Corporate Strategies

1. 6 CorporateStrategies

2. Learning Objectives • Three directions for corporate strategy • Growth • Diversification • M&A, JV/SA • International • Stability • Renewal • Retrenchment • Turnaround

3. Brief Overview of Corporate Strategy • Those strategies concerned with the broad and long-term questions of what business(es) the organization is in and what it wants to do with those businesses

4. Organizational Growth • Growth Strategy • One that involves the attainment of specific growth objectives by increasing the level of an organization’s operations • Typical growth strategies include • Increases in sales revenues • Profits • Other performance measures

5. Types of Growth Strategies International Concentration Organizational Growth Diversification Vertical Integration •Related •Unrelated •Backward •Forward Horizontal Integration

6. Concentration Organization concentrates on its primary line of business and looks for ways to meet its growth objectives through increasing its level of operation in this primary business

7. Concentration Product(s) Current New Product-Market Exploitation Product Development Current New Customers Market Development Product/Market Diversification

8. Diversification Operational Skills-Capabilities Product Similarities Related Diversification Distribution Channels Similar Technology Customer Use

9. Diversification and Corporate Strategy • A company is diversified when it is in two or more lines of business • Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business • A diversified company needs a multi-industry, multi-business strategy • A strategic action plan must be developed for several different businesses competing in diverse industry environments

10. Diversification • Level • Horizontal • Anti-trust laws prohibit a lot of these • GE & Honeywell • Vertical • Suppliers buying buyers (or vice versa) • Type • Related • Unrelated

11. When to Diversify • Some companies do EXCELLENTLY and are not diversified • McDonalds, SWA, Coca-Cola, Domino’s Pizza, Wal-Mart, FedEx, Timex, Gerber • Why stay single business • Clear understanding of who we are / what we do • No Dilution of management’s attention • Risks of a single business strategy • Putting all the “eggs” in one industry basket • Unforeseen changes can undermine a single business firm’s prospects

12. 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

13. Examples of Related Diversification • Darden Restaurants • Olive Garden • Red Lobster • Bahamas Breeze • Johnson & Johnson • Prescription drugs • Non-prescription drugs (Tylenol, pepcid AC) • Band-aids • Baby products • PEPSICO • Soft drinks • Fruit Juices • Snack foods (Fritos, Lays, Cracker Jacks)

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

15. DIAGEO PLC Burger King Guinness Old El Paso Mexican food Green Giant Liquor Walt Disney Theme Park Disney Cruise Line Movies TV Textron Bell helicopters Cessna Aircraft E-Z-GO golf cars Jacobsen turf care United Technologies Pratt & Whitney aircraft engines Carrier Heating & AC Otis Elevators Examples of different levels of Unrelated diversification

16. 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 • Appeal of Unrelated Diversification Strategy • Business risk scattered over different industries • Financial resources can be directed to those industries offering best profit prospects • If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced

17. Drawbacks of Unrelated Diversification • Difficulties of competently managing many diverse businesses • Lack of strategic fits which can be leveraged into competitive advantage • Consolidated performance of unrelated businesses tends to be no better than sum of individual businesses on their own (and it may be worse) • Likely effect is 1 + 1 = 1.5, not 1 + 1 =3 • Promise of greater sales-profit stability over business cycles seldom realized

18. Combination Related-Unrelated Diversification Strategies • Dominant-business firms • One major core business accounting for 50 - 80 percent of revenues, with several small related or unrelated businesses accounting for remainder • Narrowly diversified firms • Diversification includes a few (2 - 5) related or unrelated businesses • Broadly diversified firms • Diversification includes a wide ranging collection of either related or unrelated businesses or a mixture • Multi-business firms • Diversification portfolio includes several unrelated groups of related businesses

19. Merger and Acquisition • 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

20. Joint Ventures and Strategic Alliances • 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 and Tariffs • Nationalistic political interests • Cultural roadblocks • Lack of knowledge about markets of particular countries

21. Drawbacks of JV & SA • 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

22. Benefits of SA & JV • Gain scale economies in production and/or marketing • Fill gaps in technical expertise or knowledge of local markets • Share distribution facilities and dealer networks • Direct combined competitive energies toward defeating mutual rivals • Useful way to gain agreement on important technical standards

23. Why is the World Economy Globalizing? • Previously closed national economies are opening up their markets to foreign companies • Importance of geographic distance is shrinking due to the Internet • Growth-minded companies are racing to stake out positions in the markets of more and more countries

24. Gain access to new customers Obtain access to valuable natural resources Help achieve lower costs Spread business risk across wider market base Capitalize on resource strengths and competencies What is the Motivationfor Competing Internationally?

25. Company operates in a select few foreign countries, with modest ambitions to expand further Company markets products in 50 to 100 countries and is expanding operations into additional country markets annually International or Multinational Competitor Global Competitor International vs. Global Competition

26. How Markets Differ from Country to Country • Consumer tastes and preferences • Consumer buying habits • Market size and growth potential • Distribution channels • Driving forces • Competitive pressures

27. International High Low Global Approach Transnational Approach Global Integration of Operations Multidomestic Approach Low High Local Market Responsiveness

28. Characteristics of Multi-Domestic and Global Competition • Multi-Domestic • Each country market is self-contained • Competition in one country market is independent of competition in other country markets • No “international” market, just a collection of country markets • Global Market • Many of same rivals compete in many of the same country markets • A firm’s competitive position in one country is affected by its position in other countries • Competitive advantage (or disadvantage) is based on a firm’s world-wide operations and overall global standing

29. Multi-Domestic Strategy • Strategy is matched to local market needs • Use Different country strategies when • Significant country-to-country differences in customers’ needs exist • Buyers in one country want a product different from buyers in another country • Host government regulations preclude uniform global approach • Two drawbacks • Poses problems of transferring competencies across borders • Works against building a unified competitive advantage

30. Global Strategy • Strategy for competing is similar in all country markets • Involves • Coordinating strategic moves globally • Selling in many, if not all, nations where a significant market exists • Works best when products and buyer requirements are similar from country to country

31. Strategy Options for International Markets • Exporting • Licensing • Franchising strategy • Diversification

32. Characteristics of Export Strategies • Involves using domestic plants as a production base for exporting to foreign markets • Excellent initial strategy to pursue international sales • Advantages • Minimizes both risk and capital requirements • Conservative way to test international waters • Minimizes direct investments in foreign countries • An export strategy is vulnerable when • Manufacturing costs in home country are higher than in foreign countries where rivals have plants • High shipping costs are involved

33. Characteristics of Licensing Strategies Allowing a foreign organization to take charge of manufacturing and distributing a product in its country or world region in return for a fee • Advantages • Has valuable technical know-how or a patented product but does not have international capabilities or resources to enter foreign markets • Desires to avoid risks of committing resources to markets which • Are unfamiliar, Present economic uncertainty or • Are politically volatile • Disadvantage • Risk of providing valuable technical know-how to foreign firms and losing some control over its use

34. Characteristics of Franchising Strategies • Often is better suited to global expansion efforts of service and retailing enterprises • Advantages • Franchisee bears most of costs and risks of establishing foreign locations • Franchiser has to expend only the resources to recruit, train, and support franchisees • Disadvantage • Maintaining cross-country quality control

35. Organizational Renewal Inadequate Financial Controls Overexpansion or Too Rapid Growth Uncontrollable Costs or Too High Costs Poor Management Slow or No Response to Significant External or Internal Changes New Competitors Unpredicted Shifts in Consumer Demand

36. Retrenchment • Diversification efforts have become too broad • Lack of resources or skill to support operating and investment needs of all businesses • Misfits (or poorly performing businesses) cannot be completely avoided • Unfavorable changes in industry attractiveness • Diversification may lack compatibility of values essential to cultural fit

37. Options for Accomplishing Retrenchment • Spin it off as independent company • Involves deciding whether to retain partial ownership or forego any ownership interest • Sell it • Involves finding a company which views the business as a good deal and good fit • Leveraged buy out • Involves selling business to the managers who have been running it for a minimal equity down payment and loaning balance of purchase price to new owners

38. Corporate Turnaround Strategies (downsizing) • Objectives • Restore money-losing businesses to profitability rather than divest them • Get whole firm back in the black by curing problems of ailing businesses in portfolio • Most appropriate where • Reasons for poor performance are short-term • Ailing businesses are in attractive industries • Divesting money-losers doesn’t make long-term strategic sense

39. Portfolio Analysis Relative Market Share Position High (above 1.0) Low (below 1.0) 1.0 High (faster than the economy as a whole) Low (slower than the economy as a whole) Stars Question Marks Industry Growth Rate (in constant sales dollars) Cash Cows Dogs

40. Business Unit Competitive Strength Strong Average Weak High Industry Attractiveness Medium Low High priority for investment Medium priority for investment Low priority for investment McKinsey GE-Stoplight matrix

41. Strategy Implications of Attractiveness/Strength Matrix • Businesses in upper left corner • Strategic prescription - grow and build • Businesses in three diagonal cells • Invest to maintain position • Businesses in lower right corner • Candidates for harvesting or divestiture • The lesson here is emphasize businesses that are market leaders or that can contend for market leadership

42. Characteristics of Cash Hogs • Internal cash flows are inadequate to fully fund needs for working capital and new capital investment • Parent company has to continually pump in capital to “feed the hog” • Strategic options • Aggressively invest in attractive cash hogs • Divest cash hogs lacking long-term potential

43. Characteristics of Cash Cows • Generate cash surpluses over and above what is needed to sustain present market position • Such businesses are valuable because surplus cash can be used to • Pay corporate dividends • Finance new acquisitions • Invest in promising cash hogs • Strategic objectives • Fortify and defend present market position • Keep the business healthy

44. Notes of Caution: WhyDiversification Efforts Can Fail • Transferring resource capabilities to new businesses can be far more arduous and expensive than expected • Trying to replicate a firm’s success in one business and hitting a second home run in a new business is easier said than done • Management can misjudgedifficulty of overcoming resource strengths of rivals it will face in a new business

45. Corporate and International Strategy Take Aways • Single Business: Mission Driven • Not a bad way to go, but “all eggs are in one basket” • Related Diversification: Strategy driven • An alternative way to grow, but make sure the relations are strong • Unrelated Diversification: Finance driven • Core Competency is in management, finance, strategy, or just need to become bigger • Different ways to diversify • More than 50% of all acq. do worse than expected • Rarely does 1+1 = 3, typically 1+1 = 2 and often 1+1 = 1

46. Take Aways-Global strategies • Global strategies work only if the industry is truly a global industry • Political and financial concerns are as important as strategic concerns • There are many ways to enter a new country each with benefits and risks • Global strategy is very hard!

47. Corporate Strategy Take Aways • First step: identify companies to acquire • Attractiveness / competitiveness matrix • Second step: identify resources needed to develop business • Hogs vs. Cows • Third step: does it fit our core competencies • Existing or ones we want to develop or retrenchment)