Strategy: A View From the TopChapter 9

Corporate Strategy: Shaping the Portfolio

Team 5Kristen HodgeKatelyn Reed

Venessa RodriguezMonica Longer

What is your strategy?◦Small, single business firmsClear, concise answer

◦Large, multi-business corporations Identify 3-5 strategic themesAligns behaviors and decision making at all levels within the company

Introduction

Corporate strategy◦Concerned with decisions about which businesses a company operates in.

Shaping the corporate portfolio and how to create value within it by exploiting synergies among multiple business units.

Introduction Continued

Shaping the Corporate Portfolio◦Economics of scale and scope Is bigger better?

◦Defining the portfolio’s core and potential growth

◦Growth strategies at corporate level

◦Divestment Options

This Chapter…

Economies of scale- Cost per unit decreases as volume goes up◦Better use of technologies in production

◦Greater buyer power in large scale purchasing situations

◦Better ways to perform given tasks

The Economics of Scale and Scope

Economies of Scope- unit cost of an activity falls because the asset used is shared with some other activity.◦using the same raw and semifinished materials and production processes to make a variety of different products

◦3 Decision opportunities for creating economies of scope: horizontal, geographical, and vertical scope.

The Economies of Scale and Scope Continued

Horizontal Scope Decisions◦ Choices of product scope, including tangible and

intangible assets.◦ GE has interests in appliances, medical systems,

aircraft engines, financing, and more.◦ Sony’s expertise in miniaturizing products.

Geographical Scope Decisions◦ Choices about geographical coverage◦ McDonald’s has operations in almost 100 countries◦ Whirlpool has production facilities in only a few

countries but markets its products in many more◦ Internet Companies like eBay or Amazon have a virtual

geographical scope.

The Economies of Scale and Scope Continued

Vertical Scope Decisions◦ Concerned with how a company links its value chain

activities vertically.◦ In order to reap benefits that scale and scope can bring

a company must Make related investments to create global marketing and

distribution organizations. Create the right management infrastructure to effectively

coordinate the multiple activities that makeup a multinational company.

Be a first mover Makes challengers build productive capacity while the first

mover is perfecting their production process and developing marketing and distribution strategies to compete for existing market share.

The Economies of Scale and Scope Continued

Most valuable customers, products, channels or distinctive capabilities.

Differentiate the company in a way that builds on REAL strengths and capabilities.

Many companies tend to under exploit the full potential of their strongly performing business units.

Don’t misunderstand the relationship between returns and competitive strength.◦ 3 Traps:

Assuming that business units that are performing well have reached their limit, and thus deciding not to make any further investments in the core business.

Assuming that there is greater upside potential in underperforming businesses and making unwarranted, more risky investment in underperforming portfolio components.

Prematurely abandoning core businesses

What is “Core”?

Colgate◦Share price delivered a return three times that of S&P 500 and outperformed GE; while its revenue grew less than 2 percent each year between 1996 and 2000.

◦In the same period, its stock price almost tripled because of major investments in the company’s core business.

What is “Core” Continued

A company must analyze its strengths and weaknesses, how it delivers value to customers, and what growth strategies its culture can effectively support

Three paths for growth:◦ 1. Organic or internal growth◦ 2. Growth through acquisition◦ 3. Growth through alliance-based initiatives

Growth Strategies

A corporation that continues to direct its resources to the profitable growth of a single product category in a well-defined market

Pursue concentrated growth by targeting increases in market share:◦ 1. Increasing the number of users of the product◦ 2. increasing product usage by stimulating higher

quantities of use/developing new applications◦ 3. Increasing the frequency of the product's use

Concentrated Growth

Four conditions favor concentrated growth:◦ 1. The industry is resistant to major technological

advancements. ◦ 2. Targeted markets are not product saturated.◦ 3. The product-market is sufficiently distinctive to

discourage competitors from trying to invade segment.

◦ 4. Necessary inputs are stable in price and quantity and are available when needed.

◦ Ex. Allstate, KFC, John Deere, Mack Truck

Concentrated Growth

Vertical Integration-describes a strategy of increasing a corporation’s vertical participation in a value chain.

Backward Integration-acquiring resource suppliers or raw materials that used to be sourced elsewhere

Forward Integration-refers to a strategy of moving closer to the consumer

Horizontal Integration-increasing the range of products and services offered to current markets or expanding presence in other locations

Vertical and Horizontal Integration

1. Market is too risky and unreliable and is at risk of failing

2. A company in an adjacent stage of the industry chain has more market power.

3. Used to create or exploit market power by raising barriers to entry

4. Use forward integration to develop a market when an industry is young

Four Reasons to Vertically Integrate

Definition: A strategy of entering product markets different from those in which a company is currently engaged.

Can be motivated by a variety of factors:◦ Desire to create revenue growth◦ To increase profitability through shared resources

and synergies◦ To reduce the company's overall exposure to risk

by balancing the business portfolio◦ An opportunity to exploit underutilized resources

Diversification Strategies

The potential for synergy is a major consideration in formulating a strategy

Synergy (or Relatedness) is interpreted as tangible links between business units such as common buyers, channels, technologies

Can also be interpreted as intangible links such as knowledge or capabilities

Another form of synergy is the ability of business units to jointly exercise market power◦ Ex. A company’s ability to provide complementary products

Strategic Relatedness is the similarity of the strategic challenges faced by different business units

Diversification Strategies

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

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

Can the firm catch or leapfrog competitors?

Will diversification break up strategic assets that need to be kept together?

Will our firm simply be a player in the new market or will it be a winner?

What can the corporation learn by diversifying, and are we organized to learn it?

Evaluate Risks

The Attractiveness Test:◦ Is the industry attractive from a growth, competitive,

and profitability standpoint? Can the company create favorable conditions?

The Cost of Entry Test:◦ Are the costs of entry reasonable? Are risk levels within

accepted tolerances?

The Better-Off Test:◦ Does the overall portfolio’s competitive postion and

performance improve as a result of the diversification move?

Three Tests

Mergers and Acquisitions Merger: signifies that two companies have

joined to form one company Acquisition: occurs when one firm buys

another The critical difference is in management

control◦ The management team of the buyer in

acquisitions tends to dominate decision making in the combined company

Acquisitions Quickly position an firm in a new

business/market Eliminates a potential competitor Are generally expensive Acquiring company frequently lose

shareholder value The most suitable players in the most

attractive industries are identified as targets to be purchased (theoretically)

Acquisition Strategies Specify a comprehensive framework for the due

diligence assessments of targets, plans for integrating acquired companies into the corporate portfolio, and a determination of “how much is too much” to pay.

The time to act on a target is typically very short—intense pressures to ‘do a deal’—due diligence is conducted sooner than desirable and tends to be confined to financial considerations—differences in corporate cultures are discounted—integration planning takes a back seat

6 Themes to Increase Effectiveness of Mergers and Acquisitions

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

2. Diversification through acquisition is a long-term process that requires patience

3. Successful acquisitions usually result from disciplined strategic analysis

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

5. Objectivity is essential6. Most acquisitions flounder on implementation

Cooperative Strategies Joint ventures, strategic alliances, & other

partnering arrangements Capture the benefits of internal development and

acquisition while avoiding the drawbacks of both Having alliances in a global competitive

environment is practically a necessity. Motivation for cooperative strategies is the

corporation’s ability to spread its investments over a range of options.

Key drivers—Risk sharing, funding limitations, market and technology access

Key Drivers of Cooperative Strategies Risk Sharing

◦ Whether a corporation is considering entry into a global market or investments in new technologies, the dominant logic dictates the companies prioritize their interests and balance them according to risk.

Funding Limitations◦ Historically—focus on building sustainable

advantage by establishing dominance in all of the business’ value creating activities—built barriers to entry that were extremely hard to penetrate.

Key Drivers of Cooperative Strategies Funding Limitations cont.

◦ Globalization of business environment increased and technology race intensified such a strategy became difficult to sustain.

◦ To compete in the global arena, companies must incur huge fixed costs with a shorter payback period at a higher level of risk

Market Access◦ Companies recognize their lack of prerequisite

knowledge, infrastructure, or critical relationships necessary to distribute their products to new customers.

◦ By using cooperative strategies to fill the gaps with quality products, customers will benefit.

Key Drivers of Cooperative Strategies Technology Access

◦ Products rely on so many technologies few companies can afford to remain at the front of all of them. Auto, application software, advertisement

◦ Globally technology is increasing at a rapid rate, makes time even more critical in competitive advantage

◦ Companies often partner with technologically compatible companies to achieve the essential level of excellence.

Cooperative Strategies Reasons to practice: lack of mgt. skills,

inability to add value in-house, lack of acquisition opportunities

Cover a wide range of nonequity, cross-equity, and shared equity arrangements.

Essential question: How can we structure this opportunity to maximize the benefit(s) to both parties?

The Strategic Logic of Alliance According to the Booz Allen Hamilton, Inc., a

consulting firm, each life cycle phase of a business has its own unique alliance drivers◦ Product innovation, credibility, and access to

capital are key drivers of alliance initiatives in the early growth stage

4 Alliance ModelsBased on the corporate strategy and structure of leadership

Alliance Groups Based on the basis of whether the

participants are competitors and relative depth of alliance itself:

1. Expertise Alliance – bring together non-competing firms to share expertise and capabilities (most favored by the stock market)

2. New-Business Alliance – partnerships focused on entering a new business or market

3. Cooperate Alliance – joint efforts by competing firms to attain critical mass or economies of scale

4. M&A-like Alliance – focus on near-complete integration but are prevented from doing so

Growth and Strategic RiskAs a company moves away from the core its success rate drops and strategic risk increases

Disinvestments A sell-off of a strategic business unit to a

competitor or its spin off into a separate company makes sense when analysis confirms the corporation is the wrong corporate parent for the business

Three Key Success Factors to a Spin-off1. Ensure that both the parent corporation

and the unit spun off have viable business and financial structures

2. Meet or exceed earnings expectations3. Continue growth