6 Corporate Strategies

Learning Objectives

Three directions for corporate strategy Growth

Diversification M&A, JV/SA International

Stability Renewal

Retrenchment Turnaround

Brief Overview of Corporate Strategy

Those strategies concerned with the broad and long-term questions of what business(es) the organization is in and what it wants to do with those businesses

Organizational Growth

Growth Strategy One that involves the attainment of

specific growth objectives by increasing the level of an organization’s operations

Typical growth strategies include Increases in sales revenues Profits Other performance measures

Types of Growth Strategies

OrganizationalGrowth

Concentration

Vertical Integration

• Backward• ForwardHorizontal

Integration

Diversification• Related• Unrelated

International

Concentration

Organization concentrates on its primary line of business and looks for ways to meet its growth objectives through increasing its level of operation in this primary business

Concentration

Customers

Current

New

Current New

Product-MarketExploitation

ProductDevelopment

MarketDevelopment

Product/MarketDiversification

Product(s)

Diversification

RelatedDiversification

OperationalSkills-Capabilities

DistributionChannels

CustomerUse

SimilarTechnology

ProductSimilarities

Diversification and Corporate

Strategy

A company is diversified when it is in two or more lines of business

Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business

A diversified company needs a multi-industry, multi-business strategy

A strategic action plan must be developed for several different businesses competing in diverse industry environments

Diversification

Level Horizontal

Anti-trust laws prohibit a lot of these GE & Honeywell

Vertical Suppliers buying buyers (or vice versa)

Type Related Unrelated

When to Diversify

Some companies do EXCELLENTLY and are not diversified

McDonalds, SWA, Coca-Cola, Domino’s Pizza, Wal-Mart, FedEx, Timex, Gerber

Why stay single business Clear understanding of who we are / what we do No Dilution of management’s attention

Risks of a single business strategy Putting all the “eggs” in one industry basket Unforeseen changes can undermine a single

business firm’s prospects

Related Diversificationand Competitive Advantage

Competitive advantage can result from related diversification if opportunities exist to

Transfer expertise/capabilities/technology Combine related activities into a single operation and reduce

costs Leverage use of firm’s brand name reputation Conduct related value chain activities in a collaborative

fashion to create valuable competitive capabilities

Examples of Related Diversification

Darden Restaurants Olive Garden Red Lobster Bahamas Breeze

Johnson & Johnson Prescription drugs Non-prescription drugs (Tylenol, pepcid AC) Band-aids Baby products

PEPSICO Soft drinks Fruit Juices Snack foods (Fritos, Lays, Cracker Jacks)

Involves diversifying into businesses with No strategic fit

No meaningful value chain relationships

No unifying strategic theme

Approach is to venture into “any businessin which we think we can make a profit”

Firms pursuing unrelated diversification are often referred to as conglomerates

What is Unrelated Diversification?

Examples of different levels of Unrelated diversification

DIAGEO PLC Burger King Guinness Old El Paso Mexican

food Green Giant Liquor

Walt Disney Theme Park Disney Cruise Line Movies TV

Textron Bell helicopters Cessna Aircraft E-Z-GO golf cars Jacobsen turf care

United Technologies

Pratt & Whitney aircraft engines

Carrier Heating & AC Otis Elevators

Attractive Acquisition Targets

Companies with undervalued assets Capital gains may be realized

Companies in financial distress May be purchased at bargain prices and turned around

Appeal of Unrelated Diversification Strategy Business risk scattered over different industries Financial resources can be directed to those industries

offering best profit prospects If bargain-priced firms with big profit potential are

bought, shareholder wealth can be enhanced

Drawbacks of Unrelated Diversification

Difficulties of competently managing many diverse businesses

Lack of strategic fits which can be leveraged into competitive advantage

Consolidated performance of unrelated businesses tends to be no better than sum of individual businesses on their own (and it may be worse)

Likely effect is 1 + 1 = 1.5, not 1 + 1 =3 Promise of greater sales-profit stability over business

cycles seldom realized

Combination Related-Unrelated Diversification Strategies

Dominant-business firms One major core business accounting for 50 - 80 percent

of revenues, with several small related or unrelated businesses accounting for remainder

Narrowly diversified firms Diversification includes a few (2 - 5) related or unrelated

businesses Broadly diversified firms

Diversification includes a wide ranging collection of either related or unrelated businesses or a mixture

Multi-business firms Diversification portfolio includes several unrelated

groups of related businesses

Merger and Acquisition

Most popular approach to diversification Advantages

Quicker entry into target market Easier to hurdle certain entry barriers

Technological inexperience Gaining access to reliable suppliers Being of a size to match rivals in terms of efficiency and

costs Getting adequate distribution access

Joint Ventures and Strategic Alliances

Good way to diversify when Uneconomical or risky to go it alone Pooling competencies of two partners

provides more competitive strength Foreign partners are needed to surmount

Import quotas and Tariffs Nationalistic political interests Cultural roadblocks Lack of knowledge about markets of

particular countries

Drawbacks of JV & SA

Raises questions Which partner will do what Who has effective control

Potential conflicts Control over strategy and long-term direction How operations will be conducted Control over cash flows and profits Personalities and cultures of partners

Benefits of SA & JV

Gain scale economies in production and/or marketing

Fill gaps in technical expertise or knowledge of local markets

Share distribution facilities and dealer networks Direct combined competitive energies toward

defeating mutual rivals Useful way to gain agreement on important

technical standards

Why is the World Economy Globalizing?

Previously closed national economies are opening up their markets to foreign companies

Importance of geographic distance is shrinking due to the Internet

Growth-minded companies are racing to stake out positions in the markets of more and more countries

What is the Motivationfor Competing Internationally?

Gain access tonew customers

Capitalizeon resource

strengths andcompetencies

Helpachieve

lower costsSpread

business risk across wider market base

Obtain access to valuable natural

resources

International vs. Global Competition

International or Multinational

Competitor

Company operates in a select few foreign countries, with

modest ambitions to expand further

GlobalCompetitor

Company markets products in 50 to 100 countries and is expanding operations into additional country markets

annually

How Markets Differ from Country to Country

Consumer tastes and preferences Consumer buying habits Market size and growth potential Distribution channels Driving forces Competitive pressures

International

Global Integrationof Operations

High

Low

Local MarketResponsiveness

Low High

MultidomesticApproach

GlobalApproach

TransnationalApproach

Multi-Domestic Each country market is self-contained Competition in one country market is independent of

competition in other country markets No “international” market, just a collection of country markets

Global Market Many of same rivals compete in many of the same country

markets A firm’s competitive position in one country is affected by its

position in other countries Competitive advantage (or disadvantage) is based on a firm’s

world-wide operations and overall global standing

Characteristics of Multi-Domestic and Global Competition

Multi-Domestic Strategy

Strategy is matched to local market needs Use Different country strategies when

Significant country-to-country differences in customers’ needs exist

Buyers in one country want a product different from buyers in another country

Host government regulations preclude uniform global approach

Two drawbacks Poses problems of transferring competencies across

borders Works against building a unified competitive advantage

Global Strategy

Strategy for competing is similar in all country markets

Involves Coordinating strategic moves globally Selling in many, if not all, nations where a

significant market exists Works best when products and buyer

requirements are similar from country to country

Strategy Options for International Markets

Exporting Licensing Franchising strategy Diversification

Characteristics of Export Strategies

Involves using domestic plants as a production base for exporting to foreign markets

Excellent initial strategy to pursue international sales

Advantages Minimizes both risk and capital requirements Conservative way to test international waters Minimizes direct investments in foreign countries

An export strategy is vulnerable when Manufacturing costs in home country are higher than in

foreign countries where rivals have plants High shipping costs are involved

Allowing a foreign organization to take charge of manufacturing and distributing a product in its country or world region in return for a fee

Advantages Has valuable technical know-how or a patented product but does

not have international capabilities or resources to enter foreign markets

Desires to avoid risks of committing resources to markets which Are unfamiliar, Present economic uncertainty or Are politically volatile

Disadvantage Risk of providing valuable technical know-how to foreign firms

and losing some control over its use

Characteristics of Licensing Strategies

Often is better suited to global expansion efforts of service and retailing enterprises

Advantages Franchisee bears most of costs and risks of

establishing foreign locations Franchiser has to expend only the resources to

recruit, train, and support franchisees

Disadvantage Maintaining cross-country quality control

Characteristics of Franchising Strategies

Organizational Renewal

PoorManagement

UncontrollableCosts or TooHigh Costs

NewCompetitors

UnpredictedShifts in Consumer

Demand

Slow or No Responseto Significant External

or Internal Changes

Over expansionor Too Rapid

Growth

InadequateFinancialControls

Retrenchment

Diversification efforts have become too broad

Lack of resources or skill to support operating and investment needs of all businesses

Misfits (or poorly performing businesses) cannot be completely avoided

Unfavorable changes in industry attractiveness

Diversification may lack compatibility of values essential to cultural fit

Options for Accomplishing Retrenchment

Spin it off as independent company Involves deciding whether to retain partial

ownership or forego any ownership interest Sell it

Involves finding a company which views the business as a good deal and good fit

Leveraged buy out Involves selling business to the managers who

have been running it for a minimal equity down payment and loaning balance of purchase price to new owners

Corporate Turnaround Strategies (downsizing)

Objectives Restore money-losing businesses to profitability

rather than divest them Get whole firm back in the black by curing

problems of ailing businesses in portfolio Most appropriate where

Reasons for poor performance are short-term Ailing businesses are in attractive industries Divesting money-losers doesn’t make long-term

strategic sense

Portfolio Analysis

Industry Growth Rate(in constant sales dollars)

High(faster thanthe economyas a whole)

Low(slower thanthe economyas a whole)

Relative MarketShare Position

High (above 1.0) Low (below 1.0)1.0Stars Question Marks

Cash Cows Dogs

McKinsey GE-Stoplight matrix

Low

High

Medium

AverageStrong Weak

High priority for investment Medium priority for investment

Low priority for investment

Business Unit Competitive Strength

Ind

us

try

Att

rac t

ive

ne

ss

Strategy Implications of Attractiveness/Strength Matrix

Businesses in upper left corner Strategic prescription - grow and build

Businesses in three diagonal cells Invest to maintain position

Businesses in lower right corner Candidates for harvesting or divestiture

The lesson here is emphasize businesses that are market leaders or that can contend for market leadership

Characteristics of Cash Hogs

Internal cash flows are inadequate to fully fund needs for working capital and new capital investment

Parent company has to continually pump in capital to “feed the hog”

Strategic options Aggressively invest in

attractive cash hogs Divest cash hogs lacking

long-term potential

Characteristics of Cash Cows

Generate cash surpluses over and above what is needed to sustain present market position

Such businesses are valuable because surplus cash can be used to

Pay corporate dividends Finance new acquisitions Invest in promising cash hogs

Strategic objectives Fortify and defend present market position Keep the business healthy

Notes of Caution: WhyDiversification Efforts Can Fail Transferring resource capabilities to new

businesses can be far more arduous and expensive than expected

Trying to replicate a firm’s success in one business and hitting a second home run in a new business is easier said than done

Management can misjudge difficulty of overcoming resource strengths of rivals it will face in a new business

Corporate and International Strategy Take Aways

Single Business: Mission Driven Not a bad way to go, but “all eggs are in one basket”

Related Diversification: Strategy driven An alternative way to grow, but make sure the relations are

strong Unrelated Diversification: Finance driven

Core Competency is in management, finance, strategy, or just need to become bigger

Different ways to diversify More than 50% of all acq. do worse than

expected Rarely does 1+1 = 3, typically 1+1 = 2 and often

1+1 = 1

Take Aways-Global strategies

Global strategies work only if the industry is truly a global industry

Political and financial concerns are as important as strategic concerns

There are many ways to enter a new country each with benefits and risks

Global strategy is very hard!

Corporate Strategy Take Aways

First step: identify companies to acquire Attractiveness / competitiveness matrix

Second step: identify resources needed to develop business

Hogs vs. Cows Third step: does it fit our core competencies

Existing or ones we want to develop or retrenchment)