Expanding operations backward into an industry that produces inputs for the ... Tying a company to an obsolescent technology. Demand unpredictability ... – PowerPoint PPT presentation
The process of acquiring or merging with industry competitors
Acquisition and merger
Vertical integration
Expanding operations backward into an industry that produces inputs for the company or forward into an industry that distributes the companys products
Strategic outsourcing
Letting some value creation activities within a business be performed by an independent entity
Implementing Corporate Strategy
3 Benefits of Horizontal Integration
Reducing costs
Increasing value
Product bundling
Cross selling
Managing industry rivalry (especially in mature or declining industries)
Increasing bargaining power
Market power (monopoly power)
4 Drawbacks and Limits of Horizontal Integration
Majority of mergers and acquisitions do not create value
Implementing a horizontal integration strategy is complicated
Mergers and acquisitions often fail to produce the anticipated gains (either synergies or cost savings)
Can bring the company into conflict with antitrust law
5 The Raw Material to Consumer Value Chain 6 Full and Taper Integration 7 Increasing Profitability Through Vertical Integration
Building barriers to entry
Facilitating investments in specialized assets
Protecting product quality
Improved scheduling
8 Evidence Against Vertical Integration
Cost disadvantages
Company-owned suppliers typically have higher costs than external suppliers
Rapid technological change
Tying a company to an obsolescent technology
Demand unpredictability
Difficulty of achieving close coordination among vertically integrated activities
Bureaucratic costs
9 Alternatives to Vertical Integration Cooperative Relationships
Short-term contracts and competitive bidding
Strategic alliances and long-term contracting
Building long-term cooperative relationships
Hostage taking
Credible commitments
Maintaining market discipline
Parallel sourcing policy
10 Outsourcing of Primary Value Creation Functions 11 Benefits of Outsourcing
Reducing costs
The specialist company is less than what it would cost to perform the activity internally
Differentiation
The quality of the activity performed by the specialist is greater than if the activity were performed by the company
Focus
Distractions are removed the company can focus attention and resources on activities important for value creation and competitive advantage
12 Identifying and Managing the Risks of Outsourcing
Holdup
The company can become too dependent on the provider of the outsourced activity so that the provider can raise prices
Scheduling of activities
Loss of control can result in distorted signals in the supply chain
Loss of information
Contact with the customer may be lost
13
Implementing Corporate Strategy Diversification, Acquisitions, and Internal New Ventures
14 Overview
Diversification
The process of adding new businesses to the company that are distinct from its established operations
Vehicles for diversification
Internal new venturing
Starting a new business from scratch
Acquisitions
Joint ventures
Restructuring
Reducing the scope of diversified operations by exiting from business areas
15 Expanding Beyond a Single Industry
Advantages of staying in a single industry
Focus resources and capabilities on competing successfully in one area
Focus on what the company knows and does best
Disadvantages of being in a single industry
Danger of the industry declining
Missing the opportunity to leverage resources and capabilities to other activities
Resting on laurels and not continually learning
16 Increasing Profitability Through Diversification
Transferring competencies
Taking a distinctive competence developed in one industry and applying it to an existing business in another industry
The competencies transferred must involve activities that are important for establishing competitive advantage
Sharing resources economies of scope
Cost reductions associated with sharing resources across businesses
17 Transfer of Competencies at Philip Morris 18 Sharing Resources at Proctor Gamble 19 Increasing Profitability Through Diversification
Managing rivalry multipoint competition
Diversifying into an industry in order to hold a competitor in check that has either entered its industry or has the potential to do so
Multipoint competition companies competing against each other in different industries
A strategy for strategic parity which is not associated with superior profitability
20 Types of Diversification
Related diversification
Entry into a new business activity in a different industry that is related to a companys existing business activity, or activities, by commonalities between one or more components of each activitys value chain
Unrelated diversification
Entry into industries that have no obvious connection to any of a companys value chain activities in its present industry or industries
21 The Limits of Diversification
Related diversification is only marginally more profitable than unrelated diversification
Extensive diversification tends to depress rather than improve profitability
22 Bureaucratic Costs and Diversification Strategy
The costs increases that arise in large, complex organizations due to managerial inefficiencies
Number of businesses in a companys portfolio
Information overload
Coordination among businesses
Inability to identify the unique profit contribution of a business unit that shares resources with another unit
23 Coordination Among Related Business Units 24 Bureaucratic Costs and Diversification Strategy
Limits of diversification
Bureaucratic costs place a limit on the amount of diversification that can profitably be pursued
Related or unrelated diversification?
Related diversified companies can create value in more ways than unrelated companies and both have to bear high bureaucratic costs
25 Diversification That Dissipates Value
Diversifying to pool risks
Stockholders can diversify their own portfolios at lower costs than the company can
Research suggests that corporate diversification is not an effective way to pool risks
Diversifying to achieve greater growth
Growth on its own does not create value
26 Entry Strategy Internal New VenturesAttractions
To execute corporate-level strategies when a company has a set of valuable competencies in its existing businesses that can be leveraged to enter the new business area
When entering a newly emerging or embryonic industry
Most useful when speed of entry is less important
27 Guidelines for Successful Internal New Venturing
Structured approach to managing internal new venturing
Research research aimed at advancing basic science and technology
Development research aimed at finding and refining commercial applications for the technology
Foster close links between RD and marketing between RD and manufacturing
Selection process for choosing ventures
Monitor progress
28 Entry Strategy AcquisitionsAttractions
To achieve horizontal integration
To achieve diversification when the company lacks important competencies
To move quickly
Perceived as less risky than internal new ventures
When the new industry is well established and enterprises enjoy protection from barriers to entry
29 Entry Strategy AcquisitionsPitfalls
Difficulty with post-acquisition integration
Overestimating economic benefits
The expense of acquisitions
Inadequate pre-acquisition screening
30 Guidelines for Successful Acquisition
Target identification and preacquisition screening
Bidding strategy
Hostile vs. friendly takeover
Integration
Learning from experience
31 Entry Strategy Joint VenturesAttractions
Helps avoid the risks and costs of building a new operation up from the ground floor
Teaming with another company that has complementary skills and assets may increase the probability of success
32 Entry Strategy Joint VenturesPitfalls
Requires the sharing of profits if the new business succeeds
Venture partners must share control conflicts on how to run the joint venture can cause failure
Runs the risk of giving critical know-how away to joint venture partner
33 Restructuring
Reducing the scope of the company by exiting business areas
Why restructure?
Diversification discount investors see highly diversified companies as less attractive
Complexity and lack of transparency in financial statements
Too much diversification or for the wrong reasons
Response to failed acquisitions
Innovations have diminished the advantages of vertical integration or diversification
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