Key Concepts of Strategic Management

Steven Tam, PhD

Corporate-Level Strategy
Please also read Ch.6, Ch.7 and Ch.8 of textbook

Overview
Corporate level strategy is

Creating more values through

expansion (diversification) into more
forms of businesses
Seeking more competitive advantages
through the selection and management
of such mix of businesses

C-level Idea
Single Business

Focuses distinctive competencies on
competing successfully in just one
area

Sticks to doing what we know best

C-level Idea - Growth via Corporate Management

Operating across countries

(international scope)
Operating across activities
(vertical scope)
Operating across industries
(product scope)

TIPS: Managing linkages among businesses by sharing

and transferring common resources and capabilities

Vertical Integration
Definition

A firms ownership of vertically
related activities

A company is producing its own
inputs and/or is disposing of its own
outputs

An extension in supply chain
activities
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Vertical Integration
Polypropylene
Fiber Production

Raw Materials

Carpet Manufacturing

Manufacturing of final product

Backward Integration

Retail Stores

Distribution

Forward Integration

Vertical Integration
Motives to integrate

Building barriers to entry

Facilitating investments in
specialized assets
Protecting product quality
Improving scheduling

Vertical Integration
Benefits

Risks

Secures a source of raw materials

or distribution channels

Inflated costs associated with increased

overhead and capital expenditures in
more complex activity chain

Protection and control over valuable

assets and knowledge

Loss of flexibility resulting from large

investments incurred

Simplified procurement and

administrative procedures
Access to new business
opportunities

Ways of Vertical Integration

Recent trends include

Outsourcing


Pay to subcontract others for certain

business activities

Cooperative relationship


Long-term contractual relationship to

handle certain business activities

Diversification
Definition

Entering into new businesses

Related diversification

Operate related businesses in different industries or

markets at the same time

e.g. Disney  Theme Park  Movie/TV  Licensing  Retail

Vertical Integration is also an example

Unrelated diversification


Operate in clearly unrelated industries and markets

e.g. General Electric  Lightings  NBC  Medical products 

Semiconductors

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Unrelated diversification more examples

Swire






Property
Aviation
Beverages
Trading
Marine Services

MTR (Public transport + Real estate)

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Unrelated diversification more examples

Cheung Kong/Hutchison Whampoa









Property development/Construction
Ports
Telecoms
Hotels & Leisure
IT/Internet Business
Energy
etc.

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Values of Diversification
Related diversification creates
values through

Economies of Scope and Revenue Enhancement




Leveraging core competencies (Efficiency)

Sharing activities & resources (Cost savings)

Market Power



Vertical integration (Well-connected infrastructure)

Pooled Negotiating Power (One-stop services capability)

Reduce risk?

Intended

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Values of Diversification
Unrelated diversification creates
values through

Corporate Parenting

Corporate Restructuring




Reuse of advantageous management expertise

Use of acquisition strategy into unrelated areas fast and direct

Balancing of internal performance on various units/products for
growth (Portfolio Management)

Reduce risk?

Not really

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Portfolio Management Boston Consulting Group (BCG) Matrix

HIGH

Key
Each circle
represents one of
the firms business
units carrying own
product(s) or
service(s)
Size of circle
represents the
relative size of the
business unit in
terms of revenue

LOW

HIGH

LOW

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BCG Matrix

STARS



Potentially highly profitable

Require large investment for development and/or promotion





Also require large investment but in a low-share market segment

May exist for preventing competitors from entering the segment
Can turn to be Stars or Dogs

CASH COWS





Result in large market share and likely into Cash Cows as intended

QUESTION MARKS

Form the basis of the firms profits and sales

The firm continues to invest enough in them to retain market share
Help finance the developments of Stars and Question Marks
If not managed properly, they risk becoming Dogs

DOGS




Heavy users of corporate resources but remain unprofitable

May be eliminated unless there is a chance of making them profitable
May be held for strategic reasons such as to maintain market share against competitor
penetration

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Limits of Diversification

Considerable costs from the

number of businesses
Potentially less-efficient
coordinations among businesses

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Choices of Diversification
Go for related
diversification
when
1. Core skills are
widely
applicable
2. You want to
balance
business risks

1.

2.

Go for unrelated
diversification
when
Many core skills are
specialized
Resources and costs of
restructuring are
justified for making a
successful new
business
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The Means to achieve Diversification

Mergers and acquisitions

 Buying a controlling interest in another firm
Strategic alliances
 Joint effort to serve a common business
Joint ventures
 Firms combining parts of their assets to create an
independent company
Internal development
 Making new effort for a new business (i.e. a new
market, or a new product, etc.) within self

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