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