Read this article to learn about the strategies of a firm at the corporate level.
Regardless of the corporate profile, a business may choose to be involved only in its domestic market, or it may compete abroad at one of three levels international, multinational, or global. Effective operation at any of these levels often but not always-necessitates economies of scale ant a relatively high market share.
Moving outside the domestic market, some companies choose to be involved on an international basis by operating in various countries but limiting their involvement to importing, exporting, licensing, or making strategic alliances. Exporting alone can sign significantly benefit even a small company? However, international joint ventures- a form of strategic alliance involving cooperative arrangements between businesses across borders-may be desirable even when resources for a direct investment are available.
For example, in 2001, GM launched a $333 million joint venture with Russian firm OAO Avtovaz. GM provides technological support to the struggling holdover from Soviet-era industry to engineer a stripped-down version of an SUV currently offered by the Avtovaz. The vehicle will be offered for about $7,500. By engaging in the joint venture, GM gains immediate access to the market but places its reputation on the line by putting its “Chevy” name on a vehicle produced by a technologically weak automobile producer.
Firms with global objectives may decide to invest directly in facilities abroad. Due to the complexities associated with establishing operations across borders, however, strategic alliances may be particularly attractive to firms seeking to expand their global involvement. Companies often possess market, regulatory, and other knowledge about their domestic markets but may need to “partner” with companies abroad to gain access to this knowledge as it pertains to international markets. A number of international strategic alliances can be seen among, automobile producers- for example, production facilities owned jointly by General Motors and Toyota.
International strategic alliances provide a number of advantages to a firm. They can provide entry into a global market, access to the partner’s knowledge about the foreign market and risk sharing with the partner firm. They can work effectively when partners can learn from each other, when neither partner is large enough to function alone and when both partners share common strategic goals but are not in direct competition. However, a number of problems can arise from International joint ventures, including disputes and lack of trust over proprietary knowledge, cultural differences between firms, and disputes over ways to share the costs and revenues associated with the partnership.
Other conservative options are also available to a firm seeking an international presence. Under an international licensing agreement, a foreign licensee purchases the rights to produce a company’s products and/or use its technology in the licensee’s country for a negotiated fee structure. This arrangement is common among pharmaceutical firms. Drug producers in one nation typically allow producers in other nation to produce and market their products abroad.
International franchising is a longer-term form of licensing in which a local franchisee pays a franchise in another country for the right to use the franchiser’s brand names, promotions, materials, and procedures. Whereas licensing is predominantly pursued by manufacturers, franchising is more commonly employed in service industries, such as fast-food restaurants.
Other companies are involved at the multinational level, where firms direct investments in other countries, and their subsidiaries operate independently of one another. Colgate-Palmolive has attained a large worldwide market share through its decentralized operations in a number of foreign markets.
Finally, some firms are globally involved, with direct investments and interdependent subdivisions abroad. For example, some of Caterpillar’s subsidiaries produce components in different countries, while other subsidiaries assemble these components, and still other units sell the finished products. As a result, Caterpillar as achieved a lower position by producing its own heavy components for its large global market. If its various subsidiaries operated independently and produced only for their individual regional markets, Caterpillar would be unable to realize these vast economies of scale.
Firms change from domestic-oriented strategies global orientation for numerous reasons. Pursuing global markets can reduce per unit production costs by increasing volume. A global strategy- can extend the product life cycle of products whose domestic markets may be declining, as U.S. cigarette manufacturers did in the 1990s. Establishing facilities abroad can also help a firm benefit from comparative advantage, the difference in resources among nations that provide cost advantages for the production of some but not all goods in a given country. For example, athletic shoes tend to be produced most efficiently in parts of Asia where rubber is plentiful and labor is less costly. A global orientation can also lessen risk because demand and competitive factors tend to vary among nations.
There are a number of factors to consider, however:
1. Are customer needs abroad similar to those in the firm’s domestic market? If so, the firm may be able to develop economies of scale by producing a higher volume of the same good or service for both markets.
2. Are differences in transportation and other costs abroad favorable and conducive to producing goods and services abroad? Are these differences favorable and conducive to exporting or importing goods from one country to another?
3. Are the firm’s customers or partners already involved in global business? If so, the firm may need to become equally involved.
4. Will distributing goods and services abroad be difficult? If competitors already control distribution channels in another country, expansion into that country will be difficult.
5. Will government trade policies facilitate or hinder global “expansion? For example, NAFTA facilities trade among firms in the United States, Canada, and Mexico. Similar trading blocks, such as the European Economic Union (EEU), occur in other parts of the world.
6. Will managers in one country be able to learn from managers in other countries? If so, global expansion may improve efficiency and effectiveness, both abroad and in the host country.
Corporate growth is often pursued through expansion into emerging economies, those nations that have achieved enough development to warrant expansion but whose markets are not yet fully served. Although emerging economies such as China, South Africa, Mexico, and parts of Eastern Europe are attractive in many respects, poor infrastructure (e.g., telecommunications, highways, etc.), cumbersome government regulations, and/or a poorly trained workforce can create great challenges for the firm considering expansion. The advantages and disadvantages of growth through global expansion should be considered carefully before pursuing expansion into an emerging market.
1. Growth Strategies:
The growth strategy seeks to significantly increase a firm’s revenues or market share. Many top executives believe that growth is the only strategy for a healthy firm. However, a firm should adopt a growth strategy only if that growth is expected to result in an increase in firm value. Growth may be attained in a variety of ways.
Internal growth is accomplished when a firm increases revenues, production capacity, and its workforce, whereas external growth is accomplished when other firms are acquired. Although internal growth enables the firm to preserve its corporate culture and image while expanding at a more controlled pace, external growth can enable, the firm to grow more expediently. Internal growth can occur by growing an existing business or creating new ones.
i. Horizontal (Related) Integration:
A firm that acquires other companies in the same line of business is engaging in a process called horizontal integration. Doing so allows a firm operating in a single industry to grow rapidly without moving into other industries. Hence, the primary impetus for such a strategy is a desire for increased market share. Such growth can create scale economies for the firm, increase its negotiating leverage with suppliers, and enable the firm to promote its goods and services to a large audience more efficiently and effectively.
ii. Horizontal Related Diversification:
A firm is engaging in horizontal related diversification when it acquires a business outside its present scope of operation, but with similar or related core competencies, the firm’s key capabilities and collective learning skills that are fundamental to its strategy, performance, and long-term profitability. The purpose of horizontal related diversification is to create synergy by transferring and /or sharing the capabilities among the various business units. For example, in the 1990s and early 2000s, a number of banks consolidated to gain economies of scale.
Ideally, core competencies should provide access) a wide array of markets, contributes directly to the goods and services being produced, and is difficult to imitate. When a firm lacks one or more key core competencies and acquires a business unit that possesses them, these two firms ma combine complementary core competencies. For example, when a traditional retailer with a quality reputation acquires an e-tailer with a strong Internet presence and Web savvy, the idea is to combine the two capabilities so that the newly created firm can enjoy the best of both competencies.
Synergy occurs when the combination of two organizations results in higher effectiveness and efficiency than would otherwise be generated by them separately. Opportunities for synergy are not always easy to identify. Synergy may occur when there are similarities in product or service lines, relationships in the distribution channels, or complementary managerial or technical expertise across business units.
iii. Conglomerate (Unrelated) Diversification:
When a corporation acquires a business in an unrelated industry to reduce cyclical fluctuations in cash flows or revenues, it is pursuing conglomerate (unrelated) diversification. Whereas diversifying into related industries is pursued for strategic reasons, diversifying into unrelated industries is primarily financially driven. Conglomerate diversification allows a firm to continue to grow even when its core business has matured. However, firm managers often lack the expertise required to manage a myriad of unrelated businesses.
iv. Vertical Integration:
Vertical integration refers to merging various stages of activities in the distribution channel. Firms in some industries tend to be mere vertically integrated than those in other industries, although variations can exist among similar firms. Full integration occurs when a firm performs all activities ranging from the procurement of raw materials to the production of final outputs, whereas firms that engage in some but not all of these activities are only partially integrated. When a firm acquires its suppliers (i.e., expanding “upstream’), it is engaging in backward integration, whereas a firm acquiring its buyer’s (i.e., expanding “downstream”) is engaging in forward integration.
Vertically integrated firms enjoy a number of advantages. Vertical integration can reduce transportation costs, provide more opportunities to differentiate products because of the increased control over inputs, and provide access to distribution channels that would not otherwise be accessible to the firm. Transactions costs between suppliers and buyers may be reduced when the same firm owns both entities.
Proprietary technology can be more easily secured when information is shared among businesses owned by the same parent firm. It is often possible to reduce costs by coordinating distribution activities among the business units. It is also easier to develop and maintain high quality when a single firm controls all the businesses associated with the production of a good or service.
Vertical integration also has its disadvantages. It can reduce operational flexibility because the firm is heavily invested “upstream and downstream.” Vertical integration can even raise production costs and reduce efficiency because of the lack of supplier competition; Overhead costs may increase as the need and ability to coordinate activities among business units increase because producers within a vertically integrated firm are committed to working with suppliers owned by the same firm, it will be forced to pay higher prices for its inputs if its suppliers are not technologically competitive.
A merger occurs when two or more firms, usually of roughly similar sizes, combine into one through an exchange of stock. Mergers are generally undertaken to share or transfer resources and/or improve competitiveness by developing synergy. An acquisition is a form of a merger whereby one firm purchases another, often with a combination of cash and stock. Firms with large, successful businesses often acquire smaller competitions with different or complementary product or service lines, For example, Wendy’s acquired the Mexican quick-casual chain Baja Fresh in 2001 and grew the chain to include almost 200 eateries in the United States by 2003.
The attractiveness of mergers and acquisitions seems intuitively obvious: Two firms join forces and the combined organization possesses all the strengths of the individual firms. Indeed, when two firms possess complementary resources and cooperate in a friendly acquisition or merger, the results can be positive.
There are a number of shortcomings associated with mergers and acquisitions, however. In an acquisition, the acquiring firm typically must pay a premium (i.e., an amount greater than the current share price) to obtain the firm, a process that leads to increased debt and legal fees. In addition, top managers in the acquired firm often depart the organization. Those remaining must attempt to build synergy from two distinct ways of thinking (i.e., culture), a process that can be difficult amidst the rumors or layoffs and restructuring that often accompany the deal.
vi. Strategic Alliances (Partnerships):
Strategic alliances-often called partnerships-occur when two or more firms agree to share the costs, risks, and benefits associated with pursuing new business opportunities. Such arrangements include joint ventures, franchise / license agreements, joint operations, joint long-term supplier agreements, marketing agreements, and consortiums. Strategic alliances can be temporary; disbanding after the project is finished, or can involve multiple projects over an extended period of time. The late 1990s and early 2000s witnessed a sharp increase in strategic alliances.
Although many strategic alliances may be undertaken for political, economic, or technological reasons, others may be pursued as-a alternative to diversification. In this context, a firm may opt to work closely with other firms to pursue various business opportunities instead of attempting to purchase the firms outright. Another key reason is the generation of greater customer value through synergy.
A particular project may be so large that it could strain a single company’s resources or require complex technology that no single firm possesses. Hence, firms with complementary technologies may combine forces, or one firm may contribute its technological expertise while another contributes its managerial or other abilities.
There are many examples of partnerships, especially where technology and global access are key considerations. IBM and Apple Computer have exchanged technology in an attempt to develop more effective Computer operating systems. GM, Ford, and Daimler Chrysler are jointly conducting research to enhance battery technology for electric cars. GM, Lockheed, Southern California Edison, and Pacific Gas & Electric have been working together to develop widely used electric vehicles and advanced mass transportation systems.
Strategic alliances have two major advantages. First, they minimize increases in bureaucratic, developmental, and coordination costs when compared to mergers and acquisitions. Second, each company can share in the benefits of the alliance without bearing all the costs and risks itself. The major disadvantage of a strategic alliance is that one partner in the alliance may offer less value to the project than other partners but may gain a disproportionate amount of critical know-how from the cooperation with its more progressive partners.
2. Stability Strategy:
Although growth is intuitively appealing, it is not always the most effective strategy. The stability strategy for a firm that has operations in multiple industries maintains the current array of businesses for two reasons: First, stability enables the corporation to focus managerial efforts on enhancing existing business units, by fostering productivity and innovation. Second, the cost of adding new businesses may exceed the potential benefits. A corporation may adopt a stability strategy in leaner times and shift to a growth strategy when economic conditions improve. Stability can be an effective strategy for a high performing firm, but it is not necessarily a risk-averse strategy.
For a single industry, the stability strategy is one that maintains approximately the same operation without pursuing significant growth in revenues or in the size of the organization. Growth may occur naturally but is typically limited to the level of industry growth.
Such a business may select stability instead of growth for four reasons:
1. Industry growth is slow or nonexistent. In this situation, one firm’s growth must come at the expense of another firm. This can be particularly costly, especially when attacking an industry leader.
2. Costs associated with growth do not exceed its benefits. During the “cola wars” of the 1980s, PepsiCo and Coca-Cola spent millions to lure consumers to their cola brands only to realize that the costs associated with securing this market share severely dampened profits.
3. Growth may place great constraints on quality and customer service. A number of small companies are known for their personal service and attention to detail. Strategic managers of such firms are understandably hesitant to adopt growth strategies even when financial prospects look promising if they believe that their uniqueness may be lost in the transition.
4. Large, dominant firms may not wish to risk prosecution for monopolistic practices associated with growth. American firms, for example, may be prohibited from acquiring competitors if regulators believe their combined market shares will threaten competitiveness. Even internal growth can be problematic at times was the case in the late 1990s through 2001 with Microsoft’s costly defense against federal charges that the company unfairly, dictated terms in the software industry.
It is interesting to note, however, that declines in demand do not necessarily require a stability strategy for each firm in an industry. To the contrary, business opportunities may be presented when markets shrink. For, example, F3 Fat Free Foods is a New York-based retailer of more than 7,000 food products, most of which are fat-free. In early 2001, most analysts were proclaiming that the fat-free category was past its prime. The urban grocer was experiencing considerable success, however, due in part to the declining attention traditional grocers were paying to a hard-core segment of fat-conscious consumers.
i. Retrenchment Strategies:
Growth strategies and the stability strategy ate generally adopted by firms that are in satisfactory competitive positions. But when performance is disappointing, a retrenchment strategy may be appropriate. Retrenchment may take one of three forms turnaround, divestment, or liquidation. A retrenchment strategy may also combine these forms.
A retrenchment strategy is often accompanied by a reorganization process known as corporate restructuring. Corporate restructuring includes such actions as realigning divisions in the firm, reducing that amount of cash under the discretion of senior executives, and acquiring or divesting business units. Firms that voluntarily restructure when necessary ordinarily do not have to be concerned with hostile takeover bias or externally forced involuntary restructuring. However, firms that do not manage for value may eventually be forced to restructure by outsiders, a process that is usually more costly.
Even well known, leading companies progress through product and economic cycles that require them to restructure on occasion. Fast-food giant McDonald’s, for example, posted a fourth quarter 2002 loss of $344 million, its first in 37 years. The firm responded with a restructuring plan that included fewer new stores, greater product and marketing emphasis on existing outlets, and a number of store closings in 2003 in the United States and Japan, its two largest markets.
A turnaround seeks to transform the corporation into a leaner, more effective firm, and includes such actions as eliminating unprofitable outputs, pruning assets, reducing the size of the workforce, cutting costs of distribution, and reassessing the firm’s product lines and customer groups. Turnarounds are often preceded by changes in the macro environment, Industry structure, or competitive behavior. Broadly speaking, a turnaround is not as drastic a move as restructuring, although the two can work together.
Consider, as an example, what may be the most famous turnaround in U.S. history. By the late 1970s Chrysler was on the verge of bankruptcy. Its newly hired CEO, Lee Iacocca, implemented a dramatic turnaround strategy. A number of employees were laid off, while those remaining agreed to forgo part of their salaries and benefits. Twenty plants were either closed or consolidated. Collectively, actions lowered the firm’s break-even point from an annual sales level in half to about 1.2 million vehicles.
It is interesting to note that Iacocca also implemented a divestment strategy (another form of entrenchment) by selling Chrysler’s marine outboard motor, defense, and air- conditioning divisions, as well as all its automobile manufacturing plants locate (outside the United States. By 1982, Chrysler began to show a profit after having cost $3.5 billion in the preceding four years. Over the subsequent two decades, Chrysler embarked on various forms of growth and stability strategies, and eventually merged with Daimler Benz to form DaimlerChrysler.
When a turnaround involves layoffs, firms must be prepared to address their effects on booth departing employees and survivors employees may be given opportunities to voluntarily leave-generally with an incentive-to make the process as congenial as possible. When this situation occurs, however, those departing are often the top performers who are most marketable, leaving the firm with a less competitive workforce. Of course, when layoffs are simply announced, morale is likely to suffer considerably. For this reason, turnarounds involving layoffs are often more difficult to implement than anticipated.
When layoffs are necessary, however, several actions can help to palliate some of the negative effects. Specifically, top management is encouraged to communicate honestly and effectively with all employees, explaining why the downsizing is necessary and how terminated employees were selected. Everyone, including the “survivors,” should be made aware of how departing employees will be supported.
Employees should also be encouraged to partake of services available to them, and special efforts should be made to ensure that such programs are administered in a clear and consistent manner. Although these measures will not eliminate all the harsh feelings associated with layoffs, they can help keep the process under control.
A number of executives are widely recognized as “turnaround specialists” and may be brought in as temporary CEOs to lead the process and orchestrate such unpopular strategic moves a layoffs, budget cuts, and reorganizations. Robert “Steve” Miller, also a major player in the Chrysler turnaround, has served as CEO of Waste Management and the automobile parts supplier Federal-Mogul, as well as a consultant on turnaround issues to such companies as Aetna. According to Miller, the CEO in a company seeking turnaround should be honest with employees from the outset and seek their input. He or she should also spend time with customers. As Miller put it, “Listen to your customers. They are usually more perceptive than you are about what you need to do with your company.
If it is believed that one or more of the firm’s business units may function more effectively as part of another firm, a divestment strategy may be pursued. Divestment may be necessary where the industry is in decline, or when a business unit drains resources from more profitable units, is not performing well, or is not synergistic with other corporate holdings. In a well-publicized spin-off, PepsiCo divested its KFC, Taco Bell, and Pizza Hut business units into a new company, Tricon Global Restaurants, Inc, in 1997. The spin-off was designed to refocus PepsiCo’s efforts on its beverage and snack food divisions. Tricon’s name was officially changed to Yum Brands in 2002.
Liquidation is the strategy of resort, and terminates the business unit by selling its assets. In effect, liquidation represents a divestment of all the firm’s business units and should be adopted only under extreme conditions. Shareholders and creditors experience financial losses, some of the managers and employees lose their jobs, suppliers lose a customer, and the community suffers an increase in unemployment and a decrease in tax revenues. For this reason, liquidation should be pursued only when other forms of retrenchment are not viable.