Chapter 4

Strategy
Fundamentals
and Corporate
Strategy
 Learning Objectives
• After studying this chapter, you should be
able to explain:
– The definitions of strategy
– The strategy process
– The different levels of strategy
– Corporate-level strategy:
• Mergers and acquisitions
• Alliances
• Internal diversification
 Strategy Fundamentals
• Strategy is a coordinated set of actions
that allows the firm to set its objective and
goals.
• Strategic planning is the process by which
a firm decides its direction over the next
several years.
 Strategy Fundamentals
• Resources and capabilities
– Resources are the tangible and intangible
assets the firms possess.
– Tangible assets include things such as plant
and equipment that a firm possesses.
– Intangible assets include aspects like the
reputation of the firm, relationship with
customers, and culture of the firm.
 Strategy Fundamentals
• Resources and capabilities (cont.):
– Capabilities are functional skills and routines
that a firm develops, and are the foundation
on which a firm implements its strategy.
– Key success factors are things that are
important to customers and help determine a
business’ success in a given industry.
– Core competence is a capability that is most
critical to the firm’s success.
 Strategy Fundamentals
• Resources and capabilities (cont.):
– Competitive advantage is something that a
firm does better than any of its competitors,
which allows the firm to have an advantage
over their competitors.
– Sustainable competitive advantage is the
ability to have competitive advantage over a
period of time.
 Strategy Fundamentals
• Strategy process
– The three components of the strategy process
include planning, implementation, and
evaluation and control.
– Planning is the systematic gathering of
information from which the firm sets its
mission, performance objectives, and its
strategy.
 Strategy Fundamentals
• Strategy process (cont.):
– Data gathering involves obtaining extensive
information on a firm’s external environment
and its internal capabilities.
– This process is critical as it helps establish the
foundation on which the firm bases its plans.
– Mission is a statement of the basic purpose
or reason for the business to exist and its
activities; these statements are longer with
approximately 30 to 60 words.
 Strategy Fundamentals
• Strategy process (cont.):
– Objective setting is the process of
establishing measurable objectives and
performance targets that will help the firm
fulfill its mission.
– The time period over which objectives and
performance are targeted may be as long as
five years.
 Strategy Fundamentals
• Strategy process (cont.):
– Strategy establishment helps ensure that
the actions a firm takes will lead to the
accomplishment of objectives and targets.
– Corporate-level strategy determines how
diversified the firm is to become and in what
domains will the diversification occur.
 Strategy Fundamentals
• Strategy process (cont.):
– Business strategy is concerned with how the
firm will compete in a specific product-market.
– Functional strategies are strategies of
different departments, such as accounting,
engineering, and marketing that act in support
of the given business strategy.
 Strategy Fundamentals
• Strategy process (cont.):
– Implementation of a strategy requires that the
firm conduct all of its activities in a manner
that is consistent with the mission and chosen
strategy.
– Value chain analysis is a useful tool to
conceptualize how all aspects of the firm’s
implementation of its strategy fit together.
 Strategy Fundamentals
• Strategy process (cont.):
– Value chain analysis breaks the firm’s
activities into primary activities and support
activities.
– Primary activities are major categories of
activities that take place in a firm to produce
its products and services.
– Support activities back up all the primary
activities.
 Strategy Fundamentals
• Strategy process (cont.):
– Evaluation and control is the process of
ensuring that the goals and objectives are
being met and if they are not, the necessary
adjustments are made.
– Evaluation involves comparison of actual
outcomes with expected outcomes.
– Control refers to the adjustments needed.
 Diversification and Corporate-Level
Strategy
• Mergers and acquisitions
– Mergers occur when two firms combine as
relative equals.
– Acquisition refers to the outright purchase of
a firm or some part of that firm.
 Diversification and Corporate-Level
Strategy
• Reasons for mergers and acquisitions
– Enter a new market quickly.
– Avoid costs and risks of new product
development.
– Acquire an established brand name.
– Offer a portfolio of products that complement
each other, referred to as product platform.
 Diversification and Corporate-Level
Strategy
• Reasons for mergers and acquisitions
(cont.):
– Gain market power.
– Acquire new knowledge and capabilities.
– Enhanced reputation to the manager or
increase in their financial returns; the theory
for this belief is called the agency theory.
– Agency theory: The recognition that those
who own firms and manage them are now
separated.
Table 4-1 – Factors Motivating a Firm
Entering into an M&A Alliance
 Diversification and Corporate-Level
Strategy
• Types of mergers and acquisitions
– If the firms in the merger or acquisition rely on
similar skills to conduct the critical activities of
the firm, then it is related diversification.
– In case of firms that have dissimilar skills or
abilities, it is an unrelated or conglomerate
diversification.
 Diversification and Corporate-Level
Strategy
• Types of mergers and acquisitions (cont.)
– Horizontal integration occurs when the
acquired and acquiring firms are in the same
industry.
– Vertical integration occurs when a firm
expands its business into areas that are at
different points along its production path for a
given product.
– Vertical integration leads to better quality
control of supplies and quality of distribution
to customers; it also helps reduce
opportunism and market uncertainty.
 Diversification and Corporate-Level
Strategy
• Challenges of mergers and acquisitions
– Implementation problems include:
• Cultural differences in the firms involved.
• Insufficient planning for the necessary degree of
integration of the two firms.
• Moving too slowly to combine the firms.
• Not identifying key individuals to retain in the newly
combined firm.
• Not integrating the two firms’ operational systems.
 Diversification and Corporate-Level
Strategy
• Strategic alliances
– Strategic alliance is a partnership of two or
more corporations or business units to
achieve strategically significant objectives that
are mutually beneficial.
– The reasons for alliances are organizational
learning, cost savings, and strategic behavior.
 Diversification and Corporate-Level
Strategy
• Types of alliances: formal versus informal
– In an equity joint venture, two or more firms
put some resources into a new, separate
entity.
– A joint venture commonly has detailed
agreements covering what each party is to
provide, what each party can expect, and how
each party is to operate.
 Diversification and Corporate-Level
Strategy
• Types of alliances (cont.):
– Alliances that are intermediate in their
formality are agreements that have clear
documentation but less interaction between
the parties.
– Examples of intermediate alliances include
consortia and licensing agreements.
 Diversification and Corporate-Level
Strategy
• Types of alliances (cont.):
– Consortia is characterized by several
organizations joining together to share
expertise and funding for developing,
gathering, and distributing new knowledge.
– In a licensing arrangement, one firm agrees
to pay another firm for the right to either
manufacture or sell a product.
 Diversification and Corporate-Level
Strategy
• Types of alliances (cont.):
– In informal alliances, two firms agree to
support each other’s activities in some
manner. The agreements are strictly informal
with few legal protections to enforce the
agreements.
 Diversification and Corporate-Level
Strategy
• The challenges of alliances:
– Find the proper partner.
– Ensure that there is a shared vision.
– Get the timing right.
– Communicate effectively and efficiently.
– Protect intellectual property.
– Measure real costs and profits from the
alliance.