STRATEGIC MANAGEMENT & BUSINESS POLICY

13TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER
 Two Strategy Levels
• Business-level Strategy (Competitive)
– Each business unit in a diversified firm
chooses a business-level strategy as its
means of competing in individual product
markets
• Corporate-level Strategy (Companywide)
– Specifies actions taken by the firm to gain a
competitive advantage by selecting and
managing a group of different businesses
competing in several industries and product
Copyright © 2004 South-Western. All rights 6–2
reserved.markets
Corporate-Level Strategy: Key Questions
• Corporate-level Strategy’s Value
 The degree to which the businesses in the
portfolio are worth more under the management
of the company than they would be under other
ownership
 What businesses should
the firm be in?
 How should the corporate
office manage the
group of businesses?

Business Units
Copyright © 2004 South-Western. All rights reserved. 6–3
Directional strategy- the firm’s overall orientation
toward growth, stability, or retrenchment

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 Growth Strategy

Concentration
• Vertical
• Horizontal
Diversification
• Concentric
• Conglomerate

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 Growth Strategy:
Concentration and Diversification

• Merger- a transaction involving two or more

corporations in which stock is exchanged but in which
only one corporation survives

• Acquisition- the purchase of a company that is

completely absorbed by the subsidiary or division of
the acquiring corporation

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A corporation can grow internally by expanding its operations both globally and
domestically, or it can grow externally through mergers, acquisitions, and
strategic alliances. A merger is a transaction involving two or more
corporations in which stock is exchanged but in which only one corporation
survives. Mergers usually occur between firms of somewhat similar size and
are usually “friendly.” The resulting firm is likely to have a name derived from its
composite firms. One example is the merging of Allied Corporation and Signal
Companies to form Allied Signal. An acquisition is the purchase of a company
that is completely absorbed as an operating subsidiary or division of the
acquiring corporation. Procter & Gamble’s (P&G’s) purchase of Gillette is an
example of a recent acquisition. Acquisitions usually occur
between firms of different sizes and can be either friendly or hostile. Hostile
acquisitions are often called takeovers.

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The distinction between a "merger" and an "acquisition" has become
increasingly blurred in various respects (particularly in terms of the ultimate
economic outcome), although it has not completely disappeared in all
situations. From a legal point of view, a merger is a legal consolidation of
two companies into one entity, whereas an acquisition occurs when one
company takes over another and completely establishes itself as the new
owner (in which case the target company still exists as an independent legal
entity controlled by the acquirer). Either structure can result in the economic
and financial consolidation of the two entities. In practice, a deal that is an
acquisition for legal purposes may be euphemistically called a "merger of
equals" if both CEOs agree that joining together is in the best interest of
both of their companies, while when the deal is unfriendly (that is, when the
target company does not want to be purchased) it is almost always regarded
as an "acquisition".

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Disney-Pixar
Mickey and Nemo. Pinocchio and “Toy Story.” Cinderella and “Cars.” The merger of legendary Walt
Disney and everything-we-create-kids-adore Pixar was a match made in cartoon heaven. Disney had
released all of Pixar’s movies before, but with their contract about to run out after the release of
“Cars,” the merger made perfect sense. With the merger, the two companies could collaborate freely
and easily.

Exxon-Mobil
Big oil got even bigger in 1999, when Exxon and Mobil signed a $81 billion agreement to merge and
form Exxon Mobil. Not only did Exxon Mobil become the largest company in the world, it reunited its
19th century former selves, John D. Rockefeller’s Standard Oil Company of New Jersey (Exxon) and
Standard Oil Company of New York (Mobil). The merger was so big, in fact, that the FTC required a
massive restructuring of many of Exxon & Mobil’s gas stations, in order to avoid outright
monopolization (despite the FTC’s 4-0 approval of the merger).

ExxonMobil remains the strongest leader in the oil market, with a huge hold on the international
market and dramatic earnings. In 2008, ExxonMobil occupied all ten spots in the “Top Ten Corporate
Quarterly Earnings” (earning more than $11 billion in one quarter) and it remains one of the world’s
largest publicly held company (second only to Walmart).

I think it’s safe to say that the merger was a success.

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 The Basic Value Chain

Copyright © 2004 South-Western. All rights 3–12

reserved.
 Concentration strategies

Vertical growth- taking over the function previously

provided by a supplier or by a distributor
• Vertical integration- the degree to which a firm
operates vertically in multiple locations on an
industry’s value chain from extracting raw materials
to manufacturing to retailing
– Backward integration- assuming a function previously
provided by a supplier
– Forward integration- assuming a function previously
provided by a distributor

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 Vertical Growth. Vertical growth can be achieved by taking over a function previously
provided by a supplier or by a distributor. The company, in effect, grows by making its own
supplies and/or by distributing its own products. This may be done in order to reduce costs,
gain control over a scarce resource, guarantee quality of a key input, or obtain access to
potential customers. This growth can be achieved either internally by expanding current
operations or externally through acquisitions. Henry Ford, for example, used internal
company
resources to build his River Rouge plant outside Detroit. The manufacturing process was
integrated to the point that iron ore entered one end of the long plant, and finished
automobiles
rolled out the other end, into a huge parking lot. In contrast, Cisco Systems, a maker of
Internet
hardware, chose the external route to vertical growth by purchasing Scientific-Atlanta Inc.,
a
maker of set-top boxes for television programs and movies-on-demand. This acquisition
gave
Cisco access to technology for distributing television to living rooms through the Internet.9
Vertical growth results in vertical integration—the degree to which a firm operates
vertically
in multiple locations on an industry’s value chain from extracting raw materials to
manufacturing
to retailing. More specifically, assuming a function previously provided by a
supplier is called backward integration (going backward on an industry’s value chain).
The
purchase of Carroll’s Foods for its hog-growing facilities by Smithfield Foods, the world’s
largest pork processor, is an example of backward integration. Assuming a function
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previously
 Concentration strategies

Transaction cost economies- vertical integration is

more efficient than contracting for goods and
services in the marketplace when the transaction
costs of buying on the open market become too
great

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• Full integration- a firm internally makes 100% of its
key suppliers and completely controls its distributors

Large oil companies,

• Taper integration- a firm internally produces less

than half of its own requirements and buys the rest
from outside suppliers

Tat conserve- have tomato fields

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• Quasi-integration- a company does not make any of
its key supplies but purchases most of its
requirements from outside suppliers that are under
its partial control

Iron & Steel company partnership for Towers

• Long-term contracts- agreements between 2 firms

to provide agreed-upon goods and services to each
other for a specific period of time
Tencate – 3 years contract with its suppliers.

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Under full integration, a firm internally makes 100% of its key supplies and completely controls
its distributors. Large oil companies, such as British Petroleum and Royal Dutch Shell, are fully
integrated. They own the oil rigs that pump the oil out of the ground, the ships
and pipelines that transport the oil, the refineries that convert the oil to gasoline, and the trucks
that deliver the gasoline to company-owned and franchised gas stations. Sherwin-Williams
Company, which not only manufacturers paint, but also sells it in its own chain of 3,000 retail
stores, is another example of a fully-integrated firm.16 If a corporation does not want the
disadvantages of full vertical integration, it may choose either taper or quasi-integration
strategies. With taper integration (also called concurrent sourcing), a firm internally produces
less
than half of its own requirements and buys the rest from outside suppliers (backward taper
integration). In the case of Smithfield Foods, its purchase of Carroll’s allowed it to produce 27%
of the hogs it needed to process into pork. In terms of forward taper integration, a firm sells part
of its goods through company-owned stores and the rest through general wholesalers. Although
Apple had 216 of its own retain stores in 2008, much of the company’s sales continued to be
through national chains such as Best Buy and through independent local and regional dealers.
With quasi-integration, a company does not make any of its key supplies but purchases most
of its requirements from outside suppliers that are under its partial control (backward quasi-
integration).Acompany may not want to purchase outright a supplier or distributor, but it still may
want to guarantee access to needed supplies, new products, technologies, or distribution
channels. For example, the pharmaceutical company Bristol-Myers Squibb purchased 17% of
the common stock of ImClone in order to gain access to new drug products being developed
through biotechnology. An example of forward quasi-integration would be a paper company
acquiring part interest in an office products chain in order to guarantee that its products had
access to the distribution channel. Purchasing part interest in another company usually provides
a Prentice
company with a seat on the other firm’s board of directors, thus guaranteeing the acquiring
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firm both information and control. As in the case of Bristol-Myers Squibb and ImClone, a quasi-
Horizontal growth- expansion of operations into other
geographic locations and/or increasing the range of
products and services offered to current markets
• Horizontal growth is achieved through:
– Internal development
– Acquisitions
– Strategic alliances

Horizontal integration- the degree to which a firm

operates in multiple geographic locations at the
same point on an industry’s value chain

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Horizontal Growth. Afirm can achieve horizontal growth by expanding its operations into
other geographic locations and/or by increasing the range of products and services offered
to
current markets. Research indicates that firms that grow horizontally by broadening their
product lines have high survival rates.21 Horizontal growth results in horizontal
integration—the degree to which a firm operates in multiple geographic locations at the
same
point on an industry’s value chain. For example, Procter & Gamble (P&G) continually adds
additional sizes and multiple variations to its existing product lines to reduce possible niches
competitors may enter. In addition, it introduces successful products from one part of the
world
to other regions. P&G has been introducing into China a steady stream of popular American
brands, such as Head & Shoulders, Crest, Olay, Tide, Pampers, and Whisper. By 2007, it
had
6,300 employees in China and the extensive distribution network it needed to prosper in the
world’s fastest growing market.22

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 International Entry Options for Horizontal Growth

• Exporting • Green-Field Development

• Licensing • Production Sharing
• Franchising  Turn-key Operations
• Joint Venture  BOT Concept
• Acquisitions  Management Contracts

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 Diversification Strategies

Concentric (Related) Diversification- growth into a

related industry when a firm has a strong competitive
position but attractiveness is low

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Diversification is typically defined as a strategy which takes the organisation into new markets
and products or services and therefore increases the diversity that a corporate parent must
oversee.

Diversification might be undertaken for a variety of reasons, some more value creating than others
Three potentially value-creating reasons for diversification are as follows.

First, there may be efficiency gains from applying the organisation’s existing
resources or capabilities to new markets and products or services . These are often described as
economies of scope, by contrast to economies of scale. If an organisation has under-utilised
resources or capabilities that it cannot effectively close or dispose of to other potential users, it can
make sense to use these resources or capabilities by diversification into a new activity. In other
words, there are economies to be gained by extending the scope of the organisation’s activities.

Economies of scope may apply to both tangible resources, such as halls of residence or cable
networks, and intangible resources and capabilities, such as brands or skills. Sometimes these
scope benefits are referred to as the benefits of synergy, by which is meant the benefits that
might be gained where activities or processes complement each other such that their combined
effect is greater than the sum of the parts.

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Concentric (Related) Diversification. Growth through concentric
diversification into a related industry may be a very appropriate corporate
strategy when a firm has a strong competitive position but industry
attractiveness is low.
Research indicates that the probability of succeeding by moving into a related
business is a function of a company’s position in its core business. For
companies in leadership positions, the chances for success are nearly three
times higher than those for followers.38 By focusing on the characteristics that
have given the company its distinctive competence, the company uses those
very strengths as its means of diversification. The firm attempts to secure
strategic fit in a new industry where the firm’s product knowledge, its
manufacturing capabilities, and the marketing
skills it used so effectively in the original industry can be put to good use.39
The corporation’s products or processes are related in some way: they possess
some common thread.
The search is for synergy, the concept that two businesses will generate more
profits together than they could separately. The point of commonality may be
similar technology, customer usage, distribution, managerial skills, or product
similarity. This is the rationale taken by Quebec-based Bombardier, the world’s
third-largest aircraft manufacturer. In the 1980s, the company expanded
beyond snowmobiles into making light rail equipment. Defining itself as a
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transportation company, it entered the aircraft business in 1986, with its
 Diversification Strategies

Conglomerate (Unrelated) Diversification- growth

into an unrelated industry
• Management realizes that the current industry is
unattractive
• Firm lacks outstanding abilities or skills that it could
easily transfer to related products or services in other
industries

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Conglomerate (Unrelated) Diversification. When management realizes that the
current
industry is unattractive and that the firm lacks outstanding abilities or skills that it
could easily
transfer to related products or services in other industries, the most likely strategy is
conglomerate diversification—diversifying into an industry unrelated to its current
one.
Rather than maintaining a common thread throughout their organization, strategic
managers
who adopt this strategy are primarily concerned with financial considerations of
cash flow or
risk reduction. This is also a good strategy for a firm that is able to transfer its own
excellent
management system into less-well-managed acquired firms. General Electric and
Berkshire
Hathaway are examples of companies that have used conglomerate diversification
to grow
successfully. Managed by Warren Buffet, Berkshire Hathaway has interests in
furniture
retailing, razor
Prentice Hall, blades, airlines, paper, broadcasting, soft drinks, and publishing.
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Stability Strategies- continuing activities without any significant change
in direction

• Pause/Proceed with caution strategy- an opportunity to rest

before continuing a growth or retrenchment strategy
Dell, wait for environment, EPDK (ENERGY MARKET REGULATORY
AUTHOTORITY )
• No change strategy- continuance of current operations and
policies- Small companies

• Profit Strategies- to do nothing new in a worsening situation but

instead to act as though the company’s problems are only
temporary
• Cut expenses, r&d, advertising

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Retrenchment Strategies- used when the firm has a
weak competitive position in some or all of its product
lines from poor performance

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Pause/Proceed with Caution Strategy
A pause/proceed-with-caution strategy is, in effect, a timeout—an opportunity to
rest before
continuing a growth or retrenchment strategy. It is a very deliberate attempt to make
only incremental improvements until a particular environmental situation changes. It
is typically conceived as a temporary strategy to be used until the environment
becomes more hospitableor to enable a company to consolidate its resources after
prolonged rapid growth.

Thiswas the strategy Dell followed after its growth strategy had resulted in more
growth than it
could handle. Explained CEO Michael Dell, “We grew 285% in two years, and we’re
having
some growing pains.” Selling personal computers by mail enabled Dell to underprice
competitors, but it could not keep up with the needs of a $2 billion, 5,600-employee
company
selling PCs in 95 countries. Dell did not give up on its growth strategy; it merely put it
temporarily in limbo until the company was able to hire new managers, improve the
structure,
and build new facilities.60 This was a popular strategy in late-2008 during a U.S.
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financial
No-Change Strategy
A no-change strategy is a decision to do nothing new—a choice to continue current
operations
and policies for the foreseeable future. Rarely articulated as a definite strategy, a nochan
strategy’s success depends on a lack of significant change in a corporation’s situation.
The relative stability created by the firm’s modest competitive position in an industry facin
little or no growth encourages the company to continue on its current course, making onl
small adjustments for inflation in its sales and profit objectives. There are no obvious
opportunities
or threats, nor is there much in the way of significant strengths or weaknesses. Few
aggressive
new competitors are likely to enter such an industry.

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Profit Strategy
Aprofit strategy is a decision to do nothing new in a worsening situation but instead to
act as
though the company’s problems are only temporary. The profit strategy is an attempt to
artificially
support profits when a company’s sales are declining by reducing investment and
shortterm
discretionary expenditures. Rather than announce the company’s poor position to
shareholders and the investment community at large, top management may be tempted
to follow
this very seductive strategy. Blaming the company’s problems on a hostile environment
(such as anti-business government policies, unethical competitors, finicky customers,
and/or
greedy lenders), management defers investments and/or cuts expenses (such as R&D,
maintenance,
and advertising) to stabilize profits during this period. It may even sell one of its product
lines for the cash-flow benefits.

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 Retrenchment Strategies

Turnaround strategy- emphasizes the improvement of

operational efficiency when the corporation’s problems
are pervasive but not critical

• Contraction- effort to quickly “stop the bleeding” across

the board but in size and costs- cost cutting, eliminating
jobs, closing plants like sony in 2005

• Consolidation- stabilization of the new leaner corporation

New organization structure, 6 sigma

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Turnaround strategy emphasizes the improvement of operational efficiency and is
probably
most appropriate when a corporation’s problems are pervasive but not yet critical.
Research
shows that poorly performing firms in mature industries have been able to improve
their performance
by cutting costs and expenses and by selling off assets. 61 Analogous to a
weightreduction
diet, the two basic phases of a turnaround strategy are contraction and consolidation. 62

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Sell-out strategy- management can still obtain a good
price for its shareholders and the employees can keep
their jobs by selling the company to another firm.

Divestment- sale of a division with low growth potential

Jaguar and land rover was sold to Tata Motors.

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Bankruptcy- company gives up management of the firm to
the courts in return for some settlement of the
corporation’s obligations

Liquidation- management terminates the firm

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Bankruptcy/Liquidation Strategy
When a company finds itself in the worst possible situation with a poor competitive
position
in an industry with few prospects, management has only a few alternatives—all of them
distasteful.
Because no one is interested in buying a weak company in an unattractive industry,
the firm must pursue a bankruptcy or liquidation strategy. Bankruptcy involves giving up
management of the firm to the courts in return for some settlement of the corporation’s
obligations.
Top management hopes that once the court decides the claims on the company, the In
contrast to bankruptcy, which seeks to perpetuate a corporation, liquidation is the
termination
of the firm. When the industry is unattractive and the company too weak to be sold
as a going concern, management may choose to convert as many saleable assets as
possible to
cash, which is then distributed to the shareholders after all obligations are paid.
Liquidation is
a prudent strategy for distressed firms with a small number of choices, all of which are
problematic.
71 This was Circuit City’s situation in 2008, when it liquidated its retail stores. The benefit
of liquidation over bankruptcy is that the board of directors, as representatives of the
shareholders,
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Inc. ©2012with top management make the decisions instead of turning
7-36them
Portfolio analysis- industries or markets in which the
firm competes through its products and business
unites

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Portfolio analysis- management views its product lines
and business units as a series of investments from
which it expects a profitable return

Popular portfolio analysis techniques include:

• BCG Matrix
• GE Business Screen

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The growth share (or BCG) matrix

One of the most common and long-standing ways of conceiving of the balance
of a portfolio of businesses is in terms of the relationship between market
share and market growth identified by the Boston Consulting Group (BCG).

A star is a business unit which has a high market share in a growing market.
The business unit may be spending heavily to gain that share, but experience
curve benefits should mean that costs are reducing over time and, it is to be
hoped, at a rate faster than that of competitors.

A question mark (or problem child) is a business unit in a growing market, but
without a high market share. It may be necessary to spend heavily to increase
market share, but if so, it is unlikely that the business unit is achieving
sufficient cost reduction benefits to offset such investments.

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Prentice Hall, Inc. ©2012 7-40
A cash cow is a business unit with a high market share in a mature market.
Because growth is low and market conditions are more stable, the need for
heavy marketing investment is less. But high relative market share means that
the business unit should be able to maintain unit cost levels below those of
competitors. The cash cow should then be a cash provider (e.g. to finance stars
or question marks).

Dogs are business units with a low share in static or declining markets and are
thus the worst of all combinations. They may be a cash drain and use up a
disproportionate amount of company time and resources.

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The growth share matrix permits business units to be examined in relation to (a) market (segment)
share and (b) the growth rate of that market and in this respect the life cycle development of that
market. It is therefore a way of considering the balance and development of a portfolio.

It is argued that market growth rate is important for a business unit seeking to dominate a market
because it may be easier to gain dominance when a market is in its growth state. So ‘stars’ are
particularly attractive. But if all competitors in the growth stage are trying to gain market share,
competition will be very fierce.

So it will be necessary to invest in that business unit in order to gain share and market dominance.
Moreover, it is likely that such a business unit will need to price low or spend high amounts on
advertising and selling, or both. These businesses are ‘question marks’ or ‘problem children’. They
have potential but can eat up investment and are likely to be yielding low margins in seeking to
beat competition and gain share. Investing here is high risk unless this potentially low-margin
activity is financed by products earning higher profit levels.

Higher profit levels are most likely to come from products that have a high share in more mature,
stable markets. This is where competition is likely to be less fierce and high share should have
given rise to experience curve benefits. Of course the reverse is the case; if a business in a
mature market does not have high share, it may be very difficult to take it from competitors. All this
leads to the idea of the need for a balanced mix of business units in a portfolio.

Some firms might take a different view. For example, if the corporate aspira-
tion is one of high growth in income and the business is prepared to invest to
gain that growth, then a parent may be prepared to support more stars and
question marks than one who is concerned with stable cash generation and con-
Prenticeon
centrating Hall, Inc. ©2012or building its cash cows.
preserving 7-42
 BCG Matrix- Limitations

• Use of highs and lows to form categories is too

simplistic
• Link between market share and profitability is
questionable
• Growth rate is only one aspect of industry
attractiveness
• Product lines or business units are considered only in
relation to one competitor
• Market share is only one aspect of overall competitive
position

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Prentice Hall, Inc. ©2012 7-44
 GE Business Screen- Limitations

• Complex and cumbersome

• Numerical estimates of industry attractiveness and
business strength/competitive position give the
appearance of objective, but are actually subjective
judgments that can vary from person to person
• Cannot effectively depict the positions of new products
and business units in developing industries

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 Advantages and Limitations of Portfolio Analysis

Advantages:
• Encourages top management to evaluate each of the
corporation’s businesses individually and to set
objectives and allocate resources for each
• Stimulates the use of externally oriented data to
supplement management’s judgment
• Raises the issue of cash flow availability to use in
expansion and growth

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 Advantages and Limitations of Portfolio Analysis
Limitations:
• Defining product/market segments is difficult
• Suggest the use of standard strategies that can miss
opportunities or be impractical
• Provides an illusion of scientific rigor when in reality
positions are based on objective judgments
• Value-laden terms such as cash cow and dog can lead
to self-fulfilling prophecies
• Lack of clarity on what makes an industry attractive or
where a product is in its life cycle

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 Managing a Strategic Alliance Portfolio

1. Developing and implementing a portfolio strategy for

each business unit and a corporate policy for
managing all the alliances of the entire company
2. Monitoring the alliance portfolio in terms of
implementing business units’ strategies and corporate
strategy and policies
3. Coordinating the portfolio to obtain synergies and
avoid conflicts among alliances
4. Establishing an alliance management system to
support other tasks of multi-alliance management

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