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Strategy Formulation: Situation Analysis

and Business Strategy

C o r p o r a t e - a n d B u s i n e

C o r p o r a t e H e a d q u a r
C o m p a n y - w i d e s t r a t

B u s i n e s s B U u n s i it n 1 e s s B U u n s i it n 2 e s s
C o m p e t i t i C v oe m A pd e v t a i t n i C v t a oe gm A e pd e v t a i t n i v t a
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 PLC’s purchase of Ben & Jerry’s


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

■ Coordinatingacross 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 target’s stock.
Strategy Formulation: Corporate Strategy

Illustration of Integration Activities:


Unilever PLC (Anglo-Dutch) buys SlimFast for $2.3 billion
and Ben & Jerry’s 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 & Jerry’s 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
acquirer’s 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 Unit’s 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 Company’s (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.
■ Bird’s Eye has more than 10% and Nestle has more than
5% market share.