CHAPTER 5



CHAPTER 6CORPORATE-LEVEL STRATEGYLearning ObjectivesAfter reading this chapter, the student should be able to:Understand that corporate-level strategies include decisions regarding diversification, international expansion, and vertical integration.Describe the differences between related and unrelated diversification and outline the advantages and disadvantages of each approach.Explain the reasons why firms decide to diversify through international expansion.Describe the process of vertical integration and explain the reasons why a firm would choose to pursue this path.Chapter OutlineIntroductionDiversification StrategyHistory of DiversificationTypes of Diversification StrategiesWhy Firms Pursue Diversification StrategiesRelated DiversificationUnrelated DiversificationThe Diversification TestResults of DiversificationInternational DiversificationMotives for International DiversificationInternational Scope TestVertical IntegrationCosts Associated with Vertical IntegrationAlternatives to Vertical IntegrationSummarySelf-Reflection: Strategizing for GrowthThis self-reflection is designed to assess students’ understanding of how firms grow through expanding the boundaries of the firm. The assessment focuses on students’ knowledge of how firms develop growth strategies through organizational design, ownership choices, and the leveraging of resources across multiple businesses. Growth StrategySelf-Reflection QuestionUnderstanding of why firms diversifyUnderstand why firm diversification is a growth strategy. (Q1)Knowledge of the different types of diversificationExplain the difference between related diversification and unrelated diversification. (Q2)Comprehend how firms employ international diversification as a growth strategy. (Q10)Knowledge of the diversification testTake the cost of entering of a new business into consideration when analyzing growth plans. (Q3)Recognize that the attractiveness of an industry should be incorporated into the decision-making process when a firm is considering diversifying. (Q4)Conceptualize how a firm positions its strategy to achieve synergies from its different businesses. (Q5)Knowledge of vertical integrationUnderstand the rationale for vertical integration. (Q6)Understand how franchising is an alternative to vertical integration. (Q7)Knowledge of alliances and outsourcing as a strategyUnderstand the advantages and disadvantages of alliances such as a growth strategy. (Q8)Understand the rationale for why some firms implement outsourcing as a growth strategy. (Q9)Students that have 8 or more true answers understand the corporate strategy. Students that have a score between 5 and 8 have some knowledge of corporate level strategy. A score of less than 5 indicates that the student is not familiar with the rationale and different types of corporate strategies. Comprehensive Lecture OutlineI.Introduction. Corporate-level strategy is the set of strategic alternatives that an organization chooses as it manages its operations simultaneously across several industries and several markets. Corporate-level strategy includes decisions on how many industries to compete across, whether to vertically integrate, whether to buy or sell companies, and how to share resources across divisions. The ultimate goal of developing a corporate-level strategy is to build a corporate advantage, which occurs when a firm maximizes its resources to build a competitive advantage across its business units.A.Corporate-Level Strategy Choices1.Scope. The markets and businesses the firm will compete in. anizational design. The manner in which activities of the firm will be coordinated. 3.Ownership. The relationship and alignment of the firm’s business units. The Leadership Development JourneyFor this assignment, students are asked to reflect upon a time when they partnered with another person to achieve a common goal. The assignment is designed to help students understand that in some cases corporate-level strategies, such as alliances and joint ventures, are similar to partnerships. Students should analyze their examples of personal partnerships by providing a strategic rationale for the partnership.Identify the advantages and disadvantages of partnerships.Examine if the partnership resulted in growth or the effective pooling of resources.Explain how the partnership benefitted others.For the final question in this assignment, students build a knowledge link between their personal partnering relationships and how the lessons learned can be applied to the management of a corporate-level strategy.Discussion Starter: Using the two examples of companies in the text, have students compare and contrast General Electric's and Westinghouse's experiences with pursuing diversification strategies. Is GE’s successful implementation of corporate-level strategy an anomaly? Can other firms achieve success through similar strategies? II.Diversification Strategy. Occurs when a firm engages in several different businesses that may or may not be related in an attempt to create more value than if the businesses existed as stand-alone entities. The ultimate goal of a diversification strategy is for the whole (the combined companies) to be greater than the sum of the parts (the individual business units). A.History of Diversification1.In the 1950s, the majority of Fortune 500 companies derived revenues from a single core business. This singular focus began to shift during the 1950s and 1960s as a result of regulatory changes that inadvertently promoted corporate diversification (the passing of the Celler-Kefauver Act of 1950). This led many firms to diversify during the 1960s and 1970s.2.The antitrust regulatory environment began to change dramatically during Ronald Reagan’s presidency. The FTC began to evaluate mergers based on factors that were different from those of previous decades, making it easier for firms to expand horizontally from their core business, essentially reversing the impact of the Celler-Kefauver Act. At the same time, as legal barriers to takeovers fell and easy financing in the form of junk bonds became available, investment firms pursuing hostile takeovers emerged.Throughout the 1980s, the diversification trend among firms largely reversed itself as managers lost faith in the portfolio model and corporate raiders divided up companies.B.Types of Diversification Strategies1.Single-product strategy. In this strategy, a firm focuses on one specific product, typically in one market. Through this strategy, a firm attempts to develop core competencies in a specific market, using its resources and capabilities. It develops greater core competency, but suffers from more cyclicality. 2.Related diversification. A firm that owns more than one business that uses a similar set of tangible and intangible resources. Tries to use resources to achieve economies of scope, which offers the potential for sharingresources or transferring skills and core competencies between business units. 3.Unrelated diversification. A firm that manages several businesses with no connection. Tries to create value through financial economies, distributing capital over many business units.C.Why Firms Pursue Diversification Strategies1.The opportunity to leverage core assets or skills between different businesses to create synergy. Synergy is created when a firm generatessustainable cost savings by combining duplicate activities or deploying underutilized assets across multiple businesses.2.The opportunity for growth and expansion, particularly as opportunities for internal growth diminish. 3.The potential to manage or minimize risk. Based on the portfolio management model, which states that by holding several different businesses, a manager will be able to spread the risks of one business across the entire spectrum of businesses. 4. The potential for personal gain. This reason is based on the self-interests and preferences of senior managers.A Different View: Small Giants and Their Business MojoFor this chapter’s A Different View, we recommend that the professor facilitate a discussion regarding why some companies decide not to diversify. The professor can base the discussion on the book Small Giants: Companies that Choose to Be Great Instead of Big, by Bo Burlingham. Small Giants are companies that place a greater emphasis on vision and culture than on the bottom line and growth. Small Giants measure their success by achieving their goals such as workplace culture, customer service, and community contributions. After a discussion on Small Giants, students can use the internet and research the ECCO company and another “small giant” to learn more about their strategies. D.Related Diversification. In most related diversification strategies, managers attempt to create value through the sharing and transferring of resources andskills among units: 1.Reasons for Pursuing Related Diversification. Transferring skills and resources leads to competitive advantage if the similarities among businesses meet the following three conditions.a.The activities involved in the business are similar enough that sharing expertise is meaningful.b. The transfer of skills involves activities important to competitive advantage.c. The skills transferred represents a significant source of competitive advantage for the receiving unit.E.Unrelated Diversification. The ultimate goal of an unrelated diversification strategy is to create some type of financial economies. Financial economies involve cost savings that a firm achieves through the distribution of capital among business units. 1.Reasons for Pursuing Unrelated Diversificationa.To reduce the overall risk of the business through the efficient distribution of capital between business units.b.To allow for the use of capital from a profitable division to sustain a failing firm for a period of time.c.To acquire undervalued assets and attempt to raise their value through specific restructuring activities. F.The Diversification Test1.How Attractive Is the Industry? Is the industry profitable or capable of being profitable? Attractive industries are often marked by high barriers to entry, lack of substitutes, low intensity of competition, and low supplier and buyer power.2.What Is the Cost of Entry? How costly is it to enter the new industry? The cost of entering an industry cannot exceed the benefits management expects to derive from competing in the industry.3.Will the Business Be Better Off? Will the new industry provide the firm with a competitive advantage? Does the presence of the corporation improve the total competitive advantage of business units above and beyond what they could achieve on their own?”G.Results of DiversificationAccording to one key study, a firm’s performance increases as it shifts from single-business strategies to related diversification, but performance decreases as firms change from related diversification to unrelated diversification.Teaching Tip: Use the Walt Disney case to illustrate Disney's use of diversification to create corporate advantage in class discussion. Use Figure 6.6 ? Diversification of Disney in your discussion. Case In Point: Walt DisneyWhat is Disney’s core competency? How did Disney align its core competency into its different businesses? Disney’s core competency is animated entertainment. The firm has leveraged this core competency into films, music, television shows, amusement parks, hotels, retail stores, and Broadway plays.Map out Disney’s vertical-integration strategy. How did it create a corporate advantage? Students should refer to Figure 5.10 and map out how Disney has vertically integrated. Students should share examples of backward integration (the control of inputs to the production process) such as Disney characters, and share examples of forward integration (the control of outputs or distribution channels for main products) such as Disney hotels. For Disney, vertical integration creates a corporate advantage by increasing its revenues and allowing different divisions to share resources and transfer skills.?In recent years, what key investments did Disney make to expand its corporate advantage? In recent years, Disney has expanded its theme parks, invested in retail stores, created Broadway productions, acquired a television network, and developed new movie production companies.What future investments do you recommend to Disney’s portfolio of businesses over the next five years? For this question, students should recommend a business investment for Disney’s corporate portfolio and provide a rationale based on the Diversification Test illustrated in Figure 5.4. III.International Diversification. Firms may seek to diversify internationally to expand the market for their products or to gain certain resources for inputs into their value chain.A.Motives for International Diversification1.Finding new markets2.Achieving economies of scale3. Taking advantage of location and local resource factors B.International Scope Test1.Better off Test. Will a global presence improve the firm’s competitive advantage over and above what it could achieve on its own?2.Ownership Test. Does owning a global business unit provide the best alternative to sustaining or achieving a competitive advantage?Teaching Tip: Use the CEMEX case to illustrate the international diversification strategy in class discussion. Use Figure 6.9 ? Countries in Which CEMEX Competes in your discussion. Case In Point: CEMEX: Reducing Risk Through Diversification For firms in the cement industry, why is international diversification a viable strategy? For the cement industry, international diversification is a viable strategy because it is difficult to transport cement over large distances without it spoiling.What was the rationale for CEMEX’s international-diversification strategy? CEMEX decided to pursue an international diversification strategy in its core cement business as a solution to the cyclical nature of its other businesses (petrochemicals, mining, and tourism).How was CEMEX’s international-diversification strategy executed? The strategy was executed through a market-entry mode because of the cost associated with building a cement plant from scratch. For CEMEX, how has international diversification resulted in a competitive advantage? This strategy has resulted in a competitive advantage because CEMEX has managed to reduce the cyclical nature of its cash flow and maintained a competitive advantage in the markets in which the firm operates.IV.Vertical Integration. Occurs when one corporation owns business units that make inputs for other business units in the same corporation. Forward integration. Occurs when a firm owns or controls the customers or distribution channels for its main products. Backward integration. Occurs when a firm owns or controls the inputs it uses.Extra Example: See the article "A Bargain-Priced Hatch", Neil, Dan, Wall Street Journal (Online) [New York, N.Y] 31 Dec 2011. An article on how Hyundai Motors is using vertical integration to its advantage.A.Costs Associated with Vertical Integration. To understand why a firm should vertically integrate, we must understand the difference between transaction and administrative costs. Administrative costs refer to the costs a firm incurs to coordinate activities between business units. Transaction costs are costs associated with obtaining a product or service from a contractor or supplier.1.Advantagesa.Potential cost reductions in productionb.Improved coordination and quality controlc.Protection of proprietary technology or processesd.Reduction in marketing costs (captive market)Potential in2.Disadvantagesa.Higher administrative costs for internal coordinationb.Potential for obsolescence in technology or processesc.Tendency for complacency and lack of efficiencyd.Lack of strategic flexibility—harder to change courseB.Alternatives to Vertical Integration1.Short-term contracts, sometimes referred to as spot contracts, involve a firm’s commitment to buy a commodity product at a specific price.2.In outsourcing, a firm contracts with an entity outside the corporation to perform certain tasks or functions that the corporation used to do on its own.Extra Example: See the article "TCS to Boost U.S. Outsourcing Staff", Thoppil, Dhanya Ann. Wall Street Journal (Online) [New York, N.Y] 15 June 2011. Tata Consultancy Services Ltd. expects to hire more than 1,200 Americans this fiscal year through March 2012 in an effort to diversify its talent pool as well as counter anti-outsourcing sentiment in the U.S.Teaching Tip: Use the “Zara: A Vertically Integrated Apparel Maker” case to illustrate vertical integration in class discussion. Discussion TopicsCompare and contrast business-level and corporate-level strategies. How do these strategies complement each other? What leadership skills are most needed for executing each approach? At what point in its lifecycle should a firm consider the development and execution of a corporate-level strategy? What role should the government have in regulating or overseeing the way in which firms pursue diversification strategies? In today’s business environment, do you believe that the level of regulation of corporate-level strategies is too much, too little, or about right?What are the advantages and disadvantages of related and unrelated diversification strategies? How should a firm consider which diversification path to follow?Why have firms found it so hard to reap the potential benefits of diversification? What could a firm do to increase its chances of reaping the benefits of diversification?Why have large family-based conglomerates like the Tata Group in India been successful with unrelated diversification? What aspects of the context in emerging markets are conducive to the pursuit of unrelated diversification?Why do firms pursue international diversification? What risks do firms face when they diversify on an international level? How can these risks be mitigated?When does vertical integration make sense for an organization?How do companies derive the most value from pursuing vertical integration?Outsourcing has become an increasingly popular alternative to vertical integration. What are the costs and benefits of outsourcing? AssignmentsManagement ResearchFor this series of management research questions, students should conduct research and apply theories from the textbook to answer the questions in the text. Students should consider 1) a firm that employs a diversification strategy; 2) a firm that employs a vertical-integration strategy; and 3) a firm that employs an international-diversification strategy.Find a firm that employs a diversification strategy and list the different industries in which it competes. Use the diversification test to decide whether this company should be in those different industries. Use the Internet and public filings such as annual reports and 10-Ks to gather this information.Find a firm that employs a vertical-integration strategy and list the stages of production that make it vertically integrated. Use the vertical-integration test to decide whether this company should be vertically integrated or whether it should contract with an outside firm to fulfill certain aspects of its production process. Use the Internet and public filings such as Annual Reports and 10-Ks to gather this information.Find a firm that employs an international-diversification strategy and list the regions in which the firm competes. Use the international-diversification test to decide if this company should be competing internationally. Use the Internet and public filings such as Annual Reports and 10-Ks to gather this information.In the FieldFor this, “In the Field” assignment students should facilitate a brainstorming session with a local business that historically has not pursued a corporate-level strategy. As part of the brainstorming session, students can discuss the questions from the text.What are the firm’s options for a diversification strategy?For each diversification strategy proposed, what are the pros and cons?Are there opportunities for the firm to vertically integrate?Does the firm have any alliance partners? If so, what are the benefits of those partnerships?Has the firm considered international diversification? Why or why not?This page intentionally left blank. ................
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