lecture7 (2) smu

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Chapter 7

Corporate Strategies I

Moses Acquaah, Ph.D.

377 Bryan BuildingPhone: (336) 334-5305

Email: [email protected]

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Lecture Objectives

Define corporate strategy.

Explain the difference between a single-business firm and amultiple-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 diversification

Discuss the advantages and disadvantages of related &unrelated diversification.

Explain how growth strategies can be implemented.

Describe when organizational stability is an appropriatestrategic choice.

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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 businesses

Task involves

Moves to enter new businesses

Actions to boost combined performance of businesses

Ways to capture synergy among related businesses

Establishing investment priorities & steering

corporate resources into most attractive units

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Single & Multiple Business

Organizations

Single business organizations

Operates primarily in only one industry (e.g., Coca-Cola

Beverage Industry; Wrigley Jr. CompanyChewing

Gum)

Multiple Business Organizations

Operates in more than one industry

Example: PepsiCoSnack Food Industry business

(Frito Lay); & Beverage Industry

Philip Morris CompaniesTobacco Industry; Brewery

Industry (Miller Brewery); & Food Processing Industry

(Kraft General Foods).

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Corporate, Competitive &

Functional Strategies

Corporate strategy establishes the overall

direction that the organization hopes to go.Competitive & functional strategies provide

the means or mechanisms for making surethe organization gets there.

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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 ordecline -- Organizational Renewal

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ORGANIZATIONAL GROWTH

Growth strategy

Involves the attainment of specific growth objectives byincreasing the level of an firms operations

Typical growth objectives for businessesIncrease in sales revenues

Increase in earnings or profits

Other performance measures

Growth objectives of not-for-profit businessesIncreasing clients served or patrons attracted

Broadening the geographic area

Increasing programs offered

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Types of Growth Strategies

Organizational

Growth

Diversification

Related

Unrelated Horizontal

Integration

Vertical

Integration

Backward

Forward

ConcentrationInternational

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Concentration Strategy

A growth strategy where the firm

Concentrates on its primary line of business

Looks for ways to meet its growth objectivesthrough increasing its level of operation in this

primary business

When a single-business organization

pursues growth, it is using the concentration

strategy

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Four concentration strategy options

Products

CustomersCurrent

New

Current New

Product-Market

Exploration

Product

Development

Market

Development

Product/Market

Diversification

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Product-Market Exploration Option

Describes attempts by firm to increase sales of

its current product(s) in its current market(s) bydepending on its functional & competitive

strategies

Product Development Option

Firm create new product for use by its current

market (customers)

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Market Development Option

When a firm sell its current products in newmarkets (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 adifferent industry

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Advantage

Organization becomes very good at what it does

DrawbackOrganization is vulnerable to industry and other

external environmental shifts

Concentration strategy is used by both small-sized and large organizations

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Vertical Integration Strategies

An organizations attempt to gain control ofIts inputs (backward integration) -- supplier

Its output (forward integration) -- distributor

Or both inputs and outputPurpose is to (1) reduce resource acquisition costs, &(2) deal with inefficient operations

Vertical IntegrationConsidered a growth strategy because the firms

operations are expanded beyond primary businessMixed empirical results as to whether strategy helps orhurt performance

What is the role of outsourcing in achieving sameobjective as vertical integration?

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Vertical Integration Strategies

Benefits

Reduced purchasing &selling costs

Improved coordinationof functions &capabilities

Protected proprietarytechnology

Costs

Reduced flexibility asfirm is locked into

products & technologyCreate an exit barrierdue to existence ofassets that are hard tosell

Difficulties inintegrating variousoperations

Financial costs ofacquiring or starting up

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Horizontal Integration Strategies

Expanding 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 advantage

It satisfies legal and regulatory guidelines

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Diversification Strategies

A corporate growth strategy in which a firm

expands its operation by moving into a

different industryMany reasons or motives for diversification

Two major types of diversification

Related (concentric) diversificationUnrelated (conglomerate) diversification

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Why Do Firms Diversify?

To Grow

Increase sales & profitability beyond what firms core

businesses can provide

Managerial self-serving behavior -- compensation

Managerial hubris -- pride or status that come from

managing a large business

To more fully utilize existing resources andcapabilities

Skills in sales & marketing, general management

skills & knowledge, distribution channels, etc.

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Risk reduction and/or spreading

Escape from unattractive or undesirable industries (e.g., tobacco

& oil companies)

Stability of profit flows (CAPM: systematic vs. unsystematicrisks; shareholders & diversified portfolios)

To make use of surplus cash flows

Large cash balances attract corporate raiders

Use cash balances to avoid hostile takeovers

To build shareholder value

Create synergyamong the businesses of a firm

Make 2 + 2 = 5: The whole should be greater than the sum of

the parts

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Why Do Firms Diversify

Synergy can be obtained in three waysExploiting economies of scale

Exploiting economies of scope

Efficient allocation of capital through the use of portfoliomanagement techniques

Problems that prevent diversified firms fromrealizing synergies

A poor understanding of how diversification activities will fitor be coordinated with existing businesses

Dangers or risks associated with the acquisition of businesses

Problems with the development of internal businesses

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Diversification is capable of increasing

shareholder value if it passes three tests:

The attractiveness test: The industry must bestructurally attractive or capable of being made

attractive

The cost-of-entry test: The cost of entry must

not capitalize all future profits

The better-off test: Either the new unit must gain

competitive advantage from its link with the

corporation or vice versa (i.e. synergy)

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Related (Concentric) Diversification

Related (Concentric) Diversification

Diversifying into a different industry but onethats related in some ways to the organizations

current operationsSearch for strategic synergy, which is the

performance of the sum of the parts is better thanthe whole

The idea that 2 + 2 = 5

Synergy happens because of the interactions andthe interrelatedness of the combined operationsand the sharing of resources, capabilities, &

distinctive competencies

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Related Diversification

Builds shareholder value by capturing

cross-business strategic fits

Transferring skills & capabilities from onebusiness to another

Sharing facilities or resources to reduce costs

Leveraging the use of common brand name

Combining resources to create new competitive

strengths and capabilities

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Advantages 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 businesses

Disadvantages

Complexity and difficulty of coordinating different, but

related businesses (e.g. Philip Morris General Food and

Kraft subsidiaries)

Related diversification is a strategy-driven approachto creating shareholder value

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Unrelated Diversification

Diversifying into completely differentindustry from the firms current operations

Firm move into industries where there is

No strategic fit to be exploited

No meaningful value chain relationships

No unifying strategic theme

E.g.: GE; Walt Disney; Sara Lee

Approach is venture into any business withgood profitability prospects

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Targets for unrelated diversificationFirms with undervalued assets

Firms in financial distress

Firms with bright growth prospects but limited capital

AdvantagesBusiness risk spread over different industries

Efficient allocation of capital resources

Stability of profits

Enhanced shareholder value

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Disadvantages

Difficulties of competently managing many

diverse businesses

No strategic fits which can be leveraged intocompetitive advantage

Unrelated diversification is a finance-drivenapproach to creating shareholder value

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Implementing Growth Strategies

Mergers & 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?

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Internal Development

Organization chooses to expand its operation by

starting a new business from scratch

Choice between mergers-acquisition and internaldevelopment depends on: (See Table 7-4)

The new industrys barriers to entry

Relatedness of new business to the existing one

Speed & development cost associated with each

approach

Risks associated with each approach

Stage of the industry life cycle

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Strategic Partnering

When two or more firms establish a legitimate

relationship by combining their resources, core

competencies, distinctive capabilities for somebusiness purpose

Arrangement can be used to implement any of

the growth strategies

Vertical Integration

Horizontal Integration


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Types of Strategic Partnerships

Joint Venture (JV)

Two or more separate organization form an

independent organization for strategic purposes

Partners usually own equal shares of new venture

Used when partners do not want to be legally joined

Long-Term Contract Legal contract between organizations covering a

specific business purpose

Typically between an organization & its suppliers

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Types of strategic Partnerships (contd)

Strategic Alliance

Two 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

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ORGANIZATIONAL STABILITY

A strategy where the organization maintains

its current size and current level of business

operations

When is stability an appropriate strategy?

Industry is in a period of rapid upheaval with

several key industry & external forces drastically

changing, making future highly uncertain

Industry is facing slow or no growth opportunities

Many small business owners follow stability

strategy indefinitely

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ORGANIZATIONAL STABILITY

When 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 again

large firm in large industry at maturity stage of

industry life cycleImplementation of Stability Strategy

Not expanding organizations level of operation

Sh ld b h t t t

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lecture7 (2) smu