2 Lecture Objectives Define corporate strategy. Explain the difference between a single-business firm and a multiple-business firm.Discuss how corporate strategy is related to the other firm strategies.Explain the corporate strategic directions available to firms.Describe the various organizational growth strategies.Discuss the reasons/motives for diversificationDiscuss the advantages and disadvantages of related & unrelated diversification.Explain how growth strategies can be implemented.Describe when organizational stability is an appropriate strategic choice.
3 What is Corporate Strategy? Those strategies concerned with the broad and long-term questions ofwhat business(es) the organization is in or wants to be in & what it wants to do with those businessesTask involvesMoves to enter new businessesActions to boost combined performance of businessesWays to capture synergy among related businessesEstablishing investment priorities & steering corporate resources into most attractive units
4 Single & Multiple Business Organizations Single business organizationsOperates primarily in only one industry (e.g., Coca-Cola – Beverage Industry; Wrigley Jr. Company – Chewing Gum)Multiple Business OrganizationsOperates in more than one industryExample: PepsiCo – Snack Food Industry business (Frito Lay); & Beverage IndustryPhilip Morris Companies – Tobacco Industry; Brewery Industry (Miller Brewery); & Food Processing Industry (Kraft General Foods).
5 Corporate, Competitive & Functional Strategies Corporate strategy establishes the overall direction that the organization hopes to go.Competitive & functional strategies provide the means or mechanisms for making sure the organization gets there.
6 Possible Corporate Strategic Directions (1) Moving the organization ahead -- Organizational Growth(2) Keeping the organization where it is -- Organizational Stability(3) Reversing the organization’s weaknesses or decline -- Organizational Renewal
7 ORGANIZATIONAL GROWTH Growth strategyInvolves the attainment of specific growth objectives by increasing the level of an firm’s operationsTypical growth objectives for businessesIncrease in sales revenuesIncrease in earnings or profitsOther performance measuresGrowth objectives of not-for-profit businessesIncreasing clients served or patrons attractedBroadening the geographic areaIncreasing programs offered
8 Types of Growth Strategies InternationalConcentrationOrganizationalGrowthDiversificationRelatedUnrelatedVerticalIntegrationBackwardForwardHorizontalIntegration
9 Concentration Strategy A growth strategy where the firmConcentrates on its primary line of businessLooks for ways to meet its growth objectives through increasing its level of operation in this primary businessWhen a single-business organization pursues growth, it is using the concentration strategy
10 Concentration Strategy Four concentration strategy optionsProductsCurrentNewProductDevelopmentCurrentProduct-MarketExplorationCustomersProduct/MarketDiversificationMarketDevelopmentNew
11 Concentration Strategy Product-Market Exploration OptionDescribes attempts by firm to increase sales of its current product(s) in its current market(s) by depending on its functional & competitive strategiesProduct Development OptionFirm create new product for use by its current market (customers)
12 Concentration Strategy Market Development OptionWhen a firm sell its current products in new markets (additional geographic areas or market segments not currently served by firm)Product-Market Diversification OptionWhere firm seeks to expand both into new products & new marketsSingle-business firm becomes a multiple-business firm since it is now operating in a different industry
13 Concentration Strategy AdvantageOrganization becomes very good at what it doesDrawbackOrganization is vulnerable to industry and other external environmental shiftsConcentration strategy is used by both small-sized and large organizations
14 Vertical Integration Strategies An organization’s attempt to gain control ofIts inputs (backward integration) -- supplierIts output (forward integration) -- distributorOr both inputs and outputPurpose is to (1) reduce resource acquisition costs, & (2) deal with inefficient operationsVertical IntegrationConsidered a growth strategy because the firm’s operations are expanded beyond primary businessMixed empirical results as to whether strategy helps or hurt performanceWhat is the role of outsourcing in achieving same objective as vertical integration?
15 Vertical Integration Strategies BenefitsReduced purchasing & selling costsImproved coordination of functions & capabilitiesProtected proprietary technologyCostsReduced flexibility as firm is locked into products & technologyCreate an exit barrier due to existence of assets that are hard to sellDifficulties in integrating various operationsFinancial costs of acquiring or starting up
16 Horizontal Integration Strategies Expanding the firm's operations through combining with competitors operating in the same industry & doing the same thingsIt is an appropriate corporate growth strategy as long asIt enables the company to meet its growth objectivesIt can be strategically managed to attain a sustainable competitive advantageIt satisfies legal and regulatory guidelines
17 Diversification Strategies A corporate growth strategy in which a firm expands its operation by moving into a different industryMany reasons or motives for diversificationTwo major types of diversificationRelated (concentric) diversificationUnrelated (conglomerate) diversification
18 Why Do Firms Diversify? To Grow Increase sales & profitability beyond what firm’s core businesses can provideManagerial self-serving behavior -- compensationManagerial “hubris” -- pride or status that come from managing a large businessTo more fully utilize existing resources and capabilitiesSkills in sales & marketing, general management skills & knowledge, distribution channels, etc.
19 Why Do Firms Diversify? Risk reduction and/or spreading Escape from unattractive or undesirable industries (e.g., tobacco & oil companies)Stability of profit flows (CAPM: systematic vs. unsystematic risks; shareholders & diversified portfolios)To make use of surplus cash flowsLarge cash balances attract corporate raidersUse cash balances to avoid hostile takeoversTo build shareholder valueCreate synergy among the businesses of a firmMake = 5: The whole should be greater than the sum of the parts
20 Why Do Firms Diversify Synergy can be obtained in three ways Exploiting economies of scaleExploiting economies of scopeEfficient allocation of capital through the use of portfolio management techniquesProblems that prevent diversified firms from realizing synergiesA poor understanding of how diversification activities will “fit” or be coordinated with existing businessesDangers or risks associated with the acquisition of businessesProblems with the development of internal businesses
21 Why Do Firms Diversify?Diversification is capable of increasing shareholder value if it passes three tests:The attractiveness test: The industry must be structurally attractive or capable of being made attractiveThe cost-of-entry test: The cost of entry must not capitalize all future profitsThe better-off test: Either the new unit must gain competitive advantage from its link with the corporation or vice versa (i.e. synergy)
22 Related (Concentric) Diversification Diversifying into a different industry but one that’s related in some ways to the organization’s current operationsSearch for strategic “synergy”, which is the performance of the sum of the parts is better than the wholeThe idea that = 5Synergy happens because of the interactions and the interrelatedness of the combined operations and the sharing of resources, capabilities, & distinctive competencies
23 Related Diversification Builds shareholder value by capturing cross-business “strategic fits”Transferring skills & capabilities from one business to anotherSharing facilities or resources to reduce costsLeveraging the use of common brand nameCombining resources to create new competitive strengths and capabilities
24 Related Diversification Advantages or BenefitsOpportunities to achieve economies of scale and scope through skill transfers, lower costs, common brand name, technology, etc.Opportunities to expand product or service offerings and preserve unity in businessesDisadvantagesComplexity and difficulty of coordinating different, but related businesses (e.g. Philip Morris’ General Food and Kraft subsidiaries)Related diversification is a strategy-driven approach to creating shareholder value
25 Unrelated Diversification Diversifying into completely different industry from the firm’s current operationsFirm move into industries where there isNo strategic fit to be exploitedNo meaningful value chain relationshipsNo unifying strategic themeE.g.: GE; Walt Disney; Sara LeeApproach is venture into any business with good profitability prospects
26 Unrelated Diversification Targets for unrelated diversificationFirms with undervalued assetsFirms in financial distressFirms with bright growth prospects but limited capitalAdvantagesBusiness risk spread over different industriesEfficient allocation of capital resourcesStability of profitsEnhanced shareholder value
27 Unrelated Diversification DisadvantagesDifficulties of competently managing many diverse businessesNo strategic fits which can be leveraged into competitive advantageUnrelated diversification is a finance-driven approach to creating shareholder value
28 Implementing Growth Strategies Mergers & AcquisitionsA merger is a legal transaction in which two or more organizations combine through an exchange of stock, but only one firm actually remainAn acquisition is an outright purchase of an organization by anotherWhat is a Takeover?
29 Implementing Growth Strategies Internal DevelopmentOrganization chooses to expand its operation by starting a new business from scratchChoice between mergers-acquisition and internal development depends on: (See Table 7-4)The new industry’s barriers to entryRelatedness of new business to the existing oneSpeed & development cost associated with each approachRisks associated with each approachStage of the industry life cycle
30 Implementing Growth Strategies Strategic PartneringWhen two or more firms establish a legitimate relationship by combining their resources, core competencies, distinctive capabilities for some business purposeArrangement can be used to implement any of the growth strategiesVertical IntegrationHorizontal IntegrationRelated Diversification
31 Implementing Growth Strategies Types of Strategic PartnershipsJoint Venture (JV)Two or more separate organization form an independent organization for strategic purposesPartners usually own equal shares of new ventureUsed when partners do not want to be legally joinedLong-Term ContractLegal contract between organizations covering a specific business purposeTypically between an organization & its suppliers
32 Implementing Growth Strategies Types of strategic Partnerships (cont’d)Strategic AllianceTwo or more firms share resources, capabilities or competencies to pursue some business purposeSimilar to JV’s but no formation of a separate entityOften pursued in order toPartners reap benefits of expanded operations
33 ORGANIZATIONAL STABILITY A strategy where the organization maintains its current size and current level of business operationsWhen is stability an appropriate strategy?Industry is in a period of rapid upheaval with several key industry & external forces drastically changing, making future highly uncertainIndustry is facing slow or no growth opportunitiesMany small business owners follow stability strategy indefinitely
34 ORGANIZATIONAL STABILITY When is stability an appropriate strategy?Organization has just completed a frenzied period of growth & needs to have some “down” time in order for its resources & capabilities to build up strength againlarge firm in large industry at maturity stage of industry life cycleImplementation of Stability StrategyNot expanding organization’s level of operationShould be a short-run strategy