Corporate-level Strategy

Formulation Responsibilities
• Direction Setting
› Establishment and communication of organizational mission,
vision, enterprise strategy and long-term goal
• Development of Corporate-level Strategy
› Broad approach to corporate-level strategy—concentration,
vertical integration, diversification, international expansion
› Selection of resources and capabilities in which to develop
corporate-level distinctive competencies
• Selection of Businesses and Portfolio Management
› Buy and sell businesses
› Allocation of resources to business units for capital equipment,
R&D, etc.
 Corporate-level Strategy
Formulation Responsibilities
• Selection of Tactics for Diversification and Growth
› Choice among methods of diversification—internal venturing,
acquisitions, joint ventures
• Management of Resources
› Acquisition of resources and/or development of competencies
leading to a sustainable competitive advantage for the entire
corporation
› Hire, fire and reward business-unit managers
› Ensure that the business units (divisions) within the corporation are
well managed, including strategic management. Provide training
where appropriate
› Develop a high-performance corporate management structure
› Develop control systems to ensure that strategies remain relevant
and that the corporation continues to progress towards its goals
 Corporate-level Strategies

Concentration

Internal
Growth Vertical Integration

Mergers
Concentratio and
n Acquisitions Related
Diversification
Joint
Ventures

Unrelated
Diversification
 Advantages and Disadvantages of
Concentration
• Advantages • Disadvantages
› Allows an organization to
master one business
› Less strain on resources,
allowing more of an
opportunity to develop a
sustainable competitive
advantage
› Lack of ambiguity
concerning strategic
direction
› Often found to be a
profitable strategy,
depending on the industry
› Dependence on one area is
problematic if the industry
is unstable
› Primary product may
become obsolete
› Difficult to grow when the
industry matures
› Significant changes in the
industry can be very hard
to deal with
› Cash flow can be a serious
problem
 Reasons for Diversification
• Strategic Reasons
¤ Risk reduction through investments in dissimilar
businesses or less dynamic environments
¤ Stabilization or improvement in earnings
¤ Improvement in growth
¤ Use of excess cash from slower-growing traditional areas
(a form of organizational slack)
¤ Application of resources, capabilities or core
competencies to related areas
¤ Generation of synergy through economies of scope
¤ Use of excess debt capacity (also a form of organizational
slack)
¤ Ability to learn new technologies
¤ Increase in market power
 Reasons for Diversification
• Motives of the CEO
› Desire to increase the value of the firm
› Desire to increase personal power and status
› Desire to increase personal rewards such as salary and
bonuses
› Craving for a more interesting and challenging
management environment
Requirements for the Creation of Synergy
• Relatedness
› Tangible--same physical resources for multiple purposes
› Intangible--capabilities developed in one area can be used elsewhere
• Fit
› Strategic--matching of organizational capabilities--complementary
resources and skills (based on relatedness, as described above)
› Organizational--similar processes, cultures, systems and structures
¤ Dominant logic--the way managers deal with managerial tasks,
the things they value, and their general management approach
• Managerial actions to share resources or skills
• Benefits must exceed costs of integration
 Potential Sources of Synergy from
Related Diversification
• Operations Synergies
› Common parts designs: Larger purchased quantities allows
lower cost per unit
› Common processes and equipment: Combined equipment
purchases and engineering support allow lower costs
› Common new facilities: Larger facilities may allow economies
of scale
› Shared facilities and capacity: Improved capacity utilization
allows lower per unit overhead costs
› Combined purchasing activities: Increased influence leading to
lower costs, and lower cost shipping arrangements
› Shared computer systems: Lower per unit overhead costs and
can spread the risk of investing in higher priced systems
› Combined training programs: Lower training costs per
employee
Potential Sources of Synergy from
Related Diversification
• R&D / Technology
› Shared R&D programs: Spread overhead cost and risk of
R&D to more than one business
› Technology transfer: Faster, lower cost adoption of
technology at the second business
› Development of new core businesses: Access to
capabilities and innovation not available in the market
› Multiple use of creative researchers: Opportunities for
innovation across business via individual experience and
business analogy
 Potential Sources of Synergy from
Related Diversification
• Marketing
› Shared brand names: Build market influence faster and at lower
cost through a common name
› Shared advertising and promotion: Lower unit costs and tie-in
purchases
› Shared distribution channels: Bargaining power to improve
access and lower costs
› Cross-selling and bundling: Lower costs and more integrated
view of the marketplace
• Management
› Similar industry experience: Faster response to industry trends
› Transferable core skills: Experience with previously tested,
innovative strategies and skills in strategy and program
development
 Forces that Undermine Synergies
• Management Ineffectiveness
› Too little effort to coordinate between businesses means
synergies will not be created
› Too much effort to coordinate between businesses can
stifle creativity
• Administrative Costs
› Additional layers of management and staff add costs
› Executives in larger organizations are often paid higher
salaries
› Delays from and expense of meetings and planning
sessions necessary for coordination
› Extra travel and communications costs to achieve
coordination
 Forces that Undermine Synergies
• Poor Strategic Fit
› Relatedness without strategic fit decreases the opportunity
for synergy
› Overstated (or imaginary) opportunities for synergies
› Industry evolution that undermines strategic fit
› Overvaluing potential synergies often results in paying too
much for a target firm or in promising too much
improvement to stakeholders
• Poor Organizational Fit
› Incompatible cultures and management styles
› Incompatible strategies, priorities, and reward systems
› Incompatible production processes and technologies
› Incompatible computer and budgeting systems
 Unrelated Diversification
• Conglomerates
› Large, unrelated diversified firms
• Popularity of Unrelated Diversification in the 50s, 60s
and early 70s
› Rigid antitrust enforcement
› Financial theories supported the idea that risk could be reduced by
investing in businesses in unrelated businesses with uneven
revenue streams
• Most Research Suggests that Unrelated
Diversification is Not High Performing
› Places unusual demands on managers
› Trend is towards reducing diversification (refocusing)
› In spite of the negative evidence, some firms have been successful
with this strategy
 Mergers and Acquisitions
• M&A Basics
› Mergers occur any time two organizations combine into one
› Acquisitions occur when one firm buys another firm
› Most mergers are in the form of an acquisition, so these terms are often used as
synonyms
› M&As tend to depress profitability, reduce innovation and increase leverage, at
least in the short run
• Industry Consolidation
› Occurs as competitors merge together
› A dominant trend in the U.S. and elsewhere
• Corporate Raiders
› Engage in acquisitions, typically against the will of target companies (called
hostile)
› Hostile acquisitions tend to be more expensive
› May motivate target firm managers to be more responsive to stockholder
interests (reduce agency costs)
Problems with Mergers and Acquisitions
• High Costs
› High Premiums Typically Paid By Acquiring Firms
› Increased Interest Costs from Higher Leverage
› High Advisory Fees and Other Transaction Costs
› Poison Pills—things target companies do so they are less attractive to
takeover
• Strategic Problems
› High Turnover Among the Managers of the Acquired Firm
› Short-Term Managerial Distraction—takes managers away from the critical
tasks of the core businesses
› Long-Term Managerial Distraction—lose sight of the factors that lead to
success in their core businesses
› Less Innovation
› No Organizational Fit—cultures or systems don’t combine well
› Increased Risk—increased leverage. Also the risk of unsuccessful
management
 Successful Mergers and
Acquisitions
• Low debt
• Friendly negotiations
• Complementary resources (relatedness)
• Cultures and management styles are
similar (organizational fit)
• Post-merger sharing of resources
• Due diligence before merger
• Learning occurs
 Corporate-level Distinctive
Competencies
• Come from achieving shared advantage
across the businesses of a multibusiness firm
› Integrated managerial skills
¤ Attracting and retaining competent top managers
› Shared use of resources that are hard to acquire except
through experience
¤ A well-developed strategic planning system
› Shared use of resources that contribute significantly to
perceived customer benefits
¤ Excellent R&D
› Resources that can be widely applied across businesses
¤ Excellence in tax management
 Strategic Restructuring
• Retrenchment (Downsizing)
› Turnaround through workforce reductions, plant closings,
outsourcing, cost controls, etc.
› Downsizing is dangerous to the health of an organization
• Refocusing (Downscoping)
› Reducing diversification through selling off nonessential
businesses
¤ Divestiture--reverse acquisition
¤ Spin-off--current shareholders are issued stock
• Chapter 11 Reorganization
› Legal filing allowing protection from creditors and others
while problems are worked out
› Should probably be a strategy of last resort
 Strategic Restructuring
• Leveraged Buyouts
› Private purchase of a business unit by managers, employees, unions
or private investors
› High levels of debt
› Asset sales typically lead to a smaller, more focused firm
› Stifle innovation
• Changes to Organizational Design
› Switch to a new organizational structure
¤ More decentralized or more centralized, depending on needs
¤ Linked also to changes in the culture of a firm
› Reengineering involves radical redesign of core business processes
to achieve dramatic improvements in efficiency and quality
• These Restructuring Approaches are Often Combined
Boston Consulting Group (BCG) Matrix
High

Star
Business
Growth
Rate
Cash
Dog
Cow
Low

High Low

Relative Competitive Position (Relative Market Share)