Strategy Formulation: Situation Analysis and Business Strategy

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Strategy Formulation Situation Analysis and
Business Strategy
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Strategy Formulation Corporate Strategy

• What businesses the corporation should be in?
• How should corporate headquarters manager its
  group of businesses?
• Corporate Strategy is what makes the whole
  company greater than the sum of its business
  units.
• Diversification
• Manage additional businesses - Apply excess
  resources, capabilities, and core competencies
  that have multiple uses

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Strategy Formulation Corporate Strategy

• Corporate Strategy
• Directional Strategy overall orientation
  towards growth, stability, retrenchment
• Portfolio Strategy industries/markets that the
  firm competes in through products lines
  business units
• Parenting Strategy coordination and transfer of
  resources between product lines business units

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Strategy Formulation Corporate Strategy

• Product Diversification
• Example Unilever PLCs purchase of Ben
  Jerrys Ice Cream (already has 8 billion in
  annual sales in US).
• Geographic Diversification (In this case
  undiversifying)
• Example Waste Management sold its Australian and
  Italian waste management subsidiaries.

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Strategy Formulation Corporate Strategy

• Limited Diversification
• Single Business
• 95 or more of corporate revenue come from a
  single business unit
• Wm. Wrigley Jr. Co.

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Strategy Formulation Corporate Strategy

• Limited Diversification
• Between 70-95 of corporate revenues comes from a
  single business unit.
• Hershey Foods Corporation

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Strategy Formulation Corporate Strategy

• Related Diversification
• Related-Diversified Firm Less than 70 percent of
  firm revenues comes from a single business unit,
  and different business units share numerous links
  and common attributes.
• Proctor Gamble

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Strategy Formulation Corporate Strategy

• Related Linked Diversification
• Less than 70 percent of firm revenues comes from
  a single business unit, and different business
  units share only a few links and common
  attributes or different links and common
  attributes.
• General Electric

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Strategy Formulation Corporate Strategy

• Unrelated Diversification
• Less than 70 of firm revenues comes from a
  single business, and there are few, if any, links
  or common attributes among businesses.

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Strategy Formulation Corporate Strategy

• Vertical and Horizontal Integration - Value Chain
  Activities
• Vertical Integration
• Coordinating upstream activities (those closer to
  the raw materials) with downstream activities
  (those closer to the customer)
• Acquisitions, Strategic Alliances, Internal
  Development

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Strategy Formulation Corporate Strategy

• Vertical and Horizontal Integration - Value Chain
  Activities
• Benefits of Vertical Integration
• reduces or eliminates costs of buying and selling
  (Transaction Costs)
• smoother, more efficient operation
• Limits to Vertical Integration
• Differences in minimum efficient scale in
  vertically integrated corporation.
• Must remain innovative in all Value Chain
  activities.
• Possible incompatibilities between managerial
  skills and corporate cultures that make upstream
  and downstream activities successful.

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Strategy Formulation Corporate Strategy

• Vertical and Horizontal Integration - Value Chain
  Activities
• Horizontal Integration
• Coordinating across the same or similar value
  chain activities.
• Acquisition, Strategic Alliance, Internal
  Development

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Strategy Formulation Corporate Strategy

• Vertical and Horizontal Integration - Value Chain
  Activities
• Horizontal Integration Benefits
• Corporate managers have expertise to recognize
  undervalued stocks that many individual investors
  would miss.
• Corporations have economies of scale for
  financing acquisitions that individuals do not.
• Horizontal Integration Costs
• Conglomerate discount value of stock of
  conglomerate sells for less than total value of
  individual stocks.
• Takeover premiums corporations usually pay a
  premium over the normal trading price of the
  targets stock.

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Strategy Formulation Corporate Strategy

• Illustration of Integration Activities
• Unilever PLC (Anglo-Dutch) buys SlimFast for 2.3
  billion and Ben Jerrys for 326 million
• First deal (SlimFast) is a high price but it has
  got good growth rates.
• Second deal (Ben Jerry's) is a very high price,
  but it has got some very difficult growth rates
• Ben Jerrys deal seen as a competitive response
  to an agreement by Unilever's arch-rival Nestle
  SA (Swiss) last year to form a U.S. ice cream
  joint venture with Pillsbury (unit of Diageo
  British).
• The Nestle-Pillsbury deal put together Nestle's
  U.S. novelty ice cream unit and Pillsbury's U.S.
  Haagen-Dazs business, creating a strong force in
  the growing premium ice cream market.

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Strategy Formulation Corporate Strategy

• Mergers Acquisitions
• Merger integration of operations of two firms
  relatively coequal basis.
• Study by McKinsey Company only 23 of mergers
  over a 10-year period generated returns in excess
  of costs incurred in the deal.
• THINK ABOUT AOL-TIME WARNER!!!
• Acquisition one firm buys controlling interest
  in another firm acquired firm becomes subsidiary
  in acquirers business portfolio.
• (Hostile)Takeover acquisition that was not
  solicited

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Strategy Formulation Corporate Strategy

• Mergers Acquisitions
• Reasons for M As
• Increased market power
• Capitalizing on core competencies
• Overcome entry barriers
• Bypass cost of new product development
• Increased speed to market
• Increased diversification
• Avoiding excessive competition

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Strategy Formulation Corporate Strategy

• Mergers Acquisitions
• Problems with Achieving M A Success
• Integration difficulties
• Inadequate evaluation of target
• Large or extraordinary debt
• Inability to achieve synergy
• Too much diversification
• Managers overly focused on acquisition/merger
• Too large (bureaucratic)

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Strategy Formulation Corporate Strategy

• Portfolio Analysis
• Assessing Business Units Competitive Position
• Possession of desirable core competencies
• Relative market share
• Profit margins relative to competitors
• Ability to match or beat rivals on product
  quality and service
• Relative cost position
• Knowledge of customers and markets
• Technological capabilities
• Caliber of management

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Strategy Formulation Corporate Strategy

• Portfolio Analysis
• BCG Growth-Share Matrix
• questions marks business growth rate - high
  relative competitive position - weak
• stars business growth rate - high relative
  competitive position - strong
• cash cows business growth rate - low relative
  competitive position - strong
• dogs business growth rate - low relative
  competitive position - weak

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Strategy Formulation Corporate Strategy

• Portfolio Analysis
• Strengths evaluate businesses individually,
  raises issues of cash flow for expansion
• Weaknesses difficult to define product market
  segments, subjective determinations, lack of
  clarity of product life cycle position, static
  comparisons.

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Commission of the European CommunitiesReview of
Proposed Merger

• H.J. Heinz Companys (US) subsidiary, Heinz
  Europe Limited, to acquire United Biscuits Frozen
  and Chilled Foods Limited (UK)
• Industries
• Heinz group - infant feeding products, sauces,
  convenience meals, seafood, pet food, and food
  service.
• UBFCF - processing and supply to resellers of
  frozen and chilled foods.
• Combined Revenues
• Do not achieve more than 2/3 of aggregate
  Community-wide turnover in one member state, so
  qualifies as having Community dimension.

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Commission of the European CommunitiesReview of
Proposed Merger

• Competitive Assessment
• Relevant Product Markets areas of product
  overlap include pizzas, desserts, and ready-made
  meals.
• Relevant Geographic Markets areas of geographic
  overlap for above-mentioned products include
  United Kingdom and Ireland
• Competitive Assessment only market where
  parties products would have market share in
  excess of 25 is the Irish market for frozen
  ready-made meals, where parties achieve 30.
• However, merged entity will continue to face
  competition from rapidly growing retailer brands
  (value increased by over 50 over three years)
  that account for 30 of market.
• Birds Eye has more than 10 and Nestle has more
  than 5 market share.