Strategy Formulation: Situation Analysis and Business Strategy

1. Strategy Formulation: Situation Analysis and Business Strategy

2. 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

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

4. Strategy Formulation: Corporate Strategy Product Diversification: Example: Unilever PLC’s purchase of Ben & Jerry’s 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.

5. Strategy Formulation: Corporate Strategy Limited Diversification Single Business 95% or more of corporate revenue come from a single business unit Wm. Wrigley Jr. Co.

6. Strategy Formulation: Corporate Strategy Limited Diversification Between 70-95% of corporate revenues comes from a single business unit. Hershey Foods Corporation

7. 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

8. 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

9. 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.

10. 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

11. 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.

12. 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

13. 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 target’s stock.

14. Strategy Formulation: Corporate Strategy Illustration of Integration Activities: Unilever PLC (Anglo-Dutch) buys SlimFast for $2.3 billion and Ben & Jerry’s 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 & Jerry’s 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.

15. 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 acquirer’s business portfolio. (Hostile)Takeover: acquisition that was not solicited

16. 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

17. 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)

18. Strategy Formulation: Corporate Strategy Portfolio Analysis Assessing Business Unit’s 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

19. 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

20. 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.

21. Commission of the European CommunitiesReview of Proposed Merger H.J. Heinz Company’s (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.

22. 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. • Bird’s Eye has more than 10% and Nestle has more than 5% market share.