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Unformatted text preview: Discussion post 1 The main focus of any corporate-level strategy is on two related issues and it includes in what
business a company should compete and how it can manage them in a synergistic manner for
maximizing the value. According to Dess, Lumpkin, & Eisner, (2010), diversification remains
the key in order to determine in which business a company should get involved and whether they
should rely on their ability to leverage core competence as well as the shared activities in order
to enter in different or unrelated business. Some ways in which a company can achieve
diversification would be through shared activities, vertical integration, restructuring, pooling
negotiation power, franchising, and parenting. The best ways for achieving diversification is
through acquisition and mergers. Another way of doing this is strategic alliance
Also known as the strategic partnership, a strategic alliance can be defined as an agreement
between two or more than two parties to pursue a set of pre-determined and agreed goals that
need to be fulfilled while remaining independent organizations. Although encompassing this
partnership falls short of a legal partnership agency, entity or corporate affiliate relationship. The
two companies form a strategic alliance when each of them has some business assets that may
assist other company in enhancing their business. One of the best examples of the strategic
alliance remains in an outsourcing relationship where both parties aim to achieve long-term
innovative process and win-win benefits for mutually desired outcomes. The strategic alliance
can be placed between the organic growth of a company and acquisitions and mergers. The
partners in this alliance may provide various resources to each other such as distribution
channels, products, project funding, manufacturing capacity, knowledge, intellectual property,
and expertise. One of the best examples of a strategic alliance in 2017 is Indegene and Microsoft.
Dess, G., Lumpkin, G, & Eisner, A. (2010). Strategic management: Creating competitive
Emanuela Todeva, David Knoke. Strategic Alliances & Models of Collaboration. University of
Surrey, Guildford, UK : s.n.
synergy through leveraging core competencies, sharing activities, pooling
negotiation power, vertical integration, parenting, and restructuring. Two common
ways for achieving diversification is through mergers and acquisitions. Dess, Lumpkin and Eisner explain it well when they compare core competencies
with a tree. While the trunk and limbs represent a company’s core products and
the leaves and flowers represent end-products, the core competencies are the
roots of the tree. The roots provide the nourishment for the core and end products
but are not readily visible when looking at the tree as a whole. However, the
roots/core competencies are the glue that holds the business together. For core
competencies to create value for the business, it must meet three criteria:
1. The core competency must enhance the company’s competitive advantage
by creating customer value
2. The different businesses within the corporation must be similar in at least
one way related to the core competencies
3. The core competencies must be difficult to replicate or imitate by
Siemens is an example of a company that has found its core competency in
understanding electrons. A company that built Europe’s first long distance
telegraph lines, it has grown to find uses for electrons across different sectors: the
industry sector (lighting, automation, systems integration) the energy sector
(power generation and transmission) and the health care sector
(imaging/diagnostic devices) (Raghavan, 2009).
Other than through core competencies, corporations can also achieve synergy
across their business units by sharing activities. Examples of shared activities are
facilities, distribution channels, and sales forces. Typically, the benefits for such a
decision would be derived cost savings as well as enhanced revenue and
differentiation. However, the text by Dess, Lumpkin and Eisner warn that these
managers must be cautious when considering shared activities. The example given
is related to cars and the customer perceptions of quality and prestige of the
Mercedes car company because they feel that common production components and
processes were being used across two car divisions (Mercedes and Chrysler).
Another way to create value through diversification is through market power.
Managers can leverage market power through pooled negotiating power as well as
vertical integration. Companies that benefit from having a strong parent company
can use it to strengthen a bargaining position with suppliers and customers. They
can also use their strong parent company’s budget to help fund additional projects
or advertising campaigns with the newly acquired business partners. Vertical
integration has become one way to expand a firm by either integrating forward and
back the supply chain. Shaw Industries has successfully integrated both forward
and back by acquiring a fiber manufacturing facilities in the US for internal use
and sales to other manufacturing, as well as retailers that sell their products (Dess,
Lumpkin, & Eisner, 2010).
There are a number of benefits and risks associated with vertical integration.
Some of the benefits are that companies can secure supply of raw materials or
distribution channels that may have fluctuating costs over time, procurement and administrative processes are simplified when companies do not have to work with
as many suppliers or distributors, as well as companies can gain access to new
business opportunities and technologies. The risks are that the costs associated
with overhead, expenditures, and administration and a loss in flexibility due to the
large investment made into vertical integration activities. Dess, Lumpkin, and
Eisner (2010, p. 207 – 208) suggest five key issues to consider when making
vertical integration decisions:
1. Is the company satisfied with the quality of the value that its present
suppliers/distributors are providing?
2. Are their activities in the industry value chain that are presently being
outsourced that may be a viable source of future profits?
3. Is there a high level of industry stability in demand for the organization’s
4. Does the company have the necessary competencies to execute the vertical
5. Will the vertical integration initiative have potential negative impacts on the
Simonet (2007) argues that the pharmaceutical industry tried to take advantage of
downstream vertical integration in order to facilitate access to both knowledge and
information about customers and doctors, which can in turn, lead to more
purposeful researching in the future and strong future market positioning. He
also argues that downstream vertical integration in the pharmaceutical industry
will the participating companies acquire a competitive advantage through easier
and earlier access to their target markets, such as HMOs. As Porter states it
(2008), one source of a barrier to entry is unequal access to distribution channels.
By downstream vertically integrating, pharmaceutical companies are making it
hard for new competition to enter the industry by controlling some of the
With unrelated diversification, the benefits are reaped from vertical or hierarchical
relationships. Vertical relationships create synergy through the interaction of the
corporate office with the individual business units. Typically, the sources of this
synergy come from parenting and restructuring (asset, capital and management)
as well as when managers view the company as a portfolio of businesses and
allocate resources in order to capitalize on the corporate goals as well as growth
and cash flow.
A commonly used portfolio management tool is the portfolio matrix created by The
Boston Consulting Group. This matrix uses a two by two grid to create four
quadrants, each meaning a different implication for the strategic business units.
The four quadrants are: stars, question marks, cash cows and dogs. The goal of
using portfolio strategy approaches is to create shareholder value through
understanding the business and the business’ position in order to better allocate resources. However, like with all strategies, there are limitations. The portfolio
matrix only analyzes the strategic business units on two dimensions. This can
cause future problems if managers rely too heavily on the graphical representation
and only stick to strict rules regarding resource allocation. While Eisenhardt and
Sull (2001) believe that a business can benefit from simple rules, they explained
that some strategies become stale. Managers, if using the portfolio matrix, will
need to review their allocation rules to make sure that they do not hinder future
Some corporations may also choose to diversify through strategic alliances and
joint ventures. These strategies are advantageous for entering new markets,
reducing costs along the value chain and developing new technologies (Dess,
Lumpkin & Eisner, 2010). But managers must be cautious. There are numerous
studies that have shown that a majority of alliances fail – demonstrating that they
did not meet the goals of the parent companies or deliver strategic benefits. (Kale
& Singh, 2009). Alliances and joint ventures rely heavily on communication and
trust between partners as well as both parties feeling like the partnership is a winwin situation. Kale and Singh (2009) affirm that the success of any single alliance
depends on key factors that occur at different alliance evolution stages: the
formation phase, the design phase, and the post-formation phase. During the
formation stage, the key drivers are that the partners must be complementary,
committed and compatible. During the design phase, the key drivers are equity
ownership to determine share returns and hierarchical supervision, contractual
provisions to determine rights, IP protection, obligations, and alliance governance.
The post-formation key drivers are managing coordination between the partners
and developing trust. One current example brought up by Dess, Lumpkin, and
Eisner (2010) of a strategic alliance is between Kraft Foods and Gary
Schwartzberg. The product, now called Bagel-Fuls incorporates Kraft Foods’
Philadelphia Cream Cheese with Schwartzberg’s Bageler breakfast idea of cream
cheese filled bagels. While Kraft had originally been working on a similar idea,
they did not have the bagel making expertise that Schwartzberg was able to offer
as well as his patented process for encapsulating the cream cheese in the bagel
without it escaping during the baking process. Therefore, a strategic alliance was
formed and the product is currently being sold in supermarkets.
Finally, managers can choose to achieve diversification through mergers and
acquisitions. Many companies find this strategy useful especially since the market
and technology changes so quickly. Mergers can allow companies to attain
valuable resources to help their organization expand its own products and
services. Some managers may choose to use M&A activities in order to
consolidate the market and pressure other companies to merge. Managers may
also use M&A activities to enter new markets and build up their market power.
Limitations to M&A activities include the premium price almost necessary to pay
for an acquisition, competing firms copying synergies, or cultural issues that may
affect future profitability.
Managers must act in the best interest of their shareholders. However, this is not
always the case in the real business world. Many managerial motives can erode
value creation when managers begin to act in their own self-interest rather than
the shareholders’ interests. One way that value can become eroded is when managers grow their corporation just for growth’s sake, thereby becoming blinded
by prestige rather than analyzing whether or not it is beneficial for the company or
the shareholders. Prime examples can be seen through the ethical collapses at
Enron and WorldCom. Managers also must be conscious of antitakeover tactics
such as greenmail, golden parachutes, and poison pills that often occur during
hostile takeovers when a company’s stock becomes undervalued and ensure that
they are acting ethically and within in the law.
Greenmail, a spin on the term blackmail, began when unions began top-down
organizing to encourage a pre-hire agreement that allows exclusive union
representative of employees through leveraging environmental laws that can slow
or impede operations. Greenmail has been seen in the construction industry and is
currently an issue with federal construction contracts under the Obama
administration, with some people believing it to be unethical while others believe
that the ends justify the means (Birenbaum & Friedenberg, 2010).
One company that has integrated a lot of corporate strategies is IBM, referenced in
an article written by Harreld, O’Reilly III, and Tushman (2007). In the mid 90’s,
IBM began to realize that their current strategy was not working – primarily due to
the fact that they did not know how to appropriately implement strategies. The
new CEO saw that there would be a future need to serve the customer better.
Therefore, companies will need to better integrate their organization around the
customers’ needs so that they could solve the customers’ problems better. They
understood the importance of core competencies and used what they currently had
in order to build up the customer focus angle. They took on a strategic position
that focuses first on the customer’s needs and removing the barriers needed to
help them. Beating the competition is of secondary concern. ...
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- Spring '09
- Business, Eisner, DESS, Lumpkin