Slide of strategic management w8

BMA799 STRATEGIC MANAGEMENT Lecture Eight: Corporate Level Strategies Learning objectives • Understand the nature of corporate-level strategy and be able to identify and explain various types of corporate strategies • Identify the conditions under which diversification creates value for shareholders • Evaluate the potential for sharing and transferring resources and capabilities within the diversified company • Recognise the organisational and managerial issues arising from diversification and why diversification so often fails to realise its anticipated benefits Learning objectives • Assess the relative advantages of vertical and horizontal integration in organising related activities, understand the circumstances that influence these relative advantages, and advise a company whether a particular activity should be undertaken internally or outsourced • Distinguish between mergers and acquisitions and determine their relative merits in exploiting the linkages between different businesses • Understand the purpose of turnaround and retrenchment strategies Introduction • Corporate-level strategy is about how and where a company, as a whole, competes • Corporate-level strategy decisions define the scope of the company • Three aspects of this strategy include: • Corporate parenting • Business portfolios • Portfolio matrices Introduction • Many aspects influence corporate-level strategy including: • Product scope (diversification) - How specialised should the company be in terms of the range of products? • Vertical scope (vertical integration) - What range of vertically linked activities should the company encompass? • Geographical scope (multinationality) - What is the optimal geographical spread of activities? Overview Fig 8.1 Corporate-Level Strategy • A corporate-level strategy is concerned with two key questions: –What business should the firm be in? –How should the corporate office manage its group of businesses? • Corporate level strategies are aimed to enhance a firm’s strategic competitiveness and contribute to earn above average returns Corporate-level Strategy • The corporate parent is expected to grow the overall organisation by creating value for its individual businesses • Organisations need to decide what new businesses should be added to the portfolio • There is a need to approach this in a rational and systematic manner Setting Direction Fig 8.2 Diversification Strategy • Diversification strategy refers to a company’s decision to expand its operations by adding new products and services, markets, or stages of production to the existing business • The purpose of diversification is to allow the company to enter lines of business that are different from current operations • There are two types of diversification: related and unrelated diversifications Vertical integration • Vertical integration is integration along a supply chain through which a company will control the production and distribution of products • Vertical integration has many dimensions: • Backward • Forward • Full integration • Partial integration Vertical integration • Vertical integration has multiple dimensions and offers potential benefits including: • Technical economies from physical integration • Developing distinctive capabilities • How to manage strategically different businesses? • The incentive problem • Competitive effects of vertical integration • Flexibility Designing vertical relationships • In practice, there are a variety of relationships through which buyers and sellers can interact and coordinate their interests • These relationships may be classified in relation to two characteristics: • The extent to which the buyer and seller commit resources to the relationship • The formalisation of the relationship Different types of vertical relationships Fig 8.7 Choosing between alternative vertical relationships • Designing vertical relationships is not just a ‘make or buy’ choice • Between full vertical integration and spot market contracts, there is a broad spectrum of alternative organisational forms • Choosing the most suitable vertical relationship depends on the economic characteristics of the activities involved, legal and fiscal circumstances, and the strategies and resources of the companies involved Costs and benefits of vertical integration Table 8.2 Horizontal integration strategy • Horizontal integration refers to the expansion or addition of business activities in the same industry and at the same level of the supply chain • Organisations can achieve horizontal growth through mergers and acquisitions • Horizontal integration offers significant advantages as well as drawback to the organisations Turnaround and Retrenchment Strategies • When a company is not performing well enough, its management considers either a turnaround or a retrenchment strategy • Turnaround strategy refer to the plan and effort to return an underperforming company to acceptable levels of profitability and long-term growth • A well-designed turnaround strategy involves redefining strategic objectives, reducing cost and restructuring organisational processes Turnaround and Retrenchment Strategies • Retrenchment strategy refer to a corporate- level strategy that seeks to reduce the size or diversity of an organisation’s operations • It includes all activities involving contraction of a company’s operations or changes in its assets or financial structure Turnaround and Retrenchment Activities • There are four activities that characterise retrenchment and turnaround: • Restructuring • Divestment • Liquidation or bankruptcy • Tie to a large company Corporate Parenting • Diversification implies parenting – that is, how corporate parents manage their overall business portfolios • To succeed, corporate parents need strong parenting skills for each SBU • Parental advantage occurs when diversified firms generate more value and a closer fit with the SBUs Corporate Parenting Fig 8.8 Corporate Parenting • Corporate parents face a balancing act between value-creating and value-destroying synergies • Value-creating synergies can emerge from many sources including: SBU efficiency, intermediary role and sizing up distinctive capabilities • Value-destroying synergies can emerge from many sources including: excessive managerialism, competition for resources, urgency to perform and short term perspective Portfolio Analysis • Portfolio analyse is one of key means of analysing the scope of activities of a diversified organisation • It is an important aspect to understand the position of each SBU in relation to its competitors and growth potential • Commonly used portfolio analysis methods include: • The BCG matrix • The GE-McKinsey matrix Summary • This session has covered many important issues of strategy including: • Corporate level strategy • Diversification • Vertical and horizontal integration • Merger and acquisition • Portfolio analysis ... stages of production to the existing business • The purpose of diversification is to allow the company to enter lines of business that are different from current operations • There are two types of. .. (diversification) - How specialised should the company be in terms of the range of products? • Vertical scope (vertical integration) - What range of vertically linked activities should the company encompass?... market • Economies of scope on their own not provide an adequate rationale for diversification — they must be supported by the presence of transaction costs • The operation of two factors must