Corporate Level Strategy

1. Corporate Level Strategy Growth of Product Markets through Concentration and Diversification

2. Corporate Level Strategy • Portfolio: Which businesses should we enter? Which should we exit? What binds our businesses together? • Resource allocation: How should money and other resources be allocated among business units? • Horizontal units: Which functions should be shared? What are the costs of coordination?

3. M-form Organization Structure

4. Reasons for Growth • Attract investors with competitive returns • Attract & retain talented managers and employees • Scale and scope economies • Better leverage with buyers, suppliers

5. Can there be too much growth? • At 20%, firm would double in < four years • Problems • Overburden internal processes • Second and third tier management teams can’t keep up pace

6. Concentrated Growth • Expansion within single product market • Product Development • Extend product line: add models and sizes • Modify product: add features, ingredients • Complementary products • Market Development • New geographic markets • New channels of distribution • New uses

7. Horizontal Integration • Acquisition of firms at same stage of supply chain • Objectives • Greater market share • Economies of scale • Increased power over suppliers and buyers • Fast growth • Remove competitors

8. Diversified Growth • Expansion into new product markets • Types of Diversification • Related Diversification • Vertical Integration • By-product Diversification • Unrelated (Conglomerate) Diversification

9. Related Diversification Purpose: scope economies (synergies) • Cost sharing (procurement, distribution) • Enhanced revenues (cross-selling, bundling, one-stop shopping) • Resource sharing: common brand, reputation, technological expertise, managerial talent, systems and processes, culture

10. Examples of Related Diversification • Honda into cars, motorcycles, lawn mowers and generators: competence in engines and power trains • Canon into copiers, laser printers, and cameras: competencies in optics, imaging and processor controls • Minebea from ball bearings to semiconductors: competence in miniaturized manufacturing

11. A Portfolio of Resources • Resource-based view of the firm • Resources: root of competitive advantage • Portfolio of capabilities, not businesses • Don’t enter markets without a resource advantage • Use single resource in several business, e.g., Bic -- pens, lighters, razors • Develop resource in one market; move into others from position of strength

12. Vertical Integration • Entry into new business at earlier (backward) or later (forward) stages of the supply chain • Stages of the Supply Chain • Raw material extraction • Primary manufacturing • Fabrication of commodity products • Product production • Marketing and distribution • Retailing

13. Aluminum: An Example Upstream: add value by creating commodities • Mining • Refining of mined ore • Manufacture of primary aluminum Downstream: add value through designing, positioning, marketing of products • Fabrication of aluminum products • Marketing and distribution of products • Sale in retail stores

14. Upstream versus Downstream Upstream • Standardization • Low cost • Process Innovation • Manufacturing • Technology Intensive • Supply Dominated • Maximize End Users • Sales Push Downstream • Differentiation • High margins • Product Innovation • R&D, Advertising • People Intensive • Marketing Dominated • Target End Users • Market Pull

15. Purposes of Vertical Integration • Achieve control over quality • Improve supply and distribution coordination • Scarce resources: increase dependability of supply or distribution • Raise entry barriers against new competitors • Protection of proprietary knowledge • Contracts can’t be written due to uncertainty or low frequency of transactions

16. Drawbacks to Vertical Integration • No competition = less efficiency, higher costs • Significant in-house development = reduced product variety • Bureaucratic costs increase • Firm competes with buyers and suppliers • Resources spent on new core competencies compromise existing competencies • Capacity imbalance (excess upstream capacity to ensure supply under all demand conditions)

17. By-product Diversification • Selling secondary output of firm products in the open market • e.g., a lumber company sells sawdust, an airline sells training

18. Alcoa Aluminum 1969

19. Unrelated Diversification (Conglomerates) • Collection of autonomous divisions with no shared functions/resources • Some of the best known companies in history: Beatrice, GE, ITT, Siemens • At different times both admired and vilified • Do they add value to their component businesses?

20. Arguments in Favor of Conglomerates • Portfolio is efficient • Better information on businesses than outside investors • Quicker transfer capital between divisions than market mechanisms • Parent supports divisions through economic slumps • Effective in mediating transactions when markets don’t work well (e.g., internal capital market)

21. Arguments Against Conglomerates • Portfolio is inefficient • Divisions assume cost of running HQ • Can’t dispose of unwanted properties quickly • Acquisitions are made at a premium • Parent companies support troubled divisions longer than investors keep troubled stocks • Debt, reputation of one division negatively affects entire company • Difficult to manage

22. Diversification Through Merger and Acquisition

23. Key Drivers • Seeking synergy • Scale and scope economies • Gaining access to restricted markets • Overcoming barriers to entry • Gaining market power (market share) • Acquiring technologies, products, quickly • Acquiring otherwise unavailable resources • Pooling resources, e.g., R&D • Industry overcapacity

24. Tests of Entry by Acquisition • Will returns exceed cost of capital? • Will the firm have a competitive advantage? • Is the cost reasonable? • Price of premiums • Cost of overcoming entry barriers • Will the acquisition add value? • One-time value (make changes, then sell • Ongoing value (keep for long term)

25. Reasons for Failure of Acquisitions • Empire building versus true business need • Insufficient due diligence (target and alternatives) • Overpayment (hard to value acquisition targets) • Assimilation difficulties • Underestimate difficulties of integration • Unfamiliarity: foreign market, new business • Culture clashes • Failure to retain key managers and personnel

26. Diversification Through Alliances andJoint Ventures

27. Types of Strategic Alliances • Non-equity alliance: cooperation between firms managed through contracts (licensing, supply or distribution) • Equity alliance: equity investments by one firm in the other in addition to contracts; creates a partnership • Joint venture: type of equity alliance; cooperating firms form new, independent firm in which partners invest and share any profits

28. Motivations for Equity Alliances/Joint Ventures • Exploit economies of scale • Manage risk by sharing costs • Learn from competitors (risky) • Entry into new markets, especially foreign • Manage uncertainty

29. Using Joint Venture for Acquisition • Buyer and seller form joint venture • Buyer has time to assess value of intangible assets (e.g., brands, distribution networks) and learn the business • Time period defined but buyer has choices • Price depends on length and final value of JV • For selling an underperforming but high-potential business • When disentanglement will be slow, complex

30. JV for Acquisition: Pros and Cons Advantages • High caliber people more likely to stay • Fewer defections of suppliers and distributors • Seller gets better price • Buyer assured of value Disadvantages • Seller burden high in time and attention • Complicated structure adds to overhead • Effort of getting goals and cultures in sync

31. Risks of Alliances • Misrepresentation of skills & abilities • Conflicts • Goals (beginning of alliance) • Performance metrics (life of alliance) • Strategic direction (end of alliance) • Vulnerability of valuable resources -- sharing without full control

32. Factors Determining Corporate Combination Strategy Synergy Resources Market Conditions

37. Appendices Value Building in Multibusiness Companies • Market-related opportunities • Operating opportunities • Management opportunities

38. Opportunities to Build Value Potential Competitive Advantage Impediments to Achieving Enhanced Value Shared sales force activities or shared sales office, or both • Lower selling costs • Better market coverage • Stronger technical advice to buyers • Enhanced convenience for buyers • Improved access to buyers • Buyers have different purchasing habits toward the products • Different salespersons are more effective in representing product • Some products get more attention Shared after-sale service and repair work • Lower servicing costs • Better use of service personnel • Faster servicing of customer calls • Different equipment or different labor skills, or both, needed to handle repairs • Buyers may do some in-house repairs Shared brand name • Stronger brand image and company reputation • Increased buyer confidence in brand • Company reputation is hurt if quality of one product is lower Value Building in Multibusiness Companies: Market-related Opportunities

39. Opportunities to Build Value Potential Competitive Advantage Impediments to Achieving Enhanced Value Shared advertising and promotional activities • Lower costs • Greater clout in purchasing ads • Appropriate forms of messages are different • Appropriate timing of promotions is different Common distribution channels • Lower distribution costs • Enhanced bargaining power with distributors/retailers for shelf space and positioning, stronger push, more dealer attention • Dealers resist being dominated by a single supplier and turn to multiple sources and lines • Heavy use of shared channel erodes willingness of other channels to carry firm’s products Shared order processing • Lower order processing costs • One-stop shopping for buyer enhances service and, thus, differentiation • Differences in ordering cycles disrupt order processing economies Value Building in Multibusiness Companies: Market-related Opportunities

40. Opportunities to Build Value Potential Competitive Advantage Impediments to Achieving Enhanced Value Joint procurement of purchased inputs • Lower input costs • Improved input quality • Improved service from suppliers • Input needs are different in terms of quality or other specifications • Inputs are needed at different plant locations, and centralized purchasing is not responsive to separate needs of each plan Shared manufacturing and assembly facilities • Lower manufact/assembly costs • Better capacity utilization (peak demand for one product correlates with valley demand for other) • Bigger scale of operation improves access to better technology • Higher changeover costs in shifting from one product to another • High-cost special r equipment required to accommodate quality or design differences • Lower freight and handling costs • Better delivery reliability • More frequent deliveries, such that inventory costs are reduced Shared inbound or outbound shipping and materials handling • Input sources or plant locations, or both, are in different geographic areas • Needs for frequency and reliability of inbound/outbound delivery differ among businesses Value Building in Multibusiness Companies: Operating Opportunities

41. Opportunities to Build Value Potential Competitive Advantage Impediments to Achieving Enhanced Value Shared product and process technologies or technology development • Lower product or process design costs because of shorter design times and transfer of knowledge from area to area • More innovative ability, due to scale of effort and attraction of better R&D personnel • Technologies are the same, but the applications in different business units are different enough to prevent much sharing of real value Shared administrative support activities • Lower administrative and operating overhead costs • Support activities are not a large proportion of cost, and sharing has little cost impact (and virtually no differentiation impact) Value Building in Multibusiness Companies: Operating Opportunities

42. Opportunities to Build Value Potential Competitive Advantage Impediments to Achieving Enhanced Value Shared product and process technologies or technology development • Efficient transfer of a distinctive competence - can create cost savings or enhance differentiation • Better understanding of key success factors • More effective development of strategy formulation and implementation • Technologies are the same, but the applications in different business units are different enough to prevent much sharing of real value Value Building in Multibusiness Companies: Management Opportunities