Corporate-Level Strategy

MANA 5336

2

Directional Strategies

Stages in the Raw-Material-to-Consumer Value Chain

Upstream Downstream

Stages in the Raw-Material-to-Consumer Value Chain in the Personal Computer Industry

End userDistributionAssemblyIntermediatemanufacturer

Raw materials

Examples:Examples:Dow ChemicalDow ChemicalUnion CarbideUnion CarbideKyoceraKyocera

Examples:Examples:IntelIntelSeagateSeagateMicronMicron

Examples:Examples:AppleAppleHpHpDellDell

Examples:Examples:Best BuyBest BuyOffice MaxOffice Max

Concentration on a Single Business

SEARSCoca-ColaCoca-ColaMcDonaldsMcDonalds

Southwest Airlines

Concentration on a Single Business

Advantages– Operational focus on a

single familiar industry or market.

– Current resources and capabilities add value.

– Growing with the market brings competitive advantage.

Disadvantages– No diversification of market

risks.– Vertical integration may be

required to create value and establish competitive advantage.

– Opportunities to create value and make a profit may be missed.

Diversification

Related diversification– Entry into new business activity based on shared

commonalities in the components of the value chains of the firms.

Unrelated diversification– Entry into a new business area that has no

obvious relationship with any area of the existing business.

Related Diversification

3M3M

Hewlett PackardHewlett Packard

Marriott

Unrelated Diversification

Tyco

Amer Group Amer Group

ITTITT

Diversification and Corporate Performance: A Disappointing History

Sources: Lipin, S. & Deogun, N. 2000. Big merges of the 90’s prove disappointing to shareholders. Wall Street Journal, October 30: C1; A study by Dr. G. William Schwert, University of Rochester, cited in Pare, T. P. 1994. The new merger boom. Fortune, November 28:96; and Porter, M.E. 1987. From competitive advantage to corporate strategy. Harvard Business Review, 65(3):43.

A study conducted by Business Week and Mercer Management Consulting, Inc., analyzed 150 acquisitions that took place between July 1990 and July 1995. Based on total stock returns from three months before, and up to three years after, the announcement:

30 percent substantially eroded shareholder returns. 20 percent eroded some returns. 33 percent created only marginal returns. 17 percent created substantial returns.A study by Salomon Smith Barney of U.S. companies acquired

since 1997 in deals for $15 billion or more, the stocks of the acquiring firms have, on average, under-performed the S&P stock index by 14 percentage points and under-performed their peer group by four percentage points after the deals were announced.

Relationship Between Diversification and Performance

Per

form

ance

Per

form

ance

Level of DiversificationLevel of Diversification

DominantBusiness

UnrelatedBusiness

RelatedConstrained

Restructuring:Contraction of Scope

Why restructure?– Pull-back from overdiversification.– Attacks by competitors on core

businesses.– Diminished strategic advantages of

vertical integration and diversification.Contraction (Exit) strategies

– Retrenchment– Divestment– spinoffs of profitable SBUs to investors;

management buy outs (MBOs).– Harvest– halting investment, maximizing cash flow.– Liquidation– Cease operations, write off assets.

Why Contraction of Scope?

The causes of corporate decline– Poor management– incompetence, neglect– Overexpansion– empire-building CEO’s– Inadequate financial controls– no profit responsibility– High costs– low labor productivity– New competition– powerful emerging competitors– Unforeseen demand shifts– major market changes– Organizational inertia– slow to respond to new competitive

conditions

The Main Steps of Turnaround

Changing the leadership– Replace entrenched management with new managers.

Redefining strategic focus– Evaluate and reconstitute the organization’s strategy.

Asset sales and closures– Divest unwanted assets for investment resources.

Improving profitability– Reduce costs, tighten finance and performance controls.

Acquisitions– Make acquisitions of skills and competencies to strengthen

core businesses.

Adaptive Strategies

Maintenance of ScopeEnhancement

Status Quo

Market Entry Strategies

Acquisition:Acquisition: a strategy through which one organization buys a a strategy through which one organization buys a controlling interest in another organization with the intent of controlling interest in another organization with the intent of making the acquired firm a subsidiary business within its own making the acquired firm a subsidiary business within its own portfolioportfolio

Licensing:Licensing: a strategy where the organization purchases the a strategy where the organization purchases the right to use technology, process, etc. right to use technology, process, etc.

Joint Venture:Joint Venture: a strategy where an organization joins with a strategy where an organization joins with another organization(s) to form a new organizationanother organization(s) to form a new organization

AcquisitionsAcquisitions

Reasons for Making Acquisitions

IncreaseIncreasemarket powermarket power

OvercomeOvercomeentry barriersentry barriers

Cost of newCost of newproduct developmentproduct development Increase speedIncrease speed

to marketto market

IncreaseIncreasediversificationdiversification

Reshape firm’sReshape firm’scompetitive scopecompetitive scope

Lower risk comparedLower risk comparedto developing newto developing new

productsproducts

Learn and developLearn and developnew capabilitiesnew capabilities

AcquisitionsAcquisitions

Problems With AcquisitionsIntegrationIntegrationdifficultiesdifficulties

InadequateInadequateevaluation of targetevaluation of target

Large orLarge orextraordinary debtextraordinary debt

Inability toInability toachieve synergyachieve synergy

Too muchToo muchdiversificationdiversification

Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions

Resulting firmResulting firmis too largeis too large

Strategic Alliance

A strategic alliance is a cooperative strategy in whichA strategic alliance is a cooperative strategy in which– firms combine some of their resources and capabilitiesfirms combine some of their resources and capabilities– to create a competitive advantageto create a competitive advantage

A strategic alliance involvesA strategic alliance involves– exchange and sharing of resources and capabilitiesexchange and sharing of resources and capabilities– co-development or distribution of goods or servicesco-development or distribution of goods or services

CombinedCombinedResourcesResources

CapabilitiesCapabilitiesCore CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

Strategic Alliance

Firm AFirm A Firm BFirm B

Mutual interests in designing, manufacturing,Mutual interests in designing, manufacturing,or distributing goods or servicesor distributing goods or services

Types of Cooperative Strategies

Joint venture: two or more firms create an Joint venture: two or more firms create an independent company by combining parts of their independent company by combining parts of their assetsassets

Equity strategic alliance: partners who own different Equity strategic alliance: partners who own different percentages of equity in a new venturepercentages of equity in a new venture

Nonequity strategic alliances: contractual Nonequity strategic alliances: contractual agreements given to a company to supply, produce, agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity or distribute a firm’s goods or services without equity sharingsharing

Strategic Alliances

Margin Margin

Primary Activities

Sup

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Act

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Marketing & Sales

Outbound Logistics

Operations

Inbound LogisticsFirm

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Pro

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Margin Margin

Primary Activities

Sup

port

Act

iviti

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Marketing & Sales

Outbound Logistics

Operations

Inbound LogisticsFirm

Inf

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Hum

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Mgm

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Ver

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SupplierSupplier

• vertical complementary strategic vertical complementary strategic alliance is formed between firms alliance is formed between firms that agree to use their skills and that agree to use their skills and capabilities in different stages of capabilities in different stages of the value chain to create value the value chain to create value for both firmsfor both firms

• outsourcing is one example of outsourcing is one example of this type of alliancethis type of alliance

Strategic Alliances

Margin Margin

Primary Activities

Sup

port

Act

iviti

es Service

Marketing & Sales

Outbound Logistics

Operations

Inbound LogisticsFirm

Inf

rast

ruct

ure

Hum

an R

esou

rce

Mgm

t.

Tec

hnol

ogic

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evel

opm

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Pro

cure

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t

Margin Margin

Primary Activities

Sup

port

Act

iviti

es Service

Marketing & Sales

Outbound Logistics

Operations

Inbound LogisticsFirm

Inf

rast

ruct

ure

Hum

an R

esou

rce

Mgm

t.

Tec

hnol

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evel

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BuyerBuyerPotential CompetitorsPotential Competitors

• horizontal complementary strategic alliance is formed horizontal complementary strategic alliance is formed between partners who agree to combine their resources and between partners who agree to combine their resources and skills to create value in the same stage of the value chainskills to create value in the same stage of the value chain

• focus on long-term product development and distribution opportunities

• the partners may become competitorsthe partners may become competitors• requires a great deal of trust between the partnersrequires a great deal of trust between the partners

BuyerBuyer