5-10 Page Executive Summary (ESSAY) on Lecture Slides
JohnWick321
Chapter8.pptxChapter 8: Corporate Strategy
List and define the three concentration strategies
Explain the benefits of vertical integration
Describe the two types of diversification and when they should be used
Give examples of retrenchment and restructuring
Describe why portfolio planning is useful for corporations
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Concentration Strategies
Concentration strategies: Strategies that firms use to try to successfully compete only within a single industry
There are three concentration strategies:
Market penetration
Market development
Product development
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Concentration Strategies
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Concentration Strategies
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Concentration Strategies
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Concentration Strategies
Horizontal integration: Pursuing a concentration strategy by acquiring or merging with a rival
Types of horizontal integration:
Acquisition
Merger
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Concentration Strategies
Acquisition: Takes place when one company purchases another company
The acquired company is smaller than the firm that purchases it
Merger: Joining of two companies into one
Involves similarly sized companies
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Concentration Strategies
Horizontal integration can be attractive for several reasons:
Aimed at lowering costs by achieving greater economies of scale
Provide access to new distribution channels
Despite the potential benefits of mergers and acquisitions, their financial results often are very disappointing
More than 60 percent of mergers and acquisitions erode shareholder wealth
Fewer than one in six increases shareholder wealth
http://www.youtube.com/watch?v=9dFvhq2sKfM
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Vertical Integration Strategies
Vertical integration: When a firm gets involved in new portions of the value chain
Can be very attractive when a firm’s suppliers or buyers have too much power over the firm and are becoming increasingly profitable at the firm’s expense
By entering the domain of a supplier or a buyer, executives can reduce or eliminate the leverage that the supplier or buyer has over the firm
Can create risks
Can create complacency
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Vertical Integration Strategies
Backward vertical integration: A strategy that involves a firm entering a supplier’s business
Used when executives are concerned that a supplier has too much power over their firms
Forward vertical integration: A strategy that involves a firm entering a buyer’s business
Useful for neutralizing the effect of powerful buyers
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Vertical Integration Strategies
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Risk of not being vertically integrated
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The risk of not being vertically integrated is illustrated by the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. Although the US government held BP responsible for the disaster, BP cast at least some of the blame on drilling rig owner Transocean and two other suppliers: Halliburton Energy Services (which created the cement casing for the rig on the ocean floor) and Cameron International Corporation (which had sold Transocean blowout prevention equipment that failed to prevent the disaster). In April 2011, BP sued these three firms for what it viewed as their roles in the oil spill.
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Diversification Strategies
Diversification strategies: Involve a firm entering entirely new industries
Requires moving into new value chains
Three tests for diversification:
How attractive is the industry that a firm is considering entering?
How much will it cost to enter the industry?
Will the new unit and the firm be better off?
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Diversification Strategies
Related diversification: When a firm moves into a new industry that has important similarities with the firm’s existing industry or industries
Core competency: A skill set that is difficult for competitors to imitate, can be leveraged in different businesses, and contributes to the benefits enjoyed by customers within each business
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Diversification Strategies
Unrelated diversification: When a firm enters an industry that lacks any important similarities with the firm’s existing industry or industries
Most unrelated diversification efforts do not have happy endings
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Unrelated Diversification
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Strategies for Getting Smaller-Retrenchment
Retrenchment: Reducing the size of part of a firm’s operations, often through laying off employees
Firms following a retrenchment strategy shrink one or more of their business units
Firms using this strategy hope to make just a small retreat rather than losing a battle for survival
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Strategies for Getting Smaller-Restructuring
Diversification discount: The tendency of investors to undervalue the shares of a diversified firm
Divestment: Selling off part of a firm’s operations
Spin-off: Creating a new company whose stock is owned by investors out of a piece of a bigger company
Liquidation: Shutting down portions of a firm’s operations, often at a tremendous financial loss
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Investors often struggle to understand the complexity of diversified firms, and this can result in relatively poor performance by the stocks of such firms. This is known as a diversification discount. Executives sometimes attempt to unlock hidden shareholder value by breaking up diversified companies.
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Spin-offs
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Portfolio Planning and Corporate Level Strategy
Portfolio planning: A process that helps executives make decisions involving their firms’ various industries
Offers suggestions about what to do within each industry, and provides ideas for how to allocate resources across industries.
It first gained widespread attention in the 1970s and it remains a popular tool among executives today
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Portfolio Planning and Corporate Level Strategy
The Boston Consulting Group (BCG) matrix
Best-known approach to portfolio planning
Using the matrix requires a firm’s businesses to be categorized as high or low along two dimensions:
Its share of the market
The growth rate of its industry
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Portfolio Planning and Corporate Level Strategy
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Portfolio Planning and Corporate Level Strategy
Limitations to portfolio planning:
Oversimplifies the reality of competition by focusing on just two dimensions when analyzing a company’s operations within an industry
Can create motivational problems among employees
Does not help identify new opportunities
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Research Round-Up: Divestiture and Firm Performance
For decades, executives have faced the dilemma of deciding when it might be wise to spin-off or sell parts of their firms.
A recent research study combined the findings of 94 previous studies of divestiture determined that divestiture activities help firm performance.
In addition, firms with strategic motivations to divest outperformed those that lacked a strategic rationale for divestment.
Executives must carefully manage their collection of corporate assets and be willing to sell them if the right opportunity arises.
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Chapter 8: Key Takeaways
Executives grappling with corporate-level strategy must decide in what industry or industries their firms will compete. Many of the possible answers to this question involve growth.
Concentration strategies involve competing within existing domains to expand within those domains. This can take the form of market penetration, market development, or product development.
Integration involves expanding into new stages of the value chain.
Backward integration occurs when a firm enters a supplier’s business while forward vertical integration occurs when a firm enters a customer’s business.
Diversification involves entering entirely new industries; this can be an industry that is related or unrelated to a firm’s existing activities.
Sometimes being smart about corporate-level strategy requires shrinking the firm through retrenchment or restructuring.
Portfolio planning can be useful for analyzing firms that participate in a wide variety of industries.
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