Selecting Corporate-Level Strategy Chapter 8

1. Selecting Corporate-Level StrategyChapter 8 Miles A. Zachary MGT 4380

2. Concentration Strategies • Concentration strategies involve trying to compete only in a single industry • Market Penetration-firm attempts to gain additional market share in their existing market with existing products • Most firms rely on crafty advertising to attract new customers • Market Development-firm attempts to sell existing products in a new market • Firms can enter new retail channels and/or geographical regions • Product Development-involves creating new products to serve existing markets • New products vary in their relatedness to existing products

3. Horizontal Integration • Beyond a firm’s own efforts, firm’s can horizontally integrate with other firms and competitors • Horizontal integration involves merging with or acquiring other firms • Acquisitions occur when one firm purchases another • Generally, the purchased company is smaller and possess resources and/or capabilities a firm needs or wants • Mergers occur when two (or more) firms join • Typically, firms are similarly sized and stand to gain an efficiency through merging

4. Horizontal Integration • Horizontal integration can be attractive for several reasons: • Can lower costs and increase economies scale • Increase stock of strategic resources • Access to valuable distribution channels • However, horizontal integration has its challenges: • Can destroy shareholder wealth • Meshed cultures may conflict • Resources acquired may have been overpriced • Executives should approach horizontal integration carefully since many M&As are costly failures

5. Vertical Integration • In vertical integration, a firm attempts to become involved in new portions of a value chain • Vertical integration is attractive when a firm’s suppliers or buyers have considerable power over the firm • The attractiveness of vertical integration is compounded when a suppliers and/or buyers are highly profitable • Firms can either integrate into a new market on their own or through a merger/acquisition • TCE argues that firms vertically integrate when transaction costs rise above a tolerable threshold • Oil companies remain some of the most vertically-integrated firms in business

6. Vertical Integration • Advantages • Firms may be able to better understand their upstream or downstream business • Greater control over processes/customize operations • Disadvantages • Expanding firm operations can take a firm into drastically different businesses; operations outside firm capabilities • Can create complacency • Some firms try to circumvent this problem by making subsidiaries compete with outside contractors

7. Backward Vertical Integration • Backward vertical integration typically involves a firm moving backward in the value chain • Executives may backward integrate if they feel a firm’s suppliers have too much power • Ex.-For many years, Ford relied on a subsidiary to manufacture basic vehicle components

8. Forward Vertical Integration • Forward vertical integration refers to a firm moving further down a value chain • Executives may consider forward vertical integration when buyers have too much power • Ex.-In the early 1990’s, Ford felt pressure from large rental car companies to lower their prices; in response, Ford forward-integrated by acquiring Hertz

9. Diversification Strategies • Diversification strategies are used by firms to enter new industries • Vertical integration = firm move into a new part of the value chain • Diversification = firm move to a new value chain • Many firms diversify through mergers and acquisitions • Three (3) questions for diversification • How attractive is the industry? • What is the cost of industry entry? • Will the new unit and the parent firm be better off?

10. Related Diversification • Related diversification involves diversifying into an industry similar to the firm’s existing industry or industries • A related diversification strategy allows a firm to leverage their core competencies • Core competencies are skill-sets unique to a firm that are difficult for competitors to imitate and contribute to benefits enjoyed by customers within each business • Ex.-Disney’s purchase of ABC broadcasting proved successful

11. Unrelated Diversification • Unrelated diversification involves a firm entering an industry with little to no similarity with their existing industry • Unrelated diversification is a risky strategy since firms are expanding (expending resources) into a market that is unfamiliar • Firm may lack the sufficient resources and capabilities to be successful • Ex.-Starbucks coffee had considerable trouble expanding into the furniture industry

12. Retrenchment • Retrenchment involves a firm eliminating or scaling back one or more business units • Similar to trench warfare, retrenchment is often preferable to loosing the entire firm • Firms often retrench through laying-off employees • Retrenchment allows a firm to save money to remain competitive

13. Restructuring/Divestment • When executives need stronger strategies to remain competitive, they may turn to divestment • Divestment involves selling-off one or more of a firm’s business unit(s) • Reversing a forward integration strategy-divesting a business unit later in the value chain • Ex.-Ford sold Hertz after forward integrating with them in the early 1980’s • Reversing a backward integration strategy-divesting a business unit earlier in the value chain • Ex.-GM sold Delphi Automotive Systems, a previously in-house business unit responsible for making auto parts

14. Restructuring/Divestment • Divestment can be useful to unlock hidden shareholder value of unrelated diversified firms • Investors seldom understand the motivation for unrelated diversification • By breaking up such firms, investors may be more likely to invest in each firm • Ex.-Fortune Brands is attempting to divest three business units (spirits, household goods, and golf equipments) into three individual firms “in the interest of long-term shareholder value” • Other times, firms must accept that a business unit has no value and liquidate assets

15. Portfolio Planning • Determining the right corporate strategy for heavily diversified firms is very difficult • Executives use portfolio planning strategies to determine which units to grow, shrink, and eliminate • Portfolio planning helps executives determine how business units are fairing in their industries • The Boston Consulting Group (BCG) matrix is a well-known and popular typology for categorizing and prioritizing business units

16. BCG Matrix • Business units are categorized along two (2) different dimensions • Market share • Market growth • Business units with: • High market share/low market growth = cash cows • High market share/high market growth = stars • Low market share/low market growth = dogs • Low market share/high market growth = question marks • Profits from cash cows should be invested in stars • Dogs should be eliminated or divested • Question marks should be evaluated whether to be invested in (stars) or eliminated (dogs)

17. BCG Matrix