Chapter 6

El proceso de administracion estrategica Analisis Externo Decisiones estrategicas Implementacion Estrategica Ventaja competitiva Mision Objetivos A que negocio entrar? Analisis Interno Integracion vertical Estrategia a nivel corporativo

Logica de la estrategia a nivel corporativo Estrategia a nivel corporativo debe de crear valor 1) A fin de que la compania como un todo crezca A fin de que los negocios dentro de la compania puedan tener valor por si mismos de manera independiente Que el valor de capital no pueda ser creado a traves de inversion en portafolios • La estrategia a nivel corporativo debe de generar sinergias que no son posible de crear en mercados de capital • integracion vertical+ cadenas economicas de valor

Que es la integracion vertical Ejemplo de la pizza Ganaderos semillas Cadenas de Pizza Porcesadoras de queso Agricultores Consumidor final Distribuidores de alimentos

Integracion hacia atras Que es la integracion vertical? Integracion hacia atras ganaderos semillas Cadenas de pizza procesadores Consumidor final agricultores distribuidores Inegracion hacia adelante

Economias de la cadena de valor Logica economica Integracion hacia atras ganaderos La firma focal es capaz de crear sinergia con otras firmas • reduccion en costos procesadores • mejora en beneficios • La firma focal es capaz de generar beneficios mayores a los de la competencia distribuidores Integracion hacia adelante

Ventaja competitiva Si la integracion vertical cumple los criterios del VRIO, entonces puede generar una ventaja competitiva

Valor de la integracion vertical Mercado vs. intercambio economico integrado • los mercados y las formas de integracion permiten en intercambio economico • el intercambio economico debe de ser tal que permita Maximizar el valor de la firma focal • asi las firmas buscan la manera de maxmizar sus beneficios La integracion hace sentido cuando la firma focal puede generar mayor valor que aquel en el que el mercado se crea

Valor de la integracion vertical Consideraciones de valor Apalan- camiento Oportu- nismo flexibilidad • las capacidades de Una firma pueden Ser fuentes de ventaja Competitiva en otros negocios • se puede generar al internalizar • internalizar es menos flexible • flexibilidad se da cuando la Incertidumbre es alta • internalizar puede ser menos costoso Que utilizar oportunismo • de no ser asi, no Se da el intercambio

Rareza de la IV Integracion vs no integracion • la estrategia de integracion puede ser rara si integra o no lo hace pues esta NO depende la forma que la empresa tome sino quer depende en el valor generado

Imitabilidad de la IV Forma vs funcion • la forma, per se, no es costosa de imitar • la funcion de valor puede ser costosa de imitar si: •la combinacion de los recursos y capacidades le da: historicidad unica Abiguedad causal Complejidad social Requerimientos de capital son limitados

Imitabilidad de IV Modos de entrada • adquisicion de desarrollo interno • adquriri un proveeedor en vez de generarlos • los limites son las capacidades y recursos de las empresas • las alianzas estrategicas son un ejemplo de la IV a menos costo

Organizacion Functional Structure (U-Form) CEO’s Role Cooperation Accounting Finance Marketing HR Engineering Original Business Original Business Original Business Original Business Original Business Conflict Cooperation New Business New Business New Business New Business New Business Conflict

Organizacion de la IV Metodos de control administrativo Que se necesita controlar? • los esfuerzos para generar sinergias • cooperacion y conflicto entre areas • integracion de nuevos negocios • horizonte de tiempo entre administradores

Expansion Internacional Costo-Control tradeoff Cost (capital en riesgo) alto inversion Int. vertical adquisicion Alianza estrategica IV parcial franquicia licencia No IV exportacion Control bajo alto

Resumen Integracion vertical… • hace sentido cuando economias de la cadena de Valor se pueden crear y capturar • puede peritir a algunas companias apalancar sus capacidades • puede ser una respuesta al oportunismo y la incertidumbre • como un tipo de intercambio NO es raro ni ostoso de imitar

Resumen La integracion vertical… • es una decision importante de considerar para Posibles expansiones internacionales • hace sentido en circunstancias especificas • puede ser costosa si se hace mal Propiedad puede ser costosa, integrarse solo cuando los beneficios son mas que los costos

Chapter 7

The Strategic Management Process External Analysis Strategic Choice Strategy Implementation Competitive Advantage Mission Objectives Which Businesses to Enter? Internal Analysis • Vertical Integration Corporate Level Strategy • Diversification

Logic of Corporate Level Strategy Corporate level strategy should create value: 1) such that businesses forming the corporate whole are worth more than they would be under independent ownership 2) that equity holders cannot create through portfolio investing Therefore, • a corporate level strategy must create synergies • economies of scope - diversification

Integration and Diversification Raw Materials Focal Firm Distribution Customer Supplier Backward Forward Diversification Other Businesses Current Businesses Other Businesses No Links Unrelated Related Many Links

Types of Corporate Diversification At a general level… Product Diversification: • operating in multiple industries Geographic Market Diversification: • operating in multiple geographic markets Product-Market Diversification • operating in multiple industries in multiple geographic markets

Types of Corporate Diversification At a more specific level… Limited Diversification • single business: > 95% of sales in single business • dominant business: 70% to 95% in single business Related Diversification • related-constrained: all businesses related on most dimensions • related-linked: some businesses related on some dimensions Unrelated Diversification • businesses are not related

Product and Geographic Diversification Possibilities: • single-business in one geographic area • single-business in multiple geographic areas • related-constrained in one or multiple geographic areas • related-linked in one or multiple geographic areas • unrelated in one or multiple geographic areas Note: • relatedness usually refers to products • seemingly unrelated products may be related on other dimensions

Competitive Advantage If a diversification strategy meets the VRIO criteria… Is it Valuable? Is it Rare? Is it costly to Imitate? Is the firm Organized to exploit it? …it may create competitive advantage.

Value of Diversification Two Criteria 1) There must be some economy of scope 2) The focal firm must have a cost advantage over outside equity holders in exploiting any economies of scope

Value of Diversification Business X + Business Y + Business Z Independent: equity holder could buy shares of each firm Focal Firm Business X Value Economies Of Scope Business Y Business Z Combined: equity holder buys shares in one firm

Economies of Scope Four Types Operational Financial Anticompetitive Managerialism

Economies of Scope Operational Economies of Scope Sharing Activities • exploiting efficiencies of sharing business activities Example: Frito-Lay’s Trucking Spreading Core Competencies • exploiting core competencies in other businesses • competency must be strategically relevant Example: Orbitz

Economies of Scope Financial Economies of Scope Internal Capital Market • premise: insiders can allocate capital across divisions more efficiently than the external capital market • works only if managers have better information • may protect proprietary information • may suffer from escalating commitment Example: Hanson Trust, PLC

Economies of Scope Financial Economies of Scope Risk Reduction • counter cyclical businesses may provide decreased overall risk however, • individual investors can usually do this more efficiently than a firm Example: Snow Skiis & Water Skiis

Economies of Scope Financial Economies of Scope Tax Advantages • transfer pricing policy allows profits in one division to be offset by losses in another division • this is especially true internationally • can be used to ‘smooth’ income Example: Ireland

Economies of Scope Anticompetitive Economies of Scope Multipoint Competition • mutual forbearance • a firm chooses not to compete aggressively in one market to avoid competition in another market Example: American Airlines & Delta: Dallas & Atlanta Market Power • using profits from one business to compete in another business • using buying power in one business to obtain advantage in another business

Economies of Scope Managerialism • an economy of scope that accrues to managers at the expense of equity holders • managers of larger firms receive more compensation (larger scope = more compensation) • therefore, managers have an incentive to acquire other firms and become ever larger • even though the incentive is there, it is difficult to know if managerialism is the reason for an acquisition

Equity Holders and Economies of Scope Most economies of scope cannot be captured by equity holders • risk reduction can be captured by equity holders Managers should consider whether corporate diversification will generate economies of scope that equity holders can capture • if a corporate diversification move is unlikely to generate valuable economies of scope, managers should avoid it

Rareness of Diversification Diversification per se is not rare Underlying economies of scope may be rare • relationships that allow an economy of scope to be exploited may be rare • an economy of scope may be rare because it is naturally or economically limited • a soft drink bottler buys the only source of spring water available • a hotel in a resort town creates a large water park, there are only enough customers to support one park

Imitability of Diversification Duplication of Economies of Scope Less Costly-to-Duplicate Costly-to-Duplicate Employee Compensation Core Competencies Tax Advantages Internal Capital Allocation Risk Reduction Multipoint Competition Shared Activities* Exploiting Market Power (codified/tangible) (tacit/intangible) *may be costly depending on relationships

Imitability of Diversification Substitution of Economies of Scope Internal Development Strategic Alliances • find a partner with the desired complementary assets • start a new business under the corporate whole • avoids potential cross- firm integration issues • less costly than acquiring a firm Competitors may use these strategies to arrive at a position of diversification without buying another firm

International Diversification Three Types of International Risk Cultural/Popular Financial Political • product may not be accepted simply because of your country of origin • currency exchange • nationalization • quotas • general economic conditions • tariffs • regulations Example: Resistance to McDonald’s by France’s older generation Example: Asian economic crisis of the 1990s Example: Bolivia nationalized its petroleum industry in the ’70s

International Diversification Managing International Risks Cultural/Popular • avoidance • neutral branding (disguising country of origin) Example: Where is Häagen-Dazs from? Financial • currency hedging • geographic diversification • spreading risk across several countries

International Diversification Managing International Risks Political • find a local partner • political neutrality • negotiation with governments • foreign governments often have an interest in direct investment Example: Case International in Brazil

Summary Corporate Strategy: In what businesses should the firm operate? • an understanding of diversification helps managers answer that question Two Criteria: 1) economies of scope must exist 2) must create value that outside equity holders cannot create on their own

Summary Economies of Scope • a case of synergy—combined activities generate greater value than independent activities • may generate competitive advantage if they meet the VRIO criteria Firms should pursue diversification only if careful analysis shows that competitive advantage is likely!