2012 South-Western, a part of Cengage Learning

Corporate-Level
Strategy and
Long-Run
Profitability
Chapter 7
Essentials of Strategic Management, 3/e
Charles W.L. Hill | Gareth R. Jones
2012 South-Western, a part of Cengage Learning

Corporate-Level Strategy
The principle concern:
to identify the industry or industries a
company should participate in to maximize
long-run profitability
2012 South-Western, a part of Cengage Learning

Concentration on a Single Industry
A company chooses to focus its resources
and capabilities on competing successfully
within the confines of a particular product
market
Examples of companies that pursue 1
strategy:
McDonalds
Starbucks
Neiman Marcus

2012 South-Western, a part of Cengage Learning

Concentration on a Single Industry (contd)
Advantages
Concentrates all
resources and
capabilities to
strengthening its
competitive
position in one
industry
Disadvantages
Vertical integration
may be necessary
May miss out on
other opportunities
to create more
value and increase
profitability
2012 South-Western, a part of Cengage Learning

Horizontal Integration
The process of acquiring or merging with industry
competitors to achieve the competitive
advantage that comes with large size
Merger- an agreement between two companies
to pool their resources in a combined operation
Acquisition - Occurs when a company uses
capital resources to purchase another company.
An increase in horizontal integration = an
increased level of concentration in an industry
2012 South-Western, a part of Cengage Learning

Horizontal Integration
Advantages
Lowers operating costs
Increases product
differentiation (can be
accomplished through
product bundling)
Reduces rivalry within
an industry
Increases bargaining
power over suppliers
and buyers
Disadvantages
Problems with
merging cultures,
managers and
operations.
Problems with the
Federal Trade
Commission if a
company grows
too large

2012 South-Western, a part of Cengage Learning

Vertical Integration
Expanding operations into industries that
produce inputs or into industries that use,
distribute, or sell the companys product
A company can enter a new industry to
increase its long-run profitability
A company that concentrates on a single
business may be missing out on the
opportunity to create value through vertical
integration
2012 South-Western, a part of Cengage Learning

Vertical Integration
Advantages
Enables company
to build barriers to
new competition
Facilitates
investments in
specialized assets
Protects product
quality
Results in improved
scheduling
Disadvantages
May actually
increase cost of
inputs
Suppliers have
less incentive to be
efficient
Ties a company
into old,
obsolescent, and
high cost
technology
2012 South-Western, a part of Cengage Learning

Diversification
A diversified company is one that operates in
two or more industries in order to find ways to
use distinctive competencies to increase the
value of products in other industries to
consumers and to increase long-run
profitability
A company may choose to diversify when
they have excess resources
2012 South-Western, a part of Cengage Learning

Diversification (contd)
Diversification can help a company create
value in 3 main ways:
Permitting superior internal governance
Transferring competencies among businesses
Realizing economies of scope
2012 South-Western, a part of Cengage Learning

Restructuring
Restructuring- implementing strategies for
reducing the scope of the company by
removing exiting business areas
Why restructure?
Because the stock of highly diversified
companies is often assigned a lower valuation
relative to earnings than stocks of less
diversified enterprises
In an attempt to boost returns to shareholders
2012 South-Western, a part of Cengage Learning

Restructuring (contd)
Restructuring can be beneficial due to
diminished advantages of vertical integration
or diversification
Restructuring can be a reaction to:
Managers pursuing too much diversification
Diversification for the wrong reasons
Failed Acquisition

2012 South-Western, a part of Cengage Learning

Exit Strategies
Three main exit strategies:
Divestment- most favorable
Harvest- only works under specific conditions
Liquidation- least favorable
2012 South-Western, a part of Cengage Learning

Divestment
Selling a business unit to the highest bidder
A company can sell to:
Independent Investors
Other Companies
2012 South-Western, a part of Cengage Learning

Harvest
Halting investments in order to maximize
short-to-medium term cash flow
If employees catch on, morale can sink very
quickly and the strategy may fail
2012 South-Western, a part of Cengage Learning

Liquidation
Shutting down the operation of a business or
business unit
Least attractive strategy because the
company is required to write off its
investments in the unit that is shutting down