Corporate Strategies I

Lecture ObjectivesDefine corporate strategy.Explain the difference between a single-business firm and a multiple-business firm.Discuss how corporate strategy is related to the other firm strategies.Explain the corporate strategic directions available to firms.Describe the various organizational growth strategies.Discuss the reasons/motives for diversificationDiscuss the advantages and disadvantages of related & unrelated diversification.Explain how growth strategies can be implemented.Describe when organizational stability is an appropriate strategic choice.

What is Corporate Strategy?Those strategies concerned with the broad and long-term questions of

what business(es) the organization is in or wants to be in & what it wants to do with those businessesTask involves

Moves to enter new businessesActions to boost combined performance of businessesWays to capture synergy among related businessesEstablishing investment priorities & steering corporate resources into most attractive units

Single & Multiple Business OrganizationsSingle business organizations

Operates primarily in only one industry (e.g., Coca-Cola Beverage Industry; Wrigley Jr. Company Chewing Gum)Multiple Business Organizations

Operates in more than one industryExample: PepsiCo Snack Food Industry business (Frito Lay); & Beverage IndustryPhilip Morris Companies Tobacco Industry; Brewery Industry (Miller Brewery); & Food Processing Industry (Kraft General Foods).

Corporate, Competitive & Functional StrategiesCorporate strategy establishes the overall direction that the organization hopes to go.Competitive & functional strategies provide the means or mechanisms for making sure the organization gets there.

Possible Corporate Strategic Directions(1) Moving the organization ahead -- Organizational Growth(2) Keeping the organization where it is -- Organizational Stability(3) Reversing the organizations weaknesses or decline -- Organizational Renewal

ORGANIZATIONAL GROWTH Growth strategy

Involves the attainment of specific growth objectives by increasing the level of an firms operationsTypical growth objectives for businesses

Increase in sales revenuesIncrease in earnings or profitsOther performance measuresGrowth objectives of not-for-profit businesses

Increasing clients served or patrons attractedBroadening the geographic areaIncreasing programs offered

Types of Growth Strategies

OrganizationalGrowthDiversificationRelatedUnrelated

Horizontal Integration

Vertical IntegrationBackwardForward

ConcentrationInternational

Concentration StrategyA growth strategy where the firm

Concentrates on its primary line of business Looks for ways to meet its growth objectives through increasing its level of operation in this primary businessWhen a single-business organization pursues growth, it is using the concentration strategy

Concentration StrategyFour concentration strategy options

ProductsCustomersCurrentNewCurrentNewProduct-MarketExplorationProductDevelopmentMarketDevelopmentProduct/MarketDiversification

Concentration StrategyProduct-Market Exploration Option

Describes attempts by firm to increase sales of its current product(s) in its current market(s) by depending on its functional & competitive strategiesProduct Development Option

Firm create new product for use by its current market (customers)

Concentration StrategyMarket Development Option

When a firm sell its current products in new markets (additional geographic areas or market segments not currently served by firm)Product-Market Diversification Option

Where firm seeks to expand both into new products & new marketsSingle-business firm becomes a multiple-business firm since it is now operating in a different industry

Concentration StrategyAdvantage

Organization becomes very good at what it doesDrawback

Organization is vulnerable to industry and other external environmental shiftsConcentration strategy is used by both small-sized and large organizations

Vertical Integration StrategiesAn organizations attempt to gain control of

Its inputs (backward integration) -- supplierIts output (forward integration) -- distributorOr both inputs and outputPurpose is to (1) reduce resource acquisition costs, & (2) deal with inefficient operationsVertical Integration

Considered a growth strategy because the firms operations are expanded beyond primary businessMixed empirical results as to whether strategy helps or hurt performanceWhat is the role of outsourcing in achieving same objective as vertical integration?

Vertical Integration StrategiesBenefits

Reduced purchasing & selling costsImproved coordination of functions & capabilitiesProtected proprietary technologyCosts

Reduced flexibility as firm is locked into products & technologyCreate an exit barrier due to existence of assets that are hard to sellDifficulties in integrating various operationsFinancial costs of acquiring or starting up

Horizontal Integration StrategiesExpanding the firm's operations through combining with competitors operating in the same industry & doing the same things

It is an appropriate corporate growth strategy as long as

It enables the company to meet its growth objectivesIt can be strategically managed to attain a sustainable competitive advantageIt satisfies legal and regulatory guidelines

Diversification StrategiesA corporate growth strategy in which a firm expands its operation by moving into a different industryMany reasons or motives for diversificationTwo major types of diversification

Related (concentric) diversificationUnrelated (conglomerate) diversification

Why Do Firms Diversify?To Grow

Increase sales & profitability beyond what firms core businesses can provideManagerial self-serving behavior -- compensationManagerial hubris -- pride or status that come from managing a large businessTo more fully utilize existing resources and capabilities

Skills in sales & marketing, general management skills & knowledge, distribution channels, etc.

Why Do Firms Diversify?Risk reduction and/or spreading

Escape from unattractive or undesirable industries (e.g., tobacco & oil companies)Stability of profit flows (CAPM: systematic vs. unsystematic risks; shareholders & diversified portfolios)To make use of surplus cash flows

Large cash balances attract corporate raidersUse cash balances to avoid hostile takeoversTo build shareholder value

Create synergy among the businesses of a firmMake 2 + 2 = 5: The whole should be greater than the sum of the parts

Why Do Firms DiversifySynergy can be obtained in three ways

Exploiting economies of scale Exploiting economies of scopeEfficient allocation of capital through the use of portfolio management techniquesProblems that prevent diversified firms from realizing synergies

A poor understanding of how diversification activities will fit or be coordinated with existing businessesDangers or risks associated with the acquisition of businessesProblems with the development of internal businesses

Why Do Firms Diversify?Diversification is capable of increasing shareholder value if it passes three tests:

The attractiveness test: The industry must be structurally attractive or capable of being made attractiveThe cost-of-entry test: The cost of entry must not capitalize all future profitsThe better-off test: Either the new unit must gain competitive advantage from its link with the corporation or vice versa (i.e. synergy)

Related (Concentric) DiversificationRelated (Concentric) Diversification

Diversifying into a different industry but one thats related in some ways to the organizations current operationsSearch for strategic synergy, which is the performance of the sum of the parts is better than the wholeThe idea that 2 + 2 = 5Synergy happens because of the interactions and the interrelatedness of the combined operations and the sharing of resources, capabilities, & distinctive competencies

Related DiversificationBuilds shareholder value by capturing cross-business strategic fits

Transferring skills & capabilities from one business to anotherSharing facilities or resources to reduce costsLeveraging the use of common brand nameCombining resources to create new competitive strengths and capabilities

Related DiversificationAdvantages or Benefits

Opportunities to achieve economies of scale and scope through skill transfers, lower costs, common brand name, technology, etc.Opportunities to expand product or service offerings and preserve unity in businessesDisadvantages

Complexity and difficulty of coordinating different, but related businesses (e.g. Philip Morris General Food and Kraft subsidiaries)Related diversification is a strategy-driven approach to creating shareholder value

Unrelated DiversificationDiversifying into completely different industry from the firms current operationsFirm move into industries where there is

No strategic fit to be exploitedNo meaningful value chain relationshipsNo unifying strategic themeE.g.: GE; Walt Disney; Sara LeeApproach is venture into any business with good profitability prospects

Unrelated DiversificationTargets for unrelated diversification

Firms with undervalued assets

Firms in financial distress

Firms with bright growth prospects but limited capitalAdvantages

Business risk spread over different industriesEfficient allocation of capital resourcesStability of profitsEnhanced shareholder value

Unrelated DiversificationDisadvantages

Difficulties of competently managing many diverse businessesNo strategic fits which can be leveraged into competitive advantage

Unrelated diversification is a finance-driven approach to creating shareholder value

Implementing Growth StrategiesMergers & Acquisitions

A merger is a legal transaction in which two or more organizations combine through an exchange of stock, but only one firm actually remain

An acquisition is an outright purchase of an organization by another

What is a Takeover?

Implementing Growth StrategiesInternal Development

Organization chooses to expand its operation by starting a new business from scratchChoice between mergers-acquisition and internal development depends on: (See Table 7-4)The new industrys barriers to entryRelatedness of new business to the existing oneSpeed & development cost associated with each approachRisks associated with each approachStage of the industry life cycle

Implementing Growth StrategiesStrategic Partnering

When two or more firms establish a legitimate relationship by combining their resources, core competencies, distinctive capabilities for some business purposeArrangement can be used to implement any of the growth strategiesVertical Integration Horizontal IntegrationRelated Diversification

Implementing Growth StrategiesTypes of Strategic Partnerships

Joint Venture (JV)Two or more separate organization form an independent organization for strategic purposesPartners usually own equal shares of new ventureUsed when partners do not want to be legally joinedLong-Term ContractLegal contract between organizations covering a specific business purposeTypically between an organization & its suppliers

Implementing Growth StrategiesTypes of strategic Partnerships (contd)

Strategic AllianceTwo or more firms share resources, capabilities or competencies to pursue some business purpose

Similar to JVs but no formation of a separate entity

Often pursued in order to

Partners reap benefits of expanded operations

ORGANIZATIONAL STABILITYA strategy where the organization maintains its current size and current level of business operationsWhen is stability an appropriate strategy?

Industry is in a period of rapid upheaval with several key industry & external forces drastically changing, making future highly uncertainIndustry is facing slow or no growth opportunitiesMany small business owners follow stability strategy indefinitely

ORGANIZATIONAL STABILITYWhen is stability an appropriate strategy?

Organization has just completed a frenzied period of growth & needs to have some down time in order for its resources & capabilities to build up strength againlarge firm in large industry at maturity stage of industry life cycleImplementation of Stability Strategy

Not expanding organizations level of operationShould be a short-run strategy