Corporate-level Strategies

Chapter 6 – Corporate-Level Strategy & Restructuring DR. ADAY

HTM 590

Corporate Level Strategy - Aday oStarbucks o Introducing Grab & Go Lunch at 100 Chicago Locations o New CEO o Increase stores from 26,000 to 37,000 by 2021 o That’s 11,000 new stores in 4 years (2021-2017) o Number of Days = 4 (years) * 365 days = 1,460 days o Do the math on that..... o There will be 7.53 Starbucks locations opening each day, on average for the next 4 years o 11,000 (new stores) / 1,460 (days) = 7.53 per day o That’s 52 (almost 53...52.73) stores per week (7 days)

Learning Objectives vCorporate – Level Strategy vConcentration vVertical Integration vRelated Diversification vUnrelated Diversification

vTactics for Diversification and Growth

vStrategic Restructuring

Corporate-level Strategy Formulation oDirection Setting o Establishment and communication of organizational mission, vision, enterprise strategy and long-term goal

oDevelopment of Corporate-level Strategy o Broad approach to corporate-level strategy—concentration, vertical integration, diversification, international expansion

o Selection of resources and capabilities in which to develop corporate-level distinctive competencies

oSelection of Businesses and Portfolio Management o Buy and sell businesses

oTactics for Diversification and Growth o Choice among methods of diversification—internal venturing, acquisitions, joint ventures

oManaging Resources and Capabilities o Allocation of resources to business units for capital equipment, R&D, etc.

Corporate-level Strategies

Concentration

Concentration

Vertical Integration

Related Diversification

Unrelated Diversification

Internal Growth

Mergers and

Acquisitions

Joint Ventures

Concentration Strategies oEntrepreneurial venture

oAssociated with a narrow business definition

oVirtually all of its resource investments in one business area.

oLeast complicated of the corporate-level strategies

oStill pursued by many large and successful companies

oExamples: Domino’s Pizza, Delta Airlines

Strengths of Concentration oAllows organization to master one business

oLess strain on resources, allows more of an opportunity to develop sustainable competitive advantage(s)

oLack of ambiguity concerning strategic direction

oOften found to be a profitable strategy depending on the industry

Risks of Concentration Strategies

oDependency on one area can be problematic if the industry collapses/slumps

oPrimary product could become obsolete

oIn mature industries, it’s difficult to grow

oSignificant changes in industry can make it very hard to overcome the challenges

oCash flow can be a problem

Vertical Integration Strategies oInvolvement in multiple stages of the industry supply chain

oForward Integration o Downstream o A company providing its own distribution

oBackward Integration o Upstream o A company producing its own supplies

Vertical Integration Strategies oPast studies have identified that vertical integration is usually not a highly profitable strategy compared to other strategies.

oVertical integration can lock firms into unprofitable adjacent businesses where they have little experience and expertise

oThere are successful companies that have utilized vertical integration.

KRISPY KREME

Manufacture Distribute Retail

Diversification Strategies oRelated Diversification o Organizational involvement in activities somehow related to the “core” business of the organization, often through common or complementary markets or technologies

oUnrelated Diversification o No dependence on any patter of relatedness

Related Diversification oBased on similarities that exists among the products, services, markets, or resource conversion process of different parts of the organization.

Synergy oSynergy: the whole is greater than sum of its parts

oFactors required to create synergy o Strategic fit o Organizational Fit o Managerial effort at both the corporate and business levels.

Strategic Fit oThe effective matching of strategic organizational capabilities oTangible Relatedness oUsing the same physical resources for multiple purposes oLeading to synergy through resource sharing

oIntangible Relatedness oCapabilities developed in one area can be applied to another area oSynergy based on intangible resources may be more conducive to the creation of a sustainable competitive advantage

Organizational Fit oOccurs when two organizations or business units have similar management processes, cultures, systems and structures oRelatedness on one dimension does not guarantee that business units will have an organizational fit

Managerial Effort oSharing common resources oCentralizing support activities for multiple units oResolving conflicts amongst business units

Unrelated Diversification oOften called conglomerates o Large, unrelated and highly diversified firms

oTry to reduce risk by investing in businesses in unrelated markets with uneven revenue streams

Unrelated Diversification oVery popular in the 50s, 60s, and 70s

oPast analysis indicates it is not a high performing strategy the majority of the time

oSome firms have been successful

Unrelated Diversification oTRT Holdings oPrivate Company

oThey own.... oOmni Hotels oGolds Gym oTana Exploration (oil & gas)

Corporate-level Strategies

Concentration

Concentration

Vertical Integration

Related Diversification

Unrelated Diversification

Internal Growth

Mergers and

Acquisitions

Joint Ventures

Tactics for Growth & Diversification

oInternal Venturing oMergers and acquisitions oJoint ventures

Internal Venturing oGive employees incentive to create new ideas o Post-IT Notes

Mergers oWhen two organizations combine into one

oSouthwest Airlines and Air Tran

oUS Airways and American Airlines

Acquisitions oWhen one firm buys another firm

oMarriott Acquired Starwood o $13B

oAlaska Airlines Acquired Virgin America o $2.6B

Mergers and Acquisitions oMOST mergers are in the form of an acquisition, so these terms are often used interchangeably

Successful Mergers & Acquisitions

oLow debt oFriendly negotiations oComplementary resources (relatedness) oCultures and management styles are similar (organizational fit) oPost-merger sharing of resources (points) oDue diligence before merger

Joint Venture oTwo or more firms pool a portion of their resources to create a separate, jointly owned entity. oBurger King and Groupe Olivier Bertrand oFrance – Fast Food oItalian Jewelry Bulgari & Marriott oHigh end hotels in Spain oJumeirah Group oDubai oLYFT and GMC

Strategic Restructuring oTurnaround strategies and downsizing oRefocusing corporate assets oChapter 11 reorganization oLeveraged buyouts oChanges to organizational design oGenerally these approaches are combined

Strategic Restructuring Retrenchment (Downsizing) ◦ Turnaround through workforce reductions, plant closings, outsourcing, cost controls, etc.

◦ Downsizing is dangerous to the health of an organization

Refocusing (Downscoping) ◦ Reducing diversification through selling off nonessential businesses

◦ Divestiture--reverse acquisition ◦ Spin-off--current shareholders are issued stock

Chapter 11 Reorganization ◦ Legal filing allowing protection from creditors and others while problems are worked out

◦ Should probably be a strategy of last resort

Strategic Restructuring

Leveraged Buyouts ◦ Private purchase of a business unit by managers, employees, unions or private investors

◦ High levels of debt ◦ Asset sales typically lead to a smaller, more focused firm

◦ Stifle innovation

Changes to Organizational Design

◦Switch to a new organizational structure ◦More decentralized or more centralized, depending on needs ◦Linked also to changes in the culture of a firm

◦Reengineering involves radical redesign of core business processes to achieve dramatic improvements in efficiency and quality