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Corporate-Level Strategy. MANA 5336. Directional Strategies. Upstream. Downstream. Stages in the Raw-Material-to-Consumer Value Chain. Examples: Dow Chemical Union Carbide Kyocera. Examples: Intel Seagate Micron. Examples: Apple Hp Dell. Examples: Best Buy Office Max. Distribution.

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Stages in the raw material to consumer value chain

Upstream

Downstream

Stages in the Raw-Material-to-Consumer Value Chain


Stages in the raw material to consumer value chain in the personal computer industry

Examples:

Dow ChemicalUnion CarbideKyocera

Examples:IntelSeagateMicron

Examples:AppleHpDell

Examples:Best BuyOffice Max

Distribution

Assembly

Intermediatemanufacturer

Raw materials

End user

Stages in the Raw-Material-to-Consumer Value Chain in the Personal Computer Industry


Concentration on a single business
Concentration on a Single Business

Southwest Airlines

SEARS

Coca-Cola

McDonalds


Concentration on a single business1

Advantages

Operational focus on a single familiar industry or market.

Current resources and capabilities add value.

Growing with the market brings competitive advantage.

Disadvantages

No diversification of market risks.

Vertical integration may be required to create value and establish competitive advantage.

Opportunities to create value and make a profit may be missed.

Concentration on a Single Business


Diversification
Diversification

  • Related diversification

    • Entry into new business activity based on shared commonalities in the components of the value chains of the firms.

  • Unrelated diversification

    • Entry into a new business area that has no obvious relationship with any area of the existing business.


Related diversification
Related Diversification

Marriott

3M

Hewlett Packard


Unrelated diversification
Unrelated Diversification

Tyco

Amer Group

ITT


Diversification and corporate performance a disappointing history
Diversification and Corporate Performance: A Disappointing History

  • A study conducted by Business Week and Mercer Management Consulting, Inc., analyzed 150 acquisitions that took place between July 1990 and July 1995. Based on total stock returns from three months before, and up to three years after, the announcement:

  • 30 percent substantially eroded shareholder returns.

  • 20 percent eroded some returns.

  • 33 percent created only marginal returns.

  • 17 percent created substantial returns.

  • A study by Salomon Smith Barney of U.S. companies acquired since 1997 in deals for $15 billion or more, the stocks of the acquiring firms have, on average, under-performed the S&P stock index by 14 percentage points and under-performed their peer group by four percentage points after the deals were announced.

Sources: Lipin, S. & Deogun, N. 2000. Big merges of the 90’s prove disappointing to shareholders. Wall Street Journal, October 30: C1; A study by Dr. G. William Schwert, University of Rochester, cited in Pare, T. P. 1994. The new merger boom. Fortune, November 28:96; and Porter, M.E. 1987. From competitive advantage to corporate strategy. Harvard Business Review, 65(3):43.


Relationship between diversification and performance
Relationship Between Diversification and Performance History

Performance

Dominant

Business

Related

Constrained

Unrelated

Business

Level of Diversification


Restructuring contraction of scope
Restructuring: HistoryContraction of Scope

  • Why restructure?

    • Pull-back from overdiversification.

    • Attacks by competitors on core businesses.

    • Diminished strategic advantages of vertical integration and diversification.

  • Contraction (Exit) strategies

    • Retrenchment

    • Divestment– spinoffs of profitable SBUs to investors; management buy outs (MBOs).

    • Harvest– halting investment, maximizing cash flow.

    • Liquidation– Cease operations, write off assets.


Why contraction of scope
Why Contraction of Scope? History

  • The causes of corporate decline

    • Poor management– incompetence, neglect

    • Overexpansion– empire-building CEO’s

    • Inadequate financial controls– no profit responsibility

    • High costs– low labor productivity

    • New competition– powerful emerging competitors

    • Unforeseen demand shifts– major market changes

    • Organizational inertia– slow to respond to new competitive conditions


The main steps of turnaround
The Main Steps of Turnaround History

  • Changing the leadership

    • Replace entrenched management with new managers.

  • Redefining strategic focus

    • Evaluate and reconstitute the organization’s strategy.

  • Asset sales and closures

    • Divest unwanted assets for investment resources.

  • Improving profitability

    • Reduce costs, tighten finance and performance controls.

  • Acquisitions

    • Make acquisitions of skills and competencies to strengthen core businesses.


Adaptive strategies
Adaptive Strategies History

Maintenance of Scope

Enhancement

Status Quo


Market entry strategies
Market Entry Strategies History

  • Acquisition:a strategy through which one organization buys a controlling interest in another organization with the intent of making the acquired firm a subsidiary business within its own portfolio

  • Licensing:a strategy where the organization purchases the right to use technology, process, etc.

  • Joint Venture:a strategy where an organization joins with another organization(s) to form a new organization


Reasons for making acquisitions

Learn and develop History

new capabilities

Reshape firm’s

competitive scope

Overcome

entry barriers

Increase

diversification

Acquisitions

Cost of new

product development

Increase speed

to market

Increase

market power

Lower risk compared

to developing new

products

Reasons for Making Acquisitions


Problems with acquisitions

Resulting firm History

is too large

Inadequate

evaluation of target

Managers overly

focused on acquisitions

Acquisitions

Large or

extraordinary debt

Too much

diversification

Integration

difficulties

Inability to

achieve synergy

Problems With Acquisitions


Strategic alliance
Strategic Alliance History

  • A strategic alliance is a cooperative strategy in which

    • firms combine some of their resources and capabilities

    • to create a competitive advantage

  • A strategic alliance involves

    • exchange and sharing of resources and capabilities

    • co-development or distribution of goods or services


Strategic alliance1

Firm B History

Resources

Capabilities

Core Competencies

Resources

Capabilities

Core Competencies

Firm A

Mutual interests in designing, manufacturing,

or distributing goods or services

Combined

Resources

Capabilities

Core Competencies

Strategic Alliance


Types of cooperative strategies
Types of Cooperative Strategies History

  • Joint venture: two or more firms create an independent company by combining parts of their assets

  • Equity strategic alliance: partners who own different percentages of equity in a new venture

  • Nonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing


Strategic alliances

Margin History

Margin

Margin

Margin

Service

Service

Marketing & Sales

Marketing & Sales

Technological Development

Technological Development

Human Resource Mgmt.

Human Resource Mgmt.

Support Activities

Support Activities

Outbound Logistics

Outbound Logistics

Firm Infrastructure

Firm Infrastructure

Procurement

Procurement

Operations

Operations

Inbound Logistics

Inbound Logistics

Primary Activities

Primary Activities

Strategic Alliances

  • vertical complementary strategic alliance is formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value for both firms

  • outsourcing is one example of this type of alliance

Supplier

Vertical Alliance


Strategic alliances1

Margin History

Margin

Margin

Margin

Service

Service

Marketing & Sales

Marketing & Sales

Technological Development

Technological Development

Human Resource Mgmt.

Human Resource Mgmt.

Support Activities

Support Activities

Outbound Logistics

Outbound Logistics

Firm Infrastructure

Firm Infrastructure

Procurement

Procurement

Operations

Operations

Inbound Logistics

Inbound Logistics

Primary Activities

Primary Activities

Strategic Alliances

Buyer

Buyer

Potential Competitors

  • horizontal complementary strategic alliance is formed between partners who agree to combine their resources and skills to create value in the same stage of the value chain

  • focus on long-term product development and distribution opportunities

  • the partners may become competitors

  • requires a great deal of trust between the partners


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