1 Unit III Strategy Formulation Corporate level strategy

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Unit III: Strategy Formulation – Corporate level strategy: • A) Growth-Concentration, Horizontal, Vertical, B) Diversification- Concentric, conglomerate. C) Expansion through Cooperation; Merger, Acquisitions, Joint ventures & strategic alliances D) Stability Pause/proceed with caution, No change, Profit strategies. E) Retrenchment – Turnaround, Captive Company Strategy, Selling out Bankruptcy, Liquidation. 2

Internal and External Analysis Strategic Direction Strategy Formulation (corporate and business level) Strategy Implementation and Control Strategic Restructuring 3

Entering New Businesses • WHY? �Does business fit? ¤ Financially ¤ Strategically ¤ Culturally �If not in this business today, would we want to get into it now? • HOW? �Acquisition �Internal start-up �Joint ventures

Major Corporate-Level Strategy Formulation Responsibilities • Direction setting—Mission, vision, ethics, 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 competencies leading to sustainable competitive advantage. Oversee development of business-level strategies in the business units. Develop an effective management and organizational structure. 5

Corporate Strategies • Concentration • Vertical Integration • Unrelated Diversification • Related Diversification 6

Corporate-Level Strategies • Valuable • Concentric Diversification • strengths • Firm • Status • Corporate • (Economies • growth of Scope) • Conglomerate • strategies • Corporate • Diversification • stability • (Risk Mgt. ) • strategies • Critical • Abundant • weaknesses • Corporate • retrenchment • Can still go for business-level • strategies growth (economies of scale) • Environmental Status • Critical

The BCG “Portfolio” Matrix • Market Share • High • Stars • Low • Question Marks • High • ? • Anticipated • Growth • Rate • Low • Cash Cows • ? • Dogs

Business Level Strategy • How do we support the corporate strategy? • How do we compete in a specific business arena? • Three types of business level strategies: �Low cost producer �Differentiator �Focus • Four areas of focus �Generate sustainable competitive advantages �Develop and nurture (potentially) valuable capabilities �Respond to environmental changes

A Simple Organization Chart (Single Product Business) • Business • Level • Strategy • Research and • Development • Functional • Level • Strategy • Manufacturing • Marketing • Human • Resources • Finance

A Simple Organization Chart (Single Product Business) • Business • Level • Strategy • Research and • Development • Functional • Level • Strategy • Manufacturing • Marketing • Human • Resources • Finance

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) 12

Disadvantages of Concentration • Risky in unstable environments • Product obsolescence and industry maturity • Cash flow problems 13

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 14

When to Vertically Integrate Common reasons for vertical integration • 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 15

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) 16

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 appreciate the core technologies, key success factors and special requirements of each business area 17

Related Diversification • Based on tangible and intangible relatedness • In theory, can lead to synergy (but synergy is often illusive) • Often a higher performing strategy than unrelated diversification (lower risk and higher profitability) • Can lead to corporate-level distinctive competencies 18

Value-Creating Diversification: Related Strategies Proctor and Gamble • Provides branded consumer goods products worldwide • 3 GBUs �Beauty GBU ¤ Beauty segment ¤ Grooming segment �Health and Well-Being GBU ¤ Health Care segment ¤ Snacks, Coffee, and Pet Care segment �Household Care GBU ¤ Fabric Care and Home Care segment ¤ Baby Care and Family Care segment 19

Value-Creating Diversification: Related Strategies Johnson and Johnson • Engages in the research and development, manufacture, and sale of various products in the health care field worldwide • 3 segments �Consumer segment ¤ Products for baby care, skin care, oral care, wound care, and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products �Pharmaceutical segment ¤ Products for anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology, and virology �Medical Devices and Diagnostics segment ¤ Products for circulatory disease management, orthopaedic joint reconstruction and spinal care, wound care and women’s health, minimally invasive surgical, blood glucose monitoring and insulin delivery, and diagnostic products, as well as disposable contact lenses 20

Value-Creating Diversification: Related Strategies Campbell Soup Company • Engages in the manufacture and marketing of branded convenience food products worldwide • 4 segments �U. S. Soup, Sauces, and Beverages �Baking and Snacking �International Soup, Sauces, and Beverages �North America Foodservice 21

Portfolio Analysis • Requires the continual evaluation of a firms portfolio of business units • This involves: �Assessing the attractiveness of the industries the firm competes in �Assessing the competitive strength of a firm's business units �Checking the competitive advantage potential of sharing activities and/or transferring competencies across business units �Checking the potential for capturing financial economies 22

Portfolio Analysis • Best Case Scenario: �All of a firm's business units compete in attractive industries and have strong competitive positions and �There ample opportunities to capture economies of scope and/or financial economies • Useful Tools for Portfolio Analysis Include: �Nine cell industry attractiveness and competitive strength matrix �BCG growth share matrix 23

Portfolio Analysis • Nine cell industry attractiveness and competitive strength matrix 24

Portfolio Analysis • BCG growth share matrix 25

Requirements for Synergy Creation Relatedness • Tangible--same physical resources for multiple purposes • Intangible--capabilities developed in one area can be used elsewhere (continued) 26

Requirements for Synergy Creation • Fit • Strategic--matching of organizational capabilities-complementary resources and skills • Organizational--similar processes, cultures, systems and structures • Managerial actions to share resources and skills • Benefits must outweigh costs of integration 27

Diversification Methods • Internal Ventures • Mergers and Acquisitions • Joint Ventures 28

Evaluation of Diversified Firms • Identify present corporate strategy � extent and type of diversification � geographic scope � new acquisitions � recent divestitures

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 30

Mergers and Acquisitions Mergers and acquisitions are sometimes seen as a way to “buy” innovation rather than having to produce it inhouse: • 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 31

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 32

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 33

Mergers That Work • Strong relatedness • Friendly negotiations • Low-to-moderate debt • 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 34

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 35

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 36

Portfolio Models High Business Growth Rate Low High Low Relative Competitive Position (Relative Market Share) 37