Corporate-level Strategy

Diversification (Related and Unrelated)

Integration (Vertical and Horizontal)

Contraction Strategies

Resource Allocation Decisions

BCG Matrix

Industry Attractiveness/Competitive Strength

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?

Corporate-level or strictly Business-level?

Disney?

Wal-Mart?

General Electric?

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

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

Expansion strategies include:

Diversification (Related and Unrelated)Vertical IntegrationHorizontal Integration

Contraction Strategies include:

Divestiture (including Spin-off)LiquidationCorporate TurnaroundCorporate RetrenchmentPortfolio Restructuring

Corporate-level Strategies

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)

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.

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)

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)

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.

PurchasedSuppliesInboundLogistics

OperationsDistribution

and OutboundLogistics

Salesand

MarketingService

PurchasedSuppliesInboundLogistics

OperationsDistribution

and OutboundLogistics

Salesand

MarketingService

Support Activities

Support Activities

Opportunities for Costs Savings or Skills Transfer

How do firms develop an advantageat the corporate level?

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

Parks And

Resorts

ConsumerProducts

StudioEntertainment

MediaNetworks

DISNEY

RESOURCES PROVIDE THE BASISFOR RELATEDNESS

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

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.

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.

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

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

Pharmaceuticals

Animal HealthProducts

NeuroscienceBiotechnology

Managed Care

Merck & Co., Inc.

BiotechnologyManaged

CarePrescriptions

Pharmaceuticals

Backward integration Forward integration

AnimalHealth Products

Related DiversificationManagement Fits

Operating FitsTechnology Fits

Merck & Co., Inc. (C-L Strategy)

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

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

Investment decisions require a balance of:

Financial considerations

Growth considerations

Market Share

Industry Sales Growth Rate

Boston Consulting Group Matrix

High

Low

High Low

Moo!!

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?

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?

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!!

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?

What are the limitations of the BCG Matrix?

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

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

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