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Formulating Corporate-Level Strategy
HCAD 5390
Strategies
Distinguishing Corporations from Strategic Business Units (SBUs)
Multi-SBU Corporations: Sole separate legal entity Authorized to execute contracts Able to borrow money and sell equity Produces no goods or services Quite small staff Primary function is to assemble and manage a
portfolio of SBUs
Distinguishing Corporations from Strategic Business Units (SBUs)
Strategic Business Units:
No separate legal existence No separate ability to contract or raise capital Produce goods and services Compete in one or more markets Relative autonomy to manage operations and
strategy
Value-Adding Functions of the Corporate Center
Manage the Portfolio of SBUs Raise Financial Capital for Allocation to SBUs Allocate Resources and Services to SBUs Facilitate Synergies Among SBUs Choose Parenting Style for SBU Interactions Participate in SBU Strategic Planning Process Oversee and Monitor SBU Performance Manage Corporate Relations With Stakeholders
Corporate Management of an SBU Portfolio (I)
In pursuit of a corporate vision Acquires, merges with, or develops internally
new SBUs Divests existing, unwanted SBUs Set performance goals for SBU management Provide input to SBU strategic decisions Count upon SBUs to perform unique strategic
functions
Corporate Management of an SBU Portfolio (II)
Balance between central corporate direction and individual SBU autonomy
Control vs spontaneity Hire good SBU managers, give them general
guidelines, and let them loose … or … Give detailed directions, watch closely, and
intervene frequently
Model Portfolio Management Process
1. Choose strategic thrust of the corporation– Growth– Stability– Retrenchment
2. Choose geographic areas, markets, and products or services to offer in them
3. Decide how many SBUs in the portfolio and which businesses they will be
Texas Health Resources
Texas Health Resources (THR) is one of the largest faith-based, nonprofit health care delivery systems in the United States and the largest in North Texas in terms of patients served. The system's primary service area consists of 16 counties in north central Texas, home to more than 6.2 million people. THR was formed in 1997 with the assets of Fort Worth-based Harris Methodist Health System and Dallas-based Presbyterian Healthcare Resources. Later that year, Arlington Memorial Hospital joined the THR system. THR has 12 acute-care hospitals and one long-term care hospital that total 3,100 licensed hospital beds, employs more than 18,000 people, and counts more than 3,600 physicians with active staff privileges at its hospitals. THR is also a corporate member or partner in six additional hospitals and surgery centers.
10
Adaptive Strategies
Corporate-Level Strategic Options:Growth – Expand the Portfolio
Most common corporate-level strategy direction Critical to maintaining share in a growing market In pursuit of economies of scale and scope Increase in experience and learning Top executive egos to be satisfied
12
Expansion Adaptive Strategy:– Orientation toward growth
Expand, cut back, status quo? Concentrate within current industry, diversify into
other industries? Growth and expansion through internal development
or acquisitions, mergers, or strategic alliances?
Adaptive Strategies
Growth By Concentration
All businesses start here Dedicate all resources and competencies to
one or a few products or services Achieved in one of three ways:
– Sell more of current products in current markets– Sell current products in new markets– Sell new products in current markets
To sell new products in new markets is diversification
14
Basic Growth Strategies:
Concentration– Current product line in one industry
– Market Development– Product Development– Penetration
Diversification– Into other product lines in other industries
Adaptive Strategies
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.
Concentration No Longer Sufficient to Maintain Growth
Unlikely to capture a greater share of current market
Current market is stagnating, maturing, shrinking, or otherwise lacking growth potential
Excess cash on hand needs to be invested productively
Management has greater ambitions for further strategic achievement
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.
Growth By Related Diversification
Move beyond existing markets and products Employ existing resources and competencies New businesses are closely connected
(“related”) to existing businesses Directions of related diversification
– Vertical forward integration (toward customers)– Vertical backward integration (toward suppliers)– Horizontal expansion
Forms of Relatedness
Products or services Markets Processes, systems, or other operating features Manufacturing facilities, distribution channels,
marketing media, or support services Brand image, corporate reputation, creativity or
innovation skills, or general managerial expertise
Vertical Integration
Forward or backward in the industry value chain Moving “upstream” toward suppliers
– Hospital acquiring a physician group practice
Moving “downstream” toward customers– Hospital acquiring a long-term care facility
Examples: physician-hospital organizations (failed), integrated delivery systems (succeeded)
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
Vertical Integration
Decision Steps in Vertical Integration
Adequate resources and competencies to bring the new business operations in-house
Choose form of integration – full ownership, partial ownership, joint venture, or long-term contract
Consider impact on other stakeholders Pay attention to share of industry value chain
being brought in-house
Good Reasons for Vertical Integration
Reduce costs by eliminating redundancy throughout the value chain
Better coordination at interface between value chain components
Profit-taking at several levels in the chain is eliminated Greater overall control of inputs (resources) and
outputs (distribution channels) Wider network of sources of competitive intelligence Opportunity to reengineer the value chain
Vertical Integration Problems (I)
Does the value chain function as well after integration as it did before?
Excessive costs may be incurred in managing the new businesses and their interactions
Inability to use full capacity of acquired businesses so must … sell to competitors?
Must the business deal exclusively with its new integration partners?
Vertical Integration Problems (II)
Commitment to entire chain reduces strategic flexibility
Commitment may tie business to inefficient processes, poorly managed units, and obsolete technologies
Inability to coordinate added units may increase costs and limit opportunities to create value for customers
Horizontal Expansion
Moving sideways in the value chain, acquiring similar businesses in different geographic areas
Acquisition target may be a competitor May create antitrust enforcement concerns Examples: multistate hospital networks,
nursing home chains, national health plan systems
Best Circumstances for Horizontal Expansion
Current market is growing, requiring additional capacity to meet demand
Target acquisition doing poorly – lacks resources or competencies possessed by the acquirer
Expanded size enables economies of scale leading to competitive advantage
Opportunity to create dominant market position by acquiring a competitor
31
Basic Diversification Strategies:
– Concentric (Related) Diversification
– Conglomerate (Unrelated) Diversification
Diversification
Incentives to Diversify
Internal Incentives:Internal Incentives: Poor performance may lead some firms to diversify an Poor performance may lead some firms to diversify an
attempt to achieve better returnsattempt to achieve better returns Firms may diversify to balance uncertain future cash flowsFirms may diversify to balance uncertain future cash flows Firms may diversify into different businesses in order to Firms may diversify into different businesses in order to
reduce riskreduce risk
Resources and Diversification
Besides strong incentives, firms are more likely to Besides strong incentives, firms are more likely to diversify if they have the resources to do sodiversify if they have the resources to do so
Value creation is determined more by appropriate Value creation is determined more by appropriate use of resources than incentives to diversifyuse of resources than incentives to diversify
Managerial Motives to Diversify
Managers have motives to diversifyManagers have motives to diversify – diversification increases size; size is associated with diversification increases size; size is associated with
executive compensationexecutive compensation– diversification reduces employment riskdiversification reduces employment risk– effective governance mechanisms may restrict such effective governance mechanisms may restrict such
motivesmotives
35
Concentric Diversification
– Growth into related industry– Search for synergies
Related Diversification
Related Diversification
3M3M
Hewlett PackardHewlett Packard
Marriott
Related Diversification
Advantages of Related Diversification (I)
Synergies among existing and acquired businesses
Lower overall corporate risk – balancing high and low-risk SBUs
Greater bargaining power vis-à-vis competitors, suppliers and customers
Advantages of Related Diversification (II)
Cross-subsidization among businesses at different life cycle stages
General increase in revenues and profits from acquired businesses
Opportunity to acquire new knowledge, competencies, and technologies
Enhance status, power, and compensation of top executives
Forms of Inter-SBU Synergy (I)
Share solutions to problems and ideas for improving operational efficiency
Use slack capacity to achieve economies of scale
Earn volume discounts and greater bargaining power with suppliers
Integration of computer systems and capabilities
Forms of Inter-SBU Synergy (II)
By sharing R&D facilities, reduce innovation costs and spread research risks
Share distribution channels Leverage the use of influential brand names
and images Wide opportunities for knowledge transfer
42
Unrelated (Conglomerate) Diversification– Growth into unrelated industry– Concern with financial considerations
Adaptive Strategies
Growth By Unrelated Diversification
Few similarities or commonalities among businesses in the portfolio
Operate in different industries/markets, serve different customers, face different competitors
Corporation composed of unrelated businesses may be called a “conglomerate”
What value is added by bringing unrelated businesses together into one corporation?
Unrelated Diversification
Tyco
Amer Group Amer Group
ITTITT
Adaptive Strategies
Relationship Between Diversification and Performance
Per
form
ance
Per
form
ance
Level of DiversificationLevel of Diversification
DominantBusiness
UnrelatedBusiness
RelatedConstrained
Bureaucratic Costs and the Limits of Diversification
Number of businesses– Information overload can lead to poor resource allocation
decisions and create inefficiencies.Coordination among businesses
– As the scope of diversification widens, control and bureaucratic costs increase.
– Resource sharing and pooling arrangements that create value also cause coordination problems.
Limits of diversification– The extent of diversification must be balanced with its
bureaucratic costs.
Tools for Implementing Growth Strategies
Internal development Internal new venture creation Investments in new ventures Acquisition Merger Joint venture, strategic alliance or partnership
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
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 2000 and July 2005. 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.
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
Corporate-Level Strategic Options:Stability – Maintain the Portfolio
Rapid growth outstripped financial and managerial resources
Difficulties in assimilating recent portfolio additions
Some current SBUs may have serious financial or operational problems
No attractive acquisition opportunities available Waiting for environmental changes to develop
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
Corporate-Level Strategic Options:Retrenchment – Cut Back the Portfolio
Need to do more than pause and rethink– Regain control of inefficient operations– Rebuild resources and competencies– Reconsider strategic direction
Result may be a radical restructure and redirection of the organization
Retrenchment Options
Getting back down to fighting weight Returning to core businesses and competencies Seeking a “white knight” to take over Selling the entire organization Divesting pieces of the corporate portfolio Voluntary filing for bankruptcy/reorganization Voluntary/involuntary filing for
bankruptcy/liquidation
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.
Tools for Portfolio Analysis and Management
Graphical matrix diagrams showing variable
factors key to strategic portfolios decisions
1. Boston Consulting Group Growth-Share Matrix
2. General Electric Business Screen
Reviewing the Corporate Portfolio
Portfolio Planning under the Boston Consulting Group (BCG) matrix:– Identifying the Strategic Business Units (SBUs) by
business area or product market– Assessing each SBU’s prospects (using relative
market share and industry growth rate) relative to other SBUs in the portfolio.
– Developing strategic objectives for each SBU.
The BCG Matrix
Source: Perspectives, No. 66, “The Product Portfolio.” Adapted by permission from The Boston Consulting Group, Inc., 1970.
The BCG Matrix
Stars– High relative market shares in fast growing industries.
Question marks– Low relative market shares in fast growing industries.
Cash cows– High relative market shares in low-growth industries.
Dogs– Low relative market shares in low-growth industries.
The Strategic Implications of the BCG Matrix
Stars– Aggressive investments to support continued growth and
consolidate competitive position of firms. Question marks
– Selective investments; divestiture for weak firms or those with uncertain prospects and lack of strategic fit.
Cash cows– Investments sufficient to maintain competitive position. Cash
surpluses used in developing and nurturing stars and selected question mark firms.
Dogs– Divestiture, harvesting, or liquidation and industry exit.
Limitations on Portfolio Planning
Flaws in portfolio planning:– The BCG model is simplistic; considers only two
competitive environment factors– relative market share and industry growth rate.
– High relative market share is no guarantee of a cost savings or competitive advantage.
– Low relative market share is not always an indicator of competitive failure or lack of profitability.
– Multifactor models (e.g., the McKinsey matrix) are better though imperfect.
The McKinsey Matrix
Raise Financial Capital
SBUs may lack the separate legal existence to do this on their own
Corporate center performs this function by issuing stock and borrowing
Then, allocates the capital to SBUs in some rational, objective manner that maximizes total return to the corporation
This is the practice of corporate strategic financial management
Allocate Resources and Services
In addition to financial capital, corporate center may possess other resources useful to SBUs– Human resource management services– Research and development capability– Technology assessment competence– Information technology support– Corporate legal department
These too must be allocated to the SBUs
Facilitate Synergies Among SBUs
Inter-SBU synergies are one of the main reasons for assembling corporate portfolios
Synergies do not often occur naturally; the corporate center must foster them
– Watch each SBU’s operations and strategies– Notice lacks of resources and competencies– Inventory resources or competencies owned by the SBUs– Match lacking and owning SBUs– Facilitate actual sharing among them
Forms of Synergy Facilitation (I)
Disseminate knowledge and best practices Facilitate transfer of knowledge assets and
services Encourage collaboration and coordination Arrange transfer of skills and capabilities Build central database of resources and
competencies available to all SBUs
Forms of Synergy Facilitation (II)
Temporarily assign a specialist from one SBU to another
Sponsor all-SBU meetings to share information and problem solutions
Coordinate activities of common SBU functions to gain economies of scale
Provide synergy-supporting education, training, and coaching to SBU personnel
Choose a Corporate Parenting Style
Conscious choice on how the corporate center will interact with SBUs in its portfolio
Range along a continuum from complete detachment to intrusive micromanagement
Choice will affect behavior and performance of SBU top management
Too loose parenting can lead to rogue SBUs Too tight parenting can stifle creative
spontaneity
Participate in SBU Strategy-Making
Corporate degree of involvement in SBU strategic management is a parenting choice
Difference between a true SBU and a division or department of a business:– SBU – great autonomy and freedom of action– Division – close central direction and control
Essence of SBU success is in entrepreneurial impulses of their top executives
Oversee and Monitor SBU Performance
Every corporate center must monitor the performance of SBUs in its portfolio:– Are they meeting the strategic objectives of the SBU
and the overall corporation?– Are they financially healthy?– Are there any looming problems?– Are top executives meeting personal performance
standards?
Managing Relationships With External Stakeholders
Every organization has numerous stakeholders who must be tended to
Meaning of term “stakeholder” Examples of health care stakeholders:
– Suppliers (employees, unions, contractors)– Customers (patients, payers)– Competitors– Regulators– Capital sources (donors, grantors, shareholders, lenders)– Media
Corporate Value Negation
Systems and approvals that add costs, delay decisions, and slow market responsiveness
Insulate SBU executives from realities and pressures of financial markets
Portfolio so large and diverse that no common theme is apparent
Overly large corporate HQ that incur expense without providing added value to SBUs
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
port
Act
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Marketing & Sales
Outbound Logistics
Operations
Inbound LogisticsFirm
Inf
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Mgm
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Pro
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Margin Margin
Primary Activities
Sup
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Act
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Marketing & Sales
Outbound Logistics
Operations
Inbound LogisticsFirm
Inf
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Hum
an R
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Mgm
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Pro
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Ver
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cal A
llia
nce
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
al D
evel
opm
ent
Pro
cure
men
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
ogic
al D
evel
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Pro
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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