Chapter 9: Corporate strategy: Shaping the portfolio

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StrategyA View from the Top By Kluyver Pearce

• Chapter 9 Corporate strategy Shaping the
  portfolio

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Corporate Strategy Introduction

• Ask several questions like What is your
  strategy? most effective answer is to identify
  3 to 5 strategic themes that are simple to
  communicate and comprehend
• Primary purpose of strategy creating a powerful
  management tool for aligning behaviors and
  decision making at all levels within the company
• Provides the basis for communication to the
  broader stakeholder community
• Concerned with decisions about which businesses a
  company operates in, actions that shape the
  corporate portfolio of businesses, and decisions
  about how to create value in portfolio by
  exploiting synergies among multiple business units

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Economics of Scale

• Economies of scale occurs when the unit cost of
  performing an activity decreases as the scale of
  the activity increases
• Unit costs can fall as scale is increased due to
  the use of better technologies in production
  processes or greater buyer power in large scale
  purchasing situations
• Economics of learning occurs when cost can be
  reduced as a result of finding better ways to
  perform a given task

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Economics of Scope

• Occurs when the unit cost of an activity falls
  because the asset used is shared with other
  activities
• Example Frito Lay Corporation
• Decision opportunities fall into three broad
  classes
• Horizontal scope
• Geographical scope
• Vertical scope

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Economics of Scope continued

• To capitalize on the advantages that scale and
  scope can bring, companies must
• Make related investments to create global
  marketing and distribution organizations
• Create the right management infrastructure to
  effectively coordinate the myriad activities that
  make up the modern multinational corporations
• First movers advantage Timing is critical
• Challengers face a formidable uphill battle

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What is Core?

• Core is defined as the companies most valuable
  products, most important channels, and their
  distinctive capabilities
• According to Bain International, the mistaken
  view of the relationship between returns and
  competitive strengths can cause one of three
  strategy traps
• Assuming that business units that are performing
  well have reached their limit, and therefore
  deciding not to make any further investments in
  the core business
• Assuming that there is greater upside potential
  in under-performing businesses and making
  unwarranted, more risky investment in
  underperforming portfolio components
• Prematurely abandoning core businesses

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Growth Strategies

• A growth strategy that works for one company
  might not be appropriate for another
• Relying on internal growth alone to meet revenue
  targets can be equally risky
• To formulate a successful growth strategy, a
  company must
• Carefully analyze its strengths and weaknesses
• How it delivers value to customers
• What growth strategies its culture can
  effectively support

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Growth Strategies continued

• Selecting the right growth strategy requires a
  careful analysis of opportunities, strategic
  resources, and cultural fit
• 3 avenues by which to grow its revenue base
• Organic or internal growth
• Growth through acquisition
• Growth through alliance-based initiatives
• Referred to as the Build, Buy, or Bond paradigm

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Concentrated Growth Strategies

• A corporation that continues to direct its
  resources to the profitable growth of a single
  product category in a well defined market, and
  possibly with a dominant technology is said to
  pursue a concentrated growth strategy.
• Targeting increases in market share most direct
  way of pursuing this strategy
• 3 ways of pursuing concentrated growth is
• Increasing the number of users of the product
• Increasing product usage by stimulating higher
  quantities of use or by developing new
  applications
• Increasing the frequency of the products use

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Concentrated Growth Strategies continued

• Four specific conditions favor concentrated
  growth
• Industry is resistant to major technological
  advancements
• Targeted markets are not product saturated
• The product market is sufficiently distinctive
  to dissuade competitors from trying to invade the
  segment
• Necessary inputs are stable in price and quantity
  and are available in the amounts and at the times
  needed

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Vertical and Horizontal Integration

• Vertical integration - describes a strategy of
  increasing a corporations vertical participation
  in an industrys value chain
• Barriers to entry and price discrimination
• Backward integration entails acquiring resource
  suppliers or raw materials or manufacturing
  components that used to be sourced elsewhere
• Forward integration a strategy of moving closer
  to the ultimate customer

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Vertical and Horizontal Integration continued

• Vertical integration affects industry structure
  and competitive intensity
• Example Oil Industry
• Four reasons to vertically integrate
• The market is too risky and unreliable and is at
  risk of failing
• A company in an adjacent stage of the industry
  chain has more market power.
• When used to create or exploit market power by
  raising barriers to entry or allowing price
  discrimination across customer segments.
• When an industry is young, companies sometimes
  forward integrate to develop a market.

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Vertical and Horizontal Integration continued

• PIMS comparative analysis posed three important
  questions with respect to vertical and horizontal
  integrations
• Are highly integrated businesses in general more
  or less profitable than less integrated ones?
• Under what circumstances is a high level of
  vertical integration likely to be most
  profitable?
• Apart from its influence on overall
  profitability, what are the principal benefits
  and risks associated with vertical integration
  strategies?

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Diversification Strategies

• Diversification is defined as a strategy of
  entering product markets different from those in
  which a company is currently engaged
• Example Berkshire Hathaway operates insurance,
  food, furniture, footwear, and other businesses
• Pose a great challenge to corporate executives

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Diversification Strategies continued

• Diversification Strategies are motivated by a
  variety of factors
• Desire to create revenue growth
• Increase profitability through shared resources
  and synergies
• Reduce the companys overall exposure to risk by
  balancing the business portfolio
• Opportunity to exploit underutilized resources
• Relatedness or the potential for synergy major
  consideration in formulating diversification
  strategies

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Diversification Strategies continued

• Related diversification strategies target new
  business opportunities
• Have meaningful commonalities with the rest of
  the companys portfolio
• 4 different forms of relatedness
• Tangible links between business units
• Intangible resources
• Gain or exercise market power
• Strategic relatedness

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Diversification Strategies continued

• 6 questions useful for evaluating the risks
  associated with a diversification strategy
• What can our company do better than any of its
  competitors in its current markets?
• What strategic assets are needed to succeed in
  the new market?
• Can the firm catch or leapfrog competitors?
• Will diversification break up strategic assets
  that need to be kept together?
• Will our firm simply be a player in the new
  market or will it be a winner?
• What can the corporation learn by diversifying,
  and are we organized to learn it?

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Porters Three Tests

• Porters three tests useful for deciding whether
  a particular diversification move is likely to
  enhance shareholder value
• The attractiveness test
• The cost of entry test
• The better off test

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Mergers and Acquisitions

• Mergers signifies that two companies have
  joined to form one company
• Acquisition occurs when one firm buys another
• Management team of the buyer tends to dominate
  decisions making in the combined company
• Can quickly position a firm in a new business or
  market
• Eliminates a potential competitor and does not
  contribute to the development of excess capacity

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Mergers and Acquisitions continued

• Six themes that have emerged to help increase the
  effectiveness of the merger and acquisition
  process
• Successful acquisitions are usually part of a
  well developed corporate strategy
• Diversification through acquisition is an
  ongoing, long-term process that requires patience
• Successful acquisitions result from disciplined
  strategic analysis, which looks at industries
  first before it targets companies, while
  recognizing that good deals are firm specific
• An acquirer can add value in only a few ways, and
  before proceeding with an acquisition the buying
  company should be able to specify how synergies
  will be achieved and value created
• Objectivity is essential, hard to maintain once
  the acquisition chase ensures
• Most acquisition flounder on implementation

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Cooperative Strategies

• Capture the benefits of internal development and
  acquisition while avoiding the drawbacks of both
• Key drivers that attract executives to
  cooperative strategies include
• Need for risk sharing
• Corporations funding limitations
• The desire to gain market and technology access

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The Strategic Logic of Alliances

• According to the Booz Allen Hamilton, Inc. each
  life cycle phase of a business has its own,
  unique alliance drivers
• Product innovation, credibility, and access to
  capital key drivers of alliance initiatives in
  the early growth stage
• Alliances external value and market and customer
  reach most important factors in the rapid
  growth and consolidation phases

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The Strategic Logic of Alliances continued

• 4 different alliance models based on the role the
  alliance plays in the participates corporate
  strategy and structure of the leadership of joint
  venture
• Franchise model
• Portfolio model
• Cooperative model
• Constellation model

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The Strategic Logic of Alliances continued

• 4 groups alliances are divided into on the basic
  of whether participants are competitors and on
  the relative depth/breadth of the alliance
• Expertise alliances
• New business alliances
• Cooperative alliances
• MA like alliances

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Growth and Strategic Risk

• Different growth strategies entail different
  kinds and levels of strategic risk
• Study by Bain International suggests that
  strategic risk can be measured in terms of how
  far a growth initiative takes a company away from
  the established strengths of its core business
• Distance from the core is measured on five key
  dimensions

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Disinvestments Sell-Offs, Spin-Offs, and
Liquidations

• Sell-off of an SBU to a competitor or spin off
  into a separate company make sense when the
  corporation is the wrong corporate parent for the
  business
• Example recent sale of Chrysler to Cerberus
• Key motivation for splitting a major company into
  two or more freestanding units is
• To unlock value for shareholders
• For every successful spin, there are two that
  fail to live up to their potential
• Vital that the board of directors and executives
  understand the special pressure so they can
  develop and execute growth strategies that will
  fulfill the promise

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Disinvestments Sell-Offs, Spin-Offs, and
Liquidations continued

• Three major success factors that distinguishes a
  successful spin-off
• Ensure that both the parent corporation and the
  unit spun off have viable business and financial
  structures
• Meet or exceed earnings expectations
• Continue growth