Corporate-Level Strategy

1
Corporate-Level Strategy

• MANA 5336

2
Directional Strategies
3
Stages in the Raw-Material-to-Consumer Value Chain
4
Stages in the Raw-Material-to-Consumer Value
Chain in the Personal Computer Industry
5
Concentration on a Single Business
Southwest Airlines
SEARS
Coca-Cola
McDonalds
6
Concentration on a Single Business

• Advantages
• Operational focus on a single familiar industry
  or market.
• Current resources and capabilities add value.
• Growing with the market brings competitive
  advantage.

• Disadvantages
• No diversification of market risks.
• Vertical integration may be required to create
  value and establish competitive advantage.
• Opportunities to create value and make a profit
  may be missed.

7
Diversification

• Related diversification
• Entry into new business activity based on shared
  commonalities in the components of the value
  chains of the firms.
• Unrelated diversification
• Entry into a new business area that has no
  obvious relationship with any area of the
  existing business.

8
Related Diversification
Marriott
3M
Hewlett Packard
9
Unrelated Diversification
Tyco
Amer Group
ITT
10
Diversification and Corporate Performance A
Disappointing History

• A study conducted by Business Week and Mercer
  Management Consulting, Inc., analyzed 150
  acquisitions that took place between July 1990
  and July 1995. Based on total stock returns from
  three months before, and up to three years after,
  the announcement
• 30 percent substantially eroded shareholder
  returns.
• 20 percent eroded some returns.
• 33 percent created only marginal returns.
• 17 percent created substantial returns.
• A study by Salomon Smith Barney of U.S. companies
  acquired since 1997 in deals for 15 billion or
  more, the stocks of the acquiring firms have, on
  average, under-performed the SP stock index by
  14 percentage points and under-performed their
  peer group by four percentage points after the
  deals were announced.

Sources Lipin, S. Deogun, N. 2000. Big merges
of the 90s prove disappointing to shareholders.
Wall Street Journal, October 30 C1 A study by
Dr. G. William Schwert, University of Rochester,
cited in Pare, T. P. 1994. The new merger boom.
Fortune, November 2896 and Porter, M.E. 1987.
From competitive advantage to corporate strategy.
Harvard Business Review, 65(3)43.
11
Relationship Between Diversification and
Performance
Performance
Dominant Business
Unrelated Business
Related Constrained
Level of Diversification
12
RestructuringContraction of Scope

• Why restructure?
• Pull-back from overdiversification.
• Attacks by competitors on core businesses.
• Diminished strategic advantages of vertical
  integration and diversification.
• Contraction (Exit) strategies
• Retrenchment
• Divestment spinoffs of profitable SBUs to
  investors management buy outs (MBOs).
• Harvest halting investment, maximizing cash
  flow.
• Liquidation Cease operations, write off assets.

13
Why Contraction of Scope?

• The causes of corporate decline
• Poor management incompetence, neglect
• Overexpansion empire-building CEOs
• Inadequate financial controls no profit
  responsibility
• High costs low labor productivity
• New competition powerful emerging competitors
• Unforeseen demand shifts major market changes
• Organizational inertia slow to respond to new
  competitive conditions

14
The Main Steps of Turnaround

• Changing the leadership
• Replace entrenched management with new managers.
• Redefining strategic focus
• Evaluate and reconstitute the organizations
  strategy.
• Asset sales and closures
• Divest unwanted assets for investment resources.
• Improving profitability
• Reduce costs, tighten finance and performance
  controls.
• Acquisitions
• Make acquisitions of skills and competencies to
  strengthen core businesses.

15
Adaptive Strategies

• Maintenance of Scope
• Enhancement
• Status Quo

16
Market Entry Strategies

• Acquisition a strategy through which one
  organization buys a controlling interest in
  another organization with the intent of making
  the acquired firm a subsidiary business within
  its own portfolio
• Licensing a strategy where the organization
  purchases the right to use technology, process,
  etc.
• Joint Venture a strategy where an organization
  joins with another organization(s) to form a new
  organization

17
Reasons for Making Acquisitions
18
Problems With Acquisitions
19
Strategic Alliance

• A strategic alliance is a cooperative strategy in
  which
• firms combine some of their resources and
  capabilities
• to create a competitive advantage
• A strategic alliance involves
• exchange and sharing of resources and
  capabilities
• co-development or distribution of goods or
  services

20
Strategic Alliance
21
Types of Cooperative Strategies

• Joint venture two or more firms create an
  independent company by combining parts of their
  assets
• Equity strategic alliance partners who own
  different percentages of equity in a new venture
• Nonequity strategic alliances contractual
  agreements given to a company to supply, produce,
  or distribute a firms goods or services without
  equity sharing

22
Strategic Alliances

• vertical complementary strategic alliance is
  formed between firms that agree to use their
  skills and capabilities in different stages of
  the value chain to create value for both firms
• outsourcing is one example of this type of
  alliance

Supplier
Vertical Alliance
23
Strategic Alliances
Buyer
Buyer
Potential Competitors

• horizontal complementary strategic alliance is
  formed between partners who agree to combine
  their resources and skills to create value in the
  same stage of the value chain
• focus on long-term product development and
  distribution opportunities
• the partners may become competitors
• requires a great deal of trust between the
  partners