Formulating Corporate-Level StrategyHCAD53901Strategies2Distinguishing Corporations from Strategic Business Units (SBUs)Multi-SBUCorporations:lSoleseparatelegalentitylAuthorizedtoexecutecontractslAbletoborrowmoneyandsellequitylProducesnogoodsorserviceslQuitesmallstafflPrimaryfunctionistoassembleandmanageaportfolioofSBUs3Distinguishing Corporations from Strategic Business Units (SBUs)StrategicBusinessUnits:lNoseparatelegalexistencelNoseparateabilitytocontractorraisecapitallProducegoodsandserviceslCompeteinoneormoremarketslRelativeautonomytomanageoperationsandstrategy4Value-Adding Functions of the Corporate CenterlManagethePortfolioofSBUslRaiseFinancialCapitalforAllocationtoSBUslAllocateResourcesandServicestoSBUslFacilitateSynergiesAmongSBUslChooseParentingStyleforSBUInteractionslParticipateinSBUStrategicPlanningProcesslOverseeandMonitorSBUPerformancelManageCorporateRelationsWithStakeholders5Corporate Management of an SBU Portfolio (I)lInpursuitofacorporatevisionlAcquires,mergeswith,ordevelopsinternallynewSBUslDivestsexisting,unwantedSBUslSetperformancegoalsforSBUmanagementlProvideinputtoSBUstrategicdecisionslCountuponSBUstoperformuniquestrategicfunctions6Corporate Management of an SBU Portfolio (II)lBalancebetweencentralcorporatedirectionandindividualSBUautonomylControlvsspontaneitylHiregoodSBUmanagers,givethemgeneralguidelines,andletthemlooseorlGivedetaileddirections,watchclosely,andintervenefrequently7Model Portfolio Management Process1.ChoosestrategicthrustofthecorporationGrowthStabilityRetrenchment2.Choosegeographicareas,markets,andproductsorservicestoofferinthem3.DecidehowmanySBUsintheportfolioandwhichbusinessestheywillbe8Texas Health ResourceslTexasHealthResources(THR)isoneofthelargestfaith-based,nonprofithealthcaredeliverysystemsintheUnitedStatesandthelargestinNorthTexasintermsofpatientsserved.Thesystemsprimaryserviceareaconsistsof16countiesinnorthcentralTexas,hometomorethan6.2millionpeople.THRwasformedin1997withtheassetsofFortWorth-basedHarrisMethodistHealthSystemandDallas-basedPresbyterianHealthcareResources.Laterthatyear,ArlingtonMemorialHospitaljoinedtheTHRsystem.THRhas12acute-carehospitalsandonelong-termcarehospitalthattotal3,100licensedhospitalbeds,employsmorethan18,000people,andcountsmorethan3,600physicianswithactivestaffprivilegesatitshospitals.THRisalsoacorporatememberorpartnerinsixadditionalhospitalsandsurgerycenters.910Adaptive StrategiesCorporate-Level Strategic Options:Growth Expand the PortfoliolMostcommoncorporate-levelstrategydirectionlCriticaltomaintainingshareinagrowingmarketlInpursuitofeconomiesofscaleandscopelIncreaseinexperienceandlearninglTopexecutiveegostobesatisfied1112Expansion Adaptive Strategy:Orientation toward growthlExpand, cut back, status quo?lConcentrate within current industry, diversify into other industries?lGrowth and expansion through internal development or acquisitions, mergers, or strategic alliances?Adaptive StrategiesGrowth By ConcentrationlAllbusinessesstartherelDedicateallresourcesandcompetenciestooneorafewproductsorserviceslAchievedinoneofthreeways:SellmoreofcurrentproductsincurrentmarketsSellcurrentproductsinnewmarketsSellnewproductsincurrentmarketslTosellnewproductsinnewmarketsisdiversification1314Basic Growth Strategies:ConcentrationCurrent product line in one industryMarket DevelopmentProduct DevelopmentPenetrationDiversificationInto other product lines in other industriesAdaptive StrategiesConcentrationonaSingleBusinessSEARSCoca-ColaMcDonaldsSouthwest Airlines15ConcentrationonaSingleBusinesslAdvantagesOperationalfocusonasinglefamiliarindustryormarket.Currentresourcesandcapabilitiesaddvalue.Growingwiththemarketbringscompetitiveadvantage.lDisadvantagesNodiversificationofmarketrisks.Verticalintegrationmayberequiredtocreatevalueandestablishcompetitiveadvantage.Opportunitiestocreatevalueandmakeaprofitmaybemissed.16Concentration No Longer Sufficient to Maintain GrowthlUnlikelytocaptureagreatershareofcurrentmarketlCurrentmarketisstagnating,maturing,shrinking,orotherwiselackinggrowthpotentiallExcesscashonhandneedstobeinvestedproductivelylManagementhasgreaterambitionsforfurtherstrategicachievement17DiversificationlRelateddiversificationEntryintonewbusinessactivitybasedonsharedcommonalitiesinthecomponentsofthevaluechainsofthefirms.lUnrelateddiversificationEntryintoanewbusinessareathathasnoobviousrelationshipwithanyareaoftheexistingbusiness.18Growth By Related DiversificationlMovebeyondexistingmarketsandproductslEmployexistingresourcesandcompetencieslNewbusinessesarecloselyconnected(“related”)toexistingbusinesseslDirectionsofrelateddiversificationVerticalforwardintegration(towardcustomers)Verticalbackwardintegration(towardsuppliers)Horizontalexpansion19Forms of RelatednesslProductsorserviceslMarketslProcesses,systems,orotheroperatingfeatureslManufacturingfacilities,distributionchannels,marketingmedia,orsupportserviceslBrandimage,corporatereputation,creativityorinnovationskills,orgeneralmanagerialexpertise20Vertical IntegrationlForwardorbackwardintheindustryvaluechainlMoving“upstream”towardsuppliersHospitalacquiringaphysiciangrouppracticelMoving“downstream”towardcustomersHospitalacquiringalong-termcarefacilitylExamples:physician-hospitalorganizations(failed),integrateddeliverysystems(succeeded)21Stages in the Raw-Material-to-Consumer Value ChainUpstreamDownstream22StagesintheRaw-Material-to-ConsumerValueChaininthePersonalComputerIndustryEnd userDistributionAssemblyIntermediatemanufacturerRaw materialsExamples:Dow ChemicalUnion CarbideKyoceraExamples:IntelSeagateMicronExamples:AppleHpDellExamples:Best BuyOffice Max23Vertical Integration24Decision Steps in Vertical IntegrationlAdequateresourcesandcompetenciestobringthenewbusinessoperationsin-houselChooseformofintegrationfullownership,partialownership,jointventure,orlong-termcontractlConsiderimpactonotherstakeholderslPayattentiontoshareofindustryvaluechainbeingbroughtin-house25Good Reasons for Vertical IntegrationlReducecostsbyeliminatingredundancythroughoutthevaluechainlBettercoordinationatinterfacebetweenvaluechaincomponentslProfit-takingatseverallevelsinthechainiseliminatedlGreateroverallcontrolofinputs(resources)andoutputs(distributionchannels)lWidernetworkofsourcesofcompetitiveintelligencelOpportunitytoreengineerthevaluechain26Vertical Integration Problems (I)lDoesthevaluechainfunctionaswellafterintegrationasitdidbefore?lExcessivecostsmaybeincurredinmanagingthenewbusinessesandtheirinteractionslInabilitytousefullcapacityofacquiredbusinessessomustselltocompetitors?lMustthebusinessdealexclusivelywithitsnewintegrationpartners?27Vertical Integration Problems (II)lCommitmenttoentirechainreducesstrategicflexibilitylCommitmentmaytiebusinesstoinefficientprocesses,poorlymanagedunits,andobsoletetechnologieslInabilitytocoordinateaddedunitsmayincreasecostsandlimitopportunitiestocreatevalueforcustomers28Horizontal ExpansionlMovingsidewaysinthevaluechain,acquiringsimilarbusinessesindifferentgeographicareaslAcquisitiontargetmaybeacompetitorlMaycreateantitrustenforcementconcernslExamples:multistatehospitalnetworks,nursinghomechains,nationalhealthplansystems29Best Circumstances for Horizontal ExpansionlCurrentmarketisgrowing,requiringadditionalcapacitytomeetdemandlTargetacquisitiondoingpoorlylacksresourcesorcompetenciespossessedbytheacquirerlExpandedsizeenableseconomiesofscaleleadingtocompetitiveadvantagelOpportunitytocreatedominantmarketpositionbyacquiringacompetitor3031Basic Diversification Strategies:Concentric (Related) DiversificationConglomerate (Unrelated) DiversificationDiversificationIncentives to DiversifyInternalIncentives:lPoorperformancemayleadsomefirmstodiversifyanattempttoachievebetterreturnslFirmsmaydiversifytobalanceuncertainfuturecashflowslFirmsmaydiversifyintodifferentbusinessesinordertoreducerisk32Resources and DiversificationlBesidesstrongincentives,firmsaremorelikelytodiversifyiftheyhavetheresourcestodosolValuecreationisdeterminedmorebyappropriateuseofresourcesthanincentivestodiversify33Managerial Motives to DiversifyManagershavemotivestodiversifydiversificationincreasessize;sizeisassociatedwithexecutivecompensationdiversificationreducesemploymentriskeffectivegovernancemechanismsmayrestrictsuchmotives3435Concentric DiversificationGrowth into related industrySearch for synergiesRelated DiversificationRelated Diversification3MHewlett PackardMarriott36Related Diversification37Advantages of Related Diversification (I)lSynergiesamongexistingandacquiredbusinesseslLoweroverallcorporateriskbalancinghighandlow-riskSBUslGreaterbargainingpowervis-viscompetitors,suppliersandcustomers38Advantages of Related Diversification (II)lCross-subsidizationamongbusinessesatdifferentlifecyclestageslGeneralincreaseinrevenuesandprofitsfromacquiredbusinesseslOpportunitytoacquirenewknowledge,competencies,andtechnologieslEnhancestatus,power,andcompensationoftopexecutives39Forms of Inter-SBU Synergy (I)lSharesolutionstoproblemsandideasforimprovingoperationalefficiencylUseslackcapacitytoachieveeconomiesofscalelEarnvolumediscountsandgreaterbargainingpowerwithsupplierslIntegrationofcomputersystemsandcapabilities40Forms of Inter-SBU Synergy (II)lBysharingR&Dfacilities,reduceinnovationcostsandspreadresearchriskslSharedistributionchannelslLeveragetheuseofinfluentialbrandnamesandimageslWideopportunitiesforknowledgetransfer4142Unrelated (Conglomerate) DiversificationGrowth into unrelated industryConcern with financial considerationsAdaptive StrategiesGrowth By Unrelated DiversificationlFewsimilaritiesorcommonalitiesamongbusinessesintheportfoliolOperateindifferentindustries/markets,servedifferentcustomers,facedifferentcompetitorslCorporationcomposedofunrelatedbusinessesmaybecalleda“conglomerate”lWhatvalueisaddedbybringingunrelatedbusinessestogetherintoonecorporation?43Unrelated DiversificationTycoAmer Group ITT44Adaptive Strategies45Relationship Between Diversification and PerformancePerformancePerformanceLevel of DiversificationLevel of DiversificationDominantBusinessUnrelatedBusinessRelatedConstrained46Bureaucratic Costs and the Limits of DiversificationlNumberofbusinessesInformationoverloadcanleadtopoorresourceallocationdecisionsandcreateinefficiencies.lCoordinationamongbusinessesAsthescopeofdiversificationwidens,controlandbureaucraticcostsincrease.Resourcesharingandpoolingarrangementsthatcreatevaluealsocausecoordinationproblems.lLimitsofdiversificationTheextentofdiversificationmustbebalancedwithitsbureaucraticcosts.47Tools for Implementing Growth StrategieslInternaldevelopmentlInternalnewventurecreationlInvestmentsinnewventureslAcquisitionlMergerlJointventure,strategicallianceorpartnership48AcquisitionsAcquisitionsReasons for Making AcquisitionsIncreaseIncreasemarket powermarket powerOvercomeOvercomeentry barriersentry barriersCost of newCost of newproduct developmentproduct developmentIncrease speedIncrease speedto marketto marketIncreaseIncreasediversificationdiversificationReshape firmsReshape firmscompetitive scopecompetitive scopeLower risk comparedLower risk comparedto developing newto developing newproductsproductsLearn and developLearn and developnew capabilitiesnew capabilities49Diversification and Corporate Performance: A Disappointing HistorySources: Lipin, S. & Deogun, N. 2000. Big merges of the 90s prove disappointing to shareholders. Wall Street Journal, October 30: C1; A study by Dr. G. William Schwert, University of Rochester, cited in Pare, T. P. 1994. The new merger boom. Fortune, November 28:96; and Porter, M.E. 1987. From competitive advantage to corporate strategy. Harvard Business Review, 65(3):43.lAstudyconductedbyBusiness WeekandMercerManagementConsulting,Inc.,analyzed150acquisitionsthattookplacebetweenJuly2000andJuly2005.Basedontotalstockreturnsfromthreemonthsbefore,anduptothreeyearsafter,theannouncement:l30percentsubstantiallyerodedshareholderreturns.l20percenterodedsomereturns.l33percentcreatedonlymarginalreturns.l17percentcreatedsubstantialreturns.lAstudybySalomonSmithBarneyofU.S.companiesacquiredsince1997indealsfor$15billionormore,thestocksoftheacquiringfirmshave,onaverage,under-performedtheS&Pstockindexby14percentagepointsandunder-performedtheirpeergroupbyfourpercentagepointsafterthedealswereannounced.50AcquisitionsAcquisitionsProblems With AcquisitionsIntegrationIntegrationdifficultiesdifficultiesInadequateInadequateevaluation of targetevaluation of targetLarge orLarge orextraordinary debtextraordinary debtInability toInability toachieve synergyachieve synergyToo muchToo muchdiversificationdiversificationManagers overlyManagers overlyfocused on acquisitionsfocused on acquisitionsResulting firmResulting firmis too largeis too large51Corporate-Level Strategic Options:Stability Maintain the PortfoliolRapidgrowthoutstrippedfinancialandmanagerialresourceslDifficultiesinassimilatingrecentportfolioadditionslSomecurrentSBUsmayhaveseriousfinancialoroperationalproblemslNoattractiveacquisitionopportunitiesavailablelWaitingforenvironmentalchangestodevelop52Restructuring:Contraction of ScopelWhyrestructure?Pull-backfromoverdiversification.Attacksbycompetitorsoncorebusinesses.Diminishedstrategicadvantagesofverticalintegrationanddiversification.lContraction(Exit)strategiesRetrenchmentDivestmentspinoffsofprofitableSBUstoinvestors;managementbuyouts(MBOs).Harvesthaltinginvestment,maximizingcashflow.LiquidationCeaseoperations,writeoffassets.53Why Contraction of Scope?lThecausesofcorporatedeclinePoormanagementincompetence,neglectOverexpansionempire-buildingCEOsInadequatefinancialcontrolsnoprofitresponsibilityHighcostslowlaborproductivityNewcompetitionpowerfulemergingcompetitorsUnforeseendemandshiftsmajormarketchangesOrganizationalinertiaslowtorespondtonewcompetitiveconditions54Corporate-Level Strategic Options:Retrenchment Cut Back the PortfoliolNeedtodomorethanpauseandrethinkRegaincontrolofinefficientoperationsRebuildresourcesandcompetenciesReconsiderstrategicdirectionlResultmaybearadicalrestructureandredirectionoftheorganization55Retrenchment OptionslGettingbackdowntofightingweightlReturningtocorebusinessesandcompetencieslSeekinga“whiteknight”totakeoverlSellingtheentireorganizationlDivestingpiecesofthecorporateportfoliolVoluntaryfilingforbankruptcy/reorganizationlVoluntary/involuntaryfilingforbankruptcy/liquidation56The Main Steps of TurnaroundlChangingtheleadershipReplaceentrenchedmanagementwithnewmanagers.lRedefiningstrategicfocusEvaluateandreconstitutetheorganizationsstrategy.lAssetsalesandclosuresDivestunwantedassetsforinvestmentresources.lImprovingprofitabilityReducecosts,tightenfinanceandperformancecontrols.lAcquisitionsMakeacquisitionsofskillsandcompetenciestostrengthencorebusinesses.57Tools for Portfolio Analysis and ManagementGraphicalmatrixdiagramsshowingvariablefactorskeytostrategicportfoliosdecisions1.BostonConsultingGroupGrowth-ShareMatrix2.GeneralElectricBusinessScreen58Reviewing the Corporate PortfoliolPortfolioPlanningundertheBostonConsultingGroup(BCG)matrix:IdentifyingtheStrategicBusinessUnits(SBUs)bybusinessareaorproductmarketAssessingeachSBUsprospects(usingrelative market shareandindustry growth rate)relativetootherSBUsintheportfolio.DevelopingstrategicobjectivesforeachSBU.59The BCG MatrixSource: Perspectives,No.66,“TheProductPortfolio.”AdaptedbypermissionfromTheBostonConsultingGroup,Inc.,1970.60The BCG MatrixlStarsHighrelativemarketsharesinfastgrowingindustries.lQuestionmarksLowrelativemarketsharesinfastgrowingindustries.lCashcowsHighrelativemarketsharesinlow-growthindustries.lDogsLowrelativemarketsharesinlow-growthindustries.61The Strategic Implications of the BCG MatrixlStarsAggressiveinvestmentstosupportcontinuedgrowthandconsolidatecompetitivepositionoffirms.lQuestionmarksSelectiveinvestments;divestitureforweakfirmsorthosewithuncertainprospectsandlackofstrategicfit.lCashcowsInvestmentssufficienttomaintaincompetitiveposition.Cashsurplusesusedindevelopingandnurturingstarsandselectedquestionmarkfirms.lDogsDivestiture,harvesting,orliquidationandindustryexit.62Limitations on Portfolio PlanninglFlawsinportfolioplanning:TheBCGmodelissimplistic;considersonlytwocompetitiveenvironmentfactorsrelativemarketshareandindustrygrowthrate.Highrelativemarketshareisnoguaranteeofacostsavingsorcompetitiveadvantage.Lowrelativemarketshareisnotalwaysanindicatorofcompetitivefailureorlackofprofitability.Multifactormodels(e.g.,theMcKinseymatrix)arebetterthoughimperfect.63The McKinsey Matrix64Raise Financial CapitallSBUsmaylacktheseparatelegalexistencetodothisontheirownlCorporatecenterperformsthisfunctionbyissuingstockandborrowinglThen,allocatesthecapitaltoSBUsinsomerational,objectivemannerthatmaximizestotalreturntothecorporationlThisisthepracticeofcorporatestrategicfinancialmanagement65Allocate Resources and ServiceslInadditiontofinancialcapital,corporatecentermaypossessotherresourcesusefultoSBUsHumanresourcemanagementservicesResearchanddevelopmentcapabilityTechnologyassessmentcompetenceInformationtechnologysupportCorporatelegaldepartmentlThesetoomustbeallocatedtotheSBUs66Facilitate Synergies Among SBUslInter-SBUsynergiesareoneofthemainreasonsforassemblingcorporateportfolioslSynergiesdonotoftenoccurnaturally;thecorporatecentermustfosterthemWatcheachSBUsoperationsandstrategiesNoticelacksofresourcesandcompetenciesInventoryresourcesorcompetenciesownedbytheSBUsMatchlackingandowningSBUsFacilitateactualsharingamongthem67Forms of Synergy Facilitation (I)lDisseminateknowledgeandbestpracticeslFacilitatetransferofknowledgeassetsandserviceslEncouragecollaborationandcoordinationlArrangetransferofskillsandcapabilitieslBuildcentraldatabaseofresourcesandcompetenciesavailabletoallSBUs68Forms of Synergy Facilitation (II)lTemporarilyassignaspecialistfromoneSBUtoanotherlSponsorall-SBUmeetingstoshareinformationandproblemsolutionslCoordinateactivitiesofcommonSBUfunctionstogaineconomiesofscalelProvidesynergy-supportingeducation,training,andcoachingtoSBUpersonnel69Choose a Corporate Parenting StylelConsciouschoiceonhowthecorporatecenterwillinteractwithSBUsinitsportfoliolRangealongacontinuumfromcompletedetachmenttointrusivemicromanagementlChoicewillaffectbehaviorandperformanceofSBUtopmanagementlToolooseparentingcanleadtorogueSBUslTootightparentingcanstiflecreativespontaneity70Participate in SBU Strategy-MakinglCorporatedegreeofinvolvementinSBUstrategicmanagementisaparentingchoicelDifferencebetweenatrueSBUandadivisionordepartmentofabusiness:SBUgreatautonomyandfreedomofactionDivisionclosecentraldirectionandcontrollEssenceofSBUsuccessisinentrepreneurialimpulsesoftheirtopexecutives71Oversee and Monitor SBU PerformancelEverycorporatecentermustmonitortheperformanceofSBUsinitsportfolio:AretheymeetingthestrategicobjectivesoftheSBUandtheoverallcorporation?Aretheyfinanciallyhealthy?Arethereanyloomingproblems?Aretopexecutivesmeetingpersonalperformancestandards?72Managing Relationships With External StakeholderslEveryorganizationhasnumerousstakeholderswhomustbetendedtolMeaningofterm“stakeholder”lExamplesofhealthcarestakeholders:Suppliers(employees,unions,contractors)Customers(patients,payers)CompetitorsRegulatorsCapitalsources(donors,grantors,shareholders,lenders)Media73Corporate Value NegationlSystemsandapprovalsthataddcosts,delaydecisions,andslowmarketresponsivenesslInsulateSBUexecutivesfromrealitiesandpressuresoffinancialmarketslPortfoliosolargeanddiversethatnocommonthemeisapparentlOverlylargecorporateHQthatincurexpensewithoutprovidingaddedvaluetoSBUs74Strategic AlliancelAstrategicallianceisacooperativestrategyinwhichfirmscombinesomeoftheirresourcesandcapabilitiestocreateacompetitiveadvantagelAstrategicallianceinvolvesexchangeandsharingofresourcesandcapabilitiesco-developmentordistributionofgoodsorservices75CombinedCombinedResourcesResourcesCapabilitiesCapabilitiesCore CompetenciesCore CompetenciesResourcesResourcesCapabilitiesCapabilitiesCore CompetenciesCore CompetenciesResourcesResourcesCapabilitiesCapabilitiesCore CompetenciesCore CompetenciesStrategic AllianceFirm AFirm AFirm BFirm BMutual interests in designing, manufacturing,Mutual interests in designing, manufacturing,or distributing goods or servicesor distributing goods or services76Types of Cooperative StrategieslJointventure:twoormorefirmscreateanindependentcompanybycombiningpartsoftheirassetslEquitystrategicalliance:partnerswhoowndifferentpercentagesofequityinanewventurelNonequitystrategicalliances:contractualagreementsgiventoacompanytosupply,produce,ordistributeafirmsgoodsorserviceswithoutequitysharing77Strategic AlliancesMarginMarginPrimaryActivitiesSupportActivitiesServiceMarketing&SalesOutboundLogisticsOperationsInboundLogisticsFirmInfrastructureHumanResourceMgmt.TechnologicalDevelopmentProcurementMarginMarginPrimaryActivitiesSupportActivitiesServiceMarketing&SalesOutboundLogisticsOperationsInboundLogisticsFirmInfrastructureHumanResourceMgmt.TechnologicalDevelopmentProcurementVertical AllianceVertical AllianceSupplierSupplierverticalcomplementarystrategicallianceisformedbetweenfirmsthatagreetousetheirskillsandcapabilitiesindifferentstagesofthevaluechaintocreatevalueforbothfirmsoutsourcingisoneexampleofthistypeofalliance78Strategic AlliancesMarginMarginPrimaryActivitiesSupportActivitiesServiceMarketing&SalesOutboundLogisticsOperationsInboundLogisticsFirmInfrastructureHumanResourceMgmt.TechnologicalDevelopmentProcurementMarginMarginPrimaryActivitiesSupportActivitiesServiceMarketing&SalesOutboundLogisticsOperationsInboundLogisticsFirmInfrastructureHumanResourceMgmt.TechnologicalDevelopmentProcurementBuyerBuyerPotential CompetitorsPotential Competitorshorizontal complementary strategic alliance is formed between partners who agree to combine their resources and skills to create value in the same stage of the value chainfocus on long-term product development and distribution opportunitiesthe partners may become competitorsrequires a great deal of trust between the partnersBuyerBuyer79