strategic managment chapter 5, Apuntes de Administración de Empresas

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CHAPTER 5

CORPORATE STRATEGY

STRATEGIC MANAGEMENT

UAB

Index

CORPORATE STRATEGIES

5.1. Development strategies

5.1.1. Directions of development

 Diversification

 Vertical integration

5.1.2. Methods of development

 Cooperation

5.2. Firm internationalization

To identify directions of development  Use definition of the scope of the firm , and consider the following alternatives :

1. Whether there is a change in the scope of the firm (or not)
2. Whether there is growth (or not)
3. Whether the company offers the same products and serves the same markets (or not)
4. Whether the new products and markets are related to traditional ones (or not) 5.1. DEVELOPMENT STRATEGIES 5.1.1. Directions of development

Ansoff’s Directions of Development (Ansoff, 1965)

EXISTING NEW

EXISTING Market penetration Product development NEW Market development Diversification 5.1. DEVELOPMENT STRATEGIES PRODUCT MARKET

5.1. DEVELOPMENT STRATEGIES 5.1.1. Directions of development DIRECTIONS OF DEVELOPMENT Consolidation Market penetration Product development Market development Diversification Vertical integration Restructuring Current markets with current products No growth Current markets, current products Growth Existing products, new markets Activities related to the whole production cycle Withdrawal (divestment) from present activities New products, existing markets New products, new markets

Diversification is defined as a strategy that takes an organization away from both its existing markets and its existing products (Johnson, 2008, p. 262)  New products + new markets  Change in the scope of the firm  Diversification FACTORS THAT DETERMINE DIVERSIFICATION General environment Specific environment Firm characteristics 5.1.1. Directions of development

Related diversification

- Relatedness has to do with the potential for sharing and transferring resources and capabilities between businesses (distribution channels, technologies, etc.). In related diversification there is some degree of relationship with current activities. - Reasons for related diversification: Generation of synergies, sharing assets or the knowledge acquired across businesses Competitive advantage - Risks of related diversification Coordination costs, synergies do not exist, inflexibility (exit barriers)  Diversification 5.1.1. Directions of development

RELATED DIVERSIFICATION IN “PARADORES”

In 2000 , the firm embarked upon a process of diversification oriented towards new activities related to the hospitality business  increase growth.  Catering service  “Paradores Escuela”, to train future employees  Local stores specialized in traditional cuisine  High quality Spa treatments, sport facilities (ej. Paradores Golf).  Diversification 5.1.1. Directions of development

UNRELATED DIVERSIFICATION IN “EL POZO”

Traditional business: meat processing. In 2000, “El Pozo” started engaging in unrelated activities:

• Profusa (constuction sector)
• Vishoteles (hotels)
• Aemedsa (producer of medical white oils)
• Terra Natura (exploitation of natural parks)
• ONO (telecommunications sector)
• Sacyr (construction sector)  Diversification 5.1.1. Directions of development

Backward integration Forward integration

Acquisition by a car manufacturer of a component supplier For a car manufacturer, this could be distribution, repairs and servicing Vertical integration refers to a firm’s ownership of vertically related activities. The greater a firm’s ownership extends over successive stages of the value chain for its product, the greater its degree of vertical integration (Grant, 2010; 354).  Vertical integration 5.1.1. Directions of development

• Firm risk may increase
• Higher exit barriers
• Lack of flexibility
• Less ability to develop autonomous innovations
• Profit margins not achieved
• Organizational complexity increases

RISKS OF VERTICAL INTEGRATION

 Vertical integration 5.1.1. Directions of development

DEVELOPMENT STRATEGIES (changing the scope of the firm over time) DIRECTIONS OF DEVELOPMENT METHODS OF DEVELOPMENT

• Consolidation
• Market penetration
• Diversification
• Vertical integration
• Restructuring
  • I nternal
  • External
  • Mergers,
  • Acquisitions
  • Cooperation/Alliances 5.1.2. Methods of development

Advantages

• Obtain resources required
• Greater balance between

efficiency and flexibility

• Limits some risks
• Learning from partners Disadvantages
• Undermine a firm’s competitive

position

• Loss of autonomy
• Costs (time, organizational

complexity)

• Divergent interests
• Lack of trust and commitment

among partners

 Cooperation 5.1.2. Methods of development

Contractual

agreements

Shareholder

agreements

Interorganizational

networks

• Contracts between companies that do not involve ownership, the exchange of shares, or capital investments in a new business
• Types: long-term contracts, franchise, license, subcontracting, consortia
  • Involve acquisition of shares
  • Types: Joint ventures, share swap, minority shareholder
  • Plurality of cooperation agreements between firms (all the types analyzed before), multiple partners, and complex relationships  Cooperation 5.1.2. Methods of development