Swati Dispute

 Corporate level strategy specifies actions the

firm takes to gain a competitive advantage
by selecting and managing a group of
different businesses competing in several
industries and product markets.
Corporate-Level Strategy: How do we sustain competitive
advantages in our current business? What new businesses
or industries do we wish to enter?
Corporate strategy is used to identify:
1. Businesses or industries that the company should
compete in
2. Value creation activities that the company should
perform in those businesses
3. Methods to enter or leave businesses or industries in
order to maximize its long-run profitability

Companies must adopt a long-term perspective

in formulating a corporate-level strategy.

Copyright © Houghton Mifflin Company. All rights reserved. 9|3

A multibusiness company must construct its business
model at two levels:
1. Business models and strategies for each business
unit or division in every industry in which it competes
2. Higher-level multibusiness model
that justifies its entry into different businesses and
industries

Copyright © Houghton Mifflin Company. All rights reserved. 9|4

Corporate-level strategies are primarily directed toward
improving a company’s competitive advantage and profitability
in its present business or product line:
 Horizontal Integration
 The process of acquiring or merging with industry competitors
 Vertical Integration
 Expanding operations backward into an industry that produces
inputs for the company or forward into an industry that distributes
the company’s products
 Strategic Outsourcing
 Letting some value creation activities within a business be
performed by an independent entity

Copyright © Houghton Mifflin Company. All rights reserved. 9|5

 Horizontal Integration: the process of acquiring or merging with industry
competitors in an effort to achieve the competitive advantages that come
with large scale and scope.

Staying inside a single industry allows a company to:

 Focus resources
Resources devoted to competing successfully in
one area
 ‘Stick to the knitting’
Company stays focused on what it does best

Copyright © Houghton Mifflin Company. All rights reserved. 9|6

Profits and profitability increase when horizontal integration:

1. Lowers the cost structure

• Creates increasing economies of scale
• Reduces the duplication of resources between two companies
2. Increases product differentiation
• Product bundling – broader range at single combined price
• Total solution – saving customers time and money
• Cross-selling – leveraging established customer relationships
3. Replicates the business model
• In new market segments within same industry
4. Reduces industry rivalry
• Eliminate excess capacity in an industry
• Easier to implement tacit price coordination among rivals
5. Increases bargaining power
• Increased market power over suppliers and buyers
• Gain greater control

Copyright © Houghton Mifflin Company. All rights reserved. 9|7

A wealth of data suggests that the majority of mergers and
acquisitions DO NOT create value and that many may actually
DESTROY value.
 Implementing a horizontal integration is not an easy
task
• Problems associated with merging very different company
cultures
• High management turnover in the acquired company when the
acquisition is a hostile one
• Tendency of managers to overestimate the benefits to be had in
the merger
• Tendency of managers to underestimate the problems involved in
merging their operations
 The merger may be blocked if merger is perceived to:
• Create a dominant competitor
• Create too much industry consolidation
• Have the potential for future abuse of market power
Copyright © Houghton Mifflin Company. All rights reserved. 9|8
 Backward Vertical Integration
 Company expands its operations into an industry that
produces inputs to the company’s products
 Forward Vertical Integration
 Company expands into an industry that uses, distributes,
or sells the company’s products
 Full Integration
 Company produces all of a particular input from its own
operations
 Disposes of all of its completed products through its own
outlets
 Taper Integration
 In addition to company-owned suppliers, the company
will also use other suppliers for inputs or independent
outlets in addition to company-owned outlets
Copyright © Houghton Mifflin Company. All rights reserved. 9|9
Copyright © Houghton Mifflin Company. All rights reserved. 9 | 10
Copyright © Houghton Mifflin Company. All rights reserved. 9 | 11
Copyright © Houghton Mifflin Company. All rights reserved. 9 | 12
A company pursues vertical integration to strengthen the business
model of its core business or to improve its competitive position.

1. Facilitates investments in efficiency-enhancing

specialized assets
• Lowered cost structure or better differentiation.
2. Enhances or protects product quality
• To strengthen its differentiation advantage through either
forward or backward integration
3. Results in improved scheduling
• Makes it easier and more cost-effective to plan, coordinate,
and schedule the transfer of product within the value-added
chain
• Enables a company to respond better to changes in demand

Copyright © Houghton Mifflin Company. All rights reserved. 9 | 13

 Increased Cost Structure
• Company-owned suppliers develop a higher cost structure than
those of the independent suppliers
• Bureaucratic costs of solving transaction difficulties
 Fast-changing Technology
• Vertical integration may lock into old or inefficient technology
• Prevent company from changing to a new technology that could
strengthen the business model
 Unpredictable Demand
 Creates risk in vertical integration investments

Vertical integration can weaken a business model when:

• Company-owned suppliers lack incentive to reduce costs
• Changing demand or technology reduces ability to be competitive

Copyright © Houghton Mifflin Company. All rights reserved. 9 | 14

 Short-term contracts and competitive bidding
 May signal a company’s lack of commitment to its supplier
 Strategic alliances and long-term contracting
 Enables creation of a stable long-term relationship
 Becomes a substitute for vertical integration
 Avoids the problems of having to manage a company located in an adjacent
industry
 Building long-term cooperative relationships
 Hostage taking – creating a mutual dependency
 Credible commitments – a believable promise or pledge
 Maintaining market discipline – power to discipline supplier
▪ Periodic contract renegotiation
▪ Parallel sourcing policy

Copyright © Houghton Mifflin Company. All rights reserved. 9 | 15

Strategic Outsourcing allows one or more of a company’s value-chain
activities or functions to be performed by independent specialized
companies that focus all their skills and knowledge on just one kind of
activity.

 Company is choosing to focus on a fewer number of value-creation

activities
 In order to strengthen its business model
 Companies typically focus on noncore or nonstrategic activities
 In order to determine if they can be performed more effectively and
efficiently by independent specialized companies
 Virtual Corporation
 Describes companies that have pursued extensive strategic
outsourcing

Copyright © Houghton Mifflin Company. All rights reserved. 9 | 16

Copyright © Houghton Mifflin Company. All rights reserved. 9 | 17
1. Lower cost structure
 The specialist company cost is less than what it would cost to
perform the activity internally
2. Enhanced differentiation
 The quality of the activity performed by the specialist is greater
than if the activity were performed by the company
3. Focus on the core business
 Distractions are removed
 The company can focus attention and resources on activities
important for value creation and competitive advantage

Strategic outsourcing may be detrimental when there is:

• Holdup – company becomes too dependent on specialist provider
• Loss of information – company loses important customer contact or
competitive information
Copyright © Houghton Mifflin Company. All rights reserved. 9 | 18
Diversification Strategy is the company’s decision to
enter one or more new industries (that are distinct from
its established operations) to take advantage of its
existing distinctive competencies and business model.
Types of diversification:
 Related diversification
 Unrelated diversification
Methods to implement a
diversification strategy:
 Internal new ventures
 Acquisitions
 Joint ventures
Staying inside a single industry allows a company to:
• Focus its resources  ‘Stick to its knitting’
BUT a company’s fortunes are tied closely to the
profitability of its original industry:
 Can be dangerous if the industry matures and goes into
decline
 May be missing the opportunity to leverage their distinctive
competencies in new industries
 Tendency to rest on their laurels and not engage in constant
learning

To stay agile, companies must leverage –

find new ways to take advantage of their distinctive
competencies and core business model
in new markets and industries.
 Reconceptualize the company as a
portfolio of distinctive
competencies . . . rather than a
 portfolio of products:
Consider how those competencies might
be leveraged to create opportunities in
new industries
 Existing competencies versus new
competencies that would need to be
developed
 Existing industries in which a company
competes versus new industries
 Source: Reprinted by permission of Harvard Business School Press. From Competing for the Future: Breakthrough Strategies for
Seizing Control of Your Industry and Creating the Markets of Tomorrow by Gary Hamel and C. K. Prahalad, Boston, MA. Copyright ©
1994 by Gary Hamel and C. K. Prahalad. All rights reserved.
A diversified company can create value by:
 Transferring competencies
among existing businesses
 Leveraging competencies
to create new businesses
 Sharing resources
to realize economies of scope
 Using product bundling
 Managing rivalry
by using diversification as a means in one or more industries
 Exploiting general organizational competencies that
enhance performance within all business units

Managers often consider diversification when their

company is generating free cash flow – with resources in
excess of those needed to maintain competitive advantage.
Transferring competencies across industries:
taking a distinctive competency developed in one
industry and implanting it in an EXISTING business
unit in another industry
 The competencies transferred must involve activities
that are important for establishing competitive
advantage
 Tend to acquire businesses related to their existing
activities because of the commonality between one or
more value-chain functions
For such a strategy to work,
the distinctive competency being
transferred must have real strategic value.
Figure 10.2
Leveraging competencies: taking a
distinctive competency developed by a business
in one industry and using it to create a NEW
business unit in a different industry
 The difference between leveraging and
transferring competencies is that an
entirely NEW business is created
 Different managerial processes are
involved
 Tend to use R&D competencies to
create new business opportunities in
diverse areas
Sharing resources and capabilities
across two or more business units in different
industries to realize economies of scope.
Economies of scope arise when business units
are able to effectively able to pool, share, and
utilize expensive resources or capabilities:
1. Companies that can share resources have to invest
proportionately less than companies that cannot
share.
2. Resource sharing can result in economies of scale.
Economies of scope are possible only when
there are significant commonalities between
one or more value-chain functions.
Use product bundling to differentiate
products and expand products lines in order to
satisfy customers’ needs for a package of related
products.
 Allows customers to reduce their
number of suppliers for
convenience and cost savings.
 Increased value of orders gives
customers increased commitment
and bargaining power with
suppliers.
Manage rivalry by holding a competitor in
check that has either entered its industry or
has the potential to do so.
 Multipoint competition is when companies
compete with each other in different
industries.
 Companies can manage rivalry by signaling
that competitive attacks in one industry will
be met by retaliatory attacks in
the aggressor’s home industry.
 Mutual forbearance from signaling may result
in less intense rivalry and higher industry
profits.
General organizational competencies are skills of a
company’s top managers and functional experts that
transcend individual functions or business units.
These capabilities help each business unit perform at a higher
level than if it operated as an individual company:
1. Entrepreneurial capabilities – encourage risk taking while
managing & limiting the amount of risk undertaken
2. Organizational design – create structure, culture, and control
systems that motivate and coordinate employees
3. Superstrategic capabilities – effectively manage the managers
of the business units and helping them think through strategic
problems
These managerial skills are often not present, as
they are rare and difficult to develop and put into action.
 Related diversification
Entry into a new business activity in a different industry that:
• Is related to a company’s existing business activity or
activities and
• Has commonalities between one or more components of
each activity’s value chain
Based on transferring and leveraging competencies, sharing
resources, and bundling products
 Unrelated diversification
Entry into industries that have no obvious connection to any
of a company’s value-chain activities in its present industry or
industries
Based on using only general organizational competencies to
increase profitability of each business unit
Conditions that can make diversification disadvantageous:

1. Changing Industry and Firm-Specific Conditions

 Future success of this strategy is hard to predict.
 Over time, changing situations may require businesses to be divested.
2. Diversification for the Wrong Reasons
 Must have clear vision as to how value will be created.
 Extensive diversification tends to reduce rather than improve
profitability.
3. Bureaucratic Costs of Diversification
 Costs are a function of the number of business units in a company’s
portfolio, and the
 Extent to which coordination is required to gain the benefits.
The choice of strategy depends on a comparison of the
benefits of each strategy versus the cost of pursuing it:
 Related diversification
 When company’s competencies can be applied across a greater number of
industries and
 Company has superior capabilities to keep bureaucratic costs under control
 Unrelated diversification
 When functional competencies have few useful applications across
industries and
 Company has good organizational design skills to build distinctive
competencies
 Web of corporate level strategy
 May pursue both related and unrelated diversification
 As well as other strategies that improve long-term profitability
 Diversifying to pool risks
 Stockholders can diversify their own portfolios at lower costs than the
company can.
 This represents an unproductive use of resources as profits can be returned
to shareholders as dividends.
 Research suggests that corporate diversification is not an effective way to
pool risks.
 Diversifying to achieve greater growth
 Growth on its own does not create value.
 Business cycles of different industries are inherently difficult to predict.

Based on a large number of academic studies:

Extensive diversification tends to reduce,
rather than improve, company profitability.
Various entry strategies may be employed based on
the company’s competencies and capabilities:
 Internal New Ventures
 Company has a set of valuable competencies in its existing businesses.
 Competences leveraged or recombined to enter new business areas.
 Acquisitions
 Company lacks important competencies to compete in an area.
 Company can purchase an incumbent company that has those
competencies at a reasonable price.
 Joint Ventures
 Company can increase the probability of success by teaming up with
another company with complementary skills.
 Joint ventures are preferred when risks and costs of setting up a new
business unit are more than company can assume.
 Scale of entry
 Large-scale entry is initially more expensive
than small-scale entry, but it brings higher
returns in the long run.
 Commercialization
 Technological possibilities should not
overshadow market needs and opportunities.
 Poor implementation
 Demands on cash flow
 Need clear strategic objectives
 Anticipate time and costs
 Structured approach to managing internal
new venturing:
 Research aimed at advancing basic science and
technology
 Development research aimed at finding and refining
commercial applications for the technology
 Foster close links between R&D and marketing;
between R&D and manufacturing
 Selection process for choosing ventures
 Monitor progress
Acquisitions are the principle strategy
used to implement horizontal integration:
 Used to achieve diversification when the company
lacks important competencies
 Enable a company to move quickly
 Perceived as less risky than internal new ventures
 An attractive way to enter a new industry that is
protected by high barriers to entry
There is ample evidence that many acquisitions fail to
create value or to realize their anticipated benefits:
 Integrating the acquired company
 Difficulty in integrating value-chain and management activities
 High management and employee turnover in acquired company
 Overestimating the economic benefits
 Overestimate the competitive advantages and value-added that can be
derived from the acquisition
 Pay too much for the target company
 The expense of acquisitions
 Premium paid for publicly traded companies
 Premium cancels out the prospective value-creating gains
 Inadequate preacquisition screening
 Weaknesses of acquisitions’ business model are not clear
 Target identification and preacquisition
screening for:
1. Financial position
2. Distinctive competencies and competitive advantage
3. Changing industry boundaries
4. Management capabilities
5. Corporate culture
 Bidding strategy
• Avoid hostile takeovers and speculative bidding.
• Encourage friendly takeover with amicable merger.
 Integration
• Eliminate duplication of facilities and functions.
• Divest unwanted business units included in acquisition.
 Learning from experience
• Conduct post-acquisition audits.
Attractions:
 Helps avoid the risks and costs of building a new
operation from the ground floor
 Teaming with another company that has complementary
skills and assets may increase the probability of success
Pitfalls:
 Requires the sharing of profits if the new business
succeeds
 Venture partners must share control – conflicts on how
to run the joint venture can cause failure
 Run the risk of giving critical know-how away to joint
venture partner
 The GE screen matrix is essentially a derivation
of the Boston Consulting Group’s Boston
growth matrix.
 It was developed by McKinsey and Co. for
General Electric as it had been recognized that
the Boston Consulting Group matrix was not
flexible enough to take broader issues into
account.
 The GE matrix cross-references market
attractiveness and business position using three
criteria for each – high, medium and low
 The market attractiveness considers variables relating to
the market itself, including the rate of market growth,
market size, potential barriers to entering the market, the
number and size of competitors, the actual profit margins
currently enjoyed, and the technological implications of
involvement in the market.
 The business position criteria look at the business’s
strengths and weaknesses in a variety of fields. These
include its position in relation to its competitors, and the
business’s ability to handle product research, development
and ultimate production. It also considers how well placed
the management is to deploy these resources.
 The matrix differs in its complexity compared
with the Boston Consulting Group matrix.
Superimposed on the basic diagram are a
number of circles. These circles are of variable
size . The size of each represents the size of each
market. Within each circle is a clearly defined
segment which represents the business’s market
share within that market. The larger the circle,
the larger the market, and the larger the
segment, the larger the market share.