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Team 5

Kristen Hodge
Katelyn Reed
Venessa Rodriguez
Monica Longer
 What is your strategy?
◦ Small, single business firms
 Clear, concise answer
◦ Large, multi-business
corporations
 Identify 3-5 strategic themes
 Aligns behaviors and decision
making at all levels within the
company
 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.
 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
 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
 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.
 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.
 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.
 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
 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.
 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
 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
 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
 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
 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
 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
 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
 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?
 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?
 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
 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)
 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
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 essential
6. Most acquisitions flounder on implementation
 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
 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.
 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.
 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.
 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?
 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
 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
 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
1. Ensure that both the parent corporation and
the unit spun off have viable business and
financial structures
2. Meet or exceed earnings expectations
3. Continue growth