Corporate-Level Strategy

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Corporate-Level Strategy

• MANA 5336

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Directional Strategies
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Directional Strategies

• 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?

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Directional Strategies

• 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

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Directional Strategies

• Expansion of Scope
• Basic Concentration Strategies
• Vertical growth
• Horizontal growth

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Directional Strategies

• Vertical growth
• Vertical integration
• Full integration
• Taper integration
• Quasi-integration
• Backward integration
• Forward integration

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Stages in the Raw-Material-to-Consumer Value Chain
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Stages in the Raw-Material-to-Consumer Value
Chain in the Personal Computer Industry
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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.

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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.

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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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Directional Strategies

• Horizontal Growth
• Horizontal integration

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Directional Strategies

• Basic Diversification Strategies
• Concentric Diversification
• Conglomerate Diversification

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Directional Strategies

• Concentric Diversification
• Growth into related industry
• Search for synergies

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Concentration on a Single Business
Southwest Airlines
SEARS
Coca-Cola
McDonalds
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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.

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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.

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Related Diversification
Marriott
3M
Hewlett Packard
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Unrelated Diversification
Tyco
Amer Group
ITT
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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 SP stock index by
  14 percentage points and under-performed their
  peer group by four percentage points after the
  deals were announced.

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Directional Strategies
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Directional Strategies

• Unrelated (Conglomerate) Diversification
• Growth into unrelated industry
• Concern with financial considerations

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Directional Strategies
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Reasons for Diversification
Reasons to Enhance Strategic Competitiveness

• Economies of scope/scale
• Market power
• Financial economics

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Reasons for Diversification
Incentives with Neutral Effects on Strategic
Competitiveness

• Anti-trust regulation
• Tax laws
• Low performance
• Uncertain future cash flows
• Firm risk reduction

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Incentives to Diversify

• External Incentives
• Relaxation of anti-trust regulation allows more
  related acquisitions than in the past
• Before 1986, higher taxes on dividends favored
  spending retained earnings on acquisitions
• After 1986, firms made fewer acquisitions with
  retained earnings, shifting to the use of debt to
  take advantage of tax deductible interest payments

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Incentives to Diversify

• Internal Incentives
• Poor performance may lead some firms to diversify
  an attempt to achieve better returns
• Firms may diversify to balance uncertain future
  cash flows
• Firms may diversify into different businesses in
  order to reduce risk

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Resources and Diversification

• Besides strong incentives, firms are more likely
  to diversify if they have the resources to do so
• Value creation is determined more by appropriate
  use of resources than incentives to diversify

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Reasons for Diversification
Managerial Motives (Value Reduction)

• Diversifying managerial employment risk
• Increasing managerial compensation

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Managerial Motives to Diversify

• Managers have motives to diversify
• diversification increases size size is
  associated with executive compensation
• diversification reduces employment risk
• effective governance mechanisms may restrict such
  motives

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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.

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Relationship Between Diversification and
Performance
Performance
Dominant Business
Unrelated Business
Related Constrained
Level of Diversification
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RestructuringContraction 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.

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Why Contraction of Scope?

• The causes of corporate decline
• Poor management incompetence, neglect
• Overexpansion empire-building CEOs
• 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

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The Main Steps of Turnaround

• Changing the leadership
• Replace entrenched management with new managers.
• Redefining strategic focus
• Evaluate and reconstitute the organizations
  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.

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Adaptive Strategies

• Maintenance of Scope
• Enhancement
• Status Quo

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Market Entry Strategies

• Acquisition a strategy through which one
  organization buys a controlling interest in
  another organization with the intent of making
  the acquired firm a subsidiary business within
  its own portfolio
• Licensing a strategy where the organization
  purchases the right to use technology, process,
  etc.
• Joint Venture a strategy where an organization
  joins with another organization(s) to form a new
  organization

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Reasons for Making Acquisitions
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Reasons for Making Acquisitions
Increased Market Power

• Factors increasing market power
• when a firm is able to sell its goods or services
  above competitive levels or
• when the costs of its primary or support
  activities are below those of its competitors
• usually is derived from the size of the firm and
  its resources and capabilities to compete
• Market power is increased by
• horizontal acquisitions
• vertical acquisitions
• related acquisitions

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Reasons for Making Acquisitions
Overcome Barriers to Entry

• Barriers to entry include
• economies of scale in established competitors
• differentiated products by competitors
• enduring relationships with customers that create
  product loyalties with competitors
• acquisition of an established company
• may be more effective than entering the market as
  a competitor offering an unfamiliar good or
  service that is unfamiliar to current buyers
• Cross-border acquisition

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Reasons for Making Acquisitions

• Significant investments of a firms resources are
  required to
• develop new products internally
• introduce new products into the marketplace
• Acquisition of a competitor may result in
• lower risk compared to developing new products
• increased diversification
• reshaping the firms competitive scope
• learning and developing new capabilities
• faster market entry
• rapid access to new capabilities

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Reasons for Making Acquisitions
Lower Risk Compared to Developing New Products

• An acquisitions outcomes can be estimated more
  easily and accurately compared to the outcomes of
  an internal product development process
• Therefore managers may view acquisitions as
  lowering risk

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Reasons for Making Acquisitions
Increased Diversification

• It may be easier to develop and introduce new
  products in markets currently served by the firm
• It may be difficult to develop new products for
  markets in which a firm lacks experience
• it is uncommon for a firm to develop new products
  internally to diversify its product lines
• acquisitions are the quickest and easiest way to
  diversify a firm and change its portfolio of
  businesses

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Reasons for Making Acquisitions
Reshaping the Firms Competitive Scope

• Firms may use acquisitions to reduce their
  dependence on one or more products or markets
• Reducing a companys dependence on specific
  markets alters the firms competitive scope

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Reasons for Making Acquisitions
Learning and Developing New Capabilities

• Acquisitions may gain capabilities that the firm
  does not possess
• Acquisitions may be used to
• acquire a special technological capability
• broaden a firms knowledge base
• reduce inertia

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Problems With Acquisitions
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Problems With Acquisitions
Integration Difficulties

• Integration challenges include
• melding two disparate corporate cultures
• linking different financial and control systems
• building effective working relationships
  (particularly when management styles differ)
• resolving problems regarding the status of the
  newly acquired firms executives
• loss of key personnel weakens the acquired firms
  capabilities and reduces its value

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Problems With Acquisitions
Inadequate Evaluation of Target

• Evaluation requires that hundreds of issues be
  closely examined, including
• financing for the intended transaction
• differences in cultures between the acquiring and
  target firm
• tax consequences of the transaction
• actions that would be necessary to successfully
  meld the two workforces
• Ineffective due-diligence process may
• result in paying excessive premium for the target
  company

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Problems With Acquisitions
Large or Extraordinary Debt

• Firm may take on significant debt to acquire a
  company
• High debt can
• increase the likelihood of bankruptcy
• lead to a downgrade in the firms credit rating
• preclude needed investment in activities that
  contribute to the firms long-term success

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Problems With Acquisitions
Inability to Achieve Synergy

• Synergy exists when assets are worth more when
  used in conjunction with each other than when
  they are used separately
• Firms experience transaction costs (e.g., legal
  fees) when they use acquisition strategies to
  create synergy
• Firms tend to underestimate indirect costs of
  integration when evaluating a potential
  acquisition

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Problems With Acquisitions
Too Much Diversification

• Diversified firms must process more information
  of greater diversity
• Scope created by diversification may cause
  managers to rely too much on financial rather
  than strategic controls to evaluate business
  units performances
• Acquisitions may become substitutes for innovation

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Problems With Acquisitions
Managers Overly Focused on Acquisitions

• Managers in target firms may operate in a state
  of virtual suspended animation during an
  acquisition
• Executives may become hesitant to make decisions
  with long-term consequences until negotiations
  have been completed
• Acquisition process can create a short-term
  perspective and a greater aversion to risk among
  top-level executives in a target firm

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Problems With Acquisitions
Too Large

• Additional costs may exceed the benefits of the
  economies of scale and additional market power
• Larger size may lead to more bureaucratic
  controls
• Formalized controls often lead to relatively
  rigid and standardized managerial behavior
• Firm may produce less innovation

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Strategic Alliance

• A strategic alliance is a cooperative strategy in
  which
• firms combine some of their resources and
  capabilities
• to create a competitive advantage
• A strategic alliance involves
• exchange and sharing of resources and
  capabilities
• co-development or distribution of goods or
  services

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Strategic Alliance
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Types of Cooperative Strategies

• Joint venture two or more firms create an
  independent company by combining parts of their
  assets
• Equity strategic alliance partners who own
  different percentages of equity in a new venture
• Nonequity strategic alliances contractual
  agreements given to a company to supply, produce,
  or distribute a firms goods or services without
  equity sharing

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Strategic Alliances

• vertical complementary strategic alliance is
  formed between firms that agree to use their
  skills and capabilities in different stages of
  the value chain to create value for both firms
• outsourcing is one example of this type of
  alliance

Supplier
Vertical Alliance
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Strategic Alliances
Buyer
Buyer
Potential Competitors

• horizontal complementary strategic alliance is
  formed between partners who agree to combine
  their resources and skills to create value in the
  same stage of the value chain
• focus on long-term product development and
  distribution opportunities
• the partners may become competitors
• requires a great deal of trust between the
  partners