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  2. CORPORATE LEVEL STRATEGY Making Diversification Work • Diversification • The process of firms expanding their operations by entering new businesses. STRATEGIC MANAGEMENT – BUAD 4980 2

  3. CORPORATE LEVEL STRATEGY Making Diversification Work • In which businesses should a corporation compete? • How should these businesses be managed to jointly create more value than if they were freestanding units? STRATEGIC MANAGEMENT – BUAD 4980 3

  4. CORPORATE LEVEL STRATEGY Making Diversification Work • Diversification initiatives must create value for shareholders • Mergers and acquisitions • Strategic alliances • Joint ventures • Internal development • Diversification should be synergistic STRATEGIC MANAGEMENT – BUAD 4980 4

  5. CORPORATE LEVEL STRATEGY Making Diversification Work • Related businesses(horizontal relationships) • Sharing tangible resources • Sharing intangible resources • Unrelated businesses(hierarchical relationships) • Value creation derives from corporate office • Leveraging support activities STRATEGIC MANAGEMENT – BUAD 4980 5

  6. CORPORATE LEVEL STRATEGY Related Diversification • A firm entering a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power STRATEGIC MANAGEMENT – BUAD 4980 6

  7. CORPORATE LEVEL STRATEGY Economies of Scope • Cost savings from leveraging core competencies or sharing related activities across businesses in a corporation STRATEGIC MANAGEMENT – BUAD 4980 7

  8. CORPORATE LEVEL STRATEGY Core Competencies • A firm’s strategic resources that reflect the collective learning in the organization STRATEGIC MANAGEMENT – BUAD 4980 8

  9. CORPORATE LEVEL STRATEGY Core Competencies • Core competencies reflect the collective learning in a firm: • How to coordinate diverse production skills • How to integrate multiple technologies • How to market diverse products and services STRATEGIC MANAGEMENT – BUAD 4980 9

  10. CORPORATE LEVEL STRATEGY Core Competencies • Core competencies must enhance competitive advantages by creating superior customer value • Different businesses in the firm must be similar in at least one important way related to the core competence • Core competencies must be difficult for competitors to imitate or find substitutes STRATEGIC MANAGEMENT – BUAD 4980 10

  11. CORPORATE LEVEL STRATEGY Sharing Resources • Corporations can also achieve synergy by sharing tangible and value-creating resources across their business units • Common manufacturing facilities • Distribution channels • Sales forces STRATEGIC MANAGEMENT – BUAD 4980 11

  12. CORPORATE LEVEL STRATEGY Sharing Resources • Sharing activities provide value in two primary ways: • Cost savings • Revenue enhancements STRATEGIC MANAGEMENT – BUAD 4980 12

  13. CORPORATE LEVEL STRATEGY Market Power • Firms’ abilities to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investment. STRATEGIC MANAGEMENT – BUAD 4980 13

  14. CORPORATE LEVEL STRATEGY Market Power • Pooled Negotiating Power • The improvement in bargaining position relative to suppliers and customers • Vertical Integration • an expansion or extension of the firm by integrating preceding or successive production processes STRATEGIC MANAGEMENT – BUAD 4980 14

  15. CORPORATE LEVEL STRATEGY Pooled Negotiating Power • Similar business units working together can have stronger bargaining position relative to: • Suppliers • Customers • Competitors • Abuse of bargaining power may negatively affect relationships with customers, suppliers and competitors STRATEGIC MANAGEMENT – BUAD 4980 15


  17. CORPORATE LEVEL STRATEGY Vertical Integration • Benefits • A secure source of raw materials or distribution channels. • Protection of and control over valuable assets. • Access to new business opportunities. • Simplified procurement and administrative procedures STRATEGIC MANAGEMENT – BUAD 4980 17

  18. CORPORATE LEVEL STRATEGY Vertical Integration • Risks • Costs and expenses associated with increased overhead and capital expenditures • Loss of flexibility resulting from large investments • Problems associated with unbalanced capacities along the value chain • Additional administrative costs associated with managing a more complex set of activities STRATEGIC MANAGEMENT – BUAD 4980 18

  19. CORPORATE LEVEL STRATEGY Making Vertical Integration Decisions • Is the company satisfied with the quality and value provided by our present suppliers and distributors? • Are there activities in our value chain presently being outsourced or contracted to others that could be internalized to increase profit? • Is there a high level of demand stability and future growth for the organization’s products? STRATEGIC MANAGEMENT – BUAD 4980 19

  20. CORPORATE LEVEL STRATEGY Making Vertical Integration Decisions • Do we have the necessary competencies to execute the vertical integration strategies? • Will the vertical integration initiative have potential negative impacts on our stakeholders? STRATEGIC MANAGEMENT – BUAD 4980 20

  21. CORPORATE LEVEL STRATEGY Transaction Costs • Contract or outsourcing can result in continuing transaction costs that have to be factored into the benefits of vertical integration • Search costs • Negotiating costs • Contract development costs • Monitoring and enforcement costs • These costs must be compared to the added administrative costs associated with vertical integration STRATEGIC MANAGEMENT – BUAD 4980 21

  22. CORPORATE LEVEL STRATEGY Unrelated Diversification • Entering a different business that has little horizontal interaction with other businesses of a firm. STRATEGIC MANAGEMENT – BUAD 4980 22

  23. CORPORATE LEVEL STRATEGY Corporate Parenting and Restructuring • Parenting advantage • Positive contributions of corporate administration to a new business as a result of expertise and support provided • Corporate Restructuring • Corporate administration making substantial changes to the assets, capital structure, and/or management in a new business STRATEGIC MANAGEMENT – BUAD 4980 23

  24. CORPORATE LEVEL STRATEGY Corporate Restructuring • Corporate management must have: • Insight to detect undervalued companies or businesses with high potential for transformation • Required skills and resources to turn the businesses around STRATEGIC MANAGEMENT – BUAD 4980 24

  25. CORPORATE LEVEL STRATEGY Corporate Restructuring • Can involve changes in • Assets • Capital / Financial Structure • Management STRATEGIC MANAGEMENT – BUAD 4980 25

  26. CORPORATE LEVEL STRATEGY Portfolio Management • Assessing the competitive position of a portfolio of businesses within a corporation, • Developing strategic alternatives for each business • Identifying priorities for the allocation of resources across the businesses STRATEGIC MANAGEMENT – BUAD 4980 26


  28. CORPORATE LEVEL STRATEGY Portfolio Management • Develop corporate expertise in identifying acquisition candidates that complement existing businesses or meet corporate growth objectives • Determine most efficient allocation of corporate resources to support new businesses • Determine optimal capital allocation to fund all the businesses in the portfolio • Provide high quality oversight and support for units • Develop appropriate strategic goals and performance management systems STRATEGIC MANAGEMENT – BUAD 4980 28

  29. CORPORATE LEVEL STRATEGY Means to Achieve Diversification • Acquisitions or mergers • Pooling resources of other companies with a firm’s own resource base • Joint venture • Strategic alliance • Internal development STRATEGIC MANAGEMENT – BUAD 4980 29

  30. CORPORATE LEVEL STRATEGY Mergers and Acquisitions • A means of obtaining valuable resources that can help an organization expand its product offerings and services (integration) • Can lead to consolidation within an industry and can force other players to merge • Provide new market segments or increased market share through acquisitions • Faster form of diversification than internal development or integration STRATEGIC MANAGEMENT – BUAD 4980 30

  31. CORPORATE LEVEL STRATEGY Mergers and Acquisitions • Limitations / Risks • Take-over premiums can be high, decreasing return on investment • Competing firms may be able to imitate any advantages realized, or copy synergies that result from the M&A • There can be many organizational cultural issues that may counter the intended benefits from M&A endeavors. STRATEGIC MANAGEMENT – BUAD 4980 31

  32. CORPORATE LEVEL STRATEGY Strategic Alliances and Joint Ventures • Joint Ventures involve two or more partners creating a new corporate entity, with each partner contributing equity and/or assets • Strategic Alliances are cooperative agreements or relationships between separate companies • Formal (contractual agreements) • Informal relationship STRATEGIC MANAGEMENT – BUAD 4980 32

  33. CORPORATE LEVEL STRATEGY Strategic Alliances and Joint Ventures • Introduce successful product or service into a new market • Partner provides marketing expertise or existing market development • Partner firms can reduce manufacturing (or other) costs in the value chain • Pool capital, value-creating activities, facilities STRATEGIC MANAGEMENT – BUAD 4980 33

  34. CORPORATE LEVEL STRATEGY Strategic Alliances and Joint Ventures • Develop or incorporate new technologies • Use expertise of two or more companies to bring technology to market • Develop products technologically beyond the capability of the companies acting independently STRATEGIC MANAGEMENT – BUAD 4980 34

  35. CORPORATE LEVEL STRATEGY Strategic Alliances and Joint Ventures - Downsides • Improper partner match • Each partner must bring desired complementary strengths to partnership • Strengths contributed by each should be unique • Partners must be compatible organizationally • Partners must trust one another • Partnership agreements must be specific and cover contingencies STRATEGIC MANAGEMENT – BUAD 4980 35

  36. CORPORATE LEVEL STRATEGY Managerial Motives Can Erode the Value of Acquisitions • Growth for growth’s sake • Egotism (win at all costs mentality) • Anti-takeover tactics • Greenmail • Golden parachute • Poison pills STRATEGIC MANAGEMENT – BUAD 4980 36

  37. CORPORATE LEVEL STRATEGY Internal Development • Allows companies to capture all the value of product development without having to pay acquisition premiums or share profits with partners • More time consuming to implement than acquisition or strategic partnership with well-positioned company • Firm must have all the internal capabilities - tangible and intangible resources – to effectively implement STRATEGIC MANAGEMENT – BUAD 4980 37

  38. CORPORATE LEVEL STRATEGY Case Analysis: Toyota’s Diversification into Home Manufacturing • Toyota extended its automobile expertise into factory-built, high quality manufactured homes in Japan • Homes are 85% completed at the factory in modules for final erection at the home site • Toyota applied its manufacturing principles, such as JIT, and continuous improvement systems to efficiently build custom modular homes STRATEGIC MANAGEMENT – BUAD 4980 38

  39. CORPORATE LEVEL STRATEGY Case Analysis: Steve Jobs Discusses Apple’s Core Competence • Apple doesn’t enter businesses where it cannot control or own the primary technology • For all of Apple’s products, this translates to complete control over the development of the unique software employed in its devices • Apple become so adept at developing the unique operating systems and software for its devices that is has very few competitors who can match the company’s expertise STRATEGIC MANAGEMENT – BUAD 4980 39

  40. CORPORATE LEVEL STRATEGY Case Analysis: American Idol – Far More Than Just a Television Show • German media giant Bertlesmann owns numerous widely-popular TV shows, such as American Idol • Bertlesmann leveraged its early success with American Idol by duplicating it in over 30 countries • In each country, the American Idol format is customized to accommodate cultural differences, achieving similar popularity as in the US • Bertlesmann has increased its revenue streams from American Idol through licensing broadcasting rights, product merchandise, CD’s and concerts STRATEGIC MANAGEMENT – BUAD 4980 40

  41. CORPORATE LEVEL STRATEGY Case Analysis: How 3M’s Efforts to Increase Market Power Backfired • 3M was subject to multiple class-action lawsuits by LePage’s over alleged unfair retail “bundled” rebates over 3M’s tape products • 3M offered bundled rebates to major retailers who exceeded high sales targets for each of six 3M product lines • LePage’s argued that the rebate volumes were so large that retailers would exclude offering any competing product • LePage’s was 3M’s only significant competitor in these markets • LePage asserted that 3M’s strategy was not only to reward large volume buyers, but to purposefully eliminate LePage’s as a competitor • The courts found in favor of LePage’s and awarded treble damages STRATEGIC MANAGEMENT – BUAD 4980 41

  42. CORPORATE LEVEL STRATEGY Case Analysis: Vertical Integration at Shaw Industries • Shaw Industries is a dominant carpet manufacturer in the US, owned by Berkshire Hathaway • Shaw has achieved success through a high degree of backward and forward integration • Through vertical integration, Shaw has developed a high degree of cost control • Shaw has integrated backward to produce a significant volume of polypropylene fiber used in its carpets, limiting its exposure to supplier pressure • The company has integrated forward to acquire large floor-covering retailers in an effort to control retail pricing STRATEGIC MANAGEMENT – BUAD 4980 42

  43. CORPORATE LEVEL STRATEGY Case Analysis: Campbell Soup Divests Godiva to Focus on its Core Business • Campbell Soup sold its Godiva Chocolate business in 2007 • Godiva had been a profitable brand with high growth potential • Campbell Soup sold the company because it didn’t fit the corporate focus on offering nutritious products and “focus on simple meals” STRATEGIC MANAGEMENT – BUAD 4980 43

  44. CORPORATE LEVEL STRATEGY Case Analysis: Crowdsourcing – Kraft’s Strategic Alliance With a Bagel Maker • Kraft Foods seeks out small businesses and entrepreneurs with products and inventions that might be compatible with Kraft’s market focus • Kraft has a website – to provide a forum of communication about ideas from inventors and innovative entrepreneurs • Through this process, Kraft was approached by a specialty bagel maker that invented, and manufactured on a small scale, a cream cheese filled bagel • Kraft had been attempting to create a similar product, but had encountered process problems producing the filled bagel • Through a partnership with the small company, Kraft was able to develop the product and brand it for the national market STRATEGIC MANAGEMENT – BUAD 4980 44

  45. CORPORATE LEVEL STRATEGY Case Analysis: The Ritz-Carlton Leadership Center – A Successful Internal Venture • Ritz-Carlton has a renowned reputation for quality and service • The company has won the Malcolm Baldrige National Quality Award twice • In 2000, the company established the Ritz-Carlton Leadership Center, offering leadership development programs, benchmarking seminars and workshops to outside companies • The program has become extremely successful and attracted companies from many industries • Workshop topics include leadership, employee development, customer service and quality • The Leadership Center has produced significant revenues for Ritz-Carlton STRATEGIC MANAGEMENT – BUAD 4980 45

  46. CORPORATE LEVEL STRATEGY Case Analysis: Cornelius Vanderbilt – Going to Great Lengths to Correct a Wrong! • In the mid-1800’s Cornelius Vanderbilt, owner of the steamship line Accessory Transit Company, took an extended vacation to Europe aboard his yacht • Upon his return from Europe, he discovered that two of his business associates, to whom he had granted power of attorney over the steamship business, had taken over this company • Vanderbilt invested to create a competing steamship business and put his former associates out of business, regaining control of his orignal company STRATEGIC MANAGEMENT – BUAD 4980 46

  47. CORPORATE LEVEL STRATEGY Case Analysis: How Anti-Takeover Measures May Benefit Multiple Stakeholders – Not Just Management • Anti-takeover measures can often be interpreted as means of protecting incumbent management, rather than shareholders and other stakeholders • As a result of some hostile takeover attempts, numerous states have put in place legislation favoring stakeholders during takeover litigation • Examples of situations where stakeholder interests (employees) were preserved include the hostile takeover attempt to purchase Dayton-Hudson (now Target) • Stakeholder interests (customers) were ignored during Oracle’s extended hostile takeover of PeopleSoft and the acquisition became strictly a financial deal STRATEGIC MANAGEMENT – BUAD 4980 47