Corporate Level Strategy

1
Corporate Level Strategy Restructuring

• TIM 431 (3)
• Dan Spears, PhD

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Corporate-level Strategy Formulation
Responsibilities

• Direction Setting
• Establishment and communication of organizational
  mission, vision, enterprise strategy and
  long-term goal
• Development of Corporate-level Strategy
• Broad approach to corporate-level
  strategyconcentration, vertical integration,
  diversification, international expansion
• Selection of resources and capabilities in which
  to develop corporate-level distinctive
  competencies
• Selection of Businesses and Portfolio Management
• Buy and sell businesses
• Allocation of resources to business units for
  capital equipment, RD, etc.

3
Corporate-level Strategy Formulation
Responsibilities

• Selection of Tactics for Diversification and
  Growth
• Choice among methods of diversificationinternal
  venturing, acquisitions, joint ventures
• Management of Resources
• Acquisition of resources and/or development of
  competencies leading to a sustainable competitive
  advantage for the entire corporation
• Hire, fire and reward business-unit managers
• Ensure that the business units (divisions) within
  the corporation are well managed, including
  strategic management. Provide training where
  appropriate
• Develop a high-performance corporate management
  structure
• Develop control systems to ensure that strategies
  remain relevant and that the corporation
  continues to progress towards its goals

4
Corporate-level Strategies
Concentration
Internal Growth Mergers and Acquisitions Joint
Ventures
Vertical Integration
Concentration
Related Diversification
Unrelated Diversification
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Advantages and Disadvantages of Concentration

• Advantages
• Allows an organization to master one business
• Less strain on resources, allowing more of an
  opportunity to develop a sustainable competitive
  advantage
• Lack of ambiguity concerning strategic direction
• Often found to be a profitable strategy,
  depending on the industry

• Disadvantages
• Dependence on one area is problematic if the
  industry is unstable
• Primary product may become obsolete
• Difficult to grow when the industry matures
• Significant changes in the industry can be very
  hard to deal with
• Cash flow can be a serious problem

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Reasons for Diversification

• Strategic Reasons
• Risk reduction through investments in dissimilar
  businesses or less dynamic environments
• Stabilization or improvement in earnings
• Improvement in growth
• Use of excess cash from slower-growing
  traditional areas (a form of organizational
  slack)
• Application of resources, capabilities or core
  competencies to related areas
• Generation of synergy through economies of scope
• Use of excess debt capacity (also a form of
  organizational slack)
• Ability to learn new technologies
• Increase in market power

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Reasons for Diversification

• Motives of the CEO
• Desire to increase the value of the firm
• Desire to increase personal power and status
• Desire to increase personal rewards such as
  salary and bonuses
• Craving for a more interesting and challenging
  management environment

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Requirements for the Creation of Synergy

• Relatedness
• Tangible--same physical resources for multiple
  purposes
• Intangible--capabilities developed in one area
  can be used elsewhere
• Fit
• Strategic--matching of organizational
  capabilities--complementary resources and skills
  (based on relatedness, as described above)
• Organizational--similar processes, cultures,
  systems and structures
• Dominant logic--the way managers deal with
  managerial tasks, the things they value, and
  their general management approach
• Managerial actions to share resources or skills
• Benefits must exceed costs of integration

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Potential Sources of Synergy from Related
Diversification

• Operations Synergies
• Common parts designs Larger purchased
  quantities allows lower cost per unit
• Common processes and equipment Combined
  equipment purchases and engineering support allow
  lower costs
• Common new facilities Larger facilities may
  allow economies of scale
• Shared facilities and capacity Improved
  capacity utilization allows lower per unit
  overhead costs
• Combined purchasing activities Increased
  influence leading to lower costs, and lower cost
  shipping arrangements
• Shared computer systems Lower per unit overhead
  costs and can spread the risk of investing in
  higher priced systems
• Combined training programs Lower training costs
  per employee

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Potential Sources of Synergy from Related
Diversification

• RD / Technology
• Shared RD programs Spread overhead cost and
  risk of RD to more than one business
• Technology transfer Faster, lower cost adoption
  of technology at the second business
• Development of new core businesses Access to
  capabilities and innovation not available in the
  market
• Multiple use of creative researchers
  Opportunities for innovation across business via
  individual experience and business analogy

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Potential Sources of Synergy from Related
Diversification

• Marketing
• Shared brand names Build market influence
  faster and at lower cost through a common name
• Shared advertising and promotion Lower unit
  costs and tie-in purchases
• Shared distribution channels Bargaining power
  to improve access and lower costs
• Cross-selling and bundling Lower costs and more
  integrated view of the marketplace
• Management
• Similar industry experience Faster response to
  industry trends
• Transferable core skills Experience with
  previously tested, innovative strategies and
  skills in strategy and program development

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Forces that Undermine Synergies

• Management Ineffectiveness
• Too little effort to coordinate between
  businesses means synergies will not be created
• Too much effort to coordinate between businesses
  can stifle creativity
• Administrative Costs
• Additional layers of management and staff add
  costs
• Executives in larger organizations are often paid
  higher salaries
• Delays from and expense of meetings and planning
  sessions necessary for coordination
• Extra travel and communications costs to achieve
  coordination

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Forces that Undermine Synergies

• Poor Strategic Fit
• Relatedness without strategic fit decreases the
  opportunity for synergy
• Overstated (or imaginary) opportunities for
  synergies
• Industry evolution that undermines strategic fit
• Overvaluing potential synergies often results in
  paying too much for a target firm or in promising
  too much improvement to stakeholders
• Poor Organizational Fit
• Incompatible cultures and management styles
• Incompatible strategies, priorities, and reward
  systems
• Incompatible production processes and
  technologies
• Incompatible computer and budgeting systems

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Unrelated Diversification

• Conglomerates
• Large, unrelated diversified firms
• Popularity of Unrelated Diversification in the
  50s, 60s and early 70s
• Rigid antitrust enforcement
• Financial theories supported the idea that risk
  could be reduced by investing in businesses in
  unrelated businesses with uneven revenue streams
• Most Research Suggests that Unrelated
  Diversification is Not High Performing
• Places unusual demands on managers
• Trend is towards reducing diversification
  (refocusing)
• In spite of the negative evidence, some firms
  have been successful with this strategy

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Mergers and Acquisitions

• MA Basics
• Mergers occur any time two organizations combine
  into one
• Acquisitions occur when one firm buys another
  firm
• Most mergers are in the form of an acquisition,
  so these terms are often used as synonyms
• MAs tend to depress profitability, reduce
  innovation and increase leverage, at least in the
  short run
• Industry Consolidation
• Occurs as competitors merge together
• A dominant trend in the U.S. and elsewhere
• Corporate Raiders
• Engage in acquisitions, typically against the
  will of target companies (called hostile)
• Hostile acquisitions tend to be more expensive
• May motivate target firm managers to be more
  responsive to stockholder interests (reduce
  agency costs)

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Problems with Mergers and Acquisitions

• High Costs
• High Premiums Typically Paid By Acquiring Firms
• Increased Interest Costs from Higher Leverage
• High Advisory Fees and Other Transaction Costs
• Poison Pillsthings target companies do so they
  are less attractive to takeover
• Strategic Problems
• High Turnover Among the Managers of the Acquired
  Firm
• Short-Term Managerial Distractiontakes managers
  away from the critical tasks of the core
  businesses
• Long-Term Managerial Distractionlose sight of
  the factors that lead to success in their core
  businesses
• Less Innovation
• No Organizational Fitcultures or systems dont
  combine well
• Increased Riskincreased leverage. Also the risk
  of unsuccessful management

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Successful Mergers and Acquisitions

• Low debt
• Friendly negotiations
• Complementary resources (relatedness)
• Cultures and management styles are similar
  (organizational fit)
• Post-merger sharing of resources
• Due diligence before merger
• Learning occurs

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Corporate-level Distinctive Competencies

• Come from achieving shared advantage across the
  businesses of a multibusiness firm
• Integrated managerial skills
• Attracting and retaining competent top managers
• Shared use of resources that are hard to acquire
  except through experience
• A well-developed strategic planning system
• Shared use of resources that contribute
  significantly to perceived customer benefits
• Excellent RD
• Resources that can be widely applied across
  businesses
• Excellence in tax management

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Strategic Restructuring

• Retrenchment (Downsizing)
• Turnaround through workforce reductions, plant
  closings, outsourcing, cost controls, etc.
• Downsizing is dangerous to the health of an
  organization
• Refocusing (Downscoping)
• Reducing diversification through selling off
  nonessential businesses
• Divestiture--reverse acquisition
• Spin-off--current shareholders are issued stock
• Chapter 11 Reorganization
• Legal filing allowing protection from creditors
  and others while problems are worked out
• Should probably be a strategy of last resort

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Strategic Restructuring

• Leveraged Buyouts
• Private purchase of a business unit by managers,
  employees, unions or private investors
• High levels of debt
• Asset sales typically lead to a smaller, more
  focused firm
• Stifle innovation
• Changes to Organizational Design
• Switch to a new organizational structure
• More decentralized or more centralized, depending
  on needs
• Linked also to changes in the culture of a firm
• Reengineering involves radical redesign of core
  business processes to achieve dramatic
  improvements in efficiency and quality
• These Restructuring Approaches are Often Combined

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Boston Consulting Group (BCG) Matrix
High
?
Star
Business Growth Rate
Cash Cow
Dog
Low
High
Low
Relative Competitive Position (Relative Market
Share)
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Major Concepts in Chapter 6

• Corporate-level strategy focuses on the selection
  of businesses in which the firm will compete, and
  on the tactics used to enter and manage those
  businesses
• Primary corporate-level responsibilities include
  establishing direction for the whole
  organization, formulation of a corporate
  strategy, selection of businesses, selection of
  growth tactics, and resource management
• Concentration is associated with a focus on one
  business area, which allows the company to
  specialize however, the firm is dependent on one
  business for its growth and profitability

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Major Concepts in Chapter 6

• Vertical integration allows a firm to become its
  own supplier or customer, which can provide more
  control over processes and quality. However, the
  firm is still dependent on one business
• According to the theory of transaction costs
  economics, firms should generally purchase what
  they need from the market, unless transactions
  costs are high.
• Unrelated diversification was popular in the past
  due to financial theories and rigid antitrust
  enforcement however, unrelated firms are hard to
  manage and there is a recent trend towards
  refocusing

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Major Concepts in Chapter 6

• Mergers and acquisitions are the quickest way to
  diversify however, they are fraught with
  difficulties, and most of them fail to meet
  expectations
• Restructuring approaches include retrenchment
  (downsizing), refocusing (downscoping), Chapter
  11 reorganization, leveraged buyouts (LBOs) and
  changes to organizational design