Corporate Strategies
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Learning Objectives
To understand:
• the responsibilities of corporate-level managers
• the types of corporate strategies, including
concentration, vertical integration and both related
and unrelated diversification
• merger and acquisition, joint venture, and internal
development strategies and their advantages and
disadvantages
• the appropriate use and interpretation of portfolio
models.
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Strategic Management Process
External and Internal
Analysis
Strategic
Direction
Strategy Formulation
(corporate and
business level)
Strategy Implementation
and Control
Strategic Restructuring
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Major Corporate-Level Strategy Formulation
Responsibilities
• Direction setting—Mission, vision, enterprise strategy, long-term goals
for the entire corporation
• Development of corporate-level strategy—Selection of broad approach
to corporate-level strategy: concentration, vertical integration,
diversification, international expansion. Selection of resources and
capabilities in which to build corporate-wide distinctive competencies
• Selection of businesses and portfolio management—Management of the
corporate portfolio. Emphasis given to each business unit via resource
allocations.
• Selection of tactics for diversification and growth–Internal venturing,
acquisitions and/or joint ventures
• Management of resources—Acquisition and/or development of
resources and competencies leading to sustainable competitive
advantage. Oversee development of business-level strategies in the
business units. Develop an appropriate corporate culture
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Corporate Strategies
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Concentration
Vertical Integration
Unrelated Diversification
Related Diversification
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Advantages of Concentration
• Allows a firm to master one business
• In-depth knowledge
• Easier to achieve competitive advantage
• Organizational resources under less strain
• Prevents proliferation of management levels and staff
functions
• Sometimes found more profitable than other strategies
(dependent on industry, of course)
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Disadvantages of Concentration
• Risky in unstable environments
• Product obsolescence and industry maturity
• Uneven cash flows
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The Vertical Supply Chain
Raw
Materials
Extraction
Primary
Manufacturing
Final
Product
Manufacturing
Wholesaling
Retailing
Vertical Integration: The extent to which an organization
is involved in multiple stages of the industry supply chain
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When to Vertically Integrate
Common reasons for vertical integration
• Increased efficiency
• Increased control over quality of supplies or the way the
product is marketed
• Better information about supplies or markets
• Greater opportunities for differentiation through
coordinated effort
• Opportunity to make greater profits by performing another
function in the vertical supply chain
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Transactions Costs and Vertical
Integration
Basic Proposition: Firms should buy what they need from the
market as long as transactions costs are low.
• Transactions costs are reflected by the time and resources
needed to create and enforce a contract to purchase goods
and services.
• If transactions costs are high, the market fails to provide the
best deal
• Transactions costs are high (the market fails) if:
› Highly uncertain future
› One or small number of suppliers
› One party to a transaction has more knowledge about the transaction than
the other
› An organization has to invest in an asset that can only be used to produce a
specific good or service (asset specificity)
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Unrelated Diversification
• Large, highly diversified firms are called
conglomerates
• Not a high performing strategy for most firms (with
a few notable exceptions) in industrialized nations
like the U.S.
• Difficult for a top manager to understand and
appreciate the core technologies, key success factors
and special requirements of each business area
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Related Diversification
• Based on similarities among products, services, markets or
resource conversion processes (technologies)
• May lead to synergy if:
›
Relatedness
¤ Tangible--same physical resources OR
¤ Intangible--capabilities developed in one area can be used in
other area) relatedness exists
›
Fit
¤ Strategic--complementary resources and skills
¤ Organizational—similar management processes, cultures,
systems and structures
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Diversification Methods
• Internal Ventures
• Mergers and Acquisitions
• Joint Ventures
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Internal Ventures
Internal ventures make use of the research and
development programs of the organization
• Provides high level of control over the venture
• Proprietary information need not be shared with
other firms
• All profits are retained by the venturing company
Disadvantages of internal ventures:
• Risk of failure is high
• They take a lot of time
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Mergers and Acquisitions
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Fast way to enter new markets
Acquire new products or services
Learn new technologies
Acquire needed knowledge and skills
Vertically integrate
Broaden markets geographically
Fill needs in the corporate portfolio
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Mergers and Acquisitions
Most research indicates that mergers and
acquisitions perform poorly:
•High premiums
•High turnover
•Increased interest costs
•Managerial distraction
•High advisory fees
•Less innovation
•Poison pills
•Lack of fit
•Increased risk
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Mergers that Don’t Work
• Large or extraordinary debt
• Overconfident or incompetent management
• Ethical concerns
• Changes in top management team and/or
organizational
• Inadequate analysis (due diligence)
• Diversification away from the firm’s core
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Mergers That Work
• Low-to-moderate debt
• High relatedness leading to synergy
• Friendly negotiations
• Continued focus on core strengths of firm
• Careful selection of and negotiations with target firm
• Strong cash or debt position
• Similar firm cultures and management styles
• Sharing resources across companies
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Strategic Alliances and Joint Ventures
• Resource sharing--marketing, technology, raw
materials and components, financial, managerial,
political
• Speed of entry
• Spread risk of failure
• Increase strategic flexibility
• Learn from venture partners
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Problems with Strategic Alliances
and Joint Ventures
• Only partial control and shared profitability
• High administrative costs
• Possible lack of fit
• Risk of opportunism
• Foreign joint ventures are even more risky due
to potential for miscommunications,
misunderstandings and lack of shared
knowledge about the constraints of the external
environment
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Portfolio Models
?
Hig
h
Busines
s
Growth
Rate
Lo
w
High
Low
Relative Competitive Position (Relative Market
Share)
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