Corporate-Level Strategy MANA 5336. 2 Directional Strategies.
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Transcript of Corporate-Level Strategy MANA 5336. 2 Directional Strategies.
Stages in the Raw-Material-to-Consumer Value Chain in the Personal Computer Industry
End userDistributionAssemblyIntermediatemanufacturer
Raw materials
Examples:Examples:Dow ChemicalDow ChemicalUnion CarbideUnion CarbideKyoceraKyocera
Examples:Examples:IntelIntelSeagateSeagateMicronMicron
Examples:Examples:AppleAppleHpHpDellDell
Examples:Examples:Best BuyBest BuyOffice MaxOffice Max
Concentration on a Single Business
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.
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.
Diversification and Corporate Performance: A Disappointing History
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.
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.
Relationship Between Diversification and Performance
Per
form
ance
Per
form
ance
Level of DiversificationLevel of Diversification
DominantBusiness
UnrelatedBusiness
RelatedConstrained
Restructuring:Contraction 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?
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
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.
Market Entry Strategies
Acquisition:Acquisition: a strategy through which one organization buys a a strategy through which one organization buys a controlling interest in another organization with the intent of controlling interest in another organization with the intent of making the acquired firm a subsidiary business within its own making the acquired firm a subsidiary business within its own portfolioportfolio
Licensing:Licensing: a strategy where the organization purchases the a strategy where the organization purchases the right to use technology, process, etc. right to use technology, process, etc.
Joint Venture:Joint Venture: a strategy where an organization joins with a strategy where an organization joins with another organization(s) to form a new organizationanother organization(s) to form a new organization
AcquisitionsAcquisitions
Reasons for Making Acquisitions
IncreaseIncreasemarket powermarket power
OvercomeOvercomeentry barriersentry barriers
Cost of newCost of newproduct developmentproduct development Increase speedIncrease speed
to marketto market
IncreaseIncreasediversificationdiversification
Reshape firm’sReshape firm’scompetitive scopecompetitive scope
Lower risk comparedLower risk comparedto developing newto developing new
productsproducts
Learn and developLearn and developnew capabilitiesnew capabilities
AcquisitionsAcquisitions
Problems With AcquisitionsIntegrationIntegrationdifficultiesdifficulties
InadequateInadequateevaluation of targetevaluation of target
Large orLarge orextraordinary debtextraordinary debt
Inability toInability toachieve synergyachieve synergy
Too muchToo muchdiversificationdiversification
Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions
Resulting firmResulting firmis too largeis too large
Strategic Alliance
A strategic alliance is a cooperative strategy in whichA strategic alliance is a cooperative strategy in which– firms combine some of their resources and capabilitiesfirms combine some of their resources and capabilities– to create a competitive advantageto create a competitive advantage
A strategic alliance involvesA strategic alliance involves– exchange and sharing of resources and capabilitiesexchange and sharing of resources and capabilities– co-development or distribution of goods or servicesco-development or distribution of goods or services
CombinedCombinedResourcesResources
CapabilitiesCapabilitiesCore CompetenciesCore Competencies
ResourcesResourcesCapabilitiesCapabilities
Core CompetenciesCore Competencies
ResourcesResourcesCapabilitiesCapabilities
Core CompetenciesCore Competencies
Strategic Alliance
Firm AFirm A Firm BFirm B
Mutual interests in designing, manufacturing,Mutual interests in designing, manufacturing,or distributing goods or servicesor distributing goods or services
Types of Cooperative Strategies
Joint venture: two or more firms create an Joint venture: two or more firms create an independent company by combining parts of their independent company by combining parts of their assetsassets
Equity strategic alliance: partners who own different Equity strategic alliance: partners who own different percentages of equity in a new venturepercentages of equity in a new venture
Nonequity strategic alliances: contractual Nonequity strategic alliances: contractual agreements given to a company to supply, produce, agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity or distribute a firm’s goods or services without equity sharingsharing
Strategic Alliances
Margin Margin
Primary Activities
Sup
port
Act
iviti
es Service
Marketing & Sales
Outbound Logistics
Operations
Inbound LogisticsFirm
Inf
rast
ruct
ure
Hum
an R
esou
rce
Mgm
t.
Tec
hnol
ogic
al D
evel
opm
ent
Pro
cure
men
t
Margin Margin
Primary Activities
Sup
port
Act
iviti
es Service
Marketing & Sales
Outbound Logistics
Operations
Inbound LogisticsFirm
Inf
rast
ruct
ure
Hum
an R
esou
rce
Mgm
t.
Tec
hnol
ogic
al D
evel
opm
ent
Pro
cure
men
t
Ver
tica
l All
ianc
eV
erti
cal A
llia
nce
SupplierSupplier
• vertical complementary strategic vertical complementary strategic alliance is formed between firms alliance is formed between firms that agree to use their skills and that agree to use their skills and capabilities in different stages of capabilities in different stages of the value chain to create value the value chain to create value for both firmsfor both firms
• outsourcing is one example of outsourcing is one example of this type of alliancethis type of alliance
Strategic Alliances
Margin Margin
Primary Activities
Sup
port
Act
iviti
es Service
Marketing & Sales
Outbound Logistics
Operations
Inbound LogisticsFirm
Inf
rast
ruct
ure
Hum
an R
esou
rce
Mgm
t.
Tec
hnol
ogic
al D
evel
opm
ent
Pro
cure
men
t
Margin Margin
Primary Activities
Sup
port
Act
iviti
es Service
Marketing & Sales
Outbound Logistics
Operations
Inbound LogisticsFirm
Inf
rast
ruct
ure
Hum
an R
esou
rce
Mgm
t.
Tec
hnol
ogic
al D
evel
opm
ent
Pro
cure
men
t
BuyerBuyerPotential CompetitorsPotential Competitors
• horizontal complementary strategic alliance is formed horizontal complementary strategic alliance is formed between partners who agree to combine their resources and between partners who agree to combine their resources and skills to create value in the same stage of the value chainskills to create value in the same stage of the value chain
• focus on long-term product development and distribution opportunities
• the partners may become competitorsthe partners may become competitors• requires a great deal of trust between the partnersrequires a great deal of trust between the partners
BuyerBuyer