APA Format. Must use in-text citations. 2-3 paragraphshttp://iveybusinessjournal.com/publication/what-is…http://sloanreview.mit.edu/article/how-to-build-co…Provide an example of a corporate level strategy. Refer to the link to learn more about the types of corporate level strategies.http://smallbusiness.chron.com/types-corporate-lev…
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Chapter 8 from Mastering Strategic Management was adapted by The Saylor Foundation under
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Chapter 8
Selecting Corporate-Level Strategies
LEARNING OBJECTIVES
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1.
Why might a firm concentrate on a single industry?
2.
What is vertical integration and what benefits can it provide?
3.
What are the two types of diversification and when should they be used?
4.
Why and how might a firm retrench or restructure?
5.
What is portfolio planning and why is it useful?
What’s the Big Picture at Disney?
Walt Disney remains a worldwide icon five decades after his death.
Image courtesy of Wikipedia,
http://en.wikipedia.org/wiki/File:Walt_Disney_Snow_white_1937_trailer_screenshot_(13).jpg.
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The animated film Cars 2 was released by Pixar Animation Studios in late June 2011. This sequel to the
smash hit Cars made $66 million at the box office on its opening weekend and appeared likely to be yet
another commercial success for Pixar’s parent corporation, The Walt Disney Company. By the second
weekend after its release, Cars 2 had raked in $109 million.
Although Walt Disney was a visionary, even he would have struggled to imagine such enormous numbers
when his company was created. In 1923, Disney Brothers Cartoon Studio was started by Walt and his
brother Roy in their uncle’s garage. The fledgling company gained momentum in 1928 when a character
was invented that still plays a central role for Disney today—Mickey Mouse. Disney expanded beyond
short cartoons to make its first feature film, Snow White and the Seven Dwarves, in 1937.
Following a string of legendary films such as Pinocchio (1940), Fantasia(1940), Bambi (1942),
and Cinderella (1950), Walt Disney began to diversify his empire. His company developed a television
series for the American Broadcasting Company (ABC) in 1954 and opened the Disneyland theme park in
1955. Shortly before its opening, the theme park was featured on the television show to expose the
American public to Walt’s innovative ideas. One of the hosts of that episode was Ronald Reagan, who
twenty-five years later became president of the United States. A larger theme park, Walt Disney World,
was opened in Orlando in 1971. Roy Disney died just two months after Disney World opened; his brother
Walt had passed in 1966 while planning the creation of the Orlando facility.
The Walt Disney Company began a series of acquisitions in 1993 with the purchase of movie studio
Miramax Pictures. ABC was acquired in 1996, along with its very successful sports broadcasting company,
ESPN. Two other important acquisitions were made during the following decade. Pixar Studios was
purchased in 2006 for $7.4 billion. This strategic move brought a very creative and successful animation
company under Disney’s control. Three years later, Marvel Entertainment was acquired for $4.24 billion.
Marvel was attractive because of its vast roster of popular characters, including Iron Man, the X-Men, the
Incredible Hulk, the Fantastic Four, and Captain America. In addition to featuring these characters in
movies, Disney could build attractions around them within its theme parks.
With annual revenues in excess of $38 billion, The Walt Disney Company was the largest media
conglomerate in the world by 2010. It was active in four key industries. Disney’s theme parks included not
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only its American locations but also joint ventures in France and Hong Kong. A park in Shanghai, China,
is slated to open by 2016. The theme park business accounted for 28 percent of Disney’s revenues.
Disney’s presence in the television industry, including ABC, ESPN, Disney Channel, and ten television
stations, accounted for 45 percent of revenues. Disney’s original business, filmed entertainment,
accounted for 18 percent of revenue. Merchandise licensing was responsible for 7 percent of revenue. This
segment of the business included children’s books, video games, and 350 stores spread across North
American, Europe, and Japan. The remaining 2 percent of revenues were derived from interactive online
technologies. Much of this revenue was derived from Playdom, an online gaming company that Disney
acquired in 2010.
[1]
By mid-2011, questions arose about how Disney was managing one of its most visible subsidiaries. Pixar’s
enormous success had been built on creativity and risk taking. Pixar executives were justifiably proud that
they made successful movies that most studios would view as quirky and too off-the-wall. A good example
is 2009’s Up!, which made $730 million despite having unusual main characters: a grouchy widower, a
misfit “Wilderness Explorer” in search of a merit badge for helping the elderly, and a talking dog. Disney
executives, however, seemed to be adopting a much different approach to moviemaking. In a February
2011 speech, Disney’s chief financial officer noted that Disney intended to emphasize movie franchises
such as Toy Story and Cars that can support sequels and sell merchandise.
When the reviews of Pixar’s Cars 2 came out in June, it seemed that Disney’s preferences were the driving
force behind the movie. The film was making money, but it lacked Pixar’s trademark artistry. One movie
critic noted, “With Cars 2, Pixar goes somewhere new: the ditch.” Another suggested that “this frenzied
sequel seldom gets beyond mediocrity.” A stock analyst that follows Disney perhaps summed up the
situation best when he suggested that Cars 2 was “the worst-case scenario.…A movie created solely to
drive merchandise. It feels cynical. Parents may feel they’re watching a two-hour commercial.”
[2]
Looking
to the future, Pixar executives had to wonder whether their studio could excel as part of a huge firm.
Would Disney’s financial emphasis destroy the creativity that made Pixar worth more than $7 billion in
the first place? The big picture was definitely unclear.
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Will John Lassiter, Pixar’s chief creative officer, be prevented from making more quirky films
like Up! by parent company Disney?
Image courtesy of Nicolas Genin,
http://upload.wikimedia.org/wikipedia/commons/b/bc/John_Lasseter-Up-66th_Mostra.jpg.
When dealing with corporate-level strategy, executives seek answers to a key question: In what industry
or industries should our firm compete? The executives in charge of a firm such as The Walt Disney
Company must decide whether to remain within their present domains or venture into new ones. In
Disney’s case, the firm has expanded from its original business (films) and into television, theme parks,
and several others. In contrast, many firms never expand beyond their initial choice of industry.
[1] Standard & Poor’s stock report on The Walt Disney Company.
[2] Stewart, J. B. 2011, June 1. A collision of creativity and cash. New York Times. Retrieved
from http://www.nytimes.com/2011/07/02/business/02stewart.html
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8.1 Concentration Strategies
LEARNING OBJECTIVES
1.
Name and understand the three concentration strategies.
2.
Be able to explain horizontal integration and two reasons why it often fails.
For many firms, concentration strategies are very sensible. These strategies involve trying to compete
successfully only within a single industry. McDonald’s, Starbucks, and Subway are three firms that
have relied heavily on concentration strategies to become dominant players.
Market Penetration
There are three concentration strategies: (1) market penetration, (2) market development, and (3) product
development. A firm can use one, two, or all three as part of its efforts to excel within an industry.[1]
Market penetration involves trying to gain additional share of a firm’s existing markets using existing products.
Often firms will rely on advertising to attract new customers with existing markets.
Nike, for example, features famous athletes in print and television ads designed to take market share
within the athletic shoes business from Adidas and other rivals. McDonald’s has pursued market
penetration in recent years by using Latino themes within some of its advertising. The firm also maintains
a Spanish-language website at http://www.meencanta.com; the website’s name is the Spanish translation
of McDonald’s slogan “I’m lovin’ it.” McDonald’s hopes to gain more Latino customers through initiatives
such as this website.
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Nike relies in part on a market penetration strategy within the athletic shoe business.
Image courtesy of Jean-Louis Zimmermann,
Market Development
Market development involves taking existing products and trying to sell them within new markets. One
way to reach a new market is to enter a new retail channel. Starbucks, for example, has stepped beyond
selling coffee beans only in its stores and now sells beans in grocery stores. This enables Starbucks to
reach consumers that do not visit its coffeehouses.
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Starbucks’ market development strategy has allowed fans to buy its beans in grocery stores.
Image courtesy of Claire Gribbin,http://en.wikipedia.org/wiki/File:Starbucks_coffee_beans.jpg.
Entering new geographic areas is another way to pursue market development. Philadelphia-based Tasty
Baking Company has sold its Tastykake snack cakes since 1914 within Pennsylvania and adjoining states.
The firm’s products have become something of a cult hit among customers, who view the products as
much tastier than the snack cakes offered by rivals such as Hostess and Little Debbie. In April 2011,
Tastykake was purchased by Flowers Foods, a bakery firm based in Georgia. When it made this
acquisition, Flower Foods announced its intention to begin extensively distributing Tastykake’s products
within the southeastern United States. Displaced Pennsylvanians in the south rejoiced.
Product Development
Product development involves creating new products to serve existing markets. In the 1940s, for example,
Disney expanded its offerings within the film business by going beyond cartoons and creating movies
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featuring real actors. More recently, McDonald’s has gradually moved more and more of its menu toward
healthy items to appeal to customers who are concerned about nutrition.
In 2009, Starbucks introduced VIA, an instant coffee variety that executives hoped would appeal to their
customers when they do not have easy access to a Starbucks store or a coffeepot. The soft drink industry is
a frequent location of product development efforts. Coca-Cola and Pepsi regularly introduce new
varieties—such as Coke Zero and Pepsi Cherry Vanilla—in an attempt to take market share from each
other and from their smaller rivals.
Product development is a popular strategy in the soft-drink industry, but not all developments pay
off. Coca-Cola Black (a blending of cola and coffee flavors) was launched in 2006 but discontinued
in 2008.
Image courtesy of Barry,
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Seattle-based Jones Soda Co. takes a novel approach to product development. Each winter, the firm
introduces a holiday-themed set of unusual flavors. Jones Soda’s 2006 set focus on the flavors of
Thanksgiving. It contained Green Pea, Sweet Potato, Dinner Roll, Turkey and Gravy, and Antacid sodas.
The flavors of Christmas were the focus of 2007’s set, which included Sugar Plum, Christmas Tree, Egg
Nog, and Christmas Ham. In early 2011, Jones Soda let it customers choose the winter 2011 flavors via a
poll on its website. The winners were Candy Cane, Gingerbread, Pear Tree, and Egg Nog. None of these
holiday flavors are expected to be big hits, of course. The hope is that the buzz that surrounds the unusual
flavors each year will grab customers’ attention and get them to try—and become hooked on—Jones
Soda’s more traditional flavors.
Horizontal Integration: Mergers and Acquisitions
Rather than rely on their own efforts, some firms try to expand their presence in an industry by acquiring
or merging with one of their rivals. This strategic move is known as horizontal integration.
An acquisition takes place when one company purchases another company. Generally, the acquired company is
smaller than the firm that purchases it. A merger joins two companies into one. Mergers typically involve similarly
sized companies. Disney was much bigger than Miramax and Pixar when it joined with these
firms in 1993 and 2006, respectively, thus these two horizontal integration moves are considered to be acquisitions.
Horizontal integration can be attractive for several reasons. In many cases, horizontal integration is aimed
at lowering costs by achieving greater economies of scale. This was the reasoning behind several mergers
of large oil companies, including BP and Amoco in 1998, Exxon and Mobil in 1999, and Chevron and
Texaco in 2001. Oil exploration and refining is expensive. Executives in charge of each of these six
corporations believed that greater efficiency could be achieved by combining forces with a former rival.
Considering horizontal integration alongside Porter’s five forces model highlights that such moves also
reduce the intensity of rivalry in an industry and thereby make the industry more profitable.
Some purchased firms are attractive because they own strategic resources such as valuable brand names.
Acquiring Tasty Baking was appealing to Flowers Foods, for example, because the name Tastykake is well
known for quality in heavily populated areas of the northeastern United States. Some purchased firms
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have market share that is attractive. Part of the motivation behind Southwest Airlines’ purchase of
AirTran was that AirTran had a significant share of the airline business in cities—especially Atlanta, home
of the world’s busiest airport—that Southwest had not yet entered. Rather than build a presence from
nothing in Atlanta, Southwest executives believed that buying a position was prudent.
Horizontal integration can also provide access to new distribution channels. Some observers were puzzled
when Zuffa, the parent company of the Ultimate Fighting Championship (UFC), purchased rival mixed
martial arts (MMA) promotion Strikeforce. UFC had such a dominant position within MMA that
Strikeforce seemed to add very little for Zuffa. Unlike UFC, Strikeforce had gained exposure on network
television through broadcasts on CBS and its partner Showtime. Thus acquiring Strikeforce might help
Zuffa gain mainstream exposure of its product.
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The combination of UFC and Strikeforce into one company may accelerate the growing popularity
of mixed martial arts.
Image courtesy of hydropeek,
Despite the potential benefits of mergers and acquisitions, their financial results often are very
disappointing. One study found that more than 60 percent of mergers and acquisitions erode shareholder
wealth while fewer than one in six increases shareholder wealth.
[3]
Some of these moves struggle because
the cultures of the two companies cannot be meshed. This chapter’s opening vignette suggests that Disney
and Pixar may be experiencing this problem. Other acquisitions fail because the buyer pays more for a
target company than that company is worth and the buyer never earns back the premium it paid.
In the end, between 30 percent and 45 percent of mergers and acquisitions are undone, often at huge
losses.
[4]
For example, Mattel purchased The Learning Company in 1999 for $3.6 billion and sold it a year
later for $430 million—12 percent of the original purchase price. Similarly, Daimler-Benz bought Chrysler
in 1998 for $37 billion. When the acquisition was undone in 2007, Daimler recouped only $1.5 billion
worth of value—a mere 4 percent of what it paid. Thus executives need to be cautious when considering
using horizontal integration.
KEY TAKEAWAYS
x
A concentration strategy involves trying to compete successfully within a single industry.
x
Market penetration, market development, and product development are three methods to grow within
an industry. Mergers and acquisitions are popular moves for executing a concentration strategy, but
executives need to be cautious about horizontal integration because the results are often poor.
EXERCISES
1.
Suppose the president of your college or university decided to merge with or acquire another school.
What schools would be good candidates for this horizontal integration move? Would the move be a
success?
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2.
Given that so many mergers and acquisitions fail, why do you think that executives keep making
horizontal integration moves?
3.
Can you identify a struggling company that could benefit from market penetration, market development,
or product development? What might you advise this company’s executives to do differently?
[1] Ansoff, H. I. 1957. Strategies for diversification. Harvard Business Review, 35(5), 113–124.
[2] Wagenheim, J. 2011, March 12. UFC buys out Strikeforce in another step toward global domination. SI.com.
Retrieved from http://sportsillustrated.cnn.com/2011/writers/jeff_wagenheim/03/12/strikeforcepurchased/index.html
[3] Henry, D. 2002, October 14. Mergers: Why most big deals don’t pay off. Business Week, 60–70.
[4] Hitt, M. A., Harrison, J. S., & Ireland, R. D. 2001. Mergers and acquisitions: A guide to creating value for
stakeholders. New York, NY: Oxford University Press.
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8.2 Vertical Integration Strategies
LEARNING OBJECTIVES
1.
Understand what backward vertical integration is.
2.
Understand what forward vertical integration is.
3.
Be able to provide examples of backward and forward vertical integration.
When pursuing a vertical integration strategy, a firm gets involved in new portions of the value chain
(Figure 8.3 “Vertical Integration at American Apparel”). This approach can be very attractive when a
firm’s suppliers or buyers have too much power over the firm and are becoming increasingly
profitable at the firm’s expense. By entering the domain of a supplier or a buyer, executives can
reduce or eliminate the leverage that the supplier or buyer has over the firm. Considering vertical
integration alongside Porter’s five forces model highlights that such moves can create greater profit
potential. Firms can pursue vertical integration on their own, such as when Apple opened stores
bearing its brand, or through a merger or acquisition, such as when eBay purchased PayPal.
In the late 1800s, Carnegie Steel Company was a pioneer in the use of vertical integration. The firm
controlled the iron mines that provided the key ingredient in steel, the coal mines that provided the
fuel for steelmaking, the railroads that transported raw material to steel mills, and the steel mills
themselves. Having control over all elements of the production process ensured the stability and
quality of key inputs. By using vertical integration, Carnegie Steel achieved levels of efficiency never
before seen in the steel industry.
Figure 8.3 Vertical Integration at A …
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