1. Corporate-Level Strategy MANA 5336

2. 2 Directional Strategies

3. 3 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? Directional Strategies

4. 4 Basic Growth Strategies: Concentration – Current product line in one industry – Vertical Integration – Market Development – Product Development – Penetration Diversification – Into other product lines in other industries Directional Strategies

5. 5 Expansion of Scope Basic Concentration Strategies: Vertical growth Horizontal growth Directional Strategies

6. 6 Vertical growth – Vertical integration Full integration Taper integration Quasi-integration – Backward integration – Forward integration Directional Strategies

7. Stages in the Raw-Material-to- Consumer Value Chain UpstreamDownstream

8. Stages in the Raw-Material-to-Consumer Value Chain in the Personal Computer Industry End userDistributionAssembly Intermediate manufacturer Raw materials Examples: Dow Chemical Union Carbide Kyocera Examples: Intel Seagate Micron Examples: Apple Hp Dell Examples: Best Buy Office Max

9. Vertical Integration Integration backward into supplier functions – Assures constant supply of inputs. – Protects against price increases. Integration forward into distributor functions – Assures proper disposal of outputs. – Captures additional profits beyond activity costs. Integration choice is that of which value-adding activities to compete in and which are better suited for others to carry out.

10. Creating Value Through Vertical Integration Advantages of a vertical integration strategy: – Builds entry barriers to new competitors by denying them inputs and customers. – Facilitates investment in efficiency-enhancing assets that solve internal mutual dependence problems. – Protects product quality through control of input quality and distribution and service of outputs. – Improves internal scheduling (e.g., JIT inventory systems) responses to changes in demand.

11. Creating Value Through Vertical Integration Disadvantages of vertical integration – Cost disadvantages of internal supply purchasing. – Remaining tied to obsolescent technology. – Aligning input and output capacities with uncertainty in market demand is difficult for integrated companies.

12. 12 Horizontal Growth – Horizontal integration Directional Strategies

13. 13 Basic Diversification Strategies: – Concentric Diversification – Conglomerate Diversification Directional Strategies

14. 14 Concentric Diversification – Growth into related industry – Search for synergies Directional Strategies

15. Concentration on a Single Business SEARS Coca-Cola McDonalds Southwest Airlines

16. 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.

17. 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.

18. Related Diversification 3M Hewlett Packard Marriott

19. Unrelated Diversification Tyco Amer Group ITT

20. Diversification and Corporate Performance: A Disappointing History 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.

21. Directional Strategies

22. 22 Unrelated (Conglomerate) Diversification – Growth into unrelated industry – Concern with financial considerations Directional Strategies

24. Reasons for Diversification Reasons to Enhance Strategic Competitiveness Economies of scope/scale Market power Financial economics Incentives Resources ManagerialMotives

25. Incentives with Neutral Effects on Strategic Competitiveness Anti-trust regulation Tax laws Low performance Uncertain future cash flows Firm risk reduction Incentives Resources ManagerialMotives Reasons for Diversification

26. Incentives to Diversify External Incentives: Relaxation of anti-trust regulation allows more related acquisitions than in the past Relaxation of anti-trust regulation allows more related acquisitions than in the past Before 1986, higher taxes on dividends favored spending retained earnings on acquisitions Before 1986, higher taxes on dividends favored spending retained earnings on acquisitions After 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to take advantage of tax deductible interest payments After 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to take advantage of tax deductible interest payments

27. Incentives to Diversify Internal Incentives: Poor performance may lead some firms to diversify an attempt to achieve better returns Poor performance may lead some firms to diversify an attempt to achieve better returns Firms may diversify to balance uncertain future cash flows Firms may diversify to balance uncertain future cash flows Firms may diversify into different businesses in order to reduce risk Firms may diversify into different businesses in order to reduce risk

28. Resources and Diversification Besides strong incentives, firms are more likely to diversify if they have the resources to do so Besides strong incentives, firms are more likely to diversify if they have the resources to do so Value creation is determined more by appropriate use of resources than incentives to diversify Value creation is determined more by appropriate use of resources than incentives to diversify

29. Managerial Motives (Value Reduction) Diversifying managerial employment risk Increasing managerial compensation Incentives Resources ManagerialMotives Reasons for Diversification

30. Managerial Motives to Diversify Managers have motives to diversify – diversification increases size; size is associated with executive compensation – diversification reduces employment risk – effective governance mechanisms may restrict such motives

31. 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.

32. Relationship Between Diversification and Performance Performance Level of Diversification Dominant Business Unrelated Business Related Constrained

33. 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.

34. 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

35. 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.

36. Adaptive Strategies Maintenance of Scope Enhancement Status Quo

37. Market Entry Strategies Acquisition: a strategy through which one organization buys a controlling interest in another organization with the intent of making the acquired firm a subsidiary business within its own portfolio Acquisition: a strategy through which one organization buys a controlling interest in another organization with the intent of making the acquired firm a subsidiary business within its own portfolio Licensing: a strategy where the organization purchases the right to use technology, process, etc. Licensing: a strategy where the organization purchases the right to use technology, process, etc. Joint Venture: a strategy where an organization joins with another organization(s) to form a new organization Joint Venture: a strategy where an organization joins with another organization(s) to form a new organization

38. Acquisitions Reasons for Making Acquisitions Increase market power Overcome entry barriers Cost of new product development Increase speed to market Increasediversification Reshape firm’s competitive scope Lower risk compared to developing new products Learn and develop new capabilities

39. Reasons for Making Acquisitions: Factors increasing market power Factors increasing market power – when a firm is able to sell its goods or services above competitive levels or – when the costs of its primary or support activities are below those of its competitors – usually is derived from the size of the firm and its resources and capabilities to compete Market power is increased by Market power is increased by – horizontal acquisitions – vertical acquisitions – related acquisitions Increased Market Power

40. Reasons for Making Acquisitions: Barriers to entry include Barriers to entry include – economies of scale in established competitors – differentiated products by competitors – enduring relationships with customers that create product loyalties with competitors acquisition of an established company acquisition of an established company – may be more effective than entering the market as a competitor offering an unfamiliar good or service that is unfamiliar to current buyers Cross-border acquisition Cross-border acquisition Overcome Barriers to Entry

41. Reasons for Making Acquisitions: Significant investments of a firm’s resources are required to Significant investments of a firm’s resources are required to – develop new products internally – introduce new products into the marketplace Acquisition of a competitor may result in Acquisition of a competitor may result in – lower risk compared to developing new products – increased diversification – reshaping the firm’s competitive scope – learning and developing new capabilities – faster market entry – rapid access to new capabilities

42. Reasons for Making Acquisitions: An acquisition’s outcomes can be estimated more easily and accurately compared to the outcomes of an internal product development process An acquisition’s outcomes can be estimated more easily and accurately compared to the outcomes of an internal product development process Therefore managers may view acquisitions as lowering risk Therefore managers may view acquisitions as lowering risk Lower Risk Compared to Developing New Products

43. Reasons for Making Acquisitions: It may be easier to develop and introduce new products in markets currently served by the firm It may be easier to develop and introduce new products in markets currently served by the firm It may be difficult to develop new products for markets in which a firm lacks experience It may be difficult to develop new products for markets in which a firm lacks experience – it is uncommon for a firm to develop new products internally to diversify its product lines – acquisitions are the quickest and easiest way to diversify a firm and change its portfolio of businesses Increased Diversification

44. Reasons for Making Acquisitions: Firms may use acquisitions to reduce their dependence on one or more products or markets Firms may use acquisitions to reduce their dependence on one or more products or markets Reducing a company’s dependence on specific markets alters the firm’s competitive scope Reducing a company’s dependence on specific markets alters the firm’s competitive scope Reshaping the Firms’ Competitive Scope

45. Reasons for Making Acquisitions: Acquisitions may gain capabilities that the firm does not possess Acquisitions may gain capabilities that the firm does not possess Acquisitions may be used to Acquisitions may be used to – acquire a special technological capability – broaden a firm’s knowledge base – reduce inertia Learning and Developing New Capabilities

46. Acquisitions Problems With Acquisitions Integrationdifficulties Inadequate evaluation of target Large or extraordinary debt Inability to achieve synergy Too much diversification Managers overly focused on acquisitions Resulting firm is too large

47. Problems With Acquisitions Integration challenges include Integration challenges include – melding two disparate corporate cultures – linking different financial and control systems – building effective working relationships (particularly when management styles differ) – resolving problems regarding the status of the newly acquired firm’s executives – loss of key personnel weakens the acquired firm’s capabilities and reduces its value Integration Difficulties

48. Problems With Acquisitions Evaluation requires that hundreds of issues be closely examined, including Evaluation requires that hundreds of issues be closely examined, including – financing for the intended transaction – differences in cultures between the acquiring and target firm – tax consequences of the transaction – actions that would be necessary to successfully meld the two workforces Ineffective due-diligence process may Ineffective due-diligence process may – result in paying excessive premium for the target company Inadequate Evaluation of Target

49. Problems With Acquisitions Firm may take on significant debt to acquire a company Firm may take on significant debt to acquire a company High debt can High debt can – increase the likelihood of bankruptcy – lead to a downgrade in the firm’s credit rating – preclude needed investment in activities that contribute to the firm’s long-term success Large or Extraordinary Debt

50. Problems With Acquisitions Synergy exists when assets are worth more when used in conjunction with each other than when they are used separately Synergy exists when assets are worth more when used in conjunction with each other than when they are used separately Firms experience transaction costs (e.g., legal fees) when they use acquisition strategies to create synergy Firms experience transaction costs (e.g., legal fees) when they use acquisition strategies to create synergy Firms tend to underestimate indirect costs of integration when evaluating a potential acquisition Firms tend to underestimate indirect costs of integration when evaluating a potential acquisition Inability to Achieve Synergy

51. Problems With Acquisitions Diversified firms must process more information of greater diversity Diversified firms must process more information of greater diversity Scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units’ performances Scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units’ performances Acquisitions may become substitutes for innovation Acquisitions may become substitutes for innovation Too Much Diversification

52. Problems With Acquisitions Managers in target firms may operate in a state of virtual suspended animation during an acquisition Managers in target firms may operate in a state of virtual suspended animation during an acquisition Executives may become hesitant to make decisions with long-term consequences until negotiations have been completed Executives may become hesitant to make decisions with long-term consequences until negotiations have been completed Acquisition process can create a short-term perspective and a greater aversion to risk among top-level executives in a target firm Acquisition process can create a short-term perspective and a greater aversion to risk among top-level executives in a target firm Managers Overly Focused on Acquisitions

53. Problems With Acquisitions Additional costs may exceed the benefits of the economies of scale and additional market power Additional costs may exceed the benefits of the economies of scale and additional market power Larger size may lead to more bureaucratic controls Larger size may lead to more bureaucratic controls Formalized controls often lead to relatively rigid and standardized managerial behavior Formalized controls often lead to relatively rigid and standardized managerial behavior Firm may produce less innovation Firm may produce less innovation Too Large

54. Strategic Alliance A strategic alliance is a cooperative strategy in which A strategic alliance is a cooperative strategy in which – firms combine some of their resources and capabilities – to create a competitive advantage A strategic alliance involves A strategic alliance involves – exchange and sharing of resources and capabilities – co-development or distribution of goods or services

55. CombinedResourcesCapabilities Core Competencies ResourcesCapabilities ResourcesCapabilities Strategic Alliance Firm A Firm B Mutual interests in designing, manufacturing, or distributing goods or services

56. Types of Cooperative Strategies Joint venture: two or more firms create an independent company by combining parts of their assets Joint venture: two or more firms create an independent company by combining parts of their assets Equity strategic alliance: partners who own different percentages of equity in a new venture Equity strategic alliance: partners who own different percentages of equity in a new venture Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing

57. Strategic Alliances Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurement Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurement Vertical Alliance Supplier vertical complementary strategic alliance is formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value for both firmsvertical complementary strategic alliance is formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value for both firms outsourcing is one example of this type of allianceoutsourcing is one example of this type of alliance

58. Strategic Alliances Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurement Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological DevelopmentProcurement Buyer Potential Competitors horizontal complementary strategic alliance is formed between partners who agree to combine their resources and skills to create value in the same stage of the value chainhorizontal complementary strategic alliance is formed between partners who agree to combine their resources and skills 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 Buyer