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1 Asst Prof. Dr. Songporn Hansanti Topic 7 Strategy Formulation.

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1 1 Asst Prof. Dr. Songporn Hansanti Topic 7 Strategy Formulation

2 Making Diversification Work What businesses should a corporation compete in? How should these businesses be managed to jointly create more value than if they were freestanging unit? 2

3 Making Diversification Work Diversification initiatives must create value for shareholders –Mergers and acquisitions –Strategic alliances –Joint ventures –Internal development Diversification should create synergy Business 1 Business 2 3

4 Synergy Related businesses (horizontal relationships) –Sharing tangible resources –Sharing intangible resources Unrelated businesses (hierarchical relationships) –Value creation derives from corporate office –Leveraging support activities 4

5 Related Diversification: Economies of Scope and Revenue Enhancement Economies of scope –Cost savings from leveraging core competencies or sharing related activities among businesses in the corporation –Leverage or reuse key resources Favorable reputation Expert staff Management skills Efficient purchasing operations Existing manufacturing facilities 5

6 Leveraging Core Competencies Core competencies –The glue that binds existing businesses together –Engine that fuels new business growth –Collective learning in a firm –How to coordinate diverse production skills –How to integrate multiple streams of technologies –How to market diverse products and services

7 Three Criteria of Core Competencies Three criteria (of core competencies) that lead to the creation of value and synergy –Different businesses in the firm must be similar in at least one important way related to the core competence –Not essential that products or services themselves be similar –Is essential that one or more elements in the value chain require similar essential skills –Brand image is an example

8 Sharing Activities Corporations can also achieve synergy by sharing tangible and value-creating activities across their business units –Common manufacturing facilities –Distribution channels –Sales forces Sharing activities provide two payoffs –Cost savings –Revenue enhancements

9 Related Diversification: Market Power Two principal means to achieve synergy through market power –Pooled negotiating power –Vertical integration Government regulations may restrict this power

10 Pooled Negotiating Power Similar businesses working together can have stronger bargaining position relative to –Suppliers –Customers –Competitors Abuse of bargaining power may affect relationships with customers, suppliers and competitors

11 Vertical Integration In making decisions associated with vertical integration, six issues should be considered: 1.Are we satisfied with the quality of the value that our present suppliers and distributors are providing? 2.Are there activities in our industry value chain presently being outsourced or performed independently by others that are a viable source of future profits? 3.Is there a high level of stability in the demand for the organization’s products? 4.How high is the proportion of additional production capacity actually absorbed by existing products or by the prospects of new and similar products?

12 Vertical Integration (cont.) In making decisions associated with vertical integration, six issues should be considered: 5.Do we have the necessary competencies to execute the vertical integration strategies? 6.Will the vertical integration initiative have potential negative impacts on our stakeholders?

13 Unrelated Diversification: Financial Synergies and Parenting Most benefits from unrelated diversification are gained from vertical (hierarchical) relationships –Parenting and restructuring of businesses –Allocate resources to optimize –Profitability –Cash flow –Growth –Appropriate human resources practices –Financial controls

14 Example General Electric’s products and services include: –Appliances –Aviation –Consumer Electronics –Electrical Distribution –Energy –Finance – Business; Consumer –Healthcare –Lighting –Media & Entertainment –Oil & Gas –Plastics –Rail –Security –Water Source:

15 Corporate Parenting & Restructuring Corporate Parenting –Parenting—creating value within business units Experience of the corporate office Support of the corporate office Corporate Restructuring –Find poorly performing firms With unrealized potential On threshold of significant positive change

16 Corporate Restructuring (Cont.) Corporate management must –Have insight to detect undervalued companies or businesses with high potential for transformation –Have requisite skills and resources to turn the businesses around Restructuring can involve changes in –Assets –Capital structure –Management

17 Portfolio Management Key Each circle represents one of the firm’s business units Size of circle represents the relative size of the business unit in terms of revenue

18 Portfolio Management (Cont.) Creation of synergies and shareholder value by portfolio management and the corporate office –Allocate resources (cash cows to stars and some question marks) –Expertise of corporate office in locating attractive firms to acquire Creation of synergies and shareholder value by portfolio management and the corporate office –Provide financial resources to business units on favorable terms reflecting the corporation’s overall ability to raise funds –Provide high quality review and coaching for units –Provide a basis for developing strategic goals and reward/evaluation systems

19 Means to Achieve Diversification Acquisitions or mergers Pooling resources of other companies with a firm’s own resource base –Joint venture –Strategic alliance Internal development –New products –New markets –New technology

20 20 Business Strategy Focuses on improving competitive position of company’s products or services within the specific industry or market segment Business Strategy

21 21 Porter’s Competitive Strategies Competitive Strategy -- Low cost Differentiation Direct competition Focus on niche

22 22 Porter’s Competitive Strategies Generic Competitive Strategies -- Lower Cost strategy Greater efficiencies than competitors Differentiation strategy Unique/superior value, quality, features, service

23 23 Porter’s Competitive Strategies Competitive Advantage -- Determined by Competitive Scope Breadth of the target market

24 24 Porter’s Competitive Strategies Cost Leadership -- Low-cost competitive strategy Broad mass market Efficient-scale facilities Cost reductions Cost minimization

25 25 Porter’s Competitive Strategies Differentiation – Broad mass market Unique product/service Premiums charged Less price sensitivity

26 26 Porter’s Competitive Strategies Cost-Focus – Low-cost competitive strategy Focus on market segment Niche focused Cost advantage in market segment

27 27 Cooperative Strategies

28 28 Benefits of Strategic Alliances Potential Benefits of Strategic Alliances Ease of Market Entry Shared Risk Shared Knowledge and Expertise Synergy and Competitive Advantage

29 29 Scope of Strategic Alliances Significant variation –Comprehensive alliance –Narrowly defined alliance Degree of collaboration depends upon basic goals of each partner

30 30 Types of Alliances Comprehensive Functional –Production –Marketing –Financial –Research and Development

31 31 Implementation of Strategic Alliances Selection of partners Compatibility Nature of potential partner’s products or services Relative safeness of the alliance Learning potential of the alliance

32 32 Joint Management Considerations Shared management agreements Assigned arrangements Delegated arrangements

33 33 Shared Management Agreement Partner 1Partner 2 Alliance Both partners participate actively

34 34 Assigned Arrangement Partner 1Partner 2 Alliance One partner takes primary responsibility

35 35 Delegated Arrangement Partner 1Partner 2 Joint Venture Both partners delegate management to the joint venture’s executives

36 36 Pitfalls of Strategic Alliances Pitfalls of Strategic Alliances Incompatibility of partners Access to Information Distribution of Earnings Loss of Autonomy Changing Circum- stances

37 37 Beijing Jeep – A joint venture between American Motors Company (part of Daimler Chrysler) and Beijing Auto Works

38 38 Merger & Acquisition (M&A) 1.Technological change 2.Efficiency of operations 3.Globalization and freer trade 4.Changes in industry organization 5.New industries 6.Deregulation and regulation

39 39 เป็นการรวมที่ไม่จำเป็นต้องตั้งบริษัทใหม่ ซึ่งการ รวมกันจะเป็นตกลงกันว่าจะเลิกบริษัทใด แล้วแต่จะตก ลงกัน เช่น บริษัท สปามหาวินาศ และ บริษัท สปาเทวา บรรลัย ต่างประกอบกิจการ ได้รวมกิจการเข้าด้วยกัน เหลือเพียง บริษัท สปามหาวินาศ เพียงบริษัทเดียว ซึ่งการรวมแบบนี้อาจจะเรียกได้ว่า Acquisition ซึ่งเป็น การซื้อกิจการของบริษัทอื่น อาจซื้อเพียงทรัพย์สิน หรือทั้งทรัพย์สินและหนี้สิน ( โอนกิจการ ) หรืออาจเป็นเข้าไปซื้อหุ้นเพื่อให้เพียงพอกับการเข้าไป ได้บริหารกิจการ (Take Over) Merger

40 40 Merger เป็นการรวมที่ไม่จำเป็นต้องตั้งบริษัทใหม่ ซึ่ง การรวมกันจะเป็นตกลงกันว่าจะเลิกบริษัทใด แล้วแต่จะตกลงกัน เช่น บริษัท สปามหาวินาศ และ บริษัท สปาเท วาบรรลัย ต่างประกอบกิจการ ได้รวมกิจการเข้า ด้วยกัน เหลือเพียง บริษัท สปามหาวินาศ เพียง บริษัทเดียว ซึ่งการรวมแบบนี้อาจจะเรียกได้ว่า Acquisition ซึ่งเป็นการซื้อกิจการของบริษัทอื่น อาจซื้อเพียงทรัพย์สิน หรือทั้งทรัพย์สินและ หนี้สิน ( โอนกิจการ ) หรืออาจเป็นเข้าไปซื้อหุ้นเพื่อให้เพียงพอกับการ เข้าไปได้บริหารกิจการ (Take Over)

41 41 Consolidation or Amalgamation คือการรวมกิจการที่ตั้งบริษัทใหม่ และยกเลิก บริษัทเดิม บริษัทใหม่นี้ต้องเป็นชื่อใหม่ มีการออกหุ้นใหม่ ผู้ถือหุ้นของบริษัทเดิมจะได้รับหุ้นสามัญของ บริษัทใหม่แทนของบริษัทเดิม เช่น บริษัท สูดดมอ๊อกซิไดซ์ และ บริษัท เป่า และดม ต่างประกอบกิจการผลิตยาดม ได้รวม กิจการเข้าด้วยกัน และจดทะเบียนใหม่ชื่อ บริษัท สูดเป่าและดม

42 42 M&A Terminology Merger –Negotiated deals –Mutuality of negotiations –Mostly friendly Restructuring — changes to improve operations, policies, and strategies

43 43 Types of Mergers Horizontal mergers –Between firms in same business activity –Rationale Economies of scale and scope Synergies (ex. combining of best practices) –Government regulation due to potential anticompetitive effects Vertical mergers –Combinations between firms at different stages –Goal is information and transaction efficiency

44 44 M&A

45 45 M&A Strategy Defines the long-term plans, policies and culture of an organization Strategic planning is a dynamic process that requires inputs from all segments of the organization Acquisition and restructuring policies and decisions should be part of the company's overall strategic plans and processes Ultimate responsibility for strategic planning resides in the top executive group

46 46 Alternative Strategy Methodologies SWOT or WOTS UP – inventory and analysis of organizational strengths, weaknesses, environmental opportunities and threats Top-down or Bottom-up – relate to company forecasts vs. aggregation segment forecasts Computer models – allow detail and complexity Logical incrementalism – well-supported moves from current bases Comparative histories – learn from the experiences of others

47 47 Alternative Analytical Frameworks Product life cycle – introduction, growth, maturity, decline stages with changing opportunities, threats Learning curve – costs decline with cumulative volume experience (first mover advantage) Competitive analysis – industry, suppliers, customers, complemetors, etc. Value chain analysis – seek to add product characteristics valued by customers Cost leadership – low-cost advantages

48 48 Strategy Formulation Approaches Boston Consulting Group Approach –Historical emphasis: experience curve, product life cycle, product portfolio balance –Recent approaches Impact of the Internet and other innovations Performance measurements - cash flow return on investment (CFROI) Michael Porter Approach (1980, 1985, 1987) –Select attractive industry using “Five Forces” –Develop competitive advantage through cost leadership, product differentiation, or focus –Develop attractive value chains

49 49 Formulating a Merger Strategy Requires continuing reassessment –Industry analysis –Competitor analysis –Supplier analysis –Customer analysis –Substitute products –Complementors –Technology changes –Societal factors –Firm's strengths/weaknesses relative to present/future industry conditions

50 50 Formulating a Merger Strategy Grove (1996) –Firm must adjust to six forces Existing competitors Potential competitors Complementors Customers Suppliers Industry transformation –Eclectic adaptive processes approach to strategy

51 51 Formulating a Merger Strategy Business goals - general or specific, but must be quantifiable to facilitate progress assessment –Size objectives Large enough to use fixed factors effectively Critical mass necessary to attain cost levels for profitable operation at market prices –Growth objectives - sales, assets, EPS, values To get favorable P/E multiple for shares To increase market to book value of shares

52 52 Formulating a Merger Strategy Business goals –Stability objectives - two kinds of instability Large erratic fluctuations in total size and abrupt program shifts (e.g., defense industry) Cyclical instability of durable goods industries –Flexibility objectives - ability to operate in variety of product markets and responsive to consumers Breadth of capabilities, e.g., research, manufacturing, marketing Technological breadth Stay close to customers

53 53 Formulating a Merger Strategy Aligning firm to changing environments –Gap between objectives and potential based on current capabilities –Various approaches: Choose products related to needs of customer that provide large markets Focus on technological bottlenecks Be at frontier of technology and aim for attractive product fallout Emphasize economic criteria – ex. value

54 54 Formulating a Merger Strategy Strategic planning and mergers –Diversification strategy may be necessary if firm must alter product- market mix or capabilities to reduce or close strategic gap –Both involve evaluation of current capabilities relative to those needed to reach objectives –Related diversification involves lower risks

55 55 Trends of Strategic Alliances in US ExxonMobil = Exxon + Mobil Oil Hewlett-Packard ; with Compaq Procter & Gamble buy Gillette Adidas-Salomon acquire Reebok Siemens; with Nokia The Walt Disney Company acquiring Pixar Google buys Youtube Warner Bros. Entertainment & CBS Corporation = The CW Television Network

56 56 EU DaimlerChrysler = Daimler Benz + Chrysler BP with Amoco Alcatel + Lucent Technologies = Alcatel- Lucent Air France + KLM Royal Dutch Airlines = Air France-KLM Lufthansa and SWISS

57 57 Japan Mitsubishi UFJ Financial Group Konica Minolta = Konica + Minolta SoftBank acquiring Vodafone Japan Sumitomo Mitsui Banking Corporation = Sumitomo Bank + Sakura Bank

58 58 Thailand EGV + Major = EGV-Major Cineplex Bilsstel + TG Fone LoxInfo + CS = CSLoxInfo GMM + True TMB + IFCT + DTDB

59 59 Functional Strategy The approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity Functional Strategy

60 60 Functional Strategy Marketing Strategy – –Pricing –Selling –Distribution

61 61 Functional Strategy Marketing Strategy – –Product development Line extension

62 62 Functional Strategy Marketing Strategy – –Advertising and promotion Push strategy Pull strategy

63 63 Functional Strategy Marketing Strategy – –Pricing Skim pricing Penetration pricing Dynamic pricing

64 64 Functional Strategy Financial Strategy – –Leveraged buyout –Reversed stock split –Tracking stock

65 65 Functional Strategy R&D Strategy – –Technological leader –Technological follower –Open innovation

66 66 Functional Strategy Operations Strategy – –Job shop –Connected line batch flow –Flexible manufacturing systems –Dedicated transfer lines –Mass production –Continuous improvement system –Modular manufacturing

67 67 Functional Strategy Purchasing Strategy – –Multiple sourcing –Sole sourcing –Just-in-time (JIT) –Parallel sourcing

68 68 Functional Strategy Logistics Strategy – –Centralization –Outsourcing –Internet

69 69 Functional Strategy HRM Strategy – –360 degree appraisal

70 70 Functional Strategy Outsourcing errors – –Activities that should not be outsourced –Wrong vendor selection –Writing poor contract –Overlooking personnel issues –Hidden costs of outsourcing –Failing to plan exit strategy

71 71 Proposed Outsourcing Matrix

72 72 Functional Strategy Strategies to Avoid – –3 Follow the leader –Hit another home run –Arms race –Do everything –Losing hand

73 73 Functional Strategy Subjective Factors Affecting Decisions -- –Management’s attitude toward risk –Pressures from stakeholders –Pressures from corporate culture –Needs and desires of key managers

74 74 Strategic Choice Avoiding the Consensus Trap -- –Devil’s Advocate –Dialectical Inquiry

75 75 Strategic Choice Evaluation of Strategic Alternatives -- –Mutual exclusivity –Success –Completeness –Internal consistency


ดาวน์โหลด ppt 1 Asst Prof. Dr. Songporn Hansanti Topic 7 Strategy Formulation.

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