Transcript Chapter 8 MAZ

Miles A. Zachary
MGT 4380
 Concentration strategies involve trying to compete
only in a single industry
 Market Penetration-firm attempts to gain additional
market share in their existing market with existing
products
 Most firms rely on crafty advertising to attract new customers
 Market Development-firm attempts to sell existing
products in a new market
 Firms can enter new retail channels and/or geographical
regions
 Product Development-involves creating new products to
serve existing markets
 New products vary in their relatedness to existing products
 Beyond a firm’s own efforts, firm’s can horizontally
integrate with other firms and competitors
 Horizontal integration involves merging with or
acquiring other firms
 Acquisitions occur when one firm purchases another
 Generally, the purchased company is smaller and possess
resources and/or capabilities a firm needs or wants
 Mergers occur when two (or more) firms join
 Typically, firms are similarly sized and stand to gain an
efficiency through merging
 Horizontal integration can be attractive for several
reasons:
 Can lower costs and increase economies scale
 Increase stock of strategic resources
 Access to valuable distribution channels
 However, horizontal integration has its challenges:
 Can destroy shareholder wealth
 Meshed cultures may conflict
 Resources acquired may have been overpriced
 Executives should approach horizontal integration
carefully since many M&As are costly failures
 In vertical integration, a firm attempts to become
involved in new portions of a value chain
 Vertical integration is attractive when a firm’s suppliers or
buyers have considerable power over the firm
 The attractiveness of vertical integration is compounded
when a suppliers and/or buyers are highly profitable
 Firms can either integrate into a new market on their own
or through a merger/acquisition
 TCE argues that firms vertically integrate when transaction
costs rise above a tolerable threshold
 Oil companies remain some of the most verticallyintegrated firms in business
 Advantages
 Firms may be able to better understand their upstream
or downstream business
 Greater control over processes/customize operations
 Disadvantages
 Expanding firm operations can take a firm into
drastically different businesses; operations outside firm
capabilities
 Can create complacency
 Some firms try to circumvent this problem by making
subsidiaries compete with outside contractors
 Backward vertical integration typically involves a firm
moving backward in the value chain
 Executives may backward integrate if they feel a firm’s
suppliers have too much power
 Ex.-For many years, Ford relied on a subsidiary to
manufacture basic vehicle components
 Forward vertical integration refers to a firm moving
further down a value chain
 Executives may consider forward vertical integration
when buyers have too much power
 Ex.-In the early 1990’s, Ford felt pressure from large
rental car companies to lower their prices; in response,
Ford forward-integrated by acquiring Hertz
 Diversification strategies are used by firms to enter
new industries
 Vertical integration = firm move into a new part of the
value chain
 Diversification = firm move to a new value chain
 Many firms diversify through mergers and acquisitions
 Three (3) questions for diversification
 How attractive is the industry?
 What is the cost of industry entry?
 Will the new unit and the parent firm be better off?
 Related diversification involves diversifying into an
industry similar to the firm’s existing industry or
industries
 A related diversification strategy allows a firm to
leverage their core competencies
 Core competencies are skill-sets unique to a firm that are
difficult for competitors to imitate and contribute to
benefits enjoyed by customers within each business
 Ex.-Disney’s purchase of ABC broadcasting proved
successful
 Unrelated diversification involves a firm entering an
industry with little to no similarity with their existing
industry
 Unrelated diversification is a risky strategy since firms
are expanding (expending resources) into a market
that is unfamiliar
 Firm may lack the sufficient resources and capabilities
to be successful
 Ex.-Starbucks coffee had considerable trouble
expanding into the furniture industry
 Retrenchment involves a firm eliminating or scaling
back one or more business units
 Similar to trench warfare, retrenchment is often
preferable to loosing the entire firm
 Firms often retrench through laying-off employees
 Retrenchment allows a firm to save money to remain
competitive
 When executives need stronger strategies to remain
competitive, they may turn to divestment
 Divestment involves selling-off one or more of a firm’s
business unit(s)
 Reversing a forward integration strategy-divesting a
business unit later in the value chain
 Ex.-Ford sold Hertz after forward integrating with them in
the early 1980’s
 Reversing a backward integration strategy-divesting a
business unit earlier in the value chain
 Ex.-GM sold Delphi Automotive Systems, a previously in-
house business unit responsible for making auto parts
 Divestment can be useful to unlock hidden
shareholder value of unrelated diversified firms
 Investors seldom understand the motivation for
unrelated diversification
 By breaking up such firms, investors may be more likely
to invest in each firm
 Ex.-Fortune Brands is attempting to divest three
business units (spirits, household goods, and golf
equipments) into three individual firms “in the
interest of long-term shareholder value”
 Other times, firms must accept that a business unit
has no value and liquidate assets
 Determining the right corporate strategy for heavily
diversified firms is very difficult
 Executives use portfolio planning strategies to
determine which units to grow, shrink, and eliminate
 Portfolio planning helps executives determine how
business units are fairing in their industries
 The Boston Consulting Group (BCG) matrix is a wellknown and popular typology for categorizing and
prioritizing business units
 Business units are categorized along two (2) different
dimensions
 Market share
 Market growth
 Business units with:
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

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High market share/low market growth = cash cows
High market share/high market growth = stars
Low market share/low market growth = dogs
Low market share/high market growth = question marks
 Profits from cash cows should be invested in stars
 Dogs should be eliminated or divested
 Question marks should be evaluated whether to be
invested in (stars) or eliminated (dogs)