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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.

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StrategicStrategicDirectionDirection

Strategy FormulationStrategy Formulation(corporate and (corporate and business level)business level)

Strategy ImplementationStrategy Implementationand Controland Control

Strategic RestructuringStrategic Restructuring

Internal and External Internal and External AnalysisAnalysis

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Major Corporate-Level Strategy Formulation Responsibilities

Major Corporate-Level Strategy Formulation Responsibilities

• Direction setting—Mission, vision, ethics, long-term goals for the entire corporation

• Development of corporate-level strategy—Selection 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 management—Management of the corporate portfolio. Emphasis given to each business unit via resource allocations.

• Selection of tactics for diversification and growth–Internal venturing, acquisitions and/or joint ventures

• Management of resources—Acquisition 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.

• Direction setting—Mission, vision, ethics, long-term goals for the entire corporation

• Development of corporate-level strategy—Selection 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 management—Management of the corporate portfolio. Emphasis given to each business unit via resource allocations.

• Selection of tactics for diversification and growth–Internal venturing, acquisitions and/or joint ventures

• Management of resources—Acquisition 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.

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Corporate Strategies

• Concentration

• Vertical Integration

• Unrelated Diversification

• Related Diversification

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Advantages of ConcentrationAdvantages 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)

• 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)

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Disadvantages of Concentration

Disadvantages of Concentration

• Risky in unstable environments

• Product obsolescence and industry maturity

• Cash flow problems

• Risky in unstable environments

• Product obsolescence and industry maturity

• Cash flow problems

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The Vertical Supply ChainThe Vertical Supply Chain

RawMaterialsExtraction

PrimaryManufac-turing

FinalProductManufac-turing

Whole-saling Retailing

Vertical Integration: The extent to which an organizationis involved in multiple stages of the industry supply chainVertical Integration: The extent to which an organizationis involved in multiple stages of the industry supply chain

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When to Vertically IntegrateWhen 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

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

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Transactions Costs and Vertical Integration

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)

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)

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Unrelated DiversificationUnrelated 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

• 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

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Related DiversificationRelated 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

• 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

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Requirements for Synergy CreationRequirements for Synergy Creation

Relatedness

• Tangible--same physical resources for multiple purposes

• Intangible--capabilities developed in one area can be used elsewhere

(continued)

Relatedness

• Tangible--same physical resources for multiple purposes

• Intangible--capabilities developed in one area can be used elsewhere

(continued)

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Requirements for Synergy CreationRequirements 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

• 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

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Diversification Methods

• Internal Ventures

• Mergers and Acquisitions

• Joint Ventures

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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 companyDisadvantages of internal ventures:• Risk of failure is high• They take a lot of time

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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

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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

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Mergers that Don’t WorkMergers that Don’t 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 firm’s core

• 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 firm’s core

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Mergers That WorkMergers 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

• 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

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Strategic Alliancesand Joint VenturesStrategic 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

• 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

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Problems with Strategic Alliances and Joint Ventures

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

• 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

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Portfolio ModelsPortfolio Models

BusinessGrowthRate

BusinessGrowthRate

Relative Competitive Position (Relative Market Share)Relative Competitive Position (Relative Market Share)

HighHigh

LowLow

HighHigh LowLow