CORPORATE LEVEL STRATEGY

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CORPORATE LEVEL STRATEGY

Making Diversification Work

Diversification
The process of firms expanding their operations by entering new businesses.

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CORPORATE LEVEL STRATEGY

Making Diversification Work

In which businesses should a corporation compete? How should these businesses be managed to jointly create more value than if they were freestanding units?

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CORPORATE LEVEL STRATEGY

Making Diversification Work

Diversification initiatives must create value for shareholders
Mergers and acquisitions Strategic alliances Joint ventures Internal development

Diversification should be synergistic

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CORPORATE LEVEL STRATEGY

Making Diversification Work

Related businesses (horizontal relationships)
Sharing tangible resources

Sharing intangible resources

Unrelated businesses (hierarchical relationships)

Value creation derives from corporate office Leveraging support activities

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CORPORATE LEVEL STRATEGY

Related Diversification
A firm entering a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power

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CORPORATE LEVEL STRATEGY

Economies of Scope
Cost savings from leveraging core competencies or sharing related activities across businesses in a corporation

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CORPORATE LEVEL STRATEGY

Core Competencies
A firms strategic resources that reflect the collective learning in the organization

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CORPORATE LEVEL STRATEGY

Core Competencies
Core competencies reflect the collective learning in a firm:
How to coordinate diverse production skills How to integrate multiple technologies How to market diverse products and services

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CORPORATE LEVEL STRATEGY

Core Competencies
Core competencies must enhance competitive advantages by creating superior customer value Different businesses in the firm must be similar in at least one important way related to the core competence Core competencies must be difficult for competitors to imitate or find substitutes

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CORPORATE LEVEL STRATEGY

Sharing Resources
Corporations can also achieve synergy by sharing tangible and value-creating resources across their business units
Common manufacturing facilities Distribution channels

Sales forces

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CORPORATE LEVEL STRATEGY

Sharing Resources
Sharing activities provide value in two primary ways:
Cost savings Revenue enhancements

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CORPORATE LEVEL STRATEGY

Market Power
Firms abilities to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investment.

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CORPORATE LEVEL STRATEGY

Market Power
Pooled Negotiating Power
The improvement in bargaining position relative to suppliers and customers

Vertical Integration
an expansion or extension of the firm by integrating preceding or successive production processes

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CORPORATE LEVEL STRATEGY

Pooled Negotiating Power

Similar business units working together can have stronger bargaining position relative to:
Suppliers Customers Competitors

Abuse of bargaining power may negatively affect relationships with customers, suppliers and competitors
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CORPORATE LEVEL STRATEGY

Vertical Integration

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CORPORATE LEVEL STRATEGY

Vertical Integration
Benefits
A secure source of raw materials or distribution channels. Protection of and control over valuable assets. Access to new business opportunities.

Simplified procurement and administrative procedures

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CORPORATE LEVEL STRATEGY

Vertical Integration
Risks
Costs and expenses associated with increased overhead and capital expenditures Loss of flexibility resulting from large investments Problems associated with unbalanced capacities along the value chain Additional administrative costs associated with managing a more complex set of activities
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CORPORATE LEVEL STRATEGY

Making Vertical Integration Decisions

Is the company satisfied with the quality and value provided by our present suppliers and distributors? Are there activities in our value chain presently being outsourced or contracted to others that could be internalized to increase profit? Is there a high level of demand stability and future growth for the organizations products?

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CORPORATE LEVEL STRATEGY

Making Vertical Integration Decisions

Do we have the necessary competencies to execute the vertical integration strategies? Will the vertical integration initiative have potential negative impacts on our stakeholders?

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CORPORATE LEVEL STRATEGY

Transaction Costs
Contract or outsourcing can result in continuing transaction costs that have to be factored into the benefits of vertical integration
Search costs
Negotiating costs Contract development costs

Monitoring and enforcement costs

These costs must be compared to the added administrative costs associated with vertical integration
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CORPORATE LEVEL STRATEGY

Unrelated Diversification
Entering a different business that has little horizontal interaction with other businesses of a firm.

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CORPORATE LEVEL STRATEGY

Corporate Parenting and Restructuring

Parenting advantage
Positive contributions of corporate administration to a new business as a result of expertise and support provided

Corporate Restructuring
Corporate administration making substantial changes to the assets, capital structure, and/or management in a new business

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CORPORATE LEVEL STRATEGY

Corporate Restructuring
Corporate management must have:
Insight to detect undervalued companies or businesses with high potential for transformation Required skills and resources to turn the businesses around

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CORPORATE LEVEL STRATEGY

Corporate Restructuring
Can involve changes in
Assets Capital / Financial Structure Management

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CORPORATE LEVEL STRATEGY

Portfolio Management
Assessing the competitive position of a portfolio of businesses within a corporation, Developing strategic alternatives for each business Identifying priorities for the allocation of resources across the businesses

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CORPORATE LEVEL STRATEGY

Portfolio Matrix (Boston Consulting Group)

BUSINESS REVENUE

$$$

BUSINESS UNITS

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CORPORATE LEVEL STRATEGY

Portfolio Management
Develop corporate expertise in identifying acquisition candidates that complement existing businesses or meet corporate growth objectives Determine most efficient allocation of corporate resources to support new businesses

Determine optimal capital allocation to fund all the businesses in the portfolio
Provide high quality oversight and support for units

Develop appropriate strategic goals and performance management systems

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CORPORATE LEVEL STRATEGY

Means to Achieve Diversification

Acquisitions or mergers Pooling resources of other companies with a firms own resource base
Joint venture

Strategic alliance

Internal development

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CORPORATE LEVEL STRATEGY

Mergers and Acquisitions

A means of obtaining valuable resources that can help an organization expand its product offerings and services (integration) Can lead to consolidation within an industry and can force other players to merge Provide new market segments or increased market share through acquisitions

Faster form of diversification than internal development or integration

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CORPORATE LEVEL STRATEGY

Mergers and Acquisitions

Limitations / Risks
Take-over premiums can be high, decreasing return on investment Competing firms may be able to imitate any advantages realized, or copy synergies that result from the M&A There can be many organizational cultural issues that may counter the intended benefits from M&A endeavors.

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CORPORATE LEVEL STRATEGY

Strategic Alliances and Joint Ventures

Joint Ventures involve two or more partners creating a new corporate entity, with each partner contributing equity and/or assets Strategic Alliances are cooperative agreements or relationships between separate companies
Formal (contractual agreements) Informal relationship

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CORPORATE LEVEL STRATEGY

Strategic Alliances and Joint Ventures

Introduce successful product or service into a new market
Partner provides marketing expertise or existing market development

Partner firms can reduce manufacturing (or other) costs in the value chain
Pool capital, value-creating activities, facilities

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CORPORATE LEVEL STRATEGY

Strategic Alliances and Joint Ventures

Develop or incorporate new technologies
Use expertise of two or more companies to bring technology to market Develop products technologically beyond the capability of the companies acting independently

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Strategic Alliances and Joint Ventures - Downsides

Improper partner match
Each partner must bring desired complementary strengths to partnership Strengths contributed by each should be unique

Partners must be compatible organizationally

Partners must trust one another

Partnership agreements must be specific and cover contingencies
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CORPORATE LEVEL STRATEGY

Managerial Motives Can Erode the Value of Acquisitions

Growth for growths sake

Egotism (win at all costs mentality)

Anti-takeover tactics
Greenmail Golden parachute Poison pills

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CORPORATE LEVEL STRATEGY

Internal Development
Allows companies to capture all the value of product development without having to pay acquisition premiums or share profits with partners

More time consuming to implement than acquisition or strategic partnership with wellpositioned company Firm must have all the internal capabilities tangible and intangible resources to effectively implement
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CORPORATE LEVEL STRATEGY

Case Analysis: Toyotas Diversification into Home Manufacturing

Toyota extended its automobile expertise into factory-built, high quality manufactured homes in Japan
Homes are 85% completed at the factory in modules for final erection at the home site Toyota applied its manufacturing principles, such as JIT, and continuous improvement systems to efficiently build custom modular homes

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CORPORATE LEVEL STRATEGY

Case Analysis: Steve Jobs Discusses Apples Core Competence

Apple doesnt enter businesses where it cannot control or own the primary technology
For all of Apples products, this translates to complete control over the development of the unique software employed in its devices Apple become so adept at developing the unique operating systems and software for its devices that is has very few competitors who can match the companys expertise

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CORPORATE LEVEL STRATEGY

Case Analysis: American Idol Far More Than Just a Television Show
German media giant Bertlesmann owns numerous widely-popular TV shows, such as American Idol
Bertlesmann leveraged its early success with American Idol by duplicating it in over 30 countries In each country, the American Idol format is customized to accommodate cultural differences, achieving similar popularity as in the US Bertlesmann has increased its revenue streams from American Idol through licensing broadcasting rights, product merchandise, CDs and concerts
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CORPORATE LEVEL STRATEGY

Case Analysis: How 3Ms Efforts to Increase Market Power Backfired

3M was subject to multiple class-action lawsuits by LePages over alleged unfair retail bundled rebates over 3Ms tape products 3M offered bundled rebates to major retailers who exceeded high sales targets for each of six 3M product lines

LePages argued that the rebate volumes were so large that retailers would exclude offering any competing product
LePages was 3Ms only significant competitor in these markets LePage asserted that 3Ms strategy was not only to reward large volume buyers, but to purposefully eliminate LePages as a competitor The courts found in favor of LePages and awarded treble damages
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CORPORATE LEVEL STRATEGY

Case Analysis: Vertical Integration at Shaw Industries

Shaw Industries is a dominant carpet manufacturer in the US, owned by Berkshire Hathaway
Shaw has achieved success through a high degree of backward and forward integration

Through vertical integration, Shaw has developed a high degree of cost control
Shaw has integrated backward to produce a significant volume of polypropylene fiber used in its carpets, limiting its exposure to supplier pressure The company has integrated forward to acquire large floorcovering retailers in an effort to control retail pricing

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CORPORATE LEVEL STRATEGY

Case Analysis: Campbell Soup Divests Godiva to Focus on its Core Business
Campbell Soup sold its Godiva Chocolate business in 2007
Godiva had been a profitable brand with high growth potential Campbell Soup sold the company because it didnt fit the corporate focus on offering nutritious products and focus on simple meals

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CORPORATE LEVEL STRATEGY

Case Analysis: Crowdsourcing Krafts Strategic Alliance With a Bagel Maker

Kraft Foods seeks out small businesses and entrepreneurs with products and inventions that might be compatible with Krafts market focus Kraft has a website www.innnovatewithkraft.com to provide a forum of communication about ideas from inventors and innovative entrepreneurs Through this process, Kraft was approached by a specialty bagel maker that invented, and manufactured on a small scale, a cream cheese filled bagel Kraft had been attempting to create a similar product, but had encountered process problems producing the filled bagel Through a partnership with the small company, Kraft was able to develop the product and brand it for the national market
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CORPORATE LEVEL STRATEGY

Case Analysis: The Ritz-Carlton Leadership Center A Successful Internal Venture

Ritz-Carlton has a renowned reputation for quality and service The company has won the Malcolm Baldrige National Quality Award twice In 2000, the company established the Ritz-Carlton Leadership Center, offering leadership development programs, benchmarking seminars and workshops to outside companies The program has become extremely successful and attracted companies from many industries Workshop topics include leadership, employee development, customer service and quality The Leadership Center has produced significant revenues for Ritz-Carlton
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CORPORATE LEVEL STRATEGY

Case Analysis: Cornelius Vanderbilt Going to Great Lengths to Correct a Wrong!

In the mid-1800s Cornelius Vanderbilt, owner of the steamship line Accessory Transit Company, took an extended vacation to Europe aboard his yacht
Upon his return from Europe, he discovered that two of his business associates, to whom he had granted power of attorney over the steamship business, had taken over this company Vanderbilt invested to create a competing steamship business and put his former associates out of business, regaining control of his orignal company

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CORPORATE LEVEL STRATEGY

Case Analysis: How Anti-Takeover Measures May Benefit Multiple Stakeholders Not Just Management
Anti-takeover measures can often be interpreted as means of protecting incumbent management, rather than shareholders and other stakeholders As a result of some hostile takeover attempts, numerous states have put in place legislation favoring stakeholders during takeover litigation Examples of situations where stakeholder interests (employees) were preserved include the hostile takeover attempt to purchase Dayton-Hudson (now Target) Stakeholder interests (customers) were ignored during Oracles extended hostile takeover of PeopleSoft and the acquisition became strictly a financial deal
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