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Corporate Strategy: Shaping the Portfolio. Strategy A View from the Top. Doug Hentges Austin Mapes David Murdock Cindal Peterson Molly Redden. Introduction. Answering the question “what is your strategy”? How to make your strategy clear to Employees Investors The Media Consumer.

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corporate strategy shaping the portfolio

Corporate Strategy:Shaping the Portfolio

Strategy A View from the Top

  • DougHentges
  • Austin Mapes

David Murdock

  • Cindal Peterson
  • Molly Redden
slide2

Introduction

  • Answering the question “what is your strategy”?
  • How to make your strategy clear to
    • Employees
    • Investors
    • The Media
    • Consumer

Some things to keep in mind:

Is there one best overarching strategy for a company?

Is the environment shaping you or are you shaping the environment?

the core
The “Core”
  • Defining a companies Core
    • Some companies claim their core is
      • Their most valuable customers
      • The most valuable products
      • The most important channels
          • A company should not seek to be something its not!
            • This is called wishful thinking
economics of scale and scope
Economics of Scale and Scope
  • Alfred D. Chandler
  • Economies of Scale
  • Economies of Scope
economics of scale and scope1
Economics of Scale and Scope
  • Horizontal Scope
  • Geographical Scope
  • Vertical Scope
disinvestments
Disinvestments:
  • Sell off’s
    • Intensified selling in a declining market, spurred by the fear that prices will keep declining.
  • Spin offs
    • separation of a subsidiary from its parent firm to create a new corporate entity by issuing new shares.
  • Liquidations-
    • This is done by a company who is wanting to sell off its assets to pay of its unsecured creditors.
  • All of these are done after a close look at the company reveals that the current parent company or market is not appropriate for the product.
growth strategies
Growth Strategies
  • Selecting the right growth strategy requires a careful analysis of opportunities, strategic resources and cultural fit
growth strategies1
Growth Strategies
  • Achieving consistent revenue and profit growth is hard
    • To grow 6%, a $30 Billion company, an average for the Fortune 500 companies, a new $2 billion company must be created each year
    • A large number of the mergers and acquisitions fail to meet expectations
    • Relying on internal growth alone to meet revenue targets can be equally risky
growth strategies2
Growth Strategies
  • To formulate a successful growth strategy:
    • Carefully analyze strengths and weaknesses
    • How it delivers value to customers
    • What growth strategies its culture can effectively support
growth strategies3
Growth Strategies
  • Price-value leaders require a strategy focused on entering adjacent markets
  • Performance-value leaders benefit more from continuous innovation
3 ways to grow its revenue base
3 ways to grow its revenue base
  • Organic or Internal Growth
    • Wal-mart & Dell
  • Growth Through Acquisition
    • GE
  • Growth Through Alliance-Based Incentives
    • Amazon & eBay

Also known as the “Build, Buy, or Bond” Paradigm

primary criteria using product market choice
Primary Criteria using Product-Market Choice

1. Concentrated Growth

2. Vertical & Horizontal Integration

3. Diversification

concentrated growth strategy
Concentrated Growth Strategy
  • Directing its resources to the profitable growth of a single product category, in a well-defined market, and possibly with a dominant technology
concentrated growth strategy1
Concentrated Growth Strategy
  • The most direct way of pursuing concentrated growth is to target increases in the market share.
    • Increasing the number of users of the product
    • Increasing product usage by stimulating higher quantities of use or by developing new applications
    • Increasing the frequency of the product’s use
4 specific conditions favor concentrated growth
4 Specific Conditions Favor Concentrated Growth

1. The industry is resistant to major technological advancements. This is usually the case in the late growth and maturity stages of the product life cycle and in product-markets where product demand is stable and industry barriers, such as capitalization, are high

4 specific conditions favor concentrated growth1
4 Specific Conditions Favor Concentrated Growth

2. Targeted markets are not product saturated. Markets with competitive gaps leave the firm with alternatives for growth, other than taking market share away from competitors

4 specific conditions favor concentrated growth2
4 Specific Conditions Favor Concentrated Growth

3. The product-market is sufficiently distinctive to dissuade competitors from trying to invade the segment

4. Necessary inputs are stable in price and quantity and are available in the amounts and at the times needed

vertical and horizontal integration
Vertical and Horizontal Integration
  • Vertical:
    • Strategy of increasing a corporation’s vertical participation in an industry’s value chain.
  • Four reasons to vertically integrate:
    • Market is too risky and unreliable
    • Company in an adjacent stage of the industry chain has more market power
    • Used to create or exploit market power
    • Young company, sometimes forward integrate to develop a market.
pims comparative analysis
PIMS Comparative Analysis
  • Three Questions:
  • Are highly integrated businesses in general more or less profitable than less integrated ones?
  • Under what circumstances is a high level of vertical integration likely to be most profitable?
  • Apart from its influence on overall profitability, what are the principal benefits and risks associated with vertical integration strategies?
horizontal integration
Horizontal Integration
  • Increasing the range of products and services offered to current markets or expanding the firm’s presence into a wider number of geographic locations.
  • Designed to leverage brand potential
diversification strategies
Diversification Strategies
  • A Strategy of entering product markets different from those in which a company is currently engaged.
  • Factors for diversification motivation:
    • Create revenue growth
    • Increase profitability through shared resources
    • Reduce company’s overall exposure to risk by balancing the business portfolio
    • opportunity to exploit underutilized resources
diversification strategies1
Diversification Strategies
  • Relatedness or the potential for synergy is a major consideration in formulating diversification strategies.
  • Defined in several ways:
    • Tangible links between business units
    • Intangible resources, such as knowledge or capabilities
    • Ability of business units to jointly gain or exercise market power.
    • Strategic relatedness: the similarity of the strategic challenges faced by different business units.
six questions for evaluating risks with a diversification strategy
Six Questions For Evaluating Risks With A Diversification Strategy
  • What can our company do better than any of its competitors in its current markets?
  • What strategic assets are needed to succeed in the new market?
  • Can the firm catch or leapfrog competitors?
  • Will diversification break up strategic assets that need to be kept together?
  • Will our firm simply be a player in the new market or will it be a winner?
  • What can the corporation learn by diversifying, and are we organized to learn it?
porter s tests
Porter’s Tests
  • 1.) Attractiveness test
  • 2.) The cost of entry test
  • 3.) The better-off test
mergers and acquisitions
Mergers and Acquisitions
  • Merger: two companies have joined to form one company
  • Acquisition: one firm buys another
    • Generally expensive
six themes for merger acquisition success
Six Themes for Merger/Acquisition Success

1.) Usually part of a well-developed corporate strategy

2.) Diversification through acquisition is an ongoing, long-term process that requires patience.

3.)Successful acquisitions usually result from disciplined strategic analysis

six themes for merger acquisition success1
Six Themes for Merger/Acquisition Success

4.) An acquire can add value in only a few ways. The buying company should be able top specify how synergies will be achieved and value created.

5.) Objectivity is essential, even though hard to maintain

6.) Most acquisitions struggle on implementation

cooperative strategies
Cooperative Strategies
  • Cooperative strategies capture the benefits of internal development and acquisition but also avoid drawbacks of both
  • Key drivers: need for risk sharing, corporation’s funding limitations, and desire to gain market and technology access
key drivers
Key Drivers
  • Risk Sharing
    • Companies must prioritize strategic interests and balance them according to risk
  • Funding Limitations
    • Companies will incur high fixed costs with a shorter payback period and higher level of risk
  • Market Access
    • Cooperative strategies can help fill gaps in distribution to new customers
  • Technology Access
    • Partnering with technologically compatible companies is essential and helps spread technology around the world
other reasons for cooperative strategies
Other Reasons for Cooperative Strategies
  • Lack of certain management skills
  • Inability to add value in-house
  • Lack of acquisition opportunities because of size, geographical or ownership restrictions
strategic logic of alliances
Strategic Logic of Alliances
  • Drivers of alliance initiatives: product innovation, credibility, and access to capital
  • Most important factors:
    • Rapid Growth and Consolidation phases
      • External value and market
      • Customer reach
    • Stability Stage
      • Reduced cost
      • Value-chain strengthening
      • Product extension
4 alliance models
4 Alliance Models
  • Franchise
    • When gaps in an organization’s value chain are greater than any one partner can fill
    • Company develops structure that can be replicated for a class of partnerships
  • Portfolio (aka “Hub and Spoke”)
    • Establishment of multiple alliances and manages external partners managed as a single portfolio
    • One company is “hub” for alliances and manages all the external partners.
4 alliance models1
4 Alliance Models
  • Cooperative
    • Alliance is at center
    • No one company is in control
    • Customer relationships shift from individual company members to alliance center
  • Constellation
    • Use strategies to put competitors on defensive
    • Own center focused on creating value for extended entity in strategic leadership, capability brokering, identity, control, and capital
4 groups of alliances

Cooperative Alliances

M&A-like Alliances

Competitors

Noncompetitors

Partnership Type

New-business Alliances

Expertise Alliances

Narrow Broad

Alliance Scope

4 Groups of Alliances
  • Expertise
    • Brings together noncompeting firms to share expertise and specific capabilities
      • Example: Outsourcing information technology services
  • New-business alliances
    • Partnerships that focus on entering a new business or market
      • Example: China entering the U.S. market
4 groups of alliances1

Cooperative Alliances

M&A-like Alliances

Competitors

Noncompetitors

Partnership Type

New-business Alliances

Expertise Alliances

Narrow Broad

Alliance Scope

4 Groups of Alliances
  • Cooperative
    • Joint efforts by competing firms to attain critical mass or economies of scale
      • Example: Competitors combining to seek cheaper health insurance for employees
  • M&A-like
    • Focus on near-complete integration but are prevented by legal regulatory constraints or unfavorable stock market conditions
      • Example: Airline industry
growth and strategic risk
Growth and Strategic Risk
  • Risk can be measured in terms of how far a growth initiative takes a company away from the established strengths of its core business
growth and strategic risk1
Growth and Strategic Risk
  • The farther away from the core, the company is less likely to succeed and strategic risk increases
growth and strategic risk2
Growth and Strategic Risk
  • Chances of success can vary by type of adjacency that defines growth initiative
growth and strategic risk3
Growth and Strategic Risk
  • Distance from core and type of adjacency define a strategic risk “heat map” that is useful for managing the risk profile of an overall corporate growth strategy