Published on March 11, 2014
Chapter 7 Corporate Strategies I Moses Acquaah, Ph.D. 377 Bryan Building Phone: (336) 334-5305 Email: firstname.lastname@example.org
Lecture Objectives Define corporate strategy. Explain the difference between a single-business firm and a multiple-business firm. Discuss how corporate strategy is related to the other firm strategies. Explain the corporate strategic directions available to firms. Describe the various organizational growth strategies. Discuss the reasons/motives for diversification Discuss the advantages and disadvantages of related & unrelated diversification. Explain how growth strategies can be implemented. Describe when organizational stability is an appropriate strategic choice.
What is Corporate Strategy? Those strategies concerned with the broad and long-term questions of what business(es) the organization is in or wants to be in & what it wants to do with those businesses Task involves Moves to enter new businesses Actions to boost combined performance of businesses Ways to capture synergy among related businesses Establishing investment priorities & steering corporate resources into most attractive units
Single & Multiple Business Organizations Single business organizations Operates primarily in only one industry (e.g., Coca-Cola – Beverage Industry; Wrigley Jr. Company – Chewing Gum) Multiple Business Organizations Operates in more than one industry Example: PepsiCo – Snack Food Industry business (Frito Lay); & Beverage Industry Philip Morris Companies – Tobacco Industry; Brewery Industry (Miller Brewery); & Food Processing Industry (Kraft General Foods).
Corporate, Competitive & Functional Strategies Corporate strategy establishes the overall direction that the organization hopes to go. Competitive & functional strategies provide the means or mechanisms for making sure the organization gets there.
Possible Corporate Strategic Directions (1) Moving the organization ahead -- Organizational Growth (2) Keeping the organization where it is -- Organizational Stability (3) Reversing the organization’s weaknesses or decline -- Organizational Renewal
ORGANIZATIONAL GROWTH Growth strategy Involves the attainment of specific growth objectives by increasing the level of an firm’s operations Typical growth objectives for businesses Increase in sales revenues Increase in earnings or profits Other performance measures Growth objectives of not-for-profit businesses Increasing clients served or patrons attracted Broadening the geographic area Increasing programs offered
Types of Growth Strategies Organizational Growth Diversification •Related •Unrelated Horizontal Integration Vertical Integration •Backward •Forward Concentration International
Concentration Strategy A growth strategy where the firm Concentrates on its primary line of business Looks for ways to meet its growth objectives through increasing its level of operation in this primary business When a single-business organization pursues growth, it is using the concentration strategy
Concentration Strategy Four concentration strategy options Products Customers Current New Current New Product-Market Exploration Product Development Market Development Product/Market Diversification
Concentration Strategy Product-Market Exploration Option Describes attempts by firm to increase sales of its current product(s) in its current market(s) by depending on its functional & competitive strategies Product Development Option Firm create new product for use by its current market (customers)
Concentration Strategy Market Development Option When a firm sell its current products in new markets (additional geographic areas or market segments not currently served by firm) Product-Market Diversification Option Where firm seeks to expand both into new products & new markets Single-business firm becomes a multiple- business firm since it is now operating in a different industry
Concentration Strategy Advantage Organization becomes very good at what it does Drawback Organization is vulnerable to industry and other external environmental shifts Concentration strategy is used by both small- sized and large organizations
Vertical Integration Strategies An organization’s attempt to gain control of Its inputs (backward integration) -- supplier Its output (forward integration) -- distributor Or both inputs and output Purpose is to (1) reduce resource acquisition costs, & (2) deal with inefficient operations Vertical Integration Considered a growth strategy because the firm’s operations are expanded beyond primary business Mixed empirical results as to whether strategy helps or hurt performance What is the role of outsourcing in achieving same objective as vertical integration?
Vertical Integration Strategies Benefits Reduced purchasing & selling costs Improved coordination of functions & capabilities Protected proprietary technology Costs Reduced flexibility as firm is locked into products & technology Create an exit barrier due to existence of assets that are hard to sell Difficulties in integrating various operations Financial costs of acquiring or starting up
Horizontal Integration Strategies Expanding the firm's operations through combining with competitors operating in the same industry & doing the same things It is an appropriate corporate growth strategy as long as It enables the company to meet its growth objectives It can be strategically managed to attain a sustainable competitive advantage It satisfies legal and regulatory guidelines
Diversification Strategies A corporate growth strategy in which a firm expands its operation by moving into a different industry Many reasons or motives for diversification Two major types of diversification Related (concentric) diversification Unrelated (conglomerate) diversification
Why Do Firms Diversify? To Grow Increase sales & profitability beyond what firm’s core businesses can provide Managerial self-serving behavior -- compensation Managerial “hubris” -- pride or status that come from managing a large business To more fully utilize existing resources and capabilities Skills in sales & marketing, general management skills & knowledge, distribution channels, etc.
Why Do Firms Diversify? Risk reduction and/or spreading Escape from unattractive or undesirable industries (e.g., tobacco & oil companies) Stability of profit flows (CAPM: systematic vs. unsystematic risks; shareholders & diversified portfolios) To make use of surplus cash flows Large cash balances attract corporate raiders Use cash balances to avoid hostile takeovers To build shareholder value Create synergy among the businesses of a firm Make 2 + 2 = 5: The whole should be greater than the sum of the parts
Why Do Firms Diversify Synergy can be obtained in three ways Exploiting economies of scale Exploiting economies of scope Efficient allocation of capital through the use of portfolio management techniques Problems that prevent diversified firms from realizing synergies A poor understanding of how diversification activities will “fit” or be coordinated with existing businesses Dangers or risks associated with the acquisition of businesses Problems with the development of internal businesses
Why Do Firms Diversify? Diversification is capable of increasing shareholder value if it passes three tests: The attractiveness test: The industry must be structurally attractive or capable of being made attractive The cost-of-entry test: The cost of entry must not capitalize all future profits The better-off test: Either the new unit must gain competitive advantage from its link with the corporation or vice versa (i.e. synergy)
Related (Concentric) Diversification Related (Concentric) Diversification Diversifying into a different industry but one that’s related in some ways to the organization’s current operations Search for strategic “synergy”, which is the performance of the sum of the parts is better than the whole • The idea that 2 + 2 = 5 Synergy happens because of the interactions and the interrelatedness of the combined operations and the sharing of resources, capabilities, & distinctive competencies
Related Diversification Builds shareholder value by capturing cross-business “strategic fits” Transferring skills & capabilities from one business to another Sharing facilities or resources to reduce costs Leveraging the use of common brand name Combining resources to create new competitive strengths and capabilities
Related Diversification Advantages or Benefits Opportunities to achieve economies of scale and scope through skill transfers, lower costs, common brand name, technology, etc. Opportunities to expand product or service offerings and preserve unity in businesses Disadvantages Complexity and difficulty of coordinating different, but related businesses (e.g. Philip Morris’ General Food and Kraft subsidiaries) Related diversification is a strategy-driven approach to creating shareholder value
Unrelated Diversification Diversifying into completely different industry from the firm’s current operations Firm move into industries where there is No strategic fit to be exploited No meaningful value chain relationships No unifying strategic theme E.g.: GE; Walt Disney; Sara Lee Approach is venture into any business with good profitability prospects
Unrelated Diversification Targets for unrelated diversification Firms with undervalued assets Firms in financial distress Firms with bright growth prospects but limited capital Advantages Business risk spread over different industries Efficient allocation of capital resources Stability of profits Enhanced shareholder value
Unrelated Diversification Disadvantages Difficulties of competently managing many diverse businesses No strategic fits which can be leveraged into competitive advantage Unrelated diversification is a finance-driven approach to creating shareholder value
Implementing Growth Strategies Mergers & Acquisitions A merger is a legal transaction in which two or more organizations combine through an exchange of stock, but only one firm actually remain An acquisition is an outright purchase of an organization by another What is a Takeover?
Implementing Growth Strategies Internal Development Organization chooses to expand its operation by starting a new business from scratch Choice between mergers-acquisition and internal development depends on: (See Table 7-4) • The new industry’s barriers to entry • Relatedness of new business to the existing one • Speed & development cost associated with each approach • Risks associated with each approach • Stage of the industry life cycle
Implementing Growth Strategies Strategic Partnering When two or more firms establish a legitimate relationship by combining their resources, core competencies, distinctive capabilities for some business purpose Arrangement can be used to implement any of the growth strategies • Vertical Integration • Horizontal Integration • Related Diversification
Implementing Growth Strategies Types of Strategic Partnerships Joint Venture (JV) • Two or more separate organization form an independent organization for strategic purposes • Partners usually own equal shares of new venture • Used when partners do not want to be legally joined Long-Term Contract • Legal contract between organizations covering a specific business purpose • Typically between an organization & its suppliers
Implementing Growth Strategies Types of strategic Partnerships (cont’d) Strategic Alliance • Two or more firms share resources, capabilities or competencies to pursue some business purpose • Similar to JV’s but no formation of a separate entity • Often pursued in order to • Partners reap benefits of expanded operations
ORGANIZATIONAL STABILITY A strategy where the organization maintains its current size and current level of business operations When is stability an appropriate strategy? Industry is in a period of rapid upheaval with several key industry & external forces drastically changing, making future highly uncertain Industry is facing slow or no growth opportunities Many small business owners follow stability
ORGANIZATIONAL STABILITY When is stability an appropriate strategy? Organization has just completed a frenzied period of growth & needs to have some “down” time in order for its resources & capabilities to build up strength again large firm in large industry at maturity stage of industry life cycle Implementation of Stability Strategy Not expanding organization’s level of operation Should be a short-run strategy
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