Learning Objectives
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Understand the basic corporate-level strategies and their
strengths and weaknesses
Identify the factors that are necessary for a diversification
strategy to produce synergy
Analyze existing and suggest potential corporate-level
competencies for a firm
Suggest methods to avoid pitfalls and enhance the
probability of success in mergers and acquisitions
Understand the basic types of restructuring and how
restructuring can be successfully executed
Create a portfolio matrix for a corporation and understand
what it means
Corporate-level Strategy
Formulation Responsibilities
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Direction Setting
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Development of Corporate-level Strategy
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Establishment and communication of organizational mission,
vision, enterprise strategy and long-term goal
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
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Buy and sell businesses
Allocation of resources to business units for capital equipment,
R&D, etc.
Corporate-level Strategy
Formulation Responsibilities
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Selection of Tactics for Diversification and Growth
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Choice among methods of diversification—internal venturing,
acquisitions, joint ventures
Management of Resources
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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
Concentration
Mergers
and
Acquisitions
Vertical Integration
Related
Diversification
Joint
Ventures
Unrelated
Diversification
Advantages and Disadvantages of Concentration
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Advantages
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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
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Disadvantages
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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
Advantages and Disadvantages of Vertical Integration
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Internal Benefits
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Integration economies
can eliminate steps,
reduce duplication and
cut costs
Improved coordination
reduces inventorying
and other costs
Avoids time-consuming
tasks, such as price
shopping,
communicating design
details and negotiating
contracts
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Internal Costs
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Need for overhead to
coordinate vertical
integration
Burden of excess
capacity if not all output
is used
Poorly organized firms
do not enjoy enough
synergy to compensate
for the higher costs
Advantages and Disadvantages of Vertical Integration
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Competitive Benefits
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Avoid getting shut out of
the market for rare inputs
Improve marketing or
technological intelligence
Can create differentiation
through coordinated effort
Superior control of firm’s
market environment
Increased ability to create
credibility for new products
Synergies could be
created by coordinating
vertical activities carefully
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Competitive Dangers
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Obsolete processes may be
perpetuated
Reduces strategic flexibility due
to being “locked in” to a business
May link to unprofitable adjacent
businesses
Lose access to information from
suppliers or customers
May not be potential for synergy
because vertically integrated
businesses are so different
May use the wrong method of
vertical integration (i.e., full
integration instead of contracting)
Transactions Costs
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Transactions costs economics
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Study of economic transactions and their costs
Transactions costs are reflected by the time and
resources devoted to contract creation and
enforcement
Make or Buy Decisions
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Firms should usually buy what they need in the market
as long as they do not have to expend an undue
amount of time or other resources in contract creation
and enforcement
A market failure means that these costs are high and it
is in the best interests of the firm to vertically integrate
instead of buying from the market
Transactions Costs
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Transactions costs tend to be high when:
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The future is highly uncertain
There are only one or a small number of suppliers
One party to the transaction has superior information
Asset specificity--asset investment that can be used for
only one purpose
Transaction costs are high (market failure) when:
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Highly uncertain future
One or small number of suppliers
Knowledge differences
Asset specificity
Substitutes for Full Vertical Integration
 Taper
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Produce some in-house and buy the rest
 Quasi
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Integration
Integration
Purchase most of what you need from a
supplier in which the purchaser holds an
ownership stake (i.e., stock)
 Long-term
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Contracts
Helps achieve some of the benefits of vertical
integration, such as more assurance of supply
or more control over quality
Reasons for Diversification
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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
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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
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Tangible--same physical resources for multiple
purposes
Intangible--capabilities developed in one area
can be used elsewhere
 Managerial
actions to share resources or
skills
 Benefits must exceed costs of integration
Requirements for the Creation of Synergy
 Fit
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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
Potential Sources of Synergy from
Related Diversification
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Operations Synergies
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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
Potential Sources of Synergy from
Related Diversification
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Operations Synergies
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(Continues)
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
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R&D / Technology
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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
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Marketing
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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
Potential Sources of Synergy from
Related Diversification
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Management
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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
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Management Ineffectiveness
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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
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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
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Poor Strategic Fit
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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
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Incompatible cultures and management styles
Incompatible strategies, priorities, and reward systems
Incompatible production processes and technologies
Incompatible computer and budgeting systems
Unrelated Diversification
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Conglomerates
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Large, unrelated diversified firms
Popularity of Unrelated Diversification in the 50s,
60s and early 70s
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Rigid antitrust enforcement
Financial theories supported the idea that risk could
be reduced by investing in businesses in unrelated
businesses with uneven revenue streams
Unrelated Diversification
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Most Research Suggests that Unrelated
Diversification is Not High Performing
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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
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M&A Basics
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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
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Occurs as competitors merge together
A dominant trend in the U.S. and elsewhere
Mergers and Acquisitions
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Corporate Raiders
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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
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High Costs
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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
Problems with Mergers and Acquisitions
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Strategic Problems
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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
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Come from achieving shared advantage across the
businesses of a multi-business firm
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Integrated managerial skills
• Attracting and retaining competent top managers
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Shared use of resources that are hard to acquire except
through experience
• A well-developed strategic planning system
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Shared use of resources that contribute significantly to
perceived customer benefits
• Excellent R&D
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Resources that can be widely applied across businesses
• Excellence in tax management
Strategic Restructuring
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Retrenchment (Downsizing)
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Turnaround through workforce reductions, plant
closings, outsourcing, cost controls, etc.
Downsizing is dangerous to the health of an
organization
Refocusing (Downscoping)
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Reducing diversification through selling off nonessential
businesses
• Divestiture--reverse acquisition
• Spin-off--current shareholders are issued stock
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Chapter 11 Reorganization
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Legal filing allowing protection from creditors and others
while problems are worked out
Should probably be a strategy of last resort
Strategic Restructuring
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Leveraged Buyouts
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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
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Switch to a new organizational structure
• More decentralized or more centralized, depending on needs
• Linked also to changes in the culture of a firm
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Reengineering involves radical redesign of core
business processes to achieve dramatic improvements
in efficiency and quality
Boston Consulting Group (BCG) Matrix
High
Star
Business
Growth
Rate
Cash
Cow
Dog
Low
High
Low
Relative Competitive Position (Relative Market Share)
Major Concepts in Chapter 7
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Corporate-level strategy focuses on the selection
of businesses in which the firm will compete, and
on the tactics used to enter and manage those
businesses
 Primary corporate-level responsibilities include
establishing direction for the whole organization,
formulation of a corporate strategy, selection of
businesses, selection of growth tactics, and
resource management
 Concentration is associated with a focus on one
business area, which allows the company to
specialize; however, the firm is dependent on one
business for its growth and profitability
Major Concepts in Chapter 7
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Vertical integration allows a firm to become its own
supplier or customer, which can provide more
control over processes and quality. However, the
firm is still dependent on one business
 According to the theory of transaction costs
economics, firms should generally purchase what
they need from the market, unless transactions
costs are high.
 Unrelated diversification was popular in the past
due to financial theories and rigid antitrust
enforcement; however, unrelated firms are hard to
manage and there is a recent trend towards
refocusing
Major Concepts in Chapter 7
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Mergers and acquisitions are the quickest way to
diversify; however, they are fraught with
difficulties, and most of them fail to meet
expectations
 Restructuring approaches include retrenchment
(downsizing), refocusing (downscoping),
Chapter 11 reorganization, leveraged buyouts
(LBOs) and changes to organizational design