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MANA 5336
Directional Strategies
2
Directional Strategies
3
Directional Strategies
Diversification
– Into other product lines in other industries
4
Directional Strategies
Expansion of Scope
Basic Concentration Strategies:
Vertical growth
Horizontal growth
5
Directional Strategies
Vertical growth
– Vertical integration
Full integration
Taper integration
Quasi-integration
– Backward integration
– Forward integration
6
Stages in the Raw-Material-to-
Consumer Value Chain
Upstream Downstream
Stages in the Raw-Material-to-Consumer Value
Chain in the Personal Computer Industry
Intermediate
Raw materials Assembly Distribution End user
manufacturer
Horizontal Growth
– Horizontal integration
12
Directional Strategies
– Concentric Diversification
– Conglomerate Diversification
13
Directional Strategies
Concentric Diversification
14
Concentration on a Single Business
Southwest Airlines
S
SE AC
R
o c a -C o
la
o n a l d s
McD
Concentration on a Single Business
Advantages Disadvantages
– Operational focus on a – No diversification of market
single familiar industry or risks.
market. – Vertical integration may be
– Current resources and required to create value
capabilities add value. and establish competitive
– Growing with the market advantage.
brings competitive – Opportunities to create
advantage. value and make a profit
may be missed.
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.
Related Diversification
Marriott
3M
P ack ar d
Hew l et t
Unrelated Diversification
co
Ty
Amer
G r ou p
I TT
Diversification and Corporate Performance: A
Disappointing History
22
Directional Strategies
Reasons for Diversification
Incentives
Reasons to Enhance Strategic
Competitiveness
Resources
• Economies of scope/scale
• Market power
Managerial • Financial economics
Motives
Reasons for Diversification
External Incentives:
Relaxation of anti-trust regulation allows more related
acquisitions than in the past
Before 1986, higher taxes on dividends favored spending
retained earnings on acquisitions
After 1986, firms made fewer acquisitions with retained
earnings, shifting to the use of debt to take advantage of tax
deductible interest payments
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
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
Reasons for Diversification
Incentives
Managerial Motives (Value
Reduction)
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.
Relationship Between
Diversification and Performance
Performance
Level of Diversification
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.
Why Contraction of Scope?
Maintenance of Scope
Enhancement
Status Quo
Market Entry Strategies
Increased Diversification
It may be easier to develop and introduce new products
in markets currently served by the firm
It may be difficult to develop new products for markets
in which a firm lacks experience
– it is uncommon for a firm to develop new products internally to
diversify its product lines
– acquisitions are the quickest and easiest way to diversify a firm
and change its portfolio of businesses
Reasons for Making Acquisitions:
Reshaping the Firms’ Competitive Scope
Inability to
achieve synergy
Problems With Acquisitions
Integration Difficulties
Integration challenges include
– melding two disparate corporate cultures
– linking different financial and control systems
– building effective working relationships (particularly when
management styles differ)
– resolving problems regarding the status of the newly
acquired firm’s executives
– loss of key personnel weakens the acquired firm’s
capabilities and reduces its value
Problems With Acquisitions
Too Large
Additional costs may exceed the benefits of the
economies of scale and additional market power
Larger size may lead to more bureaucratic controls
Formalized controls often lead to relatively rigid and
standardized managerial behavior
Firm may produce less innovation
Strategic Alliance
Technological Development
Human Resource Mgmt.
Support Activities
Outbound Logistics
Inbound Logistics
Primary Activities
capabilities in different stages of
Supplier the value chain to create value
for both firms
M
M
ar
gin ar
gin • outsourcing is one example of
Technological Development
Service
Firm Infrastructure
Outbound Logistics
Operations
Inbound Logistics
Primary Activities
Strategic Alliances
Buyer Buyer
M Potential Competitors M
gin ar gin ar
ar gin ar gin
M M
Technological Development
Technological Development
Human Resource Mgmt.
Support Activities
Service Service
Firm Infrastructure
Firm Infrastructure
Marketing & Sales Marketing & Sales
Procurement
Procurement
Outbound Logistics Outbound Logistics
Operations Operations
Inbound Logistics Inbound Logistics