Download - sm-cls-lec ture
-
7/28/2019 sm-cls-lec ture
1/71
-
7/28/2019 sm-cls-lec ture
2/71
Fit between a parent and its businesses
is a two-edged sword: a good fit cancreate value; a bad one can destroy it.
Andrew Campbell, Michael
Gould, and Marcus Alexander
Quote
-
7/28/2019 sm-cls-lec ture
3/71
Corporate Level Strategy
Formulation Responsibilities
Direction Setting
Establishment and communication of
organizational mission, vision, enterprise
strategy and long-term goalDevelopment of Corporate-level Strategy
Broad approach to corporate-level
strategy growth, stability, retrenchment
or combination.
Selection of resources and capabilities
in which to develop corporate-level
distinctive competencies
-
7/28/2019 sm-cls-lec ture
4/71
Selection of Businesses and Portfolio
Management
Buy and sell businesses
Allocation of resources to business unitsfor capital equipment, R&D, etc.
Selection of Tactics for Diversification and
Growth
Choice among methods of
diversificationinternal venturing,
acquisitions, joint ventures
Corporate Level Strategy
Formulation Responsibilities
-
7/28/2019 sm-cls-lec ture
5/71
Management of Resources
Acquisition of resources and/or development ofcompetencies leading to a sustainable competitive
advantage for the entire corporation
Hire, fire and reward business-unit managers
Ensure that the business units (divisions) within thecorporation are well managed, including strategic
management. Provide training where appropriate
Develop a high-performance corporate management
structure
Develop control systems to ensure that strategies
remain relevant and that the corporation continues to
progress towards its goals
-
7/28/2019 sm-cls-lec ture
6/71
CS CONCERNED WITH CHOICE OF
Businesses,
Products
And markets
-
7/28/2019 sm-cls-lec ture
7/71
Advantages of CS
Bridge the gap
Exploit the opportunities
Develop core competencies
-
7/28/2019 sm-cls-lec ture
8/71
GRAND STRATEGIC ALTERNATIVES
GROWTH/ EXPANSION
STABILITY OR CONSOLODATION
RETRENCHMENT
COMBINATION
-
7/28/2019 sm-cls-lec ture
9/71
GROWTH / EXPANSION
Intensification / Concentration
Market Penetration
Market Development
Product Development
Innovation
-
7/28/2019 sm-cls-lec ture
10/71
GROWTH / EXPANSION
DIVERSIFICATION
HORIZONTAL
CONCENTRICCONGLOMERATE
VERTICAL (INTEGRATION)
FORWARDBACKWARD
-
7/28/2019 sm-cls-lec ture
11/71
STABILITY / CONSOLODATION
INCREMENTAL GROWTH
PROFIT
SUSTAINABLE GROWTH
PAUSE STRATERGY
-
7/28/2019 sm-cls-lec ture
12/71
RETRENCHMENT
DIVESTMENT
TURNAROUND
LIQUIDATION
BANKRUPTCY
-
7/28/2019 sm-cls-lec ture
13/71
COMBINATION
JOINT VENTURES
STRATEGIC ALLIANCES
CONSORTIA
-
7/28/2019 sm-cls-lec ture
14/71
Growth / Expansion
When to Adopt
Growth be manageable
To take into account
environmental demands
Natural choice when opportunities exists
-
7/28/2019 sm-cls-lec ture
15/71
Why to pursue growth?
To ensure survival
To obtain scale of
economies
To stimulate talent
To reach commanding
heights
-
7/28/2019 sm-cls-lec ture
16/71
Options for Markets and
Products
Market
Need
Present
New
Present NewProduct
Product
Development
Diversification
(related or unrelated)
Market
Development
Market
Geography
(the third dimension)
New
Present
Do Nothing
Withdraw
ConsolidateMarket penetration
Intensification
/
Concentration
-
7/28/2019 sm-cls-lec ture
17/71
Intensification / Concentration
Conditions favorable
Industry resistant to major
technology advancements
Markets not product saturated
Competitors attention on
other segments
Fairly stable market with
relation to seasonal and cyclical
changes
GROWTH STRATEGIES
-
7/28/2019 sm-cls-lec ture
18/71
Competitive Strengths of a
Single Business Strategy
Less ambiguity about who we are Energies of firm can be directed
down one business path and keeping
strategy responsive to industry
change Less chance resources will be
stretched thinly over too many
competing activities
Resources can be focused on
building competencies and
capabilities that make the firm better
at what it does
-
7/28/2019 sm-cls-lec ture
19/71
Higher probability innovativeideas will emerge
Top executives can maintain
hands-on contact with core
business Important competencies more
likely to emerge
Ability to parlay experience and
reputation into Sustainable competitive advantage
Prominent leadership position
Competitive Strengths of a
Single Business Strategy (continued)
Ri k f Si l B i
-
7/28/2019 sm-cls-lec ture
20/71
Risks of a Single Business
Strategy
Putting all the eggs in one industrybasket
If market becomes unattractive, a
firms prospects can quickly dim
Unforeseen changes can undermine
a single business firms prospects
Changing customer needs
Technological innovation
New substitutes
-
7/28/2019 sm-cls-lec ture
21/71
Advantages of Concentration
Allows an organization to masterone business
Less strain on resources,
allowing more of an opportunity
to develop a sustainablecompetitive advantage
Lack of ambiguity concerning
strategic direction
Often found to be a profitable
strategy, depending on the
industry
-
7/28/2019 sm-cls-lec ture
22/71
Disadvantages of Concentration
Dependence on one area isproblematic if the industry is
unstable
Primary product may become
obsoleteDifficult to grow when the industry
matures
Significant changes in the industry
can be very hard to deal with
Cash flow can be a serious
problem
-
7/28/2019 sm-cls-lec ture
23/71
Diversification as Corporate Strategy
A company is diversified when it is intwo or more lines of business
Strategy-making in a diversifiedcompany is a bigger picture exercise
than crafting a strategy for a single line-of-business
A diversified company needs a
multi-industry, multi-business
strategy A strategic action plan must be
developed forseveral differentbusinesses competing in diverse
industry environments
M i T k i
-
7/28/2019 sm-cls-lec ture
24/71
Main Tasks in
Crafting Corporate Strategy
Pick new industries to enter anddecide on means of entry
Initiate actions to boost combinedperformance of businesses
Pursue opportunities to leveragecross-business value chainrelationships and strategic fitsinto competitive advantage
Establish investment priorities,steering resources into most
attractive business units
f
-
7/28/2019 sm-cls-lec ture
25/71
When Does Diversification
Start to Make Sense?
Strong competitiveposition, rapid market
growth -- Not a good
time to diversify
Strong competitiveposition, slow market
growth --Diversification is toppriority consideration
Weak competitiveposition, rapid market
growth -- Not a good
time to diversify
Weak competitiveposition, slow market
growth --Diversification merits
consideration
-
7/28/2019 sm-cls-lec ture
26/71
When to Diversify?
Diminishing growth prospects in present business
Opportunities to add value for customers orgaincompetitive advantage by broadening present businessto include complementary products
Attractive opportunities to transfer existing competenciesto new businesses
Potential cost-saving opportunities tobe realized by entering related businesses
Availability of adequate financial andorganizational resources
-
7/28/2019 sm-cls-lec ture
27/71
Why Diversify?
To build shareholder value 1 + 1 = 3
Diversification is capable of increasing
shareholder value if it passes three tests
1. Industry Attractiveness Test
2. Cost of Entry Test
3. Better-Off Test
-
7/28/2019 sm-cls-lec ture
28/71
Strategic Management Principle
To create shareholder value, a diversifying
firm must get into businesses that can
perform betterunder common management
than they could perform operating as
independent stand-alone enterprises!
-
7/28/2019 sm-cls-lec ture
29/71
Related vs. Unrelated Diversification
Related Diversification
Involves diversifying intobusinesses whose value
chains possess
competitively valuable
strategic fits with thevalue chain(s) of the firms
present business (es)
Unrelated DiversificationInvolves diversifying into
businesses where there is
no deliberate effort to seek
out businesses havingstrategic fit with thefirms other business (es)
St t Alt ti f
-
7/28/2019 sm-cls-lec ture
30/71
Strategy Alternatives fora Company Looking to Diversify
Strategy
Optionsfor a
Company
Looking to
Diversify
Build shareholder value by capturing cross-business strategic fits
- Transfer skills and capabilities from one
business to another
- Share facilities or resources to reduce costs
- Leverage use of a common brand name
- Combine resources to create newcompetitive strengths and capabilities
Diversify into Related Businesses
Spread risks across diverse businesses
Build shareholder value by doing a superior job
of choosing businesses to diversify into and ofmanaging the whole collection of businesses in
the companys portfolio
Diversify into Unrelated Businesses
Diversify into Both Related
and Unrelated Businesses
-
7/28/2019 sm-cls-lec ture
31/71
What is Related Diversification?
Involves diversifying into businesses whose valuechains possess competitively valuable strategicfitswith the value chain(s) of the present
business(es)
Capturing the strategic fitsmakes related
diversification a 1 + 1 = 3 phenomenon
Strategic Appeal of Related
-
7/28/2019 sm-cls-lec ture
32/71
Strategic Appeal of Related
Diversification
Reap competitive advantage benefits of
Skills transfer
Lower costs
Common brand name usage
Stronger competitive capabilities
Spread investorrisks over a broader base
Preserves strategic unityin its business activities
Achieve consolidated performance greater than the sum
of what individual businesses can earn operatingindependently
Related Diversification
-
7/28/2019 sm-cls-lec ture
33/71
Related Diversification
and Competitive Advantage
Competitive advantage can result from relateddiversification if opportunities exist to
Transfer expertise/capabilities/technology
Combine related activities into a single operation andreduce costs
Leverageuse of firms brand name reputation
Conduct related value chain activities in a collaborativefashion to create valuable competitive capabilities
-
7/28/2019 sm-cls-lec ture
34/71
Strategic Fit
Exists wheneverone or more activities
in the value chains of differentbusinesses are sufficiently similar topresent opportunities for Transferring competitively valuable
expertise or technological know-howfrom one business to another
Combining performance of commonvalue chain activities to achieve lowercosts
Exploiting use of a well-known brandname
Cross-business collaboration to createcompetitively valuable resource strengthsand capabilities
-
7/28/2019 sm-cls-lec ture
35/71
Types of Strategic Fits
Cross-business strategic fitscan exist anywhere along the
value chain
R&D and technology activities
Supply chain activities
Manufacturing activities
Distribution activities
Sales and marketing activities
Managerial and administrative
support activities
-
7/28/2019 sm-cls-lec ture
36/71
R&D and Technology Fits
Offer potential for sharing common
technology or transferring technologicalknow-how
Potential benefits
Cost-savings in technologydevelopment and new product R&D
Shorter times in getting new products
to market
Interdependence between resultingproducts leads to increased sales
-
7/28/2019 sm-cls-lec ture
37/71
Supply Chain Fits
Offer potential opportunities for
skills transfer
Procuring materials
Greater bargaining power in
negotiating with common suppliers
Benefits of added collaboration
with common supply chain
partners
Added leverage with shippers
in securing volume discounts
on incoming parts
-
7/28/2019 sm-cls-lec ture
38/71
Manufacturing Fits
Potential source of competitive advantage
when a diversifiers expertise can bebeneficially transferred to another business
Quality manufacture
Cost-efficient production methods
Just-in-time inventory practices Training and motivating workers
Cost-saving opportunities arise from ability to
perform manufacturing/assembly activities
jointly in same facility, making it feasible to Consolidate production into fewer plants
Significantly reduce overall manufacturing
costs
-
7/28/2019 sm-cls-lec ture
39/71
Distribution Fits
Offer potential cost-saving opportunities
Share same distribution
facilities
Use many of the same
wholesale distributors and
retail dealers to accesscustomers
Sales and Marketing Fits:
-
7/28/2019 sm-cls-lec ture
40/71
Sales and Marketing Fits:
Types of Potential Benefits
Reduction in sales costs Single sales force for related products
Advertising related products together
Combined after-sale service and repair
work
Joint delivery and shipping Joint order processing and billing
Joint promotion tie-ins
Similar sales and marketing
approaches provide opportunities totransfer selling, merchandising, andadvertising/promotional skills
Transfer of a strong companys
brand name and reputation
Managerial and Administrative
-
7/28/2019 sm-cls-lec ture
41/71
Emerge when different business units
require comparable types of
Entrepreneurial know-how
Administrative know-how
Operating know-how
Different businesses often entail
same types of administrative support
facilities
Customer data network
Billing and customer accounting systems
Customer service infrastructure
Managerial and Administrative
Support Fits
-
7/28/2019 sm-cls-lec ture
42/71
Concept: Economies of Scope
Stem from cross-business cost-saving
opportunities
Arise from ability to eliminate costs by operating twoor more businesses under same corporate umbrella
Exist when it is less costly for two or morebusinesses to operate under centralizedmanagement than to function independently
Cost saving opportunities can
stem from interrelationshipsanywhere along businessesvalue chains
-
7/28/2019 sm-cls-lec ture
43/71
Capturing Benefits of Strategic Fit
Benefits dont occur just because a company
has diversified into related businesses !
Businesses with sharing potential must be reorganized to
coordinate activities
Means must be found to make skills transfer effective
Benefits of some strategic coordination must existto justify sacrificing business-unit autonomy
Competitive advantage potential exists to Expand resources and strategic assets and
Create new ones faster and cheaper than rivals
-
7/28/2019 sm-cls-lec ture
44/71
Involves diversifying into businesses with
Nostrategic fit
No meaningful value chainrelationships
No unifying strategic theme
Approach is to venture into any business
in which we think we can make a profit
Firms pursuing unrelated diversification
are often referred to as conglomerates
What is Unrelated Diversification?
Basic Premise of
-
7/28/2019 sm-cls-lec ture
45/71
Basic Premise of
Unrelated Diversification
Any company that can be
acquired on good financialterms and offers good
prospects for profitability is a
good business to diversify into!
-
7/28/2019 sm-cls-lec ture
46/71
Appeal of Unrelated Diversification
Business risk scattered over different industries
Financial resources can be directed to those
industries offering best profit prospects
Stability of profits -- Hard times in one industry
may be offset by good times in another industry
If bargain-priced firms with big profitpotential are bought, shareholder
wealth can be enhanced
-
7/28/2019 sm-cls-lec ture
47/71
Drawbacks of Unrelated Diversification
Difficulties of competently managing many
diverse businesses
Lack of strategic fits which can be
leveraged into competitive advantage
Consolidated performance of unrelatedbusinesses tends to be no better than sum of
individual businesses on their own (and it may
be worse)
Likely effect is 1 + 1 = 2, rather than 1 + 1 =3 Promise of greater sales-profit stability over
business cycles seldom realized
How Broadly Should a
-
7/28/2019 sm-cls-lec ture
48/71
How Broadly Should a
Company Diversify?
Two questions should guide unrelateddiversification efforts
1. What is the least diversification it will take to achieveacceptable growth and profitability?
2. What is the most diversification that can be managed,given its added complexity?
Need to strike a balance between too fewdifferent businesses and too many different
businesses!
How Many Unrelated Businesses Can
-
7/28/2019 sm-cls-lec ture
49/71
How Many Unrelated Businesses Can
a Company Diversify Into?
With unrelated diversification, corporatemanagers have to be shrewd enough to
Discern good acquisitions from bad ones
Select capable managers to run many differentbusinesses
Judge soundness of strategic proposals of
business-unit managers Know what to do if a subsidiary stumbles
Di ifi i d Sh h ld V l
-
7/28/2019 sm-cls-lec ture
50/71
Diversification and Shareholder Value
Related Diversification
A strategy-drivenapproachto creating shareholder value
Unrelated Diversification
A finance-driven approach
to creating shareholder value
-
7/28/2019 sm-cls-lec ture
51/71
Vertical Integration Strategies
Vertical integration extends a firms
competitive scope within same industry Backward into sources of supply
Forward toward end-users of final product
Can aim at eitherfull orpartial integration
Internally
Performed
Activities,
Costs, &
Margins
Activities,
Costs, &
Margins of
Suppliers
Buyer/User
Value
Chains
Activities, Costs,
& Margins of
Forward Channel
Allies &
Strategic Partners
C i i S P i i l
-
7/28/2019 sm-cls-lec ture
52/71
Competitive Strategy Principle
A vertical integration strategy
has appeal onlyif it
significantly strengthens a
firms competitive position!
Strategic Advantages of
-
7/28/2019 sm-cls-lec ture
53/71
Strategic Advantages of
Backward Integration Generates cost savings only if volume needed is big enough
to capture efficiencies of suppliers
Potential to reduce costs exists when
Suppliers have sizable profit margins
Item supplied is a major cost component
Resource requirements are easily met
Can produce a differentiation-based competitive advantage
when it results in a better quality part
Reduces risk of depending on suppliers of crucial raw
materials/ parts / components
Strategic Advantages of
-
7/28/2019 sm-cls-lec ture
54/71
Strategic Advantages of
Forward Integration
Advantageous for a firm to establish its own distribution
network if
Undependable distribution channels undermine steady production
operations
Lacking a broad enough product line to justify integrating
forward into stand-alone distributorships or retail outlets, afirm may sell directly to end users
Direct sales and Internet retailing may
Lower distribution costs
Produce a relative cost advantage over rivals Enable lower selling prices to end users
Strategic Disadvantages of
-
7/28/2019 sm-cls-lec ture
55/71
Strategic Disadvantages of
Vertical Integration Boosts resource requirements
Locks firm deeper into same industry
Results in fixed sources of supply and less
flexibility in accommodating
buyer demands for product variety
Poses problems of balancing capacity at each stage of
value chain
May require radically different skills / capabilities
Reduces manufacturing flexibility, lengthening design time
and ability to introduce new products
Pros and Cons of
-
7/28/2019 sm-cls-lec ture
56/71
Integration vs. De-Integration Whethervertical integration is a viable or attractive
strategy depends on How much it can lower cost, build expertise, increase differentiation,
or otherwise enhance performance of strategy-critical activities
Its impact on investment cost, flexibility,and administrative overhead
The contribution it makes to strengthening
a company market position or helping it
create competitive advantage
Many companies are finding that de-integrating,
unbundling, and out-sourcing value chain activities are abetter strategic option when it comes to lowering cost,
improving their competitiveness, or gaining added operating
flexibility
Simplified Stages of Vertical Integration:
-
7/28/2019 sm-cls-lec ture
57/71
Simplified Stages of Vertical Integration:
Shaw Industries
Raw Materials Manufacturing of final product Distribution
Polypropylene
Fiber ProductionCarpet Manufacturing Retail Stores
Backward Integration Forward Integration
Benefits and Risks of Vertical Integration
-
7/28/2019 sm-cls-lec ture
58/71
Benefits and Risks of Vertical Integration
Benefits Secure a source of raw materials or
distribution channels
Protection and control over valuable
assets
Access to new business opportunities
Simplified procurement and
administrative procedures
Benefits and Risks of Vertical Integration
-
7/28/2019 sm-cls-lec ture
59/71
Risks
Costs and expenses associated withincreased overhead and capital expenditures
Loss of flexibility resulting from large
investments
Problems associated with unbalancedcapacities along the value chain
Additional administrative costs associated
with managing a more complex set of
activities
Benefits and Risks of Vertical Integration
Retrenchment Strategies
-
7/28/2019 sm-cls-lec ture
60/71
Retrenchment Strategies
Objective Reduce scope of diversification to smaller
number of core businesses
Strategic options involvedivesting businesses
Having little strategic fit withcore businesses
Too small to contribute to earnings
Conditions That Make
-
7/28/2019 sm-cls-lec ture
61/71
Conditions That Make
Retrenchment Attractive
Diversification efforts have become too broad Difficulties encountered in profitably managing
broad diversification
Continuing losses in certain businesses Lack of funds or resources to support operating
and investment needs of all businesses
Misfits cannot be completely avoided
Unfavorable changes in industry attractiveness
Diversification may lack compatibility of values
essential to cultural fit
Options for Accomplishing
-
7/28/2019 sm-cls-lec ture
62/71
Options for Accomplishing
Divestiture
Spin it off as independent company Involves deciding whether to retain partialownership or forego any ownership interest
Sell it Involves finding a company which views the
business as a good deal and good fit
Leveraged buy out Involves selling business to the managers
who have been running it for a minimal
equity down payment and loaning balanceof purchase price to new owners
Corporate Restructuring
-
7/28/2019 sm-cls-lec ture
63/71
Corporate Restructuring
and Turnaround Strategies
Strategy optionsfor a diversifiedfirm with ailingsubsidiaries
Why consider these options? Large losses in one or more
subsidiaries Large number of businesses
in unattractive industries
Bad economic conditions
Excessive debt load
Acquisitions performing worse thanexpected
New technologies threatening survival
of one or more core businesses
Corporate Restructuring
-
7/28/2019 sm-cls-lec ture
64/71
Corporate RestructuringStrategy
Objective
Make radical changes in mix of
businesses in portfolio via both
Divestitures and
New acquisitions
Conditions That Make Portfolio
-
7/28/2019 sm-cls-lec ture
65/71
Restructuring Attractive
Long-term performance prospects are unattractive
Core business units fall upon hard times
New CEO takes over and decides to redirect where
company is headed
Wave of the future technologies emerge prompting a
shakeup to build position in a new industry
Unique opportunity emerges and existing businesses
must be sold to finance new acquisition
Major businesses in portfolio become unattractive
Changes in markets of certain businesses proceed in such
different directions, its better to de-merge
Corporate Turnaround Strategies
-
7/28/2019 sm-cls-lec ture
66/71
Corporate Turnaround Strategies
Objectives
Restore money-losing businesses toprofitability rather than divest them
Get whole firm back in the back by
curing problems of ailing businesses in
portfolio
Most appropriate where Reasons forpoor performance
are short-term
Ailing businesses are in attractive
industries Divesting money-losers doesnt make long-
term strategic sense
Turnaround Strategies: The Options
-
7/28/2019 sm-cls-lec ture
67/71
Turnaround Strategies: The Options
Sell or close down a portion of operations
Shift to a different, and hopefully better, business-
level strategy
Launch new initiatives to boostrevenues
Pursue cost reduction
Combination of efforts
Multinational Diversification
-
7/28/2019 sm-cls-lec ture
68/71
Strategies Distinguishing characteristic
Diversity ofbusinesses anddiversity ofnationalmarkets
Presents a big strategy-making challenge Strategies must be conceived
and executed for each
business, with as many
multinational variations
as appropriate
Appeal of Multinational
-
7/28/2019 sm-cls-lec ture
69/71
ppDiversification Strategies
Offer two avenues forlong-termgrowth in revenues and profits
Enter additional businesses
Extend operations of existing
businesses into additional country
markets
Opportunities to Build Competitive
-
7/28/2019 sm-cls-lec ture
70/71
Advantage via Multinational Diversification
Full capture of economies of scale
and experience curve effects Capitalize on cross-business economies of scope
Transfer competitively valuableresources from one business to
another and/or from one country to another
Leverage use of a competitively powerful brand name
Coordinate strategic activities and initiatives across businessesand countries
Use cross-business or cross-country subsidization to out-compete
rivals
-
7/28/2019 sm-cls-lec ture
71/71