Organizational Strategy and Management

Strategic Management: Theory and Practice

Corporate-Level Strategies

Contributors: By: John A. Parnell

Book Title: Strategic Management: Theory and Practice

Chapter Title: "Corporate-Level Strategies"

Pub. Date: 2014

Access Date: March 24, 2018

Publishing Company: SAGE Publications, Ltd

City: 55 City Road

Print ISBN: 9781452234984

Online ISBN: 9781506374598

DOI: http://dx.doi.org/10.4135/9781506374598.n6

Print pages: 150-181

©2014 SAGE Publications, Ltd. All Rights Reserved.

This PDF has been generated from SAGE Knowledge. Please note that the pagination of

the online version will vary from the pagination of the print book.

Corporate-Level Strategies

Chapter Outline

The Corporate Profile

Strategic Alternatives at the Corporate Level

Growth Strategies Horizontal (Related) Integration

Horizontal (Related) Diversification

Conglomerate (Unrelated) Diversification

Vertical Integration

Strategic Alliances (Partnerships)

Stability Strategy

Retrenchment Strategies Turnaround

Divestment

Liquidation

Boston Consulting Group Growth-Share Matrix

Global Corporate Strategy

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Wal-Mart Abroad

Global Orientation Assessment

Summary

Key Terms

Review Questions and Exercises

Practice Quiz

Student Study Site

Notes

Strategies exist at three levels in any organization: (1) the corporate or firm level, (2) the business unit or competitive level, and (3) the functional or tactical level. This chapter focuses on the corporate-level strategy, or the strategy top management formulates for the overall corporation. Corporate-level strategy concerns precede the competitive and tactical issues related to business and functional strategies. We will see in subsequent chapters, however, that all three levels are linked and should be aligned.

The Corporate Profile

The first step in formulating an organization's strategy is to assess the markets or industries in which the firm operates. The corporate profile identifies one or more businesses and industries in which the firm is and/or should be operating. A firm may choose one of three basic profiles: (1) to operate in a single industry, (2) to operate in multiple related industries, and (3) to operate in multiple unrelated industries.

Most firms start as single-business companies, and many continue to thrive while remaining active primarily in one industry. By competing in only one industry, firms such as UPS, ExxonMobil, and Home Depot can benefit from the specialized knowledge that develops from concentrating efforts on one business area. This knowledge can help the firm improve product or service quality and become more efficient in its operations. Firms operating in a single industry are more susceptible to sharp downturns in business cycles, however. For this reason, most large firms eventually pursue diversification and compete in more than one industry. Diversification allows a firm to grow, (potentially) use its resources more effectively, and make use of surplus revenues.

Firms that diversify may choose to compete in related or unrelated industries. Related diversification involves diversifying into similar businesses that may complement the original or primary business. Wal-Mart—which also operates Sam's Wholesale Club—benefits from expertise derived from concentration in multiple retailing industries. In contrast, General Electric (GE) operates in a vast array of unrelated businesses ranging from TVs to aircraft engines to financial services.

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Although diversification can reduce the uncertainty and risk associated with operating in a single industry, participating in numerous unrelated businesses may result in uncertainties associated with losing touch with the fundamentals of each business. As a result, many scholars and executives occupy the “middle ground” by arguing that aggregate uncertainty is

minimized when a firm diversifies its holdings but only into related industries.1. Relatedness, however, is ultimately “in the eyes of the beholder” and can be based on clear similarities such as product lines or customers or on less obvious bases such as distribution channels or similarities in raw materials.

Unrelated diversification is driven by the desire to capitalize on profit opportunities in a given industry and involves the corporation in businesses that typically are dissimilar. Although such an approach may reduce risk for the firm, it also carries a number of potential disadvantages. Because their interests are dispersed throughout unrelated business units, strategic managers may not stay abreast of market and technological changes that affect the businesses. In addition, they may unknowingly neglect the firm's primary, or core, business in favor of one or more other units. Avoiding these pitfalls is easier when a firm's business units are related.

The key to successful related diversification is the development of synergy among the related business units. Synergy occurs when the combination of two organizations results in higher effectiveness and efficiency than would otherwise be generated separately. Opportunities for synergy are not always easy to identify. Synergy may occur when there are similarities in product or service lines, relationships in the distribution channels, or complementary managerial or technical expertise across business units. Kraft's intense pursuit of Cadbury in 2009 was driven in large part by a desire to benefit from Cadbury's strong presence in emerging markets like India, Mexico, Thailand, and Egypt. For example, Kraft lacked significant access to India's $500 million chocolate market. The Cadbury brand was already

well known in India with brands such as Crackle and Dairy Milk.2.

Synergy between business units does not always materialize as originally planned, however. For example, when Sports Illustrated campaigned in 2005 to merge its website with the America Online (AOL) web portal to create a massive sports site, AOL balked, suggesting that Sports Illustrated had too little to offer. Several years prior, parent company Time Warner might have encouraged the partnership between its two business units under the guise of “corporate synergy,” but instead Time Warner president Jeffrey Bewkes told the magazine to look elsewhere for a partner. Unlike his predecessors who preached synergy among Time Warner business units, Bewkes challenged the universality of the synergy concept and began

selling off less profitable businesses.3. After continued frustrations, Time Warner spun off its

AOL division in 2009.4.

Procter & Gamble (P&G) anticipated synergy when it acquired Gillette in 2005. On paper, combining the world's leading toothbrush—Oral B—and the world's second leading toothpaste—Crest—seemed easy enough. There were a number of problems, however. Combining the structures of the two firms with dual presidents was so complex that one of them stepped down. Many Oral-B employees decided to leave the company instead of relocating from Boston to Cincinnati. Culture also played a role, as Oral-B executives prefer face-to-face meetings and quick decisions, while their counterparts at Crest send lots of memos and deliberate more before making decisions. P&G has a way to go in its quest to

overtake Colgate-Palmolive, a leader in the overall oral care market.5.

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a.

1. 2. 3. 4. 5.

b.

1.

2.

a. b. c.

3.

In another example, when CVS acquired pharmacy-benefits manager Caremark Rx in 2007, the California Public Employees' Retirement System (CALPERS) voted more than 2.1 million Caremark shares and more than 3.1 million CVS shares against the deal. CALPERS officials

charged that poor synergy existed between the retailer and the benefits manager.6.

There is no single best corporate profile; the best approach depends on the organization. There are a number of successful organizations that have pursued each of these options. After the corporate profile is selected, the next consideration is the corporate strategy.

Strategic Alternatives at the Corporate Level

Three basic strategic alternatives exist at the corporate level: (1) growth, (2) stability, and (3) retrenchment. The available strategies are listed in Table 6.1.

Table 6.1 Corporate-Level Strategies

Growth strategies Internal growth External growth

Horizontal integration Horizontal related diversification Conglomerate (unrelated) diversification Vertical integration Strategic alliances

Stability strategy Retrenchment strategies

Turnaround Divestment Liquidation

Growth Strategies

The growth strategy seeks to increase significantly a firm's revenues or market share. Although some top executives argue that growth is always the single best strategy for a healthy firm, this is not the case. Rather, a firm should adopt a growth strategy only if growth is expected to increase firm value.

Growth is attained primarily by two means. Internal growth is accomplished when a firm increases revenues, production capacity, and its workforce; it can occur by growing an existing business or creating new ones. Capitalizing on the increased interest in organic and natural foods, Whole Foods grew internally from a single store in 1980 to 270 in the United

States and United Kingdom in 2009.7. Walgreens experienced substantial internal growth in the 1990s and early to mid-2000s by opening a new store every 16 hours. During the recession of the late 2000s and early 2010s, Walgreens continued to pursue internal growth

but by refashioning itself as a broad health care provider8.

Internal growth is not always easy to accomplish, especially when markets appear to be saturated. Consider the fast-food and fast casual segments of the broader restaurant industry.

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Faced with limited growth prospects, small chains like Cousins Submarines, Tasti D-Lite, and Toppers Pizza launched mobile franchises, trucks, or vans outfitted with fully operating kitchens. Facilities are much more extensive than the ones operated by street vendors in large cities, but franchisees must still get past licensing challenges due to permit restrictions. With market saturation in most large cities in the United States, these restaurants are finding it

difficult to grow.9.

McDonald's has grown internally by attracting customers in nonpeak periods and expanding hours of operation in many of its stores. Its McCafé line and snack products attract customers during times when business slows at most fast-food restaurants. Many of its locations

throughout the world are now open 24 hours a day.10. McDonald's maintains its leadership position in the $175 billion U.S. fast-food industry not only because it has more stores but because each one produces significantly more revenue than its closest rivals. Interestingly, Wendy's gained ground on Burger King in the late 2000s. Although the number of stores remained relatively flat for both competitors, per-store sales declined at Burger King but rose

slightly at Wendy's during this time (see Table 6.2).11.

Table 6.2 Leaders in the U.S. Fast-Food Industry (2010)12.

Firm Number of U.S. Stores Sales Per Store

McDonald's 14,027 $2.3 million

Burger King 7,264 $1.2 million

Wendy's 5,883 $1.4 million

External growth is accomplished when two firms merge or one acquires the other. A merger occurs when two or more firms, usually of roughly similar sizes, combine into one through an exchange of stock. An acquisition is a form of a merger whereby one firm purchases another, often with a combination of cash and stock. Merger and acquisition (M&A) activity is influenced by a number of factors, including valuations, competitive forces, and the economy. M&A activity increased during the 2000s but declined sharply in the early 2010s as global

economic uncertainty rose.13.

Firms with large, successful businesses often acquire smaller competitors with different or complementary product or service lines. For example, Mars acquired Wrigley in 2008 to create

a global candy powerhouse.14. PepsiCo acquired Russian dairy products and fruit juice maker Wimm-Bill-Dann in 2010, the largest acquisition for the company since purchasing Quaker Oats in 2001 and one that established PepsiCo as the largest food and beverage firm

in Russia.15. With its acquisition of AirTran in 2011, Southwest Airlines gained access to AirTran's routes in the eastern and southeastern regions of the United States and established a toehold at Hartsfield-Jackson Atlanta International Airport, the world's busiest airport located

in Atlanta, Georgia.16.

Smaller firms can acquire larger rivals, however, as Triarc Companies (the parent company of

Arby's) acquired Wendy's International in 2008 and formed Wendy's/Arby's Group, Inc.17.

Following many years of Arby's decline, an 81.5% interest in the brand was sold to Roark Capital Group in 2011. The $130 million cash payment helped Wendy's finance a revamp of

its menu and promote international growth efforts without Arby's as a distraction.18.

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There are clear advantages to both internal and external growth. Internal growth enables a firm to maintain control over the enterprise by adding new products, facilities, or businesses incrementally. Internal growth enables the firm to preserve its corporate culture and image while expanding at a more controlled pace.

The attractiveness of external growth through mergers and acquisitions is intuitive. Two firms join forces, and the combined organization possesses all the strengths of the individual firms. Indeed, when two firms possess complementary resources and cooperate in a friendly acquisition or merger, the results can be positive (see Strategy at Work 6.1).

Strategy at Work 6.1. Sears and Kmart Join Forces19.

Kmart acquired Sears in November 2004 in an $11.5 billion deal that placed the newly combined firm-named Sears Holding Corporation-in the number three U.S. retailing position behind Wal-Mart and Home Depot. The move followed a decade of struggles by both century-old companies.

Prior to the acquisition, Sears boasted more stores (2,000 vs. 1,500) and employees (249,000 vs. 144,000) than Kmart. From a financial perspective, Kmart was showing signs of turning around several years of dismal performance, generating $801 million in profit during the first 9 months of 2004, while Sears had reported $61 million in losses. It was immediately confirmed that the total number of stores and employees would be reduced as the new firm restructures.

Those behind the deal hoped for improved efficiencies, with each retailer adding a number of successful product lines from the other. Prior to the acquisition, Sears was widely believed to be the stronger brand, bringing with it Craftsman tools, DieHard batteries, Kenmore appliances, and Lands' End apparel. Kmart's key brands included Martha Stewart, Jaclyn Smith, Joe Boxer, Route 66, and Sesame Street. Insiders expected some repositioning of the store brands, with Kmart becoming a slightly more upscale retailer and Sears moving in the opposite direction.

Aside from some product overlap, the years following the acquisition have revealed little evidence of synergy, with sluggish performance at both retailers. Overall sales for both retailers declined every year between 2005 and 2011. Approximately 171 full-size Sears locations were closed during that time. Following a lackluster 2011 Christmas season, plans were announced to close another 1,200 stores to generate much-

needed cash.20. S o m e a n a l y s t s b e l i e v e t h e d o w n t u r n i s l i n k e d t o a l a c k o f maintenance in aging stores. While retailers typically spend about $6 to $8 per square foot annually on maintenance, Sears has spent only $1.90.

There are a number of shortcomings associated with external growth, however. In an acquisition, the acquiring firm typically must pay a premium (i.e., an amount greater than the current share price) to obtain the firm, thereby increasing the debt load. Top managers in the acquired firm often depart the organization as well. Moreover, regulators often scuttle M&A

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efforts, arguing that competition will be infringed. In 2011, AT&T agreed to acquire wireless carrier T-Mobile for $39 billion, only to withdraw its proposal 9 months later after the U.S.

Department of Justice (DOJ) sued to block the merger.21.

There can be other problems as well. Achieving the anticipated synergy from a merger or acquisition can be elusive. In 1990, Time acquired Warner Communications for $14 billion to form Time Warner. In 1996, Time Warner acquired Turner Broadcasting System for $7.6 billion. In 2001, however, AOL acquired Time Warner but dropped AOL from its name in 2003. Since that time, the firm has experienced problems coordinating the activities of its business units. The firm sold its music division in 2004 and its book division in 2006. Strife between two of its business units—Sports Illustrated and AOL—was common in the mid-2000s, so much so that Jeffrey Bewkes, president of Time Warner, advised the magazine to look elsewhere for partners if it could not work with AOL. The corporate synergy Time Warner executives

anticipated in the early 2000s simply did not materialize.22.

Blending two distinct cultures or ways of thinking can be difficult amidst the rumors of layoffs

and restructuring that often accompany a merger or acquisition.23. This is especially the case a c r o s s b o r d e r s . A l t h o u g h c a r m a k e r s C h r y s l e r a n d D a i m l e r - B e n z m e r g e d t o f o r m DaimlerChrysler in 1998, complete cooperation between members from the two original organizations was slow to develop. During the first few years of the merger, Mercedes executives closely guarded their technology from Chrysler for fear of eroding the Mercedes mystique. The Crossfire—a Chrysler design with Mercedes components—was introduced in 2004 and represented the first joint vehicle. The synergy never seemed to materialize, however, and most of Chrysler was sold to a private investment group, Cerberus, for $7.4 billion in 2007. After other financial considerations were taken into account, Daimler actually paid Cerberus about $500 million to take the financially strapped carmaker it had paid $36

billion for 9 years earlier.24. Fiat merged with Chrysler in 2009 to stave off bankruptcy.

Another example of a cultural challenge is InBev's acquisition of Anheuser-Busch in 2008. The Belgian-Brazilian hybrid InBev had been known for intense cost cutting, while Anheuser- Busch had grown to almost 50% of the U.S. beer market as an innovative company offering generous employee benefits. Each firm's market strength was largely in regions where the

other was not a major competitor.25. This case illustrates an interesting conundrum: Firms often merge to combine resources and strengths. The fact that each firm's successes often do not overlap is often associated with different cultural approaches, which in turn can lead to problems if the two become one.

External growth can take many forms—five of which are discussed next. Although these forms are not always mutually exclusive, it is appropriate to consider each example individually.

Horizontal (Related) Integration

A firm that acquires other companies in the same line of business is engaging in a process called horizontal integration. Doing so allows a firm operating in a single industry to grow

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rapidly without moving into other industries. Hence, the primary impetus for such a strategy is a desire for increased market share. Such growth can create scale economies for the firm, increase its negotiating leverage with suppliers, and enable the firm to promote its goods and services to a large audience more efficiently and effectively. Southwest Airlines engaged in horizontal integration when it acquired AirTran in 2010. As previously mentioned, Airtran's routes included a hub in Hartsfield-Jackson Atlanta International Airport—the busiest in the world—as well as select routes to Mexico and the Caribbean. Historically, Southwest concentrated on internal growth and has shied away from acquisitions, but the Dallas-based

discount carrier saw an opportunity to expand its coverage with the addition of AirTran.26.

Horizontal (Related) Diversification

A firm engages in horizontal related diversification when it acquires a business outside its present scope of operation but with similar or related core competencies, the firm's key capabilities and collective learning skills that are fundamental to its strategy, performance, and long-term profitability. The purpose of horizontal related diversification is to create synergy by transferring and/or sharing the capabilities among the various business units. Many banks consolidated in the 1990s and 2000s to gain economies of scale.

Ideally, core competencies should provide access to a wide array of markets, contribute directly to the goods and services being produced, and be difficult to imitate. When a firm lacks one or more key core competencies and acquires a business unit that possesses them, these two firms may combine complementary core competencies. For example, when a traditional retailer with a quality reputation acquires an e-tailer with a strong Internet presence and web savvy, the idea is to combine the two capabilities so that the newly created firm can enjoy the best of both competencies.

Conglomerate (Unrelated) Diversification

When a corporation acquires a business in an unrelated industry to reduce cyclical f l u c t u a t i o n s i n c a s h f l o w s o r r e v e n u e s , i t i s p u r s u i n g conglomerate (unrelated)

diversification.27. Whereas diversifying into related industries is pursued for strategic

reasons, diversifying into unrelated industries is primarily financially driven.28. Conglomerate diversification allows a firm to continue to grow even when its core business has matured. However, firm managers often lack the expertise required to manage a myriad of unrelated businesses.

Vertical Integration

Vertical integration refers to merging various stages of activities in the distribution channel. Firms in some industries tend to be more vertically integrated than those in other industries although variations can exist among similar firms. Full integration occurs when a firm performs all activities ranging from the procurement of raw materials to the production of final outputs: firms that engage in some but not all of these activities are only partially integrated. A firm that acquires its suppliers (i.e., expanding “upstream”) is engaging in backward integration whereas a firm acquiring its buyers (i.e., expanding “downstream”) is engaging in forward integration

Vertically integrated firms enjoy a number of advantages. Vertical integration can reduce

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transportation costs, provide more opportunities to differentiate products because of the increased control over inputs, and provide access to distribution channels that would not otherwise be accessible to the firm. Transactions costs between suppliers and buyers may be reduced when the same firm owns both entities. Proprietary technology can be more easily secured when information is shared among businesses owned by the same parent firm. It is often possible to reduce costs by coordinating distribution activities among the business units. It is also easier to develop and maintain high quality when a single firm controls all the

businesses associated with the production of a good or service.29.

Vertical integration also has its disadvantages. It can reduce operational flexibility because the firm is heavily invested “upstream and downstream.” Vertical integration can even raise production costs and reduce efficiency because of the lack of supplier competition; a firm that acquires a supplier has committed to using that supplier in the future. Overhead costs may increase as the need and ability to coordinate activities among business units increases. Because producers within a vertically integrated firm are committed to working with suppliers owned by the same firm, it must pay higher prices for its inputs if its suppliers are not

technologically competitive.30.

Strategic Alliances (Partnerships)

Strategic alliances—often called partnerships—occur when two or more firms agree to share the costs, risks, and benefits associated with pursuing new business opportunities. Such arrangements include joint ventures, franchise/license agreements, joint operations, joint long-term supplier agreements, marketing agreements, and consortiums. Strategic alliances can be temporary, disbanding after the project is finished, or can involve multiple projects over an extended period of time. The late 1990s and early 2000s witnessed a sharp increase in

strategic alliances.31.

Various forms of strategic alliances have become commonplace at both large and small firms. P&G began licensing out hundreds of undeveloped patents, brands, and rights to new products in the late 2000s, often partnering with small companies. Nehemiah Manufacturing has been licensing P&G's Pampers Kandoo line of toddler cleaning products since 2009. P&G's Febreze brand of air fresheners for use with residential air-filter products has been licensed to Imagine One Resources since 2010. The Febreze brand was licensed to Kaz USA for an odor-controlling standing fan in 2012. Between 2009 and 2011, P&G-licensed products generated about $3 billion in annual revenues, although the portion returned to the firm as

fees is not known.32.

Broadly speaking, strategic alliances are considered to be a form of growth, but the firm does not necessarily gain revenues and there is no exchange of resources. Although many strategic alliances may be undertaken for political, economic, or technological reasons, others may be pursued as an alternative to diversification. Within this context, one firm may opt to work closely with other firms to pursue various business opportunities instead of attempting to acquire the firms outright. Alternatively, a firm may create greater customer value through

synergy.33. A particular project may be so large that it would strain a single company's resources or require complex technology that no single firm possesses. Hence, firms with complementary technologies may combine forces, or one firm may contribute its technological

expertise while another contributes its managerial or other abilities.34.

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There are many examples of partnerships, especially where technology and global access are key considerations. For example, Microsoft and Yahoo formed an Internet search alliance in

2010.35. IBM and Apple have exchanged technology in an attempt to develop more effective computer operating systems. General Motors (GM), Lockheed, Southern California Edison, and Pacific Gas & Electric have been working together to develop widely used electric

vehicles and advanced mass transportation systems.36.

Ford and Toyota announced a strategic alliance in 2011 to develop a gas-electric hybrid system for light trucks and sport utility vehicles. The rivals are industry leaders in hybrid technology but came together to share high developmental costs in an effort to achieve the

increased long-term corporate average fuel economy (CAFE) standards.37.

A strategic alliance can lead to a merger if additional advantages are anticipated. United and Continental—the second and fourth largest airlines in the United States at the time— discussed a possible merger in 2008 but decided instead on a strategic alliance. As part of the arrangement, Continental joined the Star Alliance of 20 airlines anchored by United and Lufthansa. The two also agreed on code sharing—marketing a given flight under more than

one airline—to eliminate overlapping flights.38. After enjoying a successful partnership, the two finally agreed to merge in 2010.

Strategic alliances have two major advantages when compared to mergers and acquisitions. First, they minimize increases in bureaucratic, developmental, and coordination costs when compared to mergers and acquisitions. Second, each company can share in the benefits of the alliance without bearing all the costs and risks itself. The major disadvantage of a strategic alliance is that one partner in the alliance may offer less value to the project than other partners but may gain a disproportionate amount of critical know-how from the cooperation with its more progressive partners.

One of the risks associated with strategic alliances—especially relationships across borders— is that the alliance can equip a global partner to become a global competitor. GM, for example, has partnered with Shanghai Automotive Industry since 1997. Together, they have built Chevrolets and Cadillacs for China's burgeoning market as part of a successful 50/50 joint venture. GM shared valuable know-how with its Chinese counterpart along the way, however. Some analysts believe GM gave away too much in the deal. The quality of Shanghai Automotive's vehicles have improved considerably as a result of the alliance—so much so that the company may be able to compete directly with GM on the world stage, perhaps in the

United States.39.

Strategic alliances can also be problematic if the partner firms do not agree explicitly on the contribution each will make to the alliance or if one does not meet its commitment. In 2000, for example, Amazon.com and Toys“R”Us inked a 10-year deal to join forces, with Amazon agreeing to devote a portion of its website to Toys“R”Us products, and the toy retailer agreeing to stock certain items on the virtual shelves. Although the arrangement was touted as an example of how Internet retailers can work effectively with their traditional counterparts, the deal deteriorated several years later and ended up in court in 2006. Toys“R”Us argued that Amazon broke its original commitment to use Toys“R”Us as its sole provider of toys and related products, while Amazon contended that Toys“R”Us did not maintain an appropriate selection of toys. A judge sided with Toys“R”Us and ordered the partnership severed in

2006.40. Amazon has since begun to market toys on its own and partner with other sellers as

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well.

Moral hazard—when the parties in an arrangement do not share equally in the risks and benefits—can also present a problem for strategic alliances. When cooperating firms do not share ownership, managers have an incentive to promote activities that provide the greatest potential benefit for their own firm while shifting costs and risk to the partner firm. Moral hazard is prevalent in everyday life. For example, individuals with low health insurance co- payments are more likely to visit the doctor for marginal ailments, thereby shifting some of the unnecessary medical costs to others in the pool. The same principle can be applied to organizational settings. Firms in a strategic alliance may withhold some of its most advanced technology from partners and may not commit its best people to the projects. When this occurs, the alliance does not benefit from the best each organization has to offer and is likely to fail.

Stability Strategy

Although growth is intuitively appealing, it is not always the most effective strategy. The stability strategy for a firm that has operations in multiple industries maintains the current array of businesses for two reasons: First, stability enables the corporation to focus managerial efforts on enhancing existing business units by fostering productivity and innovation. Second, the cost of adding new businesses may exceed the potential benefits. A corporation may adopt a stability strategy in leaner times and shift to a growth strategy when economic conditions improve. Stability can be an effective strategy for a high-performing firm, but it is not necessarily a risk-averse strategy.

For a single industry firm, the stability strategy is one that maintains approximately the same operations without pursuing significant growth in revenues or in the size of the organization. Growth may occur naturally but is typically limited to the level of industry growth. Such a business may select stability instead of growth for four reasons:

First, industry growth may be slow or nonexistent. In this situation, one firm's internal growth must come at the expense of another firm. This can be particularly costly, especially when

attacking an industry leader.41.

Second, the costs associated with growth do not always exceed the benefits. During the “cola wars” of the 1980s, PepsiCo and Coca-Cola spent millions in the United States to lure consumers to their cola brands only to realize that the costs associated with securing this market share severely dampened profits. In the end, Americans could only drink so much cola, and market shares remained largely unchanged regardless of promotional expenditures.

Third, growth may place great constraints on quality, marketing efforts, and customer service. Growth for small firms can create a strategic challenge as managers attempt to retain the flexibility and entrepreneurial spirit that helped found the company while making the substantial capital outlays and commitments typically associated with larger firms. Strategic managers of such firms are understandably hesitant to adopt growth strategies, even when financial prospects look promising, if they believe that their uniqueness may be lost in the transition. After going public in 2002, U.S. airline upstart JetBlue surpassed the $1 billion mark in revenues in 2004. By 2011, revenues approached $4 billion, and JetBlue served 70 destinations in 22 states and seven countries with about 30,000 employees and 167 planes. But rapid growth has placed considerable strain on JetBlue. In 2007, the fast-growing airline stranded hundreds of passengers when inexperienced and overwhelmed customer and crew

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services did not cancel and reschedule flights appropriately during a snowstorm, an error that cost the company $30 million in payments to customers alone and eventually led to the

board's removal of founder David Neeleman.42.

Agreement is not universal on this point, however. While some leaders acknowledge the difficulty of maintaining excellent service while growing, they contend that a large firm can maintain a sense of closeness to its customer with an emphasis on execution. According to chief operating officer (COO) Martin Coles, one of Starbucks' chief concerns is “staying small

as we grow big.”43. Starbucks maintains its “smallness” by customizing many of its stores to their locales and emphasizing a personal relationship with each patron.

Finally, large, dominant firms may not wish to risk prosecution for monopolistic practices or the increased competitive pressure associated with growth. U.S. firms, for example, may be prohibited from acquiring competitors if regulators believe their combined market shares will threaten competitiveness. Even internal growth can be problematic at times, as was the case in the late 1990s and early 2000s with Microsoft's costly defense against federal charges that the company unfairly dictated terms in the software industry. Throughout the 2000s, Intel— supplier of 80% of the world's microprocessors—was accused of retaliating against computer makers that buy chips from other producers and even paying some of them to boycott Intel's competitors. Intel agreed to cease such activities when it reached a settlement with U.S.

antitrust regulators in 2010.44.

Google has been a target of antitrust allegations because of its massive web influence. In 2010, Google announced plans to acquire ITA Software, the flight-data company that supports flight search services for both Google and its competitors. Following anti-competition protests by rivals Kayak and Orbitz, and the DOJ, Google agreed to make travel data available to its competitors in exchange for DOJ approval of the acquisition. Although Google did not explicitly commit to link rivals to flight searches, the firm agreed to “build tools that drive more traffic to airline and online travel agency sites.” In late 2011, Google began placing its new flight search service atop search results for rivals, including Orbitz, Priceline, and Expedia. Consumers selecting the Google tool are linked directly to airline websites, circumventing its rivals in the process. Google's competitors petitioned the DOJ for further intervention, claiming

that the Internet giant was wielding its market power in an unfair manner.45.

In another 2011 U.S. Senate antitrust hearing, three Internet companies (Nextag, Yelp, and Expedia) charged Google with unfair competition by punishing them with its search engine. These companies also filed complaints with the Federal Trade Commission (FTC), claiming that Google restricted access to companies whose sites have become places where consumers search for information without going to Google first. Nextag chief executive officer (CEO) Jeff Katz argued that Google viewed his firm as a threat and prevented it from bidding on prominent advertisements that appear next to search results for certain products. Google denied the charges, claiming the restriction was based on the type of advertisement, not the

particular company seeking to purchase it.46.

Wal-Mart's historical emphasis on growth has made it the world's largest retailer. As such, Wal-Mart is the political target for attacks on American business and must defend itself from lawsuits and competitive attacks more than any other firm in the world. For example, Saint Consulting Group specializes in fighting proposed Wal-Mart locations behind the scenes. Large supermarket chains including Supervalu and Safeway have secretly funded efforts orchestrated by Saint but ostensibly led by local activists and union groups to derail the

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construction of new Wal-Marts on traffic, environmental, and other grounds. In many instances, the time it takes to open a new store more than doubles because of such litigation, and in some cases, plans for the proposed Wal-Mart are dropped altogether. Wal-Mart

receives this heightened attention because of its dominant industry position.47.

Retrenchment Strategies

Growth and stability strategies are usually adopted when firms are performing well. When performance is disappointing or declines are anticipated, a retrenchment strategy may be appropriate. Retrenchment may take one or a combination of three forms: (1) turnaround, (2) divestment, or (3) liquidation.

Turnaround

A turnaround seeks to transform the corporation into a leaner, more effective firm and includes such actions as eliminating unprofitable outputs, pruning assets, reducing the size of the workforce, cutting costs of distribution, and reassessing the firm's product lines and customer

groups.48. Broadly speaking, a turnaround is not as drastic a move as restructuring, although the terms are often interchanged in the popular business press.

A turnaround typically occurs when a firm performs poorly but anticipating problems and retrenching before problems intensify is advisable. Predicting bad times is not always easy, however, and many executives take their cues from economic forecasts. For example, the first two quarters of 2011 were generally good ones for corporate profits. But faced with the prospects of an extended recession, many firms engaged in turnarounds that included efforts to cut costs, streamline operations, and in some instances close factories and cut the workforce. These companies hoped to stay ahead of predictions for a continued sluggish

economy.49.

Lee Iacocca's Chrysler turnaround may be the most famous example in U.S. history. By the late 1970s, Chrysler was on the verge of bankruptcy. Its newly hired CEO, Lee Iacocca, implemented a dramatic turnaround strategy. A number of employees were laid off, while those remaining agreed to forgo part of their salaries and benefits. Twenty plants were either closed or consolidated. Collectively, these actions lowered the firm's break-even point from an annual sales level in half to about 1.2 million vehicles. It is interesting to note that Iacocca also implemented a divestment strategy (another form of retrenchment) by selling Chrysler's marine outboard motor, defense, and air-conditioning divisions, as well as all its automobile manufacturing plants located outside the United States. By 1982, Chrysler began to show a profit after having lost $3.5 billion in the preceding 4 years. Chrysler performed well for a number of years but struggled again in 2009 when it was acquired by Fiat.

Goodyear was feuding with its unions and struggling to compete with intense foreign competition in 2006, but a concentrated turnaround effort proved successful by 2011. The tire maker shifted to a smaller, more highly skilled workforce and began to focus on selling more premium, higher-priced tires. As CEO Rich Kramer put it, Goodyear transformed from being an auto supplier company to being a consumer products company with more emphasis on

quality instead of production volume.50.

Adidas embarked on a turnaround effort for its Reebok business unit in 2009. For several

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years, Reebok's running shoes had been sold in discount stores and supercenters, resulting in a deterioration of the image. The effort included increased investment in product development and partnerships with high-stature firms, such as the women's fitness shoe

developed with Canadian circus company Cirque du Soleil.51.

Facing the prospects of bankruptcy, Blockbuster sought a turnaround in 2010. The firm's video rental business model was attacked during the late 2000s by Netflix mail-order and online rental services, Redbox $1-a-night movie vending machines located in grocery and convenience stores, and the expansion of pay-per-view movies on cable and satellite television. The turnaround was unsuccessful, however, and the firm entered bankruptcy

proceedings and was acquired by Dish Network in 2011.52. Many otherwise strong firms engage in turnarounds when their environments change. Starbucks closed about 600 stores in 2008 in response to slow industry growth, an impending recession, and increased competition in gourmet coffees from Dunkin' Donuts and McDonald's. Starbucks remained profitable during this time, however, and maintained more than 17,000 stores in over 50

countries in 2011.53.

Turnarounds often accompany a change of company leadership. When Akio Toyoda— grandson of Toyota's founder—took over the company as CEO in 2009, he inherited an unprecedented $4.6 billion loss in the previous fiscal year. Toyoda announced a turnaround strategy that included replacing 40% of senior managers and a reorganization of its North American business that would unify its sales and manufacturing divisions. In addition, Toyota welcomed four new executive vice presidents out of a total of five and 18 new managing directors out of a total of 50. Toyoda's new approach marked a key shift from the policies of

his predecessor, Katsuaki Watanabe, who stepped down to become vice chairman.54.

Toyota's new management team faced its own turnaround scenario in late 2009 and 2010 amidst charges of braking problems with the Camry and other models.

When a turnaround involves layoffs, firms must be prepared to address their effects on both departing employees and survivors. Employees may be given opportunities to voluntarily leave—generally with an incentive—to make the process as congenial as possible. When this situation occurs, however, those departing are often the top performers who are most marketable, leaving the firm with a less competitive workforce. When layoffs are simply announced, morale is likely to suffer considerably. For this reason, turnarounds involving

layoffs are often more difficult to implement than anticipated.55.

When layoffs are necessary, however, several actions can help to palliate some of the negative effects. Specifically, top management should communicate honestly and effectively with all employees, explaining why the downsizing is necessary and how terminated employees were selected. Everyone, including the “survivors,” should be made aware of how departing employees will be supported. Employees should also be encouraged to partake of services available to them, and special efforts should be made to ensure that such programs

are administered in a clear and consistent manner.56. Although these measures will not eliminate all the harsh feelings associated with layoffs, they can help keep the process under control.

A number of executives are widely recognized as “turnaround specialists” and may be brought in as temporary CEOs to lead the process and orchestrate such unpopular strategic moves as layoffs, budget cuts, and reorganizations. Robert “Steve” Miller, also a major player in the

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Chrysler turnaround, has served as CEO of Waste Management and the automobile parts supplier Federal-Mogul, as well as a consultant on turnaround issues to such companies as Aetna. According to Miller, the CEO in a company seeking turnaround should be honest with employees from the outset and seek their input. He or she should also spend time with customers. As Miller put it, “Listen to your customers. [They] are usually more perceptive than

you are about what you need to do with your company.”57.

It can be difficult to distinguish between a turnaround strategy and routine continuous improvement efforts. In 2011, Wal-Mart had experienced seven consecutive quarterly sales declines in U.S. stores open for at least a year. Wal-Mart's U.S. chief William Simon pledged a return to the core business, an emphasis on households in the $30,000 to $70,000 category. During the recession, many customers in this category defected from the big-box store in

favor of upstart dollar store chains.58. Considering only the U.S. market, some might consider this change of focus to constitute a retrenchment strategy. Given Wal-Mart's solid performance outside of the United States, however, others might consider this shift as less substantial. Simon's efforts produced results, as Wal-Mart achieved a per-store sales growth of 1.3% in the third quarter of 2011.

Divestment

If one or more of the firm's business units may function more effectively as part of another firm, a divestment strategy may be pursued. Divestment may be necessary when the industry is in decline or when a business unit drains resources from more profitable units, is not performing well, or is not synergistic with other corporate holdings. In a well-publicized spin- off, PepsiCo divested its KFC, Taco Bell, and Pizza Hut business units into a new company, Tricon Global Restaurants, Inc., in 1997. The spin-off was designed to refocus PepsiCo's efforts on its beverage and snack food divisions. Tricon's name officially changed to Yum Brands in 2002. Yum added A&W All American Food and Long John Silver's to the portfolio shortly thereafter and has performed well.

In 2010—after the Chrysler acquisition—Italian carmaker Fiat spun off its noncar businesses —Iveco trucks, Case New Holland farming and construction equipment, and industrial and marine engine division—into a new company, Fiat Industrial. CEO Sergio Marchionne justified the decision by emphasizing the different capital needs and customer and business profiles. “There is no longer any reason to keep together sectors that operate [under] such diverse industrial logic,” he noted. The goal of the divestiture was to promote “growth, autonomy, and

efficiency.”59.

Liquidation

Liquidation is the strategy of last resort and terminates the business unit by selling its assets. In effect, liquidation represents a divestment of all the firm's business units and should be adopted only under extreme conditions. Shareholders and creditors experience financial losses, some of the managers and employees lose their jobs, suppliers lose a customer, and the community suffers an increase in unemployment and a decrease in tax revenues. For this reason, liquidation should be pursued only when other forms of retrenchment are not viable (see Case Analysis 6.1).

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Step 9: What Is the Current Firm-Level Strategy?

What is the corporate profile? Is the organization attempting to grow, maintain its present size (i.e., stability), or retrench? One need not be concerned with what the company should be doing at this point but rather what is presently being implemented. It is important to provide sufficient detail to support the assessment of the strategy. You should not assume that public references to growth in one specific division or line of business necessarily mean that a firm is pursuing an overall growth strategy.

Boston Consulting Group Growth-Share Matrix

It is often difficult to coordinate the activities of multiple business units, particularly when they are minimally related or not related at all. Corporate portfolio frameworks have been developed to provide guidelines for strategists. Although firm-specific conditions often require exceptions to the guidelines, these frameworks can provide a good starting point to consider strategy in firms with multiple business units. The Boston Consulting Group (BCG) original framework is one of the most widely recognized.

The BCG growth-share matrix was developed in 1967 by BCG and is illustrated by the matrix shown in Figure 6.1. The market's rate of growth is indicated on the vertical axis, and the firm's share of the market is indicated on the horizontal axis. A firm's business units can be plotted on the matrix with a circle whose size denotes the relative size of the business unit. The horizontal position of a business indicates its market share, and its vertical position depicts the growth rate of the market in which it competes. Managers and consultants can categorize each business unit as a star, question mark, cash cow, or dog, depending on each

one's relative market share and the growth rate of its market.60.

Figure 6.1 The Original Boston Consulting Group Framework

A star is a business unit that has a large share of a high-growth market—generally 10% or higher. Although stars are usually very profitable, they often necessitate considerable cash to continue their growth and to fight off the numerous competitors that are attracted to fast- growing markets. Question marks are business units with low shares of rapidly growing

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markets and may be new businesses just entering the market. If they are able to grow and develop into market leaders, they evolve into stars; if not, they will likely be divested or liquidated.

A cash cow is a business unit that has a large share of a slow-growth market—generally less than 10%. Cash cows are normally highly profitable because they often dominate a market that does not attract a large number of new entrants. Because they are well established, they need not spend vast resources for advertising, product promotions, or consumer rebates. The firm may invest the excess cash that they generate in its stars and question marks. Finally, dogs are business units that have small market shares in slow-growth (or even declining) industries. Dogs are generally marginal businesses that incur either losses or small profits and are often liquidated.

Ideally, a well-balanced corporation should have mostly stars and cash cows; some question marks (because they can represent the future of the corporation); and few, if any, dogs. To attain this ideal, corporate-level managers have four options (see Figure 6.2). First, managers can build market share with stars and question marks. The key for question marks is to identify and support the promising ones so that they can be transformed into stars. Building market share may involve significant price reductions, which may result in losses or marginal profitability in the short run.

Figure 6.2 Alternative Strategies With Strategic Business Units

Second, management can hold market share with cash cows, thereby generating more cash than building market share does. Hence, the cash contributed by the cash cows can be used to support stars and those question marks deemed most promising.

Third, management may harvest, or milk, as much short-term cash from a business as possible, usually while allowing its market share to decline. The cash gained from this strategy can also support stars and selected question marks. The businesses harvested usually include dogs, question marks that demonstrate little growth potential, and some weak cash cows.

Finally, management may divest a business unit to provide cash to the corporation and stem the outflow of cash that would have been spent on the business in the future. As dogs and less promising question marks are divested, the cash provided is reallocated to stars and more promising question marks.

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All things equal, healthy multi-business unit firms should maintain a balance of business units that generate cash and those that require funds for growth. Broadly speaking, business units below the dotted line in Figure 6.1 are revenue generators whereas business units above the dotted line are revenue users. The balance of businesses on both sides of the line can be a key factor in decisions to acquire new business units or divest old ones. When more revenue is needed than can be generated internally, the firm must consider external sources of capital.

The BCG matrix heavily emphasizes the importance of market share leadership as a precursor to profitability. Some question marks are cultivated to become leaders as well, but less promising question marks and dogs are usually targeted either for harvesting or divestiture.

The BCG matrix provides managers with a systematic means of considering the relationships among business units in its portfolio. A number of limitations of this and similar frameworks have been identified, however. For example, the BCG matrix assumes that strategic managers are free to make portfolio decisions, such as transferring capital from cash cows to question marks without challenges from shareholders and others. The classification of business units in the matrix can change markedly with different industry definitions. Hence, although the BCG matrix is a useful tool for evaluating the appropriate mix of business units, it should not be interpreted literally.

Global Corporate Strategy

A firm may choose to be involved only in its domestic market, or it may compete abroad at one of three levels: (1) international, (2) multinational, or (3) global. Effective operation at any of these levels often—but not always—necessitates economies of scale and a relatively high

market share.61.

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Moving outside the domestic market, some companies choose to be involved on an international basis by operating in various countries but limiting their involvement to importing, exporting, licensing, or making strategic alliances. Exporting alone can significantly benefit even a small company. However, international joint ventures—a form of strategic alliance involving cooperative arrangements between businesses across borders—may be desirable even when resources for a direct investment are available.

Firms with global objectives may decide to invest directly in facilities abroad. Due to the complexities associated with establishing operations across borders, strategic alliances may be particularly attractive to firms seeking to expand their global involvement. Companies often possess market, regulatory, and other knowledge about their domestic markets but may need to “partner” with companies abroad to gain access to this knowledge as it pertains to

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international markets. A number of international strategic alliances exist among automobile producers—for example, production facilities owned jointly by GM and Toyota. Ford and Mazda have partnered since 1979; Ford owned 33% of the company in 2008 but reduced its holdings to only 3% during the global financial crisis in 2010. Ford has shifted its emphasis to China with a fifth factory in Hangzhou and doubled its production capacity and sales outlets from 2012 to 2015. Ford's aggressive growth in China is part of a joint venture with a Chinese

counterpart, Chongqing Changan Automobile Company.62.

International strategic alliances provide a number of advantages to a firm. They can provide entry into a global market, access to the partner's knowledge about the foreign market, and risk sharing with the partner firm. They can work effectively when partners can learn from each other, when neither partner is large enough to function alone, and when both partners share common strategic goals but are not in direct competition. However, a number of problems can arise from international joint ventures, including disputes and lack of trust over proprietary knowledge, cultural differences between firms, and disputes over ways to share the costs and revenues associated with the partnership.

Other conservative options are also available to a firm seeking an international presence. Under an international licensing agreement, a foreign licensee purchases the rights to produce a company's products and/or use its technology in the licensee's country for a negotiated fee structure. This arrangement is common among pharmaceutical firms. Drug producers in one nation typically allow producers in other nations to produce and market their

products abroad.63.

International franchising is a longer-term form of licensing in which a local franchisee pays a franchiser in another country for the right to use the franchiser's brand names, promotions,

materials, and procedures.64. Whereas licensing arrangements are predominantly pursued by manufacturers, franchising is more commonly employed in service industries, such as fast- food restaurants.

Other companies are involved at the multinational level, where firms direct investments in other countries, and their subsidiaries operate independently of one another. Colgate- Palmolive has attained a large worldwide market share through its decentralized operations in a number of foreign markets.

Finally, some firms are globally involved with direct investments and interdependent subdivisions abroad. For example, some of Caterpillar's subsidiaries produce components in different countries, while other subsidiaries assemble these components and still other units sell the finished products. As a result, Caterpillar has achieved a low-cost position by producing its own heavy components for its large global market. If its various subsidiaries operated independently and produced only for their individual regional markets, Caterpillar

would be unable to realize these vast economies of scale.65.

Expanding into global markets is not always easy. Starbucks experienced early difficulties in China but amassed more than 750 locations in Greater China (i.e., the People's Republic of China, Taiwan, Macao, and Hong Kong) by 2010. McDonald's opened its first restaurant in China in 1990 but did not reach 1,000 outlets until 2010; the fast-food giant plans to reach 2,000 by 2013. McDonald's has enjoyed success in Russia where its burgeoning middle class has a taste for American goods and services. After some initial problems in the 1990s, McDonald's shifted its emphasis from more stores to larger ones with more efficient

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operations. Russian locations serve about twice as many customers per year as those in other countries. The Khamzat Khasbulatov McDonald's in Moscow is the second busiest in the

world, with 26 cash registers.66.

Yum Brands—parent company of KFC and Pizza Hut—has grown at a much faster pace in

China, with about 5,000 stores in 2012, although revenue growth has slowed.67. Yum Brands also recently launched an aggressive expansion into India. Yum operated 72 KFCs and 158 Pizza Huts in India in 2010, with plans for a total of 1,000 stores by 2015. Restaurant offerings are similar to those in the United States, except for more vegetarian options and spicier seasoning. By focusing on the youth, Yum CEO David Novak sees the same growth trajectory

in India that has contributed to the success of the company's 3,500 restaurants in China.68.

Growth in China has been a major contributor to Yum's performance, accounting for 49% of

Yum's total profits in 2010.69. In the emerging economy of Vietnam, however, Yum—like

Starbucks and McDonald's— has been much more cautious.70.

Not all U.S. restaurant chains have been successful in China. California Pizza Kitchen launched a franchised unit in 2006 but struggled due to a business model that required the import of most of its ingredients; the chain is making a second try with a corporate-owned unit opened in 2011. OSI Restaurant Partners operated two Outback Steakhouse restaurants in

Beijing but closed both in 2011 for a lack of customers.71.

In 2010, Yum Brands began to focus on Africa, announcing plans to double its number of KFC outlets there to 1,200 by 2014. Novak cited the continent's large population, improved political stability, growing middle class, and cultural preference for chicken as reasons for the strategic interest. Although an estimated 6l% of its residents currently live on less than $2 per day, Africa's middle class—those earning between $4 and $20 a day—is projected to increase to 1.1 billion, or 42% of the continent's population, by 2060. KFC estimates that it reached only about 180 million of Africa's roughly 1 billion people in 2010, while holding a sizable 44%

share of the fast-food market in South Africa.72.

Coca-Cola is already well established in Africa, with 3,200 distribution points delivering to shops of all sizes in 15 African nations. Nestle is currently following Coke's lead, investing $850 million in Africa between 2006 and 2010. Executives expect the percentage of firm revenues derived from emerging markets to increase from 30% to 45% by 2020 with Africa

accounting for a significant part of the growth.73.

German supermarket Aldi has experienced considerable growth in the United States and plans continued expansion into the 2010s. Aldi emphasizes small stores, store brands, and

low prices, a combination that bodes well in down economic times.74. German carmaker Volkswagen (VW) has also targeted the United States for growth. With only 2.2% of the U.S. market in 2010, VW is making a renewed effort to tailor its vehicles to mainstream American tastes. VW's strategy includes a larger, less expensive Jetta and the production of vehicles in

the United States beginning in 2011, the first since the 1980s.75.

A number of firms—including Ford Motor, Honda (motorcycles), and H.J. Heinz—have expanded aggressively into Indonesia. With 240 million people, Indonesia experienced significant economic growth and development in the late 2000s and has become a destination o f c h o i c e f o r m a n y m a n u f a c t u r e r s o f W e s t e r n p r o d u c t s s e e k i n g g l o b a l g r o w t h

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opportunities.76. Annual car sales increased 58% in Indonesia in 2010, compared to 33% in

China and 4% in the United States.77.

Many of the successful ventures into emerging markets— including much of South America, Africa, and Asia—are driven by inexpensive labor and the distribution of low-cost products. There are exceptions to this general rule, however. While Indian automaker Tata seeks to export its inexpensive vehicles to consumers in other nations, global ultra-luxury automakers are aggressively pursuing a growing high-end market in India. The nation may be home to half a billion of the world's poorest citizens, but its small high-wealth class is growing. Only 15,702 luxury cars were sold in India in 2010, compared to 727,227 in China. The discrepancy is due in part to India's import taxes on vehicles and the nation's poor highway infrastructure,

but demand is growing.78.

Some of the complexities associated with adopting a global perspective are illustrated by Kellogg's production dilemma. Some countries appreciate the vitamin fortification in Corn Flakes common in Kellogg's host country, the United States. Denmark, however, does not want vitamins added to cereal for fear that some might exceed recommended daily doses. Officials in the Netherlands do not believe Vitamin D or folic acid is beneficial, but the Finns like more Vitamin D to make up for sun deprivation. As a result, Kellogg's plants in England and Germany have produced four different varieties of Corn Flakes since 1997 to meet the

differences in demand throughout the European Union.79.

Wal-Mart Abroad

Wal-Mart has also experienced both successes and difficulties in global markets and is an interesting case to consider. When the giant retailer first expanded outside of the United States in the early 1990s, it made a number of mistakes by presuming that its successful American model would succeed in disparate global markets. Golf clubs in Brazil and ice skates in Mexico were among the early casualties, and some German customers mistook the

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friendliness of its clerks for flirting. In the early and mid-2000s, Wal-Mart changed course, expanding by acquiring successful local retail chains, hiring locals to manage them, and learning the local tastes and culture. Wal-Mart's acquisitions of grocer Asda in the United Kingdom and retailer Cifra SA in Mexico have given the firm strong stakes in two nations

without expanding its operations internally.80. Expansion into Japan has been one of external

growth, where Wal-Mart owns 95% of supermarket Seiyu.81. The mega-retailer has grown rapidly and enjoyed considerable success in developing markets such as Mexico whererapidly and enjoyed considerable success in developing markets such as Mexico where “shoppers care more about the cost of medicine and microwaves than the cultural incursions

of a multinational corporation.”82.

Wal-Mart has expanded aggressively into Canada, where it operated about 330 stores in early 2012, about half of them supercenters. Not to be outdone, rival Target acquired 200 stores from Canadian discount retailer Sellers. Viewing the U.S. discount retail market as increasingly saturated, Wal-Mart and its rivals are continuing to shift their attention elsewhere.

With its cultural similarities and proximity to the United States, Canada is a logical choice.83.

Wal-Mart was never able to win over Germany's frugal and demanding customers from the country's strong local discount retailers. After losing money for 8 years, Wal-Mart sold its 85 stores to German rival Metro AG. Interestingly, the firm's largest global competitor, Carrefour, seemed to know better all along. Carrefour had operations in 29 countries when Wal-Mart decided to leave Germany altogether in 2006, but the number two global retailer never had

stores in Germany84.

Wal-Mart opened its first big-box store in India in 2009. Government restrictions required Wal- Mart to secure a local joint venture partner—Bharti Enterprises—and precluded direct sales to the public, however. Under the name Best Price Modern Wholesale, the Wal-Mart store in Amritsar operates on a cash-and-carry basis, selling 10,000 products to licensed store

owners, schools, hospitals, and other institutions.85.

In 2011, Wal-Mart acquired South African retailer Massmart Holdings, a firm with 290 stores

operating in 13 African nations.86. According to Andy Bond, the Wal-Mart executive who led the negotiations, “We like South Africa. I think there's a definite confidence in it as a true

emerging economy, and it also offers a platform for growth in southern Africa.”87. T h e acquisition was met with political and regulatory resistance, however. The South African government warned that it could result in job losses, a charge echoed by various local unions

but denied by both Wal-Mart and Massmart.88. The takeover was approved on conditions that Wal-Mart halt job cuts for 2 years, honor union bargaining agreements for 3 years, and invest $14.4 million in a supply-chain training program designed to improve local industry

competitiveness.89.

Wal-Mart has faced other challenges in China where the retailer has 189 units in 2011. Wal- Mart has sought to reach rural and lower-income Chinese consumers by launching a new compact hypermarket format based on the low-cost, no frills Bodega Aurrera stores in Mexico and Changomas stores in Argentina. The 37,000 square-foot stores often have concrete floors, brick walls, and no air-conditioning. Their smaller size is more in line with Chinese preferences for small stores and enables Wal-Mart to penetrate smaller markets. The compact hypermarket is expected to become the preferred retail model for Wal-Mart in emerging

economies, where the big-box store is experiencing the fastest growth.90.

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1.

2.

3.

4.

5.

6.

Wal-Mart acquired Danish Netto's 193 stores in the United Kingdom in 2010. Netto stores were relatively small and located in urban centers, complementing Wal-Mart's cadre of larger out-of-town supercenters. Netto represented Wal-Mart's first European acquisition since

1998.91.

Wal-Mart's aggressive global orientation was countered when British supermarket Tesco opened 199 Fresh & Easy stores in the United States between 2007 and 2011. Tesco has a successful track record growing from 758 stores in six countries in 1997 to 6,351 stores in 14 countries in 2012, but two-thirds of its revenues still come from the United Kingdom. Its emphasis on high quality was greeted by a steep recession in the United States, however, prompting Tesco to cut prices, increase advertising, and develop a new budget brand. Its market share in the United Kingdom grew to over 30% by 2010 but slipped in 2011. In late 2012 CEO Philip Clarke decided to close or sell all of Tesco's stores in the United States and refocus efforts on markets in the United Kingdom and other countries. Like Wal-Mart, Tesco illustrates the challenges that must be faced when a successful firm attempts to replicate its

success abroad.92.

Global Orientation Assessment

Firms change from domestic-oriented strategies to a global orientation for numerous reasons. Pursuing global markets can reduce per-unit production costs by increasing volume. A global strategy can extend the product life cycle of products whose domestic markets may be declining— as U.S. cigarette manufacturers did in the 1990s. Establishing facilities abroad can also help a firm benefit from cost differences associated with comparative advantage, which partially explains why athletic shoes tend to be produced most efficiently in parts of Asia where rubber is plentiful and labor is less costly. A global orientation can lessen risk because demand and competitive factors tend to vary among nations. There are a number of factors to consider, however:

Are customer needs abroad similar to those in the firm's domestic market? If so, the firm may be able to develop economies of scale by producing a higher volume of the same goods or services for both markets. Are differences in transportation and other costs abroad favorable and conducive to producing goods and services abroad? Are these differences favorable and conducive to exporting or importing goods from one country to another? Are the firm's customers or partners already involved in global business? If so, the firm may need to become equally involved. Will distributing goods and services abroad be difficult? If competitors already control distribution channels in another country, expansion into that country will be difficult. Will government trade policies facilitate or hinder global expansion? For example, the North American Free Trade Agreement (NAFTA) facilitates trade among firms in the United States, Canada, and Mexico. Similar trading blocks, such as the European Economic Union (EEU), occur in other parts of the world. Will managers in one country be able to learn from managers in other countries? If so, global expansion may improve efficiency and effectiveness, both abroad and in the host country.

Corporate growth is often pursued through expansion into emerging economies—those nations that have achieved enough development to warrant expansion but whose markets are not yet fully served. In 2010, M&A activity in emerging markets outpaced that in Europe for the

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first time.93. Although emerging economies such as China, South Africa, Mexico, and parts of Eastern Europe are attractive in many respects, poor infrastructure (e.g., telecommunications, highways), cumbersome government regulations, and/or a poorly trained workforce can create great challenges for the firm considering expansion. The advantages and disadvantages of growth through global expansion should be considered carefully before pursuing expansion into an emerging market.

Summary

Two key sets of strategic decisions must be made at the corporate level. First, top executives must identify the corporate profile and determine whether the firm will operate in a single business, in more than one related business, or in more than one unrelated business. There are benefits and shortcomings associated with each profile option.

Second, strategic managers must select a corporate strategy from among three basic choices: (1) growth, (2) stability, or (3) retrenchment. A number of additional alternatives associated with growth and retrenchment strategies must also be addressed. A firm may choose a form of corporate restructuring to support strategic attempts to revive its competitiveness and performance.

Portfolio frameworks such as the BCG growth-share matrix can assist corporate executives in managing the relationships among the firm's business units. In doing so, executives must determine the extent to which the firm will involve itself in business operations.

Global concerns represent a key consideration at the corporate strategy level. There are three broad options ranging from conservative to aggressive, each with advantages and disadvantages, depending on the level of international involvement desired.

Key Terms

Acquisition: A form of a merger whereby one firm purchases another, often with a combination of cash and stock. Backward Integration: A firm's acquisition of its suppliers. BCG Growth-Share Matrix: A corporate portfolio framework developed by the Boston Consulting Group that categorizes a firm's business units by the market share that they hold and the growth rate of their respective markets. Conglomerate (Unrelated) Diversification: A form of diversification in which a firm acquires a business to reduce cyclical fluctuations in cash flows or revenues. Core Competencies: The firm's key capabilities and collective learning skills that are fundamental to its strategy, performance, and long-term profitability. Corporate Profile: Identification of the industry or industries in which a firm operates. Corporate-Level Strategy: The strategy that top management formulates for the overall company. Divestment: A corporate-level retrenchment strategy in which a firm sells one or more of its business units. External Growth: A corporate-level growth strategy whereby a firm acquires other companies. Forward Integration: A firm's acquisition of one or more of its buyers. Growth Strategy: A corporate-level strategy designed to increase revenues, and

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1.

2.

3.

4.

5.

6.

ultimately profits and/or market share. Horizontal Integration: A form of acquisition in which a firm expands by acquiring other companies in its same line of business. Horizontal Related Diversification: A form of diversification in which a firm acquires a business outside its present scope of operation but with similar or related core competencies. Internal Growth: A corporate-level growth strategy in which a firm expands by internally increasing its size and sales rather than by acquiring other companies. International Franchising: A form of licensing in which a local franchisee pays a franchiser in another country for the right to use the franchiser's brand names, promotions, materials, and procedures. International Licensing: An arrangement whereby a foreign licensee purchases the rights to produce a company's products and/or use its technology in the licensee's country for a negotiated fee structure. Liquidation: A corporate-level retrenchment strategy in which a firm terminates one or more of its business units by the sale of their assets. Merger: A corporate-level growth strategy in which a firm combines with another firm through an exchange of stock. Retrenchment Strategy: A corporate-level strategy designed to reduce the size of the firm. Stability Strategy: A corporate-level strategy intended to maintain a firm's present size and current lines of business. Strategic Alliances: A corporate-level growth strategy in which two or more firms agree to share the costs, risks, and benefits associated with pursuing new business opportunities. Strategic alliances are often referred to as partnerships. Synergy: When the combination of two firms results in higher efficiency and effectiveness than would otherwise be achieved by the two firms separately. Turnaround: A corporate-level retrenchment strategy intended to transform the firm into a leaner and more effective business by reducing costs and rethinking the firm's product lines and target markets. Vertical Integration: A form of integration in which a firm expands by acquiring a company in the distribution channel.

Review Questions and Exercises

What are the advantages and disadvantages of internal growth as opposed to growth through mergers and acquisitions? Why would management adopt a stability strategy? Can stability strategies be viable over a lengthy period of time? Why or why not? When is a retrenchment strategy appropriate? What criteria can help determine what particular retrenchment strategy should be used? How should the BCG matrix be applied? Are such portfolios always useful to corporate executives? What are the advantages and disadvantages associated with corporations operating in centralized or decentralized fashions? What factors should a firm's managers consider when determining the degree of international involvement appropriate for the organization?

Practice Quiz

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A. B. C. D.

A. B. C. D.

A. B. C. D.

A. B. C. D.

True or False?

1. Because firms operating in single industries are more susceptible to industry downturns, most firms eventually diversify into other industries. 2. The growth strategy is always the most effective strategy for a healthy firm. 3. Synergy occurs when the combination of two organizations results in higher effectiveness and efficiency than would otherwise be generated by them separately. 4. Strategic alliances typically involve higher bureaucratic and developmental costs when compared to mergers and acquisitions. 5. Corporate restructuring involves the acquisition of business units unrelated to the firm's core business unit. 6. The BCG matrix provides managers with a systematic means of determining whether a growth, stability, or retrenchment strategy should be adopted.

Multiple Choice

7.

Diversification allows a firm to________.

concentrate its efforts on a single business use its resources more effectively create excess resources all of the above

8.

A firm seeking rapid growth should pursue________.

internal growth external growth divestment of poor performing businesses a restructuring strategy

9.

When a firm purchases both its suppliers and buyers, it is engaging in________.

forward integration backward integration both forward and backward integration none of the above

10.

Which of the following is not a potential reason for selecting a stability strategy?

The industry is not growing. Growth may place constraints on customer service. Costs associated with growth exceed its benefits. The stability inherently reduces risk.

11.

Firms operating on an international basis limit their activities to________.

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A. B. C. D.

A. B. C. D.

importing and exporting licensing strategic alliances all of the above

12.

Which of the following is not an advantage of international joint ventures?

Access to knowledge about a foreign market is given. Ability to eliminate risk associated with global expansion is obtained. Firms can learn from each other. Entry into the foreign market is secured.

Student Study Site

Visit the student study site at www.sagepub.com/parnell4e to access these additional materials:

Answers to Chapter 6 practice quiz questions Web quizzes SAGE journal articles Web resources eFlashcards

Notes

1. M. Lubatkin and S. Chatterjee, “Extending Modern Portfolio Theory into the Domain of Corporate Diversification: Does It Apply?” Academy of Management Journal 37 (1994): 109- 136.

2. S. Misquitta and C. Rohwedder, “Kraft Covets Cadbury's Know-How in India,” Wall Street Journal, September 10, 2009, B1.

3. M. Karnitschnig, “After Years of Pushing Synergy, Time Warner Says Enough,” Wall Street Journal Online, June 2, 2006.

4. S. Ovide and E. Steel, “It's Now Official: AOL, Time Warner to Split,” Wall Street Journal, May 29, 2009, B1.

5. E. Byron, “Merger Challenge: Unite Toothbrush, Toothpaste,” Wall Street Journal, April 24, 2007, A1, A17.

6. J. Covert, “CVS Shareholders Approve Chain's Offer for Caremark,” Wall Street Journal Interactive Edition, March 15, 2007.

7. S. Gray, “Natural Competitor,” Wall Street Journal, December 4, 2006, B1.

8. A. Merrick, “How Walgreen Changed Its Prescription for Growth,” Wall Street Journal, March 19, 2008, B1.

9. S. E. Needleman, “Restaurant Franchises Try Truckin' as a Way to Grow,” Wall Street

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Journal, October 28, 2010, B1, B7.

10. A. Gasparro and M. Warner, “McDonald's Sells, 24/7,” Wall Street Journal, December 9, 2011, B2.

11. J. Jargon, “Wendy's Stages in Palace Coup,” Wall Street Journal, December 21, 2011, B1, B2.

12. Ibid.

13. L. Saigol and M. Johnson, “M&A Hit by Fall in Confidence,” Financial Times, October 18, 2010, 15.

14. J. Adamy, M. Karnitschnig, and J. Jargon, “Mars's Takeover of Wrigley Creates Global Powerhouse,” Wall Street Journal, April 29, 2008, A.

15. G. Chazan, D. Cimilluca, and B. McKay, “Pepsi Juices Up in Russia,” Wall Street Journal, December 3, 2010, B1-B2.

16. T. W. Martin, “Southwest Eager for a Seat in Atlanta,” Wall Street Journal, May 10, 2011.

17. J. Adamy, “After Two Years, Peltz Finally Makes a Deal for Wendy's,” Wall Street Journal, April 29, 2008, B1.

18. J. Jargon and A. Gasparro, “Wendy's Parts With Arby's,” Wall Street Journal, June 14, 2011, B8.

19. M. Bustillo, “Sears Suffers as It Skimps on Stores,” Wall Street Journal, November 17, 2011, B1, B7; A. Merrick and D. K. Berman, “Kmart to Buy Sears for $11.5 Billion,” Wall Street Journal, November 18, 2004, A1, A8.

20. M. Bustillo and A. Zimmerman, “Holiday Sales Woes Cause Cloud Over Sears,” Wall Street Journal, December 28, 2011, A1, A2; M. Bustillo and D. Mattioli, “In Retreat, Sears Set to Unload Stores,” Wall Street Journal, February 24, 2012, A1,A2.

21. A. Troianovski, “AT&T Hangs Up on T-Mobile,” Wall Street Journal, December 20, 2011, A1, A2.

22. M. Karnitschnig, “After Years of Purshing Synergy.”

23. M. A. Hitt, J. S. Harrison, and R. D. Ireland, Mergers and Acquisitions: A Guide to Creating Value for Stakeholders (New York: Oxford University Press, 2001).

24. N. E. Boudette, “At DaimlerChrysler, a New Push To Make Its Units Work Together,” Wall Street Journal, March 12, 2003, A1, A15; J. R. Healey, S. S. Carty, C. Woodyard, and M. Krantz, “Unprecedented Auto Deal,” USA Today, May 15, 2007, B1,B2.

25. M. Karnitschnig and D. Kesmodel, “InBev Mulls Bid for Rival Anheuser,” Wall Street Journal, May 24, 2008, A1; J. Foley, U. Galani, and I. Campbell, “InBev, Anheuser-Busch Offer a T a l e o f T w o D i f f e r e n t C u l t u r e s , ” W a l l S t r e e t J o u r n a l O n l i n e , M a y 2 8 , 2 0 0 8 . http://online.wsj.com/article/SB121192282307124021.html (accessed May 29, 2008).

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26. M. Esterl, “Discount Carriers Southwest, AirTran Tie Knot,” Wall Street Journal, September 28, 2010, B1.

27. M. S. Salter and W. S. Weinhold, “Diversification Via Acquisition: Creating Value,” Harvard Business Review 56, no. 4 (1978): 166-176.

28. L. E. Palich, L. B. Cardinal, and C. C. Miller, “Curvilinearity in the Diversification- Performance Linkage: An Examination of Over Three Decades of Research,” Strategic Management Journal 21 (2000): 155-174.

29. S. Bhuyan, “Impact of Vertical Mergers on Industry Profitability: An Empirical Evaluation,” Review of Industrial Organization 20 (2002): 61-78.

30. R. D. Buzzell, “Is Vertical Integration Profitable?” Harvard Business Review 6 1 , n o . 1 (1994): 92-102.

31. J. J. Reuer, M. Zollo, and H. Singh, “Post-Formation Dynamics in Strategic Alliances,” Strategic Management Journal 23 (2002): 135-152.

32. E. Glazer, “P&G's $3 Billion Sideline,” Wall Street Journal, March 20, 2012, B1, B2.

33. B. N. Anand and T. Khanna, “Do Firms Learn to Create Value? The Case of Alliances,” Strategic Management Journal 21 (2000): 295-315.

34. T. E. Stuart, “Interorganizational Alliances and the Performance of Firms: A Study of Growth and Innovation Rates in a High-Technology Industry,” Strategic Management Journal 21 (2000): 791-811.

35. J. Menn and N. Tait, “Microsoft Alliance with Yahoo is Approved,” Financial Times, February 19, 2010, 13.

36. P. Wright, M. Kroll, and J. A. Parnell, Strategic Management: Concepts (Upper Saddle River, NJ: Prentice Hall, 1998).

37. J. Bennett and M. Ramsey, “Putting Egos Aside, Ford, Toyota Pair Up for Hybrids,” Wall Street Journal, August 23, 2011, B1, B2.

38. S. Carey, “UAL and Continental Pair, but Won't Merge,” Wall Street Journal, June 20, 2008, B1.

39. G. Fairclough, “GM's Chinese Partner Looms as a New Rival,” Wall Street Journal, April 20, 2007, A1, A8.

40. M. Mangalindan, “How Amazon's Dream Alliance with Toys ‘R’ Us Went So Sour,” Wall Street Journal, January 23, 2006, A1,A12.

41. K. G. Smith, W. J. Ferrier, and C. M. Grimm, “King of the Hill: Dethroning the Industry Leader,” Academy of Management Executive 15, no. 2 (2001): 59-70.

42. S. Carey, “Amid JetBlue's Rapid Ascent, CEO Adopts Big Rivals' Traits,” Wall Street Journal, August 25, 2005, A1, A6; J. Lipton, “Storm Worries Ground JetBlue,” Forbes Online Edition, March 16, 2007; S. Carey and P. Prada, “Course Change: Why JetBlue Shuffled Top

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Rank,” Wall Street Journal, May 11, 2007, B1,B2.

43. M. Coles, “Starbucks Business Paradigm: Doing Well While Doing Good,” Keynote address at the Annual Conference of the Strategic Management Society, October 15, 2007, San Diego, CA.

44. D. Clark and T. Catan, “Intel Slapped in Antitrust Case,” Wall Street Journal, August 5, 2010, B1, B2.

45. J. Nicas, “Google Roils Travel,” Wall Street Journal, December 27, 2011, A1, A2.

46. A. Efrati and T. Catan, “Google Rivals Are Readying an Antritrust Assault in D.C.,” Wall Street Journal, September 21, 2011, B1, B8.

47. A. Zimmerman, “Rival Chains Secretly Fund Opposition to Wal-Mart,” Wall Street Journal, June 7, 2010, A1, A16.

48. See M. Garry, “A&P Strikes Back,” Progressive Grocer, February 1994, 32-38.

49. K. Linebaugh, “Lean Companies Ready to Cut,” Wall Street Journal, October 24, 2011, B1, B2.

50. J. Bennett, “Goodyear Rides Again,” Wall Street Journal, September 15, 2011, B1, B2.

51. D Shafer, “Reebok's Big Ambition to Leap Past Puma,” Financial Times, June 16, 2009, 16.

52. M. Spector, “Blockbuster Plots a Remake,” Wall Street Journal, February 24, 2010, B1.

53. J. Adamy and A. Prior, “Anxiety Grows Around Starbucks Closings,” Wall Street Journal, July 9, 2008, B3; J. Adamy, “Starbucks Moves to Cut Costs, Retain Customers,” Wall Street Journal, December 5, 2008, B1.

54. J. Soble and J. Reed, “Toyota to Sweep Away Old Guard in Overhaul,” Financial Times, May 15, 2009, 15.

55. M. Murray, “Waiting for the Ax to Fall,” Wall Street Journal, March 13, 2001, B1, B10.

56. Purchasing, “Some Specifics on How to Handle Layoffs,” December 16, 1999, 70.

57. J. S. Lublin, “Tips from a Turnaround Specialist,” Wall Street Journal, December 27, 2000, B1.

58. M. Bustillo, “With Sales Flabby, Wal-Mart Turns to Its Core,” Wall Street Journal, March 21, 2011, B1, B8.

59. J. Reed and G. Dinmore, “Fiat to Spin Off Non-Car Divisions,” Financial Times, April 22, 2010, 15.

60. B. Hedley, “Strategy and the Business Portfolio,” Long Range Planning, 10, no. 2 (1977): 9-14.

61. J. M. Geringer, S. Tallman, and D. M. Olsen, “Product and International Diversification

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Among Japanese Multinational Firms,” Strategic Management Journal 21 (2000): 51-80.

62. J. Soble and J. Reed, “Ford to End Mazda Alliance as it Sharpens Focus on Core Brands,” Financial Times, October 19, 2010, 15; S. Terlep and M. Ramsey, “Ford Bets $5 Billion on Made in China,” Wall Street Journal, April 20, 2012, B1, B2.

63. H. Merchant and D. Schendel, “How Do International Joint Ventures Create Shareholder Value?” Strategic Management Journal 21 (2000): 723-737; T. L. Powers and R. C. Jones, “Strategic Combinations and Their Evolution in the Global Marketplace,” Thunderbird International Business Review 43 (2001): 525-534.

64. P. Chan and R. Justis, “Franchise Management in East Asia,” Academy of Management Executive 4 (1990): 75-85.

65. P Wright et al., Strategic Management.

66. J. Adamy, “As Burgers Boom in Russia, McDonald's Touts Discipline,” Wall Street Journal, October 16, 2007, A1.

67. F. Yan and T. Jones, “McDonald's to Double China Restaurants by 2013,” Reuters, D e c e m b e r 1 5 , 2 0 1 0 , www.reuters.com/article/2010/12/15/us-mcdonalds-china- idUSTRE6BE0VJ20101215 (accessed October 17, 2011); L. Burkitt, “China Loses Its Taste for Yum,” Wall Street Journal, December 3, 2012, p. B9.

68. J. Jargon and A. Chang, “Yum Brands Bets on India's Young for Growth,” Wall Street Journal, December 17, 2009, B1.

69. J. E. Solsman, “China Lifts Yum Brands' Profits,” Wall Street Journal, October 6, 2010, B8.

70. J. Hookway, “In Vietnam, Fast Food Acts Global, Tastes Local,” Wall Street Journal, March 12, 2008, B1.

71. L. Burkitt, “A Secret Recipe in China,” Wall Street Journal, October 25, 2011, B1-B2.

72. J. Jargon, “KFC Savors Potential in Africa,” Wall Street Journal, December 8, 2010, B1, B2; D. Maylie, “By Foot, by Bike, by Taxi, Nestle Expands in Africa,” Wall Street Journal, December 1, 2011, B1, B16.

73. D. Maylie, “By Foot, by Bike, by Taxi.”

74. C. Rohwedder and D. Kesmodel, “Aldi Looks to U.S. for Growth,” Wall Street Journal, January 13, 2009, B1.

75. V. Fuhrmans, “Volkswagen Aims at Fast Lane in U.S.” Wall Street Journal, October 5, 2010, A1, A20.

76. P. Barta, “Brands Bet on Indonesia as Spending Booms,” Wall Street Journal, April 8, 2010, B1, B2.

77. R. Kapadia, “Redrawing the Map of the World,” Smart Money, December 2011, 58-62.

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78. J. Fontanella-Khan, “Luxury Carmakers Eye India's Super-Rich,” Financial Times, April 18, 2011, 18.

79. T. Sims, “Corn Flakes Clash Shows the Glitches in European Union,” Wall Street Journal, November 1, 2005, A1, A9.

80. G. Samor, C. Rohwedder, and A. Zimmerman, “Innocents Abroad?” Wall Street Journal Online, May 16, 2006.

81. K. Maxwell, “Wal-Mart Boosts Stake in Japan's Seiyu to 95%,” Wall Street Journal, December 5, 2007, A1.

82. J. Lyons, “In Mexico, Wal-Mart Is Defying Its Critics,” Wall Street Journal, March 5, 2007, A1.

83. S. Weinberg and P. Dvorak, “Wal-Mart's New Hot Spot: Canada,” Wall Street Journal, January 27, 2011, B3.

84. A. Zimmerman and E. Nelson, “With Profits Elusive, Wal-Mart to Exit Germany,” Wall Street Journal, July 29, 2006, A1.

85. E. Bellman, “Wal-Mart Exports Big-Box Concept to India,” Wall Street Journal, May 28, 2009, B1.

86. M. Bustillo, R. M. Stewart, and P. Sonne, “Wal-Mart Targets Africa,” Wall Street Journal, September 28, 2010, B1, B2.

87. J. Birchall, “Walmart Throws Down $4bl Gauntlet in South Africa,” Financial Times, September 28, 2010, 17.

88. D. Maylie, “Wal-Mart's Africa Foothold Shaky as Job Worries Mount,” Wall Street Journal, May 10, 2011, B1-B2.

89. D. Maylie, “Wal-Mart Gets Nod in Africa,” Wall Street Journal, June 1, 2011, B9.

90. J. Birchall, “Walmart Slims Down for China,” Financial Times, December 2, 2010, 17-20.

91. C. Rohwedder, “Wal-Mart U.K. Deal Fits Goal: Go Small,” Wall Street Journal, May 28, 2010, B1, B7.

92. C. Rohwedder, “Tesco Tries to Hit a U.S. Curveball,” Wall Street Journal, March 2, 2009, B1; P. Sonne, “Tesco's CEO-to-Be Unfolds Map for Global Expansion,” Wall Street Journal, June 9, 2010, B1, B2; P. Evans, “Tesco Overhauls Its Strategy,” Wall Street Journal, April 16, 2012, B3; P. Sonne, and P. Evans, “Five Years, $1.6 Billion Later, Tesco Decides to Quit U.S.,” Wall Street Journal, December 6, 2012, pp. B1, B4.

93. L. Saigol and H. Thomas, “Emerging Markets M&A Outstrips Europe,” Wall Street Journal, September 20, 2010, 14-15.

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Strategy + Business Reading: The Unique Advantage

To succeed in a mature industry like consumer products, the trick isn't being first—it's being hard to copy.

by Alexander Kandybin and Surbhee Grover

Mars Inc. faced a challenge that was anything but sweet. Founded more than a century ago in a kitchen in Tacoma, Wash., the chocolate giant seemed to have lost its Willy Wonka-like touch. It was the 1990s, and consumers were beginning to question the wisdom of a diet high in candy bars and other sources of sugar, and were getting interested in nutrient-added alternatives such as energy bars. Sales growth slipped into the single digits for the first time in the company's history.

But introducing major new products wasn't easy for Mars. The company had had a hard time launching even minor additions to its Snickers, M&M's, Starburst, and other core lines. Its R&D culture was geared to “making no mistakes,” as one insider put it. And any idea that managed to slip through that filter was subjected to consumer tests and panels that took years, cost millions of dollars, and tended to weed out anything bold and different. The result? The 1990s came and went without a significant successful launch in Mars's snack food lines. Its core categories of confectionary and pet foods were getting long in the tooth, and analysts wondered aloud if the privately held firm's best days were behind it.

This is an all-too-common story in mature, slow-growth industries such as food and consumer products. Companies in these industries often spend relatively little on R&D, and in many cases their innovation results are marginal. An analysis of products introduced in the food and beverage industry in 2005-06 showed that just one in five new products earned more than US$7.5 million during its first year.

Why do mature businesses struggle with innovation? Much of the problem can be traced to conventional wisdom, which goes something like this: The secret to growth in the consumer goods arena is to develop new products based on consumer needs, which are discovered through consumer research and focus groups. And what if a new idea is not great? No big deal. Marketing and advertising can always step in, turning a so-so concept into a hit. And the first to market, goes the reasoning, will capture most of the profits. This kind of thinking leads to innovation cultures that deliberately develop a long list of line extensions—new flavors of an established soda brand, say— rather than the kind of game-changing innovations that can make a real difference to the bottom line.

There is an alternative, one that can help rejuvenate a tired portfolio or a worn-out brand in a slow-growing industry. Rather than thinking about new products as a way to get customers excited for a little while, companies need to think about their innovation strategy as a way to build a high, hard wall between those customers and their strongest competitors. This means shifting some investment away from marketing and advertising toward the development of different kinds of new products. The most important thing about these game-changing new products is that they be difficult to copy. Meeting consumer needs is a necessary but no longer sufficient condition of sustainable innovation. New products that stand alone longest in the marketplace, without serious competition, bring in the highest returns.

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The Habits of Mis-investment

Mature industries are beset by underlying dynamics that make it difficult for them to invest their money in the kinds of innovation that lead to long-term success. Companies such as Campbell Soup Company, General Mills Inc., and Kellogg Company spend an average of 1 to 2 percent of sales on R&D. Although a number of studies have shown that higher R&D spending does not guarantee success, a minimum innovation investment is required for breakthrough thinking. Without it, companies tend to fill the pipeline with the “base hits” of line extension. They fall into a self-created loop of low investment, low returns, and steady but slow growth. In the end, the slow growth is not enough to keep them from falling behind competitors because everyone is in the same boat; but it does provide the illusion that the company is succeeding—or at least not shrinking—which is then taken as proof that this strategy is smart.

When the money not spent on R&D is instead spent on marketing, it reinforces the problem. Inflated advertising budgets often reflect a defensive mind-set: When competitors launch products with a full-bore assault in the media, executives conclude that they must follow suit with equally pricey campaigns or risk losing consumer share- of-mind. Money that goes into this type of “quick fix” is not available for the more fundamental solution of breakthrough innovation.

Another factor in the misplacement of investment is the predisposition of the R&D organizations themselves. Eighty percent of new products in a typical mature industry yield less than $7.5 million in sales their first year. (See Exhibit 1.) (To put that number into perspective, grocery is a $350 billion wholesale business globally, and sales of a major brand can top $500 million a year.) The industry logic is that competitors are continually introducing new versions of their products, so players are at a disadvantage if they don't match that steady clip. The tendency is for companies to focus on relatively small, often superficial line extensions that can be churned out quickly, as when Mars rolled out Tropical and Wild Berry Skittles candies in the early 1990s.

Exhibit 1 Sales from New Product Launches

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Source: Industrial Resource Institute

No one would argue that advertising can't pull the occasional rabbit out of a hat or that companies should stop launching line extensions. But when excessive advertising and line extensions become habitual solutions, it suggests that a company is locked into a pattern of high marketing spending and a need for endless small launches, and is under-investing in the kinds of R&D efforts that would lead to greater profits.

Seven Paths to Advantage

How can companies break the cycle of low-risk, low-reward copycat innovation? Through a group of interrelated changes in strategy and execution. Successful consumer packaged goods (CPG) innovators, those whose new products establish and maintain dominance in the marketplace, tend to focus on seven areas. None of them represents a “silver bullet” on its own, and many of them are common sense, but together they make innovation more difficult to copy and lead to greater returns and higher growth. Our analysis shows that mature companies consistently neglect these areas. This is a pity, because they represent a powerful way to turbocharge an innovation engine.

Exhibit 1 New Technologies and Market Needs: A Dynamic Duo

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1.

Source: Booz & Company

Technology and patents. New technologies are unbeatable in giving mature industry players a meaningful advantage in the marketplace. Their power comes from providing companies with a way to meet new consumer needs, including those that consumers don't yet know they have. These innovations can have the greatest value. In consumer health care, for instance, new products that match a new technology with a new market need deliver median brand growth of 11 percent, more than double the 5 percent growth of products addressing only an existing need. (See Exhibit 2.)

Technology can provide a way to solve a significant consumer problem, as Ore- Ida (a subsidiary of H. J. Heinz Company) proved with its Extra Crispy Easy Fries in 2004. A persistent complaint about frozen french fries was that they emerged soggy from the microwave. Ore-Ida solved this problem with its “X- Crisp” flash-freeze processing technology. The result was genuinely crispy microwaved fries cooked in four minutes, a successful new product.

Even if new technology doesn't prevent competitors from copying, it can significantly delay their launching of a copycat product. An example is Kellogg's Special K Red Berries cereal, which introduced a freeze-dried berry process and captured more than $100 million in its first year—and it got a two-year jump on archrival General Mills's version.

Alongside advantaged technologies comes the responsibility to defend them. This point is not lost on Procter & Gamble Company, which has a policy of zero tolerance on patent and other infringements. P&G has taken legal action, for example, against Whitehall Laboratories to defend innovations in a hair conditioner formulation and against Perrigo Company to protect its core Olay skin-care brand.

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2.

3.

4.

Claims. In the world of consumer goods, claims are often related to the health efficacy of a product or ingredient. And claims add substantial value when they are tied exclusively to a product and can be held for a significant period of time. In 2006, Mars developed a new line of chocolate bars, CocoaVia, which it labeled “heart-healthy” because of the demonstrated cardiovascular benefits of flavanols, a natural antioxidant in cocoa beans. The claim provides a sustainable point of differentiation because Mars owns patents related to processing technologies that are designed to retain higher concentrations of flavanols than regular chocolate manufacturing processes. The company doesn't release sales figures but says the product is “selling well,” and it is expanding the line.

Claims, however, can carry a downside risk, precisely because a competitive advantage that cannot be defended may quickly undermine any initial benefit. Competitors will often exploit a claim that is made for a widely available ingredient. Take the example of Quaker Oats, which spent a small fortune proving to the satisfaction of the U.S. Food and Drug Administration that, yes, oat bran can help lower cholesterol. Quaker (a unit of PepsiCo) may be the premier oatmeal brand, but oats are a commodity, and Quaker did not own any special technologies related to this claim. General Mills, which makes Cheerios, was free to conduct its own piggyback studies and broadcast the cholesterol- lowering benefit widely in its product marketing. The result: Sales of Cheerios climbed 11 percent, while Quaker's sales actually fell 3.5 percent.

Ingredient synonymy. Think of baking soda, and what name comes to mind? How about peanuts? Or more recently, pomegranate juice? Arm & Hammer, Planters, and POM Wonderful, respectively, have each carved out an enviable position by becoming virtual synonyms for their category. Such domination affords pricing power for products that are essentially commodities. It also builds a barrier to competitive entry and allows economies of scale and higher margins.

Perhaps more important, such synonymy with an active ingredient can provide a powerful platform for entry into adjacent categories. Planters successfully ventured into candy bars, and Arm & Hammer launched a line of baking soda toothpastes. In these examples, the ingredient itself provides the competitive p r o t e c t i o n . C r e s t a n d C o l g a t e c o u l d — a n d d i d — d e v e l o p b a k i n g s o d a toothpastes, but they did not “fit” as well in the consumer's mind. And POM Wonderful has been able to leverage its dominance in juice into adjacent categories, including blends, teas, and POMx antioxidant supplements. The company's sales grew almost 10-fold in the four years after its 2002 launch.

Unique brand characteristics. S t r o n g b r a n d s c a n b u i l d a n i d e n t i t y i n consumers' minds that transcends products. Few people can think of, say, the Wall Street Journal and not get a sense of authority in business news. For innovation purposes, such a positioning can provide a springboard for new opportunities.

An example can be found in the soft drink category. The Coca-Cola Company's primary asset is the formula of its flagship soda, and the company built on that taste when it developed and launched Coca-Cola Zero, a low-calorie product

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intended to taste more like regular Coke than Diet Coke. PepsiCo couldn't mimic Coca-Cola Zero, naturally, because its consumers want a product that tastes like Pepsi. It took Pepsi two years to develop a new diet cola called Diet Pepsi Max that leveraged its own unique taste assets—much longer than it generally takes to bring out a traditional line extension.

Other characteristics that can provide unique advantage include a meaningful heritage, which gives a certain emotional heft to new products or services from, say, Singapore Airlines. Positioning itself as the quintessence of what Westerners think of as “Asian values,” the carrier has successfully emphasized its hospitality and high-tech amenities, including new airplanes and in-flight entertainment systems. And there's value in being recognized as dominant in one area; ESPN has used its position as the “Worldwide Leader in Sports” to e x p a n d s u c c e s s f u l l y i n t o d i n i n g , w i t h i t s E S P N Z o n e c h a i n o f t h e m e restaurants.

Product experience. Successful products have an emotional component that builds a bridge to consumers, becoming part of their lives. Expanding on this aspect of a brand can be another way to build difficult-to-copy value into a p r o d u c t . L o g i s t i c a l l y c h a l l e n g i n g a n d o f t e n c o s t l y , s u c h a n e f f o r t c a n nevertheless be effective for the right brand.

Nestle SA has succeeded in transforming its Nespresso System into a chain of stores that sell appliances and coffee. The Nespresso System centers on high- quality packaged espresso packets that work with a special espresso maker. It carries an emotional claim as the first product to bring true cafe taste into European homes. Nestle capitalized on the system's modularity and the company's key relationships along the value chain to open 79 retail locations in Geneva, Vienna, Paris, Zurich, Moscow, and other cities.

Packaging. Packaging is often viewed as an innovation afterthought. The truth, however, is that new formulation is often easy to copy, whereas packaging innovation can leverage technology, emphasize unique brand characteristics, enhance the product experience, and in fact prove very difficult to duplicate.

Packaging innovation often requires major changes to the manufacturing process, which is a strong defense. An example is Campbell's Soup at Hand microwave-safe containers, launched in 2002. Although their contents didn't change, these easily heated, sip-able containers rapidly became one of the most successful new products in Campbell's history. The package helped the company's ready-to-serve soup lines grow 8 percent in Soup at Hand's first year out and gave it a four-year head start on rival Progresso. This success even caused the company's president, Douglas R. Conant, to redirect his strategy, saying, “We intend to make the C in Campbell synonymous with convenience.” Although the new product's value proposition was convenience, the fact that it was neither easy nor cheap to copy helped drive its lasting success.

Another game changer was tuna packaged in the Flavor Fresh Pouch, an innovation introduced by Starkist (then a unit of Heinz) in 2000. This vacuum- sealed foil package shook up the tuna fish industry when it appeared because, for the first time, packaged tuna could be sold in groceries without a can.

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Although competitors have since introduced their own foil packaging, the convenience of this product continues to allow Starkist to charge a premium for it over tuna in cans.

Effective vertical integration. With outsourcing and offshoring so common, and the heyday of soup-to-nuts global manufacturing entities decades in the past, it may seem strange to insist that vertical integration can be a source of difficult-to-copy advantage. But for some companies, it is. Think of Swarovski AG, which has maintained its position as the world's finest crystal manufacturer by keeping a tight rein on its methods and processes. Over a century of innovations, the company has perfected a unique method for transforming sand and lead into some of the most beautiful objects in the world. Fearing a loss of its advantage and closely guarded trade and technology secrets, the Wattens, Austria-based firm refuses to move its core technical operations out of the country, despite high labor costs there.

The Advantage of Scale

All of these strategies should be pursued together. It is possible to gain additional benefits by building scale, amplifying the effects of hard-to-copy innovations by spreading them across multiple products. (See “Design for Frugal Growth,” by Jaya Pandrangi, Steffen Lauster, and Gary L. Neilson, s+b, Autumn 2008.) For instance, a breakthrough technology or process can be applied to a number of products or categories, as Frito-Lay Inc. (a subsidiary of PepsiCo) did with its “baked” chips innovation. The process allowed the company to produce lower-calorie, less-greasy chips, and it was implemented across the Doritos, Tostitos, Lay's, and Ruffles brands. Scale can be built up internationally by employing a common platform across geographies, as Nicorette (a brand within Pharmacia AB's international portfolio at the time) managed to do with its nicotine replacement therapy smoking cessation products. The brand dominates this category in large part because of its coordinated cross- border strategy, encompassing logistics, distribution, regulatory compliance, and consistent messaging that respects local sensitivities.

It's even possible to gain scale of a kind with a highly nimble, prolific innovation organization. Launching a steady stream of good ideas, as P&G has done in home products in recent years, can give a brand a reputation for fresh thinking that transcends the individual ideas and translates into market share gains. (See “P&G's Innovation Culture,” by A.G. Lafley, s+b, Autumn 2008.) The rules still apply; any new product must be difficult to copy or it will not maintain its value. But the whole can be greater than the sum of the parts. The brand itself can benefit from an aura of originality that translates into consumer preference and sales.

Finally, we fully recognize that ideas that are difficult to copy are difficult to develop, and mature companies also need a strategy for when such ideas are in short supply. Here, we suggest defying conventional wisdom about being first to market. If a product can be copied, it's often more profitable to be the copier. Consider the Spanish-owned clothing retailer Zara International Inc. (a subsidiary of Inditex), which has become one of the world's fastest-growing retailers by combining an efficient supply chain with a successful knockoff strategy. This formidable one-two punch caused LVMH Moet

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Hennessy Louis Vuitton SA's Daniel Piette to call it “possibly the most innovative and devastating retailer in the world.”

One company that's managed to employ many of these strategies to its own benefit is the one we started with: Mars. Over the past few years, it has seen its sales growth rebound to 16 percent. The company has successfully chipped away at risk aversion in R&D and streamlined its cumbersome market testing processes. It's had a number of successful launches, including Snickers Marathon, the CocoaVia line, and WholeMeals bone-shaped pet food.

Mars also renewed its emphasis on production and formulation technologies that it could apply across multiple products. For example, it holds patents on the special ink used to print personalized M&Ms, themselves a significant new development meeting an emerging consumer desire for customized confections. These personalized candies, called My M&M's, were developed by an internal team in just 90 days using a streamlined R&D process. As these and other examples have shown, companies can find a lot of life after middle age. The key is to have the right attitude. You can't be a kid again, but we've mapped out some of the roads that could lead to renewal.

The magic formula for keeping innovation healthy in a mature industry is knowing there is no magic formula. If staying young and strong were easy, we'd live in a different world. There will always be a place for line extensions backed with big campaigns and for being first to market. But it's important to make sure when you're dipping into your own fountain that your competitor isn't standing right beside you with a siphon.

Reprint No. 08306

Author Profiles:

Alexander Kandybin is a partner in Booz & Company's consumer products and media practice based in New York. He works with leading consumer products, health-care, and chemicals companies on growth and innovation strategies, raising returns on innovation investments, and building sustainable growth and innovation capabilities.

Surbhee Grover is a senior associate with Booz & Company's consumer products and media practice in New York. She focuses on helping firms meet innovation challenges in product introduction processes, portfolio management, and capability development, and on developing strategies for growth imperatives.

Also contributing to this article was Booz & Company associate Jeannette Chang.

http://dx.doi.org/10.4135/9781506374598.n6

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