Corporate-Level Strategy

Corporate-Level Strategy MANA 5336

Directional Strategies

Upstream Downstream Stages in the Raw-Material-to-Consumer Value Chain

Examples: Dow ChemicalUnion CarbideKyocera Examples:IntelSeagateMicron Examples:AppleHpDell Examples:Best BuyOffice Max Distribution Assembly Intermediatemanufacturer Raw materials End user Stages in the Raw-Material-to-Consumer Value Chain in the Personal Computer Industry

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

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. Concentration on a Single Business

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.

Related Diversification Marriott 3M Hewlett Packard

Unrelated Diversification Tyco Amer Group ITT

Diversification and Corporate Performance: A Disappointing History • 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. 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.

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

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.

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

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.

Adaptive Strategies Maintenance of Scope Enhancement Status Quo

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 • 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

Learn and develop new capabilities Reshape firm’s competitive scope Overcome entry barriers Increase diversification Acquisitions Cost of new product development Increase speed to market Increase market power Lower risk compared to developing new products Reasons for Making Acquisitions

Resulting firm is too large Inadequate evaluation of target Managers overly focused on acquisitions Acquisitions Large or extraordinary debt Too much diversification Integration difficulties Inability to achieve synergy Problems With Acquisitions

Strategic Alliance • 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 • exchange and sharing of resources and capabilities • co-development or distribution of goods or services

Firm B Resources Capabilities Core Competencies Resources Capabilities Core Competencies Firm A Mutual interests in designing, manufacturing, or distributing goods or services Combined Resources Capabilities Core Competencies Strategic Alliance

Types of Cooperative Strategies • 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 • Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing

Margin Margin Margin Margin Service Service Marketing & Sales Marketing & Sales Technological Development Technological Development Human Resource Mgmt. Human Resource Mgmt. Support Activities Support Activities Outbound Logistics Outbound Logistics Firm Infrastructure Firm Infrastructure Procurement Procurement Operations Operations Inbound Logistics Inbound Logistics Primary Activities Primary Activities Strategic Alliances • 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 firms • outsourcing is one example of this type of alliance Supplier Vertical Alliance

Margin Margin Margin Margin Service Service Marketing & Sales Marketing & Sales Technological Development Technological Development Human Resource Mgmt. Human Resource Mgmt. Support Activities Support Activities Outbound Logistics Outbound Logistics Firm Infrastructure Firm Infrastructure Procurement Procurement Operations Operations Inbound Logistics Inbound Logistics Primary Activities Primary Activities Strategic Alliances Buyer 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 chain • focus on long-term product development and distribution opportunities • the partners may become competitors • requires a great deal of trust between the partners

Corporate-Level Strategy