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Title: Strategy: A View From the Top Chapter 9 - Corporate Strategy: Shaping the Portfolio


1
Strategy A View From the TopChapter 9 -
Corporate Strategy Shaping the Portfolio
  • Group 5
  • Laura Moore
  • Jeffri Vaughn
  • Grant Gerhardt
  • Patrick Kirkland
  • Chet Visser

2
Shaping the Portfolio
  • What exactly is your business strategy?
  • Single business companies should have a clear,
    concise answer, and an easy-to-understand answer
    to this question
  • For multi-business companies, the answer is a bit
    more complex, and much less easier to understand.

3
  • Multi-business strategies, since they tend to be
    so complicated, are usually broken down into two
    to five themes, which makes them much easier to
    comprehend.
  • Ex. GEs Strategic Themes are developing leaders,
    integrate business on a global scale, and prowess
    in making skillful acquisitions.
  • Breaking down a companys strategy creates a
    powerful management tool for aligning behaviors
    and decision making at all levels within the
    company.

4
Definitions
  • Business Unit Strategy - how to compete in a
    given industry
  • Corporate Strategy - which business should the
    company operate in

5
Economies of Scale and Scope
  • Economies of Scale- Cost per unit decreases as
    volume goes up
  • Ex. Titleist makes millions of golf balls and
    therefore can sell them at lower prices because
    of the sheer volume produced
  • Provides an advantage to being big, because large
    plants can often produce products at a much lower
    cost than smaller plants
  • Must be large to be able to compete globally, so
    you can undersell the regions local competitors
    and compete with other global companies

6
Why do costs fall?
  • From the use of better technologies in the
    production process
  • Greater buyer power in large-scale purchasing
    situations
  • Finding better ways to perform a given task, thus
    driving the costs lower
  • Referred to as Economics of Learning

7
  • Economies of Scope - Cost per unit falls because
    the asset used is shared with some other activity
  • Ex. AA using its aircraft to carry mail as well
    as parcels in extra space in their cargo holds
  • Three Classes of Economies of Scope
  • Horizontal
  • Geographical
  • Vertical

8
  • Horizontal Scope - Concerns choices of product
    scope
  • Ex. GE with their many different products Jet
    Engines, Medical, Financial, and many other areas
  • Ex. Virgin with its many different businesses
    Airline, Music, and various other things
  • Geographical Scope - Choices of geographical
    coverage
  • Ex. McDonalds and Coke with their operations in
    100 countries
  • Ex. Southwest with their choice only to operate
    domestically in the USA, and from 2nd tier
    airports

9
  • Vertical Scope - How the company will link its
    value chain activities vertically whether the
    company manufactures everything themselves or do
    they buy and re-brand.
  • Ex. Boeing has a medium vertical strategy. They
    purchase some of their components from other
    companies and manufacture other components
    in-house.

10
Capitalizing on the Advantages of Scale and Scope
  • Companies must make investments related to the
    goal of making their global marketing and
    distribution organizations function properly, and
    efficiently.
  • Timing is critical
  • First Movers have the best chance to succeed,
    because challengers face an uphill battle.
  • First Movers can continue to build their market
    share and perfect their production process as the
    challengers work on building their production
    capacity.

11
Core
  • The best starting point for crafting a corporate
    strategy is to define the core.
  • The Core is a companys most valuable products,
    channels, and distinctive capabilities.
  • Ex. AA Maintenance Personnel, Pilots, and Cabin
    Crew
  • The challenge is to define the company in a way
    that is different from all the others so that the
    company is able to build on its real capabilities
    and avoid any wishful thinking.
  • Not choosing a core will result in risking
    confusion about a companys positioning in its
    served markets, and may even make it harder to
    create value on a sustained basis.

12
Strategy Traps
  • Assumption that since their business units are
    performing well and have reached their limit, and
    therefore it is not necessary to make any more
    investments in their core business units
  • Assumption that there is a greater upside
    potential in underperforming businesses and
    making risky investments in these underperforming
    businesses
  • Prematurely abandoning core businesses

13
  • Ex. Colgate-Palmolive
  • Invested in its core business and drove it to its
    full potential.
  • Resulted in Colgate outperforming GE and
    generating returns three times of the SP 500.
  • Became a leader in their industry.
  • Ex. Boeing
  • Bet nearly the entire companys assets on the
    development of the 747 airliner.
  • Resulted in the most successful wide body in
    aviation history.
  • Cemented Boeing as the leader in commercial
    aircraft production.

14
Takeaways
  • A concise description of your corporate strategy
  • Economies of Scale and Scope and their uses and
    benefits
  • Capitalize on Economies of Scope and Scale
  • Choose a core and invest in it

15
Growth Strategies
  • Achieving consistent revenue and profit growth is
    hard, especially for large companies
  • A growth strategy that works for one company
    might not be appropriate for another
  • May even be disastrous
  • High percentage of mergers and acquisitions fail
    to meet expectations
  • Relying on internal growth to meet revenue
    targets is risky
  • Few companies consistently achieve
    higher-than-GDP growth from internal sources alone

16
Growth Strategies
  • To formulate a successful growth strategy, a
    company must carefully analyze its strengths and
    weaknesses, how it delivers value to customers,
    and what growth strategies its culture can
    effectively support
  • Selecting the right growth strategy requires a
    careful analysis of opportunities, strategic
    resources, and cultural fit

17
Growth Strategies
  • A company only has three avenues by which to grow
    its revenue base
  • 1. Organic or internal growth
  • Build Wal-Mart and Dell
  • 2. Growth through acquisition
  • Buy GE
  • 3. Growth through alliance-based initiatives
  • Bond Amazon and eBay
  • Build, Buy, or Bond paradigm
  • Growth strategies can also be characterized by
    using product-market choice as the primary
    criterion
  • 1. Concentrated growth
  • 2. Vertical and horizontal integration
  • 3. Diversification

18
Concentrated Growth Strategies
  • Existing product markets often are attractive
    avenues for growth
  • 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

19
Concentrated Growth Strategies
  • Most direct way of pursuing concentrated growth
    is to target increases in market share
  • This can be done in three ways
  • 1. Increasing the number of users of the product
  • 2. Increasing product usage by stimulating higher
    quantities of use or by developing new
    applications
  • 3. Increasing the frequency of the products use

20
Concentrated Growth Strategies
  • Concentrated growth can be a powerful competitive
    weapon
  • A tight product-market focus allows a company to
    finely assess market needs, develop a detailed
    knowledge of customer behavior and price
    sensitivity, and improve the effectiveness of
    marketing and promotion efforts
  • High success rates of new products also are tied
    to avoiding situations that require undeveloped
    skills

21
Concentrated Growth Strategies
  • Four specific conditions favor concentrated
    growth
  • 1. The industry is resistant to major
    technological advancements. This is usually the
    case in the late growth and maturity stages of
    the product life cycle and in product-markets
    where product demand is stable and industry
    barriers, such as capitalization, are high.
  • 2. Targeted markets are not product-saturated.
    Markets with competitive gaps leave the firm with
    alternatives for growth, other than taking market
    share away from competitors.
  • 3. The product-market is sufficiently distinctive
    to discourage competitors from trying to invade
    the segment.
  • 4. Necessary inputs are stable in price and
    quantity and are available in the amounts and at
    the times needed.

22
Concentrated Growth Strategies Sample of
corporations that successfully use concentrated
growth strategies include
Allstate John Deere
Amoco KFC
Avon Mack Truck
Caterpillar Martin-Marietta
Chemlawn McDonalds
Goodyear Swatch
Giant Foods Tenant
Hyatt Legal Services Hyatt Legal Services
23
Vertical and Horizontal Integration
  • If a corporations current lines of business show
    strong growth potential, two additional avenues
    for growth vertical and horizontal integration
    are available
  • Vertical integration describes a strategy of
    increasing a corporations vertical participation
    in an industrys value chain
  • Backward integration entails acquiring resource
    suppliers or raw materials or manufacturing
    components that used to be sourced elsewhere

24
Vertical and Horizontal Integration
  • Forward integration refers to a strategy of
    moving closer to the ultimate customer by
    acquiring a distribution channel or by offering
    after-sale services
  • Vertical integration can be valuable if the
    corporation possesses a business unit that has a
    strong competitive position in a highly
    attractive industry especially when the
    industrys technology is predictable and markets
    are growing rapidly
  • It can reduce a corporations strategic
    flexibility by creating an exit barrier that
    prevents the company from leaving the industry if
    its fortunes decline

25
Vertical and Horizontal Integration
  • Decisions about vertical scope are of key
    strategic importance at both the business unit
    and corporate levels because they involve the
    decision to redefine the domains in which the
    firm will operate
  • Vertical integration also affects industry
    structure and competitive intensity
  • There are four reasons to vertically integrate

26
Vertical and Horizontal Integration
  • There are four reasons to vertically integrate
  • 1. The market is too risky and unreliable and is
    at risk of failing. The typical features of a
    failed vertical market are (1) a small number of
    buyers and sellers (2) high asset specificity,
    durability, and intensity and (3) frequent
    transactions.
  • 2. A company in an adjacent stage of the industry
    chain has more market power. Specifically, if one
    stage of an industry chain exerts market power
    over another and thereby achieves abnormally high
    returns, it may be attractive for participants in
    the dominated industry to enter the dominating
    industry. Players in weak stages of an industry
    chain might have clear incentives to move into
    the powerful stages however, such a move is not
    without danger. Existing players in an industry
    often believe they can enter another business
    within the chain more easily than can outsiders.
    The key skills along an industry chain usually
    differ so substantially that outsiders with
    analogous skills from other industries often are
    superior entrants.

27
Vertical and Horizontal Integration
  • 3. Vertical integration also makes strategic
    sense when used to create or exploit market
    powers by raising barriers to entry or allowing
    price discrimination across customer segments.
  • Barriers to entry. When most competitors in an
    industry are vertically integrated, it can be
    difficult for nonintegrated players to enter.
    Potential entrants might have to enter all stages
    to compete. This increases capital costs and the
    minimum efficient scale of operations, thus
    raising barriers to entry.
  • Price discrimination. Forward integration into
    selected customer segments can allow a company to
    benefit from price discrimination.

28
Vertical and Horizontal Integration
  • 4. When an industry is young, companies sometimes
    forward integrate to develop a market. This is
    successful only when the downstream business
    possesses proprietary technology or a strong
    brand image prevents imitation by free rider
    competitors. It is futile to develop new markets
    if a company cannot capture the economic gains
    for at least several years.

29
Vertical and Horizontal Integration
  • Three important questions with respect to
    vertical and horizontal integration (PIMS Ch. 6)
  • 1. Are highly integrated businesses in general
    more or less profitable than less integrated
    ones?
  • 2. Under what circumstances is a high level of
    vertical integration likely to be most
    profitable?
  • 3. Apart from its influence on overall
    profitability, what are the principal benefits
    and risks associated with vertical integration
    strategies?

30
Vertical and Horizontal Integration
  • Answers
  • The study found that for both industrial and
    consumer manufacturing businesses, backward
    integration generally raised ROI but forward
    integration did not, whereas partial integration
    generally hurt ROI.
  • The impact of vertical integration on
    profitability varies with the size of the
    business. Larger businesses tend to benefit to a
    greater extent than smaller ones. This suggests
    that vertical integration might be a particularly
    attractive option for businesses with a
    substantial market share in which further
    backward integration has the potential for
    enhancing competitive advantage and increasing
    barriers to entry.

31
Vertical and Horizontal Integration
  • What other factors should be considered, (1)
    alternatives to ownership, such as long-term
    contracts and alliances, should actively be
    considered (2) vertical integration almost
    always requires substantial increases in
    investment (3) projected cost reductions do not
    always materialize and (4) vertical integration
    sometimes results in increased product
    innovation.
  • Although useful as a general guide to crafting
    strategy, some of these findings might need to be
    validated before applying them to a specific
    industry

32
Vertical and Horizontal Integration
  • Horizontal integration involves increasing the
    range of products and services offered to current
    markets or expanding the firms presence into a
    wider number of geographic locations
  • Horizontal integration strategies often are
    designed to leverage brand potential
  • In recent years, strategic alliances have become
    an increasingly popular way to implement
    horizontal growth strategies

33
Diversification
  • The term diversification has a wide range of
    meanings in connection with many aspects of
    business activity.
  • In a strategic context, diversification is
    defined as a strategy of entering product markets
    different from those in which a company is
    currently engaged.
  • Berkshire Hathaway is a good example of a company
    engaged in diversification.

34
Berkshire Hathaway
  • Examples of Berkshires Diversity
  • Acme Brick
  • Ben Bridge Jewelers
  • Fruit Of The Loom
  • GEICO Auto Insurance
  • NetJets
  • Sees Candy
  • Star Furniture

35
Fortune Brands
  • Jim Beam, Sauza, Makers Mark, Cruzan, Canadian
    Club, Courvoisier
  • Moen, Master Lock, Master Brands, Simonton
  • Titleist, FootJoy, Cobra, Pinnacle, Scotty
    Cameron

36
Diversification Strategy
  • Diversification strategies pose a great challenge
    to corporate executives.
  • In the 1970s, many US companies, facing stronger
    competition from abroad and diminished growth
    prospects in a number of traditional industries,
    moved into industries in which they had no
    particular competitive advantage.

37
Diversification Strategy
  • Believing that general management skill could
    offset knowledge gained from experience in an
    industry, executives thought that because they
    were successful in their own industries, they
    could be just as successful in others.
  • A depressing number of their subsequent
    experiences showed that these executives
    overestimated their relevant competence and,
    under these circumstances, bigger was worse, not
    better.

38
Diversification Strategy
  • Diversification strategies can be motivated by a
    variety of factors, including the desire to
    create revenue growth, increase profitability
    through shared resources and synergies, reduce
    the companys overall exposure to risk by
    balancing the business portfolio, or an
    opportunity to exploit underutilized resources.
  • Diversifying
  • Relatedness or the potential for synergy is a
    major consideration in formulation
    diversification strategies.
  • Relatedness or synergy can be defined in a number
    of ways

39
Relatedness or Synergy
  • The most common interpretation defines
    relatedness in terms of tangible links between
    business units.
  • A second form of relatedness among business
    unities is based on common intangible resources,
    such as knowledge or capabilities.
  • A third form of relatedness concerns the ability
    of a business unity to jointly gain or exercise
    market power.
  • A forth form is strategic relatedness. It is
    defined in terms of the similarity of the
    strategic challenges faced by different business
    units.

40
Relatedness
  • A well-known study links a companys performance
    to the degree of relatedness among its various
    businesses. It identifies three categories of
    relatedness based on a firms specialization
    ratio, defined as the proportion of revenues
    derived from the largest single group of related
    businesses dominant business companies, related
    business companies, and unrelated business
    companies.

41
Risks of Diversification Strategy
  • What can the 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 is it organized to learn it?

42
Tests
  • Attractiveness Test
  • Is the industry the company is about to enter
    fundamentally attractive from a growth,
    competitive, and profitability perspective, or
    can the company create such favorable conditions?
  • Cost of Entry Test
  • Are the costs of entry reasonable? Is the time
    horizon until the venture becomes profitable
    acceptable? Are risk levels within accepted
    tolerances?
  • Better-Off Test
  • Does the overall portfolios competitive position
    and performance improve as a result of the
    diversification move?

43
Diversification
  • Diversification is a powerful weapon in a
    corporations strategic arsenal. It is not a
    panacea for rescuing corporations with mediocre
    performance, however. If done carefully,
    diversification can improve shareholder value,
    but it needs to be planned carefully in the
    context of an overall corporate strategy.

44
Mergers and Acquisitions
  • A merger signifies that two companies have joined
    to form one company.
  • An acquisition occurs when one firm buys another.
  • In acquisitions, the management team of the buyer
    tends to dominate decision making in the combined
    company.
  • Acquisitions are generally more expensive.

45
Six Themes of Acquisition
  • 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 usually result from
    disciplined strategic analysis, which looks at
    industries first before it targets companies,
    while recognizing that good deals are
    firm-specific.

46
Six Themes cont
  • 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, even though it is hard
    to maintain once the acquisition chase continues.
  • Most acquisitions flounder on implementation
    strategies for implementation should be
    formulated before the acquisition is completed
    and executed quickly after the acquisition deal
    is closed.

47
Attractive Key Drivers
  • Risk sharingprioritize strategic interests and
    balance them according to risk
  • Funding limitationsto compete in the global
    arena, companies must incur immense fixed costs
    with a shorter payback period and at a higher
    level of risk
  • Market accesscustomers benefit because the gaps
    in product lines are filled with quality products
  • Technology accesspartnering with technologically
    compatible companies to achieve the prerequisite
    level of excellence is often essential

48
Cooperative Strategy
  • Cooperative strategiesjoint ventures, strategic
    alliances, and other partnering arrangementshave
    become increasingly popular in recent years.
  • For many corporations, cooperative strategies
    capture the benefits of internal development and
    acquisition while avoiding the drawbacks of both.
  • Other reasons to pursue a cooperative strategy
    are a lack of particular management skills an
    inability to add value in-house and a lack of
    acquisition opportunities because of size,
    geographical, or ownership restrictions.
  • The airline industry provides a good example of
    some of the drivers and issues involved in
    forging strategic alliances.

49
The Strategic Logic of Alliances
  • Each business has its own, unique alliance
    drivers.
  • Key drivers in the early growth stage
  • Product innovation
  • Credibility
  • Access to capital
  • External value, market and customer reach are the
    most important factors in the Rapid Growth and
    Consolidation phases.

50
Stability Stage
  • Reduced cost
  • Value-chain strengthening
  • Product extension
  • Alliance Models-Booz Allen Hamilton, Inc.
  • Franchise
  • Portfolio
  • Cooperative
  • Constellation

51
Portfolio and Franchise Models
  • Multiple alliances are established, but are
    managed as a single portfolio. One company acts
    as the hub for the alliances and manages the
    external partners.
  • i.e. ATT and Time Warner (book examples),
    another example is Microsoft Dynamics
  • Managers use the franchise model when gaps in an
    organizations value chain are greater than any
    one partner can fill.
  • i.e. Nintendo (book example), and many
    restaurants are franchised like Blimpie,
    Wingstop, Beef-O-Bradys, and many more.

52
Cooperative and Constellation Models
  • The alliance is at the center, customer
    relationships are no longer concentrated with the
    members of the company, but are with the alliance
    center. There is no individual company in
    control. Instead, all of the partners work
    together toward one goal.
  • i.e. Tri-Star is an alliance with CBS, Columbia
    Pictures, and HBO (book example). Another is
    Denton County Electric Cooperative (North Texas)
  • This model is for companies that design
    strategies that will put other companies on the
    defensive.
  • i.e. Constellation Energy Group, Constellation
    Wines, etc

53
Groups of Alliances-Boston Consulting Group
  • Divides alliances into four groups by whether or
    not participants are competitors.
  • Expertise Alliances
  • This brings together non-competing firms so they
    simply share their expertise.
  • i.e. outsourcing of information technology
    services.

54
Alliances
  • New-Business Alliances
  • Partnerships focused on entering a new business
    or market.
  • i.e. many businesses partner when getting into
    new parts of the world.
  • Cooperative Alliances
  • Efforts of competing companies to achieve
    economies of scale.
  • i.e. Competitors combining to seek cheaper
    health insurance for employees, for example, or
    combined purchasing arrangements.
  • MA-like alliances
  • These focus on near-complete integration but are
    prevented from doing so
  • Expertise alliances are favored the most by the
    stock market, and MA alliances are the least
    favored.

55
Growth Strategic Risk
  • Strategic risk can be shown by the choice of
    growth initiative a company takes. This measure
    is taken as a distance from core dimensions that
    is implied by a particular strategic move, and
    calculated by assessing the degree of sharing
    between the core business and the growth
    opportunity.
  • A companys success decreases as it moves away
    from its core.

56
Choice of Strategy and Level of Risk
  • Less risky
  • Local geographic expansion, or the introduction
    of a new product.
  • More risky
  • Targeting new customers, or channels.
  • Forward or backward integration.
  • Entering a completely new business.

57
Disinvestments Sell-Offs, Spin-Offs, and
Liquidations
  • A mismatch of corporate parent and corporate
    child results in a sell-off or spin-off.
  • i.e. Chrysler to Cerberus
  • Some companies try to unlock value for
    shareholders by splitting a major company into
    two or more single companies.
  • However, for every successful spin, there are
    two that fail to live up to their potential.

58
Successful Spin-Offs
  • For a successful spin-off, managers must
  • Ensure that both the parent corporation and the
    unit spun off have viable business and financial
    structures
  • Meet or exceed earnings expectations.
  • Continue growth.
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