Corporate-level Strategy Diversification (Related and Unrelated) Integration (Vertical and...
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Corporate-level Strategy
Diversification (Related and Unrelated)
Integration (Vertical and Horizontal)
Contraction Strategies
Resource Allocation Decisions
BCG Matrix
Industry Attractiveness/Competitive Strength
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What are the three levels of strategy?
What does each level deal with?
How does one know that a firm is pursuing a corporate-level strategy?
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Corporate-level or strictly Business-level?
Disney?
Wal-Mart?
General Electric?
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Corporate-level Strategy
Corporate-level strategy is guided by a vision of how “the firmas a whole can create economic value.”
Kraft Foods Philip Morris(Cigarettes) Miller Brewing P.M. Capital
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Philip Morris Corporation (Altria)
Kraft FoodsDivested 3/07
Philip Morris(Cigarettes)
MillerBrewing
P.M. Capital
The corporation is seen as a system of interdependent parts.
Divested for$5.6 billion
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Expansion strategies include:
Diversification (Related and Unrelated)Vertical IntegrationHorizontal Integration
Contraction Strategies include:
Divestiture (including Spin-off)LiquidationCorporate TurnaroundCorporate RetrenchmentPortfolio Restructuring
Corporate-level Strategies
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Diversification
Why do firms diversify? (Rationale Tests)
Stabilize Cash Flows (seasonal fluctuations)
Attractiveness test (Porter’s Five Forces, size, growth rate, remote environmental conditions, industry profit margins)
Cost of Entry (Barriers to entry, capital investments, debt)
Better off tests (economies of scope, possible strategic fits)
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Diversification
There are two kinds of diversification UnrelatedEx. Virgin: (Five industries):Airlines, music, beverage, retailing, e-commerce, financial services
RelatedEx. Johnson and Johnson (at least 6 industries):Baby products, Health and Personal Care Products, Pharmaceutical, Medical Devices, Contact Lenses.
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Economies of Scope:
When it is less costly for two or more businesses to operateunder one centralized management than to remain independent.
(Linking value chain activities)
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Related Diversification
Firms start or acquire businesses in different industries; value chainsfor both businesses should have strategic fits (or links).
Four kinds of strategic fits:
Technology (using same/similar technological infrastructure)Operating (manufacturing processes) Market (similar or the same distribution channels or customers)Managerial (management know-how or expertise)
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Benefits of Strategic Fits
Strategic Fits provide opportunities for skills transfer or cost savings.
Firms are able to:
Transfer valuable expertise, technological know-how or other capabilities(Hotels and Assisted Living Facilities)
Combine the related activities of separate businesses into a single operation to achieve lower costs of operations or administration (Economies of Scope)
Exploit brand equity by using a well-known brand name (Johnson and Johnson)
Cross-business collaboration to create or leverage valuable resourcesor capabilities.
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PurchasedSuppliesInboundLogistics
OperationsDistribution
and OutboundLogistics
Salesand
MarketingService
PurchasedSuppliesInboundLogistics
OperationsDistribution
and OutboundLogistics
Salesand
MarketingService
Support Activities
Support Activities
Opportunities for Costs Savings or Skills Transfer
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How do firms develop an advantageat the corporate level?
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Resource Based View – Corporate Level Strategy
Companies should diversify around their core businesses; and the creation of synergies by appropriately leveraging thefirm’s resources.
Even at the corporate level, resources are still king!!!
New Criteria for diversification:
1. Strategic fits2. Ability to exploit core competencies across different businesses (e.g., brand management, R&D, innovation)3. Managerial skills and know-how
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Parks And
Resorts
ConsumerProducts
StudioEntertainment
MediaNetworks
DISNEY
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RESOURCES PROVIDE THE BASISFOR RELATEDNESS
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Horizontal Integration
Firms seek ownership or increased control over competitors.(e.g., consolidation, mergers and acquisitions)
Motivations for horizontal integration:Achieve economies of scale/rationalizationTechnology exchangesCo-opting or blocking competitionFacilitate international expansion
Pfizer + Warner Lambert Pfizer
SmithKline Beckman + Beecham Group SmithKline Beecham
SmithklineBeecham + GlaxoWellcome GlaxoSmithkline
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Conditions Favoring Horizontal Integration
1. When an organization can gain monopolistic characteristicswithout being challenged by the federal government.
2. Growing and mature industries.
3. When economies of scale will lead to a competitive advantage.
4. When the organization has both the capital and managerial talent needed to fully manage the expanded organization.
5. When competitors are faltering due to lack of managerial experience or lack of key resources.
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Vertical Integration
Firms attempt to gain ownership or increased control over suppliers or distribution channels.
Assumption underlying a vertical integration strategy:
Control over inputs or distribution channels increases opportunitiesfor cost savings or value creation.
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Advantages of Vertical Integration include:
A secure source of “raw materials” or distribution channels.
Protection of or control over valuable assets, proprietary technology
Access to new business opportunities
Simplified procurement and administrative procedures
Greater control over costs of components
Reduction in transactions cost
Ability to maintain or cultivate a reputation for outstanding quality or service
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Disadvantages of Vertical Integration include:
Costs and expenses associated with increased overhead and capital expenditures
Loss of flexibility from large investments
Problems associated with unbalanced capacities along the industry value chain.
Low demand can lead to underutilization of capacity
High demand can result in a dependence on outside suppliers
Higher administrative costs associated with managing a more complex set of activities.
Transfer pricing dilemmas
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Pharmaceuticals
Animal HealthProducts
NeuroscienceBiotechnology
Managed Care
Merck & Co., Inc.
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BiotechnologyManaged
CarePrescriptions
Pharmaceuticals
Backward integration Forward integration
AnimalHealth Products
Related DiversificationManagement Fits
Operating FitsTechnology Fits
Merck & Co., Inc. (C-L Strategy)
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Contraction Strategies
Divestiture: Selling off business units (as a whole)
Spin-off: Business Unit gains financial and managerial independence (parent company may retain some ownership)
Liquidation: Selling off a business’ assets
Corporate Retrenchment: When then company attempts to reducethe overall scope of its diversification
Portfolio Restructuring: Changing the mix of industries that arerepresented in the corporate portfolio.
Corporate Turnaround: Asset Reduction and/or Cost Reduction
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Resource Allocation Decisions are Complex
Corporate-level managers must grasp the relative merits ofinvestment proposals coming from a range of businesses:
• in DIFFERENT sectors• with DIFFERENT time horizons• in DIFFERENT competitive positions
from management teams with DIFFERING credibilities
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Investment decisions require a balance of:
Financial considerations
Growth considerations
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Market Share
Industry Sales Growth Rate
Boston Consulting Group Matrix
High
Low
High Low
Moo!!
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Stars
Star businesses:
Have a strong competitive position in rapidlygrowing industries
Are major contributors to corporate revenue
Offer excellent profit potential
What about the cash?
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Question Marks
Question Marks operate in high growth industries but haverelatively low market shares
Rapid growth makes them attractive from an industry standpoint but
What about the cash?
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Cash Cows
Why are cash cows particularly valuable?
What about the cash?
They can be milked for cash to:
Pay corporate dividendsFinance new acquisitionsInvest in young stars and question marks
Moo!!
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Dogs
Dogs have a weak market position and low profit potential
Dogs are unable to generate attractive cash flows
Are Dog business units good for anything?
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What are the limitations of the BCG Matrix?
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Industry Attractiveness
Market Size and Projected Growth Rate
Intensity of Competition
Emerging Opportunities and threats
Cross-industry Strategic Fits
Resource Requirements
Seasonal/Cyclical Influences
Macro Factors (Social/Political/Legal/etc)
Industry Profitability
Industry Uncertainty and Business Risk
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Competitive StrengthRelative Market Share
Costs relative to Competitors’ Costs
Ability to Match or Beat Rivals on Key Product Attributes
Ability to benefit from Strategic Fits
Bargaining Power over Suppliers and Buyers
Caliber of Alliances
Brand Image and Reputation
Competitively Valuable Capabilities
Profitability Relative to Competitors
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IndustryAttractiveness
Competitive Strength/Market Position
Industry Attractiveness – Competitive Strength Matrix
High Priority
High Priority
High Priority
LowPriority
LowPriority
LowPriority
MediumPriority
MediumPriority
MediumPriority
Strong WeakHigh
Low
10
3.3
6.7
6.7 3.3
0
0