Chapter 6 - Corporate Strategy

An internal venture

Depends on the R&D of an organization. Since its internal management has greater control over progress Risks of failure are high and even successful ones can take many years

Contracts

Establish mutual rights Rules for management and dispute resolution Can be expensive to create and enforce

Vertical Integration

Extent to which a firm is involved in several stages of the supply chain.

Typical Industry Supply Chain

Extraction, primary manufacturing, final product manufacturing, wholesaling, retailing

Conglomerates

Firms that pursue unrelated diversification

Strategic Alliance

Formed by 2 or more org.'s to... develop new products or services, enter new markets, or improve resource conversion processes.

Unrelated Diversification research

Have lower profitablility and higher levels of risk than firms pursuing other corporate-level strategies

Market Failure

High transaction costs which encourage a firm to pursue vertical integration by producing the product or service in-house

A concentration strategy allows a firm to

Invest profit back into the business, rather than competing with other corporate holdings for the investment fund

Governance of the alliance: 3 types

a. Equity sharing or ownership, as in the case of a joint venture; b. Creating a contract that establishes the particulars of how the alliance will be managed and accounts for situations that may arise during the partnership; c. Self-enforcing relational governance that relies on reputation, goodwill, and trust.

Many successful organizations...

abandon their concentration stratigies at some point due to market saturation, increased competition.

Equity ownership

aligns the mutual interests of the partners basis for returns in relation to their investments

Intangible relatedness

any time capabilities developed in one area can be applied to another area. When executed properly, intangible relatedness can result in managerial synergy.

Resources most likely to be transferable through a joint venture..

are marketing, technology, raw materials, finances, management, and political commitments.

Related diversification Cont.

higher financial performance than Unrelated..

Organizational fit occurs when

two organizations or business units have similar management processes, cultures, systems, and structures.

The profitability of a concentration strategy

Dependent on the industry and nation in which a firm is involved.

Mergers/acquisitions are a relatively quick way to :

(1) enter new markets, (2) acquire new products or services, (3) learn new resource conversion processes, (4) acquire needed knowledge and skills, (5) vertically integrate, (6) broaden markets geographically, (7) fill needs in the corporate portfolio (8) increase market share in an existing business.

Concentration

Companies engaged in a single business area

Three broad approaches to corporate strategy

Concentration, vertical integration, and diversification

When firms come together to form a legally independent company

Joint Venture

Unsuccessful Mergers

Large Amount of debt Overconfident/ incompetent managers Poor ethics poor due diligence diversification away from core business

Successful Mergers

Low-to-moderate Debt high level of relatedness friendly negotiations focus on core business Careful Due Diligence Use of cash not stock

Portfolio Management

Managing the mix of businesses in corporate portfolio Where to invest new capital

Mergers

Occur anytime two organizations combine into one.

Acquisition

Organization choose to buy diversification. Considered a substitution for innovation. Type of merger - One organization buys a controlling interest in the stock of another organization or buys it outright.

A single-business approach allows

Organization to master one business and industry environment.

Risks of a concentration strategy:

Overdependency on one product or business area, which could change dramatically Product obsolescence and industry maturity Uneven cash flow and profitability

Relational Governance

Placing trust in the partners trust replaces a written contract

Transaction Cost Economics

Provides a cost perspective on vertical integration, helps explain when vertical integration may be approriate .

Boston Consulting Group Matrix

Two factors: industry growth rate & relative market size

Taper Integration

Vertical integration can be used profitably in combination with outsourcing.

Strategic fit refers to

complementary matching of strategic organizational capabilities. If two organizations in two related businesses combine their resources, but both of them are strong in the same areas and weak in the same areas, then the potential for synergy is diminished.

Corporate strategy typically evolves from

concentration on a single business to some form of vertical integration or diversification of products, markets, or resource conversion processes.

Unrelated Diversification

does not depend on any pattern of relatedness achieve high returns through financial economies

Three diversification Methods

internal venture to develop the new business on its own, an acquisition, or a joint venture.

Related diversification

involves diversifying from an original core business into other businesses that are similar or related.

Tangible relatedness

means that the organization has the opportunity to use the same physical resources for multiple purposes.

Since all resources are directed at doing one thing well

organization may be in a better position to develop the resources and capabilities necessary to establish a sustainable competitive advantage.

Downside of Unrelated Diversification..

places significant demands on corporate-level executives due to increased complexity and technological changes across industries, which may reduce the effectiveness of management.

A concentration strategy can prevent

proliferation of management levels and staff functions that are often associated with large multibusiness firms.

Two forms of relatedness

tangible and intangible