Chapters 1 and 2

1
Chapter 6 Corporate Strategies
2
Learning Objectives

• To understand
• the types of corporate strategies, including
  concentration, vertical integration and both
  related and unrelated diversification
• merger and acquisition strategies and their
  advantages and disadvantages
• how firms use strategic alliances and joint
  ventures and their advantages and disadvantages
• the appropriate use and interpretation of
  portfolio models.

3

• The Strategic Management Process

Internal and External Analysis
Strategy Formulation (corporate and business
level)
Strategic Direction
Strategy Implementation and Control
Strategic Restructuring
4
Major Corporate-Level Strategy Formulation
Responsibilities

• Direction settingMission, vision, ethics,
  long-term goals for the entire corporation
• Development of corporate-level strategySelection
  of broad approach to corporate-level strategy
  concentration, vertical integration,
  diversification, international expansion.
  Selection of resources and capabilities in which
  to build corporate-wide distinctive competencies
• Selection of businesses and portfolio
  managementManagement of the corporate portfolio.
  Emphasis given to each business unit via resource
  allocations.
• Selection of tactics for diversification and
  growthInternal venturing, acquisitions and/or
  joint ventures
• Management of resourcesAcquisition and/or
  development of competencies leading to
  sustainable competitive advantage. Oversee
  development of business-level strategies in the
  business units. Develop an effective management
  and organizational structure.

5
Corporate Strategies

• Concentration
• Vertical Integration
• Unrelated Diversification
• Related Diversification

6
Advantages of Concentration

• Allows a firm to master one business
• In-depth knowledge
• Easier to achieve competitive advantage
• Organizational resources under less strain
• Prevents proliferation of management levels and
  staff functions
• Sometimes found more profitable than other
  strategies (dependent on industry, of course)

7
Disadvantages of Concentration

• Risky in unstable environments
• Product obsolescence and industry maturity
• Cash flow problems

8
The Vertical Supply Chain
Final Product Manufac- turing
Raw Materials Extraction
Primary Manufac- turing
Whole-saling
Retailing
Vertical Integration The extent to which an
organization is involved in multiple stages of
the industry supply chain
9
When to Vertically Integrate

• Common reasons for vertical integration
• Increased control over quality of supplies or the
  way the product is marketed
• Better information about supplies or markets
• Greater opportunities for differentiation through
  coordinated effort
• Opportunity to make greater profits by performing
  another function in the vertical supply chain

10
Transactions Costs and Vertical Integration

• Basic Proposition Firms should buy what they
  need from the market as long as transactions
  costs are low.
• Transactions costs are reflected by the time and
  resources needed to create and enforce a contract
  to purchase goods and services.
• If transactions costs are high, the market fails
  to provide the best deal
• Transactions costs are high (the market fails)
  if
• Highly uncertain future
• One or small number of suppliers
• One party to a transaction has more knowledge
  about the transaction than the other
• An organization has to invest in an asset that
  can only be used to produce a specific good or
  service (asset specificity)

11
Unrelated Diversification

• Large, highly diversified firms are called
  conglomerates
• Not a high performing strategy for most firms
  (with a few notable exceptions) in industrialized
  nations like the U.S.
• Difficult for a top manager to understand and
  appreciate the core technologies, key success
  factors and special requirements of each business
  area

12
Related Diversification

• Based on tangible and intangible relatedness
• In theory, can lead to synergy (but synergy is
  often illusive)
• Often a higher performing strategy than unrelated
  diversification (lower risk and higher
  profitability)
• Can lead to corporate-level distinctive
  competencies

13
Requirements for Synergy Creation

• Relatedness
• Tangible--same physical resources for multiple
  purposes
• Intangible--capabilities developed in one area
  can be used elsewhere
• (continued)

14
Requirements for Synergy Creation

• Fit
• Strategic--matching of organizational
  capabilities--complementary resources and skills
• Organizational--similar processes, cultures,
  systems and structures
• Managerial actions to share resources and skills
• Benefits must outweigh costs of integration

15
Diversification Methods

• Internal Ventures
• Mergers and Acquisitions
• Joint Ventures

16
Internal Ventures

• Internal ventures make use of the research and
  development programs of the organization
• Provides high level of control over the venture
• Proprietary information need not be shared with
  other firms
• All profits are retained by the venturing company
• Disadvantages of internal ventures
• Risk of failure is high
• They take a lot of time

17
Mergers and Acquisitions

• Mergers and acquisitions are sometimes seen as a
  way to buy innovation rather than having to
  produce it in-house
• Fast way to enter new markets
• Acquire new products or services
• Learn new technologies
• Acquire needed knowledge and skills
• Vertically integrate
• Broaden markets geographically
• Fill needs in the corporate portfolio

18
Mergers and Acquisitions

• Most research indicates that mergers and
  acquisitions perform poorly

• High premiums
• Increased interest costs
• High advisory fees
• Poison pills

• High turnover
• Managerial distraction
• Less innovation
• Lack of fit
• Increased risk

19
Mergers that Dont Work

• Large or extraordinary debt
• Overconfident or incompetent management
• Ethical concerns
• Changes in top management team and/or
  organizational
• Inadequate analysis (due diligence)
• Diversification away from the firms core

20
Mergers That Work

• Strong relatedness
• Friendly negotiations
• Low-to-moderate debt
• Continued focus on core strengths of firm
• Careful selection of and negotiations with target
  firm
• Strong cash or debt position
• Similar firm cultures and management styles
• Sharing resources across companies

21
Strategic Alliancesand Joint Ventures

• Resource sharing--marketing, technology, raw
  materials and components, financial, managerial,
  political
• Speed of entry
• Spread risk of failure
• Increase strategic flexibility
• Learn from venture partners

22
Problems with Strategic Alliances and Joint
Ventures

• Only partial control and shared profitability
• High administrative costs
• Possible lack of fit
• Risk of opportunism
• Foreign joint ventures are even more risky due to
  potential for miscommunications,
  misunderstandings and lack of shared knowledge
  about the constraints of the external environment

23
Portfolio Models

• ?

High
Business Growth Rate
Low
High
Low
Relative Competitive Position (Relative Market
Share)