Slide strategic management 6e by harrison chapter 6 corporate strateies

Chapter Corporate Strategies 11 Learning Objectives To understand: • the responsibilities of corporate-level managers • the types of corporate strategies, including concentration, vertical integration and both related and unrelated diversification • merger and acquisition, joint venture, and internal development strategies and their advantages and disadvantages • the appropriate use and interpretation of portfolio models 22 Strategic Management Process External and Internal Analysis Strategic Direction Strategy Formulation (corporate and business level) Strategy Implementation and Control Strategic Restructuring 33 Major Corporate-Level Strategy Formulation Responsibilities •• Direction Direction setting—Mission, setting—Mission, vision, vision, enterprise enterprise strategy, strategy, long-term long-term goals for for the the entire entire corporation •• Development Development of of corporate-level corporate-level strategy—Selection strategy—Selection of of broad broad approach to to corporate-level corporate-level strategy: strategy: concentration, concentration, vertical vertical integration, integration, diversification, diversification, international international expansion expansion Selection Selection of of resources resources and and capabilities capabilities in which which to to build build corporate-wide corporate-wide distinctive distinctive competencies competencies •• Selection Selection of of businesses businesses and and portfolio portfolio management—Management management—Management of of the the corporate corporate portfolio portfolio Emphasis Emphasis given given to to each each business business unit unit via via resource resource allocations allocations •• Selection Selection of of tactics tactics for diversification diversification and and growth–Internal growth–Internal venturing, venturing, acquisitions acquisitions and/or and/or joint joint ventures •• Management Management of of resources—Acquisition resources—Acquisition and/or and/or development development of of resources resources and and competencies competencies leading leading to to sustainable sustainable competitive competitive advantage advantage Oversee Oversee development development of of business-level business-level strategies strategies in in the the business business units units Develop Develop an an appropriate appropriate corporate corporate culture culture 44 Corporate Strategies • Concentration • Vertical Integration • Unrelated Diversification • Related Diversification Corporate strategy typically evolves from concentration on a single business to some form of vertical integration or diversification of products, markets, or resource conversion processes At some point, a crisis may result in restructuring 55 Advantages of Concentration • Allows a firm to master one business • In-depth knowledge • Easier to achieve competitive advantage • Organizational resources under less strain • Prevents proliferation of management levels and staff functions • Allows reinvestment into same business • Profitability dependent on which industry and which nation 66 Disadvantages of Concentration •• Overdependence Overdependence on on one one product product or or business business area area •• Product Product obsolescence obsolescence and and industry industry maturity maturity •• Uneven Uneven cash cash flows flows •• Insufficient Insufficient challenge challenge and and stimulation stimulation for for management management 77 The Vertical Supply Chain Raw Materials Extraction Primary Manufacturing Final Product Manufacturing Wholesaling Retailing Vertical Integration: The extent to which an organization is involved in multiple stages of the industry supply chain 88 Possible Benefits of Vertical Integration Common reasons for vertical integration • • Increased efficiency Increased control over quality of supplies or the way the product is marketed • Better information about supplies or markets • Greater opportunities for differentiation through coordinated effort • Opportunity to make greater profits by performing another function in the vertical supply chain 99 Transactions Costs and Vertical Integration Basic Proposition: Firms should buy what they need from the market as long as transactions costs are low • Transactions costs are reflected by the time and resources needed to create and enforce a contract to purchase goods and services • If transactions costs are high, the market fails to provide the best deal This is called a market failure • Transactions costs are high (the market fails) if: ›› Highly Highly uncertain uncertain future future ›› One One or or small small number number of of suppliers suppliers ›› One One party party to to aa transaction transaction has has more more knowledge knowledge about about the the transaction transaction than than the other the other ›› An An organization organization has has to to invest invest in in an an asset asset that that can can only only be be used used to to produce produce aa specific specific good good or or service service (asset (asset specificity) specificity) 10 10 Success of Vertical Integration Strategy Research has found that vertical integration is not a particularly profitable strategy in most cases: • • • Requires Requires substantially different skills Can lock lock firms into unprofitable adjacent businesses May be associated with with lower administrative, selling, and R&D costs, but higher production costs (internal sellers don't keep costs down) When vertical integration appears to be attractive: • Taper integration: make some in-house and buy buy the rest • May provide a competitive advantage during international expansion 11 11 Corporate Strategies • Concentration – low or no diversification • Vertical Integration – depends on nature of new business, but may be similar to unrelated diversification • Unrelated Diversification – very high diversification • Related Diversification – medium level of diversification 12 12 Firm Performance Observed Relationship Between Level of Diversification and Firm Performance •High •Low •Low •Moderate •High Level of Diversification 13 13 Unrelated Diversification •• Large, Large, highly highly diversified diversified firms firms are are called called conglomerates conglomerates •• In In theory, theory, should should provide provide financial financial economies economies ›› Allocation Allocation of ofcapital capitalto to high high performing performing business business areas areas ›› Restructuring Restructuring of ofacquired acquired firm firmassets assets ›› Large Large size size should shouldlead leadto to more more attractive attractive financing financing •• Not Not aa high high performing performing strategy strategy for for most most firms firms (with (with aa few few notable notable exceptions) exceptions) in in industrialized industrialized nations nations like like the the U.S U.S •• Difficult Difficult for for aa top top manager manager to to understand understand and and appreciate appreciate the the core core technologies, technologies, key key success success factors factors and and special special requirements of each business area requirements of each business area 14 14 Related Diversification • Based on similarities among products, services, markets or resource conversion processes (technologies) • May lead to synergy if: Relatedness Relatedness ÔÔ Tangible same Tangible same physical physical resources resources OR OR ÔÔ Intangible capabilities Intangible capabilities developed developed in in one one area area can can be be used in other other area area because because relatedness relatedness exists exists Fit Fit ÔÔ Strategic complementary Strategic complementary resources and and skills skills ÔÔ Organizationalsimilar Organizationalsimilar management management processes, processes, cultures, cultures, systems systems and and structures structures 15 15 Diversification Methods • Internal Internal Ventures Ventures • Mergers Mergers and and Acquisitions Acquisitions • Joint Joint Ventures Ventures 16 16 Internal Ventures Internal Internal ventures ventures make make use use of of the the research research and and development development programs programs of of the the organization organization •• Provides Provides high high level level of of control control over over the the venture venture •• Proprietary Proprietary information information need need not not be be shared shared with with other other firms firms •• All All profits profits are are retained retained by by the the venturing venturing company company Disadvantages Disadvantages of of internal internal ventures: ventures: •• Risk Risk of of failure failure is is high high •• They They take take aa lot lot of of time time to to become become profitable profitable 17 17 Mergers and Acquisitions • • • • • • • • Fast Fast way way to to enter enter new new markets markets Acquire Acquire new new products products or or services services Learn Learn new new technologies technologies Acquire Acquire needed needed knowledge knowledge and and skills skills Vertically Vertically integrate integrate Broaden Broaden markets markets geographically geographically Fill Fill needs needs in in the the corporate corporate portfolio portfolio Increase Increase market market share share 18 18 Mergers and Acquisitions Most Most research research indicates indicates that that mergers mergers and and acquisitions acquisitions perform perform poorly: poorly: •High premiums •High turnover •Increased interest costs •Managerial distraction •High advisory fees •Less innovation •Poison pills •Lack of fit •Increased risk 19 19 Mergers that Don’t Work • Large or extraordinary debt • Overconfident or incompetent incompetent management • Ethical concerns • Changes in in top management management team and/or and/or organizational • Inadequate Inadequate analysis (due diligence) • Diversification away from the firm’s core 20 20 Mergers That Work Better • Low-to-moderate debt • High relatedness leading to synergy • Friendly negotiations (no resistance) • Continued focus on core business of firm • Careful selection of and negotiations with target firm • Use of cash for deal instead of stock • Strong financial position prior to deal • Similar firm cultures and management styles • Sharing resources across companies 21 21 Strategic Alliances and Joint Ventures • Resource sharing – marketing, technology, raw materials and components, financial, managerial, political • Speed of entry • Learning through alliances • Spread risk of failure • Increase strategic flexibility 22 22 Problems with Strategic Alliances and Joint Ventures • Only partial control and shared profitability • High administrative costs • Possible lack of fit • Risk of withdrawal of a partner • Risk of opportunism Foreign Foreign joint joint ventures ventures are are even even more more risky risky due due to to potential potential for for miscommunications, miscommunications, misunderstandings misunderstandings and and lack lack of of shared shared knowledge knowledge about about the the constraints constraints of of the the external external environment environment 23 23 Successful Alliances •• Careful Careful planning planning and and execution execution •• Selection Selection of of partner partner ›› Complementarity Complementarity each each partner partner contributes contributes non-overlapping non-overlapping resources resources ›› Partners Partners compatible compatible in in culture culture and and work work arrangements arrangements ›› Each Each party party demonstrates demonstrates commitment commitment to to alliance alliance •• Effective Effective use use of of coordinating coordinating mechanisms mechanisms •• Establishment Establishment of of trust trust •• Selection Selection of of appropriate appropriate governance governance ›› Equity Equity sharing sharing or or ownership ownership ›› Contract Contract that that contains contains the the particulars particulars ›› Self-enforcing Self-enforcing relational relational governance governance (reputation, (reputation, goodwill, goodwill, trust) trust) 24 24 Portfolio Models ? High High Business Business Growth Growth Rate Rate Low Low High High Low Low Relative Relative Competitive Competitive Position Position (Relative (Relative Market Market Share) Share) 25 25 ... portfolio models 22 Strategic Management Process External and Internal Analysis Strategic Direction Strategy Formulation (corporate and business level) Strategy Implementation and Control Strategic Restructuring... build corporate- wide corporate- wide distinctive distinctive competencies competencies •• Selection Selection of of businesses businesses and and portfolio portfolio management Management management Management. .. corporation •• Development Development of of corporate- level corporate- level strategy—Selection strategy—Selection of of broad broad approach to to corporate- level corporate- level strategy: strategy: