Strategy: A View From the Top Chapter 9 Corporate Strategy: Shaping the Portfolio

1. Strategy: A View From the TopChapter 9Corporate Strategy: Shaping the Portfolio Team 5 Kristen Hodge Katelyn Reed Venessa Rodriguez Monica Longer

2. Introduction • 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

3. Introduction Continued • 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.

4. This Chapter… • 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

5. The Economics of Scale and Scope • 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

6. The Economies of Scale and Scope Continued • 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.

7. The Economies of Scale and Scope Continued • 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.

8. The Economies of Scale and Scope Continued • 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.

9. What is “Core”? • 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

10. What is “Core” Continued • 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.

11. Growth Strategies • 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

12. Concentrated Growth • 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

13. Concentrated Growth • 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

14. Vertical and Horizontal Integration • 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

15. Four Reasons to Vertically Integrate • 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

16. Diversification Strategies • 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

17. Diversification Strategies • 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

18. Evaluate Risks • 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?

19. Three Tests • 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?

20. Mergers and Acquisitions • 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

21. Acquisitions • 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)

22. Acquisition Strategies • 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

23. 6 Themes to Increase Effectiveness of Mergers and Acquisitions • Successful acquisitions are usually part of a well-developed corporate strategy • Diversification through acquisition is a long-term process that requires patience • Successful acquisitions usually result from disciplined strategic analysis • 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 • Objectivity is essential • Most acquisitions flounder on implementation

24. Cooperative Strategies • 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

25. Key Drivers of Cooperative Strategies • 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.

26. Key Drivers of Cooperative Strategies • 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.

27. Key Drivers of Cooperative Strategies • 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.

28. Cooperative Strategies • 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?

29. The Strategic Logic of Alliance • 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

30. 4 Alliance ModelsBased on the corporate strategy and structure of leadership

31. Alliance Groups • Based on the basis of whether the participants are competitors and relative depth of alliance itself: • Expertise Alliance – bring together non-competing firms to share expertise and capabilities (most favored by the stock market) • New-Business Alliance – partnerships focused on entering a new business or market • Cooperate Alliance – joint efforts by competing firms to attain critical mass or economies of scale • M&A-like Alliance – focus on near-complete integration but are prevented from doing so

32. Growth and Strategic RiskAs a company moves away from the core its success rate drops and strategic risk increases

33. Disinvestments • 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

34. Three Key Success Factors to a Spin-off • Ensure that both the parent corporation and the unit spun off have viable business and financial structures • Meet or exceed earnings expectations • Continue growth