BUS 189 – January 13, 2011

-----
THURSDAY NEXT WEEK, Jill Albracht presenting to us 11 a.m.
(after presentations?)
(she come at the end)
Average score was about 5 (so far) for essays
-----
REVIEW CCCLS
-----
Case : Presentation + Handout (?)
-----
Ch 07 – CORPORATE-LEVEL STRATEGY and LONG-RUN PROFITABILITY

CORPORATE-LEVEL STRATEGY
The principle concern:
• to identify the industry or industries a company should participate in to maximize long-
run profitability
: successful strategy works to build co.'s competences and inc comp adv over industry rivals

CONCENTRATION ON A SINGLE INDUSTRY

For many co.'s, concentration on specific industry
e.g.
McDonald's – fast food
Starbucks – premium coffee
Neiman Marcus – luxury dep't store retailer
: concentrate on needs of customer in specific mkt

Major Adv in concentrating on a single industry

: the co. is able to focus all its managerial, financial and technological resources and capabilities
in developing strategies to strengthen its position in one industry
: offers prospect to obtain long-term substantial profits
: concentrating on a single industry allows industry to stick to the nitty—do what it knows how
to do best, rather than going into an industry where it knows little (little value)
: poor decision-making can lead to great losses
: on the other hand, concentrating on one industry can have disadv's over time
: certain amt of vertical integration is needed to maintain co.'s comp adv
: miss out on creating more value by inc'ing co.'s resources and capabilities to make and
sell products in another industry

one tool or tactic at corporate level in single industry

to help managers to position co.'s to compete better:

HORIZONAL INTEGRATION
Merger, Acquisition
Pfizer acquiring Lambder (?) - to become largest pharm co.

Managers who pursue Horizontal Integration

Adv/Disadv
: lowers operating costs → achieve economies of scale
: e.g. in telecx industry, to build network on fiber optic or wireless network, has extremely high
fixed cost ← to make investment pay out, co. has to have large volume of customers
 : why AT&T and Verizon acquired a lot of telecx co.'s to inc network

VERTICAL INTEGRATION
: when we have raw mat'ls to customer added value chain
4 main stages
raw mat'sl → component parts MFG → final assembly → retail → customer
when a co. moves upstream or downstream in this chain
fwd's and bkwd's vertical integration
fwd e.g. Apple moved from final assembly into retail industry
bkwd's e.g. Ford opened its own glass factory to manufacture glass for its vehicles
• A company can enter a new industry to increase its long-run profitability
• A company that concentrates on a single business may be missing out on the opportunity
to create value through vertical integration
: able to differentiate product more and able to ctrl product qlty the more put out (?) they are

ADV/DISADV
(+)
• enables company to build barriers to new competition
: e.g. aluminum MFR's
: in 1930s, lg deposit of aluminum-rich pocket in Jamaica, Alco and Alcam purchased rights to
this deposit ← became only producers of aluminum b/c nobody had access to this resource after
• Facilitates investments in specialized assets
: e.g. piece of machinery that can only be utilized in MFG of a certain product
: will not take on the investment of outside producer of specialized assets
: e.g. (theoretical) if Ford invented revolutionary fuel injector can only be used w/Ford vehicles
: probs w/outside investors to invest b/c only can do biz w/Ford ← lot of buyer pwr
: Ford would have to bkwd integrate and produce by self
• Protects product quality
: e.g. McDonald's in Russia; food was not up to McDonald's standards
: opened up own dairy farms, vegetable lots, and processing
• Results in improved scheduling
: the more spread out you are in the chain, you can ctrl when inputs go in, outputs go out, next
stage in industry → smoother and more ctrl of time
(–)
• May actually increase cost of inputs
: costs more than an outside supplier
: e.g. GM ← in early 1990s, produced 68% of components in MFG of car; prob b/c not cost-
efficient and probably the highest cost of prod'n; able to get products from outside suppliers at
lower cost;
• Suppliers have less incentive to be efficient
: tends to happen more w/full integration
: co.'s gets all inputs; competing w/outside suppliers (incentive to be efficient)
: less w/a tapered integration → w/outside suppliers and own operation
• Ties a company into old, obsolescent, and high cost technology
: if a co. integrates bkwds, and supplier MFG inputs for them; that MFR just totally becomes out
of date, technology no longer cost-efficient; cannot just pick up and go to cheaper supplier;
already have ties w/another co.

DIVERSIFICATION
: related and non-related
• A diversified company is one that operates in two or more industries in order to find
 ways to use distinctive competencies to increase the value of products in other industries
to consumers and to increase long-run profitability
• A company may choose to diversify when they have excess resources
: if a co. is diversifying, means that the co. is healthy
: e.g. of co. that is diversifying—GE (consumer finance, railroads, light bulbs ← all over the
place); Kirkland Signature (batteries to food to drugs); 3M
: when a co. diversifies, each of its product it diversifies in, it is its own separate unit w/its own
separate management
: related diversification—Viacom, Disney
unrelated diversification not popular on Wall Street (if diversify by acquisition; they will argue
very hard that it is w/in industry)
: generically in entertainment business

• Diversification can help a company create value in 3 main ways:

• Permitting superior internal governance
• Transferring competencies among businesses
• Realizing economies of scope
: related/non-related diversification
: strategy is taken when co. has excess resources (good strategy); indicates co. is doing well and
healthy and diversification strategy helps co. in 3 ways as mentioned

RESTRUCTURING AND DOWNSIZING: MOST COMPANIES ARE NOT TOO BIG TO FAIL
• Some companies become too big and diversified for their own good, or in other words,
too big for their stakeholders own good. At this point a good strategy would be to
restructure or downsize the company
• To restructure or downsize is a strategy for reducing the scope of the company by exiting
business areas
e.g. AT&T ← used to be in cable TV biz as well as telecx; ended up selling off its cable TV biz to
Comcast for $70 billion

WHY RESTRUCTURE?
• Restructuring is a response to declining financial performance
• A prime reason is that in recent years the stock market has assigned a diversification
discount to the stock of companies who are highly diversified
• Diversification discount: The phenomenon that shares of stock in highly diversified
companies are often assigned a lower market valuation than shares of stock in less
diversified companies
• Investors see highly diversified companies as less attractive investments
: CEOs are only w/co.'s for 2-3 yrs at a time, so look to improve self-status in the short-term
: rest of shareholders and investors are there for the long-term
: financial statements are also highly diversified (difficult to interpret)
• By restructuring, managers are attempting to boost returns for shareholders

MORE REASONS TO TRIM THE FAT

• restructuring can also be a response to failed acquisitions. When a new acquisition fails
to deliver the anticipated gains, managers often respond by cutting losses and exiting
from the acquired businesses
• A final factor is the diminished advantage of vertical integration and diversification

ENTER: LONG-TERM CONTRACTING

 • Long-term contracting provides many of the advantages of vertical integration without
the downfalls. It facilitates investment in a specialized business without the high
bureaucratic costs and loss of market discipline
: if Microsoft decided to buy Dell
: either have to re-train all of Dell's management or put in own
: costs time and money
: organizational structures/culture ← Microsoft and Dell have their own cultures
: would be trying to assimilate
: Dell is mkt leader ← Microsoft to assume it is more efficient than Dell is naïve
: better to get into long-term contract
: 65% of all acquisitions or mergers fail, but every CEO thinks he will succeed

GM RESTRUCTURES
• In 2009, automaker GM filed for bankruptcy protection and reorganization with
financial assistance from the government. In order to become profitable again, the
company took steps to restructure their organization
: making fuel inefficient cars and couldn't compete on global mkt
: exited from SUV/Truck mkt's and reinvesting in fuel efficiency, hybrid cars, and green
jobs ← resubmitted plan to Dep't of Treasury

EXIT STRATEGIES: GOODBYES ARE NEVER EASY

• Companies can choose from the three main strategies for exiting business areas:
Divestment, harvest, and liquidation

SPINOFF AND MANAGEMENT BUYOUT: THE MOST ATTRACTIVE OPTIONS

• A spinoff is normally the term used when a business unit is sold off to an independent
investor or another company.
• A spinoff makes good sense when the unit to be sold is profitable and the stock market is
on an upswing
: NewsCorp bought MySpace ← not been able to turn it around (mkt's gone) < FACEBOOK
: when AT&T sold to Comcast, their cable TV was fine, but as a whole, biz not so well
• A spinoff is usually the most profitable option because purchasers are often prepared to
pay a considerable amount of money for the chance to increase the size of their business
nearly overnight

MANAGEMENT BUYOUT
• Management Buyout (MBO): The sale of a business unit to its current management.
Often a last resort before harvest or liquidation.
• If the MBO is successful and the business unit does well, the managers stand to make
a huge sum of money. If it fails, they could lose everything.
• In this option the management finances the purchase through the sale of high-yield
bonds (junk bonds) to investors.
: buy biz unit back, try to turn around and make profitable; stand to make lot of $$ if successful

WHEN ALL ELSE FAILS: HARVEST OR LIQUIDATE

• Harvest Strategy: The halting of investments in a business unit to maximize short- to
medium-term cash flow from that unit
• Not always a tenable strategy. If employees, customers, or suppliers find out, it can
hurt their confidence and the business unit will go into a rapid decline.
: “milking the business”
 • Liquidation Strategy: The shutting down of operations of business or business unit
• Least attractive strategy b/c co. is req'd to write off its initial investments in unit that
is shutting down
END
(questions)
-----
biz-level = single industry; single division in multidivisional corp
-----
1.) Wrt to corporate-lvl strategy, horizontal integration refers to
b) When a firm acquires or merges with competitors in industry

2.) Sale of biz unit to its current execs is called

c) Management buyout

3.) Merger is
b) when 2 firms agree to pool their ops to create new entity
: JV is a special kind of merger (or strategic alliance like that)
: may be 50/50 or 51/49 ← NUMMI
: Southwestern Bell and AT&T ← adopted AT&T b/c more well-known even though
Southwestern Bell was bigger co.
: AOL/Time Warner ← acquisition (AOL acquired Time Warner)
: renamed itself “Time Warner” and trying to sell AOL (although merger worked)
: sell its parent

4.) Comcast offers a “triple play” which includes Internet service, cable TV, and phone service.
E.g. of
a) Product bundling
: raises exit barriers for customer ← wanna chg, gotta chg all of 'em

5.) Internet has enabled many MFG co.'s that used to sell to retailers to sell direct to consumers
via web. Internet has enabled
a) Fwd vertical integration

6.) Hospitals have own back-up generators for emergencies. This indicates that hospitals engage
in some degree of
b) Bkwd vertical integration

7.) when firm has 1 or more of its internal fn's performed by independent companies this is
known as
c) strategic outsourcing

8.) Which of following is good reason to bkwd integrate?

c) firm needs greater ctrl over qlty or timing of inputs
: bkwd integration reduces supplier pwr
: fwd integration reduces buyer pwr

9.) Acquisition is when co. uses its capital to... true

10.) Stock of highly diversified co.'s are often assigned higher mkt valuation than shares of
stocks in less diversified co.'s false
: Cartridge World
: HP may split into PC and printer biz (there's been talk)

11.) Horizontal Integration is the process of acquiring or merging w/industry competitors in an

effort to achieve scale and scope economies true

12.) Spinoff involves offering customers the opp to buy complete range of prod's they need at
single combined price false

13.) mkt pwr is degree to which co. utilizes effective mktg false
: what is mkt pwr? Essentially your mkt share, dependent on your size and how you wield it

14.) risk of “holdup” refers to bargaining pwr held by consumers when competition is high
buyer pwr ← 2nd B in BARBS false

15.) credible commitment is a believable pledge to support the development of a biz relationship
True
-----