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6 Corporate Strategies
Learning Objectives
Three directions for corporate strategy Growth
Diversification M&A, JV/SA International
Stability Renewal
Retrenchment Turnaround
Brief Overview of Corporate Strategy
Those strategies concerned with the broad and long-term questions of what business(es) the organization is in and what it wants to do with those businesses
Organizational Growth
Growth Strategy One that involves the attainment of
specific growth objectives by increasing the level of an organization’s operations
Typical growth strategies include Increases in sales revenues Profits Other performance measures
Types of Growth Strategies
OrganizationalGrowth
Concentration
Vertical Integration
• Backward• ForwardHorizontal
Integration
Diversification• Related• Unrelated
International
Concentration
Organization concentrates on its primary line of business and looks for ways to meet its growth objectives through increasing its level of operation in this primary business
Concentration
Customers
Current
New
Current New
Product-MarketExploitation
ProductDevelopment
MarketDevelopment
Product/MarketDiversification
Product(s)
Diversification
RelatedDiversification
OperationalSkills-Capabilities
DistributionChannels
CustomerUse
SimilarTechnology
ProductSimilarities
Diversification and Corporate
Strategy
A company is diversified when it is in two or more lines of business
Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business
A diversified company needs a multi-industry, multi-business strategy
A strategic action plan must be developed for several different businesses competing in diverse industry environments
Diversification
Level Horizontal
Anti-trust laws prohibit a lot of these GE & Honeywell
Vertical Suppliers buying buyers (or vice versa)
Type Related Unrelated
When to Diversify
Some companies do EXCELLENTLY and are not diversified
McDonalds, SWA, Coca-Cola, Domino’s Pizza, Wal-Mart, FedEx, Timex, Gerber
Why stay single business Clear understanding of who we are / what we do No Dilution of management’s attention
Risks of a single business strategy Putting all the “eggs” in one industry basket Unforeseen changes can undermine a single
business firm’s prospects
Related Diversificationand Competitive Advantage
Competitive advantage can result from related diversification if opportunities exist to
Transfer expertise/capabilities/technology Combine related activities into a single operation and reduce
costs Leverage use of firm’s brand name reputation Conduct related value chain activities in a collaborative
fashion to create valuable competitive capabilities
Examples of Related Diversification
Darden Restaurants Olive Garden Red Lobster Bahamas Breeze
Johnson & Johnson Prescription drugs Non-prescription drugs (Tylenol, pepcid AC) Band-aids Baby products
PEPSICO Soft drinks Fruit Juices Snack foods (Fritos, Lays, Cracker Jacks)
Involves diversifying into businesses with No strategic fit
No meaningful value chain relationships
No unifying strategic theme
Approach is to venture into “any businessin which we think we can make a profit”
Firms pursuing unrelated diversification are often referred to as conglomerates
What is Unrelated Diversification?
Examples of different levels of Unrelated diversification
DIAGEO PLC Burger King Guinness Old El Paso Mexican
food Green Giant Liquor
Walt Disney Theme Park Disney Cruise Line Movies TV
Textron Bell helicopters Cessna Aircraft E-Z-GO golf cars Jacobsen turf care
United Technologies
Pratt & Whitney aircraft engines
Carrier Heating & AC Otis Elevators
Attractive Acquisition Targets
Companies with undervalued assets Capital gains may be realized
Companies in financial distress May be purchased at bargain prices and turned around
Appeal of Unrelated Diversification Strategy Business risk scattered over different industries Financial resources can be directed to those industries
offering best profit prospects If bargain-priced firms with big profit potential are
bought, shareholder wealth can be enhanced
Drawbacks of Unrelated Diversification
Difficulties of competently managing many diverse businesses
Lack of strategic fits which can be leveraged into competitive advantage
Consolidated performance of unrelated businesses tends to be no better than sum of individual businesses on their own (and it may be worse)
Likely effect is 1 + 1 = 1.5, not 1 + 1 =3 Promise of greater sales-profit stability over business
cycles seldom realized
Combination Related-Unrelated Diversification Strategies
Dominant-business firms One major core business accounting for 50 - 80 percent
of revenues, with several small related or unrelated businesses accounting for remainder
Narrowly diversified firms Diversification includes a few (2 - 5) related or unrelated
businesses Broadly diversified firms
Diversification includes a wide ranging collection of either related or unrelated businesses or a mixture
Multi-business firms Diversification portfolio includes several unrelated
groups of related businesses
Merger and Acquisition
Most popular approach to diversification Advantages
Quicker entry into target market Easier to hurdle certain entry barriers
Technological inexperience Gaining access to reliable suppliers Being of a size to match rivals in terms of efficiency and
costs Getting adequate distribution access
Joint Ventures and Strategic Alliances
Good way to diversify when Uneconomical or risky to go it alone Pooling competencies of two partners
provides more competitive strength Foreign partners are needed to surmount
Import quotas and Tariffs Nationalistic political interests Cultural roadblocks Lack of knowledge about markets of
particular countries
Drawbacks of JV & SA
Raises questions Which partner will do what Who has effective control
Potential conflicts Control over strategy and long-term direction How operations will be conducted Control over cash flows and profits Personalities and cultures of partners
Benefits of SA & JV
Gain scale economies in production and/or marketing
Fill gaps in technical expertise or knowledge of local markets
Share distribution facilities and dealer networks Direct combined competitive energies toward
defeating mutual rivals Useful way to gain agreement on important
technical standards
Why is the World Economy Globalizing?
Previously closed national economies are opening up their markets to foreign companies
Importance of geographic distance is shrinking due to the Internet
Growth-minded companies are racing to stake out positions in the markets of more and more countries
What is the Motivationfor Competing Internationally?
Gain access tonew customers
Capitalizeon resource
strengths andcompetencies
Helpachieve
lower costsSpread
business risk across wider market base
Obtain access to valuable natural
resources
International vs. Global Competition
International or Multinational
Competitor
Company operates in a select few foreign countries, with
modest ambitions to expand further
GlobalCompetitor
Company markets products in 50 to 100 countries and is expanding operations into additional country markets
annually
How Markets Differ from Country to Country
Consumer tastes and preferences Consumer buying habits Market size and growth potential Distribution channels Driving forces Competitive pressures
International
Global Integrationof Operations
High
Low
Local MarketResponsiveness
Low High
MultidomesticApproach
GlobalApproach
TransnationalApproach
Multi-Domestic Each country market is self-contained Competition in one country market is independent of
competition in other country markets No “international” market, just a collection of country markets
Global Market Many of same rivals compete in many of the same country
markets A firm’s competitive position in one country is affected by its
position in other countries Competitive advantage (or disadvantage) is based on a firm’s
world-wide operations and overall global standing
Characteristics of Multi-Domestic and Global Competition
Multi-Domestic Strategy
Strategy is matched to local market needs Use Different country strategies when
Significant country-to-country differences in customers’ needs exist
Buyers in one country want a product different from buyers in another country
Host government regulations preclude uniform global approach
Two drawbacks Poses problems of transferring competencies across
borders Works against building a unified competitive advantage
Global Strategy
Strategy for competing is similar in all country markets
Involves Coordinating strategic moves globally Selling in many, if not all, nations where a
significant market exists Works best when products and buyer
requirements are similar from country to country
Strategy Options for International Markets
Exporting Licensing Franchising strategy Diversification
Characteristics of Export Strategies
Involves using domestic plants as a production base for exporting to foreign markets
Excellent initial strategy to pursue international sales
Advantages Minimizes both risk and capital requirements Conservative way to test international waters Minimizes direct investments in foreign countries
An export strategy is vulnerable when Manufacturing costs in home country are higher than in
foreign countries where rivals have plants High shipping costs are involved
Allowing a foreign organization to take charge of manufacturing and distributing a product in its country or world region in return for a fee
Advantages Has valuable technical know-how or a patented product but does
not have international capabilities or resources to enter foreign markets
Desires to avoid risks of committing resources to markets which Are unfamiliar, Present economic uncertainty or Are politically volatile
Disadvantage Risk of providing valuable technical know-how to foreign firms
and losing some control over its use
Characteristics of Licensing Strategies
Often is better suited to global expansion efforts of service and retailing enterprises
Advantages Franchisee bears most of costs and risks of
establishing foreign locations Franchiser has to expend only the resources to
recruit, train, and support franchisees
Disadvantage Maintaining cross-country quality control
Characteristics of Franchising Strategies
Organizational Renewal
PoorManagement
UncontrollableCosts or TooHigh Costs
NewCompetitors
UnpredictedShifts in Consumer
Demand
Slow or No Responseto Significant External
or Internal Changes
Over expansionor Too Rapid
Growth
InadequateFinancialControls
Retrenchment
Diversification efforts have become too broad
Lack of resources or skill to support operating and investment needs of all businesses
Misfits (or poorly performing businesses) cannot be completely avoided
Unfavorable changes in industry attractiveness
Diversification may lack compatibility of values essential to cultural fit
Options for Accomplishing Retrenchment
Spin it off as independent company Involves deciding whether to retain partial
ownership or forego any ownership interest Sell it
Involves finding a company which views the business as a good deal and good fit
Leveraged buy out Involves selling business to the managers who
have been running it for a minimal equity down payment and loaning balance of purchase price to new owners
Corporate Turnaround Strategies (downsizing)
Objectives Restore money-losing businesses to profitability
rather than divest them Get whole firm back in the black by curing
problems of ailing businesses in portfolio Most appropriate where
Reasons for poor performance are short-term Ailing businesses are in attractive industries Divesting money-losers doesn’t make long-term
strategic sense
Portfolio Analysis
Industry Growth Rate(in constant sales dollars)
High(faster thanthe economyas a whole)
Low(slower thanthe economyas a whole)
Relative MarketShare Position
High (above 1.0) Low (below 1.0)1.0Stars Question Marks
Cash Cows Dogs
McKinsey GE-Stoplight matrix
Low
High
Medium
AverageStrong Weak
High priority for investment Medium priority for investment
Low priority for investment
Business Unit Competitive Strength
Ind
us
try
Att
rac t
ive
ne
ss
Strategy Implications of Attractiveness/Strength Matrix
Businesses in upper left corner Strategic prescription - grow and build
Businesses in three diagonal cells Invest to maintain position
Businesses in lower right corner Candidates for harvesting or divestiture
The lesson here is emphasize businesses that are market leaders or that can contend for market leadership
Characteristics of Cash Hogs
Internal cash flows are inadequate to fully fund needs for working capital and new capital investment
Parent company has to continually pump in capital to “feed the hog”
Strategic options Aggressively invest in
attractive cash hogs Divest cash hogs lacking
long-term potential
Characteristics of Cash Cows
Generate cash surpluses over and above what is needed to sustain present market position
Such businesses are valuable because surplus cash can be used to
Pay corporate dividends Finance new acquisitions Invest in promising cash hogs
Strategic objectives Fortify and defend present market position Keep the business healthy
Notes of Caution: WhyDiversification Efforts Can Fail Transferring resource capabilities to new
businesses can be far more arduous and expensive than expected
Trying to replicate a firm’s success in one business and hitting a second home run in a new business is easier said than done
Management can misjudge difficulty of overcoming resource strengths of rivals it will face in a new business
Corporate and International Strategy Take Aways
Single Business: Mission Driven Not a bad way to go, but “all eggs are in one basket”
Related Diversification: Strategy driven An alternative way to grow, but make sure the relations are
strong Unrelated Diversification: Finance driven
Core Competency is in management, finance, strategy, or just need to become bigger
Different ways to diversify More than 50% of all acq. do worse than
expected Rarely does 1+1 = 3, typically 1+1 = 2 and often
1+1 = 1
Take Aways-Global strategies
Global strategies work only if the industry is truly a global industry
Political and financial concerns are as important as strategic concerns
There are many ways to enter a new country each with benefits and risks
Global strategy is very hard!
Corporate Strategy Take Aways
First step: identify companies to acquire Attractiveness / competitiveness matrix
Second step: identify resources needed to develop business
Hogs vs. Cows Third step: does it fit our core competencies
Existing or ones we want to develop or retrenchment)
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