Segundo Parcial T5-T9 PDF

TOPIC 5: CORPORATE STRATEGY 1. MOTIVATION Set of actions that a company undertakes obtain a competitive advantage through selecting and managing a group of different companies from that compete in different product markets. There’s two key questions: 1. In which product and business mar...

TOPIC 5: CORPORATE STRATEGY 1. MOTIVATION Set of actions that a company undertakes obtain a competitive advantage through selecting and managing a group of different companies from that compete in different product markets. There’s two key questions: 1. In which product and business markets the company must compete? 2. How the corporate headquarters should manage each of those businesses? Things to have into account: - Business-level: each business in a diversified company must have its own strategy. - Corporate level: an effective strategy at the corporate level creates more value in all its businesses than they would have otherwise. Business diversification: many companies have more than a single line or business unit, and compete in multiple industries. Example —> Sony: TV, mobile phones, video consoles, cameras,… Corporate strategy: it guides the company's decision regarding the range (the scope) of the business lines in which the company will operate. A corporate strategy is successful when the company improves the average competitiveness of individual business units, thereby creating and capturing value in excess of the sum of the individual parts. LEVELS OF STRATEGY CORPORATE STRATEGY It answers the following questions: - Which business should we have? - In which industries should we operate? - Which activities within the industry should we take on? - Should we enter new markets? Which ones? Types of corporate strategy: - Diversification - Vertical integration - External growth 2. DIVERSIFICATION When a firm enters into new lines of activity which entails changes in its administrative structure, systems, and other management processes. - New business lines: a product is in a new business line if its demand is largely unaffected by the prices of existing products DIVERSIFICATION ELEMENTS: 1. Decision to diversify: companies diversify for both offensive and defensive reasons in response to the general environment, the market structure, the characteristics of the company.  2. Ways to diversify: Two extreme forms: internal / organic growth (within the company) and external growth (acquisitions) Intermediate methods: strategic alliances. 3. Diversification relationship: degree of relationship between new business lines and those already established. - Business line: defined through the needs of the customer it is trying to satisfy, the group of target customers, and the technology required to meet the needs of the target customers. - Types of diversification: Related: Horizontal: new product line with a market close to that of an already established line. Vertical: when a part of the supply chain is integrated into the activity of the company. (Vertical integration). Unrelated/conglomerate MANAGING DIVERSIFICATION: Diversification complicates the management of the company as it implies operating simultaneously in new competitive environments, with success factors probably different from the usual ones. Diversification affects: - The structure of the company: when companies diversify, they tend to go from a functional structure to a structure with multiple divisions where coordination is more complicated. - Internal processes and systems: more time is spent on corporate planning at the expense of planning each line of business. - Company synergies: finding synergies between different lines of business is easy on paper, but not in reality. - The different divisions tend to function with autonomy (lack of horizontal relationship). - Synergies are often outweighed by the fight for scarce resources. REASONS TO DIVERSIFY: - Global risk reduction: the long-term risk of the company as a whole is reduced. Although some of the activities fail, it is difficult to think that all of them are wrong. - Traditional market saturation: when the growth objectives within its product-market scope cannot be achieved through expansion. This may be due to market saturation, decline in demand, etc. - Excess resources and capacities: Resources and capacities in excess of the needs of traditional activities. These surpluses can be of the following types: - Physical resources, such as facilities, premises, etc., underused or capable of being applied to new activities. - Financial resources in excess of those necessary for expansion. - Intangible resources and capabilities, such as brand, technology, reputation, customer loyalty, human skills, etc. - Investment opportunities: in new activities that offer interesting levels of growth and profitability. - Generation of synergies: diversification can allow the generation of synergies by the common use of resources or by the strategic interrelationships between activities, in such a way that the performance of all the businesses is better than that of each one of them separately - Other motives: companies can enter new businesses for other less frequent reasons: - Diversification window: This refers to being involved in activities where significant technological changes are occurring, which could impact the technology used in the company's primary activity. In other words, diversifying to stay current with technological advancements. - Image diversification: This occurs when a company diversifies to maintain or enhance its image in society. It's driven by the desire to be seen in a positive light by the public. TYPES OF DIVERSIFICATION: 1. Related diversification: entering into businesses related to traditional activity. For it to be related the company has to take advantage of resources and capacities developed in established businesses for the new activity. These are called synergies and they can be developed in two ways: - Share resources and capacities: which can be underused (facilities) or of unlimited capacity (brand, technology). - Transferring knowledge/skills: in order to exploit competitive advantages in the new businesses. These can be essential competencies or skills. - Types of related diversification: - Horizontal diversification: when the company launches new products or services in markets that are related to the commercial environment in which it carries out its usual activity. In this case, the format is changed, but not the focus. - Vertical diversification: when the company starts to manufacture products or to develop services that it traditionally acquired from third parties, which is why they are now part of its production chain. - Concentric diversification: It occurs when new products or services are integrated into an existing line. Ex, gluten-free lines. - Types of costs generated by synergies: - Coordination costs: derived from sharing resources or transfer knowledge through the establishment of appropriate formal or informal organizational mechanisms. - Commitment costs: if several businesses have shared resources, one of them cannot be managed autonomously, ignoring the repercussions it could have on the development of others. - Inflexibility costs: Relationships between different businesses can create inflexibility in costs ways: - Compromised responsiveness: difficulties to respond quickly to changes in the environment due to the need to coordinate with other business lines. - Stubbornness: the decision to close an unprofitable business within a portfolio may be postponed or even dismissed because of shared resources with other businesses, leading to the creation of exit barriers that hinder the liquidation process. 2. Unrelated diversification: - Reasons for unrelated diversification: - Global risk reduction of the company - Higher profitability when entering industries with less pressure on profits. - Investment in future, emerging or growing sectors.  - Restructuring of undervalued companies in other sectors. - Create an “investment portfolio” with financial synergies. - Lines with financing surpluses are invested in others with financing needs. - Management objectives (agency problems*): Management incentives are often more aligned towards expansion than profitability. - An agency problem is a conflict of interest inherent in any relationship where one party is expected to act in the best interest of another. Agency problems arise when incentives or motivations present themselves to an agent to not act in the full best interest of a principal. - Risks of carrying out an unrelated diversification: - Absence of synergies between lines: Beyond financial synergies, it does not contribute anything (they do not create value) and it reduces the company's resources. - Skills are gained over time, which can derail a new line of business. - Dispersion of interests: Management is no longer focused on the traditional business. - Management and coordination difficulties. - Barriers to entry in the new industry. - Types of unrelated diversification: unrelated diversification is also known as Conglomerate diversification, which represents the creation of new products or services, but in this case without being related to the current ones. Example, Samsung Group. The Boston Consulting Group (BCG) Matrix: It organises the different business lines in two dimensions: - Vertical axis: growth potential of a business line. - Horizontal axis: current market share of the business. The BCG matrix divides the product lines into 4 types: 1. Stars: best options for a company to invest its money. - High growth - High market share - Stable money flows - Requires high investment - Usually needs a good positioning strategy 2. Question marks: investments that are in fast-growing markets and consume a lot of cash but involve few sales. - High growth and low market share - Generate money only when there is investment - You can become a Star with large investments 3. Cash Cows: they’re cash flow generators and the most profitable. The money they produce should be invested in the Stars or in creating questions. - Low growth and high market share —> little future - Generate cash to create new Stars - Brings stable and constant money flows - Doesn't need a lot of investment  4. Dogs: worst type of products, since they do not grow and have little market share. It is generally advised that they be removed from the portfolio of products or investments, since they only consume resources, but do not bring anything in return. - It’s no good for a company to have all stars as they’ll eventually turn into cows and later into dogs. Therefore, it’s better to maintain a healthy mix of cows, question marks, and stars. Why? - We need cows to finance questions marks. - We need stars for the business to function well and for them to be the "future cash cows”. - We need questions marks to get "future stars” 3. VERTICAL INTEGRATION Entry of a company into new activities in its supply chain. Supply chain: set of activities, facilities and means of distribution necessary to carry out the entire sales process of a product. It can be forward or backward: - Forward: The company becomes its own customer. - Backward: The company becomes its own supplier. ADVANTAGES DISADVANTAGES - No reliance on suppliers - Expensive - Potential access to monopolising suppliers - Reduces flexibility - Economies of scale - Loss of focus - Knocking off most popular brand-name products - Not likely to have a culture that supports both - Lower costs retail stores and factories 4. EXTERNAL GROWTH Growth that results from the acquisition, participation, association or control, by a company, of other companies or of assets of other companies that were already in operation. It can be motivated by: - Economic efficiency: economies of scope, new resources and capacities, … - Market power: entering a new industry/country, vertical integration, obtaining the ability to compete globally,. Advantages of External development vs. Internal Disadvantages of External development vs. Internal - It is faster. - Limit "personalisation": how it has grown, size, - Reduces risk in unrelated diversification. technology, location, positioning, … - It does not alter the size of the industry (important - It requires a lot of information. in mature industries). - Ceteris paribus, it is more expensive as it needs duplicate assets, restructuring… - Problems of productive integration, organization and culture.. Types of external development: - Mergers: unions of two or more companies in such a way that at least one of the originals disappears, the latter losing their legal personality. - Pure Merger: two or more companies, generally of an equivalent size, agree to join together and create a new company to which they contribute all their resources, assets (assets, rights) and also debts, for which the primitive companies are subsequently dissolved. - Merger by absorption: a merger by absorption occurs when one of the companies involved (absorbed) disappears and its assets are integrated into the absorbing company - Acquisitions: a company, through various procedures, buys a part of the share capital of another, with the intention of influencing its decisions. Usually, no company loses its legal personality. - The acquisition can be: - Of absolute control: more than 80% of the share capital. - Majority control: Between 50% and 80% of the capital stock. - Minority control: