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Corporate-Level Strategies Key Terms Corporate-Level Strategy – specifies actions a firm takes to gain a competitive advantage by selecting and managing.

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Presentation on theme: "Corporate-Level Strategies Key Terms Corporate-Level Strategy – specifies actions a firm takes to gain a competitive advantage by selecting and managing."— Presentation transcript:

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2 Corporate-Level Strategies Key Terms Corporate-Level Strategy – specifies actions a firm takes to gain a competitive advantage by selecting and managing a portfolio of businesses that compete in different product markets or industries. WHERE ARE WE GOING TO COMPETE?

3 Snack Foods BeveragesFoods Frito-Lay North America Frito-Lay International Pepsi-Cola North America Gatorade/Tropicana North America PepsiCo Beverages International Quaker North America

4 Snack Foods Frito-Lay North America Lay’s Ruffles Doritos Santitas Fritos Cheetos Rold Gold Funyuns Sunchips Cracker Jack Chester’s popcorn Grandma’s cookies Munchos Smartfood Baken-ets fried pork skins Oberto meat snacks

5 Snack Foods Frito-Lay International Bocabits wheat snacks Crujitos corn snacks Fandangos corn snacks Hamkas snacks Niknaks cheese sticks Quavers potato snacks Sabritas potato chips Twisties cheese snacks Walkers potato crisps Walkers Square potato snacks Walkers Monster Munch Corn snacks Miss Vickie’s potato chips Gamesa cookies Dippas Sonric’s sweet snacks

6 Snack Foods Frito-Lay International Bocabits wheat snacks Crujitos corn snacks Fandangos corn snacks Hamkas snacks Niknaks cheese sticks Quavers potato snacks Sabritas potato chips Twisties cheese snacks Walkers potato crisps Walkers Square potato snacks Walkers Monster Munch Corn snacks Miss Vickie’s potato chips Gamesa cookies Dippas Sonric’s sweet snacks

7 Beverages Pepsi-Cola North America Pepsi-Cola Mountain Dew Slice Mug Sierra Mist FruitWorks Lipton Dole Aquafina Frappuccino SoBe AMP

8 Beverages Gatorade/Tropicana North America Gatorade Propel Tropicana Dole juices

9 Beverages PepsiCo Beverages International Loóza juices and nectars Copella juices Frui’Vita juices Tropicana 100 juices

10 Foods Quaker North America Quaker Oats Cap’n Crunch cereal Life cereal Quisp cereal King Vitaman cereal Mother’s cereal Quaker rice cakes and granola bars Rice-A-Roni side dishes Near East couscous/pilafs Aunt Jemima mixes & syrups Quaker grits

11 Foods Quaker North America Quaker Oats Cap’n Crunch cereal Life cereal Quisp cereal King Vitaman cereal Mother’s cereal Quaker rice cakes and granola bars Rice-A-Roni side dishes Near East couscous/pilafs Aunt Jemima mixes & syrups Quaker grits Business Level Strategies How are we going to compete and gain a competitive advantage in each of our businesses?

12 Snack FoodsBeveragesFoods Corporate Level Strategy 1) What businesses do we want to compete in? 2) How do manage effectively across businesses

13 Where did they go?

14 13 Corporate-level strategy Specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets Expected to help firm earn above-average returns Value ultimately determined by degree to which “the businesses in the portfolio are worth more under the management of the company then they would be under any other ownership - Synergy Product diversification (PD): primary form of corporate-level strategy

15 Goals of Corporate Strategy Moves to enter new businesses Boosting combined performance of the businesses Capturing synergies and turning them into competitive advantages Establishing investment priorities and steering resources into business units

16 4 Conditions of Successful Diversification 1) Growing industries with complementary products and technologies Apple IPhone 2) Leverage existing capabilities which match the KSFs in other arenas Disney Cruise Lines 3) Closely related moves which reduce costs Kroger & Fred Meyer 4) Powerful brand and reputation Marguerittaville, NASCAR Café, or Emril’s

17 Product Diversification Primary form of corporate-level strategy Entails the scope of the industries and markets in which the firm competes Defines how managers buy, create, and sell different businesses to match skills and strengths with opportunities Is expected to reduce variability in the firm's profitability, generating earnings from several different business units Its development and monitoring carry a cost which must be balanced with benefits to establish an ideal portfolio of businesses

18 Levels and Types of Diversification

19 Curvilinear Relationship between Diversification and Performance

20 19 Procter & Gamble’s Diversification Strategy Purpose of diversification: Use expertise and knowledge gained in one business by diversifying into a business where it can be used in a related way Builds synergy: value added by corporate office adds up to more than the value if different businesses in the portfolio were separate and independent Procter & Gamble (P&G) Product mix: beauty products targeting women and baby care products 2005: Acquired Gillette (consumer health care products) focused on masculine market

21 Related Diversification at Disney Entertainment/Production Theme Parks Resorts Entertainment/Broadcasting Cruise Lines Retailing

22 21 Levels of Diversification (N=3) (Cont’d) 2. Moderate to High Levels Related Constrained Diversification Strategy Less than 70% of revenue comes from the dominant business Direct links (I.e., share products, technology and distribution linkages) between the firm's businesses Related Linked Diversification Strategy (Mixed related and unrelated) Less than 70% of revenue comes from the dominant business Mixed: Linked firms sharing fewer resources and assets among their businesses (compared with related constrained, above), concentrating on the transfer of knowledge and competencies among the businesses

23 Tyco Electronics Tyco Telecommunications Tyco Fire and Security Tyco Safety Products Tyco Healthcare Tyco Plastics Tyco Adhesives Tyco Flow Control Tyco Electrical and Metal Products Tyco Fire and Building Products Tyco Infrastructure Services

24 GE Advanced materials Commercial loans Appliances Insurance Jet engines Electric power generation Medical imaging NBU Universal Chemical Treatment Equipment services and rentals

25 24 Levels of Diversification (N=3 ) (Cont’d) 3. Very High Levels: Unrelated Less than 70% of revenue comes from dominant business No relationships between businesses

26 Unrelated Diversification Key Terms Financial Economies – cost savings realized through improved allocations of financial resources based on investments inside or outside the firm

27 Drawbacks for Unrelated Demanding requirements Limited to no opportunities to share advantages

28 Creating Value with Diversification Strategies Operational relatedness - sharing activities Corporate relatedness - transferring knowledge

29 Value-Creating Strategies of Diversification

30 Diversification and the Multidivisional Structure Key Terms Multidivisional Structure (M-form) – organizational structure which ties together several operating divisions, each representing a separate business or profit center to which responsibility for daily operations and business-unit strategy is delegated

31 Original Benefits of the M-form It enabled corporate officers to more accurately monitor the performance of each business, which simplified the problem of control It facilitated comparisons between divisions, which improved the resource allocation process It stimulated managers of poorly performing divisions to look for ways of improving performance

32 Diversification and the Multidivisional Structure Key Terms Organizational Controls – guide the use of strategy, indicate how to compare actual results with expected results, and suggest corrective actions to take when the difference between actual and expected results is unacceptable Strategic Controls – subjective criteria intended to verify that the firm is using appropriate strategies for the conditions in the external environment and the company's competitive advantages (used for "sharing" strategies) Finance Controls – objective criteria used to measure firm performance against previously established quantitative standards (used for unrelated diversification)

33 Operational Relatedness – Sharing Activities Activity sharing requires sharing strategic control over business units Pursuing appropriate coordination mechanisms can lead to successful creation of economies of scope Activity sharing can be risky because business-unit ties create links between outcomes and can cause organizational difficulties that interfere with success More attractive results are obtained through activity sharing when facilitated by a strong corporate office

34 Variations of the M-form Cooperative Strategic business-unit (SBU) Competitive

35 Cooperative Form of the Multidivisional Structure Key Terms Cooperative Form – organizational structure using horizontal integration to bring about interdivisional cooperation

36 Cooperative Form of the Multidivisional Structure

37 All of the divisions share one or more corporate strengths Interdivisional sharing depends on cooperation Links resulting from effective integration mechanisms support sharing of both tangible and intangible resources Centralization is one integrating mechanism that can be used to link activities among divisions, allowing firms to exploit common strengths and share competencies Success is influenced by how well information is processed among divisions Success can be influenced by managerial commitment levels and the response to some lost managerial autonomy

38 The Strategic Business-Unit Form of the Multidivisional Structure Key Terms Strategic Business-Unit (SBU) Form – multidivisional organization structure with three levels used to support the implementation of a diversification strategy

39 SBU Form of the Multidivisional Structure

40 Divisions within each SBU are related in terms of shared products and/or markets Divisions of one SBU have little in common with division of other SBUs Divisions within each SBU share product or market competencies to develop economies of scope Integrations used in cooperative form are equally effective for the SBU form Each SBU is a profit center Financial controls are more vital for evaluating performance

41 The Competitive Form of the Multidivisional Structure Key Terms Competitive Form – organizational structure in which the firm's divisions are completely independent

42 Competitive Form of the Multidivisional Structure

43 Divisions do not share common corporate strengths Integration devices are not developed to coordinate activities across divisions Efficient capital markets in unrelated strategies require organizational arrangements that emphasize divisional competition rather than cooperation Specific performance expectations and accountability for independent divisions stimulate internal competition for future resources

44 Competitive Form of the Multidivisional Structure Headquarters maintains a distant relationship to avoid intervention in divisional affairs Strategic controls are used to monitor performance relative to targeted returns Headquarters remains responsible for cash flow allocation, performance appraisal, resource allocation, and the legal aspects related to acquisitions

45 Benefits of Internal Competition Internal competition creates flexibility Internal competition challenges the status quo and inertia Internal competition motivates effort

46 Competing For Advantage Part III – Creating Competitive Advantage Chapter 9 – Acquisition and Restructuring Strategy

47 Mergers, Acquisitions, and Takeovers: What Are the Differences? Key Terms Merger - strategy through which two firms agree to integrate their operations on a relatively co-equal basis. Acquisition - strategy through which one firm buys a controlling, 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio.

48 Mergers, Acquisitions, and Takeovers – What Are the Differences? Key Terms Takeover – special type of acquisition strategy wherein the target firm did not solicit the acquiring firm's bid Hostile Takeover – unfriendly takeover strategy that is unexpected and undesired by the target firm

49 Mergers and Acquisitions Reasons of Acquisitions Market Power Overcome Entry Barriers Increased Speed Lower Risk New Technologies/Capabilities Diversify Gain Competitive Advantages Reduced profits in current industry Reduce overdependence

50 Mergers and Acquisitions Problems with Acquisitions Integration of two firms Overpayment/Debt Overestimation of Synergy Overdiversification Managerial energy absorption Become too large Substitute for innovation Inadequate evaluation Transaction costs

51 Mergers and Acquisitions Results Poor Performance Who Wins? Acquired Firm Shareholders

52 Failures of Acquisitions % average acquisition premium Acquiring firm’s value drops 4% in the 3 months following acquisitions % of acquisitions are later divested Acquirers underperform S&P by 14%, peers by 4% 3 month performance before and after 30% substantial losses, 20% some losses, 33% marginal returns, 17% substantial returns

53 Why, then, do executives acquire? Often, for personal reasons Firm size and executive compensation are related When do executives loss their jobs? 1) Acquired - larger firms harder to acquire 2) Performing poorly - employment risk is reduced as returns are less volatile

54 53 Effective Acquisitions Complementary assets or resources Friendly acquisitions facilitate integration of firms Effective due-diligence process (assessment of target firm by acquirer, such as books, culture, etc.) Financial slack Low debt position 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 Innovation Flexibility and adaptability

55 When/Why to Diversify? To create shareholder value Porter’s Three Point Test 1) Attractiveness Test 2) Cost of Entry Test 3) Better off Test Should pass all 3

56 Types of Acquisitions to Increase Market Power Horizontal Acquisitions Acquisition in the same industry Exploits cost- and revenue-based synergies Similarities lead to smoother integration and higher performance Vertical Acquisitions Increase of market power by controlling more of the value chain Related Acquisitions Acquisition of a firm in a highly related industry Increase of market power by leveraging core competencies to gain a competitive advantage

57 Entry Barriers that Acquisitions Overcome Economies of scale in established competitors Differentiated products by competitors Enduring relationships with customers that create product loyalties with competitors


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