Discussion post 1-1.docx - Discussion post 1 The main focus of any corporate-level strategy is on two related issues and it includes in what business a

Discussion post 1-1.docx - Discussion post 1 The main focus...

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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. Reference Dess, G., Lumpkin, G, & Eisner, A. (2010). Strategic management: Creating competitive advantages. 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 competitors 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 products? 4. Does the company have the necessary competencies to execute the vertical integration strategies? 5. Will the vertical integration initiative have potential negative impacts on the firm’s stakeholders? 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 distribution channels. 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 productivity. 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
  • LESSOR
  • Business, Eisner, DESS, Lumpkin

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