Chapter 7 Corporate Strategies I

Moses Acquaah, Ph.D. 377 Bryan Building Phone: (336) 334-5305 Email: acquaah@uncg.edu

Lecture Objectives
Define 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 diversification Discuss 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 involves
Moves 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 organizations
Operates primarily in only one industry (e.g., Coca-Cola Beverage Industry; Wrigley Jr. Company Chewing Gum)

Multiple Business Organizations

Operates 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 organizations weaknesses or decline -- Organizational Renewal

ORGANIZATIONAL GROWTH
Growth strategy
Involves the attainment of specific growth objectives by increasing the level of an firms operations

Typical growth objectives for businesses

Increase in sales revenues Increase in earnings or profits Other performance measures

Growth objectives of not-for-profit businesses

Increasing clients served or patrons attracted Broadening the geographic area Increasing programs offered

Types of Growth Strategies

Concentration International

Organizational Growth Diversification Related Unrelated

Vertical Integration Backward Forward

Horizontal Integration

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 options
Current Current Products New

Customers

Product-Market Exploration
Market Development

Product Development
Product/Market Diversification

New

Concentration Strategy
Product-Market Exploration Option
Describes 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 Option

Firm create new product for use by its current market (customers)

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

Product-Market Diversification Option

Where firm seeks to expand both into new products & new markets Single-business firm becomes a multiplebusiness firm since it is now operating in a different industry

Concentration Strategy
Advantage
Organization becomes very good at what it does

Drawback
Organization is vulnerable to industry and other external environmental shifts

Concentration strategy is used by both smallsized and large organizations

Vertical Integration Strategies

An organizations attempt to gain control of
Its inputs (backward integration) -- supplier Its output (forward integration) -- distributor Or both inputs and output Purpose is to (1) reduce resource acquisition costs, & (2) deal with inefficient operations

Vertical Integration
Considered a growth strategy because the firms operations are expanded beyond primary business Mixed empirical results as to whether strategy helps or hurt performance What is the role of outsourcing in achieving same objective as vertical integration?

Vertical Integration Strategies

Benefits
Reduced purchasing & selling costs Improved coordination of functions & capabilities Protected proprietary technology

Costs
Reduced flexibility as firm is locked into products & technology Create an exit barrier due to existence of assets that are hard to sell Difficulties in integrating various operations Financial 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 diversification
Related (concentric) diversification Unrelated (conglomerate) diversification

Why Do Firms Diversify?

To Grow
Increase sales & profitability beyond what firms 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 spreading
Escape 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 flows

Large cash balances attract corporate raiders Use cash balances to avoid hostile takeovers

To build shareholder value

Create 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 Diversify

Synergy can be obtained in three ways
Exploiting economies of scale Exploiting economies of scope Efficient 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 businesses Dangers or risks associated with the acquisition of businesses Problems 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) Diversification
Diversifying into a different industry but one thats related in some ways to the organizations current operations Search 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 Benefits
Opportunities 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

Disadvantages
Complexity 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 firms current operations Firm move into industries where there is
No strategic fit to be exploited No meaningful value chain relationships No unifying strategic theme

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

Unrelated Diversification
Targets for unrelated diversification
Firms with undervalued assets
Firms in financial distress Firms with bright growth prospects but limited capital

Advantages
Business risk spread over different industries Efficient allocation of capital resources Stability of profits Enhanced shareholder value

Unrelated Diversification
Disadvantages
Difficulties 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 & Acquisitions
A 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 Development
Organization 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 industrys 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 Partnering
When 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 Partnerships
Joint 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 (contd)
Strategic Alliance
Two or more firms share resources, capabilities or competencies to pursue some business purpose Similar to JVs 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 Strategy

Not expanding organizations level of operation Should be a short-run strategy