1. CHAPTER 9: CORPORATE STRATEGY: SHAPING THE PORTFOLIO Strategy A View from the Top By: Kluyver & Pearce

2. Corporate Strategy: Introduction Ask several questions like “What is your strategy?” – most effective answer is to identify 3 to 5 strategic themes that are simple to communicate and comprehend Primary purpose of strategy: creating a powerful management tool for aligning behaviors and decision making at all levels within the company  Provides the basis for communication to the broader stakeholder community Concerned with decisions about which businesses a company operates in, actions that shape the corporate portfolio of businesses, and decisions about how to create value in portfolio by exploiting synergies among multiple business units

3. Economics of Scale Economies of scale occurs when the unit cost of performing an activity decreases as the scale of the activity increases  Unit costs can fall as scale is increased due to the use of better technologies in production processes or greater buyer power in large scale purchasing situations Economics of learning – occurs when cost can be reduced as a result of finding better ways to perform a given task

4. Economics of Scope Occurs when the unit cost of an activity falls because the asset used is shared with other activities  Example: Frito – Lay Corporation Decision opportunities fall into three broad classes:  Horizontal scope  Geographical scope  Vertical scope

5. Economics of Scope continued To capitalize on the advantages that scale and scope can bring, companies must:  Make related investments to create global marketing and distribution organizations  Create the right management infrastructure to effectively coordinate the myriad activities that make up the modern multinational corporations First movers advantage – Timing is critical  Challengers face a formidable uphill battle

6. What is “Core”? Core is defined as the companies’ most valuable products, most important channels, and their distinctive capabilities According to Bain International, the mistaken view of the relationship between returns and competitive strengths can cause one of three strategy “traps”:  Assuming that business units that are performing well have reached their limit, and therefore deciding not to make any further investments in the core business  Assuming that there is greater upside potential in under- performing businesses and making unwarranted, more risky investment in underperforming portfolio components  Prematurely abandoning core businesses

7. Growth Strategies A growth strategy that works for one company might not be appropriate for another Relying on internal growth alone to meet revenue targets can be equally risky To formulate a successful growth strategy, a company must:  Carefully analyze its strengths and weaknesses  How it delivers value to customers  What growth strategies its culture can effectively support

8. Growth Strategies continued Selecting the right growth strategy requires a careful analysis of opportunities, strategic resources, and cultural fit 3 avenues by which to grow its revenue base:  Organic or internal growth  Growth through acquisition  Growth through alliance-based initiatives Referred to as the “Build, Buy, or Bond” paradigm

9. Concentrated Growth Strategies A corporation that continues to direct its resources to the profitable growth of a single product category in a well defined market, and possibly with a dominant technology is said to pursue a concentrated growth strategy.  Targeting increases in market share – most direct way of pursuing this strategy 3 ways of pursuing concentrated growth is:  Increasing the number of users of the product  Increasing product usage by stimulating higher quantities of use or by developing new applications  Increasing the frequency of the product’s use

10. Concentrated Growth Strategies continued Four specific conditions favor concentrated growth:  Industry is resistant to major technological advancements  Targeted markets are not product saturated  The product – market is sufficiently distinctive to dissuade competitors from trying to invade the segment  Necessary inputs are stable in price and quantity and are available in the amounts and at the times needed

11. Vertical and Horizontal Integration Vertical integration - describes a strategy of increasing a corporation’s vertical participation in an industry’s value chain  Barriers to entry and price discrimination Backward integration – entails acquiring resource suppliers or raw materials or manufacturing components that used to be sourced elsewhere Forward integration – a strategy of moving closer to the ultimate customer

12. Vertical and Horizontal Integration continued Vertical integration affects industry structure and competitive intensity  Example: Oil Industry Four reasons to vertically integrate:  The market is too risky and unreliable and is at risk of “failing”  A company in an adjacent stage of the industry chain has more market power.  When used to create or exploit market power by raising barriers to entry or allowing price discrimination across customer segments.  When an industry is young, companies sometimes forward – integrate to develop a market.

13. Vertical and Horizontal Integration continued PIMS comparative analysis posed three important questions with respect to vertical and horizontal integrations:  Are highly integrated businesses in general more or less profitable than less integrated ones?  Under what circumstances is a high level of vertical integration likely to be most profitable?  Apart from its influence on overall profitability, what are the principal benefits and risks associated with vertical integration strategies?

14. Diversification Strategies Diversification is defined as a strategy of entering product markets different from those in which a company is currently engaged  Example: Berkshire Hathaway – operates insurance, food, furniture, footwear, and other businesses Pose a great challenge to corporate executives

15. Diversification Strategies continued Diversification Strategies are motivated by a variety of factors:  Desire to create revenue growth  Increase profitability through shared resources and synergies  Reduce the company’s overall exposure to risk by balancing the business portfolio  Opportunity to exploit underutilized resources Relatedness or the potential for synergy – major consideration in formulating diversification strategies

16. Diversification Strategies continued Related diversification strategies target new business opportunities  Have meaningful commonalities with the rest of the company’s portfolio 4 different forms of relatedness:  Tangible links between business units  Intangible resources  Gain or exercise market power  Strategic relatedness

17. Diversification Strategies continued 6 questions useful for evaluating the risks associated with a diversification strategy:  What can our company do better than any of its competitors in its current markets?  What strategic assets are needed to succeed in the new market?  Can the firm catch or leapfrog competitors?  Will diversification break up strategic assets that need to be kept together?  Will our firm simply be a player in the new market or will it be a winner?  What can the corporation learn by diversifying, and are we organized to learn it?

18. Porter’s Three Tests Porter’s three tests useful for deciding whether a particular diversification move is likely to enhance shareholder value:  The attractiveness test  The cost of entry test  The better – off test

19. Mergers and Acquisitions Mergers – signifies that two companies have joined to form one company Acquisition – occurs when one firm buys another  Management team of the buyer tends to dominate decisions making in the combined company  Can quickly position a firm in a new business or market  Eliminates a potential competitor and does not contribute to the development of excess capacity

20. Mergers and Acquisitions continued Six themes that have emerged to help increase the effectiveness of the merger and acquisition process  Successful acquisitions are usually part of a well – developed corporate strategy  Diversification through acquisition is an ongoing, long-term process that requires patience  Successful acquisitions result from disciplined strategic analysis, which looks at industries first before it targets companies, while recognizing that good deals are firm specific  An acquirer can add value in only a few ways, and before proceeding with an acquisition the buying company should be able to specify how synergies will be achieved and value created  Objectivity is essential, hard to maintain once the acquisition chase ensures  Most acquisition flounder on implementation

21. Cooperative Strategies Capture the benefits of internal development and acquisition while avoiding the drawbacks of both Key drivers that attract executives to cooperative strategies include:  Need for risk sharing  Corporation’s funding limitations  The desire to gain market and technology access

22. The Strategic Logic of Alliances According to the Booz Allen Hamilton, Inc. each life cycle phase of a business has its own, unique alliance drivers  Product innovation, credibility, and access to capital – key drivers of alliance initiatives in the early growth stage  Alliance’s external value and market and customer reach – most important factors in the rapid growth and consolidation phases

23. The Strategic Logic of Alliances continued 4 different alliance models based on the role the alliance plays in the participates’ corporate strategy and structure of the leadership of joint venture:  Franchise model  Portfolio model  Cooperative model  Constellation model

24. The Strategic Logic of Alliances continued 4 groups alliances are divided into on the basic of whether participants are competitors and on the relative depth/breadth of the alliance:  Expertise alliances  New – business alliances  Cooperative alliances  M&A – like alliances Cooperative alliances M&A – like alliances New business alliances Expertise alliances NarrowBroad Competitors Partnership Type Non-Competitors Alliance Scope

25. Growth and Strategic Risk Different growth strategies entail different kinds and levels of strategic risk Study by Bain International suggests that strategic risk can be measured in terms of how far a growth initiative takes a company away from the established strengths of its core business  Distance from the core is measured on five key dimensions

26. Disinvestments: Sell-Offs, Spin-Offs, and Liquidations Sell-off of an SBU to a competitor or spin off into a separate company make sense when the corporation is the wrong corporate parent for the business  Example: recent sale of Chrysler to Cerberus Key motivation for splitting a major company into two or more freestanding units is:  To unlock value for shareholders For every successful spin, there are two that fail to live up to their potential  Vital that the board of directors and executives understand the special pressure so they can develop and execute growth strategies that will fulfill the promise

27. Disinvestments: Sell-Offs, Spin-Offs, and Liquidations continued Three major success factors that distinguishes a successful spin-off:  Ensure that both the parent corporation and the unit spun off have viable business and financial structures  Meet or exceed earnings expectations  Continue growth