Strategy A View from the Top: Corporate Strategy: Shaping the Portfolio

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Strategy A View from the Top Corporate
Strategy Shaping the Portfolio

• Everett Gibson
• Alex Beverly
• Andrew Keeling
• Emily Dale
• Kolt Pedersen
• Carli Slingerland
• Hayley Rush

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Introduction

• What is your Strategy
• For single business companies it should be clear
  and concise
• For multibusiness corporations it is more complex
• Most effective way to answer is to identify three
  to five strategic themes that are simple to
  communicate and comprehend
• Example GEs key values Strength in developing
  leaders, ability to integrate business on a
  global scale, prowess in making skillful
  acquisitions

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Introduction

• Corporate Strategy is concerned with decisions
  about which businesses a company operates
  inactions that shape the corporate portfolio of
  businessesand with decisions about how to create
  value in the portfolio by exploiting synergies
  among multiple business units.

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Economies of Scale

• Occurs when the unit cost of performing an
  activity decreases as the scale of activity
  increases
• Reasons better technologies in production
  processes or greater buyer power in large-scale
  purchasing situations
• Economies of learning cumulative number of units
  processed or tasks performed drives the cost
  reduction-
• occurs when cost is reduced as a result of
  finding better ways to perform a task

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Economies of Scope

• Occurs when the unit cost of an activity falls
  because the asset used is shared with some other
  activity
• Frito Lay uses its trucks to deliver its Frito
  corn chips and Lays potato chips, as well as
  salsa and other dips.

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Economies of Scope

• Decision opportunities for creating economies of
  scope fall into three broad classes
• Horizontal Scope-concern decisions of product
  scope
• Geographical Scope-involves choices of
  geographical coverage
• Vertical Scope- converned with how a company
  links its value chain activities vertically

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Economies of Scope and Scale

• To capitalize on the advantages of scale and
  scope
• Companies must make related investments to create
  global marketing and distribution organizations
• Must create the right mangement infrastructure to
  effectively coordinate the operations of a
  multinational corporation (Essential piece of
  Good-to-Great Companies)
• Timing is Critical
• First Mover advantage IBM, Intel, Microsoft, and
  Sony all dominant in their industries due to
  being first movers
• Challengers Face uphill battle. They work on
  building productive capacity while the first
  movers are perfecting their production processes

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What is Core?

• A firms most valuable customers, most valuable
  products, most important channels, and
  distinctive capabilities.
• -Strategy
• You're Hedgehog

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What is Core?

• Not making a choice IS, making a choice.
• Non-linear relationship to leadership
• Increasing returns of scale

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Strategy Traps

• Assuming the business units that are performing
  well have peaked, and deciding not to make
  further investment.
• Assuming there is more potential in
  underperforming businesses and making a risky
  investment
• Prematurely abandoning core businesses.

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Vertical Integration

• Involves increasing a corporations vertical
  participation in an industrys value chain
• Forward Integration- moving closer to the
  customer
• Backward Integration- acquiring resource
  suppliers or raw materials or manufacturing
  components that used to be sourced elsewhere
• Valuable when corporation already possesses a
  business unit with strong competitive position in
  highly attractive industry
• Potentially costly by creating exit barrier that
  prevents company from leaving industry if its
  fortunes decline

VS
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Horizontal Integration

• Involves increasing the range of products and
  services already offered to current markets or
  expanding geographically
• Often designed to leverage brand potential
• In recent years, strategic alliances have become
  increasingly popular in implementing horizontal
  growth strategies
• Ex GE- appliances, medical systems, aircraft
  engines, financing, etc

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Diversification

• Defined as a strategy of entering product markets
  different from those in which a company is
  currently engaged
• Ex- Berkshire Hathaway operates in insurance,
  food, furniture, footwear, and a host of other
  businesses
• Motivated by desire to
• Create revenue growth
• Increase profitability through shared resources
• Reduce companys overall risk exposure
• Exploit underutilized resources

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Major Considerations

• Potential for relatedness- the ability to target
  new business opportunities that have meaningful
  commonalities with the rest of the companys
  portfolio
• Three degrees of relatedness dominant business
  companies, related business companies, and
  unrelated business companies companies with
  closely related portfolios outperform widely
  diversified corporations
• Types of related diversification strategies
• Target tangible links, such as opportunities
  arising from common buyers, channels,
  technologies, or other commonalities
• Target intangible resources, such as knowledge or
  capabilities
• Target ability of business units to jointly gain
  or exercise market power
• Combination in which companies have opportunity
  to exploit the different types of relatedness

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Porters 3 Tests

• The attractiveness test- Is new industry
  attractive from growth, competitive, and
  profitability perspectives? Can company create
  such favorable conditions?
• The cost of entry test- Costs of entry
  reasonable? How long before venture becomes
  profitable?
• The better-off test- Does portfolios overall
  competitive position and performance improve?

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Mergers and Acquisitions

• Companies implement diversification strategies
  through internal development
• Alliances
• Mergers and Acquisitions
• Internal development is slow and expensive
• Bonding with companies is the easiest way to
  diversify

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Mergers and Acquisitions

• Merger
• Two companies have joined to form one company
• Acquisition
• When one firm buys another firm
• The difference between the two is management
  control
• Acquisitions quickly positions a firm

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Mergers and Acquisitions

• Acquisitions process is complex
• Intense pressures
• Frenzy environment
• Six themes help the merger and acquisition
  process
• Well developed corporate strategy
• Ongoing, long term process
• Disciplined strategic analysis
• Add value
• Objectivity is essential
• Strategies must be formulated before acquisition

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Cooperative Strategies

• Cooperative strategies are becoming popular
• Globalization is an important factor in
  cooperative ventures
• Going alone is a big risk
• Motivation for cooperative strategies is the
  corporations ability to spread its investments

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Cooperative Strategies

• Key drivers for cooperative strategies
• Risk Sharing, Funding Limitations, Market Access,
  Technology Access
• Risk Sharing
• Most companies cannot afford to participate in
  all markets of interest
• Companies must prioritize

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Cooperative Strategies

• Funding Limitations
• Going it alone is not practical
• Immense fixed costs with shorter payback
• Market Access
• Lack of prerequisite knowledge, infrastructure
• Ex. Hitachi
• Technology Access
• Many different technologies
• Technology spreading rapidly

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Cooperative Strategies

• Alternative reasons to pursue
• Management skills
• Inability to add value in house
• Lack of opportunities
• Airline Industry
• Strategic alliance
• Deregulation
• Mergers blocked

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The Strategic Logic of Alliances

• Unique Alliance Drivers
• Product Innovation
• Credibility Early Growth
  Stage
• Access to Capital
• External Value
• Customer Reach
• Reduced Cost
• Value-Chain Strengthening
• Product Extension

Rapid Growth Stage
Stability Stage
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Alliance Models

• Franchise Model between a firm and one discrete
  class of partners.
• Portfolio Model multiple class alliances
  managed by one firm.
• Cooperative Model between many comparable sized
  peers.
• Constellation Model multiple alliances led by
  two or more comparably sized peers.

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Alliance Types

• Expertise Alliances A collection of non
  competing firms
• Share Expertise and have specific capabilities

• New Business Alliances Partnerships focused on
  entering a new market
• Popular when entering a new part of the world
  (China)

• Cooperative Alliances Joint efforts by
  competitors
• Looking for cheaper health insurance

• MA - like Alliances Focus on near complete
  integration.
• Prevented from doing so, due to legal constraints

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Growth Strategic Risk

• We can measure strategic risk in terms of how far
  a growth initiative takes a company away from the
  established strengths of its core business.
• Bain International
• This is calculated by assessing the degree of
  sharing between the core business and the growth
  opportunity

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Growth Strategic Risk

• Distance from the core is measured on five
  dimensions based off of certain adjacencies (1
  step, 2 steps, multi-step, diversification)
• Shared customers
• Shared costs
• Shared channels
• Shared competitors
• Shared capabilities/technology
• The chances of success vary by the type of
  adjacency that defines a particular growth
  initiative.

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Growth Strategic Risk

• Straying from the core almost always guarantees
  failure

Diversification (lt1)
Step 3 (7)
Step 2 (26)
Step 1 (38)
Core
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Growth Strategic Risk

• Two dimensions of strategic risk define a
  strategic map used to manage the risk profile of
  an overall corporate growth strategy
• The distance from the core
• The type of strategic adjacencies

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Growth Strategic Risk
Probability of Successful Adjacency Move






New Business
Forward/Backward Integration
lt10
New Channel Segment
10 - 30
New Customer Segment
New Geography
30 - 50
New Products Services
Step 1
Step 2
Diversification
Step 3
Steps from Core
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Disinvestments Sell-offs, Spin-offs, and
Liquidations

• A sell-off or a spin-off into a separate company
  makes sense when analysis confirms the
  corporation is the wrong corporate parent for the
  business.
• Example Chrysler Holding

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Pitfalls

• Splitting a company into a separate entity
  creates value for shareholders
• For every one success there are two failures
• Spin-off success factors
• Ensure that both the parent corporation and the
  unit spun off have viable business and financial
  structures.
• Meet or exceed earning expectations.
• Continue growth

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Conclusion

• The Economics of Scale and Scope
• What is core?
• Growth Strategies
• Disinvestments Sell-offs, Spin-offs, and
  Liquidations