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6.1
The author cites 3
types of corporate strategy. 1.
Directional--growth, stability, retrenchment. 2. Portfolio--products and
business units. 3. Parenting--resource
allocation and centralized management of business units.
6.2
Directional
Strategies
Growth strategies
include mergers, acquisitions, and strategic alliance. Mergers are the combining of two firms in
which only one of the firms remains.
Acquisition is the scenario in which one firm takes over another
firm. This can be voluntary or
involuntary. Strategic alliance was
discussed in chapter 5 notes. Growth
strategies are usually considered to be healthy, but can be misleading
indicators of the firms general health.
For instance, an organization could be in growth mode but be masking a
cash flow problem. Organizational slack
is a term used to identify amounts of unused resources that could be used to
resolve conflicts among divisions and departments (almost all conflict is caused
by perceived inequity of resource allocation).
If the organization needs to do a turn around strategy to overcome
weaknesses, growth mode will provide resource cushions. Finally, growth strategies do provide career
growth for employees of the organization.
Two specific
growth strategies are Concentration and diversification. Concentration consists of strategies aimed
at growth within current product lines.
In chapter 4 notes we discussed vertical integration. This is a strategy to add various aspects of
existing production and distribution channels to the organization. Backward integration would be acquiring
suppliers and manufacturers of goods.
Forward integration would be procuring organizations in the distribution
channel for the product or service. As
stated in prior notes, vertical integration provides greater economies of
scale. The firm acquires control of
costs and distribution channels for reduced per unit expenditures and improved
levels of product distribution and price.
Transaction cost
economics is a means for analyzing vertical growth strategies vs. outsourcing
strategies. The Key Theory article on
page 137 considers transaction factors that favor integration. Those are transaction uncertainty,
specialized assets, frequent occurrence of transactions between the acquiring
firm and the target of acquisition.
There are varying
levels of vertical integration. Full
integration is 100% of all supplies or products are through owned
entities. Taper integration is less
than half. Quasi integration is partial
control of the suppliers or distributors without actually purchasing them. For instance the controlling firm could
purchase 20% of the other firm’s stock.
Long term contracts are agreements between two firms without actual
exchange of ownership. Many companies
are moving away from growth and thus vertical integration strategies. In fact companies are downsizing by
outsourcing functions (discussed in chapter 5 notes).
Horizontal growth
strategies focus on expanding the distribution of products or services to new
geographic locations. For instance, KLM
purchased controlling stock in Nortwest Airlines to gain access to American and
Asian markets. If KLM purchased ground
transportation to take its passengers to home destinations, this would be
forward vertical integration.
Horizontal integration consists of working with competitors or acquiring
new products.
Horizontal
integration uses diversification strategies for growth. There are two categories, concentric and
conglomerate diversification.
Concentric diversification consists of procuring related companies. This is an example of external concentric
diversification. The company could
start related business within the firm.
This is an example of internal concentric diversification. AMR, the parent company of American Airlines
makes most of its money with the SABRE reservation system. It has spun off this technology to build
systems for other firms in the travel/hospitality industry. Internal for airline reservations. External for other related industries.
Conglomerate
Diversification is where a firm diversifies into unrelated areas. Tobacco companies have diversified into the
food industry. This form of
diversification requires strong analysis of fit between the unrelated
industries. The 1980's provided opportunities
for conglomerate diversification through highly leveraged finances. The result was large conglomerates with
holdings that did not fit the parent company.
This created the need for most large firms to divest many of their
holdings at huge financial losses.
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International
Entry Options. This information is
available in chapter 5 notes. On page
143, the author expands the discussion of acquisitions. Green field development is the scenario in
which the firm actually rebuilds certain facilities to be used by the acquired
company. This prevents inheriting the
physical resource problems of the acquired firm. It is very costly and not very common.
Production sharing
combines highly skilled functions of a developed nation with services provided
by a less developed nation. Computer
programmers in India are writing most of the programs used by American software
developers. The advantage is reasonably priced high skill labor (in other
words, exploitation).
Turnkey operations
(not turkey) are contracts in which one firm will develop an operation and turn
it over to an entity in the foreign country upon completion. A variant of this
is the Build, Operate, and Transfer (BOT) Concept. Same as turnkey, except the building entity will run the
operation for awhile then turn if over to the other interest. Management contracts provide firms with
managerial expertise to run facilities for a company. The Management company has no ownership and manages the facility
for a management fee. Many hotels are
run by management companies.
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Stability
Strategies
Most corporations
do not look favorable at stability strategies.
They do, however, make sense for many small businesses. The danger in stability by the small business,
is large corporations breaking into the industry. Can you say, “Blockbuster”?
The Pause/Proceed
with Caution strategy is a temporary time out.
The Dell computer company had phenomenal growth followed by internal
chaos within the firm. They put their
growth on hold, took care of their infrastructure and are booming again with
mail order distribution.
The No Change
strategy subscribes to doing nothing new.
This is uncommon, but appropriate for firms with solid markets and few
threats and weaknesses. In today’s
environment, this is best suited as a short term strategy.
Profit strategies
are usually driven by the stockholders.
These are short term strategies that focus on efficiency (reducing use
of resources).
Retrenchment
strategies are employed when the company if facing serious problems in its
operations.
A Turnaround
strategy addresses acute weaknesses in the organization. This is a two part strategy. First the firm contracts to stop the
bleeding (of cash). Then is
consolidates to institutionalize the operation of the now smaller firm. The IBM turnaround strategy is excellent,
but they still might fail. It was
recently announced that CEO Louis Gerstner will stay with the firm for five
more years.
The captive
company strategy is the scenario in which a small firm sacrifices its freedom
for the security of being part of a large conglomerate. The 3M company uses this strategy
extensively. They lure in small
start-up firms with state of the are technology with the opportunity for large
R&D budgets. They usually will
retain the CEO of the small firm and let that person run the operation within
the 3M organization. If the individual
manages to provide acceptable market share and margins, he or she becomes a
product champion for the company (Big$$$$$).
Sell out
strategies require selling and leaving the industry. Divestment strategies occur when conglomerates spin-off under
performing units. Bankruptcy provides
protection for the firm from creditors for a period of time to permit
reorganization. Liquidation involves
terminating the firm completely.
6.3 Portfolio
Analysis
This is a means
for reviewing the performance of multiple SBU’s collectively. See the BCG Growth-Share Matrix on next
page. The matrix compares levels of
growth with levels of competitive position.
Those SBU’s that are high in position but low in growth are cash cows
(reap the profits strategy). Those that
are high in both categories are stars (nurture and reap strategy). Question marks are high in growth but low in
market position (proceed with caution strategy). Those that are low in both categories are dogs (divest, retrench,
pause and see strategies).
GE’s Business
screen is a more complex version of the BCG.
Remember, Jack Welch disbanded the 25 member strategic planning
department soon after taking over as CEO.
This model is an example of highly centralized planning
specialists. This is probably an
inappropriate approach in today’s competitive markets. It is the opinion of this prof to simplify,
rather than complicate the planning process and to include participation from
those who interface with customers.
International
Portfolio Analysis provides a good snapshot of collective SBU’s pursuing global
ventures. Country attractiveness is measured
against competitive strength. We saw
the importance of sociocultural and legal factors influencing the Asian
division of Harley. This is a good tool
for analysis in such areas.
Corporate
Parenting is a strategy employed by highly centralized and diversified firms
with large resource pools. They will
use the analysis tools to add value to varied targeted SBU’s based on
performance and potential. They do this
by first identifying critical success factors (CSF’s) for the SBU based on its
industry standards. They then analyze
requirements to convert weaknesses into strengths. Finally, they determine parental fit. These criteria are used to determine viability of absorbing the
prospective SBU. Figure 6.5 shows an
example of the Parenting-Fit Matrix.
Heartland is a perfect fit. Edge
has pros and cons. Ballast offers
opportunities for limited improvement.
Alien Territory companies are dogs in terms of fit. Value trap are those firms that actually
could be destructive to the parent relationship due to mis diagnosis.
Internal
Horizontal strategies provide opportunities to cut across SBU’s for one of two
reasons. First is to build economies of
scale for the collective group of SBU’s.
Second, is to develop multipoint competition among SBU’s. The horizontal strategy very closely
resembles the parenting strategy, as resource allocation from the home office
is the driving force.
Summary:
Chapter 6 deals
with strategy formulation at the corporate level. Directional strategies focus on growth, stability, or
retrenchment. Integration strategies include vertical and horizontal
approaches. Diversification strategies include concentric and conglomerate
approaches.
Stability
strategies include pause/proceed, no change, and profit strategies. Retrenchment strategies include turnaround,
captive company, sell-out, bankruptcy, and liquidation approaches.
Portfolio analysis
provides for multi SBU strategy formulation.
The BCG Matrix is most popular and simple. GE business screen is somewhat complex. Portfolio by country is
conducive to global ventures. Corporate
parenting is a highly centralized approach to resource allocation and uses the
Parenting-Fit Matrix for acquisition decision making. Internal horizontal strategies can either solidify or create
internal competition among SBU’s.
This completes our
broadcast of Chapter 6 News. Stay tuned
for the Tonight Show, starring Jaaaayyyy Leeeennnnooooooo!
Discussion Board Questions1. Please discuss any experiences you may
have had with acquisitions and mergers in your organization. Were you on the acquiring or acquired
end? What happened during the
acquisition or merger? Did the
culture for your organization or department change as a result of the
acquisition or merger? |
|
2. If you haven’t had the experiences listed
above, can you identify the directional, integration, and diversification
strategies present in your firm? Are
they consistent or changing? Do they
seem to be methodically planned, or do you feel like they shift direction
without rhyme, reason, or notice?
This question is only for those who have not had the experiences
listed in question 1. |