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Corporate Level Strategy
Chapter 9-10 Corporate Level Strategy
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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
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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
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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
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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
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Beverages Pepsi-Cola North America Pepsi-Cola Mountain Dew Slice Mug
Sierra Mist FruitWorks Lipton Dole Aquafina Frappuccino SoBe AMP
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Beverages Gatorade/Tropicana North America Gatorade Propel Tropicana
Dole juices
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Beverages PepsiCo Beverages International Loóza juices and nectars
Copella juices Frui’Vita juices Tropicana 100 juices
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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
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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
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Snack Foods Beverages Foods
Corporate Level Strategy 1) What businesses do we want to compete in? 2) How do manage effectively across businesses
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Where did they go?
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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
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4 Corporate Level Strategies
1) Vertical Integration 2) Strategic Outsourcing 3) Horizontal Integration 4) Diversification – two or more different businesses with distinct operations
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1) Vertical Integration
Forward or backwards Full integration Taper integration Benefits Build barriers to entry Facilitates investment in specialized assets Protecting product quality Improved scheduling Risks Costs Rapid technological changes Demand predictability
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Alternatives to Vertical Integration
Competitive bidding Long term contracts or strategic alliances Form of Relationship Markets & Competitive Bidding Vertical Integration Hybrid & Contracts/Alliances
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2) Outsourcing Cost reduction and differentiation
Hold-ups, scheduling and hallowing out
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3) Horizontal Integration
Acquiring or merging with industry competitors Reduce cost and economies of scale Increasing value through wider product line or product bundling Manage industry rivalry Increase buyer and supplier power
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4) How to Diversify? 1) Internal Development - corporate entrepreneurship or internal venturing able to appropriate a larger portion of wealth avoids complexities of multiple partners time consuming and requires diversity of organizational capabilities
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4) How to Diversify? 2) Strategic Alliances and Joint Ventures
entering a new market via the combination of complementary resources - do more together cost reduction & sharing development/diffusion of technology Problems appropriate partners - skills and compatibility trust and commitment communication
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Who Makes a Geo? Geo Storm was actually manufactured by Isuzu. The Storm is the Isuzu Impulse. Geo Prizm = Toyota Corolla Geo Tracker = Suzuki Sidekick Geo Metro = Suzuki Esteem or Swift w/hatchback No Geo cars were actually made by General Motors. They were all imported from foreign manufacturers.
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4) How to Diversify? 3) Mergers & Acquisition
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Mergers & Acquisitions
Reasons of Acquisitions Increase Market Power Overcome Entry Barriers Increased Speed Lower Risk Avoid Competition
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Acquisitions Reasons of Acquisitions Increase Market Power
Overcome Entry Barriers Increased Speed Lower Risk Avoid Competition Problems with Acquisitions Integration of two firms Overpayment/Debt Overestimation of Synergy Overdiversification Managerial energy absorption Become too large Substitute for innovation
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Acquisitions Poor Performance Who Wins? Acquired Firm Shareholders
Reasons of Acquisitions Increase Market Power Overcome Entry Barriers Increased Speed Lower Risk Avoid Competition Problems with Acquisitions Integration of two firms Overpayment/Debt Overestimation of Synergy Overdiversification Managerial energy absorption Become too large Substitute for innovation Results Poor Performance Who Wins? Acquired Firm Shareholders
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Monday October 27th WSJ Bank of American – Boston Fleet Financial
BoA down $8.29, or 10%, BFF rose 23% Anthem – WellPoint Health Networks Anthem down 8.2%, WellPoint up 8.8% United Health – MidAtlantic Med Services UH down 4.9%, MAMS up 9.7%
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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
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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
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Related Diversification at Disney
Entertainment/Production Theme Parks Resorts Entertainment/Broadcasting Retailing Cruise Lines
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Levels of Diversification
Related Diversification - entering product markets that share some resource or capability requirements with the current business – horizontal relationships across businesses - synergies Advantages of related diversification include: Leveraging Core Competencies Sharing Activities Market Power
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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
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Levels of Diversification (cont.)
Unrelated Diversification - few similarities in the resources and capabilities required among the firm’s businesses Conglomerate Diversification - no relatedness between businesses
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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
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Portfolio analysis BCG Growth-Share Matrix GE- Nine Cell Matrix
question marks, dogs, cash cows, stars GE- Nine Cell Matrix
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Boston Consulting Group Matrix
Relative Market Share Question Marks Stars Growth Rate Cash Cows Dogs 16
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BCG Matrix for PepsiCo - Early 1990s
Relative Market Share High Taco Bell Growth Rate 10% Pizza Hut Frito Lay Low Soft Drinks KFC Low High 1.0 17
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BCG Matrix for PepsiCo - Early 1990s
Relative Market Share Pizza Hut Taco Bell High Growth Rate Frito Lay 5% KFC Soft Drinks Low Low High .75 18
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Competitive Strengths
GE 9 Cell Matrix Competitive Strengths High Low High Invest Grow Attractiveness Hold Harvest Divest Low 19
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GE 9 Cell Matrix for Pepsico Competitive Strengths
High Low High Snack Foods Attractiveness Soft Drinks Low 20
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Board of Directors Governance mechanism of owners to oversee, evaluate and ratify the actions of management Rises out of agency problem – separation of ownership and management setting corporate strategy, direction, mission, values hire/fire CEO/TMT control, monitor, supervise TMT review/approve resource allocations protect shareholders interests
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Board Involvement Mostly little or no involvement
Boards tend to be dominated by management Keys to board power CEO/Chairman duality insiders vs. outsiders outsiders often weak, unknowledgeable effective board process
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