Business Strategy and Policy

1. Business Strategy and Policy Lecture 21

2. Recap • The Balanced Scorecard The balanced scorecard is a strategic planning and management system that is used extensively in • business and industry, government, and nonprofit organizations worldwide • to align business activities to the vision and strategy of the organization • improve internal and external communications, and • monitor organization performance against strategic goals.

3. Recap Levels of Strategies a.     Corporate strategy—this strategy seeks to determine what businesses a company should be in or wants to be in. Corporate strategy determines the direction that the organization is going and the roles that each business unit in the organization will plan in pursuing that direction. b.     Business strategy—this strategy seeks to determine how an organization should compete in each of its businesses. For a small organization in only one line of business or the large organization that has not diversified into different products or markets, the business strategy typically overlaps with the organization’s corporate strategy. For organizations with multiple businesses, however, each division will have its own strategy that defines the products or services it will offer and the customers it wants to reach. c.      Functional strategy—this strategy seeks to determine how to support the business strategy. For organizations that have traditional functional departments such as manufacturing, marketing, human resources, research and development, and finance, these strategies need to support the business strategy.

4. Today’s Lecture • Types of Strategies • Forward Integration • Backward Integration • Horizontal Integration

5. Forward integration 1. Forward integration involves gaining ownership or increased control over distributors or retailers. 2. Franchising is an effective means of implementing forward integration. 3. Forward integration is a type of vertical merger (vertical integration) in which a supplier acquires a manufacturer or a manufacturer acquires a distributor. 4. Businesses engage in forward integration either to generate a higher margin from a key input which it owns or produces or to better market its products and increase its profitability.

6. Example-Forward integration - If Intel acquires Dell, it is a forward integration because it is an acquisition of manufacturer by a supplier. - If Dell acquires a distributor of computers such as BestBuy it will be a forward integration too since it is an acquisition of a distributor by a manufacturer.

7. Guidelinesfor ForwardIntegration Six guidelines when forward integration may be an especially effective strategy: • When an organizations present distributors are especially expensive or unreliable, or incapable of meeting firms distribution needs. • When the availability of quality distributors is so limited as to offer a competitive advantage to those firms that integrate forward. • When an organization competes in an industry that is growing and expected to continue to grow markedly. • When an organization has both the capital and human resources needed to manage the new business. • When the advantages of stable production are particularly high. • When present distributors have high profit margins.

8. Backward Integration • Backward integration is a strategy of seeking ownership or increased control of a firm's suppliers. This strategy can be especially appropriate when a firm's current suppliers are unreliable, too costly, or cannot meet the firm's needs. • 2. Some industries in the United States (such as automotive and aluminum industries) are reducing their historic pursuit of backward integration. Instead of owning their suppliers, companies negotiate with several outside suppliers. • 3. Outsourcing, whereby companies use outside suppliers, shop around, play one seller against another, and go with the best deal is becoming widely practiced.

9. Examples-Backward Integration • A clothing manufacturer may purchase one of its suppliers of fabrics to lessen the cost of raw materials. • A bank which sells insurance buying an insurance company. An auto manufacturing company acquires some auto ancillary organization. • A telecom firm buying mobile handset firm. • A bookseller who sells books acquires book Publisher Company. However, backward integration means that policy of a company with the help of which it tries to protect raw materials for its products by buying or merging with the company which is delivering the raw material.

10. Guidelines for backward integration There are seven guidelines for when backward integration may be especially effective: • When an organization's present suppliers are especially expensive, or unreliable, or incapable of meeting the firm's needs for parts, components, assemblies, or raw materials; • When the number of suppliers is small and the number of competitors is large; • When an organization competes in an industry that is growing rapidly; • When an organization has both capital and human resources to manage the new business of supplying its own raw materials; • When the advantages of stable prices are particularly important; • When present supplies have high profit margins; and • When an organization needs to quickly acquire needed resources.

11. Horizontal Integration Horizontal integration refers to a strategy of seeking ownership of or increased control over a firm's competitors. One of the most significant trends in strategic management today is the increased use of horizontal integration as a growth strategy. Mergers, acquisitions, and takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies.

12. Horizontal Integration • The purpose of Horizontal Integration (HI) is to grow the company in size, increase product differentiation, achieve economies of scale, reduce competition or access new markets. • When many firms pursue this strategy in the same industry, it leads to industry consolidation (oligopoly or even monopoly). • HI can occur in a form of mergers, acquisitions or hostile takeovers. Merger is the joining of two similar sizes, independent companies to make one joint entity. Acquisition is the purchase of another company. Hostile takeover is the acquisition of the company, which does not want to be acquired.

13. Effectiveness of HI HI may be an effective strategy when: • Organization competes in a growing industry. • Competitors lack of some capabilities, competencies, • skills or resources that the company already possesses. • HI would lead to a monopoly that is allowed by a government. • Economies of scale would have significant effect. • The organization has sufficient resources to manage M&A.

14. Advantages of Horizontal Integration • Lower costs. The result of HI is one larger company, which produces more services and products. The higher output leads to greater economies of scale and higher efficiency. • Increased differentiation. The combined company can offer more product or service features. • Increased market power. The larger company has more power over its suppliers and distributors/customers. • Reduced competition. The result of industry consolidation is fewer companies operating in the industry and less intense competition. • Access to new markets. New markets and distribution channels can be accessed by integrating with a company that produces the same goods but operates in a different region or serves different market segment.

15. Disadvantages of Horizontal Integration • Destroyed value. M&A rarely add value to the companies. More often M&A fail and destroy the value of the companies involved in it because expected synergies never materialize. • Legal repercussions. HI can lead to a monopoly, which is highly discouraged by many governments due to lack of competition. Therefore, governments usually have to approve any larger M&A before they can happen. • Reduced flexibility. Large organizations are harder to manage and they are less flexible in introducing innovations to the market.

16. Guidelinesfor HorizontalIntegration There are five guidelines for when horizontal integration may be an especially effective strategy: • When an organization can gain monopolistic characteristics. • When an organization competes in a growing industry. • When increased economies of scale provide major competitive advantages. • When an organization has both the capital and human talent needed to successfully manage an expanded organization. • When competitors are faltering due to lack of managerial expertise or a need for particular resources that an organization possesses.

17. Summary • Types of Strategies • Forward Integration • Backward Integration • Horizontal Integration

18. Next Lecture • INTENSIVE STRATEGIES • Market Penetration • Market Development • Product Development • DIVERSIFICATION STRATEGIES