, stronger push, more dealer attention
• Dealers resist being dominated by a single supplier and turn to multiple sources and lines
• Heavy use of shared channel erodes willingness of other channels to carry firm’s products
Shared order processing
• Lower order processing costs• One-stop shopping for buyer
enhances service and, thus, differentiation
• Differences in ordering cycles disrupt order processing economies
Value Building in Multibusiness Companies: Operating Opportunities
Opportunities to Build Value Potential Competitive Advantage Impediments to Achieving
Enhanced Value
Joint procurement of purchased inputs
Shared manufacturing and assembly facilities
• Lower input costs• Improved input quality• Improved service from suppliers
• Input needs are different in terms of quality or other specifications
• Inputs are needed at different plant locations, and centralized purchasing is not responsive to separate needs of each plan
• Lower manufact/assembly costs• Better capacity utilization (peak
demand for one product correlates with valley demand for other)
• Bigger scale of operation improves access to better technology
• Higher changeover costs in shifting from one product to another
• High-cost special r equipment required to accommodate quality or design differences
Shared inbound or outbound shipping and materials handling
• Lower freight and handling costs• Better delivery reliability• More frequent deliveries, such that
inventory costs are reduced
• Input sources or plant locations, or both, are in different geographic areas
• Needs for frequency and reliability of inbound/outbound delivery differ among businesses
Value Building in Multibusiness Companies: Operating Opportunities
Opportunities to Build Value Potential Competitive Advantage Impediments to Achieving
Enhanced Value
Shared product and process technologies or technology development
Shared administrative support activities
• Lower product or process design costs because of shorter design times and transfer of knowledge from area to area
• More innovative ability, due to scale of effort and attraction of better R&D personnel
• Technologies are the same, but the applications in different business units are different enough to prevent much sharing of real value
• Lower administrative and operating overhead costs
• Support activities are not a large proportion of cost, and sharing has little cost impact (and virtually no differentiation impact)
Value Building in Multibusiness Companies: Management Opportunities
Opportunities to Build Value Potential Competitive Advantage Impediments to Achieving
Enhanced Value
Shared product and process technologies or technology development
• Efficient transfer of a distinctive competence - can create cost savings or enhance differentiation
• Better understanding of key success factors
• More effective development of strategy formulation and implementation
• Technologies are the same, but the applications in different business units are different enough to prevent much sharing of real value