Chapter 7 Corporate Strategies I Moses Acquaah, Ph.D. 377 Bryan Building Phone: (336) 334-5305 Email: [email protected].

Chapter 7 Corporate Strategies I

Moses Acquaah, Ph.D.

377 Bryan Building

Phone: (336) 334-5305

Email: [email protected]

Lecture ObjectivesDefine 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 diversificationDiscuss 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 involvesMoves 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 organizationsOperates primarily in only one industry (e.g., Coca-Cola – Beverage Industry; Wrigley Jr. Company – Chewing Gum)

Multiple Business OrganizationsOperates 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 strategyInvolves the attainment of specific growth objectives by increasing the level of an firm’s operations

Typical growth objectives for businessesIncrease in sales revenuesIncrease in earnings or profitsOther performance measures

Growth objectives of not-for-profit businessesIncreasing clients served or patrons attractedBroadening the geographic areaIncreasing programs offered

Types of Growth Strategies

Organizational

Growth

Diversification

•Related

•Unrelated Horizontal

Integration

Vertical

Integration

•Backward

•Forward

ConcentrationInternational

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 optionsProducts

CustomersCurrent

New

Current New

Product-Market

Exploration

Product

Development

Market

Development

Product/Market

Diversification

Concentration Strategy

Product-Market Exploration OptionDescribes 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 OptionFirm create new product for use by its current market (customers)

Concentration Strategy

Market Development OptionWhen a firm sell its current products in new markets (additional geographic areas or market segments not currently served by firm)

Product-Market Diversification OptionWhere firm seeks to expand both into new products & new marketsSingle-business firm becomes a multiple-business firm since it is now operating in a different industry

Concentration Strategy

AdvantageOrganization becomes very good at what it does

DrawbackOrganization is vulnerable to industry and other external environmental shifts

Concentration strategy is used by both small-sized and large organizations

Vertical Integration StrategiesAn organization’s attempt to gain control of

Its inputs (backward integration) -- supplierIts output (forward integration) -- distributorOr both inputs and outputPurpose is to (1) reduce resource acquisition costs, & (2) deal with inefficient operations

Vertical IntegrationConsidered a growth strategy because the firm’s operations are expanded beyond primary businessMixed empirical results as to whether strategy helps or hurt performanceWhat is the role of outsourcing in achieving same objective as vertical integration?

Vertical Integration StrategiesBenefits

Reduced purchasing & selling costsImproved coordination of functions & capabilitiesProtected proprietary technology

CostsReduced flexibility as firm is locked into products & technologyCreate an exit barrier due to existence of assets that are hard to sellDifficulties in integrating various operationsFinancial 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 diversificationRelated (concentric) diversification

Unrelated (conglomerate) diversification

Why Do Firms Diversify?

To GrowIncrease 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 spreadingEscape 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 flowsLarge cash balances attract corporate raiders

Use cash balances to avoid hostile takeovers

To build shareholder valueCreate 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 DiversifySynergy can be obtained in three ways

Exploiting economies of scale Exploiting economies of scopeEfficient 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 businessesDangers or risks associated with the acquisition of businessesProblems 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) DiversificationDiversifying into a different industry but one that’s related in some ways to the organization’s current operationsSearch 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 BenefitsOpportunities 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

DisadvantagesComplexity 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 operationsFirm move into industries where there is

No strategic fit to be exploitedNo meaningful value chain relationshipsNo unifying strategic theme

E.g.: GE; Walt Disney; Sara LeeApproach is venture into any business with good profitability prospects

Unrelated Diversification

Targets for unrelated diversificationFirms with undervalued assets

Firms in financial distress

Firms with bright growth prospects but limited capital

AdvantagesBusiness risk spread over different industries

Efficient allocation of capital resources

Stability of profits

Enhanced shareholder value

Unrelated Diversification

DisadvantagesDifficulties 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 & AcquisitionsA 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 DevelopmentOrganization 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 PartneringWhen 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 PartnershipsJoint 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 strategy indefinitely

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 StrategyNot expanding organization’s level of operation

Should be a short-run strategy