1 CORPORATE LEVEL STRATEGY STRATEGIC MANAGEMENT BUAD 4980.

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1 CORPORATE LEVEL STRATEGY STRATEGIC MANAGEMENT BUAD 4980

Transcript of 1 CORPORATE LEVEL STRATEGY STRATEGIC MANAGEMENT BUAD 4980.

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CORPORATE LEVEL STRATEGY

CORPORATE LEVEL STRATEGY

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Making Diversification WorkMaking Diversification Work

Diversification

The process of firms expanding their operations by entering new businesses.

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Making Diversification WorkMaking 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?

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Making Diversification WorkMaking Diversification Work

Diversification initiatives must create value for shareholders

Mergers and acquisitions

Strategic alliances

Joint ventures

Internal development

Diversification should be synergistic

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Making Diversification WorkMaking 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

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Related DiversificationRelated Diversification

A firm entering a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power

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Economies of ScopeEconomies of Scope

Cost savings from leveraging core competencies or sharing related activities across businesses in a corporation

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Core CompetenciesCore Competencies

A firm’s strategic resources that reflect the collective learning in the organization

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Core CompetenciesCore 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

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Core CompetenciesCore 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

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Sharing ResourcesSharing Resources

Corporations can also achieve synergy by sharing tangible and value-creating resources across their business units

Common manufacturing facilities

Distribution channels

Sales forces

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Sharing ResourcesSharing Resources

Sharing activities provide value in two primary ways:

Cost savings

Revenue enhancements

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Market PowerMarket Power

Firms’ abilities to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investment.

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Market PowerMarket 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

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Pooled Negotiating PowerPooled 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

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Vertical IntegrationVertical Integration

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Vertical IntegrationVertical 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

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Vertical IntegrationVertical 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

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Making Vertical Integration DecisionsMaking 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?

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Making Vertical Integration DecisionsMaking 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?

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Transaction CostsTransaction 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

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Unrelated DiversificationUnrelated Diversification

Entering a different business that has little horizontal interaction with other businesses of a firm.

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Corporate Parenting and RestructuringCorporate 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

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Corporate RestructuringCorporate 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

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Corporate RestructuringCorporate Restructuring

Can involve changes in

Assets

Capital / Financial Structure

Management

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Portfolio ManagementPortfolio 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

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Portfolio Matrix (Boston Consulting Group)Portfolio Matrix (Boston Consulting Group)

BUSINESS UNITS

$

BUSINESS REVENUE

$$$

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Portfolio ManagementPortfolio 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

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Means to Achieve DiversificationMeans to Achieve Diversification

Acquisitions or mergers

Pooling resources of other companies with a firm’s own resource base

Joint venture

Strategic alliance

Internal development

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Mergers and AcquisitionsMergers 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

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Mergers and AcquisitionsMergers 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.

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Strategic Alliances and Joint VenturesStrategic 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

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Strategic Alliances and Joint VenturesStrategic 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

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Strategic Alliances and Joint VenturesStrategic 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

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Strategic Alliances and Joint Ventures - Downsides

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

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Managerial Motives Can Erode the Value of Acquisitions

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

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Internal DevelopmentInternal 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

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Case Analysis: Toyota’s Diversification into Home Manufacturing

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

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Case Analysis: Steve Jobs Discusses Apple’s Core Competence

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

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Case Analysis: American Idol – Far More Than Just a Television Show

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

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Case Analysis: How 3M’s Efforts to Increase Market Power Backfired

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

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Case Analysis: Vertical Integration at Shaw Industries

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

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Case Analysis: Campbell Soup Divests Godiva to Focus on its Core Business

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”

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Case Analysis: Crowdsourcing – Kraft’s Strategic Alliance With a Bagel Maker

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 – www.innnovatewithkraft.com 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

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Case Analysis: The Ritz-Carlton Leadership Center – A Successful Internal Venture

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

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Case Analysis: Cornelius Vanderbilt – Going to Great Lengths to Correct a Wrong!

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

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Case Analysis: How Anti-Takeover Measures May Benefit Multiple Stakeholders – Not Just

Management

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

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