Competing For Advantage

Competing For Advantage
Part III – Creating Competitive Advantage Chapter 7 – Cooperative Strategy

Cooperative Strategies
Key Terms Cooperative Strategy – strategy in which firms work together to achieve a shared objective Strategic Alliance – cooperative strategy in which firms combine resources and capabilities to create a competitive advantage

Types of Alliances Key Terms
Equity Strategic Alliance – alliance in which two or more firms own a portion of the equity in the venture they have created Joint Venture – strategic alliance in which two or more firms create a legally independent company to share resources and capabilities to develop a competitive advantage Nonequity Strategic Alliance – alliance in which two or more firms develop a contractual relationship to share some of their unique resources and capabilities to create a competitive advantage Types of Alliances and Other Cooperative Strategies – There are two basic types of strategic alliance based on legal form: Equity Nonequity Other cooperative strategies relate to the primary strategic objectives of firms.

Cooperative Strategies
Key Terms Co-opetition – condition created when firms that have formed cooperative strategies also compete against one another in the marketplace Importance of Cooperative Strategy - Cooperative strategies have become integral to the competitive landscape and central to the success of partnered companies.

Reasons for Cooperative Strategies
Lack the resources and capabilities Create value that they couldn't develop by acting independently Aligning stakeholder interests to reduce environmental uncertainty Provision of new sources of revenue and growth Enhance the speed of responding to opportunities Gain new knowledge and experiences to increase competitiveness Importance of Cooperative Strategy - Cooperative strategies have become integral to the competitive landscape and central to the success of partnered companies: Most firms lack the full set of resources and capabilities needed to reach their objectives. Cooperative behavior allows partners to create value that they couldn't develop by acting independently. Aligning stakeholder interests, both inside and outside of the organization, can reduce environmental uncertainty. Alliances can provide a new source of revenue. Alliances can be a vehicle for firm growth. Alliances can enhance the speed of responding to market opportunities, technological changes, and global conditions. Alliances are a way that firms can gain new knowledge and experiences to increase competitiveness. Compare how the reasons for using cooperative strategies vary across market type.

Reasons for Strategic Alliances by Market Type
The individually unique competitive conditions of slow-cycle, fast-cycle, and standard-cycle markets (discussed in Chapter 6) find firms using cooperative strategies for slightly different reasons (see Table 7.1): Slow-cycle markets - Strategic alliances are used to enter restricted markets or establish franchises in new markets with ease and speed. The alliance partner might better understand the new market's conditions and have knowledge of and relationships with key stakeholders. Fast-cycle markets - Strategic alliances between firms with excess resources and promising capabilities aid in the transition required in evolving markets and to gain rapid entry into new markets. Standard-cycle markets - Strategic alliances between large firms with economies of scale are likely to combine complimentary resources/capabilities to gain market power. This type of partnership allows firms to learn new business techniques and technologies. Additional Discussion Notes for Strategic Alliances by Market Type - These notes include additional materials that cover reasons for strategic alliances by market type, citing corporate examples to illustrate the concepts. The competitive conditions of slow-cycle, fast-cycle, and standard-cycle markets impel firms to use cooperative strategies to achieve slightly different objectives (see Table 7.1 in text). Market type examples of cooperative strategic alliances follow. Slow-Cycle Access to restricted market; establish franchises in new markets; maintain stability (e.g., establishing standards). French steelmaker Usinor formed an equity strategic alliance with Dofasco, Canada’s second largest steel mill, to build a plant to supply car bodies for Honda, Toyota, GM, Ford, and DaimlerChrysler. Through this alliance, Usinor and Dofasco established a new franchise in the import-averse U.S. steel market. American AIG formed a joint venture with India to gain entry into India’s restricted insurance market. Petrochemical companies from Venezuela and Brazil formed a joint venture for cross investments between partners. The eventual goal is to attract other oil companies in the region (Colombia and Mexico). Fast-Cycle Compress R&D time and capital; market leadership; form standards; reduce risk and uncertainty: Visa formed a venture capital program to scout technologies and capabilities that will affect the future of financial services industry in order to meld and integrate the physical and the virtual financial world, where customers have the trust, convenience, protection and security in addition to the ease in performing transactions. Standard-Cycle Gain market power; access to resources; economies of scale; overcome barriers; reduce risk; compress learning: In 1993 Lufthansa and United Airlines formed the Star Alliance. Since then 12 other airlines have joined the Star Alliance to share resources and capabilities and to access over 700 cities in 124 countries. The goal is to combine worldwide routes and offer seamless booking and travel throughout the world.

Risks of Cooperative Strategies
Potential for opportunism Misrepresentation of competencies Failure to provide complementary resources and capabilities that were committed Differences in alliance-specific investments made by each partner Competitive Risks of Cooperative Strategies – There is a high failure rate for cooperative strategies. Several factors have a negative impact on their success. Prominent risks of cooperative strategies: Partners may choose to act opportunistically, either when formal contracts fail to prevent the behavior or when an alliance is based on a false perception of partner trustworthiness Partner competencies may be misrepresented, particularly when the contributions are intangible assets Partner may fail to make available the complementary resources and capabilities that were committed, which often occurs in international arrangements when different interpretations of contractual terms or trust-based expectations exist Partner may make investments specific to the alliance while the other partner does not

Managing Competitive Risks in Cooperative Strategies
Prominent risks of cooperative strategy are shown in the top box of Figure 7.5 (the rest of the figure is explained later in this chapter). One is that a partner may act opportunistically. Opportunistic behaviors surface either when formal contracts fail to prevent them or when an alliance is based on a false perception of partner trustworthiness. Not infrequently, the opportunistic firm wants to acquire as much of its partner’s tacit knowledge as it can. Full awareness of what a partner wants in a cooperative strategy reduces the likelihood that a firm will suffer from another’s opportunistic actions. Some cooperative strategies fail when it is discovered that a firm has misrepresented the competencies it can bring to the partnership. This risk is more common when the partner’s contribution is grounded in some of its intangible assets. Superior knowledge of local conditions is an example of an intangible asset that partners often fail to deliver. Asking the partner to provide evidence that it does possess the resources and capabilities it is to share in the cooperative strategy (even when they are largely intangible) may be an effective way to deal with this risk. Another risk is that a firm fails to make available to its partners the complementary resources and capabilities (such as its most sophisticated technologies) that it committed to the cooperative strategy. This risk surfaces most commonly when firms form an international cooperative strategy. In these instances, different cultures can result in different interpretations of contractual terms or trust-based expectations. A final risk is that the firm may make investments that are specific to the alliance while its partner does not. For example, the firm might commit resources and capabilities to develop manufacturing equipment that can be used only to produce items coming from the alliance. If the partner isn’t also making alliance-specific investments, the firm is at a relative disadvantage in terms of returns earned from the alliance compared with investments made to earn the returns.

Managing Cooperative Strategies
Cost Minimization Formalized contracts and close monitoring of behavior , but leads to higher monitoring costs Prevent opportunistic behaviors Formalities can stifle partner efforts to gain maximum value from their participation Opportunity Maximization Focus on value-creation opportunities Informal relationships and fewer constraints to take advantage of unexpected opportunities, to learn and explore additional marketplace possibilities Requires a high level of trust that each will act in the other interest, which is more difficult in international situations Two methods used to manage cooperative strategies: Cost minimization Relationship with partner is formalized with contracts Contracts specify how the cooperative strategy is to be monitored and how partner behavior is to be controlled Goal is to minimize costs and prevent opportunistic behaviors by partners Costs of monitoring cooperative strategy are greater Formalities tend to stifle partner efforts to gain maximum value from their participation Opportunity maximization Focus is on maximizing partnership's value-creation opportunities Informal relationships and fewer constraints allow the partners to take advantage of unexpected opportunities to learn from each other and explore additional marketplace possibilities Partners need a high level of trust that each party will act in partnership's best interest, which is more difficult in international situations

Effective Implementation of Cooperative Strategies
Internalize knowledge learned by organizing the knowledge and properly distributing it to those involved with forming and using cooperative strategies Establish appropriate controls Assign managerial responsibility for cooperative strategy to high-level executive or team Increase the level of trust between partners Implementing and Managing Cooperative Strategies – Building superior skills at effectively implementing and managing cooperative strategies has value for the firm. Several effective ways to effectively implement and manage cooperative strategies: Internalize experiences with successful cooperative strategies to gain maximum value from the knowledge learned (this involves organizing the knowledge and properly distributing it to those involved with forming and using cooperative strategies) Establish appropriate controls Assign managerial responsibility for cooperative strategy to high-level executive or team Increasing the level of trust between partners increases the likelihood of alliance success and is an efficient way to influence and control alliance partners' behaviors

Part III – Creating Competitive Advantage Chapter 8 – Corporate-Level Strategy

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?

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

Snack Foods Frito-Lay North America Lay’s Funyuns Ruffles Sunchips
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

Frito-Lay International
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

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

Beverages Gatorade/Tropicana North America Gatorade Propel Tropicana
Dole juices

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

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

Foods Business Level Strategies
How are we going to compete and gain a competitive advantage in each of our businesses? Foods Business Level Strategies 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

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

Where did they go?

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

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

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

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 What is Diversification? It is the primary form of corporate-level strategy It is concerned with the scope of the industries and markets in which the firm competes It defines how managers buy, create, and sell different businesses to match skills and strengths with opportunities It is expected to reduce variability in the firm's profitability, generating earnings from several different business units There is a cost to developing and monitoring a diversification strategy, which must be balanced with benefits to establish an ideal portfolio of businesses

Levels and Types of Diversification
Levels of Diversification - Different levels of diversification vary according to the connections between and among businesses with a corporation. What are the five categories of diversification? Low levels of diversification Single business Dominant business Moderate to high levels of diversification Related constrained Related linked Very high levels of diversification Unrelated Figure 8.1 defines five categories of diversification. In addition to the single and dominant business categories, which denote relatively low levels of diversification, more fully diversified firms are classified into related and unrelated categories. A firm is related through its diversification when there are several links between its business units; for example, units may share products or services, technologies, or distribution channels. The more links among businesses, the more constrained is the relatedness of diversification. Unrelatedness refers to the absence of direct links between businesses.

Curvilinear Relationship between Diversification and Performance
The relationship between the level of diversification and firm performance: Research evidence suggests a curvilinear relationship exists between diversification levels and firm performance Lower performance is expected for dominant business and unrelated business strategies As illustrated in Figure 8.2, the dominant business and unrelated business strategies are expected to have lower performance than the related constrained diversification strategy. The related linked strategy would fall somewhere between the related constrained and the unrelated diversification strategies; the single business strategy is not included in the figure because it does not involve a significant level of diversification. There are many reasons why a diversification strategy that involves a portfolio of closely related firms is likely to be higher performing than other types of diversification strategies. However, it is important to note two caveats to this pattern of diversification and performance: first, some firms are successful with each type of diversification strategy; second, some research suggests that all diversification leads to trade-offs and a certain level of suboptimization. Additional Discussion Notes for Moderate and High Levels of Diversification - These notes include additional materials that cover the strategies for firms with moderate and high levels of diversification. Moderate and High Levels of Diversification A firm generating more than 30% of its sales revenue outside a dominant business and whose businesses are related to each other in some manner uses a related diversification corporate-level strategy. When the links between the diversified firm’s businesses are rather direct, a related constrained diversification strategy is being used. A related, constrained firm shares a number of resources and activities among its businesses (Campbell Soup, Procter & Gamble, Xerox, and Merck & Company). A highly diversified firm (no relationships between its businesses) follows an unrelated diversification strategy. United Technologies, Textron, and Samsung are examples of firms using this type of corporate-level strategy. In Latin America, China, Korea, and India, conglomerates (firms following the unrelated diversification strategy) continue to dominate the private sector (~30% of GNP). The largest business groups in India, Brazil, Mexico, Argentina, and Colombia are family-owned, diversified enterprises. However, the viability of these large diversified business groups is now questioned.

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

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

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) 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

Tyco Telecommunications Tyco Fire and Security Tyco Safety Products
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

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

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

Unrelated Diversification
Key Terms Financial Economies – cost savings realized through improved allocations of financial resources based on investments inside or outside the firm Unrelated Diversification – Firms can use a corporate-level unrelated diversification strategy to create value.

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

Creating Value with Diversification Strategies
Operational relatedness - sharing activities Corporate relatedness - transferring knowledge Two ways diversification strategies can create value: Operational relatedness - sharing activities Corporate relatedness - transferring knowledge

Value-Creating Strategies of Diversification
Study of these independent relatedness dimensions shows the importance of resources and key competencies. The vertical dimension of Figure 8.3 indicates sharing activities (operational relatedness), and its horizontal dimension depicts corporate capabilities for transferring knowledge (corporate relatedness). The firm with a strong capability in managing operational synergy, especially in sharing assets between its businesses, falls in the upper left quadrant, which also represents vertical sharing of assets through vertical integration. The lower right quadrant represents a highly developed corporate capability for transferring a skill across businesses. This capability is located primarily in the corporate office. The use of either operational relatedness or corporate relatedness is based on a knowledge asset that the firm can either share or transfer. Unrelated diversification is also shown in Figure 8.3 in the lower left quadrant. The unrelated diversification strategy creates value through financial economies rather than through either operational relatedness or corporate relatedness among business units.

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 Diversification and the Multidivisional Structure – The multidivisional organizational structure is used to support implementation of multi-business strategies.

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 As initially designed, there were three major 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

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) Diversification and the Multidivisional Structure – The multidivisional organizational structure is used to support implementation of multi-business strategies.

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 Operational Relatedness: Sharing Activities - Firms create operational relatedness and several issues which affect the degree to which activity sharing creates positive outcomes. Firms create operational relatedness: By sharing primary activities By sharing support activities The following issues affect the degree to which activity sharing creates positive outcomes (value and increased returns): 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 Additional Discussion Notes for Operational Relatedness - These notes include additional materials that cover and illustrate the key characteristics and assumptions of sharing activities to execute a related diversification strategy. Operational Relatedness Firms can create operational relatedness by sharing either a primary activity such as inventory delivery systems or a support activity such as purchasing practices. Procter & Gamble’s paper towel business and baby diaper business both use paper products as an input to the manufacturing process. The joint paper production plant that produces inputs for the two divisions is an example of a shared activity. In addition, because these two businesses produce consumer products, they both share distribution channels and sales networks. PepsiCo has done well in the recent past, but sales growth in carbonated beverages may have reached market saturation or could even decline due to evidence linking soft drink consumption to childhood obesity. The PepsiCo reaction? In 2001 PepsiCo purchased Quaker Oats—the maker of the sports drink Gatorade—for $12 billion. PepsiCo believes that it has found a reliable growth driver as Gatorade is the market leader in sports drinks and experienced a 13% annual growth rate in sales revenue between 1998 and To increase Gatorade’s market share PepsiCo has been integrating Gatorade into its distribution channels. Thus, Pepsi soft drinks, such as Pepsi Cola and Mountain Dew, and Gatorade are sharing the firm’s outbound logistics activity. Similarly, the same distribution channels could be used to distribute Quaker Oats’ healthy snacks and Frito-Lay’s salty snacks.

Variations of the M-form
Cooperative Strategic business-unit (SBU) Competitive Three variations of the M-form: Cooperative Strategic business-unit (SBU) Competitive

Cooperative Form of the Multidivisional Structure
Key Terms Cooperative Form – organizational structure using horizontal integration to bring about interdivisional cooperation Using the Cooperative Form of the Multidivisional Structure to Implement the Related Constrained Strategy - The formation of divisions around products or markets develops an organizational structure for implementing a related constrained diversification strategy.

Cooperative Form of the Multidivisional Structure for Implementation of a Related Constrained Strategy In Figure 8.4, product divisions are used as part of the representation of the cooperative form of the M-form. Market divisions could be used instead of or in addition to product divisions to develop the structure. Additional Discussion Notes for Related Constrained Strategy - These notes include additional materials that illustrate use of the related constrained diversification strategy. Related Constrained Strategy Procter & Gamble, a related constrained firm, is supported by a cooperative structure of five global business product units (baby, feminine and family care, fabric and home care, food and beverage, and health and beauty care) and seven market development organizations (MDOs) formed around a global region. Using the five global product units to create strong brand through ongoing innovation, P&G interfaces with customers to ensure that a division’s marketing plans fully capitalize on local opportunities. Information is shared between the product-oriented and the marketing-oriented efforts to enhance the corporation’s performance. Indeed, some corporate staff members are responsible for focusing on making certain that knowledge is meaningfully categorized and then rapidly transferred throughout P&G’s businesses. Production competencies, marketing competencies, or channel dominance are examples of strengths that P&G’s divisions might share.

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 Cooperative Form of the Multidivisional Structure for Implementation of a Related Constrained Strategy The cooperative mulidivisional form of structure can be formed around products or markets to support a related constrained diversification strategy: 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

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 Using the Strategic Business-Unit Form of the Multidivisional Structure to Implement the Related Linked Strategy – The formation of strategic business units (SBUs) develops an organizational structure for implementing a related linked diversification strategy.

SBU Form of the Multidivisional Structure
SBU Form of the Multidivisional Structure for Implementation of a Related Linked Strategy The strategic business-unit form of the M-form consists of three levels: corporate headquarters, strategic business units (SBUs), and SBU divisions (see Figure 8.5). Additional Discussion Notes for the SBU Form of Multidivisional Structure - These notes include additional materials that illustrate the complexity and use of the strategic business-unit form of multidivisional structure to implement a related linked diversification strategy. Using the SBU Form of the Multidivisional Structure for Implementation of a Related Linked Diversification Strategy Complexity is reflected by the organization’s size and product and market diversity. Related linked firm GE, for example, has twenty=eight strategic business units (SBUs), each with multiple divisions. GE Aircraft Engines, Appliances, Power Systems, NBC, and GE Capital are a few of the firm’s SBUs. The scale of GE’s business units is striking. GE Aircraft Engines is the world’s leading manufacturer of jet engines. With almost thirty divisions, GE Capital is a diversified financial services company creating comprehensive solutions to increase client productivity and efficiency. The GE Power Systems business unit has twenty-one divisions including GE Energy Rentals, GE Distributed Power, and GE Water Technologies. GE’s SBUs are making efforts to form competencies in services and technology as a source of competitive advantage. Recently, technology was identified as an advantage for the GE Medical Systems SBU, as that unit’s divisions share technological competencies to produce equipment, including computed tomography (CT) scanners, MRI systems, nuclear medicine cameras, and ultrasound systems. Once a competence is developed in one of GE Medical Systems’ divisions, it is quickly transferred to the other divisions in that SBU so that the competence can be leveraged to increase the unit’s overall performance.

SBU Form of the Multidivisional Structure
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 SBU Form of the Multidivisional Structure for Implementation of a Related Linked Strategy The SBU form of structure can be formed to support a related linked diversification strategy: 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

The Competitive Form of the Multidivisional Structure
Key Terms Competitive Form – organizational structure in which the firm's divisions are completely independent Using the Competitive Form of the Multidivisional Structure to Implement the Unrelated Diversification Strategy - The formation of independent divisions develops an organizational structure for implementing an unrelated diversification strategy.

Competitive Form of the Multidivisional Structure
Competitive Form of the Multidivisional Structure for Implementation of an Unrelated Strategy The competitive form is a structure in which the firm’s divisions are completely independent (see Figure 8.6). Unlike the divisions in the cooperative structure (see Figure 8.4), the divisions that are part of the competitive structure do not share common corporate strengths (e.g., marketing competencies or channel dominance). Because strengths aren’t shared in the competitive structure, integrating devices aren’t developed for the divisions to use. The efficient internal capital market that is the foundation for use of the unrelated diversification strategy requires organizational arrangements that emphasize divisional competition rather than cooperation. Additional Discussion Notes for the Competitive Form of Multidivisional Structure - These notes include additional materials that illustrate the use of the competitive form of multidivisional structure to implement an unrelated diversification strategy. Using the Competitive Form of the Multidivisional Structure for Implementation of an Unrelated Diversification Strategy Started as a small textile company in 1923, Textron Inc. is an industrial conglomerate using the unrelated diversification strategy. It has grown through volume, geography, vertical or horizontal integration, and diversification. Its growth started when the firm vertically integrated in 1943 to gain control of declining revenues and underutilized production capacity. Facing another revenue decline in 1952, the company diversified by acquiring businesses in unrelated industries. Today, Textron has five divisions: aircraft, automotive, industrial products, fastening systems, and finance. Return on invested capital is the financial control Textron uses as the primary measure of divisional performance. According to the firm, “return on invested capital serves as both a compass to guide every investment decision and a measurement of Textron’s success.”

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 Competitive Form of the Multidivisional Structure for Implementation of an Unrelated Strategy The competitive form of structure can be formed to support an unrelated diversification strategy: 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 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

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 Competitive Form of the Multidivisional Structure for Implementation of an Unrelated Strategy The competitive form of structure can be formed to support an unrelated diversification strategy: 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 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

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

Part III – Creating Competitive Advantage Chapter 9 – Acquisition and Restructuring Strategy The Popularity of Merger and Acquisition Strategies - Mergers and acquisitions are popularly employed strategies to increase economic value through ownership and use of an acquired firm's assets. The need to respond to market conditions and competitive realities influences the popularity of acquisition strategies today. This chapter presents statistics about the use of these strategies, resulting success and failure rates, and the expectations for their future use are also included.

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. Mergers, Acquisitions, and Takeovers: What Are the Differences? - Define and compare these strategies. Additional Discussion Notes for Mergers, Acquisitions, and Takeovers - These notes include additional materials that cover the historical use of acquisition strategies. Stats and Background There were five waves of mergers and acquisitions in the 20th century, with the last two in the 1980s and 1990s. About 40%–45% of the acquisitions in recent years were made across country borders. There were 55,000 acquisitions valued at $1.3 trillion in the 1980s, but acquisitions in the 1990s exceeded $11 trillion in value. The annual value of mergers and acquisitions peaked in 2000 at about $3.4 trillion and fell to about $1.75 trillion in Slightly more than 15,000 acquisitions were announced in 2001 compared to over 33,000 in 2000. Although acquisitions have slowed, their number remains high. Firms make acquisitions to increase market power, reduce competitive threat, to enter a new market, to spread risk, or as a way to obtain options that allow shifts in core business. Studies show that shareholders of acquired firms often earn above-average returns from an acquisition, while shareholders of acquiring firms typically earn returns from the transaction that are close to zero.

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 Mergers, Acquisitions, and Takeovers: What Are the Differences? - Define and compare these strategies.

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

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

Results Poor Performance Who Wins? Acquired Firm Shareholders

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

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

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

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

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 To Increase Market Power - This is the primary reason that firms engage in acquisition strategies. Three types of acquisitions are used to increase market power and pursue a market leadership position. It is important to understand the political and legal segments of the general environment to anticipate regulatory review and financial market scrutiny. Additional Discussion Notes for Reasons for Making Acquisitions - These notes include additional materials that discuss market power and illustrate the concept with an example of Office Depot. Then horizontal acquisition and vertical acquisition strategies are described, with examples that demonstrate the concept. Market Power: The Staple-Office Depot Proposed Merger Rationalize the market, gaining strength to fend off discount national chains invading space (Wal-Mart, Target, and Kmart in office supplies and Best Buy and Circuit City in electronics) Merger would have given Staples-Office Depot a tremendous advantage over its closest rival, OfficeMax, even if it was forced to sell off 63 stores to Office Max Merger would help Staples-Office Depot to lower costs to better compete with larger rivals Wal-Mart, Kmart, etc. Anecdotal Evidence According to Office Depot’s own ads, file folders cost $1.95 in Orlando, Florida, where it competes with Staples and Office Max, and $4.17 in Leesburg, Florida, some 50 miles away, where it is the only office supply superstore (Source: FTC judgment). The Federal Trade Commission was concerned that the merge would allow the combined firm, which would have approximately 1,000 superstores, to control prices for the sale of office supplies in more than 40 markets throughout the United States. For some people, office supplies are a subject that inspires much passion. The CEO of Office Depot told Reuters that he's using bodyguards because of threats, apparently from his employees. A few of these employees, at least, seem to buy their executives' argument that the merger will probably lead to price cuts because it will definitely lead to job cuts. Other believers include investors who have bid up the stock prices of both firms. Punch Line On March 10, 1997, The Federal Trade Commission rejected the proposed merger of Staples and Office Depot. The Commission feared the $4.9 billion merger would hurt competition in the growing market for office supplies. Staples and Office Depot are two of the three largest office supply superstores in the country. Acquisitions Regardless of size, horizontal acquisitions occur when the acquirer and acquired companies compete in the same industry. Examples include the McDonald’s acquisition of Boston Market, the Daimler-Benz acquisition of Chrysler, the Coors acquisition of Bass Brewers, and the Amgen acquisition of Immunex. A vertical acquisition refers to a firm acquiring a supplier or distributor of one or more of its goods or services. This kind of acquisition leads to additional controls over parts of the value chain such as Walt Disney Company’s acquisition of Fox Family Worldwide. Since entering international markets is extremely difficult, acquisitions strategies are commonly used to overcome such barriers. The importance of entering and competing successfully in international markets is the fact that the five emerging markets of China, India, Brazil, Mexico, and Indonesia are among the 12 largest economies in the world, with a combined purchasing power that is one-half that of the G7 industrial nations of the United States, Japan, Britain, France, Germany, Canada, and Italy.

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 Overcome Entry Barriers - Acquisitions are used to gain immediate market access in industries with high barriers to market entry. Acquisitions are also used to quickly enter international markets is described. 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 Barriers to entry include: Economies of scale in established competitors Differentiated products by competitors Enduring relationships with customers that create product loyalties with competitors

Competing For Advantage

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