Strategy Formulation: Situation Analysis and Business Strategy

Corporate- and Business-level Strategy Corporate Headquarters Company-wide strategy

Business Unit 1 Competitive Advantage

Business Unit 2 Competitive Advantage

Business Unit 3 Competitive Advantage

Strategy Formulation: Corporate Strategy

What businesses the corporation should be in?
How should corporate headquarters manager its group of businesses?

Corporate Strategy is what makes the whole company greater than the sum of its business units.

Diversification Manage additional businesses - Apply excess resources, capabilities, and core competencies that have multiple uses

Strategy Formulation: Corporate Strategy

Corporate Strategy
Directional Strategy overall orientation towards growth, stability, retrenchment Portfolio Strategy industries/markets that the firm competes in through products lines & business units Parenting Strategy coordination and transfer of resources between product lines & business units

Strategy Formulation: Corporate Strategy

Product Diversification:
Example: Unilever PLCs purchase of Ben & Jerrys Ice Cream (already has $8 billion in annual sales in US).

Geographic Diversification: (In this case undiversifying) Example: Waste Management sold its Australian and Italian waste management subsidiaries.

Strategy Formulation: Corporate Strategy

Limited Diversification

Single Business
95% or more of corporate revenue come from a single business unit Wm. Wrigley Jr. Co.

Strategy Formulation: Corporate Strategy

Limited Diversification

Between 70-95% of corporate revenues comes from a single business unit. Hershey Foods Corporation

Strategy Formulation: Corporate Strategy

Related Diversification

Related-Diversified Firm: Less than 70 percent

of firm revenues comes from a single business unit, and different business units share numerous links and common attributes.
Proctor & Gamble

Strategy Formulation: Corporate Strategy

Related Linked Diversification Less than 70 percent of firm revenues comes from a single business unit, and different business units share only a few links and common attributes or different links and common attributes. General Electric

Strategy Formulation: Corporate Strategy

Unrelated Diversification

Less than 70% of firm revenues comes from a single business, and there are few, if any, links or common attributes among businesses.

Strategy Formulation: Corporate Strategy

Vertical and Horizontal Integration - Value Chain Activities

Vertical Integration: Coordinating upstream activities (those closer to the raw materials) with downstream activities (those closer to the customer)

Acquisitions, Strategic Alliances, Internal Development

Strategy Formulation: Corporate Strategy

Vertical and Horizontal Integration - Value Chain Activities
Benefits of Vertical Integration

reduces or eliminates costs of buying and selling (Transaction Costs)

smoother, more efficient operation

Limits to Vertical Integration

Differences in minimum efficient scale in vertically integrated corporation. Must remain innovative in all Value Chain activities. Possible incompatibilities between managerial skills and corporate cultures that make upstream and downstream activities successful.

Strategy Formulation: Corporate Strategy

Vertical and Horizontal Integration - Value Chain Activities

Horizontal Integration
Coordinating

across the same or similar value chain activities.

Acquisition, Strategic Alliance, Internal Development

Strategy Formulation: Corporate Strategy

Vertical and Horizontal Integration - Value Chain Activities
Horizontal Integration Benefits:

Corporate managers have expertise to recognize undervalued stocks that many individual investors would miss. Corporations have economies of scale for financing acquisitions that individuals do not. Horizontal Integration Costs:

Conglomerate discount: value of stock of conglomerate sells for less than total value of individual stocks. Takeover premiums: corporations usually pay a premium over the normal trading price of the targets stock.

Strategy Formulation: Corporate Strategy

Illustration of Integration Activities:

Unilever PLC (Anglo-Dutch) buys SlimFast for $2.3 billion and Ben & Jerrys for $326 million
First deal (SlimFast) is a high price but it has got good growth rates. Second deal (Ben & Jerry's) is a very high price, but it has got some very difficult growth rates Ben & Jerrys deal seen as a competitive response to an agreement by Unilever's arch-rival Nestle SA (Swiss) last year to form a U.S. ice cream joint venture with Pillsbury (unit of

Diageo British).
The Nestle-Pillsbury deal put together Nestle's U.S. novelty ice cream unit and Pillsbury's U.S. Haagen-Dazs business, creating a strong force in the growing premium ice cream market.

Strategy Formulation: Corporate Strategy Mergers & Acquisitions

Merger: integration of operations of two firms; relatively coequal basis.

Study by McKinsey & Company: only 23% of mergers over a 10-year period generated returns in excess of costs incurred in the deal. THINK ABOUT AOL-TIME WARNER!!! Acquisition: one firm buys controlling interest in another firm; acquired firm becomes subsidiary in acquirers business portfolio.
(Hostile)Takeover: acquisition that was not solicited

Strategy Formulation: Corporate Strategy

Mergers & Acquisitions

Reasons for M & As

Increased market power Capitalizing on core competencies Overcome entry barriers Bypass cost of new product development: Increased speed to market Increased diversification Avoiding excessive competition

Strategy Formulation: Corporate Strategy

Mergers & Acquisitions

Problems with Achieving M & A Success

Integration difficulties

Inadequate evaluation of target

Large or extraordinary debt Inability to achieve synergy Too much diversification Managers overly focused on acquisition/merger Too large (bureaucratic)

Strategy Formulation: Corporate Strategy Portfolio Analysis

Assessing Business Units Competitive Position
Possession of desirable core competencies Relative market share Profit margins relative to competitors Ability to match or beat rivals on product quality and service Relative cost position

Knowledge of customers and markets

Technological capabilities Caliber of management

Strategy Formulation: Corporate Strategy

Portfolio Analysis
BCG Growth-Share Matrix

questions marks: business growth rate - high; relative competitive position - weak stars: business growth rate - high; relative competitive position - strong cash cows: business growth rate - low; relative competitive position - strong dogs: business growth rate - low; relative competitive position - weak

Strategy Formulation: Corporate Strategy

Portfolio Analysis
Strengths: evaluate businesses individually, raises issues of cash flow for expansion Weaknesses: difficult to define product & market segments, subjective determinations, lack of clarity of product life cycle position, static comparisons.

Commission of the European Communities Review of Proposed Merger

H.J. Heinz Companys (US) subsidiary, Heinz Europe Limited, to acquire United Biscuits Frozen and Chilled Foods Limited (UK)

Industries:
Heinz group - infant feeding products, sauces, convenience meals, seafood, pet food, and food service. UBFCF - processing and supply to resellers of frozen and chilled foods.

Combined Revenues:
Do not achieve more than 2/3 of aggregate Community-wide turnover in one member state, so qualifies as having Community dimension.

Commission of the European Communities Review of Proposed Merger

Competitive Assessment:

Relevant Product Markets areas of product overlap include

pizzas, desserts, and ready-made meals.

Relevant Geographic Markets areas of geographic overlap

for above-mentioned products include United Kingdom and Ireland

Competitive Assessment only market where parties

products would have market share in excess of 25% is the Irish market for frozen ready-made meals, where parties achieve 30%.

However, merged entity will continue to face competition from rapidly growing retailer brands (value increased by over 50% over three years) that account for 30% of market. Birds Eye has more than 10% and Nestle has more than 5% market share.