strategy: a view from the top chapter 9 - corporate strategy: shaping the portfolio group 5: laura...

Strategy: A View From the Strategy: A View From the TopTop

Chapter 9 - Corporate Chapter 9 - Corporate Strategy: Shaping the Strategy: Shaping the

PortfolioPortfolio

Group 5:Group 5:Laura MooreLaura MooreJeffri VaughnJeffri Vaughn

Grant GerhardtGrant GerhardtPatrick KirklandPatrick Kirkland

Chet VisserChet Visser

Shaping the PortfolioShaping the Portfolio

►What exactly is your business strategy?What exactly is your business strategy?►Single business companies should have Single business companies should have

a clear, concise answer, and an easy-a clear, concise answer, and an easy-to-understand answer to this questionto-understand answer to this question

►For multi-business companies, the For multi-business companies, the answer is a bit more complex, and answer is a bit more complex, and much less easier to understand.much less easier to understand.

►Multi-business strategies, since they tend Multi-business strategies, since they tend to be so complicated, are usually broken to be so complicated, are usually broken down into two to five themes, which down into two to five themes, which makes them much easier to comprehend.makes them much easier to comprehend. Ex. GE’s Strategic Themes are developing Ex. GE’s Strategic Themes are developing

leaders, integrate business on a global scale, leaders, integrate business on a global scale, and prowess in making skillful acquisitions.and prowess in making skillful acquisitions.

►Breaking down a company’s strategy Breaking down a company’s strategy creates a powerful management tool for creates a powerful management tool for aligning behaviors and decision making at aligning behaviors and decision making at all levels within the company.all levels within the company.

DefinitionsDefinitions

►Business Unit StrategyBusiness Unit Strategy - how to - how to compete in a given industrycompete in a given industry

►Corporate StrategyCorporate Strategy - which business - which business should the company operate inshould the company operate in

Economies of Scale and Economies of Scale and ScopeScope

►Economies of Scale-Economies of Scale- Cost per unit Cost per unit decreases as volume goes updecreases as volume goes up

►Ex. Titleist: makes millions of golf balls and Ex. Titleist: makes millions of golf balls and therefore can sell them at lower prices because therefore can sell them at lower prices because of the sheer volume producedof the sheer volume produced

Provides an advantage to being big, Provides an advantage to being big, because large plants can often produce because large plants can often produce products at a much lower cost than smaller products at a much lower cost than smaller plantsplants

Must be large to be able to compete Must be large to be able to compete globally, so you can undersell the region’s globally, so you can undersell the region’s local competitors and compete with other local competitors and compete with other global companiesglobal companies

Why do costs fall?Why do costs fall?

►From the use of better technologies in From the use of better technologies in the production processthe production process

►Greater buyer power in large-scale Greater buyer power in large-scale purchasing situationspurchasing situations

►Finding better ways to perform a given Finding better ways to perform a given task, thus driving the costs lowertask, thus driving the costs lower Referred to as: Referred to as: Economics of LearningEconomics of Learning

►Economies of ScopeEconomies of Scope - Cost per unit - Cost per unit falls because the asset used is shared falls because the asset used is shared with some other activitywith some other activity Ex. AA using its aircraft to carry mail as Ex. AA using its aircraft to carry mail as

well as parcels in extra space in their well as parcels in extra space in their cargo holdscargo holds

►Three Classes of Economies of ScopeThree Classes of Economies of Scope HorizontalHorizontal GeographicalGeographical VerticalVertical

►Horizontal ScopeHorizontal Scope - Concerns choices of - Concerns choices of product scopeproduct scope Ex. GE with their many different products: Jet Ex. GE with their many different products: Jet

Engines, Medical, Financial, and many other Engines, Medical, Financial, and many other areas areas

Ex. Virgin with its many different businesses: Ex. Virgin with its many different businesses: Airline, Music, and various other thingsAirline, Music, and various other things

►Geographical ScopeGeographical Scope - Choices of - Choices of geographical coveragegeographical coverage Ex. McDonalds and Coke with their operations in Ex. McDonalds and Coke with their operations in

100+ countries100+ countries Ex. Southwest with their choice only to operate Ex. Southwest with their choice only to operate

domestically in the USA, and from 2domestically in the USA, and from 2ndnd tier tier airportsairports

►Vertical ScopeVertical Scope - How the company will - How the company will link its value chain activities vertically; link its value chain activities vertically; whether the company manufactures whether the company manufactures everything themselves or do they buy everything themselves or do they buy and re-brand.and re-brand. Ex. Boeing has a medium vertical Ex. Boeing has a medium vertical

strategy. They purchase some of their strategy. They purchase some of their components from other companies and components from other companies and manufacture other components in-house.manufacture other components in-house.

Capitalizing on the Advantages Capitalizing on the Advantages of Scale and Scopeof Scale and Scope

►Companies must make investments Companies must make investments related to the goal of making their global related to the goal of making their global marketing and distribution organizations marketing and distribution organizations function properly, and efficiently.function properly, and efficiently.

►Timing is criticalTiming is critical First Movers have the best chance to First Movers have the best chance to

succeed, because challengers face an uphill succeed, because challengers face an uphill battle.battle.

First Movers can continue to build their First Movers can continue to build their market share and perfect their production market share and perfect their production process as the challengers work on building process as the challengers work on building their production capacity.their production capacity.

CoreCore► The best starting point for crafting a corporate The best starting point for crafting a corporate

strategy is to define the core.strategy is to define the core.► The The CoreCore is a company’s most valuable is a company’s most valuable

products, channels, and distinctive capabilities.products, channels, and distinctive capabilities. Ex. AA: Maintenance Personnel, Pilots, and Cabin Ex. AA: Maintenance Personnel, Pilots, and Cabin

CrewCrew► The challenge is to define the company in a The challenge is to define the company in a

way that is different from all the others so that way that is different from all the others so that the company is able to build on its real the company is able to build on its real capabilities and avoid any wishful thinking.capabilities and avoid any wishful thinking.

► Not choosing a core will result in risking Not choosing a core will result in risking confusion about a company’s positioning in its confusion about a company’s positioning in its served markets, and may even make it harder served markets, and may even make it harder to create value on a sustained basis.to create value on a sustained basis.

Strategy TrapsStrategy Traps

►Assumption that since their business Assumption that since their business units are performing well and have units are performing well and have reached their limit, and therefore it is not reached their limit, and therefore it is not necessary to make any more investments necessary to make any more investments in their core business unitsin their core business units

►Assumption that there is a greater upside Assumption that there is a greater upside potential in underperforming businesses potential in underperforming businesses and making risky investments in these and making risky investments in these underperforming businessesunderperforming businesses

►Prematurely abandoning core businessesPrematurely abandoning core businesses

►Ex. Colgate-PalmoliveEx. Colgate-Palmolive Invested in its core business and drove it Invested in its core business and drove it

to its full potential.to its full potential.►Resulted in Colgate outperforming GE and Resulted in Colgate outperforming GE and

generating returns three times of the S&P 500.generating returns three times of the S&P 500.►Became a leader in their industry.Became a leader in their industry.

►Ex. BoeingEx. Boeing Bet nearly the entire company’s assets on Bet nearly the entire company’s assets on

the development of the 747 airliner.the development of the 747 airliner.►Resulted in the most successful wide body in Resulted in the most successful wide body in

aviation history.aviation history.►Cemented Boeing as the leader in commercial Cemented Boeing as the leader in commercial

aircraft production.aircraft production.

TakeawaysTakeaways

►A concise description of your corporate A concise description of your corporate strategystrategy

►Economies of Scale and Scope and Economies of Scale and Scope and their uses and benefitstheir uses and benefits

►Capitalize on Economies of Scope and Capitalize on Economies of Scope and ScaleScale

►Choose a core and invest in itChoose a core and invest in it

Growth StrategiesGrowth Strategies►Achieving consistent revenue and profit Achieving consistent revenue and profit

growth is hard, especially for large growth is hard, especially for large companiescompanies

►A growth strategy that works for one A growth strategy that works for one company might not be appropriate for company might not be appropriate for anotheranother May even be disastrousMay even be disastrous

►High percentage of mergers and acquisitions High percentage of mergers and acquisitions fail to meet expectationsfail to meet expectations

►Relying on internal growth to meet revenue Relying on internal growth to meet revenue targets is riskytargets is risky

►Few companies consistently achieve higher-Few companies consistently achieve higher-than-GDP growth from internal sources alonethan-GDP growth from internal sources alone

Growth StrategiesGrowth Strategies

►To formulate a successful growth strategy, To formulate a successful growth strategy, a company must carefully analyze its a company must carefully analyze its strengths and weaknesses, how it delivers strengths and weaknesses, how it delivers value to customers, and what growth value to customers, and what growth strategies its culture can effectively strategies its culture can effectively supportsupport

►Selecting the right growth strategy Selecting the right growth strategy requires a careful analysis of requires a careful analysis of opportunities, strategic resources, and opportunities, strategic resources, and cultural fitcultural fit

Growth StrategiesGrowth Strategies► A company only has three avenues by which A company only has three avenues by which

to grow its revenue baseto grow its revenue base 1. Organic or internal growth1. Organic or internal growth

►Build: Wal-Mart and DellBuild: Wal-Mart and Dell 2. Growth through acquisition2. Growth through acquisition

►Buy: GEBuy: GE 3. Growth through alliance-based initiatives3. Growth through alliance-based initiatives

►Bond: Amazon and eBayBond: Amazon and eBay► ““Build, Buy, or Bond” paradigmBuild, Buy, or Bond” paradigm►Growth strategies can also be characterized Growth strategies can also be characterized

by using product-market choice as the by using product-market choice as the primary criterionprimary criterion 1. Concentrated growth1. Concentrated growth 2. Vertical and horizontal integration2. Vertical and horizontal integration 3. Diversification3. Diversification

Concentrated Growth Concentrated Growth StrategiesStrategies

►Existing product markets often are Existing product markets often are attractive avenues for growthattractive avenues for growth

►A corporation that continues to direct A corporation that continues to direct its resources to the profitable growth its resources to the profitable growth of a single product category, in a well-of a single product category, in a well-defined market, and possibly with a defined market, and possibly with a dominant technology, is said to pursue dominant technology, is said to pursue a a concentrated growth strategyconcentrated growth strategy


►Most direct way of pursuing Most direct way of pursuing concentrated growth is to target concentrated growth is to target increases in market shareincreases in market share

►This can be done in three waysThis can be done in three ways 1. Increasing the number of users of the 1. Increasing the number of users of the

productproduct 2. Increasing product usage by stimulating 2. Increasing product usage by stimulating

higher quantities of use or by developing higher quantities of use or by developing new applicationsnew applications

3. Increasing the frequency of the product’s 3. Increasing the frequency of the product’s useuse


►Concentrated growth can be a powerful Concentrated growth can be a powerful competitive weaponcompetitive weapon

►A tight product-market focus allows a A tight product-market focus allows a company to finely assess market needs, company to finely assess market needs, develop a detailed knowledge of customer develop a detailed knowledge of customer behavior and price sensitivity, and improve behavior and price sensitivity, and improve the effectiveness of marketing and the effectiveness of marketing and promotion effortspromotion efforts

►High success rates of new products also High success rates of new products also are tied to avoiding situations that require are tied to avoiding situations that require undeveloped skillsundeveloped skills


► Four specific conditions favor concentrated growthFour specific conditions favor concentrated growth 1. The industry is resistant to major technological 1. The industry is resistant to major technological

advancements. This is usually the case in the late growth advancements. This is usually the case in the late growth and maturity stages of the product life cycle and in and maturity stages of the product life cycle and in product-markets where product demand is stable and product-markets where product demand is stable and industry barriers, such as capitalization, are high.industry barriers, such as capitalization, are high.

2. Targeted markets are not product-saturated. Markets 2. Targeted markets are not product-saturated. Markets with competitive gaps leave the firm with alternatives for with competitive gaps leave the firm with alternatives for growth, other than taking market share away from growth, other than taking market share away from competitors.competitors.

3. The product-market is sufficiently distinctive to 3. The product-market is sufficiently distinctive to discourage competitors from trying to invade the discourage competitors from trying to invade the segment.segment.

4. Necessary inputs are stable in price and quantity and 4. Necessary inputs are stable in price and quantity and are available in the amounts and at the times needed.are available in the amounts and at the times needed.


Sample of corporations that successfully use Sample of corporations that successfully use concentrated growth strategies include:concentrated growth strategies include:

AllstateAllstate John DeereJohn Deere

AmocoAmoco KFCKFC

AvonAvon Mack TruckMack Truck

CaterpillarCaterpillar Martin-MariettaMartin-Marietta

ChemlawnChemlawn McDonaldsMcDonalds

GoodyearGoodyear SwatchSwatch

Giant FoodsGiant Foods TenantTenant

Hyatt Legal ServicesHyatt Legal Services

Vertical and Horizontal Vertical and Horizontal IntegrationIntegration

► If a corporation’s current lines of business If a corporation’s current lines of business show strong growth potential, two show strong growth potential, two additional avenues for growth – additional avenues for growth – vertical vertical and horizontal integrationand horizontal integration – are available – are available

►Vertical integrationVertical integration describes a strategy describes a strategy of increasing a corporation’s vertical of increasing a corporation’s vertical participation in an industry’s value chainparticipation in an industry’s value chain

►Backward integrationBackward integration entails acquiring entails acquiring resource suppliers or raw materials or resource suppliers or raw materials or manufacturing components that used to manufacturing components that used to be sourced elsewherebe sourced elsewhere


► Forward integrationForward integration refers to a strategy of refers to a strategy of moving closer to the ultimate customer by moving closer to the ultimate customer by acquiring a distribution channel or by offering acquiring a distribution channel or by offering after-sale servicesafter-sale services

► Vertical integration can be valuable if the Vertical integration can be valuable if the corporation possesses a business unit that has a corporation possesses a business unit that has a strong competitive position in a highly attractive strong competitive position in a highly attractive industry – especially when the industry’s industry – especially when the industry’s technology is predictable and markets are technology is predictable and markets are growing rapidlygrowing rapidly

► It can reduce a corporation’s strategic flexibility It can reduce a corporation’s strategic flexibility by creating an exit barrier that prevents the by creating an exit barrier that prevents the company from leaving the industry if its fortunes company from leaving the industry if its fortunes declinedecline


►Decisions about vertical scope are of key Decisions about vertical scope are of key strategic importance at both the business strategic importance at both the business unit and corporate levels because they unit and corporate levels because they involve the decision to redefine the involve the decision to redefine the domains in which the firm will operatedomains in which the firm will operate

►Vertical integration also affects industry Vertical integration also affects industry structure and competitive intensitystructure and competitive intensity

►There are four reasons to vertically There are four reasons to vertically integrateintegrate

Vertical and Horizontal Vertical and Horizontal IntegrationIntegration► There are four reasons to vertically integrateThere are four reasons to vertically integrate

1. The market is too risky and unreliable and is at 1. The market is too risky and unreliable and is at risk of “failing.” The typical features of a failed risk of “failing.” The typical features of a failed vertical market are (1) a small number of buyers vertical market are (1) a small number of buyers and sellers; (2) high asset specificity, durability, and sellers; (2) high asset specificity, durability, and intensity; and (3) frequent transactions.and intensity; and (3) frequent transactions.

2. A company in an adjacent stage of the industry 2. A company in an adjacent stage of the industry chain has more market power. Specifically, if one chain has more market power. Specifically, if one stage of an industry chain exerts market power stage of an industry chain exerts market power over another and thereby achieves abnormally over another and thereby achieves abnormally high returns, it may be attractive for participants in high returns, it may be attractive for participants in the dominated industry to enter the dominating the dominated industry to enter the dominating industry. Players in weak stages of an industry industry. Players in weak stages of an industry chain might have clear incentives to move into the chain might have clear incentives to move into the powerful stages; however, such a move is not powerful stages; however, such a move is not without danger. Existing players in an industry without danger. Existing players in an industry often believe they can enter another business often believe they can enter another business within the chain more easily than can outsiders. within the chain more easily than can outsiders. The key skills along an industry chain usually differ The key skills along an industry chain usually differ so substantially that outsiders with analogous skills so substantially that outsiders with analogous skills from other industries often are superior entrants.from other industries often are superior entrants.


3. Vertical integration also makes 3. Vertical integration also makes strategic sense when used to create or strategic sense when used to create or exploit market powers by raising barriers exploit market powers by raising barriers to entry or allowing price discrimination to entry or allowing price discrimination across customer segments.across customer segments.

Barriers to entryBarriers to entry. When most competitors in an . When most competitors in an industry are vertically integrated, it can be difficult industry are vertically integrated, it can be difficult for nonintegrated players to enter. Potential for nonintegrated players to enter. Potential entrants might have to enter all stages to compete. entrants might have to enter all stages to compete. This increases capital costs and the minimum This increases capital costs and the minimum efficient scale of operations, thus raising barriers to efficient scale of operations, thus raising barriers to entry.entry.

Price discriminationPrice discrimination. Forward integration into . Forward integration into selected customer segments can allow a company selected customer segments can allow a company to benefit from price discrimination. to benefit from price discrimination.


4. When an industry is young, companies 4. When an industry is young, companies sometimes forward integrate to develop a sometimes forward integrate to develop a market. This is successful only when the market. This is successful only when the downstream business possesses downstream business possesses proprietary technology or a strong brand proprietary technology or a strong brand image prevents imitation by “free rider” image prevents imitation by “free rider” competitors. It is futile to develop new competitors. It is futile to develop new markets if a company cannot capture the markets if a company cannot capture the economic gains for at least several years. economic gains for at least several years.


► Three important questions with respect to Three important questions with respect to vertical and horizontal integration (PIMS Ch. vertical and horizontal integration (PIMS Ch. 6):6): 1. Are highly integrated businesses in general 1. Are highly integrated businesses in general

more or less profitable than less integrated ones?more or less profitable than less integrated ones? 2. Under what circumstances is a high level of 2. Under what circumstances is a high level of

vertical integration likely to be most profitable?vertical integration likely to be most profitable? 3. Apart from its influence on overall profitability, 3. Apart from its influence on overall profitability,

what are the principal benefits and risks what are the principal benefits and risks associated with vertical integration strategies?associated with vertical integration strategies?


► Answers:Answers: The study found that for both industrial and consumer The study found that for both industrial and consumer

manufacturing businesses, backward integration manufacturing businesses, backward integration generally raised ROI but forward integration did not, generally raised ROI but forward integration did not, whereas partial integration generally hurt ROI. whereas partial integration generally hurt ROI.

The impact of vertical integration on profitability The impact of vertical integration on profitability varies with the size of the business. Larger businesses varies with the size of the business. Larger businesses tend to benefit to a greater extent than smaller ones. tend to benefit to a greater extent than smaller ones. This suggests that vertical integration might be a This suggests that vertical integration might be a particularly attractive option for businesses with a particularly attractive option for businesses with a substantial market share in which further backward substantial market share in which further backward integration has the potential for enhancing integration has the potential for enhancing competitive advantage and increasing barriers to competitive advantage and increasing barriers to entry.entry.


What other factors should be considered, (1) What other factors should be considered, (1) alternatives to ownership, such as long-term alternatives to ownership, such as long-term contracts and alliances, should actively be contracts and alliances, should actively be considered; (2) vertical integration almost always considered; (2) vertical integration almost always requires substantial increases in investment; (3) requires substantial increases in investment; (3) projected cost reductions do not always materialize; projected cost reductions do not always materialize; and (4) vertical integration sometimes results in and (4) vertical integration sometimes results in increased product innovation.increased product innovation.

► *Although useful as a general guide to crafting *Although useful as a general guide to crafting strategy, some of these findings might need to strategy, some of these findings might need to be validated before applying them to a specific be validated before applying them to a specific industryindustry


►Horizontal integration involves increasing Horizontal integration involves increasing the range of products and services the range of products and services offered to current markets or expanding offered to current markets or expanding the firm’s presence into a wider number the firm’s presence into a wider number of geographic locationsof geographic locations

►Horizontal integration strategies often Horizontal integration strategies often are designed to leverage brand potentialare designed to leverage brand potential

► In recent years, strategic alliances have In recent years, strategic alliances have become an increasingly popular way to become an increasingly popular way to implement horizontal growth strategiesimplement horizontal growth strategies

DiversificationDiversification

►The term The term diversificationdiversification has a wide has a wide range of meanings in connection with range of meanings in connection with many aspects of business activity.many aspects of business activity.

► In a strategic context, diversification is In a strategic context, diversification is defined as a strategy of entering defined as a strategy of entering product markets different from those product markets different from those in which a company is currently in which a company is currently engaged.engaged.

►Berkshire Hathaway is a good example Berkshire Hathaway is a good example of a company engaged in of a company engaged in diversification.diversification.

Berkshire HathawayBerkshire Hathaway

►Examples of Berkshire’s Diversity:Examples of Berkshire’s Diversity: Acme BrickAcme Brick Ben Bridge JewelersBen Bridge Jewelers Fruit Of The LoomFruit Of The Loom GEICO Auto InsuranceGEICO Auto Insurance NetJetsNetJets See’s CandySee’s Candy Star FurnitureStar Furniture

Fortune BrandsFortune Brands

► Jim Beam, Sauza, Maker’s Mark, Jim Beam, Sauza, Maker’s Mark, Cruzan, Canadian Club, CourvoisierCruzan, Canadian Club, Courvoisier

►Moen, Master Lock, Master Brands, Moen, Master Lock, Master Brands, SimontonSimonton

►Titleist, FootJoy, Cobra, Pinnacle, Titleist, FootJoy, Cobra, Pinnacle, Scotty CameronScotty Cameron

Diversification StrategyDiversification Strategy

►Diversification strategies pose a great Diversification strategies pose a great challenge to corporate executives.challenge to corporate executives.

► In the 1970s, many US companies, In the 1970s, many US companies, facing stronger competition from facing stronger competition from abroad and diminished growth abroad and diminished growth prospects in a number of traditional prospects in a number of traditional industries, moved into industries in industries, moved into industries in which they had no particular which they had no particular competitive advantage.competitive advantage.

Diversification StrategyDiversification Strategy►Believing that general management skill Believing that general management skill

could offset knowledge gained from could offset knowledge gained from experience in an industry, executives experience in an industry, executives thought that because they were thought that because they were successful in their own industries, they successful in their own industries, they could be just as successful in others.could be just as successful in others.

►A depressing number of their subsequent A depressing number of their subsequent experiences showed that these experiences showed that these executives overestimated their relevant executives overestimated their relevant competence and, under these competence and, under these circumstances, bigger was worse, not circumstances, bigger was worse, not better.better.

Diversification StrategyDiversification Strategy►Diversification strategies can be motivated by Diversification strategies can be motivated by

a variety of factors, including the desire to a variety of factors, including the desire to create revenue growth, increase profitability create revenue growth, increase profitability through shared resources and synergies, through shared resources and synergies, reduce the company’s overall exposure to risk reduce the company’s overall exposure to risk by balancing the business portfolio, or an by balancing the business portfolio, or an opportunity to exploit underutilized resources.opportunity to exploit underutilized resources.

►DiversifyingDiversifying RelatednessRelatedness or the potential for or the potential for synergysynergy is a is a

major consideration in formulation diversification major consideration in formulation diversification strategies.strategies.

Relatedness or synergy can be defined in a number Relatedness or synergy can be defined in a number of ways…of ways…

Relatedness or SynergyRelatedness or Synergy

► The most common interpretation defines The most common interpretation defines relatedness in terms of tangible linksrelatedness in terms of tangible links between between business units.business units.

► A second form of relatedness among business A second form of relatedness among business unities is based on common intangible unities is based on common intangible resources, such as knowledge or capabilities.resources, such as knowledge or capabilities.

► A third form of relatedness concerns the A third form of relatedness concerns the ability of a business unity to jointly gain or ability of a business unity to jointly gain or exercise market power.exercise market power.

► A forth form is strategic relatedness. It is A forth form is strategic relatedness. It is defined in terms of the similarity of the defined in terms of the similarity of the strategic challenges faced by different strategic challenges faced by different business units.business units.

RelatednessRelatedness

►A well-known study links a company’s A well-known study links a company’s performance to the degree of performance to the degree of relatednessrelatedness among its various among its various businesses. It identifies three businesses. It identifies three categories of relatedness based on a categories of relatedness based on a firm’s firm’s specialization ratiospecialization ratio, defined as , defined as the proportion of revenues derived from the proportion of revenues derived from the largest single group of related the largest single group of related businesses: dominant business businesses: dominant business companies, related business companies, companies, related business companies, and unrelated business companies.and unrelated business companies.

Risks of Diversification Risks of Diversification StrategyStrategy

► What can the company do better than any of What can the company do better than any of its competitors in its current markets?its competitors in its current markets?

► What strategic assets are needed to succeed What strategic assets are needed to succeed in the new market?in the new market?

► Can the firm catch or leapfrog competitors?Can the firm catch or leapfrog competitors?► Will diversification break up strategic assets Will diversification break up strategic assets

that need to be kept together?that need to be kept together?► Will our firm simply be a player in the new Will our firm simply be a player in the new

market or will it be a winner?market or will it be a winner?► What can the corporation learn by What can the corporation learn by

diversifying, and is it organized to learn it?diversifying, and is it organized to learn it?

TestsTests

► Attractiveness TestAttractiveness Test Is the industry the company is about to enter Is the industry the company is about to enter

fundamentally attractive from a growth, fundamentally attractive from a growth, competitive, and profitability perspective, or can competitive, and profitability perspective, or can the company create such favorable conditions?the company create such favorable conditions?

► Cost of Entry TestCost of Entry Test Are the costs of entry reasonable? Is the time Are the costs of entry reasonable? Is the time

horizon until the venture becomes profitable horizon until the venture becomes profitable acceptable? Are risk levels within accepted acceptable? Are risk levels within accepted tolerances?tolerances?

► Better-Off TestBetter-Off Test Does the overall portfolio’s competitive position Does the overall portfolio’s competitive position

and performance improve as a result of the and performance improve as a result of the diversification move?diversification move?

DiversificationDiversification

►Diversification is a powerful weapon in Diversification is a powerful weapon in a corporation’s strategic arsenal. It is a corporation’s strategic arsenal. It is not a panacea for rescuing not a panacea for rescuing corporations with mediocre corporations with mediocre performance, however. If done performance, however. If done carefully, diversification can improve carefully, diversification can improve shareholder value, but it needs to be shareholder value, but it needs to be planned carefully in the context of an planned carefully in the context of an overall corporate strategy.overall corporate strategy.

Mergers and AcquisitionsMergers and Acquisitions

►A A mergermerger signifies that two companies signifies that two companies have joined to form one company.have joined to form one company.

►An An acquisitionacquisition occurs when one firm occurs when one firm buys another.buys another.

► In acquisitions, the management team In acquisitions, the management team of the buyer tends to dominate of the buyer tends to dominate decision making in the combined decision making in the combined company.company.

►Acquisitions are generally more Acquisitions are generally more expensive.expensive.

Six Themes of AcquisitionSix Themes of Acquisition

►Successful acquisitions are usually part of Successful acquisitions are usually part of a well-developed corporate strategy.a well-developed corporate strategy.

►Diversification through acquisition is an Diversification through acquisition is an ongoing, long-term process that requires ongoing, long-term process that requires patience.patience.

►Successful acquisitions usually result Successful acquisitions usually result from disciplined strategic analysis, which from disciplined strategic analysis, which looks at industries first before it targets looks at industries first before it targets companies, while recognizing that good companies, while recognizing that good deals are firm-specific.deals are firm-specific.

Six Themes con’tSix Themes con’t

►An acquirer can add value in only a few An acquirer can add value in only a few ways, and before proceeding with an ways, and before proceeding with an acquisition, the buying company should be acquisition, the buying company should be able to specify how synergies will be able to specify how synergies will be achieved and value created.achieved and value created.

►Objectivity is essential, even though it is Objectivity is essential, even though it is hard to maintain once the acquisition chase hard to maintain once the acquisition chase continues.continues.

►Most acquisitions flounder on Most acquisitions flounder on implementation; strategies for implementation; strategies for implementation should be formulated before implementation should be formulated before the acquisition is completed and executed the acquisition is completed and executed quickly after the acquisition deal is closed.quickly after the acquisition deal is closed.

Attractive Key DriversAttractive Key Drivers

► Risk sharing—prioritize strategic interests and Risk sharing—prioritize strategic interests and balance them according to riskbalance them according to risk

► Funding limitations—to compete in the global Funding limitations—to compete in the global arena, companies must incur immense fixed arena, companies must incur immense fixed costs with a shorter payback period and at a costs with a shorter payback period and at a higher level of riskhigher level of risk

► Market access—customers benefit because Market access—customers benefit because the gaps in product lines are filled with quality the gaps in product lines are filled with quality productsproducts

► Technology access—partnering with Technology access—partnering with technologically compatible companies to technologically compatible companies to achieve the prerequisite level of excellence is achieve the prerequisite level of excellence is often essentialoften essential

Cooperative StrategyCooperative Strategy► Cooperative strategies—joint ventures, strategic Cooperative strategies—joint ventures, strategic

alliances, and other partneringalliances, and other partnering arrangements—arrangements—have become increasingly popular in recent have become increasingly popular in recent years.years.

► For many corporations, cooperative strategies For many corporations, cooperative strategies capture the benefits of internal development capture the benefits of internal development and acquisition while avoiding the drawbacks of and acquisition while avoiding the drawbacks of both.both.

►Other reasons to pursue a cooperative strategy Other reasons to pursue a cooperative strategy are a lack of particular management skills; an are a lack of particular management skills; an inability to addinability to add value in-house; and a lack of value in-house; and a lack of acquisition opportunitiesacquisition opportunities because of size, because of size, geographical, or ownership restrictions.geographical, or ownership restrictions.

► The airline industry provides a good example of The airline industry provides a good example of some of the drivers and issues involved in some of the drivers and issues involved in forging strategic alliances.forging strategic alliances.

The Strategic Logic of The Strategic Logic of AlliancesAlliances

►Each business has its own, “unique Each business has its own, “unique alliance drivers.”alliance drivers.”

►Key drivers in the early growth stageKey drivers in the early growth stage Product innovationProduct innovation CredibilityCredibility Access to capitalAccess to capital

►External value, market and customer External value, market and customer reach are the most important factors in reach are the most important factors in the Rapid Growth and Consolidation the Rapid Growth and Consolidation phases.phases.

Stability StageStability Stage

►Reduced costReduced cost►Value-chain strengtheningValue-chain strengthening►Product extensionProduct extension►Alliance Models-Booz Allen Hamilton, Inc.Alliance Models-Booz Allen Hamilton, Inc.

FranchiseFranchise PortfolioPortfolio CooperativeCooperative ConstellationConstellation

Portfolio and Franchise Portfolio and Franchise ModelsModels

►Multiple alliances are established, but are Multiple alliances are established, but are managed as a single portfolio. “One managed as a single portfolio. “One company acts as the ‘hub’ for the alliances company acts as the ‘hub’ for the alliances and manages the external partners.”and manages the external partners.” i.e. AT&T and Time Warner (book examples), i.e. AT&T and Time Warner (book examples),

another example is Microsoft Dynamicsanother example is Microsoft Dynamics►Managers use the franchise model “when Managers use the franchise model “when

gaps in an organization’s value chain are gaps in an organization’s value chain are greater than any one partner can fill.”greater than any one partner can fill.” i.e. Nintendo (book example), and many i.e. Nintendo (book example), and many

restaurants are franchised like Blimpie, restaurants are franchised like Blimpie, Wingstop, Beef-O-Brady’s, and many more.Wingstop, Beef-O-Brady’s, and many more.

Cooperative and Constellation Cooperative and Constellation ModelsModels

► The alliance is at the center, customer The alliance is at the center, customer relationships are no longer concentrated with relationships are no longer concentrated with the members of the company, but are with the the members of the company, but are with the alliance center. There is no individual company alliance center. There is no individual company in control. Instead, all of the partners work in control. Instead, all of the partners work together toward one goal. together toward one goal. i.e. Tri-Star is an alliance with CBS, Columbia i.e. Tri-Star is an alliance with CBS, Columbia

Pictures, and HBO (book example). Another is Pictures, and HBO (book example). Another is Denton County Electric Cooperative (North Texas)Denton County Electric Cooperative (North Texas)

► This model is for companies that design This model is for companies that design strategies that will put other companies on the strategies that will put other companies on the defensive.defensive. i.e. Constellation Energy Group, Constellation i.e. Constellation Energy Group, Constellation

Wines, etc…Wines, etc…

Groups of Alliances-Boston Groups of Alliances-Boston Consulting GroupConsulting Group

►Divides alliances into four groups by Divides alliances into four groups by whether or not participants are whether or not participants are competitors.competitors. Expertise AlliancesExpertise Alliances

►This brings together non-competing firms so This brings together non-competing firms so they simply share their expertise.they simply share their expertise.

i.e. “outsourcing of information technology i.e. “outsourcing of information technology services.”services.”

AlliancesAlliances►New-Business AlliancesNew-Business Alliances

““Partnerships focused on entering a new Partnerships focused on entering a new business or market.”business or market.”► i.e. many businesses partner when getting into new i.e. many businesses partner when getting into new

parts of the world.parts of the world.► Cooperative AlliancesCooperative Alliances

Efforts of competing companies to achieve Efforts of competing companies to achieve economies of scale. economies of scale. ► i.e. “Competitors combining to seek cheaper health i.e. “Competitors combining to seek cheaper health

insurance for employees, for example, or combined insurance for employees, for example, or combined purchasing arrangements.”purchasing arrangements.”

►M&A-like alliancesM&A-like alliances These focus on “near-complete integration but These focus on “near-complete integration but

are prevented from doing so…”are prevented from doing so…” Expertise alliances are favored the most by the Expertise alliances are favored the most by the

stock market, and M&A alliances are the least stock market, and M&A alliances are the least favored.favored.

Growth & Strategic RiskGrowth & Strategic Risk

►Strategic risk can be shown by the Strategic risk can be shown by the choice of growth initiative a company choice of growth initiative a company takes. This measure is taken as a takes. This measure is taken as a distance from core dimensions that is distance from core dimensions that is “implied by a particular strategic “implied by a particular strategic move, and calculated by assessing the move, and calculated by assessing the degree of sharing between the core degree of sharing between the core business and the growth opportunity.business and the growth opportunity.

►A company’s success decreases as it A company’s success decreases as it moves away from its core.moves away from its core.

Choice of Strategy and Level of Choice of Strategy and Level of RiskRisk

►Less riskyLess risky Local geographic expansion, or the Local geographic expansion, or the

introduction of a new product.introduction of a new product.

►More riskyMore risky Targeting new customers, or channels.Targeting new customers, or channels. Forward or backward integration.Forward or backward integration. Entering a completely new business.Entering a completely new business.

Disinvestments: Sell-Offs, Spin-Disinvestments: Sell-Offs, Spin-Offs, and LiquidationsOffs, and Liquidations

►A mismatch of corporate parent and A mismatch of corporate parent and corporate child results in a sell-off or corporate child results in a sell-off or spin-off.spin-off. i.e. Chrysler to Cerberusi.e. Chrysler to Cerberus

►Some companies try to “unlock value Some companies try to “unlock value for shareholders” by splitting a major for shareholders” by splitting a major company into two or more single company into two or more single companies.companies.

►However, “for every successful spin, However, “for every successful spin, there are two that fail to live up to there are two that fail to live up to their potential.”their potential.”

Successful Spin-OffsSuccessful Spin-Offs

►For a successful spin-off, managers For a successful spin-off, managers must:must: ““Ensure that both the parent corporation Ensure that both the parent corporation

and the unit spun off have viable business and the unit spun off have viable business and financial structures”and financial structures”

““Meet or exceed earnings expectations.”Meet or exceed earnings expectations.” ““Continue growth.”Continue growth.”

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