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11
CORPORATE LEVEL STRATEGY
CORPORATE LEVEL STRATEGY
STRATEGIC MANAGEMENT BUAD 4980
STRATEGIC MANAGEMENT BUAD 4980
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Making Diversification WorkMaking Diversification Work
Diversification
The process of firms expanding their operations by entering new businesses.
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Making Diversification WorkMaking 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 STRATEGYCORPORATE LEVEL STRATEGY
Making Diversification WorkMaking 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 STRATEGYCORPORATE LEVEL STRATEGY
Making Diversification WorkMaking 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 STRATEGYCORPORATE LEVEL STRATEGY
Related DiversificationRelated 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 STRATEGYCORPORATE LEVEL STRATEGY
Economies of ScopeEconomies of Scope
Cost savings from leveraging core competencies or sharing related activities across businesses in a corporation
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Core CompetenciesCore Competencies
A firm’s strategic resources that reflect the collective learning in the organization
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Core CompetenciesCore 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 STRATEGYCORPORATE LEVEL STRATEGY
Core CompetenciesCore 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 STRATEGYCORPORATE LEVEL STRATEGY
Sharing ResourcesSharing 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 STRATEGYCORPORATE LEVEL STRATEGY
Sharing ResourcesSharing Resources
Sharing activities provide value in two primary ways:
Cost savings
Revenue enhancements
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Market PowerMarket 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 STRATEGYCORPORATE LEVEL STRATEGY
Market PowerMarket 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 STRATEGYCORPORATE LEVEL STRATEGY
Pooled Negotiating PowerPooled 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 STRATEGYCORPORATE LEVEL STRATEGY
Vertical IntegrationVertical Integration
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Vertical IntegrationVertical 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 STRATEGYCORPORATE LEVEL STRATEGY
Vertical IntegrationVertical 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 STRATEGYCORPORATE LEVEL STRATEGY
Making Vertical Integration DecisionsMaking 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 organization’s products?
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Making Vertical Integration DecisionsMaking 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 STRATEGYCORPORATE LEVEL STRATEGY
Transaction CostsTransaction 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 STRATEGYCORPORATE LEVEL STRATEGY
Unrelated DiversificationUnrelated Diversification
Entering a different business that has little horizontal interaction with other businesses of a firm.
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Corporate Parenting and RestructuringCorporate 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 STRATEGYCORPORATE LEVEL STRATEGY
Corporate RestructuringCorporate 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 STRATEGYCORPORATE LEVEL STRATEGY
Corporate RestructuringCorporate Restructuring
Can involve changes in
Assets
Capital / Financial Structure
Management
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Portfolio ManagementPortfolio 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 STRATEGYCORPORATE LEVEL STRATEGY
Portfolio Matrix (Boston Consulting Group)Portfolio Matrix (Boston Consulting Group)
BUSINESS UNITS
$
BUSINESS REVENUE
$$$
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Portfolio ManagementPortfolio 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 STRATEGYCORPORATE LEVEL STRATEGY
Means to Achieve DiversificationMeans to Achieve Diversification
Acquisitions or mergers
Pooling resources of other companies with a firm’s own resource base
Joint venture
Strategic alliance
Internal development
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Mergers and AcquisitionsMergers 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 STRATEGYCORPORATE LEVEL STRATEGY
Mergers and AcquisitionsMergers 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 STRATEGYCORPORATE LEVEL STRATEGY
Strategic Alliances and Joint VenturesStrategic 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 STRATEGYCORPORATE LEVEL STRATEGY
Strategic Alliances and Joint VenturesStrategic 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 STRATEGYCORPORATE LEVEL STRATEGY
Strategic Alliances and Joint VenturesStrategic 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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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Strategic Alliances and Joint Ventures - Downsides
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 STRATEGYCORPORATE LEVEL STRATEGY
Managerial Motives Can Erode the Value of Acquisitions
Managerial Motives Can Erode the Value of Acquisitions
Growth for growth’s sake
Egotism (win at all costs mentality)
Anti-takeover tactics
Greenmail
Golden parachute
Poison pills
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Internal DevelopmentInternal 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 well-positioned company
Firm must have all the internal capabilities - tangible and intangible resources – to effectively implement
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Case Analysis: Toyota’s Diversification into Home Manufacturing
Case Analysis: Toyota’s 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 STRATEGYCORPORATE LEVEL STRATEGY
Case Analysis: Steve Jobs Discusses Apple’s Core Competence
Case Analysis: Steve Jobs Discusses Apple’s Core Competence
Apple doesn’t enter businesses where it cannot control or own the primary technology
For all of Apple’s 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 company’s expertise
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Case Analysis: American Idol – Far More Than Just a Television Show
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, CD’s and concerts
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Case Analysis: How 3M’s Efforts to Increase Market Power Backfired
Case Analysis: How 3M’s Efforts to Increase Market Power Backfired
3M was subject to multiple class-action lawsuits by LePage’s over alleged unfair retail “bundled” rebates over 3M’s tape products
3M offered bundled rebates to major retailers who exceeded high sales targets for each of six 3M product lines
LePage’s argued that the rebate volumes were so large that retailers would exclude offering any competing product
LePage’s was 3M’s only significant competitor in these markets
LePage asserted that 3M’s strategy was not only to reward large volume buyers, but to purposefully eliminate LePage’s as a competitor
The courts found in favor of LePage’s and awarded treble damages
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Case Analysis: Vertical Integration at Shaw Industries
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 floor-covering retailers in an effort to control retail pricing
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Case Analysis: Campbell Soup Divests Godiva to Focus on its Core Business
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 didn’t fit the corporate focus on offering nutritious products and “focus on simple meals”
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CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY
Case Analysis: Crowdsourcing – Kraft’s Strategic Alliance With a Bagel Maker
Case Analysis: Crowdsourcing – Kraft’s Strategic Alliance With a Bagel Maker
Kraft Foods seeks out small businesses and entrepreneurs with products and inventions that might be compatible with Kraft’s 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 STRATEGYCORPORATE LEVEL STRATEGY
Case Analysis: The Ritz-Carlton Leadership Center – A Successful Internal Venture
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 STRATEGYCORPORATE LEVEL STRATEGY
Case Analysis: Cornelius Vanderbilt – Going to Great Lengths to Correct a Wrong!
Case Analysis: Cornelius Vanderbilt – Going to Great Lengths to Correct a Wrong!
In the mid-1800’s 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 STRATEGYCORPORATE LEVEL STRATEGY
Case Analysis: How Anti-Takeover Measures May Benefit Multiple Stakeholders – Not Just
Management
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 Oracle’s extended hostile takeover of PeopleSoft and the acquisition became strictly a financial deal
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