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Corporate Level Strategy. Growth of Product Markets through Concentration and Diversification. Corporate Level Strategy. Portfolio : Which businesses should we enter? Which should we exit? What binds our businesses together?

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corporate level strategy

Corporate Level Strategy

Growth of Product Markets

through Concentration

and Diversification

corporate level strategy1
Corporate Level Strategy
  • Portfolio: Which businesses should we enter? Which should we exit? What binds our businesses together?
  • Resource allocation: How should money and other resources be allocated among business units?
  • Horizontal units: Which functions should be shared? What are the costs of coordination?
reasons for growth
Reasons for Growth
  • Attract investors with competitive returns
  • Attract & retain talented managers and employees
  • Scale and scope economies
  • Better leverage with buyers, suppliers
can there be too much growth
Can there be too much growth?
  • At 20%, firm would double in < four years
  • Problems
    • Overburden internal processes
    • Second and third tier management teams can’t keep up pace
c oncentrated growth
Concentrated Growth
  • Expansion within single product market
  • Product Development
    • Extend product line: add models and sizes
    • Modify product: add features, ingredients
    • Complementary products
  • Market Development
    • New geographic markets
    • New channels of distribution
    • New uses
horizontal integration
Horizontal Integration
  • Acquisition of firms at same stage of supply chain
  • Objectives
    • Greater market share
    • Economies of scale
    • Increased power over suppliers and buyers
    • Fast growth
    • Remove competitors
diversified growth
Diversified Growth
  • Expansion into new product markets
  • Types of Diversification
    • Related Diversification
    • Vertical Integration
    • By-product Diversification
    • Unrelated (Conglomerate) Diversification
related diversification
Related Diversification

Purpose: scope economies (synergies)

  • Cost sharing (procurement, distribution)
  • Enhanced revenues (cross-selling, bundling, one-stop shopping)
  • Resource sharing: common brand, reputation, technological expertise, managerial talent, systems and processes, culture
examples of related diversification
Examples of Related Diversification
  • Honda into cars, motorcycles, lawn mowers and generators: competence in engines and power trains
  • Canon into copiers, laser printers, and cameras: competencies in optics, imaging and processor controls
  • Minebea from ball bearings to semiconductors: competence in miniaturized manufacturing
a portfolio of resources
A Portfolio of Resources
  • Resource-based view of the firm
    • Resources: root of competitive advantage
    • Portfolio of capabilities, not businesses
  • Don’t enter markets without a resource advantage
  • Use single resource in several business, e.g., Bic -- pens, lighters, razors
  • Develop resource in one market; move into others from position of strength
vertical integration
Vertical Integration
  • Entry into new business at earlier (backward) or later (forward) stages of the supply chain
  • Stages of the Supply Chain
    • Raw material extraction
    • Primary manufacturing
    • Fabrication of commodity products
    • Product production
    • Marketing and distribution
    • Retailing
aluminum an example
Aluminum: An Example

Upstream: add value by creating commodities

  • Mining
  • Refining of mined ore
  • Manufacture of primary aluminum

Downstream: add value through designing, positioning, marketing of products

  • Fabrication of aluminum products
  • Marketing and distribution of products
  • Sale in retail stores
upstream versus downstream
Upstream versus Downstream

Upstream

  • Standardization
  • Low cost
  • Process Innovation
  • Manufacturing
  • Technology Intensive
  • Supply Dominated
  • Maximize End Users
  • Sales Push

Downstream

  • Differentiation
  • High margins
  • Product Innovation
  • R&D, Advertising
  • People Intensive
  • Marketing Dominated
  • Target End Users
  • Market Pull
purposes of vertical integration
Purposes of Vertical Integration
  • Achieve control over quality
  • Improve supply and distribution coordination
  • Scarce resources: increase dependability of supply or distribution
  • Raise entry barriers against new competitors
  • Protection of proprietary knowledge
  • Contracts can’t be written due to uncertainty or low frequency of transactions
drawbacks to vertical integration
Drawbacks to Vertical Integration
  • No competition = less efficiency, higher costs
  • Significant in-house development = reduced product variety
  • Bureaucratic costs increase
  • Firm competes with buyers and suppliers
  • Resources spent on new core competencies compromise existing competencies
  • Capacity imbalance (excess upstream capacity to ensure supply under all demand conditions)
by product diversification
By-product Diversification
  • Selling secondary output of firm products in the open market
  • e.g., a lumber company sells sawdust, an airline sells training
unrelated diversification conglomerates
Unrelated Diversification (Conglomerates)
  • Collection of autonomous divisions with no shared functions/resources
  • Some of the best known companies in history: Beatrice, GE, ITT, Siemens
  • At different times both admired and vilified
  • Do they add value to their component businesses?
arguments in favor of conglomerates
Arguments in Favor of Conglomerates
  • Portfolio is efficient
    • Better information on businesses than outside investors
    • Quicker transfer capital between divisions than market mechanisms
  • Parent supports divisions through economic slumps
  • Effective in mediating transactions when markets don’t work well (e.g., internal capital market)
arguments against conglomerates
Arguments Against Conglomerates
  • Portfolio is inefficient
    • Divisions assume cost of running HQ
    • Can’t dispose of unwanted properties quickly
    • Acquisitions are made at a premium
  • Parent companies support troubled divisions longer than investors keep troubled stocks
  • Debt, reputation of one division negatively affects entire company
  • Difficult to manage
key drivers
Key Drivers
  • Seeking synergy
  • Scale and scope economies
  • Gaining access to restricted markets
  • Overcoming barriers to entry
  • Gaining market power (market share)
  • Acquiring technologies, products, quickly
  • Acquiring otherwise unavailable resources
  • Pooling resources, e.g., R&D
  • Industry overcapacity
tests of entry by acquisition
Tests of Entry by Acquisition
  • Will returns exceed cost of capital?
  • Will the firm have a competitive advantage?
  • Is the cost reasonable?
    • Price of premiums
    • Cost of overcoming entry barriers
  • Will the acquisition add value?
    • One-time value (make changes, then sell
    • Ongoing value (keep for long term)
reasons for failure of acquisitions
Reasons for Failure of Acquisitions
  • Empire building versus true business need
  • Insufficient due diligence (target and alternatives)
  • Overpayment (hard to value acquisition targets)
  • Assimilation difficulties
    • Underestimate difficulties of integration
    • Unfamiliarity: foreign market, new business
    • Culture clashes
    • Failure to retain key managers and personnel
types of strategic alliances
Types of Strategic Alliances
  • Non-equity alliance: cooperation between firms managed through contracts (licensing, supply or distribution)
  • Equity alliance: equity investments by one firm in the other in addition to contracts; creates a partnership
  • Joint venture: type of equity alliance; cooperating firms form new, independent firm in which partners invest and share any profits
motivations for equity alliances joint ventures
Motivations for Equity Alliances/Joint Ventures
  • Exploit economies of scale
  • Manage risk by sharing costs
  • Learn from competitors (risky)
  • Entry into new markets, especially foreign
  • Manage uncertainty
using joint venture for acquisition
Using Joint Venture for Acquisition
  • Buyer and seller form joint venture
  • Buyer has time to assess value of intangible assets (e.g., brands, distribution networks) and learn the business
  • Time period defined but buyer has choices
  • Price depends on length and final value of JV
  • For selling an underperforming but high-potential business
  • When disentanglement will be slow, complex
jv for acquisition pros and cons
JV for Acquisition: Pros and Cons

Advantages

  • High caliber people more likely to stay
  • Fewer defections of suppliers and distributors
  • Seller gets better price
  • Buyer assured of value

Disadvantages

  • Seller burden high in time and attention
  • Complicated structure adds to overhead
  • Effort of getting goals and cultures in sync
risks of alliances
Risks of Alliances
  • Misrepresentation of skills & abilities
  • Conflicts
    • Goals (beginning of alliance)
    • Performance metrics (life of alliance)
    • Strategic direction (end of alliance)
  • Vulnerability of valuable resources -- sharing without full control
factors determining corporate combination strategy

Factors Determining Corporate Combination Strategy

Synergy

Resources

Market Conditions

appendices
Appendices

Value Building in Multibusiness Companies

  • Market-related opportunities
  • Operating opportunities
  • Management opportunities
value building in multibusiness companies market related opportunities

Opportunities to Build Value

Potential Competitive Advantage

Impediments to Achieving

Enhanced Value

Shared sales force activities or shared sales office, or both

  • Lower selling costs
  • Better market coverage
  • Stronger technical advice to buyers
  • Enhanced convenience for buyers
  • Improved access to buyers
  • Buyers have different purchasing habits toward the products
  • Different salespersons are more effective in representing product
  • Some products get more attention

Shared after-sale service and repair work

  • Lower servicing costs
  • Better use of service personnel
  • Faster servicing of customer calls
  • Different equipment or different labor skills, or both, needed to handle repairs
  • Buyers may do some in-house repairs

Shared brand name

  • Stronger brand image and company reputation
  • Increased buyer confidence in brand
  • Company reputation is hurt if quality of one product is lower
Value Building in Multibusiness Companies: Market-related Opportunities
value building in multibusiness companies market related opportunities1

Opportunities to Build Value

Potential Competitive Advantage

Impediments to Achieving

Enhanced Value

Shared advertising and promotional activities

  • Lower costs
  • Greater clout in purchasing ads
  • Appropriate forms of messages are different
  • Appropriate timing of promotions is different

Common distribution channels

  • Lower distribution costs
  • Enhanced bargaining power with distributors/retailers for shelf space and positioning, stronger push, more dealer attention
  • Dealers resist being dominated by a single supplier and turn to multiple sources and lines
  • Heavy use of shared channel erodes willingness of other channels to carry firm’s products

Shared order processing

  • Lower order processing costs
  • One-stop shopping for buyer enhances service and, thus, differentiation
  • Differences in ordering cycles disrupt order processing economies
Value Building in Multibusiness Companies: Market-related Opportunities
value building in multibusiness companies operating opportunities

Opportunities to Build Value

Potential Competitive Advantage

Impediments to Achieving Enhanced Value

Joint procurement of purchased inputs

  • Lower input costs
  • Improved input quality
  • Improved service from suppliers
  • Input needs are different in terms of quality or other specifications
  • Inputs are needed at different plant locations, and centralized purchasing is not responsive to separate needs of each plan

Shared manufacturing and assembly facilities

  • Lower manufact/assembly costs
  • Better capacity utilization (peak demand for one product correlates with valley demand for other)
  • Bigger scale of operation improves access to better technology
  • Higher changeover costs in shifting from one product to another
  • High-cost special r equipment required to accommodate quality or design differences
  • Lower freight and handling costs
  • Better delivery reliability
  • More frequent deliveries, such that inventory costs are reduced

Shared inbound or outbound shipping and materials handling

  • Input sources or plant locations, or both, are in different geographic areas
  • Needs for frequency and reliability of inbound/outbound delivery differ among businesses
Value Building in Multibusiness Companies: Operating Opportunities
value building in multibusiness companies operating opportunities1

Opportunities to Build Value

Potential Competitive Advantage

Impediments to Achieving Enhanced Value

Shared product and process technologies or technology development

  • Lower product or process design costs because of shorter design times and transfer of knowledge from area to area
  • More innovative ability, due to scale of effort and attraction of better R&D personnel
  • Technologies are the same, but the applications in different business units are different enough to prevent much sharing of real value

Shared administrative support activities

  • Lower administrative and operating overhead costs
  • Support activities are not a large proportion of cost, and sharing has little cost impact (and virtually no differentiation impact)
Value Building in Multibusiness Companies: Operating Opportunities
value building in multibusiness companies management opportunities

Opportunities to Build Value

Potential Competitive Advantage

Impediments to Achieving

Enhanced Value

Shared product and process technologies or technology development

  • Efficient transfer of a distinctive competence - can create cost savings or enhance differentiation
  • Better understanding of key success factors
  • More effective development of strategy formulation and implementation
  • Technologies are the same, but the applications in different business units are different enough to prevent much sharing of real value
Value Building in Multibusiness Companies: Management Opportunities