Slide of strategic management w8

Learning objectives• Understand the nature of corporate-level strategy and be able to identify and explain various types of corporate strategies • Identify the conditions under which di

Learning objectives

• Understand the nature of corporate-level strategy and be able

to identify and explain various types of corporate strategies

• Identify the conditions under which diversification creates

value for shareholders

• Evaluate the potential for sharing and transferring resources and capabilities within the diversified company

• Recognise the organisational and managerial issues arising

from diversification and why diversification so often fails to realise its anticipated benefits

Learning objectives

• Assess the relative advantages of vertical and horizontal

integration in organising related activities, understand the

circumstances that influence these relative advantages, and advise a company whether a particular activity should be

undertaken internally or outsourced

• Distinguish between mergers and acquisitions and

determine their relative merits in exploiting the linkages between different businesses

• Understand the purpose of turnaround and retrenchment strategies

• Corporate-level strategy is about how and where a

company, as a whole, competes

• Corporate-level strategy decisions define the scope of the company

• Three aspects of this strategy include:

• Corporate parenting

• Business portfolios

• Portfolio matrices

• Many aspects influence corporate-level strategy including:

• Product scope (diversification) - How specialised should the

company be in terms of the range of products?

• Vertical scope (vertical integration) - What range of vertically linked activities should the company encompass?

• Geographical scope (multinationality) - What is the optimal

geographical spread of activities?

Fig 8.1

Corporate-Level Strategy

• A corporate-level strategy is concerned with

two key questions:

–What business should the firm be in?

–How should the corporate office manage its group of businesses?

• Corporate level strategies are aimed to

enhance a firm’s strategic competitiveness and contribute to earn above average returns

Corporate-level Strategy

• The corporate parent is expected to grow the

overall organisation by creating value for its

individual businesses

• Organisations need to decide what new

businesses should be added to the portfolio

• There is a need to approach this in a rational and systematic manner

Setting Direction

Fig 8.2

Diversification Strategy

• Diversification strategy refers to a company’s

decision to expand its operations by adding new products and services, markets, or stages of

production to the existing business

• The purpose of diversification is to allow the

company to enter lines of business that are

different from current operations

• There are two types of diversification: related and unrelated diversifications

Diversification Strategy

Fig 8.3

Diversification Strategy

Table 8.1

Competitive Advantage from

Economies from Internalising

Transactions

Fig 8.4

The diversified company as an internal

market

• Economies of scope on their own do not provide

an adequate rationale for diversification — they must be supported by the presence of transaction costs

• The operation of two factors must be considered:

• Internal capital markets

• Internal labour markets

Diversification and Market Power

• Diversification can increase a company’s market power

• The following four mechanisms are particularly important:

• Predatory pricing

• Bundling

• Reciprocal dealing

• Mutual forbearance

Diversification and Performance

• Empirical research into diversification has concentrated on two major issues:

• How do diversified companies perform relative to specialised companies?

• Does related diversification outperform unrelated diversification?

Mergers and Acquisitions

• Acquisition refers to the purchase of one

company by another (also known as a takeover

or a buyout

• It usually refers to a purchase of a smaller

company by a larger one

• An acquisition may be friendly or hostile

• There are 2 types of acquisition:

• share acquisition

• asset acquisition

Mergers and Acquisitions

• Merger is the combination of two companies into

Financing Mergers and Acquisitions

• Various methods of financing mergers and

acquisitions deal exist including:

• cash transaction

• share financing

• debt financing

Reasons for Merger and Acquisition

• Many companies actively engage in merger and acquisition activities to seek better financial

Integration strategy

• The objective of integration strategy is to develop a

consistent approach to guide implementation decisions and reduce costs of key projects

• A company seeking integration strategies faces a subset

of choices:

• horizontal and

• vertical integration

Vertical integration

• Vertical integration is integration along a supply chain through which a company will control the production and distribution of products

• Vertical integration has many dimensions:

• Backward

• Forward

• Full integration

• Partial integration

Vertical integration

• Vertical integration has multiple dimensions and offers potential benefits including:

• Technical economies from physical integration

• Developing distinctive capabilities

• How to manage strategically different businesses?

• The incentive problem

• Competitive effects of vertical integration

• Flexibility

Designing vertical relationships

• In practice, there are a variety of relationships through

which buyers and sellers can interact and coordinate their interests

• These relationships may be classified in relation to two characteristics:

• The extent to which the buyer and seller commit resources to the relationship

• The formalisation of the relationship

Different types of vertical relationships

Fig 8.7

Choosing between alternative vertical

relationships

• Designing vertical relationships is not just a ‘make or buy’ choice

• Between full vertical integration and spot market

contracts, there is a broad spectrum of alternative

organisational forms

• Choosing the most suitable vertical relationship depends

on the economic characteristics of the activities involved, legal and fiscal circumstances, and the strategies and

resources of the companies involved

Costs and benefits of vertical integration

Table 8.2

Horizontal integration strategy

• Horizontal integration refers to the expansion or addition of

business activities in the same industry and at the same level of the supply chain

• Organisations can achieve horizontal growth through mergers and acquisitions

• Horizontal integration offers significant advantages as well as drawback to the organisations

Turnaround and Retrenchment Strategies

• When a company is not performing well enough, its

management considers either a turnaround or a

retrenchment strategy

• Turnaround strategy refer to the plan and effort to return an underperforming company to acceptable levels of profitability and long-term growth

• A well-designed turnaround strategy involves redefining strategic objectives, reducing cost and restructuring

organisational processes

Turnaround and Retrenchment Strategies

• Retrenchment strategy refer to a level strategy that seeks to reduce the size

corporate-or diversity of an corporate-organisation’s operations

• It includes all activities involving contraction

of a company’s operations or changes in its assets or financial structure

Turnaround and Retrenchment Activities

• There are four activities that characterise

retrenchment and turnaround:

Corporate Parenting

• Diversification implies parenting – that is, how

corporate parents manage their overall business portfolios

• To succeed, corporate parents need strong

parenting skills for each SBU

• Parental advantage occurs when diversified firms generate more value and a closer fit with the

SBUs

Corporate Parenting

Fig 8.8

• Value-destroying synergies can emerge from

many sources including: excessive

managerialism, competition for resources,

urgency to perform and short term perspective

Portfolio Analysis

• Portfolio analyse is one of key means of

analysing the scope of activities of a diversified organisation

• It is an important aspect to understand the

position of each SBU in relation to its competitors and growth potential

• Commonly used portfolio analysis methods

include:

• The BCG matrix

• The GE-McKinsey matrix

• Vertical and horizontal integration

• Merger and acquisition

• Portfolio analysis