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Corporate-Level Strategy and Long-Run Profitability

Essentials of Strategic Management, 3/e. Charles W.L. Hill | Gareth R. Jones. Corporate-Level Strategy and Long-Run Profitability. Chapter 7. Corporate-Level Strategy . The principle concern:

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Corporate-Level Strategy and Long-Run Profitability

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  1. Essentials of Strategic Management, 3/e Charles W.L. Hill | Gareth R. Jones Corporate-Level Strategy and Long-Run Profitability Chapter 7

  2. Corporate-Level Strategy • The principle concern: • to identify the industry or industries a company should participate in to maximize long-run profitability

  3. Concentration on a Single Industry • A company chooses to focus its resources and capabilities on competing successfully within the confines of a particular product market • Examples of companies that pursue 1 strategy: • McDonalds • Starbuck’s • Neiman Marcus

  4. Advantages Concentrates all resources and capabilities to strengthening its competitive position in one industry Disadvantages Vertical integration may be necessary May miss out on other opportunities to create more value and increase profitability Concentration on a Single Industry (cont’d)

  5. Horizontal Integration • The process of acquiring or merging with industry competitors to achieve the competitive advantage that comes with large size • Merger- an agreement between two companies to pool their resources in a combined operation • Acquisition - Occurs when a company uses capital resources to purchase another company. • An increase in horizontal integration = an increased level of concentration in an industry

  6. Advantages Lowers operating costs Increases product differentiation (can be accomplished through product bundling) Reduces rivalry within an industry Increases bargaining power over suppliers and buyers Disadvantages Problems with merging cultures, managers and operations. Problems with the Federal Trade Commission if a company grows too large Horizontal Integration

  7. Vertical Integration • Expanding operations into industries that produce inputs or into industries that use, distribute, or sell the company’s product • A company can enter a new industry to increase its long-run profitability • A company that concentrates on a single business may be missing out on the opportunity to create value through vertical integration

  8. Advantages Enables company to build barriers to new competition Facilitates investments in specialized assets Protects product quality Results in improved scheduling Disadvantages May actually increase cost of inputs Suppliers have less incentive to be efficient Ties a company into old, obsolescent, and high cost technology Vertical Integration

  9. Diversification • A diversified company is one that operates in two or more industries in order to find ways to use distinctive competencies to increase the value of products in other industries to consumers and to increase long-run profitability • A company may choose to diversify when they have excess resources

  10. Diversification (cont’d) • Diversification can help a company create value in 3 main ways: • Permitting superior internal governance • Transferring competencies among businesses • Realizing economies of scope

  11. Restructuring • Restructuring- implementing strategies for reducing the scope of the company by removing exiting business areas • Why restructure? • Because the stock of highly diversified companies is often assigned a lower valuation relative to earnings than stocks of less diversified enterprises • In an attempt to boost returns to shareholders

  12. Restructuring (cont’d) • Restructuring can be beneficial due to diminished advantages of vertical integration or diversification • Restructuring can be a reaction to: • Managers pursuing too much diversification • Diversification for the wrong reasons • Failed Acquisition

  13. Exit Strategies • Three main exit strategies: • Divestment- most favorable • Harvest- only works under specific conditions • Liquidation- least favorable

  14. Divestment • Selling a business unit to the highest bidder • A company can sell to: • Independent Investors • Other Companies

  15. Harvest • Halting investments in order to maximize short-to-medium term cash flow • If employees catch on, morale can sink very quickly and the strategy may fail

  16. Liquidation • Shutting down the operation of a business or business unit • Least attractive strategy because the company is required to write off its investments in the unit that is shutting down

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