Miles A. Zachary

MGT 4380

Selecting Corporate-Level Strategy

Chapter 8

Concentration strategies involve trying to compete only in a single industryMarket Penetration-firm attempts to gain additional

market share in their existing market with existing productsMost firms rely on crafty advertising to attract new

customersMarket Development-firm attempts to sell existing

products in a new marketFirms can enter new retail channels and/or geographical

regionsProduct Development-involves creating new products

to serve existing marketsNew products vary in their relatedness to existing products

Concentration Strategies

Beyond a firm’s own efforts, firm’s can horizontally integrate with other firms and competitors

Horizontal integration involves merging with or acquiring other firmsAcquisitions occur when one firm purchases

anotherGenerally, the purchased company is smaller and

possess resources and/or capabilities a firm needs or wants

Mergers occur when two (or more) firms joinTypically, firms are similarly sized and stand to

gain an efficiency through merging

Horizontal Integration

Horizontal integration can be attractive for several reasons:Can lower costs and increase economies scaleIncrease stock of strategic resourcesAccess to valuable distribution channels

However, horizontal integration has its challenges:Can destroy shareholder wealthMeshed cultures may conflictResources acquired may have been overpriced

Executives should approach horizontal integration carefully since many M&As are costly failures

Horizontal Integration

In vertical integration, a firm attempts to become involved in new portions of a value chain

Vertical integration is attractive when a firm’s suppliers or buyers have considerable power over the firmThe attractiveness of vertical integration is compounded

when a suppliers and/or buyers are highly profitableFirms can either integrate into a new market on their

own or through a merger/acquisitionTCE argues that firms vertically integrate when

transaction costs rise above a tolerable thresholdOil companies remain some of the most vertically-

integrated firms in business

Vertical Integration

AdvantagesFirms may be able to better understand their

upstream or downstream businessGreater control over processes/customize

operationsDisadvantages

Expanding firm operations can take a firm into drastically different businesses; operations outside firm capabilities

Can create complacencySome firms try to circumvent this problem by

making subsidiaries compete with outside contractors

Vertical Integration

Backward vertical integration typically involves a firm moving backward in the value chain

Executives may backward integrate if they feel a firm’s suppliers have too much power

Ex.-For many years, Ford relied on a subsidiary to manufacture basic vehicle components

Backward Vertical Integration

Forward vertical integration refers to a firm moving further down a value chain

Executives may consider forward vertical integration when buyers have too much power

Ex.-In the early 1990’s, Ford felt pressure from large rental car companies to lower their prices; in response, Ford forward-integrated by acquiring Hertz

Forward Vertical Integration

Diversification strategies are used by firms to enter new industriesVertical integration = firm move into a new

part of the value chainDiversification = firm move to a new value

chainMany firms diversify through mergers and

acquisitionsThree (3) questions for diversification

How attractive is the industry?What is the cost of industry entry?Will the new unit and the parent firm be better

off?

Diversification Strategies

Related diversification involves diversifying into an industry similar to the firm’s existing industry or industries

A related diversification strategy allows a firm to leverage their core competenciesCore competencies are skill-sets unique to a

firm that are difficult for competitors to imitate and contribute to benefits enjoyed by customers within each business

Ex.-Disney’s purchase of ABC broadcasting proved successful

Related Diversification

Unrelated diversification involves a firm entering an industry with little to no similarity with their existing industry

Unrelated diversification is a risky strategy since firms are expanding (expending resources) into a market that is unfamiliarFirm may lack the sufficient resources and

capabilities to be successfulEx.-Starbucks coffee had considerable trouble

expanding into the furniture industry

Unrelated Diversification

Retrenchment involves a firm eliminating or scaling back one or more business units

Similar to trench warfare, retrenchment is often preferable to loosing the entire firm

Firms often retrench through laying-off employees

Retrenchment allows a firm to save money to remain competitive

Retrenchment

When executives need stronger strategies to remain competitive, they may turn to divestment

Divestment involves selling-off one or more of a firm’s business unit(s)Reversing a forward integration strategy-divesting

a business unit later in the value chainEx.-Ford sold Hertz after forward integrating with

them in the early 1980’sReversing a backward integration strategy-

divesting a business unit earlier in the value chainEx.-GM sold Delphi Automotive Systems, a previously

in-house business unit responsible for making auto parts

Restructuring/Divestment

Divestment can be useful to unlock hidden shareholder value of unrelated diversified firmsInvestors seldom understand the motivation for

unrelated diversificationBy breaking up such firms, investors may be more

likely to invest in each firmEx.-Fortune Brands is attempting to divest three

business units (spirits, household goods, and golf equipments) into three individual firms “in the interest of long-term shareholder value”

Other times, firms must accept that a business unit has no value and liquidate assets

Restructuring/Divestment

Determining the right corporate strategy for heavily diversified firms is very difficult

Executives use portfolio planning strategies to determine which units to grow, shrink, and eliminate

Portfolio planning helps executives determine how business units are fairing in their industries

The Boston Consulting Group (BCG) matrix is a well-known and popular typology for categorizing and prioritizing business units

Portfolio Planning

Business units are categorized along two (2) different dimensionsMarket shareMarket growth

Business units with:High market share/low market growth = cash cowsHigh market share/high market growth = starsLow market share/low market growth = dogsLow market share/high market growth = question marks

Profits from cash cows should be invested in starsDogs should be eliminated or divestedQuestion marks should be evaluated whether to be

invested in (stars) or eliminated (dogs)

BCG Matrix

BCG Matrix