Corporate Strategies

What is Corporate Strategy?

Those strategies concerned with the broad and long-term questions of

what business(es) the organization is in or wants to be in & what it wants to do with those businesses Moves to enter new businesses Actions to boost combined performance of businesses Ways to capture synergy among related businesses Establishing investment priorities & steering corporate resources into most attractive units

Task involves

Single & Multiple Business Organizations

Single business organizations

Operates primarily in only one industry (e.g., CocaCola Beverage Industry; Wrigley Jr. Company Chewing Gum) Operates in more than one industry Example: PepsiCo Snack Food Industry business (Frito Lay); & Beverage Industry Philip Morris Companies Tobacco Industry; Brewery Industry (Miller Brewery); & Food Processing Industry (Kraft General Foods).

Multiple Business Organizations

Possible Corporate Strategic Directions (1) Moving the organization ahead -Organizational Growth
(2) Keeping the organization where it is --

Organizational Stability

(3) Reversing the organizations weaknesses or decline -- Organizational Renewal

ORGANIZATIONAL GROWTH

Growth strategy

Involves the attainment of specific growth objectives by increasing the level of an firms operations

Typical growth objectives for businesses

Increase in sales revenues Increase in earnings or profits Other performance measures

Increasing clients served or patrons attracted Broadening the geographic area Increasing programs offered

Growth objectives of not-for-profit businesses

Types of Growth Strategies

Concentration International

Organizational Growth Diversification Related Unrelated

Vertical Integration Backward Forward

Horizontal Integration

Why Do Firms Diversify?

To Grow

Increase sales & profitability beyond what firms core businesses can provide Managerial hubris -- pride or status that come from managing a large business

To more fully utilize existing resources and capabilities

Skills in sales & marketing, general management skills & knowledge, distribution channels, etc.

Why Do Firms Diversify?

Risk reduction and/or spreading

Escape from unattractive or undesirable industries (e.g., tobacco & oil companies) Stability of profit flows (CAPM: systematic vs. unsystematic risks; shareholders & diversified portfolios)
Large cash balances attract corporate raiders Use cash balances to avoid hostile takeovers Create synergy among the businesses of a firm

To make use of surplus cash flows

To build shareholder value

Why Do Firms Diversify

Synergy can be obtained in three ways

Exploiting economies of scale Exploiting economies of scope Efficient allocation of capital through the use of portfolio management techniques

Why Do Firms Diversify?

Diversification is capable of increasing shareholder value if it passes three tests:

The attractiveness test: The industry must be structurally attractive or capable of being made attractive The cost-of-entry test: The cost of entry must not capitalize all future profits The better-off test: Either the new unit must gain competitive advantage from its link with the corporation or vice versa (i.e. synergy)

Implementing Growth Strategies

Mergers & Acquisitions

A merger is a legal transaction in which two or more organizations combine through an exchange of stock, but only one firm actually remain

An acquisition is an outright purchase of an organization by another

Implementing Growth Strategies

Strategic Partnering

When two or more firms establish a legitimate relationship by combining their resources, core competencies, distinctive capabilities for some business purpose

Implementing Growth Strategies

Types of Strategic Partnerships

Joint Venture (JV)

Two or more separate organization form an independent organization for strategic purposes Partners usually own equal shares of new venture Used when partners do not want to be legally joined Legal contract between organizations covering a specific business purpose Typically between an organization & its suppliers

Long-Term Contract

Implementing Growth Strategies

Types of strategic Partnerships

Strategic Alliance

Two or more firms share resources, capabilities or competencies to pursue some business purpose Similar to JVs but no formation of a separate entity

Often pursued so that partners reap benefits of expanded operations

ORGANIZATIONAL STABILITY

A strategy where the organization maintains its current size and current level of business operations When is stability an appropriate strategy?

Industry is in a period of rapid upheaval with several key industry & external forces drastically changing, making future highly uncertain Industry is facing slow or no growth opportunities Many small business owners follow stability strategy indefinitely

ORGANIZATIONAL STABILITY

When is stability an appropriate strategy?

Organization has just completed a frenzied period of growth & needs to have some down time in order for its resources & capabilities to build up strength again large firm in large industry at maturity stage of industry life cycle