Title: Strategy: A View From the Top Chapter 9 - Corporate Strategy: Shaping the Portfolio
1Strategy A View From the TopChapter 9 -
Corporate Strategy Shaping the Portfolio
- Group 5
- Laura Moore
- Jeffri Vaughn
- Grant Gerhardt
- Patrick Kirkland
- Chet Visser
2Shaping 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.
4Definitions
- Business Unit Strategy - how to compete in a
given industry - Corporate Strategy - which business should the
company operate in
5Economies 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
6Why 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.
10Capitalizing 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.
11Core
- 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.
12Strategy 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.
14Takeaways
- 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
15Growth 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
16Growth 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
17Growth 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
18Concentrated 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
19Concentrated 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
20Concentrated 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
21Concentrated 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.
22Concentrated 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
23Vertical 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
24Vertical 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
25Vertical 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
26Vertical 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.
27Vertical 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.
28Vertical 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.
29Vertical 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?
30Vertical 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.
31Vertical 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
32Vertical 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
33Diversification
- 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.
34Berkshire Hathaway
- Examples of Berkshires Diversity
- Acme Brick
- Ben Bridge Jewelers
- Fruit Of The Loom
- GEICO Auto Insurance
- NetJets
- Sees Candy
- Star Furniture
35Fortune Brands
- Jim Beam, Sauza, Makers Mark, Cruzan, Canadian
Club, Courvoisier - Moen, Master Lock, Master Brands, Simonton
- Titleist, FootJoy, Cobra, Pinnacle, Scotty
Cameron
36Diversification 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.
37Diversification 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.
38Diversification 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
39Relatedness 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.
40Relatedness
- 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.
41Risks 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?
42Tests
- 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?
43Diversification
- 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.
44Mergers 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.
45Six 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.
46Six 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.
47Attractive 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
48Cooperative 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.
49The 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.
50Stability Stage
- Reduced cost
- Value-chain strengthening
- Product extension
- Alliance Models-Booz Allen Hamilton, Inc.
- Franchise
- Portfolio
- Cooperative
- Constellation
51Portfolio 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.
52Cooperative 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
53Groups 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.
54Alliances
- 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.
55Growth 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.
56Choice 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.
57Disinvestments 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.
58Successful 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.