Topic 7
Strategy Formulation
Asst Prof. Dr. Songporn Hansanti
1
Making Diversification Work
• What businesses should a
corporation compete in?
• How should these businesses be
managed to jointly create more
value than if they were freestanging
unit?
2
Making Diversification Work
• Diversification initiatives must create
value for shareholders
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Mergers and acquisitions
Strategic alliances
Joint ventures
Internal development
• Diversification should create synergy
Business
1
Business
2
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Synergy
• Related businesses (horizontal
relationships)
– Sharing tangible resources
– Sharing intangible resources
• Unrelated businesses (hierarchical
relationships)
– Value creation derives from corporate office
– Leveraging support activities
4
Related Diversification: Economies of
Scope and Revenue Enhancement
• Economies of scope
– Cost savings from leveraging core
competencies or sharing related activities
among businesses in the corporation
– Leverage or reuse key resources
• Favorable reputation
• Expert staff
• Management skills
• Efficient purchasing operations
• Existing manufacturing facilities
5
Leveraging Core
Competencies
• Core competencies
– The glue that binds existing businesses
together
– Engine that fuels new business growth
– Collective learning in a firm
– How to coordinate diverse production skills
– How to integrate multiple streams of
technologies
– How to market diverse products and services
Three Criteria of Core
Competencies
• Three criteria (of core competencies) that
lead to the creation of value and synergy
– Different businesses in the firm must be
similar in at least one important way related to
the core competence
– Not essential that products or services
themselves be similar
– Is essential that one or more elements in the
value chain require similar essential skills
– Is essential that one or more elements in the
value chain require similar essential skills
– Brand image is an example
Sharing Activities
• Corporations can also achieve synergy by
sharing tangible and value-creating
activities across their business units
– Common manufacturing facilities
– Distribution channels
– Sales forces
• Sharing activities provide two payoffs
– Cost savings
– Revenue enhancements
Related Diversification:
Market Power
• Two principal means to achieve synergy
through market power
– Pooled negotiating power
– Vertical integration
• Government regulations may restrict this
power
Pooled Negotiating Power
• Similar businesses working together can
have stronger bargaining position relative
to
– Suppliers
– Customers
– Competitors
• Abuse of bargaining power may affect
relationships with customers, suppliers
and competitors
Vertical Integration
•
In making decisions associated with vertical integration,
six issues should be considered:
1. Are we satisfied with the quality of the value that our
present suppliers and distributors are providing?
2. Are there activities in our industry value chain
presently being outsourced or performed
independently by others that are a viable source of
future profits?
3. Is there a high level of stability in the demand for the
organization’s products?
4. How high is the proportion of additional production
capacity actually absorbed by existing products or by
the prospects of new and similar products?
Vertical Integration (cont.)
• In making decisions associated with
vertical integration, six issues should be
considered:
5. Do we have the necessary
competencies to execute the vertical
integration strategies?
6. Will the vertical integration initiative
have potential negative impacts on our
stakeholders?
Unrelated Diversification: Financial
Synergies and Parenting
• Most benefits from unrelated
diversification are gained from vertical
(hierarchical) relationships
– Parenting and restructuring of businesses
– Allocate resources to optimize
– Profitability
– Cash flow
– Growth
– Appropriate human resources practices
– Financial controls
Example
• General Electric’s products and services include:
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Appliances
Aviation
Consumer Electronics
Electrical Distribution
Energy
Finance – Business; Consumer
Healthcare
Lighting
Media & Entertainment
Oil & Gas
Plastics
Rail
Security
Water
Source: www.ge.com
Corporate Parenting &
Restructuring
• Corporate Parenting
– Parenting—creating value within business units
• Experience of the corporate office
• Support of the corporate office
• Corporate Restructuring
– Find poorly performing firms
• With unrealized potential
• On threshold of significant positive change
Corporate Restructuring (Cont.)
• Corporate management must
– Have insight to detect undervalued companies
or businesses with high potential for
transformation
– Have requisite skills and resources to turn the
businesses around
• Restructuring can involve changes in
– Assets
– Capital structure
– Management
Portfolio Management
Key
Each circle
represents one of
the firm’s
business units
Size of circle
represents the
relative size of the
business unit in
terms of revenue
Portfolio Management (Cont.)
• Creation of synergies and shareholder value by portfolio
management and the corporate office
– Allocate resources (cash cows to stars and some
question marks)
– Expertise of corporate office in locating attractive firms
to acquire
• Creation of synergies and shareholder value by portfolio
management and the corporate office
– Provide financial resources to business units on
favorable terms reflecting the corporation’s overall
ability to raise funds
– Provide high quality review and coaching for units
– Provide a basis for developing strategic goals and
reward/evaluation systems
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
– New products
– New markets
– New technology
Business Strategy
Business Strategy
Focuses on improving competitive position of company’s products or
services within the specific industry or market segment
20
Porter’s Competitive Strategies
Competitive Strategy -•Low cost
•Differentiation
•Direct competition
•Focus on niche
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Porter’s Competitive Strategies
Generic Competitive Strategies -•Lower Cost strategy
•Greater efficiencies than competitors
•Differentiation strategy
•Unique/superior value, quality, features, service
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Porter’s Competitive Strategies
Competitive Advantage -•Determined by Competitive Scope
•Breadth of the target market
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Porter’s Competitive Strategies
Cost Leadership -•Low-cost competitive strategy
•Broad mass market
•Efficient-scale facilities
•Cost reductions
•Cost minimization
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Porter’s Competitive Strategies
Differentiation –
•Broad mass market
•Unique product/service
•Premiums charged
•Less price sensitivity
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Porter’s Competitive Strategies
Cost-Focus –
•Low-cost competitive strategy
•Focus on market segment
•Niche focused
•Cost advantage in market segment
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Cooperative Strategies
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Benefits of Strategic Alliances
Potential Benefits
of Strategic Alliances
Ease of
Market
Entry
Shared
Risk
Shared
Knowledge
and
Expertise
Synergy
and
Competitive
Advantage
28
Scope of Strategic Alliances
• Significant variation
– Comprehensive alliance
– Narrowly defined alliance
• Degree of collaboration depends
upon basic goals of each partner
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Types of Alliances
• Comprehensive
• Functional
– Production
– Marketing
– Financial
– Research and Development
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Implementation of Strategic
Alliances
• Selection of partners
• Compatibility
• Nature of potential partner’s
products or services
• Relative safeness of the alliance
• Learning potential of the alliance
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Joint Management
Considerations
• Shared management agreements
• Assigned arrangements
• Delegated arrangements
32
Shared Management Agreement
Partner 1
Both partners
participate actively
Partner 2
Alliance
33
Assigned Arrangement
Partner 1
One partner takes
primary responsibility
Partner 2
Alliance
34
Delegated Arrangement
Partner 1
Both partners delegate
management to the
joint venture’s
executives
Partner 2
Joint Venture
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Pitfalls of Strategic Alliances
Pitfalls
of Strategic Alliances
Incompatibility
of
partners
Access
to
Information
Distribution
of
Earnings
Loss
of
Autonomy
Changing
Circumstances
36
Beijing Jeep – A joint venture between
American Motors Company (part of Daimler
Chrysler) and Beijing Auto Works
37
Merger & Acquisition (M&A)
1.
2.
3.
4.
5.
6.
Technological change
Efficiency of operations
Globalization and freer trade
Changes in industry organization
New industries
Deregulation and regulation
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Merger
• เป็ นการรวมที่ไม่จาเป็ นต้องตั้งบริ ษทั ใหม่ ซึ่ งการรวมกันจะเป็ นตกลงกันว่าจะเลิก
บริ ษทั ใด แล้วแต่จะตกลงกัน
• เช่น บริ ษทั สปามหาวินาศ และ บริ ษทั สปาเทวาบรรลัย ต่างประกอบกิจการ ได้
รวมกิจการเข้าด้วยกัน เหลือเพียง บริ ษทั สปามหาวินาศ เพียงบริ ษทั เดียว
• ซึ่ งการรวมแบบนี้อาจจะเรี ยกได้วา่ Acquisition ซึ่ งเป็ นการซื้ อกิจการของบริ ษทั
อื่น
• อาจซื้ อเพียงทรัพย์สิน หรื อทั้งทรัพย์สินและหนี้สิน (โอนกิจการ)
• หรื ออาจเป็ นเข้าไปซื้ อหุ น้ เพื่อให้เพียงพอกับการเข้าไปได้บริ หารกิจการ (Take
Over)
39
Merger
• เป็ นการรวมที่ไม่จาเป็ นต้องตั้งบริ ษทั ใหม่ ซึ่งการรวมกันจะเป็ นตกลงกัน
ว่าจะเลิกบริ ษทั ใด แล้วแต่จะตกลงกัน
• เช่น บริ ษทั สปามหาวินาศ และ บริ ษทั สปาเทวาบรรลัย ต่างประกอบ
กิจการ ได้รวมกิจการเข้าด้วยกัน เหลือเพียง บริ ษทั สปามหาวินาศ เพียง
บริ ษทั เดียว
• ซึ่งการรวมแบบนี้อาจจะเรี ยกได้วา่ Acquisition ซึ่งเป็ นการซื้อ
กิจการของบริ ษทั อื่น
• อาจซื้อเพียงทรัพย์สิน หรื อทั้งทรัพย์สินและหนี้สิน (โอนกิจการ)
• หรื ออาจเป็ นเข้าไปซื้อหุน้ เพื่อให้เพียงพอกับการเข้าไปได้บริ หารกิจการ
(Take Over)
40
Consolidation or Amalgamation
• คือการรวมกิจการที่ต้ งั บริ ษทั ใหม่ และยกเลิกบริ ษทั เดิม
• บริ ษทั ใหม่น้ ีตอ้ งเป็ นชื่อใหม่ มีการออกหุน้ ใหม่ ผูถ้ อื หุน้ ของบริ ษทั เดิม
จะได้รับหุน้ สามัญของบริ ษทั ใหม่แทนของบริ ษทั เดิม
• เช่น บริ ษทั สู ดดมอ๊อกซิไดซ์ และ บริ ษทั เป่ าและดม ต่างประกอบ
กิจการผลิตยาดม ได้รวมกิจการเข้าด้วยกัน และจดทะเบียนใหม่ชอื่
บริ ษทั สู ดเป่ าและดม
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M&A Terminology
• Merger
– Negotiated deals
– Mutuality of negotiations
– Mostly friendly
• Restructuring — changes to improve
operations, policies, and strategies
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Types of Mergers
• Horizontal mergers
– Between firms in same business activity
– Rationale
• Economies of scale and scope
• Synergies (ex. combining of best practices)
– Government regulation due to potential
anticompetitive effects
• Vertical mergers
– Combinations between firms at different stages
– Goal is information and transaction efficiency
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M&A
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M&A Strategy
• Defines the long-term plans, policies
and culture of an organization
• Strategic planning is a dynamic process
that requires inputs from all segments
of the organization
• Acquisition and restructuring policies
and decisions should be part of the
company's overall strategic plans and
processes
• Ultimate responsibility for strategic
planning resides in the top executive
group
45
Alternative Strategy
Methodologies
• SWOT or WOTS UP – inventory and
analysis of organizational strengths,
weaknesses, environmental opportunities
and threats
• Top-down or Bottom-up – relate to
company forecasts vs. aggregation
segment forecasts
• Computer models – allow detail and
complexity
• Logical incrementalism – well-supported
moves from current bases
• Comparative histories – learn from the
experiences of others
46
Alternative Analytical
Frameworks
• Product life cycle – introduction, growth,
maturity, decline stages with changing
opportunities, threats
• Learning curve – costs decline with cumulative
volume experience (first mover advantage)
• Competitive analysis – industry, suppliers,
customers, complemetors, etc.
• Value chain analysis – seek to add product
characteristics valued by customers
• Cost leadership – low-cost advantages
47
Strategy Formulation
Approaches
• Boston Consulting Group Approach
– Historical emphasis: experience curve, product
life cycle, product portfolio balance
– Recent approaches
• Impact of the Internet and other innovations
• Performance measurements - cash flow
return on investment (CFROI)
• Michael Porter Approach (1980, 1985,
1987)
– Select attractive industry using “Five Forces”
– Develop competitive advantage through cost
leadership, product differentiation, or focus
– Develop attractive value chains
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Formulating a Merger
Strategy
• Requires continuing reassessment
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Industry analysis
Competitor analysis
Supplier analysis
Customer analysis
Substitute products
Complementors
Technology changes
Societal factors
Firm's strengths/weaknesses relative to
present/future industry conditions
49
Formulating a Merger
Strategy
• Grove (1996)
– Firm must adjust to six forces
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Existing competitors
Potential competitors
Complementors
Customers
Suppliers
Industry transformation
– Eclectic adaptive processes approach to
strategy
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Formulating a Merger
Strategy
• Business goals - general or specific, but
must be quantifiable to facilitate progress
assessment
– Size objectives
• Large enough to use fixed factors effectively
• Critical mass necessary to attain cost levels
for profitable operation at market prices
– Growth objectives - sales, assets, EPS, values
• To get favorable P/E multiple for shares
• To increase market to book value of shares
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Formulating a Merger
Strategy
• Business goals
– Stability objectives - two kinds of instability
• Large erratic fluctuations in total size and abrupt
program shifts (e.g., defense industry)
• Cyclical instability of durable goods industries
– Flexibility objectives - ability to operate in
variety of product markets and responsive to
consumers
• Breadth of capabilities, e.g., research,
manufacturing, marketing
• Technological breadth
• Stay close to customers
52
Formulating a Merger
Strategy
• Aligning firm to changing
environments
– Gap between objectives and potential
based on current capabilities
– Various approaches:
• Choose products related to needs of
customer that provide large markets
• Focus on technological bottlenecks
• Be at frontier of technology and aim for
attractive product fallout
• Emphasize economic criteria – ex. value
53
Formulating a Merger
Strategy
• Strategic planning and mergers
– Diversification strategy may be
necessary if firm must alter productmarket mix or capabilities to reduce or
close strategic gap
– Both involve evaluation of current
capabilities relative to those needed to
reach objectives
– Related diversification involves lower
risks
54
Trends of Strategic Alliances
in US
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ExxonMobil = Exxon + Mobil Oil
Hewlett-Packard ; with Compaq
Procter & Gamble buy Gillette
Adidas-Salomon acquire Reebok
Siemens; with Nokia
The Walt Disney Company acquiring Pixar
Google buys Youtube
Warner Bros. Entertainment & CBS
Corporation = The CW Television Network
55
EU
• DaimlerChrysler = Daimler Benz +
Chrysler
• BP with Amoco
• Alcatel + Lucent Technologies = AlcatelLucent
• Air France + KLM Royal Dutch Airlines =
Air France-KLM
• Lufthansa and SWISS
56
Japan
• Mitsubishi UFJ Financial Group
• Konica Minolta = Konica + Minolta
• SoftBank acquiring Vodafone Japan
• Sumitomo Mitsui Banking
Corporation = Sumitomo Bank +
Sakura Bank
57
Thailand
• EGV + Major = EGV-Major Cineplex
• Bilsstel + TG Fone
• LoxInfo + CS = CSLoxInfo
• GMM + True
• TMB + IFCT + DTDB
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Functional Strategy
Functional Strategy
The approach a functional area
takes to achieve corporate and
business unit objectives and
strategies by maximizing
resource productivity
59
Functional Strategy
Marketing Strategy –
–Pricing
–Selling
–Distribution
60
Functional Strategy
Marketing Strategy –
–Product development
•Line extension
61
Functional Strategy
Marketing Strategy –
–Advertising and promotion
•Push strategy
•Pull strategy
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Functional Strategy
Marketing Strategy –
–Pricing
•Skim pricing
•Penetration pricing
•Dynamic pricing
63
Functional Strategy
Financial Strategy –
–Leveraged buyout
–Reversed stock split
–Tracking stock
64
Functional Strategy
R&D Strategy –
–Technological leader
–Technological follower
–Open innovation
65
Functional Strategy
Operations Strategy –
–Job shop
–Connected line batch flow
–Flexible manufacturing systems
–Dedicated transfer lines
–Mass production
–Continuous improvement system
–Modular manufacturing
66
Functional Strategy
Purchasing Strategy –
–Multiple sourcing
–Sole sourcing
–Just-in-time (JIT)
–Parallel sourcing
67
Functional Strategy
Logistics Strategy –
–Centralization
–Outsourcing
–Internet
68
Functional Strategy
HRM Strategy –
–360 degree appraisal
69
Functional Strategy
Outsourcing errors –
–Activities that should not be
outsourced
–Wrong vendor selection
–Writing poor contract
–Overlooking personnel issues
–Hidden costs of outsourcing
–Failing to plan exit strategy
70
Proposed Outsourcing Matrix
71
Functional Strategy
Strategies to Avoid –
–3 Follow the leader
–Hit another home run
–Arms race
–Do everything
–Losing hand
72
Functional Strategy
Subjective Factors Affecting Decisions -–Management’s attitude toward risk
–Pressures from stakeholders
–Pressures from corporate culture
–Needs and desires of key managers
73
Strategic Choice
Avoiding the Consensus Trap -–Devil’s Advocate
–Dialectical Inquiry
74
Strategic Choice
Evaluation of Strategic Alternatives -–Mutual exclusivity
–Success
–Completeness
–Internal consistency
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