formulating corporatelevel strategy the university of texas at

,Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*,Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*,Formulating Corporate-Level Strategy,HCAD 5390,1,Strategies,2,Distinguishing Corporations from Strategic Business Units (SBUs),Multi-SBU Corporations,:,Sole separate legal entity,Authorized to execute contracts,Able to borrow money and sell equity,Produces no goods or services,Quite small staff,Primary function is to assemble and manage a portfolio of SBUs,3,Distinguishing Corporations from Strategic Business Units (SBUs),Strategic Business Units,:,No separate legal existence,No separate ability to contract or raise capital,Produce goods and services,Compete in one or more markets,Relative autonomy to manage operations and strategy,4,Value-Adding Functions of the Corporate Center,Manage the Portfolio of SBUs,Raise Financial Capital for Allocation to SBUs,Allocate Resources and Services to SBUs,Facilitate Synergies Among SBUs,Choose Parenting Style for SBU Interactions,Participate in SBU Strategic Planning Process,Oversee and Monitor SBU Performance,Manage Corporate Relations With Stakeholders,5,Corporate Management of an SBU Portfolio (I),In pursuit of a corporate vision,Acquires, merges with, or develops internally new SBUs,Divests existing, unwanted SBUs,Set performance goals for SBU management,Provide input to SBU strategic decisions,Count upon SBUs to perform unique strategic functions,6,Corporate Management of an SBU Portfolio (II),Balance between central corporate direction and individual SBU autonomy,Control vs spontaneity,Hire good SBU managers, give them general guidelines, and let them loose or ,Give detailed directions, watch closely, and intervene frequently,7,Model Portfolio Management Process,Choose strategic thrust of the corporation,Growth,Stability,Retrenchment,Choose geographic areas, markets, and products or services to offer in them,Decide how many SBUs in the portfolio and which businesses they will be,8,Texas Health Resources,Texas Health Resources (THR) is one of the largest faith-based, nonprofit health care delivery systems in the United States and the largest in North Texas in terms of patients served. The systems primary service area consists of 16 counties in north central Texas, home to more than 6.2 million people. THR was formed in 1997 with the assets of Fort Worth-based Harris Methodist Health System and Dallas-based Presbyterian Healthcare Resources. Later that year, Arlington Memorial Hospital joined the THR system. THR has 12 acute-care hospitals and one long-term care hospital that total 3,100 licensed hospital beds, employs more than 18,000 people, and counts more than 3,600 physicians with active staff privileges at its hospitals.THR is alsoa corporate member or partner in six additional hospitals and surgery centers.,9,10,Adaptive Strategies,Corporate-Level Strategic Options:Growth Expand the Portfolio,Most common corporate-level strategy direction,Critical to maintaining share in a growing market,In pursuit of economies of scale and scope,Increase in experience and learning,Top executive egos to be satisfied,11,12,Expansion Adaptive Strategy:,Orientation toward growth,Expand, cut back, status quo?,Concentrate within current industry, diversify into other industries?,Growth and expansion through internal development or acquisitions, mergers, or strategic alliances?,Adaptive Strategies,Growth By Concentration,All businesses start here,Dedicate all resources and competencies to one or a few products or services,Achieved in one of three ways:,Sell more of current products in current markets,Sell current products in new markets,Sell new products in current markets,To sell new products in new markets is diversification,13,14,Basic Growth Strategies:,Concentration,Current product line in one industry,Market Development,Product Development,Penetration,Diversification,Into other product lines in other industries,Adaptive Strategies,Concentration on a Single Business,SEARS,Coca-Cola,McDonalds,Southwest,Airlines,15,Concentration on a Single Business,Advantages,Operational focus on a single familiar industry or market.,Current resources and capabilities add value.,Growing with the market brings competitive advantage.,Disadvantages,No diversification of market risks.,Vertical integration may be required to create value and establish competitive advantage.,Opportunities to create value and make a profit may be missed.,16,Concentration No Longer Sufficient to Maintain Growth,Unlikely to capture a greater share of current market,Current market is stagnating, maturing, shrinking, or otherwise lacking growth potential,Excess cash on hand needs to be invested productively,Management has greater ambitions for further strategic achievement,17,Diversification,Related diversification,Entry into new business activity based on shared commonalities in the components of the value chains of the firms.,Unrelated diversification,Entry into a new business area that has no obvious relationship with any area of the existing business.,18,Growth By Related Diversification,Move beyond existing markets and products,Employ existing resources and competencies,New businesses are closely connected (“related”) to existing businesses,Directions of related diversification,Vertical forward integration (toward customers),Vertical backward integration (toward suppliers),Horizontal expansion,19,Forms of Relatedness,Products or services,Markets,Processes, systems, or other operating features,Manufacturing facilities, distribution channels, marketing media, or support services,Brand image, corporate reputation, creativity or innovation skills, or general managerial expertise,20,Vertical Integration,Forward or backward in the industry value chain,Moving “upstream” toward suppliers,Hospital acquiring a physician group practice,Moving “downstream” toward customers,Hospital acquiring a long-term care facility,Examples: physician-hospital organizations (failed), integrated delivery systems (succeeded),21,Stages in the Raw-Material-to-Consumer Value Chain,Upstream,Downstream,22,Stages in the Raw-Material-to-Consumer Value Chain in the Personal Computer Industry,End user,Distribution,Assembly,Intermediatemanufacturer,Raw materials,Examples:,Dow ChemicalUnion CarbideKyocera,Examples:IntelSeagateMicron,Examples:AppleHpDell,Examples:Best BuyOffice Max,23,Vertical Integration,24,Decision Steps in Vertical Integration,Adequate resources and competencies to bring the new business operations in-house,Choose form of integration full ownership, partial ownership, joint venture, or long-term contract,Consider impact on other stakeholders,Pay attention to share of industry value chain being brought in-house,25,Good Reasons for Vertical Integration,Reduce costs by eliminating redundancy throughout the value chain,Better coordination at interface between value chain components,Profit-taking at several levels in the chain is eliminated,Greater overall control of inputs (resources) and outputs (distribution channels),Wider network of sources of competitive intelligence,Opportunity to reengineer the value chain,26,Vertical Integration Problems (I),Does the value chain function as well after integration as it did before?,Excessive costs may be incurred in managing the new businesses and their interactions,Inability to use full capacity of acquired businesses so must sell to competitors?,Must the business deal exclusively with its new integration partners?,27,Vertical Integration Problems (II),Commitment to entire chain reduces strategic flexibility,Commitment may tie business to inefficient processes, poorly managed units, and obsolete technologies,Inability to coordinate added units may increase costs and limit opportunities to create value for customers,28,Horizontal Expansion,Moving sideways in the value chain, acquiring similar businesses in different geographic areas,Acquisition target may be a competitor,May create antitrust enforcement concerns,Examples: multistate hospital networks, nursing home chains, national health plan systems,29,Best Circumstances for Horizontal Expansion,Current market is growing, requiring additional capacity to meet demand,Target acquisition doing poorly lacks resources or competencies possessed by the acquirer,Expanded size enables economies of scale leading to competitive advantage,Opportunity to create dominant market position by acquiring a competitor,30,31,Basic Diversification Strategies:,Concentric (Related) Diversification,Conglomerate (Unrelated) Diversification,Diversification,Incentives to Diversify,Internal Incentives:,Poor performance may lead some firms to diversify an attempt to achieve better returns,Firms may diversify to balance uncertain future cash flows,Firms may diversify into different businesses in order to reduce risk,32,Resources and Diversification,Besides strong incentives, firms are more likely to diversify if they have the resources to do so,Value creation is determined more by appropriate use of resources than incentives to diversify,33,Managerial Motives to Diversify,Managers have motives to diversify,diversification increases size; size is associated with executive compensation,diversification reduces employment risk,effective governance mechanisms may restrict such motives,34,35,Concentric Diversification,Growth into related industry,Search for synergies,Related Diversification,Related Diversification,3M,Hewlett Packard,Marriott,36,Related Diversification,37,Advantages of Related Diversification (I),Synergies among existing and acquired businesses,Lower overall corporate risk balancing high and low-risk SBUs,Greater bargaining power vis-vis competitors, suppliers and customers,38,Advantages of Related Diversification (II),Cross-subsidization among businesses at different life cycle stages,General increase in revenues and profits from acquired businesses,Opportunity to acquire new knowledge, competencies, and technologies,Enhance status, power, and compensation of top executives,39,Forms of Inter-SBU Synergy (I),Share solutions to problems and ideas for improving operational efficiency,Use slack capacity to achieve economies of scale,Earn volume discounts and greater bargaining power with suppliers,Integration of computer systems and capabilities,40,Forms of Inter-SBU Synergy (II),By sharing R&D facilities, reduce innovation costs and spread research risks,Share distribution channels,Leverage the use of influential brand names and images,Wide opportunities for knowledge transfer,41,42,Unrelated (Conglomerate) Diversification,Growth into unrelated industry,Concern with financial considerations,Adaptive Strategies,Growth By Unrelated Diversification,Few similarities or commonalities among businesses in the portfolio,Operate in different industries/markets, serve different customers, face different competitors,Corporation composed of unrelated businesses may be called a “conglomerate”,What value is added by bringing unrelated businesses together into one corporation?,43,Unrelated Diversification,Tyco,Amer Group,ITT,44,Adaptive Strategies,45,Relationship Between Diversification and Performance,Performance,Level of Diversification,Dominant,Business,Unrelated,Business,Related,Constrained,46,Bureaucratic Costs and the Limits of Diversification,Number of businesses,Information overload can lead to poor resource allocation decisions and create inefficiencies.,Coordination among businesses,As the scope of diversification widens, control and bureaucratic costs increase.,Resource sharing and pooling arrangements that create value also cause coordination problems.,Limits of diversification,The extent of diversification must be balanced with its bureaucratic costs.,47,Tools for Implementing Growth Strategies,Internal development,Internal new venture creation,Investments in new ventures,Acquisition,Merger,Joint venture, strategic alliance or partnership,48,Acquisitions,Reasons for Making Acquisitions,Increase,market power,Overcome,entry barriers,Cost of new,product development,Increase speed,to market,Increase,diversification,Reshape firms,competitive scope,Lower risk compared,to developing new,products,Learn and develop,new capabilities,49,Diversification and Corporate Performance: A Disappointing History,Sources: 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.,A study conducted by,Business Week,and Mercer Management Consulting, Inc., analyzed 150 acquisitions that took place between July 2000 and July 2005. Based on total stock returns from three months before, and up to three years after, the announcement:,30 percent substantially eroded shareholder returns.,20 percent eroded some returns.,33 percent created only marginal returns.,17 percent created substantial returns.,A study by Salomon Smith Barney of U.S. companies acquired since 1997 in deals for $15 billion or more, the stocks of the acquiring firms have, on average, under-performed the S&P stock index by 14 percentage points and under-performed their peer group by four percentage points after the deals were announced.,50,Acquisitions,Problems With Acquisitions,Integration,difficulties,Inadequate,evaluation of target,Large or,extraordinary debt,Inability to,achieve synergy,Too much,diversification,Managers overly,focused on acquisitions,Resulting firm,is too large,51,Corporate-Level Strategic Options:Stability Maintain the Portfolio,Rapid growth outstripped financial and managerial resources,Difficulties in assimilating recent portfolio additions,Some current SBUs may have serious financial or operational problems,No attractive acquisition opportunities available,Waiting for environmental changes to develop,52,Restructuring:Contraction of Scope,Why restructure?,Pull-back from overdiversification.,Attacks by competitors on core businesses.,Diminished strategic advantages of vertical integration and diversification.,Contraction (Exit) strategies,Retrenchment,Divestment spinoffs of profitable SBUs to investors; management buy outs (MBOs).,Harvest halting investment, maximizing cash flow.,Liquidation Cease operations, write off assets.,53,Why Contraction of Scope?,The causes of corporate decline,Poor management incompetence, neglect,Overexpansion empire-building CEOs,Inadequate financial controls no profit responsibility,High costs low labor productivity,New competition powerful emerging competitors,Unforeseen demand shifts major market changes,Organizational inertia slow to respond to new competitive conditions,54,Corporate-Level Strategic Options:Retrenchment Cut Back the Portfolio,Need to do more than pause and rethink,Regain control of inefficient operations,Rebuild resources and competencies,Reconsider strategic direction,Result may be a radical restructure and redirection of the organization,55,Retrenchment Options,Getting back down to fighting weight,Returning to core businesses and competencies,Seeking a “white knight” to take over,Selling the entire organization,Divesting pieces of the corporate portfolio,Voluntary filing for bankruptcy/reorganization,Voluntary/involuntary filing for bankruptcy/liquidation,56,The Main Steps of Turnaround,Changing the leadership,Replace entrenched management with new managers.,Redefining strategic focus,Evaluate and reconstitute the organizations strategy.,Asset sales and closures,Divest unwanted assets for investment resources.,Improving profitability,Reduce costs, tighten finance and performance controls.,Acquisitions,Make acquisitions of skills and competencies to strengthen core businesses.,57,Tools for Portfolio Analysis and Management,Graphical matrix diagrams showing variable,factors key to strategic portfolios decisions,Boston Consulting Group Growth-Share Matrix,General Electric Business Screen,58,Reviewing the Corporate Portfolio,Portfolio Planning under the Boston Consulting Group (BCG) matrix:,Identifying the Strategic Business Units (SBUs) by business area or product market,Assessing each SBUs prospects (using,relative market share,and,industry growth rate,) relative to other SBUs in the portfolio.,Developing strategic objectives for each SBU.,59,The BCG Matrix,Source: Perspectives, No. 66, “The Product Portfolio.” Adapted by permission from The Boston Consulting Group, Inc., 1970.,60,The BCG Matrix,Stars,High relative market shares in fast growing industries.,Question marks,Low relative market shares in fast growing industries.,Cash cows,High relative market shares in low-growth industries.,Dogs,Low relative market shares in low-growth industries.,61,The Strategic Implications of the BCG Matrix,Stars,Aggressive investments to support continued growth and consolidate competitive position of firms.,Question marks,Selective investments; divestiture for weak firms or those with uncertain prospects and lack of strategic fit.,Cash cows,Investments sufficient to maintain competitive position. Cash surpluses used in developing and nurturing stars and selected question mark firms.,Dogs,Divestiture, harvesting, or liquidation and industry exit.,62,Limitations on Portfolio Planning,Flaws in portfolio planning:,The BCG model is simplistic; considers only two competitive environment factors relative market share and industry growth rate.,High relative market share is no guarantee of a cost savings or competitive advantage.,Low relative market share is not always an indicator of competitive failure or lack of profitability.,Multifactor models (e.g., the McKinsey matrix) are better though imperfect.,63,The McKinsey Matrix,64,Raise Financial Capital,SBUs may lack the separate legal existence to do this on their own,Corporate center performs this function by issuing stock and borrowing,Then, allocates the capital to SBUs in some rational, objective manner that maximizes total return to the corporation,This is the practice of corporate strategic financial management,65,Allocate Resources and Services,In addition to financial capital, corporate center may possess other resources useful to SBUs,Human resource management services,Research and development capability,Technology assessment competence,Information technology support,Corporate legal department,These too must be allocated to the SBUs,66,Facilitate Synergies Among SBUs,Inter-SBU synergies are one of the main reasons for assembling corporate portfolios,Synergies do not often occur naturally; the corporate center must foster them,Watch each SBUs operations and strategies,Notice lacks of resources and competencies,Inventory resources or competencies owned by the SBUs,Match lacking and owning SBUs,Facilitate actual sharing among them,67,Forms of Synergy Facilitation (I),Disseminate knowledge and best practices,Facilitate transfer of knowledge assets and services,Encourage collaboration and coordination,Arrange transfer of skills and capabilities,Build central database of resources and competencies available to all SBUs,68,Forms of Synergy Facilitation (II),Temporarily assign a specialist from one SBU to another,Sponsor all-SBU meetings to share information and problem solutions,Coordinate activities of common SBU functions to gain economies of scale,Provide synergy-supporting education, training, and coachin