Title: Chapter 9: Corporate strategy: Shaping the portfolio
1StrategyA View from the Top By Kluyver Pearce
- Chapter 9 Corporate strategy Shaping the
portfolio
2Corporate 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
3Economics 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
4Economics 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
5Economics 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
6What 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
7Growth 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
8Growth 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
9Concentrated 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
10Concentrated 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
11Vertical 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
12Vertical 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.
13Vertical 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?
14Diversification 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
15Diversification 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
16Diversification 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
17Diversification 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?
18Porters 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
19Mergers 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
20Mergers 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
21Cooperative 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
22The 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
23The 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
24The 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
25Growth 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
26Disinvestments 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
27Disinvestments 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