Corporate-Level Strategy and Long-Run profitability

Chapter 7

Corporate-Level

Strategy and Long-

Run profitability

Corporate-Level Strategy

• The principle concern:

– to identify the industry or industries a company should participate in to maximize long-run profitability

– Several options!!! DS!!!

Copyright © Houghton Mifflin Company. All rights reserved.

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Concentration on a Single Industry

• A company chooses to focus its resources and capabilities on competing successfully within the confines of a particular product market

• Examples of companies that pursue 1 strategy:

– McDonalds

– Starbuck’s


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Horizontal Integration

• The process of acquiring or merging with industry competitors to achieve the competitive advantage that comes with large size

• Merger- an agreement between two companies to pool their resources in a combined operation

• Acquisition - Occurs when a company uses capital resources to purchase another company.

• An increase in horizontal integration = an increased level of concentration in an industry


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Horizontal Integration

Advantages

– Lowers operating costs

– Increases product differentiation (can be accomplished through product bundling)

– Reduces rivalry within an industry

– Increases bargaining power over suppliers and buyers

Disadvantages

– Problems with merging cultures, managers and operations.

– Problems with the

Federal Trade

Commission if a company grows too large


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Horizontal Integration: EXERCISE

• Use the internet to research a company that has implemented Horizontal Integration.

– What prompted them to do this?

– Has their profitability increased?

– By producing more of their own ‘inputs’ has the firm truly reduced costs? Or is there economies of scale in the industry that they cannot capitalize on? Is this true in all industries or is this industry unique?


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Outsourcing Functional Activities

• Outsourcing of non-core functional activities

• Advantages- specialists,


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Vertical Integration

• Expanding operations into industries that produce inputs or into industries that use, distribute, or sell the company’s product

• A company can enter a new industry to increase its long-run profitability

• A company that concentrates on a single business may be missing out on the opportunity to create value through vertical integration


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Figures 7.1: Stages in the Raw-Materials-to-

Customer Value-Added Chain


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Figure 7.2: The Raw-Materials-to-Customer Value-

Added Chain in the Personal Computer Industry


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Figure 7.3: Full and Taper Integration


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Vertical Integration

Advantages

– Enables company to build barriers to new competition

– Facilitates investments in specialized assets

– Protects product quality

– Results in improved scheduling

Disadvantages

– May actually increase cost of inputs

– Suppliers have less incentive to be efficient

– Ties a company into old, obsolescent, and high cost technology


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Vertical Integration: EXERCISE

• Use the internet to research a company that has implemented Vertical Integration.

– What prompted them to do this?

– Has their profitability increased?

– By selling products to end users, do you think that they have cannibalized some of their market presence?


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Concentration on a

Single Industry (cont’d)

• Advantages

– Concentrates all resources and capabilities to strengthening its competitive position in one industry

• Disadvantages

– Vertical integration may be necessary

– May miss out on other opportunities to create more value and increase profitability


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Related Diversification

Exhibit 6.3


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“Growth does not always lead a business to build on success.

All too often it converts a highly successful business into a mediocre large business.”

- Richard Branson

“The corporate strategies of most companies have dissipated instead of created shareholder value.”

- Michael Porter


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Diversification

• A diversified company is one that operates in two or more industries in order to find ways to use distinctive competencies to increase the value of products in other industries to consumers and to increase long-run profitability

• A company may choose to diversify when they have excess resources

• Concept of related diversification and unrelated diversification


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Figure 7.5: Sharing

Resources at Procter & Gamble


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Diversification (cont’d)

• Diversification can help a company create value in 3 main ways:

– Permitting superior internal governance

– Transferring competencies among businesses

– Realizing economies of scope


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Figure 7.4: Transfer of

Competencies at Philip Morris


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Value-Adding Corporate Parents

Envisioning Strategic Intent Central Services and Resources

Focus

Clarity to external stakeholders

Clarity to business units

Intervention at Business Level

Monitor performance

Action to improve performance

Challenge/develop strategic ambitions

Coaching/training

Develop strategic capabilities

Achieve synergies

Investment

Scale advantages

Transferable management capabilities

Expertise

Provide expertise/services

Knowledge creation/sharing

Leverage

Brokering linkages/accessing external networks


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Value-Destroying Corporate Parents

• Bureaucracy

– Adds cost

– Hinders responsiveness

• Buffer from reality

– Financial safety net

• Diversity and size

– Lack of clarity on overall vision

• Managerial ambition

– Empire building


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Portfolio managers, synergy managers and parental developers

Exhibit 6.6


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Restructuring

• Restructuring- implementing strategies for reducing the scope of the company by removing exiting business areas

• Why restructure?

– Because the stock of highly diversified companies is often assigned a lower valuation relative to earnings than stocks of less diversified enterprises

– In an attempt to boost returns to shareholders


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Restructuring (cont’d)

• Restructuring can be beneficial due to diminished advantages of vertical integration or diversification

• Restructuring can be a reaction to:

– Managers pursuing too much diversification

– Diversification for the wrong reasons

– Failed Acquisition


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“The very best takeovers are thoroughly hostile. I’ve never seen a really good company taken over.

I’ve only seen bad ones.”

-

James Goldsmith

© RoyaltyFree/ Stockdisc/ Getty Images


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Exit Strategies

• Three main exit strategies:

– Divestment- most favorable

– Harvest- only works under specific conditions

– Liquidation- least favorable


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Divestment

• Selling a business unit to the highest bidder

• A company can sell to:

– Independent Investors

– Other Companies


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Management Buyout

• The managers of a business unit may be interested in purchasing it and assuming the high risk associated with the purchase

• Management often purchases a business unit through the sale of high-yield bonds


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Harvest

• Halting investments in order to maximize shortto-medium term cash flow

• If employees catch on, morale can sink very quickly and the strategy may fail


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Liquidation

• Shutting down the operation of a business or business unit

• Least attractive strategy because the company is required to write off its investments in the unit that is shutting down


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Further readings and Questions

• Study the M & A strategies of BP

• Study the Outsourcing strategies of some good companies such as BP


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Corporate Portfolio Management

• Portfolio balance

– Markets

– Organisation’s needs

• Attractiveness of business units

– Profitability

– Growth rates

• Portfolio ‘fit’

– Synergies between business units

– Synergies with corporate parent


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The Growth Share (or BCG) Matrix

Exhibit 6.8


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Public Sector Portfolio Matrix

Source: J.R. Montanari and J.S. Bracker, Strategic Management Journal, vol. 7, no. 3 (1986), reprinted by permission of

John Wiley & Sons Ltd.

Exhibit 6.9


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Indicators of SBU Strength and Market

Attractiveness

Exhibit 6.10a


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Market Attractiveness/SBU Strength Matrix

Exhibit 6.10b


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Strategy Guidelines Based on Directional

Policy Matrix

Exhibit 6.10c


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International investment opportunities based on the directional policy matrix

Source: Harrel, G.D. and R.D. Kiefer (1993), ‘Multinational market portfolio in global strategy development’, International

Marketing Review 10 (1); Phillips, C., I. Duole, and R. Lowe, International Marketing Strategy, Routledge 1994, pp. 137–8.

Exhibit 6.10d


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References

• Essential of Strategic Management, Chapter 7

• Some topics in the last few slides taken from

Exploring Corporate Strategy- 7 th Edition-

Chapter 06


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Corporate-Level Strategy and Long-Run profitability

Chapter 7

Corporate-Level Strategy

Concentration on a Single Industry

Horizontal Integration

Horizontal Integration

Horizontal Integration: EXERCISE

Outsourcing Functional Activities

Vertical Integration

Figure 7.3: Full and Taper Integration

Vertical Integration

Vertical Integration: EXERCISE

Concentration on a

Single Industry (cont’d)

Related Diversification

“The corporate strategies of most companies have dissipated instead of created shareholder value.”

Diversification

Figure 7.5: Sharing

Resources at Procter & Gamble

Diversification (cont’d)

Figure 7.4: Transfer of

Competencies at Philip Morris

Value-Adding Corporate Parents

Restructuring

Restructuring (cont’d)

Exit Strategies

Divestment

Management Buyout

Harvest

Liquidation

Further readings and Questions

Corporate Portfolio Management

The Growth Share (or BCG) Matrix

Public Sector Portfolio Matrix

International investment opportunities based on the directional policy matrix

References

Related documents

Products

Support

Corporate-Level Strategy and Long-Run profitability

Chapter 7