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The Four Main Tasks in Crafting Corporate Strategy

The Four Main Tasks in Crafting Corporate Strategy. Make moves to enter new businesses Initiate actions to boost combined performance of businesses Find ways to capture synergy among related business units

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The Four Main Tasks in Crafting Corporate Strategy

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  1. The Four Main Tasks in CraftingCorporate Strategy • Make moves to enter new businesses • Initiate actions to boost combined performance of businesses • Find ways to capture synergy among related business units • Establish investment priorities, steering resources into most attractive business units

  2. When to Diversify? • When it makes sense to diversifydepends on • Growth potential in present business • Attractiveness of opportunities to transfer existing competencies to new businesses • Potential cost-saving opportunities to be realized by entering related businesses • Availability of adequate financial and organizational resources • Managerial expertise to cope with complexity of operating a multi-business enterprise

  3. Why Diversify? • To build shareholder value • Make 2 + 2 = 5 • Diversification is capable of increasing shareholder value if it passes three tests: 1.Attractiveness Test 2.Cost of Entry Test 3.Better-Off Test

  4. Corporate Strategy Alternatives • Make new acquisitions • Divest weak units • Restructure portfolio • Retrench • Become a DMNC • Liquidate Post-Diversification Strategic Alternatives Vertical Integration Diversify into Related Businesses Diversify into Unrelated Businesses Single Business Concentration Diversify into Related & Unrelated Businesses

  5. Acquire a Company Already in the Target Industry • Most popular approach to diversification • Advantages • Quicker entry into target market • Easier to hurdle certain entry barriers • Technological inexperience • Gaining access to reliable suppliers • Being of a size to match rivals in terms of efficiency and costs • Getting adequate distribution access

  6. Diversification via Internal Startup More attractive when • Ample time exists to create a new business from ground up • Incumbents slow in responding to new entry • Less expensive than acquiring an existing firm • Company already has most of needed skills • Additional capacity will not adversely impact supply-demand balance in industry • New start-up does not have to go head-to-head against powerful rivals

  7. Diversification via Joint Ventures Good way to diversify when • Uneconomical or risky to go it alone • Pooling competencies of two partners provides more competitive strength • Foreign partners are needed to surmount • Import quotas • Tariffs • Nationalistic political interests • Cultural roadblocks

  8. Drawbacks of Joint Ventures • Raises questions • Which partner will do what • Who has effective control • Potential conflicts • Control over strategy and long-term direction • How operations will be conducted • Control over cash flows and profits • Personalities and cultures of partners

  9. Related Diversificationand Strategic Fit • Types of strategic fit • Shared technology • Similar operating methods • Common labor skills • Common distribution channels • Common suppliers andraw materials sources • Similar kinds of managerial know-how • Ability to share common sales force • Customer overlap • Any area where meaningful sharing opportunities exist in businesses’ value chains

  10. Related Diversificationand Competitive Advantage • Competitive advantage can result from related diversification if opportunities exist to • Transfer expertise/capabilities/technology • Combine related activities into a single operation and reduce costs • Leverage use of firm’s brand name reputation • Conduct related value chain activities in a collaborative fashion to create valuable competitive capabilities

  11. Common Approaches toRelated Diversification • Sharing of sales force, advertising, or distribution activities • Exploiting closely related technologies • Transferring know-how and expertise from one business to another • Transferring brand name and reputation to a new product/service • Acquiring new businesses to uniquely help firm’s position in existing businesses

  12. Concept: Economies of Scope • Arise from ability to eliminate costs by operating two or more businesses under same corporate umbrella • Exist when it is less costly for two or more businesses to operate under centralized management than to function independently • Cost saving opportunities can stem from interrelationships anywhere along businesses’ value chains

  13. Concept: Strategic Fit • Exists among different businesses when their value chains are sufficiently similar to offer opportunities • Offers competitive advantage potential of • Lower costs • Efficient transfer of • Key skills • Technological expertise • Managerial know-how • Use of a common brand name

  14. Technology Fits • Offer potential for sharing common technology or transferring technological know-how • Potential benefits • Cost-savings in technology development and new product R&D • Shorter times in getting new product to market • Interdependence between resulting products leads to increased sales • Technology-transfer allows more efficient performance of value chain activities

  15. Operating Fits • Offer potential for activity sharing or skills transfer • Procuring materials • Conducting R&D • Improving production processes • Manufacturing components • Assembling finished goods • Performing administrative support functions

  16. Potential Benefits of Operating Fits • Cost savings • Tapping into more scale economies and/or economies of scope • Increased operating efficiency • Most important skills transfer opportunities • If supply chain management or manufacturing expertise can benefit another business

  17. Distribution andCustomer-Related Fits • Arise when value chains of different businesses overlap so products are • Used by same customers • Distributed through common dealers and retailers • Marketed or promoted in similar ways • Sold under a common brand name

  18. Potential Benefits of Distributionand Customer-Related Fits • Single sales force for related products • Advertising related products together • Use of common brand name • Joint delivery and shipping • Combining after-sale service and repair work • Joint order processing and billing • Joint promotional tie-ins • Cents-off couponing, trial offers, specials • Combining dealer networks

  19. Managerial Fits • Emerge when different business units require comparable types of • Entrepreneurial know-how • Administrative know-how • Operating know-how • Allow accumulated managerial know-how in one business to be useful in managing another business

  20. What Is Unrelated Diversification? • Involves diversifying into businesses with • Nostrategic fit • No meaningful value chainrelationships • No unifying strategic theme • Approach is to venture into “any business in which we think we can make a profit” • Firms pursuing unrelated diversification are often referred to as conglomerates

  21. Acquisition Criteria For Unrelated Diversification Strategies • Can business meet corporate targets forprofitability and ROI? • Will business require substantial infusions of capital? • Is business in an industry with growth potential? • Is business big enough to contribute to the parent firm’s bottom line? • Is there potential for union difficulties or adverse government regulations? • Is industry vulnerable to recession, inflation, high interest rates, or shifts in government policy?

  22. Attractive Acquisition Targets • Companies with undervalued assets • Capital gains may be realized • Companies in financial distress • May be purchased at bargain prices and turned around • Companies with bright prospects but limited capital

  23. Diversification and Shareholder Value • RELATED DIVERSIFICATION • A strategy-drivenapproach to creating shareholder value • UNRELATED DIVERSIFICATION • A finance-drivenapproach to creating shareholder value

  24. Divestiture andLiquidation Strategies • Situations occur when a subsidiary has to be sold or shut down • Misfits cannot be completely avoided • Unfavorable changes in industry attractiveness • Sub-par performance of a subsidiary • Diversification may lack compatibility of values essential to cultural fit

  25. Divestiture and LiquidationStrategy Options • Two types of divestiture options • Spin it off as independent company • Sell it • Liquidation • Most painful option • Involves terminating firm’s existence

  26. Competitive Advantage Avenues for a DMNC via Related Diversification • Transfer of expertise in a core technology to other businesses • Collaborative and strategically coordinated R&D benefiting all the related businesses • Ability to use same distributors and retail dealers on a worldwide basis • Ability to leverage an established brand name • Use financial and organizational resources to cross-subsidize a competitive assault against rivals

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