1. Corporate-Level Strategy MANA 5336

2. 2 Directional Strategies

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

4. 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

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

6. 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.

7. 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.

8. Related Diversification 3M Hewlett Packard Marriott

9. Unrelated Diversification Tyco Amer Group ITT

10. Diversification and Corporate Performance: A Disappointing History Sources: Lipin, S. & Deogun, N. 2000. Big merges of the 90’s prove disappointing to shareholders. Wall Street Journal, October 30: C1; A study by Dr. G. William Schwert, University of Rochester, cited in Pare, T. P. 1994. The new merger boom. Fortune, November 28:96; and Porter, M.E. 1987. From competitive advantage to corporate strategy. Harvard Business Review, 65(3):43. A study conducted by Business Week and Mercer Management Consulting, Inc., analyzed 150 acquisitions that took place between July 1990 and July 1995. 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.

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

12. 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.

13. 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

14. 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.

15. Adaptive Strategies Maintenance of Scope Enhancement Status Quo

16. 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

17. 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

18. 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

19. 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

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

21. 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

22. 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

23. 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