Chapter 7

Vertical growth

taking over the function previously provided by a supplier or by a distributor

Corporate strategy

the choice of direction of the firm as a whole and the management of its business or product portfolio and concerns: 1. Directional strategy 2. Portfolio analysis 3. Parenting strategy

Horizontal integration

the degree to which a firm operates in multiple geographic locations at the same point on an industry's value chain

Vertical integration

the degree to which a firm operates vertically in multiple locations on an industry's value chain from extracting raw materials to manufacturing to retailing

Directional strategy

the firm's overall orientation toward growth, stability, or retrenchment

Parenting strategy

the manner in which management coordinates activities and transfers resources and cultivates capabilities among product lines and business units

Taper integration

a firm internally produces less than half of its own requirements and buys the rest from outside suppliers

Consolidation

stabilization of the new leaner corporation

GE Business Screen- Limitations

1. Complex and cumbersome 2. Numerical estimates of industry attractiveness and business strength/competitive position give the appearance of objective, but are actually subjective judgments that can vary from person to person 3. Cannot effectively depict the positions of new products and business units in developing industries

Limitations of Portfolio Analysis

1. Defining product/market segments is difficult Suggest the use of standard strategies that can miss opportunities or be impractical 2. Provides an illusion of scientific rigor when in reality positions are based on objective judgments 3. Value-laden terms such as cash cow and dog can lead to self-fulfilling prophecies 4. Lack of clarity on what makes an industry attractive or where a product is in its life cycle

Managing a Strategic Alliance Portfolio

1. Developing and implementing a portfolio strategy for each business unit and a corporate policy for managing all the alliances of the entire company 2. Monitoring the alliance portfolio in terms of implementing business units' strategies and corporate strategy and policies 3. Coordinating the portfolio to obtain synergies and avoid conflicts among alliances 4. Establishing an alliance management system to support other tasks of multi-alliance management

Advantages of Portfolio Analysis

1. Encourages top management to evaluate each of the corporation's businesses individually and to set objectives and allocate resources for each 2. Stimulates the use of externally oriented data to supplement management's judgment Raises the issue of cash flow availability to use in expansion and growth

Developing a Corporate Parenting Strategy

1. Examine each business unit in terms of its strategic factors 2. Examine each business unit in terms of areas in which performance can be improved 3. Analyze how well the parent corporation fits with the business unit

BCG Matrix- Limitations

1. Use of highs and lows to form categories is too simplistic 2. Link between market share and profitability is questionable 3. Growth rate is only one aspect of industry attractiveness 4. Product lines or business units are considered only in relation to one competitor 5. Market share is only one aspect of overall competitive position

BCG Matrix

Question marks Stars cash cows dogs

Popular portfolio analysis techniques include:

BCG Matrix GE Business Screen

Full integration

a firm internally makes 100% of its key suppliers and completely controls its distributors

Growth Strategy

Concentration - Vertical - Horizontal Diversification - Concentric - Conglomerate

Controversies in Directional Strategies

Is vertical growth better than horizontal growth? Is concentration better than diversification? Is concentric diversification better than conglomerate diversification?

International Entry Options for Horizontal Growth

Exporting Licensing Franchising Joint Venture Acquisitions Green-Field Development Production Sharing Turn-key Operations BOT Concept Management Contracts

Horizontal growth is achieved through:

Internal development Acquisitions Strategic alliances

Quasi-integration

a company does not make any of its key supplies but purchases most of its requirements from outside suppliers that are under its partial control

Merger

a transaction involving two or more corporations in which stock is exchanged but in which only one corporation survives

Long-term contracts

agreements between 2 firms to provide agreed-upon goods and services to each other for a specific period of time

Forward integration

assuming a function previously provided by a distributor

Backward integration

assuming a function previously provided by a supplier

Corporate parenting generates:

corporate strategy by focusing on the core competencies of the parent corporation and the value created from the relationship between the parent and its businesses

Horizontal strategy

cuts across business unit boundaries to build synergy across business units and to improve competitive position in one of more business units

Captive Company Strategy

company gives up independence in exchange for security

Bankruptcy

company gives up management of the firm to the courts in return for some settlement of the corporation's obligations

Stability Strategies-

continuing activities without any significant change in direction - Pause/Proceed with caution strategy- an opportunity to rest before continuing a growth or retrenchment strategy - No change strategy- continuance of current operations and policies - Profit Strategies- to do nothing new in a worsening situation but instead to act as though the company's problems are only temporary

Horizontal growth

expansion of operations into other geographic locations and/or increasing the range of products and services offered to current markets

Contraction

effort to quickly "stop the bleeding" across the board but in size and costs

Turnaround Strategy

emphasizes the improvement of operational efficiency when the corporation's problems are pervasive but not critical

Concentric (Related) Diversification-

growth into a related industry when a firm has a strong competitive position but attractiveness is low

Conglomerate (Unrelated) Diversification

growth into an unrelated industry - Management realizes that the current industry is unattractive - Firm lacks outstanding abilities or skills that it could easily transfer to related products or services in other industries

Portfolio analysis

industries or markets in which the firm competes through its products and business unites

Multipoint competition

large multi-business corporations compete against other large multi-business firms in a number of markets

Sell-out strategy

management can still obtain a good price for its shareholders and the employees can keep their jobs by selling the company to another firm

Liquidation

management terminates the firm

Portfolio analysis techniques

management views its product lines and business units as a series of investments from which it expects a profitable return

Stars

market leaders at the peak of their product cycle and are able to generate enough cash to maintain their high market share and usually contribute to the company's profits

Question marks

new products with the potential for success but require a lot of cash for development

Cash Cows

products that bring in far more money than is needed to maintain their market share

Dogs

products with low market share and do not have the potential to bring in much cash

Divestment

sale of a division with low growth potential

Acquisition

the purchase of a company that is completely absorbed by the subsidiary or division of the acquiring corporation

Retrenchment Strategies

used when the firm has a weak competitive position in some or all of its product lines from poor performance - Turnaround strategy

Transaction cost economies

vertical integration is more efficient than contracting for goods and services in the marketplace when the transaction costs of buying on the open market become too great

Corporate parenting

views a corporation in terms of resources and capabilities that can be used to build business unit value as well as generate synergies across business units

Synergy

when two businesses will generate more profits together than they could separately